Defective Contracts Flashcards
Contains all requisites of a valid contract, but by reason of injury or damage to either of the contracting parties or to third persons, it is susceptible to rescission at the instance of the party who may be prejudiced thereby
Rescissible Contracts
Controlling provision for rescissible contracts?
Art. 1381
Difference between Art. 1191 and Art. 1381
- Art. 1381 is a remedy for economic injury, whereas 1191 is for breach of reciprocal obligations
- Art. 1381 is only a SUBSIDIARY action, whereas 1191 is PRINCIPAL
- Art. 1381 prescribes in four years, where as 1191 is 10 years for written, 6 years for oral
A remedy granted by law to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract.
Rescission
Difference between rescission and termination
- To rescind is to declare a contract void in its inception and put an end to it as thought it never were.
- The termination of a contract would necessarily entail enforcement of its terms prior to the declaration of its cancellation.
Five causes of rescission
- Lesion to wards
- Lesion to absentees
- Fraud of creditors
- Things under litigation
- By provision of law
Those contracts which are entered into by guardians suffer lesion by more than one-fourth of the valueof the things which are the object thereof.
Lesion to wards
Those contracts agree upon in representation of absentees, if the latter suffer lesion by more than one-fourth of the value of the thing which are the object thereof
Lesion to absentees.
A person who abandons his things and/or properties
Absentee
Those contracts when the creditor cannot in any other manner collect the claims due them
Fraud of creditors
T/F. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property pay all debts contracted before the donation
True. See Art. 1387
T/F. Alienation by onerous title are also presumed fraudulent when made by persons against whom some judgment or writ of attachment has been issued
True. See Art. 1387
T/F. Payments made in a state of insolvency for the obligation to whose fulfillment the debtor count not be compelled at the time they were effected are rescissible
True. See Art. 1382. An example of a contract specially provided by law to be rescissible
Limitation to the first and second cause for rescission
Art. 1386. Rescission for lesion of wards or lesion of absentees shall not take place with respect to contract approved by the courts.
Five requisites for rescission of contracts in fraud of creditors (accion pauliana)
- That the Plaintiff(s) asking for rescission, has credit prior to the alienation, although demandable after
- That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person
- That the creditor has no other legal remedy to satisfy his claim but would benefit by rescission of the conveyance to the third person
- That the act being impugned is fraudulent; and
- That the third person who received the property conveyed, if by onerous title, has been accomplice in the fraud
Seven badges of fraud
- The fact that the consideration of the conveyance is fictitious or is inadequate
- The transfer made by a debtor after a suit has been begun and while it is pending against him
- Sale upon credit by insolvent debtor
- Evidence of large indebtedness or complete insolvency
- The transfer of all or nearly all his property by a debtor, especially when he is insolvent or greatly embarrassed financially
- The fact that the transfer is made between father and son, when there are present other of the above circumstances; or
- The failure of the vendee to take exclusive possession of all the property.
Who may file rescissions?
- The injured person; the creditor defrauded; or the plaintiff in a case where the thing in litigation was alienated
- The heirs of such person
- The creditors of such person (accion subrogatoria, Art. 1177)
Prescription period for rescission
Within four years and runs from the day it has become clear that there are no other legal remedies by which the creditor can satisfy his claims
Give general requisites for rescession:
- Rescission must be made for a cause provided by law (Art. 1380-81)
- No other legal means to obtain reparation (Art. 1383)
- Extent necessary to cover the damages (Art. 1384)
- Rescission can be carried out only when he who demands rescission can return whatever he may be obliged to return (Art 1385)
- Shall not take place when the things which are the object f the contract are legally in the possession of third persons who did not act in bad faith. (Art. 1385)
The effect of 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.(Art. 1385)
Existent, valid, and binding although they can be annulled because of want of capacity or vitiated consent of one of the parties.
Voidable contracts
Two cause for voidable contacts
- Lack of capacity (Art 1391)
- Vitiated consent (Art. 1391)
Remedy for voidable contracts?
Annulment through direct and proper Court action (Art. 1390)
Who may file for annulment?
- All who are thereby obliged principally or subsidiarily (Art. 1397)
- All whom are injured because of the defect
When will the remedy for annulment in cases of voidable contracts prescribe?
Four years and runs:
1. In cases of intimidation, from the time the defect of the consent ceases
2. In cases of fraud or mistake, time of discovery
3. In cases of contracts entered by minors, from the time guardianship ceases
Effect of annulment
To wipe it out of existence and to restore the parties to their original situation before the contract was entered into. Restoration of what has been given. See Art 1398
T/F. In obligations to render service, the value thereof shall be the basis for damages.
