Chapter 4 Reformation of Instruments

Reformation is remedy based on equity allowing the parties to reform or correct the
written instrument so that the same could be reflective or express what was truly
intended by the parties.

Again, please bear in mind that contracts are valid IN WHATEVER FORM they may
have been entered into following the principle on consensuality of contracts which only
requires that the parties give consent (definite offer--->perfected contract<---absolute
acceptance).

However, should the parties desire to reduce their agreement in written form which is
always best to do taking into account the limits of human memory, there are instances
when the written contract itself is not reflective of what was really agreed upon by the
parties.

As a rule, when the parties reduced their agreement in written form or in the form of an
instrument, the stipulations contained therein cannot be changed and neither can the
parties or even the court, be allowed to insert new stipulations or take away existing
stipulations. They are, in short, bound by the four corners of the written instrument.

This is what we call the Parol Evidence Rule which provides that once an agreement is
in written form and has been signed by the parties, it cannot be changed not even by
oral agreement except only in cases of fraud or serious mistake committed.

Hence, reducing the agreement in written form is very important. Probably the reason
why some lawyers charge much for drafting of contracts and agreements because after
all, the contract/agreement shall constitute as the "law" between the parties as far as
their transaction is concerned.

However, there are instances when the written instrument does not show or reflect the
true intent of the parties, either by way of error or mistake.

That is why previously we learned that we have under the law what we call simulation of
contracts - absolute and relative.

By way of recall, in absolute simulation of contracts, there is total absence of consent as

the parties never had any intention to be bound by any contract. The parties only give a
semblance of a contract but absence of intent and consent which renders the contract
void and/or inexistent.

The second one is relatively simulated contracts - these are the contracts which are
subject to reformation. In these types of contracts, the parties gave consent, there was
an agreement, there was intent to be bound. But the problem however, is that when the
agreement entered into by the parties was reduced in written form, the written
instrument is not reflective of their agreement - hence the need to reform the instrument.
Take note that what is being reformed here is only the instrument in writing, and not the
agreement itself.

In lay man's terms, say we have G and J, they have both been very close to one
another for several years. so close that people around them think that they are "in a
relationship" but based on their mutual agreement, they are only the best of friends.
One day they decided to discuss their "relationship status" and it was then that G
brought up the question "what is really their status?" because according to G, it feels
like they are BF-GF, it looks like they are BF-GF, and they act like they are BF-GF. So
to clarify this, they reform everything in order to stick to what they truly intended which
is, that they are only "the best of friends" (sorry G).
Article 1359 enumerates the requisites when the parties may avail of reformation as a
remedy and they are:

- There must be a valid contract with all essential requisites present

- true intent of the parties not reflected in the written instrument which is the evidence of
the agreement
- failure of instrument to disclose true intent was due either to mistake, fraud, inequitable
conduct or accident

Emphasis should be placed on the fact that in order for reformation to be availed of,
there must be contract, a valid one, which can be reformed. Hence, all three requisites
for a contract must be present, although in certain in certain cases, there may have
been a mistake as to the object or the cause or consideration.

For instance, A and B entered into a sale of a box of face mask for the agreed price of
P200. When their agreement was reduced in writing, the instrument states that the item
for sale was one face mask for the price of Php200. clearly, the written stipulation does
not conform to what was really agreed upon since the instrument shows a mistake as to
the exact number of items covered by the sale. This calls for reformation of the
instrument so that what A and B really agreed upon i.e. sale of one box of face masks
for price of Php200 will be reflected in the written instrument.

Here it should be noted that there was an agreement, there was an offer and the offer
was accepted in an absolute manner - hence the presence of consent and whenever
consent is manifested, it leads to the perfection of the contract between A and B. But
since the written instrument failed to reflect their real agreement, then the instrument,
and not the agreement, will be reformed.

Compare that to the case of X and Y whereby X offered for sale his Covid 19 test kit for
Php50,000. Thinking that it was only for Php15,000, Y agreed. Here, it would appear
that Y was mistaken as to the exact price/consideration and this mistake vitiates his
consent. With Y's consent being vitiated by mistake (Php50,000 instead of what he
thought to be only Php15,000), the remedy now is not reformation but annulment of the
contract on the ground of mistake.
Article 1360 - just read it, it is self-explanatory

Article 1361 refers to mistake in writing causing the failure of the instrument to disclose
true agreement, the remedy for this is reformation.

I offered for sale my house located at Block 14, Lot 31 which you accepted. But when
the Deed of Sale was drafted, the instrument states that I am selling Block 14, Lot 13,
which refers to a wrong/different house. this can be remedied through reformation.

Article 1362 tells us that as between two parties to the contract, one was mistaken
while the other one acted fraudulently, then it is the party who was mistaken who can
ask for reformation.

Article 1364 gives us usual causes for the errors which call for reformation.

usually, when the agreement between the parties are drafted and reduced in writing,
certain errors may arise due to:

- ignorance of the parties or the person drafting the instrument

- lack of skill
- bad faith of the person drafting the instrument and not bad faith on the part of either
party
Article 1365 is one classic example when reformation may be availed of.

It speaks of an instance when the parties truly intended to enter into a contract of loan
secured by a mortgage but when the instrument was prepared, the document was in the
form of a sale with right to repurchase also known as Deed of Sale with Pacto de Retro
Venta.

No need to dwell much on loan and mortgage as a contract. What is a Sale with Pacto
de Retro Venta? It is actually similar to an ordinary sale but with a stipulation allowing
the seller to buy back the thing from the buyer within a determined period of time. Say
for example A is the owner of a house and he decides to sell it to B but with a condition
that within a period of two years, A can buy back the house either for the same price or
a higher price based on their agreement (freedom to stipulate). After execution of the
Sale a Retro Venta, B becomes the owner but at anytime within the two year period, A
could always buy back the property at the agreed "buy back" price.

