Persons Specially Disqualified

There are people who are SPECIALLY DISQUALIFIED in certain things. Here, the
transaction is VOID because the right itself is restricted, that is, the right is
WITHHELD. (In the case of mere legal incapacity, the transaction is VOIDABLE
because the right itself is not restricted, but merely its EXERCISE, that is, it can still
be exercised but under certain conditions, such as when the parents of an
unemancipated minor consent.)
Examples of Persons Specially Disqualified
(a) As a general rule, the husband and wife cannot sell to each other (Art.
1490, Civil Code), nor can they donate to each other. (Art. 134, Civil Code).
Violations are considered VOID contracts, but only those prejudiced can assail
the validity of the transaction.
(b) Insolvents before they are discharged cannot, for example, make
payments.
(c) Persons disqualified because of fiduciary relationship, such as the
guardian, who is not allowed to purchase the property of his ward; or judges,
with reference to the property under litigation.
(d) Contracts entered into with non-Christians (except contracts of
personal service and the barter or sale of personalproperty) are VOID unless
approved by the governor or his representative.
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable.
Some Voidable Contracts by Reason of Incapacity
The voidable contracts referred to in this Article are those entered into by:
(a) Insane or demented persons (unless they acted during a lucid
interval);

(b) Those in the state of drunkenness (which temporarily results in

complete loss of understanding, and may therefore be equivalent to
temporary insanity).
(c) Those entered into during a hypnotic spell (induced by drugs, or by
deliberate or unintentional hypnotism) or while a person walks during his sleep,
somnambulism, for in these cases, a person is incapable of intelligent consent.
Lucid Intervals
Even if a person has already been judicially declared insane, and is
actually now under guardianship, he may still enter into a valid contract,
provided that it can be shown that at the time of contracting, he was in a lucid
interval. Of course here, he is already presumed insane, and therefore the
sanity must be proved.
Insanity in Some Things, But Sanity in Other Things
There are countless instances of individuals who are mentally deranged,
and have obsessions and delusions regarding certain subjects and situations
and yet are still mentally sound in other respects.
Art. 1329. The incapacity declared in Article 1327 is subject to the modifications
determined by law, and is understood to be without prejudice to special
disqualification established in the laws.
Incompetents Under the Rules of Court
Under the Rules of Court, the following are considered incompetents, and may
be placed under guardianship:
(a) those under civil interdiction
(b) hospitalized lepers
(c) prodigals (spendthrifts)
(d) deaf and dumb who are unable to read and write

(e) those of unsound mind even though they have lucid intervals
(f) those who by reason of age, disease, weak mind, and other similar
causes, cannot without outside aid, take care ofthemselves and manage their
property, becoming therebyan easy prey for deceit and exploitation
Art. 1330. A contract where consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable.
(1) Causes of Vitiated Consent
Aside from incapacity to give consent, the following are causes of vitiated
consent: (They are also referred to as vices ofconsent.)
(a) mistake (or error)
(b) fraud (or deceit)
(c) violence
(d) intimidation
(e) undue influence
[NOTE: Mistake and fraud affect the INTELLECT (which is the faculty in the mind
of man, the proper object of which is the TRUTH. They thus affect COGNITION.)
Cognition must be intelligent.]
[NOTE: Violence, intimidation, and undue influence affect the WILL (which is the
faculty in the mind of man, the proper object of which is the GOOD. They thus
affect VOLITION.) Volition must be free.]
[NOTE: Mistake and fraud result in defects of the intellect; the others result in
defects of the will.]
Nature of a Voidable Contract
A voidable contract is binding and valid, unless annulled by a proper
action in court. It is, however, susceptible of ratification before annulment. (Art.
1390, Civil Code). Annulment may be had even if there be NO damage to the
contracting parties. (Art. 1390, 1st paragraph, Civil Code).
Clear and Convincing Evidence on the Vice of Consent

