TECHNOLOGICAL UNIVERSITY OF THE PHILIPPINES VISAYAS

Capt. Sabi St., City of Talisay, Negros Occidental

LEARNING MODULE (Wk 11)

CLSE: Contracts, Laws,

Specifications & Ethics
Instructor: Samuel C. Feliciano (Bing)
Defective Contracts

LEARNING OUTCOMES
By the end of today’s lesson, students should have understood
and discussed the following:
1.Rescissible contracts
2.Voidable contracts
3.Unenforceable contracts
A. Rescissible contracts
• Defective contracts – those which fail to meet or partially meet the legal
test of validity because they lack some essential elements, or the parties
lack the capacity to contract, or there is a vice in the consent (circumstances
affecting the nature of consciousness and the free will to conclude a legal act) of one of the parties or
lesion (unfair loss) in certain case. They are rescissible (cancellable), voidable,
unenforceable, and void or inexistent contracts.

• Rescission – remedy granted by law to the contracting parties, their

successors in interest, or third persons to secure reparation of damages
caused them by a contract, even if the contract is valid, by means of
restoration of things to their condition prior to
the celebration of the contract.
A. Rescissible contracts
• Elements necessary to use rescission:
1) case specially provided by law;
2) mutual restitution of what the parties have received under the
contract;
3) object of the contract must not be in the possession of a third person
who acquired it in good faith and for a value;
4) no other legal remedy except by rescission; and
5) action has not been prescribed
A. Rescissible contracts
• Contracts that may be rescinded:
1) entered into by guardian whenever the wards whom they represent
suffer lesion (unfair loss) by more than one-fourth of the value of the
things which are the object thereof;
2) agreed upon in representation to absentees if the latter suffer lesion;
3) undertaken in fraud of creditors when the latter cannot in any other
manner collect the claims due them;
4) things under litigation if entered into by the defendant without the
knowledge and approval of the litigants or competent judicial authority;
5) Payments made under a contract where a debtor is in the state of
insolvency for obligations to those fulfilment, he could not be compelled at
the time they were effected (Article 1382); and
6) other contracts declared by law to be subject to rescission
A. Rescissible contracts
• Lesion – damage or injury to the party asking for rescission by reason of
the fact that the price is unjust or inadequate. (loss of more than ¼ of the
value of a thing)

• Contracts in representation of wards

"A" is the guardian of "B", a minor. "A" sells to "C" the property of "B"
worth P400,000 for only P200,000. By virtue of the contract of sale, "B"
suffered damages by more than one-fourth the value of his property. "B's"
remedy is to rescind the sale made by "A" to "C" before a court of
competent jurisdiction upon reaching the age of majority (RA 6809 - An Act
Lowering the Age of Majority from Twenty-One to Eighteen Years). But, if "A"
sells it for P350,000, sale cannot be rescinded because the damage
(lesion) is not more than one-fourth.
A. Rescissible contracts
• Contracts in representation of absentees
Absentee –whereabouts is unknown and cannot be located in his last
official residence or address.
If “B” is an absentee, he can file an action for rescission when he
reappears.

• Those undertaken in fraud of creditors, etc.

To enable the creditors to exercise the remedy of rescission, it must be
proven by the prejudiced creditor that he cannot collect the claim due in
any manner.
Ex: if X to evade paying his debt to Y amounting to P100,000 enters into a
contract selling his only passenger jeepney for the same amount to Z, Y
can file an action for rescission as the contract was made to defraud him --
- a creditor.
A. Rescissible contracts
• Those referring to things in litigation. A thing is considered to be in
litigation when the respondent has already received service of summons
from the court taking cognizance of the case. Ex: if X sues Y for the
recovery of a passenger jeepney and pending trial the same is sold by Y to
Z without the approval of X or the court, the sale is rescissible.

• Payment under a contract after insolvency. Insolvency here need not be a

judicially declared one but may be under a situation where a debtor is
publicly known to have defaulted in the payment of obligations due to his
various creditors. Thus, if a debtor, being insolvent, pays an obligation
which is not yet due, a creditor at the time of payment may ask the court to
rescind payment.
A. Rescissible contracts
• Contracts declared by law subject to rescission
> where one of the heirs received a share less than one-fourth of his
legitimate share (Art 1098); unpaid seller of things (Art 1526 & 1524);
breach of reciprocal obligations under Art 1191

