statutory construction starter

STATUTORY CONSTRUCTION REVIEWER l XYRUS ALAN R. BUCAO LLB 1 EH 306

It is the art of seeking the intention of the legislature in enacting a statute and of applying it to a given state of facts.

SCOPE OF CONSTRUCTION

AMBIGUITY - Defined as the doubtfulness, doubleness of meaning,

indistinctness, or uncertainty of meaning of the expression used in a written instrument.

- A condition of admitting 2 or more meanings.- Susceptible of more than one interpretation.

REMEDY FOR COURTS IN CASE OF AMBIGUITYJUDICIARY HAS SOLE POWER TO INTERPRET THE LAW

- Tools to ascertain the meaning and intention of the legislature so that they may be enforced.

- In order to expound the meaning and intention of the authors of the law, where that intention rendered doubtfully reason of ambiguity in its language or of the facts that given case is not explicitly provided for in the law.

- Is the drawing of warranted conclusions beyond direct expression of the text expressions which are in spirit though not within the text.

- It involves judicial choice by the judiciary

Construction Interpretation

Process of drawing warranted conclusion not always included in direct expressions, or determining the application of words to facts in litigation

Art of finding the true sense of meaning and sense of any form of words.

RULES OF CONSTRUCTION

- Rules of statutory construction are tools used to ascertain certain legislative intent

- Not rules of law but axioms of experience (widely accepted as true)

- In enacting statute, legislature is presumed to know the rules of statutory construction, in case of doubt, it shall be construed in accordance with the settled principles of interpretation.

- Legislature also defines to ascertain the meaning of vague, broad words or terms.

LEGISLATIVE INTENT

- Essence of the law- It is the spirit which gives life to legislative

enactment. It must be enforced when ascertained, although it may not be consistent with the strict letter of the statute.

- Determination of purpose and object of the law.

LEGISLATIVE PURPOSE

- Reason why particular statute was enacted by legislature.

- Legislation “is an active instrument and government which, for the purpose of interpretation means that laws have ends to be achieved”.

LEGISLATIVE MEANING

- Is what the law, by its language means- What it comprehends- Legislation “is an active instrument and

government which, for the purpose of interpretation means that laws have ends to be achieved”.

- What it confines and limits- What is covers and embraces

divided

FEDERATION OF FREE FARMERS VS. COURT OF APPEALS

G.R. No. 41162 – Sept. 10, 1981

RA 809 – SUGAR ACT OF 1952SEC. 1 – In the absence of a written milling agreements bet. Planters and millers in any sugar district in the Phils. Sugar and its by-product and derivatives, shall be divided bet. them. In the proportion therein specified. SEC. 9 – the proceeds in any increase participation granted the planters under this act and above their present share shall be divided 60% - labourer and 40% - planters.

ISSUES:1. WON RA 809 applies even if majority of the

planters have existing written agreements with the millers with a different stipulation of dividing the proceeds?

2. WON the legislative intent should be given effect?

HELD:

1. SC INTENT OF THE LAW, THE SACADA SHOULD BE GIVEN THEIR DUE, IRREGARDLESS OF THE PRESENCE OF AN AGREEMENT.

2. YES.

LEGAL HERMENEUTICS

- branch of science which establishes principles & rules of interpretation and construction of written rules.- Is the systematic body of rules which are recognized as applicable to the construction and interpretation of legal writing.

Take Note:

EXEGESIS – application of said principles and rules. –UNDERSTANDING THE LAW.

CLOSE INTERPRETATION - literal interpretation

STATUTORY CONSTRUCTION

DEFINITION

PURPOSE OF CONSTRUCTION ILLUSTRATIVE CASE

DIFFERENT KINDS OF INTERPRETATION


EXTENSIVE INTERPRETATION - it adopts a more comprehensive signification of the words. Liberal purpose of the law.EXTRAVAGANT INTERPRETATION – substituting to true meaning evidently beyond the true one and therefore not genuine interpretation.

FREE AND UNRESTRICTED INTERPRETATION – proceeds simply on the general principles of interpretation in good faith, not bound by any specific or superior principle

LIMITED OR RESTRICTED INTERPRETATION – influenced by other principles than the strictly hermeneutics ones.

PREDESTINED INTERPRETATION – takes place when the interpreter, labouring under a strong bias mind, makes the text subservient to his pre-conceived views and desires.

Judiciary - has final say to what the law means. (JUDICIAL FUNCTION)- it construes laws as it decides cases based on facts and the laws involved.

- laws are interpreted in the context of a peculiar factual situation of each case.

- circumstances of time, place, event, person and particularly attendant circumstances and actions before, during and after the operative fact have taken their totality so that justice can be rationally and fairly dispensed.

Take Note:Legislative – makes the lawExecutive – enforces the law

MOOT AND ACADEMIC – purpose has become stale; no practical relief can be granted; erelief has no practical effect.

GENERAL RULE : dismissal of the case

Exception : if capable of repetition, yet evading review

Public interest requires its resolutionRendering a decision on the merits would be of practical value.

SC - last bulwark of democracy.Impeachment – in cases of the SC exceeds it

powers

Judicial legislation - stretch the meaning of the statues to the point that it is outside for the bounds of the statute.- paradox cannot legislate.

JUDICIAL LEGISLATION - An encroachment upon legislative prerogative to define wisdom of the law.- courts must administer the law as they find it without regards to consequences

COURT NOT BE INFLUENCED BY QUESTION OF WISDOM- courts must must not take these matters into account in interpreting the law. (necessity, adequacy, wisdom, reasonableness, and expediency of any law)- has the final say to what the law means .

1. CONSTITUTION2. STATUTES3. ORDINANCES4. RESOLUTIONS5. EXECUTIVE ORDERS6. DEPARTMENT CIRCULARS

CONSTITUTION

-Fundamental law of the land which all other laws must conform.-body of rules-Where the powers of sovereignty are habitually exercised

PHILIPPINE CONSTITUTION

-written instrument -fundamental powers of the government are established, limited, and defined. -by which these powers are distributed among the different departments -for their safe and useful exercise -for the benefit of the public. NATURE OF CONSTITUTION

- It is not the origin of private rights, neither is it the grantor of any, nor the beginning of the government.

- It only recognizes and declares the inherent rights or pre-existing rights and prerogatives of a free-people

- It is a framework of the governmental machinery- Its contents are reflections of pre-existing laws,

rights, habits, and modes of thought.

DIFFERENCE BET. CONSTITUTION AND STATUTES

CONSTITUTION STATUTES

Lays down general foundation of government

Permanent of character

Set in detail its purposes or subject matter of which it treats

Tentative in nature, in the nature of temporary expedients

1. CONSTITUTION OF LIBERTY – prescription of fundamental civil rights and political rights of citizen with correlative limitations on the power of government as means of securing full enjoyment of those rights

2. CONSTITUTION OF GOVERNMENT – set of provisions setting up governmental framework

WHO HAS AUTHORITY TO CONSTRUE

LIMITATIONS ON THE POWER TO CONSTRUE

SUBJECTS OF CONSTRUCTION

COMMON PARTS OF CONSTITUTION


3. CONSTITUTION OF SOVEREIGNTY – set of provision setting or prescribing the procedure for amending the constitution.

1. WRITTEN CONSTITUTION – where the provisions of which are embodied in a single formal document or set of documents. It is product of a deliberate effort to lay down the fundamental principles in accordance with which the government shall be organized and conducted.

2. UNWRITTEN CONSTITUTION – where the provisions of which are not reduced in writing and formally embodied in a single or set of documents. It consists largely of mass of customs, usages, and judicial decision together with a few legislative enactments of a fundamental character.

3. CUMMULATIVE CONSTITUTION–whose origin lies mainly in customs, common law, judicial decisions, and the like.

4. CONVENTIONAL/ENACTED CONSTITUTION – which is formulated either by a constitutional convention or a royal proclamation.

5. RIGID CONSTITUTION –which legally stand over and above ordinary laws which may be amended only thru proceedings different from the ordinary legislative proceedings.

6. FLEXIBLE CONSTITUTION – has no legal force and authority than the ordinary legislative enactments.

- An act of legislature- a written will of the legislature solemnly expressed according to the required form to constitute a law of a state.- is an expression of the public will and a mandate of the people acting thru the representatives.

DIFFERENCE BET. STATUTE AND STATUTE LAW

STATUTE STATUTE LAW

Law enacted by congress Broader term, as it includes nt only statutes but also the judicial interpretation and application of such statutes.

Take Note:STARE DECISES – doctrine of precedence.

1. PUBLIC STATUTE – laws which concerns the interest of the public at large. It need not be a

universal rule. In the sense it is applied to the entire territory or to all the people in a given state.

2. PRIVATE STATUTE – law which relates to concerns and affects the particular individuals.

TYPES OF PUBLIC STATUE:

GENERAL STATUTE – law which affects all the people of the state or operates equally to all person in the same classification.

SPECIAL STATUTE – law which relates either to a particular person or thing of a class of which operates on a portion of class instead of all the class.(limited in scope)

LOCAL STATUTE – law which operates over a particular locality instead of over the entire state.

The power or authority to make laws, and to alter or repeal them.

-Embraces all subjects-extends the manner of general concerns or common interest

CONSTITUTIONAL BASIS FOR THE LEGISLATIVE POWER OF CONGRESSSec. 1 Art. 6 – Composition and election of Representatives.

TN: party-list or sectoral reps. Are filled by selection/election except religious groups.

BILL-a proposed law signed by the author of the bill -filed with the secretary of the house.-foe enactment into law-appropriation, revenue, tariff-bills authorizing increase of public debt-bills of local application and private bill are exclusively for the lower house.

Tolentino vs. Secretary of Finance

Facts:-Several bill introduced in the house of representatives to expand the tax base of VAT system and enhance its administration by amending the National Internal Revenue Code (NIRC).- these were refered to the committee to the house of ways and menas committee which consolidated a bill and recommended its approval.-after the approval, it went to the senate and referred to its committee on ways and means.- senate approval after it was recommended by its committee.-The conference committee bill was then approved by both houses and afterwards approved by the president into law.

Take note:All appropriations, revenue or tariff bills, bills of local application, and private bills shall originate exclusively in the house of the representatives, but senate may propose or concur with amendments.

Held:

KINDS OF CONSTITUTION

STATUTES

CLASSIFICATION OF STATUTES

LEGISLATIVE POWER


A bill originating in the lower house may undergo extensive changes in the senate that it may result even to the rewriting of the entire bill.

First reading-reading of number and the title of the bill-referral to the appropriate committee for study and recommendation for calendar for second reading

Composition of committee:-Experts in the subject under their jurisdiction

Committee Stage:-hold public hearing on the proposed bill-scrutinizes the bill -committee may approve, with or without amendments, rewrite the entirely, report it favourably or without recommendation.-committee reports and recommends for coalendar for second reading.

Second reading-read to be in full with the amendments proposed by the committee, unless if copies of the bill has been distributed and reading is dispense with.-debates, pertinent motions and amendments.-after approved for reading it shall be included in the calendar of bills for third reading.

Third reading-as approved by vote of yeas and nays and entered into the journal. (Art 6, Section 26)

Authentication of the bill-signing by the speaker and senate president -printed copy of the approved bill-certified by respective house secretaries

3 WAYS A BILL BECOMES A LAW:a. President signs the bill.b. Vetoed by the president and returned to

congress and passed by 2/3 votes. c. Inaction of the president after 30 calendar days.

Take note:Vetoed bill’s objection are recorded in the journal.

3 readings on separate reading may be dispensed when the presidents certifies to the necessity of its immediate enactment like emergency and crisis situations.

Political question- involve presidents discretion is beyond question unless if there is grave abuse.

Tolentino vs. Comelec – internal rules can be dispensed with as long it does not work against of the constitution.

Conference committee -third body of the legislature. Jurisdiction not only limited to harmonizing the bill but also create a compromise-mechanism to harmonize differences between both houses in the passage of a bill into a law.-it may produce result beyond its mandate.

PRESIDENTIAL ISSUANCESWhich require issuances:Those affecting the public – for due process and right to informationException:

For administrative purposes (internal consumption)

ORDINANCE POWER OF THE PRESIDENT

IMPLEMENTING RULES AND REGULATION:SUPPLIES THE DETAILS FOR OTHERS TO FOLLOW

1. PUBLICATION IS INDISPENSIBLE2. UP LAW CENTER (can be override as long as

provided)

Requisite for delegation of legislative power to supply details:

a. Germane to the object and purpose of the lawb. Regulation be not in contradiction with, but

conform to, standards that the law prescribesc. Law must be complete in itself to provide in

details.

Presumption of constitutionalityvery statute is presumed valid

-lies on how a law is enacted-due to respect to the legislation who passed and

executive who approved- to doubt is to sustain its constitutionality

Requisite for judicial review- actual case of contrive- locus standi- lis mota – crux of the matter - issue must be resolved at earliest possible time

Francisco Jr. Vs. House of the Representative- Case file against CJ Davide- another complaint file

Political question – wisdomDecided by people by their sovereign capacityDoctrine of judicial restraint – declare the law

unconstitutional .

PARTS OF THE STATUTE

Title-one title –one subject in order to prevent conglomeration and logrolling as well as surprise and fraud.-couch in the language sufficient to notify the legislators and the public.

Take note:Logrolling – combination of multiple propositions in one proposal.*In effect the entire proposal is nullified, not only the subject matter.

Preamble – prefatory explanationEnacting clause – state the authority by which the act is enacted.Definition section – defines termsAdministrative section – enforcement of the bodySanction – penaltiesTransitory provisions – temporary provisions of transitionSeparability clause- state the is any provision of the law is deemed invalid, the remainder shall not be affected.Repealing clause – is not a legislative finding that the earlier law is unconstitutionalDate of efficacy – time it takes effect or if not indicated usually 15 days following completion of publication.

Phil. Veterans Bank Employees Union vs. Vega

Facts:

HOW A BILL BECOMES A LAW


-bank under liquidation proceedings before the court, while pending, Congress enacted a law to rehabilitate the bank.-judge assail that the law was still not ineffect.

Effectivity of Presidential issuances, rules, and regulations.Publication is required before they take effect.

Exception:Interpretative or internal in nature not concerning the general public.

Presidential issuances, basis.Ordinance power of the presidentAuthority to issue executive orders, proclamations, administrative orders, memorandum, circulars, general or special orders.

Effectivity of Implementing rules and Regulations(IRR)-Penal-Publication-Filing in the UP Law CenterExcept:When law dispenses with the filing But now dispense publication

Nature of administrative rules and regulations-they partake the nature of a statute

Rule making power of the public administrative agencyDelegated legislative power.

Test of validity of delegation of rule-making power.The law must be: complete in itselfFix a standard, the limits are sufficiently determinate or determinableTypes of Administrative rules and regulationsEnforce the law - IRRInterprets the rule - LOI

Test of validity of administrative rules and regulations.Germane to the object of the lawConforms to standards prescribed by lawSole purpose of carrying into effect general provisions of the law

Effectivity of local ordinances.10 days from the date of postingIn bulletin boards and 2 other conspicuousIf ordinance is penal, published in a newspaper of general circulationHighly urbanized areas and independent component citites – posted and published

Manner of computing time.

Exclude the first day and last day includedYear - 365 dayMonth - 30 daysDay - 24 hoursNight - sunset to sunriseWeek - 7 consecutive days*even leap year – 365 days


A. Common or informal – those which require no particular form. Example – Loan

B. Special or formal – those which require some particular form. Examples – Donations, chattel mortgage

IV. According to their purpose

A. Transfer of ownership – ex. Sale B. Conveyance of use – ex. Commodatum C. Rendition of services – ex. Agency

V. According to their subject matter

A. Things – ex. Sale, deposit, pledgeB. Services – ex. Agency, lease of services

VI. According to the nature of the vinculum

A. Unilateral – those which give rise to an obligation for only one of the parties. Examples – Commodatum, gratuitous deposit

B. Bilateral – those which give rise to reciprocal obligations for both parties. Examples – Sale, lease

VII. According to their cause

A. Onerous – those in which each of the parties aspires to procure for himself a benefit through the giving of an equivalent or compensation. Example – Sale

B. Gratuitous – those in which one of the parties proposes to give to the other a benefit without any equivalent or compensation. Example – Commodatum

VIII. According to the risks involved

A. Commutative – those where each of the parties acquires an equivalent of his prestation and such equivalent is pecuniarily appreciable and already determined from the moment of the celebration of the contract. Example – Lease

B. Aleatory – those where each of the parties has to his account the acquisition of an equivalent of his prestation, but such equivalent, although pecuniarily appreciable, is not yet determined at the moment of the celebration of the contract, since it depends upon the happening of an uncertain event, thus charging the parties with the risk of loss or gain. Example – Insurance.

IX. According to their names or norms regulating them


A. Nominate – those which have their own individuality and are regulated by special provisions of law. Examples – Sale, lease

B. Innominate – those which lack individuality and are not regulated by special provisions of law.

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.

RIGHT TO CONTRACTThe contracting parties are free to establish any stipulation, clause, term or condition, so long as they are not against law, good customs, public order or public policy.

Both a statutory and constitutional rightThe freedom to contract is both a constitutional and statutory right. Hence, to uphold this right, the courts should move with all the necessary caution and prudence in holding contracts void.

