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OBLIGATIONS AND CONTRACTS 4TH EXAM

DEFECTIVE CONTRACTS REVIEWER


Emille Dane S. Viola

creditor and being already in possession his acquisition will


be respected.

DEFECTIVE CONTRACTS
RESCISSIBLE CONTRACTS
- a contract which has caused a particular damage to one of the
parties or to a third person, and which for equitable reasons may
be set aside even if its valid.
- Rescission is principally based on some economic damage
(lesion) as a result of the inequitable conduct by one party
Art. 1381. Contracts validly agreed upon may be rescinded in
cases established by law.
Requisites of rescission:
1.
Contract must be rescissible (1381&1382)
2.
Party asking for rescission must have no other legal means
to obtain reparation for damages caused (1383)
3.
Person demanding rescission must be able
to return
whatever he may be obliged to restore if rescission is
granted (1385)
4.
The thing which are the object of the contract must not have
passed legally to the possession of a third person acting in
god faith (1385)
5.
The action must be brought within 4 years (1389)

SUBSIDIARY REMEDY- it is necessary that the complaining creditors


must prove that they cannot recover in any other manner what is due
them.
As a rule, the rescission should benefit only the creditor who obtained
the rescission, because the rescission is to repair the injury caused to
him by the fraudulent alienation, however creditors who could also
bring the action may benefit if a balance is left after satisfying the
claim of the creditor who brought the action.
Creditors who cannot bring the action (those who became creditors
after rescission) cannot benefit; they cannot get indirectly what they
cannot obtain directly.
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.
Requisites
1.
The Debtor-payer must have been insolvent (no judicial
declaration needed)
2.
Debt was not yet due and demandable

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 onefourth 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.

INSOLVENCY IN FACT- does not require any judicial proceeding in


insolvency.
A creditor need not have a judgment or execution in order to rescind
the payment made during insolvency of what was not then due.

No. 1 & No. 2 are by reason of acts of administration (ex. Purchase


equipment for the cultivation of lands, sale of harvest, purchase
material for the repair of the building) and do not include acts
dominion/ownership (ex. Contract of Compromise) If it were acts
ownership, it would fall under UNENFORCEABLE CONTRACTS.

Partial rescission is possible; benefits only the creditor who has asked
for rescission

of
of
of
of

LESSION- the injury w/c one of the parties suffer by virtue of a contract
w/c is disadvantageous for him.
-must be known or could have been known at the time of the making of
the contract, and not due to circumstances subsequent thereto or
unknown to the parties
REQUISITES FOR ACCION PAULIANA
1.
the plaintiff has a credit prior to the alienation, although
demandable later*
2.
The debtor made a subsequent contract conveying a
patrimonial benefit to a 3rd person
3.
The creditor has no legal means to satisfy his claim, but
would benefit by the rescission of the conveyance to the 3 rd
person
4.
The act impugned is fraudulent
5.
The 3rd person who received the property, if by onerous title
has been an accomplice
*At the time AP was brought, the credit must already be due
-Judgment has a retroactive effect to the date when the credit was
constituted.
TEST OF FRAUD
-the fraud that justifies the AP is not characterized by the intention to
injure the creditor, but by the knowledge that damage would be
inflicted. This knowledge exists when the debtor knows that his
property cannot be alienated without producing evident injury to his
creditors with existing claims, whether they be due or not.
SIGNS OF FRAUD
1.
The fact that consideration of conveyance is inadequate
2.
A transfer made by a debtor after suit has begun and while
pending against him
3.
A sale upon a credit by an insolvent debtor
4.
Evidence of large indebtedness/insolvency
5.
Transfer of all or nearly all the debtors property, esp when
he is insolvent or greatly embarrassed financially
6.
The fact that the transfer is made between father and son,
when any of the circumstances above are present
7.
Failure of the vendee to take exclusive possession of the
property
Gratuitous alienation- simple knowledge that creditor would suffer
injury
- good faith of the transferee does not protect him because
he gave nothing and so he is not prejudiced by the
rescission.
Onerous alienation- motivated by an intention to prejudice
- transferee must be a party to the fraud; if he acts in good
faith, there can be no rescission because having given
something, his position would be similar to that of the

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.
Where is is shown that the property transferred by the debtor to
another was his only property, it is obvious that the creditor can have
no recourse to satisfy his claim except by rescission.
Art. 1384. Rescission shall be only to the extent necessary to
cover the damages caused.

