Cedro, Leah Hope E.

BSA31KB1

SUMMARY
Kinds of Defective Contracts
-

There are four (4) kinds of defective contracts:

1. Rescissible Contracts valid until rescinded.
2. Voidable Contracts valid until annulled unless ratified.
3. Unenforceable Contracts cannot be sued upon or enforced unless ratified.
4. Void or Inexistent Contracts absolutely null and void; no effect at all and
cannot be ratified.

Rescissible
Contracts
Valid unless
rescinded.
Basis is lesion or
damage.
Rescission is a
remedy.
Basis is external
The action is
subsidiary
The rescissible
character of a
contract may be
assailed by third
persons.

Voidable
Contracts

Unenforceable
Contracts

Void or Inexistent
Contracts

Valid unless it is
annulled.
Basis is vitiated
consent or
incapacity to
consent.
Annulment is
sanction.
Basis is intrinsic.
The action is
principal.
The defense of
annulability is not
available to third
persons.
Voidable is
susceptible of
ratification.

Cannot be sued
upon or enforced
unless it is
ratified.
Cannot be
assailed by third
person.
Unenforceable is
susceptible of
ratification.

Absolutely null
and void; no effect
at all and cannot
be ratified.
The action for
declaration of the
nullity or
inexistence of a
contract is
imprescriptible.
The former is not
susceptible of
ratification.
The defect of the
former consists in
absolute lack in
fact or in law of
one or some or all
of the essential
elements of a
contract.

RESCISSIBLE CONTRACTS
Meaning of Rescissible Contracts
-

Are those validly agreed upon because all the essential elements exist and,
therefore, legally effective.

Meaning of Rescission
-

A remedy granted by law to the contracting parties and to third persons in order to
secure reparation of damages caused by a valid contract.

Requisites of Rescission
1.
2.
3.
4.
5.
6.
7.

Contract is valid.
There must be lesion or pecuniary prejudice.
Rescission must be based upon a case especially provided by law.
No other legal remedy.
Party asking for rescission must be able to return what he is obliged to restore.
Object must not legally be in the possession of third persons.
Period for filing must not have prescribed.

Cases of Rescissible Contracts

1. Entered into by guardians whenever the wards suffer lesion by more than of
value of things/objects.
a. Lesion is the injury suffered as result of inequality of conditions, by one
party who does not receive the full equivalent for what he gives in a
commutative contract.
b. Ward a person under guardianship because of some incapacity.
2. Agreed upon in representation of absentee, suffer lesion by more than of value
of things/objects.
a. Absentees a person who disappears from his domicile his whereabouts
being unknown, and without leaving an agent to administer his property.
3. In fraud of creditors who cannot collect claims due them.
a. Following requisites that must be present:
i. There must be an existing credit prior to the contract to be
rescinded, although it is not yet due.
ii. There must be fraud on the part of the debtor which may be
presumed or proved.

iii. The creditor cannot recover his credit in any other manner, it not
being required that the debtor be insolvent.
4. Things under litigation, without knowledge and approval of litigant or of
competent judicial authority.
5. All other contracts specially declared by law to be subject of rescission.
a. Some of the specific contracts subject to rescission are as follows:
i. The right to rescind as provided in Article 1189 of the Civil Code in
case of deterioration of the thing to be delivered.
ii. The right to rescind given to an unpaid seller as provided for in
Article 1562 of the Civil Code.
iii. The right to rescind given to a vendee in a sale of real property per
unit for measure or lump sum price.
6. Article refers to payments paid. What is rescissible are the payments for
obligations which are not yet due. Payment must have been made by a debtor who
is in a state of insolvency.
a. State of insolvency a person considered insolvent when it is impossible
for him to fulfill his obligations because of financial constraints.
b. Requisites of premature payment:
i. The debtor or the person paying must be in the state of insolvency.
ii. The debt is not yet due or demandable.
Nature of Rescission
-

Rescission is only a subsidiary remedy, which means that there should be no other
recourse for the injured party but to rescind the contract
It shall cover only the extent of the lesion and not the whole obligation. The
contract can still exist as long as the extrinsic defect of the contract can be
repaired.

Requisites to concur before action for rescission can be instituted

1. The party seeking rescission can return what he received by virtue of contract.
2. The object of the contract is not in the legal possession of a third person who acted
in good faith.
3. There must be no other legal remedy.
4. The action must be brought within the proper prescriptive period.
Requisites for rescission of contracts in fraud of creditors
1. The existence of a credit
2. The said credit must be in prior to the contract to be rescinded
3. The existence of fraud or bad faith on the part of the debtor which can either be
presumed or proved

4. The creditors cannot recover their credits in any other manner.

Presumptions of fraud in a Rescissible Contract
1. Gratuitous Contracts contracts entered into by the debtor are considered
fraudulent when he did not reserve sufficient property to pay his debts before
donation.
2. Onerous Contracts
a. Made by persons against whom some judgment has been rendered even if not
yet final.
b. Made by persons against whom some writ of attachment has been issued. The
decision or attachment need not refer to the property alienated.
Effects of bad faith in case of alienation
1. First transfer
a. The transferee must return or indemnify.
b. Loss due to any cause includes fortuitous event.
2. Subsequent transfer
a. If the first transferee is in good faith, the good faith or bad faith of the next
transferee is not important.
b. If the first transferee is in bad faith, the next transferee is liable only if he is
also in bad faith.
Period of filing action for rescission
-

As a general rule, the action to claim rescission must be commenced within four
(4) years from the date the contract was entered into. The exceptions are:
1. For persons under guardianship, the period shall begin from the
termination of incapacity
2. For absentees, from the time the domicile in known.

