DEFECTIVE CONTRACTS Void and inexistent contracts:

1. Their defect consists in the fact that they lack absolutely either in fact or in
What are the different classes of defective contracts? law one or some of the elements of a valid contract.
1. Rescissible contracts 2. As a general rule, they produce no legal effect in accordance with the
2. Voidable contracts principle “quod nullum est nullum producil effectum” or “That which is a
3. Unenforceable contracts nullity, produces no effect”.
4. Void and inexistent contracts 3. They are not susceptible of convalidation either by ratification or by
prescription.
What are the essential features or characteristics of defective contracts? 4. The right to set up the defense of absolute nullity or inexistence cannot be
Rescissible contracts: renounced.
1. Their defect consists in injury or damage either to one of the contracting 5. They can be attacked or assailed either by a contracting party or by a third
parties or to third persons. person whose interest is directly affected.
2. Before rescission, they are valid and therefore legally effective.
3. They are susceptible of convalidation only by prescription and not by Define rescissible contracts under 1380.
ratification. A: A rescissible contract is a contract which is valid because it contains all of
Ratification – adoption by a person of an act performed by another the essential requisites prescribed by law, but which is defective because of
which cleanses the contract from all its defects from the moment the injury or damage to either of the contracting parties or to third persons, as a
contract is entered into. consequence of which it may be rescinded by means of a proper action for
4. They can be attacked directly only and not collaterally. (e.g. in a proceeding rescission.
in an action to rescind and not in a proceeding like land reg’n)
5. They can be attacked either by a contracting party who suffers injury or by a Define rescission.
third person who is defrauded. A: 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
Voidable Contracts: contract, even if the same should be valid, by means of the restoration of things
1. Their defect consists in the vitiation of consent or in the legal incapacity of to their condition prior to the celebration of the contract.
one of the contracting parties.
2. They are binding until they are annulled by a competent court.
3. They are susceptible of convalidation either by ratification or prescription. Distinguish rescission of contracts from rescission or resolution of reciprocal
4. They cannot be attacked or assailed by third persons. obligation under 1191.
A: Rescission of rescissible contracts must not be confused with the rescission
Unenforceable Contracts: or resolution of reciprocal obligations under Art. 1191 of the Civil Code.
1. Their defect consists either in the fact that they were entered into in excess Although there are similarities both with respect to validity and effects, they
or without any authority, or they do not comply with the Statute of Frauds, are distinguish from each other in the following ways:
or both contracting parties are legally incapacitated.
2. They cannot be enforced by a proper action in court. 1. As to the party who may institute action: In rescission the action
3. They are susceptible of convalidation by ratification. may be instituted not only by a party to the contract but even by
4. They cannot be attacked or assailed by third persons. third persons, whereas in resolution the action may be instituted
only by the party to the contract.
 1. In behalf of wards - Those which are entered into by guardians
2. As to causes: In rescission there are several causes or grounds such as whenever the wards whom they represent suffer lesion by more than
lesion, fraud and others expressly specified by law, whereas in one-fourth of the value of the things which are the object thereof;
resolution the only ground is failure of one of the parties to comply
with what is incumbent upon him. Guardian – person who has custody of the person and property, or of
property only, of another person who, not being under parental
3. As to power of the courts: In rescission there is no power of the court authority, is incapable of taking care of himself. The person under
to grant an extension of time for performance of the obligation so guardianship is the ward.
long as there is a ground for rescission, whereas in resolution the law What requisites must concur before a contract may be rescinded
expressly declares that courts shall have the discretionary power to on the ground of lesion?
grant an extension for performance provided that there is a just A: Whether the contract is entered into by a guardian in behalf of his
cause. ward or by a legal representative in behalf of an absentee, before it
can be rescinded on the ground of lesion, it is indispensable that the
4. As to contracts which may be rescinded or resolved: In rescission any following requisites must concur:
contract, whether unilateral or reciprocal, may be rescinded, whereas 1. The contract must be entered into by the guardian in behalf of
in resolution only reciprocal contracts may be resolved. his ward or by the legal representative in behalf of an absentee.
2. The ward or absentee suffered lesion of more than one-fourth
of the value of the property which is the object of the contract.
What requisites must concur before a contract may be rescinded? 3. The contract must be entered into without judicial approval.
A: The following are the requisites of rescission: 4. There must be no other legal means for obtaining reparation
1. The contract must be validly agreed upon. for the lesion.
2. There must be lesion or pecuniary prejudice to one of the parties or 5. The person bringing the action must be able to return
to a third person. whatever he may be obliged to restore.
