1

RESCISSIBLE CONTRACTS [Link] undertaken in fraud of creditors when the creditors cannot in any other
manner collect the claims due them (Article 1381 (3))

(THIRD PERSON MAY BRING ACTION) -This is an exception to the principle of relativity of contracts.
-Creditors, after having pursued the property in possession of the debtor to satisfy
their claims may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the
This is not be to confused with resolution, discussed in Article 1191. This chapter on acts which the debtor may have done to defraud them (Article 1177).
rescissible contracts is the proper rescissible. rescission is a process designated to -Creditors are protected in cases of contracts intended to defraud them (Article 1313).
render inefficacious a contract validly entered into and normally binding, by reason -In determining whether or not a certain conveyance is fraudulent, the question in
of external conditions, causing an economic prejudice to a party or to his creditors. every case is whether the conveyance was a bona fide transaction or trick and
A rescissible contract is a contract which is valid because it contains all the essential contrivance to defeat creditors, or whether it conserves to the debtor a special right.
requisites prescribed by law, but which is defective because of injury or damage to -All contracts by virtue of which the debtor alienates property by gratuitous tile are
either of the contracting parties or to 3rd persons, as a consequence of which it may be presumed to have been entered into in order to defraud creditors, when the donor did
rescinded by means of a proper action for rescission. not reserve sufficient property to pay all debts contracted before the donation (Article
1387, 1st ¶).
Rescission is a remedy granted by law to the contracting parties, and even to 3rd -Alienations by onerous title are also presumed fraudulent when made by persons
persons, to secure the reparation of damages caused to them by a contract, even if the against whom some judgment has been rendered in any instance or some writ of
same should be valid, by means of the restoration of things to their condition prior to attachment has been issued. The decision or attachment need not refer to the
the celebration of the contract. property alienated, and need not have been obtained by the party seeking the
rescission (Article 1387, 2nd ¶).

THE FOLLOWING CONTRACTS ARE RESCISSIBLE Badges of Fraud

[Link] fact that the consideration of the conveyance is inadequate
1..Those entered into by guardians whenever the whom they represent suffer b.A transfer made by a debtor after suit has begun and while it is pending against him
lesion by more than ¼ of the value of things which are the object thereof (Article c.A sale upon credit by an insolvent debtor
1381 (1)) [Link] of large indebtedness or complete insolvency
[Link] transfer of all or nearly all of his property by a debtor, especially when he is
-Rescission shall not take place with respect to contracts approved by the court insolvent or greatly embarrassed financially
(Article 1386). [Link] fact that the transfer is made between father and son when there are present any
of the above circumstances
-As a rule, when a guardian enters into a contract involving the disposition of the [Link] failure of the vendee to take exclusive possession of all the property
ward’s property, the guardian must secure the approval of the guardianship court. A
guardian is only authorized to manage the estate of the ward. A guardian has no
power to dispose of any portion of the estate without approval of the court. If more
than acts of mere administration are involved, judicial approval is necessary.
[Link] other contracts specially declared by law to be the subject of rescission
-In case of sale, mortgage, or other encumbrance of any portion of the estate which (Article 1381 (5))
does not have judicial approval is an unenforceable contract (Article 1403 (1)). -The following provision in sales are examples of rescissible contracts declared by
law – Arts 1526, 1534, 1538, 1539, 1540, 1556, 1560, 1567, 1659.
-Therefore, Article 1381 (1) is limited to contracts which constitute mere acts of -Payments made in a state of insolvency for obligations to whose fulfillment the
administration (i.e. the purchase of equipment for the cultivation of lands, purchase debtor could not be compelled at the time they were effected (Article 1382)
of materials for repair of buildings, etc.). The person asking for rescission must have no other legal means to obtain reparation
-For example, A is the agent of B. B owns land worth P10 M. A sells the land for P7 for the damages suffered by him (Article 1383)
M. From the facts, the lesion suffered by B is 30%. In practice, are you sure that
P10 M is the fair market value of the land. What if the situation is urgent and that The person demanding rescission must be able to return whatever he may be
property must be disposed of right away? obliged to restore if rescission is granted (Article 1385, 1st par)
-This requisite is only applicable if the one who suffers the lesion is a party to
-Another example, A is the agent of B. B owns land worth P10 M. C wants to buy the contract.
the land. C is willing to pay P 7 M – lump sum payment. D is willing to pay P 10 M -This requisite does not apply when a defrauded creditor resorts to accion
but on installments. pauliana.
2022 notes: IF THERE ARE OTHER REMEDY, rescission is not possible

