ESSENTIAL REQUISITES OF CONTRACTS

CONSENT

Definition – The concurrence of the wills of the contracting parties to the terms and conditions of
the contract - an offer having been made by the offeror, and such offer was accepted by the offeree
in all material respects – gives birth to a contract.

The meeting of the minds is reflected by the consent given by the contracting parties. In case of
written contracts, consent is manifested by the signatures of the contracting parties. In verbal
contracts, consent may be expressed by the parties, or otherwise inferred from their
contemporaneous acts. In Traders Royal Bank vs. Cuison Lumber, the consent of the parties to the
Repurchase Agreement was not altogether clear. Nonetheless, the court reviewed the exchange of
correspondence between the contracting parties, and on the basis thereof, concluded that there
was a meeting of the minds between them. Indeed, the consent of the contracting parties need not
be explicit – all that is required is for consent to be manifested one way or another. In contrast , Sps.
Gironella vs. PNB reached the opposite conclusion; i.e., that no consent was given by the parties to
the proposed Restructuring Agreement as it would seem that the negotiation between the parties
was far from completed. The factual antecedents of the Gironella case should be compared to the
facts of the Traders Royal Bank case.

Essential elements of consent: MVPWC

o Consent must be manifested expressly or tacitly (See Traders Royal Bank case).

o Consent must not be vitiated – Consent must be free, intelligent, and spontaneous. The freedom
of consent is vitiated by force or violence, intimidation or threat, and undue influence and
pressure. The intelligence of consent is vitiated by mistake. The spontaneity of consent is vitiated
by fraud. Vitiated consent results in a defective contract.
o Plurality of subject (parties) – There must be an offeror and an offeree representing two
different patrimonies.
o Consent must conform to the internal will of the parties. The consent must be reflective of the
true will of the contracting parties. A circumstance that would militate against this element is
mental reservation, where consent to a proposition is apparently given, but the person
manifesting such consent has something else in mind. A failure of consent to conform to the
internal will of the parties prevents the perfection of a contract.
o Capacity of the parties – Both offeror and offeree must possess full civil capacity (i.e., not
otherwise incapacitated).

Consent must be given bilaterally. The offeror, by making an offer, expresses his consent to enter
into the contract. The offeree, by accepting the offer, likewise makes manifest his intention and
willingness to enter into the contract.
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The manifestation of consent is essential. Consent may be given expressly or implicitly. In the case of
implicit consent, it must be proved. For which reason, there is legal basis to assert that silence is not
necessarily a manifestation of consent. This is particularly true in the case of acceptance of an offer.

Who may give consent: Full/LJ Guardians

A person with full civil capacity may give consent to a contract. Thus, unemancipated minors, the
insane or demented person, the illiterate deaf-mutes (including all other incapacitated persons) may
not, in their personal capacities, give consent to the contract. They may do so, however, through
their duly authorized representative – the guardian.

o Legal guardian – refers to the parents of the unemancipated minor who, in the exercise of
parental authority, has management of the properties of the latter. Notice the limitations and
requirements imposed in legal guardians under the Family Code.

o Judicial guardian – refers to the person designated by a competent court to (i) take custody of the
person of the ward, or (ii) to manage the property of the ward, or (iii) both custody of the person
and management of the property of the ward.

Note that following:

o The provision of the Family Code on voluntary emancipation has become moot and academic
with the lowering of the age of majority to 18.

o The archaic notion that deaf-mutes are idiots has been proven wrong.

o An insane person who gives consent to a contract during a proven lucid interval gives valid
consent.

o A drunk, drugged, hypnotized person, or a lunatic is considered in the same category as an insane
person who cannot, in their current state of the mind, give an intelligent consent to a contract.

Consent to a contract given by any of the foregoing persons is not valid consent.

OFFER

In order to be valid, the offer must be: DCI

o Definite – A definite offer is more than just an intention or willingness to enter into a contract. An
offer is definite if the acceptance thereof by the offeree perfects the contract. In Rosenstock vs.
Burke, the offeror wrote: “I take pleasure in confirming my verbal offer to you of the motor yacht
Bronzewing, at a price of P120,000.00.” In reply, the offeree wrote: “I am in a position and am
willing to entertain the purchase of it under the following terms.” The court ruled that there was
no acceptance of the offer.
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o Complete – An offer must clearly indicate the kind of contract that is proposed, including the
essential and non-essential terms and conditions. In sum, if the offeree accepts the offer, there is
nothing more to negotiate. If the offer is incomplete, the offeree’s acceptance of the incomplete
offer (which would require further negotiation) does not operate to perfect a contract.

o Intentional – An intentional offer is a serious offer – an offer that is meant to be seriously

considered by the offeree for the purpose of perfecting a contract. A courteous albeit frivolous
statement: “mi casa es su casa” cannot under any circumstance be considered as an offer by the
person speaking to give away his house to the person he is talking to.

The offeror, in his offer, may fix the time, place and manner of acceptance, and the offeree who
wishes to accept the offer, must comply with the same (Art. 1321). An offeror may make an offer
through an authorized agent (Art. 1322). The offer becomes effective from the time the agent
communicates the offer to the offeree.