Now applying Article 1364, say we have D and C. D borrowed money from C in the
amount of Php1Million payable after 1 year. this is an ordinary loan. But to assure
payment, D mortgage his house in favor of C so that in case of non-payment of the
loan, C could foreclose the mortgage over the house of D. So here, it is clear that the
agreement between D and C is that of loan secure by a mortgage.

When they reduced their agreement in writing, D and C made it appear that their
contract is that of a sale whereby D sold his house to C for the price of Php1Million
given to him not as purchase price but actually by way of loan, and that D can always
"buy back" the house from C within 1 year simply by paying back or returning
Php1Million to C.

Similar import but why do parties resort to the second type of contract (sale with a retro)

Notice that in loan with mortgage, first, C has to register the mortgage --> cost/expenses
C then has to demand payment --> cost/expenses
C then institutes foreclosure --> cost/expenses
register certificate of sale after auction --> cost/expenses
consolidate transfer ownership after 1 year from auction --> cost/expenses
file petition for issuance of writ of possession so he could take possession -->
cost/expenses

in the first type of contract (loan with mortgage) you will readily notice that it takes a
whole lot in order for C the creditor to be able to collect from D, not to mention the time
spent before he could secure relief. Remember that D could always file a civil action to
question the mortgage, question the foreclosure and even oppose the petition for
issuance of writ of possession and although these are futile exercises on the part of D,
the point is it will unnecessarily delay C's exercise of his rights.

Now if D and C opts to execute the second type of contract this is the scenario:

D --> Seller
C--> Buyer with a right to repurchase.

Simple. Right then and there, ownership over the property transferred to C and even if
he is unpaid, he is already protected because the property used as collateral is already
in his name so there is now no more need to institute foreclosure proceedings.

As between these two contracts, it would therefore appear that the second one (sale
with right to repurchase, is more advantageous to the creditor)
But then again, since it is clear that what they truly intended was a mere contract of loan
with mortgage while the instrument was a sale with right to repurchase, either D or C
could always go to Court and ask for reformation.

Article 1366 enumerates acts and contracts not subject to reformation.

They include simple donations inter vivos which are unconditional, wills and agreements
which are void.

First, unconditional donations inter vivos, these are donations which take effect during
the lifetime of the donor. valid and binding immediately, subject of course to compliance
with all other requirements for valid donations such as requirement of acceptance by the
donee and the form to be followed for donations if applicable. Should the donor be
mistaken or the instrument contain any mistake contrary to the intent of the donor, the
remedy is to revoke the donation and prepare a new one which discloses and reveals
true intent of the donor.

Wills are not contracts. By definition, a will is an act by which a person is allowed by
law, to control how his estate will be distributed after he passes away. Surely, a
deceased individual has absolutely no control how his estate will be distributed. But this
he may still do if and only if he leaves behind a valid last will and testament where he
could express his last desires and wishes, name his heirs, indicate the extent of his
estate and direct how his estate will be divided among his heirs.

Wills cannot be reformed. Wills are ambulatory. the only become final and effective
once the testator dies because for as long as the testator is still alive and well, he could
revoke his will and prepare a new one any time.

In the case of will, if the will itself contains a mistake or does not reflect the true desires
and wishes of the testator, his remedy is not reformation but to revoke that will. there
are three recognized modes for revocation of will. they are: 1) revocation by operation of
law 2) revocation by execution of a new will or a codicil 3) revocation by overt acts

a will is revoked by operation of law when it is rendered ineffectual either in whole or in

part. Example, in his will, X left behind his car to his friend Y. After preparing his will but
just before he died, X however sold that same car. so when he died, the will is rendered
useless, hence, revoked.

wills could also be revoked by preparing a new will or simply by preparing a codicil
which is also known as a little will. which will supersede an old existing will.

The last is revocation by overt or physical act coupled with animus revocandi (intent to
revoke) this is done either by tearing the will or cutting, burning the will, or obliterating
the words written on the will.

Article 1367 dictates that a party to a contract is precluded from asking for reformation if
he has already initiated an action to enforce the same. This is by reason of principle on
estoppel. On the one hand, that party is claiming the contract to the be valid which is
why he is trying to enforce the contract. He can no longer claim that the written
instrument should be reformed as he is precluded from doing so.

Articles 1368 and 1369 Just read them.

 Chapter 5 Interpretation of Contracts

Contracts are no different from our statutes, even our Constitution, when it comes to
interpretation. The basic principle is and has always remained - that is, that when the
words are clear, unambiguous and not vague, then the LITERAL MEANING OF THE
WORDS shall be applied.

This principle we all have learned in one very important minor law subject which we
often disregard - Statutory Contruction, where we learned how to interpret unclear,
vague or ambiguous wordings of the law. However, the rules in Statutory Construction
mandates that it is only when there are cases of provisions of the law which are
susceptible of multiple interpretation, or when the words of a given statute or portion
thereof is unclear or when the words used in the statute appear contrary to the evident
intent of the framers/authors of the law, that we are allowed to interpret, ratiocinate, and
construe in accordance with the rules on statutory construction.

For instance, if we have a given law on a particular subject, say, the rule on fortuitous
event which you all may have mastered by now, its meaning and application is very
much evident, that we no longer need to further construe or interpret the same and as
such, we only have to use the literal meaning of the words used. If a case calls for
application of the exception rather than the general rule, then we also apply.