3. The rescission must be based upon a case especially provided by law.. 6. The object of the contract must not be legally in the
4. There must be no other legal means for obtaining reparation for the possession of a third person who did not act in bad faith.
damage.
5. The party asking for rescission must be able to return what he is
obliged to restore by reason of the contract Ex: G, the guardian of M, a minor, sold M’s gold ring for P7,000 which
6. The object of the contract must not legally be in the possession of is valued at P10,000. The sale is rescissible because M suffered lesion
third persons who did not act in bad faith of P3,000 which is more than P2,500 which is ¼ of P10,000.00
7. The period for filing the action for rescission must not have
prescribed. Act of ownership vs. Act of administration
Court approval reqd; otherwise If w/court approval – valid,
unenforceable regardless of lesion.
What contracts are rescissible? If w/out court approval –
A: The following contracts are rescissible: rescissible, if lesion is more
than 1/4
2. In representation of absentees - Those agreed upon in representation
of the absentees, if the latter suffer the lesion stated in the preceding 4. Things in Litigation - Those which refer to things under litigation if
number; they have been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority.
Who is an absentee? – a person who disappears from his domicile his
whereabouts being unknown, and without leaving an agent to Ex. A sues B for recovery of a diamond ring. Pendente Lite, B sells the
administer his property. ring to C without the approval of A or of the court. The sale to C is
rescissible at A’s instance in case A wins in the original litigation,
Ex: R, the representative of A, an absentee, sold the harvest of A’s unless C is in good faith.
riceland for P70,000 which is valued at P100,000. The sale is
rescissible because A suffered lesion of P30,000 which is more than (Notice of lis pendens to protect the claim)
P25,000 the ¼ of P100,000.
5. Other instances - All other contracts specially declared by law to be
3. Undertaken in Fraud of Creditors With no Other means to collect subject to rescission. Ex:
(Accion Pauliana) - Those undertaken in fraud of creditors when the a. Partition, heir received things of value less by at least ¼ than the
latter cannot in any other manner collect the claims due them; share entitled to;
b. deterioration under 1189,
c. right given to an unpaid seller under 1526 and 1534, and sale of
Just because a contract is made to defraud creditors, does this real estate under 1539;
necessarily mean that it can be rescinded? d. sale in case of breach by the seller of warranty against hidden
NO, for after all the transferee may have been in good faith and is defects. (Art. 1567);
now in legal possession of the property. e. sale of animals with redhibitory defects under 1580 (renders
useless or diminishes value – would not have bought it);
What requisites must concur before a contract entered into in
fraud of creditors can be rescinded? 6. Rescissible Payments - Payments made in the state of insolvency for
obligations whose fulfilment the debtor could not be compelled at
A: Before a contract can be rescinded on the ground that it has been the time they were effected.
entered into in fraud of creditors, it is indispensable that the
following requisites must concur:
1. There must be a credit existing prior to the celebration of the
contract. Angel is the guardian of Alvarez, an insane person. Angel leased the property of
2. There must be a fraud, or at least the intent to commit fraud, Alvarez for 1 year at the rate of P750,000 only instead of the going rate of
to the prejudice of the creditor seeking the rescission. P1,000,000. Alvarez, during a lucid interval, demanded from Arkanghel the return
3. The creditor cannot in any other legal manner collect his of the property or payment of the amount of P250k to be paid to him as the
credit. property was leased at a very low price to his prejudice. Arkanghel refused.
4. The object of the contract must not be legally in the Consequently, Alvarez filed an action in court for rescission. Will his action prosper?
possession of a third person who did not act in bad faith. Ans: No, because the lesion not more than ¼ of the value of the property.
 Held: Yes, the rescission will prosper because this is the only way the creditors
To defraud his creditor, A sold his house to X. When however the creditor wanted can obtain the satisfaction of their credits.
to collect his credit, somebody lent A enough money. Should the sale of the house
still be rescinded? Art. 1384. Rescission shall be only to the extent necessary to cover the damages
A: No, it should not be rescinded, because here the creditor can collect the caused.
claim due him. 1. Extent of rescission – will not be of the whole contract. Thus, there may be a
partial rescission of the contract.
