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Chapter I General Provisions

TITLE II
CHAPTER II
ESSENTIAL REQUISITES OF CONTRACTS
SECTION 1. - CONSENT
(Articles 1318-1346)
1.

What is consent? How is it manifested? In other words, how do we know


that there has already been consent to a contract?

As defined under Article 1319, consent is manifested by the meeting of


the offer and the acceptance upon the thing and the cause which are to constitute
the contract.
2.

What is an OFFER? (Article 1319)

An OFFER is a proposal made by one party to another to enter into a


contract.
To be valid, the offer must be certain or definite with respect to the object
and cause of the contract, and other circumstances that the offeror deems
convenient under the contract.
Example of a valid offer: Selina told Ben that she was willing to sell her 2010
model Toyota Altis Car (OBJECT) to him for P1.5M cash (CAUSE). In addition,
Selina told Ben that he must accept her offer personally on February 6, 2011
before 5:00 oclock P.M. at her office at Room 206, RCBC Building, Makati City
(time, place and manner of acceptance as provided under Art. 1321).

3.

What is an ACCEPTANCE? (Article 1319)

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An ACCEPTANCE is the expression by the offeree of his agreement to the


terms of the offer made by the offeror.
To produce consent or meeting of the minds, the acceptance must be
absolute or unqualified (without any conditions). It must be identical in all aspects
to the offer.
Example of a valid acceptance to the offer above: On February 6, 2011 at
4:30 oclock P.M., Ben went to the office of Selina in Makati and signified his
willingness to buy Selinas Toyota Altis for P1.5M cash. Here, a contract of sale
is perfected.
A contract of sale is not perfected because the acceptance is qualified: On
February 6, 2011 at 4:30 oclock P.M., Ben went to the office of Selina in Makati
and signified his willingness to buy Selinas Toyota Altis for P1.5M payable in 4
equal monthly installments. Here, the acceptance is qualified (conditional), and
no contract of sale is perfected. By giving a qualified acceptance, it is as if Ben
is making a counter-offer with respect to the mode of payment of the purchase
price. However, if this counter-offer of Ben is accepted by Selina, a contract of
sale will then be perfected.

4.

What are the causes which render an offer ineffective?

(a) When the offeror withdraws his offer before its acceptance by the offeree,
the offer becomes ineffective. (Art. 1319)
(b) When the offeree makes a qualified acceptance of the offer as discussed
above. (Art. 1319)
(c) Upon the death, civil interdiction, insanity, or insolvency of either party
before acceptance is conveyed. (Art. 1323)
Example: If any one of the parties die after an offer is made but before
the offeree could convey his acceptance, the offer becomes ineffective and
no contract is perfected. On January 15, 2011, Sonia sent Bart a letter offering

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to sell her car to Bart for P3M. On January 17, 2011, Bart received the letter. On
January 18, Bart mailed his letter of acceptance of the offer to Sonia. On
January 19, Bart died in a bus bombing incident in Makati. On January 20, Sonia
received the letter of acceptance.
Question: Was there a perfected contract of sale? If Bart left a son as sole
heir, can his son demand from Sonia the delivery of the car?
Answer: NO. In this case, it cannot be denied that Bart received the letter
of Sonia regarding the offer, and was able to signify and mail his letter of
acceptance to the offer on January 18 before he died. However, before Sonia
could receive the letter of acceptance, Bart had already died in the bombing
accident. Article 1323 requires that both parties must be alive at the time the
offer is made as well as at the time the acceptance to the offer is conveyed
(made known) to the offeror. Therefore, since Bart was already dead at the time
Sonia received his letter of acceptance (i.e., before the acceptance was
conveyed), no acceptance is deemed to have been made, and no contract is
perfected. Barts son, as heir to one of the contracting parties (under the
principle of relativity) cannot then compel Sonia to deliver the car.
Remember again : If no contract is perfected, no rights and
obligations will arise. Before you determine the rights and liabilities of the
parties to a contract, you have to make sure first that a contract was indeed
perfected. If Bart had died on January 21, the contract would have been
perfected, and Barts son as heir (under the principle of relativity of contracts)
would have had the right to enforce the contract after payment of the P3M
purchase price which was the obligation of Bart under the contract of sale.

(d) Upon expiration of the period fixed in the offer for acceptance.
Article 1324 states that :
ART. 1324. When the offerer has allowed the offeree a certain period
to accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded
upon a consideration, as something paid or promised. (emphasis
supplied)
Example: The general rule is that an offer may be withdrawn by the offeror
at any time before acceptance is conveyed by the offeree. On February 1,