• Contracts in behalf of wards or absentees approved by court not

rescissible.
Contracts set in their numbers (above) entered in behalf of a minor by a
guardian ad litem or by legal representative in case of an absentee and
approved by courts, are not rescissible. Intervention of the courts is
sufficient to protect the interest of minors as well as those who are
considered absentees. (Guardian ad litem - person appointed by the court where the case is
pending for a child who is a victim of, accused of, or a witness to a crime to protect the best interests of the
said child)
A. Rescissible contracts
• Rescission without Judicial Intervention – when stipulation in a contract
provides automatic revocation or cancellation of contracts for violation of
any terms and conditions thereof without intervention of the courts.
Ex: Conditional sale on installments providing automatic rescission of the
contracts if buyer defaults to pay one or more monthly installments.
Rescission of this contract is automatic without action by the court.
A. Rescissible contracts
• Extent of rescission. Rescission shall be only to the extent necessary to
cover damages caused (Art 1384). Thus, partial rescission is allowed
since the purpose of rescission is only to repair or cover up the damages
caused and to respect and preserve the contract entered into by the
parties.
Ex: X, guardian of minor Y, sold to Z a piece of land belonging to Y in the
amount of P100,000 although the market value was P150,000. Upon
reaching the age of majority, Y filed an action for rescission due to lesion.
Z however is willing to pay the damage of P50,000.00. Thus, rescission
shall only be to repair the damage of P50,000 to Y.
A. Rescissible contracts
• Effects of rescission. > obligation to return the things which were the
object of the contract, together with fruits, and the price with interest; it
cannot be carried out when he who demands rescission cannot return
whatever he may be obliged to restore. Rescission will not take place
when things (object of the contract) are legally in the possession of a third
person who did not act in bad faith.

• Requisites for an action for rescission to prosper. Plaintiff (complainant)

must be able to return what he has received by virtue of a rescissible
contract together with fruits or the price and interest; object of the
contract is not in the hands of a third person who has acquired the same
in good faith and for value. Also, there must be no other legal remedy and
that the action be brought within the prescriptive period.
A. Rescissible contracts
• Obligation of mutual restitution. Includes return of the thing together
with the fruits, its price and interest.
Ex: X, guardian of minor Y, sold to Z a piece of land belonging to Y in the
amount of P100,000.00 although the market price was P150,000. Upon
reaching the age of majority, Y filed an action for rescission due to lesion.
Z is however willing to return the land, but Y cannot produce the proceeds
of the sale. Rescission cannot take place because he who demands
rescission shall return what he may be obliged to restore. But if Y can
return the price together with the interest received between the period
commencing from the day of the sale by X and the filing of the action, and
Z is willing to return the land and fruits received
during the period, rescission will be in order.
A. Rescissible contracts
• Subject matter in possession of purchaser in good faith. A purchaser in
good faith is one who buys the thing for value, and without notice of
defect of acquisition of the vendor.
(preceding example) If Z sold it to O who pays an amount of P150,000 and
without knowing of the flaw of Z’s title, registers it in the Registry of
Deeds, rescission cannot likewise take place because O is a purchaser in
good faith and for value.
A. Rescissible contracts
• Alienation presumed in fraud of creditors. (Alienation - process of a property owner
voluntarily giving or selling the title of their property to another party) All contracts by virtue of
which the debtor alienates property by gratuitous title are presumed to
have been entered into in fraud of creditors, whenever the donor did not
reserve sufficient property to pay all debts contracted before the
donation.
 A. Rescissible contracts
• Alienation by gratuitous title. Contracts involving gratuitous alienation
take place when debtor did not reserve sufficient property to pay all his
debts contracted before donation. Ex: X donated his land to Y. Before he
donated, he had outstanding debts, but did not reserve properties to pay
his debts. Thus, donation is presumed in fraud of creditors if no proof is
shown to prove the contrary. (Defrauds creditor if: person destroys, removes, conceals, encumbers,
transfers or otherwise deals with property subject to a security interest, with the intent to hinder enforcement of that
interest)
• Alienation by onerous title. Presumed fraudulent if made by a person
against whom a judgment has been rendered, or against whom a writ of
attachment has been issued by the court. Ex: where after judgment has
been issued against him by a court, X sold his property to Y; and where
after X’s house at Ermita, Manila, was attached by the court, X sold it or
some other tangible property to Y.
A. Rescissible contracts
• Circumstances indicative of fraud:
1. Conveyance (transfer of ownership) is fictitious or inadequate
2. Transfer made by a debtor after suit has begun while it is pending
against him
3. Sale on credit by an insolvent debtor
4. Transfer of all/ nearly all of his property by a debtor especially when
he is insolvent or greatly embarrassed financially
5. Evidence of large indebtedness or complete insolvency
6. Transfer is made between father and son in relation to preceding
circumstances
7. Failure of vendee (buyer) to take exclusive possession of all
properties
A. Rescissible contracts
• Liability of acquirer in bad faith. Whoever acquired 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.
A. Rescissible contracts
• Concept of bad faith > implies deliberate disregard of known duty to get
personal/ economic advantage in manifest disregard of the rights of others. It
is fraud of creditor and injured party can avail of the remedy of rescission
and recovering the property from the transferee in bad faith. If for any
reason, including fortuitous event, the property cannot be recovered, the
party entitled to recover may sue the transferee in bad faith for indemnity of
damages. If there are more than one alienation, first acquirer becomes liable,
then the second party, and so on.
• Ex: X, to defraud his creditors, sold his only car to Y who knew of X’s
purpose, i.e., in bad faith. Y alienated it to Z who later sold it to O. Both Z and
O are also in bad faith. If the car is lost after rescission, Y is liable first. If he
cannot pay, Z will be liable because the law says that if there are two or more
alienations, the first acquirer shall be liable first, and so on successively.
A. Rescissible contracts
• Prescription period for action for rescission
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 absentee is known.
B. Voidable Contracts
• Voidable Contracts – have requisites of valid contract: consent, object
certain and consideration, but have a defect or vice because the consent is
vitiated by mistake, violence, intimidation, undue influence and fraud, or that
one of the contracting parties is incapable of giving consent.
• Valid until voided in court. Validity is absolute once ratified or not annulled
within four years.

