Chapter 6 Rescissible Contracts Classification of Defective Contracts: 1.

Rescissible contracts valid contracts but may be rescinded for having: rd a. Caused economic damage or lesion to one of the parties or to a 3 person b. Entered into fraud of creditors c. (without knowledge and approval of the judicial authority) custodial egis over the property involved d. Being specially declared by law as rescissible Void or voidable contracts where the consent of one party is defective either because of incapacity to give consent to contract or where consent is vitiated by mistake, violence, intimidation, undue influence or fraud. (consent vitiated by vices of consent). Unenforceable contracts cannot be enforced in court because of: a. They were entered into in behave of another w/o authority or in excess of authority; b. There is non-compliance with the Statute of Frauds; and c. Both contracting parties are incapacitated. May, however be ratified in accordance with the law. Void or non-existent contracts those which produce no legal effect for they do not exist in the eyes of the law.

2. 3.

4.

RATIONALE BEHIND CLASSIFICATION - It is neither wise nor just that parties should be left in doubt as to the degree of effectiveness of their contractual relations. Legal profession is also entitled to know in a positive and unequivocal manner what contracts are rescissible, voidable, unenforceable and void. OTHER DEFECTIVE CONTRACTS NOT INCLUDED IN CLASSIFICATION (Contracts w/c are relatively ineffective): Contracts w/c are relatively ineffective are those ineffective only with respect to certain parties but effective as to other persons. Ex. Assignment of lease by lessee without consent of lessor is ineffective only as regards the lessor. Relative ineffective contract ineffectiveness with respect to party concerned is ipso jure. Voidable contract does not become inoperative unless an action to annul is instituted or allowed.

Distinctions Between and Among the Defective Contracts: Basis Origin of defect Rescissible Economic damage or lesion to one of the parties or to a 3rd person; a special declaration by law that the contract is subject to rescission (Art 1381) There must be damage /lesion or prejudice to one of the contracting parties or 3rd person. Considered valid and legally enforceable until judicially rescinded. Art 1380 Voidable Incapacity of one of the contractivng parties to give consent, or vitiated consent due to presence of vices of consent. Art 1390 Unenforceable It was entered into in behalf of another person w/o authority or in excess thereof; non-compliance w/ the Statute of Frauds; incapacity of both contracting parties to give consent. Arts 1403 and 1407 Damage or prejudice not necessary. Void Absence of any of the essential requisites of a contract (consent, object, cause) Art 1409.

Damage or prejudice

Damage or prejudice to other party not necessary. Considered valid, binding, and enforceable until judicially annulled. Art 1390 last par.

Damage or prejudice not necessary. Generally do not produce legal effects; there are few exceptions (void marriages under Art 36 & 53, F.C. produce legitimate children (see FC Art 165) Declaration of nullity of contract

Legal Effect

Inoperative until ratified. Not enforceable in court w/o proper ratification. (Art 1405)

Remedy/Action

Rescission or rescissory action

Annulment of contract

Nature of action Persons who can file action

Must be direct action. Collateral attack is not allowed Must be a contracting party. Exception: creditors who are defrauded.

Susceptibility to ratification Susceptibility to prescription

Susceptible to convalidation but not of ratification proper. Action for rescission prescribes after 4 year (Art 1389)

Direct action needed either in the complaint or as a counter-claim. Generally must be a contracting party principally or subsidiarily obliged under the contract(Art 1397) Exception: 3rd person who is prejudiced. Susceptible to ratification Art 1392 Action for annulment prescribes after 4 years (Art 1391)

This is just a personal defense when plaintiff pursues a specific performance case or complaint for damages based on breach of contract. Indirect attack is allowed in the form of a defense. Must be a contracting party. 3rd persons cannot assail it.

May be attacked directly or indirectly 3rd persons cannot assail contract unless his interests are directly affected.

Susceptible to ratification Art 1495 Action for recovery, or action for specific performance or for damages for breach of contract, also prescribe. There being no specified period, it could be 10 years if the basis of the action is a written contract, or 6 years if unwritten. Arts 1144 & 1145

Not susceptible to ratification Art 1409 last par Action for declaration of nullity or the putting of the defense of nullity of the contract does not prescribe (Art 1410)

Art. 1380 Contracts validly agreed upon may be rescinded in the cases established by law. Rescissible contract one w/c contains all essential requisites of a contract w/c make it valid, but by reason of injury or damage to either of the contracting parties or to 3 rd persons, such as creditors, may be rescinded. Action to rescind (accion pauliana) must be of last resort, availed only after all other legal remedies have been exhausted and proven futile. Characteristics:

1. 2.

It has all elements of valid contract; It has a defect consisting of injury to one of the contracting parties or 3rd persons generally in form of economic damage or lesion, fraud, and alienation of property subject of case in court w/o consent of the litigants or of the court; 3. It is valid and effective until rescinded; rd 4. It can be attacked only directly, either by one of the contracting parties or by an affected 3 person, who is injured or defrauded by the contract; 5. It is susceptible of convalidation only by prescription. Ratification proper does not apply. Voidable contract can be annulled or rescinded. Difference between Rescission proper and Rescission (Resolution) implied in Reciprocal Obligations under Art 1191. Basis Rescission in Art 1191 Rescission Proper in Art 1381 Nature It is a Principal action retaliatory in character It is a subsidiary remedy. Ground/s for rescission Only ground is Non-performance of ones obligation/s or what is There are 5 grounds to rescind a rescissible contract enumerated in incumbent upon him. Art 1381. Non-performance by other party not important. Applicability Applies only to reciprocal obligations Applies to both unilateral and reciprocal obligations rd Person who can institute action Only a party to the contract may demand fulfillment or seek the Even 3 party who is prejudiced by the contract may demand the rescission (cancellation) of the contract. rescission of the contract Fixing of period by the court Court may fix period or grant extension of time for the fulfillment Court cannot grant extension of time for fulfillment of the obligation. of the obligation. Purpose To cancel the contract To seek reparation for the damage or injury caused, thus allowing partial rescission of contract. Mutual rescission when parties mutually agree to back out from contract. - this is not rescission proper coz it is not based on any of the grounds for rescission stated in Arts 1381 & 1382 but based on will of parties w/drawing from contract. Requisites for action for rescission: 1. Contract subject of action must be one of those mentioned in Arts 1381 & 1382; 2. Plaintiff must have no other recourse to obtain reparation for the damages he suffered except rescission of contract. action is only subsidiary; 3. Plaintiff must be able to return whatever he is obliged to restore, if action would be sustained. Art 1385 4. Object/s of contract must not have legally passed unto the ownership or possession of a 3rd person who is acting in good faith. Art 1385 5. Action must be brought w/in prescriptive period, ie w/in 4 years from accrual of cause of action. Direct action needed to attack a rescissible contract. If real estate is involved and covered by title, right to rescind may be noted in Certificate of Title. Extrajudicial rescission allowed when contract itself provides that it may be revoked and cancelled for violation of any of its terms and conditions.

Art. 1381 The following contracts are rescissible contracts: 1. Rescissible contracts due to Economic Lesion or Damage of More than 25% of the value of the Thing/s: Contracts entered into by guardians whenever their wards may suffer lesion by more than of the value of the things disposed of can be rescinded. There is no judicial approval of the contracts entered into by guardians because if there is, whether the contracts involve acts of ownership or administration, the contracts will not be rescissible. Ex. If guardian is managing hacienda belonging to ward and sold the crops harvested at price lower than 35% of value thereof, the sale is rescissible coz of the economic lesion of more than of the value of the crops. Acts of representatives of absentees also governed by principles in no. 1, there being a parity of reasoning and identical law applicable. Contracts undertaken deliberately in Fraud of Creditors: Contract must be intended to defraud the creditor/s and that the creditor/s cannot in any manner collect the claim due him/them. Fraudulent intent must be proved. Without the needed proof establishing this, the contract cannot be rescinded. Test as to whether or not a conveyance is fraudulent is Does it prejudice the rights of Creditors? Badges of Fraud fraudulent character of the transactions may be determined by this. a. The fact that the consideration of the conveyance is fictitious or is inadequate. b. Transfer made by debtor after suit has been begun and while it is pending against him. c. A sale upon credit by an insolvent debtor. d. Evidence of large indebtedness or complete insolvency. e. Transfer of all or nearly all of his property by debtor, especially when he is insolvent or greatly embarrassed financially. f. The fact that the transfer is made between father and son, where there are present other of the above circumstances. g. Failure of vendee to make exclusive possession of all the property (Oria v McMicking, supra) Accion Pauliana a. Requisites: 1. The plaintiff asking for rescission has a credit prior to the alienation; 2. Debtor has made a subsequent contract conveying patrimonial benefit to a 3 rd person; 3. Creditor has no other legal remedy to satisfy his claim; 4. Act being impugned is fraudulent; 5. 3rd person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. b. Jurisdiction accion pauliana is incapable of pecuniary estimation. Jurisdiction is with the RTC court of general jurisdiction. c. Accion Pauliana distinguished from Action to Declare Nullity of An Absolutely Simulated Contract Basis Accion Pauliana Action to Declare Nullity. Nature There is a true alteration of property. There is NO alteration of property but only pretention of alteration. Purpose To set aside a contract validly entered into. To declare the inexistence of the absolutely simulated contract which prejudices the rights of a 3rd person and/or is intended contrary to law, morals, good customs, public

2. 3.

Possibility of Satisfaction Creditors who can pursue case

Satisfaction of plaintiffs claim is not possible except through the rescission. Only creditors prior to the alienation may file the action.

order or public policy. Non-satisfaction of plaintiffs claim is not required All creditors, whether before or after the simulation may file the action.

d. 4.

Accion Pauliana complements Art 1177 which is authorized under Art 1381.

Alienation of thing/s under litigation: Ex. A sues B for the recovery of a parcel of land. In this case, the land is a thing under litigation. If, during the pendency of the case, B sells the land to C w/o 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 said land unless C is in legal possession of the land in good faith. A, however, may protect his right by filing a notice of lis pendens. If the action involves a 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 custodial egis. Contracts specially declared as Rescissible By Lay may also be Rescinded: Art 1098 A partition, judicial or extrajudicial, may also be rescinded on account of lesion, when any one of the co-heirs received things whose value is less, by at least , than the share to w/c he is entitled, considering the value of the things at the time they were adjudicated. Art. 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. See also Arts. 1526, 1534, 1539, 1542, 1556, 1560, 1567, 1599, 1659, 1189.

5.

Violation of Right of First Refusal prevailing doctrine is that a contract of sale entered into in violation of right of first refusal of another person is rescissible.

Art. 1382 Article refers to payments made. What is rescissible are the payments for obligations w/c are not yet due. Payment must have been made by a payer-debtor who is in a state of insolvency. State of Insolvency A person is considered insolvent when it is impossible for him to fulfill his obligations because of financial constraints. He has more obligations than assets. - law does not require judicial declaration of insolvency to make the payments rescissible. Requisites for Action for Rescission under Art 1382 1. Payment or payments were made by the debtor to a creditor; 2. Payment or payments were made while the debtor is in state of insolvency; 3. Obligations paid were not yet due and demandable. Ex: An insolvent corp owed Jose P70k. Although debt not yet enforceable, corp delivered deed of sale covering one of its properties to Jose as payment for debt. However, value of property is much greater than amount of indebtedness. Sale is rescissible coz it was made by the debtor who is in a state of insolvency, in payment of an obli w/c is not yet due. (Asia Banking Corp v Nable Jose) Kinds of premature obligations which was paid by the insolvent debtor may include a void, natural, condoned or prescribed obligation.

Art 1383 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 necessary for the plaintiff to have exhausted all means to obtain reparation. Otherwise, the action will not prosper. This is a condition precedent.(see Art 1177) If the damage is repaired, as in the case of lesion suffered by ward or absentee, rescission cannot take place (see Art 1355, 1381) Goquilay v Sycip plaintiff must allege and prove that he had exhausted all available legal remedies to obtain reparation from the debtor, otherwise, the action is not maintainable. What to allege and consequences of failure to do so: Creditor who seeks rescission of contract as fraudulent must prove 1. That he really is a creditor; and 2. That he could not collect his credit in any other way. Exception to rule: if it can be proven that the property alienated was the only property of debtor at time of transaction, the action for rescission is certainly maintainable coz it is clear that the creditor has no other remedy under the circumstances (Regalado v Luchsinger) Persons allowed to institute action: 1. Parties who suffered economic lesion; 2. Affected creditor; and 3. Others authorized by law. In case of their death or incapacity, their heirs can institute or continue action. Heirs can rescind the contracts if the deceased person alienated his properties during his lifetime for purpose of depriving or diminishing their legitimes. Prescription to rescind fraudulent contract: 4 years which must be counted from the time the action accrues and not from date of registration of conveyance.

