3RD EXAM – Obligations and Contracts Article 1306.

The contracting parties may establish such

stipulation, clauses, terms and conditions as they may deem convenient,
Xandredg Sumpt L. Latog provided they are not contrary to law, morals, god customs, public
order, or public policy.

TITLE II. – CONTRACTS

This Article refers to the principle of autonomy or
autonomy of contracts. Obligations arising from contracts have the
Chapter 1
force of law between the parties and should be complied with in
GENERAL PROVISIONS
good faith. In characterizing the contract as having the force of law
between the parties, the law stresses the obligatory nature of a
Article 1305. A contract is a meeting of minds between two binding and valid agreement [Golangco v. PCIB].
persons whereby one binds himself, with respect to the other, to give
However, In Abe v. Foster Wheeler Corporation, The
something or to render some service.
Supreme Court held that the freedom of contract is not absolute.
The same is understood to be subject to reasonable legislative
A contract is a juridical convention manifested in legal regulation aimed at the promotion of public health, morals, safety
form, by virtue of which, one or more persons (or parties) bind and welfare. One such legislative regulation is found in Article
themselves in favor of another or, others, or reciprocally, to the 1306 of the Civil Code which allows the contracting parties to
fulfilment of a prestation to give, to do or not to do [Sanchez "establish such stipulations, clauses, terms and conditions as they
Roman].Contract is not the meeting of the minds; it is the meeting may deem convenient, provided they are not contrary to law,
of minds. morals, good customs, public order or public policy."
The contractual stipulations must not be contrary to
Elements of a Contract mandatory and prohibitive laws. Morals deal with right and wrong
(a) Essential elements – without them a contract cannot exist and with human conscience. Good customs are those that have
(consent, subject matter, cause or consideration). received for a period of time practical and social confirmation. A
(b) Special elements – required in certain contracts, but special in contract is contrary to public policy if it has a tendency to injure
a sense that they are not observed by all contracts (Ex. The the public, is against the public good, or contravenes some
requirement or the necessity of delivery in cases of real established interest of society, or is inconsistent with sound policy
contracts; essential solemnities or forms) and good morals, or tends clearly to undermine the security of the
(c) Extraordinary elements – pertain to particular types of individual’s rights [Gabriel v. Monte de Piedad].
contracts that they are extraordinary—considering that it has a
particular provision in law peculiar or specific to certain types
Castro v. Tan
of contracts. (Ex. Law on Sales – purchasing price in contract
Held: In several cases, we have ruled that stipulations
of sale is an extraordinary element because ordinarily, that is authorizing iniquitous or unconscionable interests are contrary to morals, if
what we call the consideration or cause in contracts. But it has not against the law. In Medel v. Court of Appeals, we annulled a stipulated
a definite or a specific name in law of sales) 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6%
(d) Natural elements – those found in certain contracts, and per month or 72% per annum interest on a P60,000.00 loan, respectively,
presumed to exist, unless the contrary has been stipulated. for being excessive, iniquitous, unconscionable and exorbitant. In Ruiz v.
(e) Accidental elements – these are various particular Court of Appeals, we declared a 3% monthly interest imposed on four
separate loans to be excessive. In both cases, the interest rates were reduced
stipulations that may be agreed upon by the contracting parties
to 12% per annum.
in a contract.
In this case, the 5% monthly interest rate, or 60% per annum,
compounded monthly, stipulated in the Kasulatan is even higher than the
Basic Principles or Characteristics of a Contract 3% monthly interest rate imposed in the Ruiz case. Thus, we similarly hold
(a) Freedom or liberty to stipulate, provided that it is not contrary the 5% monthly interest to be excessive, iniquitous, unconscionable and
to laws, morals, good customs, public order, or public policy exorbitant, contrary to morals, and the law. It is therefore void ab initio  for
(1306) being violative of Article 1306 of the Civil Code. With this, and in accord
(b) Obligatory force and compliance in good faith (1159 and with the Medel and  Ruiz cases, we hold that the Court of Appeals correctly
imposed the legal interest of 12% per annum in place of the excessive
1315)
interest stipulated in the Kasulatan.
(c) Both parties are mutually bound (1308) To reiterate, we fully agree with the Court of Appeals in holding
(d) Relativity (1311) that the compounded interest rate of 5% per month, is iniquitous and
unconscionable. Being a void stipulation, it is deemed inexistent from the
General rule: “between two persons” – as a general beginning. The debt is to be considered without the stipulation of the
rule, a contract contains at least two persons (minimum). iniquitous and unconscionable interest rate. Accordingly, the legal interest
Otherwise, a contract or meeting of minds cannot exist between of 12% per annum must be imposed in lieu of the excessive interest
these persons. stipulated in the agreement.
Exception: There are instances where one person may
enter into a valid and enforceable contract, and that is under the Mallari v. Prudential Bank
principle of auto contract. In auto contracts, there is only one party Held: In Toring v. Spouses Ganzon-Olan, the stipulated interest
involved. But, in reality, that said party merely acts for and on the rates involved were 3% and 3.81% per month on a P10 million loan, which
we find under the circumstances excessive and reduced the same to 1% per
account of two distinct contracting parties. This may take place
month.  While in Chua v. Timan, where the stipulated interest rates were
when a person in his capacity—which is a representative of another
7% and 5% a month, which are equivalent to 84% and 60% p.a.,
contract with himself or when he is a representative of two respectively, we had reduced the same to 1% per month or 12% p.a.  We
different persons— bring about a contract between his two said that we need not unsettle the principle we had affirmed in a plethora of
principals. This is usually brought about in a contract of agency. cases that stipulated interest rates of 3% per month and higher are
(Ex. Real estate brokers through SPA). excessive, unconscionable and exorbitant, hence, the stipulation was void
for being contrary to morals.

Page | 1
 In this case, the interest rate agreed upon by the parties was only where the parties mutually give each other a certain thing (do ut
23% p.a., or less than 2% per month, which are much lower than those des) or mutually render a service (facio ut facias). It may likewise
interest rates agreed upon by the parties in the above-mentioned cases. involve a mixed prestation such that one party gives something and
Thus, there is no similarity of factual milieu for the application of those the other party does something (do ut facias; facias ut des).
cases.
We do not consider the interest rate of 23% p.a. agreed upon by
petitioners and respondent bank to be unconscionable. Article 1308. The contract must bind both contracting
In Villanueva v. Court of Appeals, where the issue raised was parties; its validity or compliance cannot be left to the will of one of
whether the 24% p.a. stipulated interest rate is unreasonable under the them.
circumstances, we answered in the negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco This Article stresses the principle of mutuality of
Filipino Savings and Mortgage Bank, Dagupan City Branch, this Court contracts. Under this principle, there is a presumption that the
held that the interest rate of 24% per annum on a loan of P244,000.00, parties are of equal footing when they enter in a contract, such that
agreed upon by the parties, may not be considered as unconscionable and there is mutuality, they are mutually bound as against each other
excessive. As such, the Court ruled that the borrowers cannot renege on
with respect to the terms and conditions that they place in that
their obligation to comply with what is incumbent upon them under the
contract of loan as the said contract is the law between the parties and they contract. The binding effect of any agreement between the parties
are bound by its stipulations. to a contract is premised on two settled principles: (1) that
Clearly,  jurisprudence establish that the 24% p.a. stipulated obligations arising from contracts have the force of law between
interest rate was not considered unconscionable, thus, the 23% p.a. interest the contracting parties; and (2) that there must be mutuality
rate imposed on petitioners' loan in this case can by no means be considered between the parties based on their essential equality to which is
excessive or unconscionable. repugnant to have one party bound by the contract leaving the other
free therefrom. Any contract which appears to be heavily weighed
Designation of the Name of a Contract in favor of one of the parties so as to lead to an unconscionable
The parties may generally agree on any contract, but the result is void. Any stipulation regarding the validity or compliance
name that they give it should not be controlling, for a contract is of the contract which is left solely to the will of one of the parties is
what the parties intended it to be, not what they call it [Quiroga v. likewise invalid [Floirendo Jr v. Metrobank].
Parsons Hardware].
Allied Banking v. Court of Appeals
Article 1307. Innominate contracts shall be regulated by the Held: An express agreement which gives the lessee the sole
stipulation of the parties, by the provisions of Titles I and II of this option to renew the lease is frequent and subject to statutory restrictions,
Book, by the rules governing the most analogous nominate contracts, valid and binding on the parties. This option, which is provided in the same
and by the customs of the place. lease agreement, is fundamentally part of the consideration in the contract
and is no different from any other provision of the lease carrying an
Innominate contracts under the Civil Code are those undertaking on the part of the lessor to act conditioned on the performance
which are not specifically governed by any provision in the Civil by the lessee. It is a purely executory contract and at most confers a right to
obtain a renewal if there is compliance with the conditions on which the
Code or special law but which likewise involve the fulfillment or
right is made to depend. The right of renewal constitutes a part of the
accomplishment of some prestations. They are governed by the
lessee’s interest in the land and forms a substantial and integral part of the
following: agreement.
1) Stipulation of the parties. The parties may have some The fact that such option is binding only on the lessor and can
arrangements which they feel should bind them but which be exercised only by the lessee does not render it void for lack of mutuality.
nevertheless do not have any exact legal provisions in the Civil After all, the lessor is free to give or not to give the option to the lessee.
Code to govern the nature of the obligation appertaining to it. And while the lessee has a right to elect whether to continue with the lease
Following the general rule on contracts, they can therefore stipulate or not, once he exercises his option to continue and the lessor accepts, both
parties are thereafter bound by the new lease agreement. Their rights and
any provision, term and condition that will govern the
obligations become mutually fixed, and the lessee is entitled to retain
enforceability of their agreement provided they are not contrary to possession of the property for the duration of the new lease, and the lessor
law, morals, good customs, public order, or public policy; may hold him liable for the rent therefor. The lessee cannot thereafter
2) Provisions in the law of obligations and contracts escape liability even if he should subsequently decide to abandon the
under Title I and II of the Civil Code. Innominate contracts still premises. Mutuality obtains in such a contract and equality exists between
involve prestations which are to be accomplished by the parties. the lessor and the lessee since they remain with the same faculties in respect
Though they may be innominate, they are still contracts which are to fulfilment.
sources of obligations. Hence, they should likewise follow the
general rule on obligations and contracts; The consequences of mutuality are (a) a party cannot
3) Rules governing the most analogous nominate revoke or renounce a contract without the consent of the other, nor
contracts. The Civil Code provides for various types of nominate can it have it set aside on the ground that he had made a bad
contracts, namely: sale, barter or exchange, lease, partnership, bargain [Fernandez v. MRR] and (b) a contract containing a
agency, loan, deposit, aleatory contracts, compromises, guaranty,24 condition which makes its fulfillment dependent exclusively upon
pledge, mortgage, and antichresis. Other special laws govern some the uncontrolled will of one of the contracting parties, is void [PNB
other types of contracts like insurance, real estate mortgage, and v. Court of Appeals].
charter party;
4) Customs of the place. Custom is a rule of conduct PNB v. Court of Appeals
formed by repetition of acts uniformly observed as a social rule, Held: Hence, even assuming that the xxx loan agreement
legally binding and obligatory and it must be proved as a fact between the PNB and the private respondent gave the PNB a license
according to the rules of evidence. (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts.
Innominate contracts may be divided into the kind of
prestation it obligates the parties to do. It can involve a prestation

Page | 2
 Article 1309. The determination of the performance may be knowledge thereof. Since a contract may be violated only by the
left to a third person, whose decision shall not be binding until it has parties thereto as against each other, a party who has not taken part
been made known to both contracting parties. in it cannot sue for performance, unless he shows that he has a real
interest affected thereby [Sps. Borromeo v. Court of Appeals].
Article 1310. The determination shall not be obligatory if it
is evidently inequitable. In such case, the courts shall decide what is
Sps. Borromeo v. Court of Appeals
equitable under the circumstances.
Held: Respondent, although a wholly-owned subsidiary of
EPCIB, has an independent and separate juridical personality from its
The parties may constitute a third party to determine the parent company. The fact that a corporation owns all of the stocks of
performance of the contract. The decision shall become effective another corporation, taken alone, is not sufficient to justify their being
when both of the contracting parties already have knowledge of the treated as one entity. If used to perform legitimate functions, a subsidiary's
decision. It will not be binding if only one of the parties knows of separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary, shall be confined to those arising
the decision. This determination must however not destroy the
from their respective businesses. A corporation has a separate personality
nature of mutuality of the contract between the parties based on
distinct from its stockholders and other corporations to which it may be
their essential equality. Hence the law requires that the conducted. Any claim or suit of the parent corporation cannot be pursued
determination must not be evidently inequitable. Otherwise, the by the subsidiary based solely on the reason that the former owns the
court shall decide what is equitable under the circumstances. For majority or even the entire stock of the latter.
example, A and B enter into a contract whereby A will sing in the From a perusal of the records, petitioners did not enter into a
nightclub of B for 2 days. A is to be paid 5000 for such number of Loan Agreement and REM with respondent. Respondent, therefore, has no
songs to be determined by X two days before the performance, and right to foreclose the subject property even after default, since this right can
only be claimed by the creditor-mortgagor, EPCIB; and, consequently, the
any violation renders the contract ineffectual entitling B not to pay
extrajudicial foreclosure of the REM by respondent would be in violation of
A any consideration as a penalty. They sign the contract, Later, X
petitioners' property rights.
makes a determination that A is to sing 20 songs, selected by X
continually without a break starting from 6:00 in the evening to
De Roca v. Dabuya
2:00 the next morning; and, if the nightclub is filled with people, A
Held: The contract of employment between respondents, on the
will give an encore three times divided into 30 minutes each time.
one hand, and Oceanic and Ewayan on the other, is effective only between
A shall only sing those specifically requested by the audience, and them; it does not extend to petitioner, who is not a party thereto. His only
in case he does not know the song, his fee is to be reduced. X role is as lessor of the premises which Oceanic leased to operate as a hotel;
notified A two days before the performance that the latter will sing he cannot be deemed as respondent's employer - not even under the pretext
15 English rock songs and 5 Norweigan songs which obviously A that he took over as the "new management" of the hotel operated by
does not know. This is clearly a situation where the performance is Oceanic. There simply is no truth to such claim.
so inequitable. IN fact, the contract itself and not merely the
determination of its performance is almost left to the will of the Under Article 1311 of the Civil Code, the heirs are bound
third party and it greatly favors the nightclub owner. Also it tends by the contracts entered into by their predecessors-in-interest
to destroy the basic equality of the contracting parties. A can go to except when the rights and obligations therein are not transmissible
court which will decide what is equitable under the circumstances. by their nature, by stipulation or by provision of law. 
Court intertervention is necessary in order that the intent of the
parties will not be rendered nugatory by the inequitable terms and Heirs of Llenado v. Llenado
conditions of a third party. Held: A contract of lease is, therefore, generally transmissible to
the heirs of the lessor or lessee.  It involves a property right and, as such,
Article 1311. Contracts take effect only between the parties, the death of a party does not excuse non-performance of the contract.  The
their assigns, and heirs, except in case where the rights and obligations rights and obligations pass to the heirs of the deceased and the heir of the
arising from the contract are not transmissible by their nature, or by deceased lessor is bound to respect the period of the lease.  The same
stipulation or by provision of law. The heir is not liable beyond the alue principle applies to the option to renew the lease. As a general rule,
of the property he received from the decedent. covenants to renew a lease are not personal but will run with the land. 
If a contract should contain some stipulation in favor of a Consequently, the successors-in-interest of the lessee are entitled to the
third person, he may demand its fulfilment provided he communicated benefits, while that of the lessor are burdened with the duties and
his acceptance to the obligor before its revocation. A mere incidental obligations, which said covenants conferred and imposed on the original
benefit or interest of a person is not sufficient. The contracting parties parties.
must have clearly and deliberately conferred a favor upon a third The foregoing principles apply with greater force in this case
person. because the parties expressly stipulated in the March 31, 1978 Agreement
that Romeo, as lessee, shall transfer all his rights and interests under the
lease contract with option to renew "in favor of the party of the Third Part
This Article stresses the principle of relativity. It is a
(Orlando), the latter's heirs, successors and assigns" indicating the clear
basic principle in civil law that, with certain exceptions, a contract intent to allow the transmissibility of all the rights and interests of Orlando
can only bind the parties who had entered into it or their successors under the lease contract unto his heirs, successors or assigns.  Accordingly,
who assumed their personalities or their juridical positions, and the rights and obligations under the lease contract with option to renew
that, as a consequence, such contract can neither favor nor were transmitted from Orlando to his heirs upon his death on November 7,
prejudice a third person [Quano v. Court of Appeals]. 1983.
It is clear that under Article 1311 of the Civil Code, It does not follow, however, that the lease subsisted at the time
of the sale of the subject lot on January 29, 1987.  When Orlando died on
contracts take effect only between the parties who execute
November 7, 1983, the lease contract was set to expire 26 days later or on
them. Where there is no privity of contract, there is likewise no
December 3, 1983, unless renewed by Orlando's heirs for another four
obligation or liability to speak about. The civil law principle of years.  While the option to renew is an enforceable right, it must necessarily
relativity of contracts provides that contracts can only bind the be first exercised to be given effect.
parties who entered into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with Exceptions to the Principle of Relativity

