DEFECTIVE CONTRACTS

4 kinds of defective contracts according to their order of defectiveness:

1. Rescissible Contracts
2. Voidable Contracts
3. Unenforceable Contracts
4. Void or inexistent contracts

Rescissible Contracts
Art. 1380
 Rescissible contracts are those contracts that are valid and enforceable because all the
essential requisites of a contract exist, but is subject to a remedy of rescission granted
by law.
 Rescission as a remedy granted by law to the contracting parties and to the third party
may be enacted when there is an economic damage. It is a security for reparation of
damages by means of restoring all the things to their original condition prior to the
perfection of the contract.
Requisites of rescission
1. The contract must be validly agreed upon.
(Art. 1380)
 The contract entered must be valid because all the essential requisites exist.

2. There must be suffered lesion or pecuniary prejudice to one of the parties or to a third
person.
(Art. 1381)
 Contracts that were entered by guardians and representatives whom the wards or
absentees suffered lesion by at least ¼ of the value of the object of contract.

3. Rescission must be based upon certain cases provided by law.

(Art. 1381)
 Rescissible cases provided by law are:
o Contracts entered by guardians in behalf of their wards.
 Ex.: G the guardian of M (a minor) sold the real property which is inherited and belongs to M
worth 1,000,000 for only 500,000. Here, when M reaches the legal age or after being
incapacitated, M can rescind the contract because M suffered lesion for more than ¼ of its
value.
o Contracts agreed upon by a representative of an absentee.
Ex.: R as the representative of an absentee who is lost and cannot be found for decades, sold
the properties of A (an absentee) worth 1 million for only 500,000. A can rescind the contract
because he suffered lesion.
o Contracts take on fraud of creditors.
Ex.: D the debtor committed a fraud to his creditor C. C may rescind the contract if proven and
presumed.
o Contracts entered that refers to things under litigation.
Ex.: There is a pending case between A and B for the recovery a parcel of land. A sues B because
he’s claiming that the parcel of land belongs to him. While the case is not yet settled and the
land is still under litigation, B sells the land to C without any approval. If A won the case, he may
rescind the contract of sale.
o Other instances.
Referring to article 1098, 1659 and 1539

4. There must be no other legal remedy to obtain any reparation for damages.
(Art. 1383)
 Rescission is only a subsidiary remedy and not a principal remedy. It can only be
obtained if one of the injured party has no other legal means but only to rescind the
contract. If the damage is repairable, rescission is not recommended.

5. The party asking for rescission should be able to return the things that should be restored.
(Art. 1385)
 When one of the party demands rescission and the law declared so, the parties must be
able to return to each other the object of the contract along with its fruits and the price
with its legal interest.
 The remedy of rescission is not allowed when the party who demands it was not able to
return the object that he is obliged to restore.

Ex.: A sold a horse to B. The contract was rescinded, and B must return the horse along the colt which
is the fruit and A must return the sum of money with a fair price.

6. The object of a contract must not legally belongs to a third person who didn’t act in bad
faith.
(Art. 1385)
  Rescission is not allowed when the property legally belongs to a third person who acted
in good faith, unaware of the flaw and registered the property under the Torrens
System in the Registry of property. In this case, the remedy is to demand for indemnity
of damages who cause the loss.

Ex.: B sold the land to C which is under litigation between A and B. C acted in good faith and unaware
of the litigation. If A won the case, he cannot rescind the contract of sale but he is entitled for the
damage that cause by B.

7. The period for filling an action for rescission must not prescribed.
(Art. 1389)
 Rescission must commenced within 4 years from the date the contract was entered but
there are exceptions:
o For the incapacitated persons, the period will begin when the guardianship was
extinguish.
o For the absentees, the period will begin from the time the domicile is known.
 Persons entitled to claim rescission:
o Injured party or defrauded creditor
o His heirs, successors, assigns
o Creditors entitled to subrogation

Voidable Contracts
Art. 1390
 Voidable contracts are contracts that are valid because all the essential requisites are
present but is annullable by proper action in court by an injured party because of
incapability of giving consent, or when the consent is vitiated, by mistake, fraud,
intimidation, violence or undue influence.
 Voidable contracts are:
o When one of the parties who gave consent are incapacitated such as minors,
insane, illiterate persons.
o When the consent is violated due to intimidation, vitiation, by mistake, undue
influence, violence or fraud.
 Annulment is a remedy provided by law for public interest when there is a defect
happened in the consent of one of the contracting parties that made contract voidable.
Annulment results to restoration of the things into their original position before the
contract is made.
Art. 1391
 There is only 4 period to bring an action of annulment of a voidable contract and is
reckoned:
o When due to intimidation, violence, or undue influence: from the time the
intimidation ceases.
o When by mistake or fraud: from the time it is discovered.
o When the contract is entered by incapacitated persons: from the time of
guardianship ceases.
Art. 1392
 In voidable contracts when all the defects were ratified, it extinguishes the right of an
action for annulment.
 Ratification is voluntarily approving to the defects of the contract without subsequent
approval or consent. It cleanses the contract from all of its defects from the moment it is
ratified.
Art. 1393
Kinds of ratification:
o Express – when the ratification in words is in writing.
o Implied or tacit – when ratification is by action of showing the adoption or approval of
the contract or by accepting the benefits.

