Liability of Acquirer

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

If there are two or more alienations, the first acquirer shall be liable first, and so on
successively.
TRIGGER
- Person acquires in bad faith things alienated in fraud of creditors
- It is impossible for person to return things, due to any cause
RULE
 Indemnify the creditors
o For damages suffered on account of alienation

Two or more alienations

- If there are two or more alienations
RULE
 First acquirer shall be liable first
o And so on successively

Contracts referring to things under litigation

Article 1381(4)
Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
TRIGGER
- Contracts that refer to things under litigation
o Entered by defendant
o Without the knowledge and approval
 Of litigants or of competent judicial authority
RULE
 Rescissible contracts.

Ada v Baylon
- Court had to decide whether donation inter vivos may be rescinded under Article 1381(4)
o It was made during pendency of action for partition with trial court
- REQUISITES were identified:
o Defendant, during pendency of case, enters into a contract which refers to subject of litigation &
o Contract was entered into without knowledge and approval of litigants/competent judicial authority
- Upon concurrence of requisites, it is the duty of the court to order rescission.
- Seeks to remedy the presence of bad faith among parties to a case and/or fraudulent act which may be committed
with respect thing subject of litigation
- Things subject of judicial controversy should be bound by whatever disposition court renders
- Parties are expected to refrain from doing acts which would dissipate the thing which will render impending
decision ineffectual
- Restriction on disposition of thing that is subject of litigation
- Any disposition of thing without knowledge and approval is unmistakably and irrefutably indicative of bad faith
- Contract may be valid, but though considered valid, it may be rescinded at the instance of the other litigants
Contracts subject to rescission by operation of law
Article 1381(5)
All other contracts specially declared by law to be subject to rescission.
TRIGGER
- Contracts specially declared by law to be subject to rescission
RULE
 Rescissible contracts

Malicsi v Carpizo
- Was the contract of lease in question rescissible despite not being those
declared under Article 1381? No.
- Paragraph 5 expressly includes all other contracts declared by law
- Article 1659 is a provision which allows for rescission (lessee not complying
with paying rent of lease)
- Lessor has the right to bring action for rescission!

Payment made when insolvent

Article 1382
Payments made in a state of insolvency for obligations to whose fulfillment the
debtor could not be compelled at the time they were effected, are also rescissible.
TRIGGER
- Payments made in state of insolvency
o For obligations to whose fulfillment the debtor could not be compelled at the
time they were effected
RULE
 Also rescissible.
C. Limitations on rescission
Characteristics which rescission can only go to the extent of.
Subsidiary
Article 1383
The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has
no other legal means to obtain reparation for the same.
TRIGGER
- Action for rescission is subsidiary
RULE
 Cannot be instituted
o Except when the party suffering damage has no other legal means to obtain reparation for the same

Notes:
 Subsidiary remedy
o Exhaustion of all remedies by prejudiced creditor before rescission is resorted to.
o Party asking for rescission must prove that he has exhausted all other legal means to obtain
satisfaction of his claim
 Accion pauliana must be of last resort

Union Bank v Spouses Ong

- Rescission applies only when the creditor cannot recover in any other manner what is due him
- Petitioner had to show he had exhausted all properties of the respondent
o But here, petitioner did not do so
o Without proof that respondent had no other property except subject property, it cannot be
considered as one in fraud of creditors
- No evidence to show that sale deprived petitioner of means to collect its claim against respondent

To the extent of damage

Article 1384
Rescission shall be only to the extent necessary to cover the damages caused.
TRIGGER
- Rescission
RULE
 Only to the extent necessary to cover damages caused

Siguan v Lim
- Only creditor who brought action can benefit
o Strangers to the action cannot
- Revocation is only to the extent of plaintiff creditor’s unsatisfied credit
o As to the excess, the alienation is maintained.
D. Effect of rescission
ARTICLE 1385 par. 1
Rescission creates the obligation to return the things
which were the object of the contract, together with
their fruits, and the price with its interest; xxx
TRIGGER
- Rescission
RULE
 Creates the obligation to return:
o Things which were the object of the contract
o Their fruits
o Price with its interest

Notes:
 Refers to contracts that are rescissible under 1381 and 1382
o 5+1
o Doesn’t refer to contracts dissolved by mutual consent of the parties

E. When rescission improper

ARTICLE 1385
xxx consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the

person causing the loss.
TRIGGER
- Rescission is improper when:
RULE
 Person who demands rescission cannot return whatever he may be obliged to restore
 When things which are the objects are legally in the possession of third persons who did not act in bad
faith
o In this case, indemnity for damages may be demanded from person who caused the loss