[Link] agreed upon in representation of absentees, if the absentee suffers lesion The things which are the object of the contract must not have passed legally to the
possession of a 3rd person acting in good faith (Article 1385, 2nd ¶)
by more than ¼ of the value of things which are the object thereof (Article 1381
(2)) -Whoever acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered by them on account of the alienation,
-Rescission shall not take place with respect to contracts approved by the court whenever, due to any cause, it should be impossible for him to return them (Article
(Article 1386). 1388,1st ¶).
-If there are 2 or more alienations, the 1 st acquirer shall be liable 1st, and so on
-As a rule, when the legal representative of an absentee enters into a contract successively (Article 1388, 2nd ¶).
involving the disposition of the absentee’s property, he must secure the approval of -The action for rescission must be brought within the prescriptive period of 4 years
the court. A legal representative is only authorized to manage the estate of the (Article 1389)
absentee. He has no power to dispose of any portion of the estate without approval
of the court. If more than acts of mere administration are involved, judicial approval
is necessary. (2008 BAR) Dux leased his house to Iris for a period of 2 years, at the rate of
P25,000.00 monthly, payable annually in advance. The contract stipulated that it may
-In case of sale, mortgage, or other encumbrance of any portion of the estate which
does not have judicial approval is an unenforceable contract (Article 1403 (1)). be renewed for another 2-year period upon mutual agreement of the parties. The
contract also granted Iris the right of first refusal to purchase the property at any time
-Therefore, Article 1381 (2) is limited to contracts which constitute mere acts of during the lease, if Dux decides to sell the property at the same price that the property
administration (i.e. the purchase of equipment for the cultivation of lands, purchase is offered for sale to a third party. Twenty-three months after execution of the lease
of materials for repair of buildings, etc.). contract, Dux sold the house to his mother for P2 million. Iris claimed that the sale
was a breach of her right of first refusal. Dux said there was no breach because the
2010 notes: having a bad bargain is not reason to go out of the contract property was sold to his mother who is not a third party. Iris filed an action to rescind
2010 notes:Mutuality of Contracts: interest cannot be unilaterally increased. the sale and to compel Dux to sell the property to her at the same price. Alternatively,
she asked the court to extend the lease for another 2 years on the same terms.
2010 notes: REAL Contracts are Loan, deposit, Commodatum and Pledge
a) Can Iris seek rescission of the sale of the property to Dux’s mother? (3%) No, the
2010 notes: violation of right of 1st refusal, recission is available right of first refusal is applicable only if the lease property is sold to a stranger,
hence, Iris cannot demand rescission of the contract of sale because Dux sold the
subject property to his mother, who cannot be considered as a stranger
[Link] which refer to things under litigation if they have been entered into by
the defendant without the knowledge and approval of the litigants or of b) Will the alternative prayer for extension of the lease prosper? (2%)No, the lease
competent judicial authority (Article 1381 (4)) contract being payable annually in advance, the maximum period therefore Irish can
ask for extension is one year. This is the period by which Irish shall be given a period
-Article 1381 (4) refers to a contract executed by the defendant in a suit involving the to consume her advance payment. The buyer of the lease property is bound to respect
ownership or possession of a thing, when such contract is made without the any pre-existing contract entered into by the prior owner.
knowledge and approval of the plaintiff or court.
But this may however admit an alternative answer:
-As in the case of a contract in fraud of creditors, the remedy of rescission in this case
No, since Dux sold the subject property prior to the expiration of the contract, Irish
is given to a 3rd person who is not a party to the contract. The purpose is to protect
has no right to demand extension of lease because her right of first refusal has not
the plaintiff.
been violated. Dux however has the obligation to return her advance payment, if any.
 2

VOIDABLE CONTRACTS [Link]

Art. 1335, 2nd ¶. There is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an imminent and grave evil
(THIRD PERSON CANNOT BRING ACTION) upon his person or property, or upon the person or property of his spouse,
descendants or ascendants, to give his consent.
A voidable contract is a contract in which all of the essential elements for validity are Requisites of Intimidation
present, but the element of consent is vitiated either by lack f legal capacity of 1 of [Link] threat must be the determining cause for giving consent
the contracting parties or by mistake, violence, intimidation, undue influence, or
fraud. [Link] threatened act is unjust and unlawful
Voidable contracts are binding unless they are annulled by a proper action court. -A threat to enforce one’s claim through competent authority, if the claim is just or
They are susceptible to confirmation. legal, does not vitiate consent (Article 1335, 4th ¶).
There is a difference between CONFIRMATION and RATIFICATION. -The threat to enforce a right, should not be aimed at a result which is contrary to law
Confirmation is the process of curing the defect of a voidable contract. Ratification or morals, or which is unjust and contrary to good faith. Although it is lawful to
is the process of curing contracts which are defective because they were entered into exercise rights, it is not always lawful to use them for purposes different from those
without authority. for which they were created. Thus, although it is lawful to report crimes, the threat to
report it may be illicit if the purpose is not to cooperate in the discovery and
prosecution of the crime, but to obtain some prestation from the culprit which
The following contracts are voidable or annullable, even though there may have otherwise could not be obtained and which does not constitute indemnity for
been no damage to the contracting parties damages for the crime committed. -Thus, the rule is, generally, a threat to do
something lawful does not constitute intimidation.
a. Those where one of the parties is incapable of giving consent to a contract
[Link] threat is real and serious-For example the threat must be to kill you or burn
The following cannot give consent to a contract (Article 1327): your house and not merely to pinch you.
[Link] minors [Link] threat produces a well-grounded fear that the person making it can and will
inflict harm (To determine the degree of intimidation, the age, sex, and condition of
-Where necessaries are sold and delivered to a minor or other person without the person shall be borne in mind (Article 1335, 3rd ¶)).
capacity to act, he must pay a reasonable price therefore. Necessaries include
everything that is indispensable for sustenance, dwelling, clothing, and medical -Intimidation shall annul the obligation, although it may have been employed by a 3 rd
attendance. person who did not take part in the contract (Article 1336).
-Contracts effected by minors who have already passed the age of puberty and [Link] influence
adolescence and are near the adult age, when they pretend to have already reached
the age of majority, while in fact they have not, are valid, and cannot be permitted Art. 1337. There is undue influence when a person takes improper advantage of his
afterwards to excuse themselves from compliance with obligations assumed by them power over the will of another, depriving the latter of a reasonable freedom of choice.
or seek their annulment. This is in consonance with the rules of estoppel. (Mercado The following circumstances shall be considered: the confidentiality, family, spiritual
vs. Espiritu). and other relations between the parties, or the fact that the person alleged to have
been unduly influenced was suffering from mental weakness, or was ignorant or in
However in Braganza v, De Villa, the SC said that the misrepresentation of an financial distress.
incapacitate person does not estop him from denying that he was of age, or from
asserting that he was under age, at the time he entered into the contract this view is [Link]
very logical. If the minor is too young to enter into contracts, he is too young to be
estopped. Art. 1332. When one of the parties is unable to read, or if the contract is in a
ii. Insane or demented persons, and deaf mutes who do not know how to write language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully explained to
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed the former.
to in a state of drunkenness or during a hypnotic spell are voidable.
Art. 1338. There is fraud when, through insidious words or machinations of one of
Art. 1329. The incapacity declared in article 1327 is subject to the modifications the contracting parties, the other is induced to enter into a contract which, without
determined by law, and is understood to be without prejudice to special them, he would not have agreed to.
disqualifications established in the laws.
This is known as deceit or dolo causante. This is different from dolo incidente which
b. Those where the consent is vitiated by mistake, violence, intimidation, undue means fraud on things which would not prevent you from entering into a contract but
influence or fraud may hold the other liable for damages.
Art. 1330. A contract where consent is given through mistake, violence, Requisites of Fraud
intimidation, undue influence or fraud is voidable.
[Link] is employed by 1 party on the other (Articles 1342, 1344)
[Link]
[Link] other party was induced to enter into the contract (Article 1338)
Art. 1331. In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those conditions [Link] fraud must be serious (Article 1344)
which have principally moved one or both parties to enter into the contract .
[Link] is damage or injury caused
Mistake as to the identity or qualification of one of the parties will vitiate consent
only when such identity or qualifications have been the principal cause of the
contract. Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud.
A simple mistake of account shall give rise to its correction. Art. 1340. The usual exaggerations in trade, when the other party had an opportunity
Art. 1332. When one of the parties is unable to read, or if the contract is in a to know the facts, are not in themselves fraudulent.
language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully explained to Art. 1341. A mere expression of an opinion does not signify fraud, unless made by
the former. an expert and the other party has relied on the former’s special knowledge.
Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or Art. 1342. Misrepresentation by a 3rd person does not vitiate consent, unless such
risk affecting the object of the contract. misrepresentation has created substantial mistake and the same is mutual.
Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute
of the parties is frustrated, may vitiate consent. error.
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual. Art. 1344. In order that fraud may make a contract voidable, it should be serious and
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute should not have been employed by both contracting parties.
error. Incidental fraud only obliges the person employing it to pay damages.
-If a 3rd person should commit violence or intimidation on 1 of the contracting parties
[Link] and this vitiates the contracting party’s consent, then the contract may be annulled
Art. 1335, 1st ¶. There is violence when in order to wrest consent, serious or (Article 1336). By analogy, if a 3rd person should exert undue influence on 1 of the
irresistible force is employed. contracting parties and this vitiates the consent of the contracting party, then the
-Violence shall annul the obligation, although it may been employed by a 3rd person contract may be annulled. However, if the 3 rd party commits fraud, damages is the
who did not take part in the contract (Article 1336). only remedy unless the fraud committed by the 3rd person has created a mutual
Requisites of Violence substantial mistake (Article 1342).