LIMITATIONSThe right however is not absolute in character. It is subject to several limitations. Consequently, the stipulations, clauses, terms and conditions established by the parties must not be contrary to:

1. Law2. Morals3. Good customs4. Public order5. Public policy

1st Not contrary to lawThe most important of the limitations. The laws referred are:

A. Those which are mandatory or prohibitive in character

B. Those without being mandatory or prohibitive, nevertheless, expressive of fundamental principles of justice

C. Those which impose essential requisites without which the contract cannot exist

Examples:1. Pactum commissorium (a clause providing that the

mortgagee will automatically own the property mortgaged if the debt is not paid at maturity) is null and void.

2. A stipulation that all judicial and extrajudicial acts necessary under the terms thereof shall take place in a certain municipality. (Right to fix jurisdiction of courts can only be fixed by the legislative branch)

2nd Not contrary to moralsThe most difficult to ascertain because in subjecting obligations to moral precepts, there must be a careful effort not to erase the distinction between moral and the juridical order.

Morals – those principles which are incontrovertible and are universally admitted and which have received social and practical recognition. Examples:

1. A penalty clause providing for the payment of P5 for each day’s delay after the maturity of a loan for P465

was held immoral inequitable, shocking to the human conscience, and void.

2. A promise of marriage based on a carnal consideration is immoral and, therefore, void.

3. The agreement to work without pay is immoral and void since this would amount to involuntary servitude.

3rd Not contrary to good customsThe spheres of morals and good customs frequently overlap each other but sometimes they do not. It must be admitted, however, that if a moral precept or custom is not recognized universally, but is sanctioned by the practice of a certain community, then it shall be included within the scope or sphere of good customs.

4th Not contrary to public orderUnder the present Civil Code, it would seem that public order can only refer to the safety, as well as to the peace and order, of the country or of any particular community. This can be implied from the report of the Code Commission which states that “public order is not as broad as public policy, as the latter may refer not only to public safety but also to considerations which are moved by the common good.” However, in the Spanish Civil Code, both are considered synonymous.

5th Not contrary to public policyA contract is contrary to public policy if it “has a tendency to injure the public, is against the public good, or contravenes some established interest of society, or is inconsistent with sound policy and good morals, or tends clearly to undermine the security of individual’s rights.”

Examples:1. Those denying access to the courts2. Those which encourage fraud3. A stipulation bargaining away or surrendering for a

consideration the right to vote and to run for public office. These are rights conferred not for individual or private benefit or advantages but for the public good and interest.

4. Those which tend to stifle the prosecution of a person charged with a crime, for a pecuniary or other valuable consideration

5. Those exempting a carrier from liability for gross negligence

Stipulations exempting a common carrier from liability Three kinds of stipulations ordinarily made in a bill of lading:

A. Exempting the carrier from any and all liability for loss or damage occasioned by its own negligence

Effect: Contrary to public policy.

B. Providing for an unqualified limitation of such liability to an agreed valuation

Effect: Contrary to public policy, except if it can be shown to be reasonable under the circumstances, and had been fairly and freely agreed upon, then it is perfectly valid

C. Limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight

Effect: Perfectly valid and binding

Contracts which tend to restrain business or tradeThey are perfectly valid, provided that:

A. There is a limitation upon either time or place

FREEDOM TO CONTRACT


B. The restraint must be reasonably necessary for the protection of the contracting parties

Ysmael & Co. v. BarretoFacts:Defendant received 164 cases of silk from plaintiff to be shipped to Surigao. There was a stipulation in the bill of lading that the carrier shall not be liable for loss or damage from any cause beyond an amount exceeding P300 for each single package. Four cases of silk, each valued at P2, 500 were lost. Defendant argued that his liability shall extend only to the amount agreed upon in the bill of lading.

Held:Such a limitation of value is unconscionable and void against public policy. A carrier cannot limit its liability for injury or loss of goods shipped as caused by its own negligence. A contract that undertakes to relieve the carrier from any liability would in legal effect nullify the contract.

Ferrazzini v. GsellFacts:Parties agreed that the plaintiff should not (1) engage in any business enterprise similar to or in competition with those operated by the defendant or (2) enter into the employment of any enterprise in the Philippines, except after obtaining the written permission of the defendant. Plaintiff agreed to pay P10, 000 to defendant as liquidated damages for each breach of a clause of the contract.

Issue: Whether the stipulation is valid and binding upon the plaintiff.

Held:The contract is an undue and unreasonable restraint of trade and therefore against public policy. It is limited as to time and space but not as to trade. It would force the plaintiff to leave the Philippines in order to obtain a livelihood in case the defendant declined to give him the written permission to work elsewhere in the country.

Del Castillo v. RichmondFacts:Parties agreed that plaintiff should not (1) open or own nor have any interest directly or indirectly in any other drugstore either in his own name or in the name of another, (2) have any connection with or be employed by any other drugstore either as pharmacist or in any capacity in any drugstore within a radius of 4 miles from the municipality of Legaspi, so long as the defendant or his heirs may own or have an interest in a drugstore in the said municipality.

Issue: Whether the agreement is valid and binding upon the plaintiff

Held:A contract in restraint of trade is valid and not considered against the benefit of the state, provided there is a limitation upon either time or place and that the restraint is necessary to protect the interest of the parties. Considering the nature of the business in which the defendant is engaged, in relation with the limitation place upon the plaintiff both as to time and place, such limitation is legal and reasonable and not contrary to public policy.

Sy Suan v. RegalaFactsSy Suan, president of Price, Inc. executed a special power of attorney in favour of Regala authorizing him to prosecute an application for a license with the Import Control Office (ICO) for the importation of industrial starch for candy manufacture. There was a verbal agreement that as compensation for Regala’s service, he would be paid 10% of the total value of

the amount that would be approved by the ICO. Regala was able to prosecute the approval successfully. Sy Suan refused to pay the 10% commission as agreed upon contending that the agreement is contrary to public policy. Regala countered by saying that there is no showing that the contract violated any public policy.

Held:The contract is contrary to good customs, public order and public policy. The contract sprouted as a result of the controls imposed by the government on imports and dollars allocations, despite the enunciated government policy that applications for imports should be considered strictly on the basis of merit, without intervention of intermediaries that would only influence or corrupt the judgment of public officials performing services connected with the issuance of import licenses. Also, actual injury need not be shown. It is enough if the potentialities for harm are present.

Cui v. Arellano UniversityFacts:Cui took up law at Arellano University where he was a constant recipient of scholarship grants. During his stay, he was made to sign a waiver of his right to transfer to another school unless he refunds to the University the equivalent of his scholarship grants. In his last semester of his fourth year, he transferred to Abad Santos Law School. Consequently, when he applied for the Bar exams, he was required to furnish a copy of his transcript from Arellano University to which the university refused to give unless he makes the refunds, which Cui did, under protest. Subsequently, Cui brought an action to recover the amount which he paid. Will the action prosper?

Held:Yes, since the waiver signed by Cui is contrary to public policy and therefore null and void. Scholarship grants are awarded in recognition of merit and not to attract and keep brilliant students in school for their propaganda value To look at such grant as a business scheme designed to increase the business potential of a school is not only inconsistent with sound public policy but also good morals.

Compromise AgreementsA contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced.

General rule: A compromise has upon the parties the effect and authority of res judicata. This holds true even if the agreement has not been judicially approved. From the time a compromise is validly entered into, it becomes the source of the rights and obligations of the parties thereto.

Exception: To have the force of res judicata, the compromise agreement must be approved by final order of the court. To be valid, it must be based on real claims and actually agreed upon in good faith.

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.

NOMINATE CONTRACTSThose which have their own distinctive individuality and are regulated by special provisions of law.

Examples:1. Sales 7. Antichresis

NOMINATE AND INNOMINATE CONTRACTS


2. Barter or exchange 8. Compromise & arbitration

3. Lease 9. Guaranty4. Partnership 10. Pledge5. Agency 11. Mortgage6. Aleatory contracts 12. Deposit

(i.e. insurance, gambling and life annuity)

INNOMINATE CONTRACTSThose which lack individuality and are not regulated by special provisions of law.

Four kinds of innominate contracts:

A. do ut des (I give that you may give)B. do ut facias (I give that you may do)C. facio ut des (I do that you may give)D. facio ut facias (I do that you may do)

Governing rules for innominate contracts:

A. StipulationsB. Titles I and II of Book IV — Obligations and ContractsC. Rules on the most analogous nominate contractsD. Customs of the place

Perez v. PalomarFacts:Plaintiff rendered services to defendant as interpreter during a certain period. However, it does not appear that any express contract was ever entered into.

Issue:Whether there is a binding contract which will justify a court of law in fixing a just compensation for the plaintiff.

Held:Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter. Without any evidence that the same was rendered gratuitously, defendant is obligated to pay a just compensation by virtue of the innominate contract facio ut des (I do that you may give) because no one should unjustly enrich himself to the damage of another.

1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

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.

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.

MUTUALITY OF CONTRACTSThis Article stresses the principle of mutuality of contracts — that is, both parties are bound. The principle is based on the essential equality of the parties. It is repugnant to bind one party, and yet leave the other free.

Consequences of mutuality

1. The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. What is prohibited is:

a) The power to determine whether or not the contract shall be valid

b) The power to determine whether or not the contract shall be fulfilled

2. The validity or fulfillment may be left to the will of a third person whose decision shall only be binding when it has been made known to each of the contracting parties, provided that it is not evidently unequitable.

3. The validity or fulfillment can be left to chance.

PROHIBITIONS NOT FALLING UNDER ART 1308There are certain agreements which will in effect render the mutuality of contracts illusory because one of the contracting parties is placed in a position of superiority with regard to the determination of the validity of the contract – but which, however, do not fall within the purview of the prohibition in Art 1308.

1. Obligor promises to pay a certain amount which is not determined, but the contract itself specifies the manner by which the amount may be determined such as by the exercise of the judgment and discretion of the obligor.

2. Fulfillment of the contract is left to the will of one of the contracting parties in the negative form of rescission.

Liebenow v Phil Vegetable Oil Co.Facts:Plaintiff instituted an action to recover a sum of money which he considered himself entitled by way of bonus in addition to his salary while employed by the defendant. The basis of his claim is a letter from the president of the company promising to pay him in addition to his salary “such further amount as the Board of Directors may see fit to grant”. It was established that plaintiff in fact received P4, 500 in installments which the defendant contends is the bonus which the Board of Directors had seen fit to grant. However, the plaintiff maintains that it is merely an addition to his salary and that the bonus has not yet been paid.

Held:A promise of this character creates a legal obligation binding upon the promisor, although in its actual results it may not infrequently prove to be illusory. Such promise is not nugatory under Article 1182 of the Civil Code, as embodying a condition dependent exclusively upon the will of the obligor. Nor can it be held invalid under Article 1308 which declares that the validity and performance of a contract cannot be left to the will of one of the contracting parties. The uncertainty of the amount to be paid by way of bonus is also no obstacle to the validity of the contract, since the contract itself specifies the manner in which the amount payable is to be determined, namely, by the exercise of the judgment and discretion of the employer.”

Taylor v. Uy Tieng PiaoFacts:Plaintiff was employed by defendant as superintendent of an oil factory. One of the stipulations in the contract of employment was the following clause: “It is understood that should the machinery to be installed in the said factory fail to arrive within a period of 6 months, this contract may be cancelled, the cancellation not occurring before the expiration of 6 months” Because of the failure of the machinery to arrive, the defendant cancelled the contract. Subsequently, plaintiff filed for breach of contract, claiming that the validity

MUTUALITY OF CONTRACTS


of a contract cannot be left to the will of one of the contracting parties (Art 1308) and that a condition shall be deemed fulfilled if the obligor intentionally prevents its fulfillment (Art 1186).

Held:Art 1309 creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. It is entirely licit to leave the fulfillment to the will of either of the parties in the negative form of rescission for in such supposed case neither is the article infringed, nor is there any lack of equality between the persons contracting, since they remain with the same faculties in respect to fulfillment.’

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 favour 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 favour upon a third person.

RELATIVITY OF CONTRACTSThis article stresses the principle of relativity — that is contracts are generally effective only between the parties, their assigns, and their heirs. Rationale: “Res inter alios acta aliis neque nocet prodest.” (The act, declaration, or omission of another, cannot affect another)

PERSONS BOUND BY CONTRACT

General rule: Contracts can take effect only between the parties, their assigns and heirs. Therefore, generally, its terms cannot determine the rights of third persons.

A. Even though the contract may have been executed ostensibly in the name of another person, it shall produce effect only insofar as the real contracting party is concerned, provided, that such fact was known to the other party.

B. An assignment or transfer has the effect of subrogating the assignee to all of the rights and obligations of the assignor.

Take note:Monetary obligations that the decedent might have incurred during his lifetime CANNOT be transmitted to his heirs through succession. Hence, the heirs cannot be charged directly with the payment of such obligations.

Reason: Rules of Court – such obligations must be liquidated in the testate or intestate proceeding for the settlement of the estate of the decedent.

ExceptionsThe rule that an assignee or heir shall be bound by the terms of a contract IS NOT ABSOLUTE in character. The rule is not applicable if the rights and obligations arising from the contract are NOT transmissible:

1. By their nature, as when the special or personal qualification of the obligor constitutes one of the principal motives for the establishment of the contract

2. By stipulation of the parties, as when the contract expressly provides that the obligor shall perform an act by himself and not through another

3. By provision of law, as in the case of those arising from a contract of partnership or of agency

EFFECT OF CONTRACTS ON THIRD PERSONS

General rule: Since contracts can take effect only between the contracting parties, as well as their assigns or heirs, it follows as a general rule that it CANNOT produce any effect whatsoever as far as third persons are concerned. Hence, he who is not a party to a contract has no legal capacity to challenge its validity, even if the same is voidable.

Exceptions: Instances where a contract may produce effect either directly or indirectly on third persons:

1. Where the contract contains a stipulation in favour of a third person

2. Where the third person comes into possession of the object of a contract creating a real right

3. Where the contract is entered into in order to defraud a third person

4. Where the third person induces a contracting party to violate his contract

STIPULATIONS IN FAVOUR OF THIRD PERSONSA stipulation in a contract, clearly and deliberately conferred by the contracting parties in favour upon a third person, who must have accepted it before it could be revoked. In effect, such third person may demand its fulfillment.

Kinds of beneficial stipulations:

A. Those where the stipulation is intended for the sole benefit of the third person

B. Those where an obligation is due from the promise to the third person which the former seeks to discharge by means of such stipulation

Requisites:

1. There must be a stipulation in favour of a third person

2. The stipulation must be a part, not the whole of the contract

3. The contracting parties must have clearly and deliberately conferred a favour upon a third person, not a mere incidental benefit or interest

4. The third person must have communicated his acceptance to the obligor before its revocation (express or implied)

5. Neither of the contracting parties bears the legal representative or authorization of the third party

Test of beneficial stipulationHow to determine whether the interest of a third person in a contract is a stipulation our autrui or merely an incidental interest?

Answer: Rely upon the intention of the parties as disclosed by their contract. Did the contracting parties deliberately insert terms in their agreement with the avowed purpose of conferring a favour upon such third person?

RELATIVITY OF CONTRACTS


Kauffman v. Phil National BankFacts:Defendant bank, for a valuable consideration paid by the Philippine Fiber and Produce Co., agreed to cause a certain sum of money to be paid to the plaintiff in New York City. However, the bank cabled its representative in NYC to withhold payment of the amount to plaintiff. This led the plaintiff to file an action to recover the amount.

Issue:Whether or not the lack of privity with the contract on the part of the plaintiff is fatal to the maintenance of this action.

Held:The fairest test in this jurisdiction whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. The right of the plaintiff to maintain the present action is clear enough, for it is undeniable that the bank’s promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favour within the meaning of the paragraph above quoted; and the circumstances under which the promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have that money upon demand in New York City.

Coquia v. Fieldmen’s Insurance Co.Facts:Fieldmen’s Insurance Co issued in favour of Manila Yellow Taxicab Co, a common accident insurance policy which stipulates that the company will indemnify the insured in the event of accident against all sums which the insured will become legally liable to pay for death or bodily injury to any fare-paying passenger, including the driver, conductor or inspector. Subsequently, as a result of a vehicular accident, Carlito Coquia was killed (driver of one of the vehicles covered by the said policy). The company and the insured failed to agree with respect to the amount to be paid to the heirs of the drivers. Hence, the parents of Carlito brought an action against the company. The company contends that the parents have no cause of action because they have no contractual relation with the company.

Held:It is true that as a general rule, only the parties to a contract may bring an action based thereon. However, the same admits of some exceptions, one of which is 2nd par of Art 1311 which states that the enforcement of contracts pour autrui may be demanded by a third party for whose benefit it was made, although not a party to the contract. The policy provides that the company will indemnify any authorized driver of the insured and in the event of death of said driver, his personal representatives. Clearly, the policy is typical of contracts pour autrui. Therefore, the heirs of Coquia have a direct cause of action against the company.

Constantino v. EspirituFacts:A and B are legally married. A executed a fictitious deed of sale of a two-storey house and four subdivision lots in favour of his mistress, M, who was pregnant at that time, with the understanding that M should hold the properties in trust for their unborn illegitimate child.

After securing a new COT in her name, M mortgaged the properties twice to a bank, and subsequently tried to sell them. A then brought an action for preliminary injunction restraining M from further properties and for judgment ordering her to convey the properties to their illegitimate child, X, who at that time was already 5 years old.

A motion to dismiss was filed on the ground that the illegitimate child who is the beneficiary of the trust is not included as the party-plaintiff and the action is unenforceable under the Statute of Frauds. Hence, A amended his complaint to include X as party-plaintiff. The same was dismissed. A raised the case by direct appeal to the Supreme Court.

