CONTRACTS

DISCUSSION OUTLINE
Contracts
Defective Contracts
 Rescissible
 Voidable
 Unenforceable
 Void
Form of Contracts
Reformation of Instrument
Interpretation of Contracts
Classification
Classification of defective contracts
 Rescissible contract
 Voidable contract
 Unenforceable contract
 Void contract

(1) RESCISSIBLE Contract

- one which has all the essential requisites of a contract but which may be set aside by reason of
equity on account of damage to one of the parties or upon a 3rd person.
Classification
(1) RESCISSIBLE Contract

(a)* Those entered into by guardians whenever the ward whom they represent suffer lesion by more
than ¼ of the value of the things which are the object thereof.
 G, the guardian of M, sold the corn harvested from M’s farm for P40k. The value of the corn is P60k. The
sale is rescissible because the lesion of P20k is more than ¼ of P60k, or P15k.

(b)* Those agreed to in representation of absentees, if the latter suffer lesion by more than ¼ of the
value of the things which are the object thereof.

*shall not take place if the contract is approved by the court which is presumed to have taken appropriate steps to
safeguard the interest of the ward or the absentee.
Classification
(1) RESCISSIBLE Contract - cont

(c) Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims
due them.
 D owes C. To defraud C, D sells his only lot to T who knows of the fraudulent intention of D. Sale is
rescissible unless T was in good faith.

(d) Those which refer to things under litigation it they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority.

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

Classification
(1) RESCISSIBLE Contract – cont.

Rescissible payment, requisites

1. The debtor is insolvent
2. The obligation is not yet due
3. The debtor makes the payment

Rescission
-remedy allowed by law to the contracting parties and even to 3 rd persons, to secure the reparation of
damages caused to them by a contract, even if it should be valid, by means of the restoration of the
things to their condition at the moment prior to the celebration of said contract.
Classification
(1) RESCISSIBLE Contract – cont.

Requisites of rescission
1. The party suffering damage must have no other legal means to obtain reparation for the
same.
- action is subsidiary
- Hence, if the debtor has property other than that for which rescission is being brought, rescission
will not prosper.

2. The party demanding rescission must be able to return whatever he may be obliged to
restore.
- creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest
- Hence, rescission is not available if the party seeking it cannot comply with such obligation.
Classification
(1) RESCISSIBLE Contract
Requisites of rescission – cont.

3. The thing object of the contract must not be legally in the possession of a third person who
acted in good faith
- indemnity for damages may be demanded from the person causing the loss

4. The action for rescission must be brought within the period allowed by law.
-prescritive period is 4 years from the date of the contract, except;
a. persons under guardianship – 4years from termination of incapacity
b. absentees – 4 years from the time the absentee’s domicile is known.
Classification
(1) RESCISSIBLE Contract – cont.

Extent of rescission
- rescission shall only be to the extent necessary to cover the damages caused.
e.g. G, guardian, sold 100 sacks of rice harvested from the farm of M, his ward, for
P700.00 per sack, or total price of P70,000.00 to B. However, the value of each sack is
P1,000.00, or total value of P100,000.00. The rescission of the sale of 30 sacks of rice is
sufficient to cover the damage of P30,000.00 (which is more than one-fourth of the total
value of P100,000.00). Thus, B must return 30 sacks of rice to M.
Classification
(1) RESCISSIBLE Contract – cont.

Alienations in fraud of creditors

1. Gratuitous title
- presumed to have been entered into fraud of creditors if the debtor did not reserve sufficient
property to pay all debts contracted before the donation.
e.g. D owes his creditors P500,000.00. He has assets of P700,000.00. If D donates assets
amounting to P300,000.00, such donation is presumed fraudulent because it leaves D with assets of
only P400,000.00, which amount is not enough to pay his debts of P500,000.00
2. Onerous title
- presumed fraudulent when made by persons against whom some judgment has been rendered in
any instance or some writ of attachment has been issued.
e.g. D owes C P100,000.00. When D defaults, C sues him and obtains a favorable judgment
against him. If D sells properties, say to T, the sale is presumed fraudulent because it was made by D
who has a decision rendered against him. C or any other creditor may ask for the rescission of the
sale.
Classification
(1) RESCISSIBLE Contract – cont.

