D efective

Arellano
C ontracts
De Guzman
Asug Garcia
Antonio
Encarnacion
Kinds of Defective Contracts

Rescissible
Voidable
Unenforceable
Void

Rescissible Contract – valid until rescinded. There is a sort of

extrinsic defect consisting of an economic damage or lesion.

What is Rescission?
A process designated to render inefficacious a contract
validly entered into and normally binding, by reason of external
conditions, causing an economic prejudice to a party or to his
creditors.

Requisites of Rescission
1. There exists a valid contract.
2. There is lesion or financial prejudice.

Article 1381: The following contracts are rescissible:

1. Those entered by guardians where the wards suffer
lesion by more than Ɖ of the value of the thing object
thereof;
ILLUSTRATION:
 
  On  June  9,  2017,  A,  guardian,  sold  a  parcel  of  land  owned  by  
B,  minor,  to  C.  The  land  valued  at  P  1.5  million  was  sold  for  P  1  
million.  

On the above illustration, the contract may be rescinded

because the lesion suffered by the ward is more than one-fourth
of the value of the land. B suffered lesion of P 500,000 (1.5M –
1.0M) - more than one-fourth of the value of the land or 375,000
(1/4 x 1.5 million).

B can file the action of rescission of the contract of sale

within four (4) years after reaching the age of majority. Upon
rescission, the parties are obliged to return the thing with the
fruits and the price with its interest.

2. Those agreed upon in representation of an absentee; if

the latter suffered lesion by more than Ɖ of the value of
the thing object thereof;
Absentee – one who is absent from his usual place of residence
or domicile.

3. Undertaken in fraud of creditors when the latter cannot

in any other manner collect the claims due them (accion
pauliana)

ILLUSTRATION:
 
 To  defraud  B  (A’s  creditor),  A  sold  his  house  to  C.  When  B  
wanted  to  collect  his  credit  from  A,  the  latter  is  insolvent.  

The sale of the house to C may be rescinded because the

sale was fraudulent and B, the creditor, cannot in any manner
collect from A. For rescission to prosper, C must have acted in
bad faith.

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.
ILLUSTRATION:
 
  A  brought  an  action  against  B  for  the  recovery  of  a  specific  
car.  While  the  case  was  ongoing,  B  sold  the  car  to  C  without  the  
approval  of  A  or  of  the  court.    

A can rescind the sale between B and C if A wins his first

case against B unless C is in good faith.

5. All other contracts declared by law to be subject of

rescission (Partition on account of lesion, rescission of
obligation if thing deteriorates & right of an unpaid
seller to rescind sale)

Article 1382: Payments made in the state of insolvency for

obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also rescissible
provided: a) debtor-payor have been insolvent when payment
was made & b) the debt was not yet due and demandable.
Void Contracts – contracts, which have no force and effect
because of failure to meet the essential requisites of a valid
contract, or because of being unlawful or illegal.

Special Classification of Void Contracts

1. Inexistent Contract – void because the essential

formalities are not complied with.

Example: Donation of land in a private instrument.

2. Illegal or Illicit Contract

Example: Donation made is premised on sexual

intercourse.

Article 1409: The following contracts are inexistent and void

from the beginning:

a) Contrary to law, morals, good customs, public order or

public policy
b) Absolutely simulated of fictitious
c) Non-existing cause / object at the time of the transaction
d) Object is outside the commerce of men
e) Contemplates on an impossible service
 f) The principal object cannot be determined according to the
intention of the parties
g) Expressly prohibited or declared void by law

Characteristics of Void Contracts

1) Right to set up the defense of illegality cannot be waived.

(Art. 1409)
2) Action or defense for their declaration as inexistent does
not prescribe. (Art. 1410)
3) Defense of illegality of contracts is not available to 3rd
persons whose interests are not directly affected. (Art. 1421)
4) It cannot give rise to a contract, hence, a contract which is
the direct result of a previous illegal contract is also void.
(Art. 1422)
5) It generally produces no effect.
6) Generally, no action to declare it void is needed, since it is
inexistent from the very beginning.
7.) It cannot be ratified. (Art. 1409)
Kinds of Illegal Contracts

There are two (2) kinds of illegal contracts:

1.) Those where there is a criminal offense. (Art. 1411)
2.) Those where there is no criminal offense. (Art. 1412)

Effects of Contract Where There is Criminal Offense

1. Both parties are guilty.

Example: Sale of Shabu

Effects:

a.) Since they are in pari delicto (illegality of the

cause or object of the contract), they shall have
no action against each other.
b.) Both shall be prosecuted.
c.) The effects or the instruments of the crime shall
be confiscated.

