Part 2

• Rescissible Contracts:

  • Considered valid until challenged, but can be cancelled due to harm caused to one party or third parties
  • Example: A seller misrepresents the condition of a car, causing financial loss to the buyer
  • Key point: The defect arises externally, not from consent issues like in the next categories
• Voidable Contracts:

  • Defect in consent affected by factors like mistake, undue influence, or deceit
  • Remains valid until annulled, unless ratified
  • Example: Someone signs a contract under duress, they can declare the contract voidable due to lack of genuine consent
• Unenforceable Contracts:

  • Cannot be legally enforced due to lacking essential elements or violating legal requirements
  • Intermediate defect, less severe than void contracts but more so than rescindable/voidable ones
  • Example: An oral agreement exceeding a certain amount without written documentation, making it unenforceable
• Void or Inextinent Contracts:

  • Absolutely null and void, have no legal effect from the start
  • Cannot be ratified, attempts to fix them won't make them valid
  • Example: A contract to sell stolen goods is void due to its illegal nature
• Rescission:

  • Cancelling the agreement to fix the unfairness caused by the contract
  • Think of it like rewinding time and going back to before the agreement ever happened
• 6. Object Not in Possession of Third Parties in Good Faith: The object of the contract cannot be lawfully owned by someone who acquired it innocently

  7. Timely Filing: The lawsuit for rescission must be filed within the legal timeframe
• Requisites for Rescission:

  1. Valid Agreement: The contract must be legally enforceable from the beginning

  2. Lesion or Pecuniary Damage: One party must have suffered financial loss due to the contract

  3. Legal Basis for Rescission: The reason for rescission must be specifically allowed by law

  4. No Other Remedy: Rescission should be the only option to compensate for the damage

  5. Ability to Return Received Benefits: The party seeking rescission must be able to return everything they received under the contract
• 4. Deals on Disputed Property without Permission: If someone makes a deal involving property in a legal dispute without permission, it can be rescinded

  5. Other Cases Specified by Law: Other specific situations mentioned in other laws where contracts can be rescinded
• Contracts that are rescissible:

  1. Guardians & Wards: If a guardian makes a deal where their ward loses more than 25% of the value of something involved, it can be rescinded

  2. Representing Absent People: If someone representing an absent person makes a deal causing them to lose more than 25% of something's value, it can be reversed

  3. Fraudulent Contracts to Avoid Debts: If someone makes a deal to hide assets and avoid paying creditors, it can be rescinded
• Insolvency Payments:

  • 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
  • Insolvency: The person making the payment doesn't have enough assets to cover their debts
  • Obligations not due: The payments are made for debts that don't need to be paid yet or cannot be legally demanded
  • Rescission: These payments can be cancelled to protect other creditors from being unfairly disadvantaged
• Rescission as a last resort remedy:

  • Rescission is a last resort remedy, can only be used if there are no other legal options to recover damages from a bad contract
  • Even if a contract qualifies for rescission, explore other legal avenues before resorting to rescission
• Extent of Rescission:

  • Rescission shall be only to the extent necessary to cover the damages caused
  • Partial rescission is preferred, only rescind the affected portion necessary to cover the damage
  • Rescission only benefits the creditor who initiated it
• Rescission Means Returning Everything:

  • If a contract is cancelled (rescinded), both parties must return everything they received due to the agreement
  • Objects, fruits, price, and interest must be returned
  • You undo the entire exchange as if the contract never happened
• Exceptions to Returning Items:

  • If the items are legally possessed by someone else who didn't act dishonestly, rescission doesn't apply to them
  • Seek compensation for damages from the person who caused the situation requiring rescission
• Contracts approved by courts:

  • Contracts approved by courts in specific situations cannot be rescinded, even if they involve unfair terms or cause financial disadvantage to one party
  • Court approval assumes the agreement is fair and in the best interests of the protected party
• Presumptions of Fraudulent Contracts:

  1. Gratuitous Transfers (Gifts, Donations): If a debtor gives away property for free and doesn't have enough remaining assets to pay existing debts, the transfer is presumed fraudulent

  2. Onerous Transfers (Sales, Exchanges): Presumption of fraud applies to sales or exchanges if the debtor has been subject to a legal judgment or asset seizure due to debt
• Badges of fraud:

  • Circumstances indicating possible fraudulent intent behind a transaction, like a sale or transfer of property
  • Serve as red flags that alert courts to investigate further and potentially declare the transaction void due to fraud
• Importance of badges of fraud:

  • Direct evidence of fraud can be difficult to obtain, as fraud often involves secrecy and deception
  • Provide alternative ways to demonstrate fraudulent intent based on surrounding facts and conditions
• 8. Vendee aware of vendor's legal issues: Knowledge of the vendor's ongoing legal problems may suggest involvement in the fraud

  9. Vendee aware of vendor's limited assets: Knowing the vendor has few remaining assets after the sale strengthens the suspicion of fraud
• 4. Transferring most or all assets: Debtors selling a large portion of their property, especially during financial difficulties, raises concerns about potential creditor harm

  5. Heavy debts or insolvency: Significant financial strain can increase the possibility of fraudulent asset transfers

  6. Transfers between relatives: Transactions between close family members during potential fraud situations warrant closer scrutiny

  7. Vendee not taking possession: Failure to take physical control of the purchased property might indicate a hidden agreement or intent to deceive
• Common badges of fraud:

  1. Fictitious or inadequate consideration: The price paid for the property is significantly lower than its actual value, raising suspicion about the true motive

  2. Transfer during ongoing legal action: Selling property while facing lawsuits or debts suggests an attempt to hide assets from creditors

  3. Credit sale by an insolvent debtor: Selling on credit when unable to repay existing debts implies an intention to avoid fulfilling obligations
• 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
  • If there are two or more alienations, the first acquirer shall be liable first, and so on successively
• Key Point:

  • If you buy something knowing it was sold to avoid paying debts, you can be held liable to the creditors if the original sale is reversed
• Explanation:

  • If a seller sells something to another party knowing it will hinder creditors, and the buyer knows this too, the buyer is considered acting in bad faith
  • If the sale is later rescinded (cancelled), the buyer must return the item
  • If returning the item is impossible, the buyer must compensate the creditors for their losses
  • If there are multiple buyers, the first one who acted in bad faith is liable first, then the next, and so on
• 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
• Key points from the article:

  • General rule: Action for rescission must be filed within 4 years
  • Exceptions for incapacitated persons:
  • For persons under guardianship: the period starts when the incapacity ends
  • For absentees: the period starts when their domicile is known
  • Computation of the 4-year period:
  • No clear rule in the article
  • Code Commission opinion: count from when the injured party knows about the contract
  • Other views:
  • For fraud cases, count from the contract date
  • For specific situations, count from other relevant events (e.g., judgment finality)
• • Overall: unclear, so general rule (from action accrual) likely applies
• Article 1390:

  • Voidable contracts are agreements that seem valid at first glance but can be cancelled (annulled) under specific circumstances
  • They contain all the essential elements of a valid contract, but something crucial is missing or flawed
• Key Points:

  • Valid until challenged: Despite being voidable, they are initially binding and enforceable unless legally annulled
  • Two categories: Only two types of voidable contracts exist: those due to lack of legal capacity and those due to vitiated consent
  • Ratification possible: Even an initially voidable contract can be validated (ratified) if both parties freely choose to acknowledge and accept it despite the flaws
• Meaning of annulment:

  • Annulment allows parties to cancel a deal and go back to how things were before, as if the agreement never existed
  • Protects people from unfair contracts and upholds fair dealing in society
• 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
• Article 1392:

  • Ratification extinguishes the action to annul a voidable contract
• Key Points:

  • Ratification: voluntarily accepting or approving a contract with flaws
  • Effect: Makes the contract valid and enforceable, extinguishes the right to annul it
  • Important: Ratification must be voluntary and informed
• 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
• Meaning:

  • Ratification is the act of accepting and upholding a contract that could have been cancelled (annulled) due to defects in consent
  • It essentially waives the right to annulment and confirms the validity of the agreement
• Types:

  • Express: Clearly stating your agreement with the contract (written or verbal)
  • Implied or Tacit: Shown through your actions, like not objecting, accepting benefits, or continuing to fulfill your obligations
• Requirements for Implied Ratification:

  1. Knowledge of the defect: You know the reason why the contract could be annulled

  2. Defect is gone: The reason for annulment no longer exists

  3. Action implying acceptance: You do something that clearly shows you accept the contract
• Article 1394:

  • Ratification may be effected by the guardian of the incapacitated person
• Key Points:

  • Two parties can ratify a voidable contract:
  • Guardian of the incapacitated person: They have the authority to manage their ward's affairs, including contracts
  • Injured party themselves, once they become legally capable: This applies if the voidability was due to their own mistake or similar reasons
• Article 1395:

  • Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment