Chapter 7 - Voidable Contracts

Meaning of voidable contracts.

• Voidable or annullable contracts are existent, valid, and binding, unless annulled or set aside by a proper action in court. However, before such annulment, the contract shall be considered valid, and its effects before such annulment are legally recognized. 

• It is susceptible of ratification.

• These are the contracts where the consent of one party is defective either because of: 

(i) one of the parties is incapable of giving consent to a contract; or 

(ii) the consent is vitiated by mistake, violence, intimidation, undue 

influence or fraud. 

Vices of Consent

• Contracts which were entered into by a person whose consent was obtained and vitiated through:

1. Mistake;

2. Intimidation;

3. Undue influence; or

4. Fraud.

What Contracts are Voidable?

1. When one (1) of the parties is incapable of giving consent (absolute incapacity).

Exception: when contract involves necessaries.

Example: 

Justin, minor, bought clothes and food from Josh, 27 years old.  This contract may have been voidable but it involves a necessary (clothes and food). Hence, this contract is perfectly valid.

2. When one (1) or more of the vices of consent is present.

1. Violence - when serious or unstoppable force is used to coerce agreement .

Example:

Pablo asks Stell to buy his laptop for P15,000. Stell refused. Pablo then punches Stell in the stomach until he agreed to buy it.

2. Intimidation - when one of the contracting parties is is coerced into agreeing to something out of a reasonable and well-founded fear of an impending and serious harm upon to his person or property, or to the person or property of his spouse, descendants, or ascendants. 

Example:

Felip asks Justin to lease Justin’s land or else he will set Justin’s apartment in fire. 

Exception: a threat to enforce one’s claim through competent authority, if 

the claim is just or legal, does not vitiate consent.

Example:

Felip asks Justin to lease Justin’s land or else he will sue Justin because he violated Felip’s right of easement regarding Justin’s property.

3. Mistake - refers to the substance of the object, identity or qualification of a person, or conditions that have principally moved one or both parties to enter into the contract.

Example:

Ken and Sejun entered into a contract of sale for a piece of land worth P5,000,000. The clerk who made the deed sale mistakenly typed P500,000.

Josh sold to Stell a ruby ring. Later on, both of them found out it is fake.

4. Fraud - when one of the contracting parties manipulates the other into signing a contract that he otherwise would not have agreed to using cunning words or actions.

Example:

Pablo applies for a job with a requirement of 2-4 years experience on a specific job. Though having no experience, Pablo made it appear he has 4 years of experience.

5. Undue influence - when someone improperly abuses their control over another person's will, depriving them of their rightful freedom of choice.

Example:

Rose’s professor asks her to marry him. Rose is older but still the the main reason she said yes was that he was her professor and she was worried that if she said no, the professor would be displeased and would fail her in class.

Meaning of annulment.

• Annulment is the action brought to set aside a voidable contract. 

• It is a remedy as well as a sanction provided by law, for reason of public interest, for the declaration of the inefficacy of a contract based on a defect or vice in the consent of one of the contracting parties in order to restore them to their original position in which they were before the contract was executed.

ANNULMENT

• The basis is vitiated consent or incapacity to consent.

• The defect is external or extrinsic.

• The action is subsidiary.

• Plaintiff must be a party to the contract (whether bound principally or subsidiarily).

• Damage to the plaintiff is immaterial.

• Indemnity here is no bar to the prosecution of the action.

• A defect is presupposed.

• To prevent annulment, ratification is not required.

RESCISSION

• The basis is lesion (damage).

• The defect is intrinsic (in the meeting of the minds).

• The action is principal.

• Plaintiff may be a party or a third person.

• There must be damage to the plaintiff.

• If plaintiff is indemnified, rescission cannot prosper.

• Compatible with the perfect validity of the contract.

• To prevent rescission, ratification is required.

ANNULMENT OF VOIDABLE CONTRACTS:

When annulment cannot proceed?

• When the object of the contract is lost through the fault of the person who may annul the contract.

• When the contract is ratified.

 Who can annul voidable contracts?

• Incapacitated persons (upon ceasing of incapacity).

• Persons whose consent were vitiated.

When can it be annulled?

1. Within four (4) years after guardianship of minors or incapacitated persons ceases. Guardianship ceases upon reading the age of majority. An incapacitated person has no capacity to sue.

Example:

Josh sold to Pablo (17 years old) a land. Upon reaching 18 years old, Pablo can avail annulment within 4 years until his day being 22 years old.