WHO MAY BRING ACTION


1.
Person injured (ward, absentee, creditors by a fraudulent
alienation, plaintiff)
2.
The Heirs
3.
Their creditors by virtue of the right granted by Art 1177
(accion subrogatoria)
Art. 1177. The 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 acts which the debtor may
have done to defraud them

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.
MUTUAL RESTITUTION
APPLICABLE ONLY TO No. 1 and No. 2 of 1381
Requisites before Rescission can be Brought
a)
b)
c)
d)

Generally, plaintiff must be able to return what has been


received by virtue of rescissible contract. Except when it is
prejudicial to creditors.
The thing-object of the contract is not in the legal possession
of 3rd persons in good faith.
There must be no other legal remedy.
The action must be brought w/in proper prescriptive period

A valid transfer to a third person who acquires the property in good


faith is sufficient to defeat the action for rescission.
Right of the Transferee
Gratuitous Transfer- creditor has a better right than the
transferee who has given nothing and would be unjustly enriched at
the expense of the creditor if the transfer was upheld. Rescission will
be allowed irrespective of the good faith or bad faith of the trnaferee.

OBLIGATIONS AND CONTRACTS 4TH EXAM


DEFECTIVE CONTRACTS REVIEWER
Emille Dane S. Viola
Onerous Transfer- the transferee in good faith is protected; to
permit rescission, the transferee must be a party to the fraud, he must
have a knowledge that the transfer to him would prejudice existing
creditors of the transferor.
TRANSFEREE IN GOOD FAITH
Gratuitous- obliged to return the whole thing, but being a
possessor in good faith, he is not obliged to pay the fruits received by
him. He is entitled to reimbursement for the necessary and useful
expenses incurred on the thing.
Returns the thing in the condition it maybe found, he is not
liable for the losses or deterioration except in cases in which it is
proved that he acted with fraudulent intent or negligence after judicial
summons
TRANSFEREE IN BAD FAITH
Not entitled for indemnity for damages from the debtor.
RIGHT TO DAMAGES
When the contract cannot be rescinded since the property is
acquired by a third person in good faith, the person responsible for the
loss is liable for damages (guardian, representative)

SUBSEQUENT TRANSFER
If transferee is in good faith; good/ bad faith of next transferee is
immaterial;
If transferee is in bad faith; the next transferee is only liable if he
is in bad faith.
So in this case, the first acquirer shall be liable, then as we said,
he transfers it to T2 and then to T3, the liability will be only upto
T3. He will not be liable to return, precisely because he has
transferred it, but he will be liable for damages. Because of the
impossibility to return what he is supposed to return to the debtor
for purposes of answering the liabilities of the debtor.

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.

WHO CAN BRING ACTION?


1.
The injured party (or defrauded creditor)
2.
His heir or successor-in-interest
3.
Creditors of (a) and (b) by virtue of Art. 1177 of C.C

Art. 1386. Rescission referred to in Nos. 1 (entered by the


guardian) and 2 (entered by representatives of absentee) of
Article 1381 shall not take place with respect to contracts
approved by the courts.

When do you institute the action for rescission? Must be commenced


within four years. For persons under guardianship and for absentees,
the four years shall not begin until the termination of the former's
incapacity, or until the domicile of the latter is known.

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.

Now suppose it does not fall under numbers 1 and 2. When shall you
start counting the four year period? That was answered in the case of
Cheng vs. CA.