Bear in mind one fundamental rule: an offer, in order to be effective, must be communicated by
the offeror to the offeree; an acceptance, in order to perfect a contract, must be communicated by
the offeree to the offeror.

Effect of death, insanity, civil interdiction and insolvency

An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either
party before acceptance is conveyed (Art. 1323). Notice that before acceptance is conveyed to the
offeror, there is no contract. Thus, if prior to acceptance by the offeree the offeror in the meantime
dies, the offeree can no longer communicate his acceptance to the offeror. If in the meantime the
offeror becomes insane, insolvent or is placed under civil interdiction, the conveyance of the
offeree’s acceptance of the offer cannot be lawfully acted upon by the offeror who, in the
meantime, has lost his capacity to act.

In the same manner, if prior to acceptance of the offer the offeree dies, becomes insane, is placed
under civil interdiction, or becomes insolvent, he loses the opportunity to accept the offer. But if he
had accepted the offer before the happening of these contingencies, a contract is perfected. If the
offeree died thereafter, the rights and obligations arising from the perfected contract shall, unless
otherwise provided be law, be passed to his heirs. If he becomes insane or is placed under civil
interdiction, the rights and obligations shall be exercised and discharged by his legal representative.
If he should become insolvent, the rights and obligations arising from the perfected contract shall be
taken over by his trustee in insolvency or liquidator. These same rules will apply to the offeror if the
acceptance was communicated to him before he suffered the foregoing same contingencies.

Withdrawal of an offer

Prior to acceptance, an offeror may withdraw the offer, as there has yet to be a perfected contract
to which the offeror may be bound. This is a general rule. But, if an offer has been accepted by the
offeree, a binding contract is perfected and the offeror may no longer withdraw the offer. (See
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Sanchez vs. Rigos.) In the concurring opinion of Justice Antonio, he went further by saying that an
offer implies an obligation on the part of the offeror to maintain the offer in such length of time as to
permit the offeree to decide whether to accept it or not, and therefore, the offeror cannot arbitrarily
revoke the offer without being liable for damages which the offeree may suffer. Clearly, the court
stated that an offer cannot be withdrawn whimsically or arbitrarily in such a manner as to cause
damage to the offeree. This pronouncement is consistent with Art. 19 ( Every person must, in the exercise
of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith.), Art. 20 (Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the
latter for the same.), and Art. 21 ( Every person who wilfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for the damages .)
In this regard, an offeree
may protect the offer by making use of Art. 1324 (the option contract) which will effectively bar the
offeror from withdrawing the offer, without obligating the offeree to accept the same.

Option contract

In an option contract, the offeror gives the offeree a fixed period within which to accept the offer.
While ordinarily an offeror may withdraw the offer before it is accepted, an option contract protects
the fixed offer period provided that the offeree pays a consideration for the option period. By
receiving the consideration, the offeror is contractually bound to keep the offer until the expiration
of the option period.

The option contract is separate and distinct from the proposal/offer made by the offeror to the
offeree. Thus, the option contract is a preparatory contract which is supported by an independent
consideration that is likewise separate and distinct. Commercial practice, however, allows the
consideration for the option contract to be imputed to the consideration of the proposed contract, if
the offeree should accept the offer.

The subject matter of an option contract is the fixed period of time which is granted to the offeree
within which to accept or to reject an offer.

If an option contract is not supported by a consideration, it is not a contract due to the absence of
one of the essential elements of a contract. Therefore, at least in theory, the offeror may withdraw
the offer even if he gave the offeree a period of time within which to make a decision. The offeror,
theoretically, is not bound to honour the period of time which he gave the offeree. However, it is
most important to go over the case of Sanchez vs. Rigos where the court held the offeror bound to
the offer to sell even if the offeree did not pay a separate consideration for the offer period.

Public offers

Attention must be paid to public offers that are made through the media. For instance, it is common
to find an advertisement offering a reward to anyone who could provide information leading to the
arrest of a suspected criminal. No doubt it is an offer of a reward. However, in order that a
responder might bind the offeror to the offered reward, is it necessary for him to accept the offer?
The weight of opinion is that an express acceptance of a public offer is not required, it being
sufficient that acceptance is implicitly made when a responder responds to the public offer.
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Business advertisements

A business advertisement is not an offer made to the public. Notice that a business advertisement is
not synonymous to a public offer which is described above. A business advertisement is an invitation
made to the public to enter into a business relationship with the advertiser. The Code makes
reference to two distinct types of business advertisements:

o Advertisement of things for sale (Art. 1325), and

o Advertisement for bidders (Art. 1326).

In an advertisement of things for sale, the advertiser is seeking to find people who might be
interested to purchase the advertised thing. The advertiser, therefore, is making it known to the
public that a certain thing is up for sale, and the advertiser invites persons to make an offer to
purchase the thing. In sum, the responder to the advertisement is the offeror and is expected to
make an offer to buy the thing advertised. The advertiser is the offeree whose function is to accept
or to reject the offer made to him. Why is this arrangement necessary? Just imagine if the advertiser
were the offeror and the public the offeree. What if several persons express acceptance of the thing
advertised? Each acceptance would constitute a contract that is binding on the offeror. The offeror
will find himself in a dire situation because he cannot possibly fulfil his obligation to sell the thing to
several people. He would be in breach of contract to all responders to whom he is unable to sell the
thing. Note well that the advertiser may include in the advertisement some details which he would
expect the responders to consider (e.g., the price, the warranties to be given, etc.).