Notes:
 Acquisition by 3rd person is an obstacle to action for rescission
o If it is shown that third person is in lawful possession with no bad faith
o Can only be invoked by third party to contract
Union Bank v Spouses Ong
- Third party possessor did not take immediate possession of the property after the sale
o Petitioner claiming it indicates participation in fraudulent scheme
- Lee continued to allow respondents to continue living in premises
- This was not without basis or practical reason
- Continuous possession of property was by virtue of a one-year lease executed 6 days after the
sale
o There is a genuine lessor-lessee relationship

F. Prescription of Action
ARTICLE 1389
The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees, the period of four years shall
not begin until the termination of the former's incapacity, or until the domicile of
the latter is known.
TRIGGER & RULE
- Action to claim rescission
 Must be commenced within four years.
- Action to claim rescission for persons under guardianship and for absentees
 Period of 4 years doesn’t begin until termination of incapacity or until domicile
of absentee is known
 Khe Hong Cheng v CA
- Petitioners claimed that action for rescission of respondents against them accrued as
early as December 27, 1989
o When petitioners registered conveyances with the Register of Deeds
o Constructive knowledge of execution of said deeds

Court:
- It is counter to Article 1383 and jurisprudence to count prescriptive period to rescind
allegedly fraudulent contract from date of registration of conveyance
o Also violates 3rd requisite to file action (no other legal means)
- Article is silent when prescriptive period would commence
- RULE – From the moment the cause of action accrues
o From the day the action may be brought
- It is the legal possibility of bringing the action which determines starting point for
computation
- Accion pauliana presupposes:
o A judgment
o Issuance of trial court of writ of execution for satisfaction of judgment
o Failure of sheriff to enforce and satisfy judgment
- Creditor must have exhausted property of debtor
- What is important is that the credit of the plaintiff antedates fraudulent alienation by
debtor of his property
o TC decision against debtor will retroact to time when debtor became indebted to
creditor

VI. VOIDABLE CONTRACTS

Existent, valid, and binding, although they can be annulled because of want of capacity or vitiated
consent of one of the parties.
Before annulment, voidable/annullable contracts are effective and obligatory between parties.

A. Types
ARTICLE 1390
The following contracts are voidable or annullable, even though there may have been no
damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.
TRIGGER
- One of the parties to contract is incapable of giving consent
- Or consent is vitiated
 o By mistake, violence, intimidation, undue influence, or fraud (FIMUV)
RULE
 Contract is voidable/annullable
 Even if there was no damage to contracting parties
 Contracts are binding, unless annulled by proper action in court
 Susceptible of ratification

Incapable of giving consent

Legal capacity is an essential element for existence of contract
 Legal capacity is indispensable condition for existence of consent
 Legal consent presupposes capacity
o Aka for there to have consent, one must be capable.

Code provides for those who cannot give consent

ARTICLE 1327
The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not know how to write
TRIGGER
- Unemancipated minors
- Insane or demented persons
- Deaf-mutes who don’t know how to write
RULE
 Cannot give consent to a contract
 This is without prejudice to special disqualification established by laws and is subject to
modifications determined by law (Article 1329)
Francisco v Herrera
- Court had to decide whether a contract entered by person with senile
dementia/mentally incapable is void or voidable

Court
- Differentiated void and voidable contracts
o Void
 No force and effect from the very beginning
 As if it had never been entered into
 Cannot be validated by passage of time/ratification
o Voidable
 Essential requisites for validity under 1318 are present but vitiated by
want of capacity, error, violence, intimidation, undue influence, or deceit
- Article 1327 provides that insane/demented cannot give consent
- But if the insane or demented does enter into a contract, contract is voidable
o May be rendered perfectly valid by ratification, which can be express or implied
- There was implied ratification in this case
o Respondent had received payments
o If he was not agreeable to the contract, he could have prevented petitioner from
delivering payments or immediately instituted action for reconveyance
o He even negotiated for increase of purchase price while receiving installment
payments
o Only when respondent failed to convince an increase in price was there an
action

Heirs of Ureta, Sr. v Heirs of Ureta

- Court had to decide whether Deed of Extrajudicial Partition was voidable
- What is involved in this case is not Conrado’s incapacity to give consent, but rather his
lack of authority to do so
- It is unenforceable – an unauthorized contract.
- Failure to obtain authority from co-heirs rendered contract unenforceable against his
co-heirs, but not voidable
Vitiated consent
Where consent is given by:
 Mistake  Intimidation  Fraud
 Violence  Undue influence
 Contract is voidable.

