CONTRACTS

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CONTRACTSA Contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.

Stages in life of contract:1)Preparation (conception)

2)Perfection/Execuory

3)Consummation/Executed

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Estate of Orlando Llenado, et al. vs. Llenado (March 4, 2009)

Lease with option to Lessee to renew must be exercised.SC – “While the option to renew is an enforceable right, it must be first exercised to be given effect. xxx the option of the lessee gives the latter an enforceable right to renew xxx such time as provided for. xxx In the absence of a stipulation in the lease requiring notice of the exercise of an option xxx to be given within a certain time before the expiration of the lease, xxx general rule is that the lessee must exercise an option xxx to renew xxx and NOTIFY the lessor thereof BEFORE or at least at the time of the expiration of the original term xxx (Executory). The silence of lessee after termination of original period CANNOT mean to be that they opted to renew xxx (Executed).

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Effects of Contracts1) Essential – those without which there can be

no contract (Art. 1318)a) Common elements – present in all contracts

- Consent

- Object or subject matter

- Cause or consideration

b) Special elements – only in certain contracts

c) Extraordinary elements – peculiar to specific contract

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2) Natural – those which are derived from the nature of the contract and ordinarily accompany the same; they are presumed by law

3) Accidental – those which exist only when the parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract

Characteristics of Contracts

1)Obligatory force of contracts

2)Mutuality

3)Autonomy

4)Relativity

5)Consensuality

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Obligatory Force of Contracts

•This principle is explicitly recognized in Arts. 1159, 1308, 1315 and 1356.

•It is a rule that once the contract is perfected, it shall be of obligatory force upon both of the contracting parties.

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Mutuality (Art. 1308)

The contract must bind both parties.

Note:The validity or fulfilment of a contract cannot be left to the will of one of the contracting parties.

Validity or fulfilment may be left to (1) the will of a third person, whose decision shall not be binding until made known to both the contracting parties (Art. 1309) or (2) chance.

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Philippine Savings Bank vs. Sps. Castillo, et al. (May 30, 2011)

Held: The unilateral determination and imposition of the increased rates (of interest in loan) is violative of the principle of mutuality of contracts under Art. 1308 xxx. A perusal of the Promissory Note will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker xxx. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid.

BUT…

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MIAA vs. Ding Velayo Sports Center (May 30, 2011)

An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract xxx. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a substantial and integral part of the agreement.

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The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. xxx Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment.

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Autonomy (Art. 1306)

The contracting parties may establish such stipulations, clauses, terms and conditions as they deem convenient.

Limitation to the principle of autonomy:•Stipulations should not be contrary to law, morals, good customs, public order, or public policy.•Exercise of Parens Patriae – weakening the consensual nature of contracts giving undue advantage to one of the contracting parties

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Relativity (Art. 1311)

General Rule: Contracts take effect only between parties, their assigns and heirs.

Limitations: HOWEVER with respect to assignees or heirs, the general rule under Art. 1311 is not applicable if the rights and obligations arising from the contract are not transmissible or purely personal.

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Exceptions:1)Beneficial stipulation/stipulation pour autrui – A stipulation in favour of a third person.

2)When the third person comes into possession of the object of a contract creating real rights; (Art. 1312)

3)Where the contract is entered into in order to defraud a creditor; (Art. 1313)•Here, the creditor may ask for its rescission.

1)Where the third person induces a contracting party to violate his contract (Art. 1314). Such third person can be held liable for damages.

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5) Contracts creating “status” (marriage contract)

6) In suspension of payments and compositions under the Insolvency Law

7) CBA

8) Negotiorum gestio (Art. 2150-2151)

9) Violence & intimidation employed by 3P (Art. 1336)

Essential Requisites of Contracts

CONSENT: conformity of the parties to the terms of the contract; the acceptance by the offeree of the offer made by the other

Requisites:1)Must be manifested by the concurrence of the other and acceptance; (Arts. 1319-1326)

2)Parties must possess the necessary legal capacity; (Arts. 1327-1329) and

3)Must be intelligent, free, spontaneous, and real. (Arts. 1330-1346)

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• The fact that the signatures of the witnesses and the notary public were forged does not negate the existence of the contract for as long as the parties consented to it. The signatures of the witnesses and the notary public are necessary simply to make the contract binding on the third person (Soriano v. Soriano, G.R. No. 130348, Sept. 3, 2007)

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OFFER: Unilateral proposition which one party makes to the other for the celebration of a contract

Requisites:1)It must be defined.

2)It must be intentional.

3)It must be complete.

