Defective Contracts PDF

PART IV - DEFECTIVE CONTRACTS There are four kinds of defective contracts: 1. Rescissible contracts (Chapter 6); 2. Voidable contracts (Chapter 7); 3. Unenforceable Contracts (Chapter 8); and 4. Void or inexistent contracts (Chapter 9) RESCISSIBLE CONTRACTS Art. 1380. Contracts validly agr...

PART IV - DEFECTIVE CONTRACTS There are four kinds of defective contracts: 1. Rescissible contracts (Chapter 6); 2. Voidable contracts (Chapter 7); 3. Unenforceable Contracts (Chapter 8); and 4. Void or inexistent contracts (Chapter 9) RESCISSIBLE CONTRACTS Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Contracts are valid because all the essential requisites of a contract exist but by reason of injury or damage to one of the parties or to third persons, such as creditors, the contract may be rescinded.  Meaning of Rescission  Rescission is a remedy granted by law to the contracting parties and sometimes even to third person in order to secure reparation of damages caused them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of said contract. (8Manresa 748)  Requisites of Rescission 1. The contract must be validly agreed upon; 2. There must be lesion on pecuniary prejudice to one of the parties or to a third person; 3. The rescission must be based upon a case especially provided by law; 4. There must be no other legal remedy to obtain reparation for the damage;  Requisites of Rescission 5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract. 6. The object of the contract must not legally be in the possession of third person who did not act in bad faith; 7. The period for filing the action for rescission must not have prescribed. 4 years.  Requisites of Rescission 5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract. 6. The object of the contract must not legally be in the possession of third person who did not act in bad faith; 7. The period for filing the action for rescission must not have prescribed. 4 years.  Requisites of Rescission 5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract. 6. The object of the contract must not legally be in the possession of third person who did not act in bad faith; 7. The period for filing the action for rescission must not have prescribed. 4 years. Enumeration of the Rescissible Contracts Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those 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 competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. (1291a) Enumeration of the Rescissible Contracts Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those 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 competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. (1291a) Enumeration of the Rescissible Contracts First Case — In Behalf of Wards Lesion — damage or injury to the party asking for rescission (generally, disparity between the price and the value). First Case — In Behalf of Wards Effect of Contracts Entered into in Behalf of Ward 1) If an act of ownership, court approval is required; otherwise, contract is unenforceable (Art. 1403), whether there is lesion or not. 2) If merely an act of administration — a) if with court approval — valid, regardless of lesion.(Art. 1386). b) if without court approval — rescissible, if lesion is more than one-fourth. (Art. 1381, No. 1). First Case — In Behalf of Wards Effect of Contracts Entered into in Behalf of Ward 1) If an act of ownership, court approval is required; otherwise, contract is unenforceable (Art. 1403), whether there is lesion or not. 2) If merely an act of administration — a) if with court approval — valid, regardless of lesion.(Art. 1386). b) if without court approval — rescissible, if lesion is more than one-fourth. (Art. 1381, No. 1). Enumeration of the Rescissible Contracts Second Case — In Representation of Absentees Those Undertaken in Fraud of Creditors Third Case — “Those Undertaken in Fraud of Creditors, When the Latter Cannot in Any Other Manner Collect Claims Due Them” “Accion pauliana” - the action to rescind contracts made in fraud of creditors.  Exception to relativity of contracts. Those Undertaken in Fraud of Creditors Requisites before accion pauliana can be brought: 1) There must be a creditor who became such PRIOR to the contract sought to be rescinded. 2) There must be an alienation made subsequent to such credit. 3) The party alienating must be in BAD FAITH. 4) There must be no other remedy for the prejudiced creditor — “inability to collect the claims due them.” Problem: To defraud his creditor, A sold his house to X. When however the creditor wanted to collect his credit, somebody lent A enough money. Should the sale of the house still be rescinded? ANS.: No, it should not be rescinded, because here the creditor can collect the claim due him. Badges of Fraud Fourth Case — Things in Litigation Example: A sues B for recovery of a diamond ring. Pendente lite, B sells the ring to C without the approval of A or of the court.  The sale to C is rescissible at A’s instance in case A wins in the original litigation, unless C is in good faith. Premature Payments Made in a State of Insolvency Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. Rescission Not a Principal Remedy Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. Partial Rescission Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. Necessity of Mutual Restitution Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. Necessity of Mutual Restitution Necessity of Mutual Restitution The obligation of restitution does not apply to creditors who seek to impugn fraudulent transactions of their debtors. (TS, March 26, 1923). The obligation of mutual restitution applies to OTHERS so that the status quo may be restored. Necessity of Mutual Restitution What should be returned in rescinding a contract? ANS.: 1) The object of the contract, with its fruits, must be returned. 