DEFECTIVE CONTRACTS
As to defect:
As to effect:
As to
prescriptibility
of action or
defense
As to who may
assail
contracts
. As to how
contracts may
be assailed
As to validity
As to legal
remedy to
injured party
Prescriptive
period of
action
Rescissible
there is damage or
injury either to one
of the contracting
parties or to third
persons;
Voidable
there is vitiation of
consent or legal
incapacity of one
of the contracting
parties
considered valid and
enforceable until
they are rescinded
by a competent
court;
the action for
rescission may
prescribe
considered valid
and enforceable
until they are
annulled by a
competent court;
the action for
annulment or the
defense of
annulability may
prescribe
maybe assailed not
only by a contracting
party but even by a
third person who is
prejudiced or
damaged by the
contract
may be assailed
directly only, and not
collaterally
Valid and binding
until rescinded
may be assailed
only by a
contracting party
Action for rescission
Action for
annulment
4 years
4 years
may be assailed
directly or
collaterally
Valid and binding
until annulled
Uneforceable
the contract is
entered into in
excess or without
any authority, or
does not comply
with the Statute of
Frauds, or both
contracting parties
are legally
incapacitated
third cannot be
enforced by a
proper action in
court
Void/Inexistent
one or some of the essential
requisites of a valid contract
are lacking either in fact or in
law.
,the corresponding
action for
recovery, if there
was total or partial
performance of
the unenforceable
contract under No.
1 or No. 3 of Art.
1403, may
prescribe
may be assailed
only by a
contracting party
the action for declaration of
nullity or inexistence
may be assailed
directly or
collaterally
Valid but
unenforceable by
court action
None
May be assailed directly or
collaterally.
N/A
No prescriptive period
do not, as general rule,
produce any legal effect.
may be assailed not only by a
contracting party but even by
a third person whose interest
is directly affected
Invalid
Action for declaration of
nullity
Capability for
ratification
which will
clean the
defects of the
contract
Examples
Not subject to
ratification but may
be convalidated by
prescription
May be ratified
May be ratified
1. Those which are
entered into by
guardians whenever
the wards whom
they represent suffer
lesion by more than
1/4 of the value of
the things which are
the object thereof;
1. Those where
one of the parties
is incapable of
giving consent to a
contract.
i 1. Those entered
into in the name
of another by one
who has been
given no authority
or legal
representative or
who has acted
beyond his
powers.
2. Those agreed
upon in
representation of
absentees, if the
latter suffer lesion by
more than 1/4 of the
value of the things
which are the object
thereof;
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. Payments made in
a state of insolvency
for obligations to
2. Those where
the consent is
vitiated by VIMFU.
VIMFU:
1. Violence
2. Intimidation
3. Mistake
4. Fraud
5. Undue influence
2. Those that do
not comply with
the statute of
frauds.
3. Those where
both parties are
incapable of giving
consent to a
contract.
1. Those illegal per se can
never be ratified. 2. The
declaration of nullity of those
which are not illegal per se
may be barred by estoppel or
laches in exceptional cases.
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.
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.
whose fulfillment the
debtor could not be
compelled at the
time they were
effected;
6. All contracts by
virtue of which the
debtor alienates
property by
gratuitous title when
the donor did not
reserve sufficient
property to pay all
debts contracted
before the donation;
7. Alienations by
onerous title when
made by persons
against whom some
judgment has been
rendered in any
instance or some
writ of attachment
has been issued; and
8. Contracts entered
into by an insolvent
person if he does not
retain sufficient
property to pay his
obligations. (accion
pauliana)
Rescisscible Contract
ART 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)
----a contract which is valid because it contains all of the essential requisites prescribed by law, but which is
defective because of injury or damage to either of the contracting parties or to third persons, as a
consequence of which it may be rescinded by means of a proper action for rescission.
RESCISSION
A remedy granted by law to the contracting parties, and even to third persons, to secure the reparation
of damages caused to them by the contract, even if it is valid, by means of restoration of the thing to its
condition at the moment prior the celebration of the contract.
Characteristics.
(1) Their defect consists in injury or damage either to one of the contracting parties or to third persons.
(2) Before rescission, they are valid and, therefore, legally effective.
(3) They can be attacked directly only, and not collaterally.
(4) They can be attacked only either by a contracting party or by a third person who is injured or
defrauded.
(5) They are susceptible of convalidation only by prescription, and not by ratification.
Distinguished from resolution. —
Rescission of rescissible contracts must not be confused with the rescission or resolution of reciprocal
obligations under Art. 1191 of the Code. Although there are similarities both with respect to validity and
effects, they are distinguished from each other in the following ways:
(1) As to party who may institute action: In rescission the action may be instituted not only by a party to
the contract but even by a third person, while in resolution the action may be instituted only by a party
to the contract.