Notes:
 These are defects of the will
 Impairs freedom, intelligence, spontaneity and voluntariness of party to giving
consent

Spouses Guiang v CA
- Court had to decide if deed of transfer executed by husband over conjugal
property without consent of wife made sale void or voidable
- VOID – decision of court
- Wife’s consent to contract was totally inexistent or absent
o Sale took place without her knowledge
o Administration of CPG belongs to spouses jointly!
- Powers do not include powers of disposition/encumbrance without consent of
other or the court
- Nullity of contract is premised on absence of wife’s consent

Spouses Viloria v Continental Airlines

- Petitioners bought airline tickets from respondent because they were told that there
were no available seats on Amtrack
- When they were able to buy tickets from Amtrack, they demanded a refund
- Demand for refund was tantamount to seeking annulment on ground of vitiated
consent
- Court had to determine whether alleged misrepresentation constitutes causal fraud
o Must be causal inducement to the making of contract
o Must be serious and its existence established by clear and convincing evidence

Court
- Petitioners failed to prove that
o There were available seats on Amtrack at the time they spoke to travel agent
o That travel agent knew about this
o Agent informed them otherwise
- The fraud alleged was not satisfactorily established as causal in nature to warrant
annulment
- Proof of alleged fraud was wanting.
- It is possible that other passengers cancelled their bookings, making it possible for
new seats
- Existence of fraud cannot be proved by mere speculations and conjectures
- Fraud is never lightly inferred
 Katipunan v Katipunan, Jr.
- Deed of absolute sale of property allegedly executed by respondent was sought
to be annulled
- There was both vitiated consent and incapacity to give consent
- Vitiated consent
o Undue influence was exerted upon respondent by petitioners
o Negotiated with him but did not explain nature and contents of document
- Incapacity to give consent
o Respondent only reached third grade
o Impossible for him to understand contents written in English and
embellished with legal jargon
o Very low IQ and had a mind of a six-year old child

B. Ratification
Effect
ARTICLE 1392
Ratification extinguishes the action to annul a voidable contract.

TRIGGER
- Ratification of voidable contract
RULE
 Extinguishes the action to annul voidable contract

ARTICLE 1396
Ratification cleanses the contract from all its defects from the moment it was
constituted.
TRIGGER
- Ratification of annullable contract
RULE
 Cleanses contract from all its defects from moment it was constituted
Types
ARTICLE 1393
Ratification may be effected expressly or tacitly.

It is understood that there is a tacit ratification if, with knowledge of the reason which
renders the contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive his right.
TRIGGER & RULE
- Ratification
 May be effected expressly or tacitly
- Tacit ratification if:
 Person who has right to invoke nullity
 Has knowledge of reason which renders contract voidable
 Reason has ceased
 Person executes an act which implies intention to waive his right

Notes:
 Party whose consent was vitiated by mistake or fraud
o Must have knowledge of true nature of the transaction
 Party whose consent was vitiated by intimidation, violence, or under undue influence
o Can only ratify if such causes have ceased

Spouses Viloria v Continental Airlines

- Petitioners bought airline tickets from respondent because they were told that there were no available seats on
Amtrack
- When they were able to buy tickets from Amtrack, they demanded a refund
- Demand for refund was tantamount to seeking annulment on ground of vitiated consent
- Court had to determine whether alleged misrepresentation constitutes causal fraud
o Must be causal inducement to the making of contract
o Must be serious and its existence established by clear and convincing evidence

Court
- Even if there was causal fraud, the contracts have been impliedly ratified
o When petitioners decided to exercise their right to use subject tickets for purchase of new ones
- Implied ratification may take diverse forms
o Silence or acquiescence
o Acts showing approval or adoption of contract
o By acceptance and retention of benefits flowing therefrom
- Simultaneous with their demand for refund, petitioners asked for refund based on supposed bad faith in
reneging undertaking on its undertaking to replace the subject tickets with a round ticket from Manila to Los
Angeles
o Refund + Replacing it with round ticket wow
- Claim for reimbursement is one for rescission or resolution.
- By pursuing the remedy of rescission, petitioners have impliedly admitted validity of subject contract, forfeiting
their right to demand annulment
- Party cannot rely on contract and claim rights/obligations under it and at the same time impugn its existence or
validity
By guardians
ARTICLE 1394
Ratification may be effected by the guardian of the incapacitated person.
TRIGGER
- Ratification
RULE
 May be effected by the guardian of the incapacitated person.

