Obligations and Contracts – Finals Reviewer (Art. 1324 – Art.
(c) Persons disqualified because of fiduciary relationship,
1457)
Art. 1324. When the offerer has allowed the offeree certain
period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid
or promised.
- To be binding on the person who made a unilateral
promise, the promise must be supported by a cause or
consideration distinct from the price.
- May withdraw the offer as long as no consideration or
cause has been made.
Art. 1325. Unless it appears otherwise, business advertisements
of things for sale are not definite offers, but mere invitations to
make an offer.
- If important details are left out, the advertisement is not a
definite offer, but a mere invitation to make an offer.
- Example: “For Sale: 1000 sq. meter lots at P100 million to
P150 million a lot at South Forbes Park Tel. 88-00-00.” This
is clearly merely an invitation to make an offer, which the
advertiser is free to accept or to reject.
Art. 1326. Advertisements for bidders are simply invitations to
make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears.
- Gen Rule: advertiser is NOT bound to accept the highest or
lowest bidder
- Exception: Unless the contrary appears
- The mere determination of a public official or board to
accept the proposal of a bidder does NOT constitute a
contract; the decision must be communicated to the bidder.
- The owner of property offered for sale at a public or private
auction has the right to prescribe the manner, conditions,
and terms of such sale.
Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who
do not know how to write.
- Persons Incapacitated to Consent – they make the contract
voidable unless such contracts would be ratified
(a) Unemancipated minors.
(b) Insane or demented persons (unless they acted
during a lucid interval), drunks and those hypnotized. (Art.
1328, Civil Code).
(c) Deaf-mutes who do not know how to write (and read).
(NOTE: If they know how to read, but do not know how to
write, it is submitted that the contract is valid, for then
they are capable of understanding, and therefore
capacitated to give consent.)
- Persons Specially Disqualified – the transaction in this case
is VOID because the right itself is restricted, that is, the
right is WITHHELD:
(a) husband and wife cannot sell to each other, nor can they
donate to each other
(b) Insolvents before they are discharged cannot, for
example, make payments.
such as the guardian, who is not allowed to purchase the
property of his ward; or judges, with reference to the
property under litigation
(d) Contracts entered into with non-Christians (except
contracts of personal service and the barter or sale of
personal property) are VOID unless approved by the
governor or his representative.
Art. 1328. Contracts entered into during a lucid interval are valid.
Contracts agreed to in a state of drunkenness or during a
hypnotic spell are voidable.
- Article covers:
(a) Insane or demented persons (unless they acted
during lucid interval)
(b) Those in the state of drunkenness (which
temporarily results in complete loss of
understanding, and may therefore be equivalent to
temporary insanity)
(c) Those entered into during a hypnotic spell
(induced by drugs, or by deliberate or unintentional
hypnotism) or while a person walks during his sleep
Art. 1329. The incapacity declared in Article 1327 is subject to
the modifications determined by law, and is understood to be
without prejudice to special disqualification established in the
laws.
- The list of persons incapacitated to enter contracts
provided in Art. 1327 is NOT EXCLUSIVE, it can be still
modified by laws.
Art. 1330. A contract where consent is given through mistake,
violence, intimidation, undue influence, or fraud is voidable.
- Causes of VITIATED CONSENT:
(a) mistake (or error)
(b) fraud (or deceit)
(c) violence
(d) intimidation
(e) undue influence
- Mistake and fraud result in defects of the intellect; Violence,
intimidation, and undue influence result in defects of the will
Art. 1331. In order that mistake may invalidate consent, it should
refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved
one or both parties to enter into the contract
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
- Par 1: ERROR is substantial regarding the OBJECT of the
contract or the conditions which principally moved or
induced one of the parties (error in quality or in quantity)
- Par 2: ERROR is substantial regarding the identity or
qualifications (error in personae), but only if such was the
principal cause of the contract.
-
- Requisites for Mistake to Vitiate Consent:
(1) Error must be substantial
(2) Error must be excusable (not caused by negligence)
(3) Error must be mistake of fact and not of law
Art. 1332. When one of the parties is unable to read, or if the
contract is in a language not understood by him, and mistake or
fraud is alleged, the person enforcing the contract must show
that the terms thereof have been fully explained to the former.
- This is procedural.
- Burden of proving that the other party fully understood the
terms and conditions of their contract
Art. 1333. There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the contract.
- Knowledge of Doubt or Risk Does Not Vitiate Consent: It is
to be assumed here that the party was willing to take the
risk.
Art. 1334. Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated, may vitiate
consent
- Requisites for Mutual Error to Vitiate Consent:
(a) There must be mutual error.
(b) The error must refer to the legal effect of the
agreement.
(c) The real purpose of the parties is frustrated.
- Both party has an error: This makes the contract voidable
or annullable.
Art. 1335. There is violence when in order to wrest consent,
serious or irresistible force is employed.
There is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or upon the
person or property of his spouse, descendants or ascendants, to
give his consent.
To determine the degree of the intimidation, the age, sex and
condition of the person shall be borne in mind.
A threat to enforce one’s claim through competent authority,
if the claim is just or legal, does not vitiate consent.
- Par1: VIOLENCE – serious or irresistible force is employed
- Par2: INTIMIDATION - compelled by a reasonable and well-
grounded fear of an imminent and grave evil
- VIOLENCE is to physical coercion while INTIMIDATION is
to moral coercion
- In order for Violence or Intimidation to be applicable it must
be shown that the violence or intimidation must have been
the reason why the contract was entered into
- Par 3: a threat to enforce one’s claim thru competent
authority, if the claim is just or legal, does not vitiate consent.
In order to vitiate consent, the threat must be of an unjust act
or an actionable wrong.
- Reverential Fear does not vitiate consent: If a contract is
signed merely because of “fear of displeasing persons to
whom obedience and respect are due,” the contract is still
valid, for by itself reverential fear is not wrong.
Art. 1336. Violence or intimidation shall annul the obligation,
although it may have been employed by a third person who did
not take part in the contract.
- Even if a third person exercised the violence or intimidation,
the contract may be annulled. This is because the consent
is still vitiated.
Art. 1337. There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties, or the fact that
the person alleged to have been unduly influenced was suffering
from mental weakness, or was ignorant or in financial distress.
- For undue influence, the person influencing must have moral
ascendency over the other party
- Requisites for Undue Influence to Vitiate Consent:
(a) improper advantage
(b) power over the will of another
(c) deprivation of the latter’s will of a reasonable freedom of
choice
- NOTE: The influence exerted must be of a kind that
overpowers the mind as to destroy the party’s free agency
- Circumstances to be considered:
(a) confidential, family, spiritual, and other relations between
the parties
(b) mental weakness
(c) ignorance
(d) financial distress
- NOTE: To vitiate consent, the influence must be UNDUE. If
the influence is DUE or ALLOWABLE, as when caused by
solicitation, importunity, argument and persuasion, same is
not prohibited by law, morals, or equity.
Art. 1338. There is fraud when, through insidious words or
machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would
not have agreed to.