In an advertisement for bidders, the advertiser announces that he will conduct a bidding process
either for the acquisition or the disposition of a thing. He invites the public to participate in the
bidding process. The advertiser is expected to set the parameters which will guide potential bidders
in making their bid. However, the advertiser is not bound to accept any bid, unless the
advertisement clearly says so. Again, the advertiser is the offeree; and responders are the offerors.
The most common advertisement for bidders comes from the government. Under the Government
Procurement Reform Act, the government must purchase goods and services through the bidding
process. The award may be given to the offer that is most advantageous to the government. Note
that the government is not required to give the award to anyone.

ACCEPTANCE- UU

The acceptance of the offer results in the perfection of a contract. In order to be valid, the
acceptance must be:

o Unqualified – This means that the offeree accepted the offer in its entirety with no pre-
conditions or additional terms and/or conditions.

o Unequivocal – This means that the acceptance of the offer must be clear and unambiguous.
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Anything short of an unqualified acceptance is considered a counter-offer made by the offeree to

the offeror, in which case the original offeree becomes the counter-offeror, and the original offeror
becomes the counter-offeree.

Anything short of an unequivocal acceptance may fall short of perfecting a contract, unless from the
surrounding circumstances, acceptance can be clearly demonstrated. (See Malbarosa vs. Court of
Appeals.)

Just as the offeror must communicate the offer to the offeree, so must the offeree communicate his
acceptance to the offeror. The communication may be done personally by the offeror and the
offeree respectively, or through their duly authorized representatives (Art. 1322). No particular form
is required for this communication: it could be in writing or made verbally. Indeed, acceptance of an
offer may even be implied (Art. 1320). But in the case of implied acceptance, it is essential that such
implied acceptance be proved and clearly demonstrated. In Talampas vs. Moldex Realty, the court
ruled that Moldex failed to prove that Talampas gave consent, either expressly or impliedly, to the
proposed termination of the contract. Thus, the court ruled that termination of the contract did not
occur.

Effect of silence: Yes if it is duty to respond / good faith + no other interpretation / silence is
consistent of notion of acceptance.

The silence of the offeree who is faced with an offer does not equate to an acceptance. Silence is a
neutral circumstance which may be interpreted either as an acceptance or a rejection of the offer.
Some authorities however advance the proposition that silence of the offeree may mean acceptance
of the offer under the following conditions:

o The offeree must have a duty or possibility to respond to the offer, either by accepting or
rejecting the same.

o The silence of the offeree, if he is to act in good faith, and given the surrounding circumstances,
cannot be interpreted in any way other than as an acceptance of the offer.

o The silence of the offeree is reflective of his internal will, and such silence is consistent with the
notion that he accepted the offer.

Some provisions of the Code adopted this view. For instance, an heir to whom an inheritance is left,
but who refuses, fails or omits to express his acceptance thereof, is deemed to have accepted it if
after the lapse of 30 days. Furthermore, an agent is deemed to have accepted the agency if the
principal delivers the power of attorney to the agent and the latter received it without objection.

VICES OF CONSENT

A valid consent must be intelligent, free and spontaneous. Against these characteristics of a valid
consent, the law enumerates the vices or defects: mistake which destroys the intelligence of
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consent; violence, intimidation and undue influence which vitiates the freedom of consent; and
fraud, which destroys the spontaneity of consent.

Defective consent

A vice of consent renders the consent defective and results in a defective contract (voidable, to be
precise). Make no mistake, however, that a vice of consent does not obliterate the fact that consent
was indeed given; but the defective consent results in a voidable contract.

Absence of consent

It has to be crystal clear that if consent was not given at all, there is no contract to speak of. A classic
example of a contract that is without consent is an absolutely simulated contract.

Simulation of contract is an act of making it appear that a contract was entered into, but in truth (i)
the contract is not what it appears to be as the true agreement of the parties is concealed ( relative
simulation of contract), or (ii) there is no contract at all (absolute simulation of contract) because the
parties did not intend to be bound at all (Art. 1345).

If a father disguises a donation of a parcel of land to his son in the form of a fictitious sale of that
parcel of land, there is relative simulation of contract. While the document would tend to show a
contract of sale, the true contract between the father and the son is a donation. There is no law that
requires the contracting parties to declare their true agreement. For this reason, a relative
simulation of contract is valid provided 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.”(Art. 1346)
Therefore, it binds the parties to their true agreement. The concealed donation by a father to his son
is not illegal, nor is it contrary to morals, good customs, public order or public policy. Between the
father and the son, there is a valid donation. However, consider a situation where the donee is the
mistress of the donor, and the donation was concealed as a sale. In this instance, the relatively
simulated contract of sale is void, because the donation to mistress is not only contrary to law, it also
offends morality.

If a financially embarrassed debtor simulates a sale of his last remaining property to his brother for
the sole purpose of shielding that property from the claims of his unpaid creditor, the understanding
between them being that the brother will reconvey the property to him at a later time, the sale is
absolutely simulated and is therefore void. (Art. 1346) In this absolutely simulated sale, the brother
is not expected to pay the purported purchase price. The brother is not meant to own the property,
but he is merely to take possession thereof as though he is the true owner. There is no intent or
agreement between the seller and the buyer that the latter will acquire ownership of the land. There
is no true consent to what appears to be a contract of sale – let alone that the purpose of the
brothers is to defraud the creditors of the supposed seller.