Voidable contracts are as follows:

1) Where one of the parties is capable of giving consent to contract
2) Where consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
B. Voidable Contracts
• Rescission vs • Annulment
1) Basis is lesion (damage)
2) Subsidiary remedy
3) Only the parties’ private interest
are affected
4) Defect is external (visible damage)
5) Damage to plaintiff (person
bringing the action) is essential
1) Basis is vitiated consent (e.g., fraud,
coercion, duress, mistake)
2) Principal remedy
3) Public interest is essentially
affected
4) Defect is internal
5) Damage to plaintiff is not
essential in annulment
B. Voidable Contracts
• Prescription of action to annul contract. Action for annulment of contract
shall be brought within four years counted from:
a) the time the defect of consent ceases in cases of intimidation, violence
or undue influence;
b) the time of discovery of the mistake or fraud;
c) the cessation of guardianship in cases of contracts entered into by
minors and incapacitated persons.

• Ratification – the affirmance by a person of a prior act made by him or by

other persons for his account but did not bind him in the beginning, and by
reason of which gives an effect to the prior act as if originally intended or
consented to by him.
B. Voidable Contracts
• Effects of ratification of a voidable contract. It extinguishes the action to
annul a voidable contract. Contract is cleansed from all its defects from
the date the contract was entered into.

• Ratification, how effected – expressly or tacitly. Tacit ratification – with

knowledge of the reason which renders the contract voidable and such
reasons having ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to waive his rights.
Ex: a) A minor bought a piece of land but sold the same after reaching
twenty one years of age to a third person; b) A minor sold his land, and
upon reaching majority age, collected the unpaid balance of the selling
price; c) Voluntary performance by injured party of his obligation after the
cause of nullity become known to him.
B. Voidable Contracts
• Ratification of guardians. Guardians (parents) of incapacitated person
may ratify a voidable contract entered into by the latter. In the absence or
disqualification of parents, the court may appoint a guardian for the
child’s property when his interest so demand.

