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D’NOTES 2018

Defective contracts.

There are four kinds of defective contracts. They are in the order of

their defectiveness or efficaciousness:

(1) Rescissible contracts. — They are the least infirm or defective.

They are valid because all the essential requisites of a contract exist
but by reason of injury or damage to one of the parties or to third
persons, such as creditors, the contract may be rescinded. Thus, the
defect is external. Until such contracts are rescinded in an
appropriate proceeding, they remain valid and binding upon the
parties thereto

(Chap. 6.);

(2) Voidable contracts. — They are also valid until annulled unless
there has been a ratification. In a voidable contract, the defect is
caused by vice of consent (Chap. 7.);

(3) Unenforceable contracts. — They cannot be sued upon or


enforced unless they are ratified. As regards the degree of
defectiveness, voidable contracts are further away from absolute
nullity than unenforceable contracts. In other words, an
unenforceable contract occupies an intermediate ground between
a voidable and a void contract (Chap. 8.); and

(4) Void or inexistent contracts. — They are absolutely null and


void. They have no legal effect at all and cannot be ratified. (Chap.
9.)

According to the Code Commission which prepared the draft of the


present Civil Code, a great deal of confusion has been created by
the faulty terminology used in the old Civil Code as regards
defective contracts. There was no sufficient clarity as to contratos
nulos and contratos anulables — void and voidable contracts. In
order to put an end to the uncertainty and other ambiguities in the
old Code, the present Code in a clear-cut and unequivocal way
classifies and defines the various kinds of defective contracts, and
states their consequences.

RESCISSIBLE CONTRACTS

Meaning of rescission.

Rescission is an equitable remedy granted by law to the contracting


parties and sometimes even to third persons in order to secure
reparation of damages caused them by a valid contract, by means
of the restoration of things to their condition prior to the celebration
of said contract. (see 8 Manresa 748-749.)

ART. 1381. The following contracts are rescissible:

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


rescission. (1291a)

EXAMPLE:

Illustration for Art 1381 (1) (2)

G is the guardian of W (ward). G sells the property of W worth


P20,000.00 for only P15,000.00.

The contract of sale cannot be rescinded because the lesion is not


more than one-fourth. However, if the property is sold for less than
P15,000.00, W can rescind the sale by proper action in court upon
reaching the age of majority.

Illustration for Art 1381 (3)

D, insolvent debtor of C for P10,000,000.00 has a property in


Mandaluyong valued at P5,000,000.00. Despite the loan being due
and demandable to C, did not pay the P10,000,000.00 but instead
sold the property to B to defraud his creditor C, for P4,000,000.00.

C, the creditor can rescind the contract with damages based on


Art. 1381 par. 3.

Illustration for Art 1381 (4)

S sues B for the recovery of a parcel of land. In this case, the land is
a “thing under litigation.” If, during the pendency of the case, B sells
the land to C without the approval of S or of the court, the sale is
rescissible at the instance of S in case he wins in his suit for the
recovery of said land unless C is in legal possession of the land in
good faith. (Art. 1385, par. 2.)

S, however, may protect his right by filing a notice of lis pendens.


(Sec. 14, Rule 13, Rules of Court.)

ART. 1384. Rescission shall be only to the extent necessary to cover


the damages caused.

(1) G, the guardian of M, a minor was authorized by the court to sell


two parcels of land valued at P200,000.00 each. G sold the two
properties to B for only P200,000.00.

In this case, the entire contract need not be rescinded. Rescission


may properly be applied only to one parcel to cover the damage
caused by G. (see Art. 1381[1].) But if G or B is willing to pay the
difference of P200,000.00, rescission is precluded.
ART. 1389. The action to claim rescission must be commenced
within four years.

For persons under guardianship and for absentees, the period of


four years shall not begin until the termination of the former’s
incapacity, or until the domicile of the latter is known. (1299)

Period for filing action for rescission.

As a general rule, the action to rescind contracts 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; and

(2) For absentees, from the time the domicile is known.

Laches (see Title IV.) bars an action for rescission or annulment of


a contract. (see Art. 1391.)

VOIDABLE CONTRACTS

ART. 1390. The following contracts are voidable or annullable, even


though there may have been no 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. These contracts are binding,
unless they are annulled by a proper action in court. They are
susceptible of ratification. (n)

Meaning of annulment.

Annulment is a remedy as well as a sanction 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.
ART. 1391. The action for annulment shall be brought within Four
years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time


the defect of the consent ceases. In case of mistake or fraud, from
the time of the discovery of the same.

And when the action refers to contracts entered into by minors or


other incapacitated persons, from the time the guardianship
ceases. (1301a)

ART. 1392. Ratification extinguishes the action to annul a voidable


contract. (1309a)

Meaning and effect of ratification.

Ratification means that one under no disability voluntarily adopts


and gives sanction to some defective or unauthorized contract, act,
or proceeding which, without his subsequent sanction or consent,
would not be binding or him. It is this voluntary choice, knowingly
made, which amounts to a ratification of what was theretofore
unauthorized and becomes the authorized act of the party so
making the ratification. (see Maglucot-Aw vs. Maglucot, 329 SCRA
78 [2000]; Coronel vs. Constantino, 397 SCRA 128 [2003].)

