Law101: Chapter 6-9

Art 1405

Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

Meaning of Art 1397

Gen rule the action for annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily Requisites: the plaintiff must have an interest in the contract the action must be brought by the victim and not the party responsible for the defect.

Art 1407

In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

Article 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 1396

Ratification cleanses the contract from all its defects from the moment it was constituted

Art 1395

Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment

ARt 1392

Ratification extinguishes the action to annul a voidable contract

Art 1394

Ratification may be effected by the guardian of the incapacitated person

Art 1393

Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has the right to invoke it should execute an act which necessarily implies an intention to waive his right.

Kinds of defective contracts

Rescissible Contracts-are valid because all the essential requisites of a contract exist but by reason of economic injury or damage to one of the parties or to third persons, such as creditors, the contract may be rescinded Voidable Contracts- are also valid until annulled unless there have been a ratification. In a voidable contract, the defect is caused by vice of consent Unenforceable contracts-cannot be sued upon or enforced unless they are ratified. void and inexistent contracts-these are absolutely null and void contracts. It has no effect at all and cannot be ratified.

Rescissible vs void

Rescissible: an action to rescind is founded upon and presupposes the existence of a contract Void a contract which is null and void is no contract at all and hence could not be the subject of rescission

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.

Art 1386

Rescission referred to in No.s 1 and 2 of ARticle 1381 shall not take place with respect to contracts approved by the courts.

Article 1384

Rescission shall be only to the extent necessary to cover damages caused. (this is because the purpose of rescission it to repair the damages caused)

ARt 1401

The action for annulment of contracts 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. (the action for annulment shall be extinguished only if the loss is through the fault or fraud of the plaintiff) 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.(the right of action is based upon the incapacity of any one of the contracting parties. whether the right of action is based upon incapacity or not, the rule is the same)

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 cases of mistake or fraud, from the time of the discovery of the same. And when action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases.

ARt 1410

The action or defense for the declaration of the inexistence of a contract does not prescribe

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.

Art 1409: VOID AND INEXISTENT CONTRACTS

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.

Article 1381 Rescissible contracts

The following contracts are rescissible: 1. those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than 1/4 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 of rescission

Art 1390 Voidable contracts

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.

Art 1404

Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book.

ARt 1408

Unenforceable contracts cannot be assailed by third persons.(third persons cannot attack the validity of unenforceable contracts.

Void vs voidable contracts

Void a contract is inexistent and void from the very beginning when 1. its cause, object or purpose is contrary to law, morals, good customs, public order or public policy; 2. it is absolutely simulated or fictitious; 3. its cause or object did not exist at the time of the transaction; 4. its object is outside the commerce of men; 5. it contemplates an impossible service 6. the intention of the parties relative to the principal object of the contract cannot be ascertained, or 7. it is expressly prohibited or declared void by law. Voidable contract is one where 1. one of the parties is incapable of giving consent to a contract 2. the consent is vitiated by mistake, violence, intimidation, undue influence or fraud

Void vs voidable contracts

Void is one which has no force and effect from the very beginning. Hence, it is as if it has never been entered into and cannot be validated either by the passage of time or by ratification. There are 2 types of void contracts: 1. those where one of the essential requisites of a valid contract as provided for by the Art. 1318 of the CC is totally wanting, 2. those declared to be so under Art 1409 of the CC Voidable is one in which the essential requisites for validity under Art. 1318 are present, but vitiated by want of capacity, error, violence, intimidation, undue influence, or deceit.

Void vs voidable contracts

Void the action or defense for the declaration of the inexistence of a contract does not prescribe Voidable contract The action for annulment must be brought within four (4) years from the time the intimidation, violence, or undue influence ceases, or 4 years from the time of the discovery of the mistake or fraud

ARt 1406

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 parties may avail themselves of the right under Article 1357.

Art 1414

When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property

Art 1416

When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.

Art 1399

When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing price received by him ( is an exemption to the general rule of mutual restitution under the preceding article. it results that if the incapacitated person was not benefited, he is not obliged to restore what he had received but the other contracting party is still bound to return what he had received, whether he was benefited or not)

Art 1411

When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other and both shall be prosecuted. Moreover, the provisions of the Penal code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

Art 1400

Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.

Art 1415

Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person

Art 1388

Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them if there are two or more alienations, the first acquirer shall be liable first, and so on successively

Unenforceable contracts

a valid contract that, because of some technical defect, cannot be fully enforced; a contract that has some legal consequences but that may not be enforced in an action for damages or specific performance in the face of certain defenses, such as the statute of frauds

accion paulian presupposes the following

a. judgment b. issuance by the trial court of a writ of execution for the satisfaction of the judgment c. failure of the sheriff to enforce and satisfy the judgment of the court.

Action for annulment vs action for declaration of nullity

action for annulment is one filed where consent is vitiated by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence, or fraud. By its very nature, annulment contemplates a contract which is voidable, that is valid until annulled. it is binding until annulled. it may be ratified n has 4 year prescriptive period action for declaration of nullity of contract presupposes void contracts or one where all of the requisites prescribed by law for contracts are present but the cause, object or purpose are contrary to las. produces no legal effect n binding effect, neither may it be ratified and it is imprescriptible

voidable contracts

are existent, valid and binding although they can be annulled because of want of capacity or vitiated consent of one of the parties, but before annulment, they are effective and obligatory between parties.

