TYPES OF DEFECTIVE CONTRACTS:

1. Rescissible Contracts
2. Voidable or Annullable Contracts
3. Unenforceable Contracts
4. Void or Inexistent Contracts

RESCISSIBLE CONTRACTS
 Contracts validly agreed upon may be rescinded in cases established by law when there is defect
caused by economic injury/damage either to one of the parties or to a third person.
 Valid and enforceable until they are rescinded by a competent court.

Definition of Terms:

Rescission - revocation or cancellation

Lesion - the damage suffered by one party who does not receive the
adequate equivalent for what he gives in a commutative contract, like a
sale.
- an economic injury by inadequacy of price.

Contracts that are rescissible:

a. Those entered into by guardians whenever the wards whom they represent suffer lesion
by more than ¼ of the value of the things which are the object thereof;

Define “ward”: someone placed under the protection of a legal guardian by reason of
incapacity.

General rule: when a guardian enters into a contract, involving the disposition of the ward’s
property, he must secure the approval of the guardianship court. A guardian is authorized
only to manage the estate of his ward; hence, he has no power of any portion thereof without
approval of the court.

Example:

Bruce’s parents died. He inherited their mansion worth ₱40,000,000.00. Bruce was
still a minor so Alfred was appointed as his guardian. Later, Alfred sold the mansion on
behalf of Bruce for ₱29,000,000.00.

In this case, Alfred sold the mansion for a price lower by more than one-fourth (1/4)
of its market value, to the prejudice of Bruce. Bruce can ask for the rescission of the sale.

b. Those agreed upon in representation of absentees, if the latter suffer lesion by more
than ¼ of the value of the things which are the object thereof;
Example:

Bruce, already of legal age, disappeared and was declared an absentee. Alfred was appointed
as his representative. Bruce owned a car worth ₱4,000,000.00. Alfred sold the car for
₱2,900,000.00.

In this case, Alfred sold the car for a price lower by more than one-fourth (1/4) of its market
value, to the prejudice of Bruce. Bruce can ask for the rescission of the sale.

c. Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due to them;

Example:

X owed Y ₱1,000,000.00. X did not have cash to pay Y. X’s only property was a lot worth
₱1,000,000.00. X anticipated that Y would sue him soon for the unpaid debt and go after his
property, so he donated the land to Z to avoid paying Y.

In this case, Y became a creditor of X before the donation. X donated his one and only
property to Z to avoid paying Y. Consequently, Y cannot collect the ₱1,000,000.00 from X
in any other manner.

The donation is rescissible because it was done in fraud of a creditor can ask for the
rescission of the donation. This is : Accion Pauliana.

ACCION PAULIANA – an action where the creditor files an action in court for the rescission
of acts or contracts entered into by the debtor designed to defraud the former

d. Those which refer to things under litigation if they have been entered into by the
defendant without the knowledge & approval of the litigants or of competent judicial
authority;

Example:

A and B are a couple. A has an exclusive property that she acquired after marriage. Due to
circumstances, they separated. B, then proclaimed that he is the rightful owner of the said
property. A sues B for the recovery of the property.

In this case the property is under litigation. If, during the pendency of the case, B sells the
land to C without the approval of A and of the court, the contract of sale is rescissible at the
instance A wins the case unless C is in legal possession in good faith.

e. All other contracts specially declared by law to be subject to rescission.

VOIDABLE OR ANNULLABLE CONTRACTS
The following contracts are voidable or annullable, even though there may have been no damage to
the contracting parties:

f. Those where one of the parties is incapable of giving consent to a contract;

g. Those where the consent is vitiated by mistake, violence, intimidation, undue influence (state
of drunkenness or under hypnotic spell) or fraud.

The contract is legally binding, but could become void. If there is an injured party involved, the injured
party or the defrauded must take action, otherwise the contract is considered valid.

Example

A contract entered into with a minor could be voidable.

Example:

A promises to sell his car to B for 200,000. His consent is obtained by use of force. The contract is
voidable at the option of A. He may void the contract or elect to be bound by it because it was
obtained by violence and intimidation.