An instance when we usually apply rules on construction is when there appears to be

two sets of laws applicable on a given subject, one is an older law and another which is
a much later law in term of passage and effectivity. Clearly, in case of conflict between
the two, we have to interpret it to mean that the provisions of the older law which is/are
in conflict with the later law, should bow down to the provisions of the later or newer law
which will control.

There are also times when we encounter laws which appear to be vague. Laws being
passed by congress are not perfect laws - this is a known and recognized fact, and at
time, the wordings of the law as used do not convey what the framers intended, hence
the need to visit and/or revisit, the deliberations had from the committee level all the
way until the bill has passed all three readings. This is done in order to ascertain what
was really intended by congress when it came up with the piece of legislation. This is
what we have come to call the "Spirit of the Law" - the intent of its framers and authors
which gave the law its life.

Contracts are no different from statutes, when the words used in the contract, if reduced
in written form, are clear and unambiguous, then we, including the Courts, are not
supposed to interpret further. However, contracting parties, just like members of
congress, are humans, (yes humans despite having semblance of amphibians at times)
and as such, the contracts they prepare and enter into may contain certain
imperfections or ambiguities. It is then that we apply the rules on interpretation of
contracts.

Pay special attention to Article 1370 of the CC as it is the guiding principle insofar as
interpretation of contracts. The law here puts emphasis on the rule that for as long as
the terms of the contract are clear and reflect the true intent of the contracting parties,
then all we, including the courts, have to do is to apply the literal meaning which shall be
controlling.

However, in the event of conflict between the words contained in the contract and the
evident intentions of the parties, then the intent of the parties shall control. It is the
intention of the parties which gives the contract its spirit and breathes life into the
contract, hence, its primacy over what was written in words, in case of conflict.

So the question now is, how do we know and ascertain what was really intended or the
real intentions of the parties when they entered into the contract?

This is answered by Article 1371 of the CC which provides that the intentions of the
contracting parties are determined by their contemporaneous and subsequent acts or
their acts during the negotiation stage of the contract as well as their acts after the
perfection of the contract.

Say for instance we have Mr. Voidable and Mr. Cepida, they entered into an oral
contract for the lease of a commercial space. During the negotiation stage, it was
apparent that Mr. Voidable intended to use the commercial space for him to conduct his
pisonet computer business. Should the contract not contain any express stipulation as
to the exact purpose of the lease or the usage of the leased premises, then the
actuations of Mr. Voidable during the negotiation stage will be telling as to his true
intent, which is, to use the leased space for his business.

Articles 1372 up to Article 1377 provide further details on how we are supposed to
interpret contracts. They include instances when the words used admit of several or
different meanings in which case we are to adhere to the meaning of the word which
would render the entire contract effectual.

Pay special attention to Article 1377. It is provided that the interpretation, if needed or
required, of any obscure words or stipulations cannot favor the party who caused the
obscurity.

We oftentimes encounter contracts with provisions which are so miniscule and so hard
to read - those which we call fine print provisions which 90% of the time is never read
and even if read, are not understood or well comprehended. Examples of this are
contracts of insurance which contains a whole deal of fine print provisions which
provisions limit the liability of the insurance companies.

Bear in mind that Contracts of Adhesions are typical "take it or leave it" contracts
containing fine print provisions. They are frowned upon but not invalid per se since the
insured is always at liberty to reject the contract in its entirety. Should it happen that a
person enters into a contract of adhesion and the same contains fine print provisions
which includes words or stipulations which are susceptible to multiple meanings, then its
interpretation should not be in favor of the one who prepared the contract but in favor of
the other part.

Article 1378 is also quite important. It is applied when despite using all the rules in
construction or interpretation, the doubts, ambiguities still remain to be unsettled.

In case of gratuitous contracts, the rule is the contract remains valid but there must be
the least transmission of rights and interests.

If the contract is onerous, then doubts should be resolved in favor of greatest reciprocity
of interest. meaning, the most equal values must be given by both parties.

However, when the doubts now refer to the very object of the contract and the same
could not be determined, then the contract shall be null and void as if there was no
object at all to speak of. Remember that object as a requisite for contracts, must be
definite, existing at the time when the contract was perfected or at the very least one
which is capable of coming to existence. Should the object be undeterminable or if
there is a need to enter into a separate contract just to determine the exact object, the
result is that there is no object and there is, therefore no perfect contract.

THE DEFECTIVE CONTRACTS

If you notice, the Civil Code has devoted four (4) chapters to discuss the four types of
defective contracts. One might ask why is it that in the next succeeding chapters, the
law appears to have given importance to contracts which are defective when in fact the
principal aim and spirit of the law has always been for justice, and what is right and
correct to prevail. Why did the law not just concentrate on determination of valid
contracts?

Well the Civil Code from Article 1305 to Article 1379 has just did that. And in those
provisions of the law, we have learned when is it that the contract is deemed valid,
when is a contract deemed perfected, and what are the effects once the contract
becomes perfected and binding. (Again for those who might have forgotten, a contract
is perfected once consent is manifested by both parties with an offer made which is
accepted in an absolute manner. and once perfected, this contract becomes valid and
binding and has the obligatory force of law which creates rights and prestations, all of
which must be complied with in good faith for otherwise, the party who complies may
avail of any legal remedies given by law)

Having learned how to determine when a contract is deemed valid, perfected and
binding, our focus now is directed towards to four most common defective contracts
which I list down from the least defective to the most defective one:

- rescissible constracts or those valid until rescinded

- voidable contracts or those which are valid until annulled
- Unenforceable contracts or those which are valid and binding but could never be
enforced by one party against the other even through court action
- Void and inexistent contracts which are contracts considered to be non-existent and
are never sources of any obligations or rights.