Liability for damages of persons acquiring things in alienations in fraud of creditors

1. If the purchases was made in bad faith
- shall indemnify the creditors for damages suffered by them on account of the
alienation whenever due to any cause, it would be impossible for him to return them
- two or more alienations; first inquirer shall be liable first, and on successively,
provided they are both in bad faith

2. If the purchase was made in good faith

- the purchaser in good faith shall not be liable notwithstanding the fraudulent
intention of the debtor in disposing the property. (rescission will not be available.
Classification
(2) VOIDABLE Contract
- one that is defective by reason of the incapacity or vitiated consent of one of the parties.
-it is binding unless annulled by a proper action in court.
-susceptible of ratification
(a) Those where one of the parties is incapable of giving consent to a contract:
(i) Unemancipated minors
(ii) Insane or demented persons
(iii) deaf-mutes who do not know how to write
(b) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.
(c) Those where consent is given in a state of drunkenness
(d) Those where consent is given during a hypnotic spell.
Classification
(2) VOIDABLE Contract – cont.
Annulment
- the action brought to set aside a voidable contract.

Annulment and rescission, distinguished

1. Annulment is brought to declare the inefficacy inherent in the contract. Rescission is availed of
to produce the inefficacy which did not exist in the contract.
2. Annulment is based on vitiated consent; hence, damage is immaterial. Rescission is based on
lesion or damage.
3. In annulment, the action is principal. In rescission, the action is subsidiary.
4. Annulment is a sanction where the law predominates. Rescission is a remedy where equity
predominates
5. Annulment is available only to the parties, whether bound principally or subsidiarily. Rescission
is available not only to the contracting parties but also to third persons whose interests are affected.
6. Ratification is required to prevent annulment, while ratification is not required to prevent
rescission.
Classification
(2) VOIDABLE Contract

Rules on annulment of voidable contracts – cont.

1.When action must be brought (prescriptive period); otherwise the contract can no longer be set
aside

The action for annulment must be brought within four (4) years which period shall begin:
a. In cases of intimidation, violence or undue influence, from the time
the defect in the consent ceases.

b. In case of mistake or fraud, from the time of discovery of the same.

c. In cases of minority or other incapacity of a party, from the

time guardianship ceases.
Classification
(2) VOIDABLE Contract
Rules on annulment of voidable contracts – cont.
2. Who may bring action for annulment

The action for annulment may be instituted by all who are thereby obliged principally or
subsidiarily. Hence, it cannot be brought by third persons. It may be brought by the following:

a. The guardian of the incapacitated person during the latter’s incapacity

b. The incapacitated person after he has attained capacity
c. The party whose consent is vitiated by mistake, violence, intimidation, undue influence
or fraud
Classification
(2) VOIDABLE Contract
Rules on annulment of voidable contracts – cont.
3. Effects of annulment
a. Obligations created by annulment
1) In obligations to give, the contracting parties shall restore to each other, except in cases
provided by law, the following:
a) The things which have been the subject matter of the contract, with their fruits.
b) The price with its interest
2) In obligations to render service, the value thereof shall be the basis of damages
3) Restitution when one of the parties is incapacitated
*(not obliged to make any restitution except insofar as he has been benefited by the thing or price
received by him)
Classification
(2) VOIDABLE Contract
Rules on annulment of voidable contracts
3. Effects of annulment
a. Obligations created by annulment – cont.
4) When the thing is lost through the fault of the party obliged by the decree of annulment to
return it.
The said party shall return the following:
a. Fruits received
b. Value of the thing at the time of the loss
c. Interest from the time of the loss
5) Mutual restitution
Classification
(2) VOIDABLE Contract
Rules on annulment of voidable contracts - cont
4. Effect of the loss of the thing while in the possession of the party who has right to bring the
action for annulment

a. If lost through his fault, the action for annulment is extinguished, whether such party is
incapacitated or his consent is vitiated.

