RESCISSIBLE Contracts

Contracts which are valid but are defective because of injury or damage to either of the contracting
parties or to third persons, as a consequence of which it may be rescinded by means of a proper action
for rescission.

• Distinguish from ‘RESOLUTION’ in Article 1191

Requisites of rescission:

1) Contract must be rescissible under Arts. 1381 and 1382.

2) Party asking for rescission must have no other legal means to obtain reparation for the damages
suffered by him (Art. 1383)

3) Person demanding rescission must be able to return whatever he may be obliged to restore if
rescission is granted (Art. 1385)

4) Things which are the object of the contract must not have passed legally to the possession of a
third person acting in good faith (Art. 1385); and

5) Action must be brought within four years (Art. 1389)

Contracts that are rescissible

(Arts. 1381-1382)

A. Lesion

1) Those entered into by guardians where the ward suffers lesion of more than ¼ of the value of
the things which are objects thereof.

2) Those agreed upon in representation of absentees, if the latter suffer lesion by more than ¼ of
the value of the things which are subject thereof.

B. Fraud

1) Those undertaken in fraud of creditors when the latter cannot in any manner claim what are due
them. (accion pauliana)

2) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants and the court.

3) Payments made in a state of insolvency for obligations whose fulfillment the debtor could not
be compelled at the time they were effected.

C. Other Causes Stated By Law

1) Art. 1098 – partition of inheritance where an heir suffers LESION of at least ¼ of the share to
which he is entitled

2) Art. 1189 (4) – deterioration of the thing through the fault of the debtor

3) Art. 1526 (4) – right of unpaid seller to rescind

5) Art. 1539 – sale of real estate with a statement of its area at the rate of a certain price for a unit
of measure or number and the vendor failed to deliver the area stated, which should be not less
than 1/10th of that stated

6) Art. 1542 – the vendee does not accede to the failure to deliver what has been stipulated

7) Art. 1556 – when through eviction, the vendee loses a part of the thing sold of such importance,
in relation to the whole, that he would not have bought it without the said part

8) Art. 1560 – if immovable sold is encumbered with any non-apparent burden or servitude of such
nature that it cannot be presumed that the vendee could not have acquired it had he been
aware thereof

9) Art. 1567 – election of the vendee to withdraw from the contract in the cases under Arts. 1561-
1566

10) Art. 1659 – rescission by the aggrieved party in a contract of lease when the other party does
not comply with Arts. 1654 and 1657

Requisites before a contract entered into in behalf of wards of absentees may be rescinded on the
ground of LESION:

Lesion is the injury which one of the parties suffers by virtue of a contract which is disadvantageous for
him. TO give rise to rescission, the lesion must be known or could have been known at the time of
making of the contract.

1) Contract was entered into by a guardian in behalf of his ward or by a legal representative in
behalf of an absentee;

2) It was entered into without judicial approval;

3) Ward or absentee suffered lesion of more than ¼ of the value of the property which is the
object contract.

4) There is no other legal means of obtaining reparation for the lesion;

5) Person bringing the action must be able to return whatever he may obliged to restore; and

6) Object of the contract must not be legally in the possession of a third person who did not act in
bad faith.

Note:

A guardian is authorized only to MANAGE the estate of the ward; should he DISPOSE a portion thereof
without authority from the court by way of a contract, the same is unenforceable under Art. 1403 (1),
irrespective of whether there is lesion or not.

Requisites before a contract entered into in FRAUD OF CREDITORS may be rescinded:

2) There is fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking
rescission;

3) Creditor cannot in any legal manner collect his credit; and

4) Object of the contract must not be legally in the possession of a third person who did not act in
bad faith.

The action to rescind contracts in fraud of creditors is known as accion pauliana.

Requisites:

1) The plaintiff asking for rescission has a credit prior to the alienation;

2) The debtor has made a subsequent contract conveying a patrimonial benefit to a third person;

3) The creditor has no other legal remedy to satisfy his claim;

4) The act being impugned is fraudulent; and

5) The third person who received the property conveyed, if it is by onerous title, has been an
accomplice in the fraud.

