In case of mistake regarding the quantity of the thing (error in quantitate), it is important that this class

of mistake should be distinguished from a mistake of account or calculation. In the fi rst, there is a real
mistake as to the extent of the object of the contract; in the second, there is only an apparent mistake, a
mere mistake in mathematical computation. As a consequence, in the fi rst, the contract is voidable; in
the second, it is not. Thus, if the parties enter into a contract with respect to a parcel of land which they
believe has an area of 100 hectares, when in reality it has an area of only 50 hectares, there is mistake as
to the quantity of the thing; the contract in this case is voidable. If, on the other hand, they enter into a
contract in which it is agreed that a parcel of land consisting of 10 hectares shall be sold for P1,000 per
hectare, and they thought that the total price is only P5,000, there is a mistake of account; the mistake
in this case can only be corrected.83 Asiain vs. Jalandoni 45 Phil. 296 The records show that the plaintiff
offered to sell to the defendant a certain hacienda for P55,000. During the negotiation, he told the
defendant that it contained between 25 and 30 hectares and that the cane then planted would produce
2,000 piculs of sugar. Although doubtful of the extent of the land, the defendant fi nally accepted the
offer, paid P30,000 of the purchase price and took possession of the land. While thus in possession, he
discovered that the land was only about 18 hectares and the cane only about 800 piculs of sugar.
Because of this discovery, he refused to pay the balance of the purchase price. As a consequence,
plaintiff commenced this action to recover the said balance. To the complaint, defendant fi led an
answer and a counter complaint, asking that the contract be annulled. Held: “Coordinating more closely
the law and the facts in the instant case, we reach the following conclusions: This was not a contract of
hazard. It was a sale in gross in which there was a mutual mistake as to the quantity of land sold and as
to the amount of the standing crop. The mistake of fact as disclosed not alone by the terms of the
contract but by the attendant circumstances, which it is proper to consider in order to throw light upon
the intention of the parties, is, as it is sometimes expressed, the effi cient cause of the concoction. The
mistake with reference to the subject matter of the contract is such that, at the option of the purchaser,
the contract is rescissible (voidable). Without such mistake the agreement would not have made and
since this is true, the agreement is inoperative. It is not deception but is more nearly akin to bilateral
mistake for which relief should be granted. Specifi c performance of the contract can therefore not be
allowed at the instance of the vendor. 838 Manresa, 5th Ed., Bk. 2, pp. 403-404. For cases illustrating
mistakes account, see Pastor vs. Nicasio, 6 Phil. 152; Aldecoa & Co. vs. Warner, Barnes & Co., 16 Phil. 23;
Gutierrez Hermanos vs. Oria Hermanos,30 Phil. 491; Oquinena & Co. vs. Muertegui, 32 Phil. 261.
ESSENTIAL REQUISITES OF CONTRACTS Art. 1331 Consent 432 CONTRACTS “The ultimate result is to put
the parties back in exactly their respective positions before they became involved in the negotiation and
before accomplishment of the agreement. This was the decision of the trial judge and we think that
decision conforms to the facts and the principles of equity.’’ (2) Mistake as to person (error in persona):
This kind of mistake or error may refer either to the name or to the identity or to the qualifi cation of a
person. It is evident from the provision of the second paragraph of Art. 1331 that the only mistake with
regard to persons which will vitiate consent are mistakes with regard to the identity or the qualifi
cations of one of the contracting parties. Hence, mistake with regard to the name of one or both of the
contracting parties will not invalidate the contract. In order that mistake as to persons shall vitiate
consent, the following requisites must, however, concur: fi rst, the mistake must be either with regard
to the identity or with regard to the qualifi cation of one of the contracting parties; and second, such
identity or qualifi cation must have been the principal consideration for the celebration of the contract.
Generally, this kind of mistake occurs in obligations to do which require special qualifi cations of the
parties or which are based on confi dence. Examples of these obligations are those arising from
remuneratory contracts, partnership, agency, deposit, commodatum, and lease of services.84 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.85

Rule Where a Party Is Illiterate. — The rule stated in the above article was declared by the codifi ers as
“especially necessary in the Philippines where unfortunately there is still a fairly large number of
illiterates and where documents are usually drawn up in English and Spanish.”86 Thus, where the
plaintiff, who cannot 843 Castan, 7th Ed., pp. 334-335; 8 Manresa, 5th Ed., Bk. 2, p. 402. 85New
provision. 86Report of the Code Commission, p. 136, cited in Ayola vs. Valderama Lumber Co., CA, 49
Off. Gaz. 980. Art. 1332 433 read and write, signed with a cross a document which she thought was
merely a promise to pay certain expenses which defendant had advanced to her in a certain law suit, but
which turned out to be an absolute deed of sale of two parcels of land and a carabao, said document is
voidable, for had she truly understood the contents thereof, she would neither have accepted nor
authenticated it by her mark.87 Similarly, where the plaintiffs, both of whom are blind, affi xed their
thumbmarks to a deed which they thought was a deed of mortgage, but which turned out to be a deed
of sale of certain properties in favor of the defendant who is a son-in-law of one of them, although the
deed is a public document and the notary public testifi ed as to their due execution, since courts are
given a wide latitude in weighing the facts or circumstances in a given case and since there exists a fi
duciary relationship between the parties to the contract, it was held that such contract is voidable.88
The same is also true where the plaintiff had testifi ed that he had signed a voucher without knowing or
understanding its contents. Since under Art. 1332, the burden of proving that the plaintiff had
understood the contents of the document was shifted to the defendant and he had failed to do so, the
presumption of mistake still stands unrebutted and controlling.89 Article 1332 was intended for the
protection of a party to a contract who is at a disadvantage due to his illiteracy, ignorance, mental
weakness or other handicap. This article contemplates a situation wherein a contract has been entered
into, but the consent of one of the parties is vitiated by mistake or fraud committed by the other
contracting party. This is apparent from the ordering of the provisions under Book IV, Title II, Chapter 2,
Section 1 of the Civil Code, from which Article 1332 is taken. Article 1330 states that “A contract where
consent is given through mistake, violence, intimidation, undue infl uence, or fraud is voidable.’’
(Hemedes vs. Court of Appeals, 316 SCRA 348.) 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. Fraud, on the other hand, is present
when, 87Dumasug vs. Modelo, 34 Phil. 252. 88Trasporte vs. Beltran, CA, 51 Off. Gaz. 1434. 89Ayola vs.
Valderama Lumber Co., CA, 49 Off. Gaz. 980. ESSENTIAL REQUISITES OF CONTRACTS Art. 1332 Consent
434 CONTRACTS 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. Clearly, Article 1332
assumes that the consent of the contracting party imputing the mistake or fraud was given, although
vitiated, and does not cover a situation where there is a complete absence of consent. (Hemedes vs.
Court of Appeals, supra.) Art. 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract.90 Art. 1334. Mutual error as to the legal effect
of an agreement when the real purpose of the parties is frustrated, may vitiate consent.91

Mistake of Law. — Mistake of law as a rule will not vitiate consent. There is, however, an exception to
this rule. According to Art. 1334 (a new provision), mutual error as to the effect of an agreement when
the real purpose of the parties is frustrated, may vitiate consent.92 Three requisites are, therefore,
necessary in order that such mistake will vitiate consent. In the fi rst place, the mistake must be with
respect to the legal effect of an agreement; in the second place, the mistake must be mutual; and in the
third place, the real purpose of the parties must have been frustrated. Explaining the reason for the
insertion of Art. 1334 in the Civil Code, the Code Commissioners stated in their report: “Mistake of law
does not generally vitiate consent. But when there is mistake on a doubtful question of law, or on the
construction or application of law, this is analogous to a mistake of fact, and the maxim of ignorantia
legis neminem excusat should have no proper application. When even the highest courts are sometimes
divided upon diffi cult legal questions, and when one-half of the lawyers in all 90New provision. 91New
provision. 92The mistake referred to in this article seems to be the equivalent of what Castan terms a
mistake as to the nature of the contract (error in negocio) giving as an example a contract in which one
of the parties believes that he is selling the thing, while the other thinks that he is merely leasing it. (3
Castan, 7th Ed., 335.) Arts. 1333-1334 435 controversies on a legal question are wrong, why should a
layman be held accountable for his honest mistake on a doubtful legal issue?’’93 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.94 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.95

Violence and Intimidation. — The fi rst paragraph of Art. 1335 gives the defi nition of violence, while the
second paragraph of the same article gives the defi nition of intimidation. Because of the similarity
between violence and intimidation, especially with regard to their effects both upon the will of the
person upon whom they are exercised and upon the contract which is produced thereby, the two are
sometimes known as duress. One, however, must be distinguished from the other. While violence is
external, intimidation is internal; while the fi rst prevents the expression of the will substituting it with a
material act dictated by another, the second infl uences the operation of the will, inhibiting it in such a
way that the expression thereof is apparently that of a person who has freely given his consent.96 In the
terse language of Castan, violence is physical compulsion, while intimidation is moral compulsion.97
93Report of the Code Commission, p. 136. 94Art. 1267, Spanish Civil Code, in modifi ed form. 95Art.
1268, Spanish Civil Code. 968 Manresa, 5th Ed., Bk. 2, p. 408. 973 Castan, 7th Ed., p. 336. ESSENTIAL
REQUISITES OF CONTRACTS Arts. 1335-1336 Consent 436 CONTRACTS Idem;

Requisites of violence. — In order that consent is vitiated through violence, it is essential that the
following requisites must concur: fi rst, the force employed to wrest consent must be serious or
irresistible; and second, it must be the determining cause for the party upon whom it is employed in
entering into the contract.98

Requisites of intimidation. — Intimidation, on the other hand, requires the concurrence of the following
requisites: fi rst, one of the contracting parties is compelled to give his consent by a reasonable and well-
grounded fear of an evil; second, the evil must be imminent and grave; third, the evil must be unjust;
and fourth, the evil must be the determining cause for the party upon whom it is employed in entering
into the contract.99
Character of intimidation. — In order that intimidation may be suffi cient to render a contract voidable,
Art. 1335 requires that one of the contracting parties should be compelled by a reasonable and well-
grounded fear of an imminent and grave evil upon his person or property or upon the person or
property of his spouse, descendants or ascendants. This presupposes that the threat or intimidation
must be actual, serious and possible of realization, and that the actor can and still will carry out his
threat.100 The best illustrations of the application of this rule are those contracts entered into during
the Japanese occupation involving payments in Japanese military notes, where it is established that one
of the contracting parties was compelled to give his consent to the payment by reason of a threat to
report his non-acceptance of the military notes to the Japanese authorities. Thus, it has been held that
the threat to deliver anyone to the Kempetai or to the now infamous Fort Santiago, for refusal to accept
Japanese military notes, or for any cause, even to intelligent persons of ordinary fi rmness would surely
infuse just fear of great bodily harm, should there be a refusal considering the inquisitorial methods
employed by the invaders and what they had done.101 But the mere knowledge of the severe penalties
98Ibid., pp. 337-338. 99Ibid. 100This rule, which is taken from Manresa (Vol. 8, Bk. 2, 5th Ed., p. 411), is
enunciated in the cases of Alarcon vs. Kasilag, CA, 40 Off. Gaz. 11th S, p. 203; De Asis vs. Buenviaje, CA,
45 Off. Gaz. 317; Mirano vs. Mossessgeld Santiago, CA, 45 Off. Gaz. 343; Derequito vs. Dolutan, CA, 45
Off. Gaz. 1351; Valdeabella vs. Marquez, CA, 48 Off. Gaz. 719. 101Rodriguez vs. De Leon, CA, 47 Off. Gaz.
6296. Arts. 1335-1336 437 imposed by the invaders upon a violation of their proclamations and orders
regarding non-acceptance of military notes, which was common and applicable to all, without any proof
of direct acts showing the imminence and gravity of any injury, does not in itself establish intimidation,
since according to the law, such intimidation exists only when one of the contracting parties is inspired
with a reasonable and well grounded fear of suffering an imminent and grave injury to his person or
property, or to the person or property of his spouse, descendants or ascendants.

Distinguished from reluctant consent. — From what had been stated, consent given through
intimidation must not be confused with consent given reluctantly and even against good sense and
judgment. There must be a distinction to be made between a case where a person gives his consent
reluctantly and even against his good sense and judgment and where he, in reality, gives no consent at
all as where he executes a contract against his will under a pressure which he cannot resist. It is clear
that one acts as voluntarily and independently in the eyes of the law when he acts reluctantly and with
hesitation as when he acts spontaneously and joyously. Legally speaking, he acts voluntarily and freely
when he acts wholly against his better sense and judgment as when he acts in conformity with them.
Between the two acts there is no difference in law.103 The test in order to determine whether consent
given “under pressure” is intimidation within the meaning of the law or not is given by Justice Moreland
in the following words: “All men are presumed to be sane and normal and subject to be moved by
substantially the same motives. When of age and sane, they must take care of themselves. In their
resolutions with others in the business of life, wits, sense, intelligence, training, ability and judgment
meet and clash and contest, sometimes with gain and advantage to all, sometimes to a few only, with
loss and injury to others. In these contests men must depend upon themselves — upon their own
abilities, talents, 102Valdeabella vs. Marquez, CA, 48 Off. Gaz. 719. To the same effect: Mirano vs.
Mossessgeld Santiago, CA, 45 Off. Gaz. 343; Phil. Trust Co. vs. Araneta, 46 Off. Gaz. 4254; Laraga vs.
Bañez, 47 Off. Gaz. 696; Fernandez vs. Brownell, 51 Off. Gaz. 713. 103Vales vs. Villa, 35 Phil. 769; Reyes
vs. Zaballero, G.R. No. L-3561, May 23, 1951. ESSENTIAL REQUISITES OF CONTRACTS Arts. 1335-1336
Consent 438 CONTRACTS training, sense, acumen, judgment. The fact that one may be worsted by
another, of itself, furnishes no cause of complaint. One man cannot complain, because another is more
able, or better trained, or has better sense or judgment than he has; and when the two meet on a fair fi
eld the inferior cannot murmur if the battle goes against him. The law furnishes no protection to the
inferior simply because he is inferior, any more than it protects the strong because he is strong. The law
furnishes protection to both alike — to one no more or less than to the other. It makes no distinction
between the wise and the foolish, the great and the small, the strong and the weak. The foolish may
lose all they have to the wise; but that does not mean that the law will give it back to them again. Courts
cannot follow one every step of his life and extricate him from one-sided contracts, or annul the effects
of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally
incompetent. Courts operate not because one person has been defeated or overcome by another, but
because he has been defeated or overcome illegally. Men may do foolish things, make ridiculous
contracts, use miserable judgments, and lose money by them — indeed, all they have in the world; but
not for that alone can the law intervene and restore. There must be, in addition, a violation of law, the
commission of what the law knows as an actionable wrong before the courts are authorized to lay hold
of the situation and remedy it. “Furthermore, even if an actionable wrong be committed in such manner
as to authorize the court to intervene, the person injured may renounce his right to take the matter to
the courts and may compromise with the wrong-doer. Or, having been placed in a very disadvantageous
position by the wrong committed against him, he may be offered by his adversary one or more avenues
of escape. He may be required to lose more property to his enemy or go to the court for redress. In such
case the payment of an additional sum as a means of escape is not necessarily a payment for duress.
The act was preceded by an exercise of judgment. This much was plain to him; he had either to let the
matter stand as it was with the loss already sustained or go to the courts to be relieved. His judgment,
operating upon this condition, told him to pay the additional sum rather than to suffer the
inconvenience and expense of an action in court. A payment made under such conditions is not
voidable. It is a voluntary act of a sane and mature man performed upon refl ection. Not only this; it is a
compromise of the original wrong and a ratifi cation of the relation which the wrongful act was intended
to establish between the parties. Arts. 1335-1336 439 “The same may be said with greater force of a
case where a person’s own voluntary act, uninfl uenced by another, has put him in a disadvantageous
position — a position which another may unjustly make use of to his injury. The failure to reduce a
contract to writing or to have witnesses present when a verbal agreement is made, or to record an
instrument, or to exclude from the operation of its terms things verbally agreed to be excluded, etc.,
may place a person in a disadvantageous position with respect to another; but the demand that he pays
to secure his extrication is not illegal, and payment made pursuant to such demand is not necessarily
voidable. He pays for his lack of foresight. While the demand may be reprehensible morally, it is not
illegal; and of itself is not ground for relief. “There must, then, be a distinction to be made between a
case where a person gives his consent reluctantly and even against his good sense and judgment, and
where he, in reality, gives no consent at all, as where he executes a contract or performs an act against
his will under a pressure which he cannot resist. It is clear that one acts as voluntarily and indepedently
in the eyes of the law when he acts reluctantly and with hesitation, as when he acts spontaneously and
joyously. Legally speaking, he acts as voluntarily and freely when he acts wholly against his better sense
and judgment as when he acts in conformity with them. Between the two acts there is no difference in
law. But when his sense, judgment, and his will rebel and he refuses absolutely to act as requested, but
is nevertheless overcome by force or intimidation to such an extent that he becomes a mere automaton
and acts mechanically only, a new element enters, namely, a disappearance of the personality of the
actor. He ceases to exist as an independent entity with faculties and judgment and in his place is
substituted another — the one exercising the force or making use of the intimidation. While his hand
signs, the will which moves it is another’s. While a contract is made, it has, in reality and in law, only one
party, the one using the force or the intimidation; it is unenforceable for lack of a second party. “From
these considerations it is clear that every case of an alleged intimidation must be examined to
determine within which class it falls. If it is within the fi rst class, it is not duress in law, if it falls in the
second, it is.’’104 104Vales vs. Villa, 35 Phil. 769. To a certain extent the doctrine of absolute judicial
objectivity as applied to contractual relations has been humanized by the provision of Art. 24 of the New
Civil Code. ESSENTIAL REQUISITES OF CONTRACTS Arts. 1335-1336 Consent 440 CONTRACTS Martinez
vs. Hongkong and Shanghai Bank 15 Phil. 252 This is an action to annul a contract on the ground that
plaintiff’s consent thereto was obtained under duress. Under this contract, she agreed to a conveyance
of several properties to Aldecoa & Co. and the Hongkong and Shanghai Bank as settlement of their
claims against her and against her husband, who in order to escape criminal charges, had escaped to
Macao, a territory not covered by any extradition treaty. It was established at the trial that during the
period of negotiation, representations were made to her by the defendants and concurred in by her
lawyers, that if she assented to the requirements of the defendants, the civil suit against herself and her
husband would be dismissed and the criminal charges against the latter withdrawn, but if she refused,
her husband must either spend the rest of his life in Macao or be criminally prosecuted. The question
now is whether or not there was duress which would invalidate the contract. Held: “In order that this
contract can be annulled it must be shown that the plaintiff never gave her consent to the execution
thereof. It is, however, necessary to distinguish between real duress and the motive which is present
when one gives his consent reluctantly. A contract is valid even though one of the parties entered into it
against his wishes and desires or even against his better judgment. Contracts are also valid even though
they are entered into by one of the parties without hope of advantage or profi t. A contract whereby
reparation is made by one party for injuries which he has wilfully infl icted upon another is one which
from its inherent nature is entered into reluctantly by the party making the reparation. He is confronted
with a situation in which he fi nds the necessity of making reparation or of taking the consequences, civil
or criminal, of his unlawful acts. He makes the contract of reparation with extreme reluctance and only
by the compelling force of the punishment threatened. Nevertheless, such contract is binding and
enforceable. “It is undisputed that the attorneys for the plaintiff in this case advised her that, from the
facts which they had before them, facts of which she was fully informed, her husband had been guilty of
embezzlement and misappropriation in the management of the business of Aldecoa & Co. and that, in
their judgment, if prosecuted therefor, he would be convicted. In other words, under the advice of her
counsel, the situation was so presented to her that it was evident that in signing the agreement, she
Arts. 1335-1336 441 had all to gain and nothing to lose, whereas, in refusing to sign said agreement, she
had all to lose and nothing to gain. In the one case, she would lose her property and save her husband.
In the other, she would lose her property and her husband too. The argument thus presented to her by
her attorneys addressed itself to judgment and not to fear. It appealed to reason and not to passion. It
asked her to be moved by common sense and not by love of family. It spoke to her own interests as
much as to those of her husband. The argument went to her fi nancial interests as well as to those of the
defendants. It spoke to her business judgment as well as to her wifely affections. From the opinions of
her attorneys as they were presented to her upon facts assumed by all to be true, we do not well see
how she could reasonably have reached a conclusion other than that which she did reach. It is of no
consequence here whether or not her lawyers advised her wrongly. It is of no importance whether, as a
matter of law, she would have been deprived of her alleged interests in the properties mentioned in the
manner described and advised by her attorneys. The important thing is that she believed and accepted
their judgment and acted upon it. The question is not did she make a mistake, but did she consent; not
was she wrongly advised, but was she coerced; not was she wise, but was she duressed. “From the
whole case we are of the opinion that the fi nding of the court below that the plaintiff executed the
contract in suit of her own free will and choice and not from duress is fully sustained by the evidence.’’
Idem; id. —

Determination of degree of intimidation. — According to the third paragraph of Art. 1335, to determine
the degree of the intimidation, the age, sex and condition of the person shall be borne in mind. It is
evident that this provision refers principally to the person intimidated. By condition here is meant not
only the resolute or weak character of the person intimidated, but also his other circumstances, such as
his capacity or culture, which permits him to appreciate whether or not there is an imminent danger, his
position, by which he can determine whether or not it gives him a chance to thwart the danger, his
financial condition, because while a certain amount may mean nothing to some, to others it may mean
economic ruin.105 1058 Manresa, 5th Ed., Bk. 2, p. 418; Rodriguez vs. De Leon, CA, 47 Off. Gaz. 6296.
ESSENTIAL REQUISITES OF CONTRACTS Arts. 1335-1336 Consent 442 CONTRACTS But the applicability of
the provision is even more evident in the case of the spouse, descendant or ascendant of the
contracting party. When the evil which threatens is directed not against the contracting party but
against his spouse, descendant or ascendant, we must consider not only the conditions of the
contracting party, but also the conditions of such spouse, descendant or ascendant, because, although
the evil which threatens may not be suffi ciently grave or serious to bring harm to the contracting party,
it may have a different effect upon a weak woman, an aged father, or a defenseless child.106 Idem; id.
—

Effect of just or legal threat. — According to the last paragraph of Art. 1335, a threat to enforce one’s
claim through competent authority, if the claim is just or legal, does not vitiate consent. Consequently,
even if it can be established that the reason or motive of a party in entering into a contract was the
threat of the other to proceed against him through the courts, the contract would still be perfectly valid
and not voidable.107 Thus, where it is established that a demand for the settlement of an obligation
made by the creditor upon the debtor was accompanied by the threat that upon failure of the latter to
do so, an action would be instituted against him in court, it was held that such threat is proper within
the realm of the law as a means to enforce collection of the obligation, and therefore, cannot constitute
intimidation which would invalidate any settlement entered into even if the claim proves to be
unfounded so long as the creditor who made the threat believed that it was his right to do so.108 Art.
1337. There is undue infl uence 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 confi dential, family, spiritual and other relations between the parties, or the fact that
the person alleged to have been unduly infl uenced was suffering from mental weakness, or was
ignorant or in fi nancial distress.109

Undue Infl uence. — According to Art. 1337 of the Code, there is undue infl uence when a person takes
improper advantage of his power over the will of another, depriving the latter of a reasonable freedom
of choice. Concisely stated, undue infl uence invalidating a contract is that which substitutes the wishes
of another for those of a party to the contract or that which deprives the latter of his free agency.110
Idem;

Undue infl uence which vitiates consent. — Although it has often been stated that undue infl uence is an
unlawful infl uence, it appears that no more is meant by the expression “undue infl uence,” as used in
this connection than that it is the infl uence which deprives a person of his free agency. Consequently,
even if it can be established that a person entered into a contract through the importunity or persuasion
of another against his better judgment, if the deprivation of his free agency is not proved, there is no
undue infl uence which will invalidate the contract. Thus, according to the Supreme Court: “Solicitation,
importunity, argument, and persuasion are not undue infl uence and a contract is not to be set aside
merely because one party used these means to obtain the consent of the other. Infl uence obtained by
persuasion or argument or by appeals to the affections is not prohibited either in law or morals and is
not obnoxious even in courts of equity. Such may be termed ‘due infl uence.’ The line between due and
undue infl uence when drawn, must be with full recognition of the liberty due every true owner to obey
the voice of justice, the dictates of friendship, of gratitude and of benevolence, as well as the claims of
kindred, and when not hindered by personal incapacity or particular regulations, to dispose of his own
property according to his own free choice. (9 Cyc. 455, and cases there cited.)’’111 The test, therefore,
in order to determine whether or not there is undue infl uence which will invalidate a contract is to
determine whether or not the infl uence exerted has so overpowered or subjugated the mind of a
contracting party as to destroy his free agency, making him express the will of another rather than his
own.112 However, in determining whether or not there is undue infl uence, the following circumstances
shall be considered: the confi dential, family, spiritual and other relations between the parties, or the
fact that the person alleged to have been unduly infl uenced was suffering from mental weakness, or
was ignorant or in fi nancial distress.113 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.114

Fraud. — Fraud which will render a contract voidable refers to those insidious words or machinations
employed by one of the contracting parties in order to induce the other to enter into a contract, which,
without them, he would not have agreed to.115 Idem;

Kinds of fraud. — The fraud which is defi ned in Art. 1338 must not be confused with the fraud which is
mentioned in Arts. 1170 and 1171 of the Code.116 Fraud or dolo under the Civil Code, as distinguished
from fraud or dolo under the Revised Penal Code, may, therefore, be classifi ed as either fraud in the
perfection of a contract (Art. 1338) or fraud in the performance of an obligation (Art. 1170). The fi rst is
the fraud which is employed by a party to the contract in securing the consent of the other party, while
the second is the fraud which is employed by the obligor in the performance of a pre-existing obligation.
Fraud or dolo which is present or employed at the time of the birth or perfection of a contract, on the
other hand, may be subdivided into dolo causante and dolo incidente. Dolo causante or causal fraud
refers to those deceptions or misrepresentations of a serious character employed by one party and
without which the other party would not have entered into the contract. This is the fraud which is defi
ned in Art. 1338. Dolo incidente or incidental 112Coso vs. Fernandez Deza, 42 Phil. 595. 113Art. 1337,
Civil Code. 114Art. 1269, Spanish Civil Code. 115Art. 1338, Civil Code. 116See distinctions under Art.
1171, Civil Code. Art. 1338 445 fraud refers to those deceptions or mispresentations which are not
serious in character and without which the other party would still have entered into the contract. This is
the fraud referred to in Art. 1344. The two may be distinguished from each other as follows: (1) The fi rst
refers to a fraud which is serious in character, while the second is not serious. (2) The fi rst is the cause
which induces the party upon whom it is employed in entering into the contract, while the second is not
the cause. (3) The effect of the fi rst is to render the contract voidable, while the effect of the second is
to render the party who employed it liable for damages.117 Idem;

Requisites. — It is evident from the provisions of Arts. 1338 to 1344 of the Code that in order that the
consent of a party to a contract is vitiated by fraud, it is essential that the following requisites must
concur:

(1) Fraud or insidious words or machinations must have been employed by one of the contracting
parties;

(2) The fraud or insidious words or machinations must have been serious;

(3) The fraud or insidious words or machinations must have induced the other party to enter into the
contract; and

(4) The fraud should not have been employed by both of the contracting parties or by third persons.

Nature of fraud. — According to Manresa, the essence of this class of fraud lies in the deception or
misrepresentation employed by one of the contracting parties to secure the consent of the other. This is
indicated by the phrase “insidious words or machinations’’ used in Art. 1338 which is broad enough to
comprehend any kind of deception, such as false promises, fi ctitious names, fi ctitious qualifi cations, or
fi ctitious authority — in short, all the thousand and one forms of deception which may delude a
contract1178 Manresa, 5th Ed., Bk. 2, pp. 240-241; Hill vs. Veloso, 31 Phil. 160; Woodhouse vs. Halili, 49
Off. Gaz. 3374. ESSENTIAL REQUISITES OF CONTRACTS Art. 1338 Consent 446 CONTRACTS ing party to
give his consent, without necessarily constituting estafa or some other offense under our penal laws.118
Before a contract can be invalidated because of fraud, it is, however, essential that there must be proof
of concrete facts constituting the fraud or insidious words or machinations employed by one of the
contracting parties by virtue of which the other party was induced to enter into the contract, which,
without them, he would not have agreed to.119 Furthermore, it is also essential that such insidious
words or machinations must be prior to or contemporaneous with the birth or perfection of the
contract.120 Eguaras vs. Great Eastern Life Assurance Co. 33 Phil. 263 This is an action for the collection
of the value of an insurance policy. The records show that Dominador Albay fi led an application for an
insurance on his life with the defendant company; that since Albay was in poor health, the person who
presented himself for medical examination to the company physician was not the applicant, but Castor
Garcia, who posed as Dominador Albay; that as a result of the favorable report of the physician, the
defendant company executed the contract of insurance; that a short time thereafter the insured died. In
this action the company contends that the contract should be annulled on the ground of fraud. Held:
“The fraud which gave rise to the mistaken consent given by the defendant company to the application
for insurance made by Albay and to the execution of the contract through deceit, is plain and
unquestionable. The fraud consisted in the substitution at the examination of Castor Garcia in place of
the insured Dominador Albay, and as the deceit practiced in the said contract is of a serious nature, the
same is also ipso facto void and ineffective (voidable), in accordance with the provision of Article 1270
(now Art. 1344) of the Civil Code.’’121 1188 Manresa, 5th Ed., Bk. 2, p. 423; Eguaras vs. Great Eastern
Life Ass. Co., 33 Phil. 263. 119Ramos vs. Valencia, 47 Off. Gaz. 1978. 120Eguaras vs. Great Eastern Life
Ass. Co., 33 Phil. 263. 121To the same effect: Musngi vs. West Coast Ins. Co., 61 Phil. 864. Art. 1338 447
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound
by confi dential relations, constitutes fraud.122

Effect of Failure To Disclose Facts. — Failure to disclose facts, when there is a duty to reveal them, as
when the parties are bound by confi dential relations, constitutes fraud.123 Thus, where the defendant,
who is the manager of a certain corporation as well as the owner of about 3/4 of the shares of capital
stock thereof, bought through an agent 800 shares of capital stock from the plaintiff, without disclosing
the fact that he had just negotiated the sale of valuable properties to the government thus enhancing
the value of the capital stocks of the company, such nondisclosure is clearly fraudulent; therefore, the
sale can be annulled.124 However, the innocent nondisclosure of a fact, when there is no duty to reveal
it, does not constitute fraud; consequently, such nondisclosure does not affect the formation of the
contract or operate to discharge the parties from their agreement.125 Art. 1340. The usual
exaggerations in trade, when the other party had an opportunity to know the facts, are not in
themselves fraudulent.126

Effect of Exaggerations in Trade. — The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.127 Thus, according to the Supreme
Court: “When the purchaser proceeds to make investigations by himself, and the vendor does nothing
to prevent such investigations from being as complete as the former might wish, the purchaser cannot
later allege that the vendor made false representations to him. “One who contracts for the purchase of
real estate in reliance on the representations and statements of the vendor 122New provision. 123Art.
1339, Civil Code. 124Strong vs. Gutierrez Repide, 213 U.S. 419; 41 Phil. 947. 125Tuazon vs. Marquez, 45
Phil. 481. To the same effect: Escudero vs. Flores, 51 Off. Gaz. 3444. 126New provision. 127Art. 1340,
Civil Code. ESSENTIAL REQUISITES OF CONTRACTS Arts. 1339-1340 Consent 448 CONTRACTS as to its
character and value, but after he has visited and examined it for himself, and has had the means and
opportunity of verifying such statements, cannot avoid the contract on the ground that such statements
were false or exaggerated.’’128 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.129

Effect of Expression of Opinion. — 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.130 This principle is
illustrated in the following case: Songco vs. Sellner 37 Phil. 254 The principal defense in this action for
specifi c performance relates to the false representation which, it is claimed, was made by the plaintiff
Songco with respect to the quantity of uncut cane standing in the fi elds at the time the defendant
Sellner became the purchaser thereof. It is proved that Songco estimated that the crop would yield
3,000 piculs of sugar. As the crop turned out, it produced only 2,017 piculs of sugar. The question now is
whether such representation of the plaintiffvendor is fraudulent, which, under Art. 1338, would
invalidate the contract. Holding that such representation can only be considered as a mere expression of
an opinion, the Supreme Court ruled: “It is of course elementary that a misrepresentation upon a mere
matter of opinion is not an actionable deceit, nor is it a suffi cient ground for avoiding a contract as
fraudulent. We are aware that statements may be found in the books to the effect that there is a
difference between giving an honest opinion and making a false representation as to what one’s real
opinion is. We do not think, however, that this is a case where any such distinction should be drawn.
128Azarraga vs. Gay, 52 Phil. 599. To the same effect: Songco vs. Sellner, 37 Phil. 254; Puato vs.
Mendoza, 64 Phil. 457. 129New provision. 130Art. 1341, Civil Code. Arts. 1339-1340 449 “The law allows
considerable latitude to seller’s statement, or dealer’s talk, and experience teaches that it is exceedingly
risky to accept it at its face value. The refusal of the seller to warrant his estimate should have
admonished the purchaser that such estimate was put forth as a mere opinion; and we will not now
hold the seller to a liability equal to that which would have been created by a warranty, if one had been
given. “Assertions concerning the property which is the subject of a contract of sale, or in regard to its
qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and
are always understood as affording to buyers no ground for omitting to make inquiries. A man who
relies upon such an affi rmation made by a person whose interest might so readily prompt him to
exaggerate the value of his property does so at his peril and must take the consequences of his own
imprudence.’’ Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.131 Effect of

Misrepresentation by Third Persons. — Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the same is mutual.132 Even without
Art. 1342, this rule would still be applicable since it is a logical corollary to the principle that in order to
vitiate consent, the fraud must be employed only by one of the contracting parties. Besides, it would be
clearly unjust to visit upon a contracting party the disastrous effects of nullity simply because the other
contracting party has indiscreetly reposed his confi dence upon a third party. The precept, however,
would not be applicable if the third person makes the misrepresentation with the complicity or, at least,
with the knowledge, but without any objection, of the contracting party who is favored. Neither is it
applicable if the misrepresentation has created substantial mistake and the same is mutual.133

Problem — C, an old and ignorant woman, was helped by V in obtaining a loan of P3,000.00 from X Rural
Bank secured by a mortgage on her house and lot. On the day she signed the promissory note and the
mortgage covering the loan, she also signed several documents. One of these documents signed by her
was promissory note of V for a loan of P3,000.00 also secured by a mortgage on her house and lot.
Several years later, she received advice from the sheriff that her property shall be sold at public auction
to satisfy the two obligations. Immediately she fi led suit for annulment of her participation as co-maker
in the obligation contracted by V as well as of the mortgage in relation to said obligation of V on the
ground of fraud and mistake. Upon fi ling of the complaint, she deposited P3,383.00 in court as payment
of her personal obligation including interests. (a) Can be held liable for the obligation of V? Why? (b)
Was there a valid and effective consignation considering that there was no previous tender of payment
made by C to the Bank? Why?

Answer — (a) C cannot be held liable for the obligation of V. It is crystal clear that C’s participation in V’s
obligation both as co-maker and as mortgagor is voidable not on the ground of fraud because the Bank
was not a participant in the fraud committed by V, but on the ground of mistake. There was substantial
mistake on the part of both C and the Bank mutually committed by them as a consequence of the fraud
employed by V. (See Rural Bank of Caloocan City vs. CA, 104 SCRA 151.) (b) Despite the fact that there
was no previous tender of payment made directly to the Bank, nevertheless, the consignation was valid
and effective. The deposit was attached to the record of the case and the Bank had not made any claim
thereto. Therefore, C was right in thinking that it was useless and futile for her to make a previous offer
and tender of payment directly to the Bank. Under the foregoing circumstances, the consignation was
valid, if not under the strict provisions of the law, under the more liberal consideration of equity. (Ibid.)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.134 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. 134New provision. Arts. 1343-1344 451 Incidental fraud only
obliges the person employing it to pay damages.135 Magnitude of

Fraud. — The second indispensable requisite in order that the fraud employed by one of the contracting
parties will vitiate the consent of the other is that it should be serious in character. This requisite is
expressly stated in the fi rst paragraph of Art. 1344 of the Code. According to Manresa, the serious
character of the fraud refers not to its infl uence, but to its importance or magnitude. By virtue of this
requisite, the annulment of a contract cannot, therefore, be invoked just because of the presence of
minor or common acts of fraud whose veracity could easily have been investigated; neither can such
annulment be invoked because of the presence of ordinary deviations from the truth, deviations, which
are almost inseparable from ordinary commercial transactions, particularly those taking place in fairs or
markets.136

Relation Between Fraud and Consent. — The third indispensable requisite in order that the fraud
employed by one of the contracting parties will vitiate consent is that it should have induced the other
party to enter into the contract. In other words, such fraud must be the principal or causal inducement
or consideration for the consent of the party who is deceived in the sense that he would never have
given such consent were it not for the fraud. This is the fraud which Spanish commentators can dolo
causante (dolus causam dans). If the fraud is merely incidental in the sense that the party who is
deceived would have agreed to the contract even without it, his consent is not vitiated and, as a
consequence, the validity of the contract is not at all affected. Its only effect is to render the party who
has employed it liable for damages. This is the fraud which Spanish commentators call dolo incidente
(dolus incidens). The following case will serve to illustrate the effect of dolo incidente: 135Art. 1270,
Spanish Civil Code. 1368 Manresa, 5th Ed., Bk. 2, p. 426. ESSENTIAL REQUISITES OF CONTRACTS Arts.
1343-1344 Consent 452 CONTRACTS Woodhouse vs. Halili 49 Off. Gaz. 3374 Plaintiff and defendant
entered into a contract whereby it was agreed that they shall organize a partnership for the bottling and
distribution of Mission soft drinks, plaintiff to act as industrial partner and manager, and defendant as
capitalist partner; that plaintiff was to secure the Mission soft drinks franchise for and in behalf of the
partnership; and that he was to receive 30% of the net profi ts of the business. Because of the alleged
failure of defendant to comply with this contract after the bottling plant was already in operation,
plaintiff brought this action against him praying for the execution of the agreed contract of partnership,
an accounting of the profi ts of the business, as well as damages amounting to P200,000. Defendant, in
his answer, alleged that his consent to the contract was secured through plaintiff’s false representation
that he had the exclusive bottling franchise of the Mission Dry Corporation in the Philippines and that,
although such franchise was later on obtained from the Mission Dry Corporation, it was he, the
defendant, and not the plaintiff, who obtained it. He also presented a counterclaim for P200,000 as
damages. Consequently, the principal questions which will have to be decided in this case are: fi rst,
whether or not the plaintiff had falsely represented that he had the exclusive franchise to bottle Mission
beverages in the Philippines; and second, whether this false representation, if it existed, annuls the
agreement to form a partnership. Holding that there was breach of contract on the part of the
defendant as well as misrepresentation on the part of the plaintiff, the Supreme Court, speaking through
Justice Labrador, ruled: “We now come to the legal aspect of the false representation. Does it amount to
a fraud that would vitiate the contract? It must be noted that fraud is manifested in illimitable number
of degrees or gradations, from the innocent praises of a salesman about the excellence of his wares to
those malicious machinations and representations that the law punishes as a crime. In consequence,
Article 1270 (now Art. 1344) of the Civil Code distinguishes two kinds of (civil) fraud or dolo — the causal
fraud which may be a ground for the annulment of a contract, and the incidental deceit, which only
renders the party who employs it liable for damages. This Court has held that in order that fraud may
vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. The record abounds with circumstances inArts. 1343-1344
453 dicative of the fact that the defendant was led to the belief that plaintiff had the exclusive franchise,
but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had
the exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had
already lost his option thereto (when the contract was entered into), the principal obligation that he
assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for
the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this
was not the causal consideration, or the principal inducement, that led defendant to enter into the
partnership agreement. But, on the other hand, this supposed ownership of an exclusive franchise was
actually the consideration or price plaintiff gave in exchange for the share of 30% granted him in the net
profi ts of the partnership business. Defendant agreed to give plaintiff 30% share in the net profi ts
because he was transferring his exclusive franchise to the partnership. “We conclude from the above
that while the representation that plaintiff had the exclusive franchise did not vitiate defendant’s
consent to the contract, it was used by plaintiff to get from defendant a share of 30% of the net profi ts;
in other words, by pretending that he had the exclusive franchise and promising to transfer it to
defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net profi ts. This
is the dolo incidente defi ned in Article 1270 (now Art. 1344) of the Civil Code, because it was used to get
the other party’s consent to a big share in the profi ts, an incidental matter in the agreement. “The last
question for us to decide is that of damages, damages that plaintiff is entitled to receive because of
defendant’s refusal to form the partnership, and damages that defendant is also entitled to collect
because of the falsity of plaintiff’s representation. Under Article 1106 (now Art. 2200) of the Civil Code,
the measure of damages is the actual loss suffered and the profits reasonably expected to be received
embraced in the terms daño emergente and lucro cesante. Plaintiff is entitled under the terms of the
agreement to 30% of the net profi ts of the business. Against this amount of damages, we must set off
the damage defendant suffered by plaintiff’s misrepresentation that he had the exclusive franchise, by
which misrepresentation he obtained a very high percentage of share in the profi ts.’’ ESSENTIAL
REQUISITES OF CONTRACTS Arts. 1343-1344 Consent 454 CONTRACTS 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.137 Art. 1346. An absolutely
simulated or fi ctitious contract is void. A relative simulation, when it does not prejudice a third person
and is not intended for any purpose contrary to law, morals, good customs, public order or public policy
binds the parties to their real agreement.138

Simulation of Contracts. — Simulations of contract, which Castan calls vices of declaration (vicios de la
declaración), may be either absolute or relative. The simulation is absolute when there is colorable
contract but it has no substance as the contracting parties do not intend to be bound by the contract at
all, as when a debtor simulates the sale of his properties to a friend in order to prevent their possible
attachment by creditors. The basic characteristic of this type of simulation of contract is the fact that the
apparent contract is not really desired or intended to produce legal effects or in any way alter the
juridical situation of the parties.139 It is relative when the contracting parties state a false cause in the
contract to conceal their true agreement, as when a person conceals a donation by simulating a sale of
the property to the benefi ciary for a fi ctitious consideration. The primary consideration in determining
the true nature of a contract is the intention of the parties. such intention is determined from the
express terms of their agreement as well as from their contemporaneous and subsequent acts (Nena
Lazalita Tating vs. Felicidad Tating Marcella, et al., G.R. No. 155208, March 27,2007). Idem; Effects. —
While the other vices of consent (vicios de la formacion de la voluntad) render the contract voidable,
simulation of contracts affects the contract in an entirely different manner. Thus, according to Art. 1346,
an absolutely simulated contract is void, while a relatively simulated contract binds the parties and the
parties may recover from each other what they may have given 137New provision. 138Art. 1270,
Spanish Civil Code. 139Rodriguez vs. Rodriguez, 28 SCRA 229; Carrantes vs. Court of Appeals, 76 SCRA
514. Arts. 1345-1346 455 under the contract, while a relatively simulated contract is binding and
enforceable between the parties and their successors in interest to their real agreement, 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 (Gaudencio Valerio et al., vs. Vicenta Refresca, et al., G.R. No. 163687,
March 28,2006). The legal presumption is in favor of the validity of contracts. The party who impugns
the validity and regularity of a contract has the burden of proving his allegation. Contracts of Adhesion
— In the case of Development Bank of the Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004, the
Court held that: (a) A contract of adhesion is so-called because its terms are prepared by only one party
while the other party merely affi xes his signature signifying his adhesion thereto. A contract of adhesion
is just as binding as ordinary contracts. It is true that we have, on occasion, struck down such contracts
as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is
reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on
equal footing. Nevertheless, contracts of adhesion are not invalid per se; they are not entirely
prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he
gives his consent In the case of Sps. Francisco and Ruby Reyes vs. BPI Family Savings Bank, Inc., et al., G.
R. Nos. 149840-41, March 31,2006, where the petitioner spouses undertook to secure the P15M loan of
Transbuilders Resources & Development Corporation to BPI-FSB “and other credit accomodations of
whatever nature obtained by the Borrower/Mortgagor” under the Real Estate Mortgage they executed
in favor of BPI-FSB, the SC held that while the stipulation proved to be onerous to the petitioners,
neither the law nor the courts will extricate a party from an unwise or undesirable contract entered into
with all the required formalities and with full awareness of its consequences. Petitioners voluntarily
executed the REM on their property in favor of BPI-FSB to secure the loan. They cannot now be allowed
to repudiate their obligation to the bank after Transbuilder’s default . While petitioner’s liability was
written in fi ne print and in a contract written by BPI-FSB, it has been the consistent holding ESSENTIAL
REQUISITES OF CONTRACTS Arts. 1345-1346 Consent 456 CONTRACTS of the Court that contracts of
adhesion are not invalid per se. On numerous occasions, the Supreme Court has upheld the binding
effects of such contracts.

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 contracts 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. (1271a) Art. 1348. Impossible things or
services cannot be the object of contracts. (1272) 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 an 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.

Art. 1347 in relation with the defi nition of obligations in Art. 1156 of the Code.140 Consequently, the
object of a contract may be defi ned as the thing, right or service which is the subject matter of the
obligation which is created or established.141 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
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.142 Art. 1348. Impossible things or services cannot
be the object of contracts.143 1408 Manresa, 5th Ed., Bk. 2, pp. 430-431. 141Adopted from the defi
nition given by Castan (Vol. 3, 7th Ed., p. 243). 142Art. 1271, Spanish Civil Code, in modifi ed form.
143Art. 1272, Spanish Civil Code. Arts. 1347-1348 457 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 an 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.144

What May Be the Object of Contracts. — As a general rule, all things or services may be the object of
contracts. It is, however, essential that the following requisites must concur: First: The object should be
within the commerce of men; in other words, it should be susceptible of appropriation and transmissible
from one person to another. Second: The object should be real or possible; in other words, it should
exist at the moment of the celebration of the contract, or at least, it can exist subsequently or in the
future. Third: The object should be licit; in other words, it should not be contrary to law, morals, good
customs, public order or public policy. Fourth: The object should be determinate, or at least, possible of
determination, as to its kind.145 Consequently, the following cannot be the object of contracts: (1)
Things which are outside the commerce of men;146 (2) intransmissible rights;147 (3) future inheritance,
except in cases expressly authorized by law;148 (4) services which are contrary to law, morals, good
customs, public order or public policy;149 (5) impossible things or services;150 and (6) objects which are
not possible of determination as to their kind.151 Idem;

Appropriability and transmissibility. — In order that a thing, right or service may be the object of a
contract, it is essential that it must be within the commerce of men. Consequently, 144Art. 1273,
Spanish Civil Code. 1453 Castan, 7th Ed., pp. 342-343; 8 Manresa, 5th Ed., Bk. 2, pp. 431-432. 146Art.
1347, par. 1, Civil Code. 147Ibid. 148Ibid. 149Art. 1348, par. 3, Civil Code. 150Ibid. 151Art. 1349, Civil
Code. ESSENTIAL REQUISITES OF CONTRACTS Art. 1349 Object of Contract 458 CONTRACTS two
conditions must concur. In the fi rst place, the thing, right or service should be susceptible of
appropriation; and in the second place, it should be transmissible from one person to another.152 Those
things, rights or services which do not possess these conditions or characteristics are outside the
commerce of men, and therefore, cannot be the object of contracts. These include: (1) those things
which are such by their very nature, such as common things like the air or the sea, sacred things, res
nullius, and property belonging to the public domain; (2) those which are made such by special
prohibitions established by law, such as poisonous substances, drugs, arms, explosives, and
contrabands; and (3) those rights which are intransmissible because either they are purely personal in
character, such as those arising from the relationship of husband and wife, like jus consortium, or from
the relationship of paternity and fi liation, like patria potestas, or they are honorary or political in
character, such as the right to hold a public offi ce and the right of suffrage.153 Thus, in this jurisdiction,
it has been held that communal things, such as public plazas, sidewalks, streets, rivers, fountains and
other things for public use cannot be sold or leased because they are by their very nature outside the
commerce of men.154 Idem;

Existence of object. — The most evident and fundamental requisite in order that a thing, right or service
may be the object af a contract is that it should be in existence at the moment of the celebration of the
contract, or at least, it can exist subsequently or in the future. Hence, according to the fi rst sentence of
Art. 1347, even future things may be the object of contracts. Idem; id. —

Things which have perished. — In principle, these things cannot be the object of contracts because they
are inexistent. The rule declared in Art. 1493 of the Civil Code to the effect that “if at the time the
contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the
contract shall be without any effect’’ can, therefore, be generalized.155 1526 Sanchez Roman 1281.
1538 Manresa, 5th Ed., Bk. 2, pp. 441-443. 154Mun. of Cavite vs. Rojas, 30 Phil. 602; Muyot vs. de la
Fuente, CA, 48 Off. Gaz. 4866. 1558 Manresa, 5th Ed., Bk. 2, p. 432. Art. 1349 459 Idem; id. —

Future things. — It is clear from Art. 1347 that a future thing may be the object of a contract.156 Such
contract, according to Manresa, maybe interpreted in two possible ways. It may be interpreted as a
conditional contract if its effi cacy should depend upon the future existence of the thing, or as an
aleatory contract if one of the contracting parties should bear the risk that the thing will never come
into existence. In case of doubt about the nature of the contract, it must be deemed to be conditional
because of the principle stated in Art. 1378 of the Code that the doubt shall be resolved in favor of the
greatest reciprocity of interests.157 Idem; id. —

Rule with respect to future inheritance. — There is, however, one very important exception to the rule
that a future thing may be the object of a contract. This exception is found in the second paragraph of
Art. 1347 which states that no contract may be entered into with respect to future inheritance.158
There are several reasons for this exception. If the rule were otherwise, there would always be the
possibility that one of the contracting parties may be tempted to instigate the death of the other in
order that the inheritance will become his. There would also be the possibility, and this is more
probable, that fraud and prejudice may be committed or occasioned thereby. Besides, the right to make
a will would then be subordinated to the right to enter into a contract.159 By reason of the rule that no
contract may be entered into with respect to future inheritance, it has been held that an agreement for
the partition of the estate of a living person, made between those who, in case of death, would inherit
the estate is null and void.160 It has also been held that where the vendor undertook to convey to the
vendee his participation in the property left by his deceased father, the part of the property belonging to
his mother, who is still living, cannot at all be affected by the conveyance, since his interest in the
property of his mother at the time of the execution of the deed of sale was a future inheritance and
could not be the subject matter of a valid contract, pursuant to the second paragraph of Art. 1347.161
But 156See also Arts. 1461 and 1462, Civil Code. 1578 Manresa, 5th Ed., Bk. 2, p. 433. See Art. 1461, Civil
Code. 158This rule is complemented by Arts. 905 and 2035, No. 6, Civil Code. 1598 Manresa, 5th Ed., Bk.
2, p. 437. 160Arroyo vs. Gerona, 58 Phil. 226. To the same effect: Tinsay vs. Yusay, 47 Phil. 639; Tordilla
vs. Tordilla, 60 Phil. 162; Reyes vs. Reyes, CA, 45 Off. Gaz. 1836. 161Rivero vs. Serrano, 48 Off. Gaz. 642.
ESSENTIAL REQUISITES OF CONTRACTS Art. 1349 Object of Contract 460 CONTRACTS after the death of
the decedent, anyone of the co-heirs may enter into a contract with respect to the inheritance even
before partition has been effected. This is so because of the principle announced in Art. 777 of the Code
that the rights to the succession are transmitted at the moment of the death of the decedent.162 The
following case, however, provides an interesting study of the applicability or inapplicability of the rule
enunciated in the second paragraph of Art. 1347: Blas vs. Santos 1 SCRA 899 Simeon Blas married Marta
Cruz in 1898. Out of this marriage there were three children. The following year after Marta’s death,
Simeon contracted a second marriage with Maxima Santos. There were no children out of this marriage.
At the time of the second marriage, no liquidation of the properties of the fi rst marriage was made. On
Dec. 26, 1936, only over a week before his death on Jan. 9, 1937, Simeon executed a will declaring all of
his properties as conjugal and giving one-half thereof to Maxima as her share. On the same date,
Maxima signed a notarized document, stating that she had read the will of her husband and that she
promises to convey by will onehalf of the share given to her to the children of her husband by his
previous marriage. As a result, the children of Simeon by his fi rst marriage brought this action against
the estate of Maxima asking for the enforcement of the promise contained in the document. It is now
contended that the promise is not enforceable because it lacks a suffi cient cause or consideration and
that, being a contract with respect to future inheritance, it falls within the purview of the prohibition
enunciated in Art. 1271 (now Art. 1347) of the Civil Code. Held: Considering that the properties of the fi
rst marriage had not been liquidated, and the further fact that such properties were actually included as
conjugal properties of the second marriage, it is clear that the document signed by Maxima is the
compromise defi ned in Art. 1809 ( now Art. 2128) of the Civil Code. Its execution was ordered by the
testator evidently to prevent his heirs by his fi rst marriage from contesting his will and demanding
liquidation of the conjugal properties acquired 162Osorio vs. Osorio, 41 Phil. 53; Ibarle vs. Po, 49 Off.
Gaz. 1836. Art. 1349 461 during his fi rst marriage. It is, therefore, a contract with a suffi cient cause or
consideration. Neither does the prohibition enunciated in Art. 1271 (now Art. 1347) of the Civil Code
apply. What is prohibited under this article is a contract which deals with any property or right not in
existence or capable of determination at the time of the contract, that a person may in the future
acquire by succession. Here, the subject matters of the contract signed by Maxima are well-defi ned
properties, existing at the time of the agreement. Idem; id. —

