The Perfection of Contracts

The Misadventures of the Street Strategist Vol.11

 

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 In this volume the Street Strategist, the most famous unknown, the pavement philosopher of maximum imagination and minimum talent, of infinite comprehension and zero knowledge, of total opinion and minimal truth, dissects the nature of the perfection of contracts, their form, their interpretation, their defects, and their cure.
When and how is a contract perfected? Are oral contracts valid? What are the nature of the defects of contracts, what are the effects, who can assail them, when should it be assailed, can the defects be cured, and who shall cure the defects? What is a commodatum or an antichresis? What is the difference between rescissible, voidable, unenforceable, and void contracts? What is a real contract? What is a consensual contract? What is the Statute of Frauds?
This book is a concise overview for commerce students, businessmen, bar reviewees, and foreigners who need a primer on our law on contracts.
The Perfection of Contracts: The Misadventures of the Street Strategist Volume 11 is the latest compilation of the continuing chronicles of the Most Famous Unknown’s convoluted ruminations on the irrelevant, the immaterial, the insignificant, the negligible, and the obscure, as published in the longest column space in the country.



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The Perfection of Contracts
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The Street Strategist hereby dissects the nature of perfection of contracts.

So far we have discussed the definition of contracts, the limitations of the objects of contracts, the form of contracts (oral or written), the kinds of contracts that need to be in writing, the kinds of contracts that need to be in a public instrument, including the so-called Statute of Frauds as set forth in Article 1403 (2) of the Civil Code.

We have discussed the interpretation of contracts and also the kinds of defective contracts. Furthermore, we have provided a framework for analyzing defective contracts.

In this part, we shall analyze one by one the defective contracts using this framework.

Rescissible contracts

The least defective of contracts is the rescissible contract. There are six types of rescissible contracts. We shall analyze each one.

Article 1380 of the Civil Code states that contracts validly agreed upon may be rescinded in the cases established by law.

Article 1381 enumerates five cases of rescissible contracts while Article 1382 enumerates one more.

Rescissible Contract Type 1

This is the rescissible contract defined in Article 1381 (1) regarding guardians and wards.

Nature of the defect: Economic prejudice (also called lesion) or damage to owner or third person or litigant through fraud; Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; these are usually acts of administration by the guardian.

Effect of the defect on the contract: Valid until rescinded by the court

Can the contract be assailed and how:  Yes, but only by a direct action for rescission and no collateral attack is allowed. But remember, there is no rescission (repeat, no rescission) under the following circumstances:

Under 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.

Under Article 1385 rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. If the plaintiff cannot return it, no rescission is allowed.

Still under Article 1385 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, no rescission is possible because the thing is with a person in good faith.

Under Article 1386 rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.

Who can assail the defective contract: As a general rule, the injured party assails the contract. In this Rescissible Type 1, it is the ward who assails it, or the guardian ad litem (for the duration of the case) during the incapacity of the ward against the erring original guardian.

When should it be assailed: Under Article 1389 the action to claim rescission must be commenced within four years. For persons under guardianships, the period of four years shall not begin until the termination of the incapacity of the ward.

Can the defect be cured: Yes, by ratification of the contract.

Who shall cure the defect: As a general rule, it is the injured party. In this instance, by the ward.

What is the period or interval of curing the defect: Four years from gaining capacity as stated in Article 1389.

Rescissible Contract Type 2

This is the rescissible contract defined in Article 1381 (2) regarding representatives and absentees.

Nature of the defect: Economic prejudice (also called lesion) or damage to owner or third person or litigant through fraud; Those which are entered into by representatives whenever the absentee whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; these are usually acts of administration by the representative.

Effect of the defect on the contract: Valid until rescinded by the court

Can the contract be assailed and how:  Yes, but only by a direct action for rescission and no collateral attack is allowed. But remember, there is no rescission (repeat, no rescission) under the following circumstances

Under 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.

Under Article 1385 rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. If the plaintiff cannot return it, no rescission is allowed.

Still under Article 1385 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, no rescission is possible because the thing is with a person in good faith.

Under Article 1386 rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.

Who can assail the defective contract: As a general rule, the injured party assails the contract. In this Rescissible Type 2, it is the absentee who assails it.

When should it be assailed: Under Article 1389 the action to claim rescission must be commenced within four years. For absentees, the period of four years shall not begin until the domicile of the absentee is known.

Can the defect be cured: Yes, by ratification of the contract.

Who shall cure the defect: As a general rule, it is the injured party. In this instance, by the absentee.

What is the period or interval of curing the defect: Within four years from knowledge of the domicile of the absentee, or, of knowledge of the fraudulent contracts as stated in Article 1389.

Rescissible Contract Type 3

This is the rescissible contract defined in Article 1381 (3) regarding debtors in fraud of creditors.

Nature of the defect: Economic prejudice (also called lesion) or damage to owner or third person or litigant through fraud; Those which are entered into by debtors, who is in a state of insolvency, in fraud of creditors when the latter cannot in any other manner collect the claims due them;

Effect of the defect on the contract: Valid until rescinded by the court

Can the contract be assailed and how:  Yes, but only by a direct action for rescission and no collateral attack is allowed. In this specific instance, this recovery action is called “accion pauliana.” But remember, there is no rescission (repeat, no rescission) under the following circumstances

Under 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.

Under Article 1385 rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. If the plaintiff cannot return it, no rescission is allowed.

Still under Article 1385 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, no rescission is possible because the thing is with a person in good faith.

Under Article 1386 rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.

Who can assail the defective contract: As a general rule, the injured party assails the contract. In this Rescissible Type 3, it is the creditor who will assail it.

When should it be assailed: Within four years from knowledge of the fraudulent contract.

Can the defect be cured: Yes, by ratification of the contract.

Who shall cure the defect: As a general rule, it is the injured party. In this instance, by the creditor.

What is the period or interval of curing the defect: Within four years from knowledge of the fraudulent contract.

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