IV.

Defective Contracts as the right to the legitime may be defeated by

a. Rescissible contracts fraudulent contracts, and are superior to the will of
PEREZ those bound to respect them.
- they are the least infirm of contracts. Though valid and Art. 1385
possessing all the essential requisites of contracts, they may - rescission creates the obligation to return the things
be set aside for having caused economic damage to one of which were the object of the contract, together with
the contracting parties or to a third party. their fruits, and the price with its interest
TOLENTINO - it can be carried out only when he who demands
- rescission is a remedy granted by law to the contracting rescission can return whatever he may be obliged to
parties and even to third persons, to secure the reparation restore
of damages caused to them by a contract, even if this should - this applies to contracts which are rescissible due to
be valid, by means of the restoration of things to their lesion suffered by the ward or the absentee.
condition at the moment prior to the celebration of said - rescission shall not take place when the things which
contract. are the object of the contract are legally in the
- it is a relief for the protection of one of the contracting possession of third persons who did not act in bad faith
parties and third persons from all injury and damage the - in case of a fraudulent transfer by the debtor of his
contract may cause, or to protect some incompatible and property:
preferent right created by the contract. [Link] the transferee acquired the property
a.1. nature gratuitously, he is obliged to surrender it regardless
Art. 1383 of his good faith or bad faith
- the action for rescission is subsidiary; it cannot be 2. if the transferee acquired the property onerously
instituted except when the party suffering damage has (with consideration), he is obliged to surrender it
no other legal means to obtain reparation for the same. only if he acted in bad faith.
- plaintiff asking for rescission must prove that he has - the only possible application of the rule that the party
no other legal means to obtain reparation. seeking rescission must offer to restore that which he
- but where it is shown that the property transferred has received from the other is in contracts executed by
by the debtor to another was his only property, it is guardians or administrators under Nos. 1 and 2, Art.
obvious that the creditor can have no other recourse 1381.
to satisfy his claim except by rescission. - SC, however, has applied the rule to cases of mutual
Art. 1384 dissent and of rescission of reciprocal obligations
- rescission shall be only to the extent necessary to cover under Art. 1191
the damages caused. - the “third person” under the present article includes
- rescission is only in favor of the plaintiff creditor; not not only one who is not a party to the rescissible
all of the creditors. contract, but also one who is a party thereto.
- the extent of the revocation is only to the amount of - when the contract cannot be rescinded, because the
the prejudice suffered by the creditor. thing has been acquired in good faith by a third person,
- the action for rescission may be instituted by: the party who caused the loss shall be liable for
1. the person who is injured by the rescissible damages.
contract, such as the ward or absentee in the case of a.2. when rescissible
lesion, the creditors prejudiced by a fraudulent Art. 1380
alienation, and the plaintiff in a case where a thing in - contracts validly agreed upon may be rescinded in the
litigation is alienated by the defendant. cases established by law.
2. the heirs of these persons - rescission of reciprocal obligations (Art. 1191) is not
3. their creditors by virtue of the right granted by Art. identical to rescission of contracts.
1177 - similarities:
- but where a person has made a fraudulent alienation 1. both presuppose contracts validly entered into
for the purpose of depriving his compulsory heir of his and existing
legitime, can the latter institute the rescissory action? 2. both require mutual restitution when declared
- he may do so after the death of the debtor, not as proper
representative of the latter, but as a creditor with - differences:
respect to his legitime. 1. rescission under Art. 1191 may be demanded only
- his right will be based on paragraph 3 of Art. 1381 by a party to the contract, while rescission under this
because the rights of a compulsory heir are chapter may be demanded by a third party
undoubtedly similar to the credit of a creditor insofar prejudiced by the contract
 2. rescission under Art. 1191 may be denied by the representation of absentees, if the latter suffer lesion
court when there is sufficient reason to justify by more than one-fourth of the value of the things
extension of the time to the defendant in which to which are the object thereof;
perform, while such reason does not affect the right - "Lesion" means the damage caused to the ward or
to ask for rescission under this chapter. absentee due to the discrepancy between the
3. non-performance is the only ground for the right consideration received and the value of the things
to rescission under Art. 1191, while there are various alienated.
reasons of equity provided as grounds for rescission - Rescission referred to in the first two items
under this chapter. (contracts by guardians, or for absentees) shall not
4. rescission under Art. 1191 applies only to take place with respect to contracts· approved by the
reciprocal obligations where one party has not courts. (Art. 1386)
performed, while rescission under this chapter - Court approval is required for acts of ownership (as
applies whether the contract produces unilateral or distinguished from mere acts of administration)
reciprocal obligations and even when the contract executed by guardians or representatives of
has been duly fulfilled. absentees. If court approval is lacking, the contract is
- rescission should also be distinguished from an unenforceable for lack of authority (Art. 1403, par.
