CHAPTERS 6, 7, 8 AND 9

 Defective Contracts
· Rescissible Contracts – contracts that are valid because all the essential requisites are met but by
reason of injury or damage caused to one of the parties or third person, it may be rescinded.
· Voidable Contracts – contracts that are valid until annulled unless there has been ratification.
Voidable contracts are caused by vices of consent.
· Unenforceable Contracts – contracts that cannot be sued upon or enforced until ratified.
· Void or inexistent contracts – contracts that has no defect at all, they are null and void and
cannot be rescinded.

CHAPTER 6 – RESCISSIBLE CONTRACTS

Rescission – is a remedy granted by law to one of the contracting parties or to third person to secure
reparation of the damage caused by restoration of things to their condition in which they were prior to the
celebration of said contract.

Requisites of Rescission
· The contract must be validly agreed upon
· There must be lesion to one of the contracting parties or third person
· The rescission must be based upon special cases provided by law
· There must be no other remedy to obtain reparation for the damage caused
· The party asking for rescission must be able to return what he is obliged to return by reason of
the contract
· The object of the contract must not legally be in the possession of third person who did not act in
bad faith
· The period for filing the action of rescission must not have prescribed
Cases of rescissible contracts specified by law
· Those entered upon by guardians when the ward suffered lesion by one-fourth of the value of the
things which are the object thereof.
· Those entered in representation of absentees, given that he suffered lesion by one-fourth of the
value of the object as well.
· Those entered by reason of defrauding creditors in which there is no other way for the creditor to
claim what is due to him.
· Those things under litigation given that the defendant has no knowledge and approval of the
litigant or of competent judicial authority.
· Other cases specified by law such as partition given that the co-heirs received things whose value
is less than one-fourth of the share that he is supposed to receive, noncompliance of the lessor or
lessee to their obligations, and vendee may exercise rescission if the inferior value of the thing
sold exceeds one-tenth of the price agreed upon.

Requisites for defrauding a creditor to be rescinded

· There must be a credit prior to the contract to be rescinded, although it is not yet due
· There must be fraud on the part of the debtor which may be presumed or proved
· There must be no other manner by which the creditor can recover his credit, if not being required
that the debtor be insolvent

Lis pendens – a party can file this notice to protect his right for things under litigation

Custodia Legis – if the thing under litigation is a personal property

Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor
could not be compelled at the time they were effected, are also rescissible.
Article 1383. The 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 damage is repaired, as in the case of lesion suffered by the ward or absentee, rescission cannot
take place.

Article 1384. Rescission shall be only to the extent necessary to cover the damage.
The entire contract need not be extinguished if rescission can be applied partially.

Mutual restitution in rescission – when the court declares a contract rescinded, the parties must return to
each other (1) the object of the contract with its fruits and (2) the price thereof with legal interest.

When rescission not allowed

· If the party demanding for rescission cannot return what he is obliged to restore under the
contract
· When the thing or property is in legal possession of a third person who acted in good faith, that is
to say, he acquired the property and registered it under the torrens system in the Registry of
property. In such case, the remedy is to demand indemnity for damages from the person who
caused the loss

If a contract entered into in behalf of a ward or absentee has been approved by the court, rescission cannot
take place because it is valid whether there is lesion or not.

When alienation presumed in fraud of creditors

· Alienation by gratuitous title
· Alienation by onerous title given that some judgment has been issued against the seller

Circumstances denominated as badges of fraud

· The fact that the consideration of the conveyance is fictitious or inadequate
· A transfer made by a debtor after suit has begun and while it is pending against him
· A sale upon credit by an insolvent debtor
· The transfer of all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially
· The fact that the transfer is made between father and son, when there are present some or any
of the above circumstances
· The failure of the vendee to take exclusive possession of all the property
· It was known to the vendee that the vendor has no other properties other than that sold to him

Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify
the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it
should be impossible for him to return them. If there are two or more alienations, the first acquired
shall be liable first, and so on successively.

As a general rule, the action to claim rescission must be commenced within four years from the date the
contract was entered into. The exceptions are:
· For persons under guardianship, the period shall begin from the termination of incapacity
· For absentees, from the time the domicile is known

Persons entitled to bring action for rescission

· The injured party or defrauded creditor
· His heirs, assigns, or successors in interest
· The creditors of the above entitled to subrogation
 CHAPTER 7 – VOIDABLE CONTRACTS

Voidable or annullable contracts – are those which possess all the essential requisites of a valid contract
but one of the parties is incapable of giving consent, or consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud. They are valid and binding unless annulled by a proper action in
court. Once ratified, they become absolutely valid and can no longer be annulled. Note that the existence
of damage is not essential for their annulment as in the case of rescissible contracts.

Annulment – is a remedy granted by law, for reason of public interest, for the declaration of the inefficacy
of a contract based on a defect or vice in the consent of one of the contracting parties in order to restore
them to their original position in which they were before the contract was executed.

