OBLIGATIONS AND CONTRACTS Part 4

Atty. EDUARDO T. REYES, III

Civil Law Review

College of Law

University of San Agustin

(Prelim Lecture Outline - Part 4)

CHAPTER 6
Rescissible Contracts

Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Comments:

1. Should be distinguished from MUTUAL DISSENT or MUTUAL BACKING-OUT. In mutual dissent, return of the fruits or restoration is subject to parties agreement or non-agreement. In real rescission, restoration is a necessary legal consequence.

Article 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 other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission. (1291a)

Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292)

Article 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. (1294)

Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

Article 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. (1295)

Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved by the courts. (1296a)

Article 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a)

Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a)

Article 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. (1299)

CHAPTER 7
Voidable Contracts

Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n)

Article 1391. The action for annulment shall be brought within four years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a)

Article 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a)

Article 1394. Ratification may be effected by the guardian of the incapacitated person. (n)

Article 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312)

Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313)

Article 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a)

Article 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. (1303a)

Article 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304)

Article 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. (1307a)

Article 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a)

Article 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. (1308)

CHAPTER 8
Unenforceable Contracts (n)

Article 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

( f ) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

Article 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.

Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

Article 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.

Article 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

Article 1408. Unenforceable contracts cannot be assailed by third persons.

Comments:

1. Important features of Statute of Frauds

a. Ground for dismissal per Sec.1 (i) Rule 16, Rules of Court

b. It is a RULE OF ADMISSIBILITYunder Rules of Parol evidence

c. Only bars oral evidence to enforce action for damages but not an action to reform or to annul or to declare void as long as agreement is not covered by Statute of Frauds- See Cayugan v. Santos[1]

d. Concerns the admissibility of evidence and not necessarily its weight or probative value

CHAPTER 9
Void and Inexistent Contracts

Article 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

-        In Pari delicto rule. – Does not apply to ABSOLUTELY SIMULATED CONTRACTS. The doctrine can be applied if there is an object or consideration but said consideration or object is illegal.

-        Exceptions to In Pari Delicto rule: Cases when there can be recovery:

a)    Interest paid in excess allowed by usury laws[2]

b)   One of the parties to an illegal contract is incapable of giving consent[3]

c)    Money is paid or property is delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before damage has been caused to a third person.[4]

d)   When agreement is not illegal per se but merely prohibited and the prohibition by the law is designated for the protection of the plaintiff[5]

e)    When the price of any commodity or article  is determined by statute or by authority of law , any person paying any amount in excess of the maximum price allowed may recover the excess[6]

f)     When the law fixes or authorizes the fixing of the maximum number of hours of labor and a contract is entered into whereby a labourer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit[7]

g)    When the law sets, or authorizes the setting of a minimum wage for labourers, and a contract is agreed upon which a laborer accepts a lower wage, he shall be entitled to recover the deficiency[8]

h)   Where the application of the in pari delicto rule contravenes public policy such as the policy against unjust enrichment[9]

i)      Superior public policy is involved[10]

-        Read Teresita I. Buenaventura v. Metropolitan Bank and Trust Company, G.R. No. 167082, August 03, 2016

-        “The burden of showing that a contract is simulated rests on the party impugning the contract. This is because of the presumed validity of the contract that has been duly executed. The proof required to overcome the presumption of validity must be convincing and preponderant.”

Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Article 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. (1305)

Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306)

Article 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.

Article 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.

Article 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person.

Article 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.

Article 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.

Article 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit.

Article 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.

Article 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

Article 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected.

Article 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

TITLE III
NATURAL OBLIGATIONS

Article 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles.

Article 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 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.

Article 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact that he has not been benefited thereby, there is no right to demand the thing or price thus returned.

Article 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. (1160A)

Article 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.

Article 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.

Article 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.

TITLE IV
ESTOPPEL (n)

Article 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.

Article 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Code, the Code of Commerce, the Rules of Court and special laws.

Article 1433. Estoppel may in pais or by deed.

Article 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 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.

Article 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor.

Article 1437. When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present:

(1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped;

(2) The party precluded must intend that the other should act upon the facts as misrepresented;

(3) The party misled must have been unaware of the true facts; and

(4) The party defrauded must have acted in accordance with the misrepresentation.

Article 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.

Article 1439. Estoppel is effective only as between the parties thereto or their successors in interest.

TITLE V
TRUSTS (n)

CHAPTER 1
General Provisions

Article 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary.

Article 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.

Article 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted.

CHAPTER 2
Express Trusts

Article 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence.

Article 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.

Article 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust.

Article 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary.

CHAPTER 3
Implied Trusts

Article 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.

Article 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child.

Article 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof.

Article 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom its is paid. The latter may redeem the property and compel a conveyance thereof to him.

Article 1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner.

Article 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each.

Article 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated.

Article 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him.

Article 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.

Article 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.

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

Comments:

            1.“An implied trust could not have been formed between the Bank and Tala as this Court has held that “where the purchase is made in violation of an existing statute and in evasion of its express provision, no trust can result in favour of the party who is guilty of fraud.[11]”

            2. ALIENS PROHIBITED FROM ACQUIRING PHILIPPINE LANDS[12]

 “As early as Krivenko v. Register of Deeds, We have interpreted the foregoing to mean that, under the Constitution then in force, aliens may not acquire residential lands: "One of the fundamental principles underlying the provision of Article XIII of the Constitution x x x is 'that lands, minerals, forests, and other natural resources constitute the exclusive heritage of the Filipino nation. They should, therefore, be preserved for those under the sovereign authority of that nation and for their posterity."' These provisions have been substantially carried over to the present Constitution, and jurisprudence confirms that aliens are disqualified from acquiring lands of the public domain. In Ting Ho v. Teng Gui, 52 Muller v. Muller, 53 Frenzel v. Catito,54 and Cheesman v. Intermediate Appellate Court, 55 all cited in Matthews v. Sps. Taylor, 56 We upheld the constitutional prohibition on aliens acquiring land in the Philippines. We have consistently ruled thus in line with constitutional intent to preserve and conserve the national patrimony. Our Constitution clearly reserves for Filipino citizens or corporations at least sixty percent of the capital of which is owned by Filipinos the right to acquire lands of the public domain.  The prohibition against aliens owning lands in the Philippines is subject only to limited constitutional exceptions, and not even an implied trust can be permitted on equity considerations.  Much as We sympathize with the plight of a mother who adopted an infant son, only to have her ungrateful ward eject her from her property during her twilight years, We cannot grant her prayer. Applying the above rules to the present case, We find that she acquired the subject parcels of land in violation of the constitutional prohibition against aliens owning real property in the Philippines. Axiomatically, the properties in question cannot be legally reconveyed to one who had no right to own them in the first place.”

---

[1] 34 Phil. 100

[2] Modina v. CA, 317 SCRA 696 (1999)

[3] Art. 1415, NCC

[4] Art. 1414, NCC

[5] Angeles v. Court of Appeals, 102 Phil 1006

[6] Art. 1417, NCC

[7] Art. 1418, NCC

[8] Art. 1419, NCC

[9] Gonzalo v. Tarnate, Jr., G.R. No. 160600, January 15, 2014

[10] See Liguez v.CA, L-11240, December 18, 1957

[11] Tala Realty Services Corp., Inc. et al., v. Banco Filipino Savings & Mortgage Bank, G.R. No. 181369, June 22, 2016

[12] JOSE NORBERTO ANG, Petitioner, - versus - THE ESTATE OF SY SO, Respondent. ··-·-'"''"'•·-·· G.R. No. 182252, August 03, 2016