LAW ON OBLIGATIONS AND CONTRACTS

SESSION VII- DEFECTIVE CONTRACTS/

NATURAL OBLIGATIONS

Rescissible Contracts: defective by reason of damage or lesion.

 Mutual return is incumbent upon actual participants.
 It is instituted only when the party suffering damage has no other legal means to
obtain reparation for the same.
 The action must be commenced within 4 years.

RESCISSIBLE CONTRACTS ARE VALID: 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creditors, the contract may be rescinded

Kinds of Rescissible Contracts:

1. Those entered into by guardians whenever their wards represent lesion by more
than ¼ of the value of the thing.
2. Those agreed upon in representation of absentees, if the latter suffer lesion stated
in the preceding number.
3. Those undertaken in fraud of creditors.

LESION- any damage caused by the fact that the price is unjust of inadequate

RESCISSION- a remedy granted by law to the contracting parties and sometimes even
to 3rd persons in order to secure reparation of damages caused them by a valid contract,
by means of restoration of things to their condition in which they were prior to the
celebration of said contract

THE FOLLOWING CONTRACTS ARE RESCISSIBLE

1. Contracts entered into in behalf of wards- whenever the wards whom they
represent suffer lesion by more than ¼ of the value of the things which are the
object thereof
2. Contracts agreed upon in representation of absentees- if absentees suffer lesion
by more than ¼ of the value of the things which are the object thereof
3. Contracts undertaken in fraud of creditors- whenever the creditors cannot in any
other manner collect the claims due them
4. Contracts 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
 - Payments made in a state of insolvency
- Extrajudicial partition
- Lease contracts

RESCISSION
1. Not a principal remedy
2. Can be availed of only if the injured party proves that he has no other legal means
aside from rescinding the contract to obtain redress for the damage caused
3. Creates obligation of mutual restitution: the parties must return to each other the
object of the contract with its fruits and the price thereof with legal interest

WHEN RESCISSION NOT ALLOWED

1. If the party who demands rescission cannot return what he is obliged to restore
under the contract
2. If the property is legally in the possession of a 3rd person who acted in good faith

ART. 1386- if a contract entered into in behalf of a ward or absentee has been approved
by the court, rescission cannot take place because it is valid whethere there is lesion or
not

ART. 1387- prima facie presumption of fraud in case of alienation by the debtor of his
property
1. Alienation by gratuitous title
2. Alienation by onerous title

BADGES OF FRAUD
• Fictitious of inadequate consideration
• Transfer made by a debtor after suit has been filed and pending against him
• Credit sale by an insolvent debtor
• Transfer of all property by an insolvent debtor
• Transfer between father and son
• Failure of vendee to take exclusive possession of all the property

PERIOD FOR FILING ACTION FOR RESCISSION- must be commenced within 4 years
from date the contract was entered into. Exception:
- for guardianship, from the termination of incapacity
- absentees, from the time the domicile is known

PERSONS ENTITLED TO BRING ACTION

1. Injured party or defrauded creditor
 2. Heirs, assigns or successors in interest
3. Creditors of the above entitled to subrogation

Voidable Contracts: Valid but subject to annulment by reason of vitiated consent or

incapacity of one of the contracting parties.
 To commence within 4 years.
 Restitution with their fruits, and the price with its interest.

VOIDABLE CONTRACTS OR ANNULLABLE CONTRACTS- those which possess all the

essential requisites of a valid contract but one of the parties in incapable of giving consent
or consent is vitiated by mistake, violence, intimidation, undue influence or fraud

VOIDABLE CONTRACTS
1. Valid and binding unless annulled by a proper action in court
2. Valid until annulled unless there has been a ratification
3. The defect is caused by a vice of consent

ANNULMENT- remedy provided by law, for reason of public interest, for the declaration
of the inefficacy or 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- four years from-

• The time the defect of the consent ceases, in case of intimidation, violence or
undue influence
• The time of the discovery of the same in case of mistake or fraud
• The time guardianship ceases in case of contracts entered into by minors or
other incapacitated persons

RATIFICATION- extinguishes the action to annul a voidable contract

• Means that one voluntarily adopts some defective or unauthorized act or contract
which, without his subsequent approval or consent, would not be binding on him
• Cleanses the contract from all its defects from the m0oment it was constituted
• Ratification may be effected by the guardian of the incapacitated person
• Conformity of guilty party to ratification not required
 Effect of ratification retroactive

IMPORTANT
  One who is not a party to the contract or an assignee thereunder, or does not
represent those who took part therein, has not legal capacity to challenge the
validity of such contract
 Guilty party without right to bring action
 Duty of mutual restitution upon annulment
 The action for annulment of contract shall be extinguished when the thing which is
the object thereof is lost through the fraud or fault of the person who has a right to
institute the proceedings
 There will be no annulment if the party cannot restore what he is bound to return.
This is true even if the loss is due to a fortuitous event.

Unenforceable Contracts: Valid but defective because it cannot be enforced in courts.