Chapter 6 Rescissible Contract

Let me remind you that this chapter tackles contracts which are defective right from the
very beginning. Rescission taken up insofar as rescissible contracts are concerned are
far different from rescission which is a remedy under Article 1191 of the Civil Code.

If you can recall (of course you can) rescission is an alternative remedy given by law to
one party whenever he has complied with his prestation while the other party fails or
refuses to comply with what is incumbent upon him. This power to ask for rescission is
implied in agreements creating reciprocal obligations and available for the parties even
in case of silence in their agreement, written or otherwise.

In a sale for instance, should the Buyer already have paid the purchase price but the
Seller refuses to deliver, the Buyer has several remedies, one of which is to ask for
rescission or judicial resolution to cancel the contract all because of none compliance
on the part of the Seller. At the start, the contract between the Buyer and Seller
suffered no infirmity or defect but the problem one arose when the Buyer has complied
and the Seller refused to comply, thus allowing the Buyer to seek rescission as a
remedy.

Rescission now under Rescissible Contract is quite different because right from the very
inception when the contract was entered into, the contract is already rescissible and
defective because the contract tends to inflict LESION or economic damage to one of
the parties or a third party who may not even be a party to the rescissible contract.

So in a rescissible contract, all 3 essential requisites are present hence the contract was
perfected and binding but the effect of such contract is that is deals economic damage
or lesion to one of the parties or a third person.

So what are the basic features and characteristics of a Rescissble Contract?

- the defect lies in the injury or damage it causes one of the parties or a third
person

because of the contract, one of the parties thereto or even a 3rd person stands to
be affected by the contract, which is by the way an exception to the rule on privity of
contracts.

- before ordered rescinded, the contract is perfectly valid, binding and even
enforceable

for as long as the party or the 3rd person who suffers lesion does not succeed in
having the contract rescinded, the contract remains in force and may even be enforced
by the parties against one another.

- They are susceptible of convalidation by prescription

Can they be cured? yes rescissible contracts are curable but only by prescription,
meaning, the injured party, whether a party to the contract or a third person, has only a
fixed amount of time within which to file the action, otherwise, the action will be barred
by the statute of limitations (prescription)

- Rescissible contracts can be assailed/attacked directly or collaterally.

What is a direct attack and what is collateral attack?

A direct attack partakes the nature of an action whose primary purpose is to question or
assail validity of an act or a contract. For instance, a civil action is filed seeking to
declare a contract as illegal. the very purpose or aim of that action or attack is made
directly in asking the court to declare the contract invalid. the principal and main relief
being sought is asking to declare as invalid a certain act or contract.

It is a collateral attack is questioning the legality or validity of the act or contract is

merely a side issue or only an ancillary relief in the complaint.

Asking the rescission of a rescissible contract may be done through both direct or
collateral attack. Meaning the injured party pay either file a complaint where the sole
and only relief is to have the contract rescinded or there are other reliefs sought and
asking the rescission of the contract is only and additional relief.

- Rescissible contracts may be assailed by third person, aside from the injured
party.

As an exception to rule on privity of contracts (contracts take effect and only affect the
parties, their heirs and assigns), even a third party who has no privity in the contract
may go to court and ask for its rescission.

Example of this is accion pauliana which you are now so well versed of. If you can still
recall, should the debtor enter into fraudulent contracts the purpose of which is to
prevent his creditors from seeking relief against him or his properties, the creditor may
go to court and seek cancellation of these contracts which were intended to defraud
him. This the creditor may do so even if he is not a party or privy to the fraudulent
contracts entered into between his debtor and third persons all because of the fraud
committed which caused the creditor to suffer lesion.
What are the contracts which are rescissible?

Article 1381 enumerates the contracts considered to be rescissible from the beginning
and they are:

a.) contracts entered into by the guardian on behalf of their wards involving
property belonging to the ward and by reason of that contract, the ward suffers
economic damage by more than one-fourth of the value of the property involved.

b.) contracts entered into for and on behalf of a person declared as an absentee
which contract involves property belonging to the absentee and by reason of the
contract, the absentee suffers economic damage by more than one-fourth of the
value of the property involved.

Owing to their similarity, let's discuss this two simultaneously.

For instance, we have M, a minor, who as such, cannot take of himself or his affairs and
properties and could not, without the aid of his guardian, enter into contracts. M
however, owns a certain house and lot valued at Php10Million (he is a rich kid). G, the
guardian of M, is mandated to put the best interests of M first over anyone else's
interest.

But instead, G sold the same house and lot of M for only Php2Million. M, the minor
here suffers damage or lesion amounting to Php8Million which is more than 1/4 of the
value (1/4 of Php10Million is Php2.5Million according to my calculator). so clearly, M
suffers lesion in excess of the threshold of 1/4 of the value of the property.

Same applies when the property object of the sale belongs to an absentee and a
contract was entered into on his behalf by a person appointed by the court to take care
of his properties during his absence.

NOTE : notwithstanding the economic damage caused to either the minor or the
absentee, the contract here remains valid and cannot be rescinded if the contract was
approved by the court before the same was executed. (see Article 1386 CC)

c.) contracts undertaken in fraud of creditors when the creditor has no other
remedy under the law.

rescission is one of the subsidiary remedies which can be availed of by the creditor as a
remedy of last resort.

This can be availed of if:

there are no other remedies left to the creditor
there is showing or proof that the contract/s entered into by the debtors were for
purposes of defrauding the creditor.