Exceptions. — The prohibition enunciated in the second paragraph of Art. 1347, however, is not
absolute in character. There are two exceptions. They are: (1) Under Art. 130 of the Code, which allows
the future spouses to give or donate to each other in their marriage settlement their future property to
take effect upon the death of the donor and to the extent laid down by the provisions of the Civil Code
relating to testamentary succession; and (2) Under Art. 1080 of the Code, which allows a person to make
a partition of his estate by an act inter vivos, provided that the legitime of compulsory heirs is not
prejudiced. Idem; id. —

Impossible things or services. — According to Art. 1348, impossible things or services cannot be the
object of contracts. Thus, if the parties enter into a contract with respect to an impossible thing like a
mythical bird or animal or with respect to an impossible service like a trip to some distant planet or
galaxy, the contract is void or inexistent.163 It must be observed, however, that as far as impossible
services are concerned, a distinction should be made between absolute and relative impossibility.
Absolute impossibility, which arises from the very nature or essence of the act or service itself, renders
the contract void; relative impossibility, which arises from the circumstances or qualifi cations of the
obligor rendering him incapable of executing the act or service, allows the perfection of the contract,
although the fulfi llment thereof is hardly probable. Thus, as a consequence, in a contract of partnership
where one of the partners obligates himself to contribute to the common fund an amount which is
beyond his means, the contract is not void because the impossibility may disappear. When the
impossibility is permanent, however, as in the case of a person who is unable to perform the service
which he has contracted because of total blindness, the contract is void.164 Idem;

Licitness of object. — It is also an indispensable requisite that the object must be licit. Hence, the third
paragraph of Art. 1347 provides that all services which are not contrary to law, morals, good customs,
public order and public policy may be the object of a contract. This provision complements the provision
of Art. 1306 of the Code. Consequently, the same principles which we have taken up under that article
may also be applied here. Idem;

Determinability of object. — It is also an indispensable requisite that the object is determinable, or at

least, determinable, as to its kinds. When Art. 1349 says that the object must be determinate as to its
kind, it simply means that the genus of the object should be expressed although there might be no
determination of the individual specie. Consequently, there need not be any specifi cation of the
qualities and circumstances of the thing which constitutes the object of the contract, since anyway
according to Art. 1246 of the Code: “When the obligation consists in the delivery of an indeterminate or
generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a
thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into consideration.”165 Hence, if A and B enter into
an agreement by virtue of which the former binds himself to deliver “ten horses” to the latter, the
contract is perfectly valid since the law merely requires that the object must be determinate, or at least,
determinable, as to its kind. Let us, however, assume that there is no specifi cation of the quantity,
although there is a specifi cation of the class or genus to which the object belongs, is the contract valid?
According to the second sentence of Art. 1349, the fact that the quantity is not determinate shall not be
an obstacle to the existence of the contract, provided it is possible to determine the same, without the
need of 1648 Manresa, 5th Ed., Bk. 2, pp. 433-434. 165For a detailed discussion of Art. 1349, see
Manresa, Vol. 8, Bk. 2, 5th Ed., pp. 444-448. Art. 1349 463 a new contract between the parties.
Consequently, so long as it is possible to determine the quantity of the object without the necessity of
any new contract, there can be no question about the validity of a contract in which there is no specifi
cation of the quantity. This would occur in those cases where the contract itself has established the basis
upon which such quantity can be determined, such as the needs of a family, the provisions needed for a
factory, the materials for a particular work, and others of a similar nature.166 This can be determined
from the purpose or motive of the contract itself. In case of failure of any of these means, the contract is
without force whatsoever.167 In the case of Aurora Fe B. Camacho vs. CA et al., G.R. No.127520, Feb. 9,
2007, the SC held that Arts. 1349 and 1460 of the New Civil Code provide the guidelines in determining
whether or not the object of the contract is certain. In this case, the object of the contract is a 5,000
sq.m.portion of Lot 261, Balanga Cadastre. The failure of the parties to state the exact location in the
contract is of no moment. This is a mere error occasioned by the parties’ fsilure to describe with
particularity the subject property, which does not indicate the absence of the principal object as to
render the contract void. Since in this case, Camacho bound herself to deliver a potion of Lot 261 to
Atty. Banzon, the description of the property subject of the contract is suffi cient to validate the same.
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.
(1274)

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

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. (1275a)

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. (1276)

Arts. 1350-1353 135 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. (1277)

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. (n)

Concept of Cause. — In general, cause is the why of the contract or the essential reason which moves
the contracting parties to enter into the contract.170 In other words, it is the immediate, direct or most
proximate reason which explains and justifi es the creation of an obligation through the will of the
contracting parties.171 In particular, 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
contracts, it is the service or benefi t which is remunerated; and in contracts of pure benefi cence, it is
the liberality of the benefactor.172 Idem;

Distinguished from consideration. — Actually, in this jurisdiction, cause and consideration are used
interchangeably. After all, causa is merely the civil law term, while consideration is the common law
term. It is, however, undisputed that the causa in civil law jurisdictions is broader in scope than
consideration in Anglo-American jurisdictions. Many agreements which cannot be supported in Anglo-
American law for want of consideration can be enforced under the broader doctrine of causa.173 Idem;

Distinguished from object. — The cause must not be confused with the object of the contract. Of course,
there can be no question about the difference between the two in cases of remuneratory and gratuitous
contracts, it is evident that, in the fi rst, the cause is the service or benefi t which is remunerated, while
the object is the thing which is given in remuneration, and in the second, the cause is the liberality of the
donor or benefactor, while the object is the thing which is given or donated. In onerous contracts,
however, there is a tendency to confuse one with the other. Nevertheless, it is clear that the cause, for
each contracting party, is the prestation or promise of a thing or service by the other, while the object of
the contract, on the other hand, is the thing or service itself. Thus, in a contract of sale, the cause, as far
as the vendor is concerned, is the acquisition of the purchase price, while the cause, as far as the vendee
is concerned, is the acquisition of the thing,174 stated in another way, the cause of the obligation of the
vendor is the obligation of the vendee, while the cause of the obligation of the vendee is the obligation
of the vendor.175 The objects of the contract, on the other hand, are the thing which is sold and the
price which is paid.176 This view, which is upheld by Manresa and Castan, may be illustrated by an
example. If A sells, an automobile to B for P20,000, delivery and payment to be made at some specifi ed
date, the cause of the contract, as far as A is concerned, is the promise of B to pay him P20,000, while
the cause, as far as B is concerned, is the promise of A to deliver the automobile to him. The objects of
the contract, on the other hand, are the automobile and the purchase price of P20,000. Dr. Tolentino,
however, while concurring with the opinion of Manresa and Castan that as to the vendor the cause is
the obligation of the vendee to pay the price, and as to the vendee it is the obligation of the vendor to
deliver the automobile, maintains that in the example given, the object is the automobile itself because
it is the starting point of agreement, without which the negotiations would never have begun.
Consequently, the object of an onerous contract is the same as to both parties, although the cause is
different.177 Dr. Padilla, on the other hand, contends that in bilateral contracts like sale, the thing sold
is the object, while the price paid is the cause.178 We believe that the view of Dr. Tolentino is the most
logical. Idem;

Distinguished from motives. — Neither must the cause be confused with the motives of the parties in
entering into a contract.179 The motives which impel one to a sale or purchase are not always the
consideration of the contract as the term is understood in law. One may purchase an article not because
it is cheap, for in fact it may be dear, but because he may have some particular use to which it may be
put, because of a particular quality which the article has, or the relation which it will bear, to other
articles with which it will be associated. These circumstances may constitute the motive which induces
the purchase, but the real consideration of the purchase (as far as the vendor is concerned) is the
money which 175Dualde, “Concepto de la causa de los contratos,’’ cited by Castan, Vol. 3, 7th Ed., p.
450. 1768 Manresa, 5th Ed., Bk. 2, p. 450. 1774 Tolentino, Civil Code, 1956 Ed., p. 485. 178Padilla, Civil
Code, 1956 Ed., p. 553. 179Art. 1351, Civil Code. ESSENTIAL REQUISITES OF CONTRACTS Arts. 1350-1351
Cause of Contracts 466 CONTRACTS passed.180 As Castan says: “In the case of a contract of sale, the
cause as far as the vendor is concerned, is always the acquisition of the purchase price, and as far as the
vendee is concerned, it is always the acquisition of the thing; the motives of the contracting parties, on
the other hand, are as different or complex and as capable of infi nite variety as the individual
circumstances which may move men to acquire things or to make money.’’181 Consequently, the cause
of the contract and the motives of the contracting parties may be distinguished from each other in the
following ways: (1) While the cause is the direct or most proximate reason of a contract, the motives are
the indirect or remote reasons; (2) While the cause is the objective or juridical reason of a contract, the
motives are the psychological or purely personal reasons; (3) While the cause is always the same, the
motives differ for each contracting party;182 and (4) While the legality or illegality of the cause will
affect the existence or validity of the contract, the legality or illegality of the motives will not affect the
existence of the contract. There are times, however, when the boundary line between motive and cause
disappears altogether. The motive may be regarded as causa when the contract is conditioned upon the
attainment of the motive of either contracting party. In other words, motive becomes causa when it
predetermines the purpose of the contract. The best examples are the decided cases. Thus — (1) Where
a married man of mature years donated a parcel of land to a girl of sixteen subject to the condition that
the latter shall cohabit with him, and such condition is accepted, it is clear that the donation is
conditioned upon the attainment of the motive of the donor; in other words, it predetermines the
purpose of the contract. Thus considered, the conveyance is clearly predicated upon an illegal causa.
Consequently, it is void. Therefore, under what is 180De Jesus vs. Urrutia & Co., 33 Phil. 171. 1813
Castan, 7th Ed., pp. 346-347. 182Ibid. Arts. 1350-1351 467 now Art. 1412 of the New Civil Code, there
can be no recovery of what has already been delivered. (Liguez vs. CA, 102 Phil. 577.) (2) Where a
mother sold two fi shponds to a daughter and the latter, in turn, resold the same fi shponds to her and
her stepfather, as a consequence of which said fi shponds were converted into conjugal properties, it is
clear that the motive or purpose is to circumvent the law against donations between spouses (Art. 133,
CC). This motive or purpose is the illegal causa rendering the contract void. Consequently, the rule of in
pari delicto non oritur actio, now enunciated in Art. 1412 of the New Civil Code, is applicable. (Rodriguez
vs. Rodriguez, 20 SCRA 908.) (3) Where a Filipino leased a parcel of land to an alien for 99 years with an
option to buy the property within 50 years, provided that the latter shall become a Filipino citizen, it is
clear that the motive or purpose of the arrangement, which has resulted in the virtual transfer of
ownership to the lessee, is to circumvent the Constitutional prohibition of transfer of lands to aliens.
This motive or purpose is the illegal causa rendering the contract void. However, it will be the provision
of Art. 1416 and not of Art. 1412, of the New Civil Code that will apply. Because of public policy, the
lessor will be allowed to recover the property. (Phil. Banking Corp. vs. Lui She, 21 SCRA 52.) Liguez vs.
Court of Appeals 102 Phil. 577 This is an action commenced by Conchita Liguez against the widow and
heirs of Salvador Lopez to recover a parcel of land in their possession. The records show that Salvador
Lopez, a married man of mature years, donated the land to Conchita, who was then a minor of 16,
subject to the condition that she will cohabit with him as his mistress. The donation was accepted and
Conchita became the donor’s mistress until his death. Because defendants have advanced the defense
of the nullity of the contract by virtue of the illegality of the cause is of pure benefi cence, the cause is
actually the liberality of the donor; hence, what is illicit or illegal is the motive of such donor and not the
cause of the contract, since liberality per se can never be illegal. The Supreme Court, however, speaking
through Justice J.B.L. Reyes, held: “The fl aw in this argument lies in ignoring the fact that the liberality
of the donor is deemed causa only in contracts of ESSENTIAL REQUISITES OF CONTRACTS Arts. 1350-
1351 Cause of Contracts 468 CONTRACTS pure benefi cence; that is to say, contracts in which the idea of
self-interest is totally absent on the part of the transferor. Here the facts demonstrate that in making
the donation, the donor was not moved exclusively by the desire to benefi t Conchita Liguez, but also
gratify his sexual impulse. Actually, therefore, the donation was but one part of an onerous transaction
that must be viewed in its totality. Thus considered, the conveyance was clearly predicated upon an
illicit causa. “With respect to appellant’s contention regarding the distinction between causa and
motive, it is well to note that Manresa himself (Vol. 8, pp. 641-642), while maintaining the distinction,
expressly excepts from the rule those contracts that are conditioned upon the attainment of the motives
of either party. The same view is held by the Supreme Court of Spain in its decisions of February 4, 1941,
and December 4, 1946, holding that the motive may be regarded as causa when it predetermines the
purpose of the contract. In the present case, it is scarcely disputable that Lopez would not have
conveyed the property in question had he known that appellant would refuse to cohabit with him; so
that the cohabitation was an implied condition to the donation and being unlawful, necessarily tainted
the donation itself. “However, since the rule that parties to an illegal contract, if equally guilty, will not
be aided by the law but will both be left where it fi nds them, has been interpreted as barring the party
from pleading the illegality of the bargain as a cause of action or as a defense, appellant is, therefore,
entitled to so much of the donated property as may be found upon proper liquidation not to prejudice
the share of the widow or the legitimes of the forced heirs.’’ Cause in

Onerous Contracts. — 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. From this it necessarily follows that a
promise made by one party may be a suffi cient cause for a promise made by another party. It is not,
therefore, necessary that the cause or consideration should pass from one party to the other at the time
of the execution of the contract.183 Thus, where a logging company by contract designated a certain
agency as its distributor to 183Enriguez de Cavada vs. Diaz, 37 Phil. 982; Phil. Banking Corp. vs. Lui She,
102 Phil. 577. Arts. 1350-1351 469 export logs to Korea and Europe at the best market price obtainable
on condition that it would pay the latter a commission of 13% of the gross value of the logs, it was held
that for the former the cause of the agreement is the distribution of its logs in the areas agreed upon
which the latter undertook to accomplish, whereas for the latter the cause is its commitment to sell or
export the logs for onerous consideration.184 Idem;

Accessory contracts. — In accessory contracts the rule is that the cause of the accessory contract is
identical with that of the principal contract. Thus, it has been held that as a mortgage is an accessory
contract, its cause is the very cause of the principal contract from which it receives its life, and without
which it cannot exist as an independent contract, although it may secure an obligation incurred by
another.185 The same principle is applicable to the case of an accommodation party who binds himself
jointly and severally with the principal debtor for the payment of a debt by affi xing his signature to a
promissory note for the accommodation of the latter. This is so in spite of the fact that he might not
have received even a single centavo of the money given to the accommodated party. In the words of the
Supreme Court, “the consideration which supports the promise of the accommodation maker is that
parted with by the person taking the note and received by the person accommodated.’’186 Idem;

Moral obligations. — May a moral or natural obligation constitute a suffi cient cause or consideration to
support an onerous contract? The jurisprudence with respect to this question in this jurisdiction is
meager. It is, however, clear that where the moral obligation arises wholly from ethical considerations,
unconnected with any civil obligation and, as such, is not demandable in law but only in conscience, it
can not constitute a suffi cient cause or consideration to support an onerous contract,187 but where
such moral obligation is based upon a previous civil obligation which has already been barred by the
statute of limitations at the time 184General Enterprises, Inc. vs. Lianga Bay Co., 11 SCRA 733. 185China
Banking Corp. vs. Lichauco, 46 Phil. 460. 186National Bank vs. Maza, 48 Phil. 207; Acuna vs. Veloso, 50
Phil. 241. But see Standard Oil Co. vs. Arenas, 19 Phil. 363. 187Fisher vs. Robb, 69 Phil. 101. ESSENTIAL
REQUISITES OF CONTRACTS Arts. 1350-1351 Cause of Contracts 470 CONTRACTS when the contract is
entered into, it constitutes a suffi cient cause or consideration to support the said contract.188 Fisher vs.
Robb 69 Phil. 101 The defendant was one of the organizers of a certain enterprise known as the
Philippine Greyhound Club, Inc. which was formed for the purpose of introducing dog racing in the
Philippines, while the plaintiff was one of those who had invested a certain sum of money in the
venture. It appears that this venture did not succeed, and, as a result, the defendant wrote a letter to
the plaintiff explaining the critical condition of the company, and, at the same time, stating that he felt
“a moral responsibility for those who had sent in the second payment of their subscription” and that he
will see to it that “stockholders who had made such payment shall be reimbursed such amount as soon
as possible out of his own personal funds.” This action now is brought to enforce the “obligation.” The
principal question to be decided, among others, is whether there is a suffi cient cause or consideration
to justify the promise made by the defendant in his letter. Answering this question in the negative, the
Supreme Court, speaking through Justice Villareal, held: “The contract sought to be judicially enforced
by the plaintiff appellee against the defendant is onerous in character, because it supposes the
deprivation of the latter of an amount of money which impairs his property, which is a burden, and for it
to be legally valid it is necessary that it should have a consideration consisting in the lending or promise
of a thing or service by such party. The defendant-appellant is required to give a thing, namely the
payment of the sum of P2,000, but the plaintiff-appellee has not given or promised anything or service
to the former which may compel him to make such payment. The promise which said defendant-
appellant has made to the plaintiff-appellee to return to him P2,000 which he had paid to the Philippine
Greyhound Club, Inc. as a second installment of the amount of the shares for which he had subscribed,
was prompted by a feeling of pity which said defendant-appellant had for the plaintiff-appellee as a
result of the loss which the latter had suffered because of the failure of the enterprise. The 188Villaroel
vs. Estrada, 71 Phil. 14. Strictly speaking, the moral obligation in this case is a natural obligation (Arts.
1423, et seq., Civil Code), as distinguished from a purely moral obligation, such as that referred to in the
case of Fisher vs. Robb. Arts. 1350-1351 471 obligation which the said defendant-appellant had
contracted with the plaintiff-appellee is, therefore, purely moral, and, as such, is not demandable in law,
but only in conscience, over which human judges have no jurisdiction.” Villaroel vs. Estrada 71 Phil. 140
This was originally an action commenced by the plaintiff (respondent) against the defendant (petitioner)
for the purpose of enforcing a contract entered into on August 9, 1930, by virtue of which the defendant
undertook to pay to the plaintiff a certain debt which his deceased mother had incurred from the
deceased parents of the said plaintiff more than eighteen years ago. It is submitted that this debt had
already prescribed. The question now is whether this action will prosper, considering that the debt
incurred by the defendant’s mother had already prescribed. The Supreme Court, speaking through
Justice Avanceña, ruled: “The present action is not founded on the original obligation contracted by the
mother of the defendant, which had already prescribed, but on that contracted by the defendant on
August 9, 1930, in assuming the obligation which had already prescribed. The defendant being the only
heir of the original debtor with the right to succeed in her inheritance, that debt lawfully contracted by
his mother, although it lost its effi cacy by prescription, is nevertheless now a moral obligation as far as
he is concerned, a moral obligation which is a suffi cient consideration to create and make effective and
demandable the obligation which he had voluntarily contracted on August 9, 1930.’’ Cause in

Remuneratory Contracts. — According to Art. 1350, the cause in remuneratory contracts is the service
or benefi t which is remunerated. From this we can say that a remuneratory contract is one in which one
of the contracting parties remunerates or compensates the service or benefi t rendered or given by the
other party, although such service or benefi t does not constitute a demandable debt.189 This may be
clarifi ed by means of an example. If A gives a certain property in accordance with the formalities
prescribed by law to his lawyer friend, B, in remuneration for legal services which the latter had
rendered to him freely in the past and such gift is duly accepted, the cause as far as A is concerned
would 189See Art. 726, Civil Code. ESSENTIAL REQUISITES OF CONTRACTS Arts. 1350-1351 Cause of
Contracts 472 CONTRACTS be the legal services rendered by B, although such services do not constitute
demandable debts.

Cause in Contracts of Pure Benefi cence. — The cause in contracts of pure benefi cence, on the other
hand, is the mere liberality of the benefactor. Thus, if A makes a pure donation of a certain property to B
in accordance with the formalities prescribed by law, its cause is the mere liberality (causa liberalitatis)
of the donor or benefactor. The liberality would be the equivalent of what Manresa calls “el cariño, el
desprendimiento, la admiracion, la generosidad, el agradecimiento, la compasion.” Art. 1352. Contracts
without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary
to law, morals, good customs, public order or public policy.190 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.191 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.192 Art. 1355. Except in
cases specifi ed by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has
been fraud, mistake or undue infl uence.193

Essential Requisites of Cause. — In order that there will be a suffi cient cause upon which a contract may
be founded, it is essential that the following requisites must concur: First: The cause should be in
existence at the time of the celebration of the contract; Second: The cause should be licit or lawful; and
Third: The cause should be true.194 190Art. 1275, Spanish Civil Code, in modifi ed form. 191Art. 1276,
Spanish Civil Code. 192Art. 1277, Spanish Civil Code. 193New provision. 1943 Castan, 7th Ed., pp. 348-
351. Arts. 1352-1355 473 If the contract has no cause, or even if it has, if the cause should be illicit or
unlawful, the rule is that it shall not produce any effect whatsoever, or what amounts to the same thing,
it is inexistent or void from the beginning.195 The same is true if the cause stated in the contract is false,
unless it can be proved that the contract is, in reality, founded upon another cause which is true and
lawful.196 Idem;

Effect of lack of cause. — By express provision of Art. 1352, if the contract is not founded upon any
cause, then it shall not produce any effect whatsoever. This precept is confi rmed by Art. 1409 of the
Code which declares as inexistent those contracts which are absolutely simulated or fi ctitious as well as
those whose cause did not exist at the time of the transaction. Hence, it has been held that if the
purchase price in a contract of sale was never in fact paid by the purchaser or vendee to the vendor, the
contract is inexistent for all purposes for lack of a cause or consideration.197 The same rule is applicable
in cases of conveyances of property where the conveyance or transfer is simulated without any cause or
consideration whatsoever whether the purpose of the grantor is to defraud his creditors or to avert the
possible attachment of the property.198 However, the rule is not applicable where the purchaser or
vendee failed to fully pay for the property, even if there is a stipulation in the contract of sale that full
payment shall be made at the time of the celebration thereof.199 As a matter of fact, even where the
contract itself expressly states that the consideration for the sale of a piece of land is only one peso
(P1.00), it does not follow that the contract or sale is void or inexistent for lack of a cause or
consideration. The reason is obvious. There is a consideration. The contract may be voidable because of
the inadequacy of the cause or consideration, but certainly, it is not void or inexistent. Thus, in Carantes
vs. Court of Appeals,200 speaking through Chief Justice Fred Ruiz Castro, the Supreme Court declared:
195Arts. 1352, 1409, Nos. 1, 2, 3, Civil Code. 196Art. 1353, Civil Code. 197Ocejo, Perez & Co. vs. Flores,
40 Phil. 921; Onejera vs. Iga Sy, 76 Phil. 580. 198De Belen vs. Coll. of Customs, 46 Phil. 241; Gallon vs.
Gayares, 53 Phil. 43; Escutin vs. Escutin, 60 Phil. 922; Gonzales vs. Trinidad, 67 Phil. 682; Navarro vs.
Diego, CA, 40 Off. Gaz. 2106. 199Puato vs. Mendoza, 64 Phil. 457. 20076 SCRA 514. ESSENTIAL
REQUISITES OF CONTRACTS Arts. 1352-1355 Cause of Contracts 474 CONTRACTS “We do not agree with
the respondent court’s legal conclusion that the deed of “Assignment of Right to Inheritance’’ is void ab
initio and inexistent on the grounds that real consent was wanting and the consideration of P1.00 is so
shocking to the conscience that there was in fact no consideration, hence, the action for the declaration
of the contract’s inexistence does not prescribe pursuant to Article 1410 of the new Civil Code. “Article
1409(2) of the new Civil Code relied upon by the respondent court provides that contracts “which are
absolutely simulated or fi ctitious’’ are inexistent and void from the beginning. The basic characteristic of
simulation is the fact that the apparent contract is not really desired or intended to produce legal effects
or in any way alter the juridical situation of the parties. “The respondents’ action may not be considered
as one to declare the inexistence of a contract for lack of consideration. It is total absence of cause or
consideration that renders a contract absolutely void and inexistent. In the case at bar consideration
was not absent. The sum of P1.00 appears in the document as one of the considerations for the
assignment of inheritance. In addition — and this of great legal import — the document recites that the
decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the contract that the
property subject-matter thereof rightly and exclusively belonged to the petitioner Maximino Carantes.
This acknowledgment by the signatories defi nitely constitutes valuable consideration for the contract.”
In order that the cause shall be considered as existing, is it necessary that it should be stated in the
contract? This question must be resolved in the negative. According to Art. 1354, even if the cause is not
stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the
contrary.201 This is true even where the contract falls within the purview of the Statute of Frauds.202 If
instead of an absolute lack of cause or consideration, there is lesion or inadequacy of cause, shall this
not invalidate the contract? Again, this question must be resolved in the negative. This is clear
201Azarraga vs. Rodriguez, 9 Phil. 637; Eliot vs. Montemayor, 9 Phil. 960; Standard Oil Co. vs. Arenas, 19
Phil. 211; Dumaguin vs. Reynolds, 48 Off. Gaz. 3887. 202Bhen, Meyer & Co. vs. Davis, 37 Phil. 431. See
Art. 1403, No. 2, Civil Code. Arts. 1352-1355 475 from the provision of Art. 1355, which states that lesion
or inadequacy of cause, except in cases specifi ed by law, shall not invalidate a contract, unless there has
been fraud, mistake or undue infl uence. This provision (which is new) reiterates the doctrine
enunciated by the Supreme Court in several notable cases.203 However, if it can be established that the
lesion or inadequacy of the cause was due to fraud, mistake or undue infl uence, such fact will render
the contract voidable.204 Despite the fact that lesion or inadequacy of cause, in itself, can not render
the contract inexistent or void under Art. 1355 or voidable under Art. 1330, the party who has suffered
the lesion or damage is not left without a remedy. There is always the possibility that the contract may
be rescissible in accordance with the provisions of Art. 1381 of the Code, in which case he can fi le an
action for rescission. Idem;

Effect of unlawful cause. — According to Art. 1352 of the Code, the cause is unlawful when it is contrary
to law, morals, good customs, public order or public policy. According to the same article, if a contract
has an unlawful cause, it shall not produce any effect whatsoever; in other words it is void from the very
beginning.205 Thus, it has been held that where the cause or consideration for the sale of a certain
property is no other than the accumulated usurious interests which the vendor-debtor has not yet paid,
the sale is void because of the illegality of the cause or consideration.206 It has also been held that a
contract affecting the course of a criminal prosecution is invalid, because such a contract would be
manifestly contrary to public policy and the due administration of justice.207 In the words of the
Supreme Court, “in the interest of the public it is of the utmost importance that criminals should be
prosecuted and that all criminal proceedings should be instituted and maintained in the form and
manner prescribed by law. To permit an offender to 203Asky vs. Cosalan, 46 Phil. 179; Gabriel vs. Mateo,
71 Phil. 497; Garcia vs. Manas, 45 Off. Gaz. 1815. 204See Arts. 1330, et seq., Civil Code; see also Alsua-
Betts vs. Court of Appeals, 92 SCRA 332, 368. 205See Art. 1409, No. 1, Civil Code. 206Mulet vs. People of
the Phil., 73 Phil. 63. But see Briones vs. Cammayo, 41 SCRA, 404; see also comments under Art. 1420.
207Arroyo vs. Berwin, 36 Phil. 386; Velez vs. Ramas, 40 Phil. 787; Navarro vs. Yuan, CA, 40 Off. Gaz.
1675; Reyes vs. Gonzales, 45 Off. Gaz. 381; Monteney vs. Gomez, 104 Phil. 1059. ESSENTIAL REQUISITES
OF CONTRACTS Arts. 1352-1355 Cause of Contracts 476 CONTRACTS escape the penalties prescribed by
law by the purchase of immunity from private individuals would result in a manifest perversion of
justice.’’208 This doctrine, which has been reiterated several times in the past, is very aptly illustrated in
the case of Velez vs. Ramas.209 The facts of this case are as follows: C, wife of A and daughter of B,
while employed in a pawnshop owned by X, embezzled the amount of more than P2,000. In order to
prevent her criminal prosecution, A and B signed a document obligating themselves jointly and severally
to pay to X the amount embezzled including interest. Because of their failure to comply with their
promise, the latter fi led this action against them. The Supreme Court, however, ruled: “We are of the
opinion that the trial court was correct in the conclusion that an action cannot be maintained upon this
contract. In our opinion, the consideration for this agreement is clearly illicit, which fact is apparent on
the face of the contract, and the case is accordingly governed by Art. 1275 (now Art. 1352) of the Civil
Code. “There has been no period since contract law reached the state of consciousness, when the
maxim ex turpi causa non oritur actio was not recognized. A contract based upon an unlawful object is
and always has been void ab initio by the common law, by the civil law, moral law, and all laws
whatsoever. It is immaterial whether the illegal character of the contract is revealed in the matter of the
consideration, in the promise as expressed in the agreement or in the purpose which the agreement,
though legal in expression, is intended to accomplish. If the illegality lurks in any element, or even
subsists exclusively in the purpose of the parties, it is fatal to the validity of the contract. “By the
universal consensus of judicial opinion in all ages it has been considered contrary to public policy to
allow parties to make agreements designed to prevent or stifl e prosecutions for crime. It is self-evident
that the law cannot sanction an engagement which is subversive of human society. The machinery for
the administration of justice cannot be used to promote an unlawful purpose.’’ 208Arroyo vs. Berwin, 36
Phil. 386. 20940 Phil. 787. Arts. 1352-1355 477 However, the above case should be distinguished from
the following case: Mactal vs. Melegrito 111 Phil. 363 Plaintiff gave to defendant P1,770 to be used in
the purchase of palay, with the obligation to return said amount within 10 days, if not spent for said
purpose. The latter never bought palay nor returned said amount. As a result, the former accused him of
estafa. When the case was about to be heard, a common friend, acting upon defendant’s request,
prevailed upon plaintiff to move for the dismissal of the case and be contented with a promissory note
to be executed by the defendant. The note was executed and, accordingly, the criminal case was
dismissed. Defendant, however, was unable to comply with his promise despite repeated demands.
Subsequently, plaintiff brought this action against him for the recovery of the P1,770. Defendant now
contends that the promissory note is void because the consideration thereof is the dismissal of the
estafa case which is certainly contrary to public policy. Held: This contention is untenable. It is admitted
that defendant had received the P1,770 from plaintiff to be used for the purchase of palay. The cause or
consideration, therefore, for the promise was the pre-existing debt of said defendant, not the dismissal
of the estafa case, which merely furnished the occasion for the execution of the promissory note. It
must also be noted that in applying the provision of Art. 1352 regarding the effect of an unlawful cause,
it is always necessary to consider the provisions of Arts. 1411 and 1412 of the Code. It must be observed
that these provisions presuppose the existence of an illicit or illegal cause which is determinative of the
nullity of the contract. Accordingly, they cannot be applied to simulated or fi ctitious transfers of
property, where the motive of the grantor may be either to defraud his creditors or to avert the possible
attachment of the property. As stated in a previous section, the cause of the contract should not be
confused with the motive of the contracting parties.210 However, when the motive of one of the
contracting parties predetermines the purpose of the contract and such motive 210Gonzales vs.
Trinidad, 67 Phil. 862; Navarro vs. Diego, CA, 40 Off. Gaz. 2106. ESSENTIAL REQUISITES OF CONTRACTS
Arts. 1352-1355 Cause of Contracts 478 CONTRACTS or purpose is illegal or immoral, it is clear that such
illegal or illicit motive or purpose becomes the illegal causa, thus rendering the contract void from the
beginning.211 Idem;

Effect of false cause. — According to 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. Thus, where the deed of sale expressly states that the purchase price has been paid when in fact
it has never been paid, it is evident that the contract of sale is invalid in accordance with the general rule
announced in Art. 1353 and confi rmed by Art. 1409, No. 2, which declares as inexistent those contracts
which are absolutely simulated or fi ctitious. It must be observed, however, that the simulation of a
contract may be either absolute or relative.212 The fi rst is inexistent from the very beginning, while the
second binds the parties to their true agreement, provided that it does not prejudice third persons and
is not contrary to law, morals, good customs, public order or public policy.213 It is, therefore, clear that
if a contract is simulated, it does not necessarily follow that it is inexistent or void, provided, of course,
that it can be established that it is, in reality, founded upon another cause which is true and lawful.
211Liguez vs. Court of Appeals, 102 Phil. 577; Rodriguez vs. Rodriguez, 20 SCRA 908; Philippine Banking
Corp. vs. Lui She, 21 SCRA 52. 212Art. 1345, Civil Code. 213Art. 1346, Civil Code. Arts. 1352-1355 479
CHAPTER 3 FORMS 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 right of the parties stated in the following articles cannot be exercised.1 Form of Contracts;

General Rule. — According to the above article, whatever, may be the form in which a contract may
have been entered into, the general rule is that it shall be obligatory, provided all of the essential
requisites for its validity are present. We have, therefore, retained the “spiritual system” of the Spanish
Code by virtue of which the law looks more at the spirit rather than at the form of contracts. Hence,
under our legal system, the form in which a contract is executed has no effect, as a general rule, upon its
obligatory force, provided all of the essential requisites for its validity are present. Thus, it has been held
that contracts of partnership,2 of agency,3 and of lease of services,4 although executed verbally, are
obligatory as far as the contracting parties are concerned. It has been also held that a verbal
extrajudicial partition of property is valid and binding among the parties thereto.5 In such a case, 1 Art.
1278, Spanish Civil Code, in modifi ed form. 2 Fernandez vs. De la Rosa, 1 Phil. 671; Thunga Chiu vs. Que
Bentec, 2 Phil. 561. 3 Gutierrez Hnos. vs. Orense, 28 Phil. 571; Del Castillo vs. Robinson, CA, 44 Off. Gaz.
4981. 4 Arroyo vs. Azur, 76 Phil. 493. 5 Duran vs. Cecilio, CA, 43 Off. Gaz. 2237; Hernandez vs. Andal, 44
Off. Gaz. 2672. 480 CONTRACTS however, the right of a partitioner or of his successor in interest is
merely a jus ad rem (personal), not a jus in re (real), if the partition involves immovable property; in
other words, his right over the land which has been alloted to him or to his predecessor in interest is
personal, and, as a consequence, is enforceable only against the other partitioners, provided that no
innocent purchasers for value are prejudiced.6 Idem;

Exceptions. — It must be observed, however, that when Art. 1356 speaks of contracts as being
obligatory regardless of the form in which they may have been entered into, it does not include those
contracts for which the law prescribes a certain form either for validity or for enforceability. It is,
therefore, evident that there are two exceptions to the general rule. These exceptions are: (1) when the
law requires that the contract must be in a certain form in order to be valid; and (2) when the law
requires that the contract must be in a certain form in order to be enforceable. Commenting on these
exceptions, the Code Commission declared: “The project seeks to combine the spiritual system of the
Spanish Code and the principles of Anglo-American law as manifested in the Statute of Frauds.
“Examples when form is essential to validity are donations of an immovable (Art. 749) and of a movable
worth more than P5,000 (Art. 748). Instances when a contract is unenforceable, unless it be in a certain
form, are those embodied in the Statute of Frauds as formulated in Article 1403 of the project. “These
exceptions are calculated to avoid litigation. Oral contracts frequently lead to fraud in the fulfi llment of
obligations, or to false testimony. So long as the possibility of dishonesty exists in contractual relations,
the spiritual system cannot be adopted in an unqualifi ed manner.’’7 Idem; id. —

Formalities for validity. — There are certain contracts for which the law prescribes certain forms for
their validity. These contracts maybe classifi ed as follows: fi rst, those 6 Ibid. 7 Report of the Code
Commission, pp. 137-138. Art. 1356 481 which must appear in writing; second, those which must appear
in a public document; and third, those which must be registered. Contracts which must appear in writing
are as follows: (1) Donations of personal property whose value exceeds fi ve thousand pesos. According
to Art. 748 of the Code, the donation and the acceptance shall be made in writing; otherwise, it shall be
void. (2) Sale of a piece of land or any interest therein through an agent. According to Art. 1874 of the
Code, the authority of the latter shall be in writing; otherwise, the sale shall be void. (3) Agreements
regarding payment of interest in contracts of loan. According to Art. 1956 of the Code, no interest shall
be due unless it has been expressly stipulated in writing. The validity of the contract of loan, however, is
not affected. (4) Antichresis. According to Art. 2134 of the Code, in contracts of antichresis, the amount
of the principal and of the interest shall be specifi ed in writing; otherwise, the contract shall be void.
Contracts which must appear in a public document are as follows: (1) Donations of immovable property.
According to Art. 749 of the Code, the donation must be made in a public document. The acceptance, on
the other hand, may be made in the same deed of donation or in a separate public document. If the
acceptance is made in a separate public document, the donor shall be notifi ed thereof in an authentic
form, and this step shall be noted in both instruments. Noncompliance with any of these formalities
shall render the donation void. (2) Partnerships where immovable property or real rights are contributed
to the common fund. According to Arts. 1771 and 1773 of the Code, in a contract of partnership where
immovable property or real rights are contributed to the common fund, it is necessary that the contract
must appear in a public instrument and that there must be an inventory of the immovable property or
real rights, signed by the partners, and attached to the public instrument; otherwise, the contract is
void. FORMS OF CONTRACTS Art. 1356 482 CONTRACTS Contracts which must be registered are as
follows: (1) Chattel mortgages. According to Art. 2140 of the Code, by a chattel mortgage, personal
property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation.
If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a
pledge and not a chattel mortgage. (2) Sales or transfers of large cattle. According to the Cattle
Registration Act, no sale or transfer of large cattle shall be valid unless it is duly registered and a certifi
cate of transfer is secured.8 Idem; id. —

Formalities for enforceability. — There are also certain contracts which are unenforceable by action,
unless they are in writing and properly subscribed, or unless they are evidenced by some note or
memorandum, which must also be in writing and properly subscribed. These contracts are governed by
the Statute of Frauds.9

Form of Contracts Required by Law. — It must be noted that it is not only in the two exceptional cases
mentioned in the preceding sections where the law prescribes a certain form in the execution of
contracts. Art. 1358 of the Code enumerates certain kinds of contracts which must appear either in a
public or in a private document. The purpose of the requirement, however, is not to validate or to
enforce the contract, but to insure its effi cacy; in other words, the form required is neither for validity
nor enforceability but for the convenience of the contracting parties. Hence, the forms required by law
for the execution of certain contracts may be divided into: (1) those which are necessary for the
convenience of the contracting parties or for the effi cacy of the contract; (2) those which are necessary
for the validity of the contract; and (3) those which are necessary for the enforceability of the contract.
The fi rst is governed by Arts. 1356 to 1358 of the Code, the second by scattered provisions of the Code
and by special laws, and the third by the Statute of Frauds. 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 8 Sec. 22, Act No. 1147; Art. 1581; Civil Code. 9 Arts. 1403, et seq., Civil Code. Art.
1357 483 each other to observe that form, once the contract has been perfected. This right may be
exercised simultaneously with the action upon the contract.10 Art. 1358. The following must appear in a
public document: (1) Acts and contracts which have for their object the creation, transmission, modifi
cation 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 1405.11

Formalities for Effi cacy. — Although, as a general rule, contracts shall be obligatory in whatever form
they may have been entered into, yet there are certain contracts falling within the purview or scope of
this rule which, by reason of their importance, should be executed in accordance with certain formalities
in order to insure their effi cacy and to protect the interests of the contracting parties as well as that of
third persons. The Civil Code, recognizing this necessity, enumerates in Art. 1358 the different classes of
contracts which must appear either in a public or in a private document, and grants in Art. 1357 a
coercive power to the contracting parties by 10Art. 1279, Spanish Civil Code, in modifi ed form. 11Art.
1280, Spanish Civil Code, in modifi ed form. FORMS OF CONTRACTS Art. 1358 484 CONTRACTS which
they can reciprocally compel the observance of the required form.12 The following principles are clearly
deducible from an examination of the cases decided by the Supreme Court in which these provisions
were applied: (1) Arts. 1357 and 1358 do not require the execution of the contract either in a public or
in a private document in order to validate or enforce it but only to insure its effi cacy, so that after its
existence has been admitted, the party bound may be compelled to execute the necessary document.13
(2) Even where the contract has not been reduced to the required form, it is still valid and binding as far
as the contracting parties are concerned.14 Consequently, both articles presuppose the existence of a
contract which is valid and enforceable.15 (3) From the moment one of the contracting parties invokes
the provisions of Arts. 1357 and 1358 by means of a proper action, the effect is to place the existence of
the contract in issue, which must be resolved by the ordinary rules of evidence.16 (4) Art. 1357 does not
require that the action to compel the execution of the necessary document must precede the action
upon the contract.17 As a matter of fact, both actions may be exercised simultaneously.18 (5) However,
although the provisions of Art. 1357, in connection with those of Art. 1358, do not operate against the
validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfi
llment thereof, yet from the moment when any of the contracting parties invokes said provisions, it is
evident that un der them the execution of the required document must precede the determination of
the other obligations derived from the contract.19 Dauden-Hernaez vs. De los Angeles 27 SCRA 1276
Marlene Dauden, a movie actress, fi led a complaint against the Hollywood Far East Productions, Inc.
and its President and General Manager, Ramon Valenzuela, to recover P14,700 representing the balance
of her compensation as leading actress in two motion pictures produced by the defendant company.
Upon motion of defendants, the lower court dismissed the complaint because “the claim of plaintiff was
not evidenced by any written document, either public or private’’ in violation of Art. 1358 of the New
Civil Code. As a last recourse, plaintiff appealed to the Supreme Court on the ground that the court
below had abused its discretion. Held: We hold that there was abuse, since the ruling herein contested
betrays a basic and lamentable misunderstanding of the role of the written form in contracts, as
ordained in the present Civil Code. In the matter of formalities, the contractual system of our Civil Code
still follows that of the Spanish Civil Code of 1889 and of the “Ordenamiento de Alcala” of upholding the
spirit and intent of the parties over formalities; hence, in general, contracts are valid and binding from
their perfection regardless of form, whether they be oral or written. This is plain from Articles 1315 and
1356 of the present Civil Code. To this general rule, the Code admits two exceptions, to wit: (1)
Contracts for which the law itself requires that they be in some particular form in order to make them
valid and enforceable (the so called solemn contracts). Examples of these are the contracts or
agreements contemplated in Arts. 748, 749, 1744, 1773, 1874, 1956, and 2134 of the present Civil Code.
(2) Contracts that the law requires to be proved by some writing (memorandum) of its terms, as in those
covered by the Statute of Frauds, now Art. 1403(2) of the Civil Code. Their existence not being probable
by mere oral testimony (unless wholly or partly executed), these contracts are exceptional in requiring a
writing embodying the terms thereof for their enforceability by action in court. 19Manalo vs. De Mesa,
25 Phil. 495. FORMS OF CONTRACTS Art. 1358 486 CONTRACTS The contract sued upon by petitioner
herein does not come under either exception. It is true that it appears included in the last clause of Art.
1358, but it nowhere provides that the absence of written form in this case will make the agreement
invalid or unenforceable. On the contrary, Art. 1357 clearly indicates that contracts covered by Art. 1358
are binding and enforceable by action despite the absence of writing. Wherefore, the order dismissing
the complaint is set aside, and the case is ordered remanded to the court of origin for further
proceedings not at variance with this decision.

Problem — Spouses Robert and Yollie wanted to sell their house. They found a prospective buyer, Nina.
Yollie negotiated with Nina for the sale of the property. They agreed on a fair price of P2 Million. Nina
sent Yollie a letter confi rming her intention to buy the property. Later, another couple, Marius and Ellen
, offered a similar house at a lower price of P1.5 Million. But Nina insisted on buying the house of Robert
and Yollie for sentimental reasons. Nina prepared a deed of sale to be signed by the couple and a
manager’s check for P2 Million. After receiving the P2 Million, Robert signed the deed of sale. However,
Yollie was not able to sign it because she was saying she changed her mind. Yollie fi led suit for nullifi
cation of the deed of sale and for moral and exemplary damages against Nina. Does Nina have any cause
of action against Robert and Yollie? (2006 Bar Problem) Answer — Considering that the contract has
already been perfected and taken out of the operation of the statute of frauds, Nina can compel Robert
and Yollie to observe the form required by law in order for the property to be registered in the name of
Nina which can be fi led together with the action for the recovery of house.(Art. 1357, NCC). In the
alternative, she can recover the amount of P2 Million that she paid. Otherwise, it would result in
solution indebiti or unjust enrichment. Art. 1358 487 CHAPTER 4 REFORMATION OF INSTRUMENTS 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.1

Doctrine of Reformation of Instruments. — When the true intention of the parties to a perfected and
valid contract are not expressed in the instrument purporting to embody their agreement by reason of
mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the
instrument so that such true intention may be expressed.2 In order that there can be a reformation of
the instrument, the following requisites must, therefore, concur: (1) There must be a meeting of the
minds of the contracting parties; (2) Their true intention is not expressed in the instrument; and 1 New
provision. 2 Art. 1359, par. 1, Civil Code. 488 CONTRACTS (3) Such failure to express their true intention
is due to mistake, fraud, inequitable conduct or accident.3 Thus, where the complaint fails to allege that
the instrument to be reformed does not express the real agreement or intention of the parties, it is clear
that no cause of action is stated therein since such allegation is essential considering the fact that the
object of an action for reformation is to make the instrument conform to the real agreement or
intention of the parties.4 Idem;

Rationale of doctrine. — The doctrine of reformation of instruments is based on justice and equity.
According to the Code Commission: “Equity orders the reformation of an instrument in order that the
true intention of the contracting parties may be expressed. “The courts do not attempt to make another
contract for the parties. The rationale of the doctrine is that it would be unjust and inequitable to allow
the enforcement of a written instrument which does not refl ect or disclose the real meeting of the
minds of the parties. The rigor of the legalistic rule that a written instrument should be the fi nal and infl
exible criterion and measure of the rights and obligations of the contracting parties is thus tempered, to
forestall the effects of mistake, fraud, inequitable conduct or accident.’’5 Idem;

Distinguished from annulment of contracts. — The most fundamental distinction between an action for
the reformation of an instrument and an action for the annulment of a contract is that while the fi rst
presupposes a perfectly valid contract in which there has already been a meeting of the minds of the
contracting parties, the second is based on a defective contract in which there has been no meeting of
the minds because the consent of one or both of the contracting parties has been vitiated.
Consequently, if mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds
of the parties, the proper remedy is not 3 Ibid. 4 Garcia vs. Bisaya, 97 Phil. 609. To the same effect:
Ongsiaco vs. Ongsiaco, 101 Phil. 1196. 5 Report of the Code Commission, p. 56. Art. 1359 489
reformation of the instrument but annulment of the contract.6 Thus, where the vendee has been led to
enter into a contract of sale through fraud or mispresentation on the part of the vendor or in the
mistaken belief, that, as stated in the deed, the property he was buying was unregistered land, it is
evident that the proper remedy is not reformation of the deed of sale but annulment of the contract.7
Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted
insofar as they are not in confl ict with the provisions of this Code.8 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.9 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.10 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.11 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.12 Art. 1365. If two parties agree upon the mortgage or pledge or real or personal
property, but the instrument 6 Art. 1359, par. 2, Civil Code. 7 Garcia vs. Bisaya, 97 Phil. 609. 8 New
provision. 9 New provision. For illustrative cases see Philippine Sugar Estate Development Co. vs. Gov’t.
of P.I., 247 U.S. 385; Bank of the P.I. vs. Fidelity and Surety Co., 51 Phil. 57; Jardenil vs. Solas, 73 Phil.
626; De la Cruz vs. Del Pilar, 95 Phil. 444. 10New provision. See Ong Chua vs. Carr, 53 Phil. 975. 11New
provision. 12New provision. REFORMATION OF INSTRUMENTS Arts. 1360-1365 490 CONTRACTS states
that the property is sold absolutely or with a right of repurchase, reformation of the instrument is
proper.13 Art. 1366. There shall be no reformation in the following cases: (1) Simple donations inter
vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void.14 Art. 1367.
When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask
for its reformation.15 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. Art. 1369. The procedure for the reformation of instruments shall be governed by
rules of court to be promulgated by the Supreme Court.16

Contracts of Adhesion. — A contract of adhesion is defi ned as one in which one of the parties imposes a
ready made form of contract, which the other party may accept or reject, but which the latter cannot
modify. (PCIB vs. CA, 255 SCRA 299.) The Supreme Court ruled in the case of Ayala Corporation vs. Ray
Burton Development Corp., August 7, 1998, 294 SCRA 48, that a contract of adhesion in itself is not an
invalid agreement. This type of contract is as binding as a mutually executed transaction. The Supreme
Court has emphatically ruled in the case of Ong Yiu vs. Court of Appeals, et al., that “contracts of
adhesion wherein one party imposes a ready-made form of contract on the other x x x are contracts not
entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he
adheres he gives 13New provision. See Aquino vs. Deala, 63 Phil. 582; Marquez vs. Valencia, 77 Phil.
782. 14New provision. 15New provision. 16New provision. Arts. 1366-1369 491 his consent.’’ This ruling
was reiterated in Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., et al., wherein the
Supreme Court further declared through Justice Florenz Regalado that “not even an allegation of
ignorance of a party excuses noncompliance with the contractual stipulations since the responsibility for
ensuring full comprehension of the provisions of a contract of carriage (a contract of adhesion) devolves
not on the carrier but on the owner, shipper, or consignee as the case may be.’’ The Supreme Court
continued to state in the above-cited case that contracts of adhesion, however, stand out from other
contracts (which are bilaterally drafted by the parties) in that the former is accorded inordinate vigilance
and scrutiny by the courts in order to shield the unwary from deceptive schemes contained in ready-
made covenants. As stated by the Court, speaking through Justice J.B.L. Reyes, in Qua Chee Gan vs. Law
Union and Rock Insurance Co., Ltd.: “The courts cannot ignore that nowadays, monopolies, cartels and
concentration of capital, endowed with overwhelming economic power, manage to impose upon parties
dealing with them cunningly prepared ‘agreements’ that the weaker party may not change one with, his
participation in the ‘agreement’ being reduced to the alternative to ‘take it or leave it’ labeled since
Raymond Saleilles ‘contracts by adherence’ (contracts d’ adhesion) in contrast to those entered into by
parties bargaining on an equal footing. Such contracts (of which policies of insurance and international
bill of lading are prime examples) obviously call for greater strictness and vigilance on the part of the
courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent
their becoming traps for the unwary.’’ The stringent treatment towards contracts of adhesion which the
courts are enjoined to observe is in pursuance of the mandate in Article 24 of the New Civil Code that
“(i)n all contractual, property or other relations, when one of the parties is at a disadvantage on account
of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, courts
must be vigilant for his protection.’’ (Ayala Corporation vs. Ray Burton Development Corp., 294 SCRA
48.) The Supreme Court further ruled in the case of Ayala Corporation vs. Ray Burton Development
Corp. (RBDC), that the validity and/or enforceability of a contract of adhesion will have to be deter-
REFORMATION OF INSTRUMENTS Arts. 1366-1369 492 CONTRACTS mined by the peculiar circumstances
obtaining in each case and the situation of the parties concerned. In the instant case, the stipulations in
the Deed Restrictions and Special Conditions are plain and unambiguous which leave no room for
interpretation. Moreover, there was even no attempt on the part of RBDC to prove that, in the
execution of the Deed of Sale on the subject lot, it was a weaker or a disadvantaged party on account of
its moral dependence, ignorance, mental weakness or other handicap. On the contrary, as testifi ed to
by Edwin Ngo, President of RBDC, the latter is a realty fi rm and has been engaged in realty business, and
that he, a businessman for 30 years, represented RBDC in the negotiations and in the eventual purchase
of the subject lot from PALMCREST. Edwin Ngo’s testimony proves that RBDC was not an unwary party
in the subject transaction. Instead, Edwin Ngo has portrayed RBDC as a knowledgeable realty fi rm
experienced in real estate business.

Problem — (a) What is a contract of adhesion? (b) Are contracts of adhesion void or prohibited? Answer
— In the case of Development Bank of the Philippines vs. Perez, G.R. No. 14854, Nov. 11, 2004, the
Court held that: (a) A contract of adhesion is so-called because its terms are prepared by only one party
while the other party merely affi xes his signature signifying his adhesion thereto. (b) A contract of
adhesion is just as binding as ordinary contracts. It is true that we have, on occasion, struck down such
contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party
and is reduced to the. Nevertheless, contracts of adhesion are not invalid per se; they are not entirely
prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he
gives his consent. In the case of Sps. Francisco and Ruby Reyes vs. BPI Family Savings Bank, Inc., et al., G.
R. Nos. 149840-41, March 31,2006, where the petitioner spouses undertook to secure the P15M loan of
Transbuilders Resources & Development Corporation to BPI-FSB “and other credit accomodations of
whatever nature obtained by the Borrower/Mortgagor” under the Real Estate Mortgage they executed
in favor of BPI-FSB, the Supreme Court held that while the stipulation proved to be onerous to the
petitioners, neither the law nor the courts will Arts. 1366-1369 493 extricate a party from an unwise or
undesirable contract entered into with all the required formalities and with full awareness of its
consequences. Petitioners voluntarily executed the REM on their property infavor of BPI-FSB to secure
the loan. They cannot now be allowed to repudiate their obligation to the bank after Transbuilder’s
default. While petitioner’s liability was written in fi ne print and in a contract written by BPI-FSB, it has
been the consistent holding of the Court that contracts of adhesion footing are not invalid per se. On
numerous occasions, the Supreme Court has upheld the binding effects of such contracts.