2) The price, with its interest, must be returned. Necessity of Mutual Restitution A bought real property from B. A brought action to rescind the contract on the ground of non-delivery of the property. Does B have to give also the fruits received in the meantime? ANS.: No, the fruits received need not be given to A because the right takes place only when “delivery of the thing sold has been made.” (Hodges v. Granada, 59 Phil. 429). Necessity of Mutual Restitution A sold to B a piece of land in fraud of his (A’s) creditors. B took legal possession. If no other means are found to exact the satisfaction of the credits owing the creditors, may the sale to B be rescinded? ANS.: It depends upon whether B was in good faith or in bad faith. 1) If B was in good faith, rescission cannot take place, because the object of the contract is legally in the possession of a third person who did not act in bad faith. 2) If B was in bad faith, rescission is proper. Necessity of Mutual Restitution To defraud his creditors A sold to B a piece of land. B is an innocent purchaser in good faith, who takes legal possession of the land. Since the creditors cannot rescind the contract, what is their remedy? ANS.: Their remedy would be to demand indemnity for damages from the person causing the loss. (Last sentence, Art. 1385, Civil Code). Necessity of Mutual Restitution Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. Necessity of Mutual Restitution To defraud his creditor, A sold his property to B (who is in good faith). Later B sold the property to C, who is in bad faith. May the creditor rescind, although the property is now in the possession of C? ANS.: No, for it does not matter whether C is in good or bad faith, since he obtained the same from B who is in good faith. It is B’s good faith that is important. Effect if Contracts Were Judicially Approved Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.  Presumptions of Fraud Art. 1387. 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 to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. Presumptions of Fraud Gratuitous Alienations (a) Presumed fraudulent — when the debtor did not reserve sufficient property to pay all debts contracted BEFORE the donation. Example: A donated his land to B. Before the time he made the donation, he had several debts, but he did not reserve enough property to pay all these debts. Instead, he made the donation. Is the donation presumed fraudulent. ANS.: Yes, the donation is presumed in fraud of creditors. Problem A made a donation to B. Later A contracted several debts. What A has left as assets are much less than his present liabilities. May the donation to B be rescinded? ANS.: No, because the debts here of A were incurred after the donation had been made. Note: However, under the doctrine of “anticipatory fraud,” rescission may still prosper if it can be shown that the donation had been deliberately made beforehand to avoid the payment of debts still to be contracted. Presumptions of Fraud Onerous Alienations (a) Presumed fraudulent — when made by persons: 1) against whom some judgment has been rendered in any instance (thus, even if not yet a final judgment); 2) or against whom some writ of attachment has been issued. (Art. 1387, Civil Code). Presumptions of Fraud Example: After a judgment had been rendered against him, A sold his property to B. Is the sale presumed fraudulent? ANS.: Yes, the sale here is presumed fraudulent because it was made after a judgment had been issued against A. (See Gaston v. Hernaez, 58 Phil. 823). Upon the other hand, if the sale had been made BEFORE the judgment, the presumption of fraud cannot apply. This is so even if, unknown to the buyer, the suit had already been brought, but STILL PENDING as long as of course no attachment had been issued. (Adolfo Gaspar v. Leopoldo Dorado, et al., L-17884, Nov. 29, 1965). Presumptions of Fraud A brought an action against B, his debtor. A won. After judgment, B sold his property to C. X, another creditor of B, wants to rescind this sale to C. Both C and B claim that X does not have the right to interfere because, after all, it was A, not X, who had won a judgment against B. Are C and B justified? ANS.: No, C and B are not justified. It is true that it was A, not X, who won the judgment, but this is immaterial since the law says that the decision need not have been obtained by the party seeking the rescission. (2nd sentence, second paragraph, Art. 1387, Civil Code). Presumptions of Fraud Art. 1387. 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 to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. Other Badges of Fraud 1) The fact that the consideration of the conveyance is fictitious or inadequate; 2) A transfer made by a debtor after suit has been begun and while it is pending against him; 3) A sale upon credit by an insolvent debtor; 4) The 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 fact that the transfer is made between father and son (when this fact is considered together with preceding circumstances); 7) The failure of the vendee to take exclusive possession of all the property. Effect of Bad Faith Art. 1388. 