Issue:Is there a valid cause of action?

Held:Yes, there is a valid cause of action. The contract between appellant and appellee was a contract pour autrui although couched in the form of an absolute deed of sale, and the action of appellant was one for specific performance. Since the contract involved a stipulation pour autrui, the third person for whose benefit the contract was entered into may also demand its fulfillment, provided he communicated his acceptance to the obligor before the stipulation is revoked.

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.

AN EXCEPTIONThis article constitutes one of the exceptions to the general rule that a contract binds only the contracting parties. Reason: Because a real right binds the property over which it is exercised.

CONTRACTS CREATING REAL RIGHTS

Real right – A right belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally enforced. Such a right, therefore, is enforceable against the whole world.

Effect: A third person who comes into the possession of the object of a contract creating a real right will have to be bound by such right, subject to the provisions of:

1. Mortgage Law2. Land Registration Laws

Examples:1. A mortgaged his house and lot to PNB to secure P20,

000 and such mortgage is registered in the Registry of Property. Subsequently, the house and lot was sold to B. Consequently, the contract of mortgage between A and PNB will be binding upon B.

2. If A should purchase an apartment from the owner but there is a lease thereon, A must respect the lease if the same is registered in the Registry of Property.

1313. Creditors are protected in cases of contracts intended to defraud them.

AN EXCEPTIONThis Article represents another instance when a third person can interfere with another’s contract.

CONTRACTS IN FRAUD OF CREDITORSAlthough a third person cannot ask for the annulment of a contract, nevertheless, if he is a creditor of one of the contracting parties, and it can be established that the contract

CONTRACTS CREATING REAL RIGHTS

CONTRACTS IN FRAUD OF CREDITORS


was entered into with the intention of defrauding him, he may ask for its rescission.

ExampleIf A gratuitously gives B a parcel of land, and A has no other property or cash left to satisfy his creditors, said creditors may ask for the rescission of the contract, to the extent that they have been prejudiced.

1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.

AN EXCEPTIONThis Article gives an instance when a stranger to a contract can be sued in view of his unwarranted interference. Whoever is injured may properly sue for damages.

INTERFERENCES WITH CONTRACTUAL RELATIONSAny third person who induces another to violate his contract shall be liable for damages to the other contracting party.

Rationale: The right to perform a contract and to reap the profits resulting from such performance, and also the right to performance by the other party, are property rights which entitle each party to protection, and to seek compensation by an action in tort for any interference therewith

Example:S, a movie actress, has a one-year contract with XYZ Studio. If F, a friend of S induces her, without any justifiable cause, to break the contract, then XYZ Studio can sue F for damages.

RequisitesBefore the third person who induces another to violate his contract can be held liable for damages, it is essential that the following requisites must concur:

1. Existence of a valid contract2. Knowledge on the part of the third person of the

existence of the contract3. Interference by the third person without legal

justification or excuse (malice is implied)

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.

CONSENSUALITY OF CONTRACTSThis Article stresses the consensuality of contracts or perfection by mere consent.

HOW CONTRACTS ARE PERFECTEDThe perfection of a contract refers to that moment in the life of a contract when there is finally a concurrence of the wills of the contracting parties with respect to the object and the cause of the contract.

Kinds of contracts according to perfection:

A. Consensual contracts – perfected by mere agreement or consent on the subject matter and the cause or consideration. (Example: Contract of sale)

B. Real contracts – perfected by delivery (Examples: Deposit and Pledge)

C. Formal or Solemn contracts – A special form is required for perfection (Example: A simple donation inter vivos of real property must be in public instrument to be valid and perfected)

Consequences of perfection

1. The parties are bound to the fulfillment of what has been expressly stipulated and compliance thereof must be in good faith

2. The parties are bound to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.

Salvador Malbarosa v. CAA contract is perfected only from the time an acceptance of an offer is made known to the offeror.

1316. Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation.

PERFECTION OF REAL CONTRACTSReal contracts, to be perfected, require:

A. ConsentB. Subject matterC. Cause or considerationD. Delivery

The real contracts referred to in this Article are:1. Deposit2. Pledge3. Commodatum

Delivery as a requisiteDelivery is required of the very nature of the contract. For example, a depositary cannot be expected to comply with his obligation of keeping the object safely unless and until it is delivered to him.

FUTURE REAL CONTRACTS ARE CONSENSUAL CONTRACTSA contract to make a deposit, to make a pledge or to make a commodatum is a consensual contract. After delivery, it becomes a real contract.

Example:A agreed to lend B his car on April 8. If on April 8, A refuses to deliver the car, may B sue him for damages?

Yes, because of the consensual contract to make a commodatum. If A had delivered the car and B, through negligence, damages the car, A can sue him because of the real contract of commodatum.

The Contract of Carriage

A. The contract to carry (at some future time) is consensual and is perfected by mere consent.

B. The contract of carriage is a real contract, for not until the carrier is actually used can we consider the contract perfected, that is, ‘til the moment of actual use, the carrier cannot be said to have already assumed the obligation of a carrier.

INTERFERENCES WITH CONTRACTUAL RELATIONS

CONSENSUAL CONTRACTS

REAL CONTRACTS


Take note: The real contract of carriage is perfected even if the passenger has not yet paid, in fact, even if he has no money for his fare.

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.

CONTRACTS IN NAME OF ANOTHER

General rule: No person may enter into a contract in the name of another.Effect: The contract is unenforceable.

Take note: The principle enunciated is a logical corollary to the principles of the obligatory force and the relativity of contracts. It is also the basis of the contract of agency

Exceptions:1. He has been duly authorized 2. He has by law a right to represent him3. The contract has been subsequently ratified (implied

or express) by the person in whose benefit it has been executed, before the revocation of the other party

Unenforceable v. VoidableUnenforceable – cannot be sued upon or enforced, unless ratifiedVoidable – binding unless annulled by proper action in court

Badillo v. FerrerFacts: Macario died intestate in 1966, leaving a widow (Clarita) and 5 minor children. He left a parcel of land and in 1967, the wife in her own behalf and as natural guardian of the minor plaintiff, executed a deed of extra-judicial partition and sale of the property through which he sold the property to Gregorio.

Held: 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.’’

Clearly, Clarita 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. The appellee minors never ratified this Deed of Extrajudicial Partition and Sale. Hence, the contract remained unenforceable or unauthorized.

Effect of ratificationRatification cleanses the contract from all its defects from the moment the contract was entered into. Hence, there is a retroactive effect.

Take note: There can be no more ratification if the contract has previously been revoked by the other contracting party.

REQUISITES OF CONTRACTS IN GENERAL1318. There is no contract unless the following requisites concur:

1. Consent of the contracting parties2. Object certain which is the subject matter of the

contract3. Cause of the obligation which is established

Take note: These are the common essential elements of contracts.

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.

CONCEPT OF CONSENTThe most important element, which constitutes the very heart and soul of contracts, is, unquestionably, the consent of the contracting parties.

Consent - The concurrence of the wills of the contracting parties with respect to the object and the cause which shall constitute the contract.

Requisites1. The consent must be manifested by the concurrence

of the offer and the acceptance2. The contracting parties must possess the necessary

legal capacity3. The consent must be intelligent, free, spontaneous,

and real

Take note: The first requisite is expressly stated in the Code, while the others are implied.

CONTRACTS IN NAME OF ANOTHER

CHAPTER 2. ESSENTIAL REQUISITES OF CONTRACTS

GENERAL PROVISIONS

CONCEPT OF CONSENT

Section 1 – CONSENTArticles 1319 – 1346


When contracts are perfectedContracts are perfected from the moment there is manifestation of the concurrence between the offer and the acceptance with respect to the object and the cause which shall constitute the contract.

MANIFESTATION OF CONSENTBefore there is consent, it is essential that it must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract.

Effect: Once there is a manifestation of the concurrence of the wills of the contracting parties, the period of negotiation is terminated. Therefore, the contract, if consensual, is perfected.

De Lim v. Sun Life Assurance Co.Facts:Luis Lim applied to the defendant company for a policy of life insurance in the sum of P5, 000, where he designated his wife, Pilar de Lim (plaintiff) as beneficiary. The first premium of P33 was paid and upon payment, the company issued a “provisional policy” accepting the application, “provided that the company shall confirm this agreement by issuing a policy on said application when the same shall be submitted to the Head Office. It was agreed that should the company not issue the policy, then such agreement is null and void. Also, a period of 4 months from the date of application was stated as period within which the company shall issue the policy.

Luis Lim however died a month later after he filed his application – after the issuance of the provisional policy but before approval of the application by the head office. Thereafter, the wife brought an action for the recovery of P5, 000 stated in the provisional policy.

Issue: Whether or not the contract has been perfected.

Held: A contract of insurance, like other contracts, must be assented to by both parties, either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. There can be no contract of insurance unless he minds of the parties have met in agreement.

CHARACTER OF OFFER AND ACCEPTANCE

Offer – a proposal to make a contract. In order to constitute a binding proposal, the offer must be certain or definite.

Illustration:Where the defendant said that he is “in a position” and is “willing to entertain” the purchase of a yacht, there was no perfected contract since the words applied were not certain and are merely positions to deliberate whether to perform or not perform the said act.

Acceptance – In order that there will be a perfected contract, the acceptance must be:

1. Certain and definite

Illustration:Where plaintiff ordered to the defendant certain machineries in exchange for tractors and the latter answered stating “we are willing to accept the proposition” – there was not perfected contract or barter since the phrase used does not mean acceptance but simply a disposition to accept the offer in principle.

2. Absolute in character (Must be plain and unconditional)

Illustration:Where defendant offered to the plaintiff an option for 3 months to buy a certain land and the latter answered by accepting the offer but subject to certain modifications with regards to the terms of payment – there is no perfected contract because there is no concurrence between the offer and the acceptance.

Take note: In consensual contracts, the acceptance of the offer must be absolute and must not qualify the terms of the offer. It must be plain, unequivocal, unconditional and without variance of any sort from the proposal. A qualified acceptance constitutes a counter-offer and is a rejection of the original offer. Consequently, such acceptance is not sufficient to generate consent because any modification from the terms of the offer annuls the same.

Requisites for the meeting of the minds1. An offer that must be certain an definite2. An acceptance that must be certain, absolute and

unqualified.

Take note: If the acceptance is qualified, this merely constitutes a counter-offer.

ACCEPTANCE OF COMPLEX OFFERSThe rules regarding acceptance are modified in case of complex offers.

Acceptance of one is sufficientWhere the offeror proposes to lease one part and to sell another part, acceptance of one of the offeree would ordinarily result in a perfected contract, unless the offeror made one offer dependent upon the other.

Acceptance of one is insufficientHowever, prospective contracts comprised in a single offer may be so interrelated in such a way that the acceptance of one would NOT at all result in a perfected contract.

Illustration:In an offer involving a prospective contract of loan and the mortgage which will secure it, acceptance by the future debtor of the proposed loan alone would not give rise to a perfected contract.

ACCEPTANCE BY LETTER OR TELEGRAMWhen would there be a perfected contract if acceptance is made by letter or by telegram?

General rule: Acceptance made by letter or telegram does not bind the offeror, except from the time it came to his knowledge

Exception: Art 54 Code of Commerce - applicable to purely commercial contracts, such as join accounts, maritime contracts, etc. Here, contracts entered into by correspondence shall be perfected from the moment an answer is made accepting the offer.

Four theories:

1. Manifestation Theory – the contract is perfected from the moment the acceptance is declared and made. Followed by the Code of Commerce.

2. Expedition Theory – the contract is perfected from the moment the offeree transmits the notification of acceptance to the offeror, as when the letter is


placed in the mailbox. Followed by majority of American courts.

3. Reception Theory – the contract is perfected from the moment the notification of acceptance is in the hand of the offeror in such a manner that he can, under ordinary conditions, procure knowledge of its contents, even if he is not able to actually acquire such knowledge by reason of absence, sickness or some other cause. Followed by the German Civil Code.

4. Cognition Theory – the contract is perfect from the moment the acceptance comes to the knowledge of the offeror. Followed by the Spanish Civil Code.

Take note: We follow the Cognition Theory – acceptance made by

letter or telegram DOES NOT bind the offeror EXCEPT from the time it came to his knowledge. Hence, the contract is presumed to have been entered into in the place where the offer was made.

This rule equally applies to cases in which the acceptance is made by a person who is not in the presence of the offeror.

Case illustrating Cognition Theory

Enriquez v. Sun Life Assurance CoFacts:On September 24, 1917, Joaquin Herrer applied to the defendant company for a life annuity through its local office in Manila. He paid the sum of P6, 000 and was issued a provisional receipt. The application was immediately forwarded to the head office in Canada.

On November 26, the head office gave notice of acceptance by cable to Manila. Whether notice of this acceptance was sent to Herrer by the Manila office is a disputed question. On December 4, the policy was issued at Montreal. However, on December 18, the lawyer of Herrer wrote to the Manila office that Herrer desired to withdraw his application.

The local office replied stating that the policy had been issued and called attention to the notification of November 26. This letter was received by the lawyer on December 21. Herrer however died on December 20.

This action was commenced to recover the sum of P6, 000 from the defendant company, which the latter contends that the same cannot be recovered on the ground that the contract of life annuity had already been perfected.

Issue:Whether or not the contract of life annuity had already been perfected

Held:It is Art 1319 of the Civil Code and not Art 54 of the Code of Commerce that will apply to the end that acceptance made by letter or telegram does not bind the offeror except from the time it came to his knowledge. Consequently, the contract was not perfected because it has not been proved satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.

Francisco v. GSISFacts:Plaintiff offered a compromise with respect to the settlement of an obligation which had already matured, which was accepted by the GSIS by means of a telegram signed by the Board Secretary. For a year, GSIS receipted payment made pursuant to the compromise agreement.

Issue: Is there a perfected contract of compromise despite the fact that the General Manager of GSIS denied that he authorized the Board Secretary to send the telegram?

Held: There is already a perfected contract of compromise applying Art 1319 of the Civil Code. It is a familiar doctrine that if a corporation knowingly permits one of its officers to do acts within the scope of an apparent authority and holds him out to the public as possessing the power to do those acts, the corporation will be estopped from denying his authority, against anyone who dealt with the corporation through such officer in good faith.

Effect of constructive knowledge2ND par Art 1319 – Acceptance made by letter or telegram does not bind the offeror except from the time it came to his “knowledge.”

General rule: There should be actual knowledge of the acceptance. (There is a clear implication that such offeror must have read the contents of the letter or telegram accepting his offer)

Take note: Mere receipt of the letter or telegram is NOT sufficient, although there arises the presumption that he has read the contents thereof.

Exception: if it is possible that he might not have been able to do so, like when he was absent or incapacitated at the time of the receipt of the letter. Hence, he cannot be bound by the acceptance.

Exception to the exception: If being able to do so, he refused to open the letter because for some reason he has already changed his mind or has decided to revoke his offer.

Withdrawal of offerQuestion: Can the offeror, after the offer has been made, withdraw his offer or not? Yes, he may still withdraw his offer, provided he still has NO knowledge of the acceptance by the offeree.

Laudico v. AriasFacts:On Feb. 5, 1919, Arias wrote Laudico a letter, offering a lease contract. On Mar. 6, 1919, Laudico wrote a letter of complete acceptance, which was received by Arias that same afternoon. But that same morning Arias had already written Laudico a letter withdrawing the offer.

Issue: Whether or not there was a perfected contract.

Held:There was no contract perfected. Art 1319 provides that an acceptance does not have any effect until it comes to the knowledge of the offeror. Therefore, before he learns of the acceptance, he is not yet bound by it and can still withdraw the offer. Though both the offer and the acceptance existence, they did not meet to give birth to a contract.

Withdrawal of acceptanceQuestion: A, residing in Manila, has offered to lease a parcel of land for a certain price to B, who is residing in Baguio. B finally decides to accept the offer so he writes a letter of acceptance to A. The letter is mailed. Can he revoke it by using a more rapid means of communication in order to counteract the acceptance?


A. Manresa – No. From the moment the offeree accepts, he loses the power to retract such acceptance since the right to withdraw between the time and acceptance and its communication is a right expressly limited by law to the offeror. There may seem to be inequality between the contracting parties, however, since the offeree is the first person who knows of the concurrence of wills of the parties, the obligation as far as he is concerned, must also commence earlier as a consequence.

B. Dr. Tolentino – Yes. The acceptance may be revoked before it comes to the knowledge of the offeror because there is still no meeting of the minds. To hold otherwise would then make two moments when a consensual contract is perfected – first, when the offeree transmits his acceptance to the offeror, and second, when the offeror has knowledge of the acceptance. Legally, this is not possible. (More logical view)

Concurrence of offer and acceptanceGigi offered to construct the house of Chito for a very reasonable price of P1 Million, giving the latter 10 days within which to accept or reject the offer. On the fifth day, before Chito could make up his mind, Gigi withdrew the offer. What is the effect of the withdrawal of Gigi’s offer?

Answer:The withdrawal of Gigi’s offer will cause the offer to cease in law. Hence, even if subsequently accepted, there could be no concurrence of the offer and the acceptance. In the absence of concurrence of offer and acceptance, there can be no consent. Without the consent, there is no perfected contract for the construction of the house of Chito.

1320. An acceptance may be express or implied.

FORM OF ACCEPTANCE

1. Express2. Implied – from conduct or acceptance of unsolicited

services3. Presumptive – when there is silence in certain cases as

would tend to mislead the other party and thus places the silent person in estoppel.

