Contractual Obligations: Signing an Agreement Means Being Bound by Its Terms

The Supreme Court has long held that contracts are the law between the parties, and a recent ruling reinforces this principle in a case involving a buyer who claimed he signed a memorandum of agreement without understanding its legal consequences. In Dandan v. Arfel Realty & Management Corp. (G.R. No. 173114, September 8, 2008), the Court ruled that a person who signs a document is bound by its terms, even if he later claims ignorance of its legal import or alleges that the agreement lacked consideration.

The Facts of the Case

The dispute arose from a series of transactions involving a parcel of land in Las Piñas. Arfel Realty initially sold the property to the spouses Sauro under a Contract to Sell, where the spouses made a down payment and agreed to pay the balance in installments. However, Arfel Realty later sold the same property to Jayson Dandan for P320,000.00, which represented only the remaining balance due from the earlier sale to the Sauros.

On April 10, 1992, Dandan and Arfel Realty executed a Memorandum of Agreement stating that Dandan was fully aware of the previous transaction with the Sauros and that he assumed all liabilities arising from third-party claims related to the sale. The agreement also held Arfel Realty free and harmless from any suit or judgment by reason of the sale.

When the Sauros filed a complaint for specific performance against Arfel Realty, the company filed a third-party complaint against Dandan seeking indemnification. Dandan argued that the agreement was invalid because it lacked consideration and that he signed it as a favor to Arfel Realty's president without understanding its legal implications.

The Issue

The central question was whether Dandan was bound by the Memorandum of Agreement, which required the concurrence of three elements under Article 1318 of the Civil Code: consent of the contracting parties, a determinate object, and a cause or consideration for the obligation.

The Court's Ruling

The Supreme Court denied Dandan's petition and affirmed the validity of the agreement. The Court found that Dandan's claims of misunderstanding and lack of consideration were unavailing.

On consent. The Court held that the plain language of the agreement itself showed that Dandan was aware of the previous transaction with the Sauros. The agreement expressly stated that Dandan bought the property "fully aware of the previous transaction" and that he assumed all liabilities caused by third-party claims. The Court noted that Dandan benefited from the arrangement by paying only the remaining balance due under the previous contract to sell, rather than the full market value of the property.

The Court rejected Dandan's claim that he signed without understanding the agreement's import. Citing Article 1331 of the Civil Code, the Court explained that mistake invalidates consent only when it refers to the substance of the thing which is the object of the contract or to conditions that principally moved a party to enter into the contract. Moreover, mistake of law generally does not vitiate consent.

On consideration. The Court found that the agreement was supported by sufficient consideration. Dandan's advantage of paying only the remaining balance due under the previous contract to sell constituted valid consideration. The Court also noted that the agreement was contemporaneously executed with the Deed of Absolute Sale, making it a supplement to that deed, with the same consideration supporting both contracts.

On the presumption of regularity. The Court emphasized that the agreement was notarized, giving it the presumption of regularity and full faith and credit. Additionally, under Section 3(d), Rule 131 of the Rules of Court, it is presumed that a person takes ordinary care of his concerns. The natural presumption, the Court said, is that one does not sign a document without first informing himself of its contents and consequences.

The Court also cited the principle that courts are not authorized to extricate parties from the necessary consequences of their acts. The fact that contractual stipulations may turn out to be financially disadvantageous will not relieve parties of their obligations.

Practical Takeaways

• Read before you sign. The Court presumes that a person who signs a document has informed himself of its contents and consequences. Ignorance of a document's legal effect is not a defense.
• Consideration need not be monetary. A party's advantage or benefit from a contract can constitute valid consideration, even if no money changes hands.
• Notarized documents carry strong evidentiary weight. A notarized agreement enjoys the presumption of regularity and is admissible without further proof of authenticity.
• Mistake of law rarely excuses performance. Consent is vitiated by mistake only when it refers to the substance of the object of the contract or the conditions that principally moved a party to enter into it.
• Courts will not rescue parties from bad bargains. A contract that turns out to be financially disadvantageous does not relieve a party of his obligations.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.