- This is Dolo Causante or casual fraud: Here, were it not for
the fraud, the other party would not have consented.
- The contract here is VOIDABLE because of the fraud.
- Requisites of Dolo Causante:
(1) Fraud must be MATERIAL and SERIOUS
(2) Fraud must have been employed by ONLY ONE OF
THE PARTY
(3) There must be DELIBERATE INTENT to DECIEVE
or to INDUCE
(4) The other party must have RELIED on the UNTRUE
STATEMENT and is not himself guilty of negligence
Art. 1339. Failure to disclose facts, when there is a duty to reveal
them, as when the parties are bound by confidential relations,
constitutes fraud.
- Failure to disclose facts (CONCEALMENT) constitutes
FRAUD, when there is a duty to reveal them.
- Good faith not only requires that a partner should not make
any false concealment, but he also should abstain from all
concealment.
Art. 1340. The usual exaggerations in trade, when the other party
had an opportunity to know the facts, are not in themselves
fraudulent.
- Rule of Caveat Emptor – simply means that a buyer must be
on his guard. It is his duty to check the title of the seller,
otherwise the buyer gets the object at his own risk.
 - The “usual exaggerations in trade” (dealer’s talk) constitute
tolerated fraud, when the other party had an opportunity to
know the facts.
Art. 1341. A mere expression of an opinion does not signify fraud,
unless made by an expert and the other party has relied on the
former’s special knowledge.
- If a seller says that in his opinion his land is first class, but it
turns out to be second class, the sale is not fraudulent,
particularly when the buyer had opportunity to examine the
land for himself.
- The opinion of an expert is almost in the same category as
a fact, particularly when this expert’s knowledge is relied
upon by the other party.
Art. 1342. Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created substantial
mistake and the same is mutual.
- Fraud by a third person does not make the contract voidable
unless:
1) the representation has created substantial mistake, and
2) the mistake is mutual.
Art. 1343. Misrepresentation made in good faith is not fraudulent
but may constitute error.
- In here, there is no intent to deceive.
Art. 1344. In order that fraud may make a contract voidable, it
should be serious and should not have been employed by both
contracting parties.
Incidental fraud only obliges the person employing it to pay
damages.
- Par 1: Dolo Causante and Par 2: Dolo Incidente
- Requisites for Fraud to Vitiate Consent under this article:
(1) Fraud must be serious
(2) Parties must NOT be IN PARE DELICTO (mutual guilt)
- Incidental fraud is not a cause for annulment.
- INCIDENTAL FRAUD: those which are not serious in
character and without which the other party would still have
entered into the contract
Art. 1345. Simulation of a contract may be absolute or relative.
The former takes place when the parties do not intend to be
bound at all; the latter, when the parties conceal their true
agreement.
- Absolute Simulation: deceiving others by producing the
appearance of a contract that really does not exist
- Relative Simulation: deceiving others by producing the
appearance of a contract which is different from the true
agreement
- Requisites for Simulation:
(1) An outward declaration of will different from the will of
the parties
(2) The false appearance must have been intended by
mutual agreement
(3) The purpose is to deceive third persons.
Art. 1346. An absolutely simulated or fictitious contract is void. A
relative simulation, when it does not prejudice a third person and
is not intended for any purpose contrary to law, morals, good
customs, public order, or public policy binds the parties to their
real agreement.
- ABSOLUTELY simulated – The contract is VOID
- RELATIVELY simulated disguised contracts – Parties are
STILL BOUND to the real agreement except:
(1) if the contract should prejudice a third person
(2) if the purpose is contrary to law, morals, good
customs, public order, or public policy.
SECTION 2 – OBJECT OF CONTRACTS
Art. 1347. All things which are not outside the commerce of men,
including future things, may be the object of a contract. All rights
which are not intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance
except in cases expressly authorized by law.
All services which are not contrary to law, morals, good
customs, public order or public policy may likewise be the object
of a contract.
- Object of a contract may be a thing or a service
- Requisites for an object of a contract:
(a) must be within the commerce of man
(b) must be transmissible
(c) must not be contrary to law, morals, good customs,
public order, or public policy
(d) must not be impossible
(e) must be determinate as to its kind or determinable
without the need of a new contract
- GEN RULE: No contract may be entered into upon future
inheritance – EXCEPTION: in cases expressly authorized by
law
- Political rights and Personal rights cannot be an object of a
contract
Art. 1348. Impossible things or services cannot be the object of
contracts.
- Impossibility may be:
(a) because of the nature of the transaction or because of
the law;
(b) no one can do it (absolute impossibility)
(c) the particular debtor cannot comply (relative
impossibility)
- Impossibility must not be confused with difficulty. Hence, a
showing of mere inconvenience, unexpected impediments,
or increased expenses is not enough
Art. 1349. The object of every contract must be determinate as to
its kind. The fact that the quantity is not determinate shall not be
obstacle to the existence of the contract, provided it is possible
to determine the same, without the need of a new contract
between the parties.
- The object must specifically described.
- If the object is not determinate or determinable, the contract
is void for want of an essential requisite — the object of the
contract.
SECTION 3 – CAUSE OF CONTRACTS
Art. 1350. In onerous contracts the cause is understood to be, for
each contracting party, the prestation or promise of a thing or
service by the other; in remuneratory ones, the service or benefit
which is remunerated; and in contracts of pure beneficence, the
mere liberality of the benefactor.
 - CAUSE of contracts is the essential and impelling reason
why a party assumes an obligation.
- Onerous — here the cause is, for each contracting party, the
prestation or promise of a thing or service by the other.
- Remuneratory — the cause is the past service or benefit
which by itself is a recoverable debt.
- Gratuitous (or contracts of pure beneficence) — here, the
cause is the mere liability of the benefactor
- Shocking cause or consideration makes the contract VOID
Art. 1351. The particular motives of the parties in entering into a
contract are different from the cause thereof.
- MOTIVES in entering into a contract is different from the
CAUSE of the contract
- Motives do not enter at all in the validity or invalidity of cause
or consideration.
Art. 1352. Contracts without cause, or with unlawful cause,
produce no effect whatsoever. The cause is unlawful if it is
contrary to law, morals, good customs, public order or public
policy.
- If it has NO CAUSE or has UNLAWFUL CAUSE then
contract is VOID
- Requisites for CAUSE: must be PRESENT, must be TRUE,
and must be LAWFUL
- UNLAWFUL CAUSE are those that are contrary to law,
morals, good customs, public order or public policy.
Art. 1353. The statement of a false cause in contracts shall render
them void, if it should not be proved that they were founded upon
another cause which is true and lawful.
- Contracts with a STATEMENT OF FALSE CAUSE is merely
VIODABLE – it must be proven that there really exists a true
and lawful cause (if not proven, contract is void)
Art. 1354. Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor proves
the contrary.
- There is a presumption that a cause exists, unless contrary
is proven.
- It is necessary that the cause must exist, BUT it is not
necessary to STATE the cause in the contract because of
the presumption.
Art. 1355. Except in cases specified by law, lesion or inadequacy
of cause shall not invalidate a contract, unless there has been
fraud, mistake or undue influence.
