Republic of the Philippines

PARTIDO STATE UNIVERSITY

Camarines Sur

PSU Template
College of Business and Management
Module on
Law on Obligations and Contracts
(Contracts)

Name of Student: __________________________ Week Number: 14-15

Course Code: Name of Faculty: Ivan Ruzzel C.
Pesino
Course Title: Law on Obligations and Contracts

OBJECTIVES
 Discuss the concept defective contracts
 Enumerate the rescissible contract
 Discuss the remedy for rescissible contracts
Lesson:
E. Defective Contracts
 The remaining chapters deal with defective contracts. The Civil Code made major
and important improvements on this topic. Unlike the Spanish Code, the defective
contracts were ambiguous and had unclear classifications. They were simply void or
voidable. Here, in our present code, there are for types of defective contracts, from
the serious to less serious, in the following order:

Void
Unenforceable
Voidable
Rescissible

 However, our Code still has some imperfections. As pointed out by Tolentino, there
must be a “relatively void” contract. For example, in an assignment of lease without
authority, this is void as to third parties, but valid as between the parties.
 There have been several cases decided by our Supreme Court wherein a chattel
mortgage over real property was declared void as to third parties but valid as between
the parties.
 Whatever imperfections the Code has, it still is better than other codes on this topic.
1. Rescissible Contracts
Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.

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;
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

(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.

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.

Art. 1384. Rescission shall be only to the extent necessary to cover the
damages caused.

Art. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act in bad
faith.
In this case, indemnity for damages may be demanded from the person
causing the loss.

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.

Art. 1387. All contracts by virtue of which the debtor alienates property
by gratuitous title are presumed to have been entered into in fraud of creditors,
when the donor did not reserve sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been issued. The decision or
attachment need not refer to the property alienated, and need not have been
obtained by the party seeking the rescission.
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

In addition to these presumptions, the design to defraud creditors may be

proved in any other manner recognized by the law of evidence.

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them on account of
the alienation, whenever, due to any cause, it should be impossible for him to
return them.
If there are two or more alienations, the first acquirer shall be liable first,
and so on successively.

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.

 This is not be to confused with resolution, discussed in Article 1191. This chapter
on rescissible contracts is the proper rescissible. According to Scaevola,
rescission is a process designated to render inefficacious a contract validly entered
into and normally binding, by reason of external conditions, causing an economic
prejudice to a party or to his creditors.
 A rescissible contract is a contract which is valid because it contains all the
essential requisites prescribed by law, but which is defective because of injury or
damage to either of the contracting parties or to 3rd persons, as a consequence of
which it may be rescinded by means of a proper action for rescission.
 Rescission is a remedy granted by law to the contracting parties, and even to 3rd
persons, to secure the reparation of damages caused to them by a contract, even if
the same should be valid, by means of the restoration of things to their condition
prior to the celebration of the contract.
 Requisites of Rescission
a. The contact must be a rescissible contract under Article 1381 or Article 1382
 The following contracts are rescissible
i. Those entered into by guardians whenever the whom they represent
suffer lesion by more than ¼ of the value of things which are the
object thereof (Article 1381 (1))
 Rescission shall not take place with respect to contracts approved
by the court (Article 1386).
 As a rule, when a guardian enters into a contract involving the
disposition of the ward’s property, the guardian must secure the
approval of the guardianship court. A guardian is only authorized
to manage the estate of the ward. A guardian has no power to
dispose of any portion of the estate without approval of the court.
If more than acts of mere administration are involved, judicial
approval is necessary.
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

