DEFECTIVE CONTRACTS and to put an end to it as though it never

was. It is not merely to terminate it and

Kinds of defective contracts
1. Rescissible contracts;
2. Voidable contracts;
3. Unenforceable contracts; and
4. Void and inexistent contracts.
release the parties from further obligations
to each other, but to abrogate it from the
beginning and restore the parties to their
relative positions as if no contract has
been made.

CHAPTER 6 Accordingly, when a decree for rescission

is handed down, it is the duty of the court
RESCISSIBLE CONTRACTS to require both parties to surrender that
which they have respectively received and
Art. 1380. Contracts validly agreed upon to place each other as far as practicable in
may be rescinded in the cases established his original situation. The rescission has
by law. (1290) the effect of abrogating the contract in all
parts.
What is Rescission?
Rescission, as contemplated in Articles
The Supreme Court ruled that rescission
1380, et seq., of the New Civil Code, is a
of a contract will not be permitted for a
remedy granted by law to the contracting
slight or casual breach, but only for such
parties and even to third persons, to
substantial and fundamental breach as
secure the reparation of damages caused
would defeat the very object of the parties
to them by a contract, even if this should
in making the agreement; the question of
be valid, by restoration of things to their
whether a breach of contract is substantial
condition at the moment prior to the
depends upon the attending
celebration of the contract. It implies a
circumstances.
contract, which even if initially valid,
produces a lesion or a pecuniary damage
Cancellation of a contract and its
to someone.
rescission, distinguished.
There is a distinction in law between
Rescission is a relief which the law grants
cancellation of a contract and its
on the premise that the contract is valid for
rescission. To rescind is to declare a
the protection of one of the contracting
contract void in its inception and to put an
parties and third persons from all injury
end to it as though it never were. It is not
and damage the contract may cause, or to
merely to terminate it and release parties
protect some incompatible and preferential
from further obligations to each other but
right created by the contract.
to abrogate it from the beginning and
restore the parties to relative positions
Effect of Rescission
which they would have occupied had no
Rescission has the effect of "unmaking a
contract ever been made.
contract, or its undoing from the
beginning, and not merely its termination."
Termination of a contract is congruent with
Hence, rescission creates the obligation to
an action for unlawful detainer. The
return the object of the contract. It can be
termination or cancellation of a contract
carried out only when the one who
would necessarily entail enforcement of its
demands rescission can return whatever
terms prior to the declaration of its
he may be obliged to restore. To rescind is
cancellation in the same way that before a
to declare a contract void at its inception
lessee is ejected under a lease contract,
he has to fulfill his obligations thereunder
that had accrued prior to his ejectment.
However, termination of a contract need
not undergo judicial intervention. The
parties themselves may exercise such
option. Only upon disagreement between
the parties as to how it should be
undertaken may the parties resort to
courts.
Rescission described in Article 1380
and 1381 distinguished from
Resolution referred to in Article 1191
and 1592
The remedy of "rescission" is not confined
to the rescissible contracts enumerated
under Article 1381. Article 1191 of the Civil
Code gives the injured party in reciprocal
obligations, such as what contracts are
about, the option to choose between
fulfillment and "rescission." Arturo M.
Tolentino, a well-known authority in civil
law, is quick to note, however. that the
equivalent of Article 1191 in the old code
actually uses the term "resolution" rather
than the present "rescission." The
calibrated meanings of these terms are
distinct.
"Rescission" is a subsidiary action based
on injury to the plaintiff's economic
interests as described in Articles 1380 and
1381. "Resolution," the action referred to
in Article 1191, on the other hand, is
based on the defendant's breach of faith,
a violation of the reciprocity between the
parties. As an action based on the binding
force of a written contract, therefore,
rescission (resolution) under Article 1191
prescribes in 10 years. Ten years is the
period of prescription of actions based on
a written contract under Article 1144.
The distinction makes sense. Article 1191
gives the injured party an option to choose
between, first, fulfillment of the contract
and, second, its rescission. An action to
enforce a written contract (fulfillment) is
definitely an "action upon a written
contract," which prescribes in 10 years
(Article 1144). It will not be logical to make
the remedy of fulfillment prescribe in 10
years while the alternative remedy of
rescission (or resolution) is made to
prescribe after only four years as provided
in Article 1389 when the injury from which
the two kinds of actions derive is the
same.
We must stress however, that the
"rescission" in Article 1381 is not akin to
the term "rescission" in Article 1191 and
Article 1592. In Articles 1191 and 1592,
the rescission is a principal action which
seeks the resolution or cancellation of the
contract while in Article 1381, the action is
a subsidiary one limited to cases of
rescission for lesion as enumerated in said
article.
The prescriptive period applicable to
rescission under Articles 1191 and 1592,
is found in Article 1144, which provides
that the action upon a written contract
should be brought within ten years from
the time the right of action accrues.7
Art. 1381. The following contracts are
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 the things which
are the object thereof;
2. Those agreed upon 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 they have been entered into by
the defendant without the knowledge and
approval of the litigants or of competent
judicial authority;
5. All other contracts specially declared by
law to be subject to rescission.
"Rescission" in Article 1191 and
"Rescission" in Article 1381,
distinguished.
"Rescission" in Article 1191
● The rescission is a principal action which
seeks the resolution or cancellation of the
contract.
● The prescriptive period applicable to
rescission under Articles 1191 is found in
Article 1144, which provides that the
action upon a written contract should be
brought within ten years from the time the
right of action accrues."
"Rescission" in Article 1381
● The action is a subsidiary one limited to
cases of rescission for lesion as
enumerated in said article.
● The action to claim rescission must be
commenced within four (4) years.
Rescissible contracts, not being vold, they
remain legally effective until set aside in a
rescissory action and may convey title, 10
Article 1381 of the Civil Code provides that
contracts entered into in fraud of creditors
may be rescinded when the creditors
cannot in any manner collect the claims
due them. Article 1381 applies to contracts
where the creditors are not parties, for
such contracts are usually made without
their knowledge. Thus, a creditor who is
not a party to a contract can sue to rescind
the contract to prevent fraud upon him. Or,
the same creditor can instead choose to
enforce the contract if a specific provision
in the contract allows him to collect his
claim, and thus protect him from fraud.11
Note:
Article 1191 of the New Civil Code refers
to rescission applicable to reciprocal
obligations. Reciprocal obligations are
those which arise from the same cause,
and in which each party is a debtor and a
creditor of the other, such that the
obligation of one is dependent upon the
obligation of the other. They are to be
performed simultaneously such that the
performance of one is conditioned upon
the simultaneous fulfillment of the other.
Rescission of reciprocal obligations under
Article 1191 of the New Civil Code should
be distinguished from rescission of
contracts under Article 1383. Although
both presuppose contracts validly entered
into and subsisting and both require
mutual restitution when proper, they are
not entirely identical.
While Article 1191 uses the term
"rescission," the original term which was
used in the old Civil Code, from which the
article was based, was "resolution."
Resolution is a principal action which is
based on breach of a party, while
rescission under Article 1383 is a
subsidiary action limited to cases of
rescission for lesion under Article 1381 of
the New Civil Code.
When a party seeks the relief of rescission
as provided in Article 1381, there is no
need for reciprocal prestations to exist
between or among the parties. All that is
required is that the contract should be
among those enumerated in Article 1381
for the contract to be considered
rescissible. Unlike Article 1191, rescission
under Article 1381 must be a subsidiary
action because of Article 1383.
Note: Rescission or resolution under Article
1191, therefore, is a principal action that is
Justice J.B.L. Reyes' concurring opinion in immediately available to the party at the
the landmark case of Universal Food time that the reciprocal prestation was
Corporation v. Court of Appeals gave a breached. Article 1383 mandating that
definitive explanation on the principal rescission be deemed a subsidiary action
character of resolution under Article 1191 cannot be applicable to rescission or
and the subsidiary nature of actions under resolution under Article 1191
Article 1381:
Who is a ward?
The rescission on account of breach of
stipulations is not predicated on injury to
A person, usually a minor, who is under a
economic interests of the party plaintiff but
guardian's charge e protection.14
on the breach of faith by the defendant,
that violates the reciprocity between the
Who is an absentee?
parties. It is not a subsidiary action, and
Article 1191 may be scanned without
A person who disappears from his
disclosing anywhere that the action for
domicile, his whereabouts being unknown,
rescission thereunder is subordinated to
and without leaving an agent to administer
anything other than the culpable breach of
his property.
his obligations by the defendant. This
rescission is a principal action retaliatory
Elementary is the principle that the validity
in character, it being unjust that a party be
of a contract does not preclude its
held bound to fulfill his promises when the
rescission. Under Articles 1380 and 1381
other violates his. As expressed in the old
(3) of the Civil Code contracts that are
Latin aphorism "Non servanti fidem, non
otherwise valid between the contracting
est fides servanda." Hence, the reparation
parties may nonetheless be subsequently
of damages for the breach is purely
rescinded by reason of injury to third
secondary.
persons like creditors. In fact, rescission
implies that there is a contract that, while
On the contrary, in the rescission by
initially valid, produces a lesion or
reason of lesion or economic prejudice,
pecuniary damage to someone.
the cause of action is subordinated to the
existence of that prejudice, because it is
Problem:
the raison d'etre as well as the measure of
the right to rescind. Hence, where the
The spouses H and W, own the majority
defendant makes good the damages
capital stock of B Corp. On October 10,
caused, the action cannot be maintained
1990, the spouses executed a Continuing
or continued, as expressly provided in
Surety Agreement in favor of Z Bank to
Articles 1383 and 1384. But the operation
secure a P40,000,000-credit line facility
of these two articles is limited to the cases
made available to B Corp.
of rescission for lesión enumerated in
Article 1381 of the Civil Code of the
On October 22, 1991, H and W, for
Philippines, and does not apply to cases
P12,500,000, sold their lot. together with
under Article 1191.
the house and other improvements
standing thereon, to X At about this time,
B Corp. had already availed itself of the
credit facilities, and had in fact executed a
total of 22 promissory notes in favor of Z
Bank.
On November 22, 1991, B Corp. filed a
Petition for Rehabilitation and for
Declaration of Suspension of Payments
with the Securities and Exchange
Commission (SEC). To protect its interest.
Z Bank lost no time in filing an action for
rescission of the sale between H and W
and X for purportedly being in fraud of
creditors. 2 Bank, alleged that H and W
and X entered into the transaction in
question for the lone purpose of
fraudulently removing the property from
the reach of Z. Bank and other creditors.
Answering. H and W, and X, maintained,
that both contracts of sale over the
property were founded on good and valid
consideration and executed in good faith.
Does the contract of sale partake of a
conveyance to defraud Z Bank?
Answer:
Essentially, Z Bank anchors its case on
Article 1381 of the Civil Code which lists
as among the rescissible contracts "Those
undertaken in fraud of creditors when the
latter cannot in any other manner collect
the claims due them."
Contracts in fraud of creditors are those
executed with the intention to prejudice
the rights of creditors. To creditors seeking
contract rescission on the ground of
fraudulent conveyance rest the onus of
proving by competent evidence the
existence of such fraudulent intent on the
part of the debtor, albeit they may fall back
on the disputable presumptions, if proper,
established under Article 1387 of the
Code.
In the present case, spouses H and W
had sufficiently established the validity and
legitimacy of the sale in question.
Unfortunately for Z Bank, it failed to
discharge this burden. Its bare allegation
respecting the sale having been executed
in fraud of creditors and without adequate
consideration cannot, without more,
prevail over H, W, and X's evidence which
more than sufficiently supports a
conclusion as to the legitimacy of the
transaction and the bona fides of the
parties.
Parenthetically, the rescissory action to set
aside contracts in fraud of creditors is
accion pauliana, essentially a subsidiary
remedy accorded under Article1383 of the
Civil Code which the party suffering
damage can avail of only when he has no
other legal means to obtain reparation for
the same.
It does not appear in this case that Z Bank
sought other properties of the spouses
other than the subject property. Absent
proof, therefore, that H and W had no
other property except their home, the sale
thereof to X cannot simplistically be
considered as one in fraud of creditors.
Neither was evidence adduced to show
that the sale in question peremptorily
deprived 2 Bank of means to collect its
claim against H and W. Where a creditor
fails to show that he has no other legal
recourse to obtain satisfaction for his
claim, then he is not entitled to the
rescission asked.
It cannot be overemphasized that
rescission is generally unavailing should a
third person, acting in good faith, is in
lawful possession of the property, that is to
say, he is protected by law against a suit
for rescission by the registration of the
transfer to him in the registry. 17

