LAW

Contracts.4
The four kind of defective contracts
 Rescissible contracts – valid until rescinded; the defect is extrinsic defect
consisting of an economic damage or lesion.
 Voidable Contracts – valid until annulled. Annullable unless ratified, if
ratified, the contract is cleansed of its defect. This contract is effective
now but may be invalidated.
 Unenforceable contracts –cannot be sued upon or enforced unless it is
ratified. These are validable contracts .No effect now, but they may be
effective upon ratification.
 Void Contracts – is one that has no effect at all; it cannot be ratified or
validated. This is called inexistent contract.
The following contracts are rescissible:

 Those which are entered into by guardians whenever the wads whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object
thereof;
 Those agreed upon in the representation of absentees, if the latter suffer the lesion
stated in the preceding number;
 Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
 Those which refer to the things under litigation if they have been entered into by the
defendants without the knowledge and approval of the litigants of competent
judicial authority;
 All other contracts specially declared by law to be subject to rescission. (Art 1381)
No.3 of Rescissible Contracts exemplified
Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due them.
 Example:
D owes C P10,000 payable on December 25,2006.He owns a parcel of land valued P10,000.On December
24, knowing that he cannot pay his obligation to C ,he sold this land to X .On the due date ,C demanded
payment from D ,but the latter is already insolvent. C here can rescind the contract between D and
X ,because their transaction is fraudulent and the creditor cannot in any manner collect the claims due him.
It is assumed that X, the buyer ,must be in bad faith ,for if he is in good faith C cannot rescind because the
law states that rescission will not take place if the object of the contract is in the possession of a third person
who acted in good faith.
 Example of No. 5.
All other contracts specially declared by the law to be subject to rescission.
 The right to rescind as provided in Article 1189 in case of deterioration of the thing to be delivered .
 The right to rescind given to an unpaid seller as provided for in Article 1526.
 The right to rescind given to a vendee in sale of real property per unit of measure or lump sum price.
Requisites to concur before action for rescission
can be instituted.
 The party seeking rescission must return what he
received by virtue of the contract.
 The object of the contract is not in the legal
possession of a third person who acted in good faith.
 There must be no other legal remedy.
 The action must be brought within the proper
prescriptive period.
Question No.1
 S sold to B a parcel of land in fraud of C,a creditor
of S .If ,after a year ,the contract was cancelled or
rescind ,what are the obligations of S and B?
 Answer : S must return the money he received from
B plus the interest ,while B’s obligation is to return
the property plus the fruits of the property sold.
Question No.2
 In the preceding question ,supposing X is in good
faith ,can C exercise his right of rescission?
 Answer : No, because rescission is applicable if the
buyer is bad faith. The right of C is to ask for
damages against S. The measure of damages will
be the amount of the obligation plus damages
because of the committed.
What are the requisites for rescission of contracts
in fraud of creditors?
 The existence of credit;
 That said credit must be prior to the contract to be
rescinded;
 The existence of fraud or bad faith on the part of the
debtor which can either be presumed or proved; and
 The creditors cannot recover their credits in any other
manner.
Enumerate some instances considered by the court
as ‘‘badges of fraud’’.
 The fact that the consideration of the conveyance is fictitious or inadequate.
 A transfer made by a debtor after suit has begun and while it is pending
against him.
 A sale on credit by an insolvent debtor.
 Evidence of large indebtedness or complete insolvency.
 Transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
 The fact that the transfer is made between father and son, when the above
circumstances are present.
 The failure of the vendee to take exclusive possession of all the property .
What are the presumptions of fraud rescissible
contract?
 Gratuitous Contract- Contracts entered into by the debtor when he did not reserve sufficient
property to pay his debts before donation are considered fraudulent.
 Onerous Contract-
a. Made by person against whom some judgment has been rendered even if not yet final.
b. Made by person against whom some writ of attachment has been issued .The decision or
attachment has been issued. The decision or attachment need not refer to the property
alienated.
 Example of No.2: D owns 2 parcels of land: one situated in Manila, the other in Bulacan.
He also owes C P 20,000. After failing to pay C, C filed an action and attached the land
situated in Manila. After the writ of attachment was granted by the court, D sold the land
in Bulacan to X. Here, the transaction was fraudulent because a writ of attachment has
already been issued against him, The writ need not refer to the property attached.
Give example of contracts specially declared by
law to be rescissible
 The unpaid seller’s right to rescind if buyer failed
to pay the price of the sale. (Art.1526)
 violation of warranty against hidden defects.
(Art.1567)
 Sale of real estate for a lump sum price, if vendor
cannot deliver what is stated within the boundaries.
Prescriptive period for rescission
 A. General rule
 Within four (4) years from the date it was entered into;
 If the person is under guardianship ,within 4 year from the time the
guardianship ceases,
 In case of absentees –within 4 years from the time the domicile is known.
 B. Exceptions
 In certain contracts of sale which are specially declared by law to be
rescissible, the period is 6 months or even 40 days, counted from the day
of delivery.
The ff persons can bring the action for
rescission.
 The injured party
 The heirs of the injured party
 Creditors, if the transaction is fraudulent
Voidable contracts
 Those which possess all the essential requisites of a
valid contract but one of the parties is incapable of
giving consent, or consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
Nullity defined
 It is the imperfection of a contract derived from the
determinate vices of a capacity or the consent of
the parties which give rise to an action of nullity
which if it is exercised successfully produces the
destruction of the act with retroactive effect.
The ff contracts are voidable or annullable even though there
may have been no damage to the contracting parties:

 Those where one of the parties is incapable of

giving consent to a contract.
 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.
Distinguish rescission from annulment (or
rescissible from voidable contract).
 In rescissible, the basis is lesion or damage; while in voidable, it is vitiated
consent or incapacity to consent.
 In rescissible, the basis is external; while in voidable, intrinsic(in the meeting
of minds)
 In rescissible, the action is subsidiary; while in voidable, the action is principal.
 Rescission is a remedy; while annulment is a sanction.
 In the rescission ,there must be damage to the plaintiff ; while in annulment ,
damage is immaterial.
 To prevent rescission, ratification is not required while annulment , ratification
is required.
Voidable contracts and unenforceable contracts
distinguished.
 Voidable contracts are valid and enforceable until
annulled while unenforceable contracts are not
enforceable unless ratified.
 Voidable contracts are capable of being sued upon
until annulled while unenforceable contracts cannot
be sued upon unless they are ratified.
Voidable contracts and void ab initio contract
distinguished.
 Voidable contracts are valid until annulled by a proper action in court while in void ab
initio contracts no court action is required.
 In voidable contracts, all the essential requisites are present but there is a defect in the
consent, while in void ab initio contracts not all essential requisites are presents because
either the consent is missing or fictitious, or there is want of cause or the cause is illicit.
 Voidable contracts are susceptible of ratification while void ab initio contracts cannot be
ratified.
 Voidable contracts can be attacked only by the parties and their privies while void ab
initio contracts can be attacked by third persons whose interest are directly affected.
 In voidable contracts, the action to declare the nullity prescribes while the action to
declare a contract void ab initio does not prescribe.
Effect of prescriptions.
 The action for annulment must commence within
four years , otherwise the action will prescribe,
hence it can be no longer be set aside.(Art.1391)
Qualification of the rules on annulment as above
stated.
 In case of intimidation, violence or undue influence, from the time the defect of the consent
ceases.
 Example: B intimidated S into signing a contract of sale on January 1, 2006. The
intimidation continued until January 25,2007. From what time should we compute the four-
year period ? From January 25, 2007, the time the intimidation ceased.
In case of mistake or fraud, from the time of the discovery
of the same.
Example: S and B entered into a Contract of Sale on January 1,2006.B entered into the contract
because S induced him (B) by using words or machinations, making the contracts voidable.
B discovered the fraud only on January 25, 2006.Within what time must B bring the action
for annulment ? Within 4 years from January 25, 2006, that is , at the time B discovered the
fraud. If B does not file the action within this period, he loses his right forever.
What is ratification, confirmation,
acknowledgment?
 Ratification proper - is that which cures the defect of the contracts
celebrated in the name of another without authority or in excess of authority.
 Confirmation – is the act of purging the voidable contracts of its defect