The L Corp. owed Noble Jose P70k. The corporation was insolvent and although the Ex: G, the guardian of M, a minor, sold a lot belonging to M which consisted
debt was not yet enforceable, the Corporation gave to Noble Jose a deed of sale to of 1000 sq.m. at 700 per sq.m. for a total of P700,000. The FMV is P1,000 per
one of its properties (the value of which was much greater than the debt) in sq.m or at P1M. The sale is rescissible bec. M suffered a lesion of P300k which
payments for the debt. At the same time, corporation paid off a certain Corcuera its is more than ¼ of P1M or P250k. However, only the sale of 300sq.m. may be
debt of P24,000 by giving him a piece of land. This latter debt was already due and rescinded and not the total of 1000sq.m. Thus, 300sq.m. will be returned to
demandable at the time payment was made. Issue: are the two transactions M. The sale or alienation with regard to 700sq.m. is valid.
rescindable?
A: The first is rescindable because it was made in a state of insolvency for an Who are the persons who may institute an action for the rescission of a rescissible
obligation to whose fulfilment the debtor could not be compelled at the time it was contract?
effected. But the second debt is not rescindable because at the time of payment, even A: The action for rescission may be instituted by the ff:
if the corporation was already insolvent, the debt was already due, owing and 1. The person who is prejudiced, such as the person suffering the lesion
enforceable. in rescissory actions based on lesion, the creditor who is defrauded in
rescissory actions based on fraud, and other persons authorized to
Pedro, the guardian of Maria who is a minor and earning Php100,000, purchased exercise the same in other rescissory actions;
1hectare of land worth P1M in behalf of Maria. One year after, Pedro sold the land 2. Their representatives;
for P500,000. Is this is a rescissible contract? 3. Their heirs; and
4. Their creditors by virtue of subrogatory action defined in Art. 1177 of
A: No, it is an unenforceable contract because it was entered into without the power the NCC.
to sell granted to the guardian.
Art. 1385. Rescission creates obligation of mutual restitution
Art. 1383. Rescission is subsidiary, hence not a principal remedy. It may only be
1. Requisites of rescission:
availed of by the injured party if it has no other legal means of seeking redress or
a. The injured party must have no other legal means to obtain
reparation for the damages caused. reparation for the same
b. The party demanding rescission (except creditors) must be able to
Ex. Panlilio vs. Victoria, 35 Phil. 706
return whatever he may be obliged to restore.
Facts: When the owner of a drug store began to realized that as a Rescission creates the obligation to return the things which
result of a judgment against him, his drugstore would be sold to pay his were the object of the contract, together with their fruits,
creditors, the owner connived with a friend by selling to the latter for a small and the price with its interest.
sum the drug store. The creditors were not in any way able to recover from the
owner, so they asked for the rescission of said sale of the drugstore. Will the Ex: M, a minor, owns a car worth P500,000. G, his guardian,
rescission prosper? sold the car to B for P300,000 which for a lesion of P200k
 which is more than ¼ of 500k or 125k. If the sale is rescinded, Q: To defraud his creditor, A sold his property to B (who is in good faith).
M shall return the price and the interest thereon, and B, the Later B sold the property to C, who is in bad faith. May the creditor rescind,
buyer shall return the car and the fruits thereof. If M cannot although the property is now in the possession of C?
return the price and interest thereon, he cannot rescind the Ans: No, for it does not matter whether C is in good or bad faith, since he
sale. If the car has been sold by B to X who acquired it in good obtained the same from B who is in good faith. It is B’s good faith that is
faith and caused its registration with LTO, the sale cannot be important.
rescinded because the car can no longer be returned. In this
case, M can go after G, his guardian, who was responsible for Art. 1387. Presumptions of fraud in the case of gratuitous and onerous alienations
the loss. 1. Gratuitous alienations in fraud of creditors
c. The thing object of the contract must not be legally in the possession of a. Presumed fraudulent – if debtor did not reserve sufficient property
a third person who acted in good faith. – In this case the injured party to pay all debts contracted before the donation.
can go after the person who caused the loss.
b. Ex: A has properties valued at P1.5M. A donated his land to B worth
Q: What should be returned in rescinding a contract? P800,000. Before the time he made the donation, he had several
Ans: 1. the object of the contract, with its fruits, must be returned. debts amounting to P1M. Is the donation presumed fraudulent?
2. The price, with its interest, must be returned. Ans.: Yes, the donation is presumed in fraud of creditors. But, of
course, this presumption may be rebutted by adequate proof.