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2011, Mario promised to sell his Harley Davidson big bike to Shiela for the
contract price of P5M. Since Shiela couldnt make up her mind, Mario gave her
15 days (until February 16) within which to decide whether she will buy the bike.
On February 15, James went to Mario and offered to buy the big bike for P6.5M.
Because the price offer was higher, Mario sold the big bike to James and
informed Shiela about it. Shiela, however, informed Mario that she was about to
see him and she already had the P5M ready. She states that Mario cannot offer
the bike to another buyer because the 15-day period given to her within which to
decide had not yet lapsed or expired.
Question No. 1: Was there a perfected contract of sale between Mario and
Shiela? Can Shiela demand for the delivery of the bike?
Answer: Article 1324 states that before acceptance is conveyed, the offeror
may withdraw his offer by notifying the offeree even if the period to accept given
to the offeree had not yet elapsed. We then follow the general rule that the offer
may be withdrawn at any time before its acceptance. Hence, Shiela cannot
demand for the delivery of the bike because Mario withdrew the offer before she
could convey her acceptance to it.
Question No. 2: Let us assume that in the above example Shiela paid Mario a
consideration of P5,000 for giving her the 15-day period within which to decide
whether or not to buy the bike. Will your answer to Question No. 1 be the
same?
Answer: NO. This time, Shiela can demand that Mario honor the 15-day period
he had given her within which to decide. Under Article 1324, since Shiela gave a
consideration for the option (the P5,000), Mario will be bound by the 15-day
period. It is only after the lapse of the 15-day period (or starting February 17,
2011) that Mario will be free to offer the bike to other buyers. Note, however, that
even if Shiela has given Mario P5,000 as consideration for the exercise of the
option, no contract of sale is as yet perfected because Shiela had not as yet
accepted the offer. It is only when Shiela exercises her option (within the 15-day
period) and informs Mario that she has decided to buy the bike that a contract of
sale is perfected because this is the only time that she conveys her acceptance
to the offer.
The basis for Marios obligation arises from another contract perfected
between the parties. The perfected contract is known as a contract of option
which has the following essential requisites :

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1. CONSENT Mario and Shiela agreed.


2. OBJECT The option period, or the 15-day period given by Mario to Shiela
within which to decide whether she will buy the bike.
3. CAUSE/CONSIDERATION The option money, or the P5,000 that Shiela
paid Mario as payment for the exercise of the option.
Remember: If Shiela decides to buy the bike and goes to Mario on February 15,
2011, which is before February 16, 2011, it is only at this time that a contract is
perfected. This is because it is only on this day, February 15, that Shiela
signified her acceptance to the offer of Mario.
Remember also: If Shiela decides to buy the bike and goes to Mario on
February 17, 2011, which is after February 16, 2011, Mario can already refuse to
sell the bike to her as the 15-day period given had already lapsed. The
acceptance of Shiela now will be in the nature of a qualified acceptance which is
equivalent to a counter-offer (Art. 1321). Of course, if Mario still decides to sell
the bike despite Shielas exercise of the option after the lapse of the 15-day
period, then the contract of sale can still be perfected.

5.

Who are are the persons who are incapacitated (do not have legal
capacity) to give valid consent to contracts?
A. Minors [Art. 1327(1)]

A minor refers to a person who has not yet reached the age of majority (18
years old). A minor is incapacitated to validly enter into a contract.
B. Insane or demented persons [Art. 1327(2)]
Although insane or demented persons cannot validly enter into a contract, the
contract is valid if entered into by the insane person during a lucid interval.
(Art. 1328)
A lucid interval is a temporary period of sanity.

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The party who intends to enforce a contract entered into by an insane or


demented person during a lucid interval MUST PROVE that at the time the
contract was entered into by the insane person, there was a full return of the mind
to sanity as to enable him to understand the contract he is entering into.
C. Deaf-mutes who do not know how to write. [Art. 1327(3)]
A deaf-mute who can read and write is capacitated to enter into a contract.
A deaf-mute who cannot write can validly enter into a contract. A is a deafmute who is an IT graduate of San Beda. After graduation, he met an accident
wherein both his arms were amputated.
Question: Is A now incapacitated to enter into a contract?
Answer: NO. Article 1327 refers to a deaf-mute who does not know how to
write, and not to a deaf-mute who cannot write, like A in this case. It is always
presumed that a person does not know how to write, does not know how to read;
and one who knows how to read necessarily knows how to write. Therefore, a
contract entered into by a deaf-mute who knows how to read is valid even if he
cannot write because he is still capable of giving intelligent consent to a contract.

D. Persons in a state of drunkenness or under a hypnotic spell. (Art. 1328)


These conditions are equivalent to temporary sanity and thus impair the
capacity of a person to give intelligent consent. Hence, persons in a state of
drunkenness or under a hypnotic spell are incapacitated to enter into a contract.
6.

Contracts entered into by persons who are incapacitated are NOT VOID.
They are merely VOIDABLE (Article 1390). If a contract is merely voidable,
its provisions can be legally enforced by the contracting parties thereto if the
incapacitated party does not choose to annul the contract. On the other hand,
if a contract is void, it can never be enforced even if the parties thereto agree
to its enforcement.

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A void contract can never be enforced. A agreed to work for B and to be


paid a salary which is less than the minimum wage. This agreement with respect
to the compensation package is contrary to Labor Laws. Hence, even if A
agreed to the salary rate in his contract with B, it is void and will not be enforced.
B will still be compelled to pay A the minimum wage prescribed by law.
A voidable contract is valid and binding until it is declared ineffective in an
action for annulment filed by the incapacitated in court. A, a minor, entered
into a contract of sale with B who knew the status of A. When A reaches the age
of majority, he has the option to ratify the contract (i.e., to permit the contract to
be enforced against him) or to file an action in court for the annulment of the
contract. If A proves that he was incapacitated at the time the contract of sale
was perfected, then the court will annul the sale and declare it ineffective.