agreement of the parties to cancel their contract and 1), even if lesion is not shown.
mutually return the object and the cause thereof. 3. Fraud of Creditors. Those contracts undertaken in
- courts have sometimes loosely called this act of the fraud of creditors when the latter cannot in any other
parties as rescission, although it is not properly so. manner collect the claims due them;
- requisites of rescission: - All contracts by virtue of which the debtor alienates
1. the contract must be a rescissible contract, such as property by gratuitous title are presumed to have
those mentioned in Art. 1381 and 1382 been entered into in fraud of creditors, when the
2. the party asking for rescission must have no other donor did not reserve sufficient property to pay all
legal means to obtain reparation for the damages debts contracted before the donation. (Art. 1387)
suffered by him (Art. 1383) - Alienations by onerous title are also presumed
3. the person demanding rescission must be able to fraudulent when made by persons against whom
return whatever he may be obliged to restore if some judgment or writ of attachment has been
rescission is granted (Art. 1385) issued. (Art. 1387)
4. the things which are the object of the contract - The decision or attachment need not refer to the
must not have passed legally to the possession of a property alienated and need not have been
third person acting in good faith (Art. 1385) obtained by the party seeking the rescission. (Art.
5. the action for rescission must be brought within 1387)
the prescriptive period of four years (Art. 1389) - In addition to these presumptions, the design to
PEREZ (additional requisite: defraud creditors may be proved in any other
6. Rescission shall be only to the extent necessary to manner recognized by the law of evidence. (Art.
cover the damage caused. (Art. 1384) 1387) The following circumstances are considered
- rescindable contracts are not void, and until set aside badges of fraud in a sale:
in a rescissory action they are legally effective, convey i. The fact that the consideration of the conveyance
title, and cannot be attacked collaterally upon the is fictitious or is inadequate.
grounds for rescission in a land registration ii. A transfer made by a debtor after suit has been
proceeding. begun and while it is pending against him.
- in justice to the party who would be entitled to ask iii. A sale upon credit by an insolvent debtor.
for rescission, however, the court may expressly iv. Evidence of large indebtedness or complete
reserve such right of rescission so that such insolvency.
reservation may be noted upon the certificate of title v. The transfer of all or nearly all of his property by
Art. 1381 a debtor, especially when he is insolvent or greatly
- the following contracts are rescissible: embarrassed financially.
1. Lesion to Wards. Those contracts which are entered vi. The fact that the transfer is made between
into by guardians whenever the wards whom they father and son, when there are present other of
represent suffer lesion by more than one-fourth of the the above circumstances.
value of the things which are the object thereof; vii. The failure of the vendee to take exclusive
2. Lesion to Absentees. Those contracts agreed upon in possession of all of the property.
 - accion pauliana vs simulaton: - Thus, rescission under Art. 1191 may be filed only
1. in the case of rescission, there is a real by a contracting party; rescission under Art. 1381
alienation, but it is fraudulent; in the case of may be filed even by a third party.
simulation, there is in fact no alienation but a mere 2. Rescission under Art. 1191 is a principal action, while
pretense that one has been made rescission under Art. 1381 is subsidiary (in the latter,
2. the former can be alleged only by creditors prior the plaintiff must show that he has no other recourse
to the act; the latter by all creditors, before or after to repair the damage he suffered).
the simulation 3. Prescription for rescission under Art. 1191 is 10
3. impossibility of satisfying the plaintiff’s claim is years for written contracts (Art. 1 144) or 6 years for
required in the first; it is not required in the latter oral contracts (Art. 1145), while prescription for
4. accion pauliana is an action to set aside a valid rescission under Art. 1381 is 4 years. (Art. 1389)
contract; while an action to declare simulation Art. 1382
does not seek to set aside the simulated contract, - Payments made in a state of insolvency for obligations
but merely to declare its inexistence. to whose fulfillment the debtor could not be compelled
- requisites for accion pauliana: at the time they were effected, are also rescissible. (Art.
1. that the plaintiff asking for rescission has a credit 1382)
prior to the alienation, although demandable later - For Art. 1382 to apply, it is required that: (a) the
2. that the debtor has made a subsequent contract payment is made in a state of insolvency; and (b) the
conveying a patrimonial benefit to a third person obligation paid was not yet due at the time of the
3. that the creditor has no other legal remedy to payment.
satisfy his claim, but would benefit by the Art. 1386
rescission of the conveyance to the third person - rescission referred to in Nos. 1 and 2 of Art. 1381 shall
4. that the act being impugned is fraudulent not take place with respect to contracts approved by the
5. that the third person who received the property courts.
conveyed, if it is by onerous title, has been an Art. 1387
accomplice in the fraud - All contracts by virtue of which the debtor alienates
- parties who may appear to have become creditors property by gratuitous title are presumed to have been
after the alienation, but who may be considered as entered into in fraud of creditors, when the donor did
having a prior right and entitled to the accion not reserve sufficient property to pay all debts
pauliana: contracted before the donation.