Conformity not required

ARTICLE 1395
Ratification does not require the conformity of the contracting party who has no right to bring the
action for annulment.
TRIGGER
- Ratification
RULE
 Does not require conformity of contracting party who has no right to bring the action for annulment

Notes
 Does not require that the party apart from the innocent one with the right to bring action conform
to it

C. Who may institute action for annulment

Innocent parties
ARTICLE 1397
The action for the annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily.

However, persons who are capable cannot allege the incapacity of those with whom they
contracted; nor can those who exerted intimidation, violence, or undue influence, or employed
fraud, or caused mistake base their action upon these flaws of the contract.
TRIGGER
- Institution of action for annulment
RULE
 May be instituted by all who are obliged principally or subsidarily
 Persons who are capable
 Cannot allege incapacity of those with whom they contracted
 Persons who exerted FIMUV
 Cannot base action upon these flaws of contract

Notes:
 Party entitled to invoke fraud is the one who was tricked into giving his consent
 Only one who can have contract annulled is party:
o Principally or subsidarily obliged
o Incapacitated or the injured party
Prejudiced strangers
Established by jurisprudence.
 Strangers to a contract generally cannot sue either or both contracting parties to
annul and set it aside
 EXCEPT when he is prejudiced in his rights with respect to one of the contracting
parties
o And can show detriment which would positively result to him from the contract
in which he has no intervention.

Notes:
 Teves v People’s Homesite and Housing Corp
o Complaint alleged facts which showed plaintiff suffered detriment as a result of deed of sale
entered by defendants
o Plaintiff should be given a chance to present evidence to establish that she suffered detriment and is
entitled to relief
 Singson v Isabela Sawmill
o Plaintiffs were prejudiced in their rights by execution of chattel mortgage over properties by
partners
 Malabanan v Gaw Ching
o Existence of interest is the basis of right to sue
 Essential interest in general is possessed only by one who is party to a contract
o Possible qualification to above general principle
 Situation where a non-party to contract can be allowed to bring action
 If he is prejudiced in his rights with respect to one of the contracting parties
 It is required to show the detriment which positively would result to him from contract
o Limitation of stranger instituting:
 Contract may be nullified only to the extent that such nullification is absolutely necessary to
protect stranger’s lawful rights
 Bañez v CA
o Sought to annul award of property to petitioner
o Respondent was a trespasser/squatter
 He did not have a right to the land into which he has intruded
 Occupancy is only at the owner’s sufferance
 Acts are merely tolerated
 Bound by implied promise to vacate upon demand
 House International Building Tenants Ass’n Inc v Intermediate Appellate Court
o Only quoted general rule
o Made no mention of exception and simply applied Article 1397
D. Effect of annulment
Restoration
ARTICLE 1398
An obligation having been annulled, the contracting parties shall restore to each
other the things which have been the subject matter of the contract, with their
fruits, and the price with its interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages.
TRIGGER
- After an obligation is annulled
RULE
 Contracting parties shall
 Restore to each other
 Things which have been the subject matter of contract
 Their fruits
 Price with its interest
 Except in cases provided by law
 For obligations to render service
 Value thereof shall be basis for damages

ARTICLE 1402
As long as one of the contracting parties does not restore what in virtue of the decree
of annulment he is bound to return, the other cannot be compelled to comply with
what is incumbent upon him
TRIGGER
- One of the contracting parties does not restore what in virtue he is bound to return
RULE
 Other party cannot be compelled to comply with what is incumbent upon him

Villanueva v Chiong
- Respondents owned a parcel of land
- Portion of which sold to petitioners
- Court held sale to be voidable
o Effect of annulment is to wipe it out of existence
o To restore to parties, insofar as legally and equitably possible to their original situation before
contract was entered into
o Should return the land with its fruits
o While husband should return sum of P8000 which he received as price of land, together with
interest thereon
o Equitable if two amounts offset each other.
When restoration is not required or possible
ARTICLE 1399
When the defect of the contract consists in the incapacity of one of the parties, the
incapacitated person is not obliged to make any restitution except insofar as he has
been benefited by the thing or price received by him.
TRIGGER
- Defect of contract consists in the incapacity of one of the parties
RULE
 Incapacitated person restitutes only insofar as he has been benefitted by thing or
price received by him
 Not obliged to make restitution for anything else

