Types of Contracts
What constitutes a valid contract – A valid contract is one that complies with the requisites for a perfected contract required by law.
What constitutes a rescissible contract – A rescissible contract is one wherein a party is allowed to rescind or terminate the contract due to the other party’s failure to comply with the obligations set forth in their agreement. Thus, valid contracts may be rescinded in cases provided for by law. The following contracts are rescissible:
- 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;
- Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
- Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
- 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;
- Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected; and
- All other contracts specially declared by law to be subject to rescission.
No rescission for numbers 1 and 2 – For numbers 1 and 2 above, there is no rescission thereof if the contract has been approved by a court.
Prescription for rescission
4-year prescription for rescission of a contract – An action for rescission prescribes after four years. The reckoning period for persons under guardianship and for absentees are from the termination of the former’s incapacity, or the until the domicile of the latter is known.
Action for rescission is subsidiary – An action for rescission is subsidiary, i.e. it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. As such, rescission is allowed only to the extent necessary to cover the damages caused.
Effect of rescission – As a result of rescission, the parties are obliged to return the things which were the object of the contract, together with their fruits, and the price with its interest. Thus, only a party who can return whatever he may be obliged to restore can ask for rescission. In addition, a party cannot invoke rescission if 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 such a case, the person causing the loss may be held liable for indemnity as damages.
Fraud against creditors
Creditors protected against fraud – A creditor is protected against contracts intended to defraud them.
Presumption of fraud against creditors – There is a presumption of fraud against the creditors if a donor gratuitously alienates property without reserving sufficient property to pay all of his debts before making such a donation. There is also a presumption of fraud if a person against whom some judgment has been issued onerously alienates whatever property he may own, even if the same is not the subject of the decision or attachment nor have been obtained by the party seeking rescission.
Transferee in bad faith liable for damages – Persons in bad faith who acquire property alienated in fraud of creditors will be obliged to pay indemnity for damages suffered by the injured party because of the transfer whenever, due to any cause, it should be impossible for him to return them. If there are several transferees, the first one is primarily liable and so on successively.
What constitutes a voidable contract – A voidable contract is one where consent was given through mistake, violence, intimidation, undue influence, or fraud. A voidable contract remains valid and binding until it is annulled by a proper action in court. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:
- Those where one of the parties is incapable of giving consent to a contract; and
- Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.
What constitutes mistake – For mistake to invalidate consent, the same should refer: (a) to the substance of the thing that is the object of the contract, or (b) to those conditions which have principally moved one or both parties to enter into the contract.
Rural Bank v. Court of AppealsG.R. No. L-32116, 21 April 1981
Respondent Maxima Castro filed suit against petitioner Rural Bank et al., seeking the nullity of a promissory note that the former made in favor of two loans granted by the bank. The loans were secured by a real-estate mortgage covering Castro’s house and lot. Castro claimed that she was led to believe that the loan and promissory note stated the amount of P3,000, when, in fact, it stated P6,000. The fraud was perpetrated by third parties Valencias.
HELD: The loan contract was invalid insofar as the amount is concerned due to substantial mistake. “The Court cannot declare the promissory note valid between the bank and Castro and the mortgage contract binding on Castro beyond the amount of P3,000, for while the contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso, this Court declared that a contract may be annulled on the ground of vitiated consent, if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract.
Same; Mistake of identity or qualification of contracting party – The mistake as to the identity or qualifications of either of the contracting party does not vitiate consent unless such identity or qualifications have been the principal cause of the contract. A simple mistake of account will give rise simply to its correction.
Same; No mistake if party knew of doubt, contingency, or risk –There is no mistake if the party alleging it knew of the doubt, contingency, or risk affecting the object of the contract. However, when the real purpose of the parties is frustrated, mutual error as to the legal effect of the agreement may vitiate consent.
What constitutes violence or intimidation – Violence exists when serious or irresistible force is employed in order to wrest or extract consent. Intimidation exists “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, or upon the person or property of his spouse, descendants, or ascendants, to give his consent.”
Same; When employed by a third party not privy to the contract – Violence or intimidation invalidates a contract, even if the same was exercised by a third party who is not privy to the contract.
Same; Threat to enforce claim through competent authority – A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent.
What constitutes undue influence – 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.”