4)It must be directed to person or persons with whom the other offeror intends to enter into a contract except definite offers which are not directed to a particular person but to the public in general (i.e. public auction)

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Withdrawal of Offer

Offer/proposal may be withdrawn so long as the offeror has no knowledge of acceptance by offeree

Except: Option Contract (Art. 1324)

Counter-offer

Qualified acceptance; involves a new proposal; a rejection of the original offer

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Complex Offers

When a single offer involves two or more contracts, the perfection, where there is only partial acceptance, will depend upon the relation of the contracts between themselves, whether due to their nature or due to the intent of the offeror.

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Rule on Complex Offers

1)Offers are interrelated – contract is perfected if all the offers are accepted

2)Offers are not interrelated – single acceptance of each offer results in a perfected contract unless the offeror has made it clear that one is dependent upon the other and acceptance of both is necessary

ACCEPTANCE: Must be certain or definite and absolute in character. A qualified acceptance constitutes a counter-offer. (Art. 1319)

It may be express or implied (e.g. failure on the part of the heir to reject the inheritance within 30 days from notice of the order of the court distributing the estate). (Art. 1320)

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Requisites of acceptance:1)Absolute (no vitiation)

2)Directed to the offeror

3)Made with the intention to be bound

4)Made within the prior time

5)Communicated to the offeror and learned by him unless the offeror knows of the acceptance.

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Amplified Acceptance

Under certain circumstances, a mere amplification on the offer must be understood as an acceptance of the original offer, plus a new offer which is contained in the amplification.

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Withdrawal Acceptance•First View (Manresa) – Although the offeror is not bound until he learns of the acceptance, the same thing cannot be said of the offeree who from the moment he accepts, loses the power to retract such acceptance xxx•Second View (Tolentino) – Acceptance may be revoked before it comes to the knowledge of the offeror because in such case there is still no meeting of minds

Theories that determine the exact moment of perfection when acceptance is made by letter or telegram:

1)Manifestation Theory – perfected from the moment the acceptance is declared or made.•Adhered to by the Code of Commerce

1)Expedition Theory – perfected from the moment the offeree transmits the notification of acceptance to the offeror.

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3) Reception Theory – perfected from the moment that the notification is in the hands of the offeror in such a manner that he can, under ordinary conditions, procure the knowledge of its contents, even if he is not able to actually acquire such knowledge.

4) Cognition Theory – perfected from the moment the acceptance comes to the knowledge of the offerror.

Note:

The stipulation of the parties governs the manner and moment of acceptance as when they stipulate that it be expressly accepted.

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Note:

Silence can be construed as consent.

Requisites:1) There is a duty or possibility to express oneself;

2) The manifestation of the will cannot be interpreted in any other way;

3) There is a clear identity in the effect of the silence and the undisclosed will (Arts. 1670, 1870-1873)

OPTION CONTRACT

A preparatory contract in which one party grants to the other for a fixed period under specified conditions, to decide whether or not to enter into a principal contract.

Requisites:1)It is supported by an independent consideration; and

2)It is exclusive.If the option is not supported by a consideration which is distinct from the purchase price, the offer may still be withdrawn even if the offeree has already accepted it (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, p. 413 [2010])

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Persons Incapacitated to Give Consent (Art. 1327)

A.MinorsExceptions: a)When minor misrepresents his age (It must be an active not merely constructive representation); physical attributes;

b)Contracts involving the sale and delivery of necessaries to minors (Art. 1489)

c)Contracts by guardians or legal representatives.

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B. Insane or Demented Persons - Unless the contract was entered into during a lucid interval (Art. 1328).

C. Deaf-mutes who do not know how to read and write

N.B. Rule 93, Sec. 2—

Incompetents1) Persons under civil interdiction

2) Hospitalized lepers, prodigals, deaf & dumb

3) Unsound mind

4) Person who cannot take care of themselves because of age, disease or weak mind.

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Are they Incapacitated?

Answer: Incompetents also incapacitated OBVIOUSLY cannot give consent

BUT

incompetents NOT incapacitated – can give consent

BUT

if guardian already appointed, then cannot give consent anymore.

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Incapacity to give consent (Art. 1327) vs. Disqualification to contract (Art. 1329)

Article 1327 Article 1329

Restrains the existence of the right to contract

Restrains the very right itself

Based upon subjective circumstances of certain persons

Based upon public policy and morality

Voidable Void

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Vices of Consent (Art. 1330)

1)Vices of the will (vicios de la formacion de la voluntad)2)Violence3)Intimidation4)Mistake5)Fraud6)Undue Influence

Vices of Declaration (vicios de la declaracion)

-Simulation of contracts

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A. Mistake

It must refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. (Art. 1331)

Not only wrong conception of the thing but also the lack of knowledge with respect to it.