Alienations by onerous title are also presumed fraudulent


when made by persons against whom some judgment 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: Intention to defraud
Does not apply when alienation was made before judgment.
*In case of attachment, it is enough that it was issued, any alienation
after such issuance, even if made before service or execution of such
attachment, will be presumed fraudulent.
REBUTTAL OF PRESUMPTION
-satisfactory and convincing evidence; it is necessary to establish
affirmatively that the conveyance was made in good faith and for a
sufficient and valuable consideration.
-when the presumption has been overthrown, it is incumbent upon the
party asking for rescission to prove by sufficient evidence that there
was actual mala fides in the alienation, other wise the contract will not
be rescinded.
BADGES OF FRAUD
1. The fact that the consideration of the conveyances is fictitious or is
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. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially
when he is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, where
there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the
property.
EFFECT OF FRAUD
-existence of fraud does not necessarily make the alienation
rescissible, fraud is only a requisite of accion pauliana. Even if the
debtor acted fraudulently, if the transferee acquired the thing in good
faith and for valuable consideration, the rescission will not be allowed.
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.

CHENG v CA
Article 1389 of the Civil Code simply provides that, The
action to claim rescission must be commenced within four years.
Since this provision of law is silent as to when the prescriptive
period would commence, the general rule, i.e, from the moment
the cause of action accrues, therefore, applies. Article 1150 of the
Civil Code is particularly instructive:
Art. 1150. The time for prescription for all kinds of
actions, when there is no special provision which ordains
otherwise, shall be counted from the day they may be
brought.
Indeed, this Court enunciated the principle that it is the legal
possibility of bringing the action which determines the starting
point for the computation of the prescriptive period for the action.
Article 1383 of the Civil Code provides as follows:
Art. 1383. An 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.
It is thus apparent that an action to rescind or an accion pauliana
must be of last resort, availed of only after all other legal remedies
have been exhausted and have been proven futile.
An accion pauliana accrues only when the creditor discovers that
he has no other legal remedy for the satisfaction of his claim
against the debtor other than an accion pauliana. The accion
pauliana is an action of a last resort.
The period begins to run after the aggrieved party has unsuccessfully
exhausted all possible legal remedies to enforce the obligation or
recover losses, and from the time
1.The incapacity of persons under guardianship terminates, in cases of
persons under guardianship
2.The absentee learns of the contract, in cases of absentees
3.The fraud is discovered, for contracts entered in fraud of creditors
4.Of the knowledge of the transaction, for contracts entered with
respect to things under litigation without approval

VOIDABLE CONTRACTS

-a contract in which consent of one of the party is defective, either


because of want of capacity, or because it is vitiated, but contract is
still valid until set aside by a competent court.

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.

If there are two or more alienations, the first acquirer shall be


liable first, and so on successively.

The capacity of a party is not a requisite sine qua non of a contract; its
want is only a ground for annulment.

Does not apply to No. 1 & 2 of Art 1381


*maybe fortuitous, fault, or negligence

Repentance is not a ground for nullification of contract.

OBLIGATIONS AND CONTRACTS 4TH EXAM


DEFECTIVE CONTRACTS REVIEWER
Emille Dane S. Viola
These contracts are binding, unless there are annulled by a proper
action in court. They are susceptible of ratification. And voidable or
annullable contracts cannot be attacked collaterally. You must institute
a direct proceeding asking that the contract be annulled.
Institute an action asking the court asking the court to annul the
contract on the ground of 1 or 2. Or you can state it in the
counterclaim if you are a defendant.
Courts must not only declare the contract voidable; it must annul or set
aside the contract and order mutual restitution (1398)

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.
The guardian can also bring an action for annulment, but if it were the
minor, then upon reaching the age of majority, if the incapacitated,
then from the time of the cessation of guardianship.

Ratification (1392-1395)
Art. 1392. Ratification extinguishes the action to annul a
voidable contract.
Ratification cleanses the contract of its defects, and it shall retroact to
the day of the inception of the contract. It has retroactive effect, and it
cleanses the contract of whatever defects it creates. So it becomes a
valid contract.

Art. 1395. Ratification does not require the conformity of the


contracting party who has no right to bring the action for
annulment.