1. those whose claims were acknowledged by the - Alienations by onerous title are also presumed
debtor after the alienation, but the origin of which fraudulent when made by persons against whom some
antedated the alienation; the recognition does not judgment or writ of attachment has been issued.
give rise to the credit by merely confirms its - The decision or attachment need not refer to the
existence property alienated and need not have been obtained by
2. those who become subrogated, after the the party seeking the rescission.
alienation, in the rights of creditors whose credits - In addition to these presumptions, the design to
were prior to the alienation. defraud creditors may be proved in any other manner
- test of fraud: whether the conveyance was a bona recognized by the law of evidence.
fide transaction or a trick and contrivance to defeat - these presumption does not apply where the
creditors, or whether it conserves to the debtor a alienation of property was made before the judgment
special right. against the transferor was rendered.
4. Things Under Litigation. Those contracts which refer - to raise the presumption of fraud in case of
to things under litigation if they have been entered attachment, it is enough that it be issued. Any
into by the defendant without the knowledge and alienation after such issuance of an attachment, even
approval of the litigants or of competent judicial if made before service or execution of such
authority; attachment, will be presumed fraudulent.
5. By Provision of Law. All other contracts specially - presumption of fraud may be rebutted by satisfactory
declared by law to be subject to rescission. (Art. 1381) and convincing evidence (good faith and valuable
- rescission under Art. 1381 vs rescission under Art. 1191: consideration)
1. Rescission under Art. 1191 is a remedy for breach of
obligations, while rescission under Art. 1381 is a
remedy for the economic injury caused by a contract.
a.3. when available debtor, can no longer be held liable, unless the debtor
Art. 1385 and such subsequent transferee had connived to make
- rescission creates the obligation to return the things the first transferee as a mere innocent intermediary in
which were the object of the contract, together with which case the second transferee would still be liable
their fruits, and the price with its interest - if the first transferee, however, acted in bad faith, and
- it can be carried out only when he who demands then he alienates the property to another, the
rescission can return whatever he may be obliged to rescissible character of the second alienation depends
restore upon how the subsequent transferee acquired the
- this applies to contracts which are rescissible due to thing
lesion suffered by the ward or the absentee. - if the second transferee acted in good faith, the
- rescission shall not take place when the things which transfer to him cannot be rescinded, and since the
are the object of the contract are legally in the property cannot be returned, the first transferee will
possession of third persons who did not act in bad faith have to indemnify for damages
- in case of a fraudulent transfer by the debtor of his - but if the subsequent transferee also acts in bad
property: faith, he can be required to return the property
[Link] the transferee acquired the property - the first transferee cannot be held liable for
gratuitously, he is obliged to surrender it regardless damages when such return is possible
of his good faith or bad faith - but if the property cannot be returned, the
2. if the transferee acquired the property onerously transferees shall be successively liable for damages
(with consideration), he is obliged to surrender it - same rule applies where the subsequent
only if he acted in bad faith. transferee, although acting in good faith, received
- the only possible application of the rule that the party the property gratuitously.
seeking rescission must offer to restore that which he - in order that there be bad faith on the part of the
has received from the other is in contracts executed by transferee, it is not necessary that he should have
guardians or administrators under Nos. 1 and 2, Art. connived with the transferor to defraud the latter’s
1381. creditors.
- SC, however, has applied the rule to cases of mutual - it is enough that the transferee knows of the
dissent and of rescission of reciprocal obligations intention of the transferor to defraud creditors.
under Art. 1191 - the court should consider the relations between the
- the “third person” under the present article includes parties, the conditions of the sale, and other
not only one who is not a party to the rescissible circumstances from which knowledge of the
contract, but also one who is a party thereto. transferee may be inferred.
- when the contract cannot be rescinded, because the a.4. prescription
thing has been acquired in good faith by a third person, Art. 1389
the party who caused the loss shall be liable for - The action to claim rescission must be commenced
damages. within four years.
Art. 1388 - For persons under guardianship and for absentees, the
- Whoever acquires in bad faith the things alienated in period of four years shall not begin until the termination
fraud of creditors, shall indemnify the latter for damages of the farmer's incapacity, or until the domicile of the
suffered by them on account of the alienation, latter is known.
whenever, due to any cause, it should be impossible for - a minor who is a party to a contract of sale must bring
him to return them. the action for rescission within four years after
- If there are two or more alienations, the first acquirer attaining the age of majority because under the
shall be liable first, and so on successively. present article, the claim for rescission prescribes in
- the creditor can have an action against subsequent four years from removal of one’s incapacity.
transferees only when an action lies against the first
transferee.