Note:
Article 1381 and Article 1383, on the other
hand, pertain to rescission where creditors
or even third persons not privy to the
contract can file an action due to lesion or
damage as a result of the contract. 10
Art. 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. (1292)
What is insolvency?
It is when the debtor has more liabilities
than his assets.
Art. 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. (1294)
What is subsidiary remedy?
The term "subsidiary remedy" has been
defined as "the exhaustion of all remedies
by the prejudiced creditor to collect claims
due him before rescission is resorted
to."19
An action for rescission may not be raised
or set up in a summary proceeding
through a motion, but in an independent
civil action and only after a full-blown trial.
As Article 1383 of the Civil Code provides:
Art. 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.
Parenthetically, the rescissory action to set
aside contracts in fraud of creditors is
accion pauliana, essentially a subsidiary
remedy accorded under Article1383 of the
Civil Code which the party suffering
damage can avail of only when he has no
other legal means to obtain reparation for
the same. In net effect, the provision
applies only when the creditor cannot
recover in any other manner what is due
him. 21
Problem:
On May 10, 1983, X, on the one hand,
and spouses H and W, on the other hand,
executed an "Agreement of Purchase and
Sale respecting two parcels of land. The
terms and conditions of the contract read:
1. That for and in consideration of the
agreed purchase price of P2,000,000, the
mode and manner of payment is as
follows:
A. The initial payment of P600,000, shall
be broken down as follows: i. P103,499
shall be paid, by X to H and W on March
22, 1983, xxx covered by a check of even
date.
ii. That the sum of P496,500 shall be paid
directly by X to Z bank to answer for the
loan of H and W xxx.
B. That the balance of P1,400,000 shall
be paid by X to H and W in four equal
quarterly instaliments of P350,000, the
first to be due and payable on June 15,
1983, xxx.
i. That upon the payment of the total
purchase price by X, H and W bind
themselves to deliver to the former a deed
of sale xxx.
ii. That immediately upon the execution of
this document, H and W shall deliver,
surrender and transfer possession of the
said parcels of land including all the
improvements that may be found thereon,
to X.
XXX
On May 15, 1983, X took possession of
the subject parcels of land together with
the improvements thereon.
Pursuant to the contract they executed, X
paid H and W the sum of P103,499 by
depositing it with Q Bank. To answer for
his balance of P1,400,000 X issued 4
post-dated checks payable to H and W in
the amount of P350,000 each. When
presented for payment, however, the
checks were dishonored due to insufficient
funds.
On August 2, 1985, H and W, through
counsel, sent X a demand letter asking for
the return of the properties. Their demand
was left unheeded, so, on September 2,
1985, they filed, a complaint for rescission
of contract.
Is Article 1383, New Civil Code of the
Philippines applicable? Answer:
Rescission under Article 1383 is a
subsidiary action limited to cases of
rescission for lesion under Article 1381 of
the New Civil Code, which expressly
enumerates the following rescissible
contracts:
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 the things which are
the object thereof; 2. Those agreed upon
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 manner
collect the claims due them;
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; and
5. All other contracts specially declared by
law to be subject to rescission.
Obviously, the contract, entered into by
the parties in the case at bar does not fall
under any of those mentioned by Article
1381. Consequently, Article 1383 is
inapplicable. 22
Art. 1384. Rescission shall be only to the
extent necessary to cover the damages
caused.
Rationale:
This is because the purpose of rescission
is to repair the damages caused.
Note:
The remedy of rescission is not a principal
action retaliatory in character but becomes
a subsidiary one which by law is available
only in the absence of any other legal
remedy, 23
Art. 1385. Rescission creates the
obligation to return the things which
were the object of the contract, together
with their fruits, and the price with its
interest; consequently, it can be carried
out only when he who demands rescission
can return whatever he may be obliged to
restore. Neither shall rescission take place
when the things which are the object of
the contract are legally in the possession
of third persons who did not act in bad
faith.
In this case, indemnity for damages may
be demanded from the person causing the
loss
What is mutual restitution?
Mutual restitution entails the return of the
benefits that each party may have
received as a result of the contract. This
means bringing the parties back to their
original status prior to the inception of the
contract
Accordingly, when a decree for rescission
is handed down, it is the duty of the court
to require both parties to surrender that
which they have respectively received and
to place each other as far as practicable in
his original situation. The rescission has
the effect of abrogating the contract in all
parts.
Effect if it is no longer possible to return
the object of a contract?
Indeed, mutual restitution is required in all
cases involving rescission. But when it is
no longer possible to return the object of
the contract, an indemnity for damages
operates as restitution. The important
consideration is that the indemnity for
damages should restore to the injured
party what was lost.25
To rescind, meaning.
To rescind is to declare a contract void at
its inception and to put an end to it as
though it never was. Rescission does not
merely terminate the contract and release
the parties from further obligations to each
other, but abrogates it from the beginning
and restores the parties to their relative
positions as if no contract has been made.
26
Problem:
Sometime on October 9, 1984, X entered
into a verbal contract with Spouses H and
W and Y for her purchase of the latter's
house and lot, for and in consideration of
the sum of $100,000. One week
thereafter, and shortly before she left for
the United States, X paid to the Spouses
H and W and Y the amounts of $1,000
and P40,000 as earnest money, in order
that the same may be reserved for her
purchase, said earnest money to be
deducted from the total purchase price.
The purchase price of $100,000 is
payable in two payments $40,000 on
December 4, 1984 and the balance of
$60,000 on January 5, 1985. On January
25, 1985, although the period of payment
had already expired, X paid to Y in the
United States, the sum of $30,000, as
partial payment of the purchase price.
Spouses H and W and Y's counsel, Atty.
J, wrote a letter to X dated pricech 15,
1985, demanding that she pay the
balance of $70,000 and not receiving any
response thereto, said lawyer wrote
another letter to dated August 8, 1986,
informing her that she has lost
her "option to purchase" the property
subject of this case and offered to sell her
another property.
Under date of September 5, 1986, Atty. K,
counsel for X, wrote a letter to Atty. J
informing him that X "is now ready to pay
the remaining balance to complete the
sum of $100,000, the agreed amount as
selling price" and on October 24, 1986, X
filed the instant complaint.
Did the Court of Appeals err in ordering
Spouses H and W and y to return the
$30,000 paid by X? Answer:

Despite the fact that X's failure to pay the
amounts of US$ 40,000 and US$ 60,000
on or before December 4, 1984 and
January 5, 1985 respectively was a
breach of her obligation under Article 1191
of the Civil Code, spouses H and W and Y
did not sue for either specific performance
or rescission of the contract. Spouses H
and W and Y were of the mistaken belief
that X had lost her "option" over the
property when she failed to pay the
remaining balance of $70,000 pursuant to
their August 8, 1986 letter. In the absence
of an express stipulation authorizing the
sellers to extrajudicially rescind the
contract of sale, spouses H and W and Y
cannot unilaterally and extrajudicially
rescind the contract of sale. Accordingly, X
acted well within her rights when she
attempted to pay the remaining balance of
$70,000 to complete the sum owed of
$100,000 as the contract was still
subsisting at that time When spouses H
and W and Y refused to accept said
payment and to deliver the property, X
immediately sued for the rescission of the
contract of sale and prayed for the return
of the $30,000 she had initially paid.
Under Article 1385 of the Civil Code,
rescission creates the obligation to return
the things which were the object of the
contract but such rescission can only be
carried out when the one who demands
rescission can return whatever he may be
obliged to restore. This principle has been
applied to rescission of reciprocal
obligations under Article 1191 of the Civil
Code. The Court of Appeals therefore did
not ert in ordering spouses H and W and Y
to return the amount of $30,000 to X after
ordering the rescission of the contract of
sale over the property. We quote with
approval the Court of appeals' decision to
wit:
Since it has been shown that the appellee
who was not in default, was willing to
perform part of the contract while the
appellants were not rescission of the
contract is in order. 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,
(Article 1191), Rescission creates
obligation to return the things which were
the object of the contract. together with
their fruits, and the price with its interest
XXX (Article 1385)
In the case at bar, the property involved
has not been delivered to the appellee.
She has therefore nothing to return to the
appellants. The price received by the
appellants has to be returned to the
appellee as aptly ruled by the lower court,
for such is a consequence of rescission,
which is to restore the parties in their
former situations"
Art. 1386. Rescission referred to in Nos. 1
and 2 of Article 1381 shall not take place
with respect to contracts approved by the
courts. (1296a)
Rescission referred to in Nos. 1 and 2 of
Article 1381 are hereto below reproduced,
to wit:
Art. 1381. The following contracts are
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 the things
which are the object thereof; and
2. Those agreed upon in representation of
absentees, if the latter suffer the lesion
stated in the preceding number;
XXX
Art. 1387. All contracts by virtue of which
the debtor alienates property by gratuitous
title are presumed to have been entered
into in fraud of creditors, when the donor
did not reserve sufficient property to pay
all debts contracted before the donation.
Alienations by onerous title are also
presumed fraudulent when made by
persons against whom some judgment
has been issued. The decision or
attachment need not refer to the property
alienated, and need not have been
obtained by the party seeking the
rescission. In addition to these
presumptions, the design to defraud
creditors may be proved in any other
manner recognized by the law of
evidence. (1297a)
What is accion pauliana?
The action to rescind contracts in fraud of
creditors is known as uccion pauliang. 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 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;
4. The act being impugned is fraudulent;
and
5. The third person who received the
property conveyed, if it is by onerous title,
has been an accomplice in the fraud. 28
In one case, the Supreme Court held: We
quote with approval the following
disquisition of the Court of Appeals on the
matter:
An accion pauliana accrues only when the
creditor discovers that he has no other
legal remedy for the satisfaction of his
claim against the debtor other than an
accion pauliana. The accion pauliana is an
action of a last resort. For as long as the
creditor still has a remedy at law for the
enforcement of his claim against the
debtor, the creditor will not have any
cause of action against the creditor for
rescission of the contracts entered into by
and between the debtor and another
person or persons. Indeed, an accion
pauliana presupposes a judgment and the
issuance by the trial court of a writ of
execution for the satisfaction of the
judgment and the failure of the Sheriff to
enforce and satisfy the judgment of the
court. It presupposes that the creditor has
exhausted the property of the debtor. The
date of the decision of the trial court
against the debtor is immaterial. What is
important is that the credit of the plaintiff
antedates that of the fraudulent alienation
by the debtor of his property. After all, the
decision of the trial court against the
debtor will retroact to the time when the
debtor became indebted to the creditor.29
An accion pauliana thus presupposes the
following:
1. A judgment;
2. The issuance by the trial court of a writ
of execution for the satisfaction of the
judgment, and
3. The failure of the sheriff to enforce and
satisfy the judgment of the court.
It requires that the creditor has exhausted
the property of the debtor. The date of the
decision of the trial court is immaterial.
What is important is that the credit of the
plaintiff antedates that of the fraudulent
alienation by the debtor of his property.
After all, the decision of the trial court
against the debtor will retroact to the time
when the debtor became indebted to the
creditor.
Presumption of fraud is not conclusive. limited to the two instances set forth in the
This article presumes the existence of first and second paragraphs of Article
fraud made by a debtor. Thus, in the 1387 of the Civil Code. Under the third
absence of satisfactory evidence to the paragraph of the same article, "the design
contrary, an alienation of a property will be to defraud creditors may be proved in any
held fraudulent if it is made after a other manner recognized by the law of
judgment has been rendered against the evidence."
debtor making the alienation. This
presumption of fraud is not conclusive and In Oria v. Mcmicking, this Court
may be rebutted by satisfactory and considered the following instances as
convincing evidence. All that is necessary badges of fraud:
is to establish affirmatively that the
conveyance is made in good faith and for 1. The fact that the consideration of the
a sufficient and valuable consideration.30 conveyance is fictitious or is Inadequate.
2. A transfer made by a debtor after suit
Regarding contracts undertaken in fraud
has begun and while it is pending against
of creditors, the existence of the intention
him.
to prejudice the same should be
3. A sale upon credit by an insolvent
determined either by the presumption
debtor.
established by Article 1387 or by the
4. Evidence of large indebtedness or
proofs presented in the trial of the case. In
complete insolvency.
any case, the presumption of fraud
5. The transfer of all or nearly all of his
established by this article is not
property by a debtor, especially when he
conclusive, and may be rebutted by
is insolvent or greatly embarrassed
satisfactory and convincing evidence. An
financially.
independent action is necessary to prove
6. The fact that the transfer is made
that the contract is rescissible. 31
between father and son, when there are
present other of the above circumstances.
Indeed, Article 1387 of the Civil Code
7. The failure of the vendee to take
provides that alienations made by a debtor
exclusive possession of all the property.
by gratuitous title are presumed fraudulent
when the donor did not reserve sufficient
Among the circumstances indicating fraud
property to pay his outstanding debts.
is a transfer of all or nearly all of the
Likewise, alienations by onerous title are
debtor's assets, especially when the
presumed fraudulent when made by
debtor is greatly embarrassed financially.
persons against whom some judgment
Accordingly, neither a declaration of
has been rendered or some writ of
insolvency nor the institution of insolvency
attachment has been issued. These,
proceedings is a condition sine qua non
however, are mere presumptions which
for a transfer of all or nearly all of a
are in no way conclusive. The
debtor's assets to be regarded in fraud of
presumption of fraud can be overthrown
creditors. It is sufficient that a debtor is
by evidence showing that the conveyance
greatly embarrassed financially.
was made in good faith and for a sufficient
and valuable consideration.
The above enumeration, however, is not
an exclusive list. The circumstances
Badges of fraud, explained.
evidencing fraud are as varied as the men
Notably, the presumption of fraud or
who perpetrate the fraud in each case.
intention to defraud creditors is not just
The Supreme Court has therefore
declined to define it, reserving the liberty
to deal with it under whatever form it may
present itself.34
Problem:
On August 25 and 26, 1990, Y issued two
Metrobank checks in the sums of
P300,000 and P241,668, respectively,
payable to "cash." Upon presentment by X
with the drawee bank, the checks were
dishonored for the reason "account
closed." Demands to make good the
checks proved futile.
Meanwhile, a Deed of Donation conveying
parcels of land and purportedly executed
by Y on August 10, 1989 in favor of her
children, A, B, and C, was registered with
the Office of the Register of Deeds.
On June 23, 1993, X filed an accion
pauliana against Y and her children to
rescind the questioned Deed of Donation.
On the other hand, Y denied any liability to
X. As regards the questioned Deed of
Donation, she maintained that it was not
antedated but was made in good faith
Was the questioned Deed of Donation
made in fraud of X rescissible?
Answer:
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 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; (4)
the act being impugned is fraudulent; and
(5) the third person who received the
property conveyed, if it is by onerous title,
has been an accomplice in the fraud.
In the instant case, the alleged debt of Y
in favor of X was incurred in August 1990,
while the deed of donation was
purportedly executed on August 10, 1989.
The Supreme Court is not convinced with
the allegation of X that the questioned
deed was antedated to make it appear
that it was made prior to X's credit.
Notably, that deed is a public document, it
having been acknowledged before a
notary public. As such, it is evidence of the
fact which gave rise to its execution and of
its date.
X's claim against Y was constituted only in
August 1990, or a year after the
questioned alienation. Thus, the first two
requisites for the rescission of contracts
are absent.
Even assuming arguendo that X became
a creditor of Y 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, therefore,
"essential that the party asking for
rescission prove that he has exhausted all
other legal means to obtain satisfaction of
his claim. X neither alleged nor proved
that she did so. On this score, her action
for the rescission of the questioned deed
is not maintainable even if the fraud
charged actually did exist."
The fourth requisite for an accion pauliana
to prosper is not present either.
Art. 1387, first paragraph, of the Civil
Code provides: "All contracts by virtue of
which the debtor alienates property by
gratuitous title are presumed to have been
entered into in fraud of creditors when the
donor did not reserve sufficient property to
pay all debts contracted before the
donation. Likewise, Article 759 of the
same Code, second paragraph, states
that the donation is always presumed to
be in fraud of creditors when at the time
thereof the donor did not reserve sufficient
property to pay his debts prior to the
donation.
For this presumption of fraud to apply, it
must be established that the donor did not
leave adequate properties which creditors
might have recourse for the collection of
their credits existing before the execution
of the donation.
Nevertheless, a creditor need not depend
solely upon the presumption laid down in
Articles 759 and 1387 of the Civil Code.
Under the third paragraph of Article 1387,
the design to defraud may be proved in
any other manner recognized by the law
of evidence. Thus, in the consideration of
whether certain transfers are fraudulent,
the Court has laid down specific rules by
which the character of the transaction may
be determined. The following have been
denominated by the Court as badges of
fraud:
1. The fact that the consideration of the
conveyance is fictitious or is inadequate;
2. A transfer made by a debtor after suit
has begun and while it is pending against
him;
3. A sale upon credit by an insolvent
debtor;
4. Evidence of large indebtedness or
complete insolvency;
5. The transfer of all or nearly all of his
property by a debtor, especially when he
is insolvent or greatly embarrassed
financially;
6. The fact that the transfer is made
between father and son, when there are
present other of the above circumstances;
and
7. The failure of the vendee to take
exclusive possession of all the property.
X failed to discharge the burden of proving
any of the circumstances enumerated
above or any other circumstance from
which fraud can be inferred. Accordingly,
since the four requirements for the
rescission of a gratuitous contract are not
present in this case, X's action must fail.
35
Art. 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 acquirer shall be liable first, and
so on successively. (1298a)
Art. 1389. The action to claim rescission
must be commenced within four years.
For persons under guardianship and for
absentees, the period of four years shall
not begin until the termination of the
former's incapacity, or until the domicile of
the latter is known. (1299)
Prescriptive Period for Action for
Rescission
General Rule:
The action to claim rescission must be
commenced within four years.
Exceptions:
1. For persons under guardianship Within
four years from the time of the termination
of the incapacity of the ward.
2. For absentees known. Within four years
from the time the domicile of the absentee
is
Problem:
X, is the owner of B Shipping Lines. It
appears that on or about October 4, 1985,
T Corp. shipped on board the vessel M/V
Z, owned by X, 3,400 bags of copra. The
said shipment of copra was covered by a
marine Insurance policy issued by P
Insurance Co. M/V Z, however, sank.
Because of the loss, the insurer, P
Insurance Co., paid the amount of
P354,000 (the value of the copra) to the
consignee.
Having been subrogated into the rights of
the consignee, P Insurance Co. instituted
a case to recover the money paid to the
consignee, based on breach of contract of
carriage. While the case was still pending.
X executed deeds of donations of parcels
of land in favor of his children, S and R.
Subsequently, P Insurance Co. discovered
that X no longer had any property and that
he had conveyed the subject properties to
his children.
On February 25, 1997, P Insurance Co.
filed a complaint, for the rescission of the
deeds of donation executed by X in favor
of his children. P Insurance Co, alleged,
that X executed the aforesaid deeds in
fraud of his creditors.
X, S, and R subsequently filed their
answer and moved for its dismissal on the
ground that the action had already
prescribed.
When did the 4-year prescriptive period as
provided for in Article 1389 of the Civil
Code for P Insurance Co. to file its action
for rescission of the subject deeds of
donation commence to run? Answer:
Article 1389 of the Civil Code simply
provides that, "The action to claim
rescission must be commenced within four
years." Since this provision of law is silent
as to when the prescriptive period would
commence, the general rule, ie, from the
moment the cause of action accrues
therefore, applies.
To count the four-year prescriptive period
to rescind an allegedly fraudulent contract
from the date of registration of the
conveyance with the Register of Deeds,
as alleged by X, S, and R, would run
counter to Article 1383 of the Civil Code
as well as settled jurisprudence. It would
likewise violate the third requisite to file an
action for rescission of an allegedly
fraudulent conveyance of property, i.e., the
creditor has no other legal remedy to
satisfy his claim.
P Insurance Co. only learned about the
unlawful conveyances made by X in
January 1997 when its counsel
accompanied the sheriff to attach the
properties of X. There they found that he
no longer had any properties in his name.
It was only then that P Insurance Co.'s
action for rescission of the deeds of
donation accrued because then it could be
said that P Insurance Co. had exhausted
all legal means to satisfy the trial court's
judgment in its favor. Since P Insurance
Co. filed its complaint for accion pauliana
against X, S, and R on February 25, 1997,
barely a month from its discovery that X
had no other property to satisfy the
judgment award against him, its action for
rescission of the subject deeds clearly had
not yet prescribed
CHAPTER 7