2. Within four (4) years after intimidation, violence or undue influence ceases.   

3. Within four (4) years from the time of discovery of mistake or fraud. This must be so because before the time of discovery, the innocent party is unaware of the reason which renders the contract voidable and cannot also be expected to bring an action in court. 

Note: Direct court action is necessary to annul a voidable contract, and until annulled or set aside by the court, a party cannot relieve himself from the obligations arising therefrom.

Effect  of   Prescription:  

• Contract  can   no  longer   be   set aside.

Action for annulment of contract

• Filed where consent is vitiated by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence or fraud.

• Annulment contemplates a contract which is voidable, that is, valid until annulled and set aside by a court of law.

• It may be ratified.

• Has a four-year prescriptive period.

Action for nullity of contract

• An action for declaration of nullity of contract presupposes a void contract or one where all of the requisites prescribed by law for contracts are present but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, prohibited by law or declared by law to be void.

• As a rule, such contract produces no legal and binding effect even if it is not set aside by direct legal action. 

• It may not be ratified.

• It is imprescriptible.

Note: Extinctive prescription applies, not only to the action for annulment, but also to the defense of nullity. This only applies to the contracting parties but not to third persons.

Meaning of ratification.

• Ratification is the act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity.

• It cleanses the contract from all its defects from the moment it was constituted. The contract thus becomes valid. Hence, the action to annul is extinguished.

Requisites of Ratification

• The contract should be tainted with a vice which is susceptible of being cured.

• The confirmation should be affected by the person who is entitled to do so under the law.

• It should be effected with knowledge of the reason which renders the contract voidable. 

• The reason which renders the contract voidable should have already disappeared.

Effects of Ratification

• It extinguishes the action to annul a voidable contract.

Note: Once the party who has the right to seek annulment of the contract ratifies 

it, he can no longer subsequently bring the action for annulment.

• It cleanses the contract from all its defects from the moment it was constituted. In other words, the contract is validated from inception.

Confirmation, ratification, and recognition or acknowledgment.

There   is   no   more   distinction   between   the following:

• Confirmation   –   to   cure   a   defect   in   voidable contract (Art. 1396)

• Ratification   –   to   cure   the   defect   of   lack   of authority in an authorized contract (Arts. 1317& 1405)

• Acknowledgment  –   to remedy a   deficiency  of proof (Art. 1405). 

Kinds of ratification.

1. Express

• when made orally or in writing; 

2. Implied or tacit.

• It may take diverse form

• Silence or acquiescence 

• Act showing adoption or approval of the contract 

• Acceptance and retention of benefits 

• Applicable when the reason ceases

Example:

            Supposed Josh sold his car to Justin (minor) in installment. Upon reaching 

18 years old, Justin continued to pay Josh.

Requisites for implied ratification.

• There must be knowledge of the reason which renders the contract voidable;

• Such reason must have ceased; and

• The injured party must have executed an act which necessarily implies an intention to waive his right.

Example:

S, a minor, sold his land to B. Upon reaching the age of majority, S, with full knowledge of his rights in the premises, instead of repudiating the contract, disposed of the greater part of the proceeds, or collected the unpaid balance of the purchase price from B. In this case, there is tacit ratification by S. 

Requisites for express ratification.

The requisites for express ratification are the same as those for implied ratification except that the former is effected expressly.

Note: Mere   lapse   of   time   does   not   legalize   voidable contract.   It   was   held   that   remaining   silent   for   certain period of time ratifies such contract.

Party who may ratify.

1. A contract entered into by an incapacitated person may be ratified by:

1. the guardian of incapacitated peron during the latter’s incapacity; or

2. the injured party himself, provided, he is already capacitated.

Note: 

• The ward can ratify provided he becomes capacitated.

• Guardians have the power to contract on their behalf, as legal representatives of their wards. Hence, they may also ratify contracts entered into by their wards. 

2. In case the contract is voidable on the ground of mistake, violence, intimidation, undue influence or fraud, ratification can be made by the party whose consent is vitiated.

ILLUSTRATIVE CASE: 

Facts:

Nase conveyed his property to Stell Cullen and his daughter Chona Cullen, provided that he would remain in possession of the property and could repurchase them in two years. When Stell died, his rights were transferred to Chona.

When Chona died, her spouse and their children, with Felip Cullen as guardian ad-litem, brought a possessory action in the Justice of Peace of the Court of Angeles. In a compromise, the right to repurchase was given to Nase, in the sum of P8,000 within two years. However, Nase failed to pay.