[Link] physical force is employed 2022 NOTES: OLD AGE IS NOT AN INCAPACITY AS LONG AS IN THE
RIGHT MIND (DOMINGO V CA)
[Link] force is the determining cause for giving consent
2022 NOTES: A GUARDIAN MAY BRING RATIFICATION
 3

RULES REGARDING VOIDABLE CONTRACTS The action for annulment will not prosper in the following:
[Link] the contract has been confirmed (Article 1392)
[Link] the action to annul has prescribed (Article 1391)
[Link] CONTRACTS ARE EFFECTIVE UNLESS SET ASIDE [Link] the thing which is the object of the contract is lost through the fault or fraud
(ARTICLE 1390). of the person who has a right to institute the proceedings (Article 1401, 1st ¶)
[Link]

[Link] VALIDITY OF A VOIDABLE CONTRACT CAN ONLY BE [Link] CONTRACTS CAN BE CONFIRMED.
ASSAILED IN A SUIT FOR THAT PURPOSE (I.E. COMPLAINT OR
COUNTERCLAIM). -Confirmation extinguishes the action to annul a voidable contract (Article 1392).

The action for annulment of contracts may be instituted by all who are thereby -Confirmation is the proper term for curing the defect of a voidable contract.
obliged principally or subsidiarily. However, persons who are capable cannot allege -Confirmation cleanses the contract from all its defects from the moment it was
the incapacity of those with whom they contracted; nor can those who exerted constituted (Article 1396).
intimidation, violence, or undue influence, or employed fraud, or caused ,mistake
base their action upon these flaws of the contract (Article 1397).
Requisites of Confirmation
[Link] the contract is a voidable or annullable contract
The action for annulment shall be brought within 4 years. This period shall [Link] the ratification is made with knowledge of the cause for nullity
begin [Link] at the time the ratification is made, the cause of nullity has already ceased to
exist
[Link] – from the time the defect of the consent ceases -Confirmation may be effected expressly or tacitly. It is understood that there is tacit
confirmation if, with knowledge of the reason which renders the contract voidable
[Link] – from the time the defect of the consent ceases and such reason having ceased, the person who has a right to invoke it should execute
[Link] influence – from the time the defect of the consent ceases an act which necessarily implies an intention to waive his right (Article 1393).