Q: A bought real property from B. A brought action to rescind the contract
on the ground of non-delivery of the property. Does B have to give also the c. Q: A made a donation to B. Later A contracted several debts. What
fruits received in the meantime? A has left as assets are much less than his present liabilities. May
Ans: 1. No, the fruits received need not be given to A because the right takes the donation to B be rescinded?
place only when “delivery of the thing sold has been made.” A: NO, because the debts here of A were incurred after the donation
had been made. As a matter of fact, the presumption of fraud does
Q: A sold to B a piece of land in fraud of his creditors. B took legal not even arise in this case. However, under the doctrine of
possession. If no other means are found to exact the satisfaction of the “anticipatory fraud”, rescission may still prosper if it can be shown
credits owing the creditors, may the sale to B be rescinded? that the donation had been deliberately made beforehand to avoid
Ans: It depends upon whether B was in good faith or in bad faith. the payment of debts still to be contracted.
1. If B was in good faith, rescission cannot take place, because the
object of the contract is legally in the possession of a third person 2. Onerous alienations
who did not act in bad faith.
2. If B was in bad faith, rescission is proper. a. Presumed fraudulent – when made by persons:
i. against whom some judgment has been rendered in any
Q: To defraud his creditors A sold to B a piece of alnd. B is an innocent instance (thus, even if not yet a final judgment);
purchaser in good faith who takes legal possession of the land. Since the ii. or against whom some writ of attachment has been issued.
creditors cannot rescind the contract, what is their remedy?
Ans: Their remedy would be to demand indemnity for damages from the 1. D owes C P1M. When D failed to pay, C sued him. The
person causing the loss. court rendered judgment in favour of C and ordered
the sale of the lot of D located in Virac to satisfy the
 debt. Meanwhile, D sold his lot located in Bato. Is the cannot apply the first presumption in because the contract was
sale of the lot located in Bato presumed fraudulent? onerous. The second presumption cannot be also applied because in
Ans: Yes, because it was made by a person against this case, the sale had been made prior to the judgment against A, the
whom judgment has been rendered. judgment debtor.

Who may ask for the rescission of the sale? – C or any

other creditor of D may ask for the rescission of the
sale. This is so because the law says that the decision In rescissory actions based on fraud, it is essential that the fraud or the intent to
or attachment need not refer to the property defraud must be proved. How can this be done?
alienated, and need not have been obtained by the A: Such fraud or the intent to defraud may be either presumed in accordance
party seeking the rescission. with Art. 1387 of the Civil Code or duly proved in accordance with the
ordinary rules of evidence. The law presumes that there is fraud of creditors
in the following cases:
1. Alienations of property by gratuitous title if the debtor has not
D owes C P1M. When D failed to pay, C filed a case reserved sufficient property to pay all of his debts before such
against him and asked the court to issue an order alienation.
attaching the house and lot of D in Virac. The court 2. Alienations of property by onerous title if made by a debtor against
issued a writ ordering the attachment of the said lot. whom some judgment has been rendered in any instance or some
While the case was pending, D sold his lot located in writ of attachment has been issued. The decision or attachment
Bato. Is the sale of the lot located in Bato presumed need not refer to the property alienated, and need not have been
fraudulent? obtained by the party seeking the rescission.

A: YES, because it was made by a person against These are disputable presumptions only.
whom a writ of attachment has been issued.
A died intestate, survived by his wife, B and several children, X, Y, and Z, by a
Who may ask for the rescission of the sale? Same in i. Chinese wife. B subsequently filed a claim against A’s estate for P250,000 which the
court approved on the strength of a deed wherein the decedent acknowledged said
b. Q: A has 2 parcels of land. The first was mortgaged to B. During the indebtedness to his wife. Thereafter, the administrator of the estate proceeded
mortgage, A sold the second parcel to C. When the mortgage debt against A & Co., a firm founded by the decedent, for an accounting of the income
fell due, A could not pay; hence, the mortgage was foreclosed. Since derived from the shares of stock owned by the decedent in the company. In answer,
the land was sold in the foreclosure proceedings for an amount less the company alleged that the decedent had already transferred all his shares to his
than the value of the debt, B was given the right to get the balance children, X, Y, and Z. It is admitted that the transfer was made gratuitously. B, on
from A. But A had no more money. B now seeks to rescind the sale to the other hand, testified that the P250,000 borrowed by the decedent from her had
C of the second parcel of land, alleging the sale was done to defraud been invested in the company. Can the transfer be rescinded on the ground of
him. Issue: Is the sale to C presumed fraudulent? fraud?