VOIDABLE CONTRACTS
Art. 1390. The following contracts are
voidable or annullable, even though there
may have been no damage to the
contracting parties:
1. Those where one of the parties is
incapable of giving consent to a contract;
2. Those where the consent is vitiated by
mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they
are annulled by a proper action in court.
They are susceptible of ratification. (n)
What are voidable contracts?
Voidable or annullable contracts are
existent, valid, and binding, although they
can be annulled because of want of
capacity or vitiated consent of one of the
parties, but before annulment, they are
effective and obligatory between parties.
Hence, it is valid until it is set aside and its
validity may be assailed only in an action
for that purpose. They can be confirmed or
ratified.
Void and voidable contracts, distinguished
Void
A contract is inexistent and void from the
very beginning when (i) its cause, object
or purpose is contrary to law, morals, good
customs, public order or public policy; (ii) it
is absolutely simulated or fictitious; (iii) its
cause or object did not exist at the time of
the transaction; (iv) its object is outside the
of men; (v) it contemplates an impossible
service; (vi) the intention of the parties
relative to the principal object of the
contract cannot be ascertained; or (vii) it is
expressly prohibited or declared void by
law. The action or defense for the
declaration of the inexistence of a contract
does not prescribe.
A void or inexistent contract is one which
has no force and effect from the very
beginning. Hence, it is as if it has never
been entered into and cannot be validated
either by the passage of time or by
ratification. There are two types of void
contracts: (1) those where one of the
essential requisites of a valid contract as
provided for by Article 1318 of the Civil
Code is totally wanting; and (2) those
declared to be so under Article 1409 of the
Civil Code.
Voidable
A voidable or annullable contract is one
where (i) one of the parties is incapable of
giving consent to a contract; or (ii) the
consent is vitiated by mistake, violence,
intimidation, undue influence or fraud. The
action for annulment must be brought
within four (4) years from the time the
intimidation, violence or undue influence
ceases, or four (4) years from the time of
the discovery of the mistake or fraud.