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, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. Effect of Bad Faith Effect of Bad Faith (a) The acquirer must return or indemnify. (b) “Due to any cause” includes a fortuitous event. Example: To defraud his creditors, X sold his house to Y, who knew of X’s purpose. If the sale is rescinded, Y must indemnify, even if the house be destroyed by a fortuitous event, but only if X himself cannot pay. Effect of Bad Faith Subsequent Transfers (a) If the first transferee is in good faith, the good or bad faith of the next transferee is not important. (b) If the first transferee is in bad faith, the next transferee is liable only if he is also in bad faith. Effect of Bad Faith Example: A, in fraud of creditors, sold his house to B, who is in bad faith. B in turn alienated it in favor of C, who later sold it to D. Both C and D were also in bad faith. The contract is rescinded but the house is destroyed. Who, if any, are liable for damages? ANS.: B is liable first. If he cannot pay, then C will be liable. If C cannot pay, D will be liable. Prescriptive Period for Rescission Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known.  Prescriptive Period for Rescission (a) General rule — 4 years from the date the contract was entered into. (b) Exceptions: 1) persons under guardianship — 4 years from termination of incapacity 2) absentees — 4 years from the time the domicile is known Prescriptive Period for Rescission (a) Five years after a rescindable contract was made, action was brought for its rescission. The person who asked for the rescission was neither a ward nor an absentee at the time of the transaction of the rescindable contract. Will rescission still be allowed? ANS.: No, the rescission will no longer be allowed because the action has already prescribed. “The action to claim rescission must be commenced within four years.” (1st paragraph, Art. 1389, Civil Code). Prescriptive Period for Rescission (b) At the time he was 12 years old, A was under a guardian who sold, in behalf of the ward but without judicial authority, the harvest of the ward’s farm, and in so doing the ward suffered a lesion of more than one-fourth of the property. How many years will be given the ward to rescind the contract? ANS.: The ward will be given 4 years after reaching the age of majority (the time the guardianship ceases); hence, before reaching 22 years of age, the former ward should already have sued for the rescission of the contract. (2nd paragraph, Art. 1389, Civil Code). Who Can Bring the Action? (a) The injured party (or the defrauded creditor). (b) His heir or successor-in-interest. (c) Creditors of (a) and (b) by virtue of Art. 1177 of the Civil Code (accion subrogatoria).  Voidable Contracts Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (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 or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.  Meaning of Voidable Contracts  Voidable or annullable contracts are those which possess all the essential requisites of valid contract but one of the parties is incapable of giving consent, or consent is vitiate by mistake, violence, intimidation, undue influence of fraud. Meaning of Annulment  Annulment is a remedy granted by law, for reason of public interest, for the declaration of the inefficacy of a contract based on defect or vice in the consent of one of the contracting parties in order to restore them to their original position in which there were before contract was executed.  Distinctions Between a Rescissible and a Voidable Contract RESCISSION ANNULMENT The basis is lesion (damage). The basis is vitiated consent or incapacity to consent. The defect here is external or intrinsic. The defect is intrinsic (in the meeting of the minds). The action is subsidiary. The action is principal. This is a remedy. This is a sanction. Private interest governs. Public interest governs. Plaintiff may be a party or a third person. Plaintiff must be a party to the contract (whether bound principally or subsidiarily). There must be damage to the plaintiff. Damage to the plaintiff is immaterial. To prevent rescission, ratification is not To prevent annulment, ratification is required. required.  Characteristics of Voidable Contracts 1. The defect in the contract consists in the vitiation of consent of one of the contracting parties; 2. The contract is binding until annulled by a competent court; 3. The contract is susceptible of convalidation by ratification or prescription; 4. The defect or voidable character of the contract cannot be invoked by third persons. Grounds for Annulment (Declaration of Nullity) (a) incapacity to consent (b) vitiated consent Prescriptive Period for Annulment Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a) Effect of Prescription  If the action has prescribed, the contract can no longer be set aside. Period for Filing Action for Annulment The period within which the action for annulment shall be brought within four(4) years from: 1.The time the intimidation, violence or undue influence ceases; 2. The time of the discovery of mistake or fraud; and 3. The time guardianship ceases, in cases of contracts entered into by incapacipated persons. Effects of Ratification Art. 1392. Ratification extinguishes the action to annul a voidable contract. Effects of Ratification (a) The action to annul is extinguished (Art. 1392, Civil Code); thus, the contract becomes a completely valid one. (b) The contract is cleansed of its defect from the beginning. (Art. 1396, Civil Code). Requisites of Ratification (a) The contract must be a voidable one. (b) The person ratifying must know the reason for the contract being voidable (that is, the cause must be known). (c) The cause must not exist or continue to exist anymore at the time of ratification. (d) The ratification must have been made expressly or by an act implying a waiver of the action to annul. (e) The person ratifying must be the injured party. Kinds of Ratification Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. Kinds of Ratification (a) Express (oral or