DEFECTIVE CONTRACTS

There are four kinds of defective contracts.

They are in the order of their defectiveness or efficaciousness:

DEFECTIVE CONTRACTS
1. Rescissible Contracts
2. Voidable Contracts
3. Unenforceable Contracts
4. Void or Inexistent Contracts

RESCISSIBLE CONTRACTS
They are the least defective. They are valid because all the essential requisites of a contract exist but
by reason of injury or damage to one of the parties or to third persons, such as creditors, the contract
may be rescinded.

VOIDABLE CONTRACTS
•They are also valid until annulled unless there has been ratification.
•In a voidable contract, the defect is caused by VICE OF CONSENT

UNENFORCEABLE CONTRACTS
•They cannot be sued upon or enforced unless they are ratified.

VOID OR INEXISTENT CONTRACT

•They are absolutely null and void. They have no legal effect at all and cannot be ratified.

RESCISSIBLE  CONTRACTS

MEANING OF RESCISSION
•an equitable remedy granted by law to the contracting parties and sometimes even to third persons
•in order to secure reparation of damages caused them by a valid contract,
•by means of the restoration of things to their condition prior to the celebration of said contract.

REQUISITES OF RESCISSION
•The contract must be validly agreed upon.
•There must be damage to one of the parties or third persons
•The rescission must be based upon a case especially provided by law

REQUISITES OF RESCISSION
•There must be no other legal remedy to obtain reparation for the damage
•The party asking for rescission must be able to return what he is obliged to restore by reason of the
contract
•The object of the contract must not legally be in the possession of third persons who did not act in
bad faith
•The period for filing the action for rescission must not have prescribed

1. Contracts entered into in behalf of wards.

G is the guardian of W (ward). G sells the property
of W worth P20,000.00 for only P15,000.00.

•The contract of sale cannot be rescinded because the lesion is not more than one-fourth. However, if
the property is sold for less than P15,000.00, W can rescind the sale by proper action in court upon
reaching the age of majority.

2. Contracts agreed upon in representation of absentees

•An absentee is a person who disappears from his domicile, his whereabouts being unknown, and 
without leaving an agent to administer his property

 Contracts agreed upon in representation of absentees

•An absentee is a person who disappears from his
domicile, his whereabouts being unknown, and
without leaving an agent to administer his
property.

 Contracts undertaken in fraud of creditors.

•A person is free to dispose of all his property as
absolute owner thereof. The only limitation
established by law is that he could not transfer
his property to another in fraud of creditors.

 Other instances
“Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a
defect in the consent, or that the parties really intended a donation or some other act or contract.’’

“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.”

 Other instances

“Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a
defect in the consent, or that the parties really intended a donation or some other act or contract.’’

“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.”

PRESCRIPTION ENTITLED TO BRING THE ACTION FOR RESCISSION

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)PRESCRIPTION

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)

Persons entitled to bring the action for rescission.

The action for rescission may be brought by:
(1) the injured party or the defrauded creditor;

(2) his heirs, assigns, or successors in interest; or

(3)the creditors of the above entitled to

subrogation (accion subrogatoria)Persons entitled to bring the  action for rescission.

VOIDABLE RESCISSBLE
Based on vitiation of consent Based on lesion or damage to one of the parties or
third persons
May be brought only by a party to a contract Also third person who suffered damage may by
reason of the contract

Art. 1392. Ratification extinguishes the action to annul a voidable contract

Ratification means that one under no disability voluntarily adopts and gives sanction to some
defective or unauthorized contract, act, or proceeding which, without his subsequent sanction or
consent, would not be binding or him.

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.

EFFECT WHERE A PARTY CANNOT RESTORE WHAT HE IS BOUND TO RETURN.

