OBLICON

Name: NICOLE B. JARDINEL Professor : ATTY. JOSE T. YAYEN

Section: BA11

A. Discussions:

(1) Give the DIFFERENT CASES WHEN contracts are: (20 PTS). This is mandatory.

a) Rescissible – a rescissible contract has all the requisites required by law for valid contracts (Art. 1380).
What makes it rescissible is economic damage, not just any economic damage, but those kinds of economic
damage enumerated under Arts. 1381 and 1382.

For a contract to be rescissible, there are four requisites are required:

1. It must fall under either Art. 1381 or 1382 (Causapin v. CA, 233 SCRA 615 [1994]);

“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.”

“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.”

The first two contracts enumerated in Art. 1381 are entered into by representatives (guardians on behalf of wards,
and administrators representing absentees) where the ward or absentee suffers lesion exceeding 25% of the value
of the property which he parts with.

Lesionhas been defined as the “injury which one of the parties suffers by virtue of a contract which is
disadvantageous to him” (IV Arturo M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines 574 (1987), citing 3 Camus 205-06). For the contract to be rescissible, the lesion must exceed 25% of the
value of the thing owned by the ward or absentee.

“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.”

The only instance, it seems, in which these paragraphs will apply is when no court approval is required for
the contract, as in dispositions amounting to mere acts of administration (Rule 95, Sec. 1 and Rule 96, Sec. 2, Rules
of Court).

The third paragraph (Art. 1381)—contracts in fraud of creditors—refers to the ancient remedy of actio pauliana.
[Arts. 1177 and 1313 provide for the same thing.]
The requisites for actio pauliana are given in Siguan v. Lim (318 SCRA 725 [1999]):

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.

The fourth paragraph has essentially the same purpose as the third, i.e. to prevent injury to a third person (in this
case the party who has lodged a claim over the property).

Some specially declared rescissible contracts are found in the Title on Sales, viz: Arts. 1526, 1534, 1538, 1539, 1542,
1556, 1560, and 1567.

Re: rescissible contracts under Art. 1382, the insolvency there contemplated is factual insolvency, not necessarily
involving an insolvency proceeding.

2. The party seeking rescission must have no other legal means to obtain reparation for damages suffered
by him (Art. 1383);

The remedy of rescission is subsidiary. This is clear from Art. 1383:

“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.”

In this connection, a careful distinction must be made between rescission of a properly rescissible contract
and rescission under Art. 1191.

Again, Justice JBL Reyes steps in to clear up the mess, in his concurring opinion in UFC v. CA (33 SCRA 1 [1970]).
The relevant portion of that concurring opinion is:

“‘…the argument of petitioner, that the rescission demanded by the respondent-appellee….should be denied
because under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when the
party suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish
between a rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesión
or economic prejudice, Article 1381, et. seq. The rescission on account of breach of stipulation is not predicated on
injury to the economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of
his obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a
party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism:‘Non
servanti fidem, non est fides servanda.’ Hence, the reparation of damages for the breach is purely secondary.’”

On the contrary, in the rescission by reason of lesión or economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison d’être as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for
lesión enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article
1191.

“It is probable (JBL concludes) that the petitioner’s confusion arose from the defective technique of the new
Code that terms both instances as ‘rescission’ without distinctions between them; unlike the previous Spanish Civil
Code of 1889 that differentiated ‘resolution’ for breach of stipulation from ‘rescission’ by reason of lesión or
damage. But the terminological vagueness does not justify confusing one case with the other, considering the patent
difference in causes and results of either action.’” 1

“The last comment—parenthetically—is apropos, and codifiers will do well to avoid, as far as possible, the same
identical terms for different concepts. Such terms as rescission, fraud, collation, ratification, etc.—all used in the
Code in varying or equivocal senses—can only ensnare students, professors, practitioners, and courts.” (Ruben F.
Balane, A Harvest of Eighteen Years: A Survey of Jose B.L. Reyes’ Leading Supreme Court Decisions on Civil Law, Part
II, in Civil Law Florilegium: Essays on the Philippine Variant of the Civil Code Traditions 512 (2012)).

3. The party seeking rescission must be able to return whatever he may have obtained by reason of the
contract (Art. 1385, par. 1); and

4. The things object of the contract must not have passed legally to a third person in good faith (Art. 1385,
pars. 2 and 3).

b) Voidable – voidable contracts are governed by Arts. 1390 to 1402. 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.

1. Mistake - the mistake must be caused by facts of which the party demanding annulment did not know. As
held in Alcasid v. CA (237 SCRA 419 [1994]):

“To invalidate consent, the error must be real and not one that could have been avoided by the party alleging it. The
error must arise from facts unknown to him. He cannot allege an error which refers to a fact known to him or which
he should have known by ordinary diligent examination of the facts. An error so patent and obvious that nobody
could have made it, or one which could have been avoided by ordinary prudence, cannot be invoked by the one
who made it in order to annul his contract.

2. Violence - the elements of violence as a vitiating factor are:

a) it must be irresistible or serious; and

b) it must be causal, i.e. it must be the operative cause of the giving of consent.