written) (b) Tacit (implied — as from conduct implying a WAIVER). Examples of Tacit Ratification (a) A minor bought land, but sold the same, after reaching 21 years of age, to a 3rd person. (Rosales v. Reyes, 25 Phil. 495 and Atacador v. Silayan, 67 Phil. 674). (b) A minor sold land, and upon reaching majority age, collected the unpaid balance of the selling price (Tacalinar v. Corro, 34 Phil. 898), or spend the greater part of the proceeds of the sale. (Uy Soo Lim v. Tan Unchuan, 38 Phil. 552). (c) Use of the proceeds by a person who had been previously intimidated into selling his property. (Madlambayan v. Aquino, [C.A.] 51 O.G. 1925, Apr. 1955). Ratification by Guardian Art. 1394. Ratification may be effected by the guardian of the incapacitated person. Conformity of Guilty Party Not Needed Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. Retroactive Effect of Ratification Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. Retroactive Effect of Ratification Example A minor sold his land to X. When he became 22 years old, he became indebted to Y. To avoid paying Y, the former minor decided to ratify the sale of the land. He then had no other property. May Y still rescind the sale although at the time it was made he was not yet a creditor? ANS.: Yes. Although ratification has a retroactive effect, still his rights as an innocent third person must not be prejudiced. Persons Who May Ask for Annulment Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract.  The victim (principal or subsidiary party) may ask for annulment, not the guilty person or his successor. Persons Who May Ask for Annulment Persons Who May Ask for Annulment Effects of Annulment Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. Effects of Annulment (a) If the contract has not yet been complied with, the parties are excused from their obligations. (b) If the contract has already been performed, there must be MUTUAL RESTITUTION (in general) of: 1) the thing, with fruits; 2) the price, with interest. Generally, No Restitution by Incapacitated Party Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. Value May Be Substituted for Thing Itself Art. 1400. Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.  Value May Be Substituted for Thing Itself Example A forced B to sell him (A) the house of B. B brought an action to annul the contract. The contract was annulled on the ground of fraud. A was asked by the court to return to B whatever he (A) has received. But the house had been destroyed through the fault of A. What should A now give? ANS.: A should give all of the following: 1. the fruits or rentals of the house received from the time the house was given to him to the time of its loss; 2. the value of the house at the time of the loss; 3. interest at 6% per annum on the value of the house from the time the house was destroyed. Effect of Loss of Object Through Fraud or Fault of the Victim Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.  Problems (a) A was forced to sign a contract with B. In said contract, A was given a house. But A destroyed the house. May A still bring the action for annulment? ANS.: No more. His act of destroying the house extinguished his right to bring the action for annulment. (b) A, a minor, was sold a house by B. The house was destroyed by a fortuitous event. May A still annul the contract so as to recover from B the price (and interest) he (A) had given? ANS.: Yes. As a rule, if the right of action is based upon the incapacity of anyone of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action. Here, the minor was not guilty of fraud or fault. (Art. 1401, 2nd par.) One Party Cannot Be Compelled if Other Party Does Not Restore Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. Example: A forced B to take A’s car in exchange for B’s ring. B asked for annulment, and the court gave the decree of annulment ordering each to return what had been received. B refused to give A the car. May A be compelled to give back the ring? No. Effect of Loss Thru Fortuitous Event Suppose the innocent party cannot restore because of a loss thru a fortuitous event, may he still compel the other to return what he had given? ANS.: NO, because before annulment, the contract is valid, and the innocent party, being the owner of the thing lost by a fortuitous event, must bear the loss. Problem A forced B to sell to him (A) his (B’s) ring. B sued for annulment, but A had already lost the ring thru a fortuitous event. What is B’s remedy? ANS.: A can be compelled to pay its value or damages, for it is as if A was a possessor in bad faith who bears the loss even in case of a fortuitous event. (See Art. 1522, Civil Code).  Unenforceable Contracts Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: Unenforceable Contracts, cont’d. STATUTE OF FRAUDS CONT’D. (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry;  Unenforceable Contracts, cont’d. (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, 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 entry is made by the auctioneer in his sales book, at the time of the 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; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract.  