Perez v. PomarFacts:Defendant contended that there was no perfected contract entered into between him and the plaintiff because there was no proof that he accepted the services of the latter as interpreter.

Held:Not only is there an express and tacit consent which produces true contracts, but there is also a presumptive consent which is the basis of quasi-contracts, thus giving rise to the multiple juridical relations which result in obligations for the delivery of a thing or rendition of a service.

1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with.

THINGS THAT MAY BE FIXED BY THE OFFERER

1. Time2. Place3. Manner of acceptance

Take note: Any act contrary to the prescribed terms constitutes a counter-offer or counter-proposal

Contract to purchaseA contract to purchase which does not give specific description of the objects to be purchased nor the price or rate of exchange to be used, is a mere preliminary agreement.

1322. An offer made through an agent is accepted from the time acceptance is communicated to him.

ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT

A. This Article applies when both the offer and acceptance are made through an agent, who is an extension of the personality of the principal.

B. Any other intermediary is merely a sort of messenger, who must communicate to the person who sends him, otherwise, there is as yet no meeting of the minds.

Illustration:Suppose the principal himself made the offer, and the acceptance is made to the agent, would there be a meeting of the minds?

As a general rule, there would be no meeting of the minds for the agent may be an ordinary one, not authorized to receive the acceptance. However, if the agent was expressly authorized to receive the acceptance, the contract is perfected.

1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed.

WHEN OFFER BECOMES INEFFECTIVEAn offer becomes ineffective when either party, before acceptance is conveyed, suffers from:

1. Death2. Civil interdiction3. Insanity4. Insolvency

Conveyed – refers to that moment when the offeror has knowledge of the acceptance by the offeree.

Problem 1:A, residing in Manila, wrote to his friend B, residing in Cotabato, stating in the letter that he is donating to him one new car worth P25k. Upon receipt of the letter, B called A by long distance telephone telling him that he is accepting the donation. The same day, B wrote and mailed a letter to A accepting the donation. Immediately after mailing the letter B died of a heart failure. Who is entitled to the car now, A or the heirs of B?

Answer:

FORM OF ACCEPTANCE

THINGS THAT MAY BE FIXED BY THE OFFERER

ACCEPTANCE OF AN OFFER MADE THROUGH AN AGENT

WHEN OFFER BECOMES INEFFECTIVE


A is entitled to the car, since the donation in the case cannot produce any effect whatsoever. According to Art 748, if the value of the personal property donated exceeds P5, 000, the donation and acceptance shall be in writing, otherwise the donation is void. According to Art 1323, an offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed.

Problem 2:A donated a piece of land to B in a donation inter vivos. B accepted the donation in a separate instrument but A suddenly died in an accident before the acceptance could be communicated to him. Is the donation valid?

Answer: Even assuming that both the donation and the acceptance was made in a public instrument, the same is still not valid for the following reasons:

1. Art 734 – a donation is perfected from the moment the donor knows of the acceptance by the donee. It is obvious that in the instant case, A never came to know of the acceptance by B because he suddenly died.

2. Art 1323 – an offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed.

1324. When the offerer has allowed the offeree 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.

OPTIONIt is a contract granting a person the privilege to buy or not to buy certain objects at any time within the agreed period at a fixed price. The contract of option is a separate and distinct contract from the contract which the parties may enter into upon the consummation of the contract. Therefore, an option must have its own cause or consideration.

General Rule: If the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn anytime before acceptance (of the thing being offered), by communicating such withdrawal.

Example:B, interested in a car at a car exchange company, asks S for the price to which the latter said P3M. S gave B a week to make up his mind while reserving the car for the meantime. Before the week is over, can S withdraw the offer?

Yes, provided B has not signified his acceptance of the offer to sell yet and provided further that S communicates such withdrawal to B. Exception:When the option is founded upon a consideration as something paid or promised.

Example:If, in the preceding example, B gave S P20, 000 in consideration for the option, S cannot withdraw the offer to sell until after the expiration of the one week period.

Take note:If the option is without a consideration, it is a mere offer to sell which is not binding until accepted, and therefore can be withdrawn. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale. There is already a concurrence of both offer and acceptance.

PERIOD OF ACCEPTANCE: OPTIONSEffect of an option which is without a consideration and effect of one which is founded upon a consideration – insofar as the right of the offeror to withdraw his offer is concerned.

If option is without any consideration – offeror may withdraw his offer by communicating such withdrawal at any time before acceptance.

If option is founded upon a consideration – offeror cannot withdraw his offer.

1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer.

BUSINESS ADVERTISEMENTSAre business advertisements of things for sale definite offers?

Answer: IT DEPENDS.

A. If it appears to be a definite offer containing all the specific particulars needed in a contract, then it is a definite offer.

Example: For sale: 900 sqm lot with a brand new 2 storey house at 1445 Paco Manila for 10 million cash. (This is a definite offer, from the advertiser cannot back out, once it is accepted by another)

B. If important details are left out, the advertisement is not a definite offer, but a mere invitation to make an offer.

Example: For sale: 900 sqm lots at 100 million to 150 million at South Forbes Park. Tel No. 4440962 (This is clearly merely an invitation to make an offer, which the advertiser is free to accept or reject)

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.

ADVERTISEMENT FOR BIDDERS

General rule: The advertiser is not bound to accept the highest or lowest bidder.

Problem 1:In an advertisement for bidders, there was no reservation by the advertiser that he could reject any and all bids. Now then, is he still given the right to reject even the highest bidder (for offer to sell) or the lowest bidder (offer to buy)?

Answer: Yes, for the rule is that, the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears.

Problem 2:K and Co. published in the newspaper an “Invitation to Bid’’ inviting proposals to supply labour and materials for a construction project described in the invitation. L, M and N submitted bids. When the bids were opened, it appeared that L submitted the lowest bid. However, K and Co. awarded the contract to N, the highest bidder, on the ground that he was the most experienced and responsible bidder. L brought an

OPTIONS & PERIOD FOR ACCEPTANCE

BUSINESS ADVERSTISEMENTS

ADVERSTISEMENT FOR BIDDERS


action against K and Co. to compel the award of the contract to him and to recover damages. Is L’s position meritorious? Answer:L’s’ position is not meritorious. According to the Civil Code, 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. It is clear that the general rule applies in the instant case. In its advertisement, K and Co. did not state that it will award the contract to the lowest bidder. Therefore, in awarding the contract to N, the defendant company acted in accordance with its rights.

Acceptance of a bidThe mere determination to accept the proposal of a bidder does not constitute a contract. The decision must be communicated to the bidder.

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.

LEGAL CAPACITY OF CONTRACTING PARTIESThe capacity of the contracting parties is an indispensable requisite of consent. It is impossible to speak of an effective consent without presupposing the capacity to give it.

Effect: The contract is defective.

If only one of the parties is incapacitated to give his consent, the contract is voidable.

If both of them are incapacitated to give their consent, the contract is unenforceable.

INCAPACITATED PERSONSPersons incapacitated to give their consent to a contract:

1. Unemancipated minor2. Insane or demented persons3. Deaf-mutes who do not know how to write

Unemancipated minorThese are the minors who have not been emancipated by marriage, attainment of the age of majority, or by parental or judicial authority.

General rule: The contract is either voidable or unenforceable.

Exceptions: 1. When it is entered into by a minor who misrepresents

his age 2. When it involves the sale & delivery of necessaries to

the minor3. When it involves a natural obligation and such is fulfilled

voluntarily by the minor, provided that he is between 18 and 21 years old

4. When it is a marriage settlement or donation propter nuptias, provided that he is between 20 and 21 (if male), or between 18 and 21 (if female)

5. When it is a life, health or accident insurance taken on the life of the minor, provided that he is 18 and above and the beneficiary appointed is the minor’s estate, the father, mother, husband, wife, child, brother or sister.

Take note: Misrepresentation by unemancipated minors with regard to their age when entering into a contract shall bind them in the sense that they are estopped subsequently from impugning the validity of the contract on the ground of minority. It is, however, necessary that the misrepresentation must be active, not merely constructive

Braganza v. Villa AbrilleFacts:1944, Braganza and her two minor sons borrowed from Abrille P70, 000 in Japanese military notes, promising to pay the latter solidarily P10, 000 in legal currency of the Philippines as soon as International Exchange has been established two years after the cessation of hostilities. For failure to pay in 1949, Abrille filed this action.

Issue: Whether or not the minors can be held liable.

Held:No. The minors’ failure to disclose their minority does not follow that they will not be permitted thereafter to assert it. Mere silence when making a contract as to age does not constitute a fraud. To hold the minor liable, the fraud must actual and not constructive. They cannot however absolve themselves entirely from monetary liability.

Even if the contract is voidable, they shall make restitution to the extent that they may have profited by the money they received, in accordance with the Ballantyne Schedule.

Insane or demented personsAny person, who, at the time of the celebration of the contract, cannot understand the nature and consequences of the act or transaction by reason of any cause affecting his intellectual or sensitive faculties, whether permanent or temporary.

Take note: They cannot give their consent to a contract, unless they acted during a lucid interval

Question: What is the nature and extent of the mental capacity which will incapacitate a person from giving his consent to a contract?

It is sufficient that at the time of the celebration of the contract, one of the contracting parties was not capable of understanding with reasonable clearness the nature and effect of the transaction in which he was engaged.

Mental incapacity as a question of factMental incapacity to enter into a contract is a question of fact which must be decided by the courts. There is however a disputable presumption that every person of legal age possesses the necessary capacity to execute a contract.

Carillo v. JaocoFacts:The vendor of several parcels of land was declared insane by a competent court 9 days after the execution of the contract of sale.

Held:The fact that 9 days after the execution of the contract, Carillo was declared mentally incapacitated by the court DOES NOT prove that she was so when she executed the contract. The burden of proof that she was mentally incapacitated prior or during the execution of the contract is upon her who affirms said incapacity. If no sufficient proof to this effect is presented, her capacity must be presumed.

Deaf-mutesThere is a need to distinguish between the effect of a contract entered into by a deaf-mute who:

Knows how to write. (effect: Valid) Does not know how to write. (effect: Voidable or

unenforceable)

Take note: If the deaf-mute does not know how to write but knows how to read, he is capacitated.

LEGAL CAPACITY OF CONTRACTING PARTIES


Other incapacitated personsIncompetents who may be placed under guardianship:

A. Persons suffering from civil interdictionB. Hospitalized lepers C. ProdigalsD. Deaf and dumb who are unable to read and writeE. Unsound mind, even though they have lucid intervalsF. Those who by reason of age, weak mind and other

similar causes, cannot without outside aid, take care of themselves and manage their property becoming thereby an easy prey for deceit and exploitation

Take note: An incompetent can enter into a contract only through his guardian. Otherwise, the contract is voidable.

Problem:Is a person of advanced years or age or by reason of physical infirmities incapacitated to enter into a contract? No, unless such age and infirmities impair his mental faculties to the extent that he is unable to properly, intelligently and fairly understand the provisions of said contract.

Take note:The mere fact that a person is classified as an “incompetent” in does not necessarily mean that he cannot give his consent to a contract, nor does the mere fact that he is not under guardianship mean that he can give his consent to a contract. Consequently, whether or not they can give their consent to a contract becomes a matter of proof.

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.

VOIDABLE CONTRACTS BY REASON OF INCAPACITYThe voidable contracts referred to are those entered into by:

1. Insane or demented persons (unless they acted during a lucid interval)

2. Those in the state of drunkenness (which temporarily results in complete loss of understanding and may therefore be equivalent to temporary insanity)

3. Those entered into during a hypnotic spell or during somnambulism

Lucid intervalsEven if a person has already been judicially declared insane, and is actually now under guardianship, he may still enter into a valid contract, provided that it can be shown that at the time of contracting, he was in a lucid interval. Of course here, he is already presumed insane, and therefore the sanity must be proved.

1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualification established in the laws.

DISQUALIFICATIONS TO CONTRACT

The persons specially disqualified mentioned in Art 1329 refer to those who are prohibited from entering into a contract with certain persons with regard to certain property under certain circumstances AND NOT to those who are incapacitated to give their consent to a contract.

Examples:

1. Contracts entered into with non-Christians are void, unless approved by the governor or his representative.

2. A person declared insolvent before he is discharged is prohibited from entering into a contract.

3. Husband and wife cannot sell nor donate to each other.

4. Persons disqualified because of fiduciary relationship, such as guardian who is not allowed to purchase the property of his ward, or judge with reference to the property under litigation.

DISTINGUISHED FROM INCAPACITY TO CONTRACTDisqualification to contract must not be confused with incapacity to give consent to a contract.

Incapacity Disqualification

Restrains the exercise of the right to contract

Restrains the very right itself

Can still enter into a contract through his parent or

guardian

Absolutely disqualified from entering into a contract

Based upon subjective circumstances of certain

persons which compel the law to suspend for a

in/definite period their right to contract

Based upon public policy and morality

Merely voidable (unless both the contracting parties are

incapacitated – unenforceable)

Void

1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable.

VICES WHICH MAY VITIATE CONSENT

Vices of will1. Mistake 2. Fraud

VOIDABLE CONTRACTS BY REASON OF INCAPACITY

DISQUALIFICATIONS TO CONTRACTVITIATED CONSENT


3. Violence4. Intimidation5. Undue influence

Vices of declaration1. All forms of simulated contracts

VICES DEFINED

A. Violence – when in order to wrest consent, serious or irresistible force is employed.

B. Intimidation – when one of the contracting parties is compelled by a reasonable & well-grounded fear of an imminent & grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent.

C. Mistake – 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 contact. (Exception: Mutual error)

D. Fraud – when, through insidious words or machinations of 1 of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to.

E. 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.

F. Simulation of Contracts – when the contracting parties do not intend to be bound by the contract at all. Thus, an absolutely simulated contract is VOID.

REQUISITES OF CONSENT OBJECTIVELY CONSIDERED

1. Intelligent (vitiated by mistake)2. Free (vitiated by violence, intimidation and undue

influence) 3. Spontaneous (vitiated by fraud)4. Real (vitiated by simulation)

Effects Absence of any of the first three requisites – voidable. Absence of the fourth requisite – either void or valid,

depending upon whether the simulation is absolute or relative.

NATURE OF A VOIDABLE CONTRACTA voidable contract is binding and valid, unless annulled by a proper action in court. It is however susceptible of ratification before annulment.

Take note:There must be clear and convincing evidence of the presence of vitiated consent. Mere preponderance of evidence on this matter is NOT sufficient.

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.

MISTAKE

1. The wrong conception of a thing and2. The lack of knowledge with respect to a thing

Take note: The Code does not distinguish between mistake and ignorance.

Effect: Contract is voidable.

MISTAKE WHICH VITIATE CONSENT

Two general kinds of mistakes:

1. Mistake of fact – when one or both of the contracting parties believe that a fact exists when in reality it does not

2. Mistake of law – when one or both of the contracting parties arrive at an erroneous conclusion regarding the interpretation of a question of law or the legal effects of a certain transaction.

General rule: Only mistake of fact will vitiate consent, thus rendering the contract voidable. Reason: Ignorance of the law excuses no one from compliance therewith.

MISTAKE OF FACTClassifications of mistake of fact which vitiate consent:

1. Mistake as to object (error in re) The mistake referred to in the 1st paragraph.

A. Error re the object of the contract – when the thing which constitutes the object of the contract is confused with another thing.

Example: A person signed a contract of sale thinking it was only a contract of loan.

B. Error in substance or quality – necessary that such mistake should refer to the material out of which the thing is made, and to the nature which distinguishes it from all others.

Example: A person buys a fountain pen thinking it to be made of solid gold when it is merely gold-plated.

C. Error re the conditions of the thing – provided that such conditions have principally moved one or both parties to enter into the contract.

Example: Error in knowledge about the true boundaries of a parcel of land offered for sale.

D. Error in quantity – provided that the extent or dimension of the thing was one of the principal reasons of one or both of the parties for entering into the contract.

Example: A person desiring to buy land consisting of 100 hectares discovers the land has only 60 hectares.

Take note: Not to be confused with mistake of account or calculation. – Not voidable.

Asiaian v. JalandoniFacts:Plaintiff offered to sell to defendant a certain hacienda for P55, 000 where he told that latter that it contained between

MISTAKE WHICH VITIATE CONSENT


25 and 30 hectares and that the sugarcane then planted would produce 2, 000 piculs of sugar. Defendant accepted the offer and paid P30, 000 of the purchase but it turned out that the land was only about 18 hectares and the cane only about 800 piculs of sugar. Because of this, he refused to pay the balance of the purchase price. Hence, the plaintiff filed an action to recover the balance, and the defendant filed a counter-complaint asking that the contract be annulled.

Held:This was not a contract of hazard. It was a sale in gross where there was a mutual mistake as to the quantity of the land sold and as to the amount of the standing crop. In effect, the agreement is inoperative. The ultimate result is to put the parties back to the original status.

2. Mistake as to person (error in persona)

Refers to the error with regard to the identity or qualifications of one of the contracting parties.

Requisites:

A. Mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties

B. Such identity or qualification must have been the principal consideration for the celebration of the contract.

Take note: Mistake with regard to the name of one or both of the parties will NOT invalidate the contract.

Example: Hiring a pre-bar reviewer, a particular singer for a concert, contracts involving partnership, agency, and deposit. (These require trust and confidence)

Take note: If any painter or singer would do, error as to the identity would be immaterial.

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.