[Link] – from the time of the discovery of the mistake

[Link] – from the time of the discovery of the fraud
The 4 year prescription period to annul contracts entered into by minors or other
incapacitated persons shall begin from the time the guardianship ceases (Article [Link] CONTRACTS CAN BE CONFIRMED ONLY BY THE PARTY
1391, 4th ¶). WHOSE CONSENT WAS VITIATED
An obligation having been annulled, the contracting parties shall restore to each other -Confirmation does not require the conformity of the contracting party who has no
the things which have been the subject matter of the contract, with their fruits, and right to bring the action for annulment (Article -1395).
the price with its interest, except in cases provided by law (Article 1398, 1st ¶). -Confirmation may be effected by the guardian of the incapacitated person (Article
In obligations to render service, the value thereof shall be the basis for damages 1394).
(Article 1398, 2nd ¶).
When the defect of the contract consists in the incapacity of 1 of the parties, the
incapacitated person is not obliged to make any restitution except insofar as he has (2008 BAR) AB Corp. entered into a contract with XY Corp. whereby the former
been benefited by the thing or price received by him (Article 1399). agreed to construct the research and laboratory facilities of the latter. Under the terms
of the contract, AB Corp. agreed to complete the facility in 18 months, at the total
contract price of P10 million. XY Corp. paid 50% of the total contract price, the
balance to be paid upon completion of the work. The work started immediately, but
AB Corp. later experienced work slippage because of labor unrest in his company.
What if the Thing to Be Returned is Lost AB Corp.’s employees claimed that they are not being paid on time; hence, the work
slowdown. As of the 17th month, work was only 45% completed. AB Corp. asked for
extension of time, claiming that its labor problems is a case of fortuitous event, but
i. Due to Fault of Defendant this was denied by XY Corp. When it became certain that the construction could not
be finished on time, XY Corp. sent written notice canceling the contract, and
Defendant has to pay the plaintiff requiring AB Corp. to immediately vacate the premises.
[Link] of the thing loss a) Can the labor unrest be considered a fortuitous event? (1%)
[Link] if any No, fortuitous event refers to unforeseen event or such event which although
foreseen, the occurrence of which is inevitable. Primarily, it refers to act of God but
[Link] may also consider those man made events which cannot be counter-controlled by any
force of human intervention. Labor unrest cannot be considered as unforeseen event,
or foreseen event but the happening is inevitable or cannot be prevented. The fact of
ii. Due to a Fortuitous Event or due to a 3rd party such organizational problem may have been attributed to such area the management
of AB Corporation may have been overlooked. These factors could have been
Defendant has to pay the plaintiff prevented though proper management of human resources. Based on this premise
therefore, it cannot be considered as a foreseen event which occurrence is inevitable,
1. Value of the thing loss thus, not a fortuitous event.
[Link] if any
b) Can XY Corp. unilaterally and immediately cancel the contract? (2%)
Yes, under a valid sub contract agreement where construction company is not a mere
conduit of another contracting party, XY corporation has the right to immediately
iii. Due to Fault or Fraud of Plaintiff cancel the contract on failure of AB Corporation to comply its obligation due to its
The plaintiff loses the right to annul (Article 1401). own internal problem. It cannot make an excuse that labor unrest is beyond its
control because by entering into said contract, it warrants completion of the project
There is fault on the part of the plaintiff once the plaintiff regains capacity. within the specified period. Attached with this warranty is the duty to employ such
preventive measures to ensure completion of the project. The cancellation of contract
however is without prejudice to the rights of unpaid workers to run against the owner
iv. Loss without Fault on the Plaintiff’s Part of the building. But this will apply only if substantial works have been accomplished
which do not commensurate to the payment made by the owner of the building. A
Commentators have a difference of opinion situation which does not apply in this case because substantial down payment was
paid by XY Corporation against the percentage of completion done by AB
1. The right to annul is extinguished unless the plaintiff offers to pay the value of the Corporation.
object at the time of loss
[Link] plaintiff is entitled to annul without having to pay anything. c) Must AB Corp. return the 50% downpayment? (2%)
Not necessarily the whole 50% downpayment as it can be inferred from facts that
prior to such labor unrest, AB Corporation had somehow partially performed such
works on which it may have also incurred some sort of operational costs. In the
As long as 1 of the contracting parties does not restore what in virtue of the decree of absence of any express agreement between the parties, one of the basic rules of
annulment he is bound to return, the other cannot be compelled to comply with what civility shall apply; that no one should enrich himself at the expense of the others.
is incumbent upon him (Article 1402). The parties may agree on such equitable return of down payment based on reasonable
amount.
 4

UNENFORCEABLE CONTRACTS iv. An agreement for the sale of goods, chattels or things in action, at a price not
less than P500, unless the buyer accepts and receives part of such goods and
chattels, or the evidence, or some of them, of such things in action, or pay at the
time some part of the purchase money; but when a sale is made by auction and
RATIFICATION BE MADE BEFORE REVOCATION
entry is made by the auctioneer in his sales book, at the time of sale, of the
amount and kind of property sold, terms of sale, price, names of the purchasers
and person on whose account the sale is made, it is a sufficient memorandum
An unenforceable contract is a contract which cannot be enforced by a proper action
in court, unless they are ratified, because either they are entered into without or in The requirement of a written instrument or a memorandum for sales of personal
excess of authority or they do not comply with the Statute of Frauds or both the property for a price not less than P500, covers both tangible and intangible personal
contracting parties do not possess the required legal capacity. property. It also covers the assignment of choses in action.
Where a contract for the sale of goods at a price not less than P500 is oral, and there
is neither partial payment or delivery, receipt, and acceptance of the goods, the
THE FOLLOWING CONTRACTS ARE UNENFORCEABLE UNLESS THEY contract is unenforceable, and cannot be the basis of an action for the recovery of the
ARE RATIFIED (ARTICLE 1403) purchase price, or as the basis of an action for damages for breach of the agreement.
Where there is a purchase of a number of articles which taken separately does not
A. THOSE ENTERED INTO IN THE NAME OF ANOTHER PERSON BY 1 have a price of P500 each, but taken together, the price exceeds P500, the operation
WHO HAS BEEN GIVEN NO AUTHORITY OR LEGAL of the statute of frauds depends upon whether there is a single inseparable contract or
REPRESENTATION, OR WHO HAS ACTED BEYOND HIS POWERS a several one. If the contract is entire or inseparable, and the total price exceeds
P500, the statute applies. But if the contract is separable, then each article is taken
Art. 1317. No one may contract in the name of another without being authorized separately.
by the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or
legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on v. An agreement of lease for a period of more than 1 year, or the sale of real
whose behalf it has been executed, before it is revoked by the other contracting property or of an interest therein
party.
When a person enters into a contract for and in the name of another, without As long there is a sale of real property, the sale must be in writing. There is no
authority to do so, the contract does not bind the latter, unless he ratifies the same. minimum.
The agent, who has entered into the contract in the name of the purported principal, An oral contract for a supplemental lease of real property for longer period than 1
but without authority from him, is liable to 3rd persons upon the contract. year is within the Statute of Frauds.
The proper term for this case is “ratification”. An agreement to enter into an agreement is also within the Statute of Frauds. vi. A
representation as to the credit of a 3rd person
Example: In a sale, Y claimed that he was an agent of X, even if not. The contract
cannot be enforced against X. Another example is when the agent is authorized to A wants to borrow money from C. C does not know A. C goes to B to ask about A’s
lease the property but the agent instead sells the property. The principal is not bound. credit standing. B says that A’s credit standing is satisfactory even though B knows
that A is insolvent. Under Article 1403, C can go after B if B’s representation was in
writing.
thinks that this does not belong in the Statute of Frauds. There is no contract
between C and B. B did not bind himself to pay C. What we have here is an
unenforceable tort.
B. THOSE THAT DO NOT COMPLY WITH THE STATUTE OF FRAUDS
“a representation as to the credit of a 3rd person” should be replaced by Article 1443.
This is the most famous variety. Article 1443 provides that no express trusts concerning an immovable or any interest
therein may be proved by parol evidence.
When the express trust concerns an immovable or an interest therein, a writing is
i. An agreement that by its terms is not to be performed within a year from the necessary to prove it. This writing is not required for the validity of the trust. It is
making thereof required only for purposes of proof. When the property subject to the express trust,
In Babao vs. Perez, the Supreme Court interpreted the phrase “not be to performed however is not real estate or an interest therein, then it may be proved by any
within a year” to mean that the obligation cannot be finished within 1 year. does not competent evidence, including parol evidence.
agree with this interpretation the phrase “not to be performed within a year” should
mean that the obligation cannot begin within a year. For practical reasons, the
contract must be in writing since the parties might forget. This rule was made to 4blue 95: statute of frauds cannot be assailed by 3rd parties
guard against fallibility (forgetfulness) of man and fraud.
4blue 95: statute of frauds is not void, it merely is unenforceable.
the Supreme Court’s interpretation is incorrect. If the obligation cannot be finished
within 1 year, the contract is not within the Statute of Frauds because of partial
performance.