By contrast, a voidable or annullable
contract is one in which the essential
requisites for validity under Article 1318
are present, but vitiated by want of
capacity, error, violence, intimidation,
undue influence, deceit.
Vices of Consent
Contracts which were entered into by a
person whose consent was obtained and
vitiated through:
1. Mistake;
2. Violence;
3. Intimidation;
4. Undue influence; or
5. Fraud.
Thus, contracts where consent is given
through fraud, are voidable or annullable.
These are not void ab initio since voidable
or anullable contracts are existent, valid,
and binding, although they can be
annulled because of want of capacity or
the vitiated consent of one of the parties.
However, before such annulment, they are
considered effective and obligatory
between parties.
Example:
In Tagatac v. Jimenez, the plaintiff sold her
car to Feist, who sold it to Sanchez, who
sold it to Jimenez. When the payment
check issued to Tagatac by Feist was
dishonored, the plaintiff sued to recover
the vehicle from Jimenez on the ground
that she had been unlawfully deprived of it
by reason of Feist's deception. In ruling for
Jimenez, the Court of Appeals held:
The point of inquiry is whether
plaintiff-appellant Tagatac has been
unlawfully deprived of her car. At first
blush, it would seem that she was
unlawfully deprived thereof, considering
that she was induced to part with it by
reason of the chicanery practiced on her
by Feist. Certainly, swindling, like robbery,
is an illegal method of deprivation of
property. In a manner of speaking,
plaintiff-appellant was "illegally deprived"
of her car, for the way by which Feist
induced her to part with it is illegal and is
punished by law. But does this "unlawful
deprivation" come within the scope of
Article 559 of the New Civil Code?
xxx
xxx. The fraud and deceit practiced by
Feist earmarks this sale as a voidable
contracts. Being a voidable contract, it is
susceptible of either ratification or
annulment. If the contract is ratified, the
action to annul it is extinguished6 and the
contract is cleansed from all its defects; if
the contract is annulled, the contracting
parties are restored to their respective
situations before the contract and mutual
restitution follows as a consequences.
However, as long as no action is taken by
the party entitled, either that of annulment
or of ratification, the contract of sale
remains valid and binding. When
plaintiff-appellant Tagatac delivered the
car to Feist by virtue of said voidable
contract of sale, the title to the car passed
to Feist. Of course, the title that Feist
acquired was defective and voidable.
Nevertheless, at the time he sold the car
to Sanchez, his title thereto had not been
avoided and he therefore conferred a
good title on the latter, provided he bought
the car in good faith, for value and without
notice of the defect in Feist's title (Article
1506, N.C.C.). There being no proof on
record that Sanchez acted in bad faith, it
is safe to assume that he acted in good
faith.”
Problem:
Spouses H and W borrowed from N and M
the amount of P175,000. To secure the
payment of the loan, H and W mortgaged
their residential house and lot, which lot is
covered by Transfer Certificate of Title
(TCT) No. 1234. Spouses H and W failed
to pay the loan upon demand.
Consequently, the real estate mortgage
was extra judicially foreclosed and the
mortgaged property sold at a public
auction. The and lot was awarded to M
and N, who were the only bidders. TCT
No. 1234 was cancelled and, in its stead,
TCT No. 5678 was issued in the name of
M and N.
On July 23, 1999, spouses Hand W filed a
complaint for annulment of real estate
mortgage and the consequent foreclosure
proceedings.
Is there undue influence?
Answer:
We are hard put to conclude in this case
that there was any undue influence.
There is ultimately no showing that
spouses H and W's consent to the loan
and mortgage agreements was vitiated by
undue influence. The financial condition of
spouses H and W may have motivated
them to contract with M and N, but undue
influence cannot be attributed to M and N
simply because they had lent money.
Article 1391, in relation to Article 1390 of
the Civil Code, grants the aggrieved party
the right to obtain the annulment of
contract on account of factors which vitiate
consent. Article 1337 defines the concept
of undue influence, as follows:
There is undue influence when a person
takes improper advantage of his power
over the will of another, depriving the latter
of a reasonable freedom of choice. The
following circumstances shall be
considered: the confidential, family,
spiritual and other relations between the
parties or the fact that the person alleged
to have been unduly influenced was
suffering from mental weakness, or was
ignorant or in financial distress.
While spouses H and W were allegedly
financially distressed, it be proven that
there is deprivation of their free agency. In
other words, for undue influence to be
present, the influence exerted must have
so or subjugated the mind of a contracting
party as to destroy his free agency,
making him express the will of another
rather than his own. The alleged lingering
financial woes of spouses H and W per se
cannot be equated with the presence of
undue influence. 10
What is ratification?
Ratification, or confirmation, is defined as
the act or means by virtue of which
efficacy is given to a contract which
suffers from a vice of curable nullity. 11
Requisites of Ratification or Confirmation
1. The contract should be tainted with a
vice which is susceptible of being cured.
2. The confirmation should be effected by
the person who is entitled to do so under
the law.
3. It should be effected with knowledge of
the reason which renders the contract
voidable.
4. The reason which renders the contract
voidable should have already
disappeared.
RESCISSION VS. ANNULMENT
RESCISSION
1. The basis here is lesion (damage).
2. The defect here is external or extrinsic.
3. The action is subsidiary.
4. Plaintiff may be a party or a third
person.
5. There must be damage to the plaintiff.
6. If plaintiff is indemnified, rescission
cannot prosper.
7. Compatible with the perfect validity of
the contract.
8. To prevent rescission, ratification is not
required.
ANNULMENT
1. The basis here is vitiated consent or
incapacity to consent.
2. The defect here is intrinsic (in the
meeting of the minds).
3. The action is principal.
4. Plaintiff must be a party to the contract
(whether bound principally or subsidiarily).
5. Damage to the plaintiff is immaterial.
6. Indemnity here is no bar to the
prosecution of the action.
7. Here, a defect is presupposed.
8. To prevent annulment, ratification is
required.
Art. 1391. The action for annulment shall
be brought within four years. This period
shall begin:
In cases of intimidation, violence or undue
influence, from the time the defect of the
consent ceases.
In case of mistake or fraud, from the time
of the discovery of the same.
And when the action refers to contracts
entered into by minors or other
incapacitated persons, from the time the
guardianship ceases. (1301a)