•When a contract is annulled, a reciprocal obligation of restitution is created.
•There will be no annulment if the party cannot restore what he is bound to return. This is true even if
the loss is due to a fortuitous event.
EXAMPLE
•B forced S to sell the latter’s horse. The contract was annulled by the court at the instance of S.
•If the horse died through the fault of B, Article 1400 governs.(Whenever the person obliged by the
decree of annulment to return the thing cannot do so because it has been lost through his fault,
•he  shall return the fruits received and the value of the thing at the same time of the loss, with
interest from the same date)
•If the horse died due to a fortuitous event, S can refuse to return the purchase price.
But if B offers to pay the value of the horse (with its fruits if any) at the time of its death, he can
compel S to return the price with the  interest.

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

2. Statute of Frauds
The term “statute of frauds’’ is descriptive of statutes which require certain classes of contracts to be
in writing.

Agreement for sale of goods, etc. at price not less than P500.00
X and Y mutually promised to buy and sell a piano at a price of P4,000.00. This contract must be in
writing to be enforceable against either party unless there is delivery or partial or full payment, in
which case, it is taken out of the operation of the Statute of Frauds and the contract may be enforced
even if it was made orally.

Agreement for leasing for a longer period than one year.

R agreed to lease his house to E for two (2) years. Again, this agreement must appear in writing to be
enforceable unless it is partially executed.

Representation as to the credit of a third person.

•D is seeking a loan from C. T represents to C that D is solvent and has a good credit reputation.
Relying upon this representation, C extends a loan to D who, actually, is insolvent.
•The representation of T, which was made to induce the extension of credit to D, must be in writing
to be enforceable.

When unenforceable contract becomes a voidable contract.

Representation as to the credit of a third person.

Where both parties to a contract are incapable of giving consent, the contract is unenforceable. (Art.
1403[3].) However, if the parent or guardian, as the case may be, of either party, or if one of the
parties  after attaining or regaining capacity, ratifies the
contract, it becomes voidable.

Where both parties to a contract are incapable of giving consent, the contract is unenforceable.
However, if the parent or guardian, as the case may be, of either party, or if one of the parties after
attaining or regaining capacity, ratifies the contract, it becomes voidable.

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

(1) S sells a parcel of land to B. The contract is oral. C binds himself in writing for the performance
by B of his obligation.  In an action by S to recover the purchase price, C cannot assail that the
contract between S and B for being unenforceable under the Statute of Frauds. C is a stranger to the
contract.

VOID OR INEXISTENT CONTRACTS

VOID CONTRACTS
(1)Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy
(2) Those which are absolutely simulated or fictitious;
(3)Those whose cause or object did not exist at the time of the transaction;
(4)Those whose object is outside the commerce of  men;

VOID CONTRACTS
(5)Those which contemplate an impossible
service
(6)Those where the intention of the parties
relative to the principal object of the contract
cannot be ascertained
(7)Those expressly prohibited or declared void
by law.
CHARACTERISTICS
•Generally, it produces no effect whatsoever, being void or inexistent from the beginning
•It cannot be cured or validated either by time or ratification
•The right to set up the defense of illegality, inexistence, or absolute nullity cannot be waived
•The action or defense for the declaration of its illegality, inexistence, or absolute nullity does not
prescribe
•It cannot give rise to a valid contract
•Its invalidity can be questioned by any one affected by it

Contracts expressly prohibited or declared void by law

•Contracts upon future inheritance except in cases expressly authorized by law.

•Sale of property between husband and wife except when there is a separation of property

•Purchase of property by persons who are specially dis-qualified by law (like guardians, agents,
executors, administrators, public officers and employees, judges, lawyers, etc.) because of their
position or relation with the person or property under their care.

Recovery of usurious interest

•The rate of interest and other charges on a loan or forebearance of money, goods or credit shall no
longer be subject to any ceiling prescribed by
the Usury Law.
•The creditor is entitled to recover the principal of a usurious loan plus legal interest of 6% per
annum from the filing of the complain.

Recovery of additional compensation for service rendered beyond time limit.

The Labor Code sets forth that the normal hours of work of any employee shall not exceed eight (8)
hours a day.

Except: (1) government employees; (2) managerial employees; (3) field personnel; (4) members of
the family of the employer who are dependent upon him for support; (5) domestic helpers; (6)
persons in the personal service of another; and (7) workers who are paid by results.