Obligations and Contracts 4th Examination Coverage

DEFECTIVE CONTRACTS Art. 1381. The following contracts are rescissible:

1. Rescissible Contracts – a contract that has caused a particular (1) Those which are entered into by guardians whenever
damage to one of the parties or to a third person, and which for the wards whom they represent suffer lesion by more
equitable reasons may be set aside even if it is valid. than one fourth of the value of the things which are the
2. Voidable or Annulable Contracts – a contract in which the object thereof;
consent of one party is defective, either because of want of (2) Those agreed upon in representation of absentees, if the
capacity or because it is vitiated, but which contract is valid latter suffer lesion stated in the preceding number;
until set aside by a competent court. (3) Those undertaken in fraud of creditors when the latter
3. Unenforceable Contracts – a contract that for some reason cannot in any other manner collect the claims due them;
cannot be enforced, unless it is ratified in the manner provided (4) Those which refer to things under litigation if they have
by law. been entered into by the defendant without the
4. Void or Inexistent Contracts – an absolute nullity and produces knowledge and approval of the litigants or of competent
no effect, as if it had never been executed or entered into. judicial authority;
(5) All other contracts specially declared by law to be
CH6 RESCISSIBLE CONTRACTS subject to rescission.

Art. 1380. Contracts validly agreed upon may be rescinded in the Contracts with Lesion - Lesion is the injury which one of the parties
cases established by law. suffers by virtue of a contract which is disadvantageous for him. To
give rise to rescission, the lesion must be known or could have been
Rescission – a remedy granted by law to the contracting parties and known at the time of making of the contract, and not due to
even to third persons, to secure the reparation of damages caused to circumstances subsequent thereto or unknown to the parties.
them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the Contracts of Guardians – those entered into by the guardians within
celebration of said contract. their power of administration. (same for those entered into by
representative of absentees.)
Rescission in 1191 and 1380 both presuppose contracts validly
entered into & existing, and both require mutual restitution when Contracts in Fraud of Creditors – these are contracts executed with the
declared proper. intention to prejudice the rights of creditors. Existence of intention to
prejudice creditors should be determined, either by the presumption
DIFFERENCES established by article 1387 or by the proofs presented in the trial of the
1191 1380 case.
May be demanded only by a party May be demanded by third
to the contract persons prejudiced to the contract Requisites for Rescission (made in fraud of creditors):
May be denied by the court when Such reason does not affect the
there is sufficient reason to justify right to ask for rescission under
1. That the plaintiff asking for rescission has a credit priorto the
the extension of time this chapter
Non-performance is the only Various alienation, although demandable later;
ground 2. That the debtor has made a subsequent contract conveying
Applies only to reciprocal Both unilateral or reciprocal a patrimonial benefit to a third person;
obligations obligations 3. That the creditor has no other legal remedy to satisfy his
claim, but would benefit by the rescission of the conveyance
to the third person;
Requisites of Rescission: 4. That the act being impugned is fraudulent;
5. That the third person who received the property conveyed, if
(1) The contract must be a rescissible contract, such as those it is by onerous title, has been an accomplice.
mentioned in art 1381 and 1382.
(2) The party asking for rescission must have no other legal Badges of Fraud (at least 2 must occur):
means to obtain reparation for the damages suffered by him
(1383). 1. The fact that the consideration of the conveyance is
(3) The person demanding rescission must be able to return inadequate;
whatever he may be obliged to restore if rescission is 2. A transfer made by a debtor after suit has been begun and
granted (1385). while it is pending against him;
(4) The things which are the object of the contract must not 3. A sale upon credit by an insolvent debtor;
have passed legally to the possession of a third person 4. Evidence of large indebtedness or complete insolvency;
acting in good faith (1385). 5. The transfer of all or nearly all of his property by a debtor,
(5) The action for rescission must be brought within the especially when he is insolvent or greatly embarrassed
prescriptive period of 4 years (1389). financially;
6. The fact that the transfer is made between father and son,
when there are present any of the above circumstances; and
7. The failure of the vendee to take exclusive possession of all
the property.
Obligations and Contracts 4th Examination Coverage
Art. 1382. Payments made in a state of insolvency for obligations
to whose fulfillment the debtor could not be compelled at the time
they were effected, are also rescissible.

Art. 1383. The action for rescission is subsidiary; it cannot be

instituted except when the party suffering damage has no other
legal means to obtain reparation for the same.

No Other Remedy – the plaintiff asking for rescission must prove that
he has no other legal means to obtain reparation.

Art. 1384. Rescission shall be only to the extent necessary to

cover the damages caused.

Effect of Rescission – the rescission is only in favor of the plaintiff

creditor; not of all the creditors. The extent of the revocation is only to
the amount of the prejudice suffered by the creditor. If the claim of the
creditor is less than the value of the thing fraudulently alienated, the
excess remains with the transferee, even if he acted in bad faith
because the action is valid. Strangers to accion pauliana cannot
benefit from its effects.

Art. 1385. Rescission creates the obligation to return the things

which were the object of the contract, together with their fruits,
and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he
may be obliged to restore.