Accion pauliana presupposes a judgment and unsatisfied execution which cannot exist when the debt is
not yet demandable at the time the rescissory action is brought.

Even secured creditors are entitled to accion pauliana.

When alienation of property presumed in Fraud of Creditors:

1) Alienation by gratuitous title if the debtor has not reserved sufficient property to pay all of his
debts contracted before alienation;

2) Alienation by onerous title if made by a debtor against whom some judgment has been
rendered in any instance or some writ of attachment has been issued.

Requisites before payment made by insolvent can be rescinded:

1) It was made in a state of insolvency; and

2) Obligation must have been one which the debtor could not be compelled to pay at the time
such payment was effected.

Asia Banking vs. Noble Jose and Lichauco & Co., (51 Phil 703)

Where a debtor transfers property to a creditor supposedly in payment of a debt which has NOT YET
matured at the time when debtor is INSOLVENT and for a CONSIDERATION which is grossly inadequate
as compared to the actual value, SC considered the same as FRAUDULENT and may be set aside.
But... it is NOT fraudulent if the consideration of the sale was a pre-existing debt and the debt was due
and owing and enforceable at the time of sale.

Parties who may institute action:

1) The creditor who is defrauded in rescissory actions on ground of fraud, and other person
authorized to exercise the same in other rescissory actions.

2) Their representatives

3) Their heirs

4) Their creditors by virtue of the subrogatory action define in Art. 1177 of the NCC

Effect of Rescission (Art. 1385)

1) As to the parties – mutual restitution together with the fruits and interest.

Note: This is applicable only to rescissory actions on the ground of lesion and not to rescissory actions on
the ground of fraud.

2) As to third person

• Bad faith or not legally in possession – obliged to return

• Legally in possession and not in bad faith – no rescission; however, indemnity for damages may
be demanded from the person causing the loss.

Prescriptive Period: Action for Rescission (Art. 1389)

1) Under Art. 1381 (1)– within 4 years from the time of the termination of the incapacity of the
ward

2) Under Art. 1381 (2)– within 4 years from the time the domicile of the absentee is known

3) Under Art. 1381 (3) and (4) as well as Art. 1382 – within 4 years from the time of the discovery
of fraud

4) In certain contracts of sale especially declared by law to be rescissible – 6 months or even 40

VOIDABLE Contracts

Those which possess all the essential elements for validity but the consent is vitiated either by lack of
legal capacity of one of the contracting parties or by mistake violence, intimidation, undue influence or
fraud even though there may have been no damage to the contracting parties.

CAUSE

The following contracts are voidable or annullable:

1) Those where ONE of the parties is incapable of giving consent to a contract;

Prescriptive Period: Action for Annulment (Art. 1391):

1) Contracts entered into by incapacitated person – within 4 years from the time guardianship
ceases;

2) Where consent is vitiated by violence, intimidation or undue influence – within 4 years from the
time such violence, intimidation or undue influence ceases;

3) Where consent is vitiated by mistake or fraud – within 4 years from the time of the discovery of
such mistake or fraud.

• Discovery of fraud must be reckoned from the time the document was registered in the Office of
the Registry of Deeds. Registration constitutes constructive notice to the whole world.
(Carantes vs. CA, 1977)

Who May Institute Action for Annulment (Art. 1397)

General Rule: Action for annulment may be instituted by all who are thereby obliged principally or
subsidiarily. A stranger to the contract cannot institute an action for annulment.

Requisites:

1) Plaintiff must have interest in the contract;

2) The victim and not the party responsible for the vice or defect must assert the same.

Exception:

If a third person is prejudiced in his rights with respect to one of the contracting parties, and can show
detriment which would positively result to him from the contract in which he has no intervention (Teves
v. People’s Homesite & Housing Corp., GR No. 21498, June 27, 1968)

Effects of Annulment

1) In contract has not yet been consummated parties shall be released from the obligations arising
therefrom;

2) If contract has already been consummated rules provided in Arts. 1398-1402 shall govern.

