Defective Contracts

Question 1

Contains all requisites of a valid contract, but by reason of injury or damage to either of the contracting parties or to third persons, it is susceptible to rescission at the instance of the party who may be prejudiced thereby

Answer 1

Rescissible Contracts

Question 2

Controlling provision for rescissible contracts?

Answer 2

Art. 1381

Question 3

Difference between Art. 1191 and Art. 1381

Answer 3

1. Art. 1381 is a remedy for economic injury, whereas 1191 is for breach of reciprocal obligations
2. Art. 1381 is only a SUBSIDIARY action, whereas 1191 is PRINCIPAL
3. Art. 1381 prescribes in four years, where as 1191 is 10 years for written, 6 years for oral

Question 4

A remedy granted by law to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract.

Answer 4

Rescission

Question 5

Difference between rescission and termination

Answer 5

1. To rescind is to declare a contract void in its inception and put an end to it as thought it never were.
2. The termination of a contract would necessarily entail enforcement of its terms prior to the declaration of its cancellation.

Question 6

Five causes of rescission

Answer 6

1. Lesion to wards
2. Lesion to absentees
3. Fraud of creditors
4. Things under litigation
5. By provision of law

Question 7

Those contracts which are entered into by guardians suffer lesion by more than one-fourth of the valueof the things which are the object thereof.

Answer 7

Lesion to wards

Question 8

Those contracts agree upon in representation of absentees, if the latter suffer lesion by more than one-fourth of the value of the thing which are the object thereof

Answer 8

Lesion to absentees.

Question 9

A person who abandons his things and/or properties

Answer 9

Absentee

Question 10

Those contracts when the creditor cannot in any other manner collect the claims due them

Answer 10

Fraud of creditors

Question 11

T/F. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property pay all debts contracted before the donation

Answer 11

True. See Art. 1387

Question 12

T/F. Alienation by onerous title are also presumed fraudulent when made by persons against whom some judgment or writ of attachment has been issued

Answer 12

True. See Art. 1387

Question 13

T/F. Payments made in a state of insolvency for the obligation to whose fulfillment the debtor count not be compelled at the time they were effected are rescissible

Answer 13

True. See Art. 1382. An example of a contract specially provided by law to be rescissible

Question 14

Limitation to the first and second cause for rescission

Answer 14

Art. 1386. Rescission for lesion of wards or lesion of absentees shall not take place with respect to contract approved by the courts.

Question 15

Five requisites for rescission of contracts in fraud of creditors (accion pauliana)

Answer 15

1. That the Plaintiff(s) asking for rescission, has credit prior to the alienation, although demandable after
2. That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person
3. That the creditor has no other legal remedy to satisfy his claim but would benefit by rescission of the conveyance to the third person
4. That the act being impugned is fraudulent; and
5. That the third person who received the property conveyed, if by onerous title, has been accomplice in the fraud

Question 16

Seven badges of fraud

Answer 16

1. The fact that the consideration of the conveyance is fictitious or is inadequate
2. The transfer made by a debtor after a suit has been begun and while it is pending against him
3. Sale upon credit by insolvent debtor
4. Evidence of large indebtedness or complete insolvency
5. The transfer of all or nearly all his property by a debtor, especially when he is insolvent or greatly embarrassed financially
6. The fact that the transfer is made between father and son, when there are present other of the above circumstances; or
7. The failure of the vendee to take exclusive possession of all the property.

Question 17

Who may file rescissions?

Answer 17

1. The injured person; the creditor defrauded; or the plaintiff in a case where the thing in litigation was alienated
2. The heirs of such person
3. The creditors of such person (accion subrogatoria, Art. 1177)

Question 18

Prescription period for rescission

Answer 18

Within four years and runs from the day it has become clear that there are no other legal remedies by which the creditor can satisfy his claims

Question 19

Give general requisites for rescession:

Answer 19

1. Rescission must be made for a cause provided by law (Art. 1380-81)
2. No other legal means to obtain reparation (Art. 1383)
3. Extent necessary to cover the damages (Art. 1384)
4. Rescission can be carried out only when he who demands rescission can return whatever he may be obliged to return (Art 1385)
5. Shall not take place when the things which are the object f the contract are legally in the possession of third persons who did not act in bad faith. (Art. 1385)

Question 20

The effect of rescission

Answer 20

Creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest.(Art. 1385)

Question 21

Existent, valid, and binding although they can be annulled because of want of capacity or vitiated consent of one of the parties.

Answer 21

Voidable contracts

Question 22

Two cause for voidable contacts

Answer 22

1. Lack of capacity (Art 1391)
2. Vitiated consent (Art. 1391)

Question 23

Remedy for voidable contracts?

Answer 23

Annulment through direct and proper Court action (Art. 1390)

Question 24

Who may file for annulment?

Answer 24

1. All who are thereby obliged principally or subsidiarily (Art. 1397)
2. All whom are injured because of the defect

Question 25

When will the remedy for annulment in cases of voidable contracts prescribe?

Answer 25

Four years and runs: 1. In cases of intimidation, from the time the defect of the consent ceases 2. In cases of fraud or mistake, time of discovery 3. In cases of contracts entered by minors, from the time guardianship ceases

Question 26

Effect of annulment

Answer 26

To wipe it out of existence and to restore the parties to their original situation before the contract was entered into. Restoration of what has been given. See Art 1398

Question 27

T/F. In obligations to render service, the value thereof shall be the basis for damages.