Persons entitled to bring action

1. The injured party.
2. The heirs of the injured party.
3. Creditors, if the transaction is fraudulent.

VOIDABLE CONTRACTS

Meaning of Voidable Contracts

-

Are those which possess al the essential requisites of a valid contract but one of
the parties is incapable of giving consent, or consent is vitiated by mistake,
violence, intimidation, undue influence, or fraud.

Kinds of Voidable Contracts

-

A contract is voidable if the defect is caused by either:

1. Legal incapacity to give consent one of the parties in incapable of giving
consent to the contract.
2. Violation of consent the vitiation is done by mistake, violence,
intimidation, undue influence, or fraud.
Voidable Contracts

Unenforceable Contracts

Valid and enforceable until annulled

Not enforceable unless ratified

Capable of being sued upon until annulled

Cannot be sued upon unless they are ratified

Meaning of Annulment
-

Annulment is a remedy provided by law, for reason of public interest, for the
declaration of the inefficacy of a contract based on a defect or vice in the consent
of one of the contracting parties in order to restore them to their original position
in which they were before the contract was executed.

Period for filing action for annulment

-

The action for annulment shall be brought within four (4) years. This period shall
begin:
1. In cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases.
2. In case of mistake or fraud, from the time of the discovery of the same.
3. In the case of contracts entered into by minors or other incapacitated
persons, from the time the guardianship ceases. An incapacitated person
has no capacity to sue.

Person who are entitled to ask for annulment

-

The victim or injured party in a voidable contract can ask for annulment.

Person who can file the action for annulment

1. For incapacity the person incapacitated.

2. For vitiated consent the injured party.
Effect of the annulment of a voidable contract
1. If the contract is executory, the parties are not bound to comply with their
prestation.
2. If the contract was already executed, the parties shall restore to each other the
object of the contract, that is, the money plus interest, the property together with
its fruits. However, if the ground for annulment is incapacity of the other party, the
party incapacitated is bound to return only to the extent he was benefited.
3. The guilty party is liable to answer for damages.
Meaning of Ratification
-

Is that which cures the defect of the contracts celebrated in the name of another
without authority or in excess of authority.

Kinds of Ratification
1. Express (oral or written)
2. Tacit (implied)
Requisites of Ratification
1.
2.
3.
4.

The contract must be voidable

The person ratifying knew the reason why the contract is voidable.
The ratification must be have been made expressly or impliedly.
The ratification is made by the injured party.

Loss of the thing while in the possession of the party at fault

1. If due to his fault:
a. To return the value of the thing at the time of loss.
b. Interest on the value of the thing.
c. Fruits received.
2. If due to fortuitous event:
a. The fault of the thing at the time of loss but no interest.
b. Fruits received.
Loss of the thing while in the possession of the party who can annul the contract
1. If due to his fault - the right to annul is extinguish. In short, the party has no more
right to annul.

2. If due to a fortuitous event the contract can still be annulled, unless if the
innocent party could no longer restore what, by virtue of the decree of annulment,
he is bound to return.
Meaning of Mutual Restitution
-

If a voidable contract is annulled, the parties shall return to each other what they
have received. If one cannot restore what he is required to return, the other cannot
be compelled to return what he received.

UNENFORCEABLE CONTRACTS
Meaning of Unenforceable Contracts
-

Are those that cannot be enforced in court or sued upon by reason of certain
defects provided by law until and unless they are ratified according to law.

Kinds of Unenforceable Contracts

1. Those entered into in the name of another by one without, or acting in excess of,
authority.
2. Those that do not comply with the Statute of Frauds.
3. Those where both parties are incapable of giving.
Meaning of Unauthorized Contracts
-

Are 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.

Statute of Frauds
1. Definition
a. It is a law which requires that certain contracts must be in writing,
otherwise, unenforceable.
2. Purpose
a. To prevent fraud and to guard against the mistake of honest men by
requiring that certain agreements specified that are susceptible to fraud
must be in writing; otherwise, they are enforceable.
3. Application
a. Statute of Frauds is applicable only to executor contracts and not to
contracts totally or partially executed.
Agreements within the scope of the Statute of Frauds

1.
2.
3.
4.