- Lesion: is inadequacy of cause, like an insufficient price for
a thing sold.
- Gen Rule: Lesion or inadequacy of price DOES NOT
INVALIDATE A CONTRACT.
- Exceptions: together with lesion there has been FRAUD,
MISTAKE or UNDUE INFLUENCE, or in cases specified BY
LAW
CHAPTER 3 – FORM OF CONTRACTS
Art. 1356. Contracts shall be obligatory, in whatever form they
may have been entered into, provided all the essential requisites
for their validity are present. However, when the law requires that
a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the
rights of the parties stated in the following article cannot be
exercised.
- GEN RULE: FORM of contract is NOT REQUIRED in
CONSENSUAL CONTRACTS
- FORMAL CONTRACTS (SOLEMN CONTRACTS) require a
certain specified form (in a public instrument)
- REAL CONTRACTS require DELIVERY to be valid
- FORM is important for:
(a) VALIDITY
(b) ENFORCEABILITY
(c) CONVENIENCE
- Examples of FORMAL CONTRACTS:
(1) Donations of real property
(2) Donations of personal property
(3) Stipulation to pay interest on loans, interest for the USE
of the money ( must be in writing)
(4) Transfer of large cattle
(5) Sale of land thru an agent (the authority of the agent
must be in writing)
(6) Contracts of antichresis (the principal loan, and the
interest if any, must be specified in writing)
Art. 1357. If the law requires a document or other special form, as
in the acts and contracts enumerated in the following article, the
contracting parties may compel each other to observe that form,
once the contract has been perfected. This right may be exercised
simultaneously with the action upon the contract.
- One party can compel the other to execute the necessary
form of a contract if the law requires a specific form
- Applies only for CONVENIENCE, and not for validity or
enforceability of contract
- Requisites before one can compel the other:
(1) Contract MUST PERFECTED
(2) Contract MUST BE ENFORCEABLE under the Statute
of Frauds
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest
therein are governed by Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary
rights or of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power
which has for its object an act appearing or which should appear
in a public document, or should prejudice a third person; (4) The
cession of actions or rights proceeding from an act appearing in
a public document.
All other contracts where the amount involved exceeds fi ve
hundred pesos must appear in writing, even a private one. But
sales of goods, chattels or things in action are governed by
Articles 1403, No. 2 and 1405.
 - The NECESSITY FOR THE PUBLIC DOCUMENT in the
contracts enumerated here IS ONLY FOR CONVENIENCE,
not for validity or enforceability.
- All contracts enumerated here are valid, even with or without
public document.
CHAPTER 4 – REFORMATION OF INSTRUMENT
“Reformation is that remedy in equity by means of which a written
instrument is made or construed so as to express or conform to the
real intention of the parties when some error or mistake has been
committed.”
Art. 1359. When, there having been a meeting of the minds of the
parties to a contract, their true intention is not expressed in the
instrument purporting to embody the agreement, by reason of
mistake, fraud, inequitable conduct or accident, one of the parties
may ask for the reformation of the instrument to the end that such
true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has
prevented a meeting of the minds of the parties, the proper
remedy is not reformation of the instrument but annulment of the
contract.
- REFORMATION is applicable if:
(a) There have been meeting of minds;
(b) True intention was not expressed in the instrument of
the contract by reason of mistake, fraud, inequitable
conduct or accident
- ANNULMENT is applicable if:
(a) No meeting of the minds because of mistake, fraud,
inequitable conduct or accident
- Reformation does not invalidate a contract; annulment
invalidates a contract
- In reformation, no new contract is made, the existing
instrument (not the content) of the contract is reformed only
Art. 1360. The principles of the general law on the reformation of
instruments are hereby adopted insofar as they are not in
conflict with the provisions of this Code.
- In case of conflict between the Civil Code and the
principles of the general law on reformation, the former
prevails. The latter will have only suppletory effect.
- Civil code prevails over General Law
Art. 1361. When a mutual mistake of the parties causes the
failure of the instrument to disclose their real agreement said
instrument may be reformed.
- Reformation may be asked if:
(1) Mistake is mutual
(2) Mistake is proven by clear and convincing evidence
(3) Mistake must be of fact
Art. 1362. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the instrument
does not show their true intention, the former may ask for the
reformation of the instrument.
- In this Article, the mistake is unilateral but the other party
acted fraudulently or inequitably.
NOTE: if there was meeting of minds, it can always be reformed
Art. 1363. When one party was mistaken and the other knew or
believed that the instrument did not state their real agreement,
but concealed that fact from the former, the instrument may be
reformed.
- The mistake is unilateral but the other party is guilty of
concealment.
- Only the party in good faith can ask for reformation.
Art. 1364. When through the ignorance, lack of skill, negligence
or bad faith on the part of the person drafting the instrument or
of the clerk or typist, the instrument does not express the true
intention of the parties, the courts may order that the instrument
be reformed.
- court may order the reformation of the instrument if the
instrument does not convey the true intention of the parties
because of the:
(a) ignorance
(b) lack of skill
(c) bad faith of
1) the drafter of the instrument
2) or the clerk
3) or the typist.
Art. 1365. If two parties agree upon the mortgage or pledge of
real or personal property, but the instrument states that the
property is sold absolutely or with a right of repurchase,
reformation of the instrument is proper.
- True intention was not correctly expressed, but there was
meeting of minds, reformation may be asked.
Art. 1366. There shall be no reformation in the following cases:
(1) Simple donations inter vivos wherein no condition
is imposed;
(2) Will;
(3) When the real agreement is void.
- in donation inter vivos there is liberality so no reformation
may be asked – however reformation may be resorted if
the donation is conditional or onerous
- Wills are personal acts
- Agreement is void – the true intention was void
Art. 1367. When one of the parties has brought an action to
enforce the instrument he cannot subsequently ask for its
reformation.
- A party cannot asked for reformation if same party has
brought an action to enforce the instrument – this is
estoppel or ratification on his part
Art. 1368. Reformation may be ordered at the instance of either
party or his successors in interest, if the mistake was mutual;
otherwise, upon petition of the injured party, or his heirs and
assigns.
- Reformation may be asked by:
(a) either party or his successors in interest, if mistake is
MUTUAL
 (b) IN ALL OTHER CASES: injured party; his successors
and assigns
Art. 1369. The procedure for the reformation of instruments shall
be governed by Rules of Court to be promulgated by the
Supreme Court.
CHAPTER 5 – INTERPRETATION OF CONTRACTS
Art. 1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning
of its stipulations shall control.
If the words appear to be contrary to the evident intention of
the parties, the latter shall prevail over the former.
- If words of the contract are CLEAR – the literal meaning of
the STIPULATION SHALL PREVAIL
- Words are UNCLEAR: In case of conflict between the
words of the contract and the evident intention of the
parties – INTENTION MUST PREVAIL
Art. 1371. In order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be
principally considered.
- This only applies if there is ambiguity in the contract.
Art. 1372. However general the terms of a contract may be, they
shall be understood to comprehend things that are distinct and
cases that are different from those upon which the parties
intended to agree.
