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• The remaining chapters deal with defective contracts. The Civil Code made major and important improvements on this topic. Unlike the Spanish Code, the defective contracts were ambiguous and had unclear classifications. They were simply void (nulos) or voidable (anulables). Here, in our present code, there are for types of defective contracts, from the serious to less serious, in the following order:

• However, our Code still has some imperfections. As pointed out by Tolentino, there must be a “relatively void” contract. For example, in an assignment of lease without authority, this is void as to third parties, but valid as between the parties.

o A contract of lease can’t be assigned unless there is express provision. The status of the lease is relatively void. Void as between the lessor and lease, but valid between the assignor aad assignee

o Balane owes Meer and Aquino. Aquino garnishes his debt against Meer. Balane paid Meer. Valid between B and M, but invalid between B and A.

o There have been several cases decided by our Supreme Court wherein a chattel mortgage over real property was declared void as to third parties but valid as between the parties.

• Whatever imperfections the Code has, it still is better than other codes on this topic. Kinds in ascending order of defect:

• Rescissible: One which has caused economic damage and which can be set aside, although valid. o it can’t be cured because there’s nothing really wrong with it.

• Voidable either due to lack of capacity or consent. It is valid until set aside o Good until set aside.

o Convalidated à only in voidable and unenforceable

• Unenforceable: lack of authority or of writing or for incompetence of both parties cannot be given effect unless property ratified.

o This is why unenforceable is more defective. It’s unenforceable til it is ratified. Voidable is valid til set aside.

• Void: Contract only in name. One which is an absolute nullity and produces no effect as if it had never been executed or entered into.

Digests by 4A 2015

1. Rescissible Contracts

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. 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 subject to rescission.

Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible.

Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. Art. 1385. 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; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when 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 this case, indemnity for damages may be demanded from the person causing the loss. Art. 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved by the courts.

Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

Digests by 4A 2015

In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Art. 1389. The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known.

• Rescission: Process or remedy designated to render a contract validly entered into and normally binding by reason of external conditions causing an economic prejudice, wither to a party or to his creditors.

• In a sense, a rescissible contract is a valid contract. It’s defect is external, not internal. That’s why you can’t cure it.

• Defect: damage to one of the parties or 3rd _person. • IT IS VALID! But it is nonetheless defective.

• This is not be to confused with resolution, discussed in Article 1191. This chapter on rescissible contracts is the proper rescissible.

• According to Scaevola, rescission is a process designated to render inefficacious a contract validly entered into and normally binding, by reason of external conditions, causing an economic prejudice to a party or to his creditors.

• A rescissible contract is a contract which is valid because it contains all the essential requisites prescribed by law, but which is defective because of injury or damage to either of the contracting parties or to 3rd persons, as a consequence of which it may be rescinded by means of a proper action for rescission.

• Rescission is a process or remedy granted by law to the contracting parties, and even to 3rd persons, to secure the reparation of damages caused to them by a contract, even if the same should be valid, by means of the restoration of things to their condition prior to the celebration of the contract.

Requisites of Rescission

a. The contact must be a rescissible contract under Article 1381 or Article 1382

• The following contracts are rescissible:

i. Those entered into by guardians whenever the whom they represent suffer lesion by more than 1⁄4 of the value of things which are the object thereof (Art. 1381 (1))

Digests by 4A 2015

• Rescission shall not take place with respect to contracts approved by the court (Article 1386). • As a rule, when a guardian enters into a contract involving the disposition of the ward’s property,

the guardian must secure the approval of the guardianship court. A guardian is only authorized to manage the estate of the ward. A guardian has no power to dispose of any portion of the estate without approval of the court. If more than acts of mere administration are involved, judicial approval is necessary.

• In case of sale, mortgage, or other encumbrance of any portion of the estate which does not have judicial approval is an unenforceable contract (Article 1403 (1)).

• Therefore, Article 1381 (1) is limited to contracts which constitute mere acts of administration (i.e. the purchase of equipment for the cultivation of lands, purchase of materials for repair of buildings, etc.).

• Lesion is very difficult to apply in practice.

• For example, A is the agent of B. B owns land worth P10 M. A sells the land for P7 M. From the facts, the lesion suffered by B is 30%. In practice, are you sure that P10 M is the fair market value of the land. What if the situation is urgent and that property must be disposed of right away? • Another example, A is the agent of B. B owns land worth P10M. Cwantstobuytheland.

