TYPES OF DEFECTIVE CONTRACTS:

1. Rescissible Contracts
2. Voidable or Annullable Contracts
3. Unenforceable Contracts
4. Void or Inexistence Contracts

1. Rescissible Contracts

 Contracts validly agreed upon may be rescinded in cases established by law when there
is defect caused by economic injury/damage either to one of the parties or to a third
person.
 Valid and enforceable until they are rescinded by a competent court.

Definition of Terms:

 Rescission - revocation or cancellation

 Lesion - the damage suffered by one party who does not receive the
adequate equivalent for what he gives in a commutative contract,
like a sale.
- an economic injury by inadequacy of price.

Contracts that are rescissible:

a. Those entered into by guardians whenever the wards whom they represent suffer
lesion by more than ¼ of the value of the things which are the object thereof;

Define “ward”: someone placed under the protection of a legal guardian by reason
of incapacity.

General rule: when a guardian enters into a contract, involving the disposition of the
ward’s property, he must secure the approval of the guardianship court. A guardian is
authorized only to manage the estate of his ward; hence, he has no power of any
portion thereof without approval of the court.

Example:

Bruce’s parents died. He inherited their mansion worth ₱40,000,000.00. Bruce

was still a minor so Alfred was appointed as his guardian. Later, Alfred sold the
mansion on behalf of Bruce for ₱29,000,000.00.

In this case, Alfred sold the mansion for a price lower by more than one-fourth
(1/4) of its market value, to the prejudice of Bruce. Bruce can ask for the rescission
of the sale.

b. Those agreed upon in representation of absentees, if the latter suffer lesion by

more than ¼ of the value of the things which are the object thereof;
 Example:

Bruce, already of legal age, disappeared and was declared an absentee. Alfred was
appointed as his representative.Bruce owned a car worth ₱4,000,000.00.Alfred sold
the car for ₱2,900,000.00.

In this case, Alfred sold the car for a price lower by more than one-fourth (1/4) of its
market value, to the prejudice of Bruce. Bruce can ask for the rescission of the sale.

c. Those undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due to them;

Example:

X owed Y ₱1,000,000.00. X did not have cash to pay Y. X’s only property was a lot
worth ₱1,000,000.00. X anticipated that Y would sue him soon for the unpaid debt
and go after his property, so he donated the land to Z to avoid paying Y.

In this case, Y became a creditor of X before the donation. X donated his one and only
property to Z to avoid paying Y. Y cannot collect the ₱1,000,000.00 from X in any
other manner.

The donation is rescissible because it was done in fraud of a creditor can ask for the
rescission of the donation.

d. Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge & approval of the litigants or of competent judicial
authority;

Example:

A and B are a couple. A has an exclusive property that she acquired after marriage.
Due to circumstances, they separated. B, then proclaimed that he is the rightful owner
of the said property. A sues B for the recovery of the property.

In this case the property is under litigation. If, during the pendency of the case, B sells
the land to C without the approval of A and of the court, the contract of sale is
rescissible at the instance A wins the case unless C is in legal possession in good
faith.

e. All other contracts specially declared by law to be subject to rescission.

2. Voidable or Annullable Contracts

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

a. Those where one of the parties is incapable of giving consent to a contract;

b. Those where the consent is vitiated by mistake, violence, intimidation, undue influence
(state of drunkenness or under hypnotic spell) or fraud.
The contract is legally binding, but could become void. If there is an injured party involved, the
injured party or the defrauded must take action, otherwise the contract is considered valid.

Example

A contract entered into with a minor could be voidable.

Example:

A promises to sell his car to B for Rs 2000. His consent is obtained by use of force. The
contract is voidable at the option of A . He may void the contract or elect to be bound by it
because it was obtained by violence and intimidation.

Definition of Terms:

 Ratification - the action of signing or giving formal consent to a treaty, contract, or

agreement, making it officially valid. (In this case) Ratification cleanses the contract of
its defects.

Characteristics of Voidable Contracts:

a. It is valid until set aside by a competent court;

b. It is subject to ratification;
c. It is based on incapacity or vitiated consent; and
d. It is sanctioned and therefore requires no damage.

The action for annulment shall be brought within 4 years. This period shall begin:

a. In case of intimidation, violence or undue influence, from the time the defect of the consent
ceases.
b. In case of mistake or fraud, from the time of the discovery of the same.
c. And when the action refers to contracts entered into by minors or other incapacitated
persons, from the time the guardian ceases.

What is the difference between a voidable and rescissible contract?

Their binding force. Rescissible contract renders it defective due to external facts that may
prejudice a contracting party or even a third person. While voidable contract becomes
defective due to the vice of consent.

3. Unenforceable Contracts

The following contracts are unenforceable, unless they are ratified:

a. 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;
b. Those were both parties are incapable of giving consent to a contract; and
c. Those that do not comply with the Statute of Frauds
 d. Defect is caused by lack of form, authority or capacity of both parties not cured by
prescription.
e. Cannot be enforced by a proper action in court. Note: The statue of fraud applies only to
executory contracts, not to those that are partially or completely fulfilled.

An unenforceable contract or transaction is one that is valid but one, the court will not
enforce. Unenforceable is usually used in contradiction to void (or void ab initio) and voidable.
If the parties perform the agreement, it will be valid, but the court will not compel them if they
do not.
Example:
An example of a transaction which is an unenforceable contract is a contract for prostitution
under English law. Prostitution is not actually a crime under English law, but both soliciting a
prostitute and living off the earnings of a prostitute are criminal offences.[1] Yet so long as the
contract is fully performed, it remains valid. However, if either refuses to complete the bargain
(either the prostitute after being paid or the payer after receiving the services), the court will
not assist the disappointed party.