Ex.: A is an insane person sold his property to B in the state of being incapacitated. B paid the half of
the price. When A was cured and came back to normal or become a capacitated person, he claimed the
other half of the price to B.
In this case, there is an implied or tacit ratification because A showed approval to the contracts by his
action of claiming the half of proceeds.

Art. 1394
Persons who may ratify:
 When the contract is entered by an incapacitated person, it may be ratified by:
o The guardian.
o The injured party himself when he is already capacitated.
 When the consent is by mistake etc., the party whose consent is vitiated may ratify.

Art. 1395
 The consent from the guilty party is not required for ratification. Ratification can be
waived by the aggrieved party when there is a defect in his consent.
Art. 1397
Who may bring an action of annulment:
 The person who claims for annulment must have an interest in the contract.
 Only the victim of the defect can assert an annulment and not the guilty party.
Art. 1398
 When the contract is annulled, the parties must restore the object matter of a contract
to each other along with its fruits and the legal interest if any.
 In case of service rendered, its corresponding value should be the basis for damages to
be recovered by the aggrieved party.
Art. 1399
 When an incapacitated person is obliged to restore the subject matter of the contract,
he can only return to the extent of what he has been benefited. If he was not benefited,
he is not obliged to return anything that he received, but the other contracting party
should return what he had received whether he benefited from it or not.
Art. 1400
 In case that the thing to be returned is lost:
o Without the fault of the person who is obliged to make restitution: there will be
no more restitution of the thing and in that case, the other contracting party is
not also compelled to return the thing that is due to him.
o If through his fault: the obligation is converted into indemnification of damages
that consists of the value of the thing at the time of the loss with interest and the
fruits received from the time it was given to him up to the time of its lost.

Ex.: S sold his car to B. S annulled the contract but the car was lost through the fault of B. In this
case, B is subject to indemnification of the damages for the value of the car when it is lost,
along with its fruits and legal interest if there is any.

Art. 1401
 If the loss of the thing that is to be returned is due to the fraud or fault of the person
who initiate an action of annulment that results to impossibility to restore the subject
matter of the contract, the right for annulment is extinguished.
Art. 1402
 Whenever the party cannot restore what he is bound to return, the other party cannot
be compelled to return what he is obliged to restore.
UNENFORCEABLE CONTRACT
 Unenforceable contracts – these contracts are although valid but is unenforceable or
cannot be enforced because of some certain defects that is provided by law unless
ratified.
Kinds of unenforceable contracts:
 Those entered into in another name without having an authority or acting in excess of
authority

Ex.: A a friend of C sold the land of his friend to B without the approval of C.
D and E owned the property but D sold the property to F without the approval of E who also owned the
property.

 Those where both party are incapable of giving

 Those that do not complied to the Statute of Frauds
Statute of Frauds – statute of frauds required that, to be enforceable, the following types of
contracts should be in writing:
1. Contracts in consideration of marriage.
Ex.: M promises W to give her 10,000,000 and a house and lot if W will marry M. In this case, this
should be in writing for it to be enforceable.

2. Contracts that are not to be performed within 1 year

Ex.: A and B agreed that B should repair his car after today’s year. In this case, it should be in writing to
be enforceable.

3. Contracts for an interest in real property.

Ex.: A sold his real property to B. The sale of property should be in writing to be enforceable

4. Promises to pay or answer for the debt of another

Ex.: A borrowed money worth 100,000 to B. They agreed that in case that he cannot return the money,
G the guarantor will pay for it. Here, the agreement should be written and signed by G.

5. Leasing for more than 1 year.

Ex.: A agreed to lease his apartment to B for 5 years. This requires to be in writing to be enforceable.

6. Contracts for the Sale of goods valued over P500.

Ex.: S sold a goods worth 10,000 to B. This should appear to be in written form to be enforceable.
7. Representation of credit of a third person.
Art. 1405
 In ratification of contracts, infringing the Statute of Frauds may be enacted in these
ways:
 o When there is no objection by the parties even if it is only evidenced by oral
agreement but they should make it in written form for evidential purposes.
o By the acceptance of benefits under the contract.
Art. 1406
 Sale of real properties in oral agreement in unenforceable and is not compelled to put
the contract in public document for registration purposes unless ratified.