Examples:
1. Those entered into in the name of another who has been given no authority or legal
representation or who has acted beyond his powers.
2. Those where both parties are incapable of giving consent to a contract.
3. Those that do not comply under the Statute of Frauds (The items covered must appear
in writing otherwise it cannot be enforced in courts.)

UNENFORCEABLE CONTRACTS- although valid, cannot be sued upon or enforced

unless they are ratified

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

1- UNAUTHORIZED CONTRACTS- those entered into in the name of another person by

one who has given no authority or legal representation or who has acted beyond his
powers
2- STATUTE OF FRAUDS –
A. Agreement not to be performed within 1 year from the making thereof.
B. Promise to answer for the debt, default or miscarriage of another
C. Agreement in consideration of marriage other than mutual promise to marry
D. Agreement for sale of goods, etc. At price not less than p500.00
E. Agreement for leasing for a longer period than 1 year
F. Agreement for the sale of real property or of an interest therein
G. Representation as to the credit of a third person
STATUTE OF FRAUDS- applicable only to executory contracts (where no performance
has as yet been made by both parties) and not to contracts which are totally
consummated of partially performed

Summary: Statute of Frauds:

1. An agreement that by its terms is not to be performed within one (1) year;
2. A special promise to answer for the debt, default or miscarriage of another
3. An agreement for the sale of goods/chattels at a price not less than P500
4. Sale of real property
5. An agreement for the leasing for a longer period than one year

MODES OF RATIFICATION OF CONTRACTS INFRINGING THE STATUTE OF

FRAUDS
1. By failure to object to the presentation of oral evidence to prove the contract
2. By acceptance of benefits under the contract

When a contract is enforceable under the statute of frauds and a public document is
necessary for its registration in the registry of deeds, the party may compel the other to
execute a public document

WHEN UNENFORCEABLE BECOMES VOIDABLE- Where both parties to a contract are

incapable of giving consent, the contract is unenforceable. If the parent or guardian of
either party or if one of the parties after attaining or regaining capacity ratifies the contract,
it becomes voidable.

WHEN UNENFORCEABLE BECOMES VALID- if the ratification is made by the parents

or guardians of both contracting parties or by both contracting parties after attaining or
regaining capacity, the contract is validated and its validity retroacts to the time it was
entered into

UNENFORCEABLE CONTRACTS CANNOT BE ASSAILED BY THIRD PERSONS

VOID OR INEXISTENT CONTRACTS

1. Absolutely null and void ( invalid/ inexistent contract)
2. Have no effect at all and cannot be ratified (they are not subject to ratification)
3. Action or defense is imprescriptible (The right to bring an action to declare a contract
void does not prescribe)
4. The defense of illegality of contracts is not available to third persons whose interests
are not directly affected
5. A contract which is the direct result of a previous illegal contract, is also void and
inexistent
6. The right to raise the defense of illegality cannot be waived.
7. It has no force or effect.

Examples of VOID OR INEXISTENT CONTRACTS

1. Contracts whose cause, object or purpose is contrary to law, etc.
2. Contracts which are absolutely simulated or fictitious
3. Contracts without cause or object
4. Contracts whose object is outside the commerce of men
5. Contracts which contemplate an impossible service
6. Contracts where the intention of the parties relative to the object cannot be
ascertained
7. Contracts expressly prohibited or declared void by law

In Pari delicto rule: If both parties are at fault, they cannot sue each other nor demand
performance from each other. The courts will leave them as they are and no award shall
be granted.

RULES WHERE CONTRACT IS ILLEGAL AND THE ACT CONSTITUTES A CRIMINAL

OFFENSE
1. Where both parties are in pari delicto
A. The parties shall have no action against each other
B. Both shall be prosecuted
C. The things or the price of the contract shall be confiscated in favor of the
government
2. Where only one party is guilty- the innocent one or the less guilty may claim what
he has given and shall not be bound to comply with his promise

Rules where contract is illegal but the act does not constitue a criminal offense
1. Where both parties are in pari delicto
A. Neither party may recover what he has given by virtue of the contract
B. Neither party may demand the performance of the other’s 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 fulfillment of the other’s undertaking
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

NATURAL OBLIGATIONS VS. CIVIL OBLIGATIONS

  Civil obligations- give a right of action to compel their performance, they arise from
law, contracts, quasi-contracts, delicts and quasi-delicts
 Natural obligations- based not on positive law but on equity and natural law

IMPORTANT:
1. When a right to sue upon a civil obligation has lapsed by extinctive prescription,
the debtor who voluntarily performs the contract cannot recover what he has
delivered or the value of the service he has rendered
2. If a 3rd person pays the prescribed debt of the debtor without his knowledge or
against his will, the latter is not legally bound to pay him. But the debtor cannot
recover what he has paid in case he voluntarily reimburses the 3rd person
3. The heir is not personally liable beyond the value of the property he received from
the decedent. But if he voluntarily pays the difference, the payment is valid and
cannot be rescinded by him.