2 PRINCIPLES IN THE STATUTE OF FRAUDS

a. Parole (ORAL) evidence is not admissible. However, there are 3 ways of
ii.A special promise to answer for the debt, default or miscarriage of another bringing it out.

The test as to whether a promise is within the statute has been said to lie in the
answer to the question whether the promise is an original or collateral one. If the 3 Ways in Which Parole Evidence is Admissible
promise is an original one or an independent one, that is, if the promisor becomes
thereby primarily liable for the payment of the debt, the promise is not within the i. Failure to object by the opposing lawyer when parol evidence is used (Article
statute. 1405)
If the promise is collateral to the agreement of another and the promisor becomes If there is no objection, then parole evidence is admitted.
merely a surety or guarantor, the promise must be in writing.
[Link] examination (when lawyer do not object,but instead ask for the contents of
the contract)
iii. An agreement made in consideration of marriage, other than a mutual iii. Acceptance of benefits (Article 1405)
promise to marry
If there has been performance on 1 side and the other side accepts, then the Statute of
A mutual promise to marry does not fall within the Statute of Frauds since they are Frauds is not applicable. Also, estoppel sets in so by accepting performance, the
not made in writing. defect is waived.
Agreements made in consideration of marriage other than the mutual promise to
marry are within the Statute of Frauds.
b. The Statute of Frauds applies only to executory contracts and not to those
In Cabague vs. Auxilio, the father of the groom promised to improve his daughter-in- which have been executed in whole or in part.
law’s father’s house in consideration of the marriage. The father of the groom made
improvements on the house. The wedding did not take place. The Supreme Court “Executed” here means there has been performance in part and acceptance by the
said that the father of the groom could not sue on the oral contract which as to him is other.
not “mutual promise to marry”. disagrees with the Supreme Court, the father of the
groom should be able to sue since there was partial performance.
 5

C. THOSE WHERE BOTH PARTIES ARE INCAPABLE OF GIVING 2008 BAR QUESTIONS:
CONSENT TO A CONTRACT
(BAR) Eduardo was granted a loan by XYZ Bank for the purpose of improving a
building which XYZ leased from him. Eduardo, executed the promissory note (“PN”)
Neither party or his representative can enforce the contract unless it has been in favor of the bank, with his friend Recardo as cosignatory. In the PN, they both
previously ratified. acknowledged that they are “individually and collectively” liable and waived the
need for prior demand. To secure the PN, Recardo executed a real estate mortgage on
The ratification by 1 party, however, converts the contract into a voidable contract – his own property. When Eduardo defaulted on the PN, XYZ stopped payment of
voidable at the option of the party who has not ratified; the latter, therefore, can rentals on the building on the ground that legal compensation had set in. Since there
enforce the contract against the party who has ratified. was still a balance due on the PN after applying the rentals, XYZ foreclosed the real
estate mortgage over Recardo’s property. Recardo opposed the foreclosure on the
Or, instead, of enforcing the contract, the party who has not ratified it may ask for
annulment on the ground of his incapacity. ground that he is only a co-signatory; that no demand was made upon him for
payment, and assuming he is liable, his liability should not go beyond half the
The proper term is “acknowledgement” (and not ratification). balance of the loan. Further, Recardo said that when the bank invoked compensation
between the rentals and the amount of the loan, it amounted to a new contract or
novation, and had the effect of extinguishing the security since he did not give his
4blue 95: ratification of unenforceable contract, should be made before revocation. consent (as owner of the property under the real estate mortgage) thereto.

4blue 95:having a bad bargain is not a reason to rescind or avoid the contract entered a) Can XYZ Bank validly assert legal compensation? (2%)
into. No, legal compensation takes place only between parties who are both debtors and
creditors to each others which involves obligations that are both demandable. Rental
4blue 95:abiding by principle of mutuality of contracts , the interest agreed upon payment and loan, although both money obligations, are not however, both
cannot be unilaterally(by one party) increased. demandable at once. Lease contract involves rental which payment is demandable
from period to period, loan on the other hand shall become demandable only upon
4blue 95: consensual contracts need consent while real contracts are : loan, deposit, maturity. Thus, one of the requirements of legal compensation in this case has not
and pledge to name a few. been met.

b) Can Recardo’s property be foreclosed to pay the full balance of the loan? (2%)
Yes, Recardo is a co-signatory of the PN who solidarily binds himself with Eduardo.
Nothing is irregular therefore if the bank will foreclose his property which was
mortgaged with his prior consent.

c) Does Recardo have basis under the Civil Code for claiming that the original
contract was novated? (2%)
No, novation may take place only if there is change on persons of the original parties
or change in the nature or characteristic of an obligation. The nature of the obligation
has not been changed when the bank stopped paying the rental and applied the same
to the unpaid loan. The application of payment of rental will not operate as an
appointment of new debtors in favor of the old debtors. Said act is just but a
consequence of an interlocking relation between the bank and one of the solidary
debtors, Eduardo. It can hardly be considered as one that will operate as a valid
novation. Further, the withholding of rental payment and its subsequent application
as payment of the loan is not a voluntary act of Eduardo which could have the effect
of novation by which could have been relieved Recardo of his solidary liability. His
contention that no demand was made to him by the bank is without basis because the
demand to one of the solidary debtors is a demand to all.

