OBLICON QUIZ 5 REVIEWER

INTRODUCTION
 Contract according to efficacy – Valid and Defective
o Valid – Contract complied with all the requisites and it has none of the defects
o Defective – doesn’t mean invalid; In Rescissible, Voidale, Unenforcable, and Void, only void is invalid.

DEFECTIVE CONTRACTS
 Rescissible Contracts (Art. 1380-1389)
o Definition – A contract where all the essential requisites are present and it is valid, but by reason of
injury/damage to either of contracting parties or to third persons such as the creditor, it may be
rescinded.
 Not all damages; must have specific cases
 Validly agreed upon with all essential requisites but in cases established by law, the remedy of
the rescission is granted for in the interest of equity.
o Rescission of Contracts – remedy granted by law to parties, to secure the reparation of damages caused
to them by a contract, even if the same should be valid, by means of restoration of things to condition
prior celebration of contract (restore to original condition; return to each other what they want)
 Different from Art. 1191’s rescission where provided is the “resolution of a reciprocal obligation”
resulting from failure of one of the parties to comply.
 Creates the obligation to return (restoration) the things which were the object of the contract,
together with the fruits, and the price with its interest.
 Can only be carried when the one who demands can also return, to the extent necessary to
cover damage.
 Restoration is applicable only to rescissory actions on the ground of lesion and not fraud. It shall
not take place when object is legally in possession of a 3 rd person who did not act in bad faith.
(Damages)
o First Requisite of a Rescission – there must be a case specially provided by law – cannot be rescinded
if law doesn’t state or declare resissible trans. Art 1381 & 1382:
 Case 1 – those entered into by guardians, whenever wards suffer lesion by more than ¼ of the
value of the object.
 Lesion – damage or injury suffered by party seeking rescission by reason of fact that
price is unjust or inadequate. Damage must be materials and substantial.
 Shall not take place w/ respect to contracts approved by courts.
 Ward – incapacitated person that needs someone to represent him in performance of
civil acts. Guardian – appointed by court to represent incapacitated person; different
from an agent (represents a capacitated person)
 Guardian can represent ward in administration or management, doesn’t need to secure
court approval. With no court approval and ward suffers ¼ damage, contract is
rescissible.
 If there’s an act of administration and there’s court approval, the contract is valid,
irrespective of damage done.
 Guardian can represent ward in acts of ownership only with court approval. Without it,
contract is unenforceable irrespective of whether ward suffers damage or not.
 Rescissible Contracts: An act of administration; Ward suffers damage ( > 1/4); No court
approval
 Case 2 – those agreed upon in representation of absentees, if absentee suffers lesion > ¼ of
the value of object/
 Absentee – a person who disappears from his domicile, unknown whereabouts, w/o
leaving an agent to administer property.
 Representative is an ADMINISTRATOR, not guardian.
 Contract entered into by administrator is rescissible if the same is in line with the
administration of property, w/o court approval and absentees suffer lesion by more than
¼.
 Case 3 – those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due to them.
 Executed with intention to prejudice rights of creditors, and they should not be confused
with those entered into without such malintent, even if as a direct consequence thereof,
the creditor may suffer some damage.
  In determining fraudulence, question whether conveyance was a bona fide transaction
or a trick and contrivance to defeat creditors.
 Buyer in good faith – one who buys the property of another without notice that some
other person has a right to or interest in such property and pays a full and fair price for
the same at the time of such purchase or before he has notice of the claim or interest
of some other person in the property.
o Good faith consists in an honest intention to abstain from taking any
unconscientious advantage of another.
o Creditors’ claim of fraud has no basis in fact. Bad faith must be established by
competent proof, otherwise, good faith is assumed.
o Buyer must take precautionary steps to qualify as a purchase with good faith,
otherwise, it is negligence.
 Badges of Fraud
o Debtor alienates property by gratuitous title are presumed to have been entered
into in fraud of creditors, when the donor did not deserve sufficient property to
pay all debts contracted before the donation.
o Alienation by onerous title are presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ
of attachment has been issued. Decision or attachment need not refer to
property alienated and need not have been obtained by party seeking
rescission.
 Case 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.
 Case 5 – payments made in a state of insolvency for obligations to whose fulfillment the debtor
could not be compelled at the time they were effected.
 Judicial declaration of insolvency is not needed.
 If debt paid by the insolvent debtor is already due, then payment is valid. What is
rescissible are those payments for obligations that are yet due.
 Case 6 – all other contracts specially declared by law to be subject to rescission.
o Second Requisite of a Rescission – there is no other legal remedy
 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.
 If the innocent party can recover from the other property of the guilty, rescission will not
be allowed since there is another legal means to obtain reparation.
o Third Requisite of a Rescission – the party asking for rescission must be able to restore what he may
have received by reason of the contract.