While it may be difficult to prove an absolute simulation of contract, circumstantial evidence may be
so compelling to indicate that between the parties thereto, there is no intention for them to be
bound by what would appear to be their contract. (See Heirs of Intac vs. Court of Appeals).
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Mistake

Mistake is an erroneous notion of something. It is not identical to ignorance (which is the total lack
of notion about a particular matter. However, it is generally accepted that mistake and ignorance
produce the same effect. Mistake, as a vice of consent, is not defined by law. All the law tells us is
that for a mistake to vitiate consent, it must refer to:

o the substance of the thing which is the object of the contract (reference to the prestation to
give). This may be illustrated by an honest mistake as to the substance of the thing which is the
object of a contract (e.g., an erroneous notion that ascorbic acid is the same as, and therefore a
substitute for, mefenamic acid.)

o to those conditions which have principally moved one or both parties to enter into the contract.
(e.g., the buyer’s consent to purchase a parcel of land which he disclosed to the seller should be
suitable for agriculture, and it turned out later than it was not so.) Because the principal motive
or reason for entering into the contract has been disclosed, a frustration of such motive results in
a vitiation of consent. In sum, he would not have entered into the contract had he known that his
motive or purpose would not be achieved. (Difficult to prove, though.) The conditions which
principally move the parties to enter into the contract is not the same as, and should therefore be
distinguished from, their respective motives. Motive is the personal and internal reason for a
person to enter into a contract.

o Mistake as to the nature of the contract (e.g., consent of a party to affix his thumb mark on a
document which he honestly thought was a deed of mortgage, but it turned out to be a deed of
sale. Note that the counterparty, if he acted in bad faith which caused this mistake, may also be
cited for fraud.)

Mistake, as a vice of consent, will not be appreciated if it refers to:

o the identity or qualifications of one of the parties, except if the identity or qualifications are the
principal cause of the contract and the identity or qualifications cannot be substituted (e.g. (i)
error as to the identity or qualifications of a service provider like a professional singer, performer,
or artist, (ii) error as to the identity of a counterparty to a fiduciary contract; (iii) error as to the
identity of the beneficiary (donee) of a gratuitous conveyance (donation).)

o a simple mistake of account, which may be corrected by simple arithmetic processes.

o error as to quantity, which may be corrected by simple adjustment (dagdag-bawas principle).

o accidental qualities or conditions of the object of the contract which do not affect the consent
of the party who gave consent to the contract (e.g., buyer’s purchase of a book thinking it was a
good one, and it turns out not to be so).
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o a mistake of law because ignorance of the law excuses no one.

o mistake as to the legal effects (consequences) of a contract, (e.g., seller entered into a contract
of sale of real property not realizing that he has to pay certain taxes which would diminish his
cash take), except if the real purpose of the parties is frustrated (Art. 1334).

o mistake as to the solvency of a person. A person entering into a contract with another has to
exercise diligence in ascertaining that the latter is in a position to fulfil his obligation under the
contract. Anything short of due diligence constitutes negligence which, under the law, cannot be
rewarded.

o error as to estimates because estimates are not facts and are susceptible to error. In Art. 1233,
there is no mistake if the party alleging it knows the doubt, contingency or risk affecting the
object of the contract.

Caution must be observed in dealing with illiterate persons, or in executing a written contract in a
language not known to the counterparty. In these two instances, the person who seeks to enforce
the agreement must demonstrate that the terms of the contract was fully explained to the other
party – failing which, the latter may assail the validity of the contract on the ground of mistake (Art.
1332).

Violence

Duress is the generic term that refers to constraint or coercion that compels a person to give
consent to a contract. Duress includes both violence and intimidation.

Definition – Violence involves the use of serious and irresistible physical force (external force) on a
person in order to get the consent of that person to a contract.

Effect – Violence gives the victim no choice but to immediately give consent to the contract. Note
that the physical force inflicted on the victim is both serious and irresistible and of such degree that
an ordinary man cannot withstand.

Requisites – The physical force must be both serious and irresistible, and it must be the determining
cause of giving consent.

Violence may be inflicted not only by the person who seeks to obtain the consent of the victim (the
counterparty to the contract), but also by a third person who is not a contracting party (Art. 1336).
There is no doubt that third-party violence will have the same effect on the victim, who will have no
choice but to give his consent to the contract.

Intimidation
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Definition – Intimidation is the use of reasonable and well-grounded fear of a grave and imminent
evil (internal coercion, not physical or external force) that will befall the victim’s person or his
property (or the person or property of his spouse, descendants or ascendants) if the victim were to
refuse to give consent to the contract. It is generally accepted that the law includes as part of
intimidation the threat of grave evil on the person or property of anyone loved by the victim. It is
also generally accepted that the threat is not limited to a person or his property, but includes as well
a threat to honor and liberty.