Contracts of Credit Cards. — In the case of Spouses Ermitano vs. Court of Appeals, April 21, 1999, G.R.
No. 127246, the Supreme Court ruled that the contract between the parties is indeed a contract of
adhesion, so-called because its terms are prepared by only one party while the other party merely affi
xes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are as
binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations
entirely. This Court will not hesitate to rule out blind adherence to such contracts if they prove to be too
one-sided under the attendant facts and circumstances. Because of the peculiar nature of contracts of
adhesion, the validity thereof must be determined in the light of the circumstances under which the
stipulation is intended to apply. For the cardholder to be absolved from liability for unauthorized
purchases made through his lost or stolen card, two steps must be followed: (1) the cardholder must
give written notice to the credit card company, and (2) the credit card company must notify its member
establishments of such loss or theft, which, naturally, it may only do upon receipt of a notice from the
cardholder. Both the cardholder and the credit card company, then, have a responsibility to perform, in
order to free the cardholder from any liability arising from the use of a lost or stolen card. In this case,
the cardholder has complied with what was required of her under the contract with credit card
company. Having thus performed her part of the notifi cation procedure, it was reasonable for the
cardholder to expect that the credit card company would perform its part of the procedure, which is to
forthwith notify its member-establishments. Prompt notice by the cardholder to the credit card
company of the loss or theft of her card should be enough to relieve the former of REFORMATION OF
INSTRUMENTS Arts. 1366-1369 494 CONTRACTS any liability occasioned by the unauthorized use of her
lost or stolen card. The questioned stipulation in this case, which still requires the cardholder to wait
until the credit card company has notifi ed all its member-establishments, puts the cardholder at the
mercy of the credit card company which may delay indefi nitely the notifi cation of its members to
minimize if not to eliminate the possibility of incurring any loss from unauthorized purchases. Or, as in
this case, the credit card company may for some reason fail to promptly notify its members through
absolutely no fault of the cardholder. To require the cardholder to still pay for unauthorized purchases
after he has given prompt notice of the loss or theft of her card to the credit card company would simply
be unfair and unjust. The Court cannot give its assent to such a stipulation that could clearly run against
public policy. In the case of Emmanuel Aznar vs. Citibank, N.A. (Philippines), G. R. No.164273, March 28,
2007, the Supreme Court held that the terms and conditions of Citibank’s Mastercard constitute a
contract of adhesion. It is settled that the contracts between cardholders and the credit card companies
are contracts of adhesion, so-called, because their terms are prepared by only one party while the other
merely affi xes his signature signifying his adhesion thereto. In this case, paragraph 7 of the terms and
conditions states that Citibank is not responsible if the card is not honoured by any merchant affi liate
for any reason. While it is true that Citibank may have no control of all the actions of its merchant affi
liates, and should not be held liable therefor, it is incorrect, however, to give it blanket freedom from
liability if its card is dishonoured by any merchant affi liate for any reason. Such phrase renders the
statement vague and as the said terms and conditions constitute a contract of adhesion, any ambiguity
in its provisions must be construed against the party who prepared the contract, in this case Citibank.
Citibank also invokes paragraph 15 of its terms and conditions which limits its liability to P1,000.00 or
the actual damage proven, whichever is lesser. Again, such stipulation cannot be considered as valid for
being unconscionable as it precludes payment of a larger amount even though damage may be clearly
proven. The Supreme Court is not precluded from ruling out blind adherence to the terms of a contract
if the attendant facts and circumstances show that they should be ignored for being obviously too one-
sided. Arts. 1366-1369 495 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.1 Art. 1371. In order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered.2

Primacy of Intention of Parties. — The cardinal rule in the interpretation of contracts is to the effect that
the intention of the contracting parties should always prevail because their will has the force of law
between them. Art. 1370 of the Civil Code consecrates this rule and provides, further, that if the terms
of contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of
its stipulations shall be followed; and if the words appear to be contrary to the evident intention of the
contracting parties, the intention shall prevail.3 As a rule, in the construction and interpretation of a
document the intention of the parties must be sought. This is the basic rule in the interpretation of
contracts because all other rules are but ancilliary to the ascertainment of the meaning intended by the
parties. And once this intention has been 1 Art. 1281, Spanish Civil Code. 2 Art. 1282, Spanish Civil Code.
3 Kasilag vs. Rodriguez, 69 Phil. 317. To the same effect: Manila Engineering Co. vs. Cranston, 45 Phil.
842; Roman vs. Asia Banking Corp., 46 Phil. 705; Valdez vs. Sibal, 46 Phil. 930; National Bank vs. Paez, 54
Phil. 393; Abella vs. Gonzaga, 56 Phil. 132; Acosta vs. Llacuna, 59 Phil. 540; H.E. Heacock Co. vs. Buntal
Manufacturing Co., 66 Phil. 245; Jose vs. Veloso, 67 Phil. 191; Marquez vs. Valencia, 44 Off. Gaz. 895. 496
CONTRACTS ascertained it becomes an integral part of the contract as though it had been originally
expressed therein in unequivocal terms.4 These principles were reiterated by the SC in the case of
Manila Banking Corp. vs. Teodoro, Jr. (169 SCRA 95), where it was held: The character of the
transactions between the parties is not, however, determined by the language used in the document
but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured
Transaction, Section 50) said: “The character of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the form of the transfer was. If it was
intended to secure the payment of money, it must be construed as a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character might still be
qualifi ed and explained by a contemporaneous writing declaring it to have been a deposit of the
property as collateral security. It has been said that a transfer of property by the debtor to a creditor,
even if suffi cient on its face to make an absolute conveyance, should be treated as a pledge if the debt
continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms
ordinarily importing conveyance, of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifi
edly indicate a transfer of absolute ownership, in the absence of clear and ambiguous language or other
circumstances excluding an intent to pledge. (Lopez vs. Court of Appeals, 114 SCRA 671 [1982].) Further,
in the case of Philippine National Construction Corporation vs. The Hon. CA, et al., G.R. No. 159417,
Jan.25,2007, the Court held that the contract between parties is the formal expression of the parties’
rights, duties and obligations. It is the best evidence of the intention of the parties. Thus, when the
terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed
upon and there can be , between the parties and their successors in interest, no evidence of such terms
other than the contents of the written agreement. Furthermore, it is a rule that if the terms of a contract
are clear and leave no doubt as to the intention of the contracting parties, the literal meaning 4 Nielsen
& Co. vs. Lepanto Consolidated Mining Co., 18 SCRA 1040. Arts. 1370-1371 497 of its stipulation shall
control. The contract is the law between the parties and when the words of the contract are clear and
can easily be understood, there is no room for contruction (Olivares and Robles vs. Sarmiento, G.R.
158384, June 12, 2008). Idem;
How to judge intention. — In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. This is, of course, without
prejudice to the consideration of other factors as fi xed or determined by the other rules of
interpretation mentioned in the Civil Code and in the Rules of Courts. Hence, as a general rule,
documents are interpreted in the precise terms in which they are expressed, but the courts, in the
exercise of their sound discretion, are called upon to admit direct and simultaneous circumstantial
evidence necessary for their interpretation with the purpose of making the true intention of the parties
prevail.5 One pattern is to ascertain the contemporaneous and subsequent acts of the contracting
parties in relation to the transaction under consideration. Thus, where there is evidence regarding the
intention of the parties to extend the contract equivalent to the period of suspension caused by the war
and the parties understood the suspension to mean extension, it was held that the suspension of the
agreement means the extension of the same for a period equivalent to the suspension.6

Problem — What is the cardinal rule applicable in a case where the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties? Answer — It is a cardinal rule that if the
terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulation shall control. In the case of Philippine National Construction Corporation vs.
The Hon. CA, et al., G.R. No. 159417, Jan.25, 2007, the Court held that the contract between parties is
the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the
intention of the parties. Thus, when 5 Aves vs. Orillenedo, 70 Phil. 262, citing Arts. 1370 and 1371 of the
Civil Code. To the same effect: Atlantic Gulf Co. vs. Insular Government, 10 Phil. 166; Figueras vs. Rocha,
13 Phil. 504; Tanido vs. Jumaoan, 17 Phil. 335; Soler vs. Chesley, 43 Phil. 529; Kidney vs. Carter, 43 Phil.
953; Rivero vs. Rabe, 54 Phil. 982; Gonzales vs. La Previsora, 74 Phil. 165. 6 Nielsen & Co. vs. Lepanto
Consolidated Mining Co., 18 SCRA 1040. INTERPRETATION OF CONTRACTS Arts. 1370-1371 498
CONTRACTS the terms of an agreement have been reduced to writing, it is considered as containing all
the terms agreed upon and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement. It is further required that the
various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that
which may result from all of them taken jointly (Bobie Rose V. Frias vs. Flora San Diego-Sison, G.R.
No.155223, April 3, 2007). Art. 1372. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct and cases that are different from those upon which
the parties intended to agree.7 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.8
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.9 Art. 1375. Words which may have
different signifi cations shall be understood in that which is most in keeping with the nature and object
of the contract.10 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 fi ll the omission of stipulations which are
ordinarily established.11 Art. 1377. The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.12 7 Art. 1283, Spanish Civil Code. 8 Art. 1284,
Spanish Civil Code. 9 Art. 1285, Spanish Civil Code. 10Art. 1286, Spanish Civil Code. 11Art. 1287, Spanish
Civil Code. 12Art. 1288, Spanish Civil Code. Arts. 1372-1377 499 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.13
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be
observed in the construction of contracts.14 13Art. 1289, Spanish Civil Code. 14New provision. The
provisions of Rule 123 of the Rules of Court referred to are Secs. 58-67, now Secs. 8-17, Rule 130, New
Rules of Court. INTERPRETATION OF CONTRACTS Arts. 1378-1379 500 CONTRACTS CHAPTER 6
RESCISSIBLE CONTRACTS

Classes of Defective Contracts. — There are four classes of defective contracts under the present Civil
Code. They are: fi rst, rescissible contracts; second, voidable contracts; third, unenforceable contracts;
and fourth, void or inexistent contracts. Explaining the reasons behind this new classifi cation, the Code
Commission declared in its report: “A great deal of confusion has been created by the faulty terminology
used by the Spanish Code as regards defective contracts. There is no suffi cient clarity as to ‘contratos
nulos’ and ‘contratos anulables’ — void and voidable contracts. “In order to put an end to the foregoing
uncertainty and other ambiguities in the Spanish Code, the project in a clear-cut and unequivocal way
classifi es and defi nes the various kinds of defective contracts, and states their consequences. There
are, under the recommended plan, four kinds of such contracts, namely (in the order of defectiveness):
(1) rescissible; (2) voidable; (3) unenforceable; and (4) void or inexistent contracts. “It is believed that
with the explicit provisions of the Project upon the subject of defective contracts, the present nebulous
state of the law will be dispelled. It is neither wise nor just that parties should be left in doubt as to the
degree of effectiveness of their contractual relations. The legal profession is also entitled to know in a
positive and unequivocal manner what contracts are rescissible, voidable, unenforceable, and void. It is
hoped that this clarifi cation of the law on this most far-reaching subject will go far toward forestalling
many controversies and litigations.’’1 1 Report of the Code Commission, pp. 138-140. 501 Idem;

Essential features. — The essential features of the different classes of defective contracts are: 1. As to
defect: (a) In rescissible contracts, there is damage or injury either to one of the contracting parties or to
third persons; (b) In voidable contracts, there is vitiation of consent or legal incapacity of one of the
contracting parties; (c) In unenforceable contracts, the contract is entered into in excess or without any
authority, or does not comply with the Statute of Frauds, or both contracting parties are legally
incapacitated; (d) In void or inexistent contracts, one or some of the essential requisites of a valid
contract are lacking either in fact or in law. 2. As to effect: (a) The fi rst are considered valid and
enforceable until they are rescinded by a competent court; (b) The second are considered valid and
enforceable until they are annulled by a competent court; (c) The third cannot be enforced by a proper
action in court; (d) The fourth do not, as a general rule, produce any legal effect. 3. As to prescriptibility
of action or defense: (a) In the fi rst, the action for rescission may prescribe; (b) In the second, the action
for annulment or the defense of annulability may prescribe; (c) In the third, the corresponding action for
recovery, if there was total or partial performance of the unenforceable contract under No. 1 or No. 3 of
Art. 1403, may prescribe. (d) In the fourth, the action for declaration of nullity or inexistence or the
defense of nullity or inexistence does not prescribed. RESCISSIBLE CONTRACTS 502 CONTRACTS 4. As to
susceptibility of ratifi cation: (a) The fi rst are not susceptible of ratifi cation; (b) The second are
susceptible of ratifi cation; (c) The third are susceptible of ratifi cation; (d) The fourth are not susceptible
of ratifi cation. 5. As to who may assail contracts: (a) The fi rst maybe assailed not only by a contracting
party but even by a third person who is prejudiced or damaged by the contract; (b) The second may be
assailed only by a contracting party; (c) The third may be assailed only by a contracting party; (d) The
fourth may be assailed not only by a contracting party but even by a third person whose interest is
directly affected. 6. As to how contracts may be assailed: (a) The fi rst may be assailed directly only, and
not collaterally; (b) The second may be assailed directly or collaterally; (c) The third may be assailed
directly or collaterally; (d) The fourth may be assailed directly or collaterally. Art. 1380. Contracts validly
agreed upon may be rescinded in the cases established by law.2

Rescissible Contracts in General. — In a rescissible contract, all of the essential requisites of a contract
exist and the contract is valid, but by reason of injury or damage to either of the contracting parties or to
third persons, such as creditors, it may be rescinded.3 A rescissible contract is, therefore, a contract
which is 2 Art. 1290, Spanish Civil Code. 3 Report of the Code Commission, p. 139. Art. 1380 503 valid
because it contains all of the essential requisites prescribed by law, but which is defective because of
injury or damage to either of the contracting parties or to third persons, as a consequence of which it
may be rescinded by means of a proper action for rescission. Before it is rescinded, a rescissible contract
is valid and, therefore, legally effective. The only way by which it can be attacked is by means of a direct
action for rescission based on any of the causes expressly specifi ed by law; hence, it cannot be attacked
collaterally.4 Idem;

Characteristics. — Rescissible contracts, therefore, possess the following characteristics: (1) Their defect
consists in injury or damage either to one of the contracting parties or to third persons. (2) Before
rescission, they are valid and, therefore, legally effective. (3) They can be attacked directly only, and not
collaterally. (4) They can be attacked only either by a contracting party or by a third person who is
injured or defrauded. (5) They are susceptible of convalidation only by prescription, and not by ratifi
cation. Idem;

Concept of rescission. — Rescission is a remedy granted by law to the contracting parties, and even to
third persons, to secure the reparation of damages caused to them by a contract, even if the same
should be valid, by means of the restoration of things to their condition prior to the celebration of the
contract.5 Idem; id. —

Distinguished from resolution. — Rescission of rescissible contracts must not be confused with the
rescission or resolution of reciprocal obligations under Art. 1191 of the Code. Although there are
similarities both with respect to validity and effects, they are distinguished from each other in the
following ways: (1) As to party who may institute action: In rescission the action may be instituted not
only by a party to the contract but even by a third person, while in resolution the action may be
instituted only by a party to the contract. 4 Borja vs. Addison, 44 Phil. 895. 5 8 Manresa, 5th Ed., Bk. 2, p.
545. RESCISSIBLE CONTRACTS Art. 1380 504 CONTRACTS (2) As to causes: In rescission there are several
causes or grounds such as lesion, fraud and others expressly specifi ed by law, while in resolution the
only ground is failure of one of the parties to comply with what is incumbent upon him. (3) As to power
of the courts: In rescission there is no power of the courts to grant an extension of time for performance
of the obligation so long as there is a ground for rescission, while in resolution the law expressly declares
that courts shall have a discretionary power to grant an extension for performance provided that there
is a just cause. (4) As to contracts which may be rescinded or resolved: In rescission any contract,
whether unilateral or reciprocal, may be rescinded, while in resolution only reciprocal contracts may be
resolved. Idem; id. —

Distinguished from rescission by mutual consent. — Neither must rescission be confused with rescission
of a contract by mutual consent of the contracting parties. One must be distinguished from the other —
fi rst, with respect to the causes of rescisssion, second, with respect to the laws applicable, and third,
with respect to the effects. The following case will serve to illustrate these distinctions: Aquino vs.
Tañedo 31 Phil. 517 The records show that plaintiff purchased some lands from the defendant and, as a
consequence, took possession of the same and collected their products. Subsequently, they dissolved
the contract of sale, and, as a result thereof, plaintiff returned the lands, while defendant bound himself
to return the part of the purchase price which plaintiff has paid. The question now is whether or not the
plaintiff is obliged to return to the defendant the products of the lands which he had collected during his
possession. The defendant contends that he is obliged, invoking the provisions of Art. 1295 (now Art.
1385) of the Civil Code. The Supreme Court, however, ruled: “The rescission mentioned in the contract is
not the rescission referred to in Article 1295 (now Art. 1385). Although the plaintiff and the defendant
employed the word rescind, it has not, in the contract executed by them, either the scope or the
meaning of the word rescission to which Article 1295 Art. 1380 505 (now Art. 1385) refers and which
takes place only in the cases mentioned in the preceding Articles, 1291 and 1292 (now Arts. 1381 and
1382). Rescission, in the light of these provisions, is a relief which the law grants, on the premise that
the contract is valid, for the protection of one of the contracting parties and third persons from all injury
and damage that the contract may cause, or to protect some incompatible and preferential right created
by the contract. Article 1295 (now Art. 1385) refers to contracts that are rescissible in accordance with
law in the cases expressly fi xed thereby, but it does not refer to contracts that are rescinded by mutual
consent and for the mutual convenience of the contracting parties. The rescission in question was not
originated by any of the causes specifi ed in Articles 1291 and 1292 (now Arts. 1381 and 1382), nor is it
any relief for the purposes sought by these articles. It is simply another contract for the dissolution of a
previous one, and its effects, in relation to the contract so dissolved, should be determined by the
agreement made by the parties, or by the application of other legal provisions, but not by Article 1295
(now Art. 1385), which is not applicable.’’6 Art. 1381. The following contracts are rescissible: (1) Those
which are entered into by 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 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.7 6 To the same effect: Luneta Motor Co. vs. Richey,
CA, 39 Off. Gaz. 1101. 7 Art. 1291, Spanish Civil Code, in modifi ed form. RESCISSIBLE CONTRACTS Art.
1381 506 CONTRACTS Art. 1382. Payments made in a state insolvency for obligations to whose fulfi
llment the debtor could not be compelled at the time they were effected, are also rescissible.8

Contracts in Behalf of Ward. — The fi rst of the rescissible contracts are those which are entered into by
guardians whenever the wards whom they represent suffer lesion or damage by more than one-fourth
of the value of the things which are the object thereof.9 This is, however, without prejudice to the
provision of Art. 1386 which states that rescission shall not take place with respect to contracts
approved by the courts. It must be noted that under the Rules of Court, a judicial guardian entering into
a contract with respect to the property of his ward must ordinarily secure the approval of a competent
court.10 This is also true in the case of a father or mother considered as a natural guardian of the
property of a child under parental authority where such property is worth more than two thousand
pesos.11 As a matter of fact, if the contract involves the sale or encumbrance of real property, judicial
approval is indispensable.12 Consequently, if a guardian sells, mortgages or otherwise encumbers real
property belonging to his ward without judicial approval, the contract is unenforceable,13 and not
rescissible even if the latter suffers lesion or damage of more than one-fourth of the value of the
property. However, if he enters into a contract falling within the scope of his powers as guardian of the
person and property, or only of the property, of his ward, such as when the contract involves acts of
administration, express judicial approval is not necessary,14 in which case the contract is rescissible if
the latter suffers the lesion or damage mentioned in No. 1 of Art. 1381 of the Code.

Contracts in Behalf of Absentees. — The second of the rescissible contracts are those entered into in
behalf of absentees, if the latter suffer the lesion or damage stated in the preceding 8 Art. 1292, Spanish
Civil Code. 9 Art. 1281, No. 1, Civil Code. 10See Rules 95-96, New Rules of Court. 11Art. 326, Civil Code.
12Sec. 1, Rule 95, New Rules of Court. 13Arts. 1403, No. 1, and 1317, Civil Code. 14Sec. 1, et seq., Rule
96, New Rules of Court. See 2 Moran, 1957 Ed., p. 506. Art. 1382 507 number.15 However, such
contracts are not rescissible if they have been approved by the courts.16 Since the powers and duties of
a legal representative of an absentee are exactly the same as those of a guardian,17 the principles
enunciated in the preceding section are also applicable here. Whether the contract is entered into by a
guardian in behalf of his ward or by a legal representative in behalf of an absentee, before it can be
rescinded on the ground of lesion, it is indispensable that the following requisites must concur: (1) The
contract must have been entered into by a guardian in behalf of his ward or by a legal representative in
behalf of an absentee;18 (2) The ward or absentee must have suffered lesion of more than one-fourth of
the value of the property which is the object of the contract;19 (3) The contract must have been entered
into without judicial approval;20 (4) There must be no other legal means for obtaining reparation for the
lesion;21 (5) The person bringing the action must be able to return whatever he may be obliged to
restore;22 and (6) The object of the contract must not be legally in the possession of a third person who
did not act in bad faith.23 If the object of the contract is legally in the possession of a third person who
did not act in bad faith, the remedy available to the person suffering the lesion is indemnifi cation for
damages and not rescission.24 15Art. 1381, No. 2, Civil Code. 16Art. 1386, Civil Code. 17Art. 382, Civil
Code. 18Art. 1381, Nos. 1 and 2, Civil Code. 19Ibid. 20Art. 1386, Civil Code. 21Art. 1383, Civil Code.
22Art. 1385, par. 1, Civil Code. 23Art. 1385, par. 2, Civil Code. 24Art. 1385, par. 3, Civil Code. RESCISSIBLE
CONTRACTS Art. 1382 508 CONTRACTS

Contracts in Fraud of Creditors. — The third of the rescissible contracts are those undertaken in fraud of
creditors when the latter cannot in any other manner collect the claims due them.25 This complements
Art. 1177 of the Code which states that one of the remedies available to the creditor after he has
exhausted all the property in possession of the debtor is to impugn the acts which the latter may have
done to defraud him. However, before a contract can be rescinded on the ground that it has been
entered into in fraud of creditors, it is indispensable that the following requisites must concur: (1) There
must be a credit existing prior to the celebration of the contract; (2) There must be a fraud, or at least,
the intent to commit fraud, or at least, the intent to commit fraud to the prejudice of the creditor
seeking the rescission; (3) The creditor cannot in any other legal manner collect his credit;26 and (4) The
object of the contract must not be legally in the possession of a third person who did not act in bad
faith.27 If the object of the contract is legally in the possession of a third person who did not act in bad
faith, the remedy available to the creditor is to proceed against the person causing the loss for
damages.28 Accion pauliana — Article 1381 of the Civil Code enumerates the contracts which are
rescissible, and among them are “those contracts undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them.’’ The action to rescind contracts in fraud of
creditors is known as accion pauliana. For this action to prosper, the following requisites must be
present: (1) the plaintiff asking for rescission has a credit prior to the alienation; (2) the debtor has made
a subsequent contract conveying a patrimonial benefi t to a third person; (3) the creditor has no other
legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the 25Art. 1381, No. 3,
Civil Code. 263 Castan, 7th Ed., p. 422. 27Art. 1385, par. 2, Civil Code. 28Art. 1385, par. 3, Civil Code. Art.
1382 509 third person who received the property conveyed, if it is by onerous title, has been an
accomplice in the fraud. The general rule is that rescission requires the existence of creditors at the time
of the alleged fraudulent alienation, and this must be proved as one of the bases of the judicial
pronouncement setting aside the contract. Without any prior existing debt, there can neither be injury
nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to
the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retraoctive effect to the date when the credit
was constituted. (Citations omitted.) (Chief Justice Davide, Jr., First Division, Siguan vs. Lim, G.R. No.
134685, November 19, 1999.)

Contracts Referring to Things Under Litigation. — The fourth of the rescissible contracts are 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.29 The case contemplated in this number
is different from that contemplated in the preceding number. Here the purpose is to secure the possible
effectivity of a claim, while in the preceding number the purpose is to guarantee an existing credit; here
there is a real right involved, while in the preceding number there is a personal right, both of which
deserve the protection of the law. They are, however, similar in the sense that in both cases the person
who can avail of the remedy of rescission is a stranger to the contract.30

Contracts by Insolvent. — Under Art. 1382, payments made in a state of insolvency for obligations to
whose fulfi llment the debtor could not be compelled at the time they were effected, are also
rescissible. In order that the payment can be rescinded, it is indispensable (1) that it must have been
made in a state of insolvency, and (2) that the obligation must have been one which the debtor could
not be compelled to pay at the time such payment was effected. It is, therefore, clear that the basis of
the rescissible character of the transaction is fraud as in the case of Nos. 3 and 4 of Art. 1381. 29Art.
1381, No. 4, Civil Code. 308 Manresa, 5th Ed., Bk. 2, p. 558. RESCISSIBLE CONTRACTS Art. 1382 510
CONTRACTS Insolvency, as it is used in this article, should be understood in its popular or vulgar, not
technical, sense. Hence, it refers to the fi nancial situation of the debtor by virtue of which it is
impossible for him to fulfi ll his obligations.31 A judicial declaration of insolvency is not, therefore,
necessary.32 According to Manresa, the obligations contemplated by this article comprehend not only
those with a term or which are subject to a suspensive condition, but even void and natural obligations
as well as those which are condoned or which have prescribed.33 An interesting question arises with
respect to the payment of an obligation which is subject to a suspensive period. Let us assume that A is
indebted to B for P10,000 and to C for P5,000. Let us say that the obligation in favor of C is subject to a
suspensive period. While in a state of insolvency, A pays his obligation to C before the expiration of the
term or period. Can B rescind the payment? Under Art. 1382, there is no question that the payment is
rescissible, but then this conclusion would be in direct confl ict with the provision of No. 1 of Art 1198 of
the Code under which A can be compelled by C to pay the obligation even before the expiration of the
stipulated term or period since by his insolvency he has already lost his right to the benefi t of such term
or period. According to Manresa, however, the confl ict can easily be resolved by considering the priority
of dates between the two debts. If the obligation with a period became due before the obligation to the
creditor seeking the rescission became due, then the latter cannot rescind the payment even if such
payment was effected before the expiration of the period; but if the obligation with a period became
due after the obligation to the creditor seeking the rescission became due, then the latter can rescind
the payment.34

Other Rescissible Contracts. — Besides those enumerated in Arts. 1381 and 1382, there are also other
contracts which are specially declared by law to be subject to rescission.35 Examples of 31Ibid., p. 561.
32Under Sec. 70 of the Insolvency Law (Act No. 1956), any payment, pledge, mortgage, conveyance,
sale, assignment or transfer of property made by an insolvent within one month before the fi ling of the
petition in insolvency by or against him, is void, except when made for a valuable consideration and in
good faith. 338 Manresa, 5th Ed., Bk. 2, p. 562. 34Ibid., p. 536. This is, of course, without prejudice to
the provisions of the Civil Code regarding preference of credits. See Arts. 2241, et seq., Civil Code. 35Art.
1381, No. 5, Civil Code. Art. 1382 511 these contracts are those contemplated in Arts. 1098, 1189, 1526,
1534, 1539, 1542, 1556, 1560, 1567, and 1659 of the Code. 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.36

Subsidiary Character of Action. — The action for rescission is subsidiary, consequently, it cannot be
instituted except when the party suffering damage has no other legal means to obtain reparation for the
same.37 Hence, before a party who is prejudiced can avail himself of this remedy, it is essential that he
has exhausted all of the other legal means to obtain reparation.38 Thus, even where the fraud charged
which is the ground for an action for rescission actually did exist, where there is no allegation or
evidence that the creditor has already exhausted all of legal remedies to obtain reparation from the
debtor, the action to rescind the sale in question made by said debtor is not maintainable.39
Nevertheless, if it can be established that the property which is alienated or transferred by the debtor to
another was his only property at the time of the transaction, an action for rescission can certainly be
maintained because it is clear that in such case the creditor can have no other remedy.40

Parties Who May Institute Action. — According to Castan, the action for rescission may be instituted by
the following: (1) The person who is prejudiced, such as the party suffering the lesion in rescissory
actions on the ground of lesion, the creditor who is defrauded in rescissory actions on the ground of
fraud, and other persons authorized to exercise the same in other rescissory actions; (2) their
representatives; (3) their heirs; and (4) their creditors by virtue of the subrogatory action defi ned in Art.
1177 of the Code.41 An heir, therefore, may institute an action for the rescission of a rescissible
contract. As a rule, he may do so as a representative of the person who suffers from lesion or of the
creditor who is 36Art. 1294, Spanish Civil Code. 37Art. 1383, Civil Code. 38Art. 1177, Civil Code.
39Goquiolay vs. Sycip, 9 SCRA 663. 40Regalado vs. Luchsinger & Co., 5 Phil. 625; Guash vs. Espiritu, 11
Phil. 184; Honrado vs. Mercayda, CA, 49 Off. Gaz. 1492. 413 Castan, 7th Ed., p. 433. RESCISSIBLE
CONTRACTS Art. 1383 512 CONTRACTS defrauded. Suppose, however, that it can be established that the
decedent, during his lifetime, entered into a contract with another in order to defraud him of his
legitime, can he institute an action for the rescission of such contract after the death of the decedent? It
is clear that in this case the compulsory heir does not have any right to institute the action as a
representative of the decedent, since the decedent himself does not have the right. It would, however,
be possible for him to institute the action in his own right under No. 3 of Art. 1381 of the Civil Code. This
was recognized in the case of Concepcion vs. Sta. Ana. According to the Supreme Court: “The reason
why a forced heir has the right to institute an action of rescission is that the right to the legitime is
similar to a credit of a creditor. As Manresa correctly states in commenting on Article 1291 (now Art.
1381) of the Civil Code: “The rights of a forced heir to the legitime are undoubtedly similar to a credit of
a creditor insofar as the right to the legitime may be defeated by fraudulent contracts, and are superior
to the will of those bound to respect them. In its judgment of October 28, 1897, the Supreme Court of
Spain held that the forced heirs instituted as such by their father in the latter’s testament have the
undeniable right to institute an action to annul contracts entered into by the father to their prejudice. As
it is seen the action is called action of nullity, but it is rather an action of rescission taking into account
the purpose for which it is instituted and the confusion of ideas that has prevailed in this matter.’’42 Art.
1384. Rescission shall be only to the extent necessary to cover the damages caused.43

Extent of Rescission. — It must be observed that the primary purpose of rescission is reparation for the
damage or injury which is suffered either by a party to the contract or by a third person. In order that
this purpose may be realized the rescission does not necessarily have to be total in character; it may also
be partial. Consequently, according to Art. 1384, rescission shall be only to the extent necessary to cover
the damages caused. This precept, which 42Concepcion vs. Sta. Ana, 87 Phil. 787. The opinion of
Manresa quoted here is found in Vol. 8, Bk. 2, 5th Ed., pp. 555-556. See Art. 221, No. 4, Civil Code.
43New provision. Art. 1384 513 was not found in the old Code, is in accordance with the doctrine
enunciated by the Supreme Tribunal of Spain on December 10, 1904, to the effect that a contract in
fraud of creditors may be partially rescinded to an extent which is suffi cient to satisfy the damage
caused to the creditor.44 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.45

Effect of Rescission in Case of Lesion. — It is evident that the fi rst paragraph of Art. 1385 is applicable
only to rescissory actions on the ground of lesion and not to rescissory actions on the ground of fraud.
This is so because in the latter there can certainly be no obligation on the part of the plaintiff-creditor to
restore anything since he has not received anything.46 Once a contract is rescinded on the ground of
lesion, there arises an obligation on the part of both contracting parties to return to the other the object
of the contract, including fruits or interests. Consequently, rescission is not possible, unless he who
demands it can return whatever he may be obliged to restore. Thus, where a guardian alienates certain
properties of a minor for P85,000 to a certain person, and subsequently, the minor, upon reaching the
age of majority, brings an action for the rescission of the contract on the ground of lesion, the effect if
rescission is granted would be the restoration of things to their condition prior to the celebration of the
contract. But if the plaintiff cannot refund the amount including interest, the action will certainly fail
because positive statutory 448 Manresa, 5th Ed., Bk. 2, p. 572. 45Art. 1295. Spanish Civil Code. 468
Manresa, 5th Ed., Bk. 2, p. 578. RESCISSIBLE CONTRACTS Art. 1385 514 CONTRACTS law, no less than
uniform court decisions, require, as a condition precedent to rescission, that the consideration received
should be refunded.47 The “fruits of the thing” stated in Art. 1385 refer not only to natural, industrial
and civil fruits but also to other accessions obtained by the thing, while interest refers to legal interest. It
must be observed, however, that as far as the obligation to restore the fruits is concerned, the rules on
possession shall be applied.48 Consequently, the determination of the good or bad faith of the party
obliged to restore is of transcendental importance in order to assess the fruits or the value thereof
which must be returned as well as the expenses which must be reimbursed.49 Thus, it has been held
that as a condition to the rescission of a contract of sale of a parcel of land, the vendor must refund to
the vendees (who are in good faith) an amount equal to the purchase price, plus the sum expended by
them in improving the land.50

Effect of Rescission Upon Third Persons. — According to the second paragraph of Art. 1385, rescission
shall not take place when the thing which constitutes the object of the contract is legally in the
possession of a third person who did not act in bad faith. It is evident that this rule is applicable to all
kinds of rescissible contracts. There are, however, two indispensable requisites which must concur in
order that the acquisition of the thing which constitutes the object of the contract by a third person shall
defeat an action for rescission. These requisites are: fi rst, that the thing must be legally in the
possession of the third person; and second, that such third person must not have acted in bad faith.
Where the thing which constitutes the object of the contract happens to be movable property, the
concurrence of these requisites offers no diffi culty because of the principle that possession of movable
property acquired in good faith is equivalent to a title.51 Where the thing happens to be immovable
property, however, it is indispensable that the right of the third person must be registered or recorded
in the proper registry before we can say that the thing is legally in his possession, or what 47Uy Soo Lim
vs. Tan Unchuan, 38 Phil. 522. 48Arts. 543, et seq., Civil Code. 498 Manresa, 5th Ed., Bk 2, pp. 577-578.
50Gov’t. of the P.I. vs. Wagner, 54 Phil. 132. 51Art. 559, Civil Code. Art. 1385 515 amounts to the same
thing, before he is protected by law. Thus, Manresa, commenting on the provision of the second
paragraph of Art. 1385, says: “The acquisition by a third person is an obstacle to the effi caciousness of
the action for rescission, where the following two circumstances are present, to wit, that such third
person is in lawful possession of the realty, that is to say that he is protected by the law against said
action by the registration in the registry, and that he did not act in bad faith.’’52 Consequently, it has
been held that a third person to whom the realty has been transferred who has not registered his right
in the proper registry cannot be protected against the effects of a judgment rendered in the action for
rescission.53 However, where he has registered his right over the realty under the Land Registration Act
(Act No. 496), there would then be no legal obstacle to the transfer of the title of the said property, and
for this special reason the said transfer cannot be rescinded. This doctrine was enunciated by the
Supreme Court in the following case: Sikatuna vs. Guevara 45 Phil. 371 The records show that a contract
of a lease of certain lot situated in Manila was entered into between the partnership Jacinto, Palma y
Hnos, as lessor, and Potenciana Guevara, as lessee. This contract contained an option by which the
lessor is given the right to purchase within a period of one year from the time of the execution thereof a
house which the lessee had constructed on the lot, but in case of failure to exercise such right, the
lessee is given the right to purchase the lot. The period for the option having expired without the lessor
exercising its right, Guevara offered to purchase the lot, but the said lessor refused. In view of such
refusal, Guevara brought an action to compel the lessor to sell the lot to her. There was, however, no
notice of the commencement of such action fi led with the offi ce of the Register of Deeds. During the
pendency of such case, the aforesaid lessor sold the lot under litigation to the Sikatuna 528 Manresa,
5th Ed., Bk 2, pp. 379-380, quoted by the Supreme Court in Cordevero vs. Villaruz, 46 Phil. 473, and in
Gatchalian vs. Manalo, 68 Phil. 608. 53Cordevero vs. Villaruz, 46 Phil. 473. RESCISSIBLE CONTRACTS Art.
1385 516 CONTRACTS Corporation. This sale was recorded in the Registry in accordance with Act No.
496, otherwise known as the Land Registration Act. Subsequently, judgment was rendered in the civil
case in favor of Guevara, but it was not executed because the lot had already been sold to the Sikatuna
Corporation. Later, the new owner ordered Guevara to vacate the premises. Having declined to do so,
the corporation commenced these proceedings against her for unlawful detainer. In her answer, she
contended that since the contract involves the sale of property under litigation without the approval of
the litigants or of competent judicial authority, it should be rescinded. This contention was upheld by
the lower court. The Supreme Court, speaking through Justice Romualdez, however, ruled: “As the
appellant rightfully contends the rescission of the sale does not lie in the present case because the
property is now in the legal possession of a third person who has not acted in bad faith. There is no
doubt but that in this case the plaintiff corporation has the character of a third person, and it has not
been shown that it had acted in bad faith. “This case has a special circumstance in that it deals with
property registered under the Land Registration Act No. 496, Section 78, which provides that acts
concerning properties registered under the law shall affect only the parties litigant, unless a notice of
the commencement of the action is recorded, which does not appear to have been done in the case
before us. There was, therefore, no legal obstacle to the transfer of the title of the said property, and for
this special reason the said transfer cannot be rescinded.’’54 In spite of the impossibility of maintaining
an action for the rescission of the contract where the object thereof is legally in the possession of a third
person who did not act in bad faith, the person who is prejudiced is not left without any remedy. He may
still bring an action for indemnity for damages against the person who caused the loss.55 This action
may be directed against the guardian, 54From this case, it is clear that when the law speaks of “third
persons,” it refers not only to subsequent transferees who are strangers to the contract which is sought
to be rescinded, but even to the immediate transferees who are not strangers to the contract. 55Art.
1385, par. 3, Civil Code. Art. 1385 517 representative of the absentee or litigant who transferred the
thing, as the case may be.56 It may even be directed against a third person who, in bad faith, had
previously acquired the thing and, subsequently, had alienated it to an innocent purchaser for value.57
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.58 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 suffi cient 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.59 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 fi rst acquirer shall be liable fi rst, and so on successively.60

Proof of Fraud. — As we have seen in a previous section one of the requisites which must be established
in order that a contract may be rescinded on the ground that it has been entered into in 568 Manresa,
5th Ed., Bk. 2, p. 582. 57Art. 1388, par. 1, Civil Code. 58Art. 1296, Spanish Civil Code, in modifi ed form.
59Art. 1297, Spanish Civil Code, in modifi ed form. 60Art. 1298, Spanish Civil Code, in modifi ed form.
RESCISSIBLE CONTRACTS Arts. 1386-1388 518 CONTRACTS fraud of creditors is the existence of fraud, or
at least, the intent to defraud. Such fraud or intent to defraud may be either presumed in accordance
with Art. 1387 of the Code or duly proved in accordance with the ordinary rules of evidence. Idem;
Presumptions of fraud. — The law presumes that there is fraud of creditors in the following cases: (1)
Alienations of property by gratuitous title if the debtor has not reserved suffi cient property to pay all of
his debts contracted before such alienations.61 (2) Alienations of property by onerous title if made by a
debtor 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.62 Thus, where the debtor alienated a certain
property, which was his only attachable property, to his son after judgment had been rendered against
him and a writ of execution had been issued, there is a presumption that such alienation is fraudulent in
accordance with the rule stated in the second paragraph of Art. 1387.63 This presumption becomes
stronger when it is established that the conveyance by the judgment debtor is for the purpose of
preventing the judgment creditor or other creditors from seizing the property.64 But where no
judgment or preliminary attachment exists against the debtor, the presumption is not applicable.65
Cabaliw vs. Sadorra 64 SCRA 310 Isidora Cabaliw was the wife of Benigno Sadorra by his second
marriage solemnized on May 5, 1915, before the Justice of the Peace of Bayambang, Pangasinan. This
couple had a daughter named Soledad Sadorra. During their marriage, the 61Art. 1387, par. 1, Civil
Code. 62Art. 1387, par. 2, Civil Code. 63Regalado vs. Luchsinger & Co., 5 Phil. 25. To the same effect: see
Cabaliw vs. Sadorra, 64 SCRA 310. 64Bachrach vs. Peterson, 7 Phil. 571. To the same effect: Panlileo vs.
Victorio, 36 Phil. 706; Saavedra vs. Martinez, 68 Phil. 676; Contreras vs. China Banking Corp., 76 Phil.
709. 65Manila Mercantile Co. vs. Flores, 50 Phil. 759. Arts. 1386-1388 519 spouses acquired two (2)
parcels of land situated in Iniangan, Dupax, Nueva Vizcaya. One parcel with an area of 14.4847 hectares
was acquired by a Sales Patent and covered by Original Certifi cate of Title No. 1 of the Land Records of
Nueva Vizcaya issued in the name of Benigno Sadorra. The other piece of land about 1-1/2 hectares and
covered by Tax Declaration Nos. 6209 and 6642 was secured through purchase. Having been abandoned
by her husband, Isidora Cabaliw instituted an action for support with the Court of First Instance of
Manila, entitled “Isidora Cabaliw de Orden versus Benigno Sadorra’’ docketed therein as Civil Case No.
43193. On January 30, 1933, judgment was rendered requiring Benigno Sadorra to pay his wife, Isidora
Cabaliw, the amount of P75.00 a month in terms of support as of January 1, 1933, and P150.00 in
concept of attorney’s fees and the costs. Unknown to Isidora Cabaliw, on August 19, 1933, Benigno
Sadorra executed two (2) deeds of sale over the two parcels of land above described in favor of his son-
in-law, Sotero Sadorra, the latter being married to Encarnacion Sadorra, a daughter of Benigno Sadorra
by his fi rst marriage. These deeds were duly registered and Original Certifi cate of Title No. 1 was
cancelled and replaced with T.C.T. No. 522 of the Register of Deeds of Nueva Vizcaya. Because of the
failure of her husband to comply with the judgment of support, Isidora Cabaliw fi led in Civil Case 43192
a motion to cite Benigno Sadorra for contempt and the Court of First Instance of Manila in its Order of
May 12, 1937, authorized Isidora to take possession of the conjugal property, to administer the same,
and to avail herself of the fruits thereof in payment of the monthly support in arrears. With this order of
the Court, Isidora proceeded to Nueva Vizcaya to take possession of the aforementioned parcels of land,
and it was then that she discovered that her husband had sold them to his son-in-law Sotero. On
February 1, 1940, Isidora fi led with the Court of First Instance of Nueva Vizcaya Civil Case No. 449
against her husband and Sotero Sadorra for the recovery of the lands in question on the ground that the
sale was fi ctitious; at the same time a notice of lis pendens was fi led with the Register of Deeds of
Nueva Vizcaya. In May of 1940, Benigno Sadorra died. On June 7, 1948, the above-mentioned notice of
lis pendens was cancelled by the Register of Deeds of Nueva Viscaya upon RESCISSIBLE CONTRACTS Arts.
1386-1388 520 CONTRACTS the fi ling of an affi davit by Sotero Sadorra to the effect that Civil Case No.
449 had been decided in his favor and that he was adjudged the owner of the land covered by T.C.T. No.
522, but that his copy of the decision was lost during the war. On October 1, 1954, Isidora and her
daughter Soledad fi led with the Court of First Instance of Nueva Vizcaya Civil Case 634 to recover from
the spouses Sotero and Encarnacion Sadorra the aforementioned two parcels of land; they also caused
the annotation of a cautionary notice and notice of lis pendens over T.C.T. 522. On November 22, 1955,
the complaint was amended and named additional party-defendants were the children of Benigno
Sadorra by his fi rst marriage. The amended complaint prayed among others: (1) that the deeds of sale
executed by Benigno Sadorra be declared null and void; (2) that defendantspouses Sotero and
Encarnacion Sadorra be directed to yield the possession of the lands in question; and (3) that said lands
be ordered partitioned among plantiffs and defendants who are children by the fi rst marriage of
Benigno Sadorra in the proportions provided by law. During the pendency of Civil Case 634 certain
parties intervened claiming that they had purchased parts of the land covered by T.C.T. 522. After trial,
the lower court rendered judgment and among other things: (1) declared the deed of sale executed by
Benigno Sadorra to be simulated and fi ctitious; (2) recognized and upheld the rights of the intervenor-
purchasers who acquired their portions prior to the registration of the notice of lis pendens on October
1, 1954, but dismissed the claims of the intervenors who allegedly bought parts of the land subsequent
thereto; and (3) ordered the partition of the remaining unsold lands between Isidora Cabaliw, Sotero
Sadorra, on one hand and the children by the fi rst marriage of Benigno Sadorra on the other. From the
foregoing decision of the lower court in Civil Case 634 spouses Sotero and Encarnacion Sadorra appealed
to the Court of Appeals and so did the intervenors whose claims were dismissed. (CA-G.R. No. 26956-R.)
On November 29, 1965, the appellate court by a vote of 3 to 2 reversed the decision of the trial court,
and dismissed the amended complaint of Isidora Cabaliw. Hence, this petition fi led by Isidora Cabaliw
and her daughter, Soledad Sadorra, for the Court to review the adverse judgment of the Court of
Appeals. Arts. 1386-1388 521 The Supreme Court, speaking through Justice Muñoz Palma, held: The
Court of Appeals sustained the validity and effi cacy of the deeds of sale executed by Benigno Sadorra in
favor of his son-in-law (Exhibits I and I-1) on the ground that these are public documents and as such are
presumed by law to have been fair and legal; that the vendee Sotero Sadorra is presumed to have acted
in good faith, citing Art. 44, Spanish Civil Code, Art. 627, New Civil Code; that fraud is never presumed,
and it is settled in this jurisdiction that strong and convincing evidence is necessary to overthrow the
validity of an existing public instrument. The appellate court continued that inasmuch as under the old
Civil Code in force at the time of the sale, the husband was empowered to dispose of the conjugal
property without the consent of the wife, the sales made by Benigno Sadorra were valid, and the wife
Isidora cannot now recover the property from the vendee. The judgment of the Court of Appeals cannot
be sustained. The facts narrated in the fi rst portion of this Decision which are not disputed, convincingly
show or prove that the conveyances made by Benigno Sadorra in favor of his son-in-law were
fraudulent. For the heart of the matter is that about seven months after a judgment was rendered
against him in Civil Case No. 43192 of the Court of First Instance of Manila and without paying any part
of that judgment, Benigno Sadorra sold the only two parcels of land belonging to the conjugal
partnership to his son-in-law. Such a sale even if made for a valuable consideration is presumed to be in
fraud of the judgment creditor who in this case happens to be the offended wife. Article 1297 of the old
Civil Code (now Art. 1387 of the New Civil Code) which was the law in force at the time of the
transaction provides: “Contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to be made in fraud of creditors. “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 rescission.’’ (Emphasis supplied.) RESCISSIBLE
CONTRACTS Arts. 1386-1388 522 CONTRACTS The above-quoted legal provision was totally disregarded
by the appellate court, and there lies its basic error. We agree with petitioners that the parties here do
not stand in equipoise, for the petitioners have in their favor, by a specifi c provision of law, the
presumption of fraudulent transaction which is not overcome by the mere fact that the deeds of sale in
question were in the nature of public instruments. As well said in the dissenting opinion of Justice
Magno Gatmaitan, the principle invoked by the majority opinion that to destroy the validity of an
existing public document “strong and convincing evidence is necessary” operates “where the action was
brought by one party against the other to impugn the contract . . . but that rule can not operate and
does not, where the case is one wherein in the suit is not between the parties inter se but is one
instituted by a third person, not a party to the contract but precisely the victim of it because executed to
his prejudice and behind his back; neither law, nor justice, nor reason, nor logic, should so permit,
otherwise, in such case, the courts would be furnishing a most effective shield of defense to the
aggressor.” (pp. 30-31, CA Decision) Furthermore, the presumption of fraud established by the law in
favor of petitioners is bolstered by other indicia of bad faith on the part of the vendor and vendee. Thus
(1) the vendee is the son-in-law of the vendor. In the early case of Regalado vs. Luchsinger & Co., 5 Phil.
625, this Court held that the close relationship between the vendor and the vendee is one of the known
badges of fraud. (2) At the time of the conveyance, the vendee, Sotero, was living with his father-in-law,
the vendor, and he knew that there was a judgment directing the latter to give a monthly support to his
wife Isidora and that his fatherin-law was avoiding payment and execution of the judgment. (3) It was
known to the vendee that his father-in-law had no properties other than those two parcels of land
which were being sold to him. The fact that a vendor transfers all of his property to a third person when
there is a judgment against him is a strong indication of a scheme to defraud one who may have a valid
interest over his properties. Added to the above circumstances is the undisputed fact that the vendee
Sotero Sadorra secured the cancellation of the lis pendens on No. O.C.T. 1, which was annotated in 1940
at the instance of Isidora Cabaliw, and the issuance of a transfer certifi cate of title in his favor, by
executing an affi davit (Exhibit H) on June 7, 1948, wherein he referred to Isidora as “the late Isidora
Cabaliw’’ when he knew for a fact that she was alive, Arts. 1386-1388 523 and alleged that Civil Case 449
of the Court of First Instance of Nueva Vizcaya was decided in his favor where in truth there was no such
decision because the proceedings in said case were interrupted by the last world war. Such conduct of
Sotero Sadorra reveals, as stated by the lower court, an “utter lack of sincerity and truthfulness” and
belies his pretensions of good faith. On the part of the transferee, he did not present satisfactory and
convincing evidence suffi cient to overthrow the presumption and evidence of a fraudulent transaction.
His is the burden of rebutting the presumption of fraud established by law, and having failed to do so,
the fraudulent nature of the conveyance in question prevails. The decision of the Court of Appeals
makes mention of Art. 1413 of the old Civil Code (now Art. 166 of the New Civil Code) which authorizes
the husband as administrator to alienate and bind by onerous title the property of the conjugal
partnership without the consent of the wife, and by reason thereof concludes that petitioner Isidora
Cabaliw can not now seek annulment of the sale made by her husband. On this point, counsel for
petitioners rightly claims that the lack of consent of the wife to the conveyances made by her husband
was never invoked nor placed in issue before the trial court. What was claimed all along by plaintiff,
Isidora Cabaliw now petitioner, was that the conveyances or deeds of sale were executed by her
husband to avoid payment of the monthly support adjudged in her favor and to deprive her of the
means to execute said judgment. In other words, petitioner seeks relief not so much as an aggrieved
wife but more as a judgment creditor of Benigno Sadorra. Art. 1413 therefore is inapplicable; but even if
it were, the result would be the same because the very article reserves to the wife the right to seek
redress in court for alienations which prejudice her or her heirs. The undisputed facts before Us clearly
show that the sales made by the husband were merely a scheme to place beyond the reach of the wife
the only properties belonging to the conjugal partnership and deprive her of what rightly belongs to her
and her only daughter Soledad. PREMISES CONSIDERED, We fi nd merit to this Petition for Review and
We set aside the decision of the appellate court for being contrary to the law applicable to the facts of
the case. The decision of the trial court stands affi rmed with costs against private respondents. So
Ordered. RESCISSIBLE CONTRACTS Arts. 1386-1388 524 CONTRACTS It must be observed, however, that
the above presumptions are disputable, and therefore, may be rebutted by satisfactory and convincing
evidence to the contrary.66 Thus, if it can be established that the transferee acquired the property in
good faith, without the least intention of impairing the judgment obtained by the creditor against the
transferor, and that he paid the purchase price in the belief that the latter could freely dispose of the
said property, the presumption of fraud is overthrown.67 Honrado vs. Marcayda, et al. 49 Off. Gaz.
1492, C.A. This is an action commenced by plaintiff against the defendants for the rescission of a
contract of sale on the ground that such contract was entered into in fraud of creditors. The records
show that Felipe Lotivio purchased a parcel of land from Luisa Marcayda for P1,000, although at the
time the contract was executed there was already a judgment in favor of the plaintiff against the latter
with regard to the property and a writ of attachment had already been issued. The plaintiff contends
that the sale is fraudulent in accordance with the rule stated in the second paragraph of Art. 1297 (now
Art. 1387) of the Civil Code; the defendant Felipe Lotivio, on the other hand, contends that he is a
purchaser in good faith and for value. Consequently, the questions upon which this case hinges are (1)
whether or not Felipe Lotivio was a purchaser in good faith and for value, and (2) if he is, whether or not
the contract of sale executed could be rescinded. Held: “The sale was consummated on January 6, 1936,
in consideration of P1,000. Original certifi cate of title No. 14567 showed that the land was free from
any lien or encumbrance. Felipe Lotivio was not, under the law, supposed to go farther to fi nd out
whether the land has any other lien not appearing on the face of the title as held in the cases of Reynes
vs. Barrera, 68 Phil. 656; Hernandez vs. Vda. de Salas, 69 Phil. 744; Visayan Surety and Insurance Corp.
vs. Verzosa, 72 Phil. 362. It is well settled that when the property sold on execution is registered under
the Torrens system, registration is the operative act 66Peña vs. Mitchell, 9 Phil. 587 & Streiff vs. Coll. of
Customs, 31 Phil. 643; National Exchange Co. vs. Katigbak, 54 Phil. 599; Buencamino vs. Bantug, 58 Phil.
521; Gatchalian vs. Manalo, 68 Phil. 708. 67Buencamino vs. Bantug, 58 Phil. 521. To the same effect:
Peña vs. Mitchell, 9 Phil. 587; Gatchalian vs. Manalo, 68 Phil. 706. Arts. 1386-1388 525 that gives validity
to the transfer or creates a lien on the land and a purchaser on execution is not required to go behind
the registry to determine the condition of the property, and he is only charged with notice of the
burdens of the certifi cate of title. To require him to do more is to defeat one of the primary objects of
the Torrens system. “In the present case, the writ of attachment issued by the justice of the peace court
of Daraga, Albay was not annotated on the back of the original certifi cate of title. True enough that it
was fi led with the offi ce of the Register of Deeds of Albay, but such fact is not a notice to the whole
world. Consequently, such unregistered order of attachment does not create any lien or burden upon
the land in question. “The valuable consideration of P1,000 paid to Luisa Marcayda by Felipe Lotivio,
who does not appear to be her relative is, in our opinion, not small for the property since its
improvements are assessed at no less than P800. It is fi tting to apply in this case the principle of
‘innocent purchaser for value’ as declared and applied in the case of Bailon vs. Cacias, et al., 40 Off. Gaz.,
p. 1896, August, 1941. “ ‘According to our Supreme Court in the case of Cui, et al. vs. Henson, 51 Phil.
600: ‘A purchaser in good faith is one who buys property of another without notice that some other
person has a right to, or an interest in, such property and pays a full and fair price for the same, at the
time of such purchase, or before he has notice of the claim or interest of some other person in the
property. Good faith consists in an honest intention to abstain from taking any unconscientious
advantage of another. Good faith is the opposite of fraud and of bad faith and its nonexistence must be
established by competent proofs.’ “Tested by these doctrines, we hold and declare that defendant
Felipe Lotivio was, under the foregoing circumstances, a purchaser in good faith and for value; and for
this reason, we also hold that the presumption of fraud as contemplated in Article 1297 of the old Civil
Code (now Art. 1387 of the new Civil Code) can be considered overcome and overthrown as held in the
cases of Peña vs. Mitchell, 9 Phil. 587; Guash vs. Espiritu, 11 Phil. 184; Kuenkle vs. Watson & Co., 13 Phil.
26; Golinko vs. Monjardin, 31 Phil. 643; Asia Banking Corp. vs. Corcuera, 51 Phil. 781. “Therefore, the
contract of sale, for the reasons above stated, is not rescissible.’’ RESCISSIBLE CONTRACTS Arts. 1386-
1388 526 CONTRACTS Idem;