- if the first transferee acquired the thing in good faith,
he is not liable; in such case, the thing is considered to
have definitely left the patrimony of the debtor and
beyond the reach of the creditor, under the second
paragraph of Art. 1385
- hence, the subsequent transferee, even if he knows
that the first transfer was fraudulent on the part of the
b. Voidable contracts as a defense against performance. This is based on
- they are existent, valid, and binding although they can be the principle that he who comes to court must come
annulled because of want of capacity or vitiated consent of with clean hands.
one of the parties. Art. 1402
b.1. nature - as long as one of the contracting parties does not
Art. 1390 restore what I virtue of the decree of annulment he is
- the following contracts are voidable or annullable, even bound to return, the other cannot be compelled to
though there may have been no damage to the comply with what is incumbent upon him.
contracting parties:
1. those where on of the parties is incapable of giving b.3. vitiated consent
consent to a contract Art. 1328
2. those where the consent is vitiated by mistake, - contracts entered into during a lucid interval are valid.
violence, intimidation, undue influence or fraud. contracts agreed to in a state of drunkenness or hypnotic
- these contracts are binding, unless there are annulled spell are voidable.
by a proper action in court. - the presumption of insanity and mental incapacity in
- they are susceptible of ratification. a person under guardianship for mental derangement
- rescission vs annulment is only prima facie and may be rebutted by evidence.
1. nullity declares the inefficacy which the contract Art. 1330
already carries in itself, while rescission merely - a contract where consent is given through mistake,
produces that inefficacy, which did not exist essentially violence, intimidation, undue influence, or fraud is
in the contract voidable.
2. nullity, to be cured, requires an act of ratification, - the requisites of consent are:
while rescission, to be ineffective, needs no ratification 1. it should be intelligent, or with an exact notion of
3. in nullity, the direct influence of the public interest the matter to which it refers
is noted, while in rescission private interest alone 2. it should be free
governs 3. it should be spontaneous.
4. nullity is based on a vice of the contract which - the defect must be established by full, clear, and
invalidates it, while rescission is compatible with the convincing evidence
perfect validity of the contract i. state of drunkenness
5. nullity is a sanction, while rescission is a remedy, the Art. 1328
law predominating in the former, and equity in the - contracts agreed to in a state of drunkenness are
latter voidable.
6. while nullity can be demanded only by the parties to - a person may take liquor and still retain his
the contract, rescission may be demanded even by mental faculties. The use of intoxicants does not
third parties affected by it necessarily mean a complete loss of understanding
b.2. parties - but a person, through a superabundance of
Art. 1397 alcoholic drinks or the excessive use of drugs, may
- the action for the annulment of contracts may be become so mentally obscured that he is, for the
instituted by all who are thereby obliged principally or time being, comparable to an insane person in lack
subsidiarily of understanding.
- persons who are capable cannot allege the incapacity - it is the result of the use of alcohol or drugs upon
of those with whom they contracted the condition of the mind which determines
- nor can those who exerted intimidation, violence, or whether the user has capacity to contract at a
undue influence, or employed fraud, or caused mistakes given moment
base their action upon these flaws of the contract ii. during a hypnotic spell
- requisites to confer the capacity for the exercise of the Art. 1328
action for annulment of contracts: - utter want of understanding is an element
1. the plaintiff must have an interest in the contract iii. mistake
- a person who is not principally or subsidiarily bound Art. 1330
cannot attack the validity of the contract - a contract where consent is given through mistake
2. the victim and not the party responsible for the is voidable.
defect is the person who must assert the same
- he who has capacity to contract may not invoke the
incapacity of the party with whom he has contracted
Art. 1331 - the article creates a presumption of mistake and
- in order that mistake may invalidate consent, it fraud, upon a showing that:
should refer to: 1. one of the parties is unable to read, or
1. The substance of the thing which is the object of 2. the contract is in a language not understood
the contract by him.
2. Those conditions which have principally moved - If these circumstances are shown, the burden
one or both parties to enter into the contract. shifts to the other party (who seeks to enforce
- Mistake as to the identity or qualifications of the contract) to rebut the presumption of
one of the parties will vitiate consent only when mistake and fraud (by showing that the
such identity or qualifications have been the contract was fully explained to the
principal cause of the contract. disadvantaged party and was freely consented
- Identity or qualifications can usually become to)
material in obligations to do (e.g., to perform - the obligation to show that the terms of the
in a concert or paint a portrait). contract had been fully explained to the party who
- A simple mistake of account shall give rise to its is unable to read or understand the language of the
correction. contract, when fraud or mistake is alleged,
- This refers to error in mathematical devolves on the party seeking to enforce it
computation. The amount intended will - but if the illiterate party is the one seeking to
govern. enforce the contract, he need not prove that the
- The concept of error in Art. 1331 includes both: contracts was fully explained to him.
1. ignorance, which is the absence of knowledge - If a party signed a contract without knowing what
with respect to a thing it was, there is no consent, and the contract is void.