7.

What is the reason for the disqualification of the persons enumerated in


Article 1327 and Article 1328 to enter into a contract?

The reason behind Article 1327 and Article 1328 is that those persons
mentioned can easily be the victims of fraud as they are not capable of
understanding or knowing the nature and consequences of their actions. They
can, however, enter into a contract if they are assisted by a parent or a legal
guardian.
Remember: The incapacity of a person to enter into a contract is determined
at the stage of perfection or birth of a contract. In other words, if one of the
contracting parties was incapacitated at the time of conception, but attained
capacity already at the stage of the perfection of the contract, the contract is not
defective. In the same manner, if the contracting party became incapacitated only
at the stage of the consummation of the contract, the contract is also not defective.
If one of the contracting parties became incapacitated only at the stage of
consummation of the contract, the contract is not defective. D is an insane
person who leaves home only during regular check-ups with the psychiatrist. A
number of times, however, he still experiences lucid intervals when he is in his

Chapter I General Provisions

right senses. In one of his lucid intervals on February 4, 2011, D promised to sell
his 100 square-meter lot in Malolos, Bulacan to C (his best friend) for P1M. It
was agreed that delivery of the lot and payment of the purchase price was to be
made on February 10, 2011. On February 10, however, D was insane again.
Hence, C could not demand delivery of the lot from D.
Question: Was there a perfected contract of sale between D and C? Can C
demand for the delivery of the lot as agreed upon?
Answer: YES. While D was insane at the time of the consummation of the
contract when delivery was already being demanded, D was in a lucid interval
when he agreed to sell his lot to C. Under Article 1328, contracts entered into
during a lucid interval are valid. Therefore, C can demand for the delivery of the
lot. If D cannot deliver, C may ask the parent or legal guardian of D to effect the
delivery.
Remember: From the facts above, you can assume that the parents, children or
guardian of D may file an action for annulment of the contract claiming that the
contract is voidable and should be annulled because D was insane at the time
the contract was entered into. If C wants to enforce the contract of sale, C must
prove before the court that D was in a lucid interval at the time the sale was
perfected. If C successfully proves this fact, the contract will be enforced. But if
C fails to prove Ds capacity at the time of the sale, the contract will be annulled
or set aside by the court for being defective due to the incapacity of D.

(See also the discussion in No. 5 (b) above.)


8.

What are the five (5) vices of consent?

Aside from incapacity, the following are the causes that vitiate consent or
make the consent defective :
A.
B.
C.
D.
E.

Error or mistake (Article 1331)


Violence or force (Article 1335)
Intimidation or threat or duress (Article 1335)
Undue influence (Article 1337); and
Fraud or deceit (Article 1338)

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9.

What is mistake? When does mistake vitiate consent in a contract?

Mistake or error is the false belief of a thing or a fact which is material to the
contract. In other words, an erroneous belief of a thing or fact is what convinces a
party to enter into a contract. In such a case, after the mistake is discovered, the
injured party can go to court and ask the court for annulment of the contract.
To be sufficient to vitiate consent, the mistake must refer either to :
(a) the substance of the thing which is the object of the contract;
(Article 1333, par. 1)
Example A: B wanted to buy a female pig for breeding in his piggery
business. All his female pigs were already old and barren. S agreed to sell
to B his female pig which was known to give birth to at least 8 piglets
everytime. After S delivered the pig and B paid the purchase price for it, B
brought the pig to the veterinarian for check-up. The veterinarian, however,
informed B that the pig was already barren. At the time of the sale, S did not
know that the pig was already barren as it had just given birth to 9 healthy
piglets 3 months ago.
Question: May B file an action for annulment of the contract of sale
because of mistake?
Answer: YES. In this case, S was of the mistaken belief that her female
pig was still fertile. On the other hand, B, who wanted a breeding pig bought
the pig because S advised B that the pig was still fertile. There is here a
mistake as to the substance of the thing which is the object of the contract.
Hence, B can file an action for annulment of the contract of sale because he
will have no use for a barren pig in his piggery business.

(b) those conditions which have principally moved one or both parties to enter
into the contract; (Article 1333, par. 1)
Example B: T was looking for a place to rent which was near an olympic
size pool where his son can train everyday in preparation for the Olympics.
O offered to rent out his townhouse to T for a monthly rental of P15,000. O

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told T that there was an olympic size pool just 200 meters away from his
townhouse. Because of this, T agreed to rent the townhouse and gave O
two months advance rentals. However, before T and his family could move
in to the townhouse, they discovered that the olympic size pool had been
sold by the previous owner and the new owner would not allow public use of
the pool as before. O was not aware of this fact.
Question: May T file an action for annulment of the contract of lease
because of mistake.
Answer: YES. In this case, O was of the mistaken belief that the olympic
size pool near her townhouse was still open for swimming to the public. On
the basis of this belief, O told T that his son could train in the pool everyday.
This is the reason why T rented the house of O. Since it turns out that the
reason why T is renting the place is not true, then T can have the contract of
lease annulled in court on the ground of mistake or error.

