BURAEUN COMMUNITY COLLEGE

BURAUEN, LEYTE

MODULE NO.5- OBLIGATIONS and CONTRACTS

FORM of CONTRACTS and KINDS of DEFECTIVE CONTRACTS

Learning Outcome:
This Module will teach the students to distinguish the different kinds of
defective contracts, the reasons why these considered defective and their legal
effects, such as whether these are totally void or just voidable. Also, the students
are expected to understand that not all contracts are in writing. Some contracts,
while these may have been entered into verbally or orally, are still valid and binding.

1. What may be the form of a contract?

The form of a contract may be oral or in writing, or partly oral and partly
writing. If in writing, the contract may be in a public or a private instrument.

Note: A public instrument is one which is sworn to before a notary public or

other officer (e.g., judge of a court) authorized to administer oaths.

2. State the rules governing the form of contracts?

(1) General Rule- A contract shall be obligatory of binding in whatever form it may
have been entered into provided all the essential requisites (consent, object and cause
and in certain specified contracts, delivery pr form) for its validity are present. (Art.
1356.)
(2) Exceptions- In the following cases, the form of the contract is essential:
(a) when the law requires that the contract be in some form to be valid
(Ibid.; e.g., donation of real property must be in a public instrument [Art.749.];
donation of personal property the value of which exceeds P5,000, its acceptance
must be in writing [Art. 748.]; stipulation to pay interest must be in writing,
otherwise, no interest is due [Art.1956.]; sale of land through an agent whose
authority must be in writing [Art. 1874.]; contract of partnership where immovables
are contributed [Arts. 1771, 1773.]; negotiable instruments must be in writing [Sec.
1, Negotiable Instruments Law], etc.);
(b) when the law requires that a contract be in some form to be enforceable
or proved in a certain way (Ibid., Chap. 8 infra.); and
(c) When the law requires that a contract be in a certain form for the
convenience of the parties, i.e., in order that the contract may be binding and
enforceable against third persons and not as between the parties. (Art. 1357.)

EXAMPLES:
(1) X donated to Y real property. The donation is valid if made orally or in a private
document because such donation is required to be in a public instrument to be valid.
(2) X sold to Y real property. The sale is made orally. The contract is valid but
unenforceable because the law requires that a sale or real property be in writing to be
enforceable. (Art. 1403.)
(3) If the contract of sale is in private writing, then it is valid and enforceable as
between the parties but not against third persons without notice until the sale is
registered in the Registry of Property. Under the law, Y has a right to compel X to put the
contract in a public instrument so that it can be registered to affect third persons.

KINDS of DEFECTIVE CONTRACTS

(1) Rescissible contracts.- They are valid because all the essential requisites of a
contract are present but by reason of injury or damage to one of the parties or to third
persons, such as creditors, the contract may be rescinded;
(2) Voidable contracts.- They are also valid until annulled unless there has been a
ratification. Their defect is caused by vice of consent;
(3) Unenforceable contracts.- They cannot be sued upon or enforced in court by
reason of statutory defects unless they are ratified. Hence, pending ratification, it is as if
they have no effect; and
(4) Void or inexistent contracts.- They have no effect at all and cannot be ratified.

I. Rescissible Contracts-
1. Define Rescission.
Rescission is the remedy granted by law to the contracting parties and
sometimes even to third persons in order to recover indemnity for damages
caused them by contract, even if such contract be valid, by means of the
restoration of things to their condition prior to the celebration of the contract.

2. Requisites
They are;
(1) The contract must be validly agreed upon (Art. 1380.);
(2) There must be lesion or pecuniary prejudice to one of the parties or to a
third person. (Art. 1381.);
(3) The rescission must be based upon a case especially provided by law
(Arts. 1380, 1381.);
(4) There must be no other legal remedy to obtain reparation for the
damage; so, rescission is only a subsidiary remedy (Art. 1383.); it cannot be availed
of where, for example, a party is willing to pay for the damage suffered;
(5) The partly asking for rescission must be able to return what he is obliged
to restore by reason of the contract (Art. 1385.);
(6) The object of the contract must not legally be in the possession of third
persons who did not act in bad faith (Ibid.); and
(7) The period for filing the action must not have prescribed. (see Art. 1389.)