Art. 1373. If some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that import
which is most adequate to render it effectual.
- If some stipulation should admit of several meanings – the
meaning that would validate the contract shall be adopted
Art. 1374. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly.
- Stipulations are to be read together
Art. 1375. Words which may have different significations shall
be understood in that which is most in keeping with the nature
and object of the contract.
- If a word is susceptible of two or more meanings - adopt
the meaning that can be harmonize with the contract
- If this cannot be determined, then the “terms of a writing
are presumed to have been used in their primary and
general acceptation.”
Art. 1376. The usage or custom of the place shall be borne in
mind in the interpretation of the ambiguities of a contract, and
shall fill the omission of stipulations which are ordinarily
established.
- If the customs and usages are general, they need not be
alleged and proven in court. If the customs and the usages
are merely local, then they have to be both alleged
(pleaded) and proved.
Art. 1377. The interpretation of obscure words or stipulations in
a contract shall not favor the party who caused the obscurity.
- The party who drew up the contract with ambiguous terms
should be responsible therefor; so the obscurity must be
construed against him.
Art. 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.
- DOUBTS as to incidental circumstances of GRATUITOUS
CONTRACTS – rule on the least transmission of rights and
interests shall prevail
- DOUBTS as to incidental circumstances of ONEROUS
CONTRACTS – rule on the greatest reciprocity of interests
shall prevail
- DOUBTS as to the PRINCIPAL OBJECT: contract is VOID
Art. 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 of RC is only use in suppletory manner.
CHAPTER 6 – RESCISSIBLE CONTRACTS
NOTE: “Rescission is a process designated to render inefficacious a
contract validly entered into and normally binding, by reason of
external conditions, causing an economic prejudice to a party or to
his creditors.”
Art. 1380. Contracts validly agreed upon may be rescinded in
the cases established by law.
- Requisites for rescission:
(a) There must be at the beginning either a valid or a
voidable contract
(b) There is an economic or financial prejudice to either a
party or third person
(c) Requires mutual restitution.
- The grounds for rescission are only those enumerated by
law.
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by the guardians whenever
the wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
 (3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject
to rescission.
Art. 1382. Payments made in a state of insolvency for
obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also rescissible.
- Applies to premature payments made in a state of
insolvency
- Requisites (both must exists or Art 1382 shall not apply):
(a) Debtor-payer must have been insolvent
(b) Debt was not yet due and demandable
Art. 1383. The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no other
legal means to obtain reparation for the same.
- Rescission is not a principal remedy; it is only subsidiary
and may only be availed of by the injured party if it has no
other legal means of seeking redress or reparation for the
damages caused.
Art. 1384. Rescission shall be only to the extent necessary to
cover the damages caused.
- Partial rescission is possible. If there is complete rescission
it must be justified by the circumstances of the case, unless
it will not be allowed.
Art. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits,
and the price with its interest; consequently, it can be carried
out only when he who demands rescission can return whatever
he may be obliged to restore.
Neither shall rescission take place when the things which
are the object of the contract are legally in the possession of
third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded
from the person causing the loss.
- Requisites Before the Action for Rescission Can Be
Brought:
(1) Generally, the plaintiff must be able to RETURN what
has been received by virtue of the rescissible contract
except if third persons will be prejudiced
(2) The thing object of the contract is not in the legal
possession of third persons in good faith.
(3) There must be no other legal remedy.
(4) The action must be brought within the proper
prescriptive period.
Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381
shall not take place with respect to contracts approved by the
courts
Art. 1387. All contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to have been entered
into in fraud of creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the
donation.
Alienations by onerous title are also presumed fraudulent
when made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been
issued. The decision or attachment need not refer to the
property alienated, and need not have been obtained by the
party seeking the rescission.
In addition to these presumptions, the design to defraud
creditors may be proved in any other manner recognized by the
law of evidence.
- This Article establishes presumptions of fraud in the case of:
(a) Gratuitous alienations – Presumed fraudulent when the
debtor did not reserve sufficient property to pay all debts
contracted BEFORE the donation.
(b) Onerous alienations – Presumed fraudulent when made
by persons:
1) against whom some judgment has been rendered in any
instance (thus, even if not yet a final judgment);
2) or against whom some writ of attachment has been
issued.
Art. 1388. Whoever acquires in bad faith the things alienated in
fraud of creditors, shall indemnify the latter for damages
suffered by them on account of the alienation, whenever, due to
any cause, it should be impossible for him to return them.
If there are two or more alienations, the first acquirer shall
be liable first, and so on successively.
- If the one who acquires (this is not the debtor) the thing
alienated is in bad faith, he must return the thing given to
him or, if due to any cause, it is now impossible to return
such thing, he shall indemnify the injured creditor – but only
if the debtor himself cannot pay the injured creditor
Art. 1389. The action to claim rescission must be commenced
within four years.
For persons under guardianship and for absentees, the
period of four years shall not begin until the termination of the
former’s incapacity, or until the domicile of the latter is known.
- Prescriptive period for rescission:
Gen Rule: 4 years from the date the contract was
entered into
Exceptions: (1) persons under guardianship — 4 years
from termination of incapacity; (2) absentees — 4 years
from the time the domicile is known
CHAPTER 7 – VOIDABLE CONTRACTS
Art. 1390. The following contracts are voidable or annullable,
even though there may have been no damage to the contracting
parties:
(1) Those where one of the parties is incapable of giving
consent to a contract;
 (2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a
proper action in court. They are susceptible of ratification.
NOTE: In rescissible contracts there must be damage, in voidable
contracts damage is immaterial.
Art. 1391. The action for annulment shall be brought within four
years. This period shall begin:
In cases of intimidation, violence or undue influence, from
the time the defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery
of the same.
And when the action refers to contracts entered into by
minors or other incapacitated persons, from the time the
guardianship ceases.
- Period of Prescription for action to file annulment of contract:
(a) intimidation, violence or undue influence – 4 years
from the time the defect of the consent ceases
(b) mistake or fraud – 4 years from the time of the
discovery of the mistake or fraud
(c) to contracts entered into by minors or other
incapacitated persons – 4 years from the time the
guardianship ceases
Art. 1392. Ratification extinguishes the action to annul avoidable
contract.
- If there is ratification, the contract becomes a completely
valid one.
- Requisites for a Ratification:
(a) contract must be a voidable one
(b) person ratifying must know the cause for the contract
being voidable
(c) cause must not exist or continue to exist anymore at
the time of ratification
(d) ratification must have been made expressly or by an
act implying a waiver of the action to annul
(e) person ratifying must be the injured party
Art. 1393. Ratification may be effected expressly or tacitly. It is
understood that there is a tacit ratification if, with knowledge of
the reason which renders the contract voidable and such reason
having ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to waive
his right.
- Two kinds of ratification: (1) express – may be written or
oral; (2) tacit – implied as from an act or a conduct implying
a WAIVER
Art. 1394. Ratification may be effected by the guardian of the
incapacitated person.
Art. 1395. Ratification does not require the conformity of the
contracting party who has no right to bring the action for
annulment.