In an order by Judge Magsalin, the judge said that he could not sanction the sale because Nase is a Chinese citizen. Ajero, after notifying Nase of the decision, ordered him to vacate the property. Instead of seeking reconsideration, Nase filed a manifestation that he conveyed his right to acquire to Dr. Suson, a Filipino. When Nase died, his widow applied for an order for Ajero to comply with the agreed sale. The court, then presided by Judge David, authorized Ajero to sell the lands.

Ajero  instituted certiorari proceedings before the Supreme Court attacking the validity of the Judge’s decision on the grounds that the heirs of his wife had not been notified of the proposed sale.

Issue: 

Whether or not the minors were not made party to the proposed sale.

Held:

No. It has been seen that through their duly appointed guardian ad litem they ratified the compromise in open court, when not only the guardian but the oldest two of the children as well personally appeared and expressed their conformity to the proposed sale. This ratification validated the agreement as effectively as if the minors or their guardian ad litem had signed it.

Conformity of guilty party to ratification not required.

• Ratification is a unilateral act by which a party waives the defect in his consent. The consent of the guilty party is not required; otherwise, he can conveniently disregard his contract by the simple expedient of refusing to give his conformity.

• The innocent party has the prerogative to annul or not to annul a voidable contract.

• There is also no need for the innocent party to require the guilty party’s conformity before he ratifies the defective contract.

Example:

Felip is the owner of the famous hardware in Laguna. He rented the warehouse of Justin to become one of his bodega. Pablo buy the materials that he needed for the construction of his own house to Felip, since the other materials is on the warehouse of Justin and Felip already rented it, therefore the consent of Justin is not needed for the delivery of the materials that Pablo needed.

Note: The consent of the party who is bad faith is not required.

Effect of ratification retroactive.

• Ratification purges the contract of all its defects (Art. 1390.) from the moment it was executed. It shall extinguish the action for annulment. (Art. 1392.) This is to say that, because of ratification, the contract's validity will be determined by means of its prior rights in relation to third persons.

EXAMPLES:

1. B forced S to sell the latter’s horse. Later, the horse gave birth to a colt. If S should ratify the contract after the birth of the colt, who is entitled to the colt? B, because ratification has a retroactive effect. It validates the contract from the date of its execution.

2. In a state of drunkenness, S sold a parcel of land to B. Later, S sold the same land to C. The subsequent ratification by S of the sale to B cannot prejudice C.

ILLUSTRATIVE CASE:

1. Seller was not yet the owner of the property at the time it was sold but the owner, after the sale, acknowledged by means of an affidavit the seller’s title.

Facts: As security for his debt, D mortgaged his land in favor of C, under which D promised to assign to C the property if the debt was not paid at maturity. D failed to pay, and C, thinking that he had already owned that property before any actual assignment was made by D, sold the land to B. 

Subsequently, D made an affidavit in which he acknowledged that title to, and possession of, the aforesaid land had been transferred in a real and absolute sale to C.

Issue: May the sale to B be annulled on the grounds that C has not yet the owner of the property in question?

Held: No. The sale was defective because it was made before D should have transferred the property to C, pursuant to the stipulation. The sale, however, was not void per se. Its defect which would have been a ground for annulment was cured by the act of D in making the affidavit. This confirmation gave full effect to the transfer. (Dalay vs. Aquiatin, 47 Phil. 951 [1951].)

Party entitled to bring an action to annul.

• Two different requisites are required to confer the necessary capacity to bring an action for annulment of a contract, to wit:

1. The plaintiff must have an interest (see Art. 1311.) in the contract; and

2. The victim and not the guilty party or the party responsible for the defect is the person who must assert the same. (8 Manresa 801; Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].)

Right of successors-in-interest to bring action.

The successors-in-interest of a party to a voidable contract may sue for the annulment of the contract. (Descutido vs. Baltazar, 1 SCRA 1174 [1961].)

Right of strangers to bring action.

• Persons without material interest in contract.

• Creditors of the victim or aggrieved party.

• Plaintiffs in a representative suit.

Duty of mutual restitution upon annulment.

• If the contract is annulled, the parties, as a general rule, must restore to each other the subject matter of the contract with its fruits and the price thereof with legal interest. Unless there are fundamental reasons recognized by the law which will prevent such restitution.

• A contract which the law denounces as void is necessarily no contract whatever. The parties and subject matter of the contract remain in all particulars just as they did before any act was performed in relation thereto. The rule is that if a contract is declared a nullity and both parties have no fault or are not guilty, the restoration of what was given by each of them to the other is in order. (Development Bank of the Phils. vs. Court of Appeals, 249 SCRA 331 [1995].) 