Meaning of Unenforceable Contracts Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects provide by law until unless they are ratified according to law. Classes of Unenforceable Contracts 1. Those entered into the same of another person by one without authority or in excess of his authority; 2. Those which do not comply with the Statue of Frauds; and 3. Those where both parties are incapable of giving consent How the Statute of Frauds Prevents Fraud TO AID HUMAN MEMORY (Facturan v. Sabanal, 81 Phil. 512). Defenses to Contract Enforceability 15-85  Acts Covered by the Statute of Frauds (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than fi ve hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, 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 entry is made by the auctioneer in his sales book, at the time of the 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; (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person Ratification of Contracts Infringing the Statute of Frauds Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefits under them. Ratification of Contracts Infringing the Statute of Frauds Two ways of ratification of contracts infringing the Statute of Frauds are given here: (a) failure to object to the presentation of oral evidence (this is deemed a waiver). (See Domalagan v. Bolifer, 33 Phil. 471). (b) acceptance of benefits under them (the statute does not apply to executed or partially executed or performed contracts). (Hernandez v. Andal, 78 Phil. 196).  Contract Where Both Parties Are Incapacitated Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.  Contract Where Both Parties Are Incapacitated Example: A and B, both 15 years old, entered into a contract. The contract is unenforceable because both parties cannot give consent. If the guardian or parent of A ratifies expressly or impliedly the contract, it becomes voidable, valid unless annulled by the guardian or parent of B. If the guardian or parent of B also ratifies, the contract is validated right from the time it was first entered into. Strangers Cannot Assail Unenforceable Contracts Art. 1408. Unenforceable contracts cannot be assailed by third persons.  Section 1. Short Title. — This Act shall be known as the “Electronic Commerce Act of 2000”. “Electronic Document” “Electronic Document” refers to information or the representation of information, data, figures, symbols or other modes of written expression, described or however represented, by which a right is established or an obligation extinguished, or by which a fact may be proved and affirmed, which is received, recorded, transmitted, stored, processed, retrieved or produced electronically. (Sec 5 (f), R.A.8792) Legal Recognition of Electronic Documents  Electronic documents shall have the legal effect, validity or enforceability as any other document or legal writing, and - a. Where the law requires a document to be in writing, that requirement is met by an electronic document if the said electronic document maintains its integrity and reliability and can be authenticated so as to be usable for subsequent reference, in that – i. The electronic document has remained complete and unaltered, apart from the addition of any endorsement and any authorized change, or any change which arises in the normal course of communication, storage and display; and ii. The electronic document is reliable in the light of the purpose for which it was generated and in the light of all the relevant circumstances. Legal Recognition of Electronic Documents b. Paragraph (a) applies whether the requirement therein is in the form of an obligation or whether the law simply provides consequences for the document not being presented or retained in its original form. c. Where the law requires that a document be presented or retained in its original form, that requirement is met by an electronic document if – i. There exists a reliable assurance as to the integrity of the document from the time when it was first generated in its final form; and ii. That document is capable of being displayed to the person to whom it is to be presented: Provided, That no provision of this Act shall apply to vary any and all requirements of existing laws on formalities required in the execution of documents for their validity. Legal Recognition of Electronic Documents  For evidentiary purposes, an electronic document shall be the functional equivalent of a written document under existing laws.  This Act does not modify any statutory rule relating to the admissibility of electronic data messages or electronic documents, except the rules relating to authentication and best evidence. (Sec. 7, R.A. 8792) Void or Inexistent Contracts Art. 1409. The following contracts are inexistent and void from the beginning: 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;  Void or Inexistent Contracts 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. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. Simulated Contracts (a) If absolutely simulated, the contract is void for utter lack of consent. (b) If relatively simulated, the hidden or intended contract is generally binding. (Onglengco v. Ozaeta, 70 Phil. 43). Action for Declaration of Inexistence of the Contract Does Not Prescribe Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. Void or Inexistent Contracts 1. it cannot be ratified. (Art 1409) 2. the right to set up the defense of illegality cannot be waived. 3. the action or defense for the declaration of its inexistence does not prescribe. (art. 1410) 4. the defense of illegality is not available to third persons whose interests are not directly affected; and 5. it cannot give rise to a valid contract. (Art. 1422) Void or Inexistence Contract Void or inexistent contracts does not prescribe. Mere lapse of time cannot give effect to contracts which are null and void. The ‘Pari Delicto’ Rule Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be 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 innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) Meaning of Pari Delicto Pari Delicto (in equal guilt) means both parties are equally at fault or are equally guilty. The principle of pari delicto, means that when the defect of a void contracts consists in the illegality of the cause or object of the contract and both parties are at fault or in a pari delicto, the law refuse them every remedy, or the parties have no action against each other. Illegal Contract with Criminal Offense 1. When both parties are in pari delicto – Rules a. the parties shall have no action against each other; b. both shall be prosecuted; and c. the things of the price of the contract, shall be confiscated in favor of the government. 