SC: The usual exaggerations in trade; are not in themselves fraudulent

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Types of Fraud in Contracts 

Fraud is defined in Article 1338 of the Civil Code as: 

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. 

This is followed by the articles which provide legal examples and illustrations of fraud.


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 Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. (n) 


Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n)



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Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n) 

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. (n)


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Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. (n) 


Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n)


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The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.

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Incidental fraud only obliges the person employing it to pay damages. (1270) 

There are two types of fraud contemplated in the performance of contracts: dolo incidente or incidental fraud and dolo causante or fraud serious enough to render a contract voidable.


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In Geraldez v. Court of Appeals, this Court held that:




This fraud or dolo which is present or employed at the time of birth or perfection of a contract may either be dolo causante or dolo incidente. The first, or causal fraud referred to in Article 1338, are those deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract. Dolo incidente, or incidental fraud which is referred to in Article 1344, are those which are not serious in character and without which the other party would still have entered into the contract. Dolo causante determines or is the essential cause of the consent, while dolo incidente refers only to some particular or accident of the obligation. The effects of dolo causante are the nullity of the contract and the indemnification of damages, and dolo incidente also obliges the person employing it to pay damages.


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In Solidbank Corporation v. Mindanao Ferroalloy Corporation, et al., this Court elaborated on the distinction between dolo causante and dolo incidente:

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Fraud refers to all kinds of deception -- whether through insidious machination, manipulation, concealment or misrepresentation -- that would lead an ordinarily prudent person into error after taking the circumstances into account. In contracts, a fraud known as dolo causante or causal fraud is basically a deception used by one party prior to or simultaneous with the contract, in order to secure the consent of the other. Needless to say, the deceit employed must be serious. In contradistinction, only some particular or accident of the obligation is referred to by incidental fraud or dolo incidente, or that which is not serious in character and without which the other party would have entered into the contract anyway.

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Under Article 1344, the fraud must be serious to annul or avoid a contract and render it voidable. This fraud or deception must be so material that had it not been present, the defrauded party would not have entered into the contract. 


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In the recent case of Spouses Carmen S. Tongson and Jose C. Tongson, et al., v. Emergency Pawnshop Bula, Inc., this Court provided some examples of what constituted dolo causante or causal fraud:
  


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Some of the instances where this Court found the existence of causal fraud include: (1) when the seller, who had no intention to part with her property, was "tricked into believing" that what she signed were papers pertinent to her application for the reconstitution of her burned certificate of title, not a deed of sale; (2) when the signature of the authorized corporate officer was forged; or (3) when the seller was seriously ill, and died a week after signing the deed of sale raising doubts on whether the seller could have read, or fully understood, the contents of the documents he signed or of the consequences of his act.55 (Citations omitted)
  

Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must fulfill two conditions. First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party. Second, this fraud must be proven by clear and convincing evidence. 


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In Viloria v. Continental Airlines, this Court held that:

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  Under Article 1338 of the Civil Code, 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 order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud was defined as "a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other." Also, fraud must be serious and its existence must be established by clear and convincing evidence.

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In Viloria, this Court cited Sierra v. Court of Appeals60 stating that mere preponderance of evidence will not suffice in proving fraud.


Fraud must also be discounted, for according to the Civil Code:


 Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without them, he would not have agreed to.


   

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Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.

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To quote Tolentino again, the "misrepresentation constituting the fraud must be established by full, clear, and convincing evidence, and not merely by a preponderance thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the personal conditions of the victim."

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Thus, to annul a contract on the basis of dolo causante, the following must happen: First, the deceit must be serious or sufficient to impress and lead an ordinarily prudent person to error. If the allegedly fraudulent actions do not deceive a prudent person, given the circumstances, the deceit here cannot be considered sufficient basis to nullify the contract. In order for the deceit to be considered serious, it is necessary and essential to obtain the consent of the party imputing fraud. To determine whether a person may be sufficiently deceived, the personal conditions and other factual circumstances need to be considered.




Second, the standard of proof required is clear and convincing evidence. This standard of proof is derived from American common law. It is less than proof beyond reasonable doubt (for criminal cases) but greater than preponderance of evidence (for civil cases). The degree of believability is higher than that of an ordinary civil case. Civil cases only require a preponderance of evidence to meet the required burden of proof. However, when fraud is alleged in an ordinary civil case involving contractual relations, an entirely different standard of proof needs to be satisfied. The imputation of fraud in a civil case requires the presentation of clear and convincing evidence. Mere allegations will not suffice to sustain the existence of fraud. The burden of evidence rests on the part of the plaintiff or the party alleging fraud. The quantum of evidence is such that fraud must be clearly and convincingly shown.




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