(c) the identity or qualifications of one of the parties provided the same was
the principal cause of the contract; (Article 1333, par. 2)
Example C: When mistake as to the identity or qualifications of a party
does not vitiate consent (does not make the consent defective) - S sold
his car to B, who he thought was a lawyer, for P3M. After the contract of
sale was perfected between the parties, S found out that B was a doctor.
Question: Can S file an action for annulment of the contract of sale
because of mistake as to the identity of B?
Answer: NO. The mistaken belief of S here with respect to the identity of B
is not material so as to vitiate his consent. This is because the real reason
why S entered into the contract (which is the CAUSE for the contract) is not
really the identity of B but the purchase price of P3M which B will pay for the
car.
Example D: When mistake as to the identity or qualifications of a party
will vitiate consent (will make the consent defective) - Dennis hired a
private detective to look for a half-sister whom he has not seen since he was
born. The private detectives search finally proved successful, and Dennis
was introduced to Karen, the daughter of his father from another woman.

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Dennis was so happy that he donated his car to Karen on the very same day
that they were introduced. After the DNA results, however, were released, it
was found that Karen was the wrong woman.
Question: Can Dennis file an action for annulment of the contract of
donation because of mistake as to the identity of Karen?
Answer: YES. This time, the mistaken belief of Dennis with respect to the
identity of Karen is very material to the contract. The real reason why
Dennis donated the property to Karen is because he really thought that
Karen was his half-sister. If he knew otherwise, he would not have donated
his car to Karen. Since it turned out that she was not, the contract of
donation may be annulled due to mistake or error.

(d) an excusable mistake (i.e., a mistake not caused by the negligence of the
party). Under Article 1333, there is no mistake if the party alleging it
knew the doubt, contingency or risk affecting the object of the contract.
Example E: Tiny lives in a house and lot in Makati which she inherited from
her father. On February 4, 2011, Tinys Uncle Dagul (brother of his father)
filed an action in court for recovery of the ownership of the house and lot.
Dagul states that the house and lot was sold to him by his brother when he
was still alive. Tiny did not want to believe her uncle. She had the support
of her best friend Meding who even offered to buy the house and lot for
P5M. Tiny agreed to sell the house and lot and Meding eventually occupied
the property. Later on, the court hearing the case rendered judgment
declaring Dagul the rightful owner of the house and lot.
Question: Can Meding file an action for annulment of the contract of sale
on the ground of mistake?
Answer: Meding here honestly believed that her best friend Tiny was the
real owner of the lot having inherited it from her father. Meding also honestly
believed that Dagul had no right to the property. However, Meding was also
aware that a case for recovery of the ownership of the land was pending
between Tiny and Dagul. Since the court ruled in favour of Dagul, it appears
that Meding has no right over the property because the seller Tiny had no
right to sell it. Medings remedy is not to file an action for annulment of the

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contract of sale but to enforce the contract by filing an action for damages
against Tiny.

10.

If mistake or fraud is claimed as the reason or ground for filing an action


for annulment, who will prove that there was mistake or fraud?

The general rule is, he who alleges fraud or mistake must prove the same.
When a person signs a document, it is presumed that he signed the document
with full knowledge of its contents. That is why, if he should later on file an action
for annulment of the contract claiming that there was mistake or fraud, he will have
the duty to prove the facts which amount to mistake and fraud, and which made
his consent to the contract defective.
Article 1332, however, cites the exception to the general rule:
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.
Example: The burden of proof is on the party alleging mistake or
fraud. I want you to refer to Example A in No. 9 above. In that case, B filed an
action for annulment of the contract of sale on the ground of mistake because the
pig that he bought was already barren and not fertile as what the seller S stated.
In court, B will be the one to prove the female pig is no longer fertile. It will not
be the duty of S to prove that the pig is still fertile. If B does not prove the fact of
mistake, even if S does not prove anything, the action for annulment will be
denied and B will be bound by his contract of sale with S.
Example: The burden of proof is not on the party alleging mistake or
fraud but on the party enforcing the contract when one of the parties is
illiterate, or is in a language not understood by him. S is the owner of a 2hectare farmland planted with 1,000 lanzones tress. The farmland makes a P2M
annual income on its harvest. S was unschooled and did not know how to read

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or write. On February 1, S needed money for the schooling of his 3 children so


he sold the farmland to B for P3M. The parties signed a Deed of Sale which
transferred ownership of the farmland to B. B carefully explained the contents of
the deed to S before S signed the document. There were two witnesses who
were there when the document was signed. After the children of S learned about
the sale, they filed an action for annulment of the contract of sale on the ground
of fraud. The children claim that the farmland of their father was worth P5M and
it was sold for only P3M because B employed fraud on their father. In this action
for annulment, since S was illiterate, the burden of proof to prove fraud is not
upon the children. It is B, who seeks to enforce the contract of sale and who
does not want the contract of sale annulled, who must prove that he did not
exercise fraud to compel S to sell the farmland to him. It is B who must prove
that he had fully explained to S the stipulations, terms and conditions of the
Deed of Sale that S signed. If S is not able to prove this, even if the children do
not prove their allegations of fraud, the contract of sale will be annulled.