What constitutes fraud – 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.” There is also fraud when a party fails to disclose facts when there is a duty to reveal them, as when the parties are bound by confidential relations.
Same; Tolerated fraud – Tolerated fraud or the “usual exaggerations in trade, when the other party had an opportunity to know the facts” are not per se fraudulent. The rule on tolerated fraud is subject to this one: A mere expression of an opinion will not signify fraud except if an expert made such a remark upon which the other party relied on due to the former’s special knowledge.
Best Legal Practices
- Get the facts straights – To avoid being the subject of tolerated fraud (which is not per se fraud), a contracting party should research and distinguish what of the seller’s statements are factual and what are exaggerations or sales talk.
Same; Extent of fraud – For fraud to make a contract voidable, it must be serious and it must not have been employed by both contracting parties. A party will only be liable for damages in case he commits an incidental fraud.
Same; Not fraud, but an error – A misrepresentation which was done in good faith is not fraud; however, it may constitute an error. Meanwhile, a third party’s misrepresentation does not vitiate the consent of a contracting party except if such has created substantial mistake and the same is mutual.
Prescription for annulment
4-year prescription for a voidable contract – An action for annulment for a voidable contract prescribes after four years. The period begins either from: (a) the time the defect of the consent ceases in cases involving intimidation, violence, or undue influence; or (b) the time of the discovery of the mistake or fraud in cases involving the latter two; or (c) the time the guardian ceases in case of contracts entered into by minors or incapacitated persons.
Extinguishment of action for annulment – An action for annulment of a voidable contract is 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 action is grounded on the incapacity of either party, the loss of the thing is not an obstacle to the success of the action unless said loss took place through the fraud or fault of the plaintiff.
Who may initiate action for annulment – Persons who are principally or subsidiarily obliged by the voidable contract may institute an action for its annulment. However, capacitated persons cannot allege the incapacity to those with whom they contract; 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. Consequently, 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.
Effects of annulment – Once annulment is granted, the parties are required to restore to each other the things which have been the subject matter of the contract, with their fruits, as well as the the price with its interest, except in cases provided by law.
Same; Reciprocal exchange – A party who cannot be compelled to comply with what is incumbent upon him so long as the other party does not restore or return the thing owing as mandated by the decree of annulment. For obligations to render the service, the damages will be based on the value of the services rendered.
Same; When thing is lot – If a party cannot return the thing because it has been lost through his fault, he is required to return the fruits received and the value of the thing at the time of the loss, with interest from the same date.
Ratification of a voidable contract
Ratification cures the defect in a voidable contract – Ratification cures the defect in a voidable contract. Essentially, ratification cleanses the contract from all its defects from the moment it was constituted. Thus, the action annul the voidable contract is extinguished once ratified.
How ratification is done – Ratification may be express or tacitly done. There is 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.”
Same; No conformity needed for ratification – Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment.
What constitutes an unenforceable contract – An unenforceable contract is one where there is “an absence of authority on the part of one [or both] of the contracting parties”, including those falling in the Statute of Frauds.
Third party cannot challenge validity of unenforceable contract – Third persons cannot challenge the validity of an unenforceable contract.
Samples of unenforceable contract – The following contracts are unenforceable, unless they are ratified:
- 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;
- Those that do not comply with the Statute of Frauds as set forth
in this number. In the following cases an agreement hereafter made is
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:
- An agreement that by its terms is not to be performed within a year from the making thereof;
- A special promise to answer for the debt, default, or miscarriage of another;
- An agreement made in consideration of marriage, other than a mutual promise to marry;
- 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 evidence, 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;
- An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; and
- A representation as to the credit of a third person.
What is the Statute of Frauds – The Statute of Frauds is “a postulate that declares unenforceable all contracts of realty unless made in writing.” A contract violating the Statute of Frauds (number 2 above) is ratified “by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.”