Action for annulment of contract and
action for nullity of contract, distinguished.
Action for annulment contract
An action for annulment of contract is one
filed where consent is vitiated by lack of
legal capacity of one of the parties, or by
mistake, violence, intimidation, undue
influence or fraud. By its very nature,
annulment contemplates a contract which
is voidable, that is, valid until annulled.
Such contract is binding on all the
contracting parties until annulled and set
aside by a court of law. It may be ratified.
An action for annulment of contract has a
four-year prescriptive period.
Action for nullity of contract
An action for declaration of nullity of
contract presupposes a void contract or
one where all of the requisites prescribed
by law for contracts are present but the
cause, object or purpose is contrary to
law, morals, good customs, public order or
public policy, prohibited by law or declared
by law to be void. Such contract as a rule
produces no legal and binding effect even
if it is not set aside by legal action. Neither
may it be ratified. An action for the
declaration of nullity of contract is
imprescriptible.
Problem:
Sometime in July 1985, W wanted to
purchase 2 parcels of land, Lot 503 with
an apartment unit erected thereon and Lot
505 with a residential house. The two lots
were being sold together for P180,000.
Inasmuch as W had only P144,000 at
hand, she asked her sister, Y, to contribute
P36,000 to complete the purchase price.
The sisters agreed that Lot 503 and the
apartment unit thereat would belong to Y
upon full payment of its purchase price of
P80,000, while Lot 505 with a residential
house would belong to W. The properties
were then registered in the name of H
married to W. The parties, however,
verbally agreed that Y and her family
would stay at Lot 505 until she had fully
paid for Lot 503.
Sometime in 1991, Z, a sister of W and Y,
arrived from the United States. Z noticed
the strained relations between her two
siblings. When she inquired about the
status of her sisters' agreement regarding
Lot Y informed Z that the agreement was
yet to be reduced into a formal contract. Z
offered to prepare a contract between W
and Y who acceded to the offer. Thus, on
September 9, 1991, W and Y signed an
Agreement embodying the detailed
scheme of payment for the lot by the
sisters' agreement, to wit:
We, X and Y, husband and wife, of legal
age, Manila, jointly agrees to pay W the
sum of P34,000 in the following terms and
conditions:
xxx
3. The borrowers (Sps. X and Y) agree to
put their real property as guarantees for
the above loan, which has a monthly rent
of P1,200 and will be collected by W
(Lender) as part of the agreement of the
loan.
4. As part of the agreement, the borrowers
will live in the Lender's house, located at
505 Floydie St. in exchange for her
property rents.
the parties because W's consent thereto
was vitiated by mistake. Allegedly, W did
not know that the agreement provided that
the ten-year period for payment of the
balance commenced from September
1991 and not from July 1985 which was
her true intention.

