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DEFECTIVE CONTRACTS
RESCISSIBLE CONTRACTS
- a contract which has caused a particular damage to one of the
parties or to a third person, and which for equitable reasons may
be set aside even if its valid.
- Rescission is principally based on some economic damage
(lesion) as a result of the inequitable conduct by one party
Art. 1381. Contracts validly agreed upon may be rescinded in
cases established by law.
Requisites of rescission:
1.
Contract must be rescissible (1381&1382)
2.
Party asking for rescission must have no other legal means
to obtain reparation for damages caused (1383)
3.
Person demanding rescission must be able
to return
whatever he may be obliged to restore if rescission is
granted (1385)
4.
The thing which are the object of the contract must not have
passed legally to the possession of a third person acting in
god faith (1385)
5.
The action must be brought within 4 years (1389)
Partial rescission is possible; benefits only the creditor who has asked
for rescission
of
of
of
of
LESSION- the injury w/c one of the parties suffer by virtue of a contract
w/c is disadvantageous for him.
-must be known or could have been known at the time of the making of
the contract, and not due to circumstances subsequent thereto or
unknown to the parties
REQUISITES FOR ACCION PAULIANA
1.
the plaintiff has a credit prior to the alienation, although
demandable later*
2.
The debtor made a subsequent contract conveying a
patrimonial benefit to a 3rd person
3.
The creditor has no legal means to satisfy his claim, but
would benefit by the rescission of the conveyance to the 3 rd
person
4.
The act impugned is fraudulent
5.
The 3rd person who received the property, if by onerous title
has been an accomplice
*At the time AP was brought, the credit must already be due
-Judgment has a retroactive effect to the date when the credit was
constituted.
TEST OF FRAUD
-the fraud that justifies the AP is not characterized by the intention to
injure the creditor, but by the knowledge that damage would be
inflicted. This knowledge exists when the debtor knows that his
property cannot be alienated without producing evident injury to his
creditors with existing claims, whether they be due or not.
SIGNS OF FRAUD
1.
The fact that consideration of conveyance is inadequate
2.
A transfer made by a debtor after suit has begun and while
pending against him
3.
A sale upon a credit by an insolvent debtor
4.
Evidence of large indebtedness/insolvency
5.
Transfer of all or nearly all the debtors property, esp when
he is insolvent or greatly embarrassed financially
6.
The fact that the transfer is made between father and son,
when any of the circumstances above are present
7.
Failure of the vendee to take exclusive possession of the
property
Gratuitous alienation- simple knowledge that creditor would suffer
injury
- good faith of the transferee does not protect him because
he gave nothing and so he is not prejudiced by the
rescission.
Onerous alienation- motivated by an intention to prejudice
- transferee must be a party to the fraud; if he acts in good
faith, there can be no rescission because having given
something, his position would be similar to that of the
SUBSEQUENT TRANSFER
If transferee is in good faith; good/ bad faith of next transferee is
immaterial;
If transferee is in bad faith; the next transferee is only liable if he
is in bad faith.
So in this case, the first acquirer shall be liable, then as we said,
he transfers it to T2 and then to T3, the liability will be only upto
T3. He will not be liable to return, precisely because he has
transferred it, but he will be liable for damages. Because of the
impossibility to return what he is supposed to return to the debtor
for purposes of answering the liabilities of the debtor.
Now suppose it does not fall under numbers 1 and 2. When shall you
start counting the four year period? That was answered in the case of
Cheng vs. CA.
CHENG v CA
Article 1389 of the Civil Code simply provides that, The
action to claim rescission must be commenced within four years.
Since this provision of law is silent as to when the prescriptive
period would commence, the general rule, i.e, from the moment
the cause of action accrues, therefore, applies. Article 1150 of the
Civil Code is particularly instructive:
Art. 1150. The time for prescription for all kinds of
actions, when there is no special provision which ordains
otherwise, shall be counted from the day they may be
brought.
Indeed, this Court enunciated the principle that it is the legal
possibility of bringing the action which determines the starting
point for the computation of the prescriptive period for the action.
Article 1383 of the Civil Code provides as follows:
Art. 1383. An 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.
It is thus apparent that an action to rescind or an accion pauliana
must be of last resort, availed of only after all other legal remedies
have been exhausted and have been proven futile.
An accion pauliana accrues only when the creditor discovers that
he has no other legal remedy for the satisfaction of his claim
against the debtor other than an accion pauliana. The accion
pauliana is an action of a last resort.
The period begins to run after the aggrieved party has unsuccessfully
exhausted all possible legal remedies to enforce the obligation or
recover losses, and from the time
1.The incapacity of persons under guardianship terminates, in cases of
persons under guardianship
2.The absentee learns of the contract, in cases of absentees
3.The fraud is discovered, for contracts entered in fraud of creditors
4.Of the knowledge of the transaction, for contracts entered with
respect to things under litigation without approval
VOIDABLE CONTRACTS
The capacity of a party is not a requisite sine qua non of a contract; its
want is only a ground for annulment.