There must be clear and convincing evidence of the presence of vitiated

consent. Mere preponderance of evidence on this matter is not sufficient.
Art. 1331. In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those conditions
which have principally moved one or both parties to enter into the contract.
Mistake as to the identity or qualifications of one of the parties will vitiate
consent only when such identity or qualifications have been the principal
cause of the contract.
A simple mistake of account shall give rise to its correction.
Mistake or Error - It is a false belief about something.
Requisites for Mistake to Vitiate Consent
(a) The error must be substantial regarding:
1) the object of the contract
2) theconditions which principally moved or induced one of the parties
(error in quality or in quantity error in qualitateor in quantitate).
3) identity or qualifications (error in personae), but only if such was the
principal cause of the contract.
(b) The error must be excusable (not caused by negligence).
(c) The error must be a mistake of fact, and not of law.
Art. 1332. When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully
explained to the former.
Art. 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract

Knowledge of Doubt or Risk Does Not Vitiate Consent

It is to be assumed here that the party was willing to takethe risk. This is
particularly true in contracts which are evidently aleatoryin nature.
Example
A bought a fountain pen which was represented as possiblybeing able to
write even underwater. A also knew that the pensability was questionable,
and yet A bought said pen. Here, Acannot allege mistake since he knew
beforehand of the doubt,risk, or contingency affecting the object of the
contract.
Mistake Caused by Inexcusable Negligence
If mistake is caused by inexcusable negligence, the contractcannot be
annulled.
Art. 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent.
Requisites for Mutual Error to Vitiate Consent
(a) There must be mutual error.
(b) The error must refer to the legal effect of the agreement.
(c) The real purpose of the parties is frustrated.
Example: A and B entered into a contract, which they intendedshould
result in a co-ownership between them, but whichturned out later to be a
mortgage, as a result of their mutualerror as to the legal effect of the
agreement. Here the contractis voidable.
Distinguished from the Remedy of Reformation This Article must be
distinguished from Art. 1361 wherethe remedy is reformation, not annulment.
Thus, Art. 1361 ofthe Civil Code reads: When a mutual mistake of the
partiescauses the failure of the instrument to disclose their real agreement, said
instrument may be reformed.

Art. 1335. There is violence when in order to wrest consent,serious or irresistible

force is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his
person or property, orupon the person or property of his spouse, descendants
orascendants, to give his consent.
To determine the degree of the intimidation, the age, sexand condition of the
person shall be borne in mind.A threat to enforce ones claim through
competent authority,if the claim is just or legal, does not vitiate consent.
Requisites for Violence to Vitiate Consent
(a) Employment of serious or irresistible force;
(b) It must have been the reason why the contract was entered into.
Requisites for Intimidation to Vitiate Consent
(a) reasonableand well-grounded fear
(b) of an imminent and grave evil
(c) upon his person, property, or upon the person or property of his
spouse, descendants, or ascendants
(d) it must have been the reason why the contract was entered into
(e) the threat must be of an unjust act, an actionable wrong. (Therefore, a
threat to enforce ones claim thru competent authority, if the claim is just
or legal, does not vitiate consent.) (Art. 1335, last paragraph).A threat to
prosecute isnot considered as intimidation.
Art. 1336. Violence or intimidation shall annul the obligation, although it may
have been employed by a third person who did not take part in the contract.
Art. 1337. There is undue influence when a person takes improper advantage of
his power over the will of another, depriving the latter of a reasonable freedom

of choice. The following circumstances shall be considered: the confidential,

family, spiritual and other relations between the parties, or the fact that the
person alleged to have been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
Requisites for Undue Influence to Vitiate Consent
(a) improperadvantage
(b) power over the will of another (reflected for example in a superior
bargaining power
(c) deprivation of the latters will of a reasonable freedom of choice
Examples of Circumstances to be Considered
(a) confidential, family, spiritual, and other relations between the parties
(b) mental weakness
(c) ignorance
(d) financial distress
Contracts of Adhesion
Contracts where one party merely signs carefully preparedcontracts by
big companies (adhesion contracts or contracts of adherence, like
insurance or transportation contracts) should be strictly interpreted
against the company, and liberally in favor of the individual, because the
individual is usually helpless to bargain for better terms.
Art. 1338. There is fraud when, through insidious words or machinations of one of
the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
Kinds of Fraud
(a) Fraud in the CELEBRATION of the contract (this is fraud proper):
1) Dolocausante(or causal fraud): Here, were it not for the fraud, the
other party would not have consented.