Art. 1396. Ratification cleanses the contract from all its defects
from the moment it was constituted.
Ratification is merely a declaration of the waiver of the right to ask for
annulment, hence it retroacts to the moment when the contract is
entered into
If ratification has been made, no action to annul the same can be
maintained based on the same defects relating to its original validity.
Rights of innocent 3rd persons must not be prejudiced.

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.
PERSONAL REQUISITES
1.
The plaintiff must have an interest
2.
The victim, not the party responsible for the defect must
assert
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.

Ratification and annulment are two inconsistent remedies


C & R may be used interchangeably.
Conformation is the act by w/c a person entitled to bring an action for
annulment, with knowledge of the cause of annulment and after it has
ceased to exist, validates the contract either expressly or impliedly.
Ratification- act of approving a contract entered into by another
without the authorization of the person in whose name it was entered
into or beyond the scope of the authority of the former.
act or means by which efficacy is given to a contract or an
obligation w/c suffers from a vice of curable nullity.
Acknowledgement- remedies the deficiency of proof; when what has
been agreed upon orally is put in writing or when a private document is
converted into a public instrument, there is acknowledgement.
REQUISITES FOR RATIFICATION
1.
2.
3.
4.
5.

Contract is voidable
Person ratifying must know the reason for the contract being
voidable (cause is known)
Cause must not exist/continue to exist anymore at time of
ratification
Ratification is made expressly or by an act implying a waiver
of action to annul
Person ratifying must be the injured party*

*The right to ratify is transmitted to the heirs of the party entitled to


such right.
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.
Tacit acts: reselling of object, collecting unpaid balance, use of
proceeds
IMPLIED RATIFICATION
-act evincing an intent to abide by the contract is evidence of the
affirmance of the contract and a waiver of the right to ask for
annulment. It may be by silence or acquiescence, acceptance and
retention of benefits.

In obligations to render service, the value thereof shall be the


basis for damages.
EFFECT OF ANNULMENT: MUTUAL RESTITUTION**
Return parties to their original situation; if there has been no
performance by either party the contract simply ceases to have any
force and effect.
PARTIAL PERFORMANCE: return whatever he may have received by
reason of the contract unless there are reasons provided by law which
will prevent such restitution.
**Unless estoppel should be established, the registration of the land
does not extinguish the obligation of mutual restitution under this
article.
**Cannot be applied to all contracts (ex contract of lease), cannot
prosper if it would violate the principle of unjust enrichment.
Contracts of service- the party benefited by the service must pay for its
value in spite of the annulment of contract.
FRUITS & INTERESTS
Take into account the good faith & bad faith
Possessor in good faith- not required to return the
fruits or pay the interest
Possessor in bad faith (one who employed fraud,
violence, etc)- obliged to restore not inly the fruits
received but also those which might have been
received.
LIABILITY FOR DAMAGES
As a rule, annulment and mutual restitution eliminated the possibility
of damages; exception is when the property transferred has already
suffered damages in the hands of the defendant before the annulment
of the contract, in such cases the injured party should be entitled to
recover.

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.
EXCLUSIVE to nullity arising from incapacity of one of the parties, if
some other cause, apply 1398

Art. 1394. Ratification may be effected by the guardian of the


incapacitated person.

The party suffering from the incapacity is only bound to return what he
has profited by the thing sold or the price received.

The right to ratify pertains to the incapacitated person; hence. During


the existence of incapacity, it may be exercised by the guardian for
him

Not necessarily a material and permanent increase in fortune; any


beneficial use of the thing received ex for clothes, food, dwelling,
health requirements. If the thing received is still in his patrimony after
the incapacity ceases, he is deemed benefited thereby. If he alienates
or squanders it, it is deemed a ratification.
Proof of such benefit rests upon the party who has capacity.

OBLIGATIONS AND CONTRACTS 4TH EXAM


DEFECTIVE CONTRACTS REVIEWER
Emille Dane S. Viola

Art. 1400. Whenever the person obliged by the decree of


annulment to return the thing can not 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.
Loss through the fault of the person obliged to return.
Loss through obligees fault: Fruits + Value at the time of loss +
Interest from the time of loss. (F+V+I)
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.
If the thing is lost through the fault of the person who has the right to
institute the action, then the petition for annulment is extinguished.