REASON FOR THE ARTICLEThis rule is especially necessary in the Philippines where unfortunately there is still a fairly large number of illiterates, and where documents are usually drawn up in English or Spanish.

This Article is intended for the protection of a party to a contract who is at a disadvantage due to his illiteracy, ignorance, mental weakness or other handicap.

What the article contemplatesA situation wherein a contract has been entered into, but the consent of one of the parties is vitiated by mistake or fraud committed by the other contracting party.

Consent vitiated by mistake – mistake should refer to the substance of the thing which is the object of the contract or to those conditions which have principally mmoved one or both parties to enter into a contract.

Coonsent vitiated by fraud – when one of the parties induced another to enter into a contract through

insidious words or machinations, which without them, he would not have agreed to.

PRESUMPTIONThat one always acts with due care and signs with full knowledge of all the contents of a document.

When presumption does not apply

1. When one of the parties is unable to read (including a blind person)

2. If the contract is in a language not understood by one of the parties.

Take note: In both cases, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

Examples:

1. A person who cannot read and write, signed a document which she thought was merely a promise to pay certain expenses but which turned out to be an absolute deed of sale of two parcels of land – voidable.

2. When a blind person affixed his thumbmark to a deed which they thought was a deed of mortgage but rather a deed of sale – voidable.

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1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract.

KNOWLEDGE OF RISK DOES NOT VITIATE CONSENTIt is to be assumed here that the party was willing to take the risk. This is particularly true in contracts which are evidently aleatory in nature.

Example:A bought a fountain pen which was represented as possibly being able to write even underwater. A also knew that the pen’s ability was questionable, and yet A bought said pen. Here, A cannot allege mistake since he knew beforehand of the doubt, risk, or contingency affecting the object of the contract.

1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.

MUTUAL ERROR

General rule: Mistake of law will not vitiate consent.

Exception: Mutual error as to the effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent.

Reason: Mistake of law does not generally vitiate consent, BUT when there is a mistake on a doubtful question of law, or on the construction or application of law, this is analogous to a mistake of fact, and the maxim ignorance of the law excuses no one from compliance therewith should have no proper application.

Requisites:

RULE WHERE A PARTY IS ILLITERATE

KNOWLEDGE OF DOUBT OR RISK

MUTUAL ERROR


1. Mistake must be with respect to the legal effect of an agreement

2. Mistake must be mutual3. Real purpose of the parties must have been frustrated

Example: A and B entered into a contract, which they intended should result in a co-ownership between them, but which turned out later to be a mortgage, as a result of their mutual error as to the legal effect of the agreement. Here the contract is voidable.

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 the 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.

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.

VIOLENCE AND INTIMIDATION

Violence Intimidation

External Internal

Prevents the expression of the will substituting it with a

material act dictated by another

Influences the operation of the will, inhibiting it in such a

way that the expression thereof is apparently that of a person who has freely given

his consent

Physical compulsion Moral compulsion

Examples: If a person signs a contract only because a gun is pointed at him, this is intimidation because he is afraid he would be killed. But if he signs because his left hand is being twisted painfully, this is violence or force.

Requisites of violence to vitiate consent

1. Force employed must be serious and irresistible2. It must be the determining cause for the party upon

whom it is employed in entering into the contract

Requisites of intimidation to vitiate consent

1. One of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of an evil

2. The evil must be imminent and grave3. Upon his person, property or upon the person or

property of his spouse, descendants or ascendants

4. The evil must be unjust3. The evil must be the determining cause for the party

upon whom it is employed in entering into the contract

CHARACTER OF INTIMDATION

Well-grounded fear of evilFor intimidation to be sufficient to render a contract voidable, one of the parties should be 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.

The threat or intimidation must be:

1. Actual2. Serious3. Possible of realization4. The actor can and still will carry out his threat

Example:A threat during the Japanese occupation to deliver the person to the Japanese military authorities would constitute intimidation. (TN: Mere knowledge that severe penalties might be imposed is not enough)

Distinguished from reluctant consentConsent given through intimidation must not be confused with consent given reluctantly and even against good sense and judgment. Legally speaking, a person acts voluntarily and freely when he acts against his better judgment as compared to when he acts in conformity with them

Martinez v. Hongkong and Shanghai BankFacts:Under the contract, the plaintiff agreed to convey several properties to the bank as settlement of their claims against her and her husband, who escaped to Macao where there is not extradition treaty in order to escape criminal charges. It was established that during the period of negotiations, she was told that if she assented to the requirements, the civil suit against herself and her husband would be dismissed and the criminal chargers, withdrawn. But if she refused, her husband must either spend the rest of his life in Macao or be criminally prosecuted. This is an action to annul a contract on the ground that plaintiff’s consent thereto was obtained under duress.

Issue:Whether or not there was duress which would invalidate the contract.

Held:In order that the contract be annulled, it must be shown that the plaintiff never gave her consent to the execution thereof. It is necessary to distinguish between real duress and the motive which is present when one gives his consent reluctantly. A contract is valid even though one of the parties entered into it against his wishes and desires or even against his better judgment.

Imminent and Grave evilTo determine the degree of intimidation, these shall be borne in mind:

1. Age2. Sex3. Condition of the person intimidated – resolute or weak

character capacity or culture, position, financial condition

Take note: When the evil which threatens is directed not against the party but against his spouse, descendant or ascendant – consider their conditions as well.

VIOLENCE AND INTIMIDATION


Effect of just or legal threatA threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent.

Examples:

1. If a man marries a girl who threatened to report him to the Courts for immorality, and thus prevent his admission to the bar, the marriage cannot be annulled on the ground of intimidation because here the girl had the legal right to do what she threatened.

2. A threat to prosecute unless the debtor signs a contract is not intimidation.

Take note: The right to enforce one’s claim thru competent authority must not by itself constitute an unlawful act. Example: A witness to a crime threatens to report the criminal to the police unless said criminal gives money to him. This is a clear case of blackmail.

VIOLENCE OR INTIMIDATION BY A THIRD PERSONEven if a third person exercised the violence or intimidation, the contract may be annulled. This is because the consent is still vitiated. (De Asis v. Buenviaje)

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.

UNDUE INFLUENCEWhen a person takes improper advantage of his power over the wil of another, depiving the latter of a reasonable freedom of choice.

WHAT VITIATES CONSENTThe influence which deprives a person of his free agency.

Take note: To vitiate consent, the influence must be undue. if the influence is due or allowable, as when caused by solicitation, importunity, argument and persuasion, same is not prohibited by law, morals, or equity. The line between due and undue influence must be with full recognition of the liberty due every person to enter into a contract according to his own free choice.

Test of undue influenceWhether or not the influence exerted has 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.

Circumstanes to consider in determining undue influence

Confidential, family, spiritual, other relations between the parties

Mental weakness Ignorance Financial distress

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.

FRAUDFraud which will render a contract voidable refers to those insidious words or machinations employed by one of the contracting parties in order induce the other to enter into a contract which, without them, he would not have agreed to.

Kinds of fraudThe fraud referred to in Art 1338 must not be confused with the fraud in Arts 1170 and 1171 o fthe Code.

1. Fraud in the performance of an obligation (Art 1170) – employed by the obligor in the performance of a pre-existing obligation

2. Fraud in the perfection of a contract (Art 1338) – employed by a party to the contract in securing the consent of the other party.

A. Dolo causante – those deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract. (This is the fraud reffered to in this article)

Effect: Contract is voidable

B. Dolo incidente – those deceptions or misrepresentations which are not serious in character and without which, the other party would still have entered into the contract. (Fraud referred to in Art 1344)

Effect: Contract is valid but there can be an action for damages.

Causal fraud Incidental fraud

As to nature

Serious in character Not serious

As to cause

Fraud is the cause which induces the to

enter into the contract

Fraud is not the cause

As to effect

VoidableValid but party liable of fraud is liable for

damages

Requisites:1. Fraud or insidious words or machinations must have

been employed by one of the contracting parties2. The fraud must have been serious3. The fraud must have induced the other party to enter

into the contract4. The fraud should not have been employed by both of the

contracting partes or by third persons

NATURE OF FRAUDDeception or misrepresentation employed by one of the contracting parties to secure the consent of the other.

UNDUE INFLUENCE

FRAUD


Insidious words or machinations – broad enough to cover any kind of deception, such as false promises, fictitious names, qualifications or authority.

Take note: All the forms of deception which may delude a contracting party to give his consent, without necessarily constituting estafa or some other offense in our penal laws.

Before a contract can be invalidated because of fraud

1. There must be proof of concrete facts constituting the fraud employed by one of the contracting parties, by virtue of which the other was induced to enter into the contract, without which, he would not have agreed to.

2. Such insidious words or machinations must be prior to or contemporaneous with the birth or perfection of the contract.

Eguaras v. Great Eastern Life Assurance Co. Facts:Albay filed an application for insurance on his life with the defendant company. However, since Albay was in poor health, the person who presented himself for medical examination to the company physician was not Albay, but Castor Garcia who posed as Albay. As a result of the favourable report the physician, the company executed the contract of insurance. A short time thereafter, Albay died. The company contends that the contract should be annulled on the ground of fraud.

Held:The fraud which gave rise to the mistaken consent given by the company to the insurance application is unquestionable. The fraud consisted in the substitution at the examination of Castor Garcia in place of the insured and as the deceit is of a serious nature, the same is alos voidable in accordance with the provision of Art 1334.

1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud.

FAILURE TO DISCLOSE FACTS

A. Failure to disclose facts (concealment) constitutes fraud, when there is a duty to reveal them.

B. There is a duty to reveal in the following cases, for example: when the parties are bound by confidential relations as in the case of partners.

Take note: Non-disclosure of a fact when there is no duty to reveal it does not constitute fraud.

Examples:1. Defendant who is a manager of a certain corporation

and owner of about ¾ of the shares of the capital stock thereof, bought through an agent 800 shares of capital stock from the plaintiff without disclosing the fact that he had just negotiated the sale of valuable properties to the government, thus enhancing he value of the capital stocks of the company.

Poss v. GottliebFacts:

A and B were real estate partners. A heard of a possible purchaser of a certain parcel of land owned by the firm. But A did not inform B. Instead, A persuaded B to sell to him (A) B’s share at a nominal amount, after which A sold the whole parcel at a big profit. B sued A for damages for alleged deceit. A’s defense was that he after all had not been asked by B about possible purchasers.

Held:A is liable, for he should not have made any concealment. Good faith not only requires that a partner should not make any false concealment, but he also should abstain from all concealment.

Opponents in a LitigationThere would seem to be no duty to disclose facts, as between opponents in a litigation for their relations, far from being friendly or confidential, are openly antagonistic.

1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent.

EXAGGERATIONS IN TRADEThis Article stresses the rule of “caveat emptor” (let the buyer beware) – A buyer must be on his guard. It is his duty to check the title of the seller, otherwise the buyer gets the object at his own risk.

Dealer’s talkThe usual exaggerations in trade (dealer’s talk) constitute tolerated fraud, when the other party had an opportunity to know the facts. Experience teaches that it is exceedingly risky to accept it at its face value. A man who relies upon an affirmation made by a person whose interest might so readily prompt him to exaggerate the value of his property, does so at his own risk. He must therefore take the consequences of his own imprudence.

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.

EXPRESSION OF OPINION

General rule: A mere expression of an opinion does not signify fraud.Exception: When made by an expert and the other party has relied on the former’s special knowledge.

Examples:

1. A, on buying a watch, was assured by the seller that it was a good watch, and could run without rewinding for one week, in the opinion of the seller. This is a mere expression of opinion that is not fraudulent.

Except: If the seller was a watch expert, and the only reason why A bought the watch was this opinion of the seller, the contract is voidable on the ground of fraud.

2. If a seller says that in his opinion his land is first class, but it turns out to be second class, the sale is not fraudulent, particularly when the buyer had opportunity to examine the land for himself.

Songco v. SellnerFacts:

FAILURE TO DISCLOSE FACTS

EXAGGERATIONS IN TRADE

EXPRESSION OF OPINION


Songco estimated that the crop would yield 3, 000 piculs of sugar, however it produced only 2, 017 piculs. The issue is whether such representation is fraudulent that would invalidate the contract.

Held:No, such representation can only be considered as a mere expression of an opinion and the same is not an actionable deceit.

1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

MISREPRESENTATION BY THIRD PERSONS

General Rule: Misrepresentation by a third person does not vitiate consent.

Example:A and B entered into a contract with X. A’s consent was obtained only because B had deceived or defrauded him. May A ask for annulment of the contract with X? NO, because X was not a party to the fraud.

Exception:When such misrepresentation has created substantial mistake and the same is mutual.

Take note: In this case, the contract may be annulled, not principally on the ground of fraud, but on the ground of mistake.

Example:C, an old and ignorant woman, was helped by V in obtaining a loan of P3, 000 from X Rural Bank, secured by a mortgage on her house and lot. On the day she signed the promissory note and the mortgage contract, she also signed several documents. One of these documents was a promissory note of V for a loan of P3, 000 also secured by a mortgage on her house and lot. Years later, she was informed that her property shall be sold at public auction to satisfy the two obligations. She then filed a suit for annulment of her participation as co-maker in the obligation contracted by V on the ground of fraud and mistake. Upon filing of the complaint, she deposited P3, 383 in court as payment of her personabl obligation plus interests.

Issues:1. Can C be held liable for the obligation of V?2. Was there a valid and effective consignation considering

that there was no previous tender of payment made by C to the Bank?

Held:1. No, C cannot be held liable for the obligation of V

because of mistake. (not fraud because the bank was not a participant in the fraud committed by V) There was substantial mistake on the part of both C and the Bank mutually committed by them as a consequence of the fraud employed by V.

2. Notwithstanding the absence of a previous tender of payment made directly to the Bank, the consignation was valid and effective. The deposit was attached to the record of the case and the Bank had not made any claim thereto. Therefore, C was right in thinking that it was useless for her to make a previous offer and tender of payment directly to the Bank.

1343. Misrepresentation made in good faith is not fraudulent but may constitute error.

MISREPRESENTATION IN GOOD FAITH

Example:Tanya bought a certain article from Feds. The article was needed for Tanya’s radio. Feds honestly but mistakenly assured Tanya that the article was the proper object. May the contract be annulled?

Yes, but not on the ground of fraud because the misrepresentation was honest, but on the ground of substantial error.

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.

FRAUD TO VITIATE CONSENTThere are two requisites for fraud as a ground for annulment given in this Article:

1. The fraud must be serious2. The parties must not be in pari delicto (mutual guilt),

otherwise the contract is valid and neither party may ask for annulment.

Serious character of fraudRefers not to its influence, but to its importance or magnitude. Hence, a contract cannot be annulled just because of the presence of:

A. Minor or common acts of faud whose veracity could easily have been investigated

B. Ordinary deviations from the truth which are almost inseparable from ordinary commercial transactions especially those taking place in fairs or markets

RELATION BETWEEN FRAUD AND CONSENTThe fraud must be the principal or causal inducement for the consent of the party who is deceived in the sense that he would never have given such consent were it not for the fraud.

Take note: If the fraud is merely incidental in the sense that the party who is deceived would have agreed to the contract even without it, his consent is not vitiated. The contract is therefore valid. Its only effect is to render the fraudulent party liable for damages.

Woodhouse v. HaliliFacts:Plaintiff and defendant entered into a contract where it was agreed that they shall organize a partnership for the bottling and distributon of Mission soft drinks. Plaintiff as industrial partner and manager, and defendant as capitalist partner. Plaintiff was to secure the franchise for and in behalf of the partnership and he was to receive 30% net proftits of the business. Defendant failed to comply with the contract after the bottling plant was already in operation. Hence, plaintiff filed a case praying for the execution of the agreed upon partnership.

Defendant’s contention – he alleged that his consent to the contract was secured through the plaintiff’s false

MISREPRESENTATION BY THIRD PERSONS

MISREPRESENTATION IN GOOD FAITH

MAGNITUDE OF FRAUD


representation that he had the exclusive bottling franchise of the Mission Dry Corp in the Phils.

Issues:1. WON the plaintiff had falsely represented that he had

the exclusive franchise to bottle Mission beverages in the Phils

2. Whether this false representation, if its existed, annuls the agreement to form a partnership.

Held:It is true that the defendant was led to believe by the plaintiff that the latter had the exclusive franchise and the same is to be transferred to the partnership. However, the principal obligation that the plaintiff assumed was to secure said franchise for the partnership. Hence, if ever there was false misrepresentation on the part of the plaintiff, such misrepresentation was not the causal inducement that led defendant to enter into the partnership agreement. On the other hand, this supposed ownership of an exclusive franchise was only the consideration plaintiff gave in exchange for the share of 30%.

In other words, the plaintiff, by pretending that he had the exclusive franchise and promising to transfer it to defendant, obtained the consent of the latter to give him a big slice in the net profits (and not the latter’s consent to the partnership agreement itself) This is just dolo incidente because it was used to get the other party’s consent to a big share in the profts, an incidental matter in the agreement.

Since there was breach of contract on the part of the defendant as well as misrepresentation on the part of the plaintiff – set off damages

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.

1346. An absolutely simulated or fi ctitious 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.

SIMULATION OF CONTRACTSIt is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute simulation) or which is different from the true agreement (relative simulation).

Two kinds of simulation:

A. Absolute – when there is colorable contract but it has no substance because the contracting parties do not intend to be bound by the contract at all.

Example: Debtor simulates the sale of his properties to a friend in order to prevent their possible attachment by creditors or when A, as a joke, executed a deed of sale although they did not intend to be bound at all by the contract.