Ratification (1392-1395)
Art. 1392. Ratification extinguishes the action to annul a
voidable contract.
Ratification cleanses the contract of its defects, and it shall retroact to
the day of the inception of the contract. It has retroactive effect, and it
cleanses the contract of whatever defects it creates. So it becomes a
valid contract.
Art. 1396. Ratification cleanses the contract from all its defects
from the moment it was constituted.
Ratification is merely a declaration of the waiver of the right to ask for
annulment, hence it retroacts to the moment when the contract is
entered into
If ratification has been made, no action to annul the same can be
maintained based on the same defects relating to its original validity.
Rights of innocent 3rd persons must not be prejudiced.
Annulment
Art. 1397. The action for the annulment of contracts may be
instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot allege
the incapacity of those with whom they contracted; nor can
those who exerted intimidation, violence, or undue influence,
or employed fraud, or caused mistake base their action upon
these flaws of the contract.
PERSONAL REQUISITES
1.
The plaintiff must have an interest
2.
The victim, not the party responsible for the defect must
assert
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.
Contract is voidable
Person ratifying must know the reason for the contract being
voidable (cause is known)
Cause must not exist/continue to exist anymore at time of
ratification
Ratification is made expressly or by an act implying a waiver
of action to annul
Person ratifying must be the injured party*
The party suffering from the incapacity is only bound to return what he
has profited by the thing sold or the price received.
UNENFORCEABLE CONTRACTS
-does not produce any effect unless ratified; valid but no court action
may arise therefrom.
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.
1.
2.
Any party may invoke and nullity may be set up against any person
who asserts a right arising from the void contract.
An action on the Contract to declare its inexistence is necessary when
it has already been fulfilled. The intervention of a competent court is
necessary to decree the restitution of what has been given. The
judgment will retroact to the day when the contract was entered into.
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.
Nullity is permanent, however ratification may take the form of a new
contract, in which case the validity shall be determined only by the
circumstances at the time of the execution of such new contract.
The object which was illegal at the time of the first contract, may have
already become lawful at the time of the ratification or second
contract. The ratification would not retroact to the date of the 1 st
contract.
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
Art. 1418. When the law fixes, or authorizes the fixing of the
maximum number of hours of labor, and a contract is entered
into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation
for service rendered beyond the time limit.
NATURAL OBLIGATIONS
Art. 1423. Obligations are civil or natural. Civil obligations give
a right of action to compel their performance. Natural
obligations, not being based on positive law but on equity and
natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor,
they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set
forth in the following articles.
Art. 1430. When a will is declared void because it has not been
executed in accordance with the formalities required by law,
but one of the intestate heirs, after the settlement of the
debts of the deceased, pays a legacy in compliance with a
clause in the defective will, the payment is effective and
irrevocable.
ESTOPPEL
b.
Art. 1424. When a right to sue upon a civil obligation has
lapsed by extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has delivered or
the value of the service he has rendered.
c.
d.
Laches v Prescription
LACHES
Effect of delay
A question of inequity
Not statutory
Apples to equity
Not based on fixed time
PRESCRIPTION
Fact of delay
Matter of time
statutory
Applies at law
Based on fixed time
ESTOPPEL BY ACQUIESCENCE
- a person is prevented from maintaining a position inconsistent with
one in which he has as acquiesced.
Art. 1432. The principles of estoppel are hereby adopted
insofar as they are not in conflict with the provisions of this
Code, the Code of Commerce, the Rules of Court and special
laws.
1.
2.
Art. 1434. When a person who is not the owner of a thing sells
or alienates and delivers it, and later the seller or grantor
acquires title thereto, such title passes by operation of law to
the buyer or grantee.
A person who sells property when he did not have title to it, cannot
deny validity to the sale after he has acquired title. The vendee is also
deemed a purchaser in good faith.
Art. 1435. If a person in representation of another sells or
alienates a thing, the former cannot subsequently set up his
own title as against the buyer or grantee.
setting up the estoppel acted and parted with value or extended credit
on the faith of such apparent ownership or authority.
Applies to a situation wherein you allow your friend to borrow your
jewelry and pawn. And later on also made use of the portion of the
proceeds of the loan. And later on you had a change of heart and tells
the owner of the pawnshop that you are the owner. that is estoppel.
Because there is estoppel in the acceptance of benefits.
Art. 1439. Estoppel is effective only as between the parties
thereto or their successors in interest.
A stranger to a transaction is neither bound by, nor in position to take
advantage of, an estoppel arising therefrom.
Estoppel binds privies in blood, like heirs, and in estate, like grantees
Mutuality is an essential element of estoppel.
NO ESTOPPEL AGAINST THE GOVERNMENT; except by laches (St. Jude v
Republic)