Contracts in fraud of creditors

are those executed with the intention to prejudice the rights of creditors

Unenforceable contracts

are those that cannot be enforced or given effect in a court of law or sued upon by reason of certain defects provided by law until and unless they are ratified according to law.

Rescissible contracts

are those validly agreed upon because all the essential elements exist and, therefore, legally effective, but in the cases established by law, the remedy of rescission is granted in the interest of equity

complete note or memorandum

contains the names of the parties terms and conditions of the contract description of the property sufficient to render it capable of identification

Article 1380: rescissible contracts

contracts validly agreed upon may be rescinded in the cases established by law

Mutual restitution

entails the return of the benefits that each party may have received as a result of the contract. this means bringing the parties back to their original status prior to the inception of the contract.

Exceptions to the rule on in pari delicto

exceptions that permit the return of that which may have been given under a void contract to a. innocent party b. the debtor who pays usurious interest c. party repudiating the void contract before the illegal purpose is accomplished or before damage is caused to a third person and if public interest is subserved by allowing recovery d. incapacitated party if the interest of justice so demands e. party for whose protection the prohibition by law is intended if the agreement is not illegal per se but merely prohibited and if public policy would be enhanced by permitting recovery f. the party for whose benefit the law has been intended such as in price ceiling laws and labor laws

vices of consent

fraud intimidation violence undue influence mistake

Principle of in pari delicto or in equal fault

generally parties to a void agreement cannot expect the aid of the law, the courts leave them as they are, because they are deemed in pari delicto or in equal fault. In pari delicto is a universal doctrine which holds that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation, and where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other.

Effect of rescission

has the effect of unmaking the contract or its undoing from the beginning, and not merely its termination. Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. It has the effect of abrogating the contract in all parts.

Art 1412

if the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the ff rules shall be observed: 1. when the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking 2. when only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise

ARt 1413

interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment

Statute of Frauds

is a descriptive statute which requires certain classes of contracts to be in writing. The statue does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable it requires certain contracts to be evidenced by some note or memorandum in order to be enforceable. applicable only to executory contracts

Rescission

is a relief which the law grants on the premise that the contract is valid for the protection of one of the contracting parties and third persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract

rescission

is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract. It implies a contract, which even if initially valid, produces lesion or a pecuniary damage to someone.

Rescission (de leon)

is a 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 in which they were prior to the celebration of said contract

Action for annulment of contract

is one filed where consent is vitiated by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence, or fraud. By its very nature, annulment contemplates a contract which is voidable, that is valid until annulled. Such contract is binding on all the contracting parties until annulled and set aside by a court of law. It may be ratified. An action for annulment of contract has a four year prescriptive period.

voidable contracts

is one where 1. one parties is incapable of giving consent to a contract; 2. the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. The action for annulment must be brought within four years from the time the intimidation, violence or undue influence ceases, or four years from the time of the discovery of the mistake or fraud.

void contracts

is one which has no force and effect from the very beginning. hence, it is as if it has never been entered into and cannot be validated either by the passage of time or by ratification. There are two types of void contracts: those where one of the essential requisites of a valid contract as provided by Art 1318 of the CC is totally wanting, and those declared to be so under Art 1409 of the CC

Voidable

is one which the essential requisites for validity under Art. 1318 are present, but vitiated by want of capacity, error, violence, intimidation, undue influence, or deceit.

to rescind

is to declare a contract void at its inception and to put an end to its as though it never was

Presumption of fraud is not conclusive

it may be rebutted by satisfactory and convincing evidence

Action for declaration of nullity of contract

presupposes a void contract or one where all of the requisites prescribed by law for contracts are present but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, prohibited by law or declared by law to be void. Such contract as a rule produces no legal and binding effect even if it is not set aside by direct legal action. Neither may it be ratified. An action for the declaration of nullity of contract is imprescriptible.

Rescission vs annulment

rescission the basis is lesion (damage) The defect is external or extrinsic the action is subsidiary Plaintiff may be a party or a third person There must be damage to the plaintiff if the plaintiff is indemnified, rescission cannot prosper. Compatible with the perfect validity of the contract. To prevent rescission, ratification is not required. annulment the basis is vitiated consent or incapacity to consent the defect is intrinsic (in the meeting of the minds) the action is principal Plaintiff must be a party to the contract (whether bound principally or subsidiarily) damage to the plaintiff is immaterial Indemnity is no bar to the prosecution of the action A defect is presupposed. To prevent annulment, ratification is required.

ratification or confirmation

the act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity

article 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.

effects of ratification

the action to annul a voidable contract is extinguished, hence the contract becomes valid the contract is cleansed of its defect from the beginning

Accion pauliana

the action to rescind contracts in fraud of creditors

subsidiary remedy

the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted to. An action for rescission may not be raised or set up in a summary proceeding through a motion, but in an independent civil action and only after a full blown trial