Period for filing action for annulment- the four year period for bringing an action for annulment of a
voidable contract is reckoned:
· In cases of intimidation, violence or undue influence, from the time the intimidation, etc. ceases.
Before that time, the consent is still being vitiated and, therefore, the victim cannot be expected
to bring an action in court.
· In case of mistake or fraud, from the time it is discovered.
· In the case of contracts entered into by minors or incapacitated persons, from the time the
guardianship ceases. An incapacitated person has no capacity to sue.

Ratification – cleanses the contract from all its defects from the moment it was constituted. The contract
thus becomes valid. Hence, the action to annul is extinguished.

Kinds of ratification
· Express – when the ratification is manifested in words or in writing
· Implied or tacit – by silence or acquiescence; by acts showing adoption or approval of the
contract; or by acceptance and retention of benefits flowing there from

Requisites of ratification
· There must be knowledge of the reason which renders the contract voidable
· Such reason must have ceased
· The injured party must have executed an act which necessarily implies an intention to waive his
right

Who may ratify?

· A contract entered into by an incapacitated person may be ratified by the guardian or the injured
party himself provided he is already capacitated.
· In case of vices of consent, ratification can be made by the party whose consent is vitiated.

Article 1395. Ratification does not require the conformity of the contracting party who has no right to
bring the action for annulment.

Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.

Requisites required to confer the necessary capacity to bring an action for annulment
· The plaintiff must have an interest in the contract
· The victim and not the party responsible for the defect is the person who must assert the same
One who is not a party to the contract or an assignee thereunder, or does not represent those who took part
therein, has no legal capacity to challenge the validity of such contract. Strangers are without right or
personality to bring the action unless they can show detriment.

Guilty party, even his heirs or successors, has no right to bring an action to the court.

Article 1398. 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 with its
interest, except in cases provided by law. In obligations to render service, the value thereof shall be
the basis for damages.

Exception to the general rule of mutual restitution: The incapacitated person is obliged to make
restitution only to the extent that he was benefited by the thing or price received by him.

Effect of loss of thing to be returned

· If the thing to be returned is lost without the fault of the person obliged to make restitution
(defendant), there is no more obligation to return such thing. But in such a case, the other cannot
be compelled to restore what in virtue of the decree of annulment he is bound to return.
· If it is lost through his fault, his obligation is not extinguished but is converted into an indemnity
for damages consisting of the value of the thing at the time of the loss with interest from the
same date and the fruits received from the time the thing was given to him to the time of its loss.

Article 1401. The action for annulment of contracts shall be extinguished when the thing which is the
object thereof is lost through the fraud or fault of the person who has a right to institute the
proceedings.
If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the
thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud
or fault of the plaintiff.

There will be no annulment if the party cannot restore what he is bound to return. This is true even if the
loss is due to a fortuitous event.

Chapter 8 – Unenforceable Contracts

Unenforceable contracts – are those that cannot be enforced in court or sued upon by reason of defects
provided by law until and unless they are ratified according to law.

Kinds of unenforceable contracts

· Those entered into in the name of another by one without or acting in excess of authority
· Those that do not comply with the Statute of Frauds
· Those where both parties are incapable of giving consent

Unauthorized contracts – are 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.

History of Statute of Frauds – in 1677, the English parliament enacted a statute to counter the evil practice
of giving false testimony in actions founded on certain kinds of contracts.

Purpose of the Statute of Frauds – it has been enacted not only to prevent fraud but also to guard against
the mistakes of honest men by requiring that certain agreements be specified must be in writing; otherwise,
they are unenforceable by action in court.
Application of Statute of Frauds
· The Statute of Frauds is not applicable in actions which are neither for damages because of a
violation of a contract nor for the specific performance thereof.
· It is applicable only to executor contracts (where no performance has as yet been made by both
parties) and not to contracts which are totally or partially performed.
· It is not applicable where the contract is admitted, expressly or impliedly, by the failure to deny
specifically its existence, no further evidence thereof being required in such case.
· It is applicable only to the agreements enumerated therein. Thus, an agreement creating an
easement of right-of way is not covered by Statute since it is not a sale of real property or of an
interest therein.
· It is not applicable where a writing does not express the true agreement of the parties. This is so
because the Statute cannot be used as a shield for fraud or as a means for the perpetration of it.
· It does not declare that contracts infringing it are void but merely unenforceable.
· The defense of the Statute of Frauds may be waived.
· The defense of the Statute of Frauds is personal to the parties and cannot be interposed by
strangers to the contract.

Agreements within the scope of the Statute of Frauds

· Agreement not to be performed within one year from the making thereof
· Promise to answer for the debt, default, or miscarriage of another
· Agreement in consideration of marriage other than a mutual promise to marry
· Agreement in consideration of marriage other than a mutual promise to marry
· Agreements for sale of goods, etc. at price not less than P500.
· Agreement for leasing for a longer period than one year
· Agreement for the sale of real property or of an interest therein
· Representation as to the credit of a third person

Marriage Settlements – also called ante-nuptial contracts, are agreements entered into by persons who are
about to be united in marriage and in consideration thereof, for the purpose of fixing the conditions of their
conjugal partnership with respect to their present and future property.

Donations proper nuptias – also called donations by reason of marriage are those which are made before its
celebration, in consideration of the same and in favor of one or both of the future spouses.