(BAR) Felipe borrowed $100 from Gustavo in 1998, when the Phil P - US$ exchange
rate was P56 – US$1. On March 1, 2008, Felipe tendered to Gustavo a cashier’s
check in the amount of P4,135 in payment of his US$ 100 debt, based on the Phil P –
US$ exchange rate at that time. Gustavo accepted the check, but forgot to deposit it
until Sept. 12, 2008. His bank refused to accept the check because it had become
stale. Gustavo now wants Felipe to pay him in cash the amount of P5,600. Claiming
that the previous payment was not in legal tender, and that there has been
extraordinary deflation since 1998, and therefore, Felipe should pay him the value of
the debt at the time it was incurred. Felipe refused to pay him again, claiming that
Gustavo is estopped from raising the issue of legal tender, having accepted the check
in March, and that it was Gustavo’s negligence in not depositing the check
immediately that caused the check to become stale.

a) Can Gustavo now raise the issue that the cashier’s check is not legal tender? (2%)
No, Gustavo cannot raise such issue anymore. He is estopped in that he accepted a
previous Cashier's Check as payment without any complaints. He should have raised
it once such was offered to him

b) Can Felipe validly refuse to pay Gustavo again? (2%)

No, Felipe cannot validly refuse. He still owes Gustavo the US$100. He is not paid
yet. A mere payment by check does not redound to fully paying an obligation as
"actual payment" has not yet been realized by actual transfer of funds/money

c) Can Felipe compel Gustavo to receive US$100 instead? (1%) Yes, Felipe can
compel Gustavo to receive US$100 as payment. No difference between a US$100
bill then and now in value vis-a-vis
 6

VOID CONTRACTS PARI DELICTO (IN EQUAL GUILT)

Art. 1411. When the nullity proceeds from the illegality of the cause or object of
A VOID CONTRACT IS AN ABSOLUTE NULLITY AND the contract, and the act constitutes a criminal offense, both parties being in pari
PRODUCES NO EFFECT, AS IF IT HAD NEVER BEEN delicto, they shall have no action against each other, and both shall be
EXECUTED OR ENTERED INTO. prosecuted. Moreover, the provisions of the Penal Code relative to the disposal
of effects or instruments of a crime shall be applicable to the things or the price
of the contract.
This rule shall be applicable when only one of the parties is guilty; but the
The following contracts are inexistent and void from the innocent one may claim what he has given, and shall not be bound to comply
beginning (Article 1409) with his promise.
[Link] whose cause, object or purpose is contrary to law, morals. Good
customs, public order or public policy
[Link] which are absolutely simulated or fictitious
a. IF IT CONSTITUTES A CRIMINAL OFFENSE
[Link] whose cause or object did not exist at the time of the transaction
i. If both parties are in pari delicto
-Article 1409 (3) should not be “did not exist”. Rather, the correct phrase should be
“could not come into existence” because there can be a contract over a future thing. -No action for specific performance can prosper on either side (Article 1411, 1st ¶).
-Examples of “could not come into existence” are tangerine flying elephants and cars -No action for restitution can prosper on either side (Article 1411, 1st ¶).
running on urine.
-Example: A shabu supplier supplies shabu to the shabu dealer. If the shabu supplier
[Link] whose object is outside the commerce of men does not deliver the shabu, the dealer cannot file an action for specific performance.
[Link] which contemplate an impossible service--Here, there is no object. [Link] only 1 party is guilty
[Link] where the intention of the parties relative to the principal object of the -No action for specific performance can prosper on either side.
contract cannot be ascertained--This is similar to being void for vagueness
under the Constitutional law. -An action for restitution will be allowed only if the innocent party demands. The
guilty party is not entitled to restitution.
[Link] expressly prohibited or declared void by law
An example of this is sale between husband and wife, subject to exceptions. The
Supreme Court has held that contingent fees of lawyers wherein the latter receive
part of the property subject of litigation are valid, unless unconscionable in amount.
b. IF IT DOES NOT CONSTITUTE A CRIMINAL OFFENSE (1412)
(1) When the fault is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand the performance of the other's
undertaking;
Characteristics of Void Contracts (2) When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised
a. The contract produces no effect whatsoever either against or in favor of him. The other, who is not at fault, may demand the return of what he has given
anyone without any obligation to comply his promise.
b.A judgment of nullity would be merely declaratory. There is no action for Articles 1411 and 1412 refer to the pari delicto rule, which literally means “in equal
annulment necessary as such is ipso jure. kind”, or also “in equal guilt” – in pari delicto oritur actio and sometimes “in equal
guilt, the position of the defendant is stronger” – in pari delicto potior est condicio
Even when the contract is void or inexistent, an action is necessary to declare its defendentis. The position of the defendant is stronger because the plaintiff’s claim is
inexistence, when it has already been fulfilled. Nobody can take the law into his own not really granted.
hands.
The pari delicto rule applies only to contracts which is void for illegality of subject
The intervention of a competent court is necessary to declare the absolute nullity of matter. Thus, if the contract is void for simulation, the pari delicto rule does not
the contract and to decree the restitution of what has been given under it. apply so a party can claim the object back through reconveyance.
The judgment of nullity will retroact to the very day when the contract was entered
into.
EXCEPTIONS TO PARI DELICTO
c. It cannot be confirmed, ratified or cured.
4blue 95: although they are void, the law still provides certain effects arising from it.
[Link] it has been performed, the restoration of what has been given is in order,
except if pari delicto will apply. a. Interest paid in excess of the interest allowed by the usury laws may be recovered
by the debtor, with interest therefrom from the date of payment (Article 1413)
e. The right to set the contract’s nullity cannot be waived
[Link] money is paid or property delivered for an illegal purpose, the contract may
be repudiated by 1 of the parties before the purpose has been accomplished, or before
[Link] action for nullity is imprescriptible (Article 1410) any damage has been caused to a 3rd person. In such case, the courts may, if the
public interest will thus be subserved, allow the party repudiating the contract to
As between the parties to a contract, validity cannot be given to it by estoppel if it is recover the money or property (Article 1414).
prohibited by law or is against public policy.
[Link] 1 of the parties to an illegal contract is incapable of giving consent, the
g. Any person can invoke the contract’s nullity if its juridical effects are felt as courts, may, if the interest of justice so demands, allow recovery of money or
to him property delivered by the incapacitated person (Article 1415).
The defense of illegality of contracts is not available to 3rd persons whose interests [Link] the agreement is not illegal per se but is merely prohibited, and the
are not directly affected (Article 1421). prohibition by law is designed for the protection of the plaintiff, he may, if public
policy is enhanced, recover what he has paid or delivered (Article 1416).
[Link] the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price
allowed may recover such excess (Article 1417).
[Link] the law fixes, or authorizes the fixing of the maximum number of hours of
IMPORTANT PROVISIONS
labor, and a contract is entered into whereby a laborer undertakes to work longer than
Art. 1420. In case of a divisible contract, if the illegal terms can be separated the maximum thus fixed, he may demand additional compensation for service
from the legal ones, the latter may be enforced. rendered beyond the time limit (Article 1418).
[Link] the law sets or authorizes the setting of a minimum wage for laborers, and a
Art. 1421. The defense of illegality of contract is not available to third persons
contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled
whose interests are not directly affected.
to recover the deficiency (Article 1419).
Art. 1422. A contract which is the direct result of a previous illegal contract, is The above contracts are void but there is some remedy for policy considerations. An
also void and inexistent. example is the minimum wage law under Article 1419 wherein the employer and the
employee freely agree to the terms of employment below the minimum wage.
Although they are in pari elicto, you don’t follow the rules of pari delicto. There is a
policy consideration of social justice involved. This is similar to the preferential
option for the poor of churches.
 7