Badges of fraud. — It is not, however, indispensable that the creditor shall have to depend upon the two
presumptions established in the fi rst and second paragraphs of Art. 1387 in order to prove the
existence of fraud or the intention to defraud. According to the third paragraph of the same article, the
design to defraud creditors may be proved in any other manner recognized by the law of evidence.68
Thus, in determining whether or not a certain conveyance is fraudulent the question in every case, in
the words of Justice Moreland, is whether the conveyance was a bona fi de transaction or merely a trick
or contrivance to defeat creditors. It is not suffi cient that it is founded on a good or valuable cause or
consideration or is made with bona fi de intent: it must have both elements. If defective in either of
these particulars, although good between the parties, it is rescissible as far as the creditors are
concerned. The rule is universal both at law and in equity that whatever fraud creates justice will
destroy. The test as to whether or not a conveyance is fraudulent is — does it prejudice the rights of
creditors?69 In the consideration of whether or not certain transfers or conveyances are fraudulent, the
following circumstances have been denominated by the courts as badges of fraud.70 (1) The fact that
the cause or consideration of the conveyance is inadequate. (2) A transfer made by a debtor after suit
has been begun and while it is pending against him. (3) A sale on credit by an insolvent debtor. (4)
Evidence of large indebtedness or complete insolvency. (5) The transfer of all or nearly all of his property
by a debtor, especially when he is insolvent or greatly embarrassed fi nancially. (6) The fact that the
transfer is made between father and son, when there are present others of the above circumstances. (7)
The failure of the vendee to take exclusive possession of all the property. 68Ayles vs. Reyes, 18 Phil. 243.
69Oria vs. McMicking, 21 Phil. 243. 70Ibid. Arts. 1386-1388 527 Thus, where it is proved that a certain
corporation, which is heavily indebted to a certain bank, sold a large tract of land worth P400,000 to the
vendee for only P36,000 in spite of the fact that at the time of such sale it did not have any liquidated
assets and that all of its other assets were pledged or mortgaged, some of which were for far more than
their actual value, such circumstances would be suffi cient to establish the fraudulent character of the
conveyance.71 Consequently, the sale can be set aside by means of an action for rescission at the
instance of the creditor. But where the sale is founded on a fi ctitious cause or consideration it would be
futile for such creditor to invoke its rescission since such action presupposes the existence of a valid, not
inexistent, contract.72 The remedy of the creditor in such case would be to ask for a declaration of
nullity of the conveyance. Similarly, where it is proved that the person to whom the property conveyed
is a son of the transferor or a mother-in-law or a near relative, coupled with the fact that at the time of
the transfer or conveyance the said transferor was fi nancially embarrassed or had no other means with
which he could settle his personal obligations, the weight of evidence would be suffi cient to justify a
decree of rescission on the ground of fraud.73 The evidence becomes more conclusive if the fact of
relationship between the vendor and the vendee is aggravated by the fact that the conveyance was
made in secrecy and for an inadequate consideration at a time when the vendor had no other means
with which he could settle his obligations.74 It must be noted, however, that the mere fact of
relationship between vendor and vendee, as when the vendor is the vendee’s mother, is not in itself an
element of fraud, if the sale was made for a valuable consideration and said vendor was not at the time
of the conveyance insolvent.75 71Asia Banking Corp. vs. Nable Jose, 51 Phil. 763. 72Onglengco vs.
Ozaeta, 70 Phil. 43. 73Gaston vs. Hernaez, 58 Phil. 823. 74Ayles vs. Reyes, 18 Phil. 243; Alpuerto vs.
Perez, 38 Phil. 785. 75Standard Oil Co. vs. Castro, 64 Phil. 716. RESCISSIBLE CONTRACTS Arts. 1386-1388
528 CONTRACTS Rivera vs. Li Tam & Co. 4 SCRA 1072 Rafael Li Tam died intestate, survived by his wife,
Marcosa Rivera, and several children by a Chinese wife. Marcosa fi led a claim for P252,658.33 against
the intestate which the court approved on the strength of a deed wherein the decedent acknowledged
said indebtedness to his wife. Thereafter, Arminio Rivera, administrator of the estate, proceeded against
the defendant company for an accounting of the income derived from the shares of stock owned by the
decedent in said company. In answer, defendant company alleged that the decedent was no longer a
stockholder in said company, having transferred his shares to his children by his Chinese wife. Hence,
Rivera brought this action asking for the rescission of the transfer on the ground that it was made in
fraud of creditors. Held: The fraudulent character of the transfer is clearly inferable from the facts that
the transferees are the decedents’ own children, that no consideration was given for the transfer, that
the corporation was the business of the decedent, and that he has an outstanding obligation of more
than P250,000 with his wife which he had invested in the corporation. And to complete the fraudulent
scheme, the defendants dissolved the old corporation and formed a new one for no apparent reason. In
view of such fraud, the transfer is, therefore, of no effect. Idem; id. —

Acquisition by third person in good faith. — While it is true that the test as to whether or not a
conveyance is fraudulent is to determine whether or not it is prejudicial to the rights of the creditors,
nevertheless, it is also true that such a test would not be applicable if the conveyance is made in good
faith or with a bona fi de intent and for a valuable cause or consideration.76 In other words, if the
property is acquired by a purchaser in good faith and for value, the acquisition as far as the law is
concerned is not fraudulent. The right of such purchaser over the property is legally superior to that of
any other person even as against the creditor who is prejudiced by the conveyance. Consequently, the
contract or conveyance is not rescissible.77 76Oria vs. McMicking, 21 Phil. 243. 77See Honrado vs.
Marcayda, supra, for defi nition of “purchaser in good faith and for value” and also for authorities Arts.
1386-1388 529 Idem; id. —

Acquisition by third person in bad faith. — On the other hand, if the property is acquired by one who is
not a purchaser in good faith and for value, it is clear that the contract or conveyance is rescissible. In
such case the creditor who is prejudiced can still proceed after the property. This is so, even though the
said property may have been transferred or conveyed to other persons who are not innocent purchasers
for value. However, if for any cause or reason, it should be impossible for the acquirer in bad faith to
return the property, he shall indemnify the creditor seeking the rescission for damages suffered on
account of the alienation. If it happens that there are two or more alienations, the fi rst acquirer shall be
liable fi rst, and so on successively.78 Thus, if A, against whom a judgment for the payment of a certain
debt in favor of X has been rendered, conveys his only property to B in fraud of X, and B, who is aware of
the fraud, in turn, conveys the property to C, and the latter, who is also aware of the fraud, also conveys
the property to D, who is a purchaser in good faith and for value, although the conveyance to D cannot
be rescinded, yet X can still proceed against B for damages suffered by him on account of the fraudulent
alienation, and if he fails to recover he can still proceed against C. It must be noted, however, that if the
reason for the impossibility of returning the property acquired in bad faith is a fortuitous event, then
under the principle announced in Art. 1174 of the Code, there can be no liability of the acquirer.79 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.80

Prescriptive Period. — As a general rule, the action for the rescission of a contract must be commenced
within four years. Under No. 1 of Art. 1391, this period must be counted from the time of the
termination of the incapacity of the ward; under No. 2, it must be 78Art. 1388, Civil Code. 798 Manresa,
5th Ed., Bk. 2, p. 549. 80Art. 1299, Spanish Civil Code. RESCISSIBLE CONTRACTS Art. 1389 530
CONTRACTS counted from the time the domicile of the absentee is known; under Nos. 3 and 4 and also
under Art. 1382, it must be counted from the time of the discovery of the fraud. In certain cases of
contracts of sale which are specially declared by law to be rescissible, however, the prescriptive period
for the commencement of the action is six months or even forty days, counted from the day of
delivery.81 81Arts. 1543, 1571, 1577, Civil Code. Art. 1389 531 CHAPTER 7 VOIDABLE CONTRACTS

Voidable Contracts in General. — Voidable contracts may be defi ned as those in which all of the
essential elements for validity are present, although the element of consent is vitiated either by lack of
legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue infl uence,
or fraud.1 The most essential feature of a voidable contract is that it is binding until it is annulled by a
competent court. Consequently, once it is executed there are only two possible alternatives left to the
party who may invoke its voidable character — to attack its validity or to convalidate it either by ratifi
cation or by prescription. Its validity may be attacked either directly by means of a proper action in court
or indirectly by way of defense. The action itself is called annulment in order to distinguish it from an
action for the rescission of rescissible contracts or from an action for the declaration of absolute nullity
or inexistence of void or inexistent contracts, while the defense itself is called annulability or relative
nullity in order to distinguish it from the defense of absolute nullity or inexistence in void or inexistent
contracts or the defense of unenforceability in unenforceable contracts.2 Idem;

Characteristics. — Voidable contracts possess the following characteristics: (1) Their defect consists in
the vitiation of consent of one of the contracting parties. 1 See Art. 1390, Civil Code, and Art. 1300,
Spanish Civil Code. 2 Castan calls the defect of voidable contracts (contratas anulables) “anulabilidado
nulidad relativa’’ in order to distinguish it from the defect of void contracts (contratos inexistentes)
which he calls “nulidad absoluta.’’ Derecho Civil, Vol. 3, 7th Ed., pp. 409-415. 532 CONTRACTS (2) They
are binding until they are annulled by a competent court.3 (3) They are susceptible of convalidation by
ratifi cation or by prescription.4 Their defect or voidable character cannot be invoked by third persons.5
Idem;

Distinguished from rescissible contracts. — Voidable and rescissible contracts may be distinguished from
each other in the following ways: (1) In a voidable contract the defect is intrinsic because it consists of a
vice which vitiates consent, while in a rescissible contract the defect is external because it consists of
damage or prejudice either to one of the contracting parties or to a third person.6 (2) In the former the
contract is voidable even if there is no damage or prejudice, while in the latter the contract is not
rescissible if there is no damage or prejudice.7 (3) In the former the annulability of the contract is based
on the law, while in the latter the rescissibility of the contract is based on equity. Hence, annulment is
not only a remedy but a sanction, while rescission is a mere remedy. Public interest, therefore,
predominates in the fi rst, while private interest predominates in the second.8 (4) The causes for
annulment are different from the causes for rescission.9 (5) The former is susceptible of ratifi cation,
while the latter is not.10 (6) Annulment may be invoked only by a contracting party, while rescission
may be invoked either by a contracting party or by a third person who is prejudiced.11 3 Art. 1390, Civil
Code. 4 Arts. 1390, 1391, 1392-1396, Civil Code. 5 Art. 1397, Civil Code. 6 Arts. 1381, 1390, Civil Code. 7
Ibid. 8 8 Manresa, 5th Ed., Bk. 2, pp. 544-545. 9 Arts. 1381, 1390, Civil Code. 10Ibid. 118 Manresa, 5th
Ed., Bk. 2, p. 545. 533 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 infl uence or fraud. These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratifi cation.12

Contracts Which Are Voidable. — The two general classes of voidable contracts enumerated in Art. 1390
of the Code have already been discussed in detail in our discussion of consent as an essential requisite of
contracts.13 Hence, it is unnecessary to discuss them again in this chapter. It must be observed that in a
voidable contract all of the essential requisites for validity are present, although the requisite of consent
is defective because one of the contracting parties does not possess the necessary legal capacity, or
because it is vitiated by mistake, violence, intimidation, undue infl uence or fraud. Consequently, if
consent is absolutely lacking or simulated, the contract is inexistent, not voidable.14 It must also be
observed that even though there may have been no damage to the contracting parties, the contracts
enumerated in Art. 1390 are still voidable. Hence, whether a contract which the law considers as
voidable has already been consummated or is merely executory is immaterial; it can always be annulled
by a proper action in court. The following decision penned by Justice Abad Santos is quite interesting:
12New provision superseding Art. 1300, Spanish Civil Code. 13See comments on Arts. 1327-1329, with
respect to legal incapacity, and on Arts. 1330-1344, with respect to mistake, violence, intimidation,
undue infl uence, and fraud. 14Arts. 1345, 1409, No. 2, Civil Code. VOIDABLE CONTRACTS Art. 1390 534
CONTRACTS Felipe vs. Heirs of Aldon 120 SCRA 628 Maximo Aldon married Gimena Almosara in 1936.
The spouses bought several pieces of land sometime between 1948 and 1950. In 1960-62, the lands
were divided into three lots, 1370, 1371 and 1415 of the San Jacinto Public Land Subdivision, San
Jacinto, Masbate. In 1951, Gimena Almosara sold the lots to the spouses Eduardo Felipe and Hermogena
V. Felipe. The sale was made without the consent of her husband, Maximo. On April 26, 1976, the heirs
of Maximo Aldon, namely his widow Gimena and their children Sofi a and Salvador Aldon, fi led a
complaint in the Court of First Instance of Masbate against the Felipes. The complaint which was
docketed as Civil Case No. 2372 alleged that the plaintiffs were the owners of Lots 1370, 1371 and 1415;
that they had orally mortgaged the same to the defendants; and an offer to redeem the mortgage had
been refused so they fi led the complaint in order to recover the three parcels of land. The defendants
asserted that they had acquired the lots from the plaintiffs by purchase and subsequent delivery to
them. The trial court sustained the claim of the defendants and rendered the following judgment: “a.
declaring the defendants to be the lawful owners of the property subject of the present litigation; b.
declaring the complaint in the present action to be without merit and is therefore hereby ordered
dismissed; c. ordering the plaintiffs to pay to the defendants the amount of P2,000.00 as reasonable
attorney’s fees and to pay the costs of the suit.’’ The plaintiffs appealed the decision to the Court of
Appeals which rendered the following judgment: “PREMISES CONSIDERED, the decision appealed from is
hereby REVERSED and SET ASIDE, and a new one is hereby RENDERED, ordering the defendants-
appellees to surrender the lots in question as well as the plaintiffs’- appellants’ muniments of title
thereof to said plantiffsappellants, to make an accounting of the produce derived from the lands
including expenses incurred since 1951, and to solidarily turn over to the plaintiffs-appellants the NET
monetary value of the profi ts, after deducting the Art. 1390 535 sum of P1,800.00. No attorney’s fees
nor moral damages are awarded for lack of any legal justifi cation; therefore, No costs.” The ratio of the
judgment is stated in the following paragraphs of the decision penned by Justice Edgardo L. Paras with
the concurrence of Justices Venicio Escolin and Mariano A. Zosa: “One of the principal issues in the case
involves the nature of the aforementioned conveyance or transaction, with appellants claiming the
same to be an oral contract of mortgage or antichresis, the redemption of which could be done anytime
upon repayment of the P1,800.00 involved (incidentally the only thing written about the transaction is
the aforementioned receipt re the P1,800). Upon the other hand, appellees claim that the transaction
was one of sale, accordingly, redemption was improper. The appellees claim that plaintiffs never
conveyed the property because of a loan or mortgage or antichresis and that what really transpired was
the execution of a contract of sale through a private document designated as a ‘Deed of Purchase and
Sale’ (Exhibit 1), the execution having been made by Gimena Almosara in favor of appellee Hermogena
V. Felipe. “After a study of this case, we have come to the conclusion that the appellants are entitled to
recover the ownership of the lots in question. We so hold because although Exh. 1 concerning the sale
made in 1951 of the disputed lots is, in Our opinion, not a forgery the fact is that the sale made by
Gimena Almosara is invalid, having been executed without the needed consent of her husband, the lots
being conjugal. Appellees’ argument that this was an issue not raised in the pleadings is baseless,
considering the fact that the complaint alleges that the parcels were purchased by plaintiff Gimena
Almosara and her late husband Maximo Aldon’ (the lots having been purchased during the existence of
the marriage, the same are presumed conjugal) and inferentially, by force of law, could not be disposed
of by a wife without her husband’s consent.” The defendants are now the appellants in this petition for
review. They invoke several grounds in seeking the reversal of the decision of the Court of Appeals. One
of the grounds is factual in nature; petitioners claim that “respondent Court of Appeals has found as a
fact that the ‘Deed of Purchase and Sale’ VOIDABLE CONTRACTS Art. 1390 536 CONTRACTS executed by
respondent Gimena Almosara is not a forgery and therefore its authenticity and due execution is already
beyond question.’’ We cannot consider this ground because as a rule only questions of law are reviewed
in proceedings under Rule 45 of the Rules of Court subject to well-defi ned exceptions not present in the
instant case. The legal ground which deserves attention is the legal effect of a sale of lands belonging to
the conjugal partnership made by the wife without the consent of the husband. It is useful at this point
to re-state some elementary rules: The husband is the administrator of the conjugal partnership. (Art.
165, Civil Code) Subject to certain exceptions, the husband cannot alienate or encumber any real
property of the conjugal partnership without the wife’s consent. (Art. 166, Idem.) And the wife cannot
bind the conjugal partnership without the husband’s consent, except in cases provided by law. (Art. 172,
Idem.) In the instant case, Gimena, the wife, sold lands belonging to the conjugal partnership without
the consent of the husband and the sale is not covered by the phrase “except in cases provided by law.”
The Court of Appeals described the sale as “invalid” — a term which is imprecise when used in relation
to contracts because the Civil Code uses specifi c names in designating defective contracts, namely
rescissible (Arts. 1380, et seq.), voidable (Arts. 1390, et seq.), unenforceable (Arts. 1403, et seq.), and
void or inexistent (Arts. 1409, et seq.) The sale made by Gimena is certainly a defective contract but of
what category? The answer: it is a voidable contract. According to Art. 1390 of the Civil Code, among the
voidable contracts are “Those where one of the parties is incapable of giving consent to the contract.”
(Par. 1.) In the instant case Gimena had no capacity to give consent to the contract of sale. The capacity
to give consent belonged not even to the husband alone but to both spouses. The view that the contract
made by Gimena is a voidable contract is supported by the legal provision that contracts entered by the
husband without the consent of the wife when such consent is required, are annullable at her instance
during the marriage and within ten years from the transaction questioned. (Art. 173, Civil Code.)
Gimena’s contract is not rescissible for in such contract all the essential elements are untainted but
Gimena’s consent was Art. 1390 537 tainted. Neither can the contract be classifi ed as unenforceable
because it does not fi t any of those described in Art. 1403 of the Civil Code. And fi nally, the contract
cannot be void or inexistent because it is not one of those mentioned in Art. 1409 of the Civil Code. By
process of elimination, it must perforce be a voidable contract. The voidable contract of Gimena was
subject to annulment by her husband only during the marriage because he was the victim who had an
interest in the contract. Gimena, who was the party responsible for the defect, could not ask for its
annulment. Their children could not likewise seek the annulment of the contract while the marriage
subsisted because they merely had an inchoate right to the lands sold. The termination of the marriage
and the dissolution of the conjugal partnership by the death of Maximo Aldon did not improve the
situation of Gimena. What she could not do during the marriage, she could not do thereafter. The case
of Sofi a and Salvador Aldon is different. After the death of Maximo they acquired the right to question
the defective contract insofar as it deprived them of their hereditary rights in their father’s share in the
lands. The father’s share is one-half (1/2) of the lands and their share is two-thirds (2/3) thereof, one-
third (1/3) pertaining to the widow. The petitioners have been in possession of the lands since 1951. It
was only in 1976 when the respondents fi led action to recover the lands. In the meantime, Maximo
Aldon died. Two questions come to mind, namely: (1) Have the petitioners acquired the lands by
acquisitive prescription? (2) Is the right of action of Sofi a and Salvador Aldon barred by the statute of
limitations? Anent the fi rst question, We quote with approval the following statement of the Court of
Appeals: “We would like to state further that appellees [petitioners herein] could not have acquired
ownership of the lots by prescription in view of what we regard as their bad faith. This bad faith is
revealed by testimony to the effect that defendant-appellee Vicente V. Felipe (son of appellees Eduardo
Felipe and Hermogena V. Felipe) attempted in December in 1970 to have Gimena Almosara sign a ready-
made document purporting to sell the disputed lots to the appellees. This actuation clearly indicated
that the appellees knew the lots did not still VOIDABLE CONTRACTS Art. 1390 538 CONTRACTS belong to
them, otherwise, why were they interested in a document of sale in their favor? Again why did Vicente
V. Felipe tell Gimena that the purpose of the document was to obtain Gimena’s consent to the
construction of an irrigation pump on the lots in question? The only possible reason for purporting to
obtain such consent is that the appellees knew the lots were not theirs. Why was there an attempted
improvement (the irrigation tank) only in 1970? Why was the declaration of property made only in
1974? Why were no attempts made to obtain the husband’s signature, despite the fact that Gimena and
Hermogena were close relatives? All these indicate the bad faith of the appellees. Now then, even if we
were to consider appellees’ possession in bad faith as possession in the concept of owners, this
possession at the earliest started in 1951, hence the period for extraordinary prescription (30 years) had
not yet lapsed when the present action was instituted on April 26, 1976. As to the second question, the
children’s cause of action accrued from the death of their father in 1959 and they had thirty (30) years
to institute it (Art. 1141, Civil Code). They fi led action in 1976 which is well within the period.
WHEREFORE, the decision of the Court of Appeals is hereby modifi ed. Judgment is entered awarding to
Sofi a and Salvador Aldon their shares of the lands as stated in the body of this decision; and the
petitioners as possessors in bad faith shall make an accounting of the fruits corresponding to the share
aforementioned from 1959 and solidarily pay their value to Sofi a and Salvador Aldon; costs against the
petitioners. SO ORDERED.

Note: There are others who believe that when a wife sells or encumbers conjugal land without the
consent of her husband, the contract is unenforceable, not voidable. According to them, the defect of
the contract consists of lack of authority, not incapacity. Therefore, No. (1) of Art. 1403 of the Civil Code
is applicable. In the case of Guiang vs. Court of Appeals (June 26, 1998, 291 SCRA 372), the Supreme
Court clearly stated that Article 1390, par. 2, refers to contracts visited by vices of consent, i.e., contracts
which were entered into by a person whose consent was obtained and vitiated through mistake,
violence, intimidation, undue infl uence or fraud. In the said case, private respondent’s consent to the
contract of sale of their conjugal Art. 1390 539 property was totally inexistent or absent. x x x This being
the case, said contract properly falls within the ambit of Article 124 of the Family Code, which was
correctly applied by the two lower courts. x x x In the event that one spouse is incapacitated or
otherwise unable to participate in the administration of the conjugal properties, the other spouse may
assume sole powers of administration. These powers do not include the powers of disposition or
encumbrance which must have the authority of the court or the written consent of the other spouse. In
the absence of such authority or consent, the disposition or encumbrance shall be void. However, the
transaction shall be construed as a continuing offer on the part of the consenting spouse and the third
person, and may be perfected as a binding contract upon the acceptance by the other spouse or
authorization by the court before the offer is withdrawn by either or both offerors. (165a) Art. 1391. The
action for annulment shall be brought within four years. This period shall begin: In cases of intimidation,
violence or undue infl uence, 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.15

Prescriptive Period. — According to Art. 1391, the action for annulment must be commenced within a
period of four years. If the action refers to contracts entered into by incapacitated persons, the period
shall be counted from the time the guardianship ceases; if it refers to those where consent is vitiated by
violence, intimidation or undue infl uence, the period shall be counted from the time such violence,
intimidation or undue infl uence ceases or disappears; and if it refers to those where consent is vitiated
by mistake or fraud, the period shall be counted from the time of the discovery of such mistake or fraud.
If the action is not commenced within such period, the right of the party entitled to institute the action
shall prescribe.16 15Art. 1301, Spanish Civil Code, in modifi ed form. 16Naval vs. Enriquez, 3 Phil. 699;
Ullman vs. Hernaez, 30 Phil. 69; Villanueva vs. Villanueva, 91 Phil. 43. VOIDABLE CONTRACTS Art. 1391
540 CONTRACTS Carantes vs. Court of Appeals 76 SCRA 514 This is an appeal by certiorari from the
decision of the Court of Appeals in CA-G.R. 36078-R promulgated on December 23, 1970 reversing the
judgment of the Court of First Instance of Baguio City, Branch II, in Civil Case 804, and from the appellate
court’s resolution dated March 7, 1971 denying herein petitioner’s motion for reconsideration. Mateo
Carantes was the original owner of Lot No. 44 situated at Loakan, Baguio City, as evidenced by Original
Certifi cate of Title No. 3 issued in his name on September 22, 1910 by virtue of Free Patent No. 5
granted to him on the same date. In 1913 Mateo died. He was survived by his widow Ogasia and six
children, namely, Bilad, Crispino, Maximino, Apung and Sianang, all surnamed Carantes. In 1930,
construction of the Loakan Airport was commenced by the Government. Because a portion of Lot No. 44
was needed for the landing fi eld, the Government instituted proceedings (Civil Case 338) for its
expropriation. For the purpose, Lot No. 44 was subdivided into Lots Nos. 44-A, 44-B, 44-C, 44-D, and 44-
E. The portion expropriated by the Government was Lot No. 44-A. In 1933, Special Proceedings Nos. 409
to 413 were fi led with the court for the settlement of the estate of the late Mateo Carantes. One of his
sons, herein petitioner Maximino Carantes, was appointed and qualifi ed as judicial administrator of the
estate. In his capacity as administrator, Maximino fi led on June 20, 1939 a project of partition wherein
he listed as the heirs of Mateo Carantes who were entitled to inherit the estate, himself and his brothers
and sisters, or the latter’s surviving children. Apparently because negotiations were, by that time, under
way for the purchase by the Government of Lots Nos. 44-B and 44-C for the purpose of widening the
Loakan Airport, the only property listed by Maximino in the project of partition was the remaining
portion of Lot No. 44. On October 23, 1939 a deed denominated “Assignment of Right to Inheritance”
was executed by four of Mateo Carantes’ children, namely, Bilad, Sianang, Lauro and Crispino, and the
heirs of Apung Carantes (also a son of Mateo who died in 1923), namely, Pitag, Bill, Alson, Eduardo and
Juan, assigning to Maximino Carantes their rights to inheritance in Lot No. 44. The stated monetary
consideration for the assignment was P1.00. However, the document contains a recital to the effect Art.
1391 541 that the said lots, “by agreement of all the direct heirs and heirs by representation of the
deceased Mateo Carantes as expressed and conveyed verbally by him during his lifetime, rightly and
exclusively belong to the particular heir, Maximino Carantes, now and in the past in the exclusive,
continuous, peaceful and notorious possession of the same for more than ten years.” On the same date
Maximino Carantes sold to the Government Lots Nos. 44-B and 44-C and divided the proceeds of the
sale among himself and the other heirs of Mateo. On February 6, 1940, upon joint petition of the heirs
of Mateo Carantes, the Court of First Instance of Baguio City issued an Order in another proceeding —
Administrative Case No. 368 — cancelling O.C.T. No. 3. Pursuant thereto the said title was cancelled, and
in its place Transfer Certifi cate of Title No. 2533 was issued in the joint names of the fi ve children of
Mateo Carantes and the children of Apung Carantes (representing their deceased father) as co-owners
pro indiviso, or one-sixth share for each child. On March 16, 1940, Maximino Carantes registered the
deed of “Assignment of Right to Inheritance.’’ Accordingly, T.C.T. No. 2533 in the names of the heirs was
cancelled, and in lieu thereof Transfer Certifi cate of Title No. 2540 was issued on the same date in the
name of Maximino Carantes. Also on the same date, Maximino, acting as exclusive owner of the land
covered by T.C.T. No. 2540, executed a formal deed of sale in favor of the Government over Lots Nos.
44-B and 44-C. On February 21, 1947, as a result of the approval of the Subdivision Survey Plan psd-
16786, and pursuant to the deed of sale executed in 1940 by Maximino Carantes in favor of the
Government, T.C.T. No. 2540 in Maximino’s name was cancelled, and in lieu thereof Transfer Certifi cate
of Title No. T-98, covering Lots Nos. 44-A, 44-B and 44-C, was issued in the name of the Government,
while Transfer Certifi cate of Title No. T-99, covering the remaining Lots Nos. 44-D (100,345 square
meters) and 44-E (10,070 square meters) was issued in the name of Maximino Carantes, who has up to
the present remained the registered owner of said lots. On September 4, 1958, the present complaint
was fi led by three children of the late Mateo Carantes, namely, Bilad, Lauro and Crispino, and by some
of the surviving heirs of Apung and of Sianang (also children of Mateo Carantes). Maximino Carantes
was named principal defendant, and some of the heirs of Apung VOIDABLE CONTRACTS Art. 1391 542
CONTRACTS and Sianang were impleaded as parties-defendants in view of their alleged reluctance to
join as parties-plaintiffs. In their complaint, the plaintiffs alleged inter alia that they and/or their
predecessors-in-interest executed the deed of “Assignment of Right to Inheritance” on October 23,
1939, only because they were made to believe by the defendant Maximino Carantes that the said
instrument embodied the understanding among the parties that it merely authorized the defendant
Maximino to convey portions of Lot No. 44 to the Government in their behalf to minimize expenses and
facilitate the transaction; and that it was only on February 18, 1958, when the plaintiffs secured a copy
of the deed, that they came to know that the same purported to assign in favor of Maximino their rights
to inheritance from Mateo Carantes. The plaintiffs prayed that the deed of “Assignment of Right to
Inheritance” be declared null and void; that Lots Nos. 44-D and 44-E covered by T.C.T. No. T-99 be
ordered partitioned into six (6) equal shares and the defendant Maximino Carantes be accordingly
ordered to execute the necessary deeds of conveyance in favor of the other distributees; and that the
said defendant be ordered to pay the plaintiffs the sum of P1,000 as attorney’s fees and the sum of P200
as costs of suit. After trial, the court rendered its decision on January 28, 1965. It was the trial court’s
opinion that since an action based on fraud prescribes in four years from the discovery of the fraud, and
in this case the fraud allegedly perpetrated by the defendant Maximino Carantes must be deemed to
have been discovered on March 16, 1940 when the deed of assignment was registered, the plaintiffs’
right of action had already prescribed when they fi led the action in 1958; and even assuming that the
land remained the common property of the plaintiffs and the defendant Maximino Carantes
notwithstanding the execution of the deed of assignment, the co-ownership was completely repudiated
by the said defendant by performance of several acts, the fi rst of which was his execution of a deed of
sale in favor of the Government on October 23, 1939, hence, ownership had vested in the defendant
Maximino Carantes by acquisitive prescription. The court accordingly dismissed the complaint. It
likewise dismissed the counter claim. The plaintiffs moved for reconsideration. Their motion having been
denied in an Order dated March 8, 1965, they appealed to the Court of Appeals. As adverted to above,
the Court of Appeals reversed the judgment of the trial court, hence the present recourse. Art. 1391 543
Speaking through Chief Justice Fred Ruiz Castro, the Supreme Court held: “We do not agree with the
respondent court’s legal conclusion that the deed of “Assignment of Right to Inheritance’’ is void ab
initio and inexistent on the grounds that real consent was wanting and the consideration of P1.00 is so
shocking to the conscience that there was in fact no consideration, hence, the action for the declaration
of the contract’s inexistence does not prescribe pursuant to Article 1410 of the new Civil Code. “Article
1409(2) of the New Civil Code relied upon by the respondent court provides that contracts “which are
absolutely simulated or fi ctitious” are inexistent and void from the beginning. The basic characteristic of
simulation is the fact that the apparent contract is not really desired or intended to produce legal effects
or in any way alter the juridical situation of the parties. “The respondents’ action may not be considered
as one to declare the inexistence of a contract for lack of consideration. It is total absence of cause or
consideration that renders a contract absolutely void and inexistent. In the case at bar, consideration
was not absent. The sum of P1.00 appears in the document as one of the considerations for the
assignment of inheritance. In addition — and this is of great legal import — the document recites that
the decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the contract that
the property sub matter thereof rightly and exclusively belonged to the petitioner Maximino Carantes.
This acknowledgment by the signatories defi nitely constitutes valuable consideration for the contract.
“The present action is one to annul the contract entitled “Assignment of Right to Inheritance” on the
ground of fraud. “Article 1390 of the new Civil Code provides that a contract “where the consent is
vitiated by mistake, violence, intimidation, undue infuence or fraud,” is voidable or annullable. Even
Article 1359, which deals on reformation of instruments, provides in its paragraph 2 that ‘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.’ When the consent to a
contract VOIDABLE CONTRACTS Art. 1391 544 CONTRACTS was fraudulently obtained, the contract is
voidable. Fraud or deceit does not render a contract void ab initio, and can only be a ground for
rendering the contract voidable or annullable pursuant to Article 1390 of the new Civil Code by a proper
action in court. “The present action, being one to annul a contract on the ground of fraud, its
prescriptive period is four years from the time of the discovery of the fraud. “The next question that
must be resolved is: from what time must fraud, assuming that there was fraud, be deemed to have
been discovered in the case at bar? From February, 1958, when according to the private respondents,
and as found by the respondent court, the private respondents actually discovered that they were
defrauded by the petitioner Maximino Carantes when rumors spread that he was selling the property
for half a million pesos? Or from March 16, 1940, when, as admitted by the parties and found by both
the trial court and the respondent court, the deed of “Assignment of Right to Inheritance” was
registered by the petitioner in the Offi ce of the Register of Deeds? “The weight of authorities is to the
effect that the registration of an instrument in the Offi ce of the Register of Deeds constitutes
constructive notice to the whole world, and, therefore, discovery of the fraud is deemed to have taken
place at the time of the registration. In this case the deed of assignment was registered on March 16,
1940, and in fact on the same date T.C.T. No. 2533 in the names of the heirs of Mateo Carantes was
cancelled, and T.C.T. No. 2540 in the name of the petitioner was issued in lieu thereof. The four-year
period within which the private respondents could have fi led the present action consequently
commenced on March 16, 1940; and since they fi led it only on September 4, 1958, it follows that the
same is barred by the statute of limitations.” Should the defense also prescribe within the same period
as the action for annulment? Although Art. 1391 speaks only of the action, Spanish commentators
advance the view that the defense shall also prescribe after the lapse of four years, since the basis of the
action and the basis of the defense are identical.17 In Braganza 173 Castan, 7th Ed., pp. 415-416, citing
Manresa, De Buen and Ramos. Art. 1391 545 vs. Villa Abrille,18 however, the Supreme Court declared
that “there is reason to doubt the pertinency of the period fi xed by Art. 1301 — now Art. 1391 of the
Civil Code where minority is set up only as a defense to an action, without the minors asking for any
positive relief from the contract.” Although this statement in the decision is not controlling because it is
based on an assumption, nevertheless, we believe that this view is more just and logical. It is interesting
to note that the above aspect of the law was taken up in the Bar Examinations of 1979. Thus —

Problem — Mrs. S borrowed P20,000.00 from PG. She and her 19-year old son, Mario, signed the
promissory note for the loan, which note did not say anything about the capacity of the signers. Mrs. S
made partial payments little by little. After seven (7) years, she died leaving a balance of P10,000.00 on
the note. PG demanded payment from Mario who refused to pay. When sued for the amount, Mario
raised the defense: that he signed the note when he was still a minor. Should the defense be sustained?
Why? Answer No. 1 — The defense should be sustained. Mario cannot be bound by his signature in the
promissory note. It must be observed that the promissory note does not say anything about the capacity
of the signers. In other words, there is no active fraud or misrepresentation; there is merely silence or
constructive fraud or misrepresentation. It would have been different if the note says that Mario is of
age. The principle of estoppel would then apply. Mario would not be allowed to invoke the defense of
minority. The promissory note would then have all the effects of a perfectly valid note. Hence, as far as
Mario’s share in the obligation is concerned, the promissory note is voidable because of minority or non-
age. He cannot, however, be absolved entirely from monetary responsibility. Under the Civil Code, even
if his written contract is voidable because of minority he shall make restitution to the extent that he may
have been benefi ted by the money received by him (Art. 1399, Civil Code). True, more than four years
have already elapsed from the time that Mario had attained the age of 21. Apparently, his right to
interpose the defense has already prescribed. It has been held, however, that where minority is used as
a defense and no positive relief is prayed for, the four-year period (Art. 1391, 18105 Phil. 456. VOIDABLE
CONTRACTS Art. 1391 546 CONTRACTS Civil Code) does not apply. Here, Mario is merely interposing his
minority as an excuse from liability. (Braganza vs. Villa Abrille, 105 Phil. 456.) Answer No. 2 — The
defense should not be sustained. It must be noted that the action for annulment was instituted by PG
against Mario when the latter was already 26 years old. Therefore, the right of Mario to invoke his
minority as a defense has already prescribed. According to the Civil Code, actions for annulment of
voidable contracts shall prescribe after four years. In the case of contracts which are voidable by reason
of minority or incapacity, the four-year period shall be counted from the time the guardianship ceases
(Art. 1391, Civil Code). The same rule should also be applied to the defense. In the instant case, since
more than four years already elapsed from the time Mario had attained the age of 21, therefore, he can
no longer interpose his minority as a defense. It would have been different if four years had not yet
elapsed from the time Mario had attained the age of 21. Since there was no active fraud or
misrepresentation on his part at the time of execution of the promissory note, it is clear that the
contract is voidable as far as he is concerned. In such case, the defense of minority should then be
sustained. (Braganza vs. Villa Abrille, 105 Phil. 456.) Art. 1392. Ratifi cation extinguishes the action to
annul a voidable contract.19 Art. 1393. Ratifi cation may be effected expressly or tacitly. It is understood
that there is a tacit ratifi cation 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.20 Art. 1394. Ratifi cation may be effected by the
guardian of the incapacitated person.21 Art. 1395. Ratifi cation does not require the conformity of the
contracting party who has no right to bring the action for annulment.22 19Art. 1309, Spanish Civil Code,
in modifi ed form. 20Art. 1311, Spanish Civil Code, in modifi ed form. 21New provision. 22Art. 1312,
Spanish Civil Code. Arts. 1392-1395 547 Art. 1396. Ratifi cation cleanses the contract from all its defects
from the moment it was constituted.23

Concept of Ratifi cation. — Besides prescription, the action for annulment of a voidable contract may
also be extinguished by ratifi cation.24 Ratifi cation or confi rmation as it is known in the Spanish Civil
Code is defi ned as the act or means by virtue of which effi cacy is given to a contract which suffers from
a vice of curable nullity.25

Requisites of Ratifi cation. — Ratifi cation or confi rmation requires the concurrence of the following
requisites:26 First: The contract should be tainted with a vice which is susceptible of being cured.
Second: The confi rmation should be effected by the person who is entitled to do so under the law.
Third: It should be effected with knowledge of the vice or defect of the contract. Fourth: The cause of
the nullity or defect should have already disappeared. The fi rst requisite of confi rmation is that the
contract should be tainted with a vice which is susceptible of being cured. It is evident that confi rmation
presupposes the existence of a vice in the contract because otherwise it would not have any object.
Furthermore, such vice should be susceptible of being cured because otherwise the contract would be
void or inexistent and, therefore, not susceptible of confi rmation.27 The second requisite is that the
confi rmation should be effected only by the person who is entitled to do so under the law. This is
implied from the provisions of Arts. 1394 and 1395. Hence, if the contract was entered into by an
incapacitated person, the confi rmation can be effected only by such person upon attaining or 23Art.
1313, Spanish Civil Code. 24Art. 1392, Civil Code. For a third mode of extinguishing the action, see Art.
1401, Civil Code. 258 Manresa, 5th Ed., Bk. 2, p. 665. 263 Castan, 7th Ed., p. 419; 8 Manresa, 5th Ed., 2,
pp. 668-671. 278 Manresa, 5th Ed., Bk. 2, pp. 668-670. VOIDABLE CONTRACTS Art. 1396 548 CONTRACTS
regaining capacity or by his guardian if he has not yet attained or regained capacity, and if the contract
was executed through mistake, violence, intimidation, undue infl uence, or fraud, it can be effected only
by the innocent party.28 The third requisite is that the confi rmation should be effected with knowledge
of the vice or defect of the contract. This is clear from the provision of Art. 1393. Since confi rmation is
above all a form of expressing the will, as such it requires, independently of the act to which it refers,
the same conditions of freedom, knowledge and clarity which consent also requires, although it does
not require the conformity of the other party who has no right to invoke the nullity of the contract.
Consequently, confi rmation may also be invalidated by mistake, violence, intimidation, undue infl
uence, or fraud.29 It must be noted, however, that the contract may be tainted with several vices, such
as when it has been executed through mistake and fraud. In such case, if the person entitled to effect
the confi rmation ratifi es or confi rms the contract with knowledge of the mistake, but not of the fraud,
his right to ask for annulment is not extinguished thereby since the ratifi cation or confi rmation has only
purged the contract of mistake, but not of fraud.30 The fourth requisite is that the cause of nullity
should have already ceased or disappeared because otherwise the act of confi rmation would also suffer
from the very vice or defect which it seeks to cure.31 It must be observed, however, that in the case of
contracts entered into by incapacitated persons, this is not indispensable in a sense, because even while
the incapacity continues to exist, the confi rmation may be effected by the guardian of the incapacitated
person.32

Forms of Ratifi cation. — There is no special form required for confi rmation, but, as the law provides, it
may be effected expressly or tacitly. The fi rst is not defi ned in the Code, but, undoubtedly, there is an
express confi rmation 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 expressly declare 28Arts. 1394-
1395, Civil Code. See 3 Castan, 7th Ed., p. 419. 298 Manresa, 5th Ed., Bk. 2, pp. 670-671. 30Ibid., p. 672.
313 Castan, 7th Ed., p. 419. 32Art. 1349, Civil Code. Art. 1396 549 his desire to convalidate it, or what
amounts to the same thing, to renounce his right to annul the contract.33 On the other hand, there is a
tacit confi rmation, 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.34 Thus, where it is established that a minor who had entered
into a contract of sale, not only failed to repudiate it upon reaching the age of majority, but also
disposed of the greater part of the proceeds after he became of age and after he had knowledge of the
facts which he now seeks to disaffi rm, it was held that there was a tacit ratifi cation or confi rmation of
the contract.35 Similarly, if the person who can effect the confi rmation, instead of demanding the
annulment of a contract of sale, should proceed to collect the greater part of the purchase price, as set
out in a promissory note, it is clear that there is already a tacit confi rmation of the contract.36

Effects of Ratifi cation. — The effects of ratifi cation or confi rmation are clearly pointed out in Arts. 1392
and 1396. In the fi rst place, ratifi cation extinguishes the action to annul the contract; and in the second
place, it cleanses the contract of its defects from the moment it was constituted.37 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 infl uence, or employed fraud,
or caused mistake base their action upon these fl aws of the contract.38

Who May Institute Action. — From Art. 1397 of the Code it can be inferred that two different requisites
are required to confer the necessary capacity for the exercise of the action for annulment. 338 Manresa,
5th Ed., Bk. 2, p. 671. 34Art. 1393, Civil Code. 35Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552. 36Tacalinar
vs. Corro, 34 Phil. 8898. 37Arts. 1392, 1396, Civil Code; 3 Castan, 7th Ed., p. 420. 38Art. 1302, Spanish
Civil Code, in modifi ed form. VOIDABLE CONTRACTS Art. 1397 550 CONTRACTS The fi rst requisite is that
the plaintiff must have an interest in the contract. The second is that the victim and not the party
responsible for the vice or defect must be the person who must assert the same.39 Discussing the fi rst
requisite, the Supreme Court, in a leading case, declared: “From these legal provisions (referring to what
are now Arts. 1390 and 1397 of the Civil Code) it is deduced that it is the interest had in a given contract,
that is the determining reason of the right which lies in favor of the party obligated principally or
subsidiarily to enable him to bring an action for the annulment of the contract in which he intervened
and therefore he who has no right in a contract is not entitled to prosecute an action for annulment, for
according to the precedents established by the courts the person who is not a party to a contract, or
who has no cause of action or representation from those who intervened therein, is manifestly without
right of action and personality such as to enable him to assail the validity of the contract.’’40
Consequently, a third person who is a stranger to the contract cannot institute an action for its
annulment. There is, however, an exception to this rule. According to the Supreme Court, a person who
is not a party obliged principally or subsidiarily under a contract may exercise an action for annulment of
the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show
detriment which would positively result to him from the contract in which he has no intervention.41
Thus, where the remaining partners of a partnership executed a chattel mortgage over the properties of
the partnership in favor of a former partner to the prejudice of creditors of the partnership, the latter
have a perfect right to fi le the action to nullify the chattel mortgage.42 398 Manresa, 6th Ed., Bk. 2, p.
639; Wolfson vs. Estate of Martinez, 20 Phil. 340. 40Ibañez vs. Hongkong & Shanghai Bank, 22 Phil. 572.
To the same effect: Compania General vs. Topino, 4 Phil. 33; Martell Ong vs. Jariol, 17 Phil. 244; Dy Sun
vs. Brilliantes, 93 Phil. 175. 41Teves vs. People’s Homesite & Housing Corp., 23 SCRA 1141; De Santos vs.
City of Manila, 45 SCRA 409; Singsong vs. Isabela Sawmill, 88 SCRA 623. 42Singsong vs. Isabela Sawmill,
88 SCRA 623. But would this not be confusing the concept of annulment of voidable contracts with the
concept of rescission of rescissible contracts? Art. 1397 551 The second requisite, on the other hand, is
based on the wellknown principle of equity that whoever goes to court must do so with clean hands.43
Some commentators say that only the party who is prejudiced can institute the action. This statement,
however, is misleading for the simple reason that the action for annulment is independent of the lesion
or damage suffered by the plaintiff. This is clear from the provision of Art. 1390 which states that the
contracts enumerated therein are voidable, even though there may have been no damage to the
contracting parties.44

Problem No. 1 — X, of age, entered into a contract with Y, a minor. X knew and the contract specifi cally
stated the age of Y. May X successfully demand annulment of the contract? Reason. (1971 Bar Problem)
Answer — X cannot successfully demand annulment of the contract. True, said contract is voidable
because of the fact that at the time of the celebration of the contract, Y, the other contracting party,
was a minor, and such minority was known to X (Arts. 1327, No. 1, 1390 CC). However, the law is
categorical with regard to who may institute the action for annulment of the contract. In addition to the
requirement that the action may be instituted only by the party who has an interest in the contract in
the sense that he is obliged thereby either principally or subsidiarily, Art. 1397 of the Civil Code further
requires that in case of contracts voidable by reason of incapacity of one of the contracting parties, the
party who has capacity cannot allege the incapacity of the party with whom he contracted. Because of
this additional requisite, it is clear that Y and not X can institute the action for annulment.