Page | 3
(a) Where the obligations arising from the contract are not whom such right may be personally exercised; enforceable against
transmissible by their nature, by stipulation or by provision of the whole world.
law; This Article constitutes one of the exceptions to the
(b) Where there is a stipulation pour autrui; general rule that a contract binds only the parties.
This involves substantial or material benefits that have
been constituted or stipulated in favor of a third person—not mere Vallido v. Puno
incidental benefits or interests. Held: It is undisputed that there is a double sale and that the
respondents are the first buyers while the petitioners are the second buyers.
The burden of proving good faith lies with the second buyer (petitioners
Under this provision of the Civil Code, the following
herein) which is not discharged by simply invoking the ordinary
requisites must be present in order to have a stipulation pour presumption of good faith.
autrui: The non-registration of the deed of sale between Martino and
(1) there must be a stipulation in favor of a third person; Purificacion is immaterial as it is binding on the petitioners who are privies.
(2) the stipulation must be a part, not the whole of the Based on the privity between petitioner Esmeraldo and Martino, the
contract; petitioner as a second buyer is charged with constructive knowledge of
(3) the contracting parties must have clearly and prior dispositions or encumbrances affecting the subject property. The
second buyer who has actual or constructive knowledge of the prior sale
deliberately conferred a favor upon a third person, not a mere
cannot be a registrant in good faith.
incidental benefit or interest;
(4) the third person must have communicated his
acceptance to the obligor before its revocation; and PNB v. Tan Dee
Held: The petitioner is correct in arguing that it is not obliged to
(5) neither of the contracting parties bears the legal
perform any of the undertaking of respondent PEPI and AFP-RSBS in its
representation or authorization of the third party.
transactions with Dee because it is not a privy thereto. The basic principle
of relativity of contracts is that contracts can only bind the parties who
Baluyot v. Court of Appeals entered into it, and cannot favor or prejudice a third person, even if he is
Held: The allegations in the following paragraphs of the aware of such contract and has acted with knowledge thereof. “Where there
amended complaint are sufficient to bring petitioners' action within the is no privity of contract, there is likewise no obligation or liability to speak
purview of the second paragraph of Art. 1311 on stipulations pour autrui: about.”
1. Paragraph 17, that the deed of donation contains a stipulation The petitioner, however, is not being tasked to undertake the
that the Quezon City government, as donee, is required to transfer to obligations of PEPI and AFP-RSBS. In this case, there are two phases
qualified residents of Cruz-na-Ligas, by way of donations, the lots occupied involved in the transactions between respondents PEPI and Dee – the first
by them; phase is the contract to sell, which eventually became the second phase, the
2. The same paragraph, that this stipulation is part of conditions absolute sale, after Dee’s full payment of the purchase price. In a contract
and obligations imposed by UP, as donor, upon the Quezon City of sale, the parties’ obligations are plain and simple. The law obliges the
government, as donee; vendor to transfer the ownership of and to deliver the thing that is the object
3. Paragraphs 15 and 16, that the intent of the parties to the deed of sale.[26] On the other hand, the principal obligation of a vendee is to pay
of donation was to confer a favor upon petitioners by transferring to the the full purchase price at the agreed time. [27] Based on the final contract of
latter the lots occupied by them; sale between them, the obligation of PEPI, as owners and vendors of Lot
4. Paragraph 19, that conferences were held between the parties 12, Block 21-A, Village East Executive Homes, is to transfer the ownership
to convince UP to surrender the certificates of title to the city government, of and to deliver Lot 12, Block 21-A to Dee, who, in turn, shall pay, and
implying that the donation had been accepted by petitioners by demanding has in fact paid, the full purchase price of the property. There is nothing in
fulfillment thereof[16] and that private respondents were aware of such the decision of the HLURB, as affirmed by the OP and the CA, which
acceptance; and shows that the petitioner is being ordered to assume the obligation of any of
5. All the allegations considered together from which it can be the respondents. There is also nothing in the HLURB decision, which
fairly inferred that neither of private respondents acted in representation of validates the petitioner’s claim that the mortgage has been nullified. The
the other; each of the private respondents had its own obligations, in view order of cancellation/release of the mortgage is simply a consequence of
of conferring a favor upon petitioners. Dee’s full payment of the purchase price, as mandated by Section 25 of
The amended complaint further alleges that respondent UP has P.D. No. 957, to wit:
an obligation to transfer the subject parcel of land to the city government so Sec. 25. Issuance of Title. The owner or developer shall deliver
that the latter can in turn comply with its obligations to make improvements the title of the lot or unit to the buyer upon full payment of the lot or unit.
on the land and thereafter transfer the same to petitioners but that, in breach No fee, except those required for the registration of the deed of sale in the
of this obligation, UP failed to deliver the title to the land to the city Registry of Deeds, shall be collected for the issuance of such title. In the
government and then revoked the deed of donation after the latter failed to event a mortgage over the lot or unit is outstanding at the time of the
fulfill its obligations within the time allowed in the contract. issuance of the title to the buyer, the owner or developer shall redeem the
mortgage or the corresponding portion thereof within six months from such
(c) Where a third person induces another to violate his contract issuance in order that the title over any fully paid lot or unit may be secured
and delivered to the buyer in accordance herewith.
(1314);
It must be stressed that the mortgage contract between PEPI and
(d) Where, in some cases, third persons may be adversely affected the petitioner is merely an accessory contract to the principal three-year
by a contract where they dd not participate (1312); loan takeout from the petitioner by PEPI for its expansion project. It need
(e) Where the law authorizes the creditor to sue on a contract not be belaboured that “[a] mortgage is an accessory undertaking to secure
entered into by his debtor. the fulfillment of a principal obligation,” and it does not affect the
ownership of the property as it is nothing more than a lien thereon serving
Article 1312. In contracts creating real rights, third persons as security for a debt.
who come into possession of the object of the contract are bound Note that at the time PEPI mortgaged the property to the
thereby, subject to the provisions of the Mortgage Law and the Land petitioner, the prevailing contract between respondents PEPI and Dee was
Registration Laws. still the Contract to Sell, as Dee was yet to fully pay the purchase price of
the property. On this point, PEPI was acting fully well within its right when
it mortgaged the property to the petitioner, for in a contract to sell,
Real right – right belonging to a person over a specific ownership is retained by the seller and is not to pass until full payment of
thing; without a passive subject individually determined; against

Page | 4
the purchase price. In other words, at the time of the mortgage, PEPI was Soler v. Court of Appeals
still the owner of the property. Held: In the case at bar, there was a perfected oral contract.
The petitioner was well aware that the properties mortgaged by When Ms. Lopez and petitioner met in November 1986, and discussed the
PEPI were also the subject of existing contracts to sell with other buyers. details of the work, the first stage of the contract commenced.  When they
While it may be that the petitioner is protected by Act No. 3135, as agreed to the payment of the ten thousand pesos (P10,000.00) as
amended, it cannot claim any superior right as against the installment professional fees of petitioner and that she should give the designs before
buyers. This is because the contract between the respondents is protected by the December 1986 board meeting of the bank, the second stage of the
P.D. No. 957, a social justice measure enacted primarily to protect innocent contract proceeded, and when finally petitioner gave the designs to Ms.
lot buyers. Lopez, the contract was consummated.
Petitioner believed that once she submitted the designs she
Article 1313. Creditors are protected in cases of contracts would be paid her professional fees. Ms. Lopez assured petitioner that she
intended to defraud them. would be paid.
The doctrine of quantum meruit is a device to prevent undue
enrichment based on the equitable postulate that it is unjust for a person to
This article represents another instance when an outsider retain benefit without paying for it."
can in a sense interfere with another’s contract. [See Article 1177]. We note that the designs petitioner submitted to Ms. Lopez were
not returned.  Ms. Lopez, an officer of the bank as branch manager used
Article 1314. Any third person who induces another to such designs for presentation to the board of the bank.  Thus, the designs
violate his contract shall be liable for damages to the other contracting were in fact useful to Ms. Lopez for she did not appear to the board without
party. any designs at the time of the deadline set by the board.

This is called a tortious interference. The rule is that if a Consequences of perfection

contract is violated through inducement of a third person, the (a) The parties are bound to the fulfilment of what has
injured party may properly sue for damages [Gilchrist v. Cuddy]. been expressly stipulated (1315); and compliance
thereof must be in good faith (1159). If the true
REQUISITES in order for 1314 to become applicable: intention is not expressed in the written agreement,
(1) Existence of a valid contract; (2) Knowledge on the part of the in case one has been made, the proper remedy is
third person of the existence of a contract; (3) Interference of the reformation (1359).
third person is without legal justification. (b) The parties are bound to all the consequences
With regard to the third requisite (interference without which, according to their nature, may be in keeping
legal justification), there is a legal presumption of malice under the with good faith, usage and law.
law. Because malice is presumed, there is a liability for damages.
A sale by public auction is perfected “when the
Article 1315. Contracts are perfected by mere consent, and auctioneer announces its perfection by the fall of the hammer or in
from that moment the parties are bound not only to the fulfilment of other customary manner”.  It does not matter that Morales merely
what has been expressly stipulated but also to all the consequences matched the bid of the highest bidder at the said auction sale.  The
which, according to their nature, may be in keeping with good faith, contract of sale was nevertheless perfected as to Morales, since she
usage, and law. merely stepped into the shoes of the highest bidder [Province of
Cebu v. Morales].
This Article stresses the CONSENSUALITY of
contracts. A contract is the law between the parties. Any non- Province of Cebu v. Morales
fulfillment of the contract will make the violator liable. The law Held: The appellate court correctly ruled that petitioner, as
likewise states that the parties are bound to fulfil all the successor-in-interest of the City of Cebu, is bound to respect the contract of
consequences which, according to their nature, may be in keeping sale entered into by the latter pertaining to Lot No. 646-A-3.  The City of
with good faith, usage and the law. Thus, the parties are bound to Cebu was the owner of the lot when it awarded the same to respondents’
exercise the diligence of a good father of a family with respect to predecessor-in-interest, Morales, who later became its owner before the
the thing sought to be delivered unless there is another standard of same was erroneously returned to petitioner under the compromise
judgment.  The award is tantamount to a perfected contract of sale between
care stipulated by the parties or required by law.
Morales and the City of Cebu, while partial payment of the purchase price
and actual occupation of the property by Morales and respondents
How contracts are perfected effectively transferred ownership of the lot to the latter.  This is true
(a) Consensual contracts – by mere consent notwithstanding the failure of Morales and respondents to pay the balance
(b) Real contracts – perfected by delivery of the purchase price.
(c) Formal or solemn contracts – here a special form is required Petitioner can no longer assail the award of the lot to Morales on
for perfection. the ground that she had no right to match the highest bid during the public
Consensual contracts are perfected from the moment auction.  Whether Morales, as actual occupant and/or lessee of the lot, was
qualified and had the right to match the highest bid is a foregone matter that
there is agreement (consent) on the subject matter, and the cause or
could have been questioned when the award was made.  When the City of
consideration. Cebu awarded the lot to Morales, it is assumed that she met all
qualifications to match the highest bid.  The subject lot was auctioned in
A contract undergoes three stages: 1965 or more than four decades ago and was never questioned.  Thus, it is
(a) preparation, conception, or generation, which is the safe to assume, as the appellate court did, that all requirements for a valid
period of negotiation and bargaining, ending at the moment of public auction sale were complied with.
agreement of the parties;
(b) perfection or birth of the contract, which is the Article 1316. Real contracts, such as deposit, pledge and
moment when the parties come to agree on the terms of the commodatum, are not perfected until the delivery of the object of the
contract; and obligation.