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.
FORTUITOUS EVENT
The action for annulment is not extinguished by the defendant cannot
be obliged to make restitution to the plaintiff. The plaintiff who was in
possession of the object at the time of the loss must still be considered
the owner thereof snd he must bear the loss of the fortuitous event.
BUT if the plaintiff in such case offers to pay for the value of the thing
lost, as a substitute, the defendant should be obliged to make
restitution (1400) except, the plaintiff need not pay the interest of the
thing lost because the loss was not his fault. (Only Value of thing lost,
NO INTEREST)

UNENFORCEABLE CONTRACTS
-does not produce any effect unless ratified; valid but no court action
may arise therefrom.
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:
(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 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.
1.
2.

Contract of agency/ authority must be in writing


STATTUE OF FRAUDS: Purely executory contracts which
requires a certain class of contracts to be in writing. Does
not deprive parties the right to contract, merely regulates
the formalities necessary to render it enforceable. Does not
apply to actions which are neither for specific performance
nor for the violation thereof

The agreement, note, or memorandum must be in


writing + subscribed by the parties charged/ his
agent.
Purpose: to prevent fraud and perjury in the enforcement of
obligations depending for their evidence upon the unassisted
memory of the witnesses by requiring certain contracts and
transactions to be in writing and signed by the parties
charged.
No action for damages due to non-performance.
During trial, parties to the contract makes no objection to the
admissibility of oral evidence -> binding as if reduced into
writing.
2(c). acknowledgement of a child
2(d). unless the buyer receives part of the goods of the
evidences or pay at the time some part of the purchase
price.
THINGS IN ACTION- Movables not susceptible of possession;
negotiable instruments, assignment of credit
SALE BY AUCTION- entry in the sales book must be made at
the time of the sale; entry is a sufficient memorandum
1.
amount and kind of property sold
2.
terms of sale
3.
price
4.
names of purchaser and person in whose
account the purchase was made
SoF cannot be invoked when there is already a total or
partial performance and acceptance by one or both parties.
It is not enough for a party to allege partial performance in
order for SoF to be inapplicable; it must be duly proved
either by documentary or oral evidence.
No particular form of language or instrument is necessary to constitute
a memorandum or note as a writing under SoF. It meets the
requirement if it contains :
1.
the names of the parties,
2.
the terms and conditions,
3.
description of the subject matter sufficient to render it
capable of identification,
4.
the date and place of the making of agreement,
5.
signature of the party assuming the obligation.
2(a). time begins to run from the day the contract is entered into, not
from the time that performance is made. Agreements to be fully
performed on one side w/n a yr is taken out of the operation of SoF. If
there is no time fixed, and there is nothing to show that the agreement
cannot be performed w/n a year, according to its terms and
understanding, it is not w/n SoF.
2(b). original debtor continues to be liable, promisor receiving no
benefits should be bound only by the exact terms of his promise; there
must be a debt of obligation of one other then the promisor for whose
default the latter undertakes to be responsible.
default or miscarriage includes liability for tort and are not restricted
to defaults or miscarriages arising out of contracts.
2(c) the marriage must not be a mere incident but the end to be
attained, otherwise it is not in consideration of the marriage and may
be proven by oral evidence.
A promise made by the father of a prospective bride to give a gift to
the prospective husband if covered by the statute.
Agreement for a lease- the memo must designate the length or
duration of the term and the time when it is to begin.
2(f) representation must be in order to obtain credit
3. Both, neither party nor his representative can enforce the contract
unless previously ratified. The ratification by one party converts the
contract into a voidable contract at the option of the party who has not
ratified to ask for annulment on the ground of his incapacity.
Art. 1404. Unauthorized contracts are governed by Article
1317 and the principles of agency in Title X of this Book.
Ratification validates contracts
CONTRACTS OF AGENCY
Art. 1317. No one may contract in the name of another
without being authorized 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 whose
behalf it has been executed, before it is revoked by the other
contracting party.

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 benefit under them.