Effect – The intimidation or threat gives the victim a brief period of time within which to weigh the
consequence of giving his consent against the evil that is threatened if he should withhold consent.
In sum, the victim is forced to choose the lesser evil, and for which reason, if he should give his
consent to the contract, the consent would not be freely given. Unlike violence, the effect of
intimidation is not immediate.

Requisites – UURSDRwgfDC

o The threat must be unjust and unlawful. If the threat is lawful, it does not constitute
intimidation. Hence, a threat made by a wife to file a disbarment case against her philandering
husband unless the latter gives support to his minor children is not unjust. In fact, is it a lawful
threat.

o The threat must be real and serious. Threat is real if the intimidator has the means to carry out
the threat. The threat is serious if it can produce the threatened harm or evil. The threatened evil
cannot be the product of a creative imagination. (e.g., I will cast an evil spell on you if you do not
give me PhP1,000 weekly allowance.)

o There must be a disproportion between the threatened evil and the ability of the victim to
resist the threat, leading the victim to choose, as the lesser evil, the giving of his consent to the
contract. (e.g., kidnap for ransom cases, blackmail, etc.) The character of the victim may influence
the disproportion between the threatened evil and his ability to resist the threat.

o The threat produced a reasonable and well-grounded fear of an imminent (not immediate) and
grave evil upon the person, property, honor or liberty of the victim, his spouse, descendants,
ascendants, or any other person loved by the victim.

o The threat is the determining cause for giving consent.

Intimidation may be inflicted not only by the person who seeks to obtain the consent of the victim
(the counterparty to the contract), but also by a third person who is not a contracting party (Art.
1336). There is no doubt that third-party intimidation will have the same effect on the victim, who
will have to choice to give his consent to the contract in order to avoid the greater evil.

Undue Influence
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Definition – It is any means employed by a person upon a party which, under the circumstances, the
latter could not resist and which controlled his will and induced him to give consent to a contract,
which otherwise he would not have entered into. It subjugates the free will of a party and interferes
with his exercise of independent discretion which is necessary to determine the advantage or
disadvantage of a proposed contract. Thus, there is undue influence when a person takes improper
advantage of his power over the will of another which deprives the latter of a reasonable freedom of
choice.

Concept - Not every form of influence vitiates consent. For influence to do so, it must be undue
(which for lack of a better term, improper). Solicitation, importunity, argument, and persuasion do
not constitute undue influence. Obtaining the consent of a person through persuasive argument of
appeal to the emotion is neither unlawful or immoral. In order that influence would be undue, it
must be so overpowering as to subjugate the mind of the person sought to be influenced such that
the latter is deprived of the free exercise of his will and make him express the will of another,
instead of his own.

Circumstances to be taken into consideration – In order to establish undue influence, it is important

to consider the following: “the confidential, family, spiritual and other relations between the parties,
or the fact that the person alleged to have been unduly influence was suffering from mental
weakness, or was ignorant, or in financial distress” (Art. 1337). Hence, a personal confidant would
have an opportunity to unduly influence the person relying on him; a parent would have significant
influence on his child; a confessor would have significant influence over the penitent; a “bff” would
have an influence on his friend; a “jowa” would have an influence on his/her lover. A person with
low intelligence level, an ignorant person, or one who is financially embarrassed are persons likely to
be susceptible to undue influence.

Effect – Undue influence deprives the victim of a reasonable freedom of choice in giving consent to a
contract. Instead of expressing his mind, he expresses the mind of the influencer. Thus, his consent
is vitiated – consent is not freely given.

Requisite - To invalidate a contract because of undue influence, it must be established that the
influence exerted on the contracting party was so compelling that the party, who is unable to resist
the influence, had no choice but to give consent to the contract.

Undue influence may be exerted not only by a contracting party over the other. It may also be
exerted by a third person who is not a contracting party. There is no doubt that third-party influence
will have the same effect on the victim, who, because of his inability to resist the influence, will give
his consent to the contract.

Fraud
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The Code provides for two types of fraud: (i) fraud in the obligor’s performance of his obligation (Art.
1170) which results in a breach of obligation and renders the fraudster liable for damages to the
creditor (dolo incidente or incidental fraud); and (ii) fraud perpetrated on a contracting party which
results in the latter giving consent to a contract, without which, he would not have done so (Art.
1338) (dolo causante or causal fraud).

The difference between these two types of fraud lies in the time the fraud or deceit was
perpetrated. In Art. 1170, fraud or deceit was perpetrated by the obligor in the performance of his
obligation. There is nothing wrong with the obligation; the anomaly occurred in the performance of
the same. In Art. 1338, fraud or deceit was perpetrated at the time of contracting. The vitiated
consent of the defrauded person makes the contract defective – voidable to be precise.

Definition of causal fraud - Causal fraud is the use of insidious words or machinations by one of the
contracting parties on the other so that the latter is induced to give consent to a contract which,
without such insidious words or machinations, he would not have agreed to.

Causal fraud is calculated to mislead the defrauded party into error. The deception, however, must
not constitute the crime of estafa, for otherwise, the liability of the fraudster would be criminal, and
not civil, in nature.