Agreement not to be performed within one year from the making thereof.
Promise to answer for the debt, default, or miscarriage of another.
Agreement in consideration of marriage other than mutual to marry.
Agreement for sale of goods, chattels, or things in action at a price of five hundred
pesos or more.
5. Agreement for the leasing for a longer period than one year, or the sale of real
property or an interest therein.
Instances covered:
a. If the lease is one year or less, oral contract is enforceable even if the
object is real or personal property.
b. If the lease is more than one year and the object is immovable, it must be
in writing, otherwise, unenforceable.
c. If it is a sale of immovable property, irrespective of the price of the sale, it
must be in writing, otherwise, unenforceable.
6. A representation as to the credit of a third person.
Modes of ratification under the Statute
1. By failure to object to the presentation of oral evidence to prove the contract.
2. By acceptance of benefits under the contract. Hence, if the contract is partially or
totally executed, Statute of Frauds will not apply.
Acts considered as partial performance
1.
2.
3.
4.

Possession.
Payment of taxes.
Improving the property.
Tender of payment followed by surveying the lot at the expense of the buyer.

Right of the party to compel the other to execute the needed instrument
-

When a public instrument is required for mere convenience of the parties, the
same may compel each other to execute the necessary document, but only if the
following elements are present:
a. The contract must be valid.
b. The contract is enforceable.

Contracts where both parties are incapacitated

-

If both parties are incapacitated, the contract is unenforceable but can be ratified
to make it enforceable.

How are contracts ratified if both parties are incapacitated?

1. Expressly or impliedly by the parent or guardian of one of the parties making the
contract voidable.
2. If both parents or guardian of the contracting parties ratified the contract, it
becomes enforceable, validated from inception.

VOID OR INEXISTENT CONTRACTS

Meaning of Void Contracts
-

These are contracts which have absolutely no force and effect and are inexistent
from the beginning. The maxim is No contract at all.

Special classification of Void Contracts

1. Inexistent contracts the formalities required by law were not met. The contract
has no effect at all.
2. Illegal or illicit contracts may produce effect under certain circumstances where
the parties are not of equal guilt.
Characteristics of a Void or Inexistent Contract
1.
2.
3.
4.
5.

Generally, it produces no effect whatsoever.

It cannot be ratified.
The right to set up the defense of illegality cannot be waived.
The action or defense for the declaration of its inexistence does not prescribe.
The defense of illegality is not available to third persons whose interests are not
directly affected.
6. It cannot give rise to a valid contract.
Instances of Void or Inexistent Contract
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.

Void or Inexistent Contract

Voidable Contract

No effect

Binding unless it is annulled

Not susceptible of ratification

Susceptible of ratification

Action of declaration of the nullity or

inexistence is imprescriptible

Action for the annulment is prescribtible

Defense of inexistence or absolute nullity is

available to third persons whose interest are
directly affected

Defense of annulability is not available to

third persons.

Void or Inexistent Contract

Unenforceable Contract

No contract at all

There is a contract which cannot be enforced

by a court action unless it is ratified

Former is not susceptible of ratification

Latter is susceptible of ratification

Former is assailed by third persons whose

interests are directly affected

Latter cannot be assailed by third persons.

Simulated Contracts
-

Simulation takes place when the parties do not really want the contact they have
executed to produce the legal effects expressed by its wordings.
An absolutely simulated contract of sale is void ab initio and transfers no
ownership right.

Effects of contracts where there is criminal offense

1. Those where both parties are guilty.
Effects:
a. No right of action against each other.
b. Both will be prosecuted.
c. Effects or instrument of the crime will be confiscated in favor of the
government.
2. Only one party is guilty.
Effects:
a. The guilty party will be prosecuted.
b. Property sold, as the instrument of the crime, will be confiscated in favor
of the government.

c. Innocent party can claim what he has given.

Effects of contracts where there is no criminal intent
1. Those where both of the parties are guilty
a. Neither party may recover what he has given by virtue of the contract.
b. Neither party may demand the performance of the others undertaking.
2. Where only one party is guilty
a. The guilty party loses what he has given by reason of the contract.
b. The guilty party cannot ask for the fulfilment of the others understanding.
c. The innocent party may demand the return of what he has given.
d. The innocent party cannot be compelled to comply with his promise.
In pari delicto
-

No remedy could be given to any of the parties, and the court leaves them where
they are. This is a universally accepted principle in law under the maxim he who
comes to court must do so with clean hands.
Exceptions:
a. Fictitious or absolute simulated contracts because they are inexistent.
b. Payment of usurious interest, the law allows recovery of the principal and
the legal interest.
c. When public policy intervenes.
d. Payment of any amount in excess of the maximum price of any article or
commodity fixed by law, the buyer may recover the excess.
e. One of the parties in a contract is less guilty than the other.

Illegal per se
-

Illegal per se contracts are those forbidden contracts because of public interest.

Merely prohibited contracts

-

If the contract is not illegal per se.

The prohibition is for the protection of the plaintiff.
Public policy will be enhanced by allowing the recovery.

Illegal terms of the contract

-

If indivisible, the whole contract is void, even if only some parts or terms are
illegal.
If divisible, the legal terms may be enforced if they can be separated from illegal
terms.