- The guilty party’s consent is not needed for ratification.
Art. 1396. Ratification cleanses the contract from all its defects
from the moment it was constituted.
- Once ratification has taken place, annulment based on the
original defects cannot prosper.
Art. 1397. The action for the annulment of contracts may be
instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot allege
the incapacity of those with whom they contracted; nor can
those who exerted intimidation, violence, or undue influence, or
employed fraud, or caused mistake base their action upon these
flaws of the contract.
- Article simply means that only the victim (principal or
subsidiary party) may ask for annulment, not the guilty person
or his successor
- The creditors of the victim cannot ask for annulment for they
are not bound by the contract, unless they were injured then
they can ask for rescission.
Art. 1398. An obligation having been annulled, the contracting
parties shall restore to each other the things which have been
the subject matter of the contract, with their fruits, and the price
with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be
the basis for damages.
- Effects of Annulment: (a) If the contract has not yet been
complied with, the parties are excused from their
obligations; (b) If the contract has already been performed,
there must be MUTUAL RESTITUTION (in general) of:
1) the thing, with fruits;
2) the price, with interest.
Art. 1399. When the defect of the contract consists in the
incapacity of one of the parties, the incapacitated person is not
obliged to make any restitution except insofar as he has been
benefited by the thing or price received by him.
- Gen Rule: No restitution by incapacitated party
- Exception: only to the extent of what he was benefited
Art. 1400. Whenever the person obliged by the decree of
annulment to return the thing cannot do so because it has been
lost through his fault, he shall return the fruits received and the
value of the thing at the time of the loss, with interest from the
same date.
- If after annulment, the party can no longer return the object
because it has been lost through his fault – he shall return
the fruits received and the value of the thing at the time of
the loss, with interest from the same date
Art. 1401. The action for annulment of contracts shall be
extinguished when the thing which is the object thereof is lost
through the fraud or fault of the person who has a right to
institute the proceedings.
If the right of action is based upon the incapacity of any one of
the contracting parties, the loss of the thing shall not be an obstacle
to the success of the action, unless said loss took place through the
fraud or fault of the plaintiff
Par1: When it is the fault of the victim (the one who has the right
to institute action of annulment) that the object was lost, right of
action for annulment is extinguished.
Par2: if the basis for the annulment is the incapacity of any of the
parties, the loss of the object does not affect the right to institute
annulment, unless the loss was through fraud or fault of the injured.
Art. 1402. As long as one of the contracting parties does not
restore what in virtue of the decree of annulment he is bound to
return, the other cannot be compelled to comply with what is
incumbent upon him.
- One party cannot be compelled if other party does not restore
what he is bound to restore – a reciprocal obligation of
restitution has been created
CHAPTER 8 – UNFORCEABLE CONTRACTS
NOTE: Unenforceable contracts cannot be sued upon or enforced
unless ratified – it is as if they have no effect yet
Art. 1403. The following contracts are enforceable, unless they
are ratified:
(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or
who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing,
and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be
performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or
miscarriage of another;
(c) An agreement made in consideration of marriage,
other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of
such goods and chattels, or the evidences, or some of
them, of such things in action, or pay at the time some
part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount and
kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is
made, it is a sufficient memorandum;
(e) An agreement for the leasing for a longer period
than one year, or for the sale of real property or of an
interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to
a contract.
Art. 1404. Unauthorized contracts are governed by Article 1317
and the principles of agency in Title X of this Book.
- Ratification cures an unauthorized contract. Unless ratified,
the contract has no effect
Art. 1405. Contracts infringing the Statute of Frauds, referred to
in No. 2 of Article 1403, are ratified by the failure to object to the
presentation of oral evidence to prove the same, or by the
acceptance of benefits under them.
- Two ways of ratification of contracts infringing the Statute
of Frauds:
(a) failure to object to the presentation of oral evidence (this is
deemed a waiver)
(b) acceptance of benefits under them
Art. 1406. When a contract is enforceable under the Statute of
Frauds, and a public document is necessary for its registration
in the Registry of Deeds, the parties may avail themselves of the
right under Article 1357.
- Here that the right of one party to have the other execute
the public document needed for convenience in
registration, is given only when the contract is both valid
and enforceable.
Art. 1407. In a contract where both parties are incapable of
giving consent, express or implied ratification by the parent, or
guardian, as the case may be, of one of the contracting parties
shall give the contract the same effect as if only one of them
were incapacitated.
If ratification is made by the parents or guardians, as the
case may be, of both contracting parties, the contract shall be
validated from the inception.
- Both parties are incapable of giving consent then contract
is unenforceable:
(a) Parent/guardian of ONE PARTY ratifies the contract –
contract becomes VOIDABLE
(b) Parent/guardian of BOTH PARTIES ratify the contract
– contract becomes VALID and ENFORCEABLE
Art. 1408. Unenforceable contracts cannot be assailed by third
persons.
- Strangers cannot attack a contract because of its
unenforceability
CHAPTER 9 – VOID OR INEXISTENT CONTRACTS
Art. 1409. The following contracts are inexistent and void from
the beginning:
(1) Those whose cause, object or purpose is contrary to law,
morals, good customs, public order, or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of
the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
 These contracts cannot be ratified. Neither can the
right to set up the defense of illegality be waived.
NOTE: Characteristics of VOID Contracts
(a) right to set up the defense of illegality cannot be waived
(b) action or defense for their declaration as inexistent does
not prescribe
(c) defense of illegality of contracts is not available to third
persons whose interests are not directly affected
(d) Cannot give rise to a new and different contract
(e) Generally produces no effect.
(f) Generally, no action to declare them void is needed, since
they are inexistent from the very beginning
(g) They cannot be ratified.
Art. 1410. The action or defense for the declaration of the
inexistence of a contract does not prescribe.
Art. 1411. When the nullity proceeds from the illegality of the
cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable
to the things or the price of the contract.
This rule shall be applicable when only one of the parties is
guilty; but the innocent one may claim what he has given, and
shall not be bound to comply with his promise.
- The ‘Pari Delicto’ Rule refuses legal remedy to either party
to an illegal agreement; both will be prosecuted – the remedy
will only applicable if only one is guilty
Art. 1412. If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the following
rules shall be observed:
(1) When the fault is on the part of both contracting parties,
neither may recover what he has given by virtue of the contract,
or demand the performance of the other’s undertaking;
(2) When only one of the contracting parties is at fault, he
cannot recover what he has given by reason of the contract, or
ask for the fulfillment of what has been promised him. The other,
who is not at fault, may demand the return of what he has given
without any obligation to comply with his promise.
- Article covers illegal but not criminal contracts:
(a) If both are guilty - Neither may recover what he has
given by virtue of the contract or demand the
performance of the other’s undertaking.
(b) If only one is guilty:
(1) guilty party cannot recover what he has
given by reason of the contract, or ask for
the fulfillment of what had been promised
him;
(2) and party not at fault may demand the return
of what he has given, without any obligation
to comply with his promise.
Art. 1413. Interest paid in excess of the interest allowed by the
usury laws may be recovered by the debtor, with interest
thereon from the date of the payment.