Basic characteristic: Contract is not desired or intented to produce legal effects

Effect: Inexistent and void.

Cruz v. Bancom Finance CorpFacts:

Although the Deed of Sale between petitioners and Candelaria Sanchez stipulated a consideration of P150,000, there was actually no exchange of money between them.

Held:The Deed of Sale were absolutely simulated, hence, null and void. This being so, petitioners would be in the same position as they were before they executed the simulated Deed of Sale in favor of Sanchez; they are still the owners of the property.

B. Relative – when the contracting parties state a false cause in the contract to conceal their true agreement.

Example: When a person conceals a donation by simulating a sale of the property to the beneficiary for a fictitious consideration.

Effect: Binding and enforceable between the parties and their successors in interetest to the real agreement, except –

1. If the contract should prejudice a third person2. If the purpose is contrary to law, morals, etc.

Take note: The apparent or ostensible contract is the one valid. Reason: The contracting parties are in estoppel and should be penalized for their deception.

Test in determining the nature of a contractThe intention of the parties as determined from the express terms of their agreement as well as from their contemporaneous and subsequent acts.

Presumption of validity of contractsThe legal presumption is in favour of the validity of contracts. Hence, the party who impugns the validity and regularity of a contract has the burden of proving his allegation.

CONTRACTS OF ADHESIONWhere the terms thereof are prepared by only one party while the other merely affixes his signature signifying his adhesion thereto.

Effect: Valid because the one who adheres to the contract is in reality free to reject it entirely. If he adheres, he gives his consent.

Exception: If the weaker party is reduced to the alternative of taking or leaving it, completely deprived of the opportunity to bargain in equal footing.

Spouses Reyes v. BPI Family Savings BankFacts:Petitioner spouses executed a real estate mortgage on their property in favour of BPI-FSB to secure the P15M loan of Transbuilders Resources and Devt Corp to BPI.

Held:While the stipulation proved to be onerous to the petitioners, the courts will not extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full awareness of its consequences. Petitioners voluntarily executed the REM and they cannot be allowed to repudiate their obligation to the bank after Transbuilder’s default. Contracts of adhesion are not invalid per se.

SIMULATION OF CONTRACTS

Section 2 – OBJECT OF CONTRACTArticles 1347 - 1349

CONCEPT OF OBJECT


OBJECTThe subject matter of the obligation which is created or established.

Take note: Objects of contracts and that of obligations are identical.

Importance of objectThe most indispensable, if not the most fundamental requisite, in order to have at least the shadow of a contract.

Why? Because without cause, an agreement is possible, although inexplicable. Without consent, it is at least possible to have the appearance of a contract. But without an object there is nothing.

1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. No contract may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract.

1348. Impossible things or services cannot be the object of contracts.

1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties.

WHAT MAY BE THE OBJECT OF CONTRACTS

General rule: All things or services may be the object of contracts.

Exceptions:

1. Those outside the commerce of men2. Intransmissible rights3. Future inheritance, except in cases authorized by law4. Services which are contrary to law, morals, etc.5. Impossible things or services6. Those not possible of determination as to its kind

REQUISITES

1. The object must be within the commerce of men 2. Must be real or possible – exists at the moment of the

celebration of the contract or at least can exist subsequently or in the future

3. Must not be contrary to law, morals, public policy, etc. 4. Must be transmissible5. Must be determinate, or at least determinable as to its

kind

Two requisites:1. Must be susceptible of appropriation2. Must be transmissible from one person to another

Take note: Those things, rights or services which do not possess these conditions or characteristics are outside the commerce of men.

Examples:

1. Those things which are such by their very nature (i.e. air, sea, sacred things, res nullius, property belonging to public domain)

2. Those which are made such by special prohibitions established by law (i.e. poisonous substances, drugs, arms, explosives, and contrabands)

3. Those rights which are intransmissible because they are:

A. Purely personal n character (i.e. those arising from the relationship of husband and wife – jus consortium, or from the relationship pf paternity and filiation – patria potestas)

B. Honorary or political in character (i.e. right to suffrage and to hold public office)

Take note: Communal things, such as public plazas, sidewalks, streets, rivers, fountains, etc. for public use cannot be sold or leased because they are by their very nature, outside the commerce of men.

The object must be in existence at the moment of the celebration of the contract or at least, it can exist subsequently or in the future. Hence, even future things may be the object of contracts.

Things which have perishedIf at the time of the contract, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect.

Future thingsA future thing may be the object of a contract. (except future inheritance) Such contract may be interpreted in two possible ways:

A. Conditional contract – if its efficacy should depend upon the future existence of the thing

B. Aleatory contract – if one of the contracting parties should bear the risk that the thing will never come into existence.

Take note: In case of doubt, it must be deemed to be conditional because doubts should be resolve in favour of the greatest reciprocity of interests.

Example: Future harvest of sugarcane in a specific field may be sold, but by express provision of law, said future property cannot be donated.

Rule with respect to future inheritance

General rule: A future thing may be the object of a contract.

Exception:Future inheritance – any property or right NOT in existence or capable of determination at the time of the contract that a person may in the future acquire by sucession. (where source of the property is still alive)

Reason: There would be the possibility that one of the contracting parties may be tempted to instigate the death of

OBJECT OF CONTRACT

WITHIN THE COMMERCE OF MAN

EXISTENCE OF OBJECT


the other in order that the inheritance will become his, or that fraud and prejudice may be committed.

Examples:1. An agreement for the partition of the estate of a

living person, made bwteen those who, in case of death, would inherit the same is null and void.

2. Vendor undertook to convey to the vendee his participation in the property left by his deceased father. The part of the property belonging to his mother, who is still living, cannot be affected by the conveyance since his interest in the property of his mother was a future inheritance.

Take note: However, after the death of the decedent, anyone of the co-heirs may enter into a contract with respect to the inheritance even before partition has been effected. This is because the rights to succession are transmitted at the moment of the decedent’s death.

Blas v. SantosFacts:Simeon Blas married Marta Cruz in 1898 and had 3 children. A year after Marta’s death, Simeon contracted a second marriage with Maxima – no children. During the second marriage, no liquidation of the properties of the first marriage was made. Dec 26, 1936 – Simeon executed a will declaring all of his properties as conjugal and giving ½ thereof to Maxima as her share. On the same day, Maxima signed a notarized document, promising to convey by will ½ of the share given to her to the children of Simeon by his previous marriage. A week after, Simeon died. As a result, the children of the first marriage brought an action against the estate of Maxima asking for the enforcement of the promise contained in the document.

Maxima contends that the promise is not enforceable because it lacks a sufficient cause or consideration and since it is a contract with respect to future inheritance, the same falls within the prohibition of Art 1347.

Held: The execution of the document by Maxima was ordered by the testator to prevent his heirs by his first marriage from contesting his will and demanding liquidation of the conjugal properties acquired during his first marriage. Therefore, it has a sufficient cause or consideration. Also, the prohibition in Art 1347 does not apply. What is prohibited is a contract that deals with properties not in existence at the time of the contract, that a person may in the future acquire by succession. In the case, the subject matters of the contract signed by Maxima are well-defined properties existing at the time of the agreement.

Exceptions to the exception:Instances where future inheritance may be the object of the contract

1. Art 130 In the case of marriage settlements – allows future spouses to give or donate to each other in their marriage settlement their future property to take effect upon the death of the donor

2. Art 1080 In case of partitions of property inter vivos, provided that the legitime of compulsory heirs is not prejudiced.

Illustrations:

1. When his father died, but before the delivery of the property to him, a son sold his share of the property inherited. Is the sale valid?

YES. The inheritance is not future, but existing inheritance, although as yet undelivered.

2. While his father was still alive, A sold to B the property he expected to receive from his father. Is the sale valid?

NO, because the object of the contract is future inheritance since the father is still alive, and it does not fall under of the exceptions to the prohibition.

3. Some future heirs divided the property they expected to inherit from their mother, at a time when she was still alive. Is such partition valid?

NO, because the contract relates to a future inheritance since the mother is still alive, and does not come under the contegory of those contract authorized by law concerning future inheritance.

Impossible things or services

A. Absolute impossibility – arises from the very nature or essence of the act or service itself

Example: Contract to deliver a mythical bird to to travel to a distant galaxy.

Effect: Contract is void.

B. Relative impossibility – arises from the qualifications or circumstances of the obligor rendering him incapable of executing the act or service

Examples: In a contract of partnership where one of the partners obligates himself to contribute to the common fund an amount beyond his means, the contract is not void because the impossibility may disapper.

Effect: Allows the perfection of the contract, although the fulfillment is hardly probable.

Take note: If the impossibility is permanent, although relative only, the same is still void. (ex. Blind person entering into a contract which requires the use of eyesight)

Impossibility not to be confused with difficultyImpossibility must not be confused with difficulty. Hence, a showing of mere inconvenience, unexpected impediments, or increased expenses is not enough.

The object of the contract must be lawful and licit. Hence, it must not be contrary to any of the following:

A. LawB. MoralsC. Good customsD. Public order E. Public policy

The object must be determinate, or at least determinable as to its kind, without need of a new agreement.

DeterminateThe genus of the object should be expressed although there might be no determination of the individual species. Consequently, there need not be any specification of the

LICITNESS OF OBJECT

DETERMINABILITY OF OBJECT


qualities and circumstances of the thing which constitutes the object of the contract.

Illustration:Granting there is a specification as to the class or genus to which the object belongs but no specification as to quantity, is the contract valid?

YES. The fact that the quantity is not determinate, shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without need of a new contract. (2nd sen 1349)

Examples: needs of a family, provisions needed for a factory, materials for a particular work, etc.

Aurora Fe Camacho v. CAHeld:Arts 1349 and 1460 provide the guidelines in determing whether or not the object of the contract is certain. In this case, the object is a 5, 000 sqm portion of lot 261, Balanga Cadastre. The failure of the parties to state the exact location in the contract is immaterial. This is a mere error, which does not indicate the absence of the principal object as to render the contract void. The description of the property subject of the contract is sufficient to validate the same.

1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.

CAUSE DEFINEDThe essential reason which moves the contracting parties to enter into the contract. In other words, it is the immediate, direct or most proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties.

Contract Cause

Onerous contractsPrestation or promise of a thing

or service by the otherGratuitous contracts Liberality of the benefactor

Remuneratory contracts

Service or benefit which is remunerated

Distinguished from consideration Cause and consideration are used interchangeably in this jurisdiction. Causa is merely the civil law term, while consideration is the common law term.

Distinguished from object

A. For remuneratory contracts Cause – the service or benefit which is remunerated. Object – thing given in remuneration

B. For gratuitous contracts Cause – liberality of the donor or benefactor Object – the thing given or donated

C. For onerous contracts Cause – for each contracting party, the prestation or

promise of a thing or service by the other Object – the thing or service itself

Illustration for onerous contracts:

If Tanya sells a car to Feds for P20, 000, what is the cause and what is the object of the contract?

Three views:

1. Manresa and CastanCause: For Tanya, the cause is the promise of Feds to pay her P20, 000. For Feds, the cause is the promise of Tanya to deliver the car to him.

Objects: The car and the P20, 000.

2. Dr. PadillaCause: P20, 000Object: Car

3. Dr. TolentinoCause: For Tanya, the cause is the promise of Feds to pay her P20, 000. For Feds, the cause is the promise of Tanya to deliver the car to him.

Object: The car because it is the starting point of the agreement, without which the negotiation would never have begun. (The more logical view)

CAUSE IN ONEROUS CONTRACTSThe cause is for each contracting party, the prestation or promise of a thing or service by the other.

Example:A logging company by contract designated a certain agency as its distributor to export logs to Korea and Europe at the best market price obtainable on condition that it would pay the latter a commission of 13% of the gross value of the logs.

Cause for the logging company: Distribution of its logs in the areas agreed upon which the latter undertook to accomplish

Cause for the agency: Its commitment to sell or export the logs for onerous consideration.

Accessory contractsCause of accessory contracts is identical with that of the principal contract.

Examples: 1. A mortgage as an accessory contract – its cause is the

very cause of the principal contract from which it receives its life, and without which it cannot exist an independent contract, although it may secure an obligation incurred by another.

2. Where one of the signers of a promissory note was indebted to the payee in the amount of P2,000 and to secure its payment the defendant signed the note together with said debtor in solidum, the said debt is sufficient consideration for the execution of the note as to the defendant.

Moral obligationsMay a moral or natural obligation constitute a sufficient cause or consideration to support an onerous contract?

IT DEPENDS.

Where the moral obligation arises wholly from ethical considerations, unconnected with any civil obligation – not demandable in law but only in conscience and cannot constitute a sufficient cause to support an onerous contract

Where such moral obligation is based upon a previous civil obligation which has already been barred by the

Section 3 – CAUSE OF CONTRACTArticles 1350 – 1355

CONCEPT OF CAUSE


statute of limitations at the time when the contract is entered into – constitutes a sufficient cause or consideration.

Fisher v. RobbFacts: Robb was one of the organizers of Philippine Greyhound Club, Inc which was formed for the purpose of introducing dog racing in the Philippines, while Fisher was one of those who invested money in the venture. When the venture failed, Robb sent a letter to Fisher explaining the critical condition of the company and stated that he felt a moral responsibility for those who has sent in the second payment of their subscription and that he shall reimburse Fisher using his personal funds. Fisher then brought an action to enforce the “obligation”.

Issue:Whether there is a sufficient cause or consideration to justify the promise made by Robb in his letter.

Held:The contract sought to be enforced is onerous in character because it supposes the deprivation of the latter of an amount of money which impairs his property, and for it to be valid, it should have a consideration consisting in the lending or promise of a thing or service by such party. Robb is required to reimburse, but Fisher has not promised anything to Robb to compel him to make such payment. The promise by Robb of reimbursement was prompted by a feeling of pity and is purely moral – not demandable in law but only in conscience.

Villaroel v. EstradaFacts:Kalaw obtained a loan from spouses Estrada in the amount of P1, 000 payable after 7 years. Unfortunately, Kalaw and spouses Estrada died, all survived by their sons. In 1930, Villaroel, son of Kalaw, executed a document acknowledging the debt, thereby assuming the obligation. The heirs of spouses Estrada now files an action to enforce the obligation.

Issue: Whether or not the action will prosper considering that the debt incurred by the defendant’s mother had already prescribed.

Held:The present action is not founded on the original obligation contracted by the mother of Villaroel, which had already prescribed – but on that contracted by the defendant in 1930 when he assumed the obligation which had already prescribed. In effect, the same gave rise to a new obligation. It was a moal obligation which is a sufficient consideration to create and make effective and demandable the obligation which he had voluntarily contracted in 1930.

CAUSE IN REMUNERATORY CONTRACTS

Remuneratory contract – one in which one of the contracting parties remunerates or compensates the service or benefit rendered or given by the other party, although such service or beneft does not constitute a demandable debt. Cause: the service or benefit which is renumerated

Example: A gives a property in accordance with the formalities prescribed by law to his lawyer friend B, in remuneration for legal services rendered to him freely by the latter in the past.

Cause of A – legal services rendered by B, although such services do not constitute a demandable debt.

1351. The particular motives of the parties in entering into a contract are different from the cause thereof.

MOTIVESI buy a gun from a store for P50,000 because I want to kill myself. The cause of the contract is the gun (for me), the money (for the seller). My motive, however, is the killing of myself. Motives do not enter at all in the validity or invalidity of cause or consideration.

Distinguished from motivesOne may purchase an article not because it is cheap but because he may have some particular use to which it may be put, because of a particular quality which the article has, or the relation which it will bear, etc. These circumstances may constitute the motive which induces the purchase. The motives are as different or complex and as capable of infinite variety as the individual circumstances which may move men to acquire things or to make money.

Cause MotiveDirect or most proximate

reason of a contract Indirect or remote reasonsObjective or juridical reason of a contract

Psychological or purely personal reasons

Always known Unknown to the otherAlways the same Differs for each contracting

partyLegality or illegality of the

cause will affect the existence or

validity of a contract

Will not affect the lexistence of a contract

Illegal cause distinguished from illegal motiveAn illegal cause makes a contract void, whereas an illegal motive does not necessarily render the transaction void.

Example: If I buy a gun to kill my neighbour, the purchase is still valid.

Instances when the line between motive and cause disappearsWhen the motive of one of the contracting parties predetermines the purpose of the contract and such motive is illegal or immoral, then the same becomes the illegal causa – thus rendering the contract void from the very beginning.

Examples:1. A mother sold 2 fishponds to a daughter and the latter

in turn resold the same fishpoing to the mother and her stepfather. As a consequence of which, the ponds were converted into conjugal properties. It is clear that the motive or purpose is to circumvent the law against donations between spouses. This motive is the illegal causa which makes the contract void.

2. A Filipino leased a parcel of land to an alien for 99 years with an option to buy the property within 50 years, provided that the latter shall become a Filipino citizen. The motive of the agreement which resulted in the virtual transfer of ownership is to circumvent the Constitutional prohibition to transfer lands to aliens. The motive is the illegal causa, thus contract is void.

Liquez v. Court of AppealsFacts:Salvador Lopez, a married man, donated a land to a 16-year old (Conchita Liquez), subject to the condition that she will cohabit with him as his mistress. After Lopez’s death, Conchita sought to get the land from his heirs, but said heirs refused on the ground that the cause of the donation was illegal, hence void. Conchita contended that while the motive might have been immoral, still the cause which is the MOTIVES


liberality of the donor was proper. Hence, the donation is valid.