Answer 27

True. See Art. 1398

Question 28

T/F. the principle of unjust enrichment does not applies in annulment of voidable contracts.

Answer 28

False. It applies.

Question 29

Who are exempt of restoring what was given?

Answer 29

Incapacitated persons. The incapacitated person is not obliged to make any restitution except insofar as he has been benefitted by the thing or price received by him. (Art. 1399)

Question 30

Three rules when restitution cannot take place due to the lost of the thing?

Answer 30

1. If through fault or fraud of the plaintiff, the action for annulment is barred. See Art. 1401 2. If through fault or fraud of the defendant, defendant must pay the value of the thing at the time of the loss + interest as well as fruits. See Art. 1400 3. If no one's fault, paying the value of the thing at the time of the lost BUT without interest

Question 31

Another remedy afforded to voidable contracts.

Answer 31

Ratification.

Question 32

T/F. Ratification extinguishes the action to annul a voidable contracts.

Answer 32

True. See Art. 1392

Question 33

Two requisites for ratification?

Answer 33

1. The ratifying party knows of the reason which renders the contract voidable; and 2. Such reason has ceased. (Art. 1391)

Question 34

Two ways to ratify?

Answer 34

1. Express 2. Tacit

Question 35

T/F. There is express ratification if the offended party states orally or in writing that he is ratifying the voidable contract

Answer 35

True

Question 36

T/F. The person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Answer 36

True

Question 37

Who may ratify? Two instances:

Answer 37

1. Due to lack of capacity, ratification be effected by the incapacitated person upon gaining capacity or his guardian during incapacity (Art. 1394) 2. Due to vice of consent, ratification be effected by person whose consent was vitiated

Question 38

Effect of ratification?

Answer 38

Ratification cleanses the contract from all effects from the moment it was constituted (Art. 1396). Retroactive.

Question 39

Those which cannot be enforced in court unless they are ratified because they are entered into without or in excess of authority, or they do not comply with the statute of frauds, or both of the contracting parties do not possess the required legal capacity.

Answer 39

Unenforceable contracts

Question 40

Three types of unenforceable contracts

Answer 40

1. Entered in the name of another person who had given NO authority. Art. 1317 2. Those who do not comply with the statute of frauds 3. Those parties incapable of giving consent

Question 41

T/F. An exception to no authority is when a person sells a thing above the selling price

Answer 41

True. See Art. 1882

Question 42

T/F. In situations wherein both parties are incapacitated, if the contract is ratified by the parent or guardian of one of the contracting parties, the contract becomes valid?

Answer 42

FALSE. It has to be both

Question 43

May third parties raise the defense of Statute of Frauds

Answer 43

NO. Only contracting parties may raise that defense (Art. 1408)

Question 44

One which has no force and effect from the very beginning. Hence, it is as if it has never been entered to.

Answer 44

Void and inexistent contracts

Question 45

Five effects of void contracts

Answer 45

1. Produced no civil effect and no juridical relation 2. Inexistent contracts are those which an essential element is lacking, e.g., legality 3. Void contracts CANNOT be ratify. There was never a contract. 4. Defense for declaration of the existence of a contract DO NOT prescribe (Art. 1410) 5. Who can invoke? Parties and third persons directly affected by the contract.

Question 46

Eight types of void or ineqixtent contracts

Answer 46

1. Those whose cause, object or **purpose is contrary to law** 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.** 7. Those **expressly prohibited or declared void by law.** 8. A contract which is the **direct result of a previous illegal contract**, is also void and inexistent. (Art. 1422)

Question 47

T/F. Parties to a void agreement cannot expect the aid of law; the courts leave them as they are, because they are deemed in pari delicto or "in equal fault."

Answer 47

True. Each must bear the consequences of his own act

Question 48

Three exceptions to the pari delicto rule

Answer 48

1. Inexistent contracts 2. If it would violate public policy 3. When the law permits an exemption

Question 49

Six instances where the law permits the exemption to pari delicto

Answer 49

1. Innocent party (Arts. 1411-1412) 2. Payment of usurious interest (Art. 1413) 3. Incapacitated party if the interest of justice so demands (Art. 1415) 4. The party for whose protection the prohibition by law is intended, if the agreement is not illegal epr se but merely prohibited and if public policy would be enhanced by permitting recovery (Art. 1416) 5. If the party whose benefit the law has been intended such as in price ceiling laws (Art. 1417)

Question 50

Two rules when the nullity proceeds from the illegality of the cause or object of the contract

Answer 50

1. When both parties are in pari delicto-- they shall have **no action against each other,** both shall be prosecuted  2. When only one party is guilty-- the guilty party shall be prosecuted. However, the **innocent party may claim what he has given**, and shall not be bound to comply with his promise (Art. 1411).  3. When both parties are at fault-- **neither may recover what he has given** by virtue of the contract, or demand the performance of the other's undertaking (Art. 1412) 4. When only one party is at fault, the party who is not at fault **may demand the return of what he has given** without any obligation to comply with his promise. 

Question 51

T/F. When money is paid or property is delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person (Art. 1414).

Answer 51

True. Although, NOT automatic. You have to go to court