DEFECTIVE CONTRACTS

DEFECTIVE CONTRACTS
There are four defective contracts, namely, Rescissible, Voidable, Unenforceable, and Void
contracts. These contracts are presented in the law according to their degree of defectiveness with
rescissible contracts as the least defective, and void contracts as the most defective.

I.

RESCISSIBLE CONTRACTS (1380)

A rescissible contract is one in which has all the essential requisites of a contract but
which may be set aside by reason of equity on account of damage cause to one of the parties or
upon a third person.
A. What contracts are rescissible? (1381)
a. Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than of the value of the things which are the object of the
contract
A guardian is a person who has custody of the person and property, or of
property only, of another person who, not being under parental authority, is
incapable of taking care of himself. The person under guardianship is known as
ward. A court order is required to declare a person as a legal guardian.
b. Those agreed upon in representation of absentees, if the latter suffer lesion by more
than of the value of the things which are the object of the contract
An absentee is a person who disappears from his domicile, his whereabouts
being unknown, and without leaving an agent to administer his property. A court
order is required to declare a person as an absentee. Absentee is disappearing for
10 years or more.
c. Those undertaken in fraud of creditors when the latter cannot, in any manner, collect
the claims due then. (ACCION PAULIANA)
*3rd Person: with intimate relationship
d. 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 (CUSTODIA LEGIS)
e. All other contracts specified by law to be subject to rescission
Example:
a. Buyer fails to pay or Seller fails to deliver/delivered item has defect
b. Sale in case of breach by the seller of warranty against hidden defects
c. Sale of animals with redhibitory defects
d. Contract of partition when an heir received things whose value is less by at
least than the share to which he is entitled.
B. Rescissible payment (1382)
A payment may be rescinded at the instance of a creditor who is prejudiced if the
following requisites are present:
a. The debtor is insolvent
b. The debt is not due or demandable

DEFECTIVE CONTRACTS
c. Such debtor makes the payment
C. Rescission (1383)
Rescission is the remedy allowed by law to the contracting parties and to third
persons to repair the damages caused them by a contract. (REMEDY OF LAST
RESORT).
The action for rescission is subsidiary. If the injured party can get reparation by
other legal remedy than the rescission of the contract, the action for rescission cannot be
instituted by him.
1.
2.
3.
4.

Demand collection
Accion subrogatoria
Accion Pauliana
RESCISSION

D. Extent of rescission (1384)

Rescission will not be of the whole contract but only to the extent necessary to repair the
damage caused. Thus, there may be a partial rescission of the contract. The alienation with
respect to the part that is not rescinded is therefore valid.
E. Requisites of Rescission (1385)
a. The party suffering damage must have no other legal means to obtain reparation for
the same.
b. The party demanding rescission must be able to return whatever he may be obliged
to restore.
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. The obligation
to return, however, does not apply to prejudiced creditors as there is nothing to
be returned by them.
c. The thing/object of the contract must not be legally in the possession of a third
person who acted in good faith.
Rescission cannot be availed of if the object of the contract is legally in the
possession of third persons who acted in good faith. In this case, the injured party
can go after the person who caused the loss.
d. The action for rescission must be brought within the period allowed by law.
F. Effect of court approval when there is lesion (1386)
A contract entered into by a guardian in behalf of his ward, or by a representative of an
absentee, shall not be rescissible if the contract is approved by the court although the ward
or absentee suffered lesion of more than of the value of the object of the contract. The
court in such cases is presumed to have taken the appropriate steps to safeguard the interest
of the ward or the absentee.
G. Alienations in fraud of creditors (1387)
a. Gratuitous alienations

DEFECTIVE CONTRACTS
Alienations by gratuitous title are presumed to have been entered into in fraud of
creditors if the debtor did not reserve sufficient property to pay all debts
contracted before the donation
b. Onerous alienations
Alienations by onerous title are presumed to have been entered into in fraud of
creditors when made:
1) By persons against whom some judgment has been rendered
2) By persons against whom some writ of attachment has been issued
H. Badges of fraud
There are circumstances attending a sale by which the fraudulent character of the
transaction may be determined.
a. The fact that the consideration of the conveyance is fictitious or inadequate.
b. A transfer made by a debtor after suit has been begun and while it is pending against
him.
c. A sale upon credit made by an insolvent debtor
d. Evidence of large indebtedness or complete insolvency
e. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially
f. The fact that the transfer is made between father and son, when there are present
other of the above circumstances
g. The failure of the vendee to take exclusive possession of all the property.
I. Purchase made in bad faith (1388)
The purchaser in bad faith shall indemnify the creditors for damages suffered by
them on account of the alienation whenever due to any cause, it would be impossible to
return them. This rule applies even if the cause of the loss is due to a fortuitous event
If there are two or more alienations, the first acquirer shall be liable first, and so on
successively provided they are also in bad faith.
J. Purchase made in good faith.

I.

VOIDABLE CONTRACTS

II.

UNENFORCEABLE CONTRACTS

III.

VOID CONTRACTS