A: Yes, the transfer can be rescinded on the ground of fraud. Its fraudulent
Held: No, the sale to C is not presumed fraudulent. It is true that the character is clearly inferable from the facts that the transferees are the
sale was made after the mortgage of the first parcel of land, but we decedent’s own children, that no consideration was given for the transfer,
 that the corporation was the only business of the decedent, and that he has 6. The fact that the transfer is made between father and son, when
an outstanding obligation of P250,000 with his wife which he had invested in there are present others of the above circumstances.
the corporation. 7. The failure of the vendee to take exclusive possession of all the
property.

A brought an action against B for the recovery of a debt. Judgment was rendered Art. 1388.
against B, and a writ of attachment was subsequently issued against his properties. 1. Effect of Bad Faith
His only attachable property was a parcel of land, covered by a Torrens Title , and a. The acquirer must return or indemnify.
assessed at P800,000. Before it could be attached, he sold the property for b. “Due to any cause” includes a fortuitous event.
P1,000,000 to C. Subsequently, A brought an action against B and C asking for the c. Ex: to defraud his creditors, X sold his house to Y, who knew of X’s
rescission of the sale on the ground of fraud. A maintains that there is a purpose. If the sale is rescinded, Y must indemnify, even if the house
presumption of fraud; consequently, the contract is rescissible. C, however be destroyed by a fortuitous event, but only if X himself cannot pay.
contends that he is a purchaser in good faith because there was no lien or (Remember that rescission is merely a secondary remedy available
encumbrance noted down in the title, and for value because he paid P1,000,000 for only when X cannot pay.)
the property. Decide the case stating your reason. 2. Subsequent Transfers
A: The contract of sale is not rescissible. Although there is a disputable a. If the first transferee is in good faith, the good or bad faith of the next
presumption that the contract of sale made by B to C was intended to defraud transferee is not important.
A, yet the presumption is overcome by the fact that C is a purchaser in good b. If the first transferee is in bad faith, the next transferee is liable only
faith and for value. When one buys property covered by a Torrens Title, he is if he is also in bad faith.
not supposed to go outside of the four corners of the Title in order to c. Ex. D owes C. To defraud C, D sells his car to X, X to Y and Y to Z.
determine the conditions of the property. This is well-settled. i. X, bad faith; Y, bad faith; Z, bad faith.
The sale from D to X, X to Y, and Y to Z can be rescinded. IF
the car cannot be returned, X shall be liable first, followed by
What are the badges of fraud? Y, then Z.
A: If the fraud or intent to defraud cannot be established by means of the
presumptions enunciated in Art. 1387 of the NCC, it may still be proved in ii. X, bad faith; Y, bad faith; Z, good faith.
accordance with the ordinary rules of evidence. This may be done by proving The sales can no longer be rescinded because the
the existence of any one of the following circumstances which have been object of the contract is legally in the possession of a third
denominated by the courts badges of fraud: person who acted in good faith. Since the car cannot be
1. The fact that the cause or consideration of the conveyance is returned, X shall be liable first, followed by Y. Z will not be
inadequate. liable.
2. A transfer made by a debtor after suit has been begun and while it is
pending against him. iii. X, good faith; Y, bad faith; Z, bad faith.
3. A sale on credit by an insolvent debtor. The sales cannot be rescinded because of the good faith of X,
4. Evidence of large indebtedness or complete insolvency. the first purchaser. Y and Z, subsequent purchasers are not
5. The transfer of all or nearly all of his property by a debtor, especially liable even if they were in bad faith.
when he is insolvent or greatly embarrassed financially.
What is the period of prescription for an action to claim rescission?
A: As a general rule, the action to claim rescission must be commenced within
four years. If the action is based on lesion, the period must be counted from
the time of the termination of the incapacity of the ward or from the time the
domicile of the absentee is known. If it is based on fraud, the period must be
counted from the time of the discovery of the fraud. However, in certain
contracts of sale which are specially declared by law to be rescissible, the
period is six months or even forty days, counted from the day of delivery.

Q: Five years after a rescindable contract was made, action was brought for its
rescission. The person who asked for the rescission was neither a ward nor an
absentee at the time of the transaction of the rescindable contract. Will rescission
still be allowed?
A: NO, the rescission will no longer be allowed because the action has already
prescribed. The action to claim rescission must be commenced within 4 years.

Q: At the time he was 12 years old, A was under a guardian who sold, in behalf of
the ward but without judicial authority, the harvest of the ward’s farm, and in so
doing the ward suffered lesion of more than one-fourth of the property. How many
years will be given the ward to rescind the contract?
The ward will be given 4 years after reaching the age of majority (the time the
guardianship ceases); hence, before reaching 22 years of age, the former ward should
already have sued for the rescission of the contract.