Art. 1385 Applicability of Mutual Restitution when he who demands rescission can return whatever he may be obliged to restore, only when there is delivery on both sides. If complaining party cannot return whatever he may be obliged to restore, he is not entitle d to rescission. His case will be dismissed for lack of condition precedent. If property has already been alienated in favor of 3rd person, ie. Sale, and he is in good faith, the transfer of property to 3rd person will be respected. If in bad faith, property transferred to him could still be recovered, aside from imposition of damages for injury suffered by complaining party. Transferee in Good Faith who acquired property gratuitously not fully protected: he is obliged to return the thing under the principle that no person shall be enriched at the expense and prejudice of other persons like creditors. He will however not have liability for the fruits he had received and will be reimbursed for necessary and useful expenses he incurred. Also, he is not liable for the deterioration or loss of the thing possessed except when he acted with fraudulent intent or negligence after judicial summons had been received by him.

Persons liable for indemnity for damages: the person who caused the loss. Ex. Guardian caused loss, he is liable to indemnify ward for the value of economic damage or lesion suffered by the latter. Persons who can benefit from rescission: 1. only the particular creditor/s who instituted the action. 2. If rescission is partial and there is remainder after satisfying claims of creditors, the balance remains with transferee. Art 1385 has parallel in art 1402

Art 1386 Contracts entered into by guardians and representatives of Absentees if approved by court having jurisdiction over the matter could not be rescinded. Opposition to these should have been timely made before the court. Failure to do so is deemed to be a waiver of the right to rescind.

Art 1387 Fraud deception - consists of any means or ways, usually through insidious words or machinations perpetrated by one of the contracting parties, by reason of w/c, the other party is persuaded to enter into contract w/c, w/o them, he would not agree to. Presumptions of Good Faith: generally, when a person acts he is presumed to be acting in good faith. Burden of proof to the contrary rests with he who alleges and imputes bad faith. Statutory Presumptions of Fraud in Art 1387 regarding alienation of property: 1. By gratuitous title when debtor alienates his property w/o reserving sufficient property to pay all his existing debts. 2. By onerous title alienation even for a valuable consideration, contract is presumed fraudulent if at time of alienation a) some judgment has been rendered against him, whether it is on appeal or already become final and executor or b) some writ of attachment has been issued against him in any case. Presumptions of fraud are rebuttable: they may be overcome by clear, strong and convincing evidence. Unless controverted, presumptions will maintain existence of fraud with all consequences attendant thereto. Presumption of fraudulent transaction is not overcome by mere fact that mere deed of sale in question were in nature of public instruments. Their being notarized does not render them immune and free from their fraudulent and deceptive elements. Requisites to overcome statutory presumption of fraud: 1. Must be proved affirmatively that the conveyance was done in good faith. 2. Must be established that the conveyance was for a sufficient and valuable consideration (Gana v Sheriff of Laguna, 36 P 236) Establishment of these 2 requisites will mean that the presumption of fraud has been overthrown. Effect if there is no judgment against alienating debtor nor writ of preliminary attachment: presumption of fraud will not apply. Complaining creditor is not confined to the statutory presumptions to prove existence of the fraud: He may present other evidence to establish existence of fraud more convincingly, although he already enjoys favorable presumption. Presumption of Fraud in this Art not applicable to registered lands if judgment or preliminary attachment is not registered at the back of the title. A rescissible contract is valid before its rescission. It is legally effective and can transfer or convey title. It cannot be attacked collaterally; there is a need for direct attack (specific action for rescission). Badges of Fraud listed by courts: 1. Fact that the consideration paid for the conveyance is inadequate; 2. Transfer made by a debtor after suit has been filed and while it is pending against him; 3. Sale on credit by an insolvent debtor; 4. Presence of evidence of large indebtedness or complete insolvency of debtor; 5. Transfer of all or nearly all of debtors property especially when insolvent or financially embarrassed; 6. Transfer is made between father and son and any of the above circumstances are present; 7. Failure of the buyer to take exclusive possession of all the property he had purchased from the seller. Existence of fraud does not necessarily bring about rescission- if transferee acted in good faith and transaction was for a valuable consideration, rescission will not be granted.

