Obligations

and
contracts
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essential
04
general Classification of Defective
principles contracts elements of
contracts contracts
Obl igat ions Types of defective contracts
and 1. Rescissible Contracts

cont r act s 2. Voidable Contracts

3. Unenforceable Contracts

4. Void and Inexistent Contracts

Rescissible contracts
• These are contracts that are valid until rescinded.

• Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not
merely its termination." Hence, rescission creates the obligation to return the object of the
contract It can be carried out only when the one who demands rescission can return
whatever he may be obliged to restore.
The following are rescissible contracts
• (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) Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled
at the time they were effected,

• (6) All other contracts specially declared by law to be subject to rescission

Rescission in 1191 vs 1381
• Rescission in these articles are different. In 1191, Recission is the primary action, which is to
annul the contract with which the obligation arises. On the other hand, in 1381 Rescission here is
a subsidiary action, meaning it cannot be instituted except when the party suffering damage has
no other legal means to obtain reparation for the same.

• Rescission under Article 1191 is on account of a breach of contract while rescission in Article
1381 is by reason of lesion or economic prejudice.

• Rescission in Article 1191 applies only to reciprocal obligations while rescission in Article 1381
applies to all kinds of obligations.
Requisites for rescission under art. 1381 to prosper
• The action for rescission must originate from any of the causes specified in Articles 1381 and
1382

• The party suffering damage and who is asking for rescission has on other legal means to obtain
reparation for the damage suffered by him.

• The person demanding rescission must be able to return what he may be obliged to restore if
rescission is granted except in Article 1381 (3)

• The things which are the object of the contract must not be legally in the possession of third
persons who did not act in bad faith.

• The action for rescission must be filed within 4 years form accrual of the right of action.
Concept of lesion
• Lesion has been defined as the injury which one of the parties suffers by virtue of a contract
which is disadvantageous to him.

• As to scope and coverage, these refers to contracts entered into by representatives where the ward
or absentee suffers lesion exceeding 25% of the value of the thing owned by the ward or absentee.
Contracts undertaken in fraud of creditors
• Alienations by gratuitous title: presumed to have been entered into in fraud of creditors, when
the donor did not reserve sufficient property to pay all debts contracted before the donation.

• Alienations by onerous title: presumed fraudulent when made by persons against whom some
judgment 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.
Contracts undertaken in fraud of creditors
• The rescissory action to set aside contracts in fraud of creditors is known as accion pauliana. This
remedy is available when the subject matter is a conveyance, otherwise valid, undertaken in fraud
of creditors.

• Requisite for accion pauliana to prosper:

(1) The one asking for recission has a credit prior to the alienation although demandable later (2)
The debtor has made a subsequent contract conveying a benefit to a third person (3) the creditor
has no other legal remedy to satisfy his claim (4) the act being impugned is fraudulent (5) The
third person who received the property conveyed has been an accomplice in the fraud.
Badges of Fraud
• Close relationship of the parties;

• When the debtor is the seller but is in continued possession of the property;

• When the price in the contract is grossly inadequate;

• When the debtor is already insolvent and he sells his property in credit.
Legal concept pertaining to rescission
• No rescission shall take place hen the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

• Rescission can be carried out only when he who demands rescission can return whatever he may
be obliged to restore.

• The action to claim rescission must be commenced within four (4) years.

• The necessary consequence of recission is mutual restitution, that is, the parties to a rescinded
contract must be brought back to their original situation prior to the inception of the contract;
hence, they must return what they received pursuant to the contract.
Voidable contracts
• (1) Those where one of the parties is incapable of giving consent to a contract;

• (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

• These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.
Ratification Voidable contracts
• Ratification may be effected by the Party who was either incapable of giving consent or whose
consent was vitiated by mistake, violence, intimidation, undue influence or fraud.

• How is Ratification made?