Held:The donation was null and void. While it is true that motive differs from cause, still a contract that is conditioned upon the attainment of an immoral motive should be considered void, for here motive may be regarded as cause when it predetermines the purposes of the contract. Here, Lopez would not have conveyed the property in question had he known that Liguez would not cohabit with him; it follows that the cohabitation was an implied condition to the donation, and being unlawful, the donation itself must be considered unlawful.

The liberality of the donor is deemed causa only in contracts of pure liberality, that is to say contracts in which the idea of self-interest is totally absent on the part of the transferor. In the case, the donation was not moved exlusively by the desire to benefit Conchita but also to gratify his sexual impulse. Therefore, the donation was but one part of an onerous transaction. Thus considered, the conveyance was clearly predicated upon an illicit causa. Nevertheless, had Lopez been alive, he could not have invoked the immorality of the donation because it was he who was at fault. Thus Conchita is entitled to the land.

1352. Contracts without cause, or with unlawful cause, produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy.

REQUISITES OF CAUSE

1. The cause should be in existence at the time of the celebration of the contract

2. The cause should be licit or lawful3. The cause should be true

Take note: If the contract has no cause, or even if it has, if the same is unlawful or false – shall not produce any effect, inexistent and void from the very beginning.

EFFECT OF LACK OF CAUSE

General rule: It shall not produce any effect, whatsover.

Examples:

1. If the purchase price in a contract of sale was never in fact paid by the purchaser – inexistent for lack of a cause or consideration.

2. Conveyance or transfer of property is simulated without any cause or consideration

Exceptions:

A. Failure to pay the full amount of the property, even if there be a stipulation that full payent shall be made at the time of the celebration of the contract

B. Where the consideration is only P1. Reason is because there is a consideration The contract may be voidable because of the

inadequacy of the cause or consideration But it is never void or inexistent

Carantes v. Court of AppealsFacts:The heirs of a deceased person assigned in 1939 their “Right to Inheritance” in favor of a co-heir in consideration It was alleged later, in an action to nullify the assignment, that the deed of assignment was void, there being no consideration therefor.

Held:It is total absence of cause or consideration that renders a contract absolutely void and inexistent. In the case at bar, consideration was not absent. The sum of P1 appears in the document was one of the considerations for the assignment of inheritance.

Questions

1. In order that the cause shall be considered as existing, is it necessary that it should be stated in the contract?

NO, even if the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. This is true even where the contract falls within the purview of the Statute of Frauds.

2. If instead of an absolute lack of cause or consideration, there s leasion or inadequacy of casue, shall this invalidate the contract?

NO, Art 1355 lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake, etc. However, the party who has suffered the lesion or damage is given the remedy of rescission.

EXISTING CAUSEThe cause must exist at the time of the perfection of the contract. It need not exist later.

Serrano v. MiaveFacts:On Jan. 5, A sold and delivered his truck together with the corresponding certificate of public convenience to B for the sum of P1.6 million, payable within 60 days. Two weeks after the sale, and while the certificate of public convenience was still in the name of A, the certificate was revoked by the Land Transportation Commission thru no fault of A. Upon the expiration of the 60-day period, A demanded payment of the price from B. B refused to pay, alleging that the certificate of public convenience which was the main consideration of the sale no longer existed. Is the contention of B tenable?

Held: No, for the certificate was in existence at the time of the perfection of the contract. Its subsequent revocation is of no consequence insofar as the validity of the contract is concerned. Besides, B was negligent in not having caused the immediate transfer of the certificate to his name. After all, it had already been delivered to him.

LAWFUL CAUSEThe cause is unlawful when it is contrary to law, morals, etc. Effect: Void ab initio.

Examples: 1. A promissory note to cover a gambling debt or to cover

accumulate usurious debts2. A promise of marriage based on carnal consideration3. A contract to stifle criminal prosecution is void because

it is contrary to public policy and due administration of justice.

Velez v. RamasFacts:

EFFECT OF LACK OF CAUSE


An employee in a pawnshop named Restituta Quirante embezzled a sum of money from said pawnshop, and in order that she would not be prosecuted, her father and her husband signed a promissory note to pay the amount embezzled, with interest to the victim. When they did not pay, the victim instituted this action to recover the said amount.

Issue: Can recovery be made?

Held: No recovery can be made because the cause of consideration is illicit, namely, to prevent a prosecution for a crime. This was clearly the purpose of the father, and also the purpose of the husband. It is contrary to public policy to allow agreements designed to prevent or stifle prosecutions for crime. The machinery for the administration of justice cannot be used to promote an unlawful purpose.

Mactall v. MelegritoFacts:Mactal gave Melegrito P1,770 to purchase palay, with the obligation of returning the amount within 10 days, if not spent for said purpose. The agent neither bought the palay nor returned the money. Mactal thus accused him of estafa. Melegrito persuaded Mactal to drop the case, and in turn he (Melegrito) executed a promissory note in favor of the other for the amount involved. However, he was unable to comply with his promise despite repeated demands. Hence, Mactal brought an action to recover the P1,770. Melegrito now contends that the promissory note is void because the consideration thereof is the dismissal of the estafa case which is contrary to public policy.

Issue: Is the promissory note valid?

Held: Yes, for its cause or consideration was not the dismissal of the estafa case, but the pre-existing debt of Melegrito in the amount of P1, 770.

Effect if the cause is illegal

A. If one party is innocent, he cannot be compelled to perform his obligation and he may recover what he has already given.

B. If both parties are guilty – neither can sue the other, the law leaving them as they are.

1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful.

GENERAL RULEStatement of a false cause in contracts shall render them void, except if proved that they were founded upon another cause which is true and lawful.

Example: A deed of sale which expressly states that the purchase price has been paid when it fact it has never been paid – void because the same is a simulated contract.However, it can either be absolute or relative simulation. Hence, if the contract is relatively simulated, it does not necessarily follow that it is inexistence or void, provided that it can be establisehed that it is in reality founded upon another cause which is true and lawful.

1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary.

PRESUMPTION THAT CAUSE EXISTSIt is necessary that the cause must exist, but it is NOT necessary to state the cause in the contract. Reason: it is presumed that the cause exists and is lawful, unless the debtor proves the contrary.

This is true even where the contract falls within the purview of the Statute of Frauds.

Statute of FraudsUnder this, certain agreements have to be in writing. Now then, in these agreements, is it essential to put down the cause or consideration in writing? NO, because the presumption still applies.

Illustration:A made a promissory note in B’s favour. A, however, alleged that the cause was his gambling losses in a prohibited game. Who has the burden of proving that the game was indeed a prohibited one?

A, because under the law, the presumption is that the cause is lawful.

1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence.

LESIONSIt is inadequacy of cause, like an insufficient price of the thing sold.

General rule: Lesion of price does not invalidate a contract.

Exceptions:

1. When, together with lesion, there has been fraud, mistake or undue influence.

2. In cases expressly provided by law (In the following, the contracts may be rescinded)

A. Those entered into by guardians whenever the wards they represent suffer lesion by more than ¼ of the value of the things which are the objects thereof

B. Those agreed upon in representation of absentees if the latter suffer the lesion stated in the preceding no.

C. Partition among co-heirs, when anyone of them received things with a value less by at least ¼ than the share to which he is entitled.

Illustrations:1. Guardian of A sold A’s mansion worth P120M for

P60M. May the contract be rescinded on the ground of lesion?

YES, such a case is expressly provided for by law as one of the contracts that may be rescinded on the ground of lesion

FALSE CAUSE

PRESUMPTION THAT CAUSE EXISTS

LESION OR INADEQUACY


2. A sold his mansion worth P120M to B for only P60M because A did not know the true value of the house. May the contract be rescinded?

NO. As a rule, lesion or inadequacy of price, by itself, does not invalidate a contract. But if A had sold it only for this amount because of fraud or mistake or unude influence, the contract may be annulled.

Lesion as evidene of vitiated consentLesion may be evidence of the presence of fraud, mistake, or undue influence.

1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the rights of the parties stated in the following article cannot be exercised.

FORMS OF CONTRACTS

General ruleThe form in which a contract is executed has no effect upon its obligatory force, provided all of the essential requisites for its validity are present.

Exceptions1. When the law requires that the contract must be in a

certain form in order to be valid

2. When the law requires that the contract must be in a certain form to be enforceable

3. When the law requires that the contract must be in a certain form for the convenience of the contracting parties or for the efficacy of the contract

FORMALITIES FOR VALIDITYContracts for which the law prescribes certain forms for their validity.

A. Those which must appear in writingB. Those which must appear in a public documentC. Those which must be registered

Contracts which must appear in writingNon-compliance shall render the contract void.

1. Donations of personal property whose value exceed P5, 000(Art 748 – donation and acceptance shall be in writing)

2. Sale of land or any interest therein through an agent(Art 1874 – authority of the agent shall be in writing)

3. Agreements regarding payment of interest in contracts of loan(Art 1956 – no interest shall be due unless it has been expressly stipulated in writing. The validity of the contract of loan, however, is not affected)

4. Antichresis

(Art 2134 – amount of the principal and of the interest shall be specified in writing)

Contracts which must appear in a public documentNon-compliance shall reneder the contract void.

1. Donations of immovable property (Art 749 – donation must be in public document. The acceptance, however, may be made in the same deed of donation or in a separate public document. If made in a separate document, the donor shall be notified in an authentic form, and this shall be noted in both instruments)

2. Partnership where immovable property or real rights are contributed to the common fund(Arts 1771 and 1773 – must appear in a public instrument and there must be an inventory of the immovable property or real rights, signed by the partners and attached to the public instrument)

Contracts which must be registered

1. Chattel mortgages(Art 2140 – personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the same is delivered instead of being registered, the contract is a pledge)

2. Sales or transfers of large cattles(Cattle Rgistration Act – sale and transfer mst be duly registered and a certificate of transfer must be secured)

FORMALITIES FOR ENFORCEABILITYThere are contracts which are unenforceable by action, unless they are in writing and properly subscribed, or unless evidenced by some note or memorandum, which must also be in writing and properly subscribed. These contracts are governed by the Statute of Frauds.

Purpose of Statute of FraudsTo prevent fraud, and not to encourage the same. Thus, certain agreements are required to be in writing so that they may be enforced.

1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.

RIGHT TO COMPEL THE EXECUTION OF THE FORMThe Article applies only when form is needed only for convenience, not for validity or enforceability. In other words, before the contracting parties may be compelled to execute the needed form, it is essential that the contract be:

A. PerfectedB. Enforceable under the Statute of Frauds

Take note: Art 1356 says that when the law requires that a contract be in some form in order that it may be valid and enforceable, such requirement is absolute and indispensable. In such cases, the right of the parties stated in this article – the right to compel CANNOT be exercised.

Examples:

CHAPTER 3. FORMS OF CONTRACTS

FORMS OF CONTRACTS

RIGHT OF ONE PARTY TO COMPEL EXECUTION OF THE FORM


1. A donated land to B in a private instrument. B accepted in the same private instrument. B then wanted to have the donation registered but the registration requires a public instrument. So B requested A to put down the donation in a public instrument. But A refused. B then sued to compel A to observe the necessary form. Decide.

A cannot be compelled under Art 1357 because the donation is not valid.

2. Same as the first problem, except that the land has already been actually delivered to B. May A be compelled to execute the needed public instrument?

NO, for the simple reason that the donation is null and void.

3. A sold to B in a private instrument his land. Later B wanted to have the sale registered, but registration requires a public instrument. May B compel A to execute the needed public instrument?

YES, because the contract is both valid and enforceable under the Statute of Frauds.

4. Same as the preceding problem, except that the sale was made orally. May B compel A to execute the needed public instrument?

IT DEPENDS.

If the contract is still executory – NO because the contract is not enforceable under the Statute of Frauds, which requires sales of real property to be in writing to be enforceable by court action.

If the price has been paid or the land has been delivered – YES, because here the contract is both valid and enforceable.

1358 CONTRACTS MUST APPEAR IN A PUBLIC DOCUMENT

1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein.

2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains

3. The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person

4. The cession of actions or rights proceeding from an act appearing in a public document.

Take note: All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Arts 1403 & 1405.

FORMALITIES FOR EFFICACYGeneral rule: Contracts shall be obligatory in whatever form they may ave been entered into.

Exception: Contracts falling under this Article, which should be executed in accordance with certain formalities, by reason of

their importance in order to insure their efficacy and to protect the interests of the contracting parties as well as that of third persons.

Art 1357 – grants the corercive power to contracting parties by which they can reciprocally compel the observance of the required form.

Principles

1. Arts 1357 and 1358 require the execution of the contract either in a public or in a prvate document not in order to validate or enforce it, but only to insure its efficacy, so that after its existence has been admitted, the party bund may be compelled to execute the necessary document.

2. Both articles presuppose the existence of a contract which is valid and enforceable.

3. When the contracting parties invokes Arts 1357 and 1358, the effect is to place the existence of the contract in issue.

4. Art 1357 does not require that the action to compel the execution of the necessary document must precede the action upon the contract. Both may proceed simultaneously.

5. Although Art 1357, in connection with Ar 1358 do not operate against the validity of the contract, once the contracting parties invoke the same, the execution of the required document must precede the determination of the other obligations derived from the contract.

Dauden-Hernaez v. De los AngelesFacts:Marlene Dauden, a movie actress, filed a complaint against Hollywood Far East Productions and its President and General Manager, to recover P14, 700 as the balance of her compensation as leading actress in two motion pictures. Lower court dismissed the complaint since the contract price exceeded P500, the same should have been evidenced by a written instrument, in violation of Art 1358.

Held:As a general rule, contracts are valid and binding from their perfection regadless of the form, whether they be oral or written. There are only two exceptions – first, when the contractual form is needed for its validity, and second, for its enforceability. The contract for her services falls under neither exception. It is true that it appears to be included in the last clause of Art 1358, but nowhere does it state that the absence of written form will make the agreement invalid or unenforceable.

ProblemSpouses Robert and Yollie wanted to sell their house and found a prospective buyer, Nina. Yollia negotiated with Nina for the sale of the property. They agreed on a fair price of P2M. Nina sent a letter confirming her intention to buy the property. Nina prepared a deed of sale to be signed by the couple and a manager’s check for P2M. After receiving the P2M, Robert signed the deed of sale however, Yollie was not able to sign because she changed her mind. Yollie then filed for nullification of the deed of sale. Does Nina have a cause of actoin against Robert and Yollie?

Answer: Considering that the contract has already been perfected and taken out of the operation of the statute of frauds, Nina can compel Robert and Yollie to observe the form required by law in order for the property to be registered in her name, which can be filed together with the action for the recovery of the house.

FORMALITIES FOR EFFICACY


1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract.

DOCTRINE OF REFORMATION OF INSTRUMENTSWhen the true intention of the parties to a valid contract are not expressed in the instrument purporting to embody their agreement by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument so that such true intention may be expressed.

Requisites1. Meeting of the minds of the parties2. Their true intention is not expressed in the

instrument3. Such failure to express their true intention is due to

mistake, fraud inequitable conduct or accident

Take note: When there has been meeting of the minds, but there is

mistake, fraud, inequitable conduct or accident in the contract as written – remedy is reformation.

When there has been no meeting of the minds because of vitiated consent – proper remedy is annulment.

Illustration:If the seller was selling for P1,000,000 but the buyer thought he was buying for P500,000 and the contract states P1,000,000, there has been no meeting of the minds and the remedy is annulment; but if both agreed on P500,000 and the contract as written states P1,000,000, the remedy is reformation, because here, there has been a meeting of the minds.

Rationale of the doctrineEquity 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 rationale is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties.

Distinguished from annulment of contracts

Reformation of instrument Annulment of contract

Presupposes a perfectly valid contract where there has

been meeting of the minds

Based on a defective contract in which there has been no

meeting of the minds because consent has been

vitiated

Take note: If mistake, fraud, inequitable conduct or accident has prevented the meeting of the minds of the parties – proper remedy is annulment of the contract and NOT reformation.

Example:Buyer has been led to enter into a contract of sale through fraud or misrepresentation on the part of the seller that the property he was buying was unregistered land – annulment.

1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in confl ict with the provisions of this Code.

RULE IN CASE OF CONFLICTIn case of conflict between the Civil Code and the principles of the general law on reformation, the Civil Code prevails. The latter will have only suppletory effect.

WHEN CAN THERE BE REFORMATION

1. Art 1361 – When a mutial mistake of the parties causes the failure of the instrument to disclose their real agreement

2. Art 1362 – If one party was mistaken and the other acted fraudulenty or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation.

3. Ar 1363 – When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former.

4. Art 1364 – When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order the reformation.

5. Art 1365 – If two parties agree upon the mortage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase

WHEN CAN THERE BE NO REFORMATION

1. Art 1366A. Simple donations inter vivos where no condition is

imposedB. WillsC. When the real agreement is void

2. Art 1367 – When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.

WHO CAN ORDER REFORMATION

Ar 1368 – Reformation may be ordered at the instance of:

A. If mutual mistake – Either party or his successors in interest

B. If not mutual – upon petition of the injured party, or his heirs and assigns

WHAT SHALL GOVERN REFORMATION PROCEDURE

Art 1369 – The procedure for the reformation of instruments shall be governed by rules of court to be promulgated by the Supreme Court.