Art 1388 When transferee acted in bad faith liable to return the same to the particular creditor/s who had successfully instituted the complaint for rescission. If restitution not possible, transferee being in bad faith will be liable to pay indemnity to suing creditor for damages creditor suffered by reason of alienation even if loss or destruction of property is due to fortuitous event. Rule when there is a 2nd transferee of more will be liable only if an action lies against the 1st transferee. When the 1st transferee was in good faith, the property ceases to be part of the patrimony of the debtor, and the latters creditor cannot do anything to recover it. If 1 st transferee in bad faith, liability of 2nd transferee will depend upon his good faith or bad faith. If in bad faith, he is liable to restore the thing. If that is no longer possible, he will pay indemnity for the damages suffered by the creditor/s occasioned by the act of alienation of the property.

Art 1389 Prescriptive period for rescissory actions: generally 4 years Reckoning time: varies depending upon the circumstances a) If complaining party is 3rd person who has no participation in the contract, prescriptive period is 4 years reckoned from discovery of the fraudulent contract, or from registration thereof, if real property is involved. b) If complaining party is a ward who intends to rescind the contracts entered into by his guardian w/c prejudiced him, there being a sufferance of economic lesion up to at least of the value of the thing disposed of, action must be filed w/in 4 years from time of attainment of age of majority. c) If complaining party is an absentee, w/in 4 years from time his domicile has been known. Absentee one who disappears from his domicile and his whereabouts are unknown, w/o leaving agent to administer his properties. When he reappears in his domicile, he ceases to be absentee as long as he informs the court of his presence. d) When the contract is one of those specially declared by law as rescissible, prescriptive period of 4 years shall run from execution of contract. Nature of Liability of Transferee in Bad Faith is solidary with that of the transferring debtor as both of them are guilty of fraud. They may be liable criminally for fraudulent insolvency punishable under Art. 314 of RPC.

CHAPTER 7 VOIDABLE CONTRACTS Art 1390 Voidable contract one either by the incapacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence or fraud. Status of voidable contract valid and obligatory between the parties before its final annulment. - could be attacked only directly either by an action for that purpose (annulment) or seeking its annulment in a counterclaim and not merely by way of special or affirmative defense. Ratification an act by virtue of w/c efficacy is given to a contract or obligation w/c suffers from a vice of curable nullity. Susceptible to ratification. If not assailed within 4 years from time the cause of action for annulment has accrued, contract is said to have been convalidated by prescription. Thereafter, it is no longer subject of attack. Voidable contracts distinguished from Void contracts: Voidable Contract Consent of one of the parties is vitiated Effective and binding until annulled Susceptible to consolidation by ratification or by prescription Action for annulment prescribes Defect may be waived Void Contract Consent is absent or lacking. Presence of other defects will also render contract void (Art 1409) Ineffective because it does not exist in contemplation of the law. Not susceptible to consolidation by ratification or by prescription (Art 1409) Action or defense based on its inexistence or absolute nullity does not prescribe (Art 1410) Right to set up the defense of illegality cannot be waived (Art 1409, last par)

Basis Nature of Defect Effectivity Susceptibility to consolidation Prescriptibility of action for its attack Waiver of defect

Damage not essential to render a contract voidable. Voidable contract distinguished from Rescissible contract Basis Nature of Defect Effect of Damage or Prejudice Basis of Defect Predominance of public interest Susceptibility to ratification Sanction Persons who can assail contract Nature of action punishable Voidable Contract Intrinsic. There is a vice of consent which vitiates consent. Whether there is damage or not, contact is voidable Annulability of contract is based on law Public interest predominates Susceptible to ratification It is a sanction Only parties to the contract Action is a principal action Rescissible Contract External. It consist in damage or prejudice suffered by one of the rd contracting parties or a 3 person like a creditor. If no damage or prejudice, contract is not rescissible Rescissibility of contract is based on equity Private interest predominates Not susceptible to ratification It is not a sanction but a remedy 3rd persons who are affected may assail it Action is subsidiary