1. Expressly – Verbal or Written

2. Tacitly/Implied - There is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to waive his right
Ratification Voidable contracts (EFFECT)
• Ratification extinguishes the action to annul a voidable contract

• Ratification cleanses the contract from all its defects from the moment it was constituted
Annulment of Voidable contracts
• Annulment of Contracts may only be instituted by the injured party. (Art. 1397)

• When there is annulment, parties shall restore to each other the things which have been the
subject matter of the contract, with their fruits, and the price with its interest, except in cases
provided by law

• When an annulment is made and a defect of the contract consists in the incapacity of one of the
parties, the incapacitated person is not obliged to make any restitution except insofar as he
has been benefited by the thing or price received by him
Annulment of Voidable contracts
• LOSS OF THE THING SUBJECT OF ANNULMENT OF CONTRACT:

1. If lost is through the fault of the guilty party - it shall not eextinguish the action for
annulment. He is liable to return the fruits, price of the thing at the time of loss, and interest from
date of loss.

2. If lost is through the fault of the injured party – Action for annulment is extinguished.
Other concepts in Voidable contracts
• As long as one of the contracting parties does not restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what is incumbent
upon him.

• As to prescription, the following rules should be observed:

1. If the ground for annulment is vitiation of consent by intimidation, violence, or undue influence,
the four-year period starts from the time such defect ceases.

2. If the ground for annulment is vitiation of consent by mistake or fraud, the four-year period starts
from the discovery of the same.

3. If the ground for annulment is minority, the four-year period starts when the minor reaches the
age of majority.

4. If the ground for annulment is other than minority, the four-year period starts from the time the
guardianship ceases.
Unenforceable contracts
• An unenforceable contract is a written or oral agreement that will not be enforced by courts.
Unenforceable contracts
• 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;

• Contracts which do not conform with Statute of Frauds (Not in writing):

a. 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

d. Sale of personal property exceeding P500.00

e. An agreement for the leasing for a longer period 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.

Unenforceable contracts
• Those where both parties are incapable of giving consent to a contract.
Ratification of Unenforceable contracts
• Were both parties are incapable of giving consent, express or implied ratification by the parent, or
guardian, as the case may be, of one of the contracting parties shall give the contract a
VOIDABLE STATUS

• If ratification is made by the parents or guardians, as the case may be, of both contracting parties,
the contract shall be validated from the inception.
Void and inexistent contracts
• Is one which has no force and effect from the very beginning. Hence, it is as if it has never been
entered into and cannot be validated either by the passage of time or by ratification.
The following contracts are inexistent and void from the
beginning:
• (1) Those whose cause, object or purpose is 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.

Those expressly prohibited or declared void by law.
• Article 1461, - The sale of a vain hope or expectancy is void

• Article 739. The following donations shall be void:

(1) those made between persons who were guilty of adultery or concubinage at the time of the donation;(2) Those made
between persons found guilty of the same criminal offense, in consideration thereof;(3) Those made to a public officer
or his wife, descendants and ascendants, by reason of his office.

• Article 1105. A partition which includes a person believed to be an heir, but who is not, shall be void only with
respect to such person.

• Art. 1182 When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation
shall be void.

• Art. 1298. The novation is void if the original obligation was void
Concept of “in pari delicto”
• Latin for "in equal fault,'' in pari delicto connotes that two or more people are at fault or are
guilty of a crime. Neither courts of law nor equity will interpose to grant relief to the parties,
when· an illegal agreement has been made, and both parties stand in pari delicto

• Under the pari delicto doctrine, the parties to a controversy are equally culpable or guilty, they
shall have no action against each other, and it shall leave the parties where it finds them.
Rules in cases of void contracts
• Illegality of the cause or object constitute a crime:

1. When parties are in pari delicto – No action against each other. The illegal thing subject of the
contract will be confiscated by the government.

2. When only one person is guilty – The illegal thing subject of the contract will be confiscated. No
action against each other except that the innocent party ay claim what he has given, and shall not
be bound to comply with his promise.
Rules in cases of void contracts
• Illegality of the cause or object DOES NOT constitute a crime:

1. 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;

2. When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply his
promise
Other concepts pertaining to void contracts
• These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.

• The action or defense for the declaration of the inexistence of a contract does not prescribe