11.

What is violence? When does violence make the consent of a party in a


contract defective as to result in the annulment of the contract later on?

To prevent confusion, let us refer to two (2) kinds of parties when we discuss the
different vices of consent:
THE INJURED PARTY The party upon whom violence, intimidation, undue
influence and fraud is employed.
THE GUILTY PARTY The party who uses violence, intimidation, undue
influence or fraud to compel or convince the other party to enter into a particular
contract

Violence makes the consent of a party defective when : (Article 1335, par. 1)
(a) The consent of the injured party is obtained by the guilty party by the
employment of serious or irresistible force.

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(b) The violence employed is the reason why the injured party gave his
consent and perfected a contract with the guilty party.
Example: B is interested in buying the 2-hectare rice land of S. S,
however, refuses to sell his land. One evening, B, who was with two armed
men, went to the house of S. B forced S to sign a Deed of Sale
transferring ownership of the rice land to B. Since S refused to sign, he is
hit by the butt of the armed mens guns. As blood was already flowing from
his head, S was forced to sign the Deed of Sale and B handed him the
purchase price for the rice land.
Question: Can S later on file an action for annulment of the contract of sale
so he can take back his ownership over the property?
Answer: YES. S did not really give his consent to the contract of sale. The
only reason why S affixed his signature to the Deed of Sale was because S
was so frightened that the two armed companions of B might eventually kill
him if he did not sign the Deed of Sale. Hence, S can later on file an
action for the annulment of the contract of sale on the ground of violence.

From the above example, we can see that violence requires the employment of
physical force.
12.

What is intimidation or threat? When does intimidation make the consent


of a party in a contract defective as to result in the annulment of the
contract later on? (Article 1335, par. 2)

There is intimidation when a person is compelled to give his consent because


of a reasonable and well-grounded fear of an imminent and grave evil :
(a) Upon his person or property; or
(b) Upon the person or property of his spouse, descendants, or ascendants.
Example: Intimidation exerted upon the person of the injured party. In
the example above in No. 11, if the two armed companions of B did not
apply physical force on S but merely threatened to kill him by pointing the
nozzle of their guns to the head of S, it would not be violence but merely

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threat or intimidation. Still, S can later on file an action for annulment of the
contract but this time on the ground of intimidation.
Example: Intimidation exerted upon the property of the injured partys
descendant. B threatened to burn down the house of the son of S if S will
not sign the contract of sale transferring ownership of a parcel of land to B.
S then signs the Deed of Sale against his will for fear that B might burn
down the house of his son. Under Article 1335, par. 2, even if it is not the
person or property of the injured party himself that is being threatened, the
intimidation employed by the guilty party will be enough to make the consent
of the injured party defective.

From comparison of the above examples in Nos. 11 & 12, although no physical
force is exerted on the injured party in intimidation, in both violence and
intimidation, the injured party can file an action for annulment of the contract. The
reason is because in both vices of consent, he is not able to give his free and
voluntary consent to the contract. The consent is merely a product of compulsion
from the guilty party.
Remember, however, that the intimidation or threat must be of an unjust act,
an actionable wrong. Therefore, a threat to enforce a just or legal claim does not
vitiate consent. (Article 1335, par. 4)
Example: The intimidation employed constitutes a just or legal claim
which is not sufficient to invalidate a contract. B was very much interested in
buying a house and lot owned by S which was located in the heart of Makati. B
wanted to convert the property into a restaurant which had the motif of the 60s.
B knew very well that S was a crooked businessman. Hence, B threatened S
that if S will not sell the house and lot to him, B will report him to the BIR
authorities. For fear that he will be prosecuted for tax evasion and ordered to
pay millions of back taxes, S sold the land to B.
Question: Can S later on file an action for annulment of the contract of sale
against B on the ground that he was merely threatened and intimidated to sell his
house and lot to B?

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Answer: NO. Under Article 1335, par. 4, for intimidation to vitiate the consent
of the injured party and to cause the consequent annulment of the contract
where a defective consent is given, it is required that the intimidation or threat
must consist of an unjust act or an actionable wrong. Here, the threat of B to
report S to the BIR authorities is not an unjust act or an actionable wrong. It is
the duty of every citizen to report any illegal activity that he is personally aware
of. Hence, an action for annulment filed by S to invalidate the contract of sale
will not prosper or become successful.

13.

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. (emphasis supplied)
Example: B wants to buy the land of S. B thinks that after he develops the
land, the present market value of the land, which is P5,000 per square
meter, will rise to P50,000 per square meter. N is the owner of a land next to
the land of S. N thinks that he will also become a rich man if S sells the land
to B because the valuation of his property will also increase tremendously.
Without the knowledge of B, N went to S and threatened S that if he does
not sell the land to B, N will kill him. Since S knew that N had many relatives
from the Abu Sayaf, S was forced to sell the land to B. B was, of course,
surprised but happy that S had changed his mind about selling the property.
Later on, S filed an action for annulment of the contract of sale against B on
the ground of intimidation.
Question: Will the action for annulment filed by S against B prosper
considering that the intimidation here was exerted not by B but by a third
person N who was not a party to the contract of sale between S and B?
Answer: YES. That the intimidation in this case was employed by N, a third
person (with or without the knowledge or consent of B) is immaterial. What
is important to consider is that at the time S sold the land to B, S did not give
his free and voluntary consent because he acted only because of the threat
employed by N. If the injured party gave his consent not of his own free will,
his consent becomes defective or vitiated whether the party who employed
the violence or intimidation was a contracting party or a stranger to the
contract.