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Two (2) General Kinds of Mistake

Mistake of Fact Mistake of LawOne or both contracting parties believe that a fact exists when in reality it does not or vice versa.

One or both parties arrive at an erroneous conclusion regarding the interpretation of a question of law or legal effects of a certain act or transaction.

Vitiates consent Does not vitiate consent except when it involves mutual error as to the effect of an agreement when the real purpose is frustrated.

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Requisites of Art. 1334 which will vitiate consent:1)It must be of a past or present fact;

2)It must not be imputable to the party mistaken, i.e. mistake is not inadvertent and excusable;

3)Mistake must be with respect to the legal effect of an agreement;

4)It must be mutual; and

5)Parties’ real purpose must have been frustrated.

•There is NO MISTAKE in the party alleging it knew the doubt, contingency or RISK affecting the object of the contract (Art. 1333)

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B. Violence

When in order to wrest consent serious or irresistible force is employed (Art. 1335)

Requisites:1) Must be serious or irresistible

2) Must be the determining cause for the party upon whom it is employed in entering in the contract

3) It is not justified

4) It is sufficient

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C. Intimidation (Art. 1335)

Requisites:1) One party is compelled to give his consent by a

reasonable and well-grounded fear of an evil;

2) The evil must be imminent and grave;

3) The evil must be upon his person or property, spouse, descendants or ascendants; and

4) It is the reason why he enters the contract.

5) The evil must be unjust.

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Violence vs. Intimidation

Violence IntimidationRefers to physical compulsion Refers to moral compulsion

External or prevents the will to manifest itself

Internal or induces the performance of an act

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D. Undue Influence (Art. 1337)

When a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice.

Test of undue influence:Whether or not the influence exerted has so

overpowered or subjugated mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own. (Coso v. Fernandez Deza, G.R. No. 16763, December 22, 1921)

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Circumstances considered to determine whether the influence exerted is unreasonable:

1)Confidential relations

2)Family relations

3)Spiritual relations

4)Other relations between the parties

•By analogy, undue influence employed by a third person may annul the contract.

N.B.

Reverential fear is fear of displeasing a person to whom respect and obedience is due. Here, there is NO unreasonable restraint in the choice of the party and HENCE NOT VITIATE CONSENT.

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E. Fraud (Art. 1338)

When, through insidious words or machinations of one party, the other is induced to enter into a contract which without them, he would not have agreed to.

Kinds of fraud:1) Fraud in the PERFECTION of the contracts

a) Causal Fraud (Dolo Causante)

b) Incidental Fraud (Dolo Incidente)

2) Fraud in the PERFORMANCE of an obligation (Art. 1170)

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Requisites of Fraud under Art. 1338:1)One party must have employed fraud or insidious words or machinations

2)It must have been serious;

3)It induced the other party to enter into a contract;

4)It must have been employed by one contracting party upon the other and not employed by both contracting parties or by third persons;

5)Damage or injury resulted to the other party;

6)It must be made in bad faith, i.e. with knowledge of its falsify

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Dolo Causante (Art. 1338) Dolo Incidente (Art. 1344)

Refers to those deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract

Refers to those deceptions or misrepresentations which are not serious in character and without which the other party would have still entered the contract.

Fraud which is serious in character Not serious in character

It is the cause which induces the party to enter into a contract

Not the cause

Renders the contract voidable Liability for damages

Dolo Causante vs. Dolo Incidente

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Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious accusations that can be so convenient and casually invoked, and that is why they are never presumed. (Cathay Pacific Airways, Ltd vs. Sps. Vazquez, G.R. No. 150843, March 14, 2003)

Note:

Failure to disclose facts, when there is a duty to reveal them, constitutes fraud. (Art. 1339)

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• The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent (Art. 1340)

• A mere expression of an opinion does not signify fraud unless made by an expert and the other party relied on the former’s special knowledge (Art. 1341).

Fraud by third person does not vitiate consent UNLESS:

a)It has created a substantial mistake and the same is mutual.

b)Third person makes the misrepresentation with the complicity, or at least with the knowledge but without the objection, of the favoured contracting party.

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• Misrepresentation made in good faith is not fraudulent but may constitute error (Art. 1343)

• When two persons constitute one party of the contract with respect to another, the deceit exercised by one of them upon his co-party is not a cause for annulment of the contract.

Simulation of Contracts(Arts. 1345-1346)

A deliberate declaration contrary to the will of the parties.

1)Agreement of the parties to the apparently valid act.

2)The purpose is to deceive or to hide from third persons although it is not necessary that the purpose be illicit or for purposes of fraud.

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Kinds of simulation of contract:1)Absolute (simulados) – parties do not intend to be bound by the contract at all. •Status: VOID

2)Relative (disimulados) – parties conceal their true agreement. It binds the parties to their real agreement, when it does not prejudice a third person and is not intended for any pupose contrary to law, morals, good customs, public order or public policy. (i.e. a deed of sale of a piece of land is executed by the parties to conceal their two agreement which is a donation)

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Two juridical acts in relatively simulated contracts:

1)Ostensible Act (apparent or fictitious) – pretended contract

2)Hidden Act (real) – true agreement

Should the hidden act or the concealed contract be lawful and does not prejudice a third person, it is absolutely enforceable. Its validity and effects will be governed by the rules applicable to it, and not by those applicable to the apparent contract.

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With respect to a third person acting in good faith, the apparent contract must be considered as the true contract. The declaration that the contract is simulated does not prejudice him.

•Relative simulation is presumed by law in case of Art. 1602

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OBJECT: The thing, right or service which is the subject matter of the obligation arising from the contract.

Requisites:1)Must be within the commerce of man;

2)Should be real or possible;

3)Should be licit; and

4)Should be determine, or at least possible of determination as to its kind.

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Things Which Cannot Be the Object of Contracts (Art. 1347-1349)

General Rule: All things or services may be the object of contracts.

Exceptions:

1)Things outside the commerce of men;

2)Intransmissible rights;

3)Future inheritance except in cases expressly authorized by law:a)The object of the contract forms part of the inheritance; and

b)The promissor has an expectancy of a right which is purely hereditary in nature.

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4) Services contrary to law, morals, good customs, public order or public policy;

5) Impossible things or services;

6) Objects not possible of determination as to their kind.

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Note:

In order that a thing, right or service may be the object of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future:

•Future thing may be the object of a contract. Such contract may be interpreted in two possible ways:

1)Conditional contract – if its efficacy should depend upon the future existence of the thing

2)Aleatory contract – if one of the contracting parties should bear the risk that the thing will never come into existence

CAUSE: It is the immediate, direct or most proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties.

Essential requisites of cause:1)Existing at the time of the celebration of the contract;

2)Licit or lawful; and

3)True

 

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Cause and Object Distinguished

Cause Object The service or benefit which is remunerated

The thing which is given in remuneration

The liberality of the donor or benefactor

The thing which is given or donated

Prestation or promise of a thing or service by the other

The thing or service itself

Different with respect of each party

May be the same for both parties

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Cause and Motive Distinguished

Cause MotiveDirect and most proximate reason of a contract

Indirect or remote reason

Objective or juridical reason of a contract

Psychological or purely personal reason

Always the same for each contracting party

Differs for each contracting party

Its legality affects the existence or validity of the contract

Its legality does not affect the existence or validity of contract.

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Effect of Lack of Cause, Unlawful Cause, False Cause and Lesion (Arts. 1352-1355)

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Cause Effect

Lack of Cause There is a total lack or absence of cause

The contract confers no right and produces no legal effect

Illegality of cause The cause is stated but is not true

The contract is void if it should not be proved that they were founded upon another cause which is true and lawful

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Cause Effect

Lesion or inadequacy of price

Shall not invalidate the contract, UNLESS:1)There is fraud, mistake or undue influence; or 2)When the parties intended a donation or some other contract.

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FORMS OF CONTRACTS

General Rule: Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present (Art. 1356).

Exceptions:

1.When the law requires that the contract be in a certain form to be valid (Art. 1356)2.When law requires that the contract be in a certain form to be enforceable (Statute of Frauds)3.When required to make the contract effective as against third parties (Art. 1357-1358)

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Where the validity of a contract is made to depend upon a particular formality, an action under Art. 1357 cannot be brought to compel the other party to execute such formality.

Article 1357 presupposes the existence of a valid contract and cannot possibly refer to the form to make it valid.

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Contracts which must appear in writing:

1.Donation of personal property whose value exceeds five hundred pesos (Art. 748)2.Sale of a piece of land or any interest therein through an agent (Art. 1874)3.Agreements regarding payment of interest in contracts of loan (Art. 1956); 4.Antichresis (Art. 2134); and5.Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary diligence (Art. 1744)

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Contracts which must appear in public instrument:

1.Donation of immovable properties (Art. 749);2.Partnership where immovable property or real rights are contributed (Arts. 1171 and 1773); 3.Acts/contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property (Arts. 1358 (1), 1403 (2), 1405);4.The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains (Art. 1358 (2);5.The power to administer property or those which should prejudice a third person (Art. 1358 (3);6.The cession of actions or rights proceeding from an act appearing in a public document (Art. 1358 (4)

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Note:

With respect to those enumerated under Art. 1358 (items 3 to 6 in the preceding list), they are valid as between the contracting parties. The requirement that they be executed in a particular form is for the purpose of making them effective against third persons. However, with respect to items 1 and 2, formalities are required for the validity of the contract.

