Defective Contracts

Rescissible Contracts
Voidable Contracts
Unenforceable Contracts
Void Contracts
In this powerpoint presentation class, you are
required to prepare a one half yellow paper,
with your name and class number, as well as
your class section on it.
You will do what I ask you to do and write it
down on the yellow pad. Let the game begin.

• I assume that you read the notes I previously sent you on defective contracts.

• Please indicate the time you started to play this game on the lower left portion of your yellow pad, and on the
opposite side, the time you finish it.
Good Day!

• Hot topic for today is the signing off of ABS-CBN on air last night
because of franchise issue.
• How do you feel about the cease and desist order issued by NTC to
ABS-CBN?
• This brings me to ponder, is franchise (in its general sense) a contract?
• What do you think?
In “Philippine Franchising Law” presented by Atty, Jericho B.
Del Puerto, SME Business Lawyer, he mentioned the key
points on franchising law, among those mentioned were:

• There is currently no specific law on franchising

• Contract law thus applies since franchising is

essentially an agreement
You all know the essential requisites of a contract
( valid enforceable contract), I presume. . .

• Can you enumerate the essential requisites of a contract?

• I hope you did not have any difficulty recalling those.
• Let us proceed, are you married, single or complicated? Choose and
write the first letter of your choice.
• Is marriage a contract (simple contract)?
Article 1 of the Family Code pertinently provides:

• Art. 1. Marriage is a special contract of permanent union between a

man and a woman entered into in accordance with law for the
establishment of conjugal and family life. It is the foundation of the
family and an inviolable social institution whose nature,
consequences, and incidents are governed by law and not subject to
stipulation, except that marriage settlements may fix the property
relations during the marriage within the limits provided by this Code.
• As marriage is a special contract, their terms and conditions
are not merely subject to the stipulations of the contracting
parties but are governed by law.
• Thus, the law provides for the essential and formal requisites
for its validity.
• Before we proceed, can you think of a simple contract (not
obligation, take note of their difference) that you entered
during the ECQ? If none, any contract that you intend to
enter after the ECQ.
There are four (4) defective contracts:
• Worthy, to hear is the opinion that strictly speaking,
there are only two (2) defective contracts, to wit:
VOIDABLE and UNENFORCEABLE. They are the ones
susceptible of RATIFICATION. According to the opinion,
RESCISSIBLE suffer from no defect, while VOID or
INEXISTENT do not exist at all, an absolute nullity.
Accordingly, the four (4) should be called instead a s
species or forms of inefficacy of contracts. (cited in the
CEPALCO case, GR No. 226213)
Rescissible Contracts:
Art. 1191 ( properly speaking should be called
Resolution) (rescission of reciprocal obligations)
• Based on the non-performance or
non-fulfilment of the obligation
• Here, the action may be instituted
only by the injured party to the
contract
• Here, in some cases, the court may
grant a term
• Here, non-performance by the other
party is important
Art. 1380 (Rescission)
• Based on lesion or fraud upon
creditors
• Here, the action may be instituted by
either of the contracting parties or by
third persons
• Here, the court cannot grant a period
or term within which to comply
• Here, non-performance by the other
party is immaterial
Art. 1191
• Principal action
• Prescriptive period applicable is
Art. 1144
• Art. 1144. the following actions must
be brought within ten years from the
time the right of action accrues”
(1) upon a written contract
Art. 1380
• Subsidiary action
• The action to claim rescission
must be commenced within four
(4) years from the date the
contract was entered into except:
if under guardianship- 4 years
from termination of incapacity
and if absentee- 4 years from the
time domicile is known
e.g. e.g.
• A and B entered into a sale of 2 • a contract of sale entered into in
particular buses at an agreed violation of a right of first refusal
price. A delivered the 2 buses, of another person, while valid, is
but B failed to pay the purchase rescissible.
price.
• Remedy: Art. 1191, par. 2
The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become
impossible.
What do you understand of subsidiary action?

• It has been defined as the “exhaustion of all remedies by the prejudiced creditor
to collect claims due him before rescission is resorted to”.
To illustrate: sale in fraud of creditors, what to do?
• The following successive measures must be taken by a creditor before he may bring an action for
rescission of an allegedly fraudulent sale:
• (1) exhaust the properties of the debtor through levying by attachment and execution upon all the
property of the debtor, except such as are exempt from execution;
• (2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and
• (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana). 
Without availing of the first and second remedies, i.e., exhausting the properties of the debtor or
subrogating themselves x x x, petitioners simply undertook the third measure and filed an action for
annulment of sale. This cannot be done.
13. A third person who induces another to violate his shall be
liable for breach of contract.
• Quoted above is the 13th item in the True or False portion of Quiz #1.
Mostly answered FALSE.
• Breach or non-performance of the obligation is a ground for rescission under
A1191. But, take note class that this remedy can only be availed of by the
injured party to the contract, not by a third party who induces the guilty
party.
• The provision on unwanted interference is Art. 1314 which provides:
Art. 1314. Any third person who induces another to violate his contract
shall be liable for damages to the other contracting party.
Termination vs. Rescission
• the termination of a contract is not equivalent to its rescission. When
an agreement is terminated, it is deemed valid at inception. Prior to
termination, the contract binds the parties, who are thus obliged to
observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante.
Hence, there is mutual restitution of benefits received. The
consequences of termination may be anticipated and provided for by
the contract. x x x (PRYCE Corp. vs. PAGCOR, GR No. 157480, May 6,
2005)
Art. 1387. Badges of Fraud:
• In the early case of Oria vs. Mcmicking,[8] the Supreme Court considered the following
instances as badges of fraud:
• 1. The fact that the consideration of the conveyance is fictitious or 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 other
of the above circumstances
• 7. The failure of the vendee to take exclusive possession of all the property. (Underscoring
provided)
Answer the following:

True or False:
1. Rescissible contracts are not void.
2. The validity of a contract previously entered precludes rescission.
3. A person, usually a minor, who is under a guardian’s charge or
protection is called a ward.
4. Accion subrogatoria is an action to rescind contracts entered in
fraud of creditors.
5. G was appointed as the guardian of M, a minor, who owns the land
valued at 1M. M sold the land for only 600K to B. The contract is
rescissible.
6. Send the picture of your yellow pad.