Chapter I General Provisions

14.

17

When does undue influence vitiate consent to a contract?

There is undue influence when a person takes improper advantage of his


power over the will of another person, depriving that person of a reasonable
freedom of choice. (Article 1337)
Example: Tony has not been able to pay his rentals for two months worth
P12,000. His landlord has threatened to eject him from the apartment if he does
not pay his overdue rentals in three days. Tony goes to his friend Gene and tries
to borrow money. Instead of lending him money, Gene convinces Tony to sell to
him the grand piano which Tony inherited from his grandfather for P30,000. Tony
sells the piano to Gene because he has no one else to turn to for help. Later,
Tony files an action for annulment of the contract of sale of the grand piano
against Gene.
Question: Will Tony be able to recover his precious grand piano from B?
Answer: YES. In the instant case, Tony was compelled to sell his grand piano
by the employment of undue influence on the part of Gene. If we look at the
facts, Tony was never threatened by Gene to sell the piano. Neither did Gene
employ physical force on the person of Tony to compel him to sell the piano.
What Gene clearly did was take advantage of the financial distress of Tony who
was in desperate need of money for the payment of his overdue rentals. These
facts constitute undue influence which compelled Tony to sell his piano. Article
1337 states :
ART. 1337. There is undue influence when a person takes
improper advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice. The following circumstances
shall be considered: the confidential, family, spiritual and other relations
between the parties, or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or was ignorant
or in financial distress. (emphasis supplied)

Chapter I General Provisions

15.

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When is there fraud as a vice of consent?

Under Article 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.
In simple terms, fraud consists in the act of the guilty party in using dishonest
or tricky statements just to influence or convince the innocent party to enter into
the desired conract.
Not all kinds of fraud, however, is sufficient to vitiate consent and cause the
annulment of the contract. We then distinguish between two kinds of fraud :
A. Causal Fraud This is the kind of fraud referred to in Article 1338. It is
committed by one party before or at the time of the celebration of the contract to
secure the consent of the other party. In other words, were it not for the fraud
employed, the innocent party would not have given his consent to the contract.
The result of the use of this kind of fraud is the annulment of the contract because
of a defective consent given by the innocent party.
Example: The employment of causal fraud will cause the annulment of the
contract due to a defective consent. S offered to sell to B a BMW car E320
for P6M. After the sale, B found out that what he really bought was a BMW E230
worth P3.5M. It appears that A just jumbled the numbers 2 and 3 brass signs at
the back of the car changing the sign from BMW E230 to E320. Because of this,
B filed an action for annulment of the contract of sale on the ground of fraud.
Question: Will the action for annulment prosper?
Answer: YES. In this case, had B known that he was merely buying a BMW car
E230, which is of inferior quality than the BMW E320, B would not have bought
the car. However, because S represented that it was a BMW E320, B was fooled
into buying the car offered by S. This is what we call causal fraud which makes
the consent of B defective, and which prevents the perfection of a contract of
sale between the parties. Hence, an action for annulment is proper under the
facts of this case.

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19

B. Fraud in the performance of the obligations under the contract - This


is the kind of fraud referred to in Article 1170. The fraud here is employed after
the perfection of the contract. It is in the manner of performance of the obligation
that fraud is employed by the other party. The effect of the use of this kind of fraud
is liability for damages on the part of the party employing the fraud. Annulment of
the contract is not a proper remedy because there was no defective consent on
the part of both contracting parties.
Example: On February 5, 2011, S offered to sell his Omega watch to B for
P350,000. After B examined the watch, B agreed to buy it at the price offered by
S. Delivery date and payment was then set by the parties on February 15, 2011.
Before delivery date, S went to Virra Mall, Greenhills and bought an exact
imitation of the Omega watch he offered for sale to B. Two weeks after the
Omega watch was delivered to B, he discovered that the watch delivered to him
was only an imitation of the original.
Question: What is the remedy of B in this case?
Answer: In this case, a contract of sale was perfected on February 5, 2011
between S and B. There was already consent meeting of minds between the
parties with respect to the object (an authentic Omega watch) and the cause (the
P350,000 purchase price) of the contract. S did not employ fraud to convince B
to buy the watch. S is guilty of fraud in the performance of his obligation. He
employed fraud at the time the object was to be delivered to the buyer by
replacing it with an imitation. The proper remedy of B here is to file an action
against S for specific performance (to compel S to deliver the genuine watch)
and for damages for fraud.

16.

What are the essential requisites for fraud to vitiate consent?

(A) There must be misrepresentation (Art. 1338) or concealment (Art. 1339).