• The right of a minor to rescind, upon attaining his majority, a contract entered into during his minority is subject to the conditions (a) that the election to rescind must be made within a reasonable time after attaining majority and (b) that all of the consideration which was in the minor’s possession upon his reaching majority must be returned. The disposal of any part of the consideration after the attainment of a majority imports an affirmance or ratification of the contract. (Uy Soo Lim vs. Tan Unchuan, 38 Phil. 552 [1918].)

• If there has been no performance yet by both contracting parties, it is obvious that there is no duty of mutual restitution.

• In personal obligations, where the service had already been rendered, the value thereof with the corresponding interest, is the basis for damages (par. 2.) recoverable from the party benefited by the service. 

• The effects of an annulment operate prospectively and do not, as a rule, retroact to the time the sale was made. Thus, where S sold to B shares of stock but for one reason or another, the corporate secretary of the corporation failed to record the transfer in the corporate books, and S later sold the same shares of stock to C, even if the sale to were to be annulled later on, C had in the meantime, title over the shares from the time the sale was perfected until the time such sale is annulled. (see Lim Tay vs. Court of Appeals, 293 SCRA 634 [1998].)

Restitution by an incapacitated person.

This provision is an exception to the general rule of mutual restitution under the preceding article. The incapacitated person is obliged to make restitution only to the extent that he was benefited by the thing or price received by him. It results, therefore, that if he was not benefited, he is not obliged to restore what he had received but the

 other contracting party is still bound to return what he had received, whether he was benefited or not.

It is not necessary for the minor to be considered benefited that he invested the thing or amount received. It is sufficient if he has kept it. (see Art. 1241, par. 1.)

The party who has the capacity has the burden of proving the benefit or profit received by the incapacitated person. Enrichment of the incapacitated party is not presumed.

An exception to the rule of mutual restitution is also provided in Article 1427. (infra.)

Effect of loss of thing to be returned.

• If the thing to be returned is lost without the fault of the person obliged to make restitution (defendant), there is no more obligation to return such thing. But in such a case, the other cannot be compelled to restore what in virtue of the decree of annulment he is bound to return. (Art. 1402.)

• If it is lost through his fault, his obligation is not extinguished but is converted into an indemnity for damages consisting of the value of the thing at the time of the loss with interest from the same date and the fruits received from the time the thing was given to him to the time of its loss.

EXAMPLE:

S sold his plow carabao to B. On the petition of S, the contract was annulled by the court. But the carabao died in the possession of B through his fault.

Under Article 1400, B must pay the value of the carabao at the time of its death, with interest from the same date. If the carabao had given birth, the young must also be delivered as the fruit of the said animal.

Extinguishment of action for annulment.

• If the person, who has a right to institute an action for annulment (Art. 1397.), will not be able to restore the thing which he may be obliged to return in case the contract is annulled because such thing is lost through his fraud or fault, his right to have the contract annulled is extinguished. If the loss is not due to his fault or fraud, Article 1402 applies.

The action for annulment shall be extinguished only if the loss is through the fault or fraud of the plaintiff.

• Under the second paragraph, the right of action is based upon the incapacity of any one of the contracting parties. Whether the right of action is based upon incapacity or not, the rule is the same. It is no longer necessary that the fraud or fault on the part of the plaintiff (the incapacitated person) resulting in the loss must have occurred “after having acquired capacity” as under the old Code. This qualification has been deleted in the present article. The deletion has made the second paragraph redundant.

Effect where a party cannot restore what he is bound to return

• When a contract is annulled, both parties have an obligation of restitution. 

• One party must return what they are obliged to restore by the annulment decree, which may be seen as a condition for the other party to fulfill their obligation.

• If the party cannot restore what they are bound to return, the annulment cannot occur, even if the loss was due to a fortuitous event.

• If the party who lost the item due to a fortuitous event offers to pay its value with the fruits received if any, they are not liable to pay interest and the other party can be required to make restitution.

Example:

Tata entered into a contract with Cooky whereby he obliged himself to produce a clothes collection for Cooky's dog Bam. However, it turned out that Cooky is only 13 years old and as such, he is incapacitated to enter into a contract. The contract was annulled. Cooky was then obligated to return the clothes while Tata has the obligation of returning the money paid by Cooky for the clothes. Since Tata did not return the money, Cooky cannot be compelled to return the clothes.