Is the September 9, 1991 Agreement

valid?
xxx

Answer:
6. If payment was not made after 10
years, the Lender will take ownership of
the property described above.
The Supreme Court agreed with the lower
courts when they declared that the 4-year
period for filing an action for annulment of
xxx
the September 9, 1991 Agreement, on
ground of vitiated consent, had already
lapsed when the complaint subject of
Thereafter, Y continued paying the present controversy was filed on March 8,
balance she owed W. Particularly, she 1996.
paid the amount of P10,000 in September
1990 and P7,555 on May 16, 1995.
Finally, in October 1995, Y attempted to
This is in accordance with Article 1391 of
pay the remaining balance of P26,444 in
the Civil Code, which pertinently reads:
full satisfaction of her obligation but W
refused to accept the same on the ground
that, the ten-year period for the payment
of the balance, reckoned from July 1985, Art. 1391. The action for annulment shall
the alleged date of the verbal agreement be brought within four years. This shall
between them, had already expired. begin:
Thereafter W demanded that Y and her xxx
family vacate the house at 505 Floydie
In case of mistake or fraud, from the time
Street, which prompted X and Y to
of the discovery of the same.
consign the P26,444 in court.
xxx

On March 8, 1996, spouses H and W filed,

The complaint for Nullity of Contract/
a complaint for Nullity of
Agreement was filed on March 8, 1996,
Contract/Agreement on the ground that
while the agreement subject thereof was
the Agreement executed on September 9,
entered into on September 9, 1991. The
1991 did not contain the true intention of
Agreement was read to the parties before
they affixed their signatures thereon.
Spouses H and W were thereafter
furnished a copy of the subject
Agreement. Spouses H and W are
presumed to have discovered the alleged
mistake on September 9, 1991. Hence,
the action for annulment which was filed
four years and six months from the time of
the discovery of the mistake had already
prescribed. Evidently, the Agreement
could no longer be set aside. 14
Art. 1392. Ratification extinguishes the
action to annul a voidable contract.
(1309a)
Effects of Ratification
1. The action to annul a voidable contract
is extinguished; hence, the contract
becomes valid.
2. The contract is cleansed of its defect
from the beginning. 15
Art. 1393. Ratification may be effected
expressly or tacitly. It is understood that
there is a tacit ratification if, with
knowledge of the reason which renders
the contract voidable and such reason
having ceased, the person who has a right
to invoke it should execute an act which
necessarily implies an intention to waive
his right. (1311a)
Problem:
Y, in consideration of a loan in the amount
of P400,000, out of which the sum of
P336,100 was released to her, mortgaged
in favor of the Government Service
Insurance System (GSIS) a parcel of land,
with 21 bungalows.
GSIS extrajudicially foreclosed the
mortgage on the ground that up to that
date Y was in arrears on her monthly
installments in the amount of P52,000.
Payments made by Y at the time of
foreclosure amounted to P130,000. GSIS
itself was the buyer of the property in the
foreclosure sale.
On 20 February 1959, Y's father, Atty. V,
sent a letter to the general manager of
GSIS, R, the material portion of which
recited as follows:
I now propose to pay said amount of
P30,000 to the GSIS if it would agree that
after such payment the foreclosure of my
daughter's would be set aside. I am aware
that the amount of P30,000 which I offer to
pay will not cover the total arrearage of
P52,000 but as regards the balance, I
propose this arrangement: for the GSIS to
take over the administration of the
mortgaged property and to collect the
monthly installments, amounting to about
P5,000, due on the unpaid purchase price
of more than 31 lots and houses therein
and the monthly installments collected
shall be applied the payment of arrearage
until the same is fully covered.
xxx

On the same date, February 20, 1959,
Atty. V received the following telegram:
GSIS BOARD APPROVED YOUR
REQUEST RE REDEMPTION OF
FORECLOSED PROPERTY OF YOUR
DAUGHTER.
(Sgd.) R, General Manager
On February 28, 1959, Atty. V remitted to
GSIS, through R, a check for P30,000.
GSIS received the amount of P30,000,
and issued its official receipt No. 12345. It
did not, however, take over the
administration of the compound. On March
4, 1960, Y remitted, through her father, the
amount of P44,121, representing the total
monthly installments that she received
from the occupants for the period from
March to December 1959 and January to
February 1960. GSIS also received this
amount, and issued the corresponding
official receipt.
Remittances, all accompanied by letters,
corresponding to the months of March,
April, May, and June, 1960 and totaling
P24,604 were also sent by Y to GSIS from
time to time, all of which were received
and duly receipted for.
Then GSIS sent 3 letters, asking Y for a
proposal for the payment of her
indebtedness, since according to GSIS
the one-year period for redemption had
expired.
In reply, Atty. V sent a letter, dated March
11, 1960, protesting against GSIS's
request for proposal of payment and
inviting its attention to the contract
generated by his offer of February 20,
1959, its by telegram of the same date,
the compliance of the terms of the offer
already commenced by Y, and the
misapplication by GSIS of the she had
made, and requesting the proper
By letter, dated May 31, 1960, GSIS
countered the preceding protest that the
telegram should be disregarded in view of
its failure to express the contents of the
board resolution due to the error of its
employees in couching the correct
wording of the telegram.
In as much as, according to GSIS, the
remittances previously made by Atty. V
were allegedly not sufficient to pay off her
daughter's arrears and the one-year
period for redemption has expired, GSIS,
on July 5, 1960, consolidated the title to
the compound in its name, and gave
notice thereof to Y on July 26, 1960 and to
each occupant the compound.
Hence, Y instituted the present suit, for
specific performance.
Did the telegram generate a contract that
is valid and binding upon the parties?
Answer:
The offer of compromise made by Y in the Art. 1395. Ratification does not require the
letter, had been validly accepted, and was conformity of the contracting party who
binding on GSIS. The terms of the offer has no right to bring the action for
were clear, and over the signature of annulment. (1312)
GSIS's general manager, R, Y was
informed telegraphically that her proposal
had been accepted. There was nothing in
The consent of the party who is in bad
the telegram that hinted at any anomaly,
faith is not required.
or gave ground to suspect its veracity, and
Y, therefore, cannot be blamed for relying
upon it.
Art. 1396. Ratification cleanses the
contract from all its defects from the
moment it was constituted. (1313)
Yet, notwithstanding this notice, GSIS
pocketed the amount, and kept about the
telegram not being in accordance with the
true facts, as it now alleges. This silence, The above article explains that ratification
taken together with the unconditional has a retroactive effect.
acceptance of three other subsequent
remittances from Y, constitutes in itself a
binding ratification of the original
agreement (Civil Code, Art. 1393). Art. 1397. The action for the annulment of
contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
However, persons who are capable
ART. 1393. Ratification may be effected cannot allege the incapacity of those with
expressly or tacitly. It is understood that whom they contracted; nor can those who
there is a tacit ratification if, with exerted intimidation, violence, or undue
knowledge of the reason which renders influence, or employed fraud, or caused
the contract voidable and such reason mistake base their action upon these flaws
having ceased, the person who has a right of the contract. (1302a)
to invoke it should execute an act which
necessarily implies an intention to waive
his right.
General Rule:

Art. 1394. Ratification may be effected by

the guardian of the incapacitated person. The action for the annulment of contracts
(n) may be instituted by all who are thereby
obliged principally or subsidiarily.