Fraud has two faces, i.e., there are two ways of employing fraud which can
vitiate the consent of a party to the contract :

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20

(1) Misrepresentation In fraud by misrepresentation, the guilty


party uses falsehood or misleading statements to compel the innocent party to
enter into a contract. This is the kind of fraud defined under Article 1338 and
discussed in No. 15 above.
(2) Concealment - In fraud by concealment, there is an intentional
failure on the part of the guilty party to reveal to the innocent party important
facts or details which the innocent party should have known in order to be able
to give his intelligent consent to the contract.
Example: Des and Ding inherited a 1000 square meter parcel of land from
their father which had a current market price of P2,000 per square meter.
Des offered to sell to her brother her 500 square meter share in the
inheritance as she was in immediate need of cash. On February 4, 2011,
Lucy came to Ding and offered to buy the property for the price of P20,000
per square meter. Without informing his sister about Lucys proposal, Ding
accepted his sisters earlier offer to sell her share of the property and bought
the share of Des at P2,000 per square-meter. Later, Des learned that her
brother was offering the entire property for sale to Lucy who was willing to
buy it at P20,000 per square meter. Des then filed an action against Ding for
annulment of the contract of sale with respect to her 500 square meter share
from the land inherited from their father.
Question: Will the action filed by Des against Ding for annulment of the
contract of sale between them prosper?
Answer: YES. In this case, Ding never used false or deceiving statements
to compel Des to sell her share. In fact, it was Des who made the offer to
his brother in the first place. However, after Lucy made the proposal to buy
the property for a very high price of P20,000 per square meter, Ding should
have informed his sister about it. If Des had known of the offer, she would
not have sold her share to Ding. Since Des had urgent need for cash, she
would have deemed it wiser to sell her property to Lucy who was willing to
pay a much higher price for her property. In this case, Ding is guilty of
employing fraud by concealment which vitiated the consent of her sister to
the contract of sale.

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21

(B) It must be serious (Art. 1344).


Example of serious fraud: Jack sold to Jill a land and told her that there
were 3,000 coconut trees on the land even if he knew that there were only
500 trees. Jill then bought the land believing the statement of Jack. The
fraud here is serious and Jill can ask for the annulment of the contract.
Example of minor fraud: If Jack told Jill that there were 3,000 coconut
trees on the land but the truth was there were really 3,100 coconut trees, the
fraud cannot be considered serious or important enough to make the
contract voidable. But Jill has a right to deduct from the contract price the
amount representing the value of the 100 coconut trees.

(C) It must have been employed by ONLY ONE of the contracting parties
(Art. 1344).
If fraud is employed by both parties, neither may ask for annulment as the
fraud of one contracting party offsets the fraud of the other. This rule is in
accordance with the principle that he who comes to court, must come with clean
hands.
When fraud is employed by both parties: Karl offered for sale a Toyota
Fortuner car which was carnapped. He offered to sell the car to Keana who knew
that it was a carnapped vehicle. Karl told Keana that the car had a kilometer
reading of 8,000, i.e., slightly used. Because of the statement of Karl that the car
was slightly used, Keana immediately bought the car. After two weeks, Keana
found out that Karl altered the kilometer reading because the mechanic told her
that the Fortuner had already travelled 80,000 kilometers. As a result, Keana
filed an action for the annulment of the contract of sale on the ground of fraud.
Question: Will the action filed by Keana against Karl for annulment of the
contract of sale between them prosper?
Answer: NO. In this case, both Karl and Keana are guilty of fraud in entering
into the contract of sale. Hence, Keana cannot ask for any relief from the court.
On the other hand, both Karl and Keana may be put on trial for the crime of
carnapping.

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22

Unlike in the case of violence and intimidation, fraud committed by a third


person does not vitiate consent. (Article 1344)
When fraud is committed by a third person, consent is not vitiated, and the
contract cannot be annulled. B offered to buy the land of S. The actual market
value of the land is only P2,000 per square meter. F, a friend of B, tells him that
the zonal valuation for the land is P10,000 per square meter. So if B can
convince S to sell the land for P6,000 per square meter, it would be a very good
deal. Convinced by the statements of F, B bought the land from S for P6,000 per
square meter. Later, B found out from the city hall that the zonal valuation for the
land was only P2,000 per square meter.
Question: Can B file an action for annulment of the contract of sale on the
ground of fraud committed by F, a third person to the contract?
Answer: NO. Because F is not a party to the contract of sale between S and B.
Under Article 1344, one of the important requirements for fraud to vitiate
consent is that it should have been employed by one of the contracting parties.

HOWEVER,
(i) Even if employed by a third person, fraud will vitiate consent and result
in the annulment of the parties contract if it was used with the knowledge of the
contracting party who is benefited by the fraud (Art. 1344).
When the third person connives with one of the contracting parties
in committing fraud, consent is vitiated. In the example above, if the
misrepresentation made by F with B relating to the valuation of the land was with
the participation of S, the consent of B is vitiated and an action for annulment
filed by B later on will prosper. In such a case, it is as if S was the one who
committed the fraud but acting through his agent F.

(ii) Even if employed by a third person, fraud will vitiate consent and
result in the annulment of the parties contract if the misrepresentation has created
substantial mistake and the same is mutual (i.e., affects both parties).