(This is the fraud referred to in Art. 1338, Civil Code.) Effect of this kind of
fraud: The contract is VOIDABLE.
2.) Doloincidente(or incidental fraud): Here, even without the fraud
the parties would have agreed just the same, hence the fraud was only
incidental in causing consent. Very likely though, different terms would
have been agreed upon. Effect of this kind of fraud: The contract is valid,
but there can be an action for damages.
(b) Fraud in the PERFORMANCE of the obligations stipulated in the
contract.
DoloCausante
This is the use of insidious words and machinations by one of the
contracting parties to induce the other party to enter into a contract,
which, without them, he would not have agreed to.
Requisites of DoloCausante
(a) The fraud must be material and serious, that is, it really induced
the consent. (Art. 1344, Civil Code).
(b) The fraud must have been employed by only one of the
contracting parties, because if both committed fraud, the contract would
remain valid. (See Art. 1344, Civil Code).
(c) There must be a deliberate intent to deceive or to induce;
therefore, misrepresentation in GOOD FAITH is not fraud. (See Art. 1343,
Civil Code).
(d) The other party must have relied on the untrue statement, and
must himselfnot be guilty of negligence in ascertaining the truth.
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud.
Failure to Disclose Facts

(a) Failure to disclose facts (CONCEALMENT) constitute FRAUD, when

there is a duty to reveal them.
(b) There is a duty to reveal in the following cases, for example: when the
parties are bound by confidential relations (Art.1339) as in the case of
partners.
Art. 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.
The maxim caveat emptor simply means that a buyer must be on his
guard. It is his duty to check the title of the seller; otherwise the buyer gets the
object at his own risk.
Art. 1341. A mere expression of an opinion does not signify fraud, unless made
by an expert and the other party has relied on the formers special knowledge.
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same is
mutual.
Misrepresentation by a Third Person
How does the participation of a third person in force and in fraud or
misrepresentation differ?
ANS.:
(a) Force or intimidation by a third person makes the contract voidable.
(b) Fraud by a third person does not make the contract voidable unless
1) the representation has created substantial mistake, and
2) the mistake is mutual. (Art. 1342).
In this case, the contract may be annulled, not principally on the
ground of fraud, but on the ground of error or mistake.

Art. 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error.
Misrepresentation Made in Good Faith
Example:
A bought a certain article from B. The article was needed for As
radio. B honestly but mistakenly assured A that the article was the proper
object. May the contract be annulled?
ANS.: Yes, not on the ground of fraud, for the misrepresentation was
honest, but on the ground of substantial error.
Art. 1344. In order that fraud may make a contract voidable,it should be serious
and should not have been employedby both contracting parties.Incidental
fraud only obliges the person employing it topay damages.
Requisites for Fraud to Vitiate Consent
Two requisites for fraud as a ground for annulment are given in this Article:
(a) the fraud must be serious;
(b) the parties must not be in pari delicto (mutual guilt), otherwise,
neither party may ask for annulment. The contract would, therefore, be
considered valid.
Incidental Fraud Does Not Vitiate Consent
Incidental fraud should not be confused with causal fraud. Incidental
fraud is not a cause for annulment.
Art. 1345. Simulation of a contract may be absolute orrelative. The former takes
place when the parties do not intendto be bound at all; the latter, when the
parties concealtheir true agreement.
Simulation of a Contract