Orduña v. Fuentebella
G.R. No. 176841, 29 June 2010
Plaintiff Antonita filed a compalint for Annulment of Title, Reconveyance with Damages against defendants. Plaintiff claims that she entered into a verbal contract of sale over subject property with the father of defendant Armando Gabriel, Jr. who agreed to sell it to her via installments. Plaintiff and her family were then residing on the subject property and allowed to continue living therein. After receiving partial payments, the father later on died. Thereafter, defendant continued accepting the payment and issued corresponding acknowledgment receipts. Notwithstanding the said arrangement, defendant sold the property to another, who likewise sold it to another, and to another – three successive buyers. All three transactions were covered by their respective Deed of Absolute Sale. The RTC and the CA held that the verbal contract of sale was unenforceable under the Statue of Frauds, action has prescribed, and that the successive buyers were in good faith.
HELD: The contract of sale was valid, and not unenforceable. “… Foremost of these is that the Statute of Frauds expressed in Article 1403, par. (2), of the Civil Code applies only to executory contracts, i.e., those where no performance has yet been made. Stated a bit differently, the legal consequence of non-compliance with the Statute does not come into play where the contract in question is completed, executed, or partially consummated.”
The Statute of Frauds provides that “a contract for the sale of real property or of an interest therein shall be unenforceable unless the sale or some note or memorandum thereof is in writing and subscribed by the party or his agent. However, where the verbal contract of sale has been partially executed through the partial payments made by one party duly received by the vendor, as in the present case, the contract is taken out of the scope of the Statute.”
The purpose and intent behind the Statute of Frauds is “to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged. The Statute requires certain contracts to be evidenced by some note or memorandum in order to be enforceable. The term “Statute of Frauds” is descriptive of statutes that require certain classes of contracts to be in writing. The Statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable.”
Considering that contracts are “generally obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present, the Statute simply provides the method by which the contracts enumerated in Art. 1403 (2) may be proved but does not declare them invalid because they are not reduced to writing. In fine, the form required under the Statute is for convenience or evidentiary purposes only.”
In the case at bar, there has been a partial execution. “The records show that petitioners had, on separate occasions, given Gabriel Sr. and Gabriel Jr. sums of money as partial payments of the purchase price. These payments were duly receipted by Gabriel Jr. To recall, in his letter of May 1, 1997, Gabriel, Jr. acknowledged having received the aggregate payment of PhP 65,000 from petitioners with the balance of PhP 60,000 still remaining unpaid. But on top of the partial payments thus made, possession of the subject of the sale had been transferred to Antonita as buyer. Owing thus to its partial execution, the subject sale is no longer within the purview of the Statute of Frauds.”
The contract that violates the Statue of Frauds is ratified “by the acceptance of benefits under the contract. Evidently, Gabriel, Jr., as his father earlier, had benefited from the partial payments made by the petitioners. Thus, neither Gabriel Jr. nor the other respondents—successive purchasers of subject lots—could plausibly set up the Statute of Frauds to thwart petitioners’ efforts towards establishing their lawful right over the subject lot and removing any cloud in their title. As it were, petitioners need only to pay the outstanding balance of the purchase price and that would complete the execution of the oral sale.”
As for the issue on prescription, the action has no prescriptive period since the plaintiff was in possession of the subject property. Meanwhile, the successive buyers were in bad faith since they did not check the subject property despite knowing that their respective sellers were not in possession thereof.
Right to specific performance: Execution of public document – If a contract has been perfected but is unenforceable under the Statute of Frauds, the parties have the right to require each other to execute a public document (or other special form) that is necessary for the registration of the agreement with the Registry of Deeds. This right may be exercised together with an action upon the contract.
Ratification of unenforceable contract
Express or implied ratification – The express or implied ratification by the parent or guardian, as the case may be, of either one of the incapacitated parties (or those incapable of giving consent) results in the contract having the same effect as if only one of them were incapacitated. However, if the parents or guardians, as the case may be, of both contracting incapacitated parties ratified the contract, then the agreement is valid from its inception.
What constitutes a void contract – A void contract is one where an essential requisite to constitute an agreement is lacking.
Sample of void contract – These following contracts are void and inexistent from the beginning:
- Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
- 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; and
- Those expressly prohibited or declared void by law.
No ratification – A void contract does not produce any legal effect either against or in favor of anyone and, thus, it cannot be ratified.
No prescription – Any action or defense for the declaration of the inexistence of a contract cannot prescribe.
No waiver – The right to set up the defense of illegality cannot be waived for void contracts. However, third persons whose interests are not directly affected cannot avail of the defense of illegality of contract.