The ward can ratify provided he becomes

capacitated. Requisites:
1. The plaintiff must have an interest in the
contract; and
2. The action must be brought by the
victim and not the party responsible for the
defect.
Exception to the rule in Article 1397, NCC
Indeed, a contract takes effect only
between the parties who made it, and also
their assigns and heirs, except in cases
where the rights and obligations arising
from the contract are not transmissible by
their nature, or by stipulation or by
provision of law. Since a contract may be
violated by the parties thereto as against
each other, in an action upon that
contract, the real parties in interest, either
as plaintiff or as defendant must be parties
to said contract. In relation thereto, Article
1397 of the Civil Code lays the general
rule that an action for the annulment of
contracts can only maintained by those
who are bound either principally or
subsidiarily by virtue thereof. The rule,
however, admits of an exception. The
Court, in Teves v. People's Homesite and
Housing Corporation held that a person
who is obliged principally or subsidiarily in
a contract may exercise an action for
nullity of the contract if he is prejudiced in
his rights with respect to one of the
contracting parties, and can show the
detriment which could positively result to
him from the contract in which he had no
intervention. This exception to the rule has
been applied in Banez v. CA;
Development Bank of the Philippines v.
CA; Dilson Enterprises Inc. v. IAC.
Problem:
To secure loans in the aggregate amount
of P7 Million obtained by one X from Z
Bank, H, executed on July 1994 a Real
Estate Mortgage (REM) in favor of Z Bank.
Before the words "With my Marital
Consent" appearing in the REM is a
signature attributed to H's wife, W.
On October 5, 1998, H executed an
Amendment to the Real Estate Mortgage
(AREM) increasing the amount secured by
the mortgage to P26 Million, also bearing
a signature attributed to his wife W above
the words "With my Marital Consent." H
died on December 26, 1999.
The loan obligation having remained
unsettled, Z Bank filed a "Petition for
Sale", for the extrajudicial foreclosure of
the AREM and the sale at public auction
of the lot covered Acting on the petition,
the RTC Clerk of Court and Ex-Oficio
Sheriff scheduled the public auction.
A day before the scheduled auction sale,
the heirs of H, namely B, C, D, and E, filed
a Complaint/Petition against Z Bank for
annulment of the AREM, alleging, among
other things, that
xxx the said AREM is without force and
effect, the same having been executed
without the valid consent of W who at the
time of the execution of the said
instrument was already suffering from
advanced Alzheimer's Disease and,
incapable of giving consent, more so
writing and signing her name.
Z Bank argues, that the heirs of H are not
the real parties in interest, hence, their
complaint states no cause action. Z Bank
adds that since the party in interest is W
but the complaint is not brought in her
name, the heirs of H's complaint states no
cause of action.
Is W obliged principally under the AREM?
Answer:
The pertinent provision of the Civil Code
on annulment of contracts reads:
Art. 1397. The action for the annulment of
contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
However, persons who are capable
cannot allege the incapacity of those with
whom they contracted; nor can those who
exerted intimidation, violence, or undue
influence, or employed fraud, or caused
mistake base their action upon these flaws
of the contract.
Upon the other hand, the pertinent
provision of Rule 3 of the Rules of Court
(Parties to Civil Actions) read:
SEC. 2 Parties in interest. - A real party in
interest is the party who stands to be
benefited or injured by the judgment in the
suit, or the party entitled to the avails of
the suit. Unless otherwise authorized by
law or these Rules, every action must be
prosecuted or defended in the name of the
real party in interest.
The AREM was executed by H, with the
marital consent of W. Since the mortgaged
property is presumed conjugal, she is
obliged principally under the AREM. It is
thus she, following Art. 1397 of the Civil
Code vis a vis Sec. 2 of Rule 3 of the
Rules of Court, who is the real party in
interest, hence, the action must be
prosecuted in her name as she stands to
be benefited or in the action.
Art. 1398. An obligation having been
annulled, the contracting parties 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.
(1303a)
Now, if a voidable contract is annulled, the
restoration of what has been is proper.
The effect of annulment of the contract is
to wipe it out of existence and to restore
the parties, insofar as legally and
equitably possible, to their original
situation before the contract was entered
into.
Art. 1399. When the defect of the contract
consists in the incapacity of one of the
parties, the incapacitated person is not
obliged to make any restitution except
insofar he has been benefited by the thing
or price received by him. (1304)
Problem: Is X obliged to make a restitution?

X is the owner of a lot and a five-door Answer:

apartment constructed thereon. The lot is
registered in his name under TCT No.
1234. The apartment units are occupied
Here, as borne by the facts on hand, X
by lessees.
signed the deed without the remotest idea
of what it was.

On December 29, 1985, X, assisted by his

brother, Y, entered into a Deed of Absolute
The circumstances surrounding the
Sale with brothers J and K, represented by
execution of the contract manifest a
their father Atty. Z, involving the subject
vitiated consent on the part of X. Undue
property for a consideration of P187,000.
influence was exerted upon him by his
Consequently, X's title to the property was
brother Y and Atty. Z. It was his brother Y
cancelled and in lieu thereof, TCT No.
who negotiated with Atty. Z. However, they
5678 was registered and issued in the
did not explain to him the nature and
names of J and K. In January, 1986, Atty.
contents of the document. Worse, they
Z, then still alive, started collecting rentals
deprived him of a reasonable freedom of
from the lessees of the apartments.
choice. It bears stressing that he reached
only grade three. Thus, it was impossible
for him to understand the contents of the
On March 10, 1987, X filed, a complaint contract written in English and
for annulment of the Deed of Absolute embellished in legal jargon.
Sale. He averred that his brother Y, and
Atty. Z convinced him to work abroad.
Through insidious words and
Even the if any, was not shown to be
machinations, they made him sign a
actually paid to X. Extant from the records
document purportedly a contract of
is the fact that Y profited from the entire
employment, which document turned out
transaction gave only small amounts of
to be a Deed of Absolute Sale. By virtue of
money to X.
the said sale, J and K, were able to
register the title to the property in their
names. X further alleged that he did not
receive the consideration stated in the The effect of annulment is to restore the
contract. He was shocked when his sister parties to the status quo ante insofar as
told him that J and K sent a letter to the legally and equitably possible-- this much
lessees of the apartment informing them is dictated by Article 1398 of the Civil
that they are the new owners. Finally, he Code. As an exception however to the
claimed that Y, J and K, conspired with principle of mutual restitution, Article 1399
one another in taking advantage of his provides that when the defect of the
ignorance, he being only a third grader. contract consists in the incapacity of one
of the parties, the incapacitated person is
not obliged to make any restitution, except
when he has been benefited by the things
or price received by him. Thus, since the
Deed of Absolute Sale between X and J
and K brothers is voidable and hereby
annulled, then the restitution of the
property and its fruits to X is just and
proper. Y, J, K, and Z should turn over to X
all the amounts they received starting
January, 1986 to the time the property
shall have been returned to the latter. J
and K received from the lessees monthly
Where the thing is lost due to the fault of
the plaintiff, the action for annulment of
contracts shall be extinguished.
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.

Art. 1400. Whenever the person obliged

by the decree of annulment to return the
thing can not do so because it has been
lost through his fault, he shall return the
fruits received and the value of the thing at
the time of the loss, with interest from the
same date. (1307a)
Art. 1402. As long as one of the
contracting parties does not restore what
in virtue of the decree of annulment he is
bound to return, the other cannot be
compelled to comply with what is
incumbent upon him. (1308)

Where the thing is lost due to the fault of

the defendant, he shall return the fruits
received and the value of the thing at the
time of the loss, interest from the same
date.

Art. 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. (1314a)