2. Only one party is guilty.

Example: A sold to B a government property. B was

in good faith.
Effects:

a.) The guilty party will be prosecuted.

b.) The instrument of the crime will be confiscated.
c.) The innocent party may claim what he has given.

Effects of Contract Where There is No Criminal Offense

1. Both parties are guilty.

Effects: Neither may recover what he has given by virtue of the

contract or demand the performance of the other’s undertaking.
The law will leave them as they are, since they are in pari
delicto.

2. Only one party is guilty.

Effects:

a.) The guilty party cannot recover what he has given by

reason of the contract, or ask for the fulfillment of
what had been promised to him.
b.) The party not at fault may demand the return of
what he has given, without any obligation to comply
with his promise.
Voidable or Annullable Contracts

Art.1390 The following contracts are voidable or annullable,

even though there may have been damage to the contracting
parties:

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.

Voidable or Annullable Contracts

o are those which possess all the essential requisites of

a valid contract but of the parties is incapable of
giving consent, or consent is vitiated by mistake,
violence. Intimidation. Undue influence, or fraud.
o They are valid and binding between the parties
unless annulled by a proper action in court by the
injured party.
Kinds of Voidable Contracts
* Legal incapacity to give consent
- where one of the parties is incapable of giving
consent to the contract.
* Violation of consent
- where the vitiation is done by mistake,
violence, intimidation, undue influence, or
fraud.

Characteristics of Voidable Contracts

1. Their defect consists in the vitiation of consent of one of

the contracting parties.
2. They are binding until they are annulled by a competent
court
3. They are susceptible of convalidation by ratification or
prescription

Annulment

o is a remedy provided by law, for reason of public

interest, or for the declaration of the inefficacy of a
contract based on a defect of vice in the consent of
one of the contracting parties.

ART 1391. The action for annulment shall be brought within

four years.
This period shall begin:

In case of intimidation, violence, or undue influence, from the

time the defect of the consent ceases.

In care of mistake or fraud, from the time of the discovery of the

same.
And when the action refers to a contract entered into by minors
or other incapacitated persons from the time the guardianship
ceases, (1301a)

Ratification

o One voluntarily adopts or approves some defective

or unauthorized act or contract which, without his
subsequent approval or consent, would not be
binding on him.
o Cleanses the contract from all its defects from the
moment it was constituted.

Kinds of Ratification

1. Express
- when the ratification manifested in words or
writing.
2. Implied or tacit

- it may take diverse forms, such as by silence or

acquiescence; by acts showing adoptation or
approval of the contracts; or by acceptance and
retention of benefits following therefrom.

Requisites for Ratification

a) There must be knowledge of the reason which renders the

contract voidable

o before ratification, there should be a valid reason for

a contract to be ratify such as a party involve is
incapacitated.

b) Such reason must have ceased;

o The injured party must have executed an act which

necessarily implies an intention to waive right.

Example: A, a minor, sold his land to B. Upon reaching the age of

majority, S, with full knowledge of his rights in the premises,
instead of repudiating the contract, disposed of the greater part
of the proceeds, or collected the unpaid balance of the purchase
price from B.
In this case, there is tacit ratification of S. In an action fro
annulment of a contract of sale, S alleged that the sale was
executed by him through the threat and intimidation of b. It
appears, however, that S deposited the check for the purchase
price and withdrew the money form time to time.

Who may ratify:

A contract entered by a incapacitated person may be ratified by:

a.) Guardian

o the guardian is the one whose capable of ratifying

since there are the legal representative of their
wards.

b.) The injured party himself assuming that he is already

capacitated.

o the party may exercise his right as long as he is

already capable of doing it.

Art. 1395 Ratification does not required the conformity of the

contracting party who has no right to bring the action for
annulment.
Ratification is unilateral act by which a party waives the defect
in his consent. The consent of the guilty party is not required;
otherwise, he can conveniently disregard his contract by the
simple expedient of refusing to give his conformity.

Right of strangers to bring action

One party who is not part of the contract or an assignee

thereunder, or odes not represent those who took part therein,
has no legal capacity to challenge the validity of such contract.