OBLIGATIONS AND CONTRACTS 4TH EXAM


DEFECTIVE CONTRACTS REVIEWER
Emille Dane S. Viola
During trial, parties to the contract makes no objection to the
admissibility of oral evidence -> binding as if reduced into writing.
SoF cannot be invoked when the contract has been partly executed; it
applies only to executor contracts.
Art. 1406. When a contract is enforceable under the Statute of
Frauds, and a public document is necessary for its registration
in the Registry of Deeds, the parties may avail themselves of
the right under Article 1357.
SALE OF REAL PROPERTY
Art. 1357. If the law requires a document or other special
form, as in the acts and contracts enumerated in the
following article, the contracting parties may compel each
other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with
the action upon the contract.
Power to compel the other part to observe the requirement.
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. (VIODABLE)
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. (VALID)

Art. 1408. Unenforceable contracts cannot be assailed by third


persons.
DEFENSE IS PERSONAL
May be waived by the party affected

VOID AND INEXISTENT CONTRACTS

cannot be confirmed or ratified

No action for annulment necessary; the nullity is ipso jure and a


judgment of nullity would be merely declaratory
defense of illegality CANNOT be waived
No force and effect from the very beginning
As if it was not entered into
If there has been performance, resoration is in order
Ex. Donations of real property that is not in a PD and acceptance not
in a PD

Any party may invoke and nullity may be set up against any person
who asserts a right arising from the void contract.
An action on the Contract to declare its inexistence is necessary when
it has already been fulfilled. The intervention of a competent court is
necessary to decree the restitution of what has been given. The
judgment will retroact to the day when the contract was entered into.
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;
(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.
Nullity is permanent, however ratification may take the form of a new
contract, in which case the validity shall be determined only by the
circumstances at the time of the execution of such new contract.
The object which was illegal at the time of the first contract, may have
already become lawful at the time of the ratification or second
contract. The ratification would not retroact to the date of the 1 st
contract.

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.

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.
1411- Constitutes a crime
1412- Not constitute a crime
both not applicable to fictitious and simulated contracts; only refer to
contracts with an illegal cause or subj matter; presupposes the
existence of a cause, although such may be vitiated and may render
the contract void.
The pari delicto rule does not apply in case of void contracts which
are simulated to circumvent a law. For instance, a donation between
spouses is generally void under Art. 133 of the Civil Code. And it has
been ruled that in such a case, the property can be reclaimed at
anytime by the donor or his heirs or by any person prejudiced thereby.
To apply the pari delicto rule in such a case would be to sanction a
circumvention of the prohibition.
In pari delicto Rule Inapplicable to Inexistent Contracts
In pari delicto non oritur actio denies all recovery to the guilty parties
inter se. It applies to cases where the nullity arises form the illegality of
the consideration or the purpose of the contract. When two persons are
equally at fault, the law does not relieve them. The exception to this
general rule is when the principle is invoked with respect to inexistent
contracts.

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.

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.

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.

Art. 1416. When the agreement is not illegal per se but is


merely prohibited, and the prohibition by the law is designated
for the protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has paid or delivered.
Illegal Per Se contracts are those forbidden because of public
interest.
Merely prohibited contracts are those forbidden because of private
interests. Here recovery is permitted, provided that the prohibition is
designed for the protection of the plaintiff, and public policy would be
enhanced by allowing the recovery.

Art. 1410. The action or defense for the declaration of the


inexistence of a contract does not prescribe.

Ex. 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.

Defect cannot be cured by prescprition


Power to ask for the declaration of a non-existence of a contract cannot
be assigned

Doctrine of in pari delicto is not applicable where the contract is


merely prohibited by law, not illegal per se and the prohibition is
designed for the protection of the rights of the party seeking to
recover.

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

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.

OBLIGATIONS AND CONTRACTS 4TH EXAM


DEFECTIVE CONTRACTS REVIEWER
Emille Dane S. Viola

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.

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.

