DEFECTIVE CONTRACTS  The contract can be rescinded as the

lesion was more than ¼ of the actual

Chapter VI. Rescissible Contracts
amount, B can file a proper action in
A. Kinds—Art. 1381 court upon reaching the age of
majority.
 ART. 1381. The ff contracts are
rescissible: CONTRACTS AGREED UPON IN
1. Those which are entered into by REPRESENTATION OF ABSENTEES
the guardians whenever the wards
 ABSENTEE – a person who disappears
whom they represent suffer lesion
from his domicile, his whereabouts
by more than ¼ of the value of the
being unknown, and without leaving an
things which are the object
agent to administer his property.
thereof;
Likewise, the absentee must suffer
2. Those agreed upon in
lesion by more than ¼ of the value of
representation of absentees, if the
the property object of the contract to
latter suffer the lesion stated in the
entitle him to remedy of rescission.
preceding number;
3. Those undertaken in fraud of CONTRACTS UNDERTAKEN IN FRAUD OF
creditors when the latter cannot in CREDITORS
any other manner collect the claims
 REQUISITES:
due them;
1. There must be an existing credit
4. Those which refer to things under
prior to the contract to be
litigation if they have been entered
rescinded, although it is not yet due
into by the defendant without the
or demandable;
knowledge and approval of the
2. There must be fraud on the part of
litigants or of competent judicial
the debtor which maybe presumed
authority;
or proved; and
5. All other contracts specially
3. The creditor cannot recover his
declared by law to be subject to
credit in any other manner, it nor
rescission.
being required that the debtor be
CONTRACTS ENTERED INTO IN BEHALF OF insolvent.
WARDS
NOTE:
 LESION – damage or injury to the party
An action to rescind may be brought even if the
asking for rescission; disparity between
debtor has not been judicially declared
the price and the value.
insolvent, and even if the creditor has not yet
WARD – a person under guardianship
brought an action to collect his credit . BOTH
by reason of incapacity.
SECURED AND UNSECURED CREDITOR MAY
EXAMPLE OF No. 1: BRING THE ACTION; THE IMPORTANT THING IS
THAT THEY BE PREJUDICED.
A is the guardian of B (minor). The
former sells the lot inherited by the latter from NOTE:
his deceased parents. The value of the lot is
Generally, the party desiring to rescind must
2M and A sold it for 100K.
show that the conveyance or alienation was
fraudulent. He has the burden of proof, except
in the cases when there is a presumption of
fraud.
EXAMPLE OF NO. 3:
A sold his house to B, in order to
defraud the creditor X. X wished to rescind the
contract. Can it be rescinded?
Answer: Yes, it can be rescinded given that X,
the creditor, cannot collect from A in any
manner. But if on the same day, someone lent
A money to pay X, then the contract of sale
may not be rescinded for the creditor may now
collect from A.
B. Characteristics
C. Rescission—Art. 1380
1. Definition
 RESCISSION – a remedy granted by law
to the contracting parties and
sometimes even to the third persons in
order to secure reparation of damages
caused them by a valid contract by
means of the restoration of things to
their condition in which they were
prior to the celebration of said
contract.
2. As distinguished from rescission under Art.
1191
RESCISSION UNDER ART. 1381:
a.) Based on lesion or fraud upon creditors
b.) The action is instituted be either of the
contracting parties or by a third person;
c.) The courts cannot grant a period or
term within which to comply;
d.) Non performance of the other party is
immaterial.
RESCISSION UNDER ART. 1191:
a.) Based on non-performance or non-
fulfillment of the obligation
b.) The action may be instituted only by the
injured party to the contracts;
c.) In some cases, the court may grant a
term;
d.) Non-performance of the other party is
important.
REQUISITES OF RESCISSION:
a.) There must be at the beginning valid or
voidable contract;
b.) But there must be an economic or
financial prejudice against someone
c.) Requires mutual restitution
Case
Universal Food Corp. v. CA, 33 SCRA 1 (1970)
FACTS:
Magdalo Francisco Sr. discovered a formula for
a food seasoning made from banana, it is
known as Mafran. He registered his trademark
in his name. But because of insufficiency of fund
to finance the expansion of his business, he
seek financial assistance from Tirso Reyes, who
formed UFC, eventually leading to the execution
of Bill of assignment. In line with the said Bill of
Assignment he was made the chief chemist with
a Salary of 300 pesos/month. However, due to
alleged scarcity and high prices of raw
materials, UFC issued a memo stating among
others that the salary of Francisco Sr. be
stopped until the corporation resume its
operation. Francisco Sr. received his salary of
300 pesos only a month until his services were
terminated. Thereafter, UFC ooked for a buyer
of the corporation including its trademars,
formula and assets at a price not less than 300k.