Art. 1414. When money is paid or property delivered for an
illegal purpose, the contract may be repudiated by one of the
parties before the purpose has been accomplished, or before
any damage has been caused to a third person. In such case,
the courts may, if the public interest will thus be subserved,
allow the party repudiating the contract to recover the money or
property.
- Recovery can be made even in the presence of pari delicto if:
(a) the purpose has not yet been accomplished
(b) or damage has not been caused to any third person
yet
Art. 1415. Where one of the parties to an illegal contract is
incapable of giving consent, the courts may, if the interest of
justice so demands, allow recovery of money or property
delivered by the incapacitated person.
- One party to an illegal contract is incapacitated – court can
allow recovery of money or property for the interest of
justice
Art. 1416. When the agreement is not illegal per se but is merely
prohibited, and the prohibition by the law is designed for the
protection of the plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or delivered.
- This covers merely prohibited contracts.
- Merely prohibited contracts are those forbidden because of
private interests. Here recovery is permitted, provide that:
(a) the contract is not illegal per se,
(b) the prohibition is designed for the protection of the
plaintiff,
(c) and public policy would be enhanced by allowing the
recovery.
Art. 1417. When the price of any article or commodity is
determined by statute, or by authority of law, any person paying
any amount in excess of the maximum price allowed may
recover such excess.
Art. 1418. When the law fixes, or authorizes the fixing of the
maximum number of hours of labor, and a contract is entered
into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation
for service rendered beyond the time limit.
Art. 1419. When the law sets, or authorizes the setting of a
minimum wage for laborers, and a contract is agreed upon by
which a laborer accepts a lower wage, he shall be entitled to
recover the deficiency.
Art. 1420. In case of a divisible contract, if the illegal terms can
be separated from the legal ones, the latter may be enforced.
- If divisible, the legal terms may be enforced if same can be
separated from the illegal terms.
- If indivisible the whole contract is void, even if only some
terms are illegal
Art. 1421. The defense of illegality of contracts is not available
to third persons whose interests are not directly affected.
- the defense of illegality may be set up only by those whose
interest are directly affected – does not apply to strangers
to the contract
Art. 1422. A contract which is the direct result of a previous
illegal contract, is also void and inexistent.
TITLE III – NATURAL OBLIGATIONS
NOTE: In cases of natural obligations there is a moral duty, but not a
legal duty to perform or to pay.
Art. 1423. Obligations are civil or natural. Civil obligations give a
right of action to compel their performance. Natural obligations,
not being based on positive law but on equity and natural law,
do not grant a right of action to enforce their performance, but
after voluntary fulfillment by the obligor, they authorize the
retention of what has been delivered or rendered by reason
thereof. Some natural obligations are set forth in the following
articles.
- Natural obligations are based on equity and natural law –
does not grant right of action to enforce their performance
- But if voluntarily complied with, there is retention of what
has been delivered or rendered by reason thereof because
what has been complied with is a natural obligation
Art. 1424. When a right to sue upon a civil obligation has lapsed
by extinctive prescription, the obligor who voluntarily performs
the contract cannot recover what he has delivered or the value
of the service he has rendered.
- If the civil obligation has already prescribed but the debtor
still voluntarily performs his obligation, he cannot ask for
recovery of what he has given
Art. 1425. When without the knowledge or against the will of the
debtor, a third person pays a debt which the obligor is not
legally bound to pay because the action thereon has prescribed,
but the debtor later voluntarily reimburses the third person, the
obligor cannot recover what he has paid.
- Here, the debt has prescribed, but a third person, not
knowing it has prescribed, pays the said debt without the
knowledge (of the debtor); or against the will (of the debtor)
– if the debtor voluntary reimburses the third person, then
said debtor can no longer recover what he reimbursed
Art. 1426. When a minor between eighteen and twenty one years
of age who has entered into a contract without the consent of
the parent or guardian, after the annulment of the contract
voluntarily returns the whole thing or price received,
notwithstanding the fact that he has not been benefited thereby,
there is no right to demand the thing or price thus returned.
- Contracts by Minors between 18 and 21: when the contract
was without parental consent, and THERE WAS
ANNULMENT OF THE CONTRACT, if there is voluntary
return by the minor of the thing or price, he can no longer
recover what he has returned.
Art. 1427. When a minor between eighteen and twenty one years
of age, who has entered into a contract without the consent of
the parent or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the obligation, there
shall be no right to recover the same from the obligee who has
spent or consumed it in good faith.
- Contracts by minors but there is NO ANNULMENT YET: if
there is voluntary payment or delivery of the obligation –
obligee who has spent or consumed the object in good faith
is not required to restore it
Art. 1428. When, after an action to enforce a civil obligation has
failed, the defendant voluntarily performs the obligation, he
cannot demand the return of what he has delivered or the
payment of the value of the service he has rendered.
- Here there is a final court judgment, but the one who wants
to enforce the obligation lost the case, then the one who
won (the debtor) voluntary pays the obligation – said party
who paid can no longer recover what he has paid or
delivered.
Art. 1429. When a testate or intestate heir voluntarily pays a debt
of the decedent exceeding the value of the property which he
received by will or by the law of intestacy from the estate of the
deceased, the payment is valid and cannot be rescinded by the
payer.
- Gen Rule is heirs inherit obligations only to the extent of
the value of the inheritance – but if the heir voluntary pays
more than the obligation that he inherited, then the excess
payment can no longer be recovered
Art. 1430. When a will is declared void because it has not been
executed in accordance with the formalities required by law, but
one of the intestate heirs, after the settlement of the debts of the
deceased, pays a legacy in compliance with a clause in the
defective will, the payment is effective and irrevocable.
- Payment of legacies despite the fact that the will is void –
recovery of the legacy is no longer available
- Here if the will is void, the legacy would also be void and
the deceased is considered to have died without a will.
TITLE IV – ESTOPPEL
Art. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon.
NOTE: ESTOPPEL is a bar which precluded a person from denying
or asserting anything contrary to that which has been, in
contemplation of law, established as the truth either by acts of judicial
or legislative officers, or by his own deed or representation either
express or implied.
- In estoppel, a person, who by his deed or conduct has
induced another to act in a particular manner, is barred
from adopting an inconsistent position, attitude or course of
conduct that thereby causes loss or injury to another.
Art. 1432. The principles of estoppel are hereby adopted, insofar
as they are not in conflict with the provisions of this Code, the
Code of Commerce, the Rules of Court and special laws.
 - The principles of estoppel are only suppletory. The Civil
code, in case of conflict with said principles, will prevail.
Art. 1433. Estoppel may be in pais or by deed.
NOTE: ESTOPPEL IN PAIS is equitable estoppel.
- Estoppel in pais may be:
1) by conduct or by acceptance of benefits,
2) by representation or concealment,
3) by silence,
4) by omission,
5) by laches (unreasonable delay in suing).
- Estoppel BY DEED (technical estoppel) may be:
1) estoppel by deed proper (written instrument may also be
in the form of a bond or a mortgage).