Modes of ratification under the statute

· By failure to object to the presentation of oral evidence to prove the contract
· By acceptance of benefits under the contract

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is
necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right
under Art. 1357 (forms for convenience of the parties).

Art. 1407. In a contract where both the parties are incapable of giving consent, express or implied
ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give
the contract the same effect as if only one of them were incapacitated (turned into voidable contract).
If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the
contract shall be validated from the inception.

Art. 1408. Unenforceable contracts cannot be assailed by third persons.

It is a personal defense.
 Chapter 9 – Void or Inexistent Contracts
Void contracts – are those which, because of certain defects, generally produce no effect at all.

Inexistent contracts – refer to agreements which lack one or some or all of the elements which are
essential for the existence of a contract.

Characteristics of a void or inexistent contract

· It cannot be ratified
· The right to set up the defense of illegality cannot be waived
· The action or defense for the declaration of its inexistence does not prescribe
· The defense of illegality is not available to third persons whose interests are not directly affected
· It cannot give rise to a valid contract

Instances of void or inexistent contracts

· Contracts whose cause, object or purpose is contrary to law, etc.
· Contracts which are absolutely simulated or fictitious
· Contracts without cause or object
· Contracts whose object is outside the commerce of men
· Contracts which contemplate an impossible service
· Contracts where the intention of the parties relative to the object cannot be ascertained (last
resort rule)
· Contracts expressly prohibited or declared void by law

Contracts expressly prohibited or declared void by law

· Contracts upon future inheritance except in cases expressly authorized by law
· Sale of property between husband and wife except when there is a separation of property
· Purchase of property by persons who are specially disqualified by law (like guardians, agents,
executors, administrators, public officers, and employees, judges, lawyers, etc.) because of their
position or relation with the person or property under their care.
· Donation between the spouses during the marriage except moderate gifts
· A testamentary provision in favor of a disqualified person, even though made under the guise of
an onerous contract, or made through an intermediary, shall be void.
· Any stipulation that household service is without compensation shall be void
· Members of Congress are prohibited from being financially interested, directly or indirectly, in
any contract with the government or any subdivision or instrumentality thereof.

Since a void contract has no effect at all, it is therefore, unnecessary to bring an action to declare it void.
However, it is better that a judicial declaration of nullity be secured not only to give peace of mind to the
parties but also to avoid the taking of the law into their own hands.

Rules where contract is illegal and the act constitutes a criminal offense
· Where both parties are in pari delicto – the parties shall have no action against each other, both
shall be prosecuted and the things or the price of the contract, as the effects or instruments of
the crime shall be confiscated in favor of the government
· Where only one party is guilty – the innocent one or the less guilty may claim what he has given
and shall not be bound to comply with his promise.

Rules where contract is illegal but the act does not constitute a criminal offense
· Where both parties are in pari delicto – neither party may recover what he has given by virtue of
the contract and neither party may demand the performance of the other’s undertaking
· Where only one party is guilty
 The guilty party loses what he has given by reason of the contract
  The guilty party cannot ask for the fulfillment of the other’s undertaking
 The innocent party may demand the return of what he has given
 The innocent party cannot be compelled to comply with his promise
Exceptions to the general rule that when both parties are in pari delicto, the law refuses them every remedy
and leaves them where they are
· Recovery of usurious interest
· Recovery where contract is for illegal purpose
· Recovery by an incapacitated person
· Recovery where contract not illegal per se
· Recovery of amount paid in excess of ceiling price
· Recovery of additional compensation for service beyond time limit
· Recovery of amount of wage less than minimum fixed

Recovery of usurious interest – a stipulation for the payment of usurious interest is void. The person paying
the usurious interest can recover in civil action not only the interest in excess of that allowed by law, but
the whole interest paid.

Requisites in recovery where contract is for illegal purpose

· The contract is for an illegal purpose
· The contract is repudiated before the purpose has been accomplished or before any damage has
been caused to a third person
· The court considers that public interest will be subserved by allowing recovery

Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may,
if the interest of justice so demands, allow recovery of money or property delivered by the
incapacitated person.

Requisites of recovery where contract not illegal per se

· The agreement is not illegal per se but is merely prohibited
· The prohibition is designed for the protection of the plaintiff
· Public policy would be enhanced by allowing the plaintiff to recover what he has paid or delivered

Ceiling law – a statute fixing the maximum price of any article or commodity

The law (art. 1418 recovery of additional compensation for service rendered beyond time limit) applies to
employees in all establishments and undertakings; whether for profit or not, but not to:
· Government employees
· Managerial employees
· Field personnel
· Members of the family of the employers who are dependent upon him for support
· Domestic helpers
· Persons in the personal service of another
· Workers who are paid by results

Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the
latter may be enforced.

Divisible contract distinguished from divisible obligation – the test of the former is the divisibility of its
cause while the latter, its susceptibility of partial fulfillment. The former, therefore, refers to the cause,
while the latter, to the prestation or object.
Art. 1421. The defense of illegality of contracts is not available to third person whose interests are not
directly affected. (Only those directly affected)

Art. 1422. A contract which is the direct result of a previous illegal contract is also void and inexistent.