True. See Art. 1398
T/F. the principle of unjust enrichment does not applies in annulment of voidable contracts.
False. It applies.
Who are exempt of restoring what was given?
Incapacitated persons. The incapacitated person is not obliged to make any restitution except insofar as he has been benefitted by the thing or price received by him. (Art. 1399)
Three rules when restitution cannot take place due to the lost of the thing?
- If through fault or fraud of the plaintiff, the action for annulment is barred. See Art. 1401
- If through fault or fraud of the defendant, defendant must pay the value of the thing at the time of the loss + interest as well as fruits. See Art. 1400
- If no one’s fault, paying the value of the thing at the time of the lost BUT without interest
Another remedy afforded to voidable contracts.
Ratification.
T/F. Ratification extinguishes the action to annul a voidable contracts.
True. See Art. 1392
Two requisites for ratification?
- The ratifying party knows of the reason which renders the contract voidable; and
- Such reason has ceased. (Art. 1391)
Two ways to ratify?
- Express
- Tacit
T/F. There is express ratification if the offended party states orally or in writing that he is ratifying the voidable contract
True
T/F. The person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.
True
Who may ratify? Two instances:
- Due to lack of capacity, ratification be effected by the incapacitated person upon gaining capacity or his guardian during incapacity (Art. 1394)
- Due to vice of consent, ratification be effected by person whose consent was vitiated
Effect of ratification?
Ratification cleanses the contract from all effects from the moment it was constituted (Art. 1396). Retroactive.
Those which cannot be enforced in court unless they are ratified because they are entered into without or in excess of authority, or they do not comply with the statute of frauds, or both of the contracting parties do not possess the required legal capacity.
Unenforceable contracts
Three types of unenforceable contracts
- Entered in the name of another person who had given NO authority. Art. 1317
- Those who do not comply with the statute of frauds
- Those parties incapable of giving consent
T/F. An exception to no authority is when a person sells a thing above the selling price
True. See Art. 1882
T/F. In situations wherein both parties are incapacitated, if the contract is ratified by the parent or guardian of one of the contracting parties, the contract becomes valid?
FALSE. It has to be both
May third parties raise the defense of Statute of Frauds
NO. Only contracting parties may raise that defense (Art. 1408)
One which has no force and effect from the very beginning. Hence, it is as if it has never been entered to.
Void and inexistent contracts
Five effects of void contracts
- Produced no civil effect and no juridical relation
- Inexistent contracts are those which an essential element is lacking, e.g., legality
- Void contracts CANNOT be ratify. There was never a contract.
- Defense for declaration of the existence of a contract DO NOT prescribe (Art. 1410)
- Who can invoke? Parties and third persons directly affected by the contract.
Eight types of void or ineqixtent contracts
- Those whose cause, object or purpose is contrary to law
- Those which are absolutely simulated or fictitious
- Those whose cause or object did not exist at the time of the transaction.
- Those whose object is outside the commerce of men
- Those which contemplate an impossible service.
- Those where the intention of the parties relative to the principal object of the contract cannot be ascertained.
- Those expressly prohibited or declared void by law.
- A contract which is the direct result of a previous illegal contract, is also void and inexistent. (Art. 1422)
T/F. Parties to a void agreement cannot expect the aid of law; the courts leave them as they are, because they are deemed in pari delicto or “in equal fault.”
True. Each must bear the consequences of his own act
Three exceptions to the pari delicto rule
- Inexistent contracts
- If it would violate public policy
- When the law permits an exemption
Six instances where the law permits the exemption to pari delicto
- Innocent party (Arts. 1411-1412)
- Payment of usurious interest (Art. 1413)
- Incapacitated party if the interest of justice so demands (Art. 1415)
- The party for whose protection the prohibition by law is intended, if the agreement is not illegal epr se but merely prohibited and if public policy would be enhanced by permitting recovery (Art. 1416)
- If the party whose benefit the law has been intended such as in price ceiling laws (Art. 1417)
Two rules when the nullity proceeds from the illegality of the cause or object of the contract
- When both parties are in pari delicto– they shall have no action against each other, both shall be prosecuted
- When only one party is guilty– the guilty party shall be prosecuted. However, the innocent party may claim what he has given, and shall not be bound to comply with his promise (Art. 1411).
- When both parties are at fault– neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking (Art. 1412)
- When only one party is at fault, the party who is not at fault may demand the return of what he has given without any obligation to comply with his promise.
T/F. When money is paid or property is delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person (Art. 1414).
True. Although, NOT automatic. You have to go to court