Cosmic Lumber Corporation v. Court of Appeals
G.R. No. 114311, 29 November 1996
Petitioner Cosmic Lumber Corporation challenges the verdict of the trial court on the ground that the latter’s decision was void because the compromise agreement upon which it was based was void. To be precise, the said corporation’s Attorney-in-fact Villamil-Estrada “did not possess the authority to sell nor was she armed with a Board Resolution authorizing the sale of its property.” In fact, she was merely empowered “to enter into a compromise agreement in the recovery suit she was authorized to file against persons squatting on Lot No. 443, such authority being expressly confined to the ‘ejectment of third persons or squatters of… lot… (No.) 443… for the said squatters to remove their houses and vacate the premises in order that the corporation may take material possession of the entire lot.”
HELD: The Compromise Agreement was void. “The authority granted Villamil-Estrada under the special power of attorney was explicit and exclusionary: for her to institute any action in court to eject all persons found on Lots Nos. 9127 and 443 so that petitioner could take material possession thereof, and for this purpose, to appear at the pre-trial and enter into any stipulation of facts and/or compromise agreement but only insofar as this was protective of the rights and interests of petitioner in the property. Nowhere in this authorization was Villamil-Estrada granted expressly or impliedly any power to sell the subject property nor a portion thereof. Neither can a conferment of the power to sell be validly inferred from the specific authority ‘to enter into a compromise agreement’ because of the explicit limitation fixed by the grantor that the compromise entered into shall only be ‘so far as it shall protect the rights and interest of the corporation in the aforementioned lots.’ In the context of the specific investiture of powers to Villamil-Estrada, alienation by sale of an immovable certainly cannot be deemed protective of the right of petitioner to physically possess the same, more so when the land was being sold for a price of P80.00 per square meter, very much less than its assessed value of P250.00 per square meter, and considering further that petitioner never received the proceeds of the sale.”
When parties are in pari delicto – The parties to a void contract which results from the illegality of the cause or object thereof, and the act being criminal, where both of them are in pari delicto, cannot file suit against each other and expect positive relief from their illegal acts and transactions. Thus, a contract that is the direct result of a previous illegal contract is also void and inexistent. However, if only one is guilty, the innocent party may claim what he has given and he shall not be obliged to comply with his promise.
Same; When not a criminal offense – If the act consisting of an unlawful or forbidden cause does not constitute a criminal offense, the following rules shall be observed:
- 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;
- 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.
Same; When recovery of payment or delivery is allowed –The plaintiff may recover what he has paid or delivered if the agreement, which is not illegal per se but is simply prohibited, and the prohibition by the law is for his protection if public policy is thereby enhanced.
When repudiation may be done – The contract may be repudiated by either party before the accomplishment of the purpose or before a third party is damaged if the money is paid or the property is delivered for an illegal purpose. In such a case, the courts may permit the repudiating party to recover the money or property if the public interest will thus be subserved.
 Ibid. Paragraph 2, Article 1318 cf. 1315, 1356.
 Ibid. Article 1380.
 Ibid. Article 1381 (1) .
 Ibid. Article 1381 (2) .
 Ibid. Article 1381 (3) .
 Ibid. Article 1381 (4) .
 Ibid. Article 1382.
 Ibid. Article 1381 (5). This includes the right of rescission which is implied in reciprocal obligations.
 Ibid. Article 1386.
 Ibid. Paragraph 1, Article 1389.
 Ibid. Paragraph 2, Article 1389.
 Ibid. Article 1383.
 Ibid. Article 1384.
 Ibid. Paragraph 1, Article 1385.
 CIVIL CODE. Paragraph 2, Article 1385.
 Ibid. Paragraph 3, Article 1385.
 Ibid. Article 1313.
 CIVIL CODE. Paragraph 1, Article 1387.
 Ibid. Paragraph 2, Article 1387.
 CIVIL CODE. Paragraph 1, Article 1388.
 Ibid. Paragraph 2, Article 1388.
 Ibid. Article 1330.
 Ibid. Paragraph 2, Article 1390.
 Ibid. Paragraph 1, Article 1390 (1).
 Ibid. Paragraph 1, Article 1390 (2).
 Ibid. Paragraph 1, Article 1331.