Rescissible Contracts (1998 Bar) Unenforceable Contracts

Q: In a 20-year lease contract over a building, the lessee is expressly granted a right of first Q: May a person sell something that does not belong to him?
refusal should the lessor decide to sell both the land and building. However, the lessor sold A: Yes, a person may sell something which does not belong to him. For the sale to be valid,
the property to a third person who knew about the lease and in fact agreed to respect it. the law does not require the seller to be the owner of the property at the time of the sale.
Consequently, the lessee brings an action against both the lessor-seller and the buyer (a) to (Art. 1434, NCC) If the seller cannot transfer ownership over the thing sold at the time of
rescind the sale and (b) to compel specific performance of his right of first refusal in the delivery because he was not the owner thereof, he shall be liable for breach of contract Void
sense that the lessor should be ordered to execute a deed of absolute sale in favor of the or Inexistent Contracts (1991, 1999 Bar)
lessee at the same price. The defendants contend that the plaintiff can neither seek rescission
of the sale nor compel specific performance of a “mere” right of first refusal. Decide the Q: Maria Enriquez failed to pay the realty taxes on her unregistered agricultural land located
case. (1998 BAR) in Magdugo, Toledo City. In 1989, to satisfy the taxes due, the City sold it at public auction
A: The action filed by the lessee, for both rescission of the offending sale and specific to Juan Miranda, an employee at the Treasurer’s Office of said City, whose bid at
performance of the right of first refusal which was violated, should prosper. The ruling P10,000.00 was the highest. In due time, a final bill of sale was executed in his favor. Maria
in Equatorial Realty Development, Inc. v. Mayfair Theater, Inc, (264 SCRA 482), a refused to turn-over the possession of the property to Juan alleging that (1) she had been, in
case with similar facts, sustains both rights of action because the buyer in the the meantime, granted a free patent and on the basis thereof an Original Certificate of Title
subsequent sale knew the existence of right of first refusal, hence in bad faith. was issued to her, and (2) the sale in favor of Juan is void from the beginning in view of the
provision in the Administrative Code of 1987 which prohibits officers and employees of the
government from purchasing directly or indirectly any property sold by the government for
nonpayment of any tax, fee or other public charge. a) Is the sale to Juan valid? If so, is the
Voidable Contracts (1990, 1996, 2004 Bar) effect of the issuance of the Certificate of Title to Maria? b) If the sale is void, may Juan
recover the P10, 000.00? If not, why not? c) If the sale is void, did it not nevertheless,
Q: Distinguish briefly but clearly between inexistent and annullable contracts. (2004 Bar) operate to divest Maria of her ownership? If it did, who then is the owner of the property?
A: Inexistent contracts are considered as not having been entered into and, therefore, void ab (1991 Bar)
initio. They do not create any obligation and cannot be ratified or validated, as there is no A:
agreement to ratify or validate. a) The sale of the land to Juan is not valid, being contrary to law. Therefore, no transfer of
In the other hand, annullable or voidable contracts are valid until invalidated by the court but ownership of the land was effected from the delinquent taxpayer to him. The original
may be ratified. In inexistent contracts, one or more requisites of a valid contract are absent. certificates of title obtained by Maria thru a free patent grant from the Bureau of Lands
In annullable contracts, all the elements of a contract are present except that the consent of (under Chapter VII, CA 141) is valid but in view of her delinquency, the said title is subject
one of the contracting parties was vitiated or one of them has no capacity to give consent. to the right of the City Government to sell the land at public auction. The issuance of the
OCT did not exempt the land from the tax sales. Section 44 of P.D. No. 1529 provides that
Q: X was the owner of a 10, 000 square meter property. X married Y and out of their union, every registered owner receiving a Certificate of Title shall hold the same free from all
A, B and C were born. After the death of Y, X married Z and they begot as children, D, E encumbrances, subject to certain exemptions.
and F. After the death of X, the children of the first and second marriages executed an b) Juan may recover because he was not a party to the violation of thelaw.
extrajudicial partition of the afore stated property on May 1, 1970. D, E and F were given a c) No, the sale did not divest Maria of her title precisely because the sale is void. It is as
one thousand square meter portion of the property. They were minors at the time of the good as if no sale ever took place. In tax sales, the owner is divested of his land initially
execution of the document. D was 17 years old, E was 14 and F was 12; and they were made upon award and issuance of a Certificate of Sale, and finally after the lapse of the 1 year
to believe by A, B and C that unless they sign the document they will not get any share. Z period from date of registration, to redeem, upon execution by the treasurer of an instrument
was not present then. In January 1974, D E and F filed an action in court to nullify the suit sufficient in form and effects to convey the property. Maria remained owner of the land until
alleging they discovered the fraud only in 1973. a) Can the minority of D, E and F be a basis another tax sale is to be performed in favor of a qualified buyer.
to nullify the partition? Explain your answer b) How about fraud? Explain your answer.
(1990 Bar) Q: In 1950, the Bureau of Lands issued a Homestead patent to A. Three years later, A sold
A: the homestead to B. A died in 1990, and his heirs filed an action to recover the homestead
a) Yes, minority can be a basis to nullify the partition because D, E and F were not from B on the ground that its sale by their father to the latter is void under Section 118 of the