ARTICLE 1400
Whenever the person obliged by the decree of annulment to return the thing can not
do so because it has been lost through his fault, he shall return the fruits received and
the value of the thing at the time of the loss, with interest from the same date.
TRIGGER
- Person obliged by decree of annulment to return thing
o Cannot return because it was lost through his fault
RULE
 Shall return fruits received and value of thing at the time of the loss
o With interest from the date of the loss

Traders Royal Bank v CA

- Court ordered petitioner to pay respondents the fair market value
- Respondents filed for partial reconsideration
- Respondents would be ordinarily entitled to, aside from value of property,
interest thereon from date of loss(here the sale of property)
- Court took price in the deed of sale as stipulation between parties of the value of
the property

E. Prescription or extinguishment of action

 ARTICLE 1391
The action for annulment shall be brought within four years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent
ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other incapacitated
persons, from the time the guardianship ceases.
TRIGGER
- Action for annulment
RULE
 Prescribes after 4 years
 Period begins:
o Intimidation, violence or undue influence
 From the time defect of consent ceases
o Mistake or fraud
 From the time of discovery of the same
o Contracts by minors or other incapacitated
 From time guardianship ceases

ARTICLE 1401
The action for annulment of contracts shall be extinguished when the thing which is the object thereof
is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the
thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud
or fault of the plaintiff.
TRIGGER
- Loss of the thing through fraud or fault of person with the right to institute the proceedings
RULE
 Action for annulment shall be extinguished
 If right was based on incapacity of any one of contracting parties
o Loss will not be obstacle to success of action
o Unless it took place through fraud or fault of plaintiff

Notes:
  First Philippine Holdings Corp v Trans Middle East
o Annul validity of sale transaction on ground of fraud
o Suit for annulment of voidable contract on account of fraud must be filed within four years
from the discovery of the same
o From time questioned sale took place, petitioner did not deny actual knowledge
 He was fully aware of sale
 But petitioner did not question the sale
 Only after 4 years and 7 months had lapsed
o Instead of immediately availing of courts to retrieve their shares, they gave them up
without a fight and discounted judicial recourse
 Carantes v CA
o Sought to annul deed of “Assignment of Right to Inheritance” on the ground of ffault
o Court had to resolve from what time fraud be deemed discovered
o Registration of instrument in Register of Deeds constitutes constructive notice to the whole
world
 Discovery of fraud is deemed to have taken place at the time of registration
 MWSS v CA
o Hypothetically admitting that Marcos unduly influenced the sale, prescriptive period will
begin once defect to consent ceases
o Period will begin on the date President Marcos was deposed
o But if consent was vitiated by fraud
 Discovery commenced from date of execution of sale documents which petitioner
was a party thereto
 Deemed to take place upon date of registration with register of deeds

VII. UNENFORCEABLE CONTRACTS

Contracts which cannot be sued upon or enforced unless it is first RATIFIED in the manner
provided by law.

Rescissible and voidable

- Biding or produce legal effects unless set aside.
Unenforceable
- Does not produce any effects unless it is ratified
- Intermediate ground between void and voidable

A. Types
ARTICLE 1403
The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted
beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made
shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept
and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of
the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of
the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a
sufficient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

( f ) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

Unenforceable contracts, unless ratified:

1. Entered into in the name of another person by one who has been given no authority
or legal representation or those who have acted beyond his powers
2. Those that do not comply with Statute of Frauds
o Originally appeared under former Rules of Evidence
o Transfer was to show that Statute of Frauds is substantive law, and not merely
procedural law.
3. Where both parties are incapable of giving consent to contract

Unauthorized Contracts
Article 1403(1)
entered into in the name of another person by one who has been given no authority or legal representation, or who
has acted beyond his powers

ARTICLE 1404
Unauthorized contracts are governed by article 1317
and the principles of agency in Title X of this Book.
GOVERNING PRINCIPLE FOR UNAUTHORIZED CONTRACTS:
Article 1317
No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party.

Notes:
 Unenforceable contract unless ratified
o Expressly or impliedly
o By person whose behalf it has been executed
o Before it is revoked by other contracting party
 Mercado v Allied Banking
o Real estate mortgage entered into by agent on behalf of principal without his
authority
 NAPOCOR v National Merchandising
o Rule providing for unenforceability refers to unenforceability of contract
against the principal
o Enforceable against the agent and its surety
 Agent is personally liable to the party with whom he contracted

Contracts infringing statute of frauds

Those that do not comply with the Statute of Frauds as set forth in this number.