through the renunciation of the action of nullity made by the person who can
invoke the vice or defect of said contract.
 Acknowledgement – is the act of remedying the deficiency of proof as when

in a document an agreement made verbally is admitted or a private document

is made a public document.
Note: Under the New Civil Code, all the three terms are now uniformly called
Ratification.
Kinds of Ratifications
1. Express( Oral or written)
2. Tacit ( implied)
Example of No. 2:a minor, bought a parcel of land. After
reaching the of majority, he sold it to X. In here, he could
no longer file the action because the act of selling is
considered an act of ratification. Likewise, if S , collected
the unpaid balance, he is considered to have waived his
right to file the action for annulment.
Requisites of ratification
1. The contract must be voidable.
2. The person ratifying knew the reason why the
contract is voidable.
3. The ratification must have been made expressly or
impliedly.
4. The ratification is made by the injured party.
Illustrative cases in voidable contracts:
A) Pedro sold a piece of land to his nephew Quintin, a minor. One
month later, Pedro died. Pedro’s heirs then brought an action to
annul the sale on the ground that Quintin was a minor and
therefore without legal capacity to contract. Is the contract
voidable? Why?
A) No. Under the principle of relativity of contracts, the law states that
a contract takes effect not only between the contracting parties but
also between their assigns and heirs. Besides, under voidable
contracts it is incapacity of the other under the principle of estoppel.
Illustrative cases in voidable contracts:
A) X , of age , entered into a contract with Y, a
minor. X knew and the contract specifically
stated the age of Y. May X successfully demand
annulment of the contract? Reason.
A) No, because persons who are capacitated cannot
allege the incapacity of the person with whom he
contracted under the principle of estoppel.
Illustrative cases in voidable contracts:
A) M, a minor, misrepresented himself to be of age entered into a contract with
C, a person who is capacitated. May M later on ask for annulment?
In the first case decided, the court ruled that M cannot ask for annulment because
he is guilty of estoppel. In the second case, the court ruled that M can file an
action for annulment because he cannot be guilty of estoppel since he is not
liable for his conduct, act or omission. In the third case, the court change its
stand and reiterated the first decision that a minor cannot annul because he is
guilty of estoppel. The age of the minor in this case is 17 years old.
We can conclude therefore that a minor if guilty of misrepresentation cannot ask
for annulment because under the rules on statutory construction the latest
decision shall prevail.
Illustrative cases in voidable contracts:
D borrowed P 20,000.00 from C. D and his 17-year old son, S signed the
promissory note did not say anything about the capacity of the signers. D made
partial payments little by little. After seven years, D died leaving a balance of P
10,000.00 on the note. C demanded payment from S who refused to pay. When
sued for the amount, S raised the defense that when he signed the note , he was
still a minor. Is S liable? Why?
Yes. S is liable because the defense of minority has already prescribed . If the
contract is voidable by reason of minority the prescriptive period of four year
shall be counted from the time guardianship ceases. The defense of minority is
correct if the action is filed against S within four years after reaching the age of
majority. In the latter case, if the contract is annulled is still liable to return the
money received by him to the extent he was benefited.(Art.1397)
Illustrative cases in voidable contracts:
D, who owns a parcel of land, is in indebted to C for P
10,000.00. X, who is interested in buying the land, intimated
D to sign a deed of sale transferring the land to X.
1. Can C annul the contract between D and X?
1. No, because he is not a party to the contract. In short, C is not a obliged
by the terms of the contract, either principally or subsiadiarily.
2. What can C do inorder to protect his interest?
1. C can ask for the rescission because the contract between D and X
prejudices him if D could no longer pay the obligation to C.
What is the effect of the annulment of a
voidable contract?
1. If the contract is executory , the parties are not bound to comply
with their prestation.
2. If the contract was already executed, the parties shall restore to
each other the object of the contract, that is, the money plus
interest, the property together with its fruits. However, if the
ground for annulment is incapacity of the other party, the party
incapacitated is bound to return only to the extent he was
benefited.(Art.1398 and 1402)
3. The guilty party is liable to answer damages.
Illustrative Case:
 S, a minor, owns a parcel of land planted with camote. S sold this land to B for P 10,000.
After reaching the age of majority, but within four years (4) years, S filed an action for
annulment and the court annulled the contract.