properly represented by their parents or guardians at the time they contracted the Public Land Law. B contends, however, that the heirs of A cannot recover the homestead
extrajudicial partition. (Articles 1327, 1391, Civil Code) from him anymore because their action has prescribed and that furthermore, A was in pari
b) In the case of fraud, when through insidious words or machinations of one of the delicto. Decide. (1999 Bar)
other is induced to enter into the contract without which he would nothave agreed to, A: The sale of the land by A to B 3 years after issuance of the homestead patent, being in
the action still prosper because under Art. 1391 of the Civil Code, in case of fraud, the violation of Section 118 of the Public Land Act, is void from its inception. The action filed
action for annulment may be brought within four years from the discovery of the by the heirs of B to declare the nullity or inexistence of the contract and to recover the land
fraud. should be given duecourse. B’s defense of prescription is untenable because an action which
seeks to declare the nullity or inexistence of a contract does not prescribe. (Article 1410;
Q: Sometime in 1955, Tomas donated a parcel of land to his stepdaughter Irene, subject to Banga v. Soler, 2 SCRA 755)
the condition that she may not sell, transfer or cede the same for twenty years. Shortly On the other hand, B’s defense of pari delicto is equally untenable. While as a rule, parties
thereafter, he died. In 1965, because she needed money for medical expenses, Nene sold the who are in pari delicto have no recourse against each other on the principle that a
land to Conrado. The following year, Irene died, leaving as her sole heir a son by the name transgressor cannot profit from his own wrongdoing, such rule does not apply to violations
of Armando. When Armando learned that the land which he expected to inherit had been of Section 118 of the Public Land Act because of the underlying public policy in the said
sold by Irene to Conrado, he filed an action against the latter for annulment of the sale, on Act “to conserve the land which a homesteader has acquired by gratuitous grant from the
the ground that it violated the restriction imposed by Tomas. Conrado filed a motion to government for himself and his family”. In keeping with this policy, it has been held that
dismiss, on the ground that Armando did not have the legal capacity to sue. If you were the one who purchases a homestead within the five-year prohibitory period can only recover the
judge, how will you rule on this motion to dismiss? Explain. (1996 Bar) price which he has paid by filing a claim against the estate of the deceased seller. (Labrador
A: As judge, I will grant the motion to dismiss. Armando has no personality to bring the vs. Delos Santos 66 Phil. 579) under the principle that no one shall enrich himself at the
action for annulment of the sale to conrado. Only an aggrieved party to the contract may expense of another. Applying the pari delicto rule to violations of Section 118 of the Public
bring the action for annulment thereof. (Art. 1397, NCC) While Armando is heir and Land Act, the Court of Appeals has ruled that “the homesteader suffers the loss of the fruits
successor-in-interest of his mother (Art. 1311, NCC), he (standing in place of his mother) realized by the vendee who in turn forfeits the improvement that he has introduced into the
has no personality to annul the contract. Both are not aggrieved parties on account of their land”. (Obot vs. Sandadlillas, 62 OG, April 25, 1966)
own violation of the condition of, or restriction on, their ownership imposed by the donation.
Only the donor or his heirs would have the personality to bring an action to revoke a Q: Briefly explain whether the following contracts are valid, rescissible, unenforceable, or
donation for violation of a condition thereof or a restriction thereon. (Garrido v. CA, 236 void: (a) A contract of sale between Lana and Andy wherein 16-year old Lana agreed to sell
SCRA 450) Consequently, while the donor or his heirs were not parties to the sale, they her grand piano for P5, 000.00. (b) A contract of lease of the Philippine Sea entered by and
have the right to annul the contract of sale because their rights are prejudiced by one of the between Mitoy and Elsa. (c) A barter of toys executed by 12-year old Clarence and 10-year
contracting parties thereof. (DBP v. CA, 96 SCRA 342; Teves v. PHHC, 23 SCRA 1141) old Czar. (d) A sale entered by Barri and Garri, both minors, which their parents later
Since Armando is neither the donor nor heir of the donor, he has no personality to bring the ratified. (e) Jenny’s sale of her car to Celestine in order to evade attachment by Jenny’s
action for annulment. creditors (2012, 2017 Bar)
A:
a. The contract of sale is voidable, because Lana is a minor, and is thus incapable of
giving consent to a contract.
b. The contract of sale is void, because its object, the Philippine sea, is outside the
commerce ofmen.
Alternative answer: (b) the contract of sale is void under Article 1306 of the Civil
Code because it is against public policy.
Another alternative answer: (b) The contract of sale is void as it is prohibited by a
treaty, which is considered binding law in the Philippines. [Note: Under Article 137 of
the UNCLOS, the Philippine Sea is governed by the following mandates: xxx (b) No
State or natural or juridical person shall appropriate any part thereof. xxx].

c. The contract unenforceable, because both parties, being minors, are incapable of
givingconsent.
d. The contract is valid and may not be annulled by either party due to the ratification
by the parents of Barri and Garri, if done while both were still minors. Ratification
extinguishes the action to annul a voidable contract, or an unenforceable contract, as in
this case were both parties were minors and may be done by the parents, as guardians
of the minor children. [Article 1407, NCC]
e. The contract is rescissible because it is in fraud of creditors. [Article 1381, NCC]