2. mistake properly speaking, which is a wrong Art. 1333
conception about said thing, or a belief in the - There is no mistake if the party alleging it knew the
existence of some circumstance, fact, or event, doubt, contingency or risk affecting the object of the
which in reality does not exist. contract.
- In both cases, there is a lack of full and correct - To invalidate consent, the error must be real and
knowledge about the thing not one that could have been avoided by the party
- Examples of mistake proper: alleging it. An error so patent and obvious that
1. sale of a parcel of land which the seller nobody could have made it, or one which could
mistakenly thought he owned have been avoided by ordinary prudence, cannot
2. sale a parcel of land which the seller thought be invoked by the one who made it in order to
and represented to be 30 hectares, but turned annul his contract
out to be only 18 hectares Art. 1334
- The error must be the. causal, not merely - Mutual error as to the legal effect of an agreement
incidental, factor that induced the complaining party when the real purpose of the parties is frustrated,
to enter into the contract. may vitiate consent.
- Error as to quality (a DVD movie which · turned - general rule: mistake of law, or misappreciation
out to be boring) or as to value (a jewelry which of the legal import of the contract, will not vitiate
turned out to be overpriced) is generally merely consent.
incidental. - exception, but the following requisites must be
- Mere error as to designation will not vitiate present:
consent, as long as the intended object is clear. 1. the error is mutual
- Thus, a sale of a particular parcel of land may be 2. it refers to the legal effect of the agreement
considered valid even if there is a mistake in the 3. the real purpose of the parties is frustrated.
designation of its lot number or TCT number. The - the article may encompass mistake as to the
remedy here is reformation of instrument. nature of the contract.
Art. 1332 - thus, if A promises to lend B a particular thing,
- When one of the parties is unable to read, or if the and B agrees in the belief that it is donated to
contract is in a language not understood by him, and him, there is no contract.
mistake or fraud is alleged, the person enforcing the iv. violence
contract must show that the terms thereof have Art. 1330
been fully explained to the former. - a contract where consent is given through violence
is voidable.
 Art. 1335 force or intimidation to such an extent that he
- there is violence when in order to wrest consent, becomes a mere automaton and acts
serious or irresistible force is employed. mechanically only.
- requisites of violence: - A high level of education usually entails that a
1. the physical force must be irresistible, or of such person is less susceptible to intimidation.
a degree that the victim has no other course, under Art. 1336
the circumstances, but to submit - Intimidation shall annul the obligation, although it
2. such force is the determining cause in giving the may have been employed by a third person who did
consent to the contract not take part in the contract
Art. 1336 Violence and intimidation distinguished
- Violence shall annul the obligation, although it may 1. violence refers to physical force or compulsion,
have been employed by a third person who did not while intimidation refers to moral force or
take part in the contract. compulsion.
v. intimidation 2. violence is external and generally serves to
Art. 1330 prevent an act from being done, while intimidation is
- a contract where consent is given through internal, operating upon the will, and induces the
intimidation is voidable performance of an act. The latter influences the
Art. 1335 mind to choose between two evils, between the
- there is intimidation when one of the contracting contract and the imminent injury; it influences the
parties is compelled by a reasonable and well- expression of the will, inhibiting the true intent and
grounded fear of an imminent and grave evil upon making it manifest something apparently as that of
his person or property, or upon the person or the person who consents.
property of his spouse, descendants or ascendants, vi. undue influence
to give his consent Art. 1330
- requisites of intimidation: - a contract where consent is given through undue
1. The intimidation must be the determining cause influence is voidable
of the contract, or must have caused the consent Art. 1337
to be given - there is undue influence when a person takes
2. The threatened act be unjust or unlawful improper advantage of his power over the will of
- A threat to enforce one's claim through another, depriving the latter of a reasonable
competent authority, if the claim is just or legal, freedom of choice.
does not vitiate consent. - Undue influence is any means employed upon a
- There is nothing unlawful in a threat to sue as party which, under the circumstances, he could not
a means to enforce a claim, even if a claim well resist, and which controlled Iris volition and
proves to be unfounded, as long as the induced him to give his consent to the contract,
claimant believes it was his right to do so which otherwise he would not have entered into.
3. The threat must be real and serious, there being It must destroy the free agency of a party and
an evident disproportion between the evil and the interfere with the· exercise of that independent
resistance which all men can offer, leading to the discretion which is necessary for determining the
choice of the contract as the lesser evil advantages or disadvantages of a proposed
4. The threat produces a reasonable and well- contract
grounded fear from the fact that the person from - The following circumstances shall be considered:
whom it comes has the necessary means or ability 1. The confidential, family, spiritual and other
to inflict the threatened injury. relations between the parties, or
- to determine the degree of intimidation, the age, 2. The fact that the person alleged to have been
sex and condition of the person shall be borne in unduly influenced was suffering from mental
mind. weakness or was ignorant or in financial distress.