Forms of deception – Deception may come in various forms such as:

o the use of insidious words or machinations (Art. 1338), such as:

o making false promises
o exaggeration of hopes or benefits
o abuse of confidence
o use of fictitious names
o misrepresentation of qualifications
o misrepresentation of authority;

o deliberately rendering an erroneous professional opinion (Art. 1341);

o malicious misrepresentation (Art. 1342)

o Failure to disclose facts when there is a duty to disclose them (Art. 1339)

Consider the following:

o A misrepresentation that one’s check will be honoured when presented for payment (which in
fact was dishonoured) does not constitute causal fraud (Tongson vs. Emergency Pawnshop).

o Causal fraud in the form of misrepresentation leads the victim to commit a mistake. Thus, an
alleged victim commits no mistake if there is no plausible misrepresentation made to him (Roman
Catholic Church vs. Pante).
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o Usual exaggeration in trade where the other party has an opportunity to discover the facts is not
fraudulent (Art. 1340). This is the basis of the doctrine of caveat emptor.

o An expression of an opinion is not fraudulent, particularly if not made by an expert, and the
opinion is not intended to be relied upon (Art. 1341). An opinion is not a statement of a fact
which is meant to express the truth; an opinion is merely an expression of what someone
believes to be true or factual. There is, therefore, a room for error.

o Misrepresentation in good faith does not constitute fraud, but may constitute error (Art. 1343). In
this instance, good faith means that the person making the representation has not reason to
believe that his representation is other than factual. The misrepresentation therefore emanates
from the error on the part of the person making it, and not from malice.

o An unexplained delay in bringing the appropriate action for the annulment of a contract allegedly
procured through fraud leads to the conclusion that either the contract has been ratified or that
fraud was waived (ECE Realty vs. Mandap).

o Fraud leads the defrauded party into error – into believing something to be true when in truth it
is not. But not every mistake results from fraud. And even if the mistake arose from fraud, the
mistake must 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 .” (Art.
1331)

Requisites of fraud – In order that fraud to vitiate consent:

o It must be employed by one contracting party on another party. Thus, in Art. 1342, if fraud is
perpetrated by a stranger, it will not vitiate consent of the contracting parties, except the third–
party fraud resulted in substantial mistake on the part of both contracting parties. In this case,
the defect of the contract arose not from fraud, but from mutual mistake. In any event, the
contract is voidable.

o Fraud must have induced the defrauded party to enter into the contract. Notice that with this
requisite, a contract will not be annulled by reason of reciprocal fraud. The law will leave the
contracting parties where they find themselves in.

o Fraud must be serious (Art. 1344). The test of “seriousness” of fraud is the sufficiency of the fraud
to convince a person of ordinary prudence to believe it and to enter into the contract on the basis
thereof. Hence, if the fraud is clear from the perspective of an ordinary prudent man, it cannot be
serious. (Think for a moment of the victims of scams and pyramiding scheme. They include public
school teachers, professionals, and even policemen. Is it even thinkable that a prudent man will
invest his lifetime savings in a scheme that promises to pay 30% monthly interest (or 360%
annual interest) on his investment? Or is this a simple case of uncontrolled greed? It is
understandable that the appropriate charge on the scammer would be the serious violation of
the Securities Act – a crime that is not based on fraud, but on mala prohibita.)
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o Fraud must be the determining cause of giving consent to the contract. It must be the reason for
the defrauded party to enter into the contract.

o It should result in damage or injury to the defrauded party. If no damage or injury is caused to the
defrauded party, there would be no basis to annul the contract.

o Fraud must be proved. Good faith is presumed; bad faith must be proved. The requisite proof is
not merely preponderance of evidence, but clear and convincing evidence. In Metropolitan
Fabrics vs. Prosperity Credit, the court was not convinced that a well-educated person who is
familiar with the object of the transaction, and who was assisted by competent counsel, was
deceived into entering into the contract.

Effect of causal fraud

Causal fraud renders the contract voidable because the consent of the victim is not spontaneous.
The perpetrator of fraud is liable for damages to the victim.

OBJECT OF CONTRACTS

What may be the object of a contract – The following may be the object of a contract:

o All things (tangible things) which are within the commerce of man, including future things;

A thing is outside the commerce of man if its “alienation or free exchange is restricted by law or
stipulation, which the parties cannot modify at will.” The test, therefore, is: is this thing tradable
or alienable without legal or contractual restriction, and if there is restriction may the parties
alter such restriction or otherwise ignore the same? If the answer is in the affirmative, the thing is
within the commerce of man.

Future things refer to those things which at the time of the celebration of the contract (i) have
yet to exist, provided they have the possibility of coming to existence, or (ii) have yet to be
acquired by the obligor, but which he may acquire subsequently. Indeed, a person may sell
something which he has yet to acquire, provided that at the appointed time of delivery, he has
the power to transfer its ownership to the buyer (Art. 1459).

If the object of a contract is a future thing, the contract is either:

(i) conditional – i.e., the efficacy of the contract is subject to the suspensive condition that the
thing will come to existence. Therefore, if the thing does not come to existence, the contract
does not become effective; or

(ii) aleatory – i.e., the contract is immediately effective, but the party seeking to acquire the
future thing which is the object of the contract, takes the risk that the thing may not come to
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existence. In that event, he stands to lose what he paid for the future thing and cannot recover
from the other party.

o All rights that are transmissible (i.e., intangibles, excluding (i) intransmissible rights, and (ii) the
right to future inheritance);

Rights acquire in virtue of an obligation are transmissible, except if (i) there is a stipulation to the
contrary (Art. 1178), or (ii) where the transmission is prohibited by law, or (iii) where the right is
purely personal (e.g., parental authority, the right to vote in an election).