Page | 5
 Delivery is required of the very nature of the contract.
Real contracts refer to deposit, pledge, and commodatum. Ratification can be implied from acts and it cleanses the
A loan is a real contract, not consensual, and as such is contract from all its defects from the moment the contract was
perfected only upon the delivery of the object of the contract. Upon entered into.
delivery of the object of the contract of loan (in this case the money
received by the debtor when the checks were encashed) the debtor Chapter 2
acquires ownership of such money or loan proceeds and is bound ESSENTIAL REQUISITES OF CONTRACTS
to pay the creditor an equal amount.
GENERAL PROVISIONS
Garcia v. Thio
Held: It is undisputed that the checks were delivered to Article 1318. There is no contract unless the following
respondent. However, these checks were crossed and payable not to the requisites concur:
order of respondent but to the order of a certain Marilou Santiago. Thus the (1) Consent of the contracting parties;
main question to be answered is: who borrowed money from petitioner -- (2) Object certain which is the subject matter of the
respondent or Santiago? contract;
We agree with petitioner. Delivery is the act by which the res or (3) Cause of the obligation which is established.
substance thereof is placed within the actual or constructive possession or
control of another. Although respondent did not physically receive the The three essential requisites for consensual contracts are
proceeds of the checks, these instruments were placed in her control and
enumerated in this article.
possession under an arrangement whereby she actually re-lent the amounts
to Santiago.
Real contracts require a fourth requisite – DELIVERY.
Several factors support this [Link], respondent Solemn or formal contracts require a fourth requisite –
admitted that petitioner did not personally know Santiago.  It was highly COMPLIANCE WITH THE FORMALITIES REQUIRED BY
improbable that petitioner would grant two loans to a complete stranger LAW.
without requiring as much as promissory notes or any written
acknowledgment of the debt considering that the amounts involved were Section 1
quite big. Respondent, on the other hand, already had transactions with CONSENT
Santiago at that time.
Second, Leticia Ruiz, a friend of both petitioner and respondent
(and whose name appeared in both parties' list of witnesses) testified that Article 1319. Consent is manifested by the meeting of the
respondent's plan was for petitioner to lend her money at a monthly interest offer and the acceptance upon the thing and the cause which are to
rate of 3%, after which respondent would lend the same amount to Santiago constitute the contract. The offer must be certain and the acceptance
at a higher rate of 5% and realize a profit of 2%. This explained why absolute. A qualified acceptance constitutes a counter-offer.
respondent instructed petitioner to make the checks payable to Santiago. Acceptance made by letter or telegram does not bind the
Respondent has not shown any reason why Ruiz' testimony should not be offerer except from the time it came to his knowledge. The contract, in
believed. such case, is presumed to have been entered into in the place where the
Third, for the US$100,000 loan, respondent admitted issuing her offer was made.
own checks in the amount of P76,000 each (peso equivalent of US$3,000)
for eight months to cover the monthly interest. For the P500,000 loan, she Consent is the meeting of minds between the parties on
also issued her own checks in the amount of P20,000 each for four the subject matter and the cause of the contract, even if neither one
months. According to respondent, she merely accommodated petitioner's has been delivered.
request for her to issue her own checks to cover the interest payments since
petitioner was not personally acquainted with Santiago. She claimed,
Requisites for consent:
however, that Santiago would replace the checks with cash. [36] Her
explanation is simply incredible. It is difficult to believe that respondent 1. Concurrence of the offer and acceptance (Art. 1319 to 1326)
would put herself in a position where she would be compelled to pay 2. Legal capacity of the parties (Art. 1327 to 1329)
interest, from her own funds, for loans she allegedly did not contract. 3. Must be free, intelligent, voluntary, and free from defect
Fourth, in the petition for insolvency sworn to and filed by (Art. 1330 – 1346)
Santiago, it was respondent, not petitioner, who was listed as one of her
(Santiago's) creditors. To produce a contract, the acceptance must not qualify
Last, respondent inexplicably never presented Santiago as a
the terms of the offer. However, the acceptance may be express or
witness to corroborate her story. The presumption is that "evidence
willfully suppressed would be adverse if produced." Respondent was not
implied. For a contract to arise, the acceptance must be made
able to overturn this presumption. known to the offeror. Accordingly, the acceptance can be
withdrawn or revoked before it is made known to the offeror
[Jardine Davis v. Court of Appeals]. If there is completely no
Article 1317. No one may contract in the name of another
without being authorized by the latter, or unless he has by law a right acceptance of if the offer is expressly rejected, there is no meeting
to represent him. of minds. In cases of qualified acceptance, a contract is not created,
A contract entered into in the name of another by one who since there is no meeting between the offer and acceptance.
has no authority or legal representation, or who has acted beyond his Acceptance must be unconditional. It must be identical to the terms
powers, shall be unenforceable, unless it is ratified, expressly or of the offer.
impliedly, by the person on whose behalf it has been executed, before it
is revoked by the other contracting party.
Cognition Theory
A contract is perfected the moment the acceptance on the
IF a person wants to contract in the name of another -
part of the offeree comes to the knowledge of the offerer, not
(a) He must be duly authorized (expressly or impliedly); or
during the day that the offer was accepted.
(b) He must have by law a right to represent him (like the
Acceptance made by letter or telegram does not bind the
guardian or administrator); or
offerer except from the time it came to his knowledge. The contract
(c) The contract must be subsequently ratified expressly or
in such a case is presumed to have been entered into the place
impliedly, by word or by deed.

Page | 6
where the offer was made. The offeree can also withdraw his distinct from the selling price itself, but consideration may be pure
acceptance only before the offerer acquires knowledge of such liberality [Paras].
acceptance, because there is no contract yet and therefore, still no Since an option is by itself a contract, it is not perfected
meeting of the offer and acceptance. The acceptance will only be unless there is a meeting of the minds on the option. Thus, the offer
binding from the time the offerer had knowledge of the acceptance. to grant an option, even if founded on a distinct cause or
consideration, may itself be withdrawn before the acceptance of the
Article 1320. An acceptance may be express or implied. offer of an option [Paras].
When the written agreement itself does not state the
As regards consent, “when there is merely an offer by consideration for the option contract, the offeree or promisee bears
one party without acceptance of the other, there is no contract.”  the burden of proving the existence of a separate consideration for
The decision to accept a bidder’s proposal must be communicated the option. The offeree cannot rely on Article 1354 of the Civil
to the bidder.  However, a binding contract may exist between the Code, which presumes the existence of consideration, since Article
parties whose minds have met, although they did not affix their 1479 of the Civil Code is a specific provision on option contracts
signatures to any written document, as acceptance may be that explicitly requires the existence of a consideration distinct
expressed or implied. It “can be inferred from the contemporaneous from the purchase price. For uniformity and consistency in contract
and subsequent acts of the contracting parties.” The rule is that interpretation, the better rule to follow is that the consideration for
except where a formal acceptance is so required, although the the option contract should be clearly specified as such in the option
acceptance must be affirmatively and clearly made and must be contract or clause. Otherwise, the offeree must bear the burden of
evidenced by some acts or conduct communicated to the offeror, it proving that a separate consideration for the option contract exists.
may be made either in a formal or an informal manner, and may be [PNOC v. Keppel Holdings].
shown by acts, conduct, or words of the accepting party that clearly
manifest a present intention or determination to accept the offer to PNOC v. Keppel Holdings
buy or sell.  Thus, acceptance may be shown by the acts, conduct, Held: As earlier mentioned, the consideration for an option
or words of a party recognizing the existence of the contract of sale contract does not need to be monetary and may be anything of
[Robern Development v. PELA]. value. However, when the consideration is not monetary, the
consideration must be clearly specified as such in the option contract or
clause.
Article 1321. The person making the offer may fix the time,
In the present case, none of the above rules were observed. We
place, and manner of acceptance, all of which must be complied with.
find nothing in paragraph 5 of the Agreement indicating that the grant to
Lusteveco of the option to convert the purchase price for Keppel shares was
The offerer can indicate the manner of acceptance and intended by the parties as the consideration for Keppel's option to buy the
the time when and the place where it should be made. The offerer land; Keppel itself as the offeree presented no evidence to support this
will not be bound by an acceptance made by the acceptor in any finding. On the contrary, the option to convert the purchase price for shares
other manner than that specified by the offerer unless the latter should be deemed part of the consideration for the contract of sale itself,
acquiesces to the change. since the shares are merely an alternative to the actual cash price.
Given our finding that the Agreement did not categorically refer
to any consideration to support Keppel's option to buy and for Keppel's
Article 1322. An offer made through an agent is accepted
failure to present evidence in this regard, we cannot uphold the existence of
from the time acceptance is communicated to him.
an option contract in this case.
The absence of a consideration supporting the option contract,
The article applies when both the offer and the however, does not invalidate an offer to buy (or to sell). An option
acceptance are made through an agent. Any other intermediary who unsupported by a separate consideration stands as an unaccepted offer
is not an agent is merely a sort of messenger, who must to buy (or to sell) which, when properly accepted, ripens into a contract
communicate to the person who sends him; otherwise, there is as to sell. 
yet no meeting of minds.
Sanchez v. Rigos reconciled the apparent conflict
Article 1323. An offer becomes ineffective upon the death, between Articles 1324 and 1479 of the Civil Code, which are
civil interdiction, insanity, or insolvency of either party before quoted below:
acceptance is conveyed.
Article 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time before acceptance
This article gives four instances when the offer becomes
by communicating such withdrawal, except when the option is founded
ineffective. When an offer becomes ineffective, nothing can be upon a consideration, as something paid or promised.
accepted. The phrase “before acceptance is conveyed” means Article 1479. A promise to buy and sell a determinate thing for a
before acceptance has come to the actual knowledge of the offeror. price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
Article 1324. When the offerer has allowed the offerer determinate thing for a price certain is binding upon the promissor if
certain period to accept, the offer may be withdrawn at any time before the promise is supported by a consideration distinct from the price, 
acceptance by communicating such withdrawal, except when the option The Court en banc declared that there is no distinction between
is founded upon a consideration, as something paid or promised. these two provisions because the scenario contemplated in the second
paragraph of Article 1479 is the same as that in the last clause of Article
1324. Instead of finding a conflict, Sanchez v. Rigos harmonised the two
Option is a contract granting a person the privilege to
provisions, consistent with the established rules of statutory construction.
buy or not or not to buy certain objects at any time within the
agreed period at a fixed price. The contract of option is a separate
Thus, when an offer is supported by a separate
and distinct contract from the contract which the parties may enter
consideration, a valid option contract exists, i.e., there is
into upon the consummation of the contract. Therefore, an option
a contracted offer which the offerer cannot withdraw from
must have its own cause or consideration [Dela Cavada v. Diaz],
without incurring liability in damages.

Page | 7
 On the other hand, when the offer is not supported by a there was a perfected sale between the parties where earnest money was
separate consideration, the offer stands but, in the absence of a given.  Finally, when petitioner gave the "earnest money," the Receipt did
binding contract, the offeror may withdraw it any time. In either not reveal that she was bound to pay the balance of the purchase price.  In
case, once the acceptance of the offer is duly fact, she could even forfeit the money given if the terms of the option were
not met.  Thus, the P20,000.00 could only be money given as consideration
communicated before the withdrawal of the offer, a bilateral
for the option contract.  That the contract between the parties is one of
contract to buy and sell is generated which, in accordance with the option is buttressed by the provision therein that should the transaction of
first paragraph of Article 1479 of the Civil Code, becomes the property not materialize without fault of petitioner as buyer, respondent
reciprocally demandable. Lorenzo de Vera obligates himself to return the full amount of P20,000.00
Accordingly, when an option to buy or to sell is not "earnest money" with option to buy or forfeit the same on the fault of
supported by a consideration separate from the purchase price, the petitioner.  It is further bolstered by the provision therein that guarantees
option constitutes as an offer to buy or to sell, which may be petitioner that she or her representative would be notified in case the
withdrawn by the offeror at any time prior to the communication of subject property was sold or encumbered to a third person.  Finally,
the Receipt provided for a period within which the option to buy was to be
the offeree's acceptance. When the offer is duly accepted, a mutual
exercised, i.e., "within ten (10) days" from 31 July 1978.
promise to buy and to sell under the first paragraph of Article 1479 Doubtless, the agreement between respondent spouses and
of the Civil Code ensues and the parties' respective obligations petitioner was an "option contract" or what is sometimes called an
become reciprocally demandable [PNOC v. Keppel]. "unaccepted offer." During the option period the agreement was not
converted into a bilateral promise to sell and to buy where both respondent
PNOC v. Keppel spouses and petitioner were then reciprocally bound to comply with their
Held: Applied to the present case, we find that the offer to buy respective undertakings as petitioner did not timely, affirmatively and
the land was timely accepted by Keppel. clearly accept the offer of respondent spouses.
As early as 1994, Keppel expressed its desire to exercise its
option to buy the land. Instead of rejecting outright Keppel's acceptance, Option vs. Contract
PNOC referred the matter to the Office of the Government Corporate An option is not of itself a purchase, but merely secures
Counsel (OGCC). In its Opinion No. 160, series of 1994, the OGCC opined the privilege to buy.  It is not a sale of property but a sale of the
that Keppel "did not yet have the right to purchase the Bauan lands." On
right to purchase.  It is simply a contract by which the owner of
account of the OGCC opinion, the PNOC did not agree with Keppel's
property agrees with another person that he shall have the right to
attempt to buy the land; nonetheless, the PNOC made no categorical
withdrawal of the offer to sell provided under the Agreement. buy his property at a fixed price within a certain time. He does not
sell his land; he does not then agree to sell it; but he does sell
Earnest money vs. Option money something, that is, the right or privilege to buy at the election or
"Earnest money" and "option money" are not the same option of the other party.  Its distinguishing characteristic is that it
but distinguished thus:  (a) earnest money is part of the purchase imposes no binding obligation on the person holding the option,
price, while option money is the money given as a distinct aside from the consideration for the offer. Until acceptance, it is
consideration for an option contract; (b) earnest money is given not, properly speaking, a contract, and does not vest, transfer, or
only where there is already a sale, while option money applies to a agree to transfer, any title to, or any interest or right in the subject
sale not yet perfected; and, (c) when earnest money is given, the matter, but is merely a contract by which the owner of property
buyer is bound to pay the balance, while when the would-be buyer gives the optionee the right or privilege of accepting the offer and
gives option money, he is not required to buy, but may even forfeit buying the property on certain terms. 
it depending on the terms of the option [Limson v. Court of On the other hand, a contract, like a contract to sell,
Appeals]. involves a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to
render some service.  Contracts, in general, are perfected by mere
San Miguel Properties v. Sps. Huang
consent,  which is manifested by the meeting of the offer and the
Held: In this case, the P1 million "earnest-deposit" could not
have been given as earnest money as contemplated in Art. 1482 because, at acceptance upon the thing and the cause which are to constitute the
the time when petitioner accepted the terms of respondents' offer of March contract. The offer must be certain and the acceptance absolute. 
29, 1994, their contract had not yet been perfected. This is evident from the The distinction between an "option" and a contract of
following conditions attached by respondents to their letter, to wit: (1) that sale is that an option is an unaccepted offer. It states the terms and
they be given the exclusive option to purchase the property within 30 days conditions on which the owner is willing to sell his land, if the
from acceptance of the offer; (2) that during the option period, the parties holder elects to accept them within the time limited. If the holder
would negotiate the terms and conditions of the purchase; and (3) petitioner
does so elect, he must give notice to the other party, and the
would secure the necessary approvals while respondents would handle the
accepted offer thereupon becomes a valid and binding contract. If
documentation.
The first condition for an option period of 30 days sufficiently an acceptance is not made within the time fixed, the owner is no
shows that a sale was never perfected. As petitioner correctly points out, longer bound by his offer, and the option is at an end. A contract of
acceptance of this condition did not give rise to a perfected sale but merely sale, on the other hand, fixes definitely the relative rights and
to an option or an accepted unilateral promise on the part of respondents to obligations of both parties at the time of its execution. The offer
buy the subject properties within 30 days from the date of acceptance of the and the acceptance are concurrent, since the minds of the
offer. Such option giving respondents the exclusive right to buy the contracting parties meet in the terms of the agreement [Adelfa
properties within the period agreed upon is separate and distinct from the
Properties v. Court of Appeals].
contract of sale which the parties may enter. All that respondents had was
just the option to buy the properties which privilege was not, however,
exercised by them because there was a failure to agree on the terms of Adelfa Properties v. Court of Appeals
payment. No contract of sale may thus be enforced by respondents. Held: The test in determining whether a contract is a "contract of
sale or purchase" or a mere "option" is whether or not the agreement could
be specifically enforced.  There is no doubt that the obligation of petitioner
Limson v. Court of Appeals to pay the purchase price is specific, definite and certain, and consequently
Held: There is nothing in the Receipt which indicates that the binding and enforceable. Had private respondents chosen to enforce the
P20,000.00 was part of the purchase price.  Moreover, it was not shown that contract, they could have specifically compelled petitioner to pay the