Now, Francisco Sr. filed an action for rescission
of the bill of assignment and damages due to his
dismissal as the chief chemist.
ISSUE: W Francisco Sr. is entitled to rescission
due to his dismissal from UFC
RULING: SC answered in positive. Magdalo has
the right to the remedy of rescission.
Article 1191. The power to rescind
obligations is implied in reciprocal ones, in case
one of the obligors should not comply with
what is incumbent upon him. The injured party
may choose between fulfillment and rescission
of the obligation, with payment of damages in
either case.
First, the SC pointed that the Bill of Assignment
is reciprocal in nature, it also established that
UFC violated the Bill of Assignment by
terminating Francisco Sr. without lawful and
justifiable cause.
The petitioner contends that rescission of the
Bill of Assignment should be denied, because
under article 1383, rescission is a subsidiary
remedy which cannot be instituted except
when the party suffering damage has no other
legal means to obtain reparation for the same.
However, in this case the dismissal of Francisco
Sr. as the permanent chief chemist is a
fundamental and substantial breach of the Bill
of Assignment. He was dismissed without any
fault or negligence on his part. Thus, apart from
the legal principle that the option — to demand
performance or ask for rescission of a contract
— belongs to the injured party, the fact remains
that Francisco Sr. had no alternative but to file
the present action for rescission and damages.
Hence, the SC declared the Bill of assignment
rescinded and modified CA’s ruling but still
ruled in favor of Francisco Sr.
3. Requisites: (1383, 1385, 1389)
4. Effect of rescission—Art. 1389
a. With respect to third persons who acquired
the thing in good faith—
Art. 1385, 2nd and 3rd par.
5. Extent of rescission—Art. 1384
 Only to the extent to cover the
damages caused.
6. Presumption of fraud—Art. 1384
a. Badges of fraud
Case
Oria vs. Memicking, 21 Phil. 243 (1912)
Facts:
Actions for recovery are filed against the Oria
Hermanos & Co. by Gutierrez Hermanos. Prior
to a judgement, the company was dissolved and
liquidated. A contract of sale was executed
between the company and Manuel Oria (the
son of one of the partners). The trial court ruled
in favor of GH and ordered OHC to make
payment, when the company refused to pay,
the sheriff levied upon the steamship
“Serantes” and announced its sale at a public
auction. Prior to the auction day, Manuel Oria
presents a statement to the sheriff, claiming to
be the owner of the steamship. Upon the
payment of GH of a bond for the auction, the
auction proceeded and GH was the highest
bidder for the steamship. Manuel Oria filed the
present action, praying for the prevention of
the sale of steamship, to be declared as its
owner, and for damages of P10,000. The CFI
ruled in favor of GH, declaring the sale between
Manuel Oria and OHC fraudulent.
Issue: Does the sale prejudice the rights of the
creditors?
Ruling: The SC said this case presents every one
of the badges of fraud above enumerated.The
result is clear, the sale in the form in which it
was made leaves the creditors substantially
without recourse. The property of the company
is gone, its income is gone, the business itself is
likely to fail, the property is being dissipated,
and is depreciating in value. Since the records
shows that there was no property with which
the judgment in question could be paid, the
defendants were obliged to resort to and levy
upon the steamer in suit. The court below was
correct in finding the sale fraudulent and void as
to Gutierrez Hermanos in so far as was
necessary to permit the collection of its
judgment. The creditor may attack the sale by
ignoring it and seizing under his execution the
property, or any necessary portion thereof,
which is the subject of the sale.
Siguan v. Lim et al., 318 SCRA 725 (1999)
Facts:
Plaintiff herein filed an accion pualiana against
Lim and her children to rescind the deed of
donation executed by Lim in favor of her
children. Petitioner claimed that sometime in
1991, Lim fraudulently transferred her
properties to her children by way of the Deed
and that the transfer is in bad faith and in fraud
of the creditors including her. As a result of the
conveyance, Lim was left with no sufficient
properties to pay her obligations.
Lim, in her defense, as regards to the
questioned deed of donation maintained that it
was not antedated and it was made in good
faith at the time that she had sufficient
property.
The trial court ordered the rescission of the
deed of donation, but the CA reversed its
decision and dismissed the petitioner’s accion
pauliana saying that two requisites of which are
absent. [(1) there must be a credit existing
prior to the celebration of the contract;
and; (2) there must be a fraud, or at least
the intent to commit fraud, to the
prejudice of the creditor seeking the
rescission.]