- Mere reluctance or hesitation in giving consent - a contract of adhesion is one wherein almost all of
does not vitiate it. the provisions are drafted by one party. The
- To vitiate consent, it must be shown that the participation of the other party is limited to affixing
party acted against his will under a pressure he his signature or his 'adhesion' to the contract
cannot resist; or that his sense, judgment, and - Any ambiguity, obscurity or doubt in a contract of
his will rebel and he refuses absolutely to act as adhesion is construed or resolved strictly against
requested, but is nevertheless overcome by the party who prepared it. The purpose of this is to
 protect a party who is disadvantaged because of - when two persons constitute one party of the
ignorance, indigence, mental weakness, tender contract with respect to another, the deceit
age, and other similar handicap. (Art. 24) exercised by one of them upon his co-party is not
- In some exceptional cases, the court may even set a cause for the annulment of the contract
aside prejudicial stipulations in an adhesion - when both parties use fraud reciprocally, neither
contract (such as a clause on an inconvenient one has an action against the other; the fraud of
venue). one compensates that of the other, and neither
- A typical example is transportation tickets, party can ask for the annulment of the contract.
which are usually accepted by passengers or the - incidental fraud only obliges the person employing
riding public without paying much attention, it to pay damages
particularly when the available common carriers vii.a. active fraud
serving a given area are few Art. 1338
- contracts of adhesion are not invalid per se and - there is fraud when, through insidious words or
not strictly against the law; they are as binding as machinations of one of the contracting parties, the
ordinary contracts. This is particularly so in other is induced to enter into a contract which,
contracts entered into ·by educated persons or by without them; he would not have agreed to.
seasoned businessmen, since they are presumed - "Insidious words or machinations" include false
to have acted with due care and to have signed the promises, the exaggeration of hopes or benefits,
contracts with full knowledge of its import. The the abuse of confidence, the use of pretended
court may also consider the nature of the names, qualities, or powers, and the thousand
transaction and the amount of money involved; other forms of deceit, by which one may be
major transactions involving huge sums of money misled
are naturally deemed to have been entered only - The fraud under Art. 1338 which is deemed a
with care, deliberation and diligent study vice of consent refers to that which is employed
vii. fraud prior or simultaneous to the creation of the
- two kinds of fraud: contract.
1. dolo causante or causal fraud - This should be distinguished from fraud under
- its effects are the nullity of the contract and Art. 1171, which is fraud in the fulfillment of a
indemnification of damages contract or obligation already existing. Fraud
2. dolo incidente or incidental fraud under Art. 1171 is bad faith in the performance
- does not annul the contract but obliges the of an obligation or a conscious and intentional
person employing it to pay damages design to evade the normal fulfillment of
Art. 1330 existing obligations
- a contract where consent is given through fraud is - Good faith is presumed, and allegations of fraud
voidable must be proved by clear and convincing
Art. 1344 evidence.
- in order that fraud may make a contract voidable, it - requisites of fraud:
should be serious and should not have been 1. it must have been employed by one
employed by both contracting parties contracting party upon the other (Art. 1342 and
- the fraud is serious when it is sufficient to 1344)
impress, or to lean an ordinarily prudent person to 2. it must have induced the other party to enter
error into the contract (Art. 1338)
- exaggerated claims as to the good qualities of a 3. it must have been serious (Art. 1344)
thing will not usually deceive the average person; 4. it must have resulted in damage or injury to
but to give the object a false appearance may the party seeking annulment
mislead an ordinary person - the misrepresentation constituting the dolo
- the degree of instruction, the experience, and causante must be alleged and proved, otherwise
the profession or occupation of the party alleging the contract cannot be annulled on this ground.
the fraud should be important factors in Art. 1340
determining its existence - the usual exaggeration in trade, when the other
- the fraud must be the determining cause of the party had an opportunity to know the facts, are not
contract. The fraud must be dolo causante or in themselves fraudulent.
causal fraud - the article refers to tolerated fraud
- lawful misrepresentation (dolus bonus)
 - practice has come to tolerate such false considered as an accomplice to the fraud, and
affirmations the contract becomes voidable
- they are tolerated so long as they do not go to - two reasons to justify the difference between
the extent of malice or bad faith, such as fraud and intimidation when employed by a third
changing the appearance of the thing by false person:
devices, and of preventing all verification or 1. the party has nothing to do with fraud by a
discovery of the truth by the other party third person and cannot be blamed for it
- where the means of knowledge are at hand and 2. intimidation can be more easily resisted that
equally available to both parties, one will not be fraud
heard to say that he has been deceived. Art. 1343
- The law allows considerable latitude to seller's - misrepresentation made in good faith is not
statements or dealer's talk; it is natural for the fraudulent but may constitute error
seller to exaggerate the value, qualities and vii.b. passive fraud
characteristics of his products. The buyer is Art. 1332
expected to make the proper inquiries and not to - when one of the parties is unable to read, or if the
simply rely on or accept the seller's assertions at contract is in a language not understood by him,
face value and mistake or fraud is alleged, the person
- However, there may be fraud if the seller makes enforcing the contract must show that the terms
false statements of fact or gives his products thereof have been fully explained to the former
false appearances which are designed to - the article creates a presumption of mistake and
mislead. fraud, upon a showing that:
- Also, Art. 110 of the Consumer Act (RA 7394) 1. one of the parties is unable to read, or
prohibits "false, deceptive or misleading 2. the contract is in a language not understood
advertisement" to induce the purchase of by him.