It is the process of intentionally deceiving others by producing the

appearance of a contract that really does not exist (absolute simulation) or
which is different from the true agreement (relative simulation).
Requisites for Simulation
(a) An outward declaration of will different from the will of the parties;
(b) The false appearance must have been intended by mutual
agreement;
(c) The purpose is to deceive third persons.
Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order, or public policy
binds the parties to their real agreement.
Kinds of Simulated Contracts
(a) Absolutely simulated (simulados) fictitious contracts:
1) Here, the parties do not intend to be bound.
2) Effect: The contract is VOID.
(b) Relatively simulated (disimulados) disguised contracts:
1) Here, the parties conceal their true agreement.
2) Effect: The parties are bound to the real or true agreement except

a) if the contract should prejudice a third person;

b) or if the purpose is contrary to law, morals, good customs,
public order, or public policy.
OBJECT OF CONTRACTS

Art. 1347. All things which are not outside the commerce of men, including
future things, may be the object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases
expressly authorized by law.
All services which are not contrary to law, morals, good customs, public order
or public policy may likewise be the object of a contract.
Object (Subject Matter) of a Contract
The object of a contract is really to create or to end obligationswhich, in
turn, may involve things or services. Hence,elliptically, it may be said that the
object of a contract is a thingor a service.
Requisites
(a) the thing or service must be within the commerce of man;
(b) must be transmissible;
(c) must not be contrary to law, morals, good customs, public order, or
public policy;
(d) must not be impossible (Art. 1348, Civil Code);
(e) must be determinate as to its kind or determinable without the need of
a new contract or agreement. (Art. 1349, CivilCode).
Art. 1348. Impossible things or services cannot be the object of contracts.
Impossibility may be:
(a) because of the nature of the transaction or because of the law;
(b) absolute(objectively impossible) (here, NO ONE can do it);
(c) relative(subjectively impossible) (here, the particular

debtor cannot comply).

Art. 1349. The object of every contract must be determinateas to its kind. The
fact that the quantity is not determinateshall not be obstacle to the existence of
the contract,provided it is possible to determine the same, without theneed of a
new contract between the parties.
CAUSE OF CONTRACTS
Art. 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other; in
remuneratory ones, the service or benefit which is remunerated; and in
contracts of
pure beneficence, the mere liberality of the benefactor.
Cause
It is the essential and impelling reason why a party assumes an obligation.
(8 Manresa 677). Strictly speaking, there is no cause of a contract, but there is a
cause for an obligation.
Cause and Subject Matter Distinguished
The difference is only a matter of viewpoint in some way,because what
may be the subject matter for one party will bethe cause or consideration for
the other party.
Example: A is obliged to sing at a concert, in return for which she will receive a
car from B.
Regarding A, the subject matter is the singing; the cause is the car.
Regarding B, the subject matter is the car; the cause is the singing.
Hence, we can form this general conclusion: In reciprocal contracts, the
subject matter for one is the cause for the other, and vice versa.
If a particular piano is sold for P500,000 what is the object and what is the
cause?

ANS.: There are two schools of thought here.

(a) According to Manresa, for the seller the object is the piano and
the cause is the price; for the buyer the object is the price and the cause
is the piano.
(b) According to others, for both the seller and the buyer, there is just
one object, namely, the piano. The cause for the seller is the price; the
cause for the buyer is the delivery of the piano.
Art. 1351. The particular motives of the parties in enteringinto a contract are
different from the cause thereof.
Motives of the Parties for Entering Into a Contract
Example: I buy a gun from a store for P50,000 because I want to kill myself.
The cause of the contract is the gun (for me); the money (for the seller).
My motive, however, is the killing of myself. Motives do not enter at all in
the validity or invalidity of cause or consideration.
Motive Distinguished from Cause
(a) The motive of a person may vary although he enters into the same
kind of contract; the cause is always the same.
(b) The motive may be unknown to the other; the cause is always known.
(c) The presence of motive cannot cure the absence of cause.
Art. 1352. Contracts without cause, or with unlawfulcause, produce no effect
whatsoever. The cause is unlawfulif it is contrary to law, morals, good customs,
public order orpublic policy.
Requisites for Cause
(a) It must be present (at the time the contract was entered into);
(b) It must be true (not false);
(c) It must be lawful (not contrary to law, morals, good customs,
public order, or public policy).