3. What are the Rescissible Contracts?

They are:
(1) Those made by guardians when their wards (i.e., persons under
guardianship by reason of some incapacity, such as minors and insane persons)
suffer lesion (see Chap. 2, Sec, 2, question No.7.) by more than 1/4 of the value
things which are the object thereof;
(2) Those agreed upon in behalf of absentees (i.e., persons who disappear
from their domicile, their whereabouts being unknown, and without leaving an
agent to administer their property) if the latter suffer the lesion stated above;
(3) Those made in fraud of creditors provided the following requisites are
present:
(a) There must be a credit prior to the contract to be rescinded;
(b) There must be fraud on the part of the debtor which may be proved
or presumed (Art. 1387.); and
(c) The creditor cannot recover his credit in any other manner.
(4) Those which refer to things under litigation made by defendants without
the knowledge and approval of the litigants or of competent judicial authority; and
(5) All other contracts especially declared by law to be subject to rescission.
(Art. 1381.)

4. Give the Effects of Rescission?

 They are:
(1) The thing, object of the contract, must be returned together with its fruits
and price together with its interest (Art. 1385.);
(2) In case of alienation in fraud of creditor-
(a) transferee acted in good faith.- The remedy of the creditor is merely
an action for damages against the person causing the loss or injury (Ibid.); and
(b) transferee acted in bad faith.- The transferee must return the thing
with its fruits; if return is impossible due to any cause, he must pay indemnity
for damages; and if there are two or more alienations, the first acquirer
(transferee) shall be liable first, and so on successively. (Art. 1388.)

`` 5. When is an alienation presumed in fraud pf creditors?

(1) Alienation by gratuitous title.- When the debtor did not reserve sufficient
property to pay all debts contracted before the donations;
(2) Alienation by onerous title.- When made by persons against whom some
judgment (even if not yet final or writ of attachment has been issued, and the said
judgment need not refer to the property alienated and need not have been
obtained by the party seeking the rescission (Art. 1387); and
(3) Alienation indicating bad faith.- When it is attended by circumstances that
have been denominated by our courts as “badges of fraud.”

6. Mention some circumstances that have been denominated by our courts as

“badges of fraud.”
They are:
(1) Consideration of the conveyance is fictitious or inadequate;
(2) Transfer is made by the debtor after suit has been begun and while it is
pending against him;
(3) Sale upon credit by an insolvent debtor;
(4) Transfer of all or nearly all of his property by a debtor especially when he
is insolvent or greatly embarrassed financially;
(5) Evidence of large indebtedness or complete insolvency;
(6) The close relationship between the vendor and the vendee, such as
where the transfer made is between father and son, where there are present any of
the above circumstances; and
(7) Failure of vendee (in an absolute sale) to take exclusive possession of the
property sold. (Oria vs. McMicking, 4 Phil. 243.)

II. VOIDABLE CONTRACTS

1. Define annulment.
Annulment is a remedy granted by law, for reason of public interest, for the
declaration of the inefficacy of a contract based on a defect or vice in the consent of
one of the contracting parties in order to restore them their original position before
the contract was executed.

2. What are the voidable or annullable contracts?

They are:
(1) Those where one of the parties is incapable of giving consent to a
contract; and
(2) Those where consent is vitiated by mistake, violence, intimidation, undue
influence, or fraud. (Art. 1309.)

3. State the grounds for the annulment of a contract.

They are:
(1) Incapacity of the party to give consent; and
 (2) Mistake, violence, intimidation, undue influence, or fraud vitiating
consent, (Ibid.)

4. Give the characteristic of voidable contract.

They are:
(1) It is valid and binding unless annulled by a proper action in court;
(2) It is susceptible of ratification;
(3) It requires no damage to the contracting parties; and
(4) Its defect is that the consent of one contracting parties is vitiated. (Ibid.)

5. Who can institute an action to annul a contract?

The victim or aggrieved party, whether he is principally or subsidiary bound by
the contracts can bring the action. The capacitated party or the guilty party (Art.
1397.) and the creditors (unless they can show prejudice to their rights) of the
victim cannot ask for annulment.