Art. 1420. In case of a divisible contract, if the illegal terms


can be separated from the legal ones, the latter may be
enforced.
General Rule: if stipulations in the contract (some are valid some are
void) can be separated from each other, those which are void will not
have any effect but those which are valid will be enforced. In case of
doubt, the contract must be considered as divisible or separable
Exceptions: 1. When the nature of the contract requires indivisibility
2. when the intention of the parties is that the contract be
entire
Art. 1421. The defense of illegality of contract is not available
to third persons whose interests are not directly affected.

Art. 1422. A contract which is the direct result of a previous


illegal contract, is also void and inexistent.

NATURAL OBLIGATIONS
Art. 1423. Obligations are civil or natural. Civil obligations give
a right of action to compel their performance. Natural
obligations, not being based on positive law but on equity and
natural law, do not grant a right of action to enforce their
performance, but after voluntary fulfillment by the obligor,
they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set
forth in the following articles.

Art. 1430. When a will is declared void because it has not been
executed in accordance with the formalities required by law,
but one of the intestate heirs, after the settlement of the
debts of the deceased, pays a legacy in compliance with a
clause in the defective will, the payment is effective and
irrevocable.

ESTOPPEL

Origin in equity, based on moral and natural justice.


A bar which precludes a person from denying or asserting
any thing contrary to that which has, in contemplation of
law, has been established as truth, either by judicial of
legislative officers or by his own deed, express or implied.
The principle of estoppel would step in to prevent one party
from going back upon his own acts and representations to
the prejudice of the other party who relied upon them.
No estoppel due to ignorance founded on innocent mistake.
Estoppel cannot be predicated on an illegal act.

Art. 1431. Through estoppel an admission or representation is


rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon.
A party may be estopped to insist upon a claim, assert an objection, or
take a position which is inconsistent with an admission which he has
previously made AND in reliance upon which the other party has
changed his position.
SILENCE OR INACTION: ESTOPPEL BY LACHES
One who is silent when he ought to speak will not be heard to speak
when he ought to be silent
-Failure or neglect, for an unreasonable and unexplained length of
time, to do that which, by exercising due diligence should have been
done earlier.
Mere innocent silence will not work an estoppel, there must be some
element or TURPITUDE or NEGLIGENCE connected with the silence by
which another is misled to his injury.
ELEMENTS OF LACHES
a.

b.
Art. 1424. When a right to sue upon a civil obligation has
lapsed by extinctive prescription, the obligor who voluntarily
performs the contract cannot recover what he has delivered or
the value of the service he has rendered.

Art. 1425. When without the knowledge or against the will of


the debtor, a third person pays a debt which the obligor is not
legally bound to pay because the action thereon has
prescribed, but the debtor later voluntarily reimburses the
third person, the obligor cannot recover what he has paid.

Art. 1426. When a minor between eighteen and twenty-one


years of age who has entered into a contract without the
consent of the parent or guardian, after the annulment of the
contract voluntarily returns the whole thing or price received,
notwithstanding the fact the he has not been benefited
thereby, there is no right to demand the thing or price thus
returned.

Art. 1427. When a minor between eighteen and twenty-one


years of age, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a sum of
money or delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the same from the
obligee who has spent or consumed it in good faith.

c.
d.

Conduct on the part of defendant, or of one under


whom he claims, giving rise to the situation of w/c the
complaint is made and for w/c the complaint seeks a
remedy.
Delay in asserting the complainants rights, the
complainant having had knowledge or notice of
defendants conduct and having been afforded an
opportunity to institute a suit.
Lack of knowledge or notice on the part of the
defendant that complainant would assert the right on
w/c he bases his suit.
Injury/ prejudice to defendant in the event relief is
accorded to complainant, or the suit is not held to be
barred.

Laches v Prescription
LACHES
Effect of delay
A question of inequity
Not statutory
Apples to equity
Not based on fixed time

PRESCRIPTION
Fact of delay
Matter of time
statutory
Applies at law
Based on fixed time

ESTOPPEL BY ACQUIESCENCE
- a person is prevented from maintaining a position inconsistent with
one in which he has as acquiesced.
Art. 1432. The principles of estoppel are hereby adopted
insofar as they are not in conflict with the provisions of this
Code, the Code of Commerce, the Rules of Court and special
laws.