 Question No. 1: What are the rights and obligations of the parties?
 Answer: S must return the P10,000 plus the interest . B must return the property or land plus
the fruits of the land.
 Question No.2: Supposing S, after receiving the P 10,000, deposited the P 4,000 at Banco
Fino , while the last P6,000 was taken unlawfully by X. Up to what amount is he obliged to
return?
 Answer: P 4000.00 only, because the law states that “ if the ground for annulment is
incapacity, the person incapacitated is only bound to return to the extent he was benefited.
Qualifying illustrative case
 S and B, both of age, entered into a contract of sale, regarding a parcel of
land for P10,000. B intimidated S, rendering the contract voidable. Of the
P10K received by S, the P4K was deposited at Banco Fino, while P6K was
taken unlawfully by X.
 Question: How much is S obliged to return B if the contract is annulled?
 Answer: P10,000 because the beneficial interest stated in Article 1339 is
applicable only if the ground for annulment is incapacity of one of the
parties .If the ground for annulment is of the five (5) causes ,the party who
is bound to return is obliged to return even to the extent he was not
benefited .
Loss of the thing while in the possession of the
party who can annul the contract.

1. If due to his fault – the right to annul is

extinguished. In short, the party has no more right
to annul.
2. If due to fortuitous event- the contract can still be
annulled , unless if the innocent party could no
longer restore what in virtue of the decree of
annulment he is bound to return.
Illustrative Cases
 S forced B to sign a contract of sale of a specific house for
P10,000. In here, B got the house and destroyed it.
 Question: Can B still file an action for annulment?
 Answer: Yes. If the right of action is based upon the
incapacity of anyone of the contracting parties the loss of
the thing shall not be an obstacle to the success the action.
Be it noted that the loss is due to fortuitous event and the
minor is not guilty of fraud or fault.
Unenforceable Contracts
 Those that cannot be enforced in court or sued
upon by reason of the defects provided by law until
and unless they are ratified according to law.
Concept of Unenforceable Contract
 An unenforceable contact is one which cannot be
enforced unless it is first ratified. These are called
contracts without effect, but if ratified, they are
valid contracts. Sometimes these are called
‘‘validable’’ contracts.
Distinguish unenforceable from voidable and
rescissible contracts:
 Voidable and rescissible are valid and binding until
annulled or rescinded; while unenforceable
contracts are without effect unles ratified.
Kinds of unenforceable contract
1. Those executed by one in the name of another
without any authority or in excess of such authority
2. Those that do not comply with the statute of frauds.
3. Those where both parties are incapable of living
consent.
Note: The enumeration under article 1403 of the civil
is exclusive.
Unauthorized or disauthorized contracts
 Contracts 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 power are unenforceable unless ratified.
 Example: O is the owner of a specific car. X, sold the car to B
without authority from O. In this case, B cannot demand
delivery from O because the contract is unenforceable. However
, if B gave X the purchase price and X gave it to O who
accepted it the contract becomes unenforceable because there
was ratification
What is the statute of frauds?
 It is a law which requires that certain contracts
must be in writing otherwise unenforceable.
What is its purpose?
 In the case Facturan vs Sabonal , 81 Philippine Report
512 , the court has this to say: Since memory is many
times unreliable, oral agreement may sometimes
result in injustice. To aid human memory, to prevent
the commission of injustice due to faulty memory, to
discourage intentional misrepresentations are the
principal aims of statute of Frauds.
Form required.
 Contracts falling under the statute of frauds are
required to be in writing or there should be a note
or memorandum subscribed by the party charged,
or his agent. Failure to execute the contract in
writing does not render the contract void but only
unenforceable.
Application
 Statute of frauds is applicable only to executory contracts and not to
contracts totally or partially executed.
 Example: S sold the partial land to B for P10,000. The contracts was