Definition of Terms:

□ Ratification - the action of signing or giving formal consent to a treaty, contract, or agreement,
making it officially valid. (In this case) Ratification cleanses the contract of its defects.

Characteristics of Voidable Contracts:

a. It is valid until set aside by a competent court;

b. It is subject to ratification;
c. It is based on incapacity or vitiated consent; and
d. It is sanctioned and therefore requires no damage.

The action for annulment shall be brought within 4 years. This period shall begin:

a. In case of intimidation, violence or undue influence, from the time the defect of the consent
ceases.
b. In case of mistake or fraud, from the time of the discovery of the same.
c. And when the action refers to contracts entered into by minors or other incapacitated
persons, from the time the guardian ceases.
 What is the difference between a voidable and rescissible contract?

Their binding force. Rescissible contract renders it defective due to external facts that may prejudice a
contracting party or even a third person. While voidable contract becomes defective due to the vice of
consent.

UNENFORCEABLE CONTRACTS
The following contracts are unenforceable, unless they are ratified:

a. 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;
b. Those were both parties are incapable of giving consent to a contract; and
c. Those that do not comply with the Statute of Frauds
d. Defect is caused by lack of form, authority or capacity of both parties not cured by
prescription.
e. Cannot be enforced by a proper action in court. Note: The statue of fraud applies only to
executory contracts, not to those that are partially or completely fulfilled.

An unenforceable contract or transaction is one that is valid but one, the court will not enforce.
Unenforceable is usually used in contradiction to void (or void ab initio) and voidable. If the parties
perform the agreement, it will be valid, but the court will not compel them if they do not.

Example:
An example of a transaction which is an unenforceable contract is a contract for prostitution under
English law. Prostitution is not actually a crime under English law, but both soliciting a prostitute and
living off the earnings of a prostitute are criminal offences.[1] Yet so long as the contract is fully
performed, it remains valid. However, if either refuses to complete the bargain (either the prostitute
after being paid or the payer after receiving the services), the court will not assist the disappointed
party.

Definition of Terms:

□ Statute of Frauds - the requirement that certain kinds of contracts be memorialized in

writing, signed by the party to be charged, with sufficient content to evidence the contract.
VOID OR INEXISTENT CONTRACTS
The following contracts are inexistent and void:

a. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy;
b. Those which are absolutely simulated or fictitious;
c. Those whose cause or object did not exist at the time of transaction;
d. Those whose object is outside the commerce of men;
e. Those which contemplate an impossible service;
f. Those where the intention of the parties relative to the principal object of the contract cannot
be ascertained; and
g. Those expressly prohibited or declared void by law.

Example:

A contract that was between an illegal drug dealer and an illegal drug supplier to purchase a specified
number of drugs for a specified amount. Either one of the parties could void the contract since there is
no lawful objective and hence missing one of the elements of a valid contract.

Technical distinction:

In void contract, all the requisites are present but one or some of them are unlawful or prohibited by
law.

In inexistent contract, one, some or all the requisites are absent.

Basic features of void contracts:

a. A void contract cannot be ratified;
b. The right to raise the defense of illegality cannot be waived;
c. The action or defense to declare the inexistence of a contract does not prescribe;
d. The defense of illegality of contracts is not available to 3rd persons whose interests are not
directly affected; and
e. A contract which is the direct result of a previous illegal contract is also void.
Principle of Pari Delicto

Latin for "in equal fault"

• When the defect of a void contract consists in the illegality of the cause or object of the contract and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against
each other, and both shall be prosecuted.

• When only one of the parties is guilty, the innocent one may claim what he has given, and shall not be
bound to comply with his promise.

If the act in which the unlawful or forbidden cause consists doesn’t constitute a criminal offense, the ff
rules shall be observed:

• When the fault is on the part of both contracting parties, neither may recover what he has given by
virtue of the contract, or demand the performance of the other’s undertaking;

• When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
contract, or ask for the fulfillment of what has been promised. The other who is not at fault, may demand
the return of what he has given without any obligation to comply with his promise.
TYPES OF DAMAGES:

Damages are monetary awards. In in a legal sense, “damages” refers to monetary compensation that is
claimed by a person or awarded by a court in a civil action to a person who has been injured or suffered
loss because of the wrongful conduct of another party.