UNENFORCEABLE CONTRACTS

ART. 1403. The following contracts are unenforceable, unless they


are ratified:

(1) Those entered into the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth
in this number. In the following cases an agreement hereafter made
shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement
cannot be received without the writing, or a secondary evidence
of its contents:

(a) An 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) An agreement for the sale of goods, chattels, or things in


action, at a price not less than Five hundred pesos, unless the buyer
accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action, or pay at the
time some part of the purchase money; but when a sale is made by
auction and entry is made by the auctioneer in his sales book, at
the time of the sale, of the amount and kind of property sold, terms
of sale, price, names of the purchasers and person on whose
account the sale is made, it is a sufficient memorandum;

(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.

(3) Those where both parties are incapable of giving consent to a


contract.

Kinds of unenforceable contracts.

Under Article 1403, the following contracts are unenforceable:

(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; and

(3) Those where both parties are incapable of giving consent.


A party to an unenforceable contract may bring an action to
enforce it subject to the defense of the lack of the required form
(Statute of Frauds) or absence of authority or in excess thereof. The
law expressly provides that such a contract cannot be assailed by
a third person. (Art. 1408.)

STATUTE OF FRAUDS

Modes of satisfaction of the Statute.

The Statute specifies three ways in which a contract of sale of


goods within its terms may be made binding, namely:

(1) the giving of a note or memorandum;

(2) acceptance and receipt of part of the goods (or things in


action) sold; and

(3) payment at the time some part of the purchase price.

ILLUSTRATION FOR ART. 1403 PAR. (2)(A)

On December 1, 2003, X entered into an oral contract with Y for the


construction of Y’s house to begin on December 10, 2004. The
contract must be in writing to be enforceable

ILLUSTRATION FOR ART. PAR. (2)(B)

D owes C P1,000.00 with G as guarantor. Here, G has a special


promise to answer for the debt of D in case D fails to pay the same.
This promise is unenforceable unless it is in writing signed by G.

If the promise of G is to pay C what D owes him (C), G’s promise,


even if verbally made, is enforceable as it is not a collateral
“promise to answer for the debt, default, or miscarriage of another.”

ILLUSTRATION FOR ART. PAR. (2)(C)

X agrees to build a house worth P500,000.00 for Y if Y will marry X.


This must appear in writing to be enforceable unless X ratifies the
agreement. The Statute applies even when the promise to build the
house is made by a third person to Y.
But a mutual promise of X and Y to marry each other need not be
in writing. For breach of the mutual promise to marry, the injured
party may prove the promise by oral evidence in an action for
damages.

ILLUSTRATION FOR ART. PAR. (2)(D)

(1) X and Y mutually promised to buy and sell a piano at a price of


P4,000.00. This contract must be in writing to be enforceable against
either party unless there is delivery or partial or full payment, in
which case, it is taken out of the operation of the Statute of Frauds
and the contract may be enforced even if it was made orally.

(2) If Y denies a contract of sale of goods worth P500.00 but X


claims the price is only P450.00 (which is less than P500.00), oral
evidence of the sale is admissible inasmuch as the true agreement
claimed is not covered by the Statute.

ILLUSTRATION FOR ART. PAR. (2)(E)

R agreed to lease his house to E for two (2) years. Again, this
agreement must appear in writing to be enforceable unless it is
partially executed.

ILLUSTRATION FOR ART. PAR. (2)(F)

(1) S orally sold his land or his right or usufruct in said land to B. The
agreement is also unenforceable, unless it has been partially
executed.

(2) S agreed in a private document to sell his land to B. The


document was given to B who lost it. May B prove the agreement
by oral evidence?

Yes. Here, what is to be proved is not an oral but a written contract


of sale. It is necessary, however, that B first presents proof that the
written agreement really existed.

VOID CONTRACTS

ART. 1409. 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.

These contracts cannot be ratified. Neither can the right to set up


the defense of illegality be waived.

Meaning of void contracts.

Void contracts are those which, because of certain defects,


generally produce no effect at all. They are considered as inexistent
from its inception or from the very beginning.

The expression ‘‘void contract” is, therefore, a contradiction in


terms. However, the expression is often loosely used to refer to an
agreement tainted with illegality.

Characteristics of a void or inexistent contract.

They are as follows:

(1) Generally, it produces no effect whatsoever, being void or


inexistent from the beginning;

(2) It cannot be cured or validated either by time or ratification


(Art. 1409, par. 2.);

(3) The right to set up the defense of illegality, inexistence, or


absolute nullity cannot be waived (Ibid.);
(4) The action or defense for the declaration of its illegality,
inexistence, or absolute nullity does not prescribe (see Art. 1410.);

(5) The defense of illegality, inexistence, or absolute nullity is not


available to third persons whose interests are not directly affected
(see Art. 1421.);

(6) It cannot give rise to a valid contract. (see Art. 1422.); and

(7) Its invalidity can be questioned by anyone affected by it. (see


Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].)

The above characteristics distinguish a void contract from the other


defective contracts.