Notice here that the person who suffers damage or lesion is not even a party to the
contract sought to be rescinded but due to the fraud and the damage he sustains, a
creditor is allowed to have contracts cancelled if they were entered into by the debtor
with the intent of defrauding his creditors.
d.) contracts involving things which are subject of a pending litigation entered
into by the defendant without the knowledge and approval of the litigants and the
court.

A is the owner of Lot 123. P stole the original title covering Lot 123 and by falsifying the
signature of A, P was able to transfer ownership of Lot 123 to his name. A filed a civil
action to recover the title from P. While the case was pending litigation, P sold the
property to X. Notice that if the sale between P and X remains uncancelled, if A
succeeds, it is a case of a paper judgment since there is nothing more to recover
because ownership has passed to X. Hence the economic damage. That is why A is
allowed to ask for the cancellation of the sale between P and X especially so when the
same was done without authority from the court.

on this note, what should we do if we were in the place of A after filing the civil action in
order to prevent the subsequent transfer of ownership while the case is still pending in
court? Best remedy is to ask for annotation of a lis pendens in the title so that once
registered, it will constitute as sufficient notice to the whole world that the property is
subject of a pending case and one should deal with the property with great caution
(caveat emptor)

Otherwise, without the lis pendens, the buyer could claim that he/she is a buyer for
value and in good faith and had no knowledge concerning the question on the
ownership over the property. as a buyer in good faith, he will be protected by law and
no recovery can be made against him.

e.) other contracts specially declared by law to be rescissible.

These includes Article 1382 - payments made while in a state of insolvency and
payments made when the debt was not yet due and demandable. They are considered
rescissible considering that these obligations are supposed to be retained in view of the
insolvency of the debtor and any payment to be paid should first be coursed through
court which declared the debtor to be insolvent.

In Article 1387, the law provides the presumptions of fraud. This is important
considering that one of the contracts considered by law to be rescissible are contract
undertaken in fraud of creditors. So when can we say that a certain contract or
agreement is presumed to be fraudulent?

Article 1387 answers this by providing presumptions of fraud.

If the contract is essentially gratuitous in nature such as donations or grants, it is

presumed fraudulent if the donor/grantor made such donations without reserving
sufficient properties to pay his outstanding debts contracted before the donation.

Common sense dictates that when a person is indebted, he should first pay off his
outstanding debts before donating his assets. Or at the very least, liquidate his assets in
order to pay off his unpaid debts before making gratuitous donations. Hence, a
donation made by a person without having reserved sufficient properties to pay for
debts is an indication of fraud.

Alienations or dispositions which are onerous are presumed fraudulent if such

alienations were entered into by a person after a judgment has been rendered against
him declaring him liable. The presumption is such that by making such onerous
alienations, the person is trying to prevent his assets from being subject to attachment
or execution in view of the adverse decision/judgment rendered against him by the
Court.
A sale for instance made by a debtor involving all or nearly all of his properties is a sign
of fraud the purpose of which is to frustrate the creditor from being able to run after the
judgment debtor's property by simply making it appear that the property has already
been sold.

Kindly read the case of Oria vs McMicking, 21 Phil. 243 where the Supreme Court
enumerated the so-called badges or indications of fraud which, if present, may render a
contract rescinded in view of fraud.

Article 1388 should be read together with Article 1385 2nd paragraph.

Say a person who has unpaid debts succeeds in selling or alienating his properties to
defraud his unpaid creditors, does the buyer incur any liability?

Article 1388 answers in the affirmative because under this provision, the person who
acquires the property through alienation done in fraud of creditors are considered to
have purchased the property in bad faith and as such, may either be required to return
the thing purchased or made to indemnify the creditor for damages.

This is so even if the failure of the purchaser to return the thing fraudulently sold by
debtor was lost due to a fortuitous event.

Example, D is indebted to C. C instituted a civil action to collect the debt of D and after
trial, D was declared liable. In order to prevent his car from being subject to attachment,
D sold his car to X. X here may be directed to return the car so that the same may be
subject to execution to satisfy the claims of C. If the car could not be returned by X as it
was lost even due to a fortuitous, X can still be held liable to pay for damages by way of
exception to the rule on fortuitous event.

Article 1389 provides for prescriptive period within which an action for rescission should
be filed.

As I discussed earlier, rescissible contracts are susceptible of convalidation and thus

may be cured and this is so only by way of prescription.

The prescriptive period as provided under Article 1389 is FOUR YEARS counted from?

In cases of contracts entered into on behalf of ward or absentees, four years counted
from time when incapacity (minority or absence) is terminated. For other types of
rescissible contracts, four years counted from the time the contract was entered into.

Chapter 7 Voidable Contracts

What are the features and characteristics of a voidable contract?

- Their defect lies in the fact that either one of the parties to the contract was
incapacitated to give consent or that the consent was given by one party was
obtained using any of the vices of consent (FIVMU) - in short, consent is present
but defective.

- Status of voidable contracts --> they are valid binding and enforceable until
annulled as ordered by the Court

Do they give rise to obligations? YES

Can it be the source of a right? YES
Is it enforceable? YES
- voidable contracts are susceptible of convalidation and can be cured through
ratification and prescription

- can only be attacked in a direct action and only by parties to the contract

Article 1390 enumerates contracts which are deemed voidable and they are:

1.) those where ONE of the contracting parties is incapable of giving consent;

2.) those where the consent is present but vitiated by mistake, violence, intimidation,
undue influence or fraud;

Important to note that as stated in Article 1390, the contract here is considered voidable
regardless of whether the injured party suffered any damage or not. Damage or lesion
is immaterial in voidable contracts.

Illustration:

A and B entered into a contract of sale. A at that time was suffering from insanity.
Considering A was incapable of giving consent at that time, the contract is defective and
is voidable at the instance of A, the injured party (injured not because of insanity but
because A is the party who is not in a position to give consent.)