Example:

G sold a house and lot to H. The consent of G was vitiated by

fraud. Subsequently, G, sold the same house and lot to J.

In this case, J can bring an action to annul the sale.

UNENFORCEABLE CONTRACTS
(Articles 1403 – 1408)

A contract is a legally binding agreement. Once you enter

into it with another person or business, you and the other party
are both expected to comply or fulfill the stipulations of the
contract. But it is possible for a valid contract to be
unenforceable, meaning the court will not compel if the one or
both you do not perform the agreement.

An unenforceable contract or transaction is one that is

valid, but which the court will not enforce. A contract may be
unenforceable when certain statutory requirements have not
been met.

Example: An oral contract to buy land would not be enforceable

because the Statute of Frauds requires such an agreement to be
in writing.

Kinds of Unenforceable Contracts

Under Article 1403, the following contracts are unenforceable,

unless they are ratified:

1. Those entered into the name of another by one without, or

acting in excess of, authority;
2. Those that do not comply with the Statute of Frauds; and
3. Those where both parties are incapable of giving consent to a
contract

Unauthorized Contracts
Unauthorized contracts are those entered into in the name
of another person by one who has been given no authority or
legal presentation or who has acted beyond his powers.

Statute of Frauds
Statute of Frauds (Article 1403, paragraph 2) requires
that certain contracts be in writing, and that they be signed by
all parties to be bound by the contract.
The Statute of Frauds finds its roots from the Parliament
of England in the 1600's. It was then adopted in our Civil Code.
The rationale behind the Statute of Frauds is to prevent fraud
and perjury in the enforcement of obligations. Without a written
contract, parties will depend on their sheer memory or of their
witnesses. Without any palpable evidence of the intention of the
parties, when the contract is executed, there is a high
probability of fraud.
Agreements within the scope of the Statute of Frauds

1. Agreements whose terms are not to be performed within a

year from its making.
Any agreement that cannot be completed or fulfilled within
one year must be made in writing. For instance, an agreement to
pay back a personal loan in five years cannot be completed in
one year.

2. A special promise to answer for the debt, default or

miscarriage of another.
A contract in which one person promises to pay the debt of
another person is considered a “surety,” and is subject to the
Statute of Frauds.

3. Transactions made in consideration of marriage.

This includes any promises made in consideration of
marriage, including gifts given in consideration of marriage,
such as an engagement ring.

4. Sale of personal property for a price not less than Five

Hundred Pesos (PhP 500.00).
The sale of goods worth PhP500 or more must be made in
writing. This gets tricky when dealing with a modified contract
for sale of goods, however. In general, if the contract is modified
to a value of less than the PhP500, is not subject to the Statute
of Frauds. A modification raising the value over the PhP500
limit is required to be placed in writing.

5. Agreement for a lease longer than one year.

The sale or other transfer of real property must be made in
writing. This does not apply to a lease, unless it falls under the
year requirement.

6. Representations made to the credit of a third person

Thus, as a general rule, a representation made by a
corporate officer to bind a corporation to a verbal agreement
may be impugned for being unenforceable if such was not made
in writing. However, such objections must be timely made and
no benefit must have been derived by the corporation from the
said transaction.

Purpose of the Statute of Frauds

The purpose of the Statute of Frauds is to prevent injuries

from fraudulent conduct.

Requirements for a Binding Agreement under the

Statute of Frauds

§ Be in written form, though it does not need to be written in

any type of formal language
§ Identify the subject of the contract in an easily understood
manner

§ Spell out the essential terms of the agreement, including the

exact nature of the goods or services, and the price or other
consideration agreed upon.

§ Include the signatures of both parties, or at a minimum, the

signature of the party that is being charged for the goods or
services

Unenforceable Contracts as to EFFECTS

Unenforceable contracts can't be enforced by a proper

action in court. Once ratified, these contracts may then be
enforceable.

a) Failure of defendant to object in time, to the presentation of

parole evidence in court, the defect of unenforceability is cured.

b) Acceptance of benefits under the contract. If there is

performance in either part and there is acceptance of
performance, it takes it out of unenforceable contracts; also
estoppel sets in by accepting performance, the defect is waived.
Unenforceable Contracts as to REMEDIES

Remedy for unenforceable contracts is RATIFICATION; a

personal defense when the plaintiff pursues a specific
performance case or complaint for damages based on breach of
contract.