DEFECTIVE

CONTRACTS
1. RESCISSIBLE CONTRACTS
2. VOIDABLE CONTRACTS
3. UNENFORCEABLE CONTRACTS
4. VOID CONTRACTS

Code: RVUV
RESCISSIBLE CONTRACTS
RESCISSIBLE CONTRACTS ARE THOSE WHICH ARE VALIDLY
AGREED UPON BECAUSE ALL THE ESSENTIAL ELEMENTS ARE
PRESENT AND THEREFORE, LEGALLY EFFECTIVE, BUT IN
CASES ESTABLISHED BY LAW, THE REMEDY OF RESCISSION IS
GRANTED IN THE INTEREST OF EQUITY.

Rescission – the process or remedy granted by law to the contracting

parties or even to third persons to secure reparation of damages caused
them by a valid contract, by means of restoration of things to their
condition in which they were prior to the celebration of a contract.
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The following are rescissible contracts
 Those entered into by guardians whenever the ward whom they represent suffer
lesion by more than ¼ of the value of the things which are the object of the contract.
 Those agreed upon in representation of an absentee if the latter suffer lesion by
more than ¼ of the value of the things which are the object thereof.
 Those undertaken in fraud of creditors when the latter cannot in any manner collect
the claims due them.
 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.
 All other contracts specially declared by law to be the subject of rescission. (Article
1381)
 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)
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REQUISITES OF RESCISSION
 The contract must be validly agreed upon. (Article 1380)
 There must be lesion or pecuniary prejudice to one of the parties or to a third person. (Article. 1381)
 The rescission must be based upon a case especially provided by law. (Article 1381 and 1382)
 There must be no other legal remedy to obtain reparation for damages. (Art. 1383)
 The party asking for rescission must be able to return what he is obliged to restore by reason of the
contract. (Article 1385)
 The object of the contract must not legally be in the possession of third persons who did not act in bad
faith; and
 The period for filing the action for rescission must not have prescribed.

Prescriptive period – 4 years from the date of the contract, except:

1. for persons under guardianship – 4 years from termination of incapacity.
2. for absentee – 4 years from the time the absentee’s domicile is known.

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Extent of rescission of contract
Article 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 damages.

Article 1384. Rescission shall be only to the extent necessary to

cover the damages caused.

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Article 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with the 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 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.

Article 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with
respect to contracts approved by the court.

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 ALIENATION IN FRAUD OF
CREDITORS
1. Alienation by gratuitous title
Gratuitous alienations are presumed to have been entered into in fraud of creditors if the debtor did
not reserve sufficient property to pay all debts contracted before the donation (Article 1387, first
paragraph)

2. Alienation by onerous title

Alienation 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 par.)

In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence.
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Badges of fraud
1. The fact that the consideration of the conveyance is fictitious or inadequate.
2. A transfer made by the debtor after a case has been filed and while the case is pending.
3. A sale upon credit by an insolvent debtor.
4. The transfer of all of his property by a debtor, when he is insolvent or greatly embarrassed
financially.
5. The failure of the vendee to take exclusive possession of all the property.
6. The fact that the transfer was made between father and son, when there are present some
or any other above circumstances.
7. It was known to the vendee that the vendor had nor properties other than that sold to him.

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 Liabilities for damages of third
persons who acquired the property
1. Buyer in bad faith.

Article. 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.

2. Buyer in good faith.

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No liability for damages.
VOIDABLE CONTRACTS
A VOIDABLE CONTRACT IS ONE THAT IS DEFECTIVE BY REASON OF
THE INCAPACITY OR VITIATED CONSENT OF ONE OF THE PARTIES BY
REASON OF MISTAKE, VIOLENCE, INTIMIDATION, UNDUE INFLUENCE
OR FRAUD. IT IS BINDING UNLESS ANNULLED BY A PROPER ACTION IN
COURT. IT IS SUSCEPTIBLE OF RATIFICATION. (ARTICLE 1390)

How to set aside a voidable contract?

Through the process of annulment.

WHAT ARE VOIDABLE OR ANNULLABLE
CONTRACTS?
I. Those where one of the parties in incapable of giving consent.

A. Unemancipated minor
B. Insane or demented persons (except: during lucid interval)
C. Deaf-mutes who do not know how to write.

2. Those where consent was vitiated by mistake, violence, intimidation, undue influence
or fraud. (article 1390)

3. Those where consent is given in a state of drunkenness. (Article 1328)

4. Those where consent is given during a hypnotic spell. (Article 1328)

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 Annulment vs. Rescission
1. Annulment is based on vitiated consent and damage is not material; Recission is based
on lesion or damage.
2. In annulment, the action is principal; in rescission, the action is subsidiary.
3. Annulment is the process where law predominates while rescission is a remedy where
equity predominates.
4. Annulment is available only to the parties, whether bound principally or subsidiarily.
Rescission is available not only to the contracting parties but also to third persons
whose interest is affected or suffered damages.
5. Ratification is required to prevent annulment; ratification is not required to prevent
rescission.

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Rules on annulment of contract
1.When action must be brought (prescriptive period) otherwise the contract cannot be set aside:

Action for annulment of contract must be brought within 4 years from:

- In cases of intimidation, violence, or undue influence, from the time the defect in the consent ceases.
- In case of mistake or fraud, from the time of discovery of the same.
- In case of minority or other incapacity of a party, from the time the guardianship ceases.

2. Who may bring an action for annulment

a. The guardian of the incapacitated person during the latter’s incapacity.

b. The incapacitated person after he has attained capacity.
c. The party whose consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

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3. Effects of annulment

A. In obligations to give, the contracting parties shall

restore to each other, the following:
- the things which have been the subject matter of the
contract with their fruits.
- the price with its interest.

B. In obligations to render service, the value of the

service shall be the basis of damages.

C. Restitution when one of the parties is incapacitated.

The incapacitated person is not obliged to make
restitution except insofar as he has been benefited by the
thing or price received by him.
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D. When the thing is lost through the fault of the party
obliged by the decree of annulment to return it:
-fruits received
- value of the thing at the time of the loss.
- interest from the time of the loss.

E. Mutual Restitution

If one party cannot restore what he is bound to return, the

other party cannot be compelled to comply with what is
incumbent upon him.

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4. Effect of loss of thing while in the possession of the party
who has the right to bring the action for annulment.

a. If lost through his fault, the action for annulment is

extinguished, whether such party is incapacitated or his
consent is vitiated.
b. If lost without his fault and such party is incapacitated, he
can still bring an action for annulment. However, he will
be required to return the value of the thing and it fruits and
only up to the extent that he has been benefited.

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RATIFICATION – THE ACT OF
ADOPTING OR AFFIRMING A
CONTRACT WHICH IS DEFECTIVE
BECAUSE OF PARTY’S VITIATED
CONSENT OR INCAPACITY.

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Rules on ratification
1. How ratification is made
a. Express
b. Impliedly or tacit

2. Who may ratify

c. The guardian of an incapacitated person during the ward’s incapacity
d. The incapacitated person after he has attained capacity
e. The party whose consent is vitiated by mistake, violence, intimidation, undue influence
or fraud

Note: Ratification does not require the conformity of the other contracting party who has
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no right to bring the action for annulment.
4.Effect of ratification
a. It extinguishes the action to annul a
voidable contract.
b. It cleanses the contract from all its
defects from the moment it was
constituted. In other words, the contract
is deemed validated from inception
(retroactive effect).
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