Definition of Terms:

 Statute of Frauds - the requirement that certain kinds of contracts be memorialized in

writing, signed by the party to be charged, with sufficient content to evidence the contract.

4. Void or Inexistence Contracts

The following contracts are inexistent and void:

a. Those whose cause, object or purpose is contrary to law, morals, good customs, public
order or public policy;
b. Those which are absolutely simulated or fictitious;
c. Those whose cause or object did not exist at the time of transaction;
d. Those whose object is outside the commerce of men;
e. Those which contemplate an impossible service;
f. Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained; and
g. Those expressly prohibited or declared void by law.

Example:

A contract that was between an illegal drug dealer and an illegal drug supplier to purchase a
specified number of drugs for a specified amount. Either one of the parties could void the contract
since there is no lawful objective and hence missing one of the elements of a valid contract.

Technical distinction:

In void contract, all the requisites are present but one or some of them are unlawful or prohibited
by law.
In inexistence contract, one, some or all the requisites are absent.

Basic features of void contracts:

a. A void contract cannot be ratified;
b. The right to raise the defense of illegality cannot be waived;
c. The action or defense to declare the inexistence of a contract does not prescribe;
d. The defense of illegality of contracts is not available to 3rd persons whose interests are
not directly affected; and
e. A contract which is the direct result of a previous illegal contract is also void.

Principle of Pari Delicto

Latin for "in equal fault"

• When the defect of a void contract consists in 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.

• When only 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 the act in which the unlawful or forbidden cause consists doesn’t constitute a criminal offense,
the ff rules shall be observed:

• 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;

• When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of contract, or ask for the fulfillment of what has been promised. The other who is not at
fault, may demand the return of what he has given without any obligation to comply with his
promise.
TYPES OF DAMAGES:

Damages are monetary awards. In in a legal sense, “damages” refers to monetary compensation
that is claimed by a person or awarded by a court in a civil action to a person who has been
injured or suffered loss because of the wrongful conduct of another party.

1. Actual or Compensatory
2. Moral
3. Nominal
4. Temperate or Moderate
5. Liquidated
6. Exemplary or Corrective

1. Actual or Compensatory Damages

 pecuniary loss as well as unrealized profit

Example:

If at the local gym a defendant drops a barbell on the foot of a plaintiff who is a construction
worker, the plaintiff could recover consequential damages for the loss of income resulting from
the injury.

These consequential damages are based on the resulting harm to the plaintiff’s personal income.
They are not based on the injury itself, which was the direct result of the defendant’s conduct.

2. Moral Damages

 physical and mental anguish

Example:

Young adult motorcyclist fell on illegally placed advertising board in highway. The municipality
was condemned in 2010 to pay the parents for moral damages 350.000 Euros for moral damage.

Moral damages may be recovered in the following & analogous cases:

a. A criminal offense resulting in physical injuries;
b. Quasi-delicts causing physical injuries; (Whoever by act or omission causes damage
to another, there being fault or negligence, is obliged to pay for the damage done.
Such fault or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict).
c. Seduction, abduction, rape, or other lascivious acts;
d. Adultery or concubinage;
e. Illegal or arbitrary detention or arrest;
f. Illegal search;
g. Libel, slander or other form of defamation;
h. Malicious prosecution
i. the parents of the female seduced, abducted, raped or abused may also recover moral
damages.
3. Nominal Damages

 vindicate a right, when no other kind of damages may be recovered

Example:

Someone was using your land and you wanted them to stay off, you may be awarded $1 for you
suffered no loss but merely wanted to assert your rights.

Juan slaps Matthew in a heated argument. In court, it is shown that even though Juan wrongfully
slapped Matthew, Matthew suffered no serious injury. The court awarded $1 in nominal
damages to Matthew.

4.Temperate or Moderate Damages

 are more than nominal but less than compensatory damages

 exact amount cannot be determined
Example:
My brother was a passenger in a bus going to our province when an accident happened. He lost
his limbs. He can no longer work and, recently, the company he worked with was bombed and
lost its files. My question is, since we cannot produce copies of the documents that will show his
pay from his work, because of what happened to their firm recently, may we still be able to get
damages for his loss of earning capacity?
Temperate damages in lieu of actual damages for loss of earning capacity may be awarded where
earning capacity is plainly established but no evidence was presented to support the allegation of
the injured party’s actual income.
5. Liquidated Damages

 predetermined by an agreement
 those agreed upon by the parties to a contract, to be paid in case of breach thereof.

Example:

Gerald has agreed to purchase Reta’s home for $50,000. As part of the agreement, he must put
down a deposit of $5,000. Both parties agree that if either of them does not follow the terms of
the contract, the other person gets the $5,000 deposit. If Gerald fails to follow through with the
purchase, Reta gets to keep the $5,000. If Reta decides she does not want to sell her home to
Gerald, she must return the $5,000.

Liquidated damages clauses act as insurance for both parties. The person who breaks the
contract knows ahead of time how much they would owe the other party. Similarly, the other party
can negotiate an amount that would adequately cover their loss without having to go to court.
However, the purpose of a liquidated damages clause is not to punish the person that breaches
the contract.

6. Exemplary or Corrective Damages

  corrective or to set an example

 plaintiff must show that he is entitled to moral, temperate or compensatory damages

before the court may consider the question of whether or not exemplary damages should
be awarded

Example:
A libel was committed by an author and his publisher against a distinguished naval officer. The
officer sued for damages. he was awarded £15000 compensatory and £ 25000 exemplary
damages against both attendants.
These damages are awarded both as a punishment and to set a public example. They reward the
plaintiff for the horrible nature of what she/he went through or suffered. Although often requested,
exemplary damages are seldom awarded.