Art. 1354. Although the cause is not stated in the contract,it is presumed that it
exists and is lawful, unless the debtorproves the contrary.
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake or undue
influence.
Lesion - It is inadequacy of cause, like an insufficient price for athing sold.
General Rule Lesion or inadequacy of price does not invalidate a contract.
Exceptions:
(a) When, together with lesion, there has been:
1) fraud
2) mistake
3) or undue influence
Art. 1357. If the law requires a document or other specialform, as in the acts
and contracts enumerated in the followingarticle, the contracting parties may
compel each other toobserve that form, once the contract has been perfected.
Thisright may be exercised simultaneously with the action uponthe contract.
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over immovable
property; sales of real property or of an interest therein are governed by
Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those
of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or
should prejudice a third person;

(4) The cession of actions or rights proceeding from an act appearing in a

public document.
All other contracts where the amount involved exceeds five hundred
pesos must appear in writing, even a private one. But sales of goods,
chattels or things in action are governed by Articles 1403, No. 2 and 1405.
Art. 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the reformation of the instrument to the
end that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting of
the minds of the parties, the proper remedy is not reformation of the instrument
but annulment of the contract.
Reformation
Reformation is that remedy in equity by means of whicha written
instrument is made or construed so as to express orconform to the real intention
of the parties when some error ormistake has been committed.
Reason for Reformation
Equity orders the reformation of an instrument in orderthat the true intention of
the contracting parties may be expressed.The courts do not attempt to make
another contractfor the parties. The rationale of the doctrine is that it would
beunjust and inequitable to allow the enforcement of a writteninstrument
which does not reflect or disclose the real meetingof the minds of the parties.
The rigor of the legalistic rule thata written instrument should be the final and
inflexible criterionand measure of the rights and obligations of the contracting
partiesis thus tempered to forestall the effects of mistake, fraud,inequitable
conduct or accident.
Distinctions between Reformation and Annulment
(a) Where there has been a meeting of the minds, but there is mistake,
fraud, inequitable conduct or accident in the contract as written, the

remedy is REFORMATION. When there has been no meeting of the minds,

because of vitiated consent, the proper remedy is ANNULMENT.
(b) Reformation does not invalidate a contract; annulment invalidates a
contract.
Requisites for the Action for Reformation
(a) There must be a meeting of the minds.
(b) The true intention is not expressed in the instrument.
(c) There must be clear and convincing proof thereof.
(d) It must be brought within the proper prescriptive period.
(e) The document must not refer to a simple unconditional donation inter
vivos (Art. 1366), or to wills (Art. 1366), or to a contract where the real
agreement is void.
Art. 1360. The principles of the general law on the reformation of instruments are
hereby adopted insofar as they are not in conflict with the provisions of this
Code.
Art. 1361. When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement, said instrument may be reformed.
Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true intention,
the former may ask for the reformation of the instrument.
Unilateral Mistake
In this Article, the mistake is unilateral but the other party acted
fraudulently or inequitably.
Art. 1363. When one party was mistaken and the other knew or believed that
the instrument did not state their real agreement, but concealed that fact from
the former, the instrument may be reformed.