Page | 8
balance of P2,806,150.00. This is distinctly made manifest in the contract Generally, advertisement of things for sale are mere
itself as an integral stipulation, compliance with which could legally and invitations to make an offer. Ths, if a seller advertises that he
definitely be demanded from petitioner as a consequence. intends to sell his house to any willing purchaser, it is an invitation
This is not a case where no right is as yet created nor an for the purchase to make an offer or to negotiate as to how he
obligation declared, as where something further remains to be done before
intends to buy the house. The phrase “unless it appears
the buyer and seller obligate themselves.  An agreement is only an "option"
when no obligation rests on the party to make any payment except such as
otherwise” connotes that the advertisement may constitute an
may be agreed on between the parties as consideration to support the option offer which is certain.
until he has made up his mind within the time specified. An option, and not
a contract to purchase, is effected by an agreement to sell real estate for Article 1326. Advertisements for bidders are simply
payments to be made within a specified time and providing for forfeiture of invitations to make proposals, and the advertiser is not bound to accept
money paid upon failure to make payment, where the purchaser does not the highest or lowest bidder, unless the contrary appears.
agree to purchase, to make payment, or to bind himself in any way other
than the forfeiture of the payments made.  As hereinbefore discussed, this is A person who entertains an advertisement to bid does not
not the situation obtaining in the case at bar.
automatically become the other party to a contract. As a general
While there is jurisprudence to the effect that a contract which
provides that the initial payment shall be totally forfeited in case of default rule, the advertiser is not bound to accept the highest or lowest
in payment is to be considered as an option contract,  still we are not bidder.
inclined to conform with the findings of respondent court and the court a
quo that the contract executed between the parties is an option contract, for Article 1327. The following cannot give consent to a
the reason that the parties were already contemplating the payment of the contract:
balance of the purchase price, and were not merely quoting an agreed value (1) Unemancipated minors;
for the property. The term "balance," connotes a remainder or something (2) Insane or demented persons, and deaf-mutes who do not
remaining from the original total sum already agreed upon. know how to write.
In other words, the alleged option money of P50,000.00 was
actually earnest money which was intended to form part of the purchase
Persons incapacitated to give consent:
price. The amount of P50,000.00 was not distinct from the cause or
1. Unemancipated minors;
consideration for the sale of the property, but was itself a part thereof. It is a
statutory rule that whenever earnest money is given in a contract of sale, it 2. Insane or demented persons (unless they acted during a lucid
shall be considered as part of the price and as proof of the perfection of the interval), drunks and those hypnotized;
contract.  It constitutes an advance payment and must, therefore, be 3. Deaf-mutes who do not know how to write and read.
deducted from the total price. Also, earnest money is given by the buyer to
the seller to bind the bargain. In general, the contracts which they enter into are
The aforequoted characteristics of earnest money are apparent in VOIDABLE, unless:
the so-called option contract under review, even though it was called
a. Upon reaching the age of majority, they ratify the same.
“option money” by the parties. In addition, private respondents failed to
show that the payment of the balance of the purchase price was only a
b. They were entered through a guardian, and the court having
condition precedent to the acceptance of the offer or to the exercise of the jurisdiction had approved the same.
right to buy. On the contrary, it has been sufficiently established that such c. They were contracts of necessities such as food, but here the
payment was but an element of the performance of petitioner's obligation people who are legally bound to give them support should pay
under the contract to sell.  therefor.
NOTE: Incapacity means that these persons cannot be
Option contract vs. Sale bound by contracts by themselves but may be bound through
As a contract, it must necessarily have the essential consent given by guardians or persons having authority over them.
elements of subject matter, consent, and consideration. Although
an option contract is deemed a preparatory contract to the principal Article 1328. Contracts entered into during a lucid interval
contract of sale, it is separate and distinct therefrom, thus, its are valid. Contracts agreed to in a state of drunkenness or during a
essential elements should be distinguished from those of a sale. hypnotic spell are voidable.
In an option contract, the subject matter is the right or
privilege to buy (or to sell) a determinate thing for a price Here, there is already a presumption of insanity because
certain, while in a sales contract, the subject matter is the the person must be judicially declared insane. So it must be shown
determinate thing itself. The consent in an option contract is the that at the time of contracting, the insane person was in a lucid
acceptance by the offeree of the offerer's promise to sell (or to interval [Dumaguin v. Reynolds].
buy) the determinate thing, i.e., the offeree agrees to hold the right
or privilege to buy (or to sell) within a specified period. This Article 1329. The incapacity declared in Article 1327 is
acceptance is different from the acceptance of the offer itself subject to the modifications determined by law, and is understood to be
whereby the offeree asserts his or her right or privilege to buy (or without prejudice to special disqualification established in the laws.
to sell), which constitutes as his or her consent to the sales contract.
The consideration in an option contract may be anything of value, Examples of persons specially disqualified:
unlike in a sale where the purchase price must be in money or its 1. The husband and wife cannot sell t each other, nor can they
equivalent. There is sufficient consideration for a promise if there donate to each other. Violations are considered void contracts.
is any benefit to the offeree or any detriment to the offeror [PNOC 2. Insolvents before they are discharged cannot make payments.
v. Keppel Holdings]. 3. Persons disqualified because of fiduciary relationship such as
the guardian, who is not allowed to purchase the property of
Article 1325. Unless it appears otherwise, business his ward.
advertisements of things for sale are not definite offers, but mere
invitations to make an offer. Distinction between incapacitated persons in Article
1327 and persons with special disqualifications established in the
laws

Page | 9
 Persons incapacitated under 1327 restrains their capacity read or understand the language in which the contract was written, or that
to contract. Those persons cannot contract by themselves because the contract was left unexplained to said party.  Petitioners failed to
of incapacity to give valid consent, but such consent may be valid discharge this burden.
if given through a guardian, etc.
Meanwhile, special disqualifications restrain the very Feliciano v. Zaldivar
right to contract itself. It is not in any way possible for them to Held: Applying the foregoing principles, the presumption is that
enter into contracts. Remegia, considering her limited educational attainment, did not
understand the full import of the joint affidavit of confirmation of sale and,
consequently, fraud or mistake attended its execution. The burden is on
Article 1330. A contract where consent is given through
respondents, the spouses Zaldivar, to rebut this presumption. They tried to
mistake violence, intimidation, undue influence or fraud is voidable.
discharge this onus by presenting Atty. Francisco Velez (later RTC Judge)
who notarized the said document. Atty. Velez testified that he "read and
A voidable contract is binding and valid, unless annulled interpreted" the document to the affiants and he asked them whether the
by a proper action in court. It is, however, susceptible of contents were correct before requiring them to affix their signatures
ratification before the annulment. Mistake and fraud affect the thereon.[21] The bare statement of Atty. Velez that he "read and interpreted"
intellect. Violence, intimidation, and undue influence affect the the document to the affiants and that he asked them as to the correctness of
will. There must be clear and convincing evidence of the presence its contents does not necessarily establish that Remegia actually
comprehended or understood the import of the joint affidavit of
of vitiated consent. Mere preponderance is not sufficient
confirmation of sale. Nowhere is it stated in the affidavit itself that its
[Centenera v. Palicio]. contents were fully explained to Remegia in the language that she
understood before she signed the same. Thus, to the mind of the Court, the
Article 1331. In order that mistake may invalidate consent, presumption of fraud or mistake attending the execution of the joint
it should refer to the substance of the thing which is the object of the affidavit of confirmation of sale was not sufficiently overcome.
contract, or to those conditions which have principally moved one or
both parties to enter into the contract.
Article 1333. There is no mistake if the party alleging it
Mistake as to the identity or qualifications of one of the
knew the doubt, contingency or risk affecting the object of the contract.
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. Knowledge of doubt or risk does not vitiate consent. The
principle is that the law cannot protect you from bad bargains.
Requisites for mistake to vitiate consent: Under the Law on Sales, that is what you call caveat emptor or “let
1. The error must be substantial regarding: the buyer beware”. Under normal circumstances, if the contracting
a. The object of the contract; parties enter into a contract, they are presumed under the law to
b. The conditions which principally moved or induced one of know about certain doubts, contingencies, and risks in the contract
the parties (error in quality or in quantity); that they entered into. Logically because of this presumption, the
c. Identity or qualifications, but only if such was the law says there is no mistake on bad bargains. Therefore, their
principal cause of the contract. consent cannot be vitiated.
2. The error must be excusable, not caused by negligence. If mistake is caused by inexcusable negligence, the
3. The error must be a mistake of fact, and not of law. contract cannot be annulled.

Article 1332. When one of the parties is unable to read, or if Article 1334. Mutual error as to the legal effect of an
the contract is in a language not understood by him, and mistake or agreement when the real purpose of the parties is frustrated, may
fraud is alleged, the person enforcing the contract must show the terms vitiate consent.
thereof have been fully explained to the former.
Requisites for mutual error to vitiate consent:
The natural presumption is that one always acts with due 1. There must be mutual error
care and signs with full knowledge of all the contents of a 2. The error must refer to the legal effect of the agreement
document. He, thus, cannot repudiate the transaction [Abaya v. 3. The real purpose of the parties is frustrated.
Standard Vacuum Oil].
The principle that a party is presumed to know the import This Article needs to be distinguished from the remedy
of a document to which he affixes his signature is modified by the of reformation under Article 1361. Under Article 1361, the real
foregoing article. Where a party is unable to read or when the agreement is not disclosed; in Article 1334, the error is as to the
contract is in a language not understood by the party and mistake or legal effect of the agreement.
fraud is alleged, the obligation to show that the terms of the
contract had been fully explained to said party who is unable to Article 1335. There is violence when in order to wrest
read or understand the language of the contract devolves on the consent, serious or irresistible force is employed.
party seeking to enforce the contract to show that the other party There is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an imminent and
fully understood the contents of the document. If he fails to
grave evil upon his person or property, or upon the person or property
discharge this burden, the presumption of mistake, if not, fraud, of his spouse, descendants or ascendants, to give his consent.
stands unrebutted and controlling [Feliciano v. Zaldivar]. To determine the degree of the intimidation, the age, sex,
and condition of the person shall be borne in mind.
Dela Cruz v. Dela Cruz A threat to enforce one’s claim through competent
Held: Petitioners harp on the fact that the assailed Deed was in authority, if the claim is just or legal, does not vitiate consent.
English and that it was not explained to Paciencia.  But we find that the
petitioners failed to prove their allegation that Pacencia could not speak, Violence refers to physical coercion; intimidation, to
read, or understand English.  Moreover, Paciencia’s bare testimony on this moral coercion.
point is uncorroborated.  For Article 1332 to apply, it must first be
convincingly established that the illiterate or disadvantaged party could not

Page | 10
 Requisites for violence to vitiate consent: 2. Fraud in the performance of the obligations stipulated in the
1. Employment of serious or irresistible force; contract. This kind of fraud presupposes the existence of an
2. It must have been the reason why the contract was entered already perfected contract.
into.
REQUISITES OF FRAUD (TOLENTINO) (in rel. to
Requisites for intimidation to vitiate consent: Art. 1344):
1. One of the contracting parties is compelled to give his/her 1. It must have been employed by one contracting party
consent by unreasonable and well-grounded fear of an evil; upon the other, not against a co-party.
2. The evil must be evidently grave and unjust; 2. It must have induced the other party to enter into the
3. The evil must be the determinate cause upon whom it is contract.
employed in entering that contract. (It is employed not only to 3. It must have been serious.
his/her persons or property, but also to his spouse, 4. It must have resulted in damage or injury to the party
descendants, and ascendants). seeking annulment.

Article 1336. Violence or intimidation shall annul the Fontana Resort v. Tan
obligation, although it may have been employed by a third person who Held: The general rule is that he who alleges fraud or mistake in
did not take part in the contract. a transaction must substantiate his allegation as the presumption is that a
person takes ordinary care for his concerns and that private dealings have
Even if a third person exercised the violence or been entered into fairly and regularly. One who alleges defect or lack of
intimidation, the contract may be annulled. This is because the valid consent to a contract by reason of fraud or undue influence must
establish by full, clear and convincing evidence such specific acts that
consent is still vitiated.
vitiated a party’s consent, otherwise, the latter’s presumed consent to the
contract prevails.
Article 1337. There is undue influence when a person takes In this case, respondents have miserably failed to prove how
improper advantage of his power over the will of another, depriving petitioners employed fraud to induce respondents to buy FRCCI shares.  It
the latter of a reasonable freedom of choice. The following can only be expected that petitioners presented the FLP and the country
circumstances shall be considered: the confidential, family, spiritual club in the most positive light in order to attract investor-members.  There
and other relations between the parties, or the fact that the person is no showing that in their sales talk to respondents, petitioners actually
alleged to have been unduly influenced was suffering from mental used insidious words or machinations, without which, respondents would
weakness, or was ignorant or in financial distress. not have bought the FRCCI shares.  Respondents appear to be literate and
of above-average means, who may not be so easily deceived into parting
Requisites for undue influence to vitiate consent with a substantial amount of money.  What is apparent to us is that
1. Improper advantage respondents knowingly and willingly consented to buying FRCCI shares,
but were later on disappointed with the actual FLP facilities and club
2. Power over the will of another
membership benefits.
3. Deprivation of the latter’s will of a reasonable freedom of
Similarly, we find no evidence on record that petitioners
choice. defaulted on any of their obligations that would have called for the
rescission of the sale of the FRCCI shares to respondents.
Article 1338. There is fraud when, through insidious words
or machinations of one of the contracting parties, the other is induced DOLO CAUSANTE, REQUISITES:
to enter into a contract which, without them, he would not have agreed
1. The fraud must be material and serious—that is, it
to.
really induced the consent.
2. The fraud must have been employed by only one of the
There is fraud when one party is induced by the other to
contracting parties, because if both committed fraud, the contract
enter into a contract, through and solely because of the latter’s
would remain valid (in pari delicto)
insidious words or machinations.  But not all forms of fraud can
3. There must be deliberate intent to deceive or to induce.
vitiate consent.  Under Article 1330, fraud refers to dolo causante
Therefore, misrepresentation in good faith is not fraud.
or causal fraud, in which, prior to or simultaneous with the
4. The other party must have relied on the untrue
execution of a contract, one party secures the consent of the other
statement and must himself not be guilty of negligence in
by using deception, without which such consent would not have
ascertaining the truth.
been given. Simply stated, the fraud must be the determining cause
of the contract, or must have caused the consent to be given
There must always be damage or injury in cases of fraud.
[Fontana Resort v. Tan].
For example if A, an expert jeweller and in order to be able to sell
his glass figurine, told X that such figurine is made of Diamond
Kinds of Fraud
from South Africa and, on such false representation, X bought the
1. Fraud in the celebration of the contract (fraud proper)
figuring, the contract of sale can be annulled by X. Indeed, the
a. Dolo causante (or causal fraud): Here, were it not for
unbroken jurisprudence is that "bad faith or fraud under the law
the fraud, the other party would not have consented.
cannot be presumed; it must be established by clear and convincing
This is under Article 1338.
evidence [Clemente v. Court of Appeals].
b. Dolo incidente (or incidental fraud): Here, even without
the fraud the parties would have agreed just the same,
Article 1339. Failure to disclose facts, when there is a duty to
hence the fraud was only incidental in causing the
reveal them, as when the parties are bound by confidential relations,
consent. The contract is valid, but there can be an action constitutes fraud.
for damages [Woodhouse v. Halili].
Each party is bound to be as diligent and circumspect as
possible in entering into a contract and therefore each party is not
duty-bound to make known to each other any fact which is both

Page | 11
within their knowledge or within their opportunity to know. Also, misrepresentation is not fraudulent. Thus a misrepresentation as to
the mere fact that one of the aprties has superior knowledge of the the subject-matter of or parties to a contract may be innocently
value of the property subject of the transaction than the other party made, and, if so, it does not amount to fraud, but is a
does not per se constitute fraud. misrepresentation. Misrepresentations may be made without the
There is only fraud when, under special and peculiar and therefore completely done in good faith. In such a case it may
circumstances of each case, a legal or equitable duty is imposed constitute merely an error.
upon the dominant party to reveal certain facts material to the
transaction or when there is a confidential relationship between the Article 1344. In order that fraud may make a contract
parties. Hence, animal breeder has a duty to disclose to an ordinary voidable, it should be serious and should not have been employed by
buyer that the particular cow the buyer wants to buy is suffering both contracting parties.
from a disease not detectable to the naked eye. Also, a lawyer or an Incidental fraud only obliges the person employing it to pay
damages.
agent, because of his confidential and trust relationship with his
principal or client is duty-bound to reveal facts important to the
transaction; otherwise, non-disclosure will constitute fraud. Incidental fraud should not be confused with causal
Other examples: (1) Guardians have fiduciary relations, fraud. Incidental fraud is not a cause for annulment.
with respect to its wards or with incapacitated persons; (2) agents
have fiduciary relationship of utmost trust and confidence, with Requisites for Fraud to vitiate consent:
respect to their principals, and (3) Members of Boards in a (a) Fraud must be serious;
corporation have fiduciary duties in relation to the corporation, as a (b) The parties must not be in pari delicto (mutual guilt),
juridical person. otherwise, neither party may ask for annulment. The contract
would therefore, be considered valid.