consumer products or services - If these circumstances are shown, the burden
Art. 1341 shifts to the other party (who seeks to enforce
- a mere expression of an opinion does not signify the contract) to rebut the presumption of
fraud, unless made by an expert and the other mistake and fraud (by showing that the
party has relied on the former’s special knowledge contract was fully explained to the
- an opinion of an expert is like a statement of disadvantaged party and was freely consented
fact, and if false, may be considered a fraud to)
giving rise to annulment. - the obligation to show that the terms of the
- when the expert, however, was employed by contract had been fully explained to the party who
the party who was misled, he cannot ask for is unable to read or understand the language of the
annulment, because he is chargeable with the contract, when fraud or mistake is alleged,
acts and declarations of his employee devolves on the party seeking to enforce it
Art. 1342 - but if the illiterate party is the one seeking to
- misrepresentation by a third person does not enforce the contract, he need not prove that the
vitiate consent, unless such misrepresentation has contracts was fully explained to him.
created substantial mistake and the same is - If a party signed a contract without knowing what
mutual it was, there is no consent, and the contract is void.
- general rule: fraud employed by a third person Art. 1339
does not vitiate consent and cause the nullity of - failure to disclose facts, when there is a duty to
a contract; it merely gives rise to an action for reveal them, as when the parties are bound by
damages by the party injured against such third confidential relations, constitutes fraud
person - the silence or concealment, by itself, does not
- there is no reason for making one of the constitute fraud, unless there is a special duty to
parties suffer the consequences of the act of a disclose certain facts, or unless according to
third person in whom the other contracting good faith and the usages of commerce the
party may have reposed an imprudent communication should be made
confidence. - the innocent non-disclosure of a fact does not
- but if one of the parties is in collusion with the affect the formation of the contract or operate
third person, or knows of the fraud by the third to discharge the parties from their agreement.
person, and he is benefited thereby, he may be
 - caveat emptor is the principle that the buyer - there is a tacit ratification if, with knowledge of the
alone is responsible for checking the quality and reason which renders the contract voidable and such
suitability of goods before a purchase is made. reason having ceased, the person who has a right to
b.4. ratification invoke it should execute an act which necessarily implies
Art. 1392 an intention to waive the right
- ratification extinguishes the action to annul a voidable - implied ratification may take various forms – like
contract silence or acquiescence, acts showing approval or
- confirmation vs ratification adoption of the act, or acceptance and retention of
- confirmation is the act by which a person, entitled benefits flowing therefrom
to bring an action for annulment, with knowledge of Art. 1394
the cause of annulment and after it has ceased to - ratification may be effected by the guardian of the
exist, validates the contract either expressly or incapacitated person
impliedly; while ratification is the act of approving a - the right to ratify pertains to the incapacitated
contract entered into by another without the person; hence, during the existence of incapacity, it
authorization of the person in whose name it was may be exercised by the guardian for him
entered into, or beyond the scope of the authority of Art. 1395
the former - ratification does not require the conformity of the
- in other words, confirmation is properly applicable contracting party who has no right to bring the action for
only to annullable contracts, while ratification annulment.
applies to unenforceable contracts or contracts Art. 1396
where consent is totally absent - ratification cleanses the contract from all its defects
- our Code uses ratification even for the situation in from the moment it was constituted
which confirmation is proper b.5. effect of loss of the thing due
- ratification is that act or means by which efficacy is Art. 1400
given to a contract or an obligation which suffers from a - whenever the person obliged by the decree of
vice of curable nullity. annulment to return the thing cannot do so because it
- ratification means that a person knowingly and has been lost through his fault, he shall return the fruits
voluntarily adopts or gives sanction to an unauthorized received and the value of the thing at the time of the
or defective act, which would otherwise not be binding loss, with interest from the same date
on him Art. 1401
- acknowledgement vs ratification - as long as one of the contracting parties des not restore
- ratification cures a defect of nullity, while what in virtue of the decree of annulment he is bound to
acknowledgement remedies deficiencies of proof return, the other cannot be compelled to comply with
- requisites of ratification what is incumbent upon him.