Problem No. 2. — Pedro sold a piece of land to his nephew Quintin, a minor. One month later, Pedro
died. Pedro’s heirs then brought an action to annul the sale on the ground that Quintin was a minor and
therefore without legal capacity to contract. If you are the judge, would you annul the sale? (1974 Bar
Problem) Answer — If I am the judge, I will not annul the sale. The Civil Code in Art. 1397 is explicit.
Persons who are capable cannot allege the incapacity of those with whom they contracted. True, Pedro
who sold the land to the minor Quintin is already 43Bastida vs. Dy Buncio & Co., 93 Phil. 195. 448
Manresa, 5th Ed., Bk. 2, p. 641. VOIDABLE CONTRACTS Art. 1397 552 CONTRACTS dead, and it is his heirs
who are now assailing the validity of the sale. However, under the principle of relativity of contracts
recognized in Art. 1311 of the Civil Code, the contract takes effect not only between the contracting
parties, but also between their assigns and heirs. (Note: Another way of answering the above problem
would be to state the two requisites which must concur in order that a voidable contract may be
annulled. These requisites are: (a) that the plaintiff must have an interest in the contract; and (b) that
the victim or the incapacitated party must be the person who must assert the same. The second
requisite is lacking in the instant case.) 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.45 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 benefi ted by the thing or price received by him.46

Effects of Annulment. — If the contract has not yet been consummated, it is evident, although the Code
does not expressly say so, that the contracting parties shall be released from the obligations arising
therefrom.47 However, if the contract has already been consummated, the rules provided for in Arts.
1398 to 1402 of the Code shall govern. Idem;

Obligation of mutual restitution. — Upon the annulment of the contract, if the prestation thereof
consisted in obligations to give, the 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. If, on 45Art. 1303, Spanish Civil Code, in modifi ed form. 46Art. 1304, Spanish Civil Code. 473
Castan, 7th Ed., pp. 416-417. Arts. 1398-1399 553 the other hand, the prestation consisted in obligations
to do or not to do, there will have to be an apportionment of damages based on the value of such
prestation with corresponding interests.48 In other words, upon annulment the contracting parties
should be restored to their original position by mutual restitution.49 There is, therefore, practically no
difference between the effect of rescission based on lesion as enunciated in the fi rst paragraph of Art.
1385 of the Code and the general effect of annulment as enunciated in Art. 1398. As in the case of
rescission, the question of fruits shall be governed by the rules on possession. Interest of course, refers
to the legal interest.50 Idem; id. —
Rule in case of incapacity. — The principle of mutual restitution as enunciated in Art. 1398 is, however,
modifi ed by the provision of Art. 1399. When the defect of the contract consists in the incapacity of one
of the contracting parties, the incapacitated person is not obliged to make any restitution except insofar
as he has been benefi ted by the thing or price received by him.51 It is evident that this rule is applicable
only and exclusively to those cases where the nullity arises from the incapacity of one of the contracting
parties. Consequently, if the nullity should arise from some other cause, the general rule enunciated in
Art. 1398 shall govern.52 The benefi t spoken of in Art. 1399 which obliges the incapacitated person to
make restitution does not necessarily presuppose a material and permanent augmentation of fortune; it
is suffi cient if there has been a prudent and benefi cial use by the incapacitated person of the thing
which he has received. In order to determine this, it is necessary to know his necessities, his social
position as well as his duties as a consequence thereof to others. Thus, such benefi t is present if the
thing received is used for food, clothing, shelter, health, and others of a similar character. It is, however,
clear that the proof of such benefi t is cast upon the person who has capacity, since it is presumed in the
absence of proof that no such benefi t has accrued 48Art. 1398 Civil Code; 3 Castan, 7th Ed., pp. 416-
417. 49Cadwallader & Co. vs. Smith, Bell & Co., 7 Phil. 461. To the same effect: Dumasug vs. Modelo, 34
Phil. 252; Oliveros vs. Porciongcola, 69 Phil. 305; Talag vs. Tankengco, 92 Phil. 1066. 508 Manresa, 5th
Ed., Bk. 2, p. 646. 51See Art. 1426, Civil Code. 528 Manresa, 5th Ed., Bk. 2, p. 647. VOIDABLE CONTRACTS
Arts. 1398-1399 554 CONTRACTS to the incapacitated person.53 Thus, where two minors borrowed a
certain amount from the creditor during the Japanese occupation, and such indebtedness is evidenced
by a promissory note, while it is true that they cannot be bound by their signatures because of their
minority, they can still be compelled to make restitution to the extent that they may have been benefi
ted by the money which they received. Since there is proof that the funds were used for their support
during the Japanese occupation, it is but fair to hold that they had profi ted to the extent of the value of
such money. They must, therefore, reimburse the creditor the value of such money, which value must
be computed in accordance with the Ballantyne Schedule.54 It must be observed that Art. 1399 cannot
be applied to those cases where the incapacitated person can still return the thing which he has
received. Thus, according to the Supreme Court, whatever difference may exist in the authorities as to
the obligation of an incapacitated person to return the entire consideration received by virtue of a
contract of sale as a condition precedent to disaffi rming the contract, they are unanimous in holding
that he must return such portion thereof as remains in his possession upon reaching or attaining
capacity. Hence, if after attaining capacity, it is established that he not only failed to ask for the
annulment of the contract but he also squandered that part of the consideration which remained, it is
clear that there is already an implied ratifi cation or confi rmation.55 Art. 1400. Whenever the person
obliged by the decree of annulment to return the thing can not 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.56 Art. 1401. The action for annulment of contracts shall be extinguished
when the thing which is the object thereof is 53Ibid., pp. 648-649. 54Braganza vs. Villa Abrille, 105 Phil.
456. 55Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552. See also Young vs. Tecson, CA, 39 Off. Gaz. 953. 56Art.
1307, Spanish Civil Code, in modifi ed form. Arts. 1400-1401 555 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.57 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.58
Effect of Failure to Make Restitution. — Sometimes, for some reason or other, the action for annulment
is commenced after the lapse of several years from the time of the consummation of the contract.
Suppose then that prior to the commencement of the action, the thing which constitutes the object of
the contract is lost, what is the effect upon the right of the party who, ordinarily, is entitled to institute
the action for annulment? This question is resolved in part by the provisions of Arts. 1400 to 1402 of the
Code. Idem;

Where loss is due to fault of defendant. — According to Art. 1400, when 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. It is evident that this rule is applicable only when the loss of the thing is due to the fault of the
party against whom the action for annulment may be instituted.59 This is so because if the loss is due to
the fault of the party who has a right to institute the action, the provision of Art. 1401 shall apply. The
loss of the thing which constitutes the object of the contract through the fault of the party against
whom the action for annulment may be instituted shall not, therefore, extinguish the action for
annulment. The only difference from an ordinary action for annulment is that, instead of being
compelled to restore the thing, the defendant can only be compelled to pay the value thereof at the
time of the loss. 57Art. 1314, Spanish Civil Code, in modifi ed form. 58Art. 1308, Spanish Civil Code. 598
Manresa, 6th Ed., Bk. 2, p. 658. VOIDABLE CONTRACTS Art. 1402 556 CONTRACTS Idem;

Where loss is due to fault of plaintiff. — However, if the loss of the thing is due to the fraud or fault of
the party who is entitled to institute the proceedings, according to the fi rst paragraph of Art. 1401, the
action for annulment shall be extinguished. There are, therefore, three modes whereby such action may
be extinguished. They are: (1) prescription; (2) ratifi cation; and (3) the loss of the thing which is the
object of the contract through the fraud or fault of the person who is entitled to institute the action. The
second paragraph of Art. 1401, on the other hand, which at fi rst blush seems to be an exception to the
rule stated in the fi rst paragraph, has created a legal absurdity. Under the old Code, the provision was
as follows: “If the cause of action is the incapacity of any of the contracting parties, the loss of the thing
shall not be an obstacle to the success of the action, unless it has occurred through the fraud or fault of
the plaintiff after having acquired capacity.”60 Hence, under the old law, if the loss of the thing was due
to the fraud or fault of the plaintiff after he had acquired capacity, the general rule was applicable; in
other words, the action was extinguished. But if the loss was due to the fraud or fault of the plaintiff
during his incapacity, the exception was applicable; in other words, the loss would not be an obstacle to
the success of the action. However, with the deletion of the phrase “after having acquired capacity”
from the provision of the second paragraph of Art. 1401 of the present Code, the result is an absolute
redundancy. Whether the loss occurred during the plaintiff’s incapacity or after he had acquired
capacity, the action for annulment would still be extinguished in accordance with the rule stated in the fi
rst paragraph. Idem;

Where loss is due to fortuitous event. — Unfortunately, the Code in Arts. 1400 and 1401 does not
provide for the effect of the loss of the object of the contract through a fortuitous event upon the right
to ask for the annulment of the contract. In spite of this omission, it is, however, possible to apply the
general principles regarding the effects of fortuitous events to any problem that may arise. If the person
obliged by the decree of annulment to return the thing cannot do so because it has been lost through a
fortuitous event, the contract can still be annulled, but with this difference — 60Art. 1314, Spanish Civil
Code. Art. 1402 557 the defendant can be held liable only for the value of the thing at the time of the
loss, but without interest thereon. The defendant, and not the plaintiff, must suffer the loss because he
was still the owner of the thing at the time of the loss; he should, therefore, pay the value of the thing,
but not the interest thereon because the loss was not due to his fault.61 If it is the plaintiff who cannot
return the thing because it has been lost through a fortuitous event, the contract may still be annulled,
but with this difference — he must pay to the defendant the value of the thing at the time of the loss,
but without interest thereon. According to Dr. Tolentino, if the plaintiff offers to pay the value of the
thing at the time of its loss as a substitute for the thing itself, the annulment of the contract would still
be possible, because, otherwise, we would arrive at the absurd conclusion that an action for annulment
would in effect be extinguished by the loss of the thing through a fortuitous event.62 614 Tolentino, Civil
Code, 1956 Ed., pp. 558-559. 62Ibid., pp. 557-558. VOIDABLE CONTRACTS Art. 1402 558 CONTRACTS
CHAPTER 8 UNENFORCEABLE CONTRACTS

Unenforceable Contracts in General. — Unenforceable contracts are those which cannot be enforced by
a proper action in court, unless they are ratifi ed, because, either they are entered into without or in
excess of authority or they do not comply with the statute of frauds or both of the contracting parties do
not possess the required legal capacity.1 As regards the degree of defectiveness, they occupy an
intermediate ground between voidable and void contracts.2 Idem;

Classes. — There are three general classes of unenforceable contracts. They are: fi rst, those contracts
entered into in the name of another person by one without any authority or in excess of his authority;
second, those which do not comply with the Statute of Frauds; and third, those where both contracting
parties are legally incapacitated. Under the old law, the fi rst were considered as a special type of void
contracts — void contracts which were susceptible of ratifi cation as distinguished from void and
inexistent contracts which were (and still are) not susceptible of ratifi cation. Under the present law,
they are now placed in the same category as contracts which do not comply with the Statute of Frauds.3
Yet there is no question that the defects from which each of these three classes of unenforceable
contracts suffers are essentially different 1 Art. 1403, Civil Code. 2 Report of the Code Commission, p.
139. 3 While the classifi cation in the other defective contracts is based on the defect from which the
contracts suffer, here it is based on the consequence. As a result, the classifi cation found in Art. 1403
has been criticized on the ground that it places contracts which are tainted with a vice or defect which
affects not only their enforceability but also their validity in the same category as contracts which are
tainted with a mere formal defect which affect only their enforcement. 559 from each other. In the fi rst,
there is absolutely no consent insofar as the person in whose name the contract is entered into is
concerned; in the second, there is no writing, note or memorandum by which the contract maybe
proved; while in the third, consent is absolutely vitiated by the legal incapacity of both of the contracting
parties. From these differences, consequences which are also essentially different from each other arise.
Idem;

Characteristics. — Although they are essentially different from each other, yet all unenforceable
contracts possess the following characteristics: (1) They cannot be enforced by a proper action in court;4
(2) They are susceptible of ratifi cation;5 (3) They cannot be assailed by third persons.6 Idem;

Distinguished from rescissible contracts. — An unenforceable contract may be distinguished from a

rescissible contract in the following ways: (1) An unenforceable contract cannot be enforced by a proper
action in court, while a rescissible contract can be enforced, unless it is rescinded. (2) The causes for the
unenforceable character of the former are different from the causes for the rescissible character of the
latter. (3) The former is susceptible of ratifi cation, while the latter is not. (4) The former cannot be
assailed by third persons, while the latter may be assailed by third persons who are prejudiced. Idem;

Distinguished from voidable contracts. — An unenforceable contract may be distinguished from a

voidable contract in the following ways: (1) An unenforceable contract cannot be enforced by a proper
action in court, while a voidable contract can be enforced, unless it is annulled. 4 Art. 1403, Civil Code. 5
Arts. 1403, 1405, 1407, 1371, Civil Code. 6 Art. 1408, Civil Code. UNENFORCEABLE CONTRACTS 560
CONTRACTS (2) The causes for the unenforceable character of the former are different from the causes
for the voidable character of the latter. Art. 1403. The following contracts are unenforceable, unless
they are ratifi ed: (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 suffi cient
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; Art. 1403 561 (f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.7

Contracts Without or in Excess of Authority. — Contracts 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 are
unenforceable. Under the old law, such contracts were classifi ed as void contracts, although susceptible
of ratifi cation.8 According to Art. 1404, such contracts shall be governed by Art. 1317 and by the
principles of agency in Title X of the Code. Consequently, the following principles are applicable: (1) No
one may contract in the name of another without being authorized by the latter or unless he has a right
to represent him. If he is duly authorized, he must act within the scope of his powers.9 (2) A contract
entered into in the name of another by one who has no authority or legal representation, or who has
acted beyond his powers, is unenforceable.10 This principle is reiterated in the law on agency.11 (3)
However, such contract may be ratifi ed, expressly or impliedly, by the person in whose behalf it has
been executed, before it is revoked by the other contracting party.12 It must be noted that under the
old law (Spanish Civil Code), the terms “confi rmation” and “ratifi cation” were not interchangeable. 7
New provision. 8 Tipton vs. Velasco, 6 Phil. 67; Gutierrez Hnos. vs. Orense, 28 Phil. 517; Tacalinar vs.
Corro, 34 Phil. 898; Ibañez vs. Rodriguez, 47 Phil. 554; Zamboanga Trans. Co. vs. Bachrach Motor Co., 62
Phil. 244; Gana vs. Archbishop of Manila, 43 Off. Gaz. 3224.9 Arts. 1317, 1881, Civil Code. 10Arts. 1403,
No. 1, 1317, Civil Code. 11Art. 1898, Civil Code. “If the agent contracts in the name of the principal,
exceeding the scope of his authority, and the principal does not ratify the contract, it shall be void if the
party with whom the agent contracted is aware of the limits of the powers granted by the principal. In
this case, however, the agent is liable if he undertook to secure the principal’s ratifi cation.” It must be
noted that this article says that the contract is void, whereas Art. 1403, No. 1, says that it is
unenforceable. Now, which is which? The mistake is in Art. 1898. The correct term is “unenforceable.”
12Art. 1317, Civil Code. UNENFORCEABLE CONTRACTS Art. 1403 562 CONTRACTS Confi rmation was a
term used to designate the act by which a voidable contract was cured of its vice or defect, while ratifi
cation was used exclusively to designate the act by which a contract entered into by a person in behalf
of another without or in excess of authority is cured of its defect. Under the present Code, the term
ratifi cation is now used to designate the act of validating any kind of defective contract. Under the old
law, it was also customary to distinguish confi rmation and ratifi cation from recognition. Recognition or
acknowledgment refers to an act whereby a defect of proof is cured, such as when an oral contract is
put in writing, or when a private instrument is converted into a public instrument. Thus, according to the
Supreme Court, in the case of Luna vs. Linatoc:13 “Confi rmation tends to cure a vice of nullity, and ratifi
- cation is for the purpose of giving authority to a person who previously acted in the name of another
without authority. Recognition, on the other hand, is merely to cure a defect of proof. In recognition,
there is no vice to be remedied such as fraud, violence or mistake, so that the case is distinguished from
confi rmation. In recognition, the person acting on behalf of another is duly authorized to do so, so the
situation is different from ratifi cation.’’

Contracts Infringing Statute of Frauds. — The second class of unenforceable contracts are those which
do not comply with the Statute of Frauds. The Statute of Frauds, being essentially a rule of substantive
law, is now found in No. 2 of the Art. 1403 of the Civil Code, thus superseding the statute as enunciated
in Sec. 21 of Rule 123 of the old Rules of Court. Idem;

Purpose of Statute. — The Statute of Frauds was enacted for the purpose of preventing frauds. Hence, it
should not be made the instrument to further them.14 Idem;

Form required by Statute. — Under the Statute of Frauds, the only formality required is that the
contract or agreement must be in writing and subscribed by the party charged or by his 1374 Phil. 15.
14Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857; Shoemaker vs. La Tondeña, 68 Phil. 24. Art.
1403 563 agent.15 However, it has been held that a telegram advising a person to whom a verbal
promise for the sale of land had been previously made to come at once in order to complete the
purchase, but which telegram neither describes the property nor states the purchase price, and which is
not signed by any person having authority to bind the seller, is not a suffi cient memorandum of sale to
satisfy the requirement of the statute.16 Idem;

Effect of noncompliance with Statute. — In case of noncompliance with the Statute of Frauds, the
contract or agreement is unenforceable by action. This is clear from the statute itself which states that
evidence of the agreement cannot be received without the writing, or a secondary evidence of its
contents. What is, therefore, affected by the defect of the contract or agreement is not its validity, but
its enforceability. The Statute of Frauds simply provides the method by which the contracts enumerated
therein may be proved. It does not declare that said contracts are invalid because they are not reduced
to writing. A contract exists and is valid even though it is not clothed with the necessary form.
Consequently, the effect of non-compliance with the requirement of the statute is simply that no action
can be enforced unless the requirement is complied with.17 It is, therefore, clear that the form required
is for evidential purposes only. Hence, if the parties permit a contract to be proved, without any
objection, it is then just as binding as if the statute has been complied with.18 Idem;
Contracts Covered by Statute. — There are six classes of contracts which are covered by the Statute of
Frauds. They are: (1) An agreement that by its terms is not to be performed within a year from the
making thereof. It is well-settled that this refers only to agreements which by their terms are not to be
performed on either side within a year from the execution thereof. Hence, those which are to be fully
performed on one side within a year are taken out of the operation of the statute.19 Thus, when in an
15Jimenez vs. Rabot, 38 Phil. 378. 16Basa vs. Raquel, 45 Phil. 655. 17Gallemit vs. Tabilaran, 20 Phil. 241.
18Domalagan vs. Bolifer, 33 Phil. 471. 19Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857.
UNENFORCEABLE CONTRACTS Art. 1403 564 CONTRACTS oral contract, which by its terms is not to be
performed within one year from the execution thereof, one of the contracting parties has already
complied within the year with the obligations imposed upon him by said contract, the other party
cannot avoid the fulfi llment of those incumbent upon him under the same contract by invoking the
Statute of Frauds, because such statute aims to prevent and not to protect fraud.20 (2) A special
promise to answer for the debt, default or miscarriage of another. It is well-settled that a promise in
order to fall under the statute must be collateral, not independent or original. Thus, in the case of Reiss
vs. Memije,21 the Supreme Court held: “The true test as to whether a promise is within the statute has
been said to lie in the answer to the question whether the promise is an original or a collateral one. If
the promise is an original or an independent one, that is, if the promisor becomes thereby primarily
liable for the payment of the debt, the promise is not within the statute. But, on the other hand, if the
promise is collateral to the agreement of another and the promisor becomes thereby merely a surety,
the promise must be in writing. Just what is the character of a promise as original or collateral is a
question of law and fact which must in each case be determined from the evidence as to the language
used in making the promise, and the circumstances under which the promise was made; and since as a
general rule the parties making a promise of this nature rarely understand the legal and technical
difference between an original and collateral promise, the precise form of words used, even when
established by undisputed testimony, is not always conclusive. So that it is said that ‘While, as a matter
of law, a promise, absolute in form, to pay or to be responsible or to be the paymaster is an original
promise, and while on the other hand, if the promisor says, ‘I will see you paid,’ or ‘I will pay if he does
not,’ or uses equivalent words, the promise standing alone is collateral, yet under all the circumstances
of the case, an absolute promise to pay, or a promise to be responsible, may be found to be collateral,
or promises deemed prima facie collateral may be adjudged original.’’ 20Shoemaker vs. La Tondeña, 68
Phil. 24. 2115 Phil. 350. Art. 1403 565 (3) An agreement made in consideration of marriage, other than a
mutual promise to marry.22 Thus, marriage settlements and donations by reason of marriage, according
to the Code, shall be regulated by the Statute of Frauds.23 (4) An agreement for the sale of goods,
chattels or things in action, at a price not less than Five hundred pesos.24 (5) An agreement for the
leasing of real property for a longer period than one year, or for the sale of real property or an interest
therein.25 Thus, in the case of Syquia vs. CA (151 SCRA 507), the Supreme Court ruled that an alleged
oral assurance or promise of the representatives of the lessor that the lessee should be given priority or
a renewal of the lease cannot be enforceable. This is because under Article 1403, No. 2(e), of the New
Civil Code, an agreement for the leasing for a longer period than one year is 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. In the subsequent case of Zaide vs. CA (163 SCRA 705), the SC reiterated the
principle enunciated in Syquia case and further ruled that the writing be in the form of a public
document, thus it held: “If the agreement concerns “the sale of land or of an interest therein,’’ the law
requires not only that “the same, or some note or memorandum thereof, be in writing, and subscribed
by the party charged,’’ in order that it may be enforceable by action (Article 1403 [2]), but also that the
writing be in the form of a “public document’’ (Article 1358). The law fi nally provides that, “if the law
requires a document or other special form,’’ as in the acts and contracts enumerated in Article 1358, the
contracting parties may compel each other to observe that form, once the contract has been perfected
and such right may be exercised simultaneously with the action upon the contract (Article 1357). 22For
illustrative cases, see Atienza vs. Castillo, 72 Phil. 589; Cabague vs. Auxilio, 48 Off. Gaz. 4823. 23Arts.
122, 127, Civil Code. 24For illustrative case, see Robles vs. Lizarraga Hnos, 50 Phil. 387. 25For illustrative
cases, see Gorospe vs. Ilayat, 29 Phil. 21; Fernandez vs. Bayan, 62 Phil. 909; Pascual vs. Realty
Investment, Inc., 91 Phil. 257; Valino vs. Medina, CA, 49 Off. Gaz. 592. UNENFORCEABLE CONTRACTS Art.
1403 566 CONTRACTS Western Mindanao Co. vs. Medalle 79 SCRA 703 Appeal from the order of the
Court of First Instance of Zamboanga City dismissing the complaint upon the ground that the claim on
which it is founded is unenforceable under the Statute of Frauds and special law. The complaint, fi led
on December 16, 1960, alleges that: “2. — The Plaintiff is engaged in logging operations in Curuan,
Zamboanga City and in connection with the said logging operation it obtained on September 8, 1955 a
right-of-way through the said Lot 2136 of the Cadastral Survey of Zamboanga from Mr. Luciano
Hernandez, then the registered owner, a copy of the agreement being enclosed as Annex ‘A’; “3. — The
former owners of the logging concession operated by the Plaintiff constructed and maintained the said
road through Lot 2136, but the Plaintiff improved the said road, paying to the registered owner for all
the improvements damaged by the improvement of the road; “4. — Long before the execution of the
right-of-way agreement on September 8, 1955, since then and up to the present time the said road has
been maintained and used not only by the predecessor of the Plaintiff and the Plaintiff, but also by the
public; “5. — The said Lot 2136 was purchased by the defendants in 1958 and the said road then existed
and was in public use and the defendants did not oppose but instead allowed the continued use and
maintenance of the road by the Plaintiff and the public; “6. — The said road is indispensable to the
business operations of the Plaintiff, because it is the only access from their concession to the highway;
“7. — That defendants have now sent to the Plaintiff a notice (Annex ‘B’) of their intention to close the
road; and “8. — The Plaintiff has the right to the continued use of said road, the closing of which will
cause injustice and irreparable damages to the Plaintiff and the Plaintiff is willing to post a bond for the
issuance of a writ of preliminary injunction to stop the defendants from closing the road.” Art. 1403 567
x x x x x x x x x Wherefore, the plaintiff prayed that a writ of preliminary injunction be issued restraining
the defendants from closing the said road, and after hearing, make the injunction permanent. It also
prayed that the defendants be directed to recognize and respect the said road right-of-way agreement.
Copies of the road right-of-way agreement and the letter of the defendants advising the plaintiff of the
closure of the road were attached thereto. Upon the fi ling of a bond in the amount of P1,000.00, a writ
of preliminary injunction was issued, restraining the defendants from closing the road. Instead of a
responsive pleading, the defendant fi led a motion to dismiss the complaint on January 4, 1961, upon
the ground that the claim on which the action or suit is founded is unenforceable under the provisions
of the Statute of Frauds and special law, in that the fi rst page of the said road rightof-way agreement
was not signed by both parties and their instrumental witnesses; page two thereof is not dated, and the
signature of the plaintiff’s corporate agent does not appear; and that said agreement is not
acknowledged before a person authorized to administer oaths. The plaintiff opposed the motion, stating
that the agreement between plaintiff and Luciano Hernandez is not one of those agreements specifi ed
in the Statute of Frauds. Nevertheless, the trial court granted the motion to dismiss on January 17, 1961
and dismissed the cases. The plaintiff fi led a motion for reconsideration of the said order, insisting that
the road right-of-way agreement is not covered by the Statute of Frauds. Then, on March 4, 1961, the
plaintiff fi led an Amended Complaint, accompanied by a motion for its admission. The plaintiff therein
prayed, among others, that the Defendants be ordered to keep the road open and to respect the right-
of-way agreement and “should it be ascertained that under the law the plaintiff is bound to pay
compensation for the right-of-way to the defendants, it is prayed that the reasonable amount of such
compensation be fi xed. After hearing the parties, the trial court issued an order on September 6, 1961,
denying the motion for reconsideration. Whereupon, the plaintiff perfected an appeal to the Court of
Appeals. The appellate court, fi nding that only questions of law are raised, elevated the appeal to this
Court. UNENFORCEABLE CONTRACTS Art. 1403 568 CONTRACTS The Supreme Court, speaking through
Justice H. Concepcion, held: The appeal is meritorious. The Statute of Frauds refers to specifi c kinds of
transactions and cannot apply to any that is not enumerated therein. The transactions or agreements
covered by said statute are the following: “(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 fi ve 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 purchasers and
person on whose account the sale is made, it is suffi cient memorandum; “(e) An agreement for the
leasing for a longer period than one year, for the sale of real property or of an interest therein; “(f) A
representation as to the credit of a third person.’’ Obviously, an agreement creating an easement of
right-ofway is not one of those contracts covered by the statute of frauds since it is not a sale of real
property or of an interest therein. The trial court, therefore erred in dismissing the case upon the
defendants’ claim that the road right-of-way agreement in question is unenforceable under the Statute
of Frauds. Besides, the complaint, as amended, may be viewed not only as a claim for the recognition of
the existence of an easement of right-of-way on defendants’ estate, but also a demand for the
establishment of an easement of right-of-way, if none exists, pursuant to Art. 649 of the Civil Code, in
view of the plaintiff’s offer to pay reasonable compensation for the use of the land. WHEREFORE, the
judgment appealed from is hereby reversed and the orders of January 17, 1961 and September 6, 1961
set aside. Costs against the defendant-appellees. SO ORDERED. Art. 1403 569 (6) A representation as to
the credit of a third person.

Problem — “A” and “B” entered into a verbal contract whereby “A” agreed to sell to “B” his only parcel
of land for P20,000.00 and “B” agreed to buy at the aforementioned price. “B” went to the bank,
withdrew the necessary amount, and returned to “A” for the consummation of the contract. “A,”
however, had changed his mind and refused to go through with the sale. Is the agreement valid? Will an
action by “B’’ against “A” for specifi c performance prosper? Reason. (1982 Bar problem) Answer — It
must be observed that there are two questions which are asked. They are: (1) Is the agreement valid?
The answer is yes. It is a time honored rule that even a verbal agreement to sell land is valid so long as
there is already an agreement with respect to the object and the purchase price. (2) Will an action by
“B” against “A” for specifi c performance prosper? The answer is no, unless it is ratifi ed. The reason is
obvious. The agreement, being an agreement of sale of real property, is covered by the Statute of
Frauds. It cannot, therefore, be enforced by a court action because it is not evidenced by any note or
memorandum or writing properly subscribed by the party charged. (Note: The above answer is based on
No. 2 of Art. 1403 of the Civil Code and on decided cases.) Idem;

Effect of Performance of Contract. — The rule is well established that the Statute of Frauds is applicable
only to those contracts which are executory and not to those which have been consummated either
totally or partially.26 The basis of this rule is, of course, the fact that in such case there is already a ratifi
cation of the contract within the meaning of Art. 1405 of the Civil Code. There is acceptance of benefi ts.
26Arroyo vs. Azur, 76 Phil. 493. To the same effect: Almirol vs. Monserrat, 48 Phil. 67; Asturias Sugar
Central, Inc. vs. Montinola, 69 Phil. 725; Diana vs. Macalibo, 74 Phil. 70; Facturan vs. Sabanal, 46 Off.
Gaz. 310; Carbonnel vs. Poncio, 103 Phil. 655. UNENFORCEABLE CONTRACTS Art. 1403 570 CONTRACTS
Carbonnel vs. Poncio, et al. 103 Phil. 655 The records show that plaintiff purchased from defendant
Poncio a parcel of land; that she paid part of the agreed price with the understanding that she will pay
the balance upon the execution of the deed of conveyance; that defendant refused to execute the deed
in spite of repeated demands; and that defendant sold the land to his co-defendants who knew of the fi
rst sale. Defendants, however, contend that plaintiff’s claim is unenforceable under the Statute of
Frauds. Held: “It is well settled in this jurisdiction that the Statute of Frauds is applicable only to
executory contracts (Facturan vs. Sabanal, 81 Phil. 512), not to contracts that are totally or partially
performed. (Almirol, et al. vs. Monserrat, 48 Phil. 67, 70; Robles vs. Lizarraga Hermanos, 50 Phil. 387;
Diana vs. Macalibo, 74 Phil. 70) The reason is simple. In executory contracts there is a wide fi eld for
fraud because unless they be in writing there is no palpable evidence of the intention of the contracting
parties. The statute has precisely been enacted to prevent fraud. (Moran, Comments on the Rules of
Court, Vol. III, 1957 ed., p. 178) However, if a contract has been totally or partially performed, the
exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep
the benefi ts already derived by him from the transaction in litigation, and, at the same time, evade the
obligations, responsibilities or liabilities assumed or contracted by him thereby. So that when the party
concerned has pleaded partial performance, such party is entitled to a reasonable chance to establish by
parol evidence the truth of his allegation, as well as the contract itself.” Idem;

Ratifi cation. — Contracts infringing the Statute of Frauds are susceptible of ratifi cation. According to
Art. 1405 of the Civil Code, such contracts may be ratifi ed either (1) by the failure to object to the
presentation of oral evidence to prove the same, or (2) by the acceptance of benefi ts under them.

Problem — Can an oral sale of land be judicially enforced as between the contracting parties, if the land
has not been delivered but the buyer has paid ten percent (10%) of the purchase price? (1974 Bar
problem) Answer — Yes, an oral sale of land where the land has not been delivered but the buyer has
paid ten percent (10%) of the purchase price may be judicially enforced. Well-settled is the rule that the
Statute of Frauds by virtue of which oral contracts Art. 1403 571 are unenforceable by court action is
applicable only to those contracts which are executory and not to those which have been consummated
either totally or partially. The reason is obvious. In effect, there is already a ratifi cation of the contract
because of acceptance of benefi ts. As a matter of fact, this reason is now embodied in the New Civil
Code. According to Art. 1405 of said Code, contracts infringing the Statute of Frauds are ratifi ed by the
failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefi
ts under them.

Problem — “O” verbally leased his house and lot to “L’’ for two years at a monthly rental of P250.00 a
month. After the fi rst year, “O” demanded a rental of P500.00 claiming that due to the energy crisis,
with the sudden increase in the price of oil, which no one expected, there was also a general increase in
prices. “O” proved an infl ation rate of 100%. When “L’’ refused to vacate the house, “O” brought an
action for ejectment. “O” denied that they had agreed to a lease for two years. Question No. 1 — Can
the lessee testify on a verbal contract of lease? Reason. (1981 Bar problem) Answer — Yes, the lessee
“L” may testify on the verbal contract of lease. Well-settled is the rule that the Statute of Frauds by
virtue of which oral contracts (such as the contract in the instant case) are unenforceable by court
action is applicable only to those contracts which have not been consummated, either totally or
partially. The reason for this is obvious. In effect, there is already a ratifi cation of the contract by
acceptance of benefi ts. Here “L’’ has been paying to “O” a monthly rental of P250.00 for one year. The
case is, therefore, withdrawn from the coverage of the Statute of Frauds. (Note: The above answer is
based on Arts. 1403, No. 2 and 1405 of the Civil Code, and on decided cases.) Question No. 2 —
Assuming that “O” admits the two-year contract, is he justifi ed in increasing the rental? Why? (1981 Bar
problem) Answer — Yes, “O’’ is justifi ed in increasing the monthly rental. Since it is admitted that the
contract of lease is for a defi nite term or period of two years, it is crystal clear that the case is
withdrawn from the coverage of the new rental law. Now during the hearing of the case, “O” was able
to prove an infl ation rate of 100%. Therefore, an increase is justifi ed. (Note: The above answer is based
on Batas Pambansa Blg. 25.) UNENFORCEABLE CONTRACTS Art. 1403 572 CONTRACTS

Contracts Where Both Parties Are Incapacitated. — Contracts where both parties are legally
incapacitated are also unenforceable.27 If only one of the parties is incapacitated, the contract is
voidable.28 As in the case of those entered into in the name of another by one without or in excess of
authority, contracts where both parties are legally incapacitated may be ratifi ed either expressly or
impliedly. Such ratifi cation may be effected by the parents or guardians of the contracting parties.
Although the Code does not say so, there is no reason why it cannot also be effected by the parties
themselves upon attaining or regaining capacity. We must, however, distinguish between the effect of
ratifi cation by the parent or guardian of one of the contracting parties or by the latter himself upon
attaining capacity and the effect of ratifi cation by the parents or guardians of both parties or by both of
such themselves upon attaining capacity. In the fi rst, the contract becomes voidable; hence, the rules
on voidable contracts shall govern. In the second, the contract shall be validated from its inception.29
Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of
this Book.30 Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are
ratifi ed by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefi ts under them.31 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 1357.32 Art. 1407. In a contract where both parties are
incapable of giving consent, express or implied ratifi cation by the par27Art. 1403, No. 3, Civil Code.
28Art. 1390, No. 1, Civil Code. 29Art. 1407, Civil Code. 30New provision. 31New provision. 32New
provision. Arts. 1404-1407 573 ent, or guardian, as the case may be, of one of the contracting parties
shall give the same effect as if only one of them were incapacitated. If ratifi cation is made by the
parents or guardians, as the case may be, of both contracting parties, the contract shall be validated
from the inception.33 Art. 1408. Unenforceable contracts cannot be assailed by third persons.34 33New
provision. 34New provision. UNENFORCEABLE CONTRACTS Art. 1408 574 CONTRACTS CHAPTER 9 VOID
OR INEXISTENT CONTRACTS
Void and Inexistent Contracts in General. — In general, a void or inexistent contract may be defi ned as
one which lacks absolutely either in fact or in law one or some of the elements which are essential for its
validity.1 Thus, if there is absolutely no consent, object or cause, or if the formalities which are essential
for validity are not complied with, or even if there is a cause and an object, if such cause or object is
contrary to law, morals, good customs, public order or public policy, or if the contract is expressly
prohibited or declared by law to be void, the contract is void or inexistent. Although used
interchangeably, strictly speaking, void and inexistent contracts are different from each other. Contracts
which are void refer to those where all of the requisites of a contract are present, but the cause, object
or purpose is contrary to law, morals, good customs, public order or public policy, or contract itself is
prohibited or declared void by law. On the other hand, contracts which are inexistent refer to those
where one or some or all of those requisites which are essential for the validity of a contract are
absolutely lacking, such as those which are absolutely simulated or fi ctitious, or those where the cause
or object did not exist at the time of the transaction. This distinction between void and inexistent
contracts, which has already been expressly recognized by the Supreme Court,2 is important especially
in connection with the application of the in pari delicto principle as enunciated in Arts. 1411 and 1412 of
the Code. This is so because if the contract is inexistent, it is open to attack even by the parties thereto,
but if the contract is 1 8 Manresa, 5th Ed., Bk. 2, p. 608. 2 Liguez vs. Court of Appeals, 102 Phil. 577;
Motion for Reconsideration, Feb. 13, 1958. 575 not inexistent but merely void or illegal, specifi c articles
of the Civil Code command that neither party thereto may be heard to invoke its unlawful character as a
ground for relief.3 Consequently, the two may be distinguished from each other as follows: (1) In a void
contract, all of the requisites of a contract are present, but the cause, object or purpose is contrary to
law, morals, good customs, public order or public policy, or the contract itself is prohibited or declared
by law to be void; in an inexistent contract, one or some or all of those requisites which are essential for
validity are absolutely lacking. (2) The principle of pari delicto is applicable in the fi rst, but not in the
second. Consequently, the fi rst may produce legal effects, but the second cannot produce any effect
whatsoever. Idem;

Distinguished from Rescissible Contracts. — A void or inexistent contract may be distinguished from a
rescissible contract in the following ways: (1) A void or inexistent contract produces as a rule no effect
even if it is not set aside by a direct action, while a rescissible contract is valid, unless it is rescinded.4 (2)
The defect of the former consists in absolute lack in fact or in law of one or some of the essential
elements of a contract, while the defect of the latter consists in lesion or damage to one of the
contracting parties or to third persons.5 (3) In the former, the nullity or inexistence of the contract is
based on the law, whi1e in the latter the rescissible character is based on equity. Hence, absolute nullity
is not only a remedy but a sanction, while rescission is a mere remedy. Public interest, therefore,
predominates in the fi rst, while private interest predominates in the second.6 (4) The action for the
declaration of the nullity or inexistence of a contract is imprescriptible, while the action for the
rescission of a contract is prescriptible.7 3 Ibid. 4 Art. 1380, 1409, Civil Code. 5 Ibid. 6 8 Manresa, 5th Ed.,
Bk. 2, pp. 544-545. 7 Arts. 1389, 1410, Civil Code. VOID OR INEXISTENT CONTRACTS 576 CONTRACTS (5)
The nullity or inexistence of a contract cannot as a rule be assailed by third persons, while the rescissible
character of a contract may be assailed by third persons.8 Idem;

Distinguished from Voidable Contracts. — A void or inexistent contract may be distinguished from a
voidable contract in the following ways: (1) A void or inexistent contract produces as a rule no effect
even if it is not set aside by a direct action, while a voidable contract is binding, unless it is annulled.9 (2)
The causes for the inexistence or absolute nullity of the former are different from the causes for the
annulability or relative nullity of the latter.10 (3) The former is not susceptible of ratifi cation, while the
latter is susceptible of ratifi cation.11 (4) The action for the declaration of the nullity or inexistence of a
contract is imprescriptible, while the action for the annulment of a contract is prescriptible.12 (5) The
defense of inexistence or absolute nullity is available to third persons whose interests are directly
affected, while the defense of annulability is not available to third persons.13 Idem;

Distinguished from Unenforceable Contracts. — A void or inexistent contract may be distinguished from
an unenforceable contract in the following ways: (1) In a void or inexistent contract, there is in reality no
contract at all, while in an unenforceable contract, there is actually a contract which cannot be enforced
by a court action, unless it is ratifi ed.14 (2) The causes for the inexistence or absolute nullity of the
former are different from the causes for the unenforceability of the latter.15 8 Arts. 1381, 1382, 1409,
Civil Code. 9 Arts. 1390, 1409, Civil Code. 10Ibid. 11Ibid. 12Arts. 1391, 1410, Civil Code. 13Arts. 1397,
1421, Civil Code. 14Arts. 1403, 1409, Civil Code. 15Ibid. 577 (3) The former is not susceptible of ratifi
cation, while the latter is susceptible of ratifi cation.16 (4) The former can be assailed by third persons
whose interests are directly affected, while the latter cannot be assailed by third persons.17 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 fi ctitious; (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 ratifi ed. Neither can the right to set up the defense of illegality be waived.18

Contracts Which Are Void or Inexistent. — The seven classes of void or inexistent contracts enumerated
in Art. 1409 have already been discussed in previous chapters of this text.19 It is, therefore unnecessary
to discuss them all over again in this chapter. It must be observed, however, that Nos. 1, 4, 5, 6 and 7
refer to contracts which are void, while Nos. 2 and 3 refer to contracts which are inexistent. 16Arts.
1404, 1405, 1407, 1409, Civil Code. 17Arts. 1408, 1421, Civil Code. 18New provision. 19For comments,
cases and related provisions on No. 1, see those under Arts. 1306, 1346, 1347, 1352; on No. 2, see those
under Arts. 1345, 1346, on No. 3, see those under Arts. 1347, 1352; on No. 4, see those under Art. 1347;
on No. 5, see those under Art. 1348; on No. 6, see those under Art. 1378. VOID OR INEXISTENT
CONTRACTS Art. 1409 578 CONTRACTS Besides those enumerated in the article, we can include those
which are the direct results of previous illegal contracts,20 those where there is no concurrence
between the offer and the acceptance with regard to the object and the cause of the contract, and
those which do not comply with the required form when such form is essential for validity.21 No. 7,
however, is broad enough to include all other contracts which are not included in the enumeration. The
fi rst part is a reiteration of the principle declared in Art. 5 of the Code that acts which are executed
against the provisions of mandatory or prohibitory laws shall be void, except when the law itself
authorizes their validity. Examples of such acts are those regulated by Arts. 133, 1490, 1491, 1689, 1782,
1799, 2035, 2088 and 2130 of the Code.

Problem — (a) Cite an example of a contract which is contrary to morals. (b) Can the nullity of the
stipulation on the usurious interest affect (i) the lender’s rights to recover the principal loan; (ii) the
terms of the real estate mortgage? Answer — (a) Stipulations authorizing iniquitous or unconscionable
interests are contrary to morals, if not against the law. Under Art. 1409 of the New Civil Code, these
contracts are inexistent and void from the very beginning. They cannot be ratifi ed nor the right to set
up their illegality as a defense be waived. (b) The nullity of the stipulation on the usurious interest does
not, however, affect the lender’s right to recover the principal loan. Nor would it affect the terms of the
real estate mortgage (REM). The right to foreclose the mortgage remains with the creditors and said
right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be
considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be
added in place of the excessive interest formerly imposed. 20Art. 1422, Civil Code. 213 Castan, 7th Ed.,
p. 409. Art. 1409 579 But in a situation where the total amount of indebtedness during the foreclosure
proceedings is pegged in an amount which included interest which is excessive, iniquitous and
exorbitant, the foreclosure proceedings cannot be given effect and will be considered invalid.. If the
foreclosure proceedings were considered valid, this would result in an inequitable situation wherein the
borrowers will have their land foreclosed for failure to pay an over-infl ated loan only a small part of
which they were obligated to pay. (Heirs of Zoilo Espiritu and Primitiva Espiritu vs. Sps. Maximo Landrito
and Paz Landrito, etc., G.R.No. 169617, April 3, 2007). Idem;

Characteristics. — In Tongoy vs. Court of Appeals, 123 SCRA 99 (1983), the Court said that the following
are the most fundamental characteristics of void or inexistent contracts: (1) As a general rule, they
produce no legal effects whatsoever in accordance with the principle “quod nullum est nullum producit
effectum.’’22 (2) They are not susceptible of ratifi cation.23 (3) The right to set up the defense of
inexistence or absolute nullity cannot be waived or renounced.24 (4) The action or defense for the
declaration of their inexistence or absolute nullity is imprescriptible.25 (5) The inexistence or absolute
nullity of a contract cannot be invoked by a person whose interests are not directly affected.26 Idem;

Effects. — As far as inexistent contracts are concerned, it is clear that such contracts can produce no
legal effect whatsoever in accordance with the principle “quod nullum est nullum producit effectum.’’27
However, in the case of void contracts where the nullity proceeds from the illegality of the cause or
object, a certain qualifi cation must be made. Under Arts. 1411 and 1412 of the Civil Code, nullity of
contracts due to illegal cause or object, when executed 22Ibid., p. 410. 23Art. 1409, Civil Code. 24Ibid.
25Art. 1410, Civil Code. 26Art. 1421, Civil Code; 3 Castan, 7th Ed., p. 410. 273 Castan, 7th Ed., p. 409.
VOID OR INEXISTENT CONTRACTS Art. 1409 580 CONTRACTS (and not merely executory), will produce
the effect of barring any action by a guilty to recover what he has already given under the contract. The
above principle is very well illustrated in the case of Liguez vs. Court of Appeals.28 Here, the deceased,
Salvador Lopez, a married man of mature years, donated a parcel of land belonging to the conjugal
partnership to Conchita Liguez, a minor of sixteen, subject to the condition that the latter shall become
his mistress. The donation was duly accepted. After the perfection of the donation, Conchita became the
mistress of Lopez. When Lopez died, his widow and heirs took possession of the land. Subsequently,
Conchita commenced an action for the recovery of the property. The widow and heirs of the deceased
now maintain that since the cause of the contract is illegal or immoral, consequently, it is inexistent, and
therefore, can produce no effect whatsoever; hence, they are entitled to the property donated. Plaintiff,
on the other hand, contends that what is illegal is the motive of the donor and not the cause, since the
contract in this case is one of pure benefi cence. Hence, the principal questions to be resolved are: (1)
What is the character of the contract — valid, void or inexistent? (2) Assuming that the contract is either
void or inexistent, what are its effects, if any? The decision of the Supreme Court may be summarized as
follows: (1) According to the plaintiff, the contract is valid because the condition that she will become
the mistress of the donor is merely the motive of a party to the contract and not the causa. In other
words, according to her, the contract here is a contract of pure benefi cence; hence, the causa is the
liberality of the benefactor,29 and certainly, under the law, liberality per se can never be illegal. This
contention is untenable. The contract is onerous in character. Here the facts clearly demonstrate that in
making the donation, the donor was not moved exclusively by the desire to benefi t the donee, but also
to gratify his sexual impulse. While it is true that we must not confuse the causa of a contract with the
motives of the contracting parties,30 there is an exception. The motive may be regarded as causa when
it pre-determines the purpose of the contract. In other words, we must except from the rule those
contracts that are conditioned upon 28102 Phil. 577. 29Art. 1350, Civil Code. 30Art. 1351, Civil Code.
Art. 1409 581 the attainment of the motives of either party. In the present case, it is scarcely disputable
that the donor would not have conveyed the property in question had the donee refused to accept the
condition that she will cohabit with him. Hence, the cohabitation was an implied condition of the
donation, and being unlawful, necessarily tainted the donation. Because of the illegality of the causa,
according to the defendants, the contract is inexistent. Again this contention is untenable. The contract
here is void, not inexistent. A void contract is different from an inexistent contract. The fi rst refers to
those contracts where all of the requisites of a contract are present, but the cause, object or purpose is
contrary to law, morals, good customs, public order or public policy, or the contract itself is prohibited
or declared by law to be void, while the second refers to those contracts where one or some of those
requisites which are essential for validity are absolutely lacking. (2) Since the contract is void by reason
of the illegality of the cause, the provisions of Art. 1412 of the Civil Code are, therefore, applicable. It
must be noted, however, that the principle of in pari delicto is not applicable here. Plaintiff was only a
minor of 16 at the time of the donation, while the donor was a married man of mature years and
experience. It is well known that minors occupy a privileged position under our law. As a matter of fact,
the law’s tender care for them is now emphasized in Art. 1415 of the Civil Code. Consequently, the two
parties are not in pari delicto. At any rate, even if they were in pari delicto the same rules would still
apply. Under Arts. 1411 and 1412 of the Code, nullity of contracts due to illegal cause or object, when
executed (and not merely executory) will produce the effect of barring any action by a guilty party to
recover what he has already given under the contract. These articles make it plain that, as far as the
guilty party is concerned, his act of conveying property pursuant to an illicit contract operates to divest
him of the ownership of the property, and to bar him from recovering it from his transferee, just as if
the transfer were through a bargain legal from its inception. Although repugnant, “the law deems it
more repugnant that a party should invoke his own guilt as a reason for relief from a situation which he
has deliberately entered. This serves to explain why the tainted conveyance to the extent that it has
been carried out becomes conclusive as between the guilty parties, even if without effect against
strangers without notice; and VOID OR INEXISTENT CONTRACTS Art. 1409 582 CONTRACTS why a guilty
party may not ask the courts for a restoration to the status quo ante.” The same reasons can also be
applied to the case of the successors or heirs of the guilty party. They cannot attack the validity of the
donation in their quality as successors or heirs of the donor, since it is undeniable that they cannot be
placed in a better position than their predecessor. It must be observed, however, that the property
donated is conjugal. Does that mean that the donation made by Lopez to the plaintiff shall not be given
any effect with respect to the share of the widow? The answer is simple. Since the donation was made
under the old law, the Civil Code of 1889 shall apply. The second paragraph of Art. 1419 of the old Code
considers the donation as merely fraudulent, subject to collation upon liquidation of the conjugal
partnership and deduction of its value from the donor’s share in the conjugal profi ts.31 Therefore, the
plaintiff is entitled to so much of the donated property as may be found upon proper liquidation not to
prejudice the share of the widow or the legitimes of the compulsory heirs. But suppose that the above
donation had been made after the effectivity of the New Civil Code, would the same rules stated in the
decision still apply? It is submitted that as far as the donor is concerned, the same rules with respect to
the illegality of the donation and its consequences would still apply. The contract would still be void
because of the illegality of the causa or consideration for the reasons stated in Liguez. It would also be
void under Art. 174 of the New Civil Code (a provision not found in the Spanish Civil Code) which
declares that “with the exception of moderate donations for charity, neither husband nor wife can
donate any property of the conjugal partnership without the consent of the other.’’ Consequently, as far
as the donor is concerned, Art. 1412 of the Civil Code would be applicable. However, as far as the wife of
the donor is concerned the applicable rules would be different. Art. 173 of the New Civil Code states:
“The wife may, during the marriage and within ten years 31The law which is now applicable is found in
Arts. 173 and 174 of the New Civil Code. Art. 1409 583 from the transaction questioned, ask the courts
for the annulment of any contract of the husband entered into without her consent, when such consent
is required, or any act or contract of the husband which tends to defraud her or impair her interest in
the conjugal partnership property. Should the wife fail to exercise this right, she or her heirs, after the
dissolution of the marriage, may demand the value of the property fraudulently alienated by the
husband.” Does this provision, which was not found in the Spanish Civil Code, spell the remedy of the
wife in Liguez? I do not think so; it only indicates it. It must be observed that the article presupposes
either a voidable (or unenforceable) contract executed by the husband, and not a void contract.
Therefore, the remedy of the wife is to bring an action for the declaration of absolute nullity of the
contract of donation, a remedy which will have all of the effects of an action for reconveyance. The
action would be imprescriptible because it would be based on a void contract. If she dies without
bringing the action, her heirs in their capacity as heirs, would be able to institute the action. The
principle of pari delicto in such a case cannot be applied because the wife or her heirs were not parties
to the illegal contract. The case of Francisco J. Chavez vs. PCGG (May 19, 1999, 307 SCRA 394) states,
among others that where the Agreements undeniably contain terms and conditions that are clearly
contrary to the Constitution and the laws and are not subject to compromise, such terms and conditions
cannot be granted by the PCGG to anyone. Being so, no argument of the contractors will make such
illegal and unconstitutional stipulations pass the test of validity. The void agreement will not be
rendered operative by the parties’ alleged performance (partial or full) of their respective prestations. A
contract that violates the Constitution and the law is null and void ab initio and vests no rights and
creates no obligations. It produces no legal effect at all. A void contract cannot be ratifi ed. — In the case
of Guiang vs. Court of Appeals (June 26, 1998, 291 SCRA 372), the Supreme Court ruled that the trial
court correctly held: “By the specifi c provision of the law (Art. 1390, Civil Code) therefore, the Deed of
Transfer of Rights cannot be ratifi ed, even by an ‘amicable settlement.’ The participation by some
barangay authorities in the ‘amicable settlement’ cannot otherwise validate an invalid act. Moreover, it
cannot be denied that the ‘amicable settlement’ entered into by plaintiff Gilda Corpuz and defendant
spouses Guiang is a VOID OR INEXISTENT CONTRACTS Art. 1409 584 CONTRACTS contract. It is a direct
offshoot of the Deed of Transfer of Rights. By express provision of law, such a contract is also void. Thus,
the legal provision, to wit: ‘Art. 1422. A contract which is the direct result of a previous illegal contract, is
also void and inexistent.’ (Civil Code of the Philippines.) In summation therefore, both the Deed of
Transfer of Rights and the ‘amicable settlement’ are null and void.’’ Doctrinally and clearly, a void
contract cannot be ratifi ed. In the same case, the Supreme Court also ruled that the sale of a conjugal
property requires the consent of both the husband and the wife. The absence of the consent of one
renders the sale null and void, while the vitiation thereof makes it merely voidable. Only in the latter
case can ratifi cation cure the defect. Art. 1410. The action or defense for the declaration of the
inexistence of a contract does not prescribe.32

Imprescriptibility of Action or Defense. — Because of the fact that the defect of void or inexistent
contracts is of a more or less permanent character, mere lapse of time cannot give effi cacy to such
contracts. In other words, the defect is of such a nature that it cannot be cured by prescription.33 This
principle of imprescriptibility is applicable not only to the action for the declaration of the inexistence or
absolute nullity of the contract but also to the defense. Castillo vs. Galvan 85 SCRA 526 Appeal from the
order of the Court of First Instance of Pangasinan dismissing the complaint fi led in Civil Case No. D-1227
and the order denying the motion for the reconsideration of said order. The complaint, fi led on August
1, 1961, is for the annulment of a document, denominated “DEED OF ABSOLUTE SALE,’’ executed on
August 3, 1965, by and between Paulino Galvan, professedly the predecessor-in-interest of herein
plaintiffs, and defendants Josefa Galvan and Natividad S. Galvan, and for damages and attorney’s fees.
The plaintiffs therein alleged that Paulino Galvan, during his lifetime, was the registered owner 32New
provision. 33Eugenio vs. Perdido, 97 Phil. 41.