Remedy of Annulment distinguished from other remedies in attacking defective contracts: 1. Remedy of annulment applies to voidable contracts 2. Remedy of rescission applies to rescissible contracts 3. Remedy of declaration of nullity applies to void or inexistent contracts Defenses: Defendant may put up defense of annulability or relative nullity of a voidable contract and the absolute nullity of a void or inexistent contract. Action for declaration of the inexistence of the contract does not prescribe.

Art 1391 Article applies only to parties in the contract. Prescription of Action for annulment mere lapse of time fixed by law. It is one of the grounds for extinguishing obligations. Failure to pursue an action w/in the period prescribed by law will have effect of extinguishing the action. When the contract is voidable at most, the 4 year prescriptive period under Art 1391 applies. Time of Reckoning of the 4 year period: 1. If vice consists in a) intimidation, b) violence or c) undue influence, begins from cessation of such vice. 2. If it consists in a) mistake or b) fraud, begins from discovery thereof. 3. If it consists in incapacity of contracting party (like minority or insanity) who is under guardianship, begins from cessation of the guardianship. Special reckoning period for fraud thru public instruments involving lands registered under the torrens system from the registration of the public document with said registry (act of registration is a notice to the whole world, it is the operative act w/c binds registered lands under the Torrens System).

Art 1392 Ratification extinguishes the action to annul a voidable contract Confirmation, Ratification, and Recognition (or Acknowledgment) concepts; distinctions 1. Confirmation term previously used to refer to act of curing a voidable contract of its vice or defects. 2. Ratification act by w/c a contract entered into by someone in behalf of another w/o authority or in excess of authority is cured of its vice or defect by subsequent act or conduct of the latter. Ex. A sold Bs land w/o latters consent. B however got proceeds from A and/or conformed to the contract. There is ratification by acceptance of benefits and/or by recognizing the authority of the agent. 3. Recognition or Acknowledgment an act whereby a defect of proof in the contract is cured. Ex. Oral contract was reduced into a public document to conform with the formal requisites required by law. NOTE: now, there are no more distinctions between the 3 terms. They are now referred to as Ratification.

Confirmation when a person confirms a voidable contract, it is presupposed that he has participated in the very act which is the object of the action for annulment/ Ratification - person who ratifies has no participation in the act but only approves the act executed by another.

Art 1399 Ratification act or means by virtue of w/c efficacy is given to a contract w/c suffers form a vice of curable nullity. This concept covers voidable contracts. Requisites of Ratification: 1. Contract must be voidable (Art 1390) 2. Confirmation is made by the injured contracting party 3. Confirming party has full knowledge of the vice or defect of the contract 4. Cause of voidability should have already ceased or disappeared at the time of the ratification. Otherwise, if the cause of voidability is still present such as subsisting intimidation the act of confirmation would also suffer from the very vice or defect it is attempting to cure. Forms of Ratification: 1. Express takes place when desire of innocent party to convalidate the contract, or his waiver or renunciation of his right to annul the contract is clearly manifested verbally or formally in writing. 2. Tacit or implied takes place when innocent party w/ full knowledge of vice w/c renders contract voidable and the same having ceased already, he executed act/s or displayed a conduct w/c necessarily implies hi intention to waive his right to annul the contract (Art 1393) Ex. Uy Soo Lim v Tan Unchuan: Minor entered into a contract of sale. When he became of legal age, he did not repudiate the sale. Instead, he disposed of the greater part of the purchase price after having full knowledge of the facts w/c he now seeks to disaffirm. It was held that he tacitly confirmed the contract. rd Rosales v Reyes: A minor purchased a parcel of land. After becoming of legal age, he sold the land to a 3 person. The first sale has been ratified. Effect of lapse of time A voidable contract, if not questioned w/in prescriptive period of the action for annulment, remains valid and effective. Effects of Ratification: 1. Contract is purged or cleansed of its defects from the moment of its constitution or establishment. Validation is retroactive to day of its creation. 2. Corrolarily, there being a convalidated contract w/c is clean, any action for its annulment is extinguished. Right to ratify is a transmissible right if party did not ratify during his lifetime, his heirs may do so. Effect of lack of ratification voidable contracts: remains valid until annulled. Within prescriptive period for filing action for annulment, contract is open to assailment. Unenforceable contracts: remains ineffective, cannot be enforced. Void contracts: not ratifiable coz in contemplation of the law, they do not exist.