6. Give the effects of annulment when it is ordered by a court.

They are:
(1) If the contract has not yet been performed, the parties are released from
their obligations;
(2) If it has already been performed, the parties must return to each other,
the thing with its fruits (i.e., benefits received from the things), and the price with
its interest. In obligations to render service, the value thereof is the basis of
damage. (Art. 1398.)
7. What are the exceptions to the rule of mutual restitution in case of annulment?
They are:
(1) The incapacitated person is obliged to make restitution only to the extent
that he was benefited by the thing or price received (Art. 1426, IV.- Natural
Obligations, infra.);
(2) The person, through whose fault the thing he is obliged to return was
lost, is liable to return the fruits received and the value of the thing at the same
time of the loss with interest from the same date (Art. 1400.); and
(3) A party cannot be compelled to comply with what is incumbent upon
him, if other does not restore what he is obliged to return by virtue of the decree of
annulment. (Art. 1402.)

III. UNENFORCEABLE CONTRACTS

1. Classes
They are:
(1) Those entered into the name of another by one without authority or legal
representation, or who acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds; and
(3) Those where both parties are incapable of giving consent to the contract.
(Art. 1403.) i.e., both minors

2. What is the Statute of Frauds?

The Statute of Frauds, found in Article 1403, No.2, Civil Code, is the rule which
requires that certain agreements or some note of memorandum thereof, shall be in
writing and subscribe by the party charged or by his agent; otherwise, such
agreements shall be unenforceable by action because evidence of the same cannot
be received without the writing, or a secondary evidence of its contents.

3. Purpose
The purpose is not only to prevent fraud but also to guard against the mistakes
 of honest men by requiring that certain specified agreements must be in writing
otherwise, they are unenforceable. Since man’s memory is oftentimes faulty and
unreliable, the enforceable of the agreements may result in injustice. (see Factoran
vs. Sabanal, 81 Phil. 513.)

4. What agreements must appear in writing to be enforceable according to the

Statute of Frauds?
They are:
(1) An agreement that by its terms is not to be performed within a year from
the making thereof (e.g., A contract entered into by X with Y on August 1, 2004 for
the construction of B’s house to begin on September 1, 2005);
(2) A special promise to answer for the debt, default or miscarriage of
another (e.g., If X owes Y with G as guarantor, G is not liable unless the guaranty is in
writing signed by him. Note: In guaranty, the promise is subsidiary or collateral to
the promise of the principal debtor. Original promises are not within the Statute.
Thus, if the promise of G is to pay Y what X owes him (Y), G’s promise even if
verbally made may be proved by oral evidence);
(3) An agreement made in consideration of marriage other than a mutual
promise to marry (e.g., X agrees to build a house for Y worth P5,000,000 of Y will
marry X);
(4) An agreement for the sale of goods, chattels, or things in action at a price
of not less than P500, unless there has been partial delivery or payment;
(5) An agreement for the leasing for more than one (1) year, or for the sale of
real property or of an interest therein, unless it has been partially executed; and
(6) A representation as to the credit of a third person (Art. 1403; e.g., Where
X is applying for a loan from Y [bank], and Z represents to Y that X is solvent and has
good credit reputation, the representation of Z must be in writing to be enforceable
against him).

IV. VOID or Inexistent Contracts

1. Classes
They are:
(1) Inexistent contracts or those where a requisites or some of the essential
requisites of a contract are lacking or where the formalities prescribed by laaw
validity are not complied with (e.g., donation of real property made in a private
instrument); and
(2) Illegal or illicit contracts or those where the essential requisites of a
contract are present but the cause, object, or purpose is contrary to law, morals, etc.
They are often referred to as void contracts.
Note: In legal effect, there is no distinction between a void and an inexistent
contract

2. Enumerate the void and inexistent contracts.

They are:
(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
(but future things may legally be the object of a contract);
(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 by law. (Art. 1409.)
3. What are the characteristic of a void inexistent contract?
They are:
(1) Generally, it produces no effect whatsoever (Art. 1409.);
(2) It cannot be ratified (Ibid.);
(3) It cannot give rise to a valid contract (Art. 1422.);
(4) The right to set up the defense of illegality cannot be waived (Art. 1409.);
(5) The defense of illegality is available to third persons only when their
interests are directly affected (Art. 1421; e.g., Where A, husband sold his land to B,
his wife, the defense of illegality is not available to C, who became a creditor of A
after the transfer); and
(6) The action of defense for the declaration of its existence does not
prescribed. (Art. 1410.)