orally entered into. The contracts is unenforceable because the Statute of
Frauds requires that if the object is immovable property the contract
must be in writing. However, if B paid the price of the sale, accepted by
S, the letter cannot be refuse to deliver because there was partial
performance of the contract, the same becomes enforceable. Likewise if
S delivered the land to B and B accepted delivery the contracts becomes
enforceable because there was partial execution of the contract.
Contracts covered by the statute of frauds.
1. An agreement by its term in not to be performed within a year from the
making thereof.
This statute of frauds is applicable only to agreements not to be performed
within a year from the making thereof. Agreements therefore to be
performed within one year from the making are not covered by the
law.
Example: On June 15, 2006, S sold to B orally a specific chair for P400.
The parties agreed that the delivery and payments shall on June 15,
2008. Since the performance shall take place after one year from the
execution of the contract it shall be in writing to be enforceable.
Contracts covered by the statute of frauds.
2. A special promise to answer for the debt, default,
or miscarriage of another.
Example: D owes C P10,000 , guaranteed by G. The
contract is entered into orally. If D cannot pay on
the due date. C cannot compel G to pay because
the contract is unenforceable for it was not
reduced in writing.
Contracts covered by the statute of frauds.
3. An agreement with made in consideration of marriage other than mutural promise to
marry.
Example: D promised W to give her a specific car if W will marry H next month. The
contract was oral. Five (5) days after, W married H.
Question: Can W demand delivery of the car?
Answer: No, because If the agreement is in consideration of marriage , it must be in writing
otherwise unenforceable.
Exception : If it is a mutual promise to marry between the parties, the contract is enforceable
even if orally entered into. Take Note, however, if one of the parties does not comply
with his obligation to marry the other, the injured party cannot compel the other party
to proceed with the marriage proposition. His only right is to ask for damage because of
the breach of promise.
Contracts covered by the statute of frauds.
4. An agreement for the sale of goods, chattels, or thing in
action at a price of five hundred pesos or more.
Example: S and B entered orally into a contract of a specific
table for P600. Delivery and payment ate to take place on
June 30. If on the date stated, S refused to deliver, B
cannot compel him to do so even if he is willing to pay
because the contract falls under the Statue of Frauds: to
be enforceable it must be in writing.
Contracts covered by the statute of frauds.
4. An agreement for the sale of goods, chattels, or thing in
action at a price of five hundred pesos or more.
Example: S and B entered orally into a contract of a specific
table for P600. Delivery and payment ate to take place on
June 30. If on the date stated, S refused to deliver, B
cannot compel him to do so even if he is willing to pay
because the contract falls under the Statue of Frauds: to
be enforceable it must be in writing.
Contracts covered by the statute of frauds.
5. An agreement for the leasing for longer period than one year, of the
sale of real property or an interest therein:
Instances covered:
a. If the lease is one year or less, oral contract is enforceable even if
the object is real or personal property.
b. If the lease is for more than one year and the object is immovable, it
must be in writing otherwise unenforceable.
c. If it is a sale of immovable property, irrespective of the price of the
sale, it must be in writing, otherwise unenforceable.
Contracts covered by the statute of frauds.
6. A representation as to the credit of a third person.
Example: D wanted to borrow P100,000 at Banco Fino. Before the bank
released the money, the bank inquired from R about the credit status
of D. R orally assured the bank that the credit is good, a well known
client of other banks in the locality , and could easily pay his loan if
given. By virtue of such statement, Banco Fino released the money.
Question: If on the due date, D cannot pay, can the bank hold R liable?
Answer: No, because the representation as to the credit of other person
must be in writing, otherwise unenforceable.