Art 1394 Ratification may be effected by the guardian of the incapacitated person. If only one party to a contract is incapacitated, contract voidable. If both parties are incapacitated, contact is unenforceable. If they continue with their condition of not being able to give consent, their guardian may effect the ratification of the defective contract. If the incapacitated person/s become capacitated or regained their capacity, they may themselves ratify their defective contracts.

Art 1395 Ratification does not require the conformity of the contracting party who has no right to being the action for annulment. It is the innocent party who has the prerogative to annul or not to annul a voidable contract. The one who caused the vice of consent personally or thru a 3 rd person is not allowed to file a case of annulment coz of the principle that he who comes to court, must come with clean hands.

Art 1396 Ratification cleanses the contract from all its defects from the moment it was constituted. Cleansing of voidable contract retroacts to time of its constitution. Action for annulment of contract based on its original curable defects can no longer prosper after its due ratification or confirmation. Exception to effect of retroactivity: rule of retroactivity shall not prejudice rights of innocent 3 rd persons for that will result in injustice w/c is not the intention of the law.

Art 1397 Persons who can institute action for annulment of contract only persons who are parties bound either principally or subsidiarily by the contract and who are innocent of the act/s constituting the reason for the voidability or annullability of the contract. Plaintiffs must be persons with interest in the contract. Ex. S sold parcel of land to B. The consent of S was vitiated by fraud. Subsequently, S sold the same lot to C. In this case, C can bring an action to annul the sale. Meaning of principal and subsidiary liability: ex. Principal debtor is principally bound to the creditor while the guarantor is only subsidiarily bound. Guarantor becomes liable only if principal is unable to answer for his obligation and after all proper remedies against debtor had been resorted to but failed. Effect if Minor is guilty of one of the vices of consent: they cannot seek annulment of contract based on rules of estoppel. However, in case of Young v Tecson, SC held that minor can never be guilty or estoppel because he is not liable for his conduct or act. In case of Braganza v Villa Abrille, SC held that if misrepresentation as to age of minors is active, meaning, minors specifically stated in the deed that they were of legal age, they will be estopped from annulling the contract based on their minority. However, if their representation was passive, meaning there is failure to disclose their minority, they may be allowed to annul the contract. Exception to the general rule that 3rd persons cannot annul contracts - person who is not obliged principally or subsidiarily in a contract may exercise and 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 w/c could positively result to him from the contract in w/c he had no intervention.

Art 1398 Applies only if contract had been consummated. If not, it is understood there is no obligation to restore as nothing had been received by the parties. Duty of Mutual Restitution: If obligation has been annulled, contracting parties shall restore to one another what they have received by virtue of the contract. This covers the return of 1. Things received together with the fruits or the value thereof. 2. The subject matter with interest at the legal rate. Strangers not covered by article. Innocent 3rd parties, who are not privies to the contract cannot be obliged to restore.

Article speaks of annulment of obligation and not of contract because of the possibility that a contract may cover several prestations w/c are divisible. Some may be voided, but others may be retained. Obligations to render service if services already rendered and obligation was annulled, damages, if suffered, may be recovered using as basis of estimation, the value of services st rendered. (Last par of Art refers to obligation To do or not to do while 1 par refers to obligation to give. Rule of mutual restitution is not absolute if and when it will result in an unjust enrichment of one party at the expense of the other, rule of mutual restitution must give way. Damages may be imposed upon the party guilty of the act/s w/c constitute the reason and cause for the annulment of the contract. Meaning of Except in Cases Provided by Law w/ the annulment of the contract, there must be restoration of things received w/ their fruits, and the price w/ interest except in cases provided by law. Insofar as fruits are concerned, the rules on possession must be appliedArt s 544 and 549. Articles parallel provision in rescissible contracts Art. 1385

