DEFECTIVE CONTRACTS

4 KINDS OF DEFECTIVE CONTRACTS

1. Rescissible
a. Valid until rescinded; there is a sort of extrinsic defect consisting of an
economic damage or lesion.
b. All the essential requisites of a valid contract exist but by reason of
injury or damage to third person, the contract may be rescinded.
2. Voidable
a. Valid till annulled. The defect is more or less intrinsic, as in the case of
vitiated consent.
3. Unenforceable
a. Cannot be sued upon or enforced, unless it is ratified.
4. Void
a. One that has no effect at all.
Art. 1380. RESCISSION

It is 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.
It is a remedy granted by law to the contracting parties both to contracting
parties and to third persons in order to secure reparation of damages caused
them by a contract, even if the contract be valid, by means of restoration of
things to their condition prior to the celebration of said contract.
It is a relief to protect one of the parties or a third person from all injury and
damages which the contract may cause, to protect some preferential right.
Requisites:
o There must be a valid or voidable contract
o There is an economic or financial prejudice to someone
o Requires mutual restitution
2 kinds:
o Rescission mentioned in Art. 1380 of the New Civil Code.
o Rescission mentioned in Art. 1191 of the New Civil Code
Rescission in general (1380):
o Based on lesion or fraud upon creditors
o The action instituted by either of the contracting parties or by the third
person
o The courts cannot grant a period or term within which to comply
o Non-performance by the other party is immaterial
Rescission (1191):
o Based on non-performance or non-fulfilment of the obligation
o The action maybe instituted only by the injured party to the consent
o In some cases, the courts may grant a term
o Non-performance by the other party is important

Art. 1381. RESCISSIBLE CONTRACTS

Contracts entered in behalf of wards which suffered lesion

Contracts entered in representation of the absentees who suffered lesion
Those undertaken in fraud of creditors, when the latter cannot in ay manner
collect claims due them
o Accion pauliana
o Requites:
There must be a creditor who became such prior to the contract
sought to be rescinded
There must be an alienation made subsequent to such credit
The party alienating must be in bad faith
There must be no other remedy for the prejudiced creditor
Those things in litigations
Other instances
o Partitions, result of deterioration, right given to an unpaid seller, sale of
real estate

Art. 1382. PREMATURE PAYMENTS MADE IN A STATE OF INSOLVENCY

Requisites:
o The debtor-payer have been insolvent
o The debt was not yet due and demandable

Art. 1383. RESCISSION NOT A PRINCIPAL REMEDY

It is only subsidiary and may only be availed of by the injured party if it has
no other means of seeking redress or reparation for the damages caused.

Art. 1384. PARTIAL RESCISSION

Art. 1385. MUTUAL RESTITUTION

Requisites:
o The plaintiff must be able to return what has been received by the
virtue of the rescissible contract
o The thing object of the contract is not in legal possession of third
person in good faith
o There must be no other legal remedy
o He action must be brought within the proper perspective period
What should be returned in rescinding a contract?
o Object of the contract, with its fruits
o Price with its interest

Art. 1386. EFFECTS IF CONTRACT WERE JUDICIALLY APPROVED

ART. 1387. PRESUMPTION OF FRAUD

In the case of:

o Gratuitous alienations
Presumed fraudulent when the debtor did not reserve sufficient
property to pay all debts contracted before the donation.
o Onerous alienations
Presumed fraudulent when made by persons
Against whom some judgement has been rendered in any
instance
Or against whom some writ of attachment has been
issued
Badges of fraud circumstances indication that a certain alienation has been
made in fraud of creditors
o Examples please see page 754

Art. 1388. EFFECT OF BAD FAITH

The acquirer must return or indemnify

Due to any cause includes a fortuitous event
Subsequent transfers:
o If the first transferee is in good faith, the good or bad faith of the next
transferee is not important
o If the first transferee is in bad faith, the next transferee is liable only if
he is also in bad faith

Art. 1389. PRESCRIPTIVE PERIOD FOR RESCISSION

General rule: 4 years from the date the contract was entered into
Exceptions:
o Persons under guardianship 4 years from termination of incapacity
o Absentees 4 years from the time the domicile is known
Who can bring the action?
o The injured party
o His heir or successor-in-interest
o Creditors of the first and second by virtue of art. 1177 of the civil code
(accion subrogatoria)

1390. VOIDABLE CONTRACTS

Rescissible vs. Voidable contracts

RESCISSION

ANNULMENT

The basis here is lesion

The defect here is external

Subsidiary action
Remedy
Private interest governs
Equity predominates
Plaintiff may be a part or a third person
There must be damage to the plaintiff
If plaintiff is indemnify, rescission cannot
prosper
Compatible with the perfect validity of
the contract
Ratification is not required
Grounds for annulment
o Incapacity to consent
o Vitiated consent

The basis here is vitiated consent or

incapacity to consent
The defect here is intrinsic
Principal action
sanction
Public interest governs
Law predominates
Plaintiff must be a party to the contract
Damage id immaterial
Indemnity here is no bar to the
prosecution of the action
Defect is presupposed
Ratification is required

Art. 1391. PRESCRIPTION

Effect of prescription:
o If the action has prescribed, the contract can no longer be set aside
In cases of intimidation, violence or undue influence from the time the
defect of the consent ceases
On case of mistake or fraud from the time of the discovery of the same
Contract entered by minors from the time the guardianship ceases

Art. 1397. PERSON WHO MAY ASK FOR ANNULMENT

The victim and not the guilty person or his successor.

Exception:
o A person who is not obliged principally or subsidiarily in a contract may
exercise an action for nullity of the contract if he is prejudiced in his
rights with respect to one of the contracting parties, and can show the
detriment which could positively result to him from the contract in
which he had no intervention.
Creditors of the victim cannot ask for annulment for they are not bound by
the contract.
Intimidation or fraud by a minor cannot sue for annulment
o Estoppel

Art. 1398. EFFECTS OF ANNULMENT

If the contract has not yet been complied with, the parties are excused from
their obligations.

If the contract has already been performed, there must be mutual restitution
of:
o The thing with fruits
o The price with interest

Art. 1399. RESTITUTION BY INCAPACITATED PARTY

Restitution is only to the extent of enrichment

The capacitated person has the burden of showing such enrichment

Art. 1400. VALUE MAY BE SUBSTITUTED FOR THING ITSELF

The value of the thing with interest substitutes for the thing itself that was
lost thru the partys fault.

Art. 1401. EFFECT OF LOSS OF OBJECT THROUGH FRAUD OR FAULT OF THE VICTIM
Art. 1402. REASON WHY ONE PARTY CANNOT BE COMPELLED IF OTHER PARTY DOES
NOT RESTORE