2) estoppel by judgment as a court record
Art. 1434. When a person who is not the owner of a thing sells or
alienates and delivers it, and later the seller or grantor acquires
title thereto, such title passes by operation of law to the buyer or
grantee.
- Applies to sale or alienation by non-owner
- Illustration: Jose sold in his own name Brigitte’s car to
Gina. He also delivered the car to Gina. If later on Brigitte
donates the car to Jose, ownership over the same passes
to Gina, not by tradition or delivery, but by operation of law.
Art. 1435. If a person in representation of another sells or
alienates a thing, the former cannot subsequently set up his
own title as against the buyer or grantee.
- Applies to sale or alienation in representation of another
person - estoppel created in a representative capacity
- Example: Amalia, in representation of Romeo, sells to
Juanito a car. Amalia cannot afterwards allege that she
was really the owner of the car, and that, therefore, the sale
is not valid.
Art. 1436. A lessee or a bailee is estopped from asserting title to
the thing leased or received, as against the lessor or bailor.
- This is a disputable presumption.
- Covers estoppel on the part of a lessee or a bailee
- Illustration: one of the instances of conclusive
presumptions is in the case of the tenant, who is not
permitted to deny the title of his landlord at the time of the
commencement of the relation of landlord and tenant
between them.
Art. 1437. When in a contract between third persons concerning
immovable property, one of them is misled by a person with
respect to the ownership or real right over the real estate, the
latter is precluded from asserting his legal title or interest
therein, provided all these requisites are present:
(1) There must be fraudulent representation or wrongful
concealment of facts known to the party estopped;
(2) The party precluded must intend that the other should
act upon the facts as misrepresented;
(3) The party misled must have been unaware of the true
facts; and
(4) The party defrauded must have acted in accordance
with the misrepresentation.
- Article covers estoppel concerning immovable property
- Note that here one should have been misled, otherwise
there is no estoppel – the one who is to be in estoppel must
have made a fraudulent representation or wrongful
concealment of facts known to him
- If there is collusion between the parties in the
accomplishment of the fraud – neither can claim estoppel
NOTE: Estoppel does not apply to the Government or the State
Art. 1438. One who has allowed another to assume apparent
ownership of personal property for the purpose of making any
transfer of it, cannot, if he received the sum for which a pledge
has been constituted, set up his own title to defeat the pledge of
the property, made by the other to a pledgee who received the
same in good faith and for value.
- Illustration: A has a diamond ring. He allowed B to assume
apparent ownership over the ring so that B might sell the same.
Instead, B pledged the ring with C to obtain a loan. The money
lent was later handed over to A. Later A attacks the validity of
the pledge claiming that under the law, the pledgee must be the
owner thereof, and since B in this case acted without authority,
the pledge is invalid. Is A allowed to do this?
ANS.: No, A is not allowed to do this. His receipt of the sum for
which the pledge was made is an implied ratification of the
pledge and A is, therefore, in estoppel.
Art. 1439. Estoppel is effective only as between the parties
thereto or their successors in interest.
- Persons bound by estoppel: both the contracting parties
and their respective successors-in-interest; minors can be
bound even if without consent of parents provided they
acted with discernment and intelligence
- Estoppel applies only to questions of fact and not of law.
NOTE: Concept of an Agency by Estoppel – the ff. must be
established:
1. the principal manifested a representation of the agent’s
authority or knowingly allowed the agent to assume such
authority; or
2. the third person, in good faith, relied upon such
representation; or
3. relying upon said representation, a third person has changed
his position to his detriment.
TITLE V – TRUSTS
Chapter 1 – General Provisions
NOTE: Trust is a fiduciary relationship concerning property which
obliges the person holding it to deal with the property for the benefit
of another. The person holding, in view of his equitable title, is
allowed to exercise certain powers belonging to the owner of the
legal title.
Characteristics of a TRUST:
(a) It is a fiduciary relationship.
 (b) Created by law or by agreement
(c) Where the legal title is held by one, and the equitable title
or beneficial title is held by another.
Trust Fund – refers to money or property set aside as a trust for the
benefit of another and held by a trustee
Art. 1440. A person who establishes a trust is called the trustor;
one in whom confidence is reposed as regards property for the
benefit of another person is known as the trustee; and the
person for whose benefit the trust has been created is referred
to as the beneficiary.
NOTE: PARTIES to a ‘Trust’:
(a) TRUSTOR OR SETTLER — he establishes the trust
(b) TRUSTEE — holds the property in trust for the benefit
of another
(c) BENEFICIARY OR CESTUI QUE TRUST — the person
for whose benefit the trust has been created
(NOTE: The trustor may at the same time be also the
beneficiary.)
ELEMENTS of a Trust:
(a) PARTIES to the trust
(b) The TRUST PROPERTY or the trust estate or the
subject matter of the trust
Art. 1441. Trusts are either express or implied. Express trusts
are created by the intention of the trustor or of the parties.
Implied trusts come into being by operation of law.
- Expressed Trust – created by the parties, or by the
intention of the trustor.
- Implied trust — created by operation of law
1.) Resulting trust - there is an intent to create a trust but
it is not effective as an express trust
2.) Constructive trust – no intention to create a trust is
present, but a trust is nevertheless created by law to
prevent unjust enrichment or oppression.
Art. 1442. The principles of the general law of trusts, insofar as
they are not in conflict with this Code, the Code of Commerce,
the Rules of Court and special laws are hereby adopted.
- General laws of trusts are only suppletory.
CHAPTER 2 – EXPRESS TRUSTS
NOTE: Express trusts must be in written form. Express trusts do NOT
prescribe as long as they have not been repudiated.
Art. 1443. No express trusts concerning an immovable or any
interest therein may be proved by parol evidence.
- Parol evidence is oral evidence.
- And the requirement that the EXPRESS TRUST BE
WRITTEN is only for enforceability, not for validity between
the parties.
- Take note: a TRUST OVER PERSONAL PROPERTY an
oral agreement is valid and enforceable between the
parties
- FOR THIRD PERSONS: the trust must be: in a public
instrument and REGISTERED in the Registry of Property, if
it concerns REAL PROPERTY.
Art. 1444. No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended.
An Express Trust Is Created:
(a) By conveyance to the trustee by an act inter vivos or mortis causa
(as in a will).
(b) By admission of the trustee that he holds the property, only as
trustee.
NOTE: Administration of the Trust is created by court:
(a) The trustee must file a bond
(b) The trustee must make an inventory of the real and
personal property in trust.
(c) The trustee must manage and dispose of the estate and
faithfully discharge his trust in relation thereto, according to
law or according to the terms of the trust instrument as long
as they are legal and possible.
(d) The trustee must render a true and clear account.
(e) The trustee cannot acquire the property held in trust by
prescription as long as the trust is admitted.
Art. 1445. No trust shall fail because the trustee appointed
declines the designation, unless the contrary should appear in
the instrument constituting the trust.
- Trust ordinarily continues even if the trustee declines.
Reason — the court will appoint a new trustee, unless
otherwise provided for in the trust instrument.
- A new trustee has to be appointed, otherwise the trust will
not exist.