b. If lost without his fault and such party is incapacitated, he can still bring an action for
annulment.
Classification
(2) VOIDABLE Contract – cont.
Ratification
- the adoption or affirmation of a contract which is defective because of a party’s vitiated consent
or incapacity.
- How ratification is made

a. Express – made orally or in writing

b. Implied or tacit (with knowledge of the reason)
- Who may ratify (same persons who may annul the contract)?

i. Guardian of the incapacitated person during the latter’s incapacity

ii. Incapacitated person after he has attained capacity
iii. The party whose consent is vitiated by mistake, violence, intimidation, undue influence or
fraud – persons who employed such vices cannot ratify
Classification
(2) VOIDABLE Contract
Ratification – cont.
- Effects?
(i) It extinguishes the action to annul a voidable contract.
(ii) It cleanses the contract from all its defects from the moment it was constituted. Contract is
validated from inception.
(3) UNENFORCEABLE Contract
- one that cannot be enforced unless ratified.
- Right is available only to the contracting parties.
- Cannot be assailed by 3rd persons
(A) Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers.
Classification
(3) UNENFORCEABLE Contract –cont.
(B) Those that do not comply with the Statute of Frauds.
- a statute designed to prevent the commission of fraud by requiring certain contracts to be in writing and
be subscribed by the party charged.
- applies only to wholly executory contracts (contracts where no performance has yet been made by both
contracting parties).
- Contracts infringing the Statute of Frauds cannot be sued upon either for damages or specific
performance

a. An agreement that by its terms is not to be performed within a year from the making thereof.
b. A special promise to answer for the debt, default, or miscarriage of another. [Known as GUARANTTY]
c. An agreement in consideration of marriage, other than mutual promise to marry.
d. Sale of goods, chattels or things in action (e.g. shares; credit) at a price not less than P500
e. An agreement for the leasing of a real property or of an interest therein for more than 1 year
f. Sale of real property or an interest therein (regardless of price)
g. A representation as to the credit of a 3rd person
Classification
(3) UNENFORCEABLE Contract – cont.

Applicability of Statute of Frauds and Ratification

- Applies only to executory, not to completed, executed or partially consummated contracts.
- Susceptible of ratification through:

(i) By the failure to object to the presentation of oral evidence to prove them
(ii) By the acceptance of benefits under them – will make the contract executed in part. (e.g.
giving of down payment)
Classification
Problem: S and B entered into a contract whereby S sold his computer to B for P20,000.00. The parties
agreed that S would deliver the computer, and that B would pay the price the following day. B signed
the written agreement, but S refused to sign it saying that he would sign it when B makes the payment.
The following day, B went to the place of S to get the computer and offered the payment. S refuses to
deliver the computer. May B enforce the contract against S?

Answer: No. It is not enough that there is a writing of the agreement for it to be enforceable. It
must likewise be subscribed by the party charged. So since S did not subscribe to the agreement,
the same cannot be enforced against him.

-Those were both parties are incapable of giving consent to a contract

- Thus, the contract is unenforceable if one party is a minor, while the other party is insane.
Classification
Effect of ratification by parent or guardian

a. When only the parent or guardian of one party ratifies, the contract is voidable at
the instance of the parent or guardian of the party who did not ratify the contract.