But how about the doctrine of stale demands (laches) — has not this doctrine eroded entirely the
provision of Art. 1410? Art. 1410 585 of an undivided one-half (1/2) interest over two parcels of land,
known as Lot Nos. 4541 and 4542 of the Dagupan Cadastre and covered by OCT Nos. 3813 and 3917,
respectively, of the Register of Deeds of Dagupan City. The other undivided half is owned by his two
daughters by a fi rst marriage, herein defendants Josefa Galvan and Natividad Galvan. On these lots,
which are contiguous, is built the family home. On February 10, 1961, Paulino Galvan died and the
plaintiffs, out of “delicadeza” waited for the defendants to initiate the move for the settlement of his
estate. But, after waiting for some time and fi nding that none was forthcoming, the plaintiffs became
apprehensive, so that they began to go over the papers concerning the properties of the decedent. In
the offi ce of the Register of Deeds of Dagupan City, they were surprised to fi nd a deed of sale, signed
by the late Paulino Galvan and the plaintiff, Maria Encarnacion Castillo, whereby they had purportedly
sold for P500.00 the one-half undivided portion of Paulino Galvan over said lots in favor of the
defendants. When apprised of the existence of a deed of sale, plaintiff Maria Encarnacion Castillo
remembered that way back in 1953, she and her husband Paulino Galvan were made to sign a certain
document by Josefa Galvan “upon the fraudulent misrepresentation that the said document was only
for purpose of enabling them, the co-owners of the parcels of land in question, to have their separate
tax declarations for the respective portions owned by them so that they can pay their respective real
estate taxes separately, the said spouses not knowing that the said document is a deed of sale for which
no consideration was even paid.’’ The plaintiffs further alleged that Paulino Galvan could not have
intented to sell his share and participation over the lots in question during his lifetime as he had no
other residential lot to live in and there is no necessity for him to sell the same as he and his wife had
suffi cient income to sustain them. Besides, the undivided half share of Paulino Galvan was worth
around P22,500.00 so that he could not have sold it for only P500.00. Wherefore, they prayed that the
deed of sale be declared null and void; that the plaintiffs be declared the owners of four-sixths (4/6) of
the undivided half share pertaining to Paulino Galvan; that the defendants be ordered to pay the
amount of P1,500.00 as attorney’s fees; and to pay the costs of suit. The defendants fi led their answer
with counterclaim on August 23, 1961 wherein they interposed negative and affi rmative defenses. As
their affi rmative defense, the defendants claim that “they are the absolute and exclusive owners of
whole parcels of land described in the complaint for having acquired the portions VOID OR INEXISTENT
CONTRACTS Art. 1410 586 CONTRACTS belonging to their late father Paulino Galvan through legal and
valid conveyance and this fact is known to the plaintiffs long before the fi ling of the complaint.” Three
years thereafter, or on August 24, 1964, but before the case was tried, the defendants fi led an amended
answer with the corresponding motion to admit it, which amended answer contained an allegation that
“the action of plaintiffs is barred by the statute of limitations.” The plaintiffs fi led objections to the
defendants’ motion to amend their answer. Plaintiffs’ principal objection was their contention that the
defendants had waived the right to plead the statute of limitations and were estopped from pleading it
by reason of the fact that they had tried to do so after the fi ling of their answer to the complaint. The
plaintiffs further contend that the inclusion of the defense of prescription substantially altered the
defense. Over plaintiffs’ objections, the trial court permitted the defendants to amend their answer by
adding the defense of statute of limitations. Then two more years later or on August 27, 1966, the
defendants fi led a motion to dismiss the complaint upon the ground that the action is barred by the
statute of limitations for the reason that the present action for the annulment of the instrument of sale
is based upon fraud which should be brought within four (4) years from the time of the discovery of the
same in accordance with Article 1391 of the Civil Code; and fraud, as a ground for annulment, shall be
deemed to be discovered from the date of the registration of the alleged fraudulent documents; and
considering that the deed of sale in question was registered on August 4, 1955, while the action for its
annulment was commenced only on August 1, 1961, or after the lapse of more than four (4) years from
its registration with the Register of Deeds, the action for annulment had prescribed. The trial court
sustained the defendants’ contention, and, consequently, dismissed the complaint without costs, on
September 22, 1966. A motion for the reconsideration of this order having been denied on November 2,
1966, the plaintiffs interposed the present appeal. On the question of extinctive prescription, the
Supreme Court, speaking through Justice H. Concepcion, ruled: The other issue raised is whether or not
the trial court improperly dismissed the complaint on the ground Art. 1410 587 of prescription. In its
order dated September 22, 1966, dismissing the complaint, the trial court said: “The complaint, among
others, prays for the annulment of document, which is a deed of sale dated August 3, 1955, purporting
conveyance of the two parcels described in the complaint in favor of defendants Josefa Galvan and
Natividad Galvan and Emilio Samson. Said document (Exh. 1 for defendants) was registered on August 4,
1955 (Exhs. 1-A and 1-B). It is the contention of the defendants that plaintiffs’ action has prescribed as
the same was not presented within four years from the registration of the document. “The court
sustains defendants’ contention. The basis of the annulment is alleged fraud, and the action for the
annulment of the document should be brought within 4 (four) years from the discovery of fraud
(Mauricio vs. Villanueva, L-11072, September 24, 1959), and that such discovery of fraud is deemed to
have taken place when the instrument was fi led and registered with the Register of Deeds and a new
transfer certifi cate of title is issued in the name of the vendee for the registration of the deed
constitutes constructive notice to the whole world (Diaz vs. Gorricho, L-11229, March 29, 1958; Ignacio
Gerona, et al. vs. Carmen de Guzman, et al., L-19060, May 29, 1964). “In view of the foregoing, the court
resolves to dismiss as it hereby dismisses, the complaint without costs.” The allegations of the complaint
show, however, that the plaintiffs’ action is to declare void and inexistent the deed of sale executed by
Paulino Galvan and Encarnacion Castillo on August 3, 1955 in favor of Josefa and Natividad Galvan, upon
the grounds that: (a) there is fraud in securing the signatures of the vendors in said deed of sale; and (b)
there was no consideration given at the time of the transaction. In other words, the plaintiffs are seeking
a judicial declaration that the deed of sale in question is void ab initio, which action is impres-criptible.
The trial court erred, therefore, in dismissing the complaint for the reasons stated. WHEREFORE, the
judgment appealed from is reversed and the order of September 22, 1966, dismissing the complaint, is
hereby set aside. Let this case be remanded to the court of origin for further proceedings. Without costs.
SO ORDERED. VOID OR INEXISTENT CONTRACTS Art. 1410 588 CONTRACTS The concurring opinion of
Justice Aquino to the above decision is as follows: I concur. The trial court committed a grievous error in
dismissing the complaint on the ground of prescription. It erroneously assumed that plaintiffs’ cause of
action is for the annulment of a deed of sale on the ground of fraud. In reality, plaintiffs’ action is to
declare void or inexistent the fi ctitious deed of sale of August 3, 1955 on the ground that its
consideration did not exist at the time of the transaction. That action is imprescriptible (Arts. 1409[3]
and 1410, Civil Code). Fraud was alleged in the complaint merely to show why the alleged vendor (the
septuagenarian father of the vendees) signed the deed of sale. The plaintiffs categorically alleged in
paragraph 9 of the complaint that no consideration was paid for the sale. They prayed that the sale “be
declared null and void.” (pp. 4-6, Record on Appeal.) The thrust of the action is to secure a judicial
declaration that the sale is void ab initio. A contract of sale is void and produces no effect whatsoever
where the price, which appears thereon as paid, has in fact never been paid by the purchaser to the
vendor (Arts. 1352 and 1353, Civil Code; Ocejo, Perez and Co. vs. Flores and Bas, 40 Phil. 921; Mapalo vs.
Mapalo, L-21489, May 19, 1966, 17 SCRA 114, 122.) Such a sale is nonexistent and cannot be considered
consummated. (Borromeo vs. Borromeo, 98 Phil. 432; Cruzado vs. Bustos and Escaler, 34 Phil. 17;
Garanciang vs. Garanciang, L-22351, May 21, 1969, 28 SCRA 229.) Plaintiffs’ cause of action is supported
by the following ultimate facts alleged in their complaint: Paulino Galvan married twice. By his fi rst
marriage, he begot two daughters, defendants Josefa Galvan and Natividad Galvan. His second wife was
Encarnacion Castillo with whom he begot three children named Elisea, Patrocinio and Florangel. Paulino
Galvan was the owner of a one-half pro-indiviso share in two parcels of land located at Burgos Street,
Dagupan City with a total area of 1,115 square meters. The other one-half share is owned by Natividad
Galvan and Josefa Galvan, his two daughters of the fi rst marriage. Art. 1410 589 Existing on those two
lots is the conjugal house of the spouses Paulino Galvan and Encarnacion Castillo. The house is made of
wood with galvanized iron roofi ng. On August 3,1955, when Paulino Galvan, who did not have much
education, was already seventy-eight years old, his daughter, Josefa, asked him and his wife,
Encarnacion, also old and not highly educated, to sign a document which, according to Josefa, was
necessary in order to have separate tax declarations for their respective one-half portions of the two
lots. The Galvan spouses signed the document. Paulino Galvan died on February 10, 1961 at the age of
eighty-four years. He was survived by his second wife and his fi ve above-named children. It was only
after the death of Paulino Galvan that his widow and their three children discovered that the document,
which Josefa had asked her father to sign, was a deed of sale, which is in English, a language not known
to the Galvan spouses. Paulino Galvan could not have sold his one-half share in the two lots for a measly
sum of P500, the price stated in the deed of sale, because in 1961 the two lots were worth P45,000, at
forty pesos a square meter. Paulino Galvan’s one-half share was worth at least P22,500. The action to
declare the sale void was fi led on August 1, 1961 against Natividad Galvan and Josefa Galvan. They
pleaded as a defense that the sale was valid. Later, they amended their answer by pleading prescription.
The trial court dismissed the complaint on that ground. The trial court overlooked the fact that the
fraudulent manner by which the signatures of the Galvan spouses in the deed were obtained
strengthens plaintiffs’ theory that the sale is void or inexistent because it would appear that the said
spouses did not consent at all to the sale. In the Mapalo case, supra, the spouses, Miguel Mapalo and
Candida Quiba, illiterate farmers, decided to donate to Maximo Mapalo the brother of Miguel, the
eastern half of their 1,635-square meter residential land located in Manaoag, Pangasinan. However,
they were deceived into signing on October 15, 1936 a deed of absolute sale for the entire land in favor
of Miguel Mapalo. Their signatures were procured by fraud. They were made to believe by Maximo and
the notary public that the VOID OR INEXISTENT CONTRACTS Art. 1410 590 CONTRACTS document was a
deed of donation covering the eastern half of their land. Although the deed of sale stated a
consideration of P500 (as in the instant case), the said spouses did not receive anything of value for the
land. The spouses remained in possession of the western half of the land. On March 15, 1938 Maximo
Mapalo registered the sale and obtained a Torrens title for the entire land. On October 20, 1951 Maximo
sold the entire land to Evaristo, Petronila, Pacifi co and Miguel, all surnamed Narciso. A transfer certifi
cate of title was issued to the Narcisos’ for the whole land. They took possession of the eastern half of
the land. On February 7, 1952 the Narcisos’ sued the Mapalo spouses. They prayed that they be
declared the owners of the entire land. They sought to recover possession of its western portion. The
Mapalo spouses fi led a counterclaim, wherein they prayed that the western half of the land be
conveyed to them. They alleged that their signatures to the deed of sale were obtained through fraud.
They sued the Narcisos’ in 1957. They asked that the 1936 and 1951 deeds of sale be declared void as to
the western portion. The Court of Appeals held that the sale was merely voidable on the ground of
fraud; that the action for annulment should have been brought within four years from the registration of
the sale, and that, as that period had already expired, the action had also prescribed. This Court,
reversing the decision of the Court of Appeals, held that the 1936 sale was not merely voidable but was
void or inexistent and that the “inexistence of a contract is permanent and incurable and cannot be the
subject of prescription.’’ The holding of the trial court that the Mapalo spouses should be issued a
Torrens title for the western half of the land was affi rmed. The ruling in the Mapalo case is squarely
applicable to this case. In the instant case, the plaintiffs, the widow and a child of the fi rst marriage, as
compulsory heirs of Paulino Galvan, the victim of the alleged fraud, have the right to sue to declare the
sale void because they were deprived of their legitime in the estate of Paulino Galvan. (Art. 221[4], Civil
Code; Reyes vs. Court of Appeals, 95 Phil. 952; Armentia vs. Patriarca, L-18210, December 29, 1966, 18
SCRA 1253, 1258-1260.) Art. 1410 591 It is interesting to note that the above case became the basis of a
problem asked in the Bar Examinations of 1979. The problem is as follows: “On the basis of a document
entitled ‘Deed of Absolute Sale’ a certain lot and building then leased by its owner, PC, to JG with
monthly rental of P1,000.00 was sold to, and thus registered in the latter’s name. Six years after the
issuance of the title to JG, MC the sole heir of PC who had just died, brought an action for recovery of
the property alleging in his complaint, among others, that PC then very old and with weak eyesight was
tricked by JG into signing the Deed of Absolute Sale upon the fraudulent misrepresentation that said
document was only a renewal of the lease contract over the property; that the price stated in the
document is only P10,000.00 although the property was then worth about P50,000.00. JG moved to
dismiss the action on the ground of prescription. Should the motion be granted?’’ Also, in the case of
Paluwagan ng Bayan Savings Bank vs. King (172 SCRA 60), it was held that an action to declare the nullity
of a void judgment 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.34 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 34Art. 1410 in relation to Art.
1409(3) of the Civil Code. VOID OR INEXISTENT CONTRACTS Arts. 1411-1412 592 CONTRACTS 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 fulfi
llment 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.35

Principle of In Pari Delicto. — When the defect of a void contract consists in the illegality of the cause or
object of the contract, and both of the parties are at fault or in pari delicto, the law refuses them every
remedy and leaves them where they are. This rule which is embodied in Arts. 1411 and 1412 of the Code
is what is commonly known as the principle of in pari delicto. Thus, where the contract involves a
violation of our coast-wise trade law,36 or of our contraband laws, such as the importation of silver into
this country,37 and both of the contracting parties are in pari delicto, it is evident that under Art. 1411
of the Code neither party would have any remedy against the other. The rule is expressed in the
maxims: “Ex dolo malo non oritur actio’’ and “In pari delicto potior est conditio defendantis.’’ The law
will not aid either party to an illegal agreement it leaves them where they are. Of course, this
presupposes that the fault of one party is more or less equal or equivalent to the fault of the other
party.38 Rodriguez vs. Rodriguez 20 SCRA 908 This is an appeal by Concepcion Felix Vda. de Rodriguez
from the decision of the Court of First Instance of Bulacan in Civil Case No. 2565, which she commenced
on May 28, 1962, to secure declaration of nullity of two contracts executed on January 24, 1934 and for
the recovery of certain properties. 35Art. 1306, Spanish Civil Code. 36Perez vs. Herranz, 7 Phil. 693.
37Iribar vs. Millat, 5 Phil. 362. For cases illustrating Art. 1411, see Go Chioco vs. Martinez, 45 Phil. 256;
Harden vs. Benguet Consolidated Mining Co., 58 Phil. 141. 38Bough vs. Cantiveros, 40 Phil. 209. Arts.
1411-1412 593 The facts of this case may be briefl y stated as follows: Concepcion Felix, widow of the
late Don Felipe Calderon, and with whom she had one living child, Concepcion Calderon, contracted a
second marriage on June 20, 1929, with Domingo Rodriguez, a widower with four children by a previous
marriage, named Geronimo, Esmeragdo, Jose and Mauricio, all surnamed Rodriguez. There was no issue
in this second marriage. Prior to her marriage to Rodriguez, Concepcion Felix was the registered owner
of 2 fi shponds located in the barrio of Babañgad, municipality of Bulacan, Bulacan province, Nos. 605
and 807. Under the date of January 24, 1934, Concepcion Felix appeared to have executed a deed of
sale conveying ownership of the aforesaid properties of her daughter, Concepcion Calderon, for the sum
of P2,500.00, which the latter in turn appeared to have transferred to her mother and stepfather by
means of a document dated January 27, 1934. Both deeds, notarized by Notary Public Jose D. Mendoza,
were registered in the offi ce of the Register of Deeds of Bulacan on January 29, 1934, as a consequence
of which, the original titles were cancelled and TCT Nos. 13815 and 13816 were issued in the names of
the spouses Domingo Rodriguez and Concepcion Felix. On March 6, 1953, Domingo Rodriguez died
intestate, survived by the widow, Concepcion Felix, his children Geronimo, Esmeragdo, and Mauricio
and grandchildren Oscar, Juan and Ana, surnamed Rodriguez, children of a son, Jose, who had
predeceased him. On March 16, 1953, the above-named widow, children and grandchildren of the
deceased entered into an extrajudicial settlement of his (Domingo’s) estate, consisting of one-half of the
properties allegedly belonging to the conjugal partnership. Among the properties listed as conjugal were
two parcels of land in Bulacan, Bulacan, which, together with another piece of property, were divided
among the heirs in this manner: “WHEREAS, the parties have furthermore agreed that the fi shpond
covered by TCT Nos. 13815, 13816, and 24109 of the Offi ce of the Register of Deeds of Bulacan,
containing an area of 557,971 sq.m., which is likewise the conjugal property of the deceased and his
surviving spouse; 1/2 of the same or 278,985.50 sq.m. belongs to said Concepcion Felix Vda. de
Rodriguez, as her share in the conjugal property; and 3/4 of the remaining half VOID OR INEXISTENT
CONTRACTS Arts. 1411-1412 594 CONTRACTS or 209,239.125 sq.m. are transferred in full ownership to
Geronimo Rodriguez. Esmeragdo Rodriguez and Mauricio Rodriguez, share and share alike, while the
other 1/4 or 69,746.375 sq.m. of the said remaining half goes in equal shares to Oscar Rodriguez, Juan
Rodriguez and Ana Rodriguez.” As a result of this partition, TCT Nos. 13815 and 13816 were cancelled
and TCT Nos. T-11431 and T-14432 were issued in the names of the said heirs of the deceased. On
March 23, 1953, in a power of attorney executed by the children and grandchildren of Domingo
Rodriguez, Concepcion Felix Vda. de Rodriguez was named their attorney-in-fact, authorized to manage
their shares in the fi shponds (Exh. 4). On July 2, 1954, the heirs ended their co-ownership by executing a
deed of partition, dividing and segregating their respective shares in the properties, pursuant to a
consolidation and subdivision plan (PCS-3702), in accordance with which, Concepcion Felix Vda. de
Rodriguez obtained TCT No. T-12910, for the portion pertaining to her (Exh. L), while TCT No. T-12911
was issued to the other heirs, for their shares. This latter title was subsequently replaced by TCT No.
16660 (Exh. M). On October 12, 1954, the Rodriguez children executed another document granting unto
the widow lifetime usufruct over one-third of the fi shpond which they received as hereditary share in
the estate of Domingo Rodriguez, which grant was accepted by Concepcion Felix Vda. de Rodriguez.
Then, in a contract dated December 15, 1961, the widow appeared to have leased from the Rodriguez
children and grandchildren the fi shpond (covered by TCT No. 16660) for a period of 5 years
commencing August 16, 1962, for an annual rental of P7,161.37 (Exh. 5). At about this time, it seemed
that the relationship between the widow and her stepchildren had turned for the worse. Thus, when she
failed to deliver to them the balance of the earnings of the fi shponds, in the amount of P3,000.00, her
stepchildren endorsed the matter of their lawyer who, on May 16, 1962, sent a letter of demand to the
widow for payment thereof. On May 28, 1962, Concepcion Felix Vda. de Rodriguez fi led the present
action in the Court of First Instance of Manila naming as defendants, Geronimo Rodriguez, Esmeragdo
Rodriguez, Oscar Rodriguez, Concepcion Bautista Vda. de Rodriguez, as guardian of the minors Juan and
Ana Rodriguez, and Antonio Diaz de Arts. 1411-1412 595 Rivera and Renato Diaz de Rivera, as guardians
of the minors Maria Ana, Mercedes, Margarita, Mauricio, Jr. and Domingo (children of Mauricio
Rodriguez who had also died). The action to declare null and void the deeds of transfer of plaintiff’s
properties to the conjugal partnership was based on the force and pressure on her; that the
conveyances of the properties — from plaintiff to her daughter and then to the conjugal partnership of
plaintiff and her husband — are both without consideration; that plaintiff participated in the
extrajudicial settlement of estate (of the deceased Domingo Rodriguez) and in other subsequent deeds
or instruments involving the properties in dispute, on the false assumption that the said properties had
become conjugal by reason of the execution of the deeds of transfer in 1934, then laboring under the
same false assumption, plaintiff delivered to defendants, as income of the properties from 1953 to 1961,
the total amount of P56,976.58. As alternative cause of action, she contented that she would claim for
her share, as surviving widow, of 1/5 of the properties in controversy, should such properties be
adjudged as belonging to the conjugal partnership. Thus, plaintiff prayed that the deeds of transfer
mentioned in the complaint be declared fi ctitious and simulated; that the “Extrajudicial Settlement of
Estate’’ be also declared null and void; that TCT No. 16660 of the Registry of Deeds of Bulacan be
cancelled and another one be issued in the name of plaintiff, Concepcion Felix Vda. de Rodriguez; that
defendants be ordered to pay plaintiff the sum of P56,976.58, with legal interest thereon from the date
of the fi ling of the complaint, and for appropriate relief in connection with her alternative cause of
action. In their separate answers, defendants not only denied the material allegations of the complaint,
but also set up as affi rmative defenses lack of cause of action, prescription, estoppel and laches. As
counterclaim, they asked for payment by the plaintiff of the unpaid balance of the earnings of the land
up to August 15, 1962 in the sum of P3,000.00, for attorney’s fees and expenses of litigation. On October
5, 1963, judgment was rendered for the defendants. In upholding the validity of the contracts, the court
found that although the two documents, Exhibits A and B, were executed for the purpose of converting
plaintiff’s separate properties into conjugal assets of the marriage with Domingo Rodriguez, the consent
of the parties thereto was voluntary, contrary to the allegations of plaintiff and her witness. The court
also ruled that having taken part in the questioned transactions, VOID OR INEXISTENT CONTRACTS Arts.
1411-1412 596 CONTRACTS plaintiff was not the proper party to plead lack of consideration to avoid the
transfers; that contracts without consideration are not inexistent, but are only voidable, following the
ruling in the case of Concepcion vs. Sta. Ana (87 Phil. 787); that there was ratifi cation or confi rmation
by the plaintiff of the transfer of her property, by her execution (with the other heirs) of the extrajudicial
settlement of estate; that being a voluntary party to the contracts, Exhibits A and B, plaintiff cannot
recover the properties she gave thereunder. Plaintiff’s alternative cause of action was also rejected on
the ground that action for rescission of the deed of extrajudicial settlement should have been fi led
within 4 years from its execution (on March 16, 1953). From the decision of the Court of First Instance,
plaintiff duly appealed to this Court, insisting that the conveyances in issue were obtained through
duress, and were inexistent, being simulated and without consideration. Speaking through Justice J.B.L.
Reyes, the Supreme Court held: We agree with the trial Court that the evidence is not convincing that
the contracts of transfer from Concepcion Felix to her daughter, and from the latter her mother and
stepfather were executed through violence or intimidation. The charge is predicated solely upon the
improbable and biased testimony of appellant’s daughter, Concepcion C. Martelino, whom the trial
court refused to believe, considering that her version of violence and harassment was contradicted by
Bartolome Gualberto, who had lived with the Rodriguez spouses from 1917 to 1953, and by the
improbability of Rodriguez threatening his stepdaughter in front of the Notary Public who ratifi ed her
signature. Furthermore, as pointed out by the appealed decision, the charge of duress should be treated
with caution considering that Rodriguez had already died when the suit was brought for duress, like
fraud, is not to be lightly laid at the door of men already dead. (Cf. Prevost vs. Gratz, 6 Wheat. [U.S.] 481,
498; Sinco vs. Longa, 51 Phil. 507.) What is more decisive is that duress being merely a vice or defect of
consent, an action based upon it must be brought within four years after it has ceased;39 and the
present action 39Article 1301 of the Civil Code of 1889, in force when the assailed contracts were
executed (1934). Arts. 1411-1412 597 was instituted only in 1962, twenty-eight (28) years after the
intimidation is claimed to have occurred, and no less than nine (9) years after the supposed culprit died
(1953). On top of it, appellant entered into a series of subsequent transactions with appellees that confi
rmed the contracts that she now tries to set aside. Therefore, this cause of action is clearly barred.
Appellant’s main stand in attacking the conveyances in question is that they are simulated or fi ctitious,
and inexistent for lack of consideration. We shall examine each purported defect separately. The charge
of simulation is untenable, for the characteristic of simulation is the fact that the apparent contract is
not really desired or intended to produce legal effects or in any way alter the juridical situation of the
parties. Thus, where a person, in order to place his property beyond the reach of his creditors, simulates
a transfer of it to another, he does not really intend to divest himself of his title and control of the
property, hence, the deed of transfer is but a sham. But appellant contends that the sale by her to her
daughter, and the subsequent sale by the latter to appellant and her husband, the late Domingo
Rodriguez, were done for the purpose of converting the property from paraphernal to conjugal, thereby
vesting a half interest in Rodriguez, and evading the prohibition against donations from one spouse to
another during coverture (Civil Code of 1889, Art. 1334). If this is true, then the appellant and her
daughter must have intended the two conveyances to be real and effective; for appellant could not
intend to keep the ownership of the fi shponds and at the same time vest half of them in her husband.
The two contracts of sale then could not have been simulated, but were real and intended to be fully
operative, being the means to achieve the result desired. Nor does the intention of the parties to
circumvent by these contracts the law against donations between spouses make them simulated ones.
Ferrara, in his classic book “La Simulacion de los Negocios Juridicos” (Sp. trans, 1926), pp. 95, 105,
clearly explains the difference between simulated transactions and transactions in fraudem legis: Otra fi
gura que debe distinguirse de la simulacion es el fraus legis. Tambien aqui se di una gran confucion que
persiste aun en la jurisprudencia, apegada tenazmente a antiguos errores. Se debe a Bahr el haber
defendido con vigor la antitesis teorica que existe entre negocio VOID OR INEXISTENT CONTRACTS Arts.
1411-1412 598 CONTRACTS fi ngido y haber atacada la doctrina comun que hacia una mescolanza con
los dos conceptos. “Se confunde — dice (2) —, el negocio in fraudem legis con el negocio simulado;
aunque la naturaleza de ambos sea totalmente diversa. El negocio fraudulento no es, en absoluto, un
negocio aparante. Es perfectamente serio: se quiere realmente. Es mas, se quiere tal como se ha
realizado, con todas las consecuencias que corresponden a la forma juridica elegida. Muchas veces,
estas consecuencias con incomodas para una u otra de las partes, aunque serian mucho mas incomodas
las consecuencias que llevaria consigo el acto prohibido. x x x x x x x x x “El resultado de las precedentes
investigaciones es el siguiente: el negocio simulado quiere producir una apariencia; el negocio
fraudulente, una realidad; los negocios simulados son fi cticios, no queridos; los negocios in fraudem son
serios, reales, y realizados en tal forma por las partes para consequir un resultado prohibido: la
simulacion nunca es un medio para eludir la ley, sino para ocultar su violacion. La transgresion del
contenido verbal e inmediato de la norma se encubre bajo el manto de un negocio licito, lo cual no
altera el caracter del contra legem agere. Tan verdad es, que si se ha redactado una contraescritura que
documenta y declara la verdadera naturaleza del negocio realizado, no queda mas que aplicar pura y
simplemente la prohibicion. “Tambien el fraude quiere perjudicar la ley, pero emplea para ello medios
diversos y sigue distintos caminos. No oculta el acto eterior, sino que lo deja claro y visible, tratando de
huir sesgadamente de la aplicacion de la ley merced a una artistica y sabia combinacion de varios
medios juridicos no reprobados.” Appellant invokes our decision in Vasquez vs. Porta, 98 Phil. 490, but
to no purpose. The mortgage and foreclosure sale involved in that case were typical simulations, merely
apparent but not really intended to produce legal effects, as proved by the Court’s fi nding that the
alleged creditor and buyer at the foreclosure sale “Porta himself ostensibly acknowledged by his inertia
in allowing the doctor (alleged mortgagor debtor) to exercise dominical power thereon without any
protest on his part “(cas. cit., p. 495). Not only this, but the mortgagor’s wife, when her husband died
“found among his papers Porta’s Arts. 1411-1412 599 cancellation of the mortgage in his favor and the
draft of the complaint for foreclosure.’’ Plainly, the precedent cited is here inapplicable. Were the two
conveyances from appellant to her daughter and from the latter to the spouses Rodriguez void ab initio
or inexistent for lack of consideration? We do not fi nd them to be so. In the fi rst transaction, the price
of P2,500.00 is recited in the deed itself (Exh. A); in the second (Exh. B), the consideration set forth is
P3,000.00. Now, Article 1274 of the Civil Code of 1889 (in force when the deeds were executed)
provided that — “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.’’ (Italics supplied.) Since in each conveyance the
buyer became obligated to pay a defi nite price in money, such undertaking constituted in themselves
actual causa or consideration for the conveyance of the fi shponds. That the prices were not paid
(assuming ad arguendo that Concepcion Martelino’s testimony to this effect is true) does not make the
sales inexistent for want of causa. As ruled in Enriquez de la Cavada vs. Diaz, 37 Phil. 982, “the
consideration (causa) need not pass from one (party) to the other at the time the contract is entered
into. x x x The consideration need not be paid at the time of the promise. The one promise is a
consideration for the other.’’ What would invalidate the conveyances now under scrutiny is the fact that
they were resorted to in order to circumvent the legal prohibition against donations between spouses
contained in Article 1334, paragraph 1, of the Civil Code of 1889, then prevailing. That illegal purpose
tainted the contracts, for as held by the Spanish Tribunal Supremo in its decision of 2 April 1941: “ha de
ser reputado inefi caz, por exigencias ineludibles del caracter social y moral del Derecho, todo contrato
que persiga un fi n ilicito o inmoral, sea cualquiera el medio empleado por los contratantes para lograr
esa fi nalidad, no justifi cada por un interes digno de ser socialmente protegido.’’ The illicit purpose then
becomes illegal causa within the terms of the old Civil Code, for as declared by the same Spanish Court
in its decision of 14 December 1940 — “toda vez que to que caracteriza fundamentalmente la ilicitud de
la causa es la lesion de un interes general juridico o moral,’’ a ruling reiterated in the decision of 2 April
1941 when the Court ruled: “El concepto de la causa ilicita, tal como la desenvuelve y aplica con gran
amplitud y fl exibilidad la doctrina moderna, permite cobijar, no solo VOID OR INEXISTENT CONTRACTS
Arts. 1411-1412 600 CONTRACTS las covenciones ilicitas por razon de su objeto o de su motivo x x x sino
tambien multiples convenciones que no encerrando en si ningun de directa antijuricidad son ilicitas por
el matiz in moral que reviste la operacion en su conjunto x x x.’’ Unfortunately for herein appellant, in
contracts invalidated by illegal subject matter or illegal causa, Articles 1305 and 1306 of the Civil Code
then in force apply rigorously the rule in pari delicto non oritur actio, denying all recovery to the guilty
party inter se. And appellant is clearly as guilty as her husband in the attempt to evade the legal
interdiction of Article 1334 of the Code, already cited. Wherefore, her present action to reinvindicate
the conveyed properties was correctly repulsed by the Court below. “ART. 1306. If the act which
constitutes the illicit consideration is neither a crime nor a misdemeanor, the following rules shall be
observed: 1. When both parties are guilty, neither of them can recover what he may have given by
virtue of the contract, or enforce the performance of the undertaking of the other party; x x x x x x x x x
That Article 1306 applies to cases where the nullity arises from the illegality of the consideration of the
purpose of the contract was expressly recognized by this Supreme Court in Gustilo vs. Maravilla. 48 Phil.
449-450.40 Finally, it cannot be denied that plaintiff-appellant had knowledge of the nullity of the
contract for the transfer of her properties in 1934, because she was even a party thereto. And yet, her
present action was fi led only on May 28, 1962 and after the breaking up of friendly relations between
her and defendantsappellees. Appellant’s inaction to enforce her right, for 28 years, cannot be justifi ed
by the lame excuse that she assumed that the transfer was valid. Knowledge of the effect of that
transaction would have been obtained by the exercise of diligence. Ignorance which is the effect of
inexcusable negligence, it has been said, is no excuse for laches. (Go Chi Gun, etc., et al. vs. Co Cho, et
al., G.R. No. L-5208, Feb. 28, 1955.) Even assuming for the sake of argument that appellant held her
peace, during the lifetime of her husband, out of legitimate fear for her life, there is no justifi cation for
her failure to bring the proper action after his 40See also Liguez vs. Court of Appeals, 102 Phil. 581-582;
Perez vs. Herranz, 7 Phil. 695. Arts. 1411-1412 601 death in 1953. Instead, she entered into a series of
agreements with herein appellees, the children of her husband by a prior marriage, of partition, usufruct
and lease of their share in the fi shponds, transactions that necessarily assumed that Rodriguez has
acquired one-half of the litigated fi shponds. In the circumstances, appellant’s cause has become a stale
demand and her conduct placed her in estoppel to question the validity of the transfer of her properties.
(Manila, et al. vs. Galvan, et al., G.R. No. L-23507, May 24, 1967; Perez vs. Herranz, 7 Phil. 695-696.) In
view of the foregoing, the decision appealed from is affi rmed. Costs against appellant Concepcion Felix
Vda. de Rodriguez. So ordered. It must be observed, however, that the principle of in pari delicto applies
only to cases of existing contracts with an illegal cause or object and not to simulated or fi ctitious
contracts nor to those which are inexistent for lack of an essential requisite such as cause or
consideration.41 In other words, the principle can have no application to inexistent contracts, since such
contracts are always open to attack even by the parties thereto. But where the contract is void because
of the illegality of the cause or the object, the principle is applicable since the Code in Arts. 1411 and
1412 commands that neither party thereto may be heard to invoke its unlawful character as a ground
for relief.42 It must also be observed that the illegality must be with respect to the cause or the object
of the contract and not with respect to the motives of the contracting parties. Thus, if the plaintiff
transfers to the defendant a parcel of land by means of a fi ctitious deed of sale for the purpose of
averting its attachment by his creditors, it is clear that the principle, enunciated in Art. 1412 of the Civil
Code is not applicable, since what is illegal is the motive of the transferor and not the object or the
cause of the contract.43 Idem;

Effect if only one party is at fault. — When only one of the contracting parties is at fault, we must have
to distinguish between a case where the contract has already been executed and one where it is merely
executory. If the contract has already 41Vasquez vs. Porta, 98 Phil. 490. 42Liguez vs. Court of Appeals,
supra. 43Gonzales vs. Trinidad, 67 Phil. 682. VOID OR INEXISTENT CONTRACTS Arts. 1411-1412 602
CONTRACTS been executed, the guilty party is barred from recovering what he has given to the other
party by reason of the contract. Although repugnant, “the law deems it more repugnant that a party
should invoke his own guilt as a reason for relief from a situation which he had deliberately entered.’’44
The innocent party, however, may demand for the return of what he has given.45 On the other hand, if
the contract is merely executory, it is clear that it cannot produce any legal effect whatsoever. Neither
of the contracting parties can demand for the fulfi llment of any obligation arising from the contract nor
be compelled to comply with such obligation.46 Idem;

Exceptions. — The principle of pari delicto is not, however, absolute in character. The Civil Code
recognizes the following exceptions: (1) Payment of usurious interest. In such case, the law allows the
debtor to recover the interest paid in excess of that allowed by the usury laws, with interest thereon
from the date of payment.47 (2) Payment of money or delivery of property for an illegal purpose, where
the party who paid or delivered repudiates the contract before the purpose has been accomplished, or
before any damage has been caused to a third person. In such case, the courts may allow such party to
recover what he has paid or delivered, if the public interest will thus be subserved.48 (3) Payment of
money or delivery of property by an incapacitated person. In such case, the courts may allow such
person to recover what he has paid or delivered, if the interest of justice so demands.49 (4) Agreement
or contract which is not illegal per se but is merely prohibited by law, and the prohibition is designed for
the protection of the plaintiff. In such case, such plaintiff, if public policy is thereby enhanced, may
recover what he has paid or delivered.50 44Liguez vs. Court of Appeals, supra. 45Arts. 1411, 1412, Civil
Code. 46Ibid. 47Art. 1413, Civil Code. 48Art. 1414, Civil Code. 49Art. 1415, Civil Code. 50Art. 1416, Civil
Code. Arts. 1411-1412 603 (5) Payment of any amount in excess of the maximum price of any article or
commodity fi xed by law. In such case, the buyer may recover the excess.51 (6) Contract whereby a
laborer undertakes to work longer than the maximum number of hours fi xed by law. In such case, the
laborer may demand for overtime pay.52 (7) Contract whereby a laborer accepts a wage lower than the
minimum wage fi xed by law. In such case, the laborer may demand for the defi ciency.53 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.54

Recovery by Debtor of Usurious Interest. — The fi rst exception to the principle of pari delicto as
enunciated in Arts. 1411 and 1412 is given in the above article. It must be noted, however, that the rule
enunciated in this article, although consistent with the rule enunciated in Art. 1961, which states that
“usurious contracts shall be governed by the Usury Law and other special laws so far as they are not
inconsistent with this Code,” is inconsistent with the rule enunciated in Art. 1175, which states that
“usurious transactions shall be governed by special laws,” and Art. 1957, which states that “the
borrower may recover in accordance with the laws on usury.’’ Insofar as the amount recoverable by the
debtor from the creditor is concerned, it is quite evident that there is absolute incompatibility between
the provision of Art. 1961 which upholds the rule stated in Art. 1413, and the provisions of Arts. 1175
and 1957, which incorporate by reference the rule stated in Sec. 6 of the Usury Law (Act No. 2655).
Under Art. 1413, the debtor may recover the interest paid in excess of the interest allowed by the Usury
Law, with interest thereon from the date of payment; under Sec. 6 of the Usury Law, on the other hand,
the debtor may recover the whole interest paid with costs and 51Art. 1417, Civil Code. 52Art. 1418, Civil
Code. 53Art. 1419, Civil Code. 54New provision. VOID OR INEXISTENT CONTRACTS Art. 1413 604
CONTRACTS attorney’s fees in such sum as may be allowed by the court in an action against the creditor
if such action is brought within two years after such payment. The above-stated confl ict, however, is
more apparent than real. Thus, in Angel Jose Warehousing Co. vs. Chelda55 the Supreme Court declared
that, in reality, there is no confl ict between the Civil Code and the Usury Law. Under the latter, in Sec. 6,
the debtor may recover the whole interest paid. Under the Civil Code, in 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 payment.” When the Code speaks of “interest paid in excess of that allowed by the
usury law,’’ it means the whole usurious interest. Thus, if the loan is P1,000.00, with interest of 20% per
annum or P200 per year, and the borrower paid P200, the whole P200 is the usurious interest. The only
change effected, therefore, by Art. 1413 of the Civil Code is not to provide for the recovery of the
interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that
the same can be recovered “with interest thereon from the date of payment.” The Angel Jose
Warehousing Co. case not only resolved all doubts with respect to the apparent confl ict between Art.
1413 of the New Civil Code and Sec. 6 of the Usury Law; it also resolved all doubts with respect to the
question as to whether or not the creditor will be allowed to recover the amount loaned. The factual
backdrop of this case is as follows: The action is one for the recovery of an unpaid loan, with legal
interest from the fi ling of the complaint, plus attorney’s fees. Defendants interposed the defense that
since the loan is usurious and therefore void, the principle of pari delicto as enunciated in Art. 1411 of
the New Civil Code is applicable. To strengthen this defense, they invoked the provisions of Arts. 1413
and 1961 of the Civil Code as well as the case of Sebastian vs. Bautista56 wherein the Court of Appeals
held that in usurious contract, although the Civil Code in Art. 1413 provides for an exception to the rule
of pari delicto in the case of the debtor, it does not provide for an exception in the case of the creditor.
Is this correct? According to the Supreme Court, this is not correct. A contract of loan with usurious
interest consists of principal and accessory stipulation; the principal 5523 SCRA 119. 5658 Off. Gaz. 3146.
See also People vs. Masangkay, 58 Off. Gaz. 3565. Art. 1413 605 one is to pay the debt; the accessory is
to pay interest thereon. These two stipulations are divisible. According to Art. 1420 of the New Civil
Code, “in case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter
may be enforced.” In a simple contract of loan with usurious interest, the prestation of the debtor to
pay the principal debt is not illegal; what is illegal is to pay the stipulated interest. Hence, being
separable, the latter only should be deemed void. Plaintiff is therefore entitled to the recovery of the
principal of the loan plus legal interest of 6% per annum from the fi ling of the complaint pursuant to
Art. 2209 of the New Civil Code. Attorney’s fees, however, cannot be recovered since there is no
showing that the case falls under any of the exceptions provided for in Art. 2208 of the New Civil Code.
Besides, defendants had reasons to resist the claim since there was yet no defi nite ruling on the point of
law involved herein in the light of the New Civil Code.57 The above doctrine was reiterated in Briones vs.
Cammayo. In order that we shall have a complete picture of the case, we are reproducing the entire
decision penned by Justice Dizon, including the dissenting opinion penned by Justice Castro and the
concurring opinion penned by Justice Barredo. Briones vs. Cammayo 41 SCRA 404 DIZON, J.: On
February 22, 1962, Aurelio G. Briones fi led an action in the Municipal Court of Manila against Primitivo,
Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them, jointly and severally,
the amount of P1,500.00, plus damages, attorney’s fees and costs of suit. The defendants answered the
complaint with specifi c denials and the following special defenses and compulsory counterclaim: “x x x;
By way of — 57Angel Jose Warehousing Co. vs. Chelda Enterprises, supra. VOID OR INEXISTENT
CONTRACTS Art. 1413 606 CONTRACTS SPECIAL DEFENSES Defendants Allege: 4. Defendants executed
the real estate mortgage, Annex ‘A’ of the complaint, as security for the loan of P1,200.00 given to
defendant Primitivo O. Cammayo upon the usurious agreement that defendant pays to the plaintiff and
that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged
loan of P1,500.00 as interest the sum of P300.00 for one year; 5. That although the mortgage contract,
Annex ‘A’ was executed for securing the payment of P1,500 for a period of one year, without interest,
the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum
of P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for one year; 6.
That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during
the period from October, 1955 to July, 1956 the total sum of P330.00 which plaintiff, illegally and
unlawfully refuse to acknowledge as part payment of the account but as in interest of said loan for an
extension of another term of one year; 7. That said contract of loan entered into between plaintiff and
defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good customs,
public order or public policy and is, therefore, inexistent and void from the beginning (Art. 1407, Civil
Code); And as — COMPULSORY COUNTERCLAIM Defendants replead all their allegations in the
preceding paragraphs; 8. That plaintiff, by taking and receiving interest in excess of that allowed by law,
with full intention to violate the law, at the expense of the defendants, committed a fl agrant violation
of Act 2655, otherwise known as the Usury Law, causing the defendants damages and attorney’s fees,
the amount of which will be proven at the trial; 9. That this is the second time this same case is fi led
before this court, the fi rst having been previously fi led and Art. 1413 607 docketed in this court as Civil
Case No. 75845 (Branch VII) and the same was dismissed by the Court of First Instance (Branch of
Manila) on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly bringing this case to the
court, harassing and persecuting defendants in the manner, defendants have suffered mental anguish
and anxiety for which they should be compensated for moral damages.’’ On September 7, 1962, Briones
fi led an unverifi ed reply in which he merely denied the allegations of the counterclaim. Thereupon, the
defendants moved for the rendition of a summary judgment on the ground that, upon the record, there
was no genuine issue of fact between the parties. The Municipal Court granted the motion and rendered
judgment sentencing the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon at
the legal rate from February 22, 1962, plus the sum P150.00 as attorney’s fees. From this judgment, the
defendants appealed to the Court of First Instance of Manila where, according to the appealed decision,
“defendant has asked for summary judgment and plaintiff has agreed to the same.” (Record on Appeal,
p. 21.) Having found the motion for summary judgment to be in order, the court then proceeded to
render judgment as follows: “Judgment is, therefore, rendered, ordering defendant to pay plaintiff the
sum of P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully paid. This
judgment represents defendant’s debts of P1,500.00 less usurious interest of P120.00 and the additional
sum of P200.00 as attorney’s fees or a total deduction of P320.00. Plaintiff shall pay the costs.” In the
present appeal defendants claim that the trial court erred in sentencing them to pay the principal of the
loan notwithstanding its fi nding that the same was tainted with usury, and erred likewise in not
dismissing the case. It is now disputed that the contract of loan in question was tainted with usury. The
only questions to be resolved, therefore, are fi rstly, whether the creditor is entitled to collect from the
debtor the amount representing the principal obligation; secondly, in the affi rmative, if he is entitled to
collect interests thereon, and if so, at what rate. The Usury Law penalizes any person or corporation
who, for any loan or renewal thereof or forbearance, shall collect or receive a higher rate or greater sum
or value than is allowed by law, and provides further that, in such case, the debtor may VOID OR
INEXISTENT CONTRACTS Art. 1413 608 CONTRACTS recover the whole interest, commissions, premiums,
penalties and surcharges paid or delivered, with costs and attorney’s fees, in an appropriate action
against his creditor, within two (2) years after such payment or delivery. (Section 6, Act 2655, as
amended by Acts 3291 and 3998.) Construing the above provision, We held in Go Chioco vs. Martinez,
45 Phil. 256, that even if the contract of loan is declared usurious the creditor is entitled to collect the
money actually loaned and the legal interest due thereon. In Gui Jong & Co. vs. Rivera, et al., 45 Phil.
778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay
the creditor the amount which he justly owes him, citing in support of this ruling its previous decisions in
Go Chioco, supra, Aguilar vs. Rublato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739. In
all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that
the creditor has no right of action to recover the interest in excess of the lawful rate; but that this did
not mean that the debtor may keep the principal received by him as loan — thus unjustly enriching
himself to the damage of the creditor. Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We
also held that the standing jurisprudence of this Court on the question under consideration was clearly
to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover
from the borrower the money actually loaned to and enjoyed by the latter. This Court went further to
say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious
contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate
the evil of usury, the legal question involved should not be resolved on the basis of convenience. Other
cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554,
January 31, 1964, 10 SCRA 199, 200-202. In the latter, We expressly held that when a contract is found
to be tainted with usury “the only right of the respondent (creditor) x x x was merely to collect the
amount of the loan, plus interest due thereon.’’ The view has been expressed, however, that the ruling
thus consistently adhered to should now be abandoned because Article 1957 of the new Civil Code — a
subsequent law — Art. 1413 609 provides that contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury, shall be void, and that in such cases “the
borrower may recover in accordance with the laws on usury.’’ From this the conclusion is drawn that the
whole contract is void and that, therefore, the creditor has no right to recover — not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated and the view
referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda
Enterprises, etc. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract
may or may nor recover the principal of the loan, and, in the affi rmative, whether or not he may also
recover interest thereon at the legal rate, We said the following: “x x x. The court found that there
remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged
usurious interests, of which P1,048.15 has actually been deducted in advance by plaintiff from the loan;
that said amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50
leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that notwithstanding the
usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its balance
of P19,247.35. Accordingly, it stated in the dispositive portion of the decision, thus: “WHEREFORE,
judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of
P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional sum of
P2,000.00 as damages for attorney’s fee; and, in case the assets of defendant partnership be insuffi cient
to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (1/2)
of the unsatisfi ed portion on this judgment. “With costs against the defendants.” Appealing directly to
Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover
the principal of the loan? (2) Should attorney’s fees be awarded in plaintiff’s favor? VOID OR INEXISTENT
CONTRACTS Art. 1413 610 CONTRACTS “Great reliance is made by appellants on Art. 1411 of the New
Civil Code which states: “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.’’ Since,
according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari
delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each
other. Said rule, however, appellants add, is modifi ed as to the borrower, by express provision of the
law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest
allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover
on the contract. So — they continue — the New Civil Code provisions must be upheld as against the
Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the
New Civil Code, that: “Usurious contracts shall be governed by the Usury Law and other special laws, so
far as they are not inconsistent with this Code.’’ (Italics ours.) We do not agree with such reasoning.
Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code.
Therefore, said provision is no warrant for departing from previous interpretation that, as provided in
the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the
interest. True, as stated in Article 1411 of the New Civil Code the rule of pari delicto applies where a
contract’s nullity proceeds from illegality of the cause or object of said contract. However, appellants fail
to consider that a contract of loan with usurious interest consists of principal and accessory stipulations;
the principal one is to pay the debt; the accessory stipulation is to pay interest thereon. Art. 1413 611
And said two stipulations are divisible in the sense that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: “The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in force.’’ The question
therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the
legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this
regard: “In case of a divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced.’’ In simple loan with stipulation of usurious interest the prestation of the debtor
to pay the principal debt, which is the cause of the contracts (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter
only shouId be deemed void, since it is the only one that is illegal. Neither is there a confl ict between
the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have
paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest
paid. The New Civil Code, in Article 1413 states: “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 payment.’’ Article
1413, in speaking of “interest paid in excess of the interest allowed by the usury laws’’ means the whole
usurious interest; that is, in a loan of P1,000.00, with interest of 20% per annum or P200.00 for one
year, if the borrower pays said P200 the whole P200.00 is the usurious interest, not just that part
thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The
whole stipulation as to interest void, since payment of said interest is illegal. The only change effected,
therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in
excess of that allowed by law, which the Usury Law already provided for, but to add that the same can
be recovered “with interest thereon from the date of payment.’’ The foregoing interpretation is reached
with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said
stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment
of interest. It should not, however, be interpreted to mean forfeiture even of the principal for this would
unjustly enrich VOID OR INEXISTENT CONTRACTS Art. 1413 612 CONTRACTS the borrower at the
expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further
deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus
be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt
earns interest from the date of the demand (in this case from the fi ling of the complaint). Such interest
is not due to stipulation, for there was none, the same being void. Rather, it is due to the general
provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay
interest by way of damages (Art. 2209, Civil Code). The Court a quo therefore, did not err in ordering
defendants to pay the principal debt with interest thereon at the legal rate, from the date of fi ling of
the complaint. In answer to the contention that the forefeiture of the principal of the usurious loan is
necessary to punish the usurer. We say this: Under the Usury Law there is already provision for
adequate punishment for the usurer namely, criminal prosecution where, if convicted, he may be
sentenced to pay a fi ne be not less than P50.00 nor than P500.00, or imprisonment of not less than 30
days nor more than one year, or both, in the discretion of the court. He may further be sentenced to
return the entire sum received as interest, with subsidiary imprisonment in case of non-payment
thereof. It is, of course, to be assumed that this last penalty may be imposed only if the return of the
entire sum received as interest had not yet been the subject of judgment in a civil action involving the
usurious contract of loan. In arriving at the above conclusion, We also considered our decision in Mulet
vs. People, but found that the same does not apply to the present case. The facts therein involved were
as follows: “On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos secured from petitioner
Miguel Mulet a loan of P550, payable within 5 years at 30 per cent interest per annum. In the deed of
mortgage executed by the Rubillos as a security, the sum of P1,375.00 was made to appear as capital
loan of P550.00 and the total interest of P825.00 computed at 30 per cent per annum of 5 years. Within
four years following the execution of the mortgage, the debtors made partial payments aggregating
P278.27, on account of interest. Thereafter, the debtors paid the whole capital Art. 1413 613 of P550.00
due to petitioner’s promise to condone the unpaid interest upon payment of such capital. But to their
suprise, petitioner informed them that they were still indebted in the sum of P546.73 which represented
the balance of the usurious interest. And in consideration of this amount, petitioner pressed upon the
debtors to execute in October, 1933 in his favor, a deed of sale with pacto de retro of a parcel of land, in
substitution of the original mortgage which was cancelled. From the date of the execution of the new
deed up to 1936, petitioner received, as his share of the products of the land the total sum of P480.00.
Prosecuted on November 18, 1936, for the violation of the Usury Law, petitioner was convicted by the
trial court, and on appeal, the judgment was affi rmed by the Court of Appeals. The instant petition for
certiorari is directed at that portion of the decision of the appellate court ordering petitioner to return
to the offended parties the sum of P373.27, representing interests received by him in excess of that
allowed by law.’’ It was Mulet’s claim that, as the amount of P373.27 had been paid more than two
years prior to the fi ling of the complaint for usury against him, its return could no longer be ordered in
accordance with the prescriptive period provided therefor in Section 6 of the Usury Law. Said amount
was made up of the usurious interest amounting to P278.27 paid to Mulet, in cash, and the sum of
P480.00 paid to him in kind, from the total of which two amounts 14% interest allowed by law —
amounting to P385.00 — was deducted. Our decision was that Mulet should return the amount of
P480.00 which represented the value of the produce of the land sold to him under pacto de retro which,
with the unpaid balance of the usurious interest, was the consideration of the transaction — meaning
the pacto de retro sale. This Court then said: “x x x. This last amount is not usurious interest on the
capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro with
the unpaid balance of the usurious interest (P546.73) as the consideration of the transaction. This
consideration, because contrary to law, is illicit, and the contract which results therefrom, is null and
void. (Art. 1275, Civil Code). And under the provisions of Article 1305, in connection with Article 1303, of
the Civil Code, when the nullity of a contract arises from the illegality of the consideration which in itself
constitutes as felony, the guilty party shall be subject to criminal proceeding while the innocent party
VOID OR INEXISTENT CONTRACTS Art. 1413 614 CONTRACTS may recover whatever he has given,
including the fruits thereof.’’ (Italics supplied.) It is clear, therefore, that in the Mulet case, the principal
of the obligation had been fully paid by the debtor to the creditor; that the latter was not sentenced to
pay it back to the former, and that what this Court declared recoverable by debtor were only the
usurious interest paid as well as the fruits of the property sold under pacto de retro. IN VIEW OF THE
FOREGOING, the decision appealed from is modifi ed in the sense that appellee may recover from
appellant the principal of the loan (P1,180.00) only, with interest thereon at legal rate of 6% per annum
from the date of the fi ling of the complaint. With costs. Makalintal, Zaldivar, Teehankee, Villamor and
Makasiar, JJ., concur. Concepcion, C.J., and Fernando, J., concur in the dissenting opinion of Justice
Castro. Reyes, J.B.L., J., concurs with Justice Barredo. Castro, J., dissents. Barredo, Jr., concurs in
separate opinion. Castro J., dissenting: Beyond the area of debate is the principle that in a contract of
loan of sum of money, the cause, with respect to the lender, is generally the borrower’s prestation to
return the same amount. It is my view, however, that in a contract which is tainted with usury, that is,
with a stipulation (whether written or unwritten) to pay usurious interest, the prestation to pay such
interest is an integral part of the cause of the contract.58 It is also the controlling cause, for a usurer
lends his money not just to have it returned but indeed to acquire inordinate gain. Article 1957, which is
a new provision in the Civil Code, provides as follows: “Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury shall be void. The borrower may
recover in accordance with the laws on usury.” This article which declares the contract itself — not
merely the stipulation to pay usurious interest — void, necessarily regards the prestation to pay such
usurious interest as an integral part of the cause, making it illegal. 58See Articles 1933, 1950 and 1957,
New Civil Code. Art. 1413 615 Undoubtedly, the motive of the usurer is his desire to acquire inordinate
gain; this motive becomes an integral and controlling part of the cause because its realization can be
achieved only by compliance by the borrower with the stipulated prestation to pay usurious interest.
The law never proscribes a contract merely because of the immoral motive of a contracting party, for
the reason that it does not concern itself with motive but only with cause.59 An exception is where such
motive becomes an integral part of the cause, like the stipulated usurious interest in a contract of loan.
While the old law, according to El Hogar,60 considered the usurious loan valid as to the loan and void as
to the usurious interest, the new law, in Article 1957 of the new Civil Code, declares the usurious loan
void as to the loan and void as to the usurious interest. What is the reason for the new law? In my view,
it is none other than its intention to regard the usurious interest as an integral part of the cause, thus
making it illegal; otherwise, the new law would be devoid of reason. Any interpretation that divests the
new law of reason, that declares the usurious contract void and in the same breath permits recovery of
the principal of the loan — which was the same result under the old law, as well as under El Hogar that
considered the usurious contract valid as to the loan — renders Article 1957 of the new Civil Code
meaningless and pointless. The prestation to pay usurious interest being an integral and controlling part
of the cause, making it illegal and the contract of loan void, Article 1411 of the new Civil Code should be
applied. This article provides: “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 instrument 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.’’ 59De Jesus vs.
Urrutia & Company, 32 Phil. 171. 60Lopez and Javelona vs. El Hogar Pilipino, 47 Phil. 249. VOID OR
INEXISTENT CONTRACTS Art. 1413 616 CONTRACTS An exception is, however, provided in the second
sentence of Article 1957 which states: “The borrower may recover in accordance with the laws on
usury.” As an exception to the general rule in Article 1411, the debtor is allowed in accordance with the
Usury Law to recover the amount he has paid as usurious interest. Thus, Article 1413 explicitly
authorizes that “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 payment.” But the lender is not allowed to recover
the principal, because no such exception is made; hence, he falls within the general rule stated in Article
1411. In Mulet vs. People, 61 the Supreme Court, in effect, reconsidered its opinion in El Hogar. In
Mulet, the plaintiff extended a usurious loan to Rubillos. When the debtor failed to pay the whole
usurious interest, the creditor, in consideration of the said unpaid interests, made the debtor execute a
pacto de retro sale of certain properties to him. He then sought to be exempt from returning the value
of the produce of the lands so transferred. Mr. Justice Moran, speaking for the Supreme Court, said: “* *
* We are of the opinion that the petitioner should be ordered to return * * * the amount * * * of
P480.00. This last amount is not usurious interest on the capital of the loan but the value of the produce
of the land sold to petitioner under pacto de retro, with the unpaid balance of the usurious interest as
the consideration, because contrary to law, is illicit, and the contract which results therefrom, is null and
void. “If the unpaid usurious interests as the consideration of the pacto de retro sale render such sale
null and void, a fortiori, the usurious interest as consideration of the contract of loan, also renders such
loan null and void.” In Asturias, et al. vs. Court of Appeals, 62 the Supreme Court, speaking through Mr.
Justice Jesus Barrera, stressed that: “A contract designed to hide a usurious agreement not only violates
the law but contravenes public policy. Such a contract can not be countenanced and is therefore illegal
and void from its inception.” 6173 Phil. 60. 62L-17895, promulgated Sept. 30, 1963, 9 SCRA 131. Art.
1413 617 The ruling in El Hogar that a usurious loan was valid as to the principal but void as to the
usurious interest was based upon the laws then in force, namely, the old Civil Code and the Usury Law,
both of which did not contain any specifi c explicit provision prescribing the contract itself. I am fully
persuaded that in drafting Chapter 2, Title XI of Book IV of the new Civil Code, the Code Commission
knew of the majority opinion in El Hogar, took note of it, and, to offset any doubt concerning the
intention of the Commission to overrule El Hogar, formulated Articles 1957 and 1961. And it is of great
signifi cance to me that when the Commission formulated Article 1957, knowing that under El Hogar the
usurer may recover the principal of the loan, it omitted affi rmance of the right of the lender to recover
the principal, and instead emphasized that “the borrower may recover in accordance with the laws on
usury.’’ BARREDO, J., concurring: I concur. I believe that this decision expresses the fair and just intent of
our usury laws and suffi ciently effectuates the public policy that should be pursued in usury cases. I
consider usury to be unchristian and inhuman, particularly because it thrives best in the misery of
people by taking advantage of them when they are precisely in urgent need of money to save
themselves from a tight situation. Usury has always been considered as a scourge everywhere in the
world since the time of the Holy Scriptures. All these notwithstanding, I do not believe in condoning the
whole indebtedness of a person who borrows money, only because he has been made to agree, directly
or indirectly, to pay more interest than that authorized by law. It is my considered view that what the
law proscribes and declares null and void is not the lending of money, but only the collection of
excessive interest. There is nothing morally wrong in allowing a money-lender to get back the money he
has loaned because, after all, the borrower has used the same for his own needs, and it is only fair that
he should not be enriched at the expense of another. And this, to my mind, is obvious from the language
of Article 1957 of the Civil Code which provides that: “Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury be void. The borrower may recover in
accordance with the laws on usury. (n)’’ VOID OR INEXISTENT CONTRACTS Art. 1413 618 CONTRACTS
Properly construed, the phrase “contracts and stipulations” in this provision does not contemplate the
totality of the contract of loan but only the portion thereof that is “intended to circumvent the laws
against usury,” and that necessarily is no more than any term, “cloak or device which results in the
collection of interest in excess of the rate allowed by law. In fact, the same provision expressly provides
that in spite of the nullity it ordains, “the borrower may recover in accordance with the laws on usury.”
In other words, instead of leaving the consequences of the declared nullity to be in accordance with
general principles, the article itself spells out in black and white what should be done with the proceeds
of the proscribed act, and it says that the special laws on usury shall be followed in that respect. To the
same effect is Article 1961 of the Civil Code. It provides that: “Usurious contracts shall be governed by
the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n)” And I see
no point of collision between the Civil Code and the Usury Law for the simple reason that even before
Art. 1957 declared usurious contracts and transactions null and void, Section 7 of the Usury Law already
provided thus: “All covenants and stipulations, constrained in conveyances, mortgages, bonds, bills,
notes and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or
whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received, directly or
indirectly, a higher rate or greater sum or value for the renewal thereof or forbearance of money, goods,
or credits than is hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in
the computation of interest, made without intent to evade any of the provisions of this Act, shall render
a contract void: And provided, further, That nothing herein contained shall be construed to prevent the
purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable
consideration before maturity, when there has been no intent on the part of said purchaser to evade
the provisions of this Act and said purchase was not a part of the original usurious transaction. In any
case, however, the maker of said note shall have the right to recover from said original holder Art. 1413
619 the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney’s
fees as may be allowed by the Court.” In this connection, it is to be noted that Section 6 of the Usury
Law provides: “Any person or corporation who, for any such loan or renewal thereof or forbearance,
shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be
taken or received, may recover the whole interest, commissions, premiums penalties and surcharges
paid or delivered with costs and attorney’s fees in such sum as may be allowed by the court in an action
against the person or corporation who took or received them if such action is brought within two years
after such payment or delivery: Provided, however, That the creditor shall not be obliged to return the
interest, commissions and premiums for a period of not more than one year collected by him in advance
when the debtor shall have paid the obligation before it is due, provided such interest, and commissions
and premiums do not exceed the rates fi xed in this Act.” As a matter of fact, then, even as the Civil Code
yields to the Usury Law in Articles 1957 and 1413, in reality, there is no confl ict between their
corresponding provisions. To say that because these laws specify only the remedies in favor of the
borrower, they impliedly deny to the lender any remedy to recover the principal of the loan is, I submit,
a non sequitur. It appears to me more logical to construe the provisions allowing the borrower to
recover all the interest he has paid, as Article 1413 of the Civil Code and Section 6 of the Usury Law have
been construed together to mean in Angel Jose vs. Chelda Enterprises, cited in the main opinion, as
indicating that the borrower may not recover from the lender the amount he has paid as payment of his
principal debt, and conversely, that the lender may collect the same if it has not been paid by the
borrower. In brief, my point is that while it is true that Article 1957 of the Civil Code declares that all
usurious contracts and stipulations are void, this is nothing new, for such has been the law even under
the Usury Law before the Civil Code went into effect, and, moreover, it is evident that the Civil Code
itself yields to the Usury Law when it comes to the question of how much of the loan and interests paid
by the borrower may be recovered by him, and the Usury Law is clear that he may VOID OR INEXISTENT
CONTRACTS Art. 1413 620 CONTRACTS recover only all the interests, including, of course, the legal part
thereof, with legal interest from the date of judicial demand, without maintaining that he can also
recover the principal he has already paid to the lender. As fi rst discussed under Art. 1175, there is now
no longer any ceiling in interest rates on loans pursuant to Central Bank Circular No. 224 issued last Dec.
1, 1982.