Article 1340. The usual exaggerations in trade, when the What is the status of the contract:
other party had an opportunity to know the facts, are not in themselves
1. If one person is incapacitated: Voidable [Art. 1390]
fraud.
2. If both parties are incapacitated: Unenforceable [Art.
1403 (3)]
The maxim caveat emptor simply means that a buyer
3. If the consent of one of the parties has been vitiated:
must be on his guard. The “usual exaggerations in trade” (dealer’s
Voidable [Art. 1390]
talk) constitute tolerated fraud (dolus gunos), when the other party
4. If consent of both parties to a contract has been
had an opportunity to know the facts.
vitiated: Not Voidable
The law recognizes the practice in trade that there are
usual exaggerations employed by the parties to consummate a
Article 1345. Simulation of a contract may be absolute or
particular transaction. If a party is induced by such usual
relative. The former takes place when the parties do not intend to be
exaggerations, there may be fraud amounting to active bound at all; the latter, when the parties conceal their true agreement.
misrepresentation. If it is within the means of the other party to
investigate the truthfulness of such exaggeration and he does not do
Simulation of a contract is the process of intentionally
so, there will be no fraud despite the exaggerations.
deceiving others by producing the appearance of a contract that
really does not exist (absolute simulation) or which is different
Article 1341. A mere expression of an opinion does not from the true agreement (relative simulation). It is a vice of
signify fraud, unless made by an expert and the other party has relied
declaration.
on the former’s special knowledge.

Requisites:
General Rule: Mere expressions of opinion do not
1. An outward declaration of will different from the will of the
vitiate consent.
parties;
Exception:
2. The false appearance must have been intended by mutual
1. The opinion must be rendered by an expert using
agreement;
special knowledge in a field of his expertise.
3. The purpose is to deceive third persons.
2. The other party relied on the experts’ opinion.
Exception to the exception: When the expert, however,
Article 1346. An absolutely simulated or fictitious contract is
was employed by the party who was misled, he cannot ask for
void. A relative simulation, when it does not prejudice a third person
annulment, because he is chargeable with the acts and declarations and is not intended for any purpose contrary to law, morals, good
of his employee. customs, public order, or public policy, binds the parties to their real
agreement.
Article 1342. Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation has created substantial Kinds of simulated contracts:
mistake and the same is mutual. 1. Absolutely simulated (simulados) fictitious contracts:
a. Here, the parties do not intend to be bound.
Misrepresentation by a third person vitiates consent only b. Effect: The contract is VOID.
if it created substantial mistake and the same is mutual.
In absolute simulation, there is a colorable contract but it
Article 1343. Misrepresentation made in good faith is not has no substance as the parties have no intention to be bound by it.
fraudulent but may constitute error. The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce legal
Misrepresentation is, in the main, inclusive of the term effect or in any way alter the juridical situation of the parties. As a
fraud. Practically every fraud is a misrepresentation but every result, an absolutely simulated or fictitious contract is void, and the

Page | 12
parties may recover from each other what they may have given sq m, and the price is certain, without any condition or reservation of title
under the contract [Villaceran v. De Guzman]. on the part of the petitioners.
To bolster their claim that the deeds of sale were void, the
petitioners argue that there is gross disproportion between the price and the
Sps. Intac v. Court of Appeals
value of the subject property. The Court, however, ruled that gross
Held: In the case at bench, the Court is one with the courts
inadequacy of price by itself will not result in a void contract. Gross
below that no valid sale of the subject property actually took place between
inadequacy of price does not even affect the validity of a contract of sale,
the alleged vendors, Ireneo and Salvacion; and the alleged vendees,
unless it signifies a defect in the consent or that the parties actually intended
Spouses Intac.  There was simply no consideration and no intent to sell it.
a donation or some other contract. Inadequacy of cause will not invalidate a
Critical is the testimony of Marietto, a witness to the execution
contract unless there has been fraud, mistake or undue influence.
of the subject absolute deed of sale. He testified that Ireneo personally told
The Court observed that the petitioners are assailing the deeds of
him that he was going to execute a document of sale because Spouses Intac
sale for being absolutely simulated and for inadequacy of the price.
needed to borrow the title to the property and use it as collateral for their
However, these two grounds are incompatible. If there exists an actual
loan application. Ireneo and Salvacion never intended to sell or
consideration for transfer evidenced by the alleged act of sale, no matter
permanently transfer the full ownership of the subject property to Spouses
how inadequate it be, the transaction could not be a simulated sale.
Intac. Marietto was characterized by the RTC as a credible witness.
Nonetheless, the fact remains that the petitioners have failed to
Aside from their plain denial, petitioners failed to present any
prove that the assailed deeds of sale were simulated. The legal presumption
concrete evidence to disprove Marietto’s testimony. They claimed that they
is in favor of the validity of contracts and the party who impugns its
actually paid P150,000.00 for the subject property. They, however, failed to
regularity has the burden of proving its simulation. Since the petitioners
adduce proof, even by circumstantial evidence, that they did, in fact, pay it. 
failed to discharge the burden of proving their allegation that the deeds of
Even for the consideration of P60,000.00 as stated in the contract,
sale were simulated, the presumption of regularity and validity of the
petitioners could not show any tangible evidence of any payment therefor.
contract stands.
Their failure to prove their payment only strengthened Marietto’s story that
there was no payment made because Ireneo had no intention to sell the
subject property. 2. Relatively simulated (disimulados) disguised contracts:
Angelina’s story, except on the consideration, was consistent a. Here the parties conceal their true agreement.
with that of Marietto.  Angelina testified that she and her husband b. Effect: the parties are bound to their true or real agreement
mortgaged the subject property sometime in July 1978 to finance the except:
construction of a small hospital in Sta. Cruz, Laguna. Angelina claimed that - If the contract should prejudice a third person
Ireneo offered the property as he was in deep financial need.
- Or if the purpose is contrary to law, morals, good customs,
Granting that Ireneo was in financial straits, it does not prove
that he intended to sell the property to Angelina. Petitioners could not
public order or public policy.
adduce any proof that they lent money to Ireneo or that he shared in the
proceeds of the loan they had obtained. And, if their intention was to build If the parties state a false cause in the contract to conceal
a hospital, could they still afford to lend money to Ireneo? And if Ireneo their real agreement, the contract is only relatively simulated and
needed money, why would he lend the title to Spouses Intac when he the parties are still bound by their real agreement. Hence, where the
himself could use it to borrow money for his needs?  If Spouses Intac took essential requisites of a contract are present and the simulation
care of him when he was terminally ill, it was not surprising for Angelina to refers only to the content or terms of the contract, the agreement is
reciprocate as he took care of her since she was three (3) years old until she
absolutely binding and enforceable between the parties and their
got married. Their caring acts for him, while they are deemed services of
value, cannot be considered as consideration for the subject property for successors in interest [Villaceran v. De Guzman].
lack of quantification and the Filipino culture of taking care of their elders. There are two juridical acts involved in relative
simulation-- the ostensible act and the hidden act. The ostensible
The burden of proving the alleged simulation of a act is the contract that the parties pretend to have executed while
contract falls on those who impugn its regularity and validity. A the hidden act is the true agreement between the parties. To
failure to discharge this duty will result in the upholding of the determine the enforceability of the actual agreement between the
contract. The primary consideration in determining whether a parties, we must discern whether the concealed or hidden act is
contract is simulated is the intention of the parties as manifested by lawful and the essential requisites of a valid contract are present
the express terms of the agreement itself, as well as the [Villegas v. Rural Bank of Tanjay].
contemporaneous and subsequent actions of the parties. The most
striking index of simulation is not the filial relationship between Villegas v. Rural Bank of Tanjay
the purported seller and buyer, but the complete absence of any Held: In this case, the juridical act which binds the parties are
the loan and mortgage contracts, i.e., petitioners' procurement of a loan
attempt in any manner on the part of the latter to assert rights of
from respondent. Although these loan and mortgage contracts were
dominion over the disputed property [Clemente v. Court of
concealed and made to appear as sugar crop loans to make them fall within
Appeals]. the purview of the Rural Banks Act, all the essential requisites of a contract
were present. However, the purpose thereof is illicit, intended to circumvent
Tanchuling v. Cantela the Rural Banks Act requirement in the procurement of
Held: In this case, the Court agrees with the RTC that the loans. Consequently, while the parties intended to be bound thereby, the
subject deed was absolutely simulated. The parties never intended to be agreement is void and inexistent under Article 1409 of the Civil Code.
bound by any sale agreement. Instead, the subject deed was executed
merely as a front to show the public that Sps. Tanchuling were the owners
Villaceran v. De Guzman
of the properties in order to deter the group of John Mercado from illegally
Held: In the case at bar, there is a relative simulation of contract
selling the same.
as the Deed of Absolute Sale dated June 19, 1996 executed by De Guzman
in favor of petitioners did not reflect the true intention of the parties.
Sta. Fe Realty v. Sison It is worthy to note that both the RTC and the CA found that the
Held: In this case, all the elements for a contract to be valid are evidence established that the aforesaid document of sale was executed only
present. A perfected contract of absolute sale exists between SFRI and to enable petitioners to use the property as collateral for a bigger loan, by
Fabregas and then Fabregas and Sison. There was meeting of the minds way of accommodating De Guzman. Thus, the parties have agreed to
between the parties when they agreed on the sale of a determinate subject transfer title over the property in the name of petitioners who had a good
matter, which is the south eastern portion of Lot 1-B with an area of 15,598 credit line with the bank. The CA found it inconceivable for De Guzman to

Page | 13
sell the property for P75,000 as stated in the June 19, 1996 Deed of Sale protected.  In this regard, Philbank is entitled to have its mortgage carried
when petitioners were able to mortgage the property with FEBTC for over or annotated on the titles of Cipriana Delgado over the said properties.
P1,485,000. Another indication of the lack of intention to sell the property
is when a few months later, on September 6, 1996, the same property, this Section 2
time already registered in the name of petitioners, was reconveyed to De
OBJECT OF CONTRACTS
Guzman allegedly for P350,000.
As regards petitioners’ assertion that De Guzman’s previous
loans should have been considered to prove that there was an actual sale, Article 1347. All things which are not outside the commerce
the Court finds the same to be without merit. Petitioners failed to present of men, including future things, may be the object of a contract. All
any evidence to prove that they indeed extended loans to De Guzman in the rights which are not intransmissible may also be the object of
amounts of P300,000, P600,000 and P200,000. We note that petitioners contracts.
tried to explain that on account of their close friendship and trust, they did No contract may be entered into upon future inheritance
not ask for any promissory note, receipts or documents to evidence the except in cases expressly authorized by law.
loan. But in view of the substantial amounts of the loans, they should have All services which are not contrary to law, morals, good
been duly covered by receipts or any document evidencing the transaction. customs, public order or public policy may likewise be the object of a
Consequently, no error was committed by the CA in holding that the June contract.
19, 1996 Deed of Absolute Sale was a simulated contract.
The object of a contract is really to create or to end
What about parties who acted in good faith? obligations which, in turn, may involve things, or services. Hence
While it is settled that a simulated deed of sale is null and elliptically, it may be said that the object of a contract is a thing or
void and therefore, does not convey any right that could ripen into a service.
a valid title, it has been equally ruled that, for reasons of public
policy, the subsequent nullification of title to a property is not a Requisites:
ground to annul the contractual right which may have been derived 1. The thing or service must be within the commerce of man;
by a purchaser, mortgagee or other transferee who acted in good 2. Must be transmissible;
faith [Philippine Banking Corp v. Dy]. 3. Must not be contrary to law, morals, good customs, public
order, or public policy;
Philippine Banking Corp v. Dy 4. Must not be impossible (1348);
Held: Primarily, it bears noting that the doctrine of “mortgagee 5. Must be determinate as to its kind or determinable without the
in good faith” is based on the rule that all persons dealing with property need of a new contract or agreement (1349).
covered by a  Torrens Certificate of Title  are not required to go beyond
what appears on the face of the title.  This is in deference to the public For a thing to be within the commerce of men, it must be
interest in upholding the indefeasibility of a certificate of title as evidence (1) susceptible of appropriation; and (2) transmissible from one
of lawful ownership of the land or of any encumbrance thereon.  In the case
person to another.
of banks and other financial institutions, however, greater care and due
diligence are required since they are imbued with public interest, failing
which renders the mortgagees in bad faith.  Thus, before approving a loan General rule: human organs are not a valid subject
application, it is a standard operating practice for these institutions to matter of a contract.
conduct an ocular inspection of the property offered for mortgage and to Exception: The only allowed mode in making human
verify the genuineness of the title to determine the real owner(s) thereof. 
organs the subject matter of a contract is by way of donation:
The apparent purpose of an ocular inspection is to protect the “true owner”
of the property as well as innocent third parties with a right, interest or
claim thereon from a usurper who may have acquired a fraudulent R.A. 7170 – Organ Donations Act Section 4. Person
certificate of title thereto. Who May Execute a Donation. – (a) Any of the following, person,
In this case, while Philbank failed to exercise greater care in in the order of property stated hereunder, in the absence of actual
conducting the ocular inspection of the properties offered for mortgage, its
notice of contrary intentions by the decedent or actual notice of
omission did not prejudice any innocent third parties.  In particular, the
buyer did not pursue her cause and abandoned her claim on the property. 
opposition by a member of the immediate family of the decedent,
On the other hand, Sps. Delgado were parties to the simulated sale in favor may donate all or any part of the decedent's body for any purpose
of the Dys which was intended to mislead Philbank into granting the loan specified in Section 6 hereof: (1) Spouse; (2) Son or daughter of
application.  Thus, no amount of diligence in the conduct of the ocular legal age; (3) Either parent; (4) Brother or sister of legal age; or (5)
inspection could have led to the discovery of the complicity between the Guardian over the person of the decedent at the time of his death.
ostensible mortgagors (the Dys) and the true owners (Sps. Delgado). In (b) he persons authorized by sub-section (a) of this Section may
fine, Philbank can hardly be deemed negligent under the premises since the make the donation after or immediately before death.
ultimate cause of the mortgagors' (the Dys') defective title was the
simulated sale to which  Sps. Delgado were privies.
To be sure, fraud comprises “anything calculated to deceive,
Emptio rei speratae – the sale or in the transmission of
including all acts, omissions, and concealment involving a breach of legal future things; sale of hope or an expectancy; uncertainty with
duty or equitable duty, trust, or confidence justly reposed, resulting in respect to the quantity or the quality of the thing not to its
damage to another, or by which an undue and unconscientious advantage is existence.
taken of another.”  In this light, the Dys' and Sps. Delgado's deliberate
simulation of the sale intended to obtain loan proceeds from and to
ART. 1461. Things having a potential existence may be the
prejudice Philbank clearly constitutes fraudulent conduct.  As such, Sps.
object of the contract of sale.
Delgado cannot now be allowed to deny the validity of the mortgage
The efficacy of the sale of a mere hope or expectancy is deemed
executed by the Dys in favor of Philbank as to hold otherwise would
subject to the condition that the thing will come into existence.
effectively sanction their blatant bad faith to Philbank's detriment.
The sale of a vain hope or expectancy is void. (n)
Accordingly, in the interest of public policy, fair dealing, good
faith and justice, the Court accords Philbank the rights of a mortgagee in
good faith whose lien to the securities posted must be respected and Future things are things that are yet to exist legally,
because they are subject to certain conditions, subject to suspensive
conditions.