Future inheritance refers to the assets and liabilities (the hereditary estate) existing at the time of
the death of the decedent, which shall be transmitted to his heirs. Note that during the lifetime
of the decedent, his assets and liabilities are recorded in his balance sheet, and his net assets,
after deducting his liabilities, constitute his net worth. He owns all his assets, and owes his
liabilities. But upon his death, his net worth (assuming he did not lose or dissipate his wealth,
which obviously he can do) becomes his net hereditary estate which shall pass to his heirs. Each
heir is entitled to a fraction of the estate – not specific properties.

With this as the background, it is readily perceivable that an heir has no business to bargain away
with what he may possibly inherit from his predecessor from the hereditary estate. The heir has
nothing to bargain away since there is no certainty that at the time of the death of his
predecessor there would be a hereditary estate (i.e., the collection of properties of value). Thus,
to some commentators, a contract entered into by a future heir is a contract that has no object –
and therefore an absolute nullity. Specifically, Art. 1347 declares all such contracts void. Be
careful though that the statutory prohibition refers to a contract involving future inheritance –
i.e., the fractional part of a hereditary estate which pertains to the heir. It does not prohibit the
heir from selling a specific property that belongs to his predecessor. A contract of this nature is
valid as a sale of future thing. (See the discussion of a future thing above.)

o Lawful services (excluding services that are contrary to law, morals, good customs, public order,
or public policy. (See WT Construction vs. Province of Cebu which involves construction services
rendered to the Province of Cebu under a contract which did not comply with the legal
requirements on government procurement of services.)

Requisites of a valid object

o The object must be within the commerce of man (refer to the definition above);

o The object must be possible, both physically and legally (reference is to Art. 1348 which pertains
to impossible things or services which may not be the object of a contract);

Impossibility of the object is either physical (no possibility of coming to existence) or legal
(outside the commerce of man). Impossibility may also refer to the service which is the object of
a contract. Physically impossible service refers to a service which the obligor cannot perform. In
this sense, the physical impossibility of service may either be (i) absolute, if no one can perform
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such service, or (ii) relative, is the service cannot be performed by the obligor, but can be
performed by someone else. Legal impossibility refers to services which are prohibited by law,
even if the service can easily be performed by the obligor (e.g., prostitution).

In a contract involving impossible service, the nullity of the contract is premised on (i) the lack of
seriousness of the parties in entering into a contract which they both know cannot be performed,
or (ii) the perversity of their minds. Thus, the relevant time to determine the impossibility of the
service is the time of the perfection of the contract. If the service was lawful at that time, but
becomes unlawful subsequently (i.e., subsequent impossibility), the contract is not rendered
void, but the contract is extinguished because of the loss (legal loss) of its object.

Impossibility may also be (i) permanent (i.e., the promisor is permanently unable to render the
service, hence the obligation is extinguished), or (ii) temporary (i.e., impossibility renders the
obligor temporarily unable to render the service, hence performance is deferred without liability
for damages until such time as the temporary impossibility is over, at which time the obligor must
perform the obligation).

The difficulty in performing the service is not equivalent to impossibility of performing the
service. A contract cannot be declared void because the service to be performed by the obligor is
difficult. However, if the service has (subsequent to the perfection of the contract) become so
difficult as to be manifestly be beyond the contemplation of the parties, the obligor may petition
the court to be released from the obligation, either totally or partially (Art. 1267).

o It must be determinate as to its kind (Art. 1349). Note that this requisite pertains to the
obligation to give. This is apparent in the law which in part reads as follows: “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.”

The object of a contract may either be the delivery of a specific thing or a generic thing. There is
no issue with respect to the delivery of a specific thing. That is the very thing which the obligor
must deliver. In the case of a generic thing, mind the provision of the second paragraph of Art.
1460: “The requisite that a thing be determine is satisfied if at the time the contract is entered
into, the thing is capable of being made determinate without the necessity of a new or further
agreement between the parties.”

CAUSE OF CONTRACTS
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For the avoidance of doubt, it is best not to use the term “cause of contracts.” It is more accurate to
use the term “consideration of contracts.” This will eliminate the potential confusion between the
cause or consideration of contracts, and the motives of the contracting parties in entering into a
contract. (See Art. 1351)

So, what is the consideration of a contract? I suggest the following:

o For onerous contracts, the consideration is that which a contracting party has to give up in order
to get what he wants. Thus in 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.”

o For remuneratory contracts, that which a contracting party will give up or part with in exchange
for the benefit which he has received from the latter in the past. Thus in Art. 1350, “ in
remuneratory ones, the service or benefit which is to be remunerated.” Note that in a
remuneratory contract, the party giving up something is not obliged to do so. He does so
nonetheless because of his desire to recompense the recipient for the benefit or service which he
received from the latter at some other time.

o For gratuitous contracts, that which a contracting party will give up or part with as a token of his
affection for the recipient. Thus in Art. 1350, “in contracts of pure beneficence, the mere liberality
of the benefactor.”