Problem — On Jan. 15, 1958, D borrowed P10,000 from C. as evidence of the indebtedness, D executed
a promissory note promising to pay the entire obligation on Jan. 15, 1959, at 24% interest per annum. As
security for the payment of the obligation, he also executed a real estate mortgage on a house and lot
registered in his name in favor of C. This mortgage was duly registered. When the note matured, D paid
the entire obligation plus interest amounting to P2,400. Considering that the contract is usurious, if D
institutes an action against C for the recovery of the usurious interest which he has paid, how much can
he recover? Reason. Answer — D can recover the entire interest of P2,400 which he has paid plus 6%
interest thereon from the date of payment. This is in accordance with Sec. 6 of the Usury Law and Art.
1413 of the New Civil Code. It must be observed that under Sec. 6 of the Usury Law, the debtor may
recover the whole interest paid. Under the New Civil Code , in 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 payment.” When the Code speaks of “interest paid in excess of the interest allowed by usury laws,” it
means the whole usurious interest. The two provisions, therefore, are almost identical. The only change
effected by Art. 1413, NCC, is not to provide for the recovery of the interest paid in excess of that
allowed by law, which the Usury Law already provided for, but to add that the same can be recovered
“with interest thereon from the date of payment.” (Angel Jose Warehousing Co. vs. Chelda Enterprises,
23 SCRA 119.) (Note: Prior to January 1, 1983 and under the Treasury Laws, no person shall receive a
rate of interest, including commissions, premiums, fi nes and penalties, higher than 12% per annum or
the maximum rate prescribed by the Monetary Board for a loan secured by a mortgage upon real estate
the title to which is duly registered. Therefore, the 18% interest rate plus the additional interest and
penalty charges of 18% and 8%, respectively, are highly usurious. [Development Bank of the Art. 1413
621 Philippines vs. Perez, G.R. No. 148541, Nov. 11, 2004.] Under Central Bank (CB) Circular No. 905,
which became effective on Jan. 1, 1983, whereby the Monetary Board is authorized to fi x interest rates,
the ceiling rates under the Usury law [Act No. 2655, as amended by P.D. No. 116] have been abolished.
It should be noted that Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
suspended the latter’s effectivity. The legislation of usury is wholly the creature of legislation. A CB
Circular cannot repeal a law. Only a law can repeal another law. Thus, retroactive application of a CB
Circular cannot, and should not, be presumed. (Development Bank of the Philippines vs. Perez, G.R. No.
148541, Nov. 11, 2004.) In declaring void the stipulations authorizing excessive interest and charges, the
SC declared that although the Usury Law was suspended by CB Circular No. 905 and consequently the
parties are given wide latitude to agree on any interest rate, nothing in the said Circular grants lenders
carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets. (Heirs of Zoilo Espiritu and Primitiva Espiritu vs. Sps. Maximo Landrito
and Paz Landrito, etc., G.R. No. 169617, April 3, 2007) 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.63 Art. 1415. When 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.64 Art. 1416. When the agreement is not illegal per se
but is merely prohibited, and the prohibition by the law is designed 63New provision. 64New provision.
VOID OR INEXISTENT CONTRACTS Arts. 1414-1416 622 CONTRACTS for the protection of the plaintiff, he
may, if public policy is thereby enhanced, recover what he has paid or delivered.65

Article Applied. — The above exception to the principle of pari delicto is illustrated in the following
cases: Angeles vs. Court of Appeals 102 Phil. 1006 The records show that on March 12, 1935, a
homestead patent was issued to Juan Angeles. On May 28, 1937, Angeles sold he homestead to
defendants, Gregorio Inez and Anastacia Divino. This is now an action commenced by the heirs of
Angeles to recover the homestead from the defendants on the ground that the sale is void since it was
made within the prohibited period of fi ve years as enumerated in Sec. 118 of the Public Land Law.
Defendants, however, maintain that under the principle of pari delicto, there can be no recovery. The
Supreme Court, speaking through Justice Labrado, held: “The principle of in pari delicto is not applicable
to a homestead which has been illegally sold in violation to the homestead law. The reason for the rule
is that the policy of the law is to give land to a family for home and cultivation; consequently, the law
allows the homesteader to reacquire the land even if it has been sold; hence, the right may not be
waived. The sale of the homestead in the case at bar is, therefore, null and void and petitioners have the
right to recover the homestead illegally disposed of. Consequently, the action to recover the same does
not prescribe. “While the rule of in pari delicto should not apply to the sale of the homestead, because
such sale is contrary to the public policy enunciated in the homestead law, the loss of the products
realized by the defendants and the value of the necessary improvements made by them on the land
should not be excepted from the application of the said rule because no cause or reason can be cited to
justify an exception. It has been held that the rule of in pari delicto is inapplicable only where the same
violates a wellestablished public policy. The heirs of the homesteader should, therefore, be declared to
have lost and forfeited the value of the products gathered from the land, and 65New provision. Arts.
1414-1416 623 so should the defendants lose the value of the necessary improvements that they have
made thereon. With respect to the price for the land, in view of the rule that no one should enrich
himself at the expense of another, the return of the price by the plaintiffs should be decreed, before the
plaintiffs may be allowed to recover back the possession of the homestead.’’66 Philippine Banking Corp.
vs. Lui She 21 SCRA 52 Justina Santos and her sister Lorenza were owners in common of a valuable piece
of land located in Manila. In it are two residential houses with entrance on Florentino Torres street
which were occupied by Justina and Lorenza and the Hen Wah Restaurant with entrance on Rizal
Avenue which was occupied and operated by Wong Heng, a long time lessee. When Lorenza died in
1957, Justina became the absolute owner of the property. Then already well advanced in years, being 90
years old, blind, crippled, and an invalid, with no other companions except 8 maids and 17 dogs, her
dreary existence was brightened only now and then by the visits of the four children of her friend, Wong
Heng. Wong, on the other hand, who had always been her trusted man and friend, became closer to
her. On Nov. 15, 1957, “in grateful acknowledgment of the personal services of the lessee to her,”
Justina executed a contract of lease in favor of Wong, covering the portion then already leased to him
and another portion fronting Florentino Torres street. The lease was for 50 years at a monthly rental of
P3,120.00. Ten days later (Nov. 25), the contract was amended so as to make it cover the entire
property at an additional monthly rental of P360.00. For his part, Wong undertook to pay out of the
rental due from him an amount not exceeding P1,000.00 a month for the salaries of the maids and the
food of her dogs. On Dec. 21, 1957, she executed another contract giving Wong the option to buy the
leased premises for P120,000, payable within ten years at a monthly installment of P1,000.00. The
option imposed on Wong the obligation to spend P1,800.00 a month for the salaries of her maids and
the food of the dogs. In addition, it also imposed the condition that Wong must become a Filipino
citizen. In order that this condition would be complied with, 66To the same effect: Santander vs.
Villanueva, 103 Phil. 1; Feliceo vs. Iriola 103 Phil. 125; Ras vs. Sua, 25 SCRA 153. VOID OR INEXISTENT
CONTRACTS Arts. 1414-1416 624 CONTRACTS Justina fi led a petition to adopt Wong and his children on
the erroneous belief that adoption would confer on them Philippine citizenship. The error was
discovered and the proceedings were abandoned. On Nov. 18, 1958, she executed to other contracts,
one extending the term of the lease to 99 years and another fi xing the term of the option at 50 years.
On Aug. 24 and 29, 1959, she executed two wills wherein she bade her legatees to respect the contracts
she had entered into with Wong, but in a codicil executed on Nov. 4, 1959, she appears to have
undergone a change of heart. Claiming that the various contracts were made by her because of
machinations and inducements practised by Wong Heng, she now directed her executor to secure the
annulment of the contracts. On Nov. 18, 1959, the present action was fi led in the Court of First Instance
of Manila. The case was heard after which the court rendered judgment declaring all the above stated
contracts, with the exception of the lease contract of Nov. 15, 1957, null and void. From this judgment
both parties appealed directly to the Supreme Court. After the case was submitted for decision, both
parties died. Wong was substituted by his wife, Lui She, while Justina Santos was substituted by the
Philippine Banking Corporation. The only question that has to be resolved now in this case is whether or
not the above stated contracts are valid. The Supreme Court, speaking through Justice Castro, held:
“With respect to the lower court’s fi nding that in all probability Justina Santos could not have intended
to part with her property while she was alive nor even to lease it in its entirety as her house was built in
it, suffi ce it to quote the testimony of her own witness and lawyer who prepared the contracts in
question, Atty. Alonzo: “The ambition of the old woman, before her death, according to her revelation
to me, was to see to it that these properties be enjoyed, even to own them, by Wong Heng because
Doña Justina told me that she did not have any relatives near or far, and she considered Wong Heng as a
son and his children her grandchildren; especially her consolation in life was when she would hear the
children reciting prayers in Tagalog. She was very emphatic in the care of the seventeen (17) dogs and of
the maids who helped her much, and she told me to see to it that no one would disturb Wong Heng
from those properties. That is why we thought of the ninety-nine (99) years lease, we thought of Arts.
1414-1416 625 adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship;
being the adopted child of a Filipino citizen.’ “This not to say, however, that the contracts are valid. For
the testimony just quoted, while dispelling doubt as to the intention of Justina Santos, at the same time
gives the clue to what we view as a scheme to circumvent the Constitutional prohibition against the
transfer of lands to aliens. ‘The illicit purpose then becomes the illegal causa67 rendering the contracts
void. “Taken singly, the contracts show nothing that is necessarily illegal but considered collectively,
they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be
sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy
real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko vs.
Register of Deeds:68 ‘Aliens are not completely excluded by the Constitution from the use of lands for
residential purposes. Since their residence in the Philippines is temporary, they may be granted
temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire
to remain here forever and share our fortunes and misfortunes, Filipino citizenship is not impossible to
acquire.’ “But an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of
which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it
becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests
himself in stages, not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus
abutendi) but also of the right to dispose of it (jus disponendi) — rights the sum total of which make up
ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the
disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in
an alien. And yet this is just exactly what the parties in this case did within the space of one year, with
the result that Justina 67Rodriguez vs. Rodriguez, 20 SCRA 908. 6829 Phil. 480-481 (1947). VOID OR
INEXISTENT CONTRACTS Arts. 1414-1416 626 CONTRACTS Santos’ ownership of her property was
reduced to a hollow concept. If this can be done, then the Constitutional ban against alien landholding in
the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave peril. “It does not
follow from what has been said, however, that because the parties are in pari delicto they will be left
where they are, without relief. For one thing, the original parties who were guilty of a violation of the
fundamental charter have died and have since been substituted by their administrators to whom it
would be unjust to impute their guilt.69 For another thing, and this is not only cogent but also
important, Article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that ‘When
the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for
the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or
delivered.’ The Constitutional provision that ‘Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to individuals, corporations, or associations
qualifi ed to acquire or hold lands of the public domain in the Philippines’70 is an expression of public
policy to conserve lands for the Filipinos. “That policy would be defeated and its continued violation
sanctioned if, instead of setting the contracts aside and ordering the restoration of the land to the estate
of the deceased Justina Santos, this Court should apply the general rule of pari delicto. To the extent
that our ruling in this case confl icts with that laid down in Rellosa vs. Gaw Chee Hun71 and subsequent
similar cases, the latter must be considered as pro tanto qualifi ed. “Accordingly, the contracts in
question are annulled and set aside; the land subject-matter of the contracts is ordered returned to the
estate of Justina Santos as represented by the Philippine Banking Corporation; Wong Heng (as
substituted by the defendant appellant Lui She) is ordered to pay the Philippine Banking Corporation the
sum P56,564.35, with legal interest from the date of the 69Cf. Concurring opinion of Justice Bengzon in
Rellosa vs. Gaw Chee Hun, 93 Phil. 827, 836 (1953). 70Const., Art. XIII, Sec. 5. 7193 Phil. 827 (1953). Arts.
1414-1416 627 fi ling of the amended complaint; and the amounts consigned in court by Wong Heng
shall be applied to the payment of rental from November 15, 1959 until the premises shall have been
vacated by his heirs. Costs against the defendant-appellant.’’ Fernando, J., concurring: “With the able
and well-written opinion of Justice Castro, I am in full agreement. The exposition of the facts leaves
nothing to be desired and the statement of the law is notable for its comprehensiveness and clarity. This
concurring opinion has been written solely to express what I consider to be the unfortunate and
deplorable consequences of applying the pari delicto concept, as was, to my mind, indiscriminately
done, to alien landholding declared illegal under the Krivenko doctrines in some past decisions. “It is to
be remembered that in Krivenko vs. The Register of Deeds of Manila, 72 this Court over strong dissents
held that residential and commercial lots may be considered agricultural within the meaning of the
constitutional provision prohibiting the transfer of any private agricultural land to individuals,
corporations or associations not qualifi ed to acquire or hold lands of the public domain in the
Philippines save in cases of hereditary succession. That provision of the Constitution took effect on
November 15, 1935 when the Commonwealth Government was established. The interpretation as set
forth in the Krivenko decision was only handed down on November 15, 1947. Prior to that date there
were many who were of the opinion that the phrase agricultural land should be construed strictly and
not be made to cover residential and commercial lots. Acting on that belief, several transactions were
entered into transferring such lots to alienvendees by Filipino-vendors. “After the Krivenko decision,
some Filipino vendors sought recovery of the lots in question on the ground that the sales were null and
void. No defi nite ruling was made by this Court until September of 1953, when on the 20th of said
month, Rellosa vs. 7279 Phil. 461 (1947). VOID OR INEXISTENT CONTRACTS Arts. 1414-1416 628
CONTRACTS Gaw Chee Hun,73 Bautista vs. Uy Isabelo,74 Talento vs. Mckiki,75 Caoile vs. Chiao Peng76
were decided. “Of the four decisions in September, 1953, the most estensive discussion of the question
is found in Rellosa vs. Gaw Chee Hun, the opinion being penned by the retired Justice Bautista Angelo,
with the concurrence only of one Justice, Justice Labrador, also retired. Former Chief Justice Paras as
well as former Justices Tuazon and Montemayor concurred in the result. The necessary sixth vote for a
decision was given by then Justice Bengzon, who had a two-paragraph concurring opinion disagreeing
with the main opinion as to the force to be accorded to the two cases77 therein cited. There were two
dissenting opinions by former Justices Pablo and Alex Reyes. “The doctrine as announced in the Rellosa
case is that while the sale by a Filipino-vendor to an alien-vendee of a residential or a commercial lot is
null and void as held in the Krivenko case, still the Filipino-vendor has no right to recover under a civil
law doctrine, the parties being in pari delicto. The only remedy to prevent this continuing violation of
the Constitution which the decision impliedly sanctions by allowing the alien vendees to retain the lots
in question is either escheat or reversion. Thus: ‘By following either of these remedies, or by approving
an implementary law as above suggested, we can enforce the fundamental policy of our Constitution
regarding our natural resources without doing violence to the principle of pari delicto. “Were the parties
really in pari delicto? Had the sale by and between Filipino-vendor and alien-vendee occurred after the
decision in the Krivenko case, then the above view would be correct that both Filipino-vendor and alien-
vendee could not be considered as innocent parties within the contemplation of the law. Both of them
should be held equally guilty of evasion of the Constitution. “Since, however, the sales in question took
place prior to the Krivenko decision, at a time when the assumption could be honestly entertained that
there was no constitutional prohibition 7393 Phil. 827. 7493 Phil. 843. 7593 Phil. 855. 7693 Phil. 861. See
also Arambulo vs. Cua So, 95 Phil. 749 (1954); Dinglasan vs. Lee Bun Ting, 99 Phil. 427 (1955). 77Bough
vs. Cantiveros, 40 Phil. 210 (1919) and Perez vs. Herranz, 7 Phil. 693 (1902). Arts. 1414-1416 629 against
the sale of commercial or residential lots by Filipinovendor to alien-vendee, in the absence of a defi nite
decision by the Supreme Court, it would not be doing violence to reason to free them from the
imputation of evading the Constitution. For evidently evasion implies at the very least knowledge of
what is being evaded. The new Civil Code (Art. 526) expressly provides: ‘Mistakes upon a doubtful or
diffi cult question of law may be the basis of good faith.’ “According to the Rellosa opinion, both parties
are equally guilty of evasion of the Constitution, based on the broader principle that ‘both parties are
presumed to know the law.’ This statement that the sales entered into prior to the Krivenko decision
were at that time already vitiated by a guilty knowledge of the parties may be too extreme a view. It
appears to ignore a postulate of a constitutional system, wherein the words of the Constitution acquire
meaning through Supreme Court adjudication. “After the Krivenko decision, there is no doubt that
continued possession by alien-vendee of property acquired before its promulgation is violative of the
Constitution. It is as if an act granting aliens the right to acquire residential and commercial lots were
annulled by the Supreme Court as contrary to the provision of the Constitution prohibiting aliens from
acquiring agricultural land. “The question then as now, therefore, was and is how to divest the alien of
such property rights on terms equitable to both parties. That question should be justly resolved in
accordance with the mandates of the Constitution not by a wholesale condemnation of both parties for
entering into a contract at a time when there was no ban as yet arising from the Krivenko decision,
which could not have been anticipated. Unfortunately, under the Rellosa case, it was assumed that the
parties, being in pari delicto, would be left in the situation in which they were, neither being in a position
to seek judicial redress. “Would it not have been more in consonance with the Constitution, if instead
the decision compelled the restitution of the property by the alien-vendee to the Filipino-vendor?
Krivenko decision held in clear, explicit and unambiguous language that: ‘We are deciding the instant
case under Section 5 of Article XIII of the Constitution which is more comprehensive and more absolute
in the sense that it prohibits the transfer to aliens of any private agricultural land including residential
land whatever its origin might have been x x x. This prohibition VOID OR INEXISTENT CONTRACTS Arts.
1414-1416 630 CONTRACTS (Rep. Act No. 133) makes no distinction between private lands that are
strictly agricultural and private lands that are residential or commercial. The prohibition embraces the
sale of private lands of any kind in favor of aliens, which is again a clear implementation and a legislative
interpretation of the constitutional prohibition. x x x It is well to note at this juncture that in the present
case we have no choice. We are construing the Constitution as it is and not as we may desire it to be.
Perhaps the effect of our construction is to preclude aliens, admitted freely into the Philippines, from
owning sites where they may build their homes. But if this is the solemn mandate of the Constitution,
we will not attempt to compromise it even in the name of amity or equity.78 “Alien-vendee is therefore
incapacitated or disqualifi ed to acquire and hold real estate. That incapacity and that disqualifi cation
should date from the adoption of the Constitution on November 15, 1935. That incapacity and that
disqualifi cation, however, was made known to Filipino-vendor and to alien-vendee only upon the
promulgation of the Krivenko decision on November 15, 1947. Alien-vendee, therefore, cannot be
allowed to continue owning and exercising acts of ownership over said property, when it is clearly
included within the Constitutional prohibition. Alien-vendee should thus be made to restore the
property with its fruits and rents to Filipino-vendor, its previous owner, if it could be shown that in the
utmost good faith, he transferred his title over the same to alien-vendee, upon restitution of the
purchase price of course. The Constitution bars alien-vendees from owning the property in question. By
dismissing those suits, the lots remained in alien hands. Notwithstanding the solution of escheat or
reversion offered, they are still at the moment of writing, for the most part in alien hands. There have
been after almost twenty years no proceedings for escheat or reversion. “Yet it is clear that an alien-
vendee cannot consistently with the constitutional provision, as interpreted in the Krivenko decision,
continue owning and exercising acts of ownership over the real estate in question. It ought to follow
then, if such a continuing violation of the fundamental law is to be put an end to, that the Filipino-
vendor, who in good faith entered into, a contract with an incapacitated person, transferring ownership
of a piece of land after the Constitution went into full force 7879 Phil. 461, 480 (1947). Arts. 1414-1416
631 and effect, in the light of the ruling in the Krivenko case, be restored to the possession and
ownership thereof, when he has fi led the appropriate case or proceeding. Any other construction would
defeat the ends and purposes not only of this particular provision in question but the rest of the
Constitution itself. “The Constitution frowns upon the title remaining in the alien-vendee. Restoration of
the property upon payment of the price received by Filipino vendor or its reasonable equivalent as fi xed
by the court is the answer. To give the constitutional provision full force and effect, in consonance with
the dictates of equity and justice, the restoration to Filipino-vendor upon the payment of a price fi xed
by the court is the better remedy. He thought he could transfer the property to an alien and did so. After
the Krivenko case had made clear that he had no right to sell nor an alien-vendee to purchase the
property in question, the obvious solution would be for him to reacquire the same. That way the
Constitution would be given, as it ought to be given respect and deference. “It may be said that it is too
late at this stage to hope for such a solution, the Rellosa opinion, although originally concurred in by
only one justice, being too fi rmly inbedded. The writer however sees a welcome sign in the adoption by
the Court in this case of the concurring opinion of the then Justice, later Chief Justice Bengzon. Had it
been followed then, the problem would not be still with us now. Fortunately, it is never too late — not
even in constitutional adjudication.’’ 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.79 Art. 1418. When the law fi xes, or authorizes the fi xing 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 fi xed, he may demand additional compensation for service
rendered beyond the time limit.80 Art. 1419. When the law sets, or authorizes the setting of a minimum
wage for laborers, and a contract is agreed upon 79New provision. 80New provision. VOID OR
INEXISTENT CONTRACTS Arts. 1417-1419 632 CONTRACTS by which a laborer accepts a lower wage, he
shall be entitled to recover the defi ciency.81 Art. 1420. In case of a divisible contract, if the illegal terms
can be separated from the legal ones, the latter may be enforced.82 Article Applied. — The above article
was applied to usurious contracts of loan in Angel Jose vs. Chelda (supra) and Briones vs. Cammayo
(supra). The doctrine is illustrated in the following problem asked in the 1975 Bar Examinations:

Problem — A partnership borrowed P20,000.00 from “A’’ at clearly usurious interest. Can the creditor
recover anything from the debtor? Explain. Answer — Yes, the creditor can recover from the debtor the
following: the principal, legal interest on the principal from the date of demand (Art. 2209, CC), legal
interest on the legal interests from the time of judicial demand (Art. 2212, CC), and attorney’s fees, if
proper, under Art. 2208 of the Civil Code. That the creditor can recover the principal from the debtor is
now well settled. (Angel Jose vs. Chelda Enterprises, 23 SCRA 119; Briones vs. Cammayo, 41 SCRA 404.)
In a usurious contract of loan, there are always two stipulations. They are: fi rst, the principal stipulation
whereby the debtor undertakes to pay the principal; and second, the accessory stipulation whereby the
debtor undertakes to pay a usurious interest. These two stipulations are divisible. According to Art. 1420
of the Civil Code, in case of a divisible contract, if the illegal terms can be separated from the legal ones,
the latter may be enforced. It is clear that what is illegal is the prestation to pay the stipulated interest.
Hence, being separable, the latter only should be deemed void. (Note: It must be noted that in Angel
Jose vs. Chelda, it was held that attorney’s fees cannot be awarded. The principal reason is that, at the
time when the decision was promulgated, there was yet no defi nite ruling on the point of law involved.
Now, it is already well-settled that the creditor may recover the principal. Consequently, plaintiff
creditor may recover the principal plus legal interest under Arts. 2209 and 2212 of the Civil Code. Hence,
attorney’s fees may also be awarded.) 81New provision. 82New provision. Art. 1420 633 In a dissenting
opinion, however, in Briones vs. Cammayo, the then Justice Castro (with Chief Justice Concepcion and
Justice Fernando concurring) declared: “Beyond the area of debate is the principle that in a contract of
loan of a sum of money, the cause, with respect to the lender, is generally the lender’s prestation to
return the same amount. It is my view, however, that in a contract which is tainted with usury, that is,
with a stipulation x x x to pay usurious interest, the prestation to pay such interest is an integral part of
the cause of the contract. It is also the controlling cause, for a usurer lends his money not just to have it
returned but indeed to acquire inordinate gain. x x x “Undoubtedly, the motive of the usurer is his desire
to acquire inordinate gain; this motive becomes an integral and controlling part of the cause because its
realization can be achieved only by compliance by the borrower with the stipulated prestation to pay
usurious interest. “The law never proscribes a contract merely because of the immoral motive of a
contracting party, for the reason that it does not concern itself with motive but only with cause. An
exception is where such motive becomes an integral part of the cause, like the stipulated usurious
interest in a contract of loan. x x x “The prestation to pay usurious interest being an integral part and
controlling part of the cause, making it illegal and the contract of loan void, Article 1411 of the New Civil
Code should be applied. x x x “An exception is, however, provided in the second sentence of Article 1957
which states: “The borrower may recover in accordance with the laws on usury.’ As an exception to the
general rule in Article 1411, the debtor is allowed in accordance with the Usury Law to recover the
amount he has paid as usurious interest. Thus, Article 1413 explicitly authorizes that “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 payment.” But the lender is not allowed to recover the principal, because no exception
is made; hence, he falls within the general rule stated in Article 1411.’’ We believe that the above
pronouncement is the correct law. VOID OR INEXISTENT CONTRACTS Art. 1420 634 CONTRACTS Art.
1421. The defense of illegality of contracts is not available to third persons whose interests are not
directly affected.83 Art. 1422. A contract which is the direct result of a previous illegal contract, is also
void and inexistent.84 83New provision. 84New provision. Arts. 1421-1422 635
TITLE III. — NATURAL OBLIGATIONS1 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
fulfi llment 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.

Concept of Natural Obligations. — According to the above article, natural obligations are those based on
equity and natural law, which do not grant a right of action to enforce their performance, but after
voluntary fulfi llment by the obligor, authorize the retention of what has been delivered or rendered by
reason thereof. In other words, they refer to those “obligations without a sanction, susceptible of
voluntary performance, but not through compulsion by legal means.”2 Examples of such obligations are
those regulated by Arts. 1424 to 1430 of the Code. Idem;

Distinguished from civil obligations. — While it is true that natural obligations are now regulated by the
New Civil Code, there are still two essential distinctions between such obligations and civil obligations.3
They are: fi rst, natural obligations are based on equity and natural law, while civil obligations are based
on positive law; and second, natural obligations are not enforceable by court action, while civil
obligations are enforceable by court action.4 1 All provisions in this Title are new. 2 4 Tolentino, Civil
Code, 1956 Ed., p. 588, citing Colin & Capitant. 3 See comments under Art. 1156, Civil Code. 4 Art. 1423,
Civil Code. 636 CONTRACTS Idem; Distinguished from moral obligations. — Although the terms “natural
obligations’’ and “moral obligations’’ are used interchangeably in this jurisdiction, strictly speaking,
there are two essential differences between the two. They are: fi rst, in natural obligations there is a
juridical tie between the parties which is not enforceable by court action, while in moral obligations
there is no juridical tie whatsoever,5 and second, voluntary fulfi llment of natural obligations by the
obligor produces legal effects which the courts will recognize and protect, while voluntary fulfi llment of
moral obligations, on the other hand, does not produce any legal effect which courts will recognize and
protect.6

Reasons for Regulation of Natural Obligations. — The Code Commission explains the reasons for the
regulation of natural obligations in the new Code in the following words: “In all the specifi ed cases of
natural obligation recognized by the new Civil Code, there is a moral but not a legal duty to perform or
pay, but the person thus performing or paying feels that in good conscience he should comply with his
undertaking which is based on moral grounds. Why should the law permit him to change his mind and
recover what he has delivered or paid? Is it not wiser and more just that the law should compel him to
abide by his honor and conscience? Equity, morality, natural justice — these are, after all, the abiding
foundations of all positive law. A broad policy justifi es a legal principle that would encourage persons to
fulfi ll their moral obligations. Furthermore, when the question is viewed from the side of the payee, the
incorporation of natural obligations into the legal system becomes imperative. Under the laws in force
under the old Code, the payee is obliged to return the amount received by him because the payor was
not legally bound to make the payment. But the payee knows that by all considerations of right and
justice he ought to keep what has been delivered to him. He is therefore dissatisfi ed over the law,
which deprives him of that which in honor and fair dealing ought to pertain to him. Is it advisable for the
state thus to give grounds to the citizens to be justly disappointed? 5 See 4 Tolentino, Civil Code, 1956
Ed., p. 589. 6 See Villaroel vs. Estrada, 71 Phil. 140, and Fisher vs. Robb, 69 Phil. 101. See also Art. 1350,
Civil Code. Strictly speaking, the obligation referred to the fi rst case is a natural obligation, while that
referred to the second case is a moral obligation. Art. 1423 637 To recapitulate: because they rest upon
morality and because they are recognized in some leading civil codes, natural obligations should again
become part and parcel of Philippine law.’’7 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. Article Applied. — The application of the
above article may be illustrated by the following:

Problem — A borrowed from B P1,000 which amount B failed to collect. After the debt has prescribed, A
voluntarily paid B who accepted the payment. After a few months, being in need of money, A demanded
the return of the P1,000 on the ground that there was a wrong payment, the debt having already
prescribed, B refused to return the amount paid. May A succeed in collecting if he sues B in court?
Reason out your answer. (1970 Bar problem) Answer — A will not succeed in collecting the P1,000 if he
sues B in court. The case is expressly covered by Art. 1424 of the Civil Code which declares that 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.
Because of extinction prescriptive, the obligation of A to pay his debt of P1,000 to B became a natural
obligation. While it is true that a natural obligation cannot be enforced by court action, nevertheless,
after voluntary fulfi llment by the obligor, under the law, the obligee is authorized to retain what has
been paid by reason thereof. (Art. 1423, Civil Code.) 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. 7 Report of the Code Commission, pp. 58-59. NATURAL
OBLIGATIONS Arts. 1424-1425 638 CONTRACTS Art. 1426. When a minor between eighteen and
twentyone 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 benefi ted thereby, there is no right to demand the thing
or price thus returned. Art. 1427. When a minor between eighteen and twentyone 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 fulfi llment of the obligation, there shall be no right to recover the same
from the obligee who has spent or consumed it in good faith. 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.
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. 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. Arts. 1426-1430 639
TITLE IV. — ESTOPPEL1 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.

Concept of Estoppel. — Using the above article as basis, estoppel may be defi ned as a condition or state
by virtue of which an admission or representation is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying thereon. The reason for the inclusion of a
separate chapter in the New Civil Code on estoppel, according to the Code Commission, is that the
principle of estoppel, which is an important branch of American law, will afford solution to many
questions which are not foreseen in our legislation. It is, of course, true that under the old Code there
are some articles whose underlying principle is that of estoppel; but the fact that it does not defi nitely
recognize estoppel as a separate and distinct branch of our legal system has not at all helped in the
solution of these problems.2 Art. 1432. The principles of estoppel are hereby adopted insofar as they
are not in confl ict with the provisions of this Code, the Code of Commerce, the Rules of Court and
special laws. Art. 1433. Estoppel may be in pais or by deed. Kinds of Estoppel. — The New Civil Code, in
Art. 1433, gives only two kinds of estoppel — estoppel in pais (by conduct) and estoppel by deed. This
classifi cation is based on the common law classifi cation of estoppels into equitable and technical
estoppel. 1 All provisions in this Title are new. 2 Report of the Code Commission, p. 59. 640 CONTRACTS
This classifi cation, however, is too broad. Hence, in a recent case, the Supreme Court classifi ed
estoppels into: (1) estoppel in pais, (2) estoppel by deed or by record, and (3) estoppel by laches.3 Idem;

Estoppel in pais. — Estoppel in pais or by conduct is that which arises when one by his acts,
representations, or admissions, or by his silence when he ought to speak out, intentionally or through
culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and
acts on such belief, as a consequence of which he would be prejudiced if the former is permitted to deny
the existence of such facts.4 Idem; id. —

Estoppel by silence. — Estoppel by silence or inaction refers to a type of estoppel in pais which arises
when a party, who has a right and opportunity to speak or act as well as a duty to do so under the
circumstances, intentionally or through culpable negligence, induces another to believe certain facts to
exist and such other relies and acts on such belief, as a consequence of which he would be prejudiced if
the former is permitted to deny the existence of such facts.5 A good example of this type of estoppel
would be that which is contemplated in Art. 1437 of the New Civil Code. Idem; id. —

Estoppel by acceptance of benefi ts. — Estoppel by acceptance of benefi ts refers to a type of estoppel
in pais which arises when a party by accepting benefi ts derived from a certain act or transaction,
intentionally or through culpable negligence, induces another to believe certain facts to exist and such
other relies and acts on such belief, as a consequence of which he would be prejudiced if the former is
permitted to deny the existence of such facts.6 A good example of this type of estoppel would be that
which is contemplated in Art. 1438 of the New Civil Code. Idem;

Estoppel by deed or by record. — Strictly speaking, estoppel by deed and estoppel by record are two
distinct types of technical estoppel. Thus, estoppel by deed is defi ned as a type of technical estoppel by
virtue of which a party to a deed and his privies are precluded from asserting as against the other party
and his 3 Tijam vs. Sibonghanoy, 23 SCRA 29. 4 31 C.J.S. 237. 5 Ibid. 6 Ibid. Arts. 1431-1433 641 privies
any right or title in derogation of the deed, or from denying any material fact asserted therein.7 On the
other hand, estoppel by record is defi ned as a type or technical estoppel by virtue of which a party and
his privies are precluded from denying the truth of matters set forth in a record whether judicial or
legislative.8 Idem; id. —

Estoppel by judgment. — Estoppel by judgment refers to a type of estoppel by virtue of which the party
to a case is precluded from denying the facts adjudicated by a court of competent jurisdiction. Actually,
estoppel by judgment is merely a type of estoppel by record. It may be defi ned as the preclusion of a
party to a case from denying the facts adjudicated by a court of competent jurisdiction.9 It must not,
however, be confused with res judicata. Estoppel by judgment bars the parties from raising any question
that might have been put in issue and decided in the previous litigation, whereas res judicata makes a
judgment conclusive between the same parties as to the matter directly adjudged.10 Idem;

Estoppel by laches. — Laches, in a general sense, is failure or neglect, for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence, could or should have been
done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a
presumption that the party entitled to assert it either has abandoned it or declined to assert it.11 It is,
therefore, a type of equitable estoppel which arises when a party, knowing his rights as against another,
takes no step or delays in enforcing them until the condition of the latter, who has no knowledge or
notice that the former would assert such rights, has become so changed that he cannot without injury or
prejudice, be restored to his former state. Idem; id. —

Basis. — The doctrine of laches or of “stale demands” is based upon grounds of public policy which
requires, for the peace of society, the discouragement of stale claims and, unlike the statute of
limitations, is not a mere question of time but 7 Ibid. 8 19 Am. Jur. 601. 9 Ibid. 10Phil. National Bank vs.
Barretto, 52 Phil. 818; Namarco vs. Macadaeg, 52 Off. Gaz. 182. 11Tijam vs. Sibonghanoy, supra.
ESTOPPEL Arts. 1431-1433 642 CONTRACTS is principally a question of the inequity or unfairness of
permitting a right or claim to be enforced or asserted.12 Idem; id. —

Elements. — In order to apply the doctrine of laches, four essential elements must be present. These
elements are: (1) conduct on the part of the defendant, or of one under whom he claims, giving rise to
the situation of which complaint is made and for which the complaint seeks a remedy; (2) delay in
asserting the complainant’s rights, the complainant having had knowledge or notice, of the defendant’s
conduct and having been afforded an opportunity to institute a suit; (3) lack of knowledge or notice on
the part of the defendant that the complainant would assert the right on which he bases his suit; and (4)
injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not
held to be barred.13 Idem; id. id. —

Application. — The doctrine of laches has been applied several times in actions based on void contracts
practically rendering the doctrine of imprescriptibility of such actions useless. Thus, in Rodriguez vs.
Rodriguez,14 where the plaintiff, in 1934, sold two fi shponds to a daughter by a previous marriage, and
the latter, in turn, sold the same fi shponds to her mother and stepfather for the purpose of
circumventing the legal prohibition against donations between spouses thus converting the said fi
shponds into conjugal properties, in an action commenced by said plaintiff to revindicate the conveyed
properties twenty-eight years later, it was held that the doctrine of laches is applicable. The case of
Miguel vs. Catalino15 is even more illustrative. The factual setting of this case is as follows: The father of
the plaintiffs, a non-Christian, sold a parcel of land to the father of the defendant in 1928 without
executive approval as required by Sec. 145 of the Administrative Code. Despite the invalidity of the sale,
the former allowed the latter to enter, possess and enjoy the land in question without protest, from
1928 to 1943, when the former died. The plaintiffs, who succeeded the deceased in turn, remained
inactive, without taking any step to revindicate the property from 1943 to 1962, when the present suit
was fi nally commenced in court. Is this 12Ibid. 13Miguel vs. Catalino, 26 SCRA 234, and cases cited
therein. 1424 SCRA 908. 15Supra. Arts. 1431-1433 643 suit now barred by laches? According to the
Supreme Court, the suit is now barred by laches. Even granting plaintiff’s proposition that no
prescription lies against their father’s recorded title, their passivity and inaction for more than thirty-
four years justifi es the defendant in setting up the equitable defense of laches. All of the four elements
of laches are present. As a result, the action of plaintiffs must be considered barred.16 Heirs of Lacamen
vs. Heirs of Laruan 65 SCRA 605 Petition for review by certiorari of a decision of the Honorable Court of
Appeals affi rming the judgment of the Court of First Instance of Baguio City in Civil Case No. 738 entitled
“Heirs of Batiog Lacamen vs. Heirs of Laruan’’ . . . declaring the contract of sale between Lacamen and
Laruan null and void for [lack of approval of the Director of the Bureau of Non-Christian Tribes] . . .’’
Petitioners-appellants are the surviving heirs of Batiog Lacamen, while respondents-appellants are the
heirs of Laruan. Sometime on January 28, 1928, Laruan executed a Deed of Sale in favor of Batiog
Lacamen conveying for the sum of P300.00 his parcel of land situated in the sitio of La Trinidad, Benguet,
Mountain Province, comprising 86 acres and 16 centares and covered by Certifi cate of Title No. 420 of
the Registry of Benguet. The deed was acknowledged before Antonio Rimando, a notary public in the
City of Baguio. Immediately after the sale, Laruan delivered the certifi cate of title to Lacamen.
Thereupon, Lacamen entered in possession and occupancy of the land without securing the
corresponding transfer certifi cate of title in his name. He introduced various improvements and paid
the proper taxes. His possession was open, continuous, peaceful, and adverse. After his death in 1942,
his heirs remained in and continued possession and occupancy of the land. They too paid the taxes.
After the last Global War, Lacamen’s heirs “started fi xing up the papers of all properties” left by him. In
or about June, 1957, they discovered that Laruan’s heirs, respondents-appel16To the same effect —
Lucas vs. Compania, 100 Phil. 277; Lotho vs. Ice and Cold Storage of the Phil., 113 Phil. 713; Heirs of
Lacamen vs. Heirs of Laruan, 65 SCRA 605. ESTOPPEL Arts. 1431-1433 644 CONTRACTS lants, were able
to procure a new owner’s copy of Certifi cate of Title No. 420 by a petition fi led in court alleging that
their copy has been lost or destroyed. Through this owner’s copy, respondents-appellants caused the
transfer of the title on the lot in their names. Transfer Certifi cate of Title No. T-775 was issued to them
by the Registry of Deeds of Benguet. Refused of their demands for reconveyance of the title, petitioners-
appellants sued respondents-appellants in the Court of First Instance of Baguio City on December 9,
1957, praying among other things, that they be declared owners of the subject property; that
respondents-appellants be ordered to convey to them by proper instruments or documents the land in
question; and that the Register of Deeds of Benguet be ordered to cancel Transfer Certifi cate of Title
No. T-775 and issue in lieu thereof a new certifi cate of title in their names. In answer, respondents-
appellants traversed the averments in the complaint and claim absolute ownership over the land. They
asserted that their deceased father, Laruan, never sold the property and that the Deed of Sale was not
thumbmarked by him. On 5 April 1962, the Court of First Instance of Baguio City found for respondents-
appellants and against petitionersappellants. Forthwith, petitioners-appellants appealed to the Court of
Appeals. On 7 December 1966, the Court of Appeals sustained the trial court. The Supreme Court,
speaking through Justice R. Martin, held: In this review, petitioners-appellants press that the Court of
Appeals erred — I “. . . IN DECLARING THE SALE BETWEEN LACAMEN AND LARUAN TO BE NULL AND
VOID. II “. . . IN APPLYING STRICTLY THE PROVISIONS OF SECTIONS 118 AND 122 OF ACT NO. 2874 AND
SECTIONS 145 AND 146 OF THE MINDANAO AND SULU. Arts. 1431-1433 645 III “. . . IN AFFIRMING THE
DECISION OF THE COURT OF FIRST INSTANCE OF BAGUIO CITY.’’ which assignments could be whittled
down into the pervading issue of whether the deceased Batiog Lacamen and/or his heirs, herein
petitioners-appellants, have validly acquired ownership over the disputed parcel of land. “The 1917
Administrative Code of Mindanao and Sulu declares in its Section 145 that no contract or agreement
relating to real property shall be made by any person with any nonChristian inhabitant of the
Department of Mindanao and Sulu, unless such contract shall bear the approval of the provincial
governor of the province wherein the contract was executed, or his representative duly authorized for
such purpose in writing endorsed upon it. Any contract or agreement in violation of this section is “null
and void’’ under the succeeding Section 146. “On 24 February 1919, Act No. 2798 was approved by the
Philippine Legislature extending to the Mountain Province and the Province of Nueva Vizcaya the laws
and other legal provisions pertaining to the provinces and minor political subdivisions of the Department
of Mindanao and Sulu, with the specifi c proviso that the approval of the land transaction shall be by the
Director of the Bureau of Non-Christian Tribes. “Then on 29 November 1919, came Act No. 2874
otherwise known as “The Public Land Act.’’ It provided in Section 118 thereof that “Conveyances and
encumbrances made by persons belonging to the so-called ‘non-Christian tribes,’ when proper shall not
be valid unless duly approved by the Director of the Bureau of Non-Christian Tribes.” Any violation of
this injunction would result in the nullity and avoidance of the transaction under the following Section
122. “During the regime of the Commonwealth, C.A. 141 otherwise known as “The Public Land Act” was
passed — November 7, 1936 — amending Act No. 2874. However, it contained a similar provision in its
Section 120 that “Conveyances and encumbrances made by illiterate non-Christians shall not be valid
unless duly approved by the Commissioner of Mindanao and Sulu.’’ “The contracting parties, Lacamen
and Laruan, are bound by the foregoing laws, since both of them are illiterate Igorots, belonging to the
“non-Christian Tribes” of the Mountain ESTOPPEL Arts. 1431-1433 646 CONTRACTS Province and the
Controverted land was derived from a Free Patent or acquired from the public domain. “The trial court
did show cordiality to judicial pronouncements when it avoided the realty sale between Lacamen and
Laruan for want of approval of the Director of the Bureau of Non-Christian Tribes. For jurisprudence
decrees that non-approved conveyances and encumbrances of realty by illiterate non-Christians are not
valid, i.e., not binding or obligatory. “Nevertheless, the thrust of the facts in the case before us weakens
the gathered strength of the cited rule. The facts summon the equity of laches. “Laches” has been defi
ned as “such neglect or omission to assert a right, taken in conjunction with lapse of time and other
circumstances causing prejudice to an adverse party, as will operate as a bar in equity.” It is a delay in
the assertion of a right “which works disadvantage to another” because of the “inequity founded on
some change in the condition or relations of the property or parties.” It is based on public policy which,
for the peace of society, ordains that relief will be denied to a stale demand which otherwise could be a
valid claim. It is different from and applies independently of prescription. While prescription is
concerned with the fact of delay, laches is concerned with the effect of delay. Prescription is a matter of
time; laches is principally a question of inequity of permitting a claim to be enforced. This inequity being
founded on some change in the condition of the property or the relation of the parties. Prescription is
statutory; laches is not. Laches applies in equity, whereas prescription applies at law. Prescription is
based on a fi xed time, laches is not. “Laruan’s sale of the subject lot to Lacamen could have been valid
were it not for the sole fact that it lacked the approval of the Director of the Bureau of Non-Christian
Tribes. There was impressed upon its face full faith and credit after it was notarized by the notary public.
The non-approval was the only “drawback” of which the trial court has found the respondentsappellants
to “have taken advantage as their lever to deprive [petitioner-appellants] of this land and that their
motive is out and out greed.” As between Laruan and Lacamen, the sale was regular, not infected with
any fl aw. Laruan’s delivery of his certifi cate of title to Lacamen just after the sale symbolizes nothing
more than a bared recognition and acceptance on his part that Lacamen is the new owner of the
property. Thus, not any antagonistic show of ownership was ever exhibited by Laruan after that sale and
until his death in May 1938. Arts. 1431-1433 647 “From the transfer of the land on January 28, 1928,
Lacamen possessed and occupied the ceded land in concepto de dueno until his death in April 1942.
Thereafter, his heirs, petitioners-appellants herein, took over and exercised dominion over the property,
likewise unmolested for nearly 30 years (1928-1957) until the heirs of Laruan, respondents-appellants,
claimed ownership over the property and secured registration of the same in their names. At the trial,
petitioners-appellants have been found to have introduced improvements on the land consisting of
houses, barns, greenhouses, walls, roads, etc., and trees valued at P38,920.00. “At this state, therefore,
respondents-appellants’ claim of absolute ownership over the land cannot be countenanced. It has been
held that while a person may not acquire title to the registered property through continuous adverse
possession, in derogation of the title of the original registered owner, the heir of the latter, however,
may lose his right to recover back the possession of such property and the title thereto, by reason of
laches.17 Much more should it be in the instant case where the possession of nearly 30 years or almost
half a century now is in pursuance of sale which regrettably did not bear the approval of the executive
authority but which the vendor never questioned during his lifetime. Laruan’s laches extends to his
heirs, the respondents-appellants herein, since they stand in privity with him. “Indeed, in a like case,18 it
was ruled that — “Courts can not look with favor at parties who, by their silence, delay and inaction,
knowingly induce another to spend time, effort and expense in cultivating the land, paying taxes and
making improvements thereon for 30 long years, only to spring from ambush and claim title when the
possessor’s efforts and the rise of land values offer an opportunity to make easy profi t at his expense.”
“For notwithstanding the invalidity of the sale, the vendor Laruan suffered the vendee Lacamen to
enter, possess and occupy the property in concepto de dueno without demurrer and molestation, from
1928 until the former’s death in 1938; and when respondents-appellants succeeded to the estate of
their 17De Lucas vs. Gamponia, 100 Phil. 277; Wright, Jr. vs. Lepanto Consolidated Mining Co., L-18904,
July 11, 1964, 11 SCRA 508. 18Miguel vs. Catalino, L-23072, November 29, 1968, 26 SCRA 234. ESTOPPEL
Arts. 1431-1433 648 CONTRACTS father, they too kept si1ent, never claiming that the lot is their own
until in 1957 or after almost 30 years they took “advantage of the [non-approval of the sale] as their
lever to deprive [petitioners-appellants] of this land’’ with a motive that was “out and out greed.’’ Even
granting, therefore, that no prescription lies against their father’s recorded title, their quiescence and
inaction for almost 30 years now commands the imposition of laches against their adverse claim.
(Miguel, footnote 27) “It results that as against Laruan and his heirs, respondents-appellants herein, the
late Batiog Lacamen and his heirs, petitioners-appellants herein, have superior right and, hence, have
validly acquired ownership of the litigated land. Vigilantibus non dormientibus sequitas subvenit. “IN
VIEW OF THE FOREGOING, the judgment of the Court of Appeals affi rming that of the trial court is
hereby reversed and set aside. “The petitioners-appellants are hereby declared the lawful owners of the
land in question. Accordingly, Transfer Certifi cate of Title No. T-775 in the name of respondents-
appellants is hereby cancelled and in lieu thereof the Register of Deeds of Benguet is ordered to issue a
new transfer certifi cate of title in the name of petitioners-appellants.’’ As a matter of fact, the doctrine
has even been applied to actions for reconveyance of property held in constructive or implied trust.
Thus, where some of the co-heirs were able, through fraud, to register a large tract of land in their
names in 1937, while it is very true that the principle is that if property is acquired through fraud, the
person obtaining it is considered a trustee of an implied trust for the benefi t of the person from whom
the property comes or to whom it belongs, nevertheless, since the action by the benefi ciary for
reconveyance of the property was commenced only in 1960, it is clear that the doctrine of laches is
applicable. In other words, the action is already barred.19 Idem; id. —

Laches distinguished from prescription. — Laches is different from prescription. Thus — (1) Laches is
concerned with the effect of delay; prescription is concerned with the fact of delay. 19Fabian vs. Fabian,
22 SCRA 231. Arts. 1431-1433 649 (2) Laches is principally a question of inequity of permitting a claim to
be enforced, this inequity being founded on some changes in the condition of the property or the
relation of the parties; prescription is a question or matter of time; (3) Laches is not statutory, whereas
prescription is statutory. (4) Laches applies in equity, whereas prescription applies at law. (5) Laches is
not based on fi xed time, whereas prescription is based on fi xed time.20 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.