b. When the parents or guardians of both parties ratify, the contract shall be considered
validated from inception.
Classification
(4) VOID or INEXISTENT Contract
- one which has no force and effect from the very beginning, as if it had never been entered into,
and which cannot be validated either by time or ratification.
Characteristic of a void contract:
- Cannot be ratified.
- Right to set up the defense of illegality cannot be waived – can be raised even on appeal.
- Action or defense for the declaration of the inexistence of a contract does not prescribe.
- Defense of illegality of contracts is not available to 3 rd persons whose interests are not directly
affected.
- Contract is void and inexistent if it is the direct result of a previous illegal contract.
Classification
(4) VOID or INEXISTENT Contract –cont.
- The following contracts are VOID from the beginning:
(a) Those whose cause, object or purpose is contrary to law, morals, good customs, public order
or public policy.
(b) Those which are absolutely simulated or fictitious.
(c) Those whose object or cause did not exist at the time of the transaction – refer to things that
are not capable of coming into existence, and not to future goods or things having a potential
existence which may be validly the object of a contract.
(d) Those whose object is outside the commerce of men.
(e) Those which contemplate an impossible service.
(f) Those expressly prohibited or declared void by law, viz:
(i) Contract of donation between spouses during the marriage (except moderate ones given
on the occasion of family rejoicing)
(ii) Contract of sale between spouses (except when there is separation of property)
(iii) Contract which stipulates that household service shall be without any compensation.
(iv) Contract upon future inheritance (except marriage settlements)
Kinds of illegal contracts; effect of illegality
1. Where the contract is a criminal offense
a. If both parties are guilty (in pari delicto)
- They shall have no right of action against each other
- Both shall be criminally prosecuted
- The effects and instruments of the crime shall be confiscated in favor of the
government.
b. If only one party is guilty
- guilty party will be criminally prosecuted
- neither one may compel the other to comply with his undertaking
- The instruments will be confiscated in favor of the government
- The innocent party shall not be bound to comply with his promise if he has not
yet given anything, and if he had given, he may claim for its return
e.g. B is buying a bale of tobacco leaves from S. However, S delivers to B a bale of marijuana leaves which B believes
to be tobacco.
- marijuana leaves will be confiscated by the government
- S will be prosecuted and he cannot compel B to pay the price.
- If B has paid, he may recover it
Kinds of illegal contracts; effect of illegality
2. Where the contract is not a criminal offense
a. If both parties are guilty
- neither party may recover what he has given or demand the performance of the other’s
undertaking.

e.g. W, a woman, agreed to live with M, a man, as M’s wife without the benefit of marriage in
consideration of M’s giving a monthly support to W. Both M and W are single.

Conclusion: The contract is illegal for being immoral but the illegality does not constitute a crime.
Neither party may ask for the fulfillment of the other’s promise nor recover what he has given. If M has
already given support to W, M cannot recover it.
Kinds of illegal contracts; effect of illegality
2. Where the contract is not a criminal offense – cont.
b. If only one party is guilty
1) The guilty party cannot recover what he has given nor can he ask for the fulfillment of
what has been promised him.

2) The innocent party may demand the return of what he has given without any obligation to
comply with his promise.

e.g. S sold and delivered to B for P3,000.00 a cow which S knew was suffering from contagious
disease. The sale is void under Art. 1575 of the Civil Code.

However, the illegality does not constitute a crime. If B, the innocent party, had paid the price, he can
recover it. And if he had not paid yet, he cannot be compelled to make the payment. S, the guilty
party, cannot recover the cow. Since the animal is suffering from contagious disease, it shall be
condemned by the authorities.
Pari delicto

- a universal doctrine which holds that no action arises, in equity or law, from
an illegal contract

- no suit can be maintained for its specific performance, or to recover the

property agreed to be sold or delivered, or the money agreed to be paid, or
damages for its violation; and where the parties are in pari delicto

- no affirmative relief of any kind will be given to one, against the other.

- applies only when there is equal guilt, and not when one party is more
guilty than the other
Exceptions to the rule of pari delicto
Rule: When the contract is unlawful, whether or not it constitutes a criminal offense, recovery by either party is
not allowed if both parties are in pari delicto.

Cases when recovery may be made despite the parties being in pari delicto.