A saw B holding an unused N95 Facemask. A offered to buy the facemask but B
refused. A grabbed B by the neck and threatened to kill B if B refused to sell it to him.
Because of this, B had no choice but to sell the mask to A. B's consent, while present
and given, was not given freely or spontaneously and instead, was vitiated, which
renders the contract voidable.

In addition to the two voidable contracts enumerated under Article 1390, remember that
the law also declares as voidable contracts entered into while in a state of drunkenness
or during a hypnotic spell because in these two types of contracts, the consent of one
party was not freely given and is defective.

Article 1391 gives us the prescriptive period within which an action for annulment of
contracts (ordinary contracts) should be filed.

Period is FOUR Years

- four years from the time intimidation, violence or undue influence ceases
- four years from discovery of fraud or mistake.
- four years counted from the time the incapacity ceases.

Articles 1392 to 1396 deal with convalidation of voidable contracts through ratification.

Ratification has the effect of extinguishing the action to annul a voidable contract.

If you may recall, if a marriage is voidable, it may be ratified by free and continuous
cohabitation of the spouses.

In ordinary contracts, the injured party here gives his consent once again by ratifying the
contract thereby cleansing it of any defect. By doing so, the injured party is renouncing
or waiving his right to institute an action for annulment of the voidable contract.
Requisites of valid ratification:
1.) contract must be voidable
2.) the one who ratifies must know the cause which renders contract voidable
3.) Cause which renders contract voidable must no longer exist
4.) ratification is made expressly or impliedly showing renunciation of action to annul
5.) ratification is done by injured party only

Article 1393 provides two types of ratification

Express Ratification - oral or written ratification

Implied Ratification - shown from the conduct of the injured party renouncing his right to
file action to annul a voidable contract

Article 1394 - if contract is voidable due to incapacity of one party, it may be ratified by
the guardian.

Article 1396 - effect of ratification is it cleanses the contract of any defect which
retroacts to the day when the contract was perfected.

Article 1397 - Who may file action for annulment of voidable contract?

- it may be filed by one who is either principally bound by the contract or subsidiarily
bound thereby.

- in cases when a contract is voidable because of incapacity of one of the parties, it is

the incapacitated party who may file annulment and not the capacitated one.

- in case a contract is voidable because consent was obtained through FIVMU, action
can only be filed by the party whose consent was obtained through FIVMU and not the
party who employed FIVMU

Article 1398 to Article 1402 - rules which apply when a voidable contract has already
been performed or complied with

Article 1398 - once annulment of a voidable contract is granted/decreed, it results to

mutual restitution, meaning, the parties must return what they received out of the
annulled contract. <--- this entails mutual restitution

Example, A forced B to sell to him B's house. Because of the force exerted by A, B
accepted and gave his consent and A then paid the purchase price. Once this contract
is ordered annulled, B has the obligation to return what he received out of the contract
and A also has to return the house delivered to him by B.

Mutual restitution does not apply if the contract involves performance of a service
because once the service is done, it cannot be restored.

Article 1399 Special rule in case of contract being voidable where one party is
incapacitated

It is provided that in the event that the contract be voidable because one of the parties
thereto is incapacitated, said party is not required to make restitution or to return what
was received out of the contract which was annulled.

In short, the general rule is that the incapacitated party is not required to make
restitution.
Exception -> unless the incapacitated party benefited from the thing or the price
received out of the voidable contract in which case he now must make restitition.

Article 1400 - When voidable contract has been annulled and the defendant who is the
guilty party cannot return what he received out of the contract, then he was the duty to
pay for its value plus fruits and interest.

Article 1401 - When a contract is voidable but the plaintiff who is the injured party
cannot return what he received as the same was lost due to his own fraud or fault, then
the right to file the action for annulment is extinguished.

Example, A was the owner of a car with plate number FFF123 while B owns a car with
plate number FFY321. B forced A to exchange cars. the agreement is clearly voidable
because A's consent was obtained by B through force. However, if A could not
anymore return the car he received from B due to A's own fault or fraud, then A loses
the right to institute an action for annullment of the contract.

In short, pursuant to Articles 1400 and 1401, in order a party to be able to file an action
for annulment, said party must not be the guilty party but instead the injured one (the
one who is incapacitated or the one whose consent was vitiated)

Further, it is clear that in order for the injured party to be able to file the action for
annulment, he must be in a position to make restitution or return what he received out of
the defective voidable contract.

Article 1402 - Restitution must be mutual and rule is that the duty of one party to
restitute or return only arises as soon as the other party is ready to restore as well what
he received out of the contract.

Chapter 8 Unenforceable Contracts

These contracts are one of a kind. They are valid, binding and perfected. There is
presence of all the essential requisites. Despite being valid and binding however,
neither of the parties can enforce the contract against each other to demand
compliance, not even through court action.

Remember that as I have previously discussed a contract has two important aspects,
1st - Validity which exists the moment all 3 essential requisites are present; and 2nd -
Enforceability, or the characteristic of the contract which provides that the prestations
arising therefrom may be enforced by one party against the other.

Bear in mind that a contract which is enforceable is valid. But not all contracts which
are valid are enforceable. Never confuse one from the other.

As early as Article 1156, we learned the concept of enforceability, and at that time, it
came in the concept of Juridical Necessity such that when the obligor fails or refuses to
fulfill his prestation, then the other may compel fulfillment through proper court action.

Now in contracts, once the contract is perfected and binding, it gives rise to prestations
which must be fulfilled. However, if the contract, although valid, is unenforceable, the
parties cannot demand fulfillment of any of the prestations arising out of the
unenforeceable contract.