Article Applied. — The above article is illustrated in the following case: Bucton vs. Gabar 55 SCRA 499
Appeal from the decision of the Court of Appeals in CAG.R. No. 49091-R, dated January 10, 1973,
reversing the judgment of the trial court and dismissing the complaint fi led by herein petitioners, and
from said appellate court’s resolution dated February 5, 1973, denying petitioners’ motion for
reconsideration. The facts of the case, as found by the trial court, which have not been disturbed by
respondent Court of Appeals, are as follows: “Plaintiff Nicanora Gabar Bucton (wife of her coplaintiff
Felix Bucton) is the sister of defendant Zosimo Gabar, husband of his co-defendant Josefi na Llamoso
Gabar. “This action for specifi c performance prays, interalia, that defendants-spouses be ordered to
execute in 20Miguel vs. Catalino, supra; Nielsen vs. Lepanto Consolidated Mining Co., 18 SCRA 1040.
ESTOPPEL Art. 1434 650 CONTRACTS favor of plaintiffs a deed of sale of the western half of a parcel of
land having an area of 728 sq.m. covered by TCT No. II (from OCT No. 6337) of the offi ce of the Register
of Deeds of Misamis Oriental. “Plaintiff’s evidence tends to show that sometime in 1946 defendant
Josefi na Llamoso Gabar bought the abovementioned land from the spouses Villarin on installment
basis, to wit, P500.00 down, the balance payable in installments. Josefi na entered into a verbal
agreement with her sister-in-law, plaintiff Nicanora Gabar Bucton, that the latter would pay one-half of
the price (P3,000) and would then own one-half of the land. Pursuant to this understanding Nicanora on
January 19, 1946 gave her sister-in-law Josefi na the initial amount of P1,000, for which the latter signed
a receipt marked as Exhibit A. “Subsequently, on May 2, 1948, Nicanora gave Josefi na P400. She later
signed a receipt marked as Exhibit B. “On July 30, 1951 plaintiffs gave defendants P1,000.00 in concept
of loan, for which defendant Zosimo Gabar signed a receipt marked as Exhibit E. “Meanwhile, after
Josefi na had received in January, 1946 the initial amount of P1,000.00 as above stated, plaintiffs took
possession of the portion of the land indicated to them by defendants and built a modest nipa house
therein. About two years later plaintiffs built behind the nipa house another house for rent. And,
subsequently, plaintiffs demolished the nipa house and in its place constructed a house of strong
materials with three apartments in the lower portion for rental purposes. Plaintiffs occupied the upper
portion of this house as their residence, until July, 1969 when they moved to another house, converting
and leasing the upper portion as a dormitory. “In January, 1947, the spouses Villarin executed the deed
of sale of the land abovementioned in favor of defendant Josefi na Llamoso Gabar, Exhibit I, to whom
was issued on June 20, 1947 TCT No. II, cancelling OCT No. 6337 (Exhibit D). “Plaintiffs then sought to
obtain a separate title for their portion of the land in question. Defendants repeatedly declined to
accommodate plaintiffs. Their excuse: the entire land was still mortgaged with the Art. 1434 651
Philippine National Bank as guarantee for defendants’ loan of P3,500 contracted on June 16, 1947
(Exhibit D-1). “Plaintiffs continued enjoying their portion of the land, planting fruit trees and receiving
the rentals of their buildings. In 1953, with the consent of defendants (who were living on their portion),
plaintiffs had the entire land surveyed and subdivided preparatory to obtaining their separate title to
their portion. After the survey and the planting of the concrete monuments defendants erected a fence
from point 2 to point 4 of the plan, Exhibit I, which is the dividing line between the portion pertaining to
defendants, Exhibit I-1, and that pertaining to plaintiffs, Exhibit I-2. “In the meantime, plaintiffs
continued to insist on obtaining their separate title. Defendants remained unmoved, giving the same
excuse. Frustrated, plaintiffs were compelled to employ Atty. Bonifacio Regalado to intercede; counsel
tried but failed. Plaintiffs persevered, this time employing Atty. Aquilino Pimentel, Jr. to persuade
defendants to comply with their obligation to plaintiffs; this, too, failed. Hence, this case, which has cost
plaintiff’s P1,500.00 in attorney’s fees. “Defendants’ evidence — based only on the testimony of
defendant Josefi na Llamoso Gabar — denies agreement to sell to plaintiffs one-half of the land in
litigation. She declared that the amounts she had received from plaintiff Nicanora Gabar Bucton — fi rst,
P1,000 then P400 — were loans, not payment of one-half of the price of the land (which was P3,000.00).
This defense is devoid of merit. “When Josefi na received the fi rst amount of P1,000 the receipt she
signed, Exhibit A, reads: ‘Cagayan, Mis. Or. January 19, 1946 ‘Received from Mrs. Nicanora Gabar the
sum of one thousand (P1,000) pesos, victory currency, as part payment of the one thousand fi ve
hundred (P1,500.00) pesos, which sum is one-half of the purchase value of Lot No. 337, under Torrens
Certifi cate of Title No. 6337, sold to me by Mrs. Carmen Roa Villarin. ‘(Sgd.) Josefi na Ll. Gabar.’’’
ESTOPPEL Art. 1434 652 CONTRACTS On the basis of the facts quoted above the trial court on February
14, 1970, rendered judgment the dispositive portion of which reads: “WHEREFORE, judgment is hereby
rendered for plaintiffs: “1) Ordering defendants within thirty days from receipt hereof to execute a deed
of conveyance in favor of plaintiffs of the portion of the land covered by OCT No. II, indicated as Lot 337-
B in the Subdivision Plan, Exhibit I, and described in the Technical Description, Exhibit I-2; should
defendants for any reason fail to do so, the deed shall be executed in their behalf by the Provincial
Sheriff of Misamis Oriental, or his Deputy; “2) Ordering the Register of Deeds of Cagayan de Oro, upon
presentation to him of the above-mentioned deed of conveyance, to cancel TCT No. II and in its stead to
issue two Transfer Certifi cates of Title, to wit, one to plaintiffs and another to defendants, based on the
subdivision Plan and Technical Description above-mentioned; and ordering defendants to present and
surrender to the Register of Deeds their TCT No. II so that the same maybe cancelled; and “3) Ordering
defendants to pay unto plaintiffs attorney’s fees in the amount of P1,500.00 and to pay the costs. “SO
ORDERED.” Appeal was interposed by private respondents with the Court of Appeals, which reversed
the judgment of the trial court and ordered petitioners’ complaint dismissed, on the following legal
disquisition: “Appellees’’ alleged right of action was based on the receipt (Exh. A) which was executed
way back on January 19, 1946. An action arising from a written contract does not prescribe until after
the lapse of ten (10) years from the date of action accrued. This period of ten (10) years is expressly
provided for in Article 1144 of the Civil Code. “From January 19, 1946 to February 15, 1968, when the
complaint was fi led in this case, twenty-two (22) years and twenty-six (26) days had elapsed. Therefore,
the plaintiffs’ action to enforce the alleged written contract (Exh. A) was not brought within the
prescriptive period of ten (10) years from the time the cause of action accrued. Art. 1434 653 “The land
in question is admittedly covered by a torrens title in the name of Josefi na Llamoso Gabar so that the
alleged possession of the land by the plaintiffs since 1947 is immaterial because ownership over
registered realty may not be acquired by prescription or adverse possession (Section 40 of Act 496). “It is
not without reluctance that in this case we are constrained to sustain the defense of prescription, for we
think that plaintiffs really paid for a portion of the lot in question pursuant to their agreement with the
defendants that they would then own one-half of the land. But we cannot apply ethical principles in lieu
of express statutory provisions. It is by law provided that: ‘ART. 1144. The following actions must be
brought within ten years from the time the right of action accrues: 1. Upon a written contract; 2. Upon
an obligation created by law; 3. Upon a judgment.’ “If eternal vigilance is the price of safety, one cannot
sleep on one’s right and expect it to be preserved in its pristine purity.’’ Petitioners appeal is predicated
on the proposition that as owners of the property by purchase from private respondents, and being in
actual, continuous and physical possession thereof since the date of its purchase, their action to compel
the vendors to execute a formal deed of conveyance so that the fact of their ownership may be
inscribed in the corresponding certifi cate of title, had not yet prescribed when they fi led the present
action. The Supreme Court, speaking through Justice Antonio, held: “We hold that the present appeal is
meritorious. “1. There is no question that petitioner Nicanora Gabar Bucton paid P1,500.00 to
respondent Josefi na Gabar as purchase price of one-half of the lot now covered by TCT No. II, for
respondent Court of Appeals found as a fact “that plaintiffs really paid for a portion of the lot in question
pursuant to their agreement with the defendants that they would own one-half (1/2) of the land.” That
sale, although not consigned in a public instrument or formal writing, is nevertheless valid and binding
between petitioners and private respondents, for the time-honored rule ESTOPPEL Art. 1434 654
CONTRACTS is that even a verbal contract of sale or real estate produces legal effects between the
parties.21 Although at the time said petitioner paid P1,000.00 as part payment of the purchase price on
January 19, 1946, private respondents were not yet the owners of the lot, they became such owners on
January 24, 1947, when a deed of sale was executed in their favor by the Villarin spouses. In the
premises, Article 1434 of the Civil Code, which provides that “[w]hen 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,” is applicable.22 Thus, the payment by petitioner
Nicanora Gabar Bucton of P1,000.00, on January 19, 1946, her second payment of P400.00 on May 2,
1948, and the compensation, up to amount of P100.00 (out of the P1,000.00 loan obtained by private
respondents from petitioners on July 30, 1951), resulted in the full payment of the purchase price and
the consequential acquisition by petitioners of ownership over one-half of the lot. Petitioners therefore
became owners of the one-half portion of the lot in question by virtue of a sale which, though not
evidenced by a formal deed, was nevertheless proved by both documentary and parole evidence. 2. The
error of respondent Court of Appeals in holding that petitioners’ right of action had already prescribed
stems from its belief that the action of petitioners is based on the receipt Exh. “A’’ which was executed
way back on January 19, 1946, and, therefore, in the view of said appellate court, since petitioners’
action was fi led on February 15, 1968, or after the lapse of twentytwo (22) years and twenty-six (26)
days from the date of said document, the same is already barred according to the provisions of Article
1144 of the new Civil Code. The aforecited document (Exh. “A’’), as well as the other documents of
similar import (Exh. “B” and Exh. “E”), are the receipts issued by private respondents to petitioners,
evidencing payments by the latter of the purchase price of one-half of the lot. 21Couto vs. Cortes, 8 Phil.
459, 460 (1907); Guerrero vs. Miguel, 10 Phil. 52, 53 (1908). 22Llacer vs. Muñoz de Bustillo, et al., 12
Phil. 328, 334; Inquimboy vs. Paez Vda. de Cruz, 108 Phil. 1054, 1057; Castrillo, et al. vs. Court of
Appeals, et al., March 31, 1964, 10 SCRA 549, 553; Estoque vs. Pajimula, L-24419, July 15, 1968, 24 SCRA
59, 62. Art. 1434 655 “The real and ultimate basis of petitioners’ action is their ownership of one-half of
the lot coupled with their possession thereof, which entitles them to a conveyance of the property. In
Sapto, et al. vs. Fabiana, 23 this Court, speaking thru Mr. Justice J.B.L. Reyes, explained that under the
circumstances no enforcement of the contract is needed, since the delivery of possession of the land
sold had consummated the sale and transferred title to the purchaser, and that, actually, the action for
conveyance is one to quiet title, i.e., to remove the cloud upon the appelee’s ownership by the refusal of
the appellants to recognize the sale made by their predecessors. We held therein that “* * * it is an
established rule of American Jurisprudence (made applicable in this jurisdiction by Art. 480 of the New
Civil Code) that actions to quiet title to property in the possession of the plaintiff are imprescriptible. (44
Am. Jur., p. 47; Cooper vs. Rhea, 20 L.R.A. 930; Inland Empire Land Co. vs. Grant County, 138 Wash. 439,
245 Pac. 14.) “The prevailing rule is that the right of a plaintiff to have his title to land quieted, as against
one who is asserting some adverse claim or lien thereon, is not barred while the plaintiff or his grantors
remain in actual possession of the land, claiming to be owners thereof, the reason for this rule being
that while the owner in fee continues liable to an action, proceeding, or suit upon the adverse claim he
has a continuing right to the aid of a court of equity to ascertain and determine the nature of such claim
and its effect on his title, or to assert any superior equity in his favor. He may wait until his possession is
disturbed or his title in attacked before taking step to vindicate his right. But the rule that the statute of
limitations is not available as a defense to an action to remove a cloud from title can only invoked by a
complainant when he is in possession. One who claims property which is in the possession of another
must, it seems, invoke his remedy within the statutory period.’ (44 Am. Jur., p. 47)’’ The doctrine was
reiterated recently in Gallar vs. Husain, et al., where we ruled that by the delivery of the possession of
the land, the sale was consummated and title was transferred to the appellee, that the action is actually
not for specifi c performance, since all it seeks is to quiet title, to remove the cloud cast upon appellee’s
ownership as a result of appellant’s refusal to recognize the sale made by his predecessor, and that as
plaintiff-appellee is in possession of the land, and the action 23103 Phil. 683, 686-687. ESTOPPEL Art.
1434 656 CONTRACTS is imprescriptible. Considering that the foregoing circumstances obtain in the
present case, we hold that petitioner’s action has not prescribed. “WHEREFORE, the decision and
resolution of respondent Court of Appeals appealed from are hereby reversed, and the judgment of the
Court of First Instance of Misamis Oriental, Branch IV, in its Civil Case No. 004, is revived. Costs against
private respondents.’’ 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. Art. 1436. A lessee or a
bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor. 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. 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. Art. 1439. Estoppel is effective
only as between the parties thereto or their successors in interest. Arts. 1435-1439 657
TITLE V. — TRUST1 CHAPTER 1 GENERAL PROVISIONS

Art. 1440. A person who establishes a trust is called the trustor; one in whom confi dence is reposed as
regards property for the benefi t of another person is known as the trustee; and the person for whose
benefi t the trust has been created is referred to as the benefi ciary.

Concept of Trusts. — Trust is the legal relationship between one person having an equitable ownership
in a certain property and another person owning the legal title to such property.2 There are always
three persons involved in the creation of a trust, whether created by intention of the parties or by
operation of law. They are: fi rst, the trustor, or the person who establishes the trust; second, the
trustee, or the one in whom confi dence is reposed as regards property for the benefi t of another
person; and third, the benefi ciary, or the person for whose benefi t the trust has been created.3 The
object of the trust, on the other hand, is known as the trust res. The trust res must consist of property,
actually in existence, in which the trustor has a transferable interest or title, although as a rule, it
consists of any kind of transferable property, either realty or personalty, including undivided, future, or
contingent interest therein.4 1 All provisions in this Title are new. 2 54 Am. Jur., Sec. 4, p. 21. 3 Art.
1440, Civil Code. 4 54 Am. Jur., Sec. 32, p. 44. 658 CONTRACTS 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.

Kinds of Trust. — Trusts are either express or implied. Express trusts are those created by the intention
of the trustor or of the parties. Implied trusts come into being by operation of law.5 Implied trusts may
be either resulting or constructive. In Ramos vs. Ramos (61 SCRA 284), the Supreme Court adopted the
following defi nitions: “Implied trusts are those which, without being expressed, are deducible from the
nature of the transaction as matters of intent, or which are superinduced on the transaction by
operation of law as matters of equity, independently of the particular intention of the parties.” (89 C.J.S.
724.) They are ordinarily subdivided into resulting and constructive trusts. (89 C.J.S. 722.) “A resulting
trust is broadly defi ned as a trust which is raised or created by the act or construction of law, but in its
more restricted sense it is a trust raised by implication of law and presumed always to have been
contemplated by the parties, the intention as to which is to be found in the nature of their transaction,
but not expressed in the deed or instrument of conveyance.” (89 C.J.S. 725.) Examples of resulting trusts
are found in Articles 1448 to 1455 of the Civil Code. “On the other hand, a constructive trust is a trust
“raised by construction of law, or arising by operation of law.” In a more restricted sense and as
contradistinguished from a resulting trust, a constructive trust is “a trust not created by any words,
either expressly or impliedly evincing a direct intention to create a trust, but by the construction of
equity in order to satisfy the demands of justice. It does not arise by agreement or intention but by
operation of law.” (89 C.J.S. 726-727.) “If a person obtains legal title to property by fraud or
concealment, courts of equity will impress upon the title a so-called constructive trust in favor of the
defrauded party.” A constructive trust is not a trust in the technical sense. (See Art. 1456, Civil Code.)” 5
Art. 1441, Civil Code. Art. 1441 659 Idem;

Express and implied trusts distinguished. — Express and implied trusts may be distinguished from each
other as follows: (1) Express trust is one created by the intention of the trustor or of the parties,
whereas an implied trust is one that comes into being by operation of law. (2) Express trusts are those
created by the direct and positive acts of the parties, by some writing or deed or will or by words
evidencing an intention to create a trust, whereas implied trusts are those which, without being
expressed, are deducible from the nature of the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. (3) Thus, if the intention to establish a trust is
clear, the trust is express; if the intent to establish a trust is to be taken from circumstances or other
matters indicative of such intent, then the trust is implied. (4) An express trust concerning an immovable
or any interest therein cannot be proved by parole evidence, whereas an implied trust concerning an
immovable or any interest therein may be proved by parole evidence. (5) An action to enforce an
express trust, so long as there is no express repudiation of the trust by the trustee and made known to
the benefi ciary, cannot be barred by laches or by extinctive prescription, whereas an action to enforce
an implied trust, even when there is no express repudiation of the trust by the trustee and made known
to the benefi ciary, may be barred by laches or by extinctive prescription.6 Art. 1442. The principles of
the general law of trusts, insofar as they are not in confl ict with the Code, the Code of Commerce, the
Rules of Court and special laws are hereby adopted. 6 See Cuaycong vs. Cuaycong, 21 SCRA 1192; Fabian
vs. Fabian, 22 SCRA 231. See also Arts. 1443, 1457, Civil Code. TRUST Art. 1442 660 CONTRACTS
CHAPTER 2 EXPRESS TRUSTS Art. 1443. No express trusts concerning an immovable or any interest
therein may be proved by parole evidence. Art. 1444. No particular words are required for the creation
of an express trust, it being suffi cient that a trust is clearly intended. Art. 1445. No trust shall fail
because the trustee appointed declines the designation, unless the contrary should appear in the
instrument constituting the trust. Art. 1446. Acceptance by the benefi ciary is necessary. Nevertheless, if
the trust imposes no onerous condition upon the benefi ciary, his acceptance shall be presumed, if there
is no proof to the contrary. 661 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. Art. 1448. There is an implied trust when property is sold,
and the legal estate is granted to one party but the price is by another for the purpose of having the
benefi cial interest of the property. The former is the trustee, while the latter is the benefi ciary.
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. 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
benefi cial interest or only a part thereof. Art. 1450. If the price of a sale of property is loaned or paid by
one person for the benefi t 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.

Article Applied. — The above article is illustrated in the following problem asked in the 1959 Bar
Examinations:

Problem — “X’’ being unable to pay the purchase price of a house and lot for his residence has
requested “Y,’’ and “Y’’ agreed to lend him the money under one condition, that the 662 CONTRACTS
Certifi cate of Title be transferred to him, in Y’s own name for his protection and as security of the loan.
Later on “Y’’ mortgaged the property to the bank without the knowledge of “X.’’ When the mortgage
became due, “Y’’ did not redeem the mortgage and the property was advertised for sale. “X’’ retained
you as his lawyer. What advise would you give your client and what legal ground provided by the Code
would you assert to defend his rights? Give reasons. (1959 Bar Problem) Answer — It is clear that in the
instant problem, the provision of Art. 1450 of the Civil Code is applicable. This article provides: “If the
price of the sale of property is loaned or paid by one person for the benefi t 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.” It must be observed, however, that
the mortgage of the property by “Y’’ to the bank is perfectly valid inas- much as the bank was not aware
of any fl aw or defect in the title or mode of acquisition of “Y’’ since the right of “X’’ has not been
annotated in the Certifi cate of Title; in other words, the bank had acted in good faith. Consequently, the
only way by which I would be able to help “X’’ would be to advice him to redeem the mortgaged
property from the bank. After this is done, “X’’ can then institute an action to compel “Y’’ to reconvey
the property to him pursuant to the provision of Art. 1450 of the Civil Code. In this action for
reconveyance, the amount paid by “X’’ to the bank in redeeming the property can then be applied to the
payment of his debt to “Y.’’ If there is an excess, he can recover the amount from “Y.’’ 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 benefi t of the true owner. 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 benefi t of all, a trust is created by force of law in favor of the others in proportion to the
interest of each. 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 benefi t contemplated. Arts. 1451-1453 663 Art. 1454. If an absolute conveyance or
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 fulfi llment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to him. Art. 1455. When any trustee,
guardian or other person holding a fi duciary 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. 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
benefi t of the person from whom the property comes. Article Applied. — The most common application
of the above article would be those cases where after the death of the decedent, some of the co-heirs
will enter into an extrajudicial settlement or partition of the hereditary estate with preterition of the
other coheirs, and subsequently, will secure original or transfer certifi cates of title in their names. In
such a case, such co-heirs are considered trustees of an implied or constructive trust for the benefi t of
the other co-heirs who were omitted in the settlement or partition.1 Idem; Prescriptibility of actions to
enforce trust. — Prior 1964, the question as to whether or not an action for reconveyance of real
property based upon an implied trust resulting from fraud may be barred by the statute of limitations
was unsettled. The majority of cases, however, supported the view that the action cannot be barred.
Thus, where a brother, as administrator of the estate of his parents, took advantage of the absence of
his sister and registered the properties adjudicated to his sister in his own name, in an action
commenced by the sister twenty-nine years afterwards, it was held that the defense of prescription is
clearly untenable. Public policy demands that a person guilty of fraud, or, at least, of breach of trust,
should not be allowed to use a Torrens Title as a shield against the consequences of his wrongdoing.2 1
See Fabian vs. Fabian, 22 SCRA 231, and cases cited therein. 2 Jacinto vs. Jacinto, 115 Phil. 363. To the
same effect: Juan vs. Zuñiga, 114 Phil. 1163; Villaluz vs. Neme, 117 Phil. 25, and cases cited therein.
IMPLIED TRUSTS Arts. 1454-1456 664 CONTRACTS Finally, on May 29, 1964, the Supreme Court in
Gerona vs. De Guzman,3 in an excellently phrased decision penned by then Justice Concepcion,
unequivocally reaffi rmed the rule, overruling previous decisions, that “an action for reconveyance of
real property based upon an implied trust resulting from fraud, may not be barred by the statute of
limitations,” and further that “the action therefore may be fi led x x x from the discovery of the fraud,’’
the discovery in that case being deemed to have taken place when new certifi cates of title were issued
exclusively in the names of the defendants therein. This rule was subsequently reiterated in a long line
of notable decisions. Idem; id. —

Period of prescription. — What is the period of prescription for bringing an action for reconveyance
based on the implied or constructive trust which is created in Article 1456 of the New Civil Code? It
depends. Thus — 1. If the action for reconveyance involves the annulment of the voidable contract
which became the basis for the fraudulent registration of the subject property, then the period of
prescription is four years from the discovery of the fraud. This fi nds codal support in Art. 1391, par. 4, of
the Civil Code, which declares that the action for annulment of contracts which are voidable by reason
of mistake or fraud shall be brought within four years from the time of the discovery of the mistake or
fraud. It also fi nds support in the cases of Gerona vs. De Guzman (11 SCRA 153), Fabian vs. Fabian (22
SCRA 231), Carantes vs. Court of Appeals (76 SCRA 514), Alarcon vs. Bidin (120 SCRA 390), and other
cases. 2. If the action involves the declaration of the nullity or inexistence of a void or inexistent contract
which became the basis for the fraudulent registration of the subject property, then the action is
imprescriptible. This fi nds codal support in Art. 1410 of the Civil Code, which declares that the action or
defense for the declaration of the inexistence of a contract does not prescribe. It also fi nds support in
the case of Tongoy vs. Court of Appeals (123 SCRA 99). 3. If the action does not involve the annulment of
a contract, but there was fraud in the registration of the subject property, then the period of
prescription is ten years from the discovery of the fraud. 3 11 SCRA 153. Arts. 1454-1456 665 This fi nds
codal support in No. (2) of Art. 1144 of the Civil Code, which declares that an action based upon an
obligation created by law must be brought within ten years from the time the right of action accrues. It
also fi nds support in the cases of Bueno vs. Reyes (27 SCRA 1179), Varsity Hills, Inc. vs. Navarro (43 SCRA
503), Escay vs. Court of Appeals (61 SCRA 369), Jaramil vs. Court of Appeals (78 SCRA 420), Vda. de
Nacalaban vs. Court of Appeals (80 SCRA 428), Duque vs. Domingo (80 SCRA 654), and cases. 4. If the
legitimate owner of the subject property which was fraudulently registered in the name of another had
always been in possession thereof so that, as a consequence, the constructive notice rule cannot be
applied, in reality the action for reconveyance is an action to quiet title; therefore, the action is
imprescriptible. This fi nds support in the case of Caragay Layno vs. Court of Appeals (133 SCRA 718).
Idem;

Laches may bar action. — In Fabian vs. Fabian,4 the Supreme Court reiterated the rule laid down in Diaz
vs. Goricho5 that laches may bar an action to enforce a constructive trust. In the latter case, the Court,
speaking through Justice J.B.L. Reyes, declared: “Article 1456 of the new Civil Code, while not retroactive
in character, merely expresses a rule already recognized by our courts prior to the Code’s promulgation.
(see Gayondato vs. Insular Treasurer, 49 Phil. 244.) Appellants are, however, in error in believing that
like express trust, such constructive trusts may not be barred by lapse of time. The American law on
trusts has always maintained a distinction between express trusts created by the intention of the
parties, and the implied or constructive trusts that are exclusively created by law, the latter not being
trusts in their technical sense. (Gayondato vs. Insular Treasurer, supra.) The express trusts disable the
trustee from acquiring for his own benefi t the property committed to his management or custody, at
least while he does not openly repudiate the trust, and makes such repudiation known to the benefi
ciary or cestui que trust. For this reason, the old Code of Civil Procedure (Act 190) declared that the rules
on adverse 4 22 SCRA 231. 5 103 Phil. 264-265. IMPLIED TRUSTS Arts. 1454-1456 666 CONTRACTS
possession does not apply to ‘continuing and subsisting’ (i.e., unrepudiated) trusts. But in constructive
trusts, x x x the rule is that laches constitutes a bar to actions to enforce the trust, and repudiation is not
required, unless there is a concealment of the facts giving rise to the trust (54 Am. Jur., Secs. 580, 581;
65 C.J., Secs. 956, 957; American Law Institute, Restatement of Trusts, Section 219; on Restitution,
Section 179; Stianson vs. Stianson, 6 ALR 287; Claridad vs. Beñares, 97 Phil. 973.)’’ Idem;

Acquisition of property by trustee through prescription. — In this jurisdiction, it is now settled that in
constructive trusts, the trustee may acquire absolute ownership over the trust res by acquisitive
prescription. Thus, where two of the four co-owners of a certain parcel of land which they had inherited
from their parents, had been in adverse possession of the property since 1928 in the concept of owners,
declaring the property for taxation purposes in their names in 1929, and in 1945, they subdivided the
property into two equal parts, and two transfer certifi cates of title were issued separately in their
names, in an action for reconveyance commenced by the preterited co-heirs in 1960, it was held that
such action is not only barred by extinctive prescription and by laches, but a valid, full and complete title
over the property has already vested in the defendants by acquisitive prescription.6 It must be observed
that although acquisitive prescription in favor of the trustee is possible in both express and implied
trusts, nevertheless, in the former, before absolute title can be vested in the trustee, the following
requisites must concur: (1) The trustee must expressly repudiate the right of the benefi ciary; (2) such
act of repudiation must be brought to the knowledge of the benefi ciary; (3) the evidence thereon must
be clear and conclusive; and (4) expiration of the period prescribed by law.7 In implied trusts, however,
express repudiation of the trust by the trustee is not required. All that is required is that he must set up
a title which is adverse to that of the benefi ciary. In other words, the normal requisites for
extraordinary acquisitive prescription must be present. 6 Fabian vs. Fabian, supra. 7 See Lagura vs.
Levantino, 71 Phil. 566; Salinas vs. Tunson, 55 Phil. 729; Ramos vs. Ramos, 61 SCRA 284. Arts. 1454-1456
667 Idem;

Illustrative cases. — The following digests of recent cases decided by the Supreme Court will serve to
clarify some of the above-stated principles: Fabian vs. Fabian 22 SCRA 231 The land in question was
acquired by Pablo Fabian in 1909. In 1928, Pablo died survived by four children, Esperanza, Benita I,
Benita II, and Silvina. Later, in 1937, through a series of fraudulent acts, Silvina Fabian and Teodora
Fabian, a niece of Pablo, were able to secure an original certifi cate of title in their name. In 1945, they
subdivided the lot into two equal parts and as a result, two new transfer certifi cates of title were issued
in their names. On July 18, 1960, the other heirs of Pablo Fabian brought an action against them for
reconveyance on the ground of the existence of an implied or constructive trust. Defendants, however,
interposed the defenses of laches, extinctive prescription, and acquisition of absolute ownership of the
property by acquisitive prescription. From an order of dismissal of the complaint, plaintiffs have
appealed. Held: As far as the defense of laches is concerned, appellants are in error in believing that like
express trust, constructive trust may not be barred by lapse of time. The express trusts disable the
trustee from acquiring for his own benefi t the property committed to his management or custody, at
least while he does not openly repudiate the trust, and make such repudiation known to the benefi
ciary. But in constructive trusts, the rule is that laches constitutes a bar to actions to enforce the trust,
and repudiation is not required, unless there is a concealment of the facts giving rise to the trust. As far
as defense of extinctive prescription is concerned, it is well-settled in this jurisdiction that an action for
reconveyance of real property based upon a constructive or implied trust resulting from fraud may be
barred by the statute of limitations. Upon the undisputed facts in the case at bar, not only had laches set
when the appellants instituted their action for reconveyance in 1960, but their right to enforce the
constructive trust had already prescribed. It logically follows from the above disquisition that acquisitive
prescription has likewise operated to vest absolute title in the appellees, pursuant to the provisions of
Section 41 of Act 190 which was then the law in force. IMPLIED TRUSTS Arts. 1454-1456 668 CONTRACTS
Bueno, et al. vs. Reyes, et al. 27 SCRA 1179 The lot which is the subject matter of this litigation originally
belonged to Jorge Bueno. When he died, the property descended by intestate succession to his three
children, Brigida, Eugenia and Rufi no. Subsequently, Brigida and Eugenia died. In 1936, by agreement
among the heirs, Francisco Reyes, Eugenia’s husband, was entrusted with the job of fi ling the answer in
the cadastral proceedings and in obtaining title to the property for and in behalf of the heirs of Jorge
Bueno. Reyes fi led the answer, claiming the lot as property belonging to himself and to his two
brothers, Juan and Mateo. Subsequently, the lot was adjudicated in favor of the claimants, in whose
names an original certifi cate of title was issued in 1939. In 1962, the heirs of Jorge Bueno, who had
always been in possession of the property, discovered the fraud committed by Francisco Reyes. As a
consequence, they brought this action for reconveyance of the lot to them. Defendants, however,
interposed the defense or prescription of action which was reiterated in a motion to dismiss. The trial
court a quo held that the action is predicated on the existence of an implied trust and that such action
prescribes in ten years. Consequently, the case was dismissed. Plaintiffs appealed. The question now is
— has the action prescribed? Held: While there are some decisions which hold that an action based
upon a trust is imprescriptible, with better rule, as laid down by this Court in other decisions, is that
prescription does supervene where the trust is merely an implied one. Upon the general proposition
that an action for reconveyance such as the present is subject to prescription in ten years to the
appellees and the court a quo are correct. The question here, however, is: from what time should the
prescriptive period be counted? It should be remembered that the constructive trust arose by reason of
the bad faith of Francisco Reyes, compounded by the connivance of his brothers. Consequently, the
cause of action upon such trust must be deemed to have accrued only upon the discovery of such bad
faith, or to put it more specifi cally, upon the discovery by the appellants that. Francisco Reyes, in
violation of their agreement with him, had obtained registration of the disputed property in his own
name and in the names of his brothers? It would not do to say that the cadastral proceeding itself, by
virtue of its nature as a proceeding in rem, was constructive notice to the appellants, for as far as they
were concerned the cadastral answer they had authorized Francisco Arts. 1454-1456 669 Reyes to fi le
was not adverse to them; and neither he nor the appellees may invoke the constructive notice rule on
the basis of their own breach of the authority thus given. On top of all these, it was the appellants and
not the appellees who were in possession of the property as owners, continuously up to 1962, when for
the fi rst time the latter appeared upon the scene and tried to get such possession, thereby revealing to
them the fact of the fraudulent registration. It would be more in keeping with justice, therefore, to
afford the plaintiffs as well as the defendants the opportunity to lay their respective claims and defenses
before the court in a full-blown litigation. Wherefore, the order appealed from is set aside and the case
is remanded for further proceedings. De la Cerna, et al. vs. De la Cerna, et al. 72 SCRA 514 This is a direct
appeal from an order of the lower court dismissing the complaint of plaintiffs for partition and
reconveyance of property with damages on the ground that the action has already prescribed. The
factual backdrop of the case is as follows: Narciso de la Cerna died in 1945. His widow and their two
legitimate children subsequently executed a deed of extrajudicial partition, which they registered on
September 14, 1946 in the Offi ce of the Register of Deeds, wherein they stated that they are the only
owners of the subject property and that one-half thereof is the share of the widow and the other
onehalf is the share of the children. On the basis of such deed, a transfer certifi cate of title was issued
to them. Twenty years later, plaintiffs, children of Narciso by a prior marriage, brought the instant action
against defendants. Has their right of action prescribed? Held: His Honor committed no error in ruling
that the action has already prescribed. It is idle to bother as to whether the action here is one founded
exclusively on fraud which prescribed in four years or one based on constructive trust which is barred
after ten years, there being no question that the appellees secured their title more than twenty years
before the fi ling of the complaint, and it is from the date of the issuance of such title that the effective
assertion of adverse title for purposes of the statute of limitations is counted. (Gerona vs. De Guzman,
11 SCRA 153.) IMPLIED TRUSTS Arts. 1454-1456 670 CONTRACTS Caragay-Layno vs. Court of Appeals 133
SCRA 718 Respondent Appellate Court, then the Court of Appeals, affi rmed in toto the judgment of the
former Court of First Instance of Pangasinan, Branch III, at Dagupan adjudging private respondent
entitled to recover possession of a parcel of land and ordering petitioners, as defendants below, to
vacate the premises. Petitioners, as paupers, now seek a reversal of that judgment. It was established by
a relocation survey that the Disputed Portion is a 3,732 square-meter-area of a bigger parcel of sugar
and coconut land (Lot No. 1, Psu-24206 [Case No. 44, GLRO Rec. No. 117]), with a total area of 8,752
square meters, situated at Calasiao, Pangasinan. The entire parcel is covered by Original Certifi cate of
Title No. 63, and includes the adjoining Lots 2 and 3, issued on 11 September 1947 in the name of
Mariano M. de Vera, who died in 1951 without issue. His intestate estate was administered fi rst by his
widow and later by her nephew, respondent Salvador Estrada. Petitioner, Juliana Caragay, and the
decedent, Mariano de Vera, were fi rst cousins, “both orphans, who lived together under one roof in the
care of a common aunt.’’ As administrator, DE VERA’s widow fi led in Special Proceedings No. 4058 of
the former Court of First Instance of Pangasinan, Branch III, an inventory of all properties of deceased
which included “a parcel of land in the poblacion of Calasiao, Pangasinan, containing an area of 5,417
square meters, more or less, and covered by Tax Declaration No. 12664.’’ Because of the discrepancy in
area mentioned in the Inventory as 5,147 square meters (as fi led by the widow) and that in the title as
8,752 square meters, ESTRADA to the Disputed Property and found that the northwestern portion,
subsequently surveyed to be 3,732 square meters, was occupied by petitioners-spouses Juliana Caragay
Layno and Benito Layno. ESTRADA demanded that they vacate the Disputed Portion since titles in the
name of the deceased DE VERA, but petitioners refused claiming that the land belonged to them, and,
before them, to JULIANA’s father Juan Caragay. ESTRADA then instituted suit against JULIANA for the
recovery of the Disputed Portion (Civil Case No. D-2007), which she resisted, mainly on the ground that
the Disputed Portion had been fraudulently or mistakenly included in OCT No. 63, Arts. 1454-1456 671
so that an implied or constructive trust existed in her favor. She then counterclaimed for reconveyance
of property in the sense that title be issued in her favor. After hearing, the Trial Court rendered
judgment ordering JULIANA to vacate the Disputed Portion. On appeal, respondent Appellate Court affi
rmed the Decision in toto. Before us, JULIANA takes issue with the following fi nding of respondent
Court: “Although Section 102 of Act 496 allows a Petition to compel a trustee to reconvey a registered
land to the cestui que trust (Severino vs. Severino, 44 Phil. 343; Escobar vs. Locsin 74 Phil. 86) this
remedy is no longer available to Juliana Caragay. Mariano de Vera’s land Lot I, Psu24206, was registered
on September 11, 1947 (Exhibit ‘C’) and it was only on March 28, 1967 when the defendants fi led their
original answer that Caragay sought the reconveyance to her of the 3,732 square meters. Thus, her
claim for reconveyance based on implied or constructive trust has prescribed after 10 years. (Banaga vs.
Soler, L-15717, June 30, 1961; JM Tuason and Co. vs. Magdangal, L-15539, Jan. 30, 1962; Alzona vs.
Capunitan, 4 SCRA 450.) In other words, Mariano de Vera’s original Certifi cate of Title No. 63 (Exhibit
‘C’) has become indefeasible.” We are constrained to reverse. The evidence discloses that the Disputed
Portion was originally possessed openly, continuously and uninterruptedly in the concept of an owner
by Juan Caragay, the deceased father of JULIANA, and had been declared in his name under Tax
Declaration No. 28694 beginning with the year 1921 (Exhibit “2- C’’), later revised by Tax Declaration No.
2298 in 1951 (Exhibit “2-C’’). Upon the demise of her father in 1914, JULIANA adjudicated the property
to herself as his sole heir in 1958 (Exhibit “4’’), and declared it in her name under Tax Declaration No.
22522 beginning with the year 1959 (Exhibit “2-A’’), later cancelled by TD No. 3539 in 1966 (Exhibit “2’’).
Realty taxes were also religiously paid from 1938 to 1972 (Exhibit “3-A’’ to “3-H’’). Taking the previous
possession of her father to her own, they had been in actual open, continuous and uninterrupted
possession in the concept of owner for about forty-fi ve (45) years, until said possession was distributed
in 1966 when ESTRADA IMPLIED TRUSTS Arts. 1454-1456 672 CONTRACTS informed JULIANA that the
Disputed Portion was registered in Mariano DE VERA’s name. To substantiate her claim of fraud in the
inclusion of the Disputed Portion in OCT No. 63, JULIANA, an unlettered woman, declared that during his
lifetime, DE VERA, her fi rst cousin, and whom she regarded as a father as he was much older borrowed
from her the Tax Declaration of her land purportedly to be used as collateral for his loan and sugar
quota application; that relying on her cousin’s assurances, she acceded to his request and was made to
sign some documents the contents of which she did not even know because of her ignorance, that she
discovered the fraudulent inclusion of the Disputed Portion in OCT No. 63 only in 1966 when ESTRADA
so informed her and sought to eject them. Of signifi cance is the fact, disclosed by the evidence, that for
twenty (20) years from the date of registration of title in 1947 up to 1967 when this suit for recovery of
possession was instituted, neither the deceased DE VERA up to the time of his death in 1951, not his
successors-in-interest, had taken steps to possess or lay adverse claim to the Disputed Portion. They
may, therefore be said to be guilty of laches as would effectively detail their cause of action.
Administrator ESTRADA took interest in recovering the said portion only when he noticed the
discrepancy in areas in the inventory of property and in the title. Inasmuch as DE VERA has failed to
assert any rights over the Disputed Portion during his lifetime, nor did his successorsin-interest possess
it for a single moment; but that, JULIANA has been in actual, continuous and open possession thereof to
the exclusion of all and sundry, the inescapable inference is, fraud having been unsubstantiated, that
had been erroneously included in OCT No. 63. The mistake was confi rmed by the fact that deducting
3,732 sq. ms., the area of the Disputed Portion from 8,752 sq.ms., the area of Lot 1 in OCT No. 63, the
difference is 5,020 sq.ms., which closely approximates the area of 5,147 sq.ms., indicated in the
Inventory of Property of DE VERA. In fact, the widow by limiting the area in said Inventory to only 5,147
sq.ms. the effect, recognized and admitted that the Disputed Portion of 3,132 sq.ms. did not form part
of the decedent’s estate. The foregoing conclusion does not necessarily wreak havoc on the
indefeasibility of a Torrens title. For, mere possession of a certifi cate of title under the Torrens System is
not conclusive as to the holder’s true ownership of all the property described Arts. 1454-1456 673
therein for however does not by virtue of said certifi cate alone become the owner of the land illegally
included. A land Registration Court has no jurisdiction to decree a lot to persons who have never
asserted any right of ownership over it. “x x x Obviously then, the inclusion of said area in the title of Lot
No. 8151 is void and of no effect for a land registration Court has no jurisdiction to decree a lot to
persons who have put no claim in it and who have never asserted any right of ownership over it. The
Land Registration Act as well as the Cadastral Act protects only the holders of a title in good faith and
does not permit its provisions to be used as a shield for the commission of fraud, or that one should
enrich himself at the expense of another. JULIANA, whose property has been wrongfully registered in
the name of another, but which had not yet passed into the hands of third parties, can properly seek its
reconveyance. “The remedy of the landowner whose property has been wrongfully or erroneously
registered in another’s name is, after one year from the date of the decree, not to set aside the decree,
but respecting the decree as incontrovertible and no longer open to review, to bring an ordinary action
in the ordinary court of justice for reconveyance or, if the property has passed into the hands of an
innocent purchaser for value, for damages. Prescription cannot be invoked against JULIANA for the
reason that as lawful possessor and owner of the Disputed Portion, her cause of action for reconveyance
which, in effect, seeks to quiet title to the property, fall within settled jurisprudence that an action to
quiet title to property in one’s possession is imprescriptible, her undisturbed possession over a period of
fi fty-two (52) years gave her a continuing right to seek the aid of a Court of equity to determine the
nature of the adverse claim of a third party and the effect of her own title. Besides, under the
circumstances, JULIANA’s right to quiet title, to seek reconveyance, and to annul OCT No. 63 accrued
only in 1966 when she was made aware of a claim adverse to her own. It was only then that the
statutory period of prescription may be said to have commenced to run against her, following the
pronouncement in Faja vs. Court of Appeals, supra, a case almost identical to this one. “x x x Inasmuch
as it is alleged in paragraph 3 of Frial’s complaint, that Felipe Faja has been in possession of the property
since 1845 up to present for the period of 30 years, IMPLIED TRUSTS Arts. 1454-1456 674 CONTRACTS
her cause of action for reconveyance, which in effect seeks to quiet her title to the property, falls within
that rule. If at all, the period of prescription began to run against Felipe Faja only from the time she was
served with copy of the complaint in 1975 giving her notice that the property she was occupying was
titled in the name of Indalecio Frial. There is settled jurisprudence that one who is in actual possession
of a piece of land claiming to be owner thereof may wait until his possession is disturbed or his title is
attacked before taking steps to vindicate his right, the reason for the rule being, that his disturbed
possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine
the nature of the adverse claim of a third party and its effect on his own title, which right can be claimed
only by one who is in possession. No better situation can be conceived at the moment so as to apply this
rule on equity than that of herein petitioners whose mother, Felipa Faja, was in possession of the
litigated property for no less than 30 years and was suddenly confronted with a claim that the land she
had been occupying and cultivating all these years, was titled in the name of a third person. We hold
that in such a situation the right to quiet title to the property, to seek its reconveyance and annul any
certifi cate of title covering it accrued only from the time the one in possession was made aware of a
claim adverse to his own, and it is only then that the statutory period of prescription commences to run
against such possessor.” WHEREFORE, the judgment under review is hereby REVERSED AND SET ASIDE,
and another one entered ordering private respondent Salvador Estrada, as Administrator of the Estate
of the Deceased, Mariano de Vera, because the segregation of the disputed portion of 3,732 square
meters forming part of Lot No. 1, PSU-24206, Case No. 44, GLRO Rec. No. 117, presently occupied by
petitioner Juliana CaragayLayno, and to reconvey the same to said petitioner. After the segregation shall
have been accomplished, the Register of Deeds of Pangasinan is hereby ordered to issue a new certifi
cate of title covering said 3,732 sq.m. portion in favor of petitioner, and another certifi cate of title in
favor of the Estate of the deceased, Mariano de Vera covering the remaining portion of 5,052 square
meters. No costs. SO ORDERED. Even in the Bar Examinations, the subject of constructive trust has
become popular. Thus, in 1972, the following problem was asked: Arts. 1454-1456 675
Problem — “X,’’ “Y’’ and “Z,’’ falsely representing that they were the only heirs of their deceased father
Juan Reyes, executed an extrajudicial partition of the property of their deceased parent. The
extrajudicial partition was registered and as a result thereof, the original certifi cate of title of their
deceased parent was cancelled and a transfer certifi cate of title was issued to them. They subsequently
sold 1/2 of the land to Pedro who registered the deed of conveyance, and secured a transfer certifi cate
of title in his name. Fourteen years later, “A,’’ as a legitimate heir of the deceased Juan Reyes, upon
discovering these acts of his brothers, fi led an action to recover from “X,’’ “Y,’’ “Z’’ and Pedro his 1/4
pro indiviso share in said property. Can “A’’ recover? Decide with reasons. Answer — “A’’ cannot
recover. It must be observed that “X,’’ “Y’’ and “Z’’ are actually trustees of an implied or constructive
trust for the benefi t of their co-heir “A” who was omitted in the extrajudicial settlement. This is so,
because according to Art. 1456 of the Civil Code, 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 benefi t of the
person from whom the property comes. In the instant case, “A,’’ as a legitimate heir of the deceased
Juan Reyes, had a perfect right to bring an action against his co-heirs for reconveyance of his 1/4 pro
indiviso share in the property owned in common. It is different in the case of Pedro. The sale of 1/2 of
the land to him by “X,’’ “Y’’ and “Z’’ is certainly valid because he is a purchaser in good faith and for
value and because co-owners are given the right to sell their individual shares in the thing owned in
common. (Art. 493, Civil Code.) However, the effect thereof is limited to the portion which may be
alloted to the vendors upon the termination of the co-ownership. (Art 493, Civil Code.) Hence, such sale
shall be respected. However, “A’s’’ right of action against “X,’’ “Y’’ and “Z’’ is now barred: (1) By
extinctive prescription. Well-settled is the rule in this jurisdiction that an action for reconveyance of real
property based upon a constructive trust resulting from fraud may be barred by prescription after ten
years. The period is counted from the date the trustee set up a title adverse to that of the benefi ciary.
Normally, this would take place at the time the deed of extrajudicial settlement is registered and a new
certifi cate of title is IMPLIED TRUSTS Arts. 1454-1456 676 CONTRACTS issued in the name of the trustee
or trustees. The basis for this is that such registration constitutes a constructive notice to the whole
world. (2) By laches, in constructive trusts, the rule is likewise settled that laches constitutes a bar to
enforce the trust. All of the elements are present. There is conduct of the defendant giving rise to the
situation of which complaint is made and for which the complaint seeks a remedy; the plaintiff, with
knowledge or notice of such conduct, slept on his rights; the defendants had no knowledge or notice
that the plaintiff would assert his right against them; and fi nally, defendants will suffer damage or injury
if the complaint is not barred.

Problem — “HH,’’ “II,’’ “JJ’’ inherited from their parents a large parcel of land. “HH’’ and “II’’ went
abroad to reside in Canada. In their absence, “JJ’’ applied for the registration of the whole land in his
name only. In due time, “JJ’’ obtained a Torrens Title for the land. When “HH’’ and “II’’ returned from
Canada after seven years, they found out what “JJ’’ did and sued him for their respective shares. “JJ’’
contended that the decree of title can no longer be reviewed or changed because of the lapse of more
than one year from its issuance. In whose favor would you decide? (1980 Bar Problem) Answer — My
decision will be in favor of “HH’’ and “II.’’ In reality, the action commenced by plaintiffs against
defendant is an action for reconveyance of their respective shares in the subject property based on the
constructive trust recognized through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefi t of the person from whom the property comes.
Since the obligation is created by law, the action commenced by the benefi ciaries against him shall be
counted from the time of the discovery of the fraud. When did the plaintiffs discover the fraud. Under
the constructive notice rule, they are deemed to have discovered the fraud as of the date the trustee set
up in himself a title adverse to the title of the benefi ciaries. Normally, this would be the date the trustee
(“JJ’’) obtained his Torrens Title. Since the instant action was commenced seven years after the issuance
of said Title, it is obvious that it was commenced in time.

Problem — Explain the following concept of trust de son tort or otherwise known as constructive trust

(2007 Bar Problem) Arts. 1454-1456 677 Answer — A constructive trust is a form of implied trust created
by equity to meet the demands of justice. It arises contrary to intention against one who, by fraud,
duress or mistake or breach of fi duciary duty or wrongful disposition of another’s property, obtains or
holds the legal right to property which he is not entitled to under the law. (Huang vs. CA, G.R.
No.108525, Sept. 13,1994). An example of constructive trust is when a property is acquired through
mistake or fraud, the person obtainin Bar Problem g it is by force of law, considered a trustee of an
implied trust for the benefi t of the person from whom the property comes (Art.1456,NCC). Art. 1457.
An implied trust may be proved by oral evidence. — oOo — IMPLIED TRUSTS Art. 1457 i 856 Nicanor
Reyes, Sr. St. Tel. Nos. 736-05-67 • 735-13-64 1977 C.M. Recto Avenue Tel. Nos. 735-55-27 • 735-55-34
Manila, Philippines www.rexpublishing.com.ph Published & Distributed by COMMENTS and
JURISPRUDENCE on OBLIGATIONS and CONTRACTS By DESIDERIO P. JURADO† Associate Justice, Court of
Appeals Pre-Bar Reviewer, Civil Law, San Beda College, UP Law Center, Ateneo de Manila University, Far
Eastern University, University of Santo Tomas, University of Manila, Manila Review Center; Professor,
Civil Law Review, San Beda College, Far Eastern University, University of Santo Tomas, Lyceum; Lecturer,
UP Law Center TWELFTH REVISED EDITION 2010 ii Philippine Copyright, 2010 by DESIDERIO P. JURADO†
ISBN 978-971-23-5330-7 No portion of this book may be copied or reproduced in books, pamphlets,
outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devices or
in any other form, for distribution or sale, without the written permission of the author except brief
passages in books, articles, reviews, legal papers, and judicial or other offi cial proceedings with proper
citation. Any copy of this book without the corresponding number and the signature of the author on
this page either proceeds from an illegitimate source or is in possession of one who has no authority to
dispose of the same.