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Contracts which must be registered:

1.Chattel mortgages (Art. 2140)2.Sale/transfer of large cattle (Cattle Registration Act)

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Note:

Arts. 1357-1358 do not require the execution of the contract either in a public/private document in order to validate/enforce it but only to insure efficacy, so that after its existence has been admitted, the party bound may be compelled to execute the necessary document.

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• When one of the contracting parties invokes Art. 1357 and 1358 by means of proper action, the effect is to place the existence of the contract in issue, which must be resolved by the ordinary rules of evidence.

• Actions to compel the execution of the necessary document and action upon the contract may be exercised simultaneously, unless it appears that the former action must precede the latter.

• Although Art. 1357, in connection with Art. 1358, do not operate against the validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfilment thereof, it is evident that under them execution of the required document must precede the determination of the obligations derived from the contract.

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R.A. 8792 (E-Commerce Act)

It provides that the formal requirements to make contracts effective as against third persons and to establish the existence of a contract are deemed complied with provided that the electronic document is unaltered and can be authenticated as to be usable for future reference.

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Reformation of Instruments

Remedy by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed.

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Requisites:

1)Meeting of the minds of the parties;2)Their true intention is not expressed in the instrument;3)Failure to express true intention is due to mistake, fraud, inequitable conduct or accident; and4)Clear and convincing proof of mistake, accident, relative simulation, fraud, or inequitable conduct.

Reformation AnnulmentPresupposes that there is a valid contract but the document/instrument executed does not express their true intention

The contract was not validly entered into as when their minds did not meet or if the consent was vitiated

Gives life to the contract by making the instrument conform to the true intention of the parties

Involves a complete nullification of the contract

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When can one party ask for the reformation of the contract (Arts. 1361-1365)

1)In case of mutual mistake of the parties (Art. 1361)2)When one party was mistaken and the other party acted fraudulently (Art. 1362);3)When one party was mistaken, the other knew or believed that the instrument does not show their real intent but concealed that fact to the former (Art. 1363);4)In case of ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument (Art. 1364);5)When parties agree upon the mortgage or pledge of a real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase (Art. 1365).

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Instances when there can be no reformation: (Art. 1366)

1)Simple donations inter vivos wherein no condition is imposed;2)Wills;3)When the real agreement is void (Art. 1366)

Note:•If mistake, fraud, inequitable conduct or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract (Art. 1359)•Expediency and convenience are not grounds for the reformation of an instrument (Multi-Ventures Capital vs. Stalwart, G.R. No. 157439, July 4, 2007)

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4) When one of the parties brought an action to enforce the instrument (Art. 1367)

Note:• When one of the parties has brought an action to

enforce the instrument, no subsequent reformation can be asked (principle of estoppel)

• In case of mutual mistakes, reformation may be ordered at the instance of either parties or his successors in interest, otherwise it may only be brought by the petition of the injured party or his heirs and assigns (Art. 1365).

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

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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)

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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.

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B. Fraud1)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 fulfilment the debtor could not be compelled at the time they were effected.

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C. Other Causes Stated By Law1)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

4)Art. 1538 – deterioration of the object of the sale

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 1/10 th of that stated

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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.

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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.

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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:

1)There is a credit existing prior to the celebration contract;

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.

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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.

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• Accion pauliana resupposes 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.

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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.

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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.

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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

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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.

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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 days counted from the day of delivery (Arts. 1547, 1571, 1577)

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VOIDABLE Contracts

Those which possess all the essential elements fr 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.

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CAUSEThe following contracts are voidable or annullable:1)Those where ONE of the parties is incapable of giving consent to a contract;

2)Those where the consent is vitiated by mistake, violence, intimidation, undue influence of fraud (Art. 1390)

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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.

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• 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.

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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)

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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

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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.

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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,

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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.

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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)

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Void and Inexistent Contracts Distinguished

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Void Inexistent

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

Those where one or some or all of the requisites essential for the validity of a contract are absolutely lacking

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

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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.

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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);

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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

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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.

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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 fulfilment of any obligation from the contract nor may be compelled to comply with such obligation.

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