Art 1399 Incapacitated or disadvantaged person is generally favored by law. No restoration is required of him; exclusive exception Art 24 which provides: In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his protection. Exception to this: To balance things, where the minor had received something by virtue of a contract w/c is voidable solely and exclusively because of his incapacity, he must make a restoration insofar as he has been benefited by the thing or price received by him. If he did not benefit, he has no duty to make restoration. If the nullity of the contract, however, is due to other reasons, the general rule of mutual restitution in Art 1398 shall apply. Ex. Uy soo Lim v Tan Unchuan: If the incapacitated person has still in his possession the property he received, by itself is a benefit, w/c obliges him to return the same and not squander it. If he does not return or he squanders, that is tantamount to implied ratification of the defective contract. In w/c case, the contract will then be cleansed of all its defects from the moment of its constitution. Rule w/ respect to the Capacitated party: WON capacitated party benefited from what he received from a minor, he must return the same except when he received the thing from the minor in the performance of the latters natural obligation, and what had been received had been spent or consumed in good faith. The reason for this is that the minor cannot recover what he had paid in fulfillment of a natural obligation.

Art 1400 Effect when thing was lost through the fault of Defendant-obligor Article will not apply if the thing ordered to be returned w/c is determinate was destroyed or got lost w/o fault of the debtor. Ex. Determinate thing supposed to be returned got lost due to a fortuitous event. Debtor should not be made liable for the loss of the thing because it is expressly provided that Art. 1174 Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.

This exception from liability is bolstered by Art. 1262 An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. Consequences: If the thing is lost due to a fortuitous event, debtor is not liable to make restitution because he cannot restore the thing w/c no longer exists. Neither can he be compelled to substitute the lost thing w/ its value coz he is not liable for the loss. To compel him to do so will be unfair. Since the party debtor was still legally considered as the owner of the thing at the time of the loss, he must suffer the consequences but he will not be required to make restitution. Corollarily, creditor cannot be compelled to make restitution coz debtor could not fulfill what is incumbent upon him. Ultimately, Art, 1402 shall apply. There is no other way of reconciling the different related articles. The rule is different if the thing was lost through the fault of the obligor. In w/c case, he is obliged to: a. Return the fruits received; b. Return the value of the thing at the time of the loss; and c. To pay 6% interest per annum on the value of the thing. Ex. A contract was entered into between Damasug and Modelo. The contract was annulled. The subject matter of the contract is a plow carabao w/c died while in possession of Modelo. Court Held: W/ respect to the plow carabao that died while in defendants possession, value P120, defendant is obliged pursuant to provision of Art 1307 (now Art 1400) to pay and deliver to plaintiff the value of said animal, w/ interest as an indemnity for the detriment caused to its owner.

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. 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. Applicability Applies when object of contract is lost due to the a) fraud or b) fault of the creditor himself. Accordingly, his complaint must be dismissed. Creditor has no cause of action coz he himself caused the loss of the thing. Action for annulment can prosper despite the loss of the thing if plaintiff is not at fault a. If the thing is destroyed due to fortuitous event, action is extinguished unless defendant has incurred in delay or is a possessor in bad faith.

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. Duty of Restitution is mutual After the case had been decided, and the court has required the parties to restore what they received from each other, no one can file a Motion for Execution unless he himself has first restored what he is bound to return. In case neither party takes the initiative, the best solution is to make a simultaneous delivery in court of what is incumbent upon them. The inability to make restitution may apply to both parties. If one cannot restore what he is bound to return, he cannot compel the other to comply what is incumbent upon the latter. To require so is obviously unfair.

CHAPTER 8

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. Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book.

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. 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. 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. Art. 1408. Unenforceable contracts cannot be assailed by third persons.

Third persons cannot attack unenforceable contracts as the defense of the Statute of Frauds is personal to the availing party in the contract, it cannot set up as a defense by strangers to the transaction. (Ayson v Ca) Only the contracting parties may attack unenforceable contracts. However, void contract may be attacked even by strangers whose interest are directly affected. Voidable contracts may also be attacked by 3rd persons who are prejudiced thereby. Rescissible contracts are subject to attack by creditors who are being defrauded by their debtors.