Art. 1433. Estoppel may be in pais or by deed.


Art. 1428. When, after an action to enforce a civil obligation
has failed the defendant voluntarily performs the obligation,
he cannot demand the return of what he has delivered or the
payment of the value of the service he has rendered.

Art. 1429. When a testate or intestate heir voluntarily pays a


debt of
the decedent exceeding the value of the property which he
received by will or by the law of intestacy from the estate of
the deceased, the payment is valid and cannot be rescinded by
the payer.

1.

Estoppel in Pais (Equitable estoppel)


- because of something which he has done or omitted to do,
a party is denied the right to plead or prove an otherwise
important fact
a.
By conduct or by acceptance of benefits;
b.
By representation or concealment;
c.
By silence;
d.
By omission;
e.
By laches (unreasonable delay in suing)

2.

Estoppel by Deed ( Technical estoppel)


- A bar which precludes one party to a deed and his privies
from asserting as against another party and his privies any
right or title in derogation of the deed, or from denying the
truth of any material facts asserted in it.

OBLIGATIONS AND CONTRACTS 4TH EXAM


DEFECTIVE CONTRACTS REVIEWER
Emille Dane S. Viola
a.
b.

Proper (written instrument may also be in the form of a


bond/mortgage)
Estoppel by judgment as a Court record when court is
in res judicata.

Prevents the parties from raising questions that


could have been put in issue and decided in
previous case.

Art. 1434. When a person who is not the owner of a thing sells
or alienates and delivers it, and later the seller or grantor
acquires title thereto, such title passes by operation of law to
the buyer or grantee.
A person who sells property when he did not have title to it, cannot
deny validity to the sale after he has acquired title. The vendee is also
deemed a purchaser in good faith.
Art. 1435. If a person in representation of another sells or
alienates a thing, the former cannot subsequently set up his
own title as against the buyer or grantee.

Art. 1436. A lessee or a bailee is estopped from asserting title


to the thing leased or received, as against the lessor or bailor.
A tenant will not be heard to dispute his landlords title at the time of
the commencement of the relation of land lord and tenant between
them.
Art. 1437. When in a contract between third persons
concerning immovable property, one of them is misled by a
person with respect to the ownership or real right over the real
estate, the latter is precluded from asserting his legal title or
interest therein, provided all these requisites are present:
(1) There must be fraudulent representation or wrongful
concealment of facts known to the party estopped;
(2) The party precluded must intend that the other should act
upon the facts as misrepresented;
(3) The party misled must have been unaware of the true facts;
and
(4) The party defrauded must have acted in accordance with
the misrepresentation.
This applies to an immovable. If it were a movable, you apply 1435 and
1436.
Art. 1438. One who has allowed another to assume apparent
ownership of personal property for the purpose of making any
transfer of it, cannot, if he received the sum for which a pledge
has been constituted, set up his own title to defeat the pledge
of the property, made by the other to a pledgee who received
the same in good faith and for value.
Based upon the acceptance and retention by one having knowledge of
the facts of the benefits from a transaction which he might have
rejected.
Notwithstanding the fact that the owner never received the proceeds,
he may be estopped from questioning the pledge if he clothed the
agent with apparent authority to dispose of it and when the person

setting up the estoppel acted and parted with value or extended credit
on the faith of such apparent ownership or authority.
Applies to a situation wherein you allow your friend to borrow your
jewelry and pawn. And later on also made use of the portion of the
proceeds of the loan. And later on you had a change of heart and tells
the owner of the pawnshop that you are the owner. that is estoppel.
Because there is estoppel in the acceptance of benefits.
Art. 1439. Estoppel is effective only as between the parties
thereto or their successors in interest.
A stranger to a transaction is neither bound by, nor in position to take
advantage of, an estoppel arising therefrom.
Estoppel binds privies in blood, like heirs, and in estate, like grantees
Mutuality is an essential element of estoppel.
NO ESTOPPEL AGAINST THE GOVERNMENT; except by laches (St. Jude v
Republic)