• Arts. 1398-1399 – Obligation of mutual restitution

• Arts. 1400-1402 – Effect of failure to make restitution

UNEFORCEABLE Contracts

Those which cannot be enforced by proper action unless they are ratified, because, either:
 1) They are entered into without or in excess of authority (Art 1403 (1); Art. 1317);

2) They do not comply with the statute or frauds (Art. 1403 (2);

3) Both contracting parties do not possess the required legal capacity.

Note:

The statute of frauds applies only to EXECUTORY CONTRACTS, not to those that are partially or
completely fulfilled. Further, the statute does not apply to actions which are neither for specific
performance of the contract nor for the violation thereof. Take note that the provision mentions
“unenforceable by action.” The prohibition, thus, applies on actions which spring from the enforcement
of the contract.

Mactan-Cebu Int’l. Airport Authority vs. Lozado, Sr. (Feb. 25, 2010)

Held: The Statute of Frauds operates only with respect to executory contracts, and does not apply to
contracts which have been completely or partially performed,

Ratification of Contracts Infringing the Statute of Frauds (Art 1405)

Such contracts may be ratified by:

1) Failure to object to the presentation of oral evidence to prove such contracts; or

2) Acceptance of benefits under these contracts

Note:

The unenforceability of a contract can only be assailed by parties thereto (Art. 1408). This defense is
personal to the party to the agreement.

VOID OR INEXISTENT Contracts

In general, they are those which lack absolutely either in fact or in law one or some of the elements
essential for its validity.

Note:

The defense of illegality of contract is not available to third persons whose interests are not directly
affected (Art. 1421)

• A contract which is the direct result of a previous illegal contract, is also void and inexistent (Art.
1422)
Void and Inexistent Contracts Distinguished

Void Inexistent

Those where all of the requisites of a contract are present but Those where one or some or all of the requisites esse
the cause, object or purpose is contrary to law, morals, good the validity of a contract are absolutely lacking
customs, public order, or public policy or contract itself is
prohibited or declared void by law.

Principle of pari delicto is applicable Principle of pari delicto is not applicable

May produce legal effects Cannot produce legal effect

Covers Art. 1409 nos. 1, 3, 4, 5, 6 and 7 Covers Art. 1409 nos. 2 and 3

Contracts which are INEXISTENT and VOID AB INITIO (Art. 1409)

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; and

7) Those expressly prohibited or declared void by law.

Principle of In Pari Delicto (Arts. 1411-1417)

General Rule: When the defect of a void contract consists in the illegality of the cause or object of the
contract and both of the parties are at fault or in pari delicto, the law refuses them any remedy and
leaves them where they are.

Exceptions:

1) Payment of usurious interest (Art. 1413);

2) Payment of money or delivery of property for an illegal purpose, where the party who paid or
delivered repudiates the contract before the purpose has been accomplished, or before any
damage has been caused to a third person (Art. 1414);
 3) Payment of money or delivery of property made by an incapacitated person (Art. 1415);

4) Agreement or contract not illegal per se but merely prohibited by law, and the prohibition is
designed for the plaintiff’s protection (Art. 1416);

5) Payment of any amount in excess of the maximum price of any article or commodity fixed by
law (Art. 1417);

6) Contract whereby a labourer undertakes to work longer than the maximum number of hours
fixed by law (Art. 1418);

7) Contract whereby a labourer accepts a wage lower than the minimum wage fixed by law (Art.
1419);

8) In case of divisible contracts, the legal terms may be enforced separately from the illegal terms
(Art. 1420); and

9) One who lost in gambling because of fraudulent schemes practiced on him. He is allowed to
recover his losses. [Art. 315, 3(b), RPC] even if gambling is prohibited.

Note:

The principle of in pari delicto is applicable ONLY TO VOID CONTRACTS and not to inexistent
contracts.

Rules when only one of the parties is at fault:

1) Executed Contracts – guilty party is barred from recovering what he has given to the other party
by reason of the contract. Innocent party may demand for the return of what he has given.

2) Executory Contracts – Neither of the contracting parties can demand for the fulfillment of any
obligation from the contract nor may be compelled to comply with such obligation.