1) The payor may recover interest he paid in excess of the interest allowed by usury laws together with
interest from date of payment
a. Law governing usurious transactions
- usury law

b. Usury legally inexistent

- with the promulgation of Central Bank Circular No. 905, usury has become inexistent
- lender and borrower may thus freely agree on the interest to be charged on the loan
- nothing in the said circular grants lenders carte blanche to raise interest rates to levels which will enslave
their borrower
Exceptions to the rule of pari delicto
2) A party may recover, if public interest will be subserved, money or property delivered for
illegal purpose provided he repudiates the contract before the purpose has been accomplished or
before any damage has been caused to a third person
e.g. A hired B to kill X by giving P20,000.00 to B. Later, A changed his mind and told B not to kill X
anymore. A may be allowed by the court to recover the amount he gave to B.

3) An incapacitated person who is a party to an illegal contract may recover, if the interest of
justice so demands, money or property delivered by him.
e.g. A, a minor of 17 years, gave P10,000.00 to B for a dangerous drug. The court may allow A to
recover the amount he gave if the interest of justice so demands.
Exceptions to the rule of pari delicto
4) A person may recover, if public policy is thereby enhanced, what he has paid or delivered, if
the agreement is not illegal per se but is merely prohibited, and the prohibition by law is
designed for his protection.
e.g. Thus, F, a Filipino is allowed to recover a piece of land(located in the Philippines) he sold to A,
an alien, because the restoration of the land to him would enhance the public policy to conserve lands
for Filipinos.

5) Any person may recover any amount he has paid in excess of the price fixed by law for any
article or commodity.

6) A laborer may demand additional compensation for service rendered beyond the maximum
number of hours of labor in a contract where he undertakes to work longer than the maximum
hours fixed.

7) A laborer may recover the deficiency in a contract where he accepts a wage lower than the
minimum wage set by law.
Rule when contract is divisible or indivisible and
there are illegal terms.
1. If divisible
– the legal terms may be enforced; the illegal terms are void, hence, they may not be enforced

2. If indivisible
- the whole contract is void; hence, no part thereof may be enforced

e.g. S sells to B one carton of “Fortune” cigarettes and 20 sticks of marijuana for a consideration of P500.00. The
sale is indivisible because there is only one consideration for the “Fortune” cigarettes and the 20 sticks
marijuana. Accordingly, the whole contract is void because that which is legal cannot be separated from that
which is illegal.

However, if B paid P200.00 for the “Fortune” cigarettes and P300.00 for the marijuana, then only the sale of the
“Fortune” cigarettes may be enforced. Here, the sale is divisible with the part that is legal being capable of
separation from that which is illegal.
Form of Contracts
Obligatory force of contracts in whatever form, exceptions:
- Contracts shall be obligatory in whatever form they may have been entered into, provided
all the essential requisites for their validity are present.
- Rule does not apply when a certain form is required by law for the following reasons:
(i) For validity – if not in the form provided by law, contract is void.
 Contract of Donation of an immovable property – must be in a public instrument (together
with the acceptance)
 Contract of Donation of Personal property whose value exceeds P5,000 must be in writing
(together with the acceptance of the donee)
 Authority of the agent to sell a piece of land must be in writing; otherwise sale is void
(ii) For enforceability – statue of frauds
(iii) For convenience
Form of Contracts
Right to compel observance of the form required by law
- If the contract is valid and enforceable but the same is not in the form required by law,
the contracting parties may compel each other to observe that form
- This right may be exercised simultaneously with the action upon the contract

e.g. S sells his land to B. The sale is in a private instrument. The contract is valid and enforceable
because it was in writing. However, if B wants to register the sale with the Register of Deeds, he
may compel S to execute the sale in a public instrument.
Form of Contracts
Contracts for the convenience of the parties
1. Public Document
Contracts that are required to appear in a public document for the convenience of the parties
and so that they may be registered in the proper recording office to adversely affect third persons:
a. Acts and contracts which have for their object the creation, transmission, modification
or extinguishment of real rights over immovable property.

b. The cession, repudiation or renunciation of hereditary rights or of those of conjugal

partnership of gains.

c. The power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third person.
Form of Contracts
Contracts for the convenience of the parties
1. Public Document – cont.
d. The cession of actions or rights proceeding from an act appearing in a public document.

