CONTRACTS

What are the four

kinds of defective
contracts?
1. Rescissible
contracts
2. Voidable contracts
3. Unenforceable
contracts
4. Void contracts
What is a rescissible contract?

➢They are valid because all the

essential requisites of a contract
exist but by reason of economic
injury or damage to one of the
parties or to third persons, such as
creditors, the contract may be
rescinded.
 What is a voidable
contract?

➢They are also valid until annulled

unless there has been a ratification.
➢In a voidable contract, the defect
is caused by vice of consent.
What is an unenforceable
contract?

➢Cannot be sued upon or

enforced unless they are
ratified.
 What is a void or
inexistent contract?

➢They are absolutely null and

void.
➢Void contracts have no effect
at all and cannot be ratified.
RESCISSIBLE
CONTRACTS
 What is a rescissible
contract?

➢A rescissible contract is one

which has all the essential
requisites of a contract but which
may be set aside by reason of
injury or damage to third persons.
1. Those entered into by guardians
whenever the ward whom they
represent suffer lesion by more than
one fourth of the value of the things
which are the object thereof.
2. Those agreed to in
representation f absentees, if the
latter suffer lesion by more than
one fourth of the value of the
things which are the object
thereof.
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.
5. All other contracts specially
declared by law to be subject to
rescission. (Art. 1381)

NOTE: Rescission with respect to lesion in

No. 1 and 2 shall not take place if the
contract is approved by the court.
 What is the concept of
rescission?

➢It is the remedy allowed by law

to the contracting parties and to
third persons to repair the
damages caused them by a
contract by means of restoration
of things to their condition prior to
the celebration of the contract.
 What are the requisites of
rescission?

1. The contract must be validly agreed

upon.
2. There must be lesion or prejudice to
one of the parties or to third persons.
3. The rescission must be based upon a
case especially provided by law.
4. The party suffering damage must
have no other legal means to
obtain reparation for the
damage. (Art. 1383)
➢ The action for rescission is
subsidiary. Hence, if the debtor
has property other than that for
which rescission is being brought,
rescission will not prosper.
5. The party demanding the
rescission must be able to return
what he is obliged to restore by
reason of the contract. Hence,
rescission will not lie if the party
seeking it cannot comply with
such obligation. (Art. 1385)
6. The thing object of the contract
must not be legally in the
possession of a third person who
acted in good faith. (Art. 1385)
➢ In this case, indemnity for
damages may be demanded
from the person causing the loss.
(Art. 1385)
 EXAMPLE:

➢ Gail(guardian) sold a parcel of

land of May (minor) to Candy for
P140K when the true value of the
land is P200K. Upon reaching the
age of majority, May can ask for
the rescission of the sale on the
ground of lesion.
➢ Ifthe contract is rescinded, Candy
must return the land with the fruits
received by her therefrom while
May must return the P140K plus
legal interest from the date the
action was instituted in court.
However, if May cannot return the
price with the interest, she cannot
rescind the contract.
➢ IfCandy sells the land to Dan, an
innocent purchaser in good faith
who takes legal possession ,
rescission cannot also take place.
The remedy of May is to file an
action for damages against Gail,
her former guardian.
7. The action for rescission must be
brought within the period
allowed by law. (Art. 1389)
➢ The prescriptive period is 4 years
from the date of the contract
except in the following:
a) for persons under guardianship – 4
years from termination of
incapacity
b) For absentees – 4 years from the
time the absentee’s domicile is
known.
 Cases of Rescissible
Contracts

1. Contracts entered into in behalf

of wards.
2. Contracts agreed upon in
representation of absentees.
 EXAMPLE:
Kit is the guardian of Pocholo ( a
minor). Kit sells the property of
Pocholo worth P20k for only P15K.
Can the contract entered into by Kit
be rescinded?
ANSWER:
NO because the lesion is not more
than one-fourth.
3. Contracts undertaken in fraud of
creditors.

• REQUISITES TO INORDER TO BE A GROUND FOR

RESCISSION
➢ There must be an existing credit prior to the contract
to be rescinded, although it is not yet due or
demandable
➢ There must be fraud on the part of the debtor which
maybe presumed or proved.
➢ The creditor cannot recover his credit in any other
manner, it not being required that the debtor be
insolvent.
4. Contracts which refers to things
under litigation.