 In case of sale, mortgage, or other encumbrance of any portion of

the estate which does not have judicial approval is an
unenforceable contract (Article 1403 (1)).
 Therefore, Article 1381 (1) is limited to contracts which constitute
mere acts of administration (i.e. the purchase of equipment for the
cultivation of lands, purchase of materials for repair of buildings,
etc.).
 Lesion is very difficult to apply in practice.
 For example, A is the agent of B. B owns land worth P10 M. A
sells the land for P7 M. From the facts, the lesion suffered by B is
30%. In practice, are you sure that P10 M is the fair market value
of the land. What if the situation is urgent and that property must
be disposed of right away?
 Another example, A is the agent of B. B owns land worth P10 M.
C wants to buy the land. C is willing to pay P 7 M – lump sum
payment. D is willing to pay P 10 M but on installments.
ii. Those agreed upon in representation of absentees, if the absentee
suffers lesion by more than ¼ of the value of things which are the
object thereof (Article 1381 (2))
 Rescission shall not take place with respect to contracts approved
by the court (Article 1386).
 As a rule, when the legal representative of an absentee enters into a
contract involving the disposition of the absentee’s property, he
must secure the approval of the court. A legal representative is
only authorized to manage the estate of the absentee. He has no
power to dispose of any portion of the estate without approval of
the court. If more than acts of mere administration are involved,
judicial approval is necessary.
 In case of sale, mortgage, or other encumbrance of any portion of
the estate which does not have judicial approval is an
unenforceable contract (Article 1403 (1)).
 Therefore, Article 1381 (2) is limited to contracts which constitute
mere acts of administration (i.e. the purchase of equipment for the
cultivation of lands, purchase of materials for repair of buildings,
etc.).
 Lesion is very difficult to apply in practice.
 For example, A is the agent of B. B owns land worth P10 M. A
sells the land for P7 M. From the facts, the lesion suffered by B is
30%. In practice, are you sure that P10 M is the fair market value
of the land. What if the situation is urgent and that property must
be disposed of right away?
 Another example, A is the agent of B. B owns land worth P10 M.
C wants to buy the land. C is willing to pay P 7 M – lump sum
payment. D is willing to pay P 10 M but on installments.
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

iii. Those undertaken in fraud of creditors when the creditors cannot in

any other manner collect the claims due them (Article 1381 (3))
 This is an exception to the principle of relativity of contracts.
 Creditors, after having pursued the property in possession of the
debtor to satisfy their claims may exercise all the rights and bring
all the actions of the latter for the same purpose, save those which
are inherent in his person; they may also impugn the acts which the
debtor may have done to defraud them (Article 1177).
 Creditors are protected in cases of contracts intended to defraud
them (Article 1313).
 In determining whether or not a certain conveyance is fraudulent,
the question in every case is whether the conveyance was a bona
fide transaction or trick and contrivance to defeat creditors, or
whether it conserves to the debtor a special right.
 All contracts by virtue of which the debtor alienates property by
gratuitous tile are presumed to have been entered into in order to
defraud creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the donation (Article
1387, 1st ¶).
 Alienations by onerous title are also presumed fraudulent when
made by persons against whom some judgment has been rendered
in any instance or some writ of attachment has been issued. The
decision or attachment need not refer to the property alienated, and
need not have been obtained by the party seeking the rescission
(Article 1387, 2nd ¶).
 Badges of Fraud
1. The fact that the consideration of the conveyance is inadequate
2. A transfer made by a debtor after suit has begun and while it is
pending against him
3. A sale upon credit by an insolvent debtor
4. Evidence of large indebtedness or complete insolvency
5. The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed
financially
6. The fact that the transfer is made between father and son when
there are present any of the above circumstances
7. The failure of the vendee to take exclusive possession of all the
property
iv. 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 (Article 1381 (4))
 Article 1381 (4) refers to a contract executed by the defendant in a
suit involving the ownership or possession of a thing, when such
contract is made without the knowledge and approval of the
plaintiff or court.
 As in the case of a contract in fraud of creditors, the remedy of
rescission in this case is given to a 3 rd person who is not a party to
the contract. The purpose is to protect the plaintiff.
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

v. All other contracts specially declared by law to be the subject of

rescission (Article 1381 (5))
 The following provision in sales are examples of rescissible
contracts declared by law – Arts 1526, 1534, 1538, 1539, 1540,
1556, 1560, 1567, 1659.
 Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were
effected (Article 1382)
b. The person asking for rescission must have no other legal means to obtain
reparation for the damages suffered by him (Article 1383)
c. The person demanding rescission must be able to return whatever he may be
obliged to restore if rescission is granted (Article 1385, 1st par)
 This requisite is only applicable if the one who suffers the lesion is a party
to the contract.
 This requisite does not apply when a defrauded creditor resorts to accion
pauliana.
d. The things which are the object of the contract must not have passed legally to
the possession of a 3rd person acting in good faith (Article 1385, 2nd ¶)
 Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the
alienation, whenever, due to any cause, it should be impossible for him to
return them (Article 1388,1st ¶).
 If there are 2 or more alienations, the 1 st acquirer shall be liable 1st, and so
on successively (Article 1388, 2nd ¶).
e. The action for rescission must be brought within the prescriptive period of 4
years (Article 1389)