Neither shall rescission take place when the things

which are the object of the contract are legally in the possession
of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded

from the person causing the loss.
Obligations and Contracts 4th Examination Coverage
VOIDABLE CONTRACTS Art. 1393. Ratification may be effected expressly or tacitly. It
understood that there is a tacit ratification if, with knowledge of
Art. 1390. The following contracts are voidable or annullable, even the reason which renders the contract voidable and such reason
though there may have been no damage to the contracting having ceased, the person who has a right to invoke it should
parties: execute an act which necessarily implies an intention to waive his
right.
(1) Those where one of the parties is incapable of giving
consent to a contract; Art. 1394. Ratification may be effected by the guardian of the
(2) Those where the consent is vitiated by mistake, incapacitated person.
violence, intimidation, undue influence, or fraud.
Art. 1395. Ratification does not require the conformity of the
These contracts are binding, unless they are annulled by a proper contracting party who has no right to bring the action for
action in court. They are susceptible of ratification. annulment.

Concept of Voidable Contracts – these contracts are existent, valid, Art. 1396. Ratification cleanses the contract from all its defects
and binding, although they can be annulled because of want of from the moment it was constituted.
capacity or vitiated consent of one of the parties; but before annulment,
they are effective and obligatory between the parties. Effect of Ratification – after a contract has been validly ratified, no
action to annul the same can be maintained based upon defects
DIFFERENCES relating to its original validity. It retroacts to the moment when the
NULLITY RESCISSION contract was entered into.
1. declares the inefficacy which 1. merely produces that
the contract already carries in inefficacy, which did not exist Art. 1397. The action for the annulment of contracts may be
itself essentially in the contract instituted by all who are thereby obliged principally or
2. to be cured, requires an act of 2. to be ineffective, needs no subsidiarily. However, persons who are capable cannot allege the
ratification ratification incapacity of those with whom they contracted; nor can those
3. direct influence of public 3. private interest alone governs who exerted intimidation, violence, or undue influence, or
interest is noted employed fraud, or caused mistake base their action upon these
4. based on a vice of a contract 4. compatible with the perfect flaws of the contract.
which invalidates it validity of the contract
5. a sanction; law predominates 5. a remedy; equity predominates (1398 & 1399 – consent must be vitiated)
6. demanded only by parties to 6. may be demanded by third
the contract persons affected by it Art. 1398. An obligation having been annulled, the contracting
. parties shall restore to each other the things which have been the
subject matter of the contract, with their fruits, and the price with
In voidable contracts, the court has first to set aside and render its interest, except in cases provided by law.
ineffective by its judgment the contract which theretofore is valid and In obligations to render service, the value thereof shall be the
producing legal effect, before the defendant can be exempt from basis for damages.
compliance therewith; hence, the attack against its validity must be
directly made in an action or in a counterclaim for that purpose, with Mutual Restitution – the effect of annulment of the contract is to wipe it
the consequences flowing from the declaration of nullity. out of existence, and to restore the parties, in so far as legally and
equitably possible, to their original situation before the contract was
Art. 1391. The action for annulment shall be brought within four entered into. (Each party must return to the other whatever he may
years. have received by reason of the contract). Only the contracting parties
may invoke restitution.
This period shall begin:
Art. 1399. When the defect of the contract consists in the
incapacity of one of the parties, the incapacitated person is not
In cases of intimidation, violence, or undue influence,
obliged to make any restitution except insofar as he has been
from the time the defect of the consent ceases.
benefitted by the thing or price received by him.
In case of mistake or fraud, from the time of the
Incapacitated Party – the provisions of this article exclusively refer to
discovery of the same.
nullity arising from incapacity of one of the contracting parties.
And when the action refers to contracts entered into by
Profit by Incapacitated – it is not necessarily a material and permanent
minors or other incapacitated persons, from the time the
increase in fortune, but any prudent beneficial use by the incapacitated
guardianship ceases.
of the thing he received, for his necessities, social position, or
discharge of duties to others; thus, there is benefit or profit, even
*applies to the action for annulment, and to the defense of nullity. without increase of fortune, if the thing received is used for food,
clothing, dwelling, health requirements, etc. The proof of such benefit
Art. 1392. Ratification extinguishes the action to annul a voidable is incumbent upon the party who has capacity.
contract.

Requisites of Ratification:
Art. 1400. Whenever the person obliged by the decree of
1. That the contract is a voidable or annullable contract, or one annulment to return the thing cannot do so because it has been
in which the consent of one party is defective. lost through his fault, he shall return the fruits received and the
2. That the ratification is made with knowledge of the cause for value of the thing at the time of the loss, with interest from the
nullity. same date.
3. That at the time the ratification is made, the cause of nullity
has already ceased to exist. Art. 1401. The action for annulment of contracts shall be
extinguished when the thing which is the object thereof is lost
Obligations and Contracts 4th Examination Coverage
through the fraud or fault of the person who has a right to
institute the proceedings.

If the right of action is based upon the incapacity of any

one of the contracting parties, the loss of the thing shall not be an
obstacle to the success of the action, unless said loss took place
through the fraud or fault of the plaintiff.

Art. 1402. As long as one of the contracting parties does not

restore what in virtue of the decree of annulment he is bound to
return, the other cannot be compelled to comply with what is
incumbent upon him.

Loss of Thing by Plaintiff:

- If through his fraud or fault, he cannot ask for annulment

pursuant to Art 1401. The action is extinguished, even if at
the time of the loss the plaintiff was still a minor or was
insane.
- If through fortuitous event, action is not extinguished but
defendant cannot be obliged to make restitution to the
plaintiff pursuant to Art 1402. (res perit domino – the owner
thereof must bear the loss by fortuitous event)