EXAMPLE:
Pearl sues Jinky for the recovery of a
parcel of land. If, during the pendency of
the case, Jinky sells the land to Marygold,
the sale is rescissible at the instance of
Pearl in case she wins in the case unless
Marygold is in legal possession of the land
in good faith.
5. All other contracts specially
declared by law.
 What is the extent of
rescission?

 Rescission shall only be to the

extent necessary to cover the
damages caused. (Art. 1384)
 The entire contract need not be
set aside by rescission if the
damage can be repaired or
covered by partial rescission.
 EXAMPLE:

➢Gab, the guardian of Mike, a

minor was authorized by the court
to sell the two parcels of land
valued at P100K each. Gab sold the
two parcels to Ben for only P100K.
Can the whole contract be
rescinded?
 ANSWER:

➢NO. The entire contract need not

be rescinded. Rescission may
properly be applied only to one
parcel to cover the damage
caused by Gab.
➢But if Gab or Ben is willing to pay
the difference of P100K, rescission is
precluded.
 VOIDABLE
CONTRACTS
What is a voidable contract?
➢A voidable contract is one that is
defective by reason of the
incapacity or vitiated consent of one
of the contracting parties.
➢It is binding unless annulled by a
proper action in court.
➢It is susceptible of ratification. (Art.
1390)
 Cases of voidable contract?

1. Those where one of the parties

is incapable of giving consent
to a contract.
 The following are incapable of
giving consent to a contract:
Unemancipated minors
Insane or demented persons.
Deaf-mutes who do not know how
to write. (Art. 1327)
2. Those where the consent is
vitiated by mistake, violence,
intimidation, undue influence or
fraud. (Art. 1390)
 What is the concept of
Annulment?
 it is the action brought to set aside a voidable
contract.
 It is the remedy provided by law, for reason of
public interest, for the declaration of the
inefficacy of a contract based on a defect or
vice in the consent of one of the contracting
parties in order to restore them to their original
position in which they were before the
contract was executed.
 Rules on annulment of voidable
contract?

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.
(Art. 1391)
2. Who may bring action for
annulment
➢ the action for annulment may be
instituted by all who are thereby
obliged principally or subsidiarily. (Art.
1397).
➢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 (hence, the persons
who employed such vices of consent
cannot base their actions on such
flaws of the contract)
 Requisites required to bring an
action for annulment of contract?

1. The plaintiff must have an

interest in the contract ; and
2. The victim and not the party
responsible for the defect is the
person who must assert the
same.
 Example

➢ Star sold a parcel of land to Boy.

The consent of Star was vitiated
by fraud. Subsequently, Star sold
the same lot to Cath.
➢ In this case, Cath can bring an
action to annul the sale.
3. Effects of annulment

a) In obligations to give, the

contracting parties shall restore to
each other, except in cases
provided by law, the following:

➢ The things which have been the subject

matter of the contract with their fruits.
➢ The price with its interest. (Art. 1398)
b) in obligations to render service,
the value thereof shall be the
basis of damages. (Art. 1398)

c) Restitution when one of the parties

is incapacitated
➢ The incapacitated person is not obliged to
make any restitution except insofar as he
has been benefited by the thing or price
received by him. (Art. 1399).
d) When thing is lost thru the fault of
the party obliged by the decree
of annulment to return it. The said
party shall return the following:
▪ Fruits received
▪ Value of the thing at the time of the loss
▪ Interest from the time of the loss
(Art. 1400)
e) Mutual restitution

➢ If one party cannot restore what he is

bound to return in the decree of
annulment, the other cannot be
compelled to comply with what is
incumbent upon him. (Art. 1402)
4. Effect of loss of thing while in the
possession of the party who has right
to bring the action for annulment.

a) If lost thru 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. However, he will be
required to return the value of the thing
and its fruits (Art. 1398) and only up to the
extent that he has been benefited. (Art.
1399)
 Example
➢ Ben forced Sam to sell the latter’s horse. The
contract was annulled by the court at the
instance of Sam.
➢ If the horse died through the fault of Ben, then
he is liable to pay damages.
➢ If the horse died due to fortuitous event, San
can refuse to return the purchase price.
➢ With or without the fault of Ben, Sam, as injured
party, has the right to demand the value of the
horse with damages.
 What is ratification?