Activities:
Problem 1:
Mr. and Mrs. Mayaman is a billionaire in the town of Goa, Camarines Sur, they have their only
child name Anton. One day while Mr. and Mrs. Mayaman is on their business trip in USA, their
plane crashed and the couple has been found dead. All the properties of Mr. and Mrs. Mayaman
has been transferred to Anton their only child which is only 14 years old. Anton was left under
the Guardianship of their gardener named Angel Dela Guardia. Later on, Angel sold the 62” Flat
screen Smart TV owned by Anton to Booba (Angel’s Friend) in the amount of P50,000, the Fair
market Value of the TV is P75,000. The proceeds of the sale was used to pay the tuition fee of
Anton. Is the Contract Valid? What is/are the remedy/ies of Anton?

Answer:
The contract of sale entered by Angel is valid, however it is rescissible. Anton suffered more
than 25% of lesion in the FMV of the object of the contract. The remedies available to Anton are
(a) ratify the contract when he turns 18, to cure the defect of the rescissble contract or (b) within
4 years after Anton turns 18, he may ask for the recission of the contract for the reason that he
suffers lesion.

Problem 2:
Capt. Bernardo Bernardino, a Philippine Air Force pilot, encountered a tragic event when his
C130 plane was shot down by an RPG while making a landing at Marawi City. The body of
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

Capt. Bernardo was not found in a crash site. He was survived by his wife and his only son. He
left several properties to his wife and son, one of it is a Mitsubishi Monetero Sport 2017 model,
with FMV of P1,500,000. The wife of Capt. Bernardo wasn’t able to drive the Montero Sport
that why she decided to sell it to her Kumpare, for P1,000,000. Months have passed, Capt.
Bernardo was found to be alive and was under care of the indigenous people in Mindanao. What
is the remedy available to Capt. Bernardo in case he wants back his Montero?
Answer:
Capt. Bernardo may file for recission of the contract entered by his wife, for the reason of lesion
of more than 25%, within 4 years after he was found to be alive.

Assessment:
1. The following statements concerning ratification are correct, except
a. Guardian of a minor
b. Guardian of an insane or demented person
c. Party whose consent is vitiated
d. Party who is capable or the party who committed the vices of consent
2. Indicate the proper order from least defective to most defective contract.
I. Rescissible contract which is a contract that has caused a particular damage to one of
the parties or to a third person, and which for equitable reasons may be set aside
even if it is valid.
II. Voidable or annullable contract, which is contract in which the consent of one party is
defective, either because of want of capacity or because it is vitiated, but which
contract is valid until set aside by a competent court.
III. Unenforceable contact which is a contract that for some reason cannot be enforced,
unless it is ratified in the manner provided by law.
IV. Void or inexistent contract which is an absolute nullity and produces no effect, as if
had never been executed or entered into and cannot be ratified.
a. IV-III-II-I
b. I-II-III-IV
c. II-I-IV-III
d. I-III-II-IV
3. The following may ask for the reformation of an instrument, except
a. Either party if the mistake is mutual.
b. Injured party
c. Successors in interest, heir and assigns of injured party
d. Guilty party
4. The following are the rules for interpreting or constructing a contract, except
a. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.
b. 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.
c. If some stipulation of any contract should admit several meanings, it shall be
understood as bearing that import which is most adequate to render in effectual.
d. The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken jointly.
e. Words which may have different significations shall be understood in that which
is most in keeping with the nature and object of the contract.
 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur

f. 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 omissions of stipulations which are
ordinarily established.
g. The interpretation of obscure words or stipulations in a contract shall favor the
party who caused the obscurity.
5. G the guardian of S, sold the ring of S with the value of P20,000 for P15,000. What is the
status of the contract entered by G? and why?
Suggested References
 De Leon and De Leon, The Law on Obligations and Contracts(2015),REX Book Store.
Manila
 De Leon, comprehensive Review of Business Law( 2017), REX Book Store. Manila
 Chan, J. G., & Chan Robles & Associates. (n.d.). BOOK IV (FULL TEXT) : CIVIL
CODE OF THE PHILIPPINES : CHAN ROBLES VIRTUAL LAW LIBRARY.
Retrieved from http://www.chanrobles.com/civilcodeofthephilippinesbook4.htm
 Soriano F. R., Obligations and Contracts (Law and Application) For Business and Law
Students (2016), GIC Enterprises & Co., Inc. Manila