(2) As to causes: In rescission there are several causes or grounds such as lesion, fraud and others
expressly specifi ed by law, while in resolution the only ground is failure of one of the parties to comply
with what is incumbent upon him
(3) As to power of the courts: In rescission there is no power of the courts to grant an extension of time
for performance of the obligation so long as there is a ground for rescission, while in resolution the law
expressly declares that courts shall have a discretionary power to grant an extension for performance
provided that there is a just cause.
(4) As to contracts which may be rescinded or resolved: In rescission any contract, whether unilateral or
reciprocal, may be rescinded, while in resolution only reciprocal contracts may be resolved.
Requisites of rescission. The following are the requisites in order that the remedy of rescission under
this Chapter may be availed of:
(1) The contract must be validly agreed upon (Art. 1380; see Onglengco vs. Ozaeta and Hernandez, 70
Phil. 43 [1940].);
(2) There must be lesion or pecuniary prejudice or damage to one of the parties or to a third person (Art.
1381.);
(3) The rescission must be based upon a case especially provided by law (Arts. 1380, 1381, 1382.);
(4) There must be no other legal remedy to obtain reparation for the damage (Art. 1383.);
(5) The party asking for rescission must be able to return what he is obliged to restore by reason of the
contract (Art. 1385, par. 1.);
(6) The object of the contract must not legally be in the possession of third persons who did not act in
bad faith (Ibid., par. 2.); and
(7) The period for filing the action for rescission must not have prescribed. (Art. 1389.)
NOTE: It has been held that a contract for the sale of personal property expressly providing that the
owner may rescind it if the purchaser fails to make the payments stipulated therein is not governed by
Articles 1380, et seq., but rather by Articles 1191 and 16003 of the Civil Code. (Guevarra vs. Pascua, 12
Phil. 311 [1908]; see, however, Art. 1381[5].)
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 sub ject to rescission. (1291a)
UNENFORCEABLE CONTRACTS
Unenforceable contracts are those which cannot be enforced by a proper action in court, unless they are
ratified, because, either 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.
classes:
1. those contracts entered into in the name of another person by one without any authority or in excess
of his authority;
*there is absolutely no consent insofar as the person in whose name the contract is entered into
is concerned
2. those which do not comply with the Statute of Frauds; and
*there is no writing, note or memorandum by which the contract maybe proved
3. those where both contracting parties are legally incapacitated
*consent is absolutely vitiated by the legal incapacity of both of the contracting parties. If only
one of the parties is incapacitated, the contract is voidable.
Characteristics
Although they are essentially different from each other, yet all unenforceable contracts possess the
following characteristics:
(1) They cannot be enforced by a proper action in court;
(2) They are susceptible of ratification;
(3) They cannot be assailed by third persons.
Contracts Without or in Excess of Authority shall be governed by Art. 1317
Confirmation (tends to cure a vice of nullity)

term used to designate the act by which a voidable contract was cured of its vice or defect.
Ratification


purpose of giving authority to a person who previously acted in the name of another without
authority
under the present Code, it is now used to designate the act of validating any kind of defective
contract.
Recognition or acknowledgment

merely to cure a defect of proof
STATUTE OF FRAUD
Under the Statute of Frauds, the only formality required is that the contract or agreement must be in
writing and subscribed by the party charged or by his agent.
Ex. However, it has been held that a telegram advising a person to whom a verbal promise for the sale
of land had been previously made to come at once in order to complete the purchase, but which
telegram neither describes the property nor states the purchase price, and which is not signed by any
person having authority to bind the seller, is not a sufficient memorandum of sale to satisfy the
requirement of the statute.
NONCOMPLiANCE:
The Statute of Frauds simply provides the method by which the contracts enumerated therein may be
proved. It does not declare that said contracts are invalid because they are not reduced to writing. A
contract exists and is valid even though it is not clothed with the necessary form. Consequently, the
effect of non-compliance with the requirement of the statute is simply that no action can be enforced
unless the requirement is complied with.17 It is, therefore, clear that the form required is for evidential
purposes only. Hence, if the parties permit a contract to be proved, without any objection, it is then just
as binding as if the statute has been complied with
STATUTE OF FRAUDS:
(a) Agreement to be performed within a year after making contract;
(b) A special promise to answer for the debt, default, or miscarriage of another. It is well-settled that a
promise in order to fall under the statute must be collateral, not independent or original
Note: If the promise is an original or an independent one, that is, if the promisor becomes thereby
primarily liable for the payment of the debt, the promise is not within the statute. But, on the other
hand, if the promise is collateral to the agreement of another and the promisor becomes thereby merely
a surety, the promise must be in writing.
if the promisor says, ‘I will see you paid,’ or ‘I will pay if he does not,’ or uses equivalent words, the
promise standing alone is collateral, yet under all the circumstances of the case, an absolute promise to
pay, or a promise to be responsible, may be found to be collateral, or promises deemed prima facie
collateral may be adjudged original.’’