CiswillingtopayP7M– lump sum payment. D is willing to pay P 10 M but on installments. • Is it so low to amount of want of consideration?

ii. Those agreed upon in representation of absentees, if the absentee suffers lesion by more than 1⁄4 of the value of things which are the object thereof (Art.1381 (2)) • Rescission shall not take place with respect to contracts approved by the court (Article 1386). • As a rule, when the legal representative of an absentee enters into a contract involving the

disposition of the absentee’s property, he must secure the approval of the court. A legal

representative is only authorized to manage the estate of the absentee. He has no power to dispose of any portion of the estate without approval of the court. If more than acts of mere

administration are involved, judicial approval is necessary.

• In case of sale, mortgage, or other encumbrance of any portion of the estate which does not have judicial approval is an unenforceable contract (Article 1403 (1)).

• Therefore, Article 1381 (2) is limited to contracts which constitute mere acts of administration (i.e. the purchase of equipment for the cultivation of lands, purchase of materials for repair of buildings, etc.).

• Lesion is very difficult to apply in practice.

• For example, A is the agent of B. B owns land worth P10 M. A sells the land for P7 M. From the facts, the lesion suffered by B is 30%. In practice, are you sure that P10 M is the fair market value of the land. What if the situation is urgent and that property must be disposed of right away? • Another example, A is the agent of B. B owns land worth P10M. Cwantstobuytheland.

CiswillingtopayP7M– lump sum payment. D is willing to pay P 10 M but on installments. • Correlate with Art. 1386. If the court gives its approval then there can be no lesion. • But if you sell without court authorityà unenforceable.

• So, it is only rescissible if the sale doesn’t require prior judicial approval: sales of personalty which are pure acts of admin (Rule 96, §§1-2).

Digests by 4A 2015

iii. Those undertaken in fraud of creditors when the creditors cannot in any other manner collect the claims due them (Art.1381 (3))

• This is an exception to the principle of relativity of contracts.

• Creditors, after having pursued the property in possession of the debtor to satisfy their claims may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them (Article 1177).

• Creditors are protected in cases of contracts intended to defraud them (Article 1313).

• In determining whether or not a certain conveyance is fraudulent, the question in every case is whether the conveyance was a bona fide transaction or trick and contrivance to defeat creditors, or whether it conserves to the debtor a special right.

• All contracts by virtue of which the debtor alienates property by gratuitous tile are presumed to have been entered into in order to defraud creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation (Article 1387, 1st ¶).

• Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission (Article 1387, 2nd ¶).

• This is accion pauliana. Only applies if the alienation is subsequent. Also, good faith finds no application in donation, since he didn’t give anything.

• Badges of Fraud

1. The fact that the consideration of the conveyance is inadequate

2. A transfer made by a debtor after suit has begun and while it is pending against him 3. A sale upon credit by an insolvent debtor

4. Evidence of large indebtedness or complete insolvency

5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially

6. The fact that the transfer is made between father and son when there are present any of the above circumstances

7. The failure of the vendee to take exclusive possession of all the property • 1387 is presumptive fraud

iv. 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 (Article 1381 (4))

• Article 1381 (4) refers to a contract executed by the defendant in a suit involving the ownership or possession of a thing, when such contract is made without the knowledge and approval of the plaintiff or court.

• As in the case of a contract in fraud of creditors, the remedy of rescission in this case is given to a 3rd person who is not a party to the contract. The purpose is to protect the plaintiff.

Digests by 4A 2015

v. All other contracts specially declared by law to be the subject of rescission (Article 1381 (5))

• The following provision in sales are examples of rescissible contracts declared by law – Arts 1526, 1534, 1538, 1539, 1540, 1556, 1560, 1567, 1659.

• Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected (Article 1382)

b. The person asking for rescission must have no other legal means to obtain reparation for the damages suffered by him (Article 1383)

c. The person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Article 1385, 1st par)

• This requisite is only applicable if the one who suffers the lesion is a party to the contract. • This requisite does not apply when a defrauded creditor resorts to accion pauliana.

• This will not apply to ¶3-4.

d. The things which are the object of the contract must not have passed legally to the possession of a 3rd person acting in good faith (Article 1385, 2nd ¶)

• Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them (Article 1388,1st ¶).

• If there are 2 or more alienations, the 1st acquirer shall be liable 1st, and so on successively (Article 1388, 2nd ¶).

e. The action for rescission must be brought within the prescriptive period of 4 years (Article 1389)

Guzman v. Bonnevie: The status of creditors could be validly accorded the Bonnevies for they had