Void or Inexistent Contracts

Art. 1409
 Void contracts - are those contracts that are inexistent or ineffective from the very
beginning. These contacts are inexistent because it doesn’t comply to the essential
requisites of a contract.
These characteristics should be present for the contract to be void or inexistent:
 It has no force and effect.
 Cannot be ratified.
 Cannot waived a defense for illegality.
 Third person who is not affected cannot defend the illegality of the contract.
 The void contract cannot be valid.

Examples of void or inexistent contracts:

 Contracts that is contrary to law.
Ex.: A and B entered into a contract where B should murder C and he will be given P100,000. This
contract is void because murder is contrary to law.

 Contracts that are absolutely simulated or fictitious.

Ex.: A pretended to sell his land to B. A didn’t receive anything in exchange and the land is still in his
possession. Here, the contract is void.

 Contracts without cause or objects.

 Contracts whose object is outside the commerce of man.

Ex.: A and B entered into a contract wherein the object is air. Air is outside the commerce of man, so
the contract is ineffective.

 Contracts that are impossible to fulfill.

 Ex. A promises to marry B if he can reach the sun. In this case the contract is void because it is
impossible to do.

 Contracts that were entered has no certainty that pertains to the object.
Ex.: A owed money to B worth 15,000 with 5% interest. Here the contract is void because there is no
certainty on how A will make a payment for it.

 Contracts that are expressly prohibited by law.

Examples:
o Contracts entered about future inheritance.
o Contract of sale between husband and wife.
o Purchasing a property by person who are specially disqualified by law.
o Donations between spouses except moderate gifts.
o Testamentary wills in favor to a disqualified person.
o Household services without compensation.
o Any related to financial contracts entered by the member of Congress with the
government.
Art. 1410
 If a contract is void, any party can raise the void contract to the court to declare it void
and the party who are against can also raise the defense of nullity in anytime.
Art. 1411
Pari delicto – means equally guilty.
Rules if the contract is illegal and it constitutes a criminal offense:
 When both parties are in pari delicto: (1) there should be no action against each other,
(2) both will be prosecuted, (3) the things of the contracts committed in crime will be
confiscated by the government.
 When only one party is guilty: the innocent party or the less guilty is not bound to
compel to his promise and may claim what he has given.
Art. 1412
Rules for contracts that are illegal but does not constitute criminal offense:
 When both parties are in pari delicto: (1) any of the parties cannot recover what was
given by each because of the entered contract. (2) anyone of the parties cannot demand
performance.
 When only one party is guilty: (1) the guilty party will lose what he has given (2) the
guilty party cannot ask for fulfillment. (3) the innocent party may claim what he has
given (4) the innocent party is not obliged to compel with his promise.
Art. 1413
Usurious interest rate – interest rates that are considerably above the current market rate.
These rates are illegal and is use by unsecured lenders on loans to take advantage of
vulnerable individuals.
 Under this article, any usurious interest rates for payment is void. The person who is
paying the usurious interest can recover not only the interest in excess of what is
allowed but the whole interest paid.
Art. 1414
 If one of the party paid a money or property for an illegal purpose, the contract may be
rejected by one of the parties and may allow recovery before the purpose has been
accomplished.
Ex.: A gave 1million to B in consideration for being his slave. A changed his mind before the purpose
was accomplished. A can recover the 1,000,000 given to B.

Art. 1415
 Recovery is allowed if one of the parties who entered into an illegal contract is an
incapacitated person if the interest of justice demands so. It is also not necessary if the
illegal purpose is accomplished or not or even if it caused damages to a third person.
Art. 1416
 The party may recover what he has paid or delivered if the agreement entered is not
illegal but prohibited by law.
Art. 1417
 Any person who paid in excess of the maximum price allowed by the statute or known
as the ceiling law on any article or commodity, he may recover such excess.
Art. 1418
 A laborer who entered into a contract that undertakes longer working hours than the
maximum fixed by the Labor Code may take a recovery for additional compensation for
the service rendered beyond the time limit.
Except to:
o Managerial employees
o Field personnel
o Members of the family of the employers who are dependent upon him for
support
o Domestic helpers
o Persons in the personal service of another
o Workers who are paid by results.
Art. 1419
  If an employee receives less than the minimum wage, he can recover the deficiency with
the legal interest. The employer who is guilty is liable to a criminal offense.
Art. 1420
 If the contract is divisible like the illegal part of the contract is separable, the legal
portion can be enforced.
Art. 1421
 A third person cannot raise a defense against the illegality of contract who is not directly
affected into the contracts, however he can avail to the defense if he is directly affected
by the contract.
Art. 1422
 An illegal contract or void contract cannot give rise to a valid contract.