Relatively simulated contract

the parties state a false cause in the contract to conceal their real agreement such a contract is relatively simulated. Here the parties' real agreement binds them

absolutely simulated

there is colorable contract but without any substance, bec. the parties have no intention to be bound by it. -void contract and the parties may recover from each other what they may have given under the contract

unauthorized contracts

those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers

Purpose of Statute of Frauds

to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged.

cancellation of a contract and its rescission

to rescind is to declare a contract void in its inception and to put an end to it as though it never were. it is not merely to terminate it and release parties from further obligations but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied had no contract ever been made termination of contract is congruent with an action for unlawful detainer. the termination or cancellation of contract would necessarily entail enforcement of its terms prior to the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. It may not under go judicial intervention, the parties themselves may exercise such option. only upon disagreement between parties as to how it should be undertaken may the parties resort to courts.

void vs voidable contracts

void a contract is inexistent and void from the very beginning when 1. its cause, object or purpose is contrary to laws, morals, good customs, public policy or order 2. it is absolutely simulated or fictitious 3. its cause or object did not exist at the time of the transaction 4. its object is outside the commerce of men 5. it contemplates an impossible service 6. the intention of the parties relative to the principal object of the contract cannot be ascertained or 7. it is expressly prohibited or declared void by law. The action or defense for the declaration of the in existence of a contract does not prescribe.

Effect if it is no longer possible to return the object of a contract

when it is no longer possible to return the object of the contract, an indemnity for damages operates as restitution. The important consideration is that the indemnity for damages should restore to the injured party what was lost.

insolvency

when the debtor has more liabilities than his assets

when is rescission permitted

when there is substantial and fundamental breach

Agreements within the scope of Statute of Frauds

1. Agreement not to be performed within 1 year from the making thereof 2. promise to answer for the debt, default, or miscarriage of another 3. agreement in consideration of marriage other than mutual promise to marry 4. Agreement for sale of goods, etc. at price not less than Php500 5. Agreement for leasing for a longer period than 1 year 6. Agreement for the sale of real property or of an interest therein 7. Representation as to the credit of a third person

Modes of ratification under the Statute

1. by failure to object to the presentation of oral evidence to prove the contract 2. by acceptance of benefits under the contract, in this case the contract is no longer executory and therefore, the Statute does not apply.

6 types of rescissible contracts

1. contracts entered into in behalf of wards-a person under guardianship by reason of some incapacity 2. contracts agreed upon in representation of absentees-a person who disappears from his domicile his whereabouts being unknown, and without leaving an agent to administer his property, must suffer lesion by more than 1/4 of the value of the property object of the contract to entitle him to the remedy of rescission 3. contracts undertaken in fraud of creditors 4.contracts which refer to things under litigation 5. other instances declared by law

requisites of ratification

1. the contract should be tainted with a vice which is susceptible of being cured 2. the confirmation should be effected by the person who is entitled to do so under law 3. it should be effected with knowledge of the reason which renders the contract voidable 4. the reason which renders the contract voidable should have already disappeared

badges of fraud

1. the fact that the consideration of the conveyance is fictitious or is inadequate 2. a transfer made by a debtor after suit has begun and while it is pending against him 3. a sale upon credit by an insolvent debtor 4. evidence of large indebtedness or complete insolvency 5. the transfer of all or nearly all of his property by a debtor, esp. when he is insolvent or greatly embarassed financially 6. the fact that the transfer is made between father and son, when there are present other of the above circumstances 7. the failure of the vendee to take exclusive possession of all the property

requisites of accion pauliana

1. the plaintiff asking for rescission has a credit prior to the alienation, although demandable after 2. the debtor has made a subsequent contract conveying a partrimonial benefit to a third person 3. the creditor has no other legal remedy to satisfy his claim 4. the act being impugned is fraudulent 5. the third person who received the property conveyed, if it is by onerous title, has been an accomplice in fraud

contracts that are unenforceable unless ratified

1. unauthorized contracts 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

Simulation of contract

Absolute relative

Article 1387

All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.

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 its interest, except in cases provided by law in obligations to render service, the value thereof shall be the basis for damages. (duty of mutual restitution upon annulment: the effect of annulment is to restore the parties to the status quo ante insofar as legally and equitably possible)

Art 1403: Unenforceable contracts

Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in 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 of 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.

Rescission described in Art 1380 and 1381 distinguished from Resolution referred to in Article 1191 and 1592

Article 1191 Rescission under this article is a principal action which seeks the resolution or cancellation of the contract. Rescission is equivalent to resolution referred to in Art 1191, which is based on the defendant's breach of faith, a violation of the reciprocity between the parties .As an action based on the binding force of a written contract, therefore, rescission (resolution) under this Article prescribes 10 years, which is the period of prescription of actions based on a written contract, thus the action to a written contract should be brought within ten years from the time the right of action accrues Rescission under Article 1191 is not akin to the rescission in article 1381. Rescission under this Article is a subsidiary action limited to cases of rescission for lesion as enumerated in said article. The action to claim rescission must be commenced within four years.

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.