 Obligation to return the things which were the contract’s object, together with the fruits, and
price with interest. Can only be carried out when the one who demands can return whatever he
may be obliged to restore. However, it will only be to the extent to cover the damages caused.
o Fourth Requisite of a Rescission – object must not be legally in possession of a third person who
acquired it in good faith.
 Indemnity for damages may be demanded from the person causing loss.
o When to institute action for rescission?
 Action to claim rescission must be commenced within 4 years.
 Four years from the time of the termination of the incapacity of ward.
 Four years from re-appearance of the absentee or from the time his whereabouts are
known.
 Four years from the discovery of fraud.
 Voidable Contracts
o Definition – all essential elements for validity are present, although the element of consent is vitiated
either by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation,
undue influence, or fraud.
 Still a valid contract until annulled. Becomes absolutely valid once ratified.
 Following contracts are voidable or annullable even though there may have been no damage to
the contracting parties: (Contracts are binding unless annulled by proper court action)
 Where one of the parties is incapable of giving consent to a contract.
 Where consent is vitiated by M,V,UI, or F.
o Annulment – action to be instituted to attack validity of a valid contract.
 Action may be instituted by all who are obliged principally or subsidiarily. The one moving for
annulment must have interest in the contract.
  One must prove fraudulence / mistake to substantiate allegation since it is presumed a person
takes ordinary care.
 Persons who are capable cannot allege incapacity of those whom they contracted, nor can
those who exerted intimidation, violence, or undue influence or employed fraud, caused mistake
base their actions upon these flaws of the contract.
 Action for annulment shall be brought within four years. This shall begin:
 In case of I, V, or UI, from the time the defect of the consent ceases.
 In case of M or F, from the time of the discovery.
 When action refers to contracts entered into by minors or incapacitated persons, from
the time the guardianship ceases.
 Restitution – 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 w/ interest, except in cases provided by law.
 In obligation to render service, the value shall be the basis for damages.
 As long as one of the contracting parties does not restore, the other cannot be
compelled to comply with what is incumbent upon him.
 When defect consists in incapacity of one, the incapacitated person is not obliged to
make any restitution except in so far as he has been benefitted by the thing or price
received by him.
 Whenever person obliged to return cannot due to loss by his fault, he shall return the
fruits received and the value at the time loss, with interest.
 Action for annulment is extinguished when the object is lost through fraud or fault of the
person who has right to institute proceedings.
 If the right of action is based upon the incapacity of any one of the contracting parties,
the loss of the thing due shall not be an obstacle to action, unless it took place through
fraud or fault.
 Annulment vs Rescission
 There is rescission if the contract is rescissible. There is annulment if contract is
voidable. Purpose of both is to cancel.
 Once contract is rescinded or annulled, there will be restoration for the other.
 Nature is different. Rescission is remedy and annulment is sanction.
 Basis of rescission is damage while annulment is vitiated consent or incapacity.
 Rescission is subsidiary while annulment is primary remedy.
 Ratification – the affirmance by a person of a prior act which did not bind him but which was
done or professedly done on his account, whereby the act, as to some or all persons, is given
effect as if originally authorized by him.
 It purges the contract of all defects to which it may have been subject as from the
moment it was entered into.
 It cleanses the contracts from all its defects from the moment it was constituted.
 It extinguishes the action to annul a voidable contract.
 May be effected expressly or tacitly. It is understood that there is tacit ratification if the
person who has a right to invoke it should execute an act which necessarily implies an
attention to waive his right.
 May be effected by the guardian of incapacitated person.
 Does not require conformity of the contracting party who has no right to bring action for
annulment (innocent party)
 Unenforcable Contracts (Art. 1403 – 1408)
o Definition – those which cannot be enforced by proper court action, unless ratified, because either they
are entered into without or in excess of authority or they do not comply with the statute of frauds or both
parties do not possess required legal capacity. It can be assailed by third persons.
o Statute of Frauds – the law designed to prevent fraud; to guard against it, the law requires that certain
agreements specified in the Statute must be in writing otherwise unenforceable by action in court. (only
lays down method to prove, but doesn’t declare invalid, because these are not the law)
o What contracts are unenforceable?
 Those entered into by name of another person by one who has been given no authority or legal
representation, or who has acted beyond powers.
 Can be ratified expressly or impliedly, before revoked by contracting party.
 Those where both parties are incapable of giving consent to a contract.
 If only one party incapable = voidable
  If ratification is made by parents or guardians of both parties, contract shall be validated
from inception. If both parties or lawful representatives will ratify it, the contract becomes
valid.
