Defective Contracts

      Rescissible Contracts  

            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, four requisites are required:

1. it must fall under either Art. 1381 or 1382 (Causapin v. CA, 233 SCRA 615 [1994]);
2. the party seeking rescission must have no other legal means to obtain reparation for
damages suffered by him (Art. 1383);
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).

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.”

Voidable Contracts

            Voidable contracts are governed by Arts. 1390 to 1402. As noted earlier, consent is one
of the three essential elements of contracts. If the consent of one of the parties is defective or
vitiated, the contract is voidable. Defect or vitiation of consent is caused by either internal or
external factors. These factors are laid down in Arts. 1327 to 1344.
            Consent, as an element of contracts, must be intelligent and free. If either attribute is
impeded or impaired, then consent is said to be vitiated, and the contract voidable.

               The factors that impair intelligence are:

1. Minority (Art. 1327, par. 1)

The age of emancipation, previously 21 under both the Civil Code and the Family Code, has
been reduced by RA 6089 to 18.

2.  Insanity, deaf-mutism coupled with illiteracy, intoxication, and hypnotic spell (Arts. 1327,
par. 2 and 1328)

3. Fraud (Art. 1338)

Fraud, as a vitiating factor of consent, is equivalent to and synonymous with deceit, and is not to
be confused with fraud under Art. 1170, which consists in “the deliberate and intentional evasion
of the normal fulfillment of an obligation” (Legaspi Oil v. CA, 224 SCRA 213 [1993]). That
other fraud is synonymous with malice or bad faith. More, fraud as deceit is antecedent to or at
least simultaneous with the birth of the contract and for that reason vitiates consent, which must
exist when the contract is entered into. On the other hand, fraud as malice occurs subsequent to
the constitution of the obligation and results, not in the annulment of the obligation, but in
liability for damages (Art. 1170).
            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). 

  Unenforceable Contracts

            Third in the classification of defective contracts are the 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.

1. 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.”
            To the same effect are the provisions of Art. 1317.

                        “Art. 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.”

“A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified,
expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked
by the other contracting party.”

            Thus also provides Art. 1910, par. 2.

“As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.”

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.

            B.         The second kind (although third in the enumeration of the Article) of
unenforceable contracts is found in Art. 1403, par. 3:

                        “Those where both parties are incapable of giving consent to a contract.”

The confirmation by one of the incapacitated parties does not convalidate the contract; it merely
raises the contract one rung higher—to the level of a voidable contract.

C.        The third—and best-known—kind of the unenforceable contracts includes those

enumerated by Art. 1403, par. 2—the provision that is commonly known as the Statute of
Frauds.

    Void Contracts

            Fourth in the enumeration of defective contracts are the void or inexistent contracts, the

most seriously defective of all:   

“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.”

                   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])