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When fraud committed by a third person creates substantial mistake: S


owns a land on which he wants to construct his home. B offered to buy the land
at a price much higher than its valuation because it was a good location for his
car rental and car wash business. Not quite sure of the classification of the land,
S and B went to the city hall and inquired from F. F informed the parties that the
land is part of the commercial zone. On the basis of this representation of F, S
sold the land to B. It turns out, however, that the area is a residential zone. It
then becomes obvious that B will not be able to use the land for the purpose for
which he bought it from S in the first place.
Question: Can B file an action for annulment of the contract of sale on the
ground of fraud committed by F, a third person to the contract?
Answer: YES. This time, even if the fraud is committed by F, a stranger to the
contract of sale, Bs action for annulment of the contract will prosper. The fraud
committed by F induced both S and B to perfect the contract of sale on the
mistaken belief that the land object of the sale was commercial land. However,
since fraud was committed by a third person, the basis for the annulment of the
contract of sale in this case is not fraud but substantial mistake or error as to the
object of the contract which vitiates the consent of both S and B to the contract.

(D) It must be made with intent to deceive (to trick or to cheat) the other
contracting party.
In the following instances, there is no intent to deceive, so there is no fraud.
(1) Misrepresentation made in good faith is not fraudulent but may
constitute error or mistake (Art. 1343).
Example: Nina inherited a ring from her mother. Nina did not know anything
about stones or other pieces of jewelry. She believed that she had inherited a
diamond ring. Later, when she was in dire need of money for her sick son, she
offered the ring for sale to Nicholas and told him that it was genuine diamond.
Nicholas bought the ring for P40,000 but found out later that the stone on the ring
was only Russian diamond worth P3,000.

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24

Discussion: In this case, there is no fraud under Article 1338. There was no
intent to deceive on the part of Nina. She honestly believed that the ring she
inherited was genuine diamond and that is what she told Nicholas. However,
Nicholas can still file an action for annulment but on the ground of mistake or
error under Article 1331. This is because Nicholas bought the ring on the
mistaken belief that it was a diamond ring. Had he known that it was only
Russian diamond, he would not have bought the ring or paid an enormous price
for it.

(2) The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent (Art. 1340).
Dealers talk or traders talk are usually exaggerated and not exactly true. If a
party gives his consent to a contract on the basis of these misrepresentations
made by merchants or traders, the contract cannot be invalidated on the ground of
fraud.
Example: I saw an advertisement in the department store which read :
Possess flawless skin in 7 days. Your husband will never take his eyes off you.
Because of the ad, I bought 3 bottles of the product and immediately used the
product. Two weeks had passed and my husband barely noticed me.
Discussion: In this case, I cannot file an action for annulment of the contract of
sale on the ground of the misrepresentations made in the ad which is the reason
why I bought the product from the department store.

(3) The mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the formers special
knowledge (Art. 1341).
Example: In the example in No. 1 above, Nina was merely expressing her
opinion regarding the worth of the ring. The misrepresentations made by Nina to
Nicholas on the basis of that opinion was made in good faith and, therefore, did
not amount to fraud. However, if Nina is a goldsmith or jeweller, and she
represents to Nicholas that the ring was genuine diamond, she will have been
making a misrepresentation in bad faith because of her expertise in stones and

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25

other pieces of jewelry. This time, Nicholas can have the contract annulled on
the ground of fraud.

(E) It must have induced the consent of the other contracting party.
The fraud employed by the guilty party is the main reason why the injured party
gave his consent to the contract.
17.

What is meant by simulation of a contract. (Article 1345)

Simulation of a contract is the act of intentionally deceiving others by


producing the appearance of a contract that really does not exist (absolute
simulation) or which is different from the true agreement (relative simulation).
There are two (2) kinds of simulation of a contract :
(A) Absolute simulation There is absolute simulation when the contract
does not really exist and the parties do not intend to be bound at all (Article
1345). Absolutely simulated or fictitious contracts are inexistent and void (Article
1346).
(B) Relative simulation - There is relative simulation when the contract
entered into by the parties is different from their true agreement (Article 1345).
Here, the parties conceal their true agreement. The parties are bound to the real
or true agreement except
(B.1) if the contract should prejudice a third person; OR
(B.2) if the purpose is contrary to law, morals, good customs, public order,
or public policy
Example: Absolute Simulation: D owes C P2M. Before maturity date, D
became insolvent. The only property that he had was a 200 square-meter lot
valued at P3M. To prevent C from enforcing his P2M credit, D pretended to sell
the land to F, his brother-in-law. D and F then entered into a Deed of Sale of

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26

the lot for P3M. D, however, did not receive a single centavo from F as purchase
price. Neither did F, as new owner, occupy the lot.
Discussion: D fraudulently entered into a contract of sale with F only for the
purpose of transferring title to the lot to F, so that C will not be able to attach the
lot anymore when C collects his claim. D and F never intended to be bound
under the contract as shown by the fact that no purchase price was paid and D
continued occupying the lot. The contract of sale is, therefore, void for being
absolutely simulated. Hence, on maturity date, if D is insolvent to pay his debt, C
can still attach the lot to secure the payment of the obligation.
Example: Relative Simulation:
Discussion: (TO BE CONTINUED)

18.
Prepared by :
Atty. Harriet Reyes Linsangan
February 5, 2011

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