CHAPTER 4. REFORMATION OF INSTRUMENTS

DOCTRINE OF REFORMATION OF INSTRUMENTS

RULE IN CASE OF CONFLICT

WHEN CAN THERE BE REFORMATION

MUTUAL MISTAKE


1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed.

MUTUAL MISTAKEReformation may be asked because of mutual mistake.

Example:A sold to B orally a house at 16 San Isidro Malate. In the written public document, both forgot the true number of the house and instead wrote on the contract No. 18 San Isidro Malate. Since there was mutual mistake, reformation of the instrument is proper.

Requisites:1. Mistake should be of a fact2. The mistake should be proved by clear and convincing

evidence3. The mistake should be mutual

1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument.

UNILATERAL MISTAKE PLUS FRAUDThe Mistake is unilateral but the other party acted fraudulently or inequitably. TN: Only the mistaken party can ask for reformation.

Example:It was agreed that A would be loaned P10M by B. In the contract signed by A and B, it was stated that A was selling his house to B for said amount. A signed the contract in the belief that it was really a contract of loan. Who, if any, may ask for the reformation of the instrument if B had acted fraudulently?

Answer: A may ask for the reformation of the instrument because after the meeting of the minds, one party (B) acted fraudulently or inequitably in such a way that the contract does not show their real intention. In such a case, the law provides that the person who acted by mistake may ask for the reformation of the instrument.

Ong Chua v. Carr, et al.Facts:Teck sold his land to Ong with the right to repurchase within 4 years. Ong sold the land to Carr with the understanding that Carr was buying it, subject to the right to repurchase on the part of Teck. At that time, Carr did not have enough money. So Carr asked for a loan from an Association. The Association offered to give a loan provided Carr could offer, as security, land of which he was the absolute owner, that is, land which would not be subject for example to repurchase.

With the help of a lawyer who drafted the deed, Carr and Ong (who did not know English) signed a contract in which Carr was made out to be the absolute owner of the land, and the words regarding the “right to repurchase” omitted. Later Teck was repurchasing the property from Ong, and Ong demanded the reconveyance of the property from Carr. Carr refused on the ground that he (Carr) was the absolute owner of the land. Hence, Ong brought this action against Carr.

Issue:May the contract be reformed? If so, may Ong now demand the land from Carr so that it would be resold to Teck?

Held:

Yes, the contract may be reformed because “if one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument.” It follows, therefore, that Ong may now demand the reconveyance of the property to him so that the land may be repurchased by Teck.

1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed.

UNILATERAL MISTAKE PLUS CONCEALEMENTThe mistake is unilateral but the other party is guilty of concealment. TN: Only the party in good faith can ask for reformation.

1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed.

FAILURE TO CONVEY THE TRUE INTENTThe court may order the reformation of the instrument if the instrument does not convey the true information of the parties because of the:

A. IgnoranceB. Lack of skill orC. Bad faith

(of the drafter of the instrument, the clerk or the typist)

Manila Engineering Co v. Cranston and HeacockIn a contract, although the original draft read in dollars, the contract was made out in pesos through the typist’s fault. May the instrument be reformed?

Yes. “It conclusively appears from the collateral facts and surrounding circumstances that it was intended that the dollar sign was to be used and that defendant knew or in the ordinary course of business should have known that a mistake was made. The contract will be reformed and the dollar sign substituted for the peso sign.”

1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.

INTENT TO HAVE A MORTGAGE OR PLEDGE

Example:B wanted to borrow from C, so he offered his land by way of mortgage as security. Both parties agreed on this point but the contract drafted contained an absolute sale. May the instrument be reformed?

YES, otherwise, the true intention of the parties would be frustrated.

How to judge the parties’ intent

UNILATERAL MISTAKE + FRAUD

UNILATERAL MISTAKE + CONCEALMENT

FAILURE TO CONVEY THE TRUE INTENT

INTENT TO HAVE A MORTGAGE OR PLEDGE


Intention of the parties can be judged from their contemporaneous or subsequent acts.

1366. There shall be no reformation in the following cases: (1) Simple donations inter vivos wherein no condition is imposed; (2) Will; (3) When the real agreement is void.

WHEN REFORMATION IS NOT ALLOWED

1. Donations inter vivos wherein no condition is imposed

Reason: Because donations are essentials acts of pure liberality.

Exception: If donation is conditional – reformation may be resorted to so that the true conditions intended by the donor might be brought out. In case the donation is an onerous one, reformation is very much in order.

2. Wills

Reason: Because the making of a will is strictly a personal act, which is free. Moreover, a will may be revoked at any time.

Exception: After the death of the testators, errors or imperfections in descriptions may be corrected under Art 789, but not the manner of property disposal.

3. Void agreements

Reason: Because such a procedure would be useless because the agreement is void in the first place. Once reformation is made, the new instrument would be void precisely because the true agreement and intention is void.

1367. When one of the parties has brought an action to enforce the instrument he cannot subsequently ask for its reformation.

EFFECT OF AN ACTION TO ENFORCE THE INSTRUMENTWhen one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Rationale: Estoppel, waiver or ratification.

Example:A sold B a house. A fraudulently made the contract one of mortgage instead of sale. Both signed the contract of mortgage, with B believing all the time that it was a contract of sale. B, therefore, has the right to bring an action for the reformation of the instrument. But if B brings an action to foreclose the mortgage, he is thereby enforcing the instrument. He cannot, therefore, subsequently ask for the reformation of the instrument to make it one of sale.

1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.

PLAINTIFFS IN AN ACTION FOR REFORMATION

A. If the mistake is mutual –Either party or his successors in interest

B. In all other cases –Injured party, his heirs and assigns

ProblemA and B agreed on a certain contract, but A fraudulently made a document reciting another kind of contract. Later, both A and B died.

1. May the son of B bring an action to reform the instrument?Yes, because he is the heir of the injured party.

2. May the son of A bring an action to reform the instrument?No, as it was his father who caused the fraud.

Query: Supposing the son of A wanted to correct the fraud made by his father? – This is okay but in such a case, no court action is needed anyone, since both parties can agree to reform the instrument by themselves.

What complaint must allegeBefore reformation can be granted, the complaint must allege:

A. That the instrument to be reformed does not express the real agreement or intention of the parties

B. What the real agreement or intention was

Take note: It is not the function of the remedy of reformation to make a new agreement, but to establish and perpetuate the teu existing one.

1369. The procedure for the reformation of instruments shall be governed by Rules of Court to be promulgated by the Supreme Court.

PROCEDURAL RULESThese procedural rules are supposed to be promulgated by the SC.

CONTRACT OF ADHESIONOne in which one of the parties imposes a ready made form of contract, which the other party may accept or reject, but which the latter cannot modify.

Ayala Corporation v. Ray Burton Devt Corp.A contract of adhesion in itself is not an invalid agreement. This is binding as a mutually executed transaction. The one who adheres to the contract is in reality free to reject it entirely, and if he adheres, he gives his consent.

Philippine American General Insurance v. Sweet Lines IncNot even an allegation of ignorance of a party excuses non-compliance with the contractual stipulations since the responsibility for ensuring full comprehension of the provisions of a contract of carriage (contract of adhesion) devolves not on the carrier but on the owner, shipper or consignee as the case may be.

Contracts of adhesion stand out from other contracts

WHEN REFORMATION IS NOT ALLOWED

ESTOPPED TO ASK FOR REFORMATION

PLAINTIFFS IN ACTION FOR REFORMATION

PROCEDURAL RULES

CONTRACTS OF ADHESION


Contracts of adhesion stand out from other contracts which are bilaterally drafted by the parties in a sense that the former is accorded inordinate vigilance and scrutiny by the courts in order to shield the unwary from deceptive schemes contained in ready-made contracts.

Qua Chee Gan v. Law Union and Rock InsuranceThe courts cannot ignore that nowadays, monopolies, cartels and concentration of capitals manage to impose cunningly prepared agreements that the weaker party may not change – his participation thereof being reduced to the alternative to take it or leave it, depriving them to bargain on equal footing.

Hence, these contracts (i.e. insurance and bill of lading) call for greater strictness and vigilance for the courts to protect the weaker party from abuses and prevent their becoming traps for the unwary.

Basis: Article 24 NCC – In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, tender age, mental weakness, etc, the courts must be vigilant for his protection.

What shall determine its validity and/or enforceabilityThe peculiar circumstances obtaining in each case and the situation of the parties concerned.

Ayala Corp v. Ray Burton Devt CorpIn the instance case, the stipulations in the Deed Restrictions and Special Conditions are plain and unambiguous which leave no room for interpretation. Moreover, there was even no attempt on the part of RBDC to prove that in the execution of the Deed of Sale on the subject lot, it was a weaker or a disadvantaged party on account of its moral dependence, ignorance, etc. On the contrary, the latteris a realty firm and has been engaged in realty business for several years already. Hence RBDC was not an unwary party in the subject transaction. It was in fact a knowledgeable realty firm experienced in real estate business, as testified by Edwin Ngo, President of RBDC.

Spouses Reyes v. BPI Family Savings BankFacts:Petitioner spouses executed a real estate mortgage on their property in favour of BPI-FSB to secure the P15M loan of Transbuilders Resources and Devt Corp to BPI.

Held:While the stipulation proved to be onerous to the petitioners, the courts will not extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full awareness of its consequences. Petitioners voluntarily executed the REM and they cannot be allowed to repudiate their obligation to the bank after Transbuilder’s default. Contracts of adhesion are not invalid per se.

CONTRACTS OF CREDIT CARDSContracts between cardholders and credit card companies are contracts of adhesion because their terms are prepared by only one party while the other merely affixes his signature signifying his adhesion thereto.

Unauthorized purchases through lost credit cardFor the cardholder to be asolved from liability for unauthorized purchases made through his lost or stolen card, two steps must be followed: (Ermitano v. CA)

A. The cardholder must give written notice to the credit card company

B. The credit card company must notify its member establishments of such loss or theft, which naurlly, it may only do upon receipt of a notice from the cardhoplder

Take note: Both the cardholder and company have a responsibility to perform, in order to free the cardholder from any liability arising from the use of a lost or stlen credit card.

What absolves the cardholderPrompt notice by the cardholder to the company of the loss or theft of her card should be enough to relieve her from any liability occasioned by the unauthorized use of her lost card.

Does the cardholder need to wait until the company has notified all its member establishments?

NO, because it would be unfair and unjust to put the cardholder at the mercy of the company which may delay indefinitely the notification of its members to minimize if not eliminate the possibility of incurring loss from unauthorized purchases. (against public policy)

Emmanuel Aznar v. CitibankThe terms and conditions of Citibank’s mastercard constitute a contract of adhesion. Par 7 of the contract states that Citibank is not responsible if the card is not honoured by any merchant affiliate for any reason. Though the bank may have no control of all the actions of its merchant affiliates, it is not right however to give it blanket freedom from liability if its card is dishonoured by any merchant affiliates for any reason. Such phrase renders the statement vague and as the said terms constitute a contract of adhesion – any ambiguity mst be construed against the party who prepared the contract.

Par 15 thereof also limits its liability to P1,000 or the actual damage proven, whichever is lesser. Again, such stipulation is not valid for the same is unconscionable as it precludes payment of a larger amount even though damage may be clearly proven.

Take note: The Supreme Court is not precluded from ruling out blind adherence to the terms of a contract if the attendant facts and circumstances show that they should be ignored fro being obviously too one-sided.

1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.

REASON FOR INTERRETATIO OF CONTRACTSWhat is the use of interpreting a contract? Should we not just apply the terms thereof?

It is true that we must apply the terms of the contract but only when they are so clear that there is no doubt regarding the intention of the contracting parties. In other cases, we should apply the rules of interpretation.

PRIMACY OF INTENTION OF PARTIES

Cardinal rule in the interpretation of contractsTo effect that the intention of the contracting parties should always prevail because their will has the force of law between them.

CONTRACTS OF CREDIT CARDS

CHAPTER 5. INTERPRETATION OF CONTRACTS

PRIMACY OF INTENTION OF PARTIES


If the terms are clear and leave no doubt as to the intention of the contracting parties – literal sense of its stipulations must be followed.

If the words appear to be contrary to the evident intention of the contracting parties – the intention shall prevail.

Take note: Once the intention has been ascertained, it becomes an integral part of the contract as though it had been originally expressed therein in unequivocal terms.

Manila Banking Corp v. Teodoro JrThe character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security.

Philippine National Construction Corp v. CAThe contract between parties is the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be , between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. Furthermore, it is a rule that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control. The contract is the law between the parties and when the words of the contract are clear and can easily be understood, there is no room for contruction.

Rule in case of conflictIn case of conflict between the words of the contract and the evident intention of the parties, which one must prevail?

The intention must prevail. Let us interpret not by the letter that killeth but by the spirit that giveth life. But where the words are clear as to leave no doubt as to the intention of the contracting parties, the literal meaning shall control. Hence, there is no room for interpretation.

Examples: 1. A promissory note stated that it was payable upon

receipt of the debtor of cash payment from a certain estate, or upon demand. Is the obligation demandable at once? YES, because of the clear import of the words “upon demand”.

2. A and B entered into a so-called contract of lease, whereby B would pay certain regular amounts as rentals and at the end of the lease, B would become the absolute owner of the property. Is this really a lease or a sale in installments?

This contract is really a sale in installments for such was the evident intention of the contracting parties. “Although in the contract, Exhibit A, the usual words ‘lease,’ ‘lessee,’ and ‘lessor’ were employed, that is not obstacle to holding that said contract was a sale on installments, for such was the evident intention of the parties in entering into said contract.”

3. In a written contract, it was agreed that all legal actions may be brought to the jurisdiction of the proper courts in the City of Manila. May the parties sue in courts outside Manila? YES, because the clause in question being permissive only in view of the use of the word “may”.

1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

HOW TO JUDGE INTENT OF THE PARTIES

General rule: Contract is interpreted in the precise terms in which they are expressed. But the courts, are called upon to admit direct circumstantial evidence necessary for their interpretation with the purpose of making the true intention of the parties prevail. Consequently, the courts should consider:

1. Contemporaneous acts2. Subsequent acts

Take note: This is without prejudice to the consideration of other factos determined by other rules of interpretation in the Civil Code and the Rules of Courts.

Manila Electric Co v. CommissionersFacts:When the Meralco obtained a franchise from the City of Manila, free transportation was granted in the franchise to employees of the City of Manila “wearing offi cial badges.” The question to determine is: What should be the proper interpretation of “wearing,” wearing so that it could be seen, or wearing the badge, without the badge being seen? Or should the term include both? To properly solve the question, the Supreme Court had to look into the actions of the contracting parties at the time of and subsequent to the granting of the franchise. It was proved to the satisfaction of the court that for nine years the parties interpreted the phrase to mean “the wearing of the offi cial badges so that they could be seen.”

Held: Such interpretation of the parties should be th interpretation by the court, because “the courts are NOT at liberty to adopt a construction opposed to that which the parties have placed on their contract.”

1372. However general the terms of a contract may be, they shall be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree.

EFFECT OF USE OF GENERAL TERMS

Example: A sold B his house including “all the furniture therein”. Suppose part of the furniture belonged to a relatie of A who had asked him (A) for permission to leave them there temporarily. Should such furniture be included?

NO, because although the term “all” is general, it should still not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree.

Special intent prevails over a general intentJust as a special provision controls a general provision, a special intent prevails over a general intent.

1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual.

STIPULATION ADMITTING OF SEVERAL MEANINGS

HOW TO JUDGE INTENT OF PARTIES

EFFECT OF USE OF GENERAL TERMS

STIPULATION ADMITTING OF SEVERAL MEANINGS


A wife exchanged “her house” for a diamond ring. Now the wife had a house which was her paraphernal property and another house, which however, belonged to the conjugal partnership. The contract entered into by the house was against the consent of the husband. To which house shoud “her house” refer?

To the paraphernal house, because this would validate the contract. If the other interpretation would be followed, the exchange would not be valid since the husband had not given consent.

1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.

STIPULATIONS TO BE READ TOGETHER

Bank of the P.I. v. Ty Camco SobrinoFacts:A mortgaged his property to B. In the contract, it was stated that a second mortgage was prohibited, except with the written consent of B. The contract further stated that the penalty for such a violation would be that B can immediately foreclose the mortgage. Without the consent of B, A mortgaged the property a second time to C. Has B the right to consider the second mortgage null and void?

Held: No, B has no right to consider the second mortgage null and void. His only right is to foreclose the fi rst mortgage right now. The whole mortgage contract must be read. Said the Supreme Court: “The mortgage contract should be read in its entirety. If so read, it is at once seen that while the making of the second mortgage except with the written consent of the mortgagee is prohibited, the contract continues and states the penalty for such a violation, namely, it gives the mortgagee (B) the right to immediately foreclose the mortgage. It does not give the mortgagee the right to treat the second mortgage as null and void.”

1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract.

INTERPRETED TO BE IN KEEPING WITH NATURE AND OBJECTIf a word is susceptible to two or more meanings, what meaning should be used?

A. That in keeping with the nature and object of the contract.

B. If this cannot be determined, then the “terms of a writing are presumed to have been used in their primary and general acceptation”

Example:If authority is given to exact payment by legal means, does this include authority to file actions in court to recover sums of money?

Yes. The clause in question means “the power to exact payment of debts due the concerned by means of the institution of suits for their recovery. If there could be any doubt as to the meaning of this language taken by itself, it would be removed by a consideration of the general scope and purpose of the instrument in which it concurs.”

STIPULATIONS TO BE READ TOGETHER

WORDS WITH DIFFERENT SIGNIFICATIONS

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