(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) Agreement for lease of property for more than one year and sale of real property regardless of
price
“If the agreement concerns “the sale of land or of an interest therein,’’ the law requires not only that
“the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged,’’
in order that it may be enforceable by action (Article 1403 [2]), but also that the writing be in the form
of a “public document’’ (Article 1358).
(f) A representation as to the credit of a third person.
Ex. A representation as to the credit of a third person. Problem — “A” and “B” entered into a verbal
contract whereby “A” agreed to sell to “B” his only parcel of land for P20,000.00 and “B” agreed to buy
at the aforementioned price. “B” went to the bank, withdrew the necessary amount, and returned to
“A” for the consummation of the contract. “A,” however, had changed his mind and refused to go
through with the sale. Is the agreement valid? Will an action by “B’’ against “A” for specific performance
prosper? Reason. (1982 Bar problem)
Answer — It must be observed that there are two questions which are asked. They are: (1) Is the
agreement valid? The answer is yes. It is a time honored rule that even a verbal agreement to sell land is
valid so long as there is already an agreement with respect to the object and the purchase price. (2) Will
an action by “B” against “A” for specific performance prosper? The answer is no, unless it is ratified. The
reason is obvious. The agreement, being an agreement of sale of real property, is covered by the Statute
of Frauds. It cannot, therefore, be enforced by a court action because it is not evidenced by any note or
memorandum or writing properly subscribed by the party charged. (Note: The above answer is based on
No. 2 of Art. 1403 of the Civil Code and on decided cases.)
Effect of Performance of Contract. — The rule is well established that the Statute of Frauds is applicable
only to those contracts which are executory and not to those which have been consummated either
totally or partially. The basis of this rule is, of course, the fact that in such case there is already a
ratification of the contract within the meaning of Art. 1405 of the Civil Code. There is acceptance of
benefits.
In executory contracts there is a wide field for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties.
Ratification. — Contracts infringing the Statute of Frauds are susceptible of ratification. According to Art.
1405 of the Civil Code, such contracts may be ratified either
(1) by the failure to object to the presentation of oral evidence to prove the same, or
(2) by the acceptance of benefits under them.
Problem — Can an oral sale of land be judicially enforced as between the contracting parties, if the land
has not been delivered but the buyer has paid ten percent (10%) of the purchase price? (1974 Bar
problem)
Answer — Yes, an oral sale of land where the land has not been delivered but the buyer has paid ten
percent (10%) of the purchase price may be judicially enforced. Well-settled is the rule that the Statute
of Frauds by virtue of which oral contracts are unenforceable by court action is applicable only to those
contracts which are executory and not to those which have been consummated either totally or
partially. The reason is obvious. In effect, there is already a ratifi cation of the contract because of
acceptance of benefi ts. As a matter of fact, this reason is now embodied in the New Civil Code.
According to Art. 1405 of said Code, contracts infringing the Statute of Frauds are ratifi ed by the failure
to object to the presentation of oral evidence to prove the same, or by the acceptance of benefi ts
under them.
Problem — “O” verbally leased his house and lot to “L’’ for two years at a monthly rental of P250.00 a
month. After the first year, “O” demanded a rental of P500.00 claiming that due to the energy crisis,
with the sudden increase in the price of oil, which no one expected, there was also a general increase in
prices. “O” proved an inflation rate of 100%. When “L’’ refused to vacate the house, “O” brought an
action for ejectment. “O” denied that they had agreed to a lease for two years.
Question No. 1 — Can the lessee testify on a verbal contract of lease? Reason. (1981 Bar problem)
Answer — Yes, the lessee “L” may testify on the verbal contract of lease. Well-settled is the rule that the
Statute of Frauds by virtue of which oral contracts (such as the contract in the instant case) are
unenforceable by court action is applicable only to those contracts which have not been consummated,
either totally or partially. The reason for this is obvious. In effect, there is already a ratification of the
contract by acceptance of benefits. Here “L’’ has been paying to “O” a monthly rental of P250.00 for one
year. The case is, therefore, withdrawn from the coverage of the Statute of Frauds. (Note: The above
answer is based on Arts. 1403, No. 2 and 1405 of the Civil Code, and on decided cases.)