Features and Characteristics of Unenforceable Contracts:

- Defect lies in the fact that although they are valid and binding, they cannot be enforced
even in courts of law because of the following reasons:

- because the contract was entered into in the name of another without prior
authority or in excess of the given authority (unauthorized)
- because the contract failed to comply with the requirements as to form for
enforceability under the Statute of Frauds
- because BOTH parties to the contract are incapacitated.

- Status of the contract is that they are perfected, valid and binding but cannot be
enforced even through court action

- Susceptible of convalidation and can be cured by ratification or in certain cases, by

failure to object to presentation of parol (oral evidence)

- cannot be attacked or assailed by 3rd persons.

What are the 3 unenforceable contracts?

1st - Unauthorized contracts (total absence of authority or act is in excess of

authority given)

try to recall Article 1317, the fundamental legal basis of the law on agency, which
provides that a person is only allowed to contract under the name of another if he has
been given prior authorization to do so or he has under the law a right to represent the
latter.

For instance, we have A, who is the owner of a parcel of land known as Lot 123. B
offered Lot 123 for sale to C who agreed to purchase the same. This sale entered into
by B with C involving the property of A cannot be binding and cannot be enforced by C
against A considering that A never gave prior authority to B for the latter to sell his
property.

Same is true in cases when there was prior authorization but the act of the agent
exceeded the powers and authority granted to him. the act performed by the agent is
likewise unenforceable against the principal.

2nd - Contracts where BOTH parties are incapacitated. Take note BOTH parties.
unlike in cases of voidable contracts where only one of the parties is
incapacitated.

Reason for this is so self-explanatory. Imagine A and B entering into a contract with
both of them being insane and not capacitated to give intelligent consent. in case of
non-fulfillment, would they be allowed to sue each other in court? The law and the
courts will leave them as they are, with no recourse against one another.

Take note, however, that in this type of unenforceable contract, in the event that one of
the parties regains legal capacity, then only one party remains incapacitated, in which
case the contract ceases to be unenforceable but is converted to a voidable contract.

3rd - Contracts which infringe the Statute of Fraud.

What is the Statute of Fraud?

 - provision of the law which aims to prevent commission of fraud by requiring
certain agreements to be in written form and signed by the parties in order for the
agreement to be enforceable.

If agreement does not comply with Statute of Fraud, is it valid?

- Yes it is valid and binding but as i said, while it may be valid, the contract may
not necessarily be enforceable. remember that contracts are valid and binding in
whatever form entered into. So if entered into orally a contract generally is valid and
binding. But as to whether or not it is enforceable, it is another story to tell since the law
requires certain agreements to be in written form not for purposes of attaining validity
but for purposes of being enforceable.

Can a contract be valid but unenforceable at the same time?

- YES again. because while all the necessary and essential requisites are
present, the contract is rendered valid and binding and perfect, but if the same contract
is required by law to be in written form and this requirement is not complied with, the
status of the contract is valid (because all requisites are present) but unenforceable
(because it fails to follow the prescribed form)

What if the form required by law is for validity of the contract?

- in such a case, the contract is now not only unenforceable but also invalid,
unperfected and not binding because by way of exception, when the law requires a form
to be followed in order that an agreement could be valid, that requirement must be
complied with, otherwise, it would render the contract/agreement void.

What is the requirement imposed under the Statute of Fraud?

- The law requires certain agreements/contracts to be contained in a note or

memorandum, in writing, and must be signed by the party against whom the contract is
being enforced. So if A is trying to enforce a contract against B, the note or
memorandum or written agreement must be signed by B in order for it to be
enforceable.

What are the agreements which must comply with the Statute of Fraud?

1.) Agreement that by its terms is not to be performed within a year from its
making

A bound himself to give B a specific car which A will perform one year from
today. If entered into orally, this contract is already valid as it is but In order that B can
enforce it against A a year later, the agreement must be in writing and signed by A.

2.) A special promise to answer for the debt, default or miscarriage of

another;

D contracted a loan from C. G agreed to be bound as guarantor and to

guarantee payment of the loan in case D could not pay. While the loan and even the
guarantee made by G is valid if entered into orally, in order that C can enforce the
guarantee against G, the agreement of G must be in writing and signed by him.
Otherwise, C cannot enforce it against G.

3.) agreement made in consideration of marriage other than a mutual

promise to marry.
 Agreement made for an intended marriage? a marriage settlement is one. it must
be in writing signed by the parties before the celebration of the marriage. A and B
desired to contract marriage. Prior thereto they agreed on the arrangement that once
married, their property regime will be a regime of complete separation of property. In
order that A could enforce this against B during their marriage, this agreement should
be in writing and should bear the signature of B.

Take note that this does not include a mutual promise to marry because for one,
even if a mutual promise to marry is reduced in writing, its breach is never actionable
save the three exceptional instances.

4.) Agreement for sale of goods, chattels or things in action at a price of

not less than Five Hundred Pesos.

any sale of goods for as long as the price Php500 or more, it must be in writing in
order for the sale to be enforceable.

**** What if the buyer already paid the purchase price of Php500 and the sale
was not reduced in writing, can he compel the seller to comply notwithstanding the fact
that the agreement was not in writing?? This is actually an exception. Please take note
that the Statute of Frauds only apply to executory contracts.

In the event that the contract has partly been executed, the contract may now be
enforceable despite non-compliance with the Statute of Fraud.

Hence, if A for example purchased a basket of banana for Php1,000 and paid the
purchase price. Even if the sale here is not reduced in writing, A can enforce the
contract and demand delivery of the basket of banana from the seller since the contract
has been partially executed because A already paid the purchase price.