1. that the contract is a voidable or annullable contract, Restatement of the rules in Art. 1400 and 1401:
or one in which the consent of one party is defective, - in case the thing which is the object of the contract has
either because of lack of capacity to contract or been lost (regardless of the cause of voidability of the
because of error, fraud, violence, intimidation, or contract - whether due to incapacity or vice of consent),
undue influence the following rules apply:
2. that the ratification is made with knowledge of the 1. if loss is through the fraud or fault of the plaintiff (the
cause for nullity party who has the right to institute the action) – the
3. that at the time the ratification is made, the cause of action for annulment is barred
nullity has already ceased to exist 2. if loss is through the fraud or fault of the defendant
- the right to ratify is transmitted to the heirs of the party – the action is not barred; the defendant must pay the
entitled to such right value of the thing at the time of the loss (with interest
- examples of ratification: from the same date) as well as the fruits received.
1. acceptance and retention of benefits under the 3. if loss is not due to the fraud or fault of any party
voidable contract (such as by fortuitous event) – the action is not barred;
2. use of the proceeds of the voidable contract restitution may still be effected by paying the value of
3. introduction by the seller of the buyer as the new the thing at the time of loss, but without interest (since
owner of the property the payer was not at fault).
Art. 1393
- ratification may be effected expressly or tacitly.
b.6. effect of annulment the damages occasioned to him by its restitution,
Art. 1398 – General Rule such as injuries caused by its removal
- an obligation having been annulled, the contracting Art. 1399 – Exception
parties shall restore to each other the things which have - when the defect of the contract consists in the
been the subject matter of the contract, with their fruits, incapacity of one of the parties, the incapacitated person
and the price with its interest, except in cases provided is not obliged to make any restitution except insofar as
by law he has been benefited by the thing or price received by
- in obligations to render service, the value thereof shall him.
be the basis for damages - a person entering into a contract must see to it that
- in general, the effect of annulment of the contract is the other party has sufficient capacity to bind himself
to wipe it out of existence, and to restore the parties, - the profit or benefit received by the incapacitated
insofar as legally and equitably possible, to their person, which obliges him to make restitution, is not
original situation before the contract was entered into. necessarily a material and permanent increase in
- if there has been no performance by either party, the fortune, but any prudent and beneficial use by the
contract simply ceases to have any force and effect incapacitated of the thing he received, for his
- but if one or both of the parties have already necessities, social position, or discharge of duties to
performed, each party must return to the other others
whatever he may have received by reason of the - presumed that there is no benefit or profit to the
contract, unless there are fundamental reasons incapacitated person
recognized by law which will prevent such restitution. - mere delivery of the thing to the incapacitated person
MUTUAL RESTITUTION! is not the benefit required by law
- the principle of unjust enrichment applies here. - however, where the thing received by the
- thus, if a lease is annulled, the lessee cannot incapacitated party is still existing in his patrimony at
demand the return of past rentals which correspond the time the incapacity ceases, he will be deemed to
to the period that he was in possession of the have benefited thereby.
property - ordinarily, the party who had capacity would be
- the article makes no qualification with respect to the obliged to make complete restitution. An exception,
duty of restoring fruits and interests. however, is provided in Art. 1427
- the article can be applied without qualification only - when a minor between eighteen and twenty-one
when the cause of nullity does not involve an illicit years of age, who has entered into a contract
act, such as error and incapacity unknown to the without the consent of the parent or guardian,
other party voluntarily pays a sum of money or delivers a
- but when the cause of nullity is illicit, such as fraud, fungible thing in fulfillment of the obligation, there
violence, intimidation, or undue influence, the party shall be no right to recover the same from the
who employed those means must be considered as a obligee who has spent or consumed it in good faith.
possessor in bad faith, and must be obliged to b.7. prescription
restore not only the fruits received but also those Art. 1391
which might have been received - the action for annulment shall be brought within four years
- on the other hand, the innocent party must be - the period shall begin:
deemed a possessor in good faith and should not 1. in cases of intimidation, violence or undue influence –
be required to return fruits or pay interests. from the time the defect of the consent ceases
2. In case of mistake or fraud – from the time of the
- damages that may be awarded:
discovery of the same
1. the expenses incurred in the execution of the
- discovery commences from the date of the execution
contract
of the contract or, at the very least, from the date of
2. reasonable disbursements made by the injured
registration thereof with the Register of Deeds, as
party in connection with the contract after its registration is constructive notice to the world
execution, such as for preparations to carry out the 3. in case of contracts entered into by minors or other
contract incapacitated persons – from the time the guardianship
3. the damages suffered by the thing which must be ceases.
returned to the plaintiff, when imputable to the - extinctive prescription applies, not only to the action for
defendant annulment, but also to the defense of nullity.
4. the losses suffered by the plaintiff from the - prescription does not apply to third persons
possession of the thing because of its qualities, and