• Persons who may ask for annulment. Action for annulment of contracts
may be instituted by all who are obliged principally or subsidiarily.
Persons who are capable cannot alleged the incapacity of those whom
they contracted.
B. Voidable Contracts
• Requisites for actions (annulment) to prosper.
a) plaintiff has an interest in the contract either principally or subsidiarily;
b) victim and not the party responsible for the defect is the person who
must assert the same because equity can only be demanded if the
party seeking it has clean hands.
Ex: X, using intimidation, secured the signature of Y in a Deed of Sale
whereby Y sold a yacht for P1,000,000 to X on Jan 5, 2004 to be paid on
Jan 30, 2004. Before due date, X learned that the price is rather high and
so he filed an action for annulment. In this case, the action for annulment
will not prosper since he caused the defect (intimidation) of the contract.
That is how equity works – go to the court with clean hands.
 B. Voidable Contracts
• Obligation of parties after decree of annulment. Contracting parties shall
restore to each other the things which have been the subject matter of the
contract together with the fruits, and the price with interest, except in
cases provided by law. But, in obligations to render service, the value
thereof shall be the basis of the damage.
Ex: X, an uncle who wields undue influence over Y, succeeded in having Y
sign a contract selling to him a three-door apartment on his birthday, Sept
11, 2004 for P1,800,000, paying one-half and the balance to be paid on
Sept 30, 2004. Each door earns P20,000 a month. Y got the nerve to file an
action for annulment only in Dec 2004. If the court will decree the
annulment of the contract on Sept 10, 2005, X will be obliged to return to Y
the apartment plus the rental amounting to P240,000 received by X, and Y
to return to X the sum of P1,800,000 with interest (based on usury law, legal
interest is 6% per annum).
 B. Voidable Contracts
• Non-restitution by incapacitated party, exemption.
When the defect of the contract consists in the incapacity of the one of
the parties, the incapacitated person is not obliged to make any restitution
except when he has benefited by the thing received by him.
Ex: X, a minor, entered into a contract of sale of his car with Y for
P300,000. P200,000 of this was placed in time deposit to mature when he
will reach twenty-one years and the rest were lost to gambling. After
reaching the age of majority, he filed an action to annul the contract and
the court voided it. Therefore, X must return simultaneous with the return
of the car by Y to him the P200,000 only because he was benefited or was
enriched to that extent.
B. Voidable Contracts
• Restitution through payment of value with interest. When the person obliged
by the decree of annulment to return the thing cannot do so because it has
been lost through his fault, he shall return the fruits received and the value of
the thing at the time of loss, with interest from the same date. If what is to be
returned is lost through the fault of the party obliged to return, obligation is
not extinguished. The value of things lost shall be paid in the form of
indemnity with interest plus the fruits received from the time the thing was
received until its loss.
• Ex: X forced Y to sell him the latter’s house which X took possession
immediately. After cessation of the violence, Y filed an action of annulment
and the court granted it but X could not return the house because it was
burned through X’s fault. Hence X should return a) the rentals of the house
from its delivery up to the time it was razed; b) value of the house; and c)
interest of 6% of the value of the house at the time it was burned.
B. Voidable Contracts
• Effect of loss of object through fraud or fault of victim.
Action for annulment of contracts shall be extinguished when the object is
lost through fraud of the person who has a right to institute the
proceedings. 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 of the action, unless the said loss took place through the fault
of the plaintiff (complainant).
Ex: X sold to Y, a minor, a motorboat for P300,000. If the motorboat is
thereafter lost through the fault or fraud of Y, his right to file an action for
annulment is lost. But if the same disappears due to a strong typhoon or
other fortuitous event, his right to file an action for annulment will not be
extinguished even if the boat cannot be returned. In this case, Y would
merely be entitled to return the price with interest.
B. Voidable Contracts
• Obligation to return is reciprocal.
If one of the contracting parties does not restore what (by decree of
annulment) he is bound to return, the other party cannot be compelled to
comply with what is incumbent upon him.
C. Unenforceable Contracts
• Meaning of unenforceable contracts >when it cannot be sued upon or
enforced in court unless it is ratified.
• All elements of valid contract are there but cannot be enforced because
of non-compliance with the requirements of the law, i.e., writing or
evidence by a note or memorandum.
C. Unenforceable Contracts
Art 1403. Unenforceable contracts, unless they are ratified:
1) entered into the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;
2) do not comply with the Statute of Frauds
An agreement hereafter made shall be unenforceable by action, unless
the same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or his agent;
a) An agreement that by its terms is not to be performed within a year
from the making thereof;
b.) A special promise to answer for the debt, default, or miscarriage of
another;
c.) An agreement made in consideration of marriage, other than a mutual
promise to marry.
C. Unenforceable Contracts
d) An agreement for the sale of goods, chattels, or things in action, at a price
not less than P500,000, unless the buyer accepts and receives part of such
goods and chattels, or the evidences, or some of them, of such things in
action, or pays at the time some part of the purchase money; but when the
sale is made by auction and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of property sold, terms of the
sale, price, names of the purchasers and person on whose account the sale is
made, it is sufficient memorandum;
e) An agreement (leasing) for a period longer than one year, or for the sale of
real property or of an interest therein;
f.) A representation as to the credit of a third person;

3) where both parties are incapable of giving consent to a contract.

