Defective Contracts FOUR KINDS OF DEFECTIVE CONTRACTS

a) Rescissible contract is valid until rescinded; there is a sort of extrinsic defect consisting of an economic damage or lesion

b) Voidable contract is valid until annulled. It cannot be annulled however if there is ratification. The effect is more or less intrinsic as in the case of vitiated consent

c) Unenforceable contract cannot be sued upon or enforced, unless it is ratified. In a way it may be considered as a validable transaction, that is, it has no effect now, but it may be effective upon ratification

d) Void contract is one that has no effect at all; it cannot be ratified or validated

ARTICLE 1380

Contracts validly agreed upon may be rescinded in the cases established by law

RESCISSION

> 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 rights

REQUISITES FOR RESCISSION

There must be at the beginning, either a valid or a voidable contract

But there is an economic and financial prejudice to someone (a party or a third person) Requires mutual restitution

ARTICLE 1381

The following contracts are rescissible:

Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; 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 to rescission

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

REQUIREMENTS FOR THE CONTRACT TO BE RESCINDED

The debtor-payor must have been insolvent

The debt was not yet due and demandable

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

ARTICLE 1384

Rescission shall be only to the extent necessary to cover the damages caused

ARTICLE 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

REQUISITES BEFORE THE ACTION FOR RESCISSION CAN BE BROUGHT

>The plaintiff must be able to return what has been received by virtue of the rescissible contract (except: prejudiced creditors)

>The object of the contract is not in possession of a third person in good faith

>There must be no legal remedy

>The action must be brought within the proper prescriptive period

ARTICLE 1386

Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts

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 the 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.

BADGES OF FRAUD

> Wherein it has indicated some circumstances that a certain alienation has been made in fraud of creditors

BADGES OF FRAUD

1. The fact that the consideration of the conveyance is fictitious or inadequate 2. A transfer made by the debtor after suit has been begun and while it is pending against him 3. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially 4. Evidence of large indebtedness or complete insolvency 5. The fact that the transfer is made between the father and son 6. The failure of the vendee to take exclusive possession of all the property sold

ARTICLE 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

EFFECT OF BAD FAITH

The acquirer must return or indemnify

SUBSEQUENT TRANSFERS

>If the first transferee is in good faith, the good or bad faith of the next transferee is not important

>If the 1st transferee is in bad faith, the next transferee is liable only if he is also in bad faith

ARTICLE 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