So, what is the difference in these various forms of consideration? In onerous and remuneratory
contracts, there is an exchange of values between the contracting parties. In contrast, in a gratuitous
contract, there is no exchange of values. This is the reason why it is an aberration of the law to
consider a donation a contract. Nonetheless, the law is the law: a donation is a contract.

Moral obligations have no cause. The fulfilment of a moral obligation is generally not a matter of law
or contractual commitment, but a matter of conscience or ethical consideration.

In the case of accessory contracts, the cause is the same as that which pertains to the principal
contract to which the accessory contract is attached.

Necessity of consideration

In any case, a contract (whether it be onerous, remuneratory, or gratuitous) must be supported by a

consideration – or else the contract is void. (Art. 1352). Is it, therefore, necessary to bring an action
for the declaration of nullity of a contract that has no consideration? There are two possible
scenarios. (i) If the void contract is purely executory (i.e., neither party has performed, in whole or in
part, his obligation under the void contract), there is no need to bring an action to have the contract
declared void. The parties may simply set aside the void contract. (ii) If the void contract has been
performed, either in whole or in part, an action for the declaration of nullity may be necessary (for
the recovery of what has been paid for the void contract), unless the contracting parties have agreed
to resolve the issue amicably between them.
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In any case, want of consideration is discussed in Carantes vs. Court of Appeals.

Failure of consideration

Want or absence of consideration makes a contract void (Art. 1352). However, want of consideration
is not the same as failure of consideration. Want of consideration means that the parties did not
agree on, and therefore not obliged to deliver, any consideration at all. It makes the contract void.
Failure of consideration occurs when the agreed consideration does not materialize. Thus, if a buyer
tenders to the seller an unfunded check to pay for his purchase, there is a valid contract of sale. But
because the check was dishonoured upon presentment for payment, the seller is unable to realize
the price of the thing which he sold to the buyer. There is a failure of consideration. The contract is
valid, but the buyer defaulted in his obligation to perform his obligation to pay the purchase price.
The seller may sue the buyer to recover the purchase price.

Inadequate consideration (Art. 1355)

In an onerous contract, the consideration is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other (Art. 1350). The law, however, does not
require that the reciprocal prestation or promise by one party to the other should be of equal value.
In the process of negotiating a contract, it is possible that one of the parties will get a good deal –
and this translates to what could be a bad deal for the other. This inequality between the contracting
parties does not make a defective contract. In every deal, there are winners and there are losers.

There is a statutory exception to this rule which is found in paragraphs 1 and 2 of Art. 1381 (there
are a few more elsewhere in the Code). In contracts where one of the parties is either an
incapacitated person or an absentee who is represented by a guardian or administrator in a
transaction, the law allows the rescission of the contract entered into by a guardian or
administrator if the incapacitated person or the absentee, as a consequence of that contract,
suffers economic damage which exceeds 25% of the value of the thing which is the object of the
contract. Note, however, that the law permits a maximum 25% variance below the fair value of the
thing. But even in this case, the law does not, as a general rule, require full and adequate
consideration.

A second point. If the consideration received by a contracting party is grossly inadequate, there is a
legal basis to challenge the validity of the contract – possibly on the ground of mistake on the part
of the aggrieved party, or that he was defrauded, or that there is something wrong with the
consent that he gave to that contract (Art. 1355). In any case, it is incumbent upon the person
raising the issue of gross inadequacy of the price to prove by competent evidence the legal basis for
setting aside the contract. (See Sps. Buenaventura vs. Court of Appeals)

Motive - It is the internal or psychological reason of a party in entering into a contract. Thus, a
person buys a can of soda because he is thirsty. The motive of the contract of sale, as to the buyer, is
to quench his thirst. But as to the same buyer, the consideration for the contract of sale is the price
he has to pay for the can of soda. As to the seller, the consideration for receiving the purchase price
from the buyer is that he has to give the latter a can of soda.
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Motive is not an element of a contract and is generally irrelevant in assessing the validity or nullity of
the contract. However, if the motive of a contracting party is the principal purpose for entering into
the contract, his motive may well be considered the consideration thereof which may, therefore,
have an effect on the validity of the contract. Thus, if the motive of a person in selling his house is to
conceal his assets from his creditors so that he would have an opportunity to evade payment, the
sale may be rescinded (in the proper case) at the instance of the creditors. (Note that it is not so
difficult to conceal cash.)

Requisites of consideration of an onerous contract –

o The consideration must exist (Art. 1354) – It is not required for the parties to state the
consideration of the contract. Even if no consideration is stated, the law presumed the existence
of a lawful consideration, unless the contrary is proved.

o The consideration must be true (Art. 1353) – The falsity of the consideration of a contract, by
itself, is not sufficient to declare the contract void. If it can be proved by competent evidence that
the contract is founded upon another cause which is true and lawful, the contract is valid. This is
the legal basis for sustaining the validity of relatively simulated contracts, or contracts where the
apparent agreement is not true, but the concealed agreement is lawful.

o The consideration must be lawful (Art. 1352) – The consideration is illegal if it is contrary to law,
morals, good customs, public order or public policy. (See Liguez vs. Court of Appeals). However
void a contract due to the illegality of the consideration, cannot be nullified at the instance of just
about any person; he has to have the legal standing to challenge the validity of the contract.