C. Unenforceable Contracts
Illustrations and explanations:
1)Unauthorized contracts. Without X’s authority, his brother Y sold his car, in
his name to Z. Contract being unauthorized cannot bind X unless he ratifies
the same expressly or impliedly, as by accepting the proceeds of the sale. If X
ratifies the contract, then he will be bound by it and the principles of agency
shall be applied.
2)Contracts in violation of the Statute of Frauds. Statute of Frauds prevents
the commission of frauds by requiring the contract to be in writing and
subscribed by the party charged because the law considers the human brain
unreliable to retain what has been orally agreed upon by the parties. If
contract is not in writing, then it is unenforceable in court. Writing is the only
one acceptable as evidence to enforce the contract in court, unless the party
against whom it is enforced failed to object to the presentation of oral
evidence of the agreement.
C. Unenforceable Contracts
Illustrations and explanations:
a) Agreement not to be performed within a year. On June 26, 2013, X had a
verbal contract with Y for the construction of his house to start on June
30, 2014. If Y fails or refused to construct by June 30, 2014, X cannot
enforce the agreement between them since the contract is not in writing.
b) Promise to answer for a debt, default, etc. X owes Y P50,000.00. When Y
asked that X puts up a security on the debt, Z verbally committed to Y:
“Don’t bother, if X does not pay, I will pay the amount”. This promise must
be in writing in order to be enforceable in court.
c) Agreement in consideration of marriage, etc. X made a verbal promise to
give his nephew Y a house and lot if Y marries his secretary, Miss Z. Two
months later Y and Z were married. X refused to abide with his promise to
give Y the house and lot. Can Y sue X for breach of contract? No, because
the contract is not in writing.
C. Unenforceable Contracts
Illustrations and explanations:
d) Agreement for sale of goods, chattel, etc. Ex1: X agreed verbally to sell his
car to Y to be delivered and paid a month later. If X will refuse to abide with
the contract, Y cannot enforce the contract for lack of writing. Ex2: Supplier X
and dealer Y verbally agreed to sell and buy merchandise worth P100,000 to
be executed on a later date. This is unenforceable for lack of writing. But if X
delivers part of the merchandise, or Y paid partial payment, the contract will
be removed from the operation of the Statute of Frauds for being partially
executed.
e) Agreement of lease for more than one year, etc. Lease of real property for
more than one year and sale of real property or interest therein, irrespective
of the price, are agreements referred to in Art 1403. Ex: X leased his 2-door
apartment to Y verbally for two years. If X ejects Y after six months, the latter
cannot rely on the contract because it is not in writing.
C. Unenforceable Contracts
Illustrations and explanations:
f) Representation as to credit of a third person. X, a lawyer, in behalf of his
client Y, negotiated for a loan with a bank. When the bank asked about the
credit of Y, X verbally assured that Y is solvent and will secure the loan
with several parcels of land which is in X’s possession. This representation
of X cannot be enforced against him because it is not in writing.
3) Contracts where both parties are incapacitated to give consent. X, a
minor entered into a contract of sale of bicycle with Y, an insane, to be
performed a week later. If X refuses to comply with his
obligation, no action for specific performance by the
guardian of Y can be filed as the contract is unenforceable.
C. Unenforceable Contracts
• Ratification of contracts violative of Statute. Contracts violating the
statute of frauds are deemed ratified (enforceable) for failure to object to
the presentation of oral evidence to prove the same in court or by
acceptance of the benefits under the contract. If the plaintiff presents at
the beginning of the trial oral evidence to prove the verbal contract and
this is not objected by the defendant, the contract is deemed ratified.
 C. Unenforceable Contracts
• Compelling execution of public instrument. When a contract is
enforceable under the Statute of Frauds because it is in writing, although
not in the required form (registration in the Registry of Deeds), the
affected party may compel the other party to have the contract reduced in
the required form. Ex: X sells to Y a piece of land written in a writing pad.
Under the Statute, the contract is valid and enforceable between them, but
the writing cannot be registered to bind third parties. Y can compel X to
write or reduce it in a public instrument so that it can be registered in the
Registry of Deeds.
• In Contract where both parties are incapacitated, express or implied,
ratification by a parent or guardian of one of the contracting parties shall
give the contract same effect as if one of them were incapacitated. If
ratification is made by the parents or the guardians of both the contracting
parties, the contract shall be valid from inception.
Assignment (small group)= 30 pts
1. Discuss three (3) situations wherein contracts can be rescinded
(10 pts)
2. Discuss three (3) differences between voidable and unenforceable
contracts (10 pts)
3. X mortgaged a piece of land to Y, but the instrument is in a private
writing. When Y sought to register the mortgage, the Registry of
Deeds refused registration because it is not in a public instrument.
What is the remedy of Y? Explain. (10 Points)
Deadline: on/befoe next meeting