3. Intimidation - the elements of intimidation are enumerated in De Leon v. CA (186 SCRA 345 [1990]):

“In order that intimidation may vitiate consent and render the contract invalid, the following requisites must concur:
(1) that the intimidation must be the determining cause of the contract, or must have caused the consent to be
given; (2) that the threatened act be unjust or unlawful; 2 (3) that the threat be real and serious, there being an
evident disproportion between the evil and the resistance which all men can offer, leading to the choice of the
contract as the lesser evil; and (4) that it produces a reasonable and well-grounded fear from the fact that the person
from whom it comes has the necessary means or ability to inflict the threatened injury.”

4. Undue influence - according to Alcasid v. CA (237 SCRA 419 [1994]):

“Undue influence, therefore, is any means employed upon a party which, under the circumstances, he could not
well resist and which controlled his volition and induced him to give his consent to the contract, which otherwise he
would not have entered into. It must in some measure destroy the free agency of a party and interfere with the
exercise of that independent discretion which is necessary for determining the advantages or disadvantages of a
proposed contract.”
 5. Fraud – as deceit, in order to vitiate consent, must be serious (Art. 1344, par. 1), or as commentators call
it, dolo causante, to be distinguished from dolo incidente, incidental fraud. Dolo causante vitiates consent;
dolo incidente only gives rise to a liability for damages. (Art. 1344, par. 2).

In Samson v. CA (238 SCRA 397 [1994]), the Court explained:

“In contracts, the kind of fraud that will vitiate consent is one where, through insidious words or machinations of
one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have
agreed to. This is known as dolo causante or causal fraud which is basically a deception employed by one party prior
to or simultaneous to the contract in order to secure the consent of the other.”

c) Unenforceable – which are just a notch higher than the void. As such, they cannot be given effect, cannot
be the basis of an action for specific performance. Their defect, however, is not irremediable; it can be
cured in a process called ratification or acknowledgment.

The first of the unenforceable contracts is that referred to in Art. 1403, par. 1:

"(1) 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."

The contract is unenforceable whether the authority is only exceeded or absolutely absent. The two cases
mentioned supra (Heirs of Sevilla and Gochan) in which it was held that the contract is void if authority is totally
wanting have no basis in statutory provision.

d) Void - “Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is a 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;
(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.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.”

A. Characteristics of Void Contracts

The following rules regarding void contracts may be mentioned:

1. They produce no effect whatsoever either against or in favor of anyone (Quod nullum est nullum producit
effectum).
2. No action for annulment is necessary. Their nullity exists eo ipso and therefore any judgment of nullity is
merely declaratory.
3. They can neither be confirmed nor ratified. (Art. 1409)
4. If performance is made, restoration of what has been delivered is required, except when the pari delicto
rule is applicable.
5. The right to set up the defense of nullity cannot be waived. (Art. 1409)
6. The action or defense of nullity does not prescribe. (Art. 1410)
7. The defense of nullity may be invoked by anyone against whom the effects of the contract are asserted.
(Art. 1421; Tongoy v. CA, 123 SCRA 99 [1983])
B. The Pari Delicto Rule

The rationale of the pari delicto rule has been expressed as follows

“The principle of pari delicto is grounded on two premises — first that courts should not lend their good offices to
mediating disputes among wrongdoers; second, that denying relief to an admitted wrongdoer is an effective means
of deterring illegality. This principle of ancient vintage is not a principle of justice but one of policy as articulated in
1775 by Lord Mansfield…” (Acabal v. Acabal, 454 SCRA 555 [2005]).

B. Problem Analysis:

(1) Mr A owns two lots, Lot 1 and Lot 2. Mr. B wants to buy Lot 2 but Mr. A is only willing to sell Lot 1. Mr. A
and Mr. B entered into a contract of sale whereby Mr. A sold Lot 1. However, Mr. B, who was the one who
prepared the Deed of Sale indicated that the lot that was sold was Lot 2. Is reformation or annulment
proper? Why? (5points)

The proper remedy is annulment of the contract. According to Article 1359 par. 2, If mistake, fraud, inequitable
conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of
the instrument but annulment of the contract. If Mr. A was selling his Lot 1 only and Mr. B was buying the Lot 2 of
Mr. A, then, there has no meeting of the minds and the remedy, therefore, is annulment. Reformation cannot be
remedy, because the consent of one of the parties being vitiated by mistakes, etc.

(2) Mr. A sold car to Mr. B. They agreed that there is a right to repurchase for a period of one year. Mr. A
thought that the period in the document is one year although what was stated is five months. Mr. B knew
that the period that was inserted was five months but he did not inform Mr. A about it. Is reformation or
annulment proper? Why? (5pts)

The proper remedy is reformation of the instrument. According to Article 1363, when one party was mistaken
and the other knew or believed that the instrument did not state their real agreement. But concealed that fact from
the former, the instrument may be reformed. As Mr. B concealed the mistake, he is entitled for the reformation of
instrument that they used in their contract. If the party is guilty of concealment and attended with bad faith,
therefore, reformation is authorized to avoid injustice and inequity while if the second party is not aware of the
imperfection and acted in good faith as the first party therefore the mistake becomes mutual and reformation is
authorized.

(3) Mr. A was appointed by the court as guardian of the minor, X. Mr. A sold the vegetables that were planted
in the lot of X. The value of the vegetable is P5,000 but Mr. A sold the vegetables for only P2,000. Is
rescission or annulment proper? Why? If Mr. sold the lot of X without court approval, what kind of contract
is made? Why? (10 pts)

The proper remedy is rescission of the contract. According to Article 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;”. The contract of sale can be
rescinded because the lesion is more than one fourth. X can rescind the sale by proper action in court upon reaching
the age of majority.