Unilateral Mistake Also

(a) Here again, the mistake is unilateral but the other party is guilty of
concealment.
(b) Only the party in good faith can ask for reformation.
Art. 1364. When through the ignorance, lack of skill,negligence or bad faith on
the part of the person drafting theinstrument or of the clerk or typist, the
instrument does notexpress the true intention of the parties, the courts may
orderthat the instrument be reformed.
Failure to Convey the True Intent
The court may order the reformation of the instrument if the instrument
does not convey the true intention of the parties because of the:
(a) ignorance
(b) lack of skill
(c) bad faith of
1) the drafter of the instrument
2) or the clerk
3) or the typist.
(1) The Four Kinds of Defective Contracts
There are four kinds of defective contracts (contracts which may be
invalidated)
(a) rescissible
(b) voidable
(c) unenforceable
(d) void (which may be inexistent or illegal)
[NOTE: In general

(a) The rescissiblecontract is valid until rescinded; there is a sort of

extrinsic defect consisting of an economic damage or lesion.
(b) The voidable contract is valid till annulled. It can be annulled. It
cannot be annulled, however, if there has been a ratification. The defect
is more or less intrinsic, as in the case of vitiated consent.
(c) The unenforceable contract cannot be sued upon or enforced,
unless it is ratified. In a way, it may be considered as a validable
transaction, that is, it has no effect now, but it may be effective upon
ratification.
(d) The void contract is one that has no effect at all; it cannot be
ratified or validated.
Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.
Rescission
- is a remedy granted by law to the contracting parties both to
contracting parties and to third persons in order to secure reparation
of damages caused them by a contract, even if the contract be
valid, by means of the restoration of things to their condition prior to
the celebration of said contract
Requisites for Rescission
1. There must be at the beginning either a valid or a voidable contract
(not a void one);
2. But there is an economic or financial prejudice to someone (a party
or a third person);
3. Requires mutual restitution
Two Kinds of Rescission
1. Rescission in general (Art. 1380)
a) Is based on lesion or fraud upon creditors;

b) Here, the action is instituted by either of the contracting parties or

by third persons;
c) here, the courts cannot grant a period or term within which to
comply;
d) Here, non-performance by the other party is immaterial
2. Rescission under Art. 1191 (resolution)
a) Is based on non-performance or non-fulfillment of the obligation;
b) Here, the action may be instituted only by the injured party to the
contract;
c) Here, in some cases, the courts may grant a term;
d) Here, non-performance by the other party is important.
Art. 1381. The following contracts are rescissible:
1. Those which are entered into by the 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

* Lesion damage or injury to the party asking for rescission

(generally, disparity between the price and the value).
If merely an act of administration
a) ifwith court approval valid, regardless of lesion. (Art. 1386).
b) ifwithout court approval rescissible, if lesion is more than onefourth. (Art. 1381, No. 1).
Requisites before accionpaulianacan be brought:
1) There must be a creditor who became such PRIOR to the contract
sought to be rescinded (whether the party asking for rescission is a
judgment creditor already or not, is likewise immaterial).
2) There must be an alienation made subsequent to such credit.
3) The party alienating must be in BAD FAITH (that is, he knew that
damages would be caused his creditors whether or not he intended to
cause such damage).
4) There must be no other remedy for the prejudiced creditor
inability to collect the claims due them
Premature Payments Made in a State of Insolvency
Two requisites are essential under this Article:
(a) The debtor-payer must have been insolvent (the
insolvency need not be a judicially declared one);
(b) The debt was not yet due and demandable
Necessity of Mutual Restitution
The obligation of restitution does not obviously apply to creditors
who seek to impugn fraudulent transactions of their debtors. The

obligation of mutual restitution applies to OTHERS so that the status quo

may be restored.