- Agreement for the lease for a period longer than one year or for the sale
real property or an interest therein.

this is actually self-explanatory.

Can one sell real property orally and would it be valid?

Yes it is allowed and the contract is valid but it is unenforceable. To make it

enforceable, compel the other party to follow required form for purposes of
enforceabiliyt and registration.

- A representation as to the credit of a third person.

Remember expromision? If a third person makes representations for the debt of

another, his undertaking to pay for the debt of the original debtor must be in writing and
he must sign that written agreement. Otherwise, while it is valid and binding, it cannot
be enforced.

NOTE: all the foregoing 6 agreements are valid and binding even if entered into orally.
However, for purposes of enforceability, they must be in writing and signed by the party
against whom the contract is being enforced.

If the Agreement is entered into orally and valid as such, what can the parties do
in order to make the contract enforceable? they can compel one another to follow the
required form for enforceability as contemplated in Article 1357.
How does Statute of Fraud prevent fraud?

- If these agreements are not reduced in writing, tendency is the parties would
either forget about the existence of the agreement or they change the terms of these
agreements. So, in order to prevent that from happening, the law deems it best for
these agreement to be reduced in written form for purposes of enforceability.

What is the best evidence to prove existence of these agreements?

Only the written agreement itself is admissible in evidence to prove existence of

the same. Parol or oral evidence cannot be admitted, as rule, to prove existence or the
terms of the agreement.

How are unenforceable contracts convalidated or cured of defect?

- for unauthorized contracts, they are cured by ratification, either express or implied.

- for contracts where both parties are incapacitated, the termination of the incapacity of
one or both parties cures the defect.

- for contracts which infringe the Statute of Fraud? they are ratified by the failure to
make a timely objection to the introduction of parol evidence to prove existence of the
agreement.

For instance, A entered into a contract of loan with B as creditor whereby C acted
and stood as guarantor. When the contract was entered into, X was present as a
witness. This contract was entered into only orally.

When C tried to collect from C the guarantor, C refused payment prompting B to

institute a civil action against both A and his guarantor, C. During the trial, the counsel
of B presented X as witness and was testifying that he was present when the loan was
contracted and that C agreed to stand and be bound as guarantor. Supposedly, the
counsel of both A and C should object to the presentation of oral evidence or testimony
tending to prove existence of the agreement which is required to be in writing. If a timely
objection is made, then the parol or oral evidence introduced will be denied admission.

But if the counsel of A and C failed to object, the evidence, although oral or parol
evidence, will remain on record.

Chapter 9 Void or inexistent contracts

These are contracts which are regarded as most defective ones. They either do not
exist at all or are void for being contrary to law.

Features and characteristics:

- Defect lies in the fact that they lack one, some or all of the essential requisites or they
are contrary to law.

- Status of these contracts is that they are not valid and produce no legal effect at all.

- Can never be cured or convalidated.

- Can be assailed directly or collaterally even by 3rd persons.

What are the void contracts?

Article 1409 enumerates them.

Article 1409. The following contracts are inexistent and void from the beginning:  
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy; 
(2) Those which are absolutely simulated or fictitious;  
(3) Those whose cause or object did not exist at the time of the transaction;  
(4) Those whose object is outside the commerce of men;  
(5) Those which contemplate an impossible service;  
(6) Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained; 
(7) Those expressly prohibited or declared void by law.  
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.

Note: #1, 4, 7 are technically void while #2, 3, 5 and 6 are inexistent.

Does the action to declare a contract void prescribe?

No, it is imprescriptible.

Illegal contracts are found in Articles 1411 and 1412

Article 1411 --> contracts which are void for being both illegal and constitutes a
crime.

rules depend on whether both parties are guilty or only one party is guilty.

If both parties are equally guilty, contract is void and both parties may be held
criminally liable and do not have legal recourse against each other.

Example - A bought illegal drugs from B. the contract is not only illegal but is
likewise a crime. Both A and B and equally guilty so therefore they cannot sue one
another by reason of their contract. Both of them will likewise face criminal prosecution.

If only one party is guilty, A sold to B a computer set which belongs to the
government and B was unaware of such fact. the contract is both illegal and also a
crime but only A is guilty. Result is, the contract is also void and A cannot sue B for the
price but if price already paid by B, B may recover what he paid on account of his good
faith. Only A can be prosecuted criminally.

Article 1412 --> contracts which are illegal but does not constitute a crime

If both parties are guilty, contract remains void and parties have no recourse
against one another.

A sold a parcel of land to an American which is prohibited under the Constitution.

This contract is void for being contrary to law and as such, A and the American buyer
have no recourse against each other.
 If only one party is guilty, the guilty party cannot recover what he gave or paid but
he party not at fault may recover what was paid or given.

Article 1413 - obsolete, do not read.

Article 1414 - instance when recovery allowed even in cases where both parties
are in pari delicto

A paid X to kill B. Before X was able to accomplish the task, A went back to X
and told X not to pursue the plan. A may recover the amount he paid.

Articles 1415 and 1416 - just read them.

Article 1417 - useless provision. what we only have is suggested retail price which is not
even being followed.

Article 1418 and 1419 - important provision and in relation to labor standards law.

contract requiring laborer/employee to render work in excess of 8 hours per day is void
because any worker made to work in excess of 8 hours should be compensated and
paid premium for overtime pay.

Employers must comply with minimum daily wages for its employees. In case of failure,
employer may be liable for wage differentials. This is so even if the employment
contract entered into and signed by the employee indicates that employee agrees to
receive amount below the minimum wage.

Article 1420 to 1422 - just read.

A here type