Page | 14
 Aleatory contracts are contracts which are dependent on The cause in accessory contracts like mortgage and
chance. Contracts created between persons subject to the outcome pledge is the same as the cause for the principal contract of loan
of a certain event. [China Banking v. Lichauco].
In Republic of the Phils. v. Silim, the Supreme Court
Emptio spei – the efficacy of the sale of a mere hope or classified donations according to purpose.  A pure/simple donation
expectancy is deemed to be subject to the condition that that thing is the truest form of donation as it is based on pure gratuity.  The
will come into existence. If the sale of a mere hope or expectancy remuneratory/compensatory type has for its purpose the rewarding
is a vain hope or a vain expectancy, that sale is void. (Ex.: Losing of the donee for past services, which services do not amount to a
the lottery) demandable debt. A conditional/modal donation, on the other hand,
Future Inheritance, as a rule, cannot be subject to a is a consideration for future services; it also occurs where the donor
contract, because under the Law on Succession (Art. 777), you imposes certain conditions, limitations or charges upon the donee,
cannot give which is not yet yours. whose value is inferior to the donation given. Lastly, an onerous
The exception is in donations propter nuptias—the donation imposes upon the donee a reciprocal obligation; this is
donation of future properties (Art. 84 of the Family Code). The made for a valuable consideration whose cost is equal to or more
future spouses cannot donate more than 1/5 of their present than the thing donated.
properties if they agree upon a regime other than the absolute
community of property. Article 1351. The particular motives of the parties in
entering into a contract are different from the cause thereof.

Article 1348. Impossible things or services cannot be the

object of contracts. Motive distinguished from cause
1. Motive of a person may vary although he enters into the
Impossibility must not be confused with difficulty. same kind of contract; the cause is always the same.
Hence, a showing of mere inconvenience, unexpected impediment, 2. The motive may be unknown to the other; the cause is
or increased expenses is not enough [Castro v. Longa]. always known.
3. The presence of motive cannot cure the absence of cause.
Article 1349. The object of every contract must be
determinate as to its kind. The fact that the quantity is not determinate Ordinarily, a party’s motives for entering into the
shall not be obstacle to the existence of the contract, provided it is contract do not affect the contract. However, when the motive
possible to determine the same, without the need of a new contract predetermines the cause, the motive may be regarded as the cause.
between the parties. In Liguez vs. Court of Appeals, this Court, speaking through Justice
J.B.L. Reyes, held:
Object of the contract: It is well to note, however, that Manresa himself
(a) The object must be determinate or determinable (without (Vol. 8, pp. 641-642) while maintaining the distinction and
need of a new agreement). upholding the inoperativeness of the motives of the parties to
determine the validity of the contract, expressly excepts from
(b) If the object s not determinate or not determinable, the
the rule those contracts that are conditioned upon the attainment
contract is void for want of an essential requisite. of the motives of either party.

Section 3
Article 1352. Contracts without cause, or with unlawful
CAUSE OF CONTRACTS cause, produce no effect whatsoever. The cause is unlawful if it is
contrary to law, morals, good customs, public order or public policy.
Article 1350. In onerous contracts the cause is understood to
be, for each contracting party, the prestation or promise of a thing or If the contract is without cause, or with unlawful cause, it
service by the other; in remuneratory ones, the service or benefit which
is void.
is remunerated and in contracts of pure beneficence, the mere
liberality of the benefactor.
Requisites for cause:
1. It must be present at the time the contract was
entered into;
Cause is the essential and impelling reason why a party
2. It must be true;
assumes an obligation. Strictly speaking, there is no cause of a
3. It must be lawful.
contract, but there is a cause for an obligation.

Article 1353. The statement of a false cause in contracts shall

Cause and Subject Matter Distinguished
render them void, if it should not be proved that they were founded
The difference is only a matter of viewpoint in some
upon another cause which is true and lawful.
way, because what may be the subject matter for one party will be
the cause or consideration for the other party.
A contract based upon an unlawful consideration or
designed to promote an unlawful object is and always has been
If it is an onerous contract, the cause or consideration
void ab initio by the common law, by the civil law, moral law, and
therein is the prestation or the promise of a thing or service by the
all laws whatsoever (Collins vs. Bantern, 2 Wils. C. Pl., 341.) It is
other. It is based on some valuable consideration.
immaterial whether the illegal character of the contract is revealed
Remuneratory contracts talk about the payment of
in the matter of the consideration, in the promise as expressed in
services already rendered. It means for services that have already
the agreement, or in the purpose which the agreement, though legal
been rendered, that person should be compensated in so far as that
in expression, is intended to accomplish. If the illegality lurks in
person deserves.
any element, or even subsists exclusively in the purpose of the
Gratuitous contracts are based on the mere liberality on
parties, it is fatal to the validity of the contract. (Manresa, Codigo
the part of the benefactor, like in contracts of commodatum or
Civil, 2d ed.f vol. 8, p. 686.)
donation.

Page | 15
 The general rule provided by the law is that a false cause can only leave them where they are and it has no choice but to dismiss the
stated in a contract makes the contract void. Thus, a contract of complaint, as the lower courts should have done.
sale, which states that the price of the object for sale is P500 when Consequently, the DAS executed by Jasminia in favor of
in fact no such price has been paid at all, is void. However, when a petitioner Lolita over the subject property is valid, the presumption that it
has sufficient consideration not having been rebutted. The same holds true
contract, though stating a false consideration, has in fact a real
regarding the Real Estate Mortgage between petitioner Lolita and
consideration, the contract is not void. Thus, when a contract petitioners spouses Alexander and Elizabeth Gutierrez.
stating the consideration of a ballpen is P1000 but it is only sold for
P500 which the seller accepted, the contract is valid. At the least,
Article 1355. Except in cases specified by law, lesion or
the contract, the contract is a relatively simulated one.
inadequacy of cause shall not invalidate a contract, unless there has
been fraud, mistake or undue influence.
Velez v. Ramas
Held: As regards the defendant Roberto Quirante there was Lesion is inadequacy of cause, like an insufficient price
absolutely no other motive for making the contract than a desire to prevent
for a thing sold.
the prosecution of his daughter; and the only consideration in the legal
sense for his promise to pay was the engagement of the plaintiffs whereby
General Rule – Lesion or inadequacy of price does not
they bound themselves to suspend criminal proceedings. As regards the invalidate a contract.
defendant Salomon Ramafe, it might be supposed that the act of his wife, Exceptions:
Restituta Quirante, in embezzling the money of her employers created a 1. When together with lesion, there has been fraud,
civil debt which was binding on him as a member of the community mistake, or undue influence
partnership and that he at any rate would be liable for that money without 2. In cases expressly provided by law (in the
reference to the contract. But that liability cannot be enforced in an action following, the contracts may be rescinded):
to which the wife is not a party. It results that, even as against Ramas, this
a. Those which are entered into by guardians
case must be decided on the question of the legality, or illegality, of the
contract sued on. whenever the wards they represent suffer lesion
In our opinion the consideration for this agreement is clearly by more than one-fourth of the value of the
illicit, which fact is apparent on the face of the contract; and the case is things which are the objects thereof (1381)
accordingly governed by article 1275 of the Old Civil Code. b. Those agreed upon in representation of
absentees, if the latter suffer the lesion stated in
Mactal v. Melegrito the preceding (1381).
Held: The lower court specifically found that Melegrito had
received from Mactal P1,777.00 to be used in the purchase of palay for the Chapter 3
latter, with the obligation to return said amount, within ten (10) days, if not FORMS OF CONTRACTS
spent for said purpose. In fact, Melegrito admitted, on the witness stand,
that he is indebted to the plaintiff in the aggregate sum of P1,777.00,
Article 1356. Contracts shall be obligatory, in whatever
although he claims that his liability therefor was merely that of a guarantor,
form they may have been entered into, provided all the essential
not principal debtor. So when the Chief of Police succeeded in persuading
requisites for their validity are present. However, when the law
Mactal to withdraw the criminal case for estafa, Melegrito was only too
requires that a contract be in some form in order that it may be valid
willing to sign the document, in which he promised to pay the
or enforceable or that a contract be proved in a certain way, that
aforementioned amount in January 1954. The consideration for this promise
requirement is absolute and indispensable. In such cases, the rights of
was, therefore, the aforesaid pre-existing debt of Melegrito, not the
the parties stated in the following article cannot be exercised.
dismissal of the estafa case, which merely furnished the occasion for the
execution of the document.
Form may be important:
Article 1354. Although the cause is not stated in the contract, (a) For validity. A contract needs to be in a particular form in
it is presumed that it exists and is lawful, unless the debtor proves the order for said contract to be valid. A contract does not exist if
contrary. certain solemnities and formalities are not observed;
(b) For enforceability. For the enforceability of contracts, the law
Mendoza v. Palugod requires that certain contracts must observe a particular form
Held: All told, petitioners' evidence has superior weight. While in order that they may be proved in a certain way. If a contract
petitioner Lolita could not present receipts to show her payments to the late does not follow this form, you cannot prove them;
Jasminia, her sworn testimony which in certain portions were corroborated (c) For convenience.
by pertinent documents, remains more credible than that of respondent
Natividad. Indeed, the lack of receipts may be explained by the "close In general, form does not matter for the validity of a
friendship" between petitioner Lolita and Jasminia. The non-admission by
contract. It is enough that there be consent, subject matter, and
petitioner Lolita of the "husband and wife" relationship that she shared with
Jasminia and her being a "lesbian or tomboy," as respondent Natividad cause. This rule applies, however, to consensual contracts.
claimed, is of no moment. Whatever transpired between her and Jasminia is Formal contracts require a certain specified form, in
a private matter, which the Court would not even speculate on. As to the addition to the three essential requisites. An example would be a
gender identity and sexual preference of petitioner Lolita, that is likewise a donation of real property, which should be in a public instrument in
private matter. order to be valid. Real contracts require delivery to be valid as a
Even from a pure evaluation of only the parties' testimonial real contract even as between the parties.
evidence, wherein doubts on the truthfulness of their respective narrations
It is thus seen that to the general rule that the form (oral
of the relevant facts are perceived and there may be difficulty in
or written) is irrelevant to the binding effect inter partes of a
determining who between respondent Natividad and petitioner Lolita is the
more credible witness and in which side the testimonial evidence contract that possesses the three validating elements of consent,
preponderates, the evidence of the parties should, at the very least, be held subject matter, and causa. Article 1356 establishes only two
to be in equipoise. That being the situation, respondents, who have the exceptions, to wit:
burden of proof in the present case, fail upon their cause of action. a) Contracts for which the law itself requires that they be in
Following Rivera v. CA[82] quoted above, as neither party was able to make some particular form (writing) in order to make them valid
out a case, neither side having established his/her cause of action, the Court and enforceable (the so-called solemn contracts). Of these the

Page | 16
 typical example is the donation of immovable property that document. Article 1358 does not require the accomplishment of the
the law (Article 749) requires to be embodied in a public acts or contracts in a public instrument in order to validate the act
instrument in order “that the donation may be valid,” i.e., or contract but only to insure its efficacy, so that after the existence
existing or binding. Other instances are the donation of of said contract has been admitted, the party bound may be
movables worth more than P5,000 which must be in writing, compelled to execute the proper document.
“otherwise the donation shall be void” (Article 748); contracts If the document follows the formalities required under
to pay interest on loans (mutuum) that must be “expressly the law, the contracting parties will know that, as to them and as to
stipulated in writing (Article 1956); and the agreements the entire world, such contract is valid, complete, and it binds both
contemplated by Articles 1744, 1773, 1847, and 2134 of the of them. Furthermore, such documents will be binding before the
present Civil Code. courts, since it follows the formalities under the Statute of Frauds
b) Contracts that the law requires to be proved by some writing (Art. 1403, par. 2). The contract will also affect the rights of third
of its terms, as in those covered by the old Statute of Frauds, persons if it follows the formalities of a public document.
now Article 1403(2) of the Civil Code. Their existence not Article 1358 requires a particular formality—it being a
being provable by mere oral testimony (unless wholly or public instrument—in order to ensure the greater efficacy of
partly executed), these contracts are exceptional in requiring a contracts. In order that after its existence has been admitted, the
writing embodying the terms thereof for their enforceability party bound may be compelled to execute the necessary
by action in court. documents.

Article 1357. If the law requires a document or other special What is the effect if there is a failure to follow the
form, as in the acts and contracts enumerated in the following article, formalities under Art. 1358?
the contracting parties may compel each other to observe that form, If a particular document requires a certain formality for
once that contract has been perfected. This right may be exercised its convenience, and such formality is not observed, the existence,
simultaneously with the action upon the contract. genuineness, and due execution of that document may become an
issue in trial. It does not carry with it the presumption of regularity
A party, who desires to have his contract reduced in the and has no evidentiary weight.
particular form required by law, can file an action to compel the The action to compel the other party to observe the
other party to comply with such form. If the requirement of law is formalities under the law survives even upon the death of any of
directory only and has no bearing the contracting parties.
This Article applies only when form is needed only for Example: A and B entered into a contract. X, Y, and Z
convenience, not for validity or enforceability. are the children of A. If A dies, then X, Y, and Z will have the right
In other words, before the contracting parties may be to compel B to follow the formalities provided for under Art. 1358.
compelled to execute the needed form, it is essential that the Because, in accordance with the principle of transmission of rights,
contract be; upon the death of any of the contracting parties, all the rights and
a. Perfected (valid) (Article 1357) obligations in a particular contract will be transmitted to the heirs
b. Enforceable under the Statute of Frauds (1356) or successors in interest.