 In a contracts where both parties are incapable of giving consent, express of implied
ratification by the parent, or guardian, shall give the same effect as if only one of them
were incapacitated. Voidable if only one party will ratify it.
 Those that do not comply with the Statute of Frauds
 SOF talks about enforceability, not validity. It requires certain contracts to be in writing
to be enforceable. It is needed to prove existence of alleged contracts so that it can be
given force and effect.
 Following cases are unenforceable by nature:
o An agreement that by its term is not to be performed within a year from the
making thereof
o A special promise to answer for the debt, default, or miscarriage of another.
o An agreement made in consideration of marriage, other than a mutual promise
to marry.
o An agreement for the sale of goods, chattels or things in action, at a price not
less that P500.
o An agreement for the leasing for a longer period than one year.
o An agreement for the sale of real property or of an interest therein.
o A representation as to the credit of a third person.
 Evidence of agreement cannot be received without the writing, or a
secondary evidence of its contents.
 Memorandum = sufficient if it contains name of persons who entered
contract, stipulation, terms, signatures.
 Contracts infringing the Statute of Frauds are ratified by the failure to
object to the presentation of oral evidence to prove the same, or by the
acceptance of benefits under them.
 Statute of Frauds applies only to executory contracts. Once executed,
even partially, SOF doesn’t apply na. There’s no need of a written
document and contract is perfectly valid and enforceable. Thus,
evidence may be admitted to prove existence of agreement.
 Purpose – to prevent fraud and perjury in the enforcement of obligations depending for
their evidence on the unassisted memory of witnesses, by requiring certain enumerated
contracts to be evidenced by a writing signed by the party to be charged, to be
enforceable.
 Merely regulates the formalities of the contract necessary to render it enforceable,
doesn’t necessarily declare a contract invalid, for convenience or evidentiary purposes
only.
 Void Contracts
o Definition – inexistent contract; one which lacks absolutely either in fact or in law one or some of the
elements which are essential for its validity (void since the start)
o Characteristics:
 Have no force and legal effect
 Cannot be ratified
 Defense of illegality cannot be waived
 Action or defense for the declaration of the inexistence of a contract doesn’t prescribe
 Defense of illegality of contracts is not available to third persons whose interests are not directly
affected
o Contracts inexistent from the start
 Whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy (sale of prohibited drug)
 Which are absolutely simulated or fictitious (pretended sale for the purpose of defrauding
creditors)
 Whose cause or object did not exist (could not exist) at the time of transaction (non-existing
thing must have the capacity to exist in the future) (sale of a raffle ticket which has already been
drawn is void; no chance to win)
 Whose object is outside the commerce of men (sale involving humans)
 Which contemplate an impossible service (from time contract is entered into)
  Where the intention of parties relative to principal object of the contract cannot be ascertained
(very poorly drafted contract with unknown intention)
 Expressly prohibited or declared void by law (sale of land to an alien in PHL)
 Which is the direct result of a previous illegal contract (Art. 1422)
o In Pari Delicto (both parties are at fault)
 Latin “in equal fault,” connotes that 2 or more people are at fault/guilty. Nothing will interpose to
grant relief to parties. Parties shall have not action against each other, and it shall leave the
parties where it finds them. Court will take a hands off stance.
 When defect consists in the illegality of the cause, and both parties are at fault, law refuses
every remedy and leaves them. Law will not aid.
 When one of the parties is guilty, the innocent one may claim what he has given and shall not
be bound to comply with his promise.
 If not a criminal offense,
 When fault is on both, neither may recover what he has given, or demand performance.
 When only one, he cannot recover what was given by reason of contract, or ask
fulfillment of what was promised. The innocent may demand return without obligation
to comply with promise.
 Exceptions
 Interest paid in excess of interest allowed by laws may be recovered by debtor, with
interest thereon from date of payment.
 When money is paid or property delivered for an illegal purpose, contract may be
repudiated before purpose has been accomplished, or before damage has been done
to third person. May be allowed to recover money or property.
 Where one of the parties to illegal contract is incapable of giving consent, the courts
may allow recover of money or property delivered by incapacitated person.
 When agreement is not illegal but prohibited, for the protection of plaintiff, he may
recover what he has paid or delivered.
 When price of any article or commodity is determined by statute or law, any person
paying any amount in excess of maximum price may recover.
 When the law fixes the number of hours of a labor and contract is entered into whereby
a laborer undertakes to work longer than the maximum thus fixed, he may demand
additional compensation for the service rendered beyond the time limit. (Labor Code)
 When the law sets minimum wage for laborers and there’s a contract regarding lower
wage, he is entitled to recover deficiency. (Labor Code)
 Effect of Divisibility on Void Contracts – if illegal terms can be separated from legal terms, latter
may be enforced.