Defective Contracts

Defective contracts are those which may be relatively ineffective in

relation to certain parties. The following are the kinds of defective contracts,
and in the order of their defectiveness:
a) Rescissible Contracts
b) Voidable Contracts
c) Unenforceable Contracts
d) Void or Inexistent Contracts

Rescissible Contracts
Those which have caused a particular economic damage either to one
of the parties or to a third person and which may be set aside even if valid. It
may be set aside in whole or in part, to the extent of the damage caused.

Contracts that are rescissible.

1. Entered into by persons exercising fiduciary capacity:
a. Entered into by guardian whenever ward suffers damage more than one-
fourth of value of property.
EXAMPLE:

A is the guardian of B, who is a minor. A sells the property of B worth

400,000 for only 300,000.

The contract of sale cannot be rescinded because the lesion is not more
than one-fourth. However, if the property is sold for less than 300,000, B
can rescind the sale by proper action in court upon reaching the age of
majority.
 b. Agreed upon in representation of absentees, if absentee suffers lesion
by more than one-fourth of value of property.
c. Contracts where rescission is based on fraud committed on creditor or
accion pauliana.
d. Objects of litigation. Contract entered into by defendant without
knowledge or approval of litigants or judicial authority.
EXAMPLE:

A sues B for the recovery of a car. In this case, the car is a “thing under
litigation.”

If, during the pendency of the case, B sells the car to C without the
approval of A or of the court, the sale is rescissible at the instance of A in
case he wins in his suit for the recovery of the said car unless C is in legal
possession of the car in good faith. A, however may protect his right by filing
a notice of lis pendens or suit pending.

If the action involves personal property, A may petition the court for
the issuance of an order of attachment or the appointment of a receiver to
place the property in custodia legis.

e. Payment by an insolvent – on debts which are not yet due or prejudices

claim of others.
2. Payments made in state of insolvency:
a. Plaintiff has no other means to maintain reparation.
b. Plaintiff must be able to return whatever he may be obliged to return
due to rescission.
c. The things must not have been passed to third persons in good faith.
 d. It must be made within 4 years. 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.

What are the requisites before a contract entered into in fraud of

creditors may be rescinded?
1. There must be credit existing prior to the celebration of the contract.
2. There must be fraud, or at least, the intent to commit fraud to the
prejudice of the creditor seeking rescission.
3. The creditor cannot in any legal manner collect his credit (subsidiary
character of rescission); and
4. The object of the contract must not be legally in possession of a third
person in good faith.
 Voidable Contracts
A voidable or annulable contract is an agreement with legal validity but
may be invalidated by a court action on the grounds of incapacity of one of
the parties to give consent or consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud.
This defective contract may either be annulled or ratified by a court.

Characteristics of Voidable Contract

A contract is voidable:
 If one of the parties has no capacity to give consent.
 If the consent is invalidated by mistake, violence, intimidation,
undue influence, or fraud.

Such contract raises an action for:

 Annulment to invalidate it.
 Ratification to verify its validity.

Annulment of Voidable Contract

A voidable contract may be invalidated through the remedy of
annulment, which restores the parties to the positions they would have had if
the contract had not been made. Such annulment is applicable even though
the contract has not yet cause damage to the contracting parties.

A direct court action for annulment must be brought within a four-

year period, which begins:
 In case of intimidation, violence, or undue influence, from the time
such defect ends. Before that time, the consent is still being vitiated
 and, therefore, the victim cannot be expected to bring an action in
court.

 In case of mistake or fraud, from the time of the discovery of such

defect. This must be so because before the time of discovery, the
innocent party is unaware of the reason which renders the contract
voidable and cannot also be expected to bring an action in court.
Furthermore, the guilty party should not be rewarded for
successfully hiding the fraud.

 In case of contracts entered into by minors or a person’s incapacity

to give consent, from the time the guardianship ends. An
incapacitated person has no capacity to sue.

Ratification of Voidable Contract

A voidable contract may be verified as valid through the remedy of
ratification, either express or implied, which extinguishes the action for
annulment. Ratification cleanses the contract from all its defects from the
moment it was constituted.
Requisites of ratification.
1) For implied ratification:
a. There must be knowledge of the reason which renders the
contract voidable.
b. Such reason must have ceased; and
c. The injured party must have executed an act which necessarily
implies an intention to waive his right.
EXAMPLES:
1) A, a minor, sold a vintage car he inherited from his grandfather to
B. upon reaching the age of majority, with full knowledge of his rights to the
car, instead of invalidating the contract, collected the unpaid balance of the
purchase price from B.
 In this case, there is an implied ratification by A.
2) In an action for annulment of a contract of sale, A alleged that the
sale of the vintage car was executed by him through the threat and
intimidation of B. However, A deposited the check made to him by B for the
purchase price and withdrew the money from time to time.
The contract is deemed ratified.

2) The requisites for express ratification are the same as those for implied
ratification except that the former is effected expressly.

The court action for ratification must be brought by:

 The aggrieved or injured party himself.
 The guardian of the incapacitated injured party.
As legal representative of their wards, guardians have the power to
contract on their behalf. Hence, they may also ratify the contracts entered into
by their wards.
In case the contract is voidable on the ground of mistake, ratification
can be made by the party whose consent is vitiated.

Right of strangers to bring action.

One who is not a party to the contract or an assignee, or does not
represent those who took part has, under Article 1397, no legal capacity to
challenge the validity of such contract. They are not obliged principally or
subsidiarily, unless they can show detriment which would positively result to
them from the contract in which they had no participation.
EXAMPLES:
1) A sold a vintage car to B. the consent of A was vitiated by fraud.
Subsequently, A sold the same vintage car to C.
 In this case, C can bring an action to annul the sale of the vintage car.

2) A sold a piece of urban land to B. by the provisions of the law, A or B

can bring an action to annul the contract. But C, adjoining owner of A,
cannot ask for the annulment of the sale as C is not obliged principally
nor subsidiarily under the contract.

However, C may question the sale if under the law (Art. 1622) he has a
right to redemption or repurchase the property from B. in this case, C
would be prejudiced, if the sale is not set aside. The exercise of the
right of redemption of C will in effect annul the contract of sale
between A and B.

Duty of mutual restitution upon annulment.

1) If the contract is annulled, the parties, as general rule, must restore to
each other the subject matter of the contract with its fruits and the price
thereof with legal interest.

2) In personal obligations, where the service had already been rendered,

the value thereof with the corresponding interest, is the basis for
damages recoverable from the party benefited by the service.
Effect of loss of the thing to be returned.
1) If the thing to be retuned is lost without the fault of the person obliged
to make the restitution, there is no more obligation to return such thing.
But in such case, the other cannot be compelled to restore what in
virtue of the decree of annulment he is bound to return.

2) If it is lost through his fault, his obligation is not extinguished but is

converted into an indemnity for damages consisting of the value of the
thing at the time of the loss with interest from the same date and the
fruits received from the time the thing was given to him to the time of
its loss.
EXAMPLE:
A sold his Labrador dog to B. Soon after the sale, A petitioned and the
contract was annulled by the court. But the dog died in the possession of B
through his fault.
Under Article 1400, B must pay the value of the dog at the time of its
death, with interest from the same date. If the dog had given birth, the young
must also be delivered as the fruit of the said animal.

“The action for annulment of contracts shall be extinguished when the

thing which is the object is lost through the fraud or fault of the person
who has a right to institute the proceedings.”