DEFECTIVE CONTRACTS

Defective contracts are those failed to meet or partially meet the legal test of validity because
they lack some essential element, or the parties thereto lack the capacity to contract, or there is a vice in
the consent of one of the parties or lesion in certain case. The defective contracts in the order of their
defectiveness are as follows: rescissible, voidable, unenforceable and void or inexistent contracts.

RECESSIBLE CONTRACTS

Concept and requisites of recission. Recission is a remedy granted by law to the contracting
parties or their successors in interest or even to third persons, in order to secure reparation of damages
caused by them by a contract, even if the contract is valid, by means of restoration of things to their
condition prior to the celebration of the contract. In order the recission may be availed of by a party, the
elements that must concur are: (1) a case especially provided by law; (2) mutual restitution of what the
parties have received under the contract; (3) object of the contract must not be in the possession of a
third person who acquired it in good faith and for value; (4) no other legal remedy except by recission;
and (5) action has not prescribed.

Contracts that may be rescinded. The following contracts are expressly provided by law to
be rescissible.

1. Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of things which are the object thereof;
2. Those agreed in representation of absentees if the latter suffer the lesion stated in the
preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
4. Those which refer to things under litigation if entered into by defendant without the knowledge
and approval of the litigants or competent judicial authority.
5. Payments made under a contract where the debtor is in the state insolvency for obligations to
whose fulfilment, he could not be compelled at the time they were effected (Article 1382); and
6. All other contracts especially declared by law to be subject to recission.
 Meaning of lesion. Lesion is the damage or injury to the party asking for recission by reason of the
fact that the price is unjust or inadequate. To constitute lesion the damage must be substantial because
mere inadequacy of price, unless shocking to the conscience is not a sufficient ground for setting aside a
sale, if there is no showing that in the event of resale a better price can be secured.

Illustration and discussions:

Contracts in representation of wards. X, the guardian of minor Y, sold to Z a piece of land

belonging to Yin the amount of Php100,000 although the market price, at the time of sale is Php150,000.
By reason of sale Y suffered lesion of more than one-fourth of its value. Upon reaching the age of
majority Y can bring an action for recission.

Contracts in representation of absentees. An absentee is a person whose whereabouts is

unknown and cannot be located in his last official residence or address. Using the above example, if Y is
an absentee, he can file an action for recission when he reappears.

Those undertaken in fraud of creditors, etc. to enable the creditors to exercise the remedy
of rescission , it must be proven by the prejudiced creditor that he cannot collect the claims due in any
other manner. Thus, if X to evade the paying his debt to Y amounting to Php50,000 enters into a
contract selling his only Ford Fierra for the same amount to Z, Y, can file an action for rescission as the
contract was made to defraud him – a creditor.

Those referring the things in litigation. A thing is considered to be in litigation when the
respondent has already received service of summons from the court taking cognizance of the case. Thus,
if X sues Y for the recovery of a car and pending trial the same is sold by Y to Z without the approval of X
or the court, the sale is rescissible.

Payment under the contract of insolvency. Insolvency here need not be a judicially declared
one, but may be under a situation where the debtor is publicly known to have defaulted in the payment
of obligations due to his various creditors. Thus, if a debtor, being insolvent, pays an obligation which is
not yet due, a creditor at the time of payment may ask the court to rescind payment.

Contracts declared by law . subject to rescission. These comprises all other contracts
scattered in the Code, like judicial or extra-judicial partition where one of the heirs received a share less
than one-fourth of his legitimate share (Articles 1098), an unpaid seller of things (Articles 1526 and
1524), and breach of reciprocal obligations under Article 1191, among others.

Contracts in behalf of wards or absentees approved by the court not rescissible.

Contracts set in these numbers (above) entered in behalf of a minor by a guardian ad litem or by a legal
representative in case of an absentee and approved by the courts, are not rescissible. This is so because
intervention of the court is sufficient to protect the interest of the minors as well as those who are
considered as absentees.
 Rescission without judicial intervention. Courts have held valid however stipulation in a
contract providing automatic revocation or cancellation of the contract for violation of any terms and
conditions thereof without intervention of the courts. A simple example of these contracts is the
conditional sale on installments providing automatic rescission of the contract if buyer defaults in two or
more monthly installments. In this case, rescission of the contract becomes automatic without action by
the court.