2. Any writing, public or private

- all other contracts where the amount involved exceeds P500.00 must be in writing for the
convenience of the parties. However, the sale of goods, chattels or things in action whose price is
P500.00 or more must be in writing to be enforceable
Thus, the lease of personal property for a period of two years at a monthly rental of
P1,000.00 must be in writing for the convenience of the parties.
Reformation of Instruments
Reformation
- a remedy in equity by means of which a written instrument is made or construed so as to
express or conform to the real intention of the parties when some error or mistake has been
committed.

Requisites of reformation
1. There must be a meeting of minds of the parties to the contract.
2. The true intention of the parties is not expressed in the instrument.
3. The reason therefore is due to mistake, fraud, inequitable conduct or accident.

e.g. S sold to B his lot consisting of P1,000 square meters for P100,000.00 cash. However, the contract they
signed showed an area of 1,200 square meters because of the clerk’s error. The parties had a meeting of
minds but the contract did not show their true intention as to area of the lot. Either party may ask for the
reformation of the contract so as to show the actual area of 1,000 square meters.
Reformation of Instruments
Who may ask for reformation
- if the mistake was mutual, by either party, or his successors in interest, such as his heirs or assigns
- In other cases, by the injured party, or his heirs or assigns

When an instrument may be reformed

1. When a mutual mistake of the parties causes the failure of the instrument to disclose their
agreement.
2. When one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention.
3. When a party was mistaken and the other knew or believed that the instrument did not state their
real agreement.
4. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting
the instrument or of the clerk or typist, the instrument does not express the intention of the parties.
5. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument
states that the property is sold absolutely or with right of repurchase.
Reformation of Instruments
When reformation is not available

1. In the case of the following:

a. Simple donations inter vivos wherein no condition is imposed
- This is so because a donation is essentially an act of liberality on the part of the
donor. However, if the donation is conditional, reformation is allowed so as show the true intent
of the donor as regards the conditions.

b. Wills
- The reason is that the making of a will is strictly a personal act which is free and the
will may also be revoked at any time by the testator.

c. When the real agreement is void

- There is nothing to reform, as the contract is inexistent
Reformation of Instruments
When reformation is not available

2. When one of the parties has brought an action to enforce the contract, he cannot
subsequently ask for its reformation.

- This is equivalent to ratification, waiver or estoppel

Interpretation of Contracts
1. If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of the stipulation shall control.
2. If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former.
3. However general the terms of a contract may be, they shall not be understood to
comprehend things that are distinct and cases that are different from those upon
which the parties intended to agree.
S sells “all the grains” in his warehouse to B, such term does not include the grains which, though stored
in S’ warehouse, do not belong to S.
4. If the stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual.
S has 2 cars. He sold one of the cars to B but without indicating such. His ownership of one car is
absolute, while his ownership of the other is disputed. The car that is deemed to have been sold is the 1st car
since such is the import that will render the contract effectual.
Interpretation of Contracts
(5) The various stipulations of a contract shall be interpreted together.
(6) Words which may have different significations shall be understood in that which
is most in keeping with the nature and object of the contract.
(7) The usage or custom of the place shall be borne in mind in the interpretation of
the ambiguities of a contract, and shall fill the omission of stipulations which are
ordinarily established.
 If A hired the services of B but the contract did not indicate the compensation to be paid, the amount thereof
shall be the rate that is customarily paid in the place where the services were rendered.
(8) The interpretation of obscure words or stipulations in a contract shall not favor a party
who caused the obscurity. (e.g. Contract of Insurance – contract of adhesion = ambiguity to
be interpreted against the Insurer)
Interpretation of Contracts
Rules when it is absolutely impossible to settle doubts under the preceding rules
1. When the doubts refer to the incidental circumstances of a gratuitous contract, the least
transmission of rights and interest shall prevail.

2. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interest.

3. If the doubts are cast upon the principal object of the contract in such way that it cannot be
known what may have been the intention or will of the parties, the contract shall be null and
void.
Question & Answer
Thank You