CA further declared that the deed of
donation, appears to be executed before
Lim incurred debt from Siguan.
Issue: W the questioned deed was
made in fraud of the petitioner and
therefore, rescissible?
Ruling: No. The rescission required the
existence of creditors at the time of
alleged fraudulent alienation, and this
must be proved as one of the bases of
the judicial pronouncement setting
aside the contract. Without, prior existing
debt, there can neither be injury nor fraud.
While it is necessary that the credit of the
plaintiff in the accion pauliana must exist
prior to the fraudulent alienation, the date
of the judgment enforcing it is immaterial.
Since LIMs indebtedness to SIGUAN
was incurred a year after the execution
of the Deed of Donation, the first
requirement of accion pauliana was not
met.
Even assuming arguendo that petitioner
became a creditor of LIM prior to the
celebration of the contract of donation, still her
action for rescission would not fare well
because the third requisite was not met. It is
essential that the party asking for rescission
prove that he has exhausted all other legal
means to obtain satisfaction of his claim.
SIGUAN neither alleged nor proved that she
did so. On his score, her action for rescission of
the questioned deed is not maintainable even if
the fraud charged actually did exist.
***NOTE: The action to rescind contracts in
fraud of creditors is known as accion pauliana.
For this action to prosper, the following
requisites must be present:
(1) the plaintiff asking for rescission
has a credit prior to the
alienation,   although demandable
12
later;
 (2) the debtor has made a subsequent
contract conveying a patrimonial
benefit to a third person;
(3) the creditor has no other legal
remedy to satisfy his claim;   
13
(4) the act being impugned is
fraudulent;   
14
(5) the third person who received the
property conveyed, if it is by onerous
title, has been an accomplice in the
fraud.
Suntay v. CA., supra
Facts:
Federico Suntay owned a parcel of land in
Bulacan. His nephew layer, Rafael,prepared an
absolute deed of sale whereby Federico for 20k
would sell to him the land. The deed
wasnotarized. Less than 3 months later, a
counter sale was prepared, selling the land back
to Federico for the same price of 20k. However,
it was notarized not as a deed of sale but a
certain “real estate mortgage on a parcel of
land to secure a loan of 3.5k”.
Even after the execution of the first
deed,Frederico remained in possession of the
property. Notwithstanding the fact that Rafael
had already become the titled owner of the
land, he (Rafael) never made any attempt to
take possession thereof,leaving Federico to
continue exercising his rights of absolute
ownership over the property. Federico now
wants the land’s title to be reconveyed back to
him with damages, while Rafael scoffed at the
attack and argued that the sale was valid and
genuine.
Issue: W/N Rafael’s failure to take exclusive
possession of the property from Federico is a
clear badge of fraud.
Ruling: The failure of the late Rafael to take
exclusive possession of the property allegedly
sold to him is a clear badge of fraud. The fact
that, notwithstanding the title transfer,
Federico remained in actual possession,
cultivation and occupation of the disputed lot
from the time the deed of sale was executed
until the present, is a circumstance which is
unmistakably added proof of the fictitiousness
of the said transfer, the same being contrary to
the principle of ownership.
The SC therefore, therefore, hold that the deed
of sale executed by Federico in favor of his now
deceased nephew, Rafael, is absolutely
simulated and fictitious and, hence, null and
void, said parties having entered into a sale
transaction to which they did not intend to be
legally bound. As no property was validly
conveyed under the deed, the second deed of
sale executed by the late Rafael in favor of his
uncle, should be considered ineffective and
unavailing.
7. Liability for acquiring in bad faith the things
alienated in fraud of creditors—
Art. 1388
Chapter VII. Voidable or Annullable Contracts
A. Kinds—Art. 1390
B. Characteristics
C. Annulment 17
1. As distinguished from rescission
2. Grounds—Art. 1390
3. Who may and may not institute action for
annulment—Art. 1397
Case
Singsong v. Isabela Sawmill, 88 SCRA 623
(1979)
Facts:
Isabela Sawmill was formed by partners
Saldajeno, Lon and Timoteo. Saldejano
Withdraw from the partnership and after Cadwallader & Co v. Smith, Bell, & Co., 7 Phil.
dissolution, Garibay and Tubungbanua 461 (1907)
continued the business still under the name
Facts:
Isabela Sawmill. The partnership is indebted to
various creditors and that Sheriff sold the assets
of Isabela Sawmill to Saldejano and was
subsequently sold to a separate company. The Issue:
plaintiffs sought to restrain the sheriff from Ruling:
proceeding with the sales and to have the CM
declared null and void in fraud of creditors. Velarde v. CA, supra