Article 1358. The following must appear in a public (1) Acts and contracts which have for their object the
document: creation, transmission, modification or extinguishment of real
(1) Acts and contracts which have for their object the rights over immovable property; sales of real property or of an
creation, transmission, modification or extinguishment of real rights
interest therein are governed by articles 1403, No. 2, and 1405
over immovable property; sales of real property or of an interest
therein are governed by Articles 1403, No. 2, and 1405.
(2) The cession, repudiation or renunciation of hereditary Real rights – those which may be claimed with regards to
rights or of those of the conjugal partnership of gains; immovable properties that can be binding as against the entire
(3) The power to administer property, or any other power world.
which has for its object an act appearing or which should appear in a What if the landowners die, the heirs take over and the
public document, or should prejudice a third person;
latter forgot to annotate their right of the usufruct in the easement,
(4) The cession of actions or rights proceeding from an act
appearing in a public document. can it bind the heirs? The answer is NO. That is why it requires to
All other contracts where the amount involved exceeds five be in a public instrument in order to facilitate its annotation in the
hundred pesos must appear in writing, even a private one. But sales of title when you register it in the Registry of Deeds. Otherwise, the
goods, chattels or things in action are governed by Article 1403, No. 2 latter would just ignore it if it is not in a public instrument.
and 1405. Articles 1357 and 1358, in relation to Art. 1403(2) of the
Civil Code, requires that the sale of real property must be in
The necessity for the public document in the contracts writing for it to be enforceable.  It need not be notarized.  If the
enumerated here is only for convenience, not for validity or sale has not been put in writing, either of the contracting parties
enforceability [Thunga Chui v. Que Bentec]. True it is that the can compel the other to observe such requirement [Martinez v.
Civil Code requires certain transactions to appear in public Court of Appeals].
documents. However, the necessity of a public document for
contracts which transmit or extinguish real rights over immovable Martinez v. Court of Appeals
property, as mandated by Article 1358 of the Civil Code, is only
for convenience; it is not essential for validity or
enforceability. Thus, in Cenido v. Apacionado, this Court ruled that
the only effect of noncompliance with the provisions of Article
1358 of the Civil Code is that a party to such a contract embodied
in a private document may be compelled to execute a public

Page | 17
 Held: This is what petitioner did when he repeatedly demanded Without the presumption of regularity accorded to the deed
that a Deed of Absolute Sale be executed in his favor by private coupled with the default of the party relying much on the same, the
respondents De la Paz.  There is nothing in the above provisions which purported sale cannot be considered. It is as if there was no deed of sale
require that a contract of sale of realty must be executed in a public between Spouses Bitte and Spouses Jonas. The genuineness and due
document. In any event, it has been shown that private respondents execution of the deed of sale in favor of Spouses Bitte not having been
Veneracion had knowledge of facts which would put them on inquiry as to established, the said deed can be considered non-existent.
the nature of petitioner's occupancy of the disputed lot.
Articles 1357 and 1358 presupposes the existence of a
Teoco v. Metrobank completely valid and enforceable contract.
Held: "Art. 1357. If the law requires a document or other special Hence, it is useless to talk about said article if, from the
form, as in the acts and contracts enumerated in the following article beginning, there is no actual contract or if the contract is void.
(Article 1358), the contracting parties may compel each other to observe The general rule is that the sale of immovable or real
that form, once the contract has been perfected. This right may be exercised
property is valid even if it is an oral contract. Except when it is
simultaneously with the action upon the contract."
On the other hand, Article 1625 of the Civil Code provides that
made through an agent. In Cosmic Lumber Corporation v. Court of
"[a]n assignment of a credit, right or action shall produce no effect as Appeals, the Supreme Court enunciated:
against third person, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment When the sale of a piece of land or any interest
involves real property." thereon is through an agent, the authority of the latter shall be in
In the case at bar, Metrobank would not be prejudiced by the writing; otherwise, the sale shall be void. Thus, the authority of
assignment by the spouses Co of their right of redemption in favor of the an agent to execute a contract for the sale of real estate must be
brothers Teoco. As conceded by Metrobank, the assignees, the brothers conferred in writing and must give him specific authority, either
Teoco, would merely step into the shoes of the assignors, the spouses Co. to conduct the general business of the principal or to execute a
The brothers Teoco would have to comply with all the requirements binding contract containing terms and conditions which are in
imposed by law on the spouses Co. Metrobank would not lose any security the contract he did execute. A special power of attorney is
for the satisfaction of any loan obtained from it by the spouses Co. In fact, necessary to enter into any contract by which the ownership of
the assignment would even prove to be beneficial to Metrobank, as it can an immovable is transmitted or acquired either gratuitously or
foreclose on the subject properties anew, provided it proves that the for a valuable consideration. The express mandate required by
subsequent loans entered into by the spouses Co are covered by the law to enable an appointee of an agency (couched) in general
mortgage contract. terms to sell must be one that expressly mentions a sale or that
includes a sale as a necessary ingredient of the act mentioned.
For the principal to confer the right upon an agent to sell real
It must be remembered, however, that the absence of estate, a power of attorney must so express the powers of the
notarization of the deed of sale would not invalidate the transaction agent in clear and unmistakable language. When there is any
evidenced therein; it merely reduces the evidentiary value of a reasonable doubt that the language so used conveys such power,
document to that of a private document, which requires proof of its no such construction shall be given the document.
due execution and authenticity to be admissible as evidence. A
defective notarization will strip the document of its public To reiterate, such authority must be conferred in writing
character and reduce it to a private instrument. Consequently, when and must express the powers of the agent in clear and unmistakable
there is a defect in the notarization of a document, the clear and language in order for the principal to confer the right upon an agent
convincing evidentiary standard normally attached to a duly- to sell the real property. It is a general rule that a power of attorney
notarized document is dispensed with, and the measure to test the must be strictly construed, and courts will not infer or presume
validity of such document is preponderance of evidence [Sps. broad powers from deeds which do not sufficiently include
Diampoc v. Buenaventura]. Thus, this is the required proof under property or subject under which the agent is to deal. [24] Thus, when
Rule 132 Section 20: the authority is couched in general terms, without mentioning any
specific power to sell or mortgage or to do other specific acts of
Section 20. Proof of private document. - Before any private strict dominion, then only acts of administration are deemed
document offered as authentic is received in evidence its due execution and conferred [Spille v. NICORP].
authenticity must be proved either:
By anyone who saw the document executed or written; or Doctrine of Apparent Authority
a)
By evidence of the genuineness of the signature or handwriting of the Under the said doctrine, acts and contracts of the agent
b) maker. within the apparent scope of the authority conferred on him,
although no actual authority to do such acts or has been beforehand
Bitte v. Sps. Jonas withdrawn, revoked or terminated, bind the principal.
Held: public document. It is an accepted rule, however, that the
failure to observe the proper form does not render the transaction invalid. It (2) The cession, repudiation or renunciation of
has been settled that a sale of real property, though not consigned in a hereditary rights or of those of the conjugal partnership of
public instrument or formal writing is, nevertheless, valid and binding gains
among the parties, for the time-honored rule is that even a verbal contract
Hereditary Rights - One is allowed to repudiate or
of sale or real estate produces legal effects between the parties. Not being
renounce his right over a particular hereditary share in an estate
considered a public document, the deed is subject to the requirement of
proof under Section 20, Rule 132. and such should be in a public document. This is in relation to:
Accordingly, the party invoking the validity of the deed of ART. 1051. The repudiation of an inheritance shall
absolute sale had the burden of proving its authenticity and due execution. be made in a public or authentic instrument, or by petition
Unfortunately, Spouses Bitte were declared as in default and, for said presented to the court having jurisdiction over the testamentary
reason, they failed to discharge such burden in the court below. Thus, the or intestate proceedings.
Court agrees with the CA that the RTC erred in applying the presumption
of regularity that attaches only to duly notarized documents as
distinguished from private documents.

Page | 18
 Conjugal Partnership of Gains - The law requires that the ART. 1625. An assignment of a credit, right or action
formality must be made in a public instrument under Art. 1358. shall produce no effect as against third persons, unless it appears
This is in relation to: in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real
ART. 89. No waiver of rights, shares and effects of
property.
the absolute community of property during the marriage can be
made except in case of judicial separation of property.
So, we have the catch-all provision–
Under the Family Code, when the waiver takes place
upon a judicial separation of property, or after the marriage has All other contracts where the amount involved exceeds
been dissolved or annulled, this waiver of rights, shares and effects PhP 500 must appear in writing, even a private one. But sales of
of the Absolute Community of Property (ACP) or Conjugal goods, chattels or things in action are governed by Articles 1403,
Partnership of Gains (CPG), should appear in a public instrument. No. 2 and 1405.
And must be recorded in accordance with: In Art. 1358 (1), sales of real property or of an interest
ART. 77. The marriage settlements and any are governed by Art. 1403 (2) and Art. 1405, as well as in the last
modification thereof shall be in writing, signed by the parties paragraph of the Art. 1358–sales of goods, chattels or things in
and executed before the celebration of the marriage. They shall action, also governed by Art. 1403 (2) and Art. 1405.
not prejudice third persons unless they are registered in the local
What do these mean? If you talk about the sale of
civil registry where the marriage contract is recorded as well as
immovable or movables that exceed Php500, formalities are
in the proper registries of properties.
required for their enforceability. They are actually exceptions of
Art. 1358. Even if they are reduced in a private document, it is
(3) The power to administer property, or any other okay. Even if it is not in a public document, as long as it is in
power which has, for its object, an act appearing—or should writing. That will now facilitate the convenience for the parties, in
appear—in a public document, or should prejudice a third order that it will show that this transaction occurred.
person
Power to Administer Property - As a general rule, under Chapter 4
the Family Code, both the husband and the wife administers the REFORMATION OF INSTRUMENTS
ACP or CPG.
However, a spouse may transfer the power to administer Distinction between a contract and instrument
to the other spouse as provided for in: The contract is the meeting of minds of two or more
ART. 110. The spouses retain the ownership,
persons whereby one binds himself to another to give something or
possession, administration and enjoyment of their exclusive
properties.
to render some service. A contract does not really require
Either spouse may, during the marriage, transfer the formalities; they are valid as long as consensual.
administration of his or her exclusive property to the other by An instrument is that document, whether public or
means of a public instrument, which shall be recorded in the private, which supposedly embodies or conveys the contract or
registry of property of the place the property is located. agreement between the parties.

Other power which has, for its object, an act appearing or Article 1359. When, there having been a meeting the minds
which should appear in a public document - Under the law on of the parties to a contract, their true intention is not expressed in the
instrument purporting to embody the agreement, by reason of mistake,
agency, Special Powers of Attorney are contracts of agency. A
fraud, inequitable conduct or accident, one of the parties may ask for
contract of agency is—by its nature—consensual. Hence, it is
the reformation of the instrument to the end that such true intention
perfected by mere consent. The formalities of such are not may be expressed.
required with regard to its enforceability or validity. If mistake, fraud, inequitable conduct, or accident has
However, under Article 1358, a Special Power of prevented a meeting of the minds of the parties, the proper remedy is
Attorney must be in a public instrument. It is in order to facilitate not reformation of the instrument but annulment of the contract.
convenience for third persons to transact with agents. And being
such, it will serve as a proof or evidence, that the latter has Reformation of an instrument is that remedy in equity by
authority to transact in behalf of the principal. means of which a written instrument is made or construed so as to
Other power which has for its object an act which should express or conform to the real intention of the parties when some
prejudice the rights of a third person - The rights of third persons error or mistake has been committed. It is predicated on the
will not be disadvantaged, will not suffer damage nor will they be equitable maxim that equity treats as done that which ought to be
prejudiced if these formalities will be followed. Hence, certain done. The rationale of the doctrine is that it would be unjust and
contracts must observe formalities to bind third persons. unequitable to allow the enforcement of a written instrument which
Under Credit Transactions, a real estate mortgage is a does not reflect or disclose the real meeting of the minds of the
purely consensual contract and not a formal one. When all the parties [Bentir v. Leanda].
requisites of a contact are present, and even if it’s not reduced into Reformation of an instrument may be allowed if
a particular writing, it is valid. subsequent and contemporaneous acts of the parties show that their
However, if there is a third person who bought the true intention was not accurately reflected in the written instrument
mortgaged property and that he is a buyer in good faith, the [Makati Tuscany Condo Corp v. Multi-Realty Development].
mortgagee cannot foreclose such property if such was not reduced In order that an action for reformation of instrument as
in a public instrument and not registered in the Registry of Deeds. provided in Article 1359 of the Civil Code may prosper, the
following requisites must concur: (1) there must have been a
(4) The cession of actions or rights proceeding from meeting of the minds of the parties to the contract; (2) the
an act appearing in a public document. instrument does not express the true intention of the parties; and (3)
Assignment of Rights or Credits- the failure of the instrument to express the true intention of the

Page | 19
parties is due to mistake, fraud, inequitable conduct or accident The mistake here is unilateral but the other party is guilty
[Villegas v. Arjona]. of concealment. One the party in good faith can ask for
reformation.
Distinction between reformation and annulment
(a) When there has been a meeting of the minds, but there is Article 1364. When through the ignorance, lack of skill,
mistake, fraud, inequitable conduct or accident in the contract negligence or bad faith on the part of the person drafting the
as written, the remedy is reformation. When there has been no instrument or of the clerk or typist, the instrument does not express the
meeting of the minds, because of vitiated consent, the proper true intention of the parties, the courts may order that the instrument
be reformed.
remedy is annulment.
(b) Reformation does not invalidate a contract; annulment
invalidates a contract. Article 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
Article 1360. The principles of the general law on the
of the instrument is proper.
reformation of instruments are hereby adopted insofar as they are not
in conflict with the provisions of this Code.
The intention of the parties can be judged from their
contemporaneous and subsequent act [Velasquez v. Teodoro].
In case of conflict between the Civil Code and the
The requisites for considering a contract of sale with a
principles of the general law on reformation, the former prevails.
right of repurchase as an equitable mortgage are (1) that the parties
The latter will have only suppletory effect.
entered into a contract denominated as a contract of sale and (2)
that their intention was to secure an existing debt by way of
Article 1361. When a mutual mistake of the parties causes
the failure of the instrument to disclose their real agreement, said
mortgage. A contract of sale with right to repurchase gives rise to
instrument may be reformed. the presumption that it is an equitable mortgage in any of the
following cases: (1) when the price of a sale with a right to
When reformation may be asked because of mutual repurchase is unusually inadequate; (2) when the vendor remains in
mistake: possession as lessee or otherwise; (3) when, upon or after the
(a) Under this Article, the mistake must be mutual. expiration of the right to repurchase, another instrument extending
(b) The mistake may be unilateral under the conditions set forth in the period of redemption or granting a new period is executed; (4)
Articles 1362 and 1363. when the purchaser retains for himself a part of the purchase price;
(c) The mistake must be of fact –usually. Therefore, generally an (5) when the vendor binds himself to pay the taxes on the thing
error of law is not enough. sold; (6) in any other case where it may be fairly inferred that the
real intention of the parties is that the transaction shall secure the
Difference between Articles 1334, 1342 and 1361 payment of a debt or the performance of any other obligation. In
Article 1334 provides mutual error as to the legal effects case of doubt, a contract purporting to be a sale with right to
of the agreement or the real purpose of the contracting parties may repurchase shall be construed as an equitable mortgage [Martinez
be vitiated. Article 1342 also pertains to mutual mistake. v. Court of Appeals].
In Article 1361, the mutual mistake is concerned with the
failure of the instrument to disclose the real agreement. This means Martires v. Chua
there is a valid agreement between the two parties, only that the Held: While indeed a notarized document enjoys the
presumption of regularity, the fact that a deed is notarized is not a guarantee
instrument purporting to embody such agreement actually does not.
of the validity of its [Link] presumption is not absolute and may be
The mutual mistakes in Articles 1334 and 1342 are mutual rebutted by clear and convincing evidence to the contrary.
mistakes that vitiate consent. The proper remedy under 1361 is Based on the foregoing, the Court finds no cogent reason to
reformation of instrument, but in 1334 and 1342, it is annulment of depart from the findings of the CA that the agreement between petitioners
contract. and respondent is, in fact, an equitable mortgage.
An equitable mortgage has been defined as one which, although
Article 1362. If one party is mistaken and the other acted lacking in some formality, or form or words, or other requisites demanded
fraudulently or inequitably in such a way that the instrument does not by a statute, nevertheless reveals the intention of the parties to charge real
show their true intention, the former may ask for the reformation of property as security for a debt, there being no impossibility nor anything
the instrument. contrary to law in this intent.
One of the circumstances provided for under Article 1602 of the
Civil Code, where a contract shall be presumed to be an equitable
In this Article, the mistake is unilateral but the other mortgage, is “where it may be fairly inferred that the real intention of the
party acted fraudulently or inequitably. The fraud or mistake here parties is that the transaction shall secure the payment of a debt or the
is done by only one of the parties during the execution of the performance of any other obligation.” In the instant case, it has been
contract or the drafting or writing of the instrument. The one who established that the intent of both petitioners and respondent is that the
may exercise the reformation of instrument is the one who made subject property shall serve as security for the latter's obligation to the
the mistake, and not the one who committed the fraudulent or former. As correctly pointed out by the CA, the circumstances surrounding
the execution of the disputed Deed of Transfer would show that the said
inequitable acts.
document was executed to circumvent the terms of the original agreement
and deprive respondent of her mortgaged property without the requisite
Article [Link] one party was mistaken and the other foreclosure.
knew or believed that the instrument did not state their real
agreement, but concealed that fact from the former, the instrument
Article 1366. There shall be no reformation in the following
may be reformed.
cases:
(1) Simple donations inter vivos wherein no consideration is
imposed;
(2) Will;