Question No. 2 — Assuming that “O” admits the two-year contract, is he justified in increasing the
rental? Why? (1981 Bar problem)
Answer — Yes, “O’’ is justified in increasing the monthly rental. Since it is admitted that the contract of
lease is for a definite term or period of two years, it is crystal clear that the case is withdrawn from the
coverage of the new rental law. Now during the hearing of the case, “O” was able to prove an inflation
rate of 100%. Therefore, an increase is justified. (Note: The above answer is based on Batas Pambansa
Blg. 25.)
Contracts Where Both Parties Are Incapacitated. — Contracts where both parties are legally
incapacitated are also unenforceable.27 If only one of the parties is incapacitated, the contract is
voidable.
Contracts where both parties are legally incapacitated may be ratified either expressly or impliedly.
May be effected by:
1. parents or guardians of the contracting parties > the contract becomes voidable hence, the rules on
voidable contracts shall govern
2. by the parties themselves upon attaining or regaining capacity > contract shall be validated from its
inception.
VOID AND INEXISTENT CONTRACTS
void contract refer to those where all of the requisites of a contract are present, but the cause, object
or purpose is contrary to law, morals, good customs, public order or public policy, or contract itself is
prohibited or declared void by law. The principle of pari delicto principle (Art. 1411 and 1412 of NCC) is
applicable and may produce legal effects. (Ar. 1409 (1,3,5,6 &7))
Inexistent contract refer to those where one or some or all of those requisites which are essential for
the validity of a contract are absolutely lacking, such as those which are absolutely simulated or
fictitious, or those where the cause or object did not exist at the time of the transaction. The principle
of pari delicto is not applicable and cannot produce any effect whatsoever. (Art. 1409 (2 &4))
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.
-Characteristics.
In Tongoy vs. Court of Appeals, 123 SCRA 99 (1983), the Court said that the following are the most
fundamental characteristics of void or inexistent contracts:
(1) As a general rule, they produce no legal effects whatsoever in accordance with the principle “quod
nullum est nullum producit effectum.’’
(2) They are not susceptible of ratification.
(3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced.
(4) The action or defense for the declaration of their inexistence or absolute nullity is imprescriptible.
(5) The inexistence or absolute nullity of a contract cannot be invoked by a person 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.’
The principle of in pari delicto applies only to cases of existing contracts with an illegal cause or object
and not to simulated or fictitious contracts nor to those which are inexistent for lack of an essential
requisite such as cause or consideration. In other words, the principle can have no application to
inexistent contracts, since such contracts are always open to attack even by the parties thereto.
But where the contract is void because of the illegality of the cause or the object, the principle is
applicable since the Code in Arts. 1411 and 1412 commands that neither party thereto may be heard to
invoke its unlawful character as a ground for relief. It must also be observed that the illegality must be
with respect to the cause or the object of the contract and not with respect to the motives of the
contracting parties.
Thus, if the plaintiff transfers to the defendant a parcel of land by means of a fictitious deed of sale for
the purpose of averting its attachment by his creditors, it is clear that the principle, enunciated in Art.
1412 of the Civil Code is not applicable, since what is illegal is the motive of the transferor and not the
object or the cause of the contract.
Effect if only one party is at fault.
 If the contract has already been executed, the guilty party is barred from recovering what he
has given to the other party by reason of the contract. The innocent party, however, may
demand for the return of what he has given
**Although repugnant, “the law deems it more repugnant that a party should invoke his
own guilt as a reason for relief from a situation which he had deliberately entered.”
 If the contract is merely executory, it is clear that it cannot produce any legal effect whatsoever.
Neither of the contracting parties can demand for the fulfillment of any obligation arising from
the contract nor be compelled to comply with such obligation.
Exceptions. — The principle of pari delicto is not, however, absolute in character. The Civil Code
recognizes the following exceptions:
(1) Payment of usurious interest. In such case, the law allows the debtor to recover the interest paid in
excess of that allowed by the usury laws, with interest thereon from the date of payment.
(2) Payment of money or delivery of property for an illegal purpose, where the party who paid or
delivered repudiates the contract before the purpose has been accomplished, or before any damage has
been caused to a third person. In such case, the courts may allow such party to recover what he has paid
or delivered, if the public interest will thus be subserved.
(3) Payment of money or delivery of property by an incapacitated person. In such case, the courts may
allow such person to recover what he has paid or delivered, if the interest of justice so demands.
(4) Agreement or contract which is not illegal per se but is merely prohibited by law, and the prohibition
is designed for the protection of the plaintiff. In such case, such plaintiff, if public policy is thereby
enhanced, may recover what he has paid or delivered.
(5) Payment of any amount in excess of the maximum price of any article or commodity fi xed by law. In
such case, the buyer may recover the excess.
(6) Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by
law. In such case, the laborer may demand for overtime pay.
(7) Contract whereby a laborer accepts a wage lower than the minimum wage fi xed by law. In such
case, the laborer may demand for the deficiency.
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.