2. Where only one party is guilty. The innocent one or less guilty may claim what he has given and shall not be bound to comply with his promise  Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:  (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;  (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 him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306) Exceptions to Pari delicto Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Exceptions to Pari delicto Art. 1414. When money is paid or property 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. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property. Exceptions to Pari delicto Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands, allow recovery of money or property delivered by the incapacitated person. Exceptions to Pari delicto Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Exceptions to Pari delicto Contracts Illegal Per Se and Those Merely Prohibited Illegal Per Se Illegal per se contracts are those forbidden because of public interest. Merely Prohibited Merely prohibited contracts are those forbidden because of private interests. Here recovery is permitted, provided that: (a) the contract is not illegal per se, (b) the prohibition is designed for the protection of the plaintiff, (c) and public policy would be enhanced by allowing the recovery. Exceptions to Pari delicto Examples A donated to B everything that he (A) possessed and owned, leaving nothing for himself. This is prohibited but not illegal per se. Since public policy is hereby enhanced, A will be allowed to recover, at least that necessary for his own support and the support of his relatives. Exceptions to Pari delicto Rule in Case of Payment in Excess of Maximum Price Art. 1417. When 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. Purpose: To curb the evils of profiteering. Example If the ceiling price for a pack of cigarettes is pegged at P300.00 a carton and you paid P400.00 for it, you may recover the excess of P100.00. Exceptions to Pari delicto Hours of Labor Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. Exceptions to Pari delicto Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. Effect of Illegal Terms in a Contract Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. In case a contract containing an illegal or legal terms, the law allows the legal terms to be enforced if it can be enforced if it can be separated from the illegal ones. Effect of Illegal Terms in a Contract Illegal Terms of a Contract The contract may be indivisible or divisible. (a) If indivisible the whole contract is void, even if only some terms are illegal. (b) If divisible, the legal terms may be enforced if same can be separated from the illegal terms. (Art. 1420). Defense of Illegality Not Generally Available to Third Persons Art. 1421. The defense of illegality of contracts is not available to third persons whose interests are not directly affected. Persons Entitled to Raise Defense of Illegality or Nullity  As general rule, contracts bind only the contracting parties, their heirs or assigns. Corollary to this rule, the illegality of a contract maybe set up as a defense only by contracting parties or by parties whose interest are affect by the contracts as a defense Contract That Is the Direct Result of a Previous Illegal Contract Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent. Example: A promised to give B a car as a reward after B has killed C. Later, after the killing, the contract was changed to a lease of a big house for a certain period. The second contract here is the direct result of a previous illegal contract and is, therefore, null and void.  RESCISSIBLE VOIDABLE UNENFORCEABLE VOID What is the defect? 1. Lesion 1. Incapacity 1. In excess or without 1. Absence of 2. Transfer in fraud of 2. Consent is vitiated authority, requisites, creditors by fraud, violence, 2. Violation of Statute 2. Illicit nature. 3. Transfer by insolvent intimidation, undue of Frauds, or before due date. influence. 3. Incapacity of both parties. What is the effect? Binding and enforceable Valid and binding until Cannot be enforced No effect is produced. unless rescinded. annulled. unless ratified or waived. Can it be ratified? Do not need to be ratified. Can be ratified. Can be ratified. Cannot be ratified. (cured of vice or defect) Who can assail the Contracting party and third Contracting parties only. Contracting parties only. Contracting parties and contract? persons who are prejudiced. third persons whose interests are affected. What is the 4 years from termination of 4 years from the time No prescriptive period is prescriptive period incapacity – lesion in intimidation, violence, or provided because the Action for declaration for filing the case? guardianship. undue influence stops. same is not applicable. that the contract is void is imprescriptible. 4 years until the domicile of 4 years from the Prescription cannot cure absentee is known. discovery of fraud. the defect. 4 years from the time guardianship of the minor and other incapacity ceases. How can it be Directly Directly or collaterally Directly or collaterally Directly or collaterally assailed, directly or collaterally? Thank you!!!!!