Page | 20
 (3) When the real agreement is void. terms which he voluntarily consented to, or impose on him those
which he did not.
The Article gives three instances when reformation is not
allowed. Donations are essentially acts of pure liberality. However, Century v. Babiano
Held: Verily, the foregoing clause is not only clear and
if the donation is conditional, reformation may be resorted to so
unambiguous in stating that Babiano is barred to "work for whatsoever
that the real or true conditions intended by the donor might be capacity x x x with any person whose business is in direct competition with
brought out. In case the donation is an onerous one, reformation is [CPI] while [he is] employed and for a period of one year from date of [his]
very much in order inasmuch as in this case, said donation would resignation or termination from the company," it also expressly provided in
partake very much of the nature of contracts. no uncertain terms that should Babiano "[breach] any term of [the
The making of a will is strictly a personal act which is employment contract], forms of compensation including commissions and
free. Moreover, a will may be revoked at any time. However, after incentives will be forfeited." Here, the contracting parties - namely Babiano
on one side, and CPI as represented by its COO-Vertical, John Victor R.
the death of the testator, errors or imperfections in descriptions
Antonio, and Director for Planning and Controls, Jose Carlo R. Antonio, on
may be corrected under the Civil Code, but not the manner of
the other -indisputably wanted the said clause to be effective even during
property disposal. the existence of the employer-employee relationship between Babiano and
Reformation is not allowed in case the real agreement is CPI, thereby indicating their intention to be bound by such clause by
void because such a procedure would be useless. Once reformation affixing their respective signatures to the employment contract. More
is made, the new instrument would be void precisely because the significantly, as CPFs Vice President for Sales, Babiano held a highly
true agreement and intention are void. sensitive and confidential managerial position as he "was tasked, among
others, to guarantee the achievement of agreed sales targets for a project
and to ensure that his team has a qualified and competent manpower
Article 1367. When one of the parties has brought an action
resources by conducting recruitment activities, training sessions, sales
to enforce the instrument he cannot subsequently ask for its
rallies, motivational activities, and evaluation programs." Hence, to allow
reformation.
Babiano to freely move to direct competitors during and soon after his
employment with CPI would make the latter's trade secrets vulnerable to
Article 1368. Reformation may be ordered at the instance of exposure, especially in a highly competitive marketing environment. As
either party or his successors in interest, if the mistake was mutual, such, it is only reasonable that CPI and Babiano agree on such stipulation in
otherwise, upon petition of the injured party, or his heirs and assigns. the latter's employment contract in order to afford a fair and reasonable
protection to CPI. Indubitably, obligations arising from contracts, including
Article 1369. The procedure for the reformation of employment contracts, have the force of law between the contracting
instruments shall be governed by Rules of Court to be promulgated by parties and should be complied with in good faith. Corollary thereto, parties
the Supreme Court. are bound by the stipulations, clauses, terms, and conditions they have
agreed to, provided that these stipulations, clauses, terms, and conditions
are not contrary to law, morals, public order or public policy, as in this
Chapter 5 case.
INTERPRETATION OF CONTRACTS
Article 1371. In order to judge the intention of the
When doubts are casted on contracts, it depends. Again, contracting parties, their contemporaneous and subsequent acts shall
remember the three (unofficial) classifications/areas of be principally considered.
interpretation:
1. Ascertaining the intention of the parties (Art. 1370-1371) Rodriguez v. Sioson
2. Rules of interpretation of the language used (Art. 1372-1377) Held: Despite the denomination of their agreement as one of
3. Determining the object of the contract (Art. 1378-1379) sale, the circumstances tend to show that Neri agreed to sell the subject
property to Thelma on the condition that title and ownership would pass or
Article 1370. If the terms of a contract are clear and leave no be transferred upon the full payment of the purchase price. This is the very
doubt upon the intention of the contracting parties, the literal meaning nature of a contract to sell, which is a "bilateral contract whereby the
of its stipulations shall control. prospective seller, while expressly reserving the ownership of the property
If the words appear to be contrary to the evident intention of despite delivery thereof to the prospective buyer, binds himself to sell the
the parties, the latter shall prevail over the former. property exclusively to the prospective buyer upon fulfillment of the
condition agreed upon, i.e., the full payment of the purchase price."[38] As
stated by the Court, the agreement to execute a deed of sale upon full
In Norton Resources and Development Corporation v. payment of the purchase price "shows that the vendors reserved title to the
All Asia Bank Corporation, the Supreme Court had the opportunity subject property until full payment of the purchase price."
to thoroughly discuss the said rule as follows:
Article 1372. However general the terms of a contract may
The rule is that where the language of a contract is be, they shall be understood to comprehend things that are distinct and
plain and unambiguous, its meaning should be determined cases that are different from those upon which the parties intended to
without reference to extrinsic facts or aids. The intention of the agree.
parties must be gathered from that language, and from that
language alone. Stated differently, where the language of a
written contract is clear and unambiguous, the contract must be
Within the purview of this article are the maxims
taken to mean that which, on its face, it purports to mean, unless noscitur a sociis and ejusdem generis. Noscitur a sociis means that
some good reason can be assigned to show that the words should general and unlimited terms are restrained and limited by particular
be understood in a different sense. Courts cannot make for the terms that follow. Ejusdem generis means that a general term
parties better or more equitable agreements than they themselves joined with a specific one will be deemed to include only things
have been satisfied to make, or rewrite contracts because they that are like, of the same genus as, the specific one.
operate harshly or inequitably as to one of the parties, or alter However broad may be the terms of a contract, it extends
them for the benefit of one party and to the detriment of the
only to those things concerning which it appears the parties
other, or by construction, relieve one of the parties from the
intended to contract. The terms employed are servants, and not
masters, of intent; they are to be interpreted so as to subserve, and

Page | 21
not to subvert, such intent. Words which admit of a more extensive Besides, the IRR of the Fire Code itself limits its scope to
or more restrictive signification must be taken in that sense which matters dealing with "life safety from fires and similar emergencies in high-
will best effectuate what it is reasonable to suppose was the real rise buildings," covering ''fire safety features in construction and protection
intention of the parties. Words are not to be taken in their broadest of exits and passageways and provisions for fire protection." Consequently,
the definition of the term "high-rise building" found therein is inapplicable
sense if they are equally appropriate in a sense limited to the object
to this case, precisely because it is not in keeping with the nature and
and the intent of the contract. The courts are sometimes required to object of the Compromise Agreement.
restrict the meaning of the words, and to the end a word in the We simply cannot reasonably conclude, in the absence of clear
plural may be restricted to the singular. language to this effect, that the parties intended to use as reference a law
that pertains to fire protection in order to define a term in a contract relating
Article 1373. If some stipulation of any contract should to the construction of buildings. Rather, the term "high-rise buildings"
admit of several meanings, it shall be understood as bearing that should be interpreted to follow its general and primacy acceptation, or in
import which is most adequate to render it effectual. other words, the prevailing industry standards and practices as adopted by
the Department of Public Works and Highways in the IRR of the NBC, at
the time the Compromise Agreement was executed.
If one interpretation makes a contract valid and illegal,
the former interpretation must prevail [Luna v. Linatoc].
Article 1376. The usage or custom of the place shall be borne
in mind in the interpretation of the ambiguities of a contract, and shall
Article 1374. The various stipulations of a contract shall be
fill the omission of stipulations which are ordinarily established.
interpreted together, attributing to the doubtful ones that sense which
may result from all of them taken jointly.
No principle of the law is better settled than the one that
Just like in statutory construction, the various provisions an express contract embodying in clear and positive terms the
of a contract must be read as a whole and not in isolation. Each intention of the parties cannot be varied nor contradicted by
provision must be related to each other in order to clearly know the evidence of usage or custom. The usage must be consistent with the
total import and application of the law and so that a harmonious contract. The office of the custom or usage is to explain the
whole will be attained. meaning of the words and phrases used in a written contract and to
annex thereto certain incidents which circumstances indicate the
parties intended when the words used do not necessarily exclude
Article 1375. Words which may have different significations
shall be understood in that which is most in keeping with the nature the operation of such custom or usage but they may not be used to
and object of the contract. contradict nor vary the plain meaning of the contract. Usage may
be admissible to explain what is doubtful; it is never admissible to
If a word is susceptible of two or more meanings, what contradict what is plain. This rule is based upon the theory that the
meanings should be used? parties, if aware of any usage or custom relating to the subject-
(a) That in keeping with the nature and object of the matter of their negotiations have so expressed their intention as to
contract. take the contract out of the operation of any rules established by
(b) If this cannot be determined, then the terms of a mere usage or custom. The proper office of a cstom or usage in
writing are presumed to have been used in their trade is to ascertain and explain the meaning and intention of the
primary and general acceptation. parties to a contract, whether written or in parol, which could not
be done without the aid of this extrinsic evidence. It does not go
Despite the fact that the terms are presumed to have beyond this, and is used as a mode of interpretation on the theory
been used in their primary and general acceptation, may other that the parties knew of its existence, and contracted with reference
meanings or significations be proved? to it. It is often employed to explain words or phrases in a contract
Yes. Evidence is admissible to show that they have a of doubtful signification, or which may be understood in different
local, technical or otherwise peculiar signification, and were so senses, according to the subject-matter t which they are applied.
used and understood in the particular instance, in which case the But if it is inconsistent with the contract, or expressly or by
agreement must be construed accordingly. necessary implication contradicts it, it cannot be received in
evidence to affect it.
Cathay Land v. Ayala Land
Held: Note that in the interpretation of documents, the Rules of Article 1377. The interpretation of obscure words or
Court provides for a presumption that the terms of a contract were used in stipulations in a contract shall not favor the party who caused the
their primary and general acceptation: obscurity.
Sec. 14. Peculiar signification of terms. - The terms of a writing
are presumed to have been used in their primary and general acceptation, Words or stipulations that are susceptible to different
but evidence is admissible to show that they have a local, technical, or interpretations causing ambiguity in their application shall be
otherwise peculiar signification, and were so used and understood in construed against the person who chose to use such ambiguous
the particular instance, in which case the agreement must be construed
words or phrases. The rule is called contra proferentem rule. The
accordingly.
expression means “against the profferer,” i.e., against the person
Thus, when the terms of the agreement are so clear and explicit
that they do not justify an attempt to read into it any alleged intention of the who drafted or tendered the documents. If there is an ambiguity in
parties, the terms are to be understood literally just as they appear on the a document which all the other methods of construction have failed
face of the contract.[60] to resolve that there are to alternative meanings to certain words,
In this case, the records are bereft of proof to show that the the court may construe the words against the party who put forward
parties had agreed to adopt the definition of the term "high-rise building" the document and give effect to the meaning more favourable to
found in the IRR of the Fire Code. The Compromise Agreement, too, does the other party.
not contain any provision that points to a reference to the Fire Code as to
the usage of the term.
Fortune Medicare v. Amorin

Page | 22
 Held: When the terms of insurance contract contain limitations show that they have a local, technical, or otherwise peculiar
on liability, courts should construe them in such a way as to preclude the signification, and were so used and understood in the
insurer from non-compliance with his obligation.  Being a contract of particular instance, in which case, the agreement must be
adhesion, the terms of an insurance contract are to be construed strictly construed accordingly.
against the party which prepared the contract – the insurer.  By reason of
3. When an instrument consists partly of written words and
the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly
partly of a printed form, and the two are inconsistent, the
interpreted against the insurer and liberally in favor of the insured, former controls the latter.
especially to avoid forfeiture.  This is equally applicable to Health Care 4. When the characters in which an instrument is written are
Agreements.  The phraseology used in medical or hospital service difficult to be deciphered, or the language is not understood
contracts, such as the one at bar, must be liberally construed in favor of the by the court, the evidence of persons skilled in deciphering the
subscriber, and if doubtful or reasonably susceptible of two interpretations characters, or who understood the language, is admissible to
the construction conferring coverage is to be adopted, and exclusionary declare the characters or the meanings of the language.
clauses of doubtful import should be strictly construed against the provider.
5. When an instrument is equally susceptible of two
The Court agrees with the CA.  As may be gleaned from the
Health Care Contract, the parties thereto contemplated the possibility of
interpretations, one in favor of a natural right and the other
emergency care in a foreign country.  As the contract recognized Fortune against it, the former is to be adopted.
Care’s liability for emergency treatments even in foreign territories, it 6. An instrument may be construed according to usage, in order
expressly limited its liability only insofar as the percentage of to determine its true character.
hospitalization and professional fees that must be paid or reimbursed was
concerned, pegged at a mere 80% of the approved standard charges. References:
The word “standard” as used in the cited stipulation was vague
 Assigned cases
and ambiguous, as it could be susceptible of different meanings.  Plainly,
the term “standard charges” could be read as referring to the  Paras, E (2016). Civil Code of the Philippines Annotated
“hospitalization costs and professional fees” which were specifically cited Volume Four
as compensable even when incurred in a foreign country.  Contrary to  Sta. Maria Jr., M (2003), Obligations and Contracts: Text and
Fortune Care’s argument, from nowhere in the Health Care Contract could Cases
it be reasonably deduced that these “standard charges” referred to the  2018 Obligations and Contracts. Atty. Alabastro lecture
“Philippine standard”, or that cost which would have been incurred if the
transcript
medical services were performed in an accredited hospital situated in the
Philippines.  The RTC ruling that the use of the “Philippine standard” could
be inferred from the provisions of Section 3(A), which covered emergency
care in an accredited hospital, was misplaced.  Evidently, the parties to the
Health Care Contract made a clear distinction between emergency care in
an accredited hospital, and that obtained from a non-accredited hospital. 
The limitation on payment based on “Philippine standard” for services of
accredited physicians was expressly made applicable only in the case of an
emergency care in an accredited hospital.

Article 1378. When it is absolutely impossible to settle

doubts by the rules established in the preceding articles, and the doubts
refer to incidental circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. If the contract is
onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.
If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what may have been the
intention or will of the parties, the contract shall be null and void.

If there is doubt as to the principal objet the contract is

void.
If there is a doubt to the incidental circumstances the
rules are that:
(a) If gratuitous, apply the rule of “least transmission of
rights and interest.”
(b) If onerous, apply the rule of the “greatest reciprocity
of interests.”

Article 1379. The principles of interpretation stated in Rule

123 of the Rules of Court shall likewise be observed in the construction
of contracts.

Rule 123 should be construed to refer to Rule 130 of the

New Rules on Evidence.
1. The language of a writing is to be interpreted according to the
legal meaning it bears in the place of its execution, unless the
parties intended otherwise.
2. The terms of a writing are presumed to have been used in their
general and primary acceptation, but evidence is admissible to

Page | 23