1. Actual or Compensatory
2. Moral
3. Nominal
4. Temperate or Moderate
5. Liquidated
6. Exemplary or Corrective

1. Actual or Compensatory Damages

 pecuniary loss as well as unrealized profit

Example:

If at the local gym a defendant drops a barbell on the foot of a plaintiff who is a construction worker, the
plaintiff could recover consequential damages for the loss of income resulting from the injury.

These consequential damages are based on the resulting harm to the plaintiff’s personal income. They are
not based on the injury itself, which was the direct result of the defendant’s conduct.

2. Moral Damages

 physical and mental anguish

Example:

Young adult motorcyclist fell on illegally placed advertising board in highway. The municipality was
condemned in 2010 to pay the parents for moral damages 350.000 Euros for moral damage.

Moral damages may be recovered in the following & analogous cases:

a. A criminal offense resulting in physical injuries;
b. Quasi-delicts causing physical injuries; (Whoever by act or omission causes damage to
another, there being fault or negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation between the parties, is called a
quasi-delict).
c. Seduction, abduction, rape, or other lascivious acts;
d. Adultery or concubinage;
e. Illegal or arbitrary detention or arrest;
f. Illegal search;
g. Libel, slander or other form of defamation;
h. Malicious prosecution
i. the parents of the female seduced, abducted, raped or abused may also recover moral
damages.
3. Nominal Damages

 vindicate a right, when no other kind of damages may be recovered

Example:

Someone was using your land and you wanted them to stay off, you may be awarded $1 for you suffered
no loss but merely wanted to assert your rights.

Juan slaps Matthew in a heated argument. In court, it is shown that even though Juan wrongfully slapped
Matthew, Matthew suffered no serious injury. The court awarded $1 in nominal damages to Matthew.

4.Temperate or Moderate Damages

 are more than nominal but less than compensatory damages

 exact amount cannot be determined
Example:
My brother was a passenger in a bus going to our province when an accident happened. He lost his limbs.
He can no longer work and, recently, the company he worked with was bombed and lost its files. My
question is, since we cannot produce copies of the documents that will show his pay from his work,
because of what happened to their firm recently, may we still be able to get damages for his loss of
earning capacity?
Temperate damages in lieu of actual damages for loss of earning capacity may be awarded where earning
capacity is plainly established but no evidence was presented to support the allegation of the injured
party’s actual income.
5. Liquidated Damages

 predetermined by an agreement
 those agreed upon by the parties to a contract, to be paid in case of breach thereof.

Example:

Gerald has agreed to purchase Reta’s home for $50,000. As part of the agreement, he must put down a
deposit of $5,000. Both parties agree that if either of them does not follow the terms of the contract, the
other person gets the $5,000 deposit. If Gerald fails to follow through with the purchase, Reta gets to keep
the $5,000. If Reta decides she does not want to sell her home to Gerald, she must return the $5,000.

Liquidated damages clauses act as insurance for both parties. The person who breaks the contract knows
ahead of time how much they would owe the other party. Similarly, the other party can negotiate an
amount that would adequately cover their loss without having to go to court. However, the purpose of a
liquidated damages clause is not to punish the person that breaches the contract.

6. Exemplary or Corrective Damages

  corrective or to set an example

 plaintiff must show that he is entitled to moral, temperate or compensatory damages before the
court may consider the question of whether or not exemplary damages should be awarded

Example:
A libel was committed by an author and his publisher against a distinguished naval officer. The officer
sued for damages. he was awarded £15000 compensatory and £ 25000 exemplary damages against both
attendants.
These damages are awarded both as a punishment and to set a public example. They reward the plaintiff
for the horrible nature of what she/he went through or suffered. Although often requested, exemplary
damages are seldom awarded.