Issue: W the contract can be annulled by the 1. When one of the parties is incapacitated—
plaintiff? Art. 1399

Ruling: 2. When the thing is lost through the fault of

the party
As a rule, a contract cannot be assailed by one
who is not a party thereto. However, when a obliged to return the same—Art. 1400
contract prejudices the rights of a third person, 6. Extinguishment of the action
he may file an action to annul the contract.
D. Ratification
This Court has held that a person, who is not a
party obliged principally or subsidiarily under a 1. Requisites:
contract, may exercised an action for nullity of
2. Forms
the contract if he is prejudiced in his rights with
respect to one of the contracting parties, and a. Express or tacit—Art. 1393
can show detriment which would positively
b. By the parties themselves or by the guardian
result to him from the contract in which he has
in behalf of an incapacitated party—Art. 1394
no intervention
3. Effects:
The plaintiffs-appellees were prejudiced in
their rights by the execution of the chattel a. Action to annul is extinguished—Art. 1392
mortgage over the properties of the
Case
partnership "Isabela Sawmill" in favopr of
Margarita G. Saldajeno by the remaining Uy Soo Lim v. Tan Unchuan, 38 Phil. 552 (1918)
partners, Leon Garibay and Timoteo
Tubungbanua. Hence, said appelees have a b. The contract is cleansed retroactively from all
right to file the action to nullify the chattel its defects—Art.
mortgage in question. 1396
4. Prescription—Art. 1391 Chapter VIII. Unenforceable Contracts
5. Effect A. Characteristics
a. Mutual restitution—Arts. 1398 and 1402 B. Kinds—Art. 1403
Case 1. Unauthorized contracts
a. Governing rules—Art. 1404

2. Contracts covered by the Statute of Frauds

a. Purpose of Statute

Case

Philippine National Bank v. Phil. Vegetable Oil

Co., 49 Phil. 857 (1927)

Rosencor Dev’t. Corp., et al. v. Inquing, 354

SCRA 119 (2001)

b. How ratified

Case

Carbonnel v. Poncio, et al., 103 Phil. 655 (1958)

c. Right of the parties when a contract is

enforceable but a public

document is necessary for its registration—Art.

1406

18

3. Contracts executed by parties who are both

incapable of giving consent

to a contract

a. Effect of ratification by the parents or

guardian of one of the

parties—Art. 1407

b. Effect of ratification by the parents or

guardian of both parties—Art.

1407