Requisites Before the Action for Rescission Can Be Brought

(a) Generally, the plaintiff must be able to RETURN what has been
received by virtue of the rescissible contract. (Exception:prejudiced
creditors.)
(b) The thing object of the contract is not in the legal possession of
third persons in good faith.
(c) There must be no other legal remedy
(d) The action must be brought within the proper prescriptive period
Badges of Fraud
- There are some circumstances indicating that a certain alienation
has been made in fraud of creditors. These are called BADGES OF
FRAUD.
The following are some of the circumstances attending sales which have been
denominated by the courts as 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 withpreceding circumstances);
7) The failure of the vendee to take exclusive possession of all the
property.
Bad Faith has been defined as a state of mind affirmatively operating with
furtive design or with some motive or self-interest or ill-will or for an ulterior
purpose, and implies a conscious and intentional design to do a wrongful
act for a dishonest purpose or moral obliquity.
Effect of Bad Faith
(a) The acquirer must return or indemnify.
(b) Due to any cause includes a fortuitous event.
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
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
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
(accionsubrogatoria)
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.
A contract where consent is vitiated, such as by violence or intimidation, is
not void ab initio but only voidable, and is binding upon the parties unless
annulled by proper action in court.
Grounds for Annulment (Declaration of Nullity)
(a) incapacity to consent
(b) vitiated consent
Confirmation to cure a defect in a voidable contract (Art.1396, Civil
Code)
Ratification to cure the defect of lack of authority in an authorized
contract (entered into by another). (Arts. 1317and 1405, Civil Code)
Acknowledgment to remedy a deficiency of proof (Art.1405, Civil
Code) (thus, an oral loan may be put in writing, or when a private
instrument is made a public instrument)
Requisites of Ratification (Properly, Confirmation of a Voidable Contract)
(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.
Unenforceable contracts cannot be sued upon or enforced unless
ratified; thus, it is as if they have no effect yet. But they may be ratified;
hence, they can have in such a case the effect of valid contracts. In one
sense, therefore, they may be called validable.
Voidable and rescissiblecontracts, upon the other hand, produce legal
effects until they are annulled or rescinded.
Thus, unenforceable contracts are nearer absolute nullity than the other
two.
Kinds of Unenforceable Contracts
(a) Unauthorized contracts.
(b) Those that fail to comply with the Statute of Frauds.
(c) Those where both parties are incapable of giving consent to a
contract.
The Statute of Frauds
(a) Purpose to prevent fraud, and not to encourage the same.
Thus, certain agreements are required to be in writing so that they
may be enforced.
(b) How the Statute of Frauds Prevents Fraud
Since memory is many times unreliable, oral agreements may
sometimes result in injustice.
Some Basic and Fundamental Principles Concerning theStatute of
Frauds (General Rules of Application)

1) The Statute of Frauds applies only to executor contracts (contracts

where no performance has yet been made) and not partially or
completely executed (consummated contracts).
2.) The Statute of Frauds cannot apply if the action is neither for
damages because of the violation of an agreement nor for the
specific performance of said agreement.
3) The Statute of Frauds is exclusive, that is, it applies only to the
agreements or contracts enumeratedherein. (See Quintos v. Morata,
54 Phil. 481; also therule of Statutory Construction which states:
Inclusiouniosest exclusion alterius what the law does notinclude,
it excludes. Or, the enumeration of certainthings excludes all those
not so enumerated
4) The defense of the Statute of Frauds may be waived.
5) The Statute of Frauds is a personal defense, that is, a contract
infringing it cannot be assailed by third persons.
6) Contracts infringing the Statute of Frauds are not void; they are
merely unenforceable.
7) The Statute of Frauds is a Rule of Exclusion, i.e., oral evidence
might be relevant to the agreements enumerated therein and might
therefore be admissible were it not for the fact that the law or the
statute excludes said oral evidence.
8) The Statute of Frauds does not determine the credibility or weight
of evidence. It merely concerns itself with the admissibility thereof.
9) The Statute of Frauds does not apply if it is claimed that the
contract does not express the true agreement of the parties. As long
as the true or real agreement is not covered by the Statute of
Frauds, it is provable by oral evidence.
Specific Agreements of Statute of Frauds

1. An Agreement that by its terms is not to be performed within a year

from the making thereof.
2. A special promise to answer for the debt, default, or miscarriage of
another
3. An agreement made in consideration of marriage other than a mutual
promise to marry
4. An agreement for the sale of goods, chattels, or things in action, at a
price notless than five hundred pesos
5. An agreement for the leasing for a longer period than one year, or for
the sale of real property or of an interest therein
6. A representation as to the credit of a third person.
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.