Art. 1446. Acceptance by the beneficiary is necessary.
Nevertheless, if the trust imposes no onerous condition upon
the beneficiary, his acceptance shall be presumed, if there is no
proof to the contrary.
- For the trust to be effective, the beneficiary must accept:
(a) expressly,
(b) or impliedly,
(c) or presumably.
- NOTE: When the granting of benefit is PURELY
GRATUITOUS (no onerous condition), the acceptance by
the beneficiary is presumed. – Exception: If there is proof
that he really did NOT accept.
NOTE: Express Trusts are ENDED by:
(a) Mutual agreement by all the parties
(b) Expiration of the term
(c) Fulfillment of the resolutory condition
(d) Rescission or annulment (as in other contracts)
(e) Loss of subject matter of the trust (physical loss or legal
impossibility)
(f) Order of the court (as when the purpose of the trust is being
frustrated)
(g) Merger
(h) Accomplishment of the purpose of the trust
CHAPTER 3 – IMPLIED TRUSTS
Art. 1447. The enumeration of the following cases of implied
trust does not exclude others established by the general law of
trust, but the limitation laid down in article 1442 shall be
applicable.
NOTE: The enumeration of instances of Implied Trust in the next
following articles is not exclusive. But trusts are recognized only if not
in conflict with:
(a) the Civil Code,
(b) the Code of Commerce,
(c) the Rules of Court,
(d) Special Laws.
Art. 1448. There is an implied trust when property is sold, and
the legal estate is granted to one party but the price is paid by
another for the purpose of having the beneficial interest of the
property. The former is the trustee, while the latter is the
beneficiary. However, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of the one paying
the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favor of the child.
- Illustration: A buys a piece of land from B. A pays the price
so that he (A) may have the beneficial interest in the land
BUT the legal title is given to C. C is the trustee and A is
the beneficiary.
- But if C was the legitimate or illegitimate child of A, no
implied trust is created – it is presumed that it was a gift in
favor of the child, C.
Art. 1449. There is also an implied trust when a donation is
made to a person but it appears that although the legal estate is
transmitted to the donee, he nevertheless is either to have no
beneficial interest or only a part thereof.
- where the “donee” becomes the trustee of the real
beneficiary
- Illustration: A donated land to B. But it was agreed that B is
supposed to have only one-third of the products of said
land. There is a trust here, with B as the trustee.
Art. 1450. If the price of a sale of property is loaned or paid by
one person for the benefit of another and the conveyance is
made to the lender or payor to secure the payment of the debt, a
trust arises by operation of law in favor of the person to whom
the money is loaned or for whom it is paid. The latter may
redeem the property and compel a conveyance thereof to him.
- This is conveyance of property so that it may serve as security -
to prevent unjust enrichment
- Illustration: Jose wants to buy a piece of land from Pedro, but
Jose has no money. So Jose asks Carlos to pay for the land. The
land is then given in Carlos’ name. This is supposed to be Carlos’
security until the debt of Jose is paid. Here an implied trust has
been created. Carlos is only a trustee, the beneficiary being Jose.
When Jose has the money, he may redeem the property from
Carlos and compel a conveyance thereof to him (Jose). The trust
here is implied, hence it exists even if in the title taken by Carlos,
there is no mention of the interest of Jose or of his right to
redeem.
Art. 1451. When land passes by succession to any person and
he causes the legal title to be put in the name of another, a trust
is established by implication of law for the benefit of the true
owner.
- Covers instances when title to inherited land is not in
owner’s name – a trust is created between the one
(beneficiary) who inherited the land and the one (trustee)
who has the legal title over the land
- Example: A inherited a piece of land from his father, but A
caused the legal title to be put in the name of X, a brother.
Here a trust is impliedly established, with X as trustee and
A as the beneficiary.
Art. 1452. If two or more persons agree to purchase property
and by common consent the legal title is taken in the name of
one of them for the benefit of all, a trust is created by force of
law in favor of the others in proportion to the interest of each.
- Here there are two or more buyers but the legal title of the
object purchased was given to only one of them – implied
trust is created where the one with the legal title is the
trustee of the other buyers
Art. 1453. When property is conveyed to a person in reliance
upon his declared intention to hold it for, or transfer it to
another or the grantor, there is an implied trust in favor of the
person whose benefit is contemplated.
- Here a person declares his intent to hold property for
someone else.
- Example: Jose bought from Pedro a parcel of land and it
was conveyed to him (Jose) on Jose’s statement or
declaration that he would hold it in behalf of Carlos. Here,
Jose is merely the trustee, while Carlos is the beneficiary.
Art. 1454. If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor
toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property
to him.
- This is absolute conveyance made for security purpose.
- Example: Marlene was indebted to Susan. For the sole
purpose of guaranteeing her debt, Marlene sold her parcel
of land to Susan. Here, a trust has been created. If Marlene
pays her debt when it becomes due, Marlene may demand
the resale of the property to her.
Art. 1455. When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of
property and causes the conveyance to be made to him or to a
third person, a trust is established by operation of law in favor
of the person to whom the funds belong.
- This applies to TRUST FUNDS.
 - Article applies to: any trustee; guardian, or other person
holding a fiduciary relationship
- Example: An agent using his principal’s money purchases
land in his own name. He also registers it under his name.
Here, he will be considered only a trustee, and the principal
is the beneficiary. The principal can bring an action for
conveyance of the property to himself, so long as the rights
of innocent third persons are not adversely affected.

Art. 1456. If property is acquired through mistake or fraud, the

person obtaining it is, by force of law, considered a trustee of an
implied trust for the benefit of the person from whom the
property comes.

- Applies when the property was acquired through mistake or

fraud.
- Example: Bella was given a car by Mina although it should
have been given to Erlinda. Bella is considered as merely
the trustee of the car for the benefit of Erlinda.
- It has been held that a trustee may be compelled to
execute a deed of reconveyance of property that has been
obtained improperly, provided, of course, that the true
owner is not barred because of prescription or because of
laches.
- NOTE: The mistake referred to in Art. 1456 is a mistake
made by a third person, not that made by a party to the
contract. For if made by a party, no trust is created.

NOTE: Prescriptive periods with respect to Implied Trusts:

(1) RESULTING TRUSTS (those presumed to have been

contemplated by the parties, but not so expressed in the
instrument of conveyance) – generally also DO NOT
PRESCRIBE; EXCEPTION — recovery from the trustee
may prescribe if the trustee has expressly repudiated the
trust;
(2) CONSTRUCTIVE TRUSTS (justified merely by equity to
satisfy the demands of justice, and therefore are not really
trusts in the technical sense) - DO PRESCRIBE, and this
rule is well-settled.

NOTE: An action for reconveyance of registered land based on an

implied trust prescribes in 10 years. This is so even if the decree of
registration is no longer open to review.

Art. 1457. An implied trust may be proved by oral evidence.

- Article applies whether the property is real or personal.

- The oral evidence here must be a trustworthy oral
evidence, for oral evidence may be easily fabricated.
- But implied trusts can also be prove by written evidence.