 It
is the adoption or affirmation of
a contract which is defective
because of a party’s vitiated
consent or incapacity.
 What are the rules on
ratification?

1. How ratification is made

a) Express – when made orally or in writing
b) Implied or tacit – there is 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
executes an act which necessarily implies an
action to waive his right. (Art. 1393)
2. Who may ratify (the same persons
who may annul the contract)
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
(hence, the person who employed such vices of
consent cannot ratify)
3. Effects of ratification
a) It extinguishes the action to annul a
voidable contract. (Art. 1392)
b) It cleanses the contract from all its
defects from the moment its was
constituted. In other words, the
contract is validated from
inception.
 EXAMPLE:

➢Sam, a minor, sold his land to Ben.

Upon reaching the age of majority,
Sam, with full knowledge his rights in
the premises, instead of repudiating
the contract, disposed of the greater
part of the proceeds, or collected the
unpaid balance of the purchase price
from Ben.
➢In this case, there is an implied
ratification by Sam.
 EXAMPLE:

➢ In an action for annulment of a

contract of sale, Sam alleged that
the sale was executed by him
through the threat and intimidation
of Ben. It appears, however, that
Sam deposited the check for the
purchase price and withdrew the
money from time to time.
UNENFORCEABLE
CONTRACTS
 What is an unenforceable
contract?

➢ One that cannot be enforced in

court or sued upon by reason of
certain defects provided by law
until and unless they are ratified
according to law.
 Who has the right to the
defense of unenforceability?

➢ This right is available only to the

contracting parties.
➢ Unenforceable contracts cannot
be assailed by third persons. (Art.
1408)
 EXAMPLE:

➢ Sam sells a parcel of land to Ben. The

contract is oral. Carlo binds himself in
writing for the performance by Ben of
his obligation to pay the purchase
price.
➢ In an action by Sam to recover the
purchase price, Carlo cannot assail
the contract between Sam and Ben
for being unenforceable under the
Statute of Frauds. Carlo is a stranger
to the contract.
 EXAMPLE:

➢ Under a verbal contract, Sam

sells a parcel of land to Ben.
➢ In an action for ejectment by Ben
against Carlo, the person in
possession, the latter cannot set
up the defense of the Statute of
Frauds.
 Cases of
Unenforceable
Contracts
(Article 1403)
1. Those entered into in the name
of another person by one who
has given no authority or legal
representation or who has acted
beyond his powers.
➢ Under Article 1317, no one may contract
in the name of another without being
authorized by the latter, or unless he has
by law a right to represent him.
➢ Such contract, if entered into, shall be
unenforceable, unless it is ratified,
expressly or impliedly, by the person in
whose behalf it has been executed,
before it is revoked by the other
contracting party.
2. Those where both parties are
incapable of giving consent
to a contract
➢Effect of ratification by parent or guardian

1. When only the parent or guardian of one party

ratifies, the contract is voidable;
2. When the parents or guardians of both parties
ratify the contract shall be considered valid from
inception. (Art. 1407)
3. Those that do not comply
with the Statute of Frauds.

➢ The Statute of Frauds is a statute designed

to prevent the commission of fraud by
requiring certain contracts to be in writing;
otherwise they are unenforceable;
 Cases under the Statute of Frauds

1. An agreement that by its terms is

not to be performed within a year
from the making thereof;
 EXAMPLE:

➢On October 10, 2007, Sam entered

into an oral contract with Ben for
the construction of Ben’s house to
begin on October 20, 2008. The
contract must be in writing to be
enforceable.
2. A special promise to answer for
the debt, default, or
miscarriage of another.
 EXAMPLE:

➢ Dave owes Cay P10K with Gab as

guarantor. Here, Gab has a
special promise to answer for the
debt of Dave in case Dave fails to
pay the same. This promise is
unenforceable unless it is I writing
signed by Gab.
3. An agreement in
consideration of marriage,
other than mutual promise to
marry;
 EXAMPLE:

➢ Mar agrees to build a house worth

P1M for Wendy if Wendy will marry
Mar. This must appear in writing to be
enforceable unless Mar ratifies the
agreement.
➢ The statute applies even when the
promise to build the house is made by
a third person to Wendy.
4. Sale of goods, chattels or things
in action at a price not less than
P500.00
 EXAMPLE:

➢ Sam and Ben mutually promised to sell

and buy a piano at a price of P12K.
➢ 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 our of the
operation of the Statute of Frauds and
the contract may be enforced even if it
was made orally.
5. An agreement for the leasing of
a real property or of an interest
therein for more than one year.
 EXAMPLE:

➢ Ray agreed to lease his house to Eve

for two years.
➢ This agreement must appear in writing
to be enforceable unless it is partially
executed.
6. Sale of real property or an
interest therein (regardless of
price)
 EXAMPLE:

➢ Sam orally sold his land or his right of

usufruct in said land to Ben.
➢ The agreement is also unenforceable,
unless it has been partially executed.
 EXAMPLE:
➢ Sam agreed in a private document to
sell his land to Ben. The document was
given to Ben who lost it. May Ben prove
the agreement by oral evidence?
ANSWER:
➢ YES. What is to be proved is not an oral
but a written contract of sale. It is
necessary, however, that Ben first present
proof that the written agreement really
existed.
7. A representation as to the
credit of a third person
 EXAMPLE:

➢ Dan is seeking a loan from Cath. Ted

represents to Cath that Dan is solvent
and has a good credit reputation.
Relying upon this representation,
Cath extends a loan to Dan who,
actually, is insolvent.
Applicability of Statute of Frauds
and ratification:

1. Contracts infringing the Statute of

Frauds apply only to wholly executory
contracts.
2. They are susceptible of ratification thru
any of the following means which will
render it enforceable:
a. By the failure to object to the
presentation of oral evidence to
prove them.
b. By the acceptance of benefits
under them. (Art. 1405). This will
make the contract executed in part.
2. The defense of the Statute of
Fraud is personal to the parties
and cannot be interposed by
strangers to the contract.
VOID or INEXISTENT
CONTRACTS
 What is a void contract?

➢ One which has no force and

effect from the beginning, as if it
had never been entered into, and
which cannot be validated either
by time or ratification.
 Characteristics of a void
contract?

1. It produces no effect whatsoever.

2. It cannot be ratified. (Art. 1409)
3. The right to set up the defense of illegality
cannot be waived. (Art. 1409)
4. The action or defense for the declaration
of the inexistence of a contract does not
prescribe. (Art. 1410)
4. The defense of illegality of contracts is
not available to third persons whose
interests are not directly affected. (Art.
1421)
5. It cannot give rise to a valid contract.
(Art. 1422)
 Contracts that are void from the
very beginning:

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 object or cause 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. (Art. 1409)
 NOTE
➢ The action or defense for the
declaration of the inexistence of a
contract does not prescribe. (Art.
1410)
➢ If a contract is void a party thereto can
always bring a court action to declare it
void or inexistent, and a party against
whom a void contract is sought to be
enforced, can always raise the defense of
nullity, despite the passing of time.
 NOTE

➢ The defense of illegality of

contracts is not available to third
persons whose interest are not
directly affected. (Art. 1421)
➢ In voidable and unenforceable
contracts, third persons are not allowed
to bring an action to annul or to assail
said contracts.
➢ If the contract is illegal or void, even a
third person may avail of the defense of
illegality or set up its nullity as long as his
interest is directly affected by the
contract.
 EXAMPLE
➢ Hubby sold his land to Wifey. Under the
law, husband and wife cannot sell
property to each other and such sale is
illegal and void. The purpose of the
prohibition is to protect third persons
who, relying upon supposed property of
either spouse, enter into a contract with
either of them only to find out that the
property relied upon was transferred to
the other spouse.
➢ Under Article 1421, if Ted, a third person,
became a creditor of Hubby before the
transaction, he can question the sale for
the reason that his rights or interest is
directly affected.
➢ However, if he became a creditor after
the transfer, the defense of illegality is
not available to him.
END OF THE DISCUSSION!