 Ibid. Paragraph 2, Article 1331.
 Ibid. Paragraph 3, Article 1331.
 Ibid. Article 1333.
 Ibid. Article 1334.
 Ibid. Paragraph 1, Article 1335.
 Ibid. Paragraph 2, Article 1335. “To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind” (Paragraph 3, Article 1335).
 Ibid. Paragraph 2, Article 1336.
 Ibid. Paragraph 4, Article 1335.
 Ibid. Article 1337. “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” (Ibid.)
 Ibid. Article 1338. In the case of mistake or fraud involving a party who is unable to read or of a contract that is in a language not understood by the latter, the other party enforcing the contract is required to show that the terms and conditions of the agreement have been fully explained to the other party (Article 1332, Civil Code).
 Ibid. Article 1339.
 Ibid. Article 1340.
 Ibid. Paragraph 2, Article 1344.
 Ibid. Paragraph 1, Article 1344.
 Ibid. Article 1341.
 Ibid. Article 1343.
 Ibid. Article 1342.
 Ibid. Article 1391.
 CIVIL CODE. Paragraph 1, Article 1401.
 Ibid. Paragraph 2, Article 1401.
 Ibid. Article 1397.
 CIVIL CODE. Article 1399.
 Ibid. Paragraph 1, Article 1398.
 Ibid. Article 1402.
 Ibid. Paragraph 2, Article 1398.
 Ibid. Paragraph 1, Article 1400.
 Ibid. Paragraph 2, Article 1390.
 Ibid. Article 1396.
 Ibid. Article 1392.
 Ibid. Article 1393. The guardian of the incapacitated person may cause the ratification for an on behalf of the latter (Article 1394, Civil Code)
 CIVIL CODE. Article 1395.
 Josefina Villanueva-Mijares, et al., v. The Court of Appeals, et al., G.R. No. 108921, 12 April 2000.
 CIVIL CODE. Article 1403.
 Ibid. Article 1408.
 Ibid. Article 1403 (1).
 Ibid. Article 1403 (2).
 See Footnote 28 in Anunciano Vda. De Ouano, et al., v. The Republic of the Philippines, et al., G.R. Nos. 168770, 168812, 09 February 2011.
 CIVIL CODE. Article 1405.
 Ibid. Article 1406, cf. Article 1357.
 Ibid. Article 1357.
 Ibid. Paragraph 1, Article 1407.
 Ibid. Paragraph 2, Article 1407.
 First Philippine Holdings Corporation v. Trans Middle East (Phils.) Equities, Inc., G.R. No. 179505, 04 December 2009.
 CIVIL CODE. Paragraph 1, Article 1409.
 Ibid. Article 1409 (1).
 Ibid. Article 1490 (2); See also Paragraph 1, Article 1409, cf. Article 1346. “Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement” (Article 1345, Civil Code). “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” (Article 1346, Ibid.).
 Ibid. Article 1409 (3).
 Ibid. Article 1409 (4).
 Ibid. Article 1409 (5).
 Ibid. Article 1409 (6).
 Ibid. Article 1409 (7).
 Sps. Joselina Alcantara and Antonio Alcantara, et al., v. Brigida L. Nido, G.R. No. 165133, 19 April 2010; See also Paragraph 2, Article 1409, Civil Code.
 CIVIL CODE. Article 1410. See also Fil-Estate Golf and Development, Inc., v. Felicidad Navarro, G.R. No. 152575, 29 June 2007.
 Ibid. Paragraph 2, Article 1409.
 Ibid. Article 1421.
 CIVIL CODE. Paragraph 1, Article 1411. The phrase “in pari delicto” means equal at fault ( Jose Manchez, et al., v. Florentino Teves Jr., G.R. No. 153201, 26 January 2005).
 Potenciano Ramirez v. Ma. Cecilia Ramirez, G.R. No. 165088, 17 March 2006.
 CIVIL CODE, Article 1422.
 Ibid. Paragraph 2, Article 1411.
 Ibid. Article 1412.
 Ibid. Article 1416.
 Ibid. Article 1414.
 Ibid. The courts may likewise allow an incapacitated party to recover his money or property delivered to a capacitated party if the interest of justice so demands (Article 1415, Ibid.).