Contracts fraud. inequitable conduct vevenedthe oeting ofthe minds of te parties, the ropes Pemedy is not reformation of the instrument but annuimeny of the contract Example No. 1 $ ow" No. 8 and No. 9. Today. ms two (2) apartments, apartment ne sold to B apartment No. 8 for the contract of sak 1 000,000. Both parties executed ier knowing that the apartment stated in the contract ig apartment No. 2. Can the parties ask for reformation? cause there was a meeting of minds. They for reformation to the end that e expressed Answer Yes, be may go to court and asi their true intention may b& Jurisprudence Equity orders the reformation ofan instrument in order that the tue intention of the contracting parties may be expressed, The courts do not attempt to make another Contract for the parties. The rationale of the doctrine of feformation is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not refiect or disclose the real meeting of the minds of the parties. The rigor of the legalistic rule that a written instrument should be the final and inflexible criterion and measure ofthe rights and obligations of the contracting paresis thus tempered, to forestall the effect of mistake, fraud, inequitable conduct or accident ‘ In order that an action for reformation of in provded inate 1359 the GugllCode may prosper the folowing requisites must concer: (1) there must have beer amecting ofthe minds ofthe parties to the contract fy pation rument does not express the true intention of the partes, and (3 the faiure of te instrument to express i.e intention of he parties is due to mistake, fraud, 85809, November 6, 1092, NlAWS: Gam. GR. No. si ott rho No refort qusiness Low (For CPAReviewees) 287. mation in the following case: imple donations inner vivos wherein no condition is imposed; wills; and When the real agreements void The reasons why these above-stated instruments cannot be reformed 4, InNo. 1, the intentions of the donor will prevail, because donations are mere liberality of the benefactor. 2. InNo. 2, the provisions in the will ofa person are his personal intentions. They cannot be reformed except by the testator himself 3, In No. 3, void contracts are inexistent, so there is nothing to reform, 74, Interpretation defined. Interpretation of a contract is the determination of the meaning of the terms or words used by the parties in their contract. 75. Rule in case of conflict. in Whenever there is a conflict between the words used the contract and that of the intention of the parties, the intention must prevai weight when they are so clear regards to the intention of the parties. The words appearing in the contract shall only be given that there is no doubt with Should there be a doubt, the intention must prevall and unambiguous about the int parties, the literal meaning of its Butif the words appear to cont ‘Asa general rule, when the terms of a contract are clear tention of the contracting stipulations shall control. itravene the evident intention 113248, 76. Cont — Contry ster shall prevail over the former. Th real nature of a contract may De deteniined #9 the cares terms of the agreement, 2S from the ae coe and subsequent acts of the partie mtemporane: Gente egpi'sAreargo and Warehouse Co, Inc, ya ‘Court of Appeals, 297 SCRA 170) san +. delivered to B his parcel of land ang Gace r00 000. The title of the contract entered into ea ae tf Lease” However, the allegation inthe document aan the folowing “For and in consideration of P100,009), Seats ransfer the ownership of my parcel of land to B Question: Is this a contract of lease or sale? “Answer: It should be interpreted fo mean a contract of sale because what is being transferred is the ownership ang rot merely the possession of the land. “xample No. 2: $ delivered to B his parcel of land and B Eres {300 The market Value ofthe land is P500 000 ‘The contract executed is a‘lease”, and the allegation is as follows: For value received, | hereby transfer the possession ‘and ownership of my parcel of land to B" Question: Is this a sale or a lease contract? Answer: It should be a contract of sale because what was transferred is not only the possession but also the ‘ownership of the land. The mere fact that the price is inadequate will not disturb the contract because under Article 1470, the law states that the gross inadequacy of the price will not invalidate @ contract of sale. of the parties, the lat Acts of the parties shall be taken into consideration in interpreting a contract. (Art. 1374) In determining the intention of the parties, their Contemporaneous and subsequent acts shall be taken into consideration Example Xana Y entered into a contract involving a parcel ofland. Alter the execution of the contract, Y entered the 11. 78, petty, fenced itwith hollow blocks, began cuttiv pred. ‘made concrete immprovoments sea kept opal ioe Re realestate tax of the land for ten (10) years, ll wing knowledge of X. In here, itis clear from their Subsequent fats thal the patios entered into contract ef al, and it was transferred is not only the possession bub gatas ranaleren Possession but also Courts may not extricate parties from the recessat consequences of their acts. Thaf the terms ofa contract ture Gut to be financial disadvantageous tc them will net relieve them of their obligations therein. They cannot now disavow the relationship formed from such agreement due to ther supposed misunderstanding ofits terms. (Torres, et. al... Court of Appeals, et.al, GR. No. 134559, December, 1399) Interpretation of the word used if so general. $ sold to B his house including “all furnitures there Inside the house are: a narra table belonging to X, washing machine, Hi-fistereo, and a 21-inch television set. Question: Are these objects mentioned included in the sale? Answer: No, the table isnotowned by S, svhe cannes tarsfer the ownership thereof. The washing ma.i'ine, “Fi ana TV are likewise not included because these a°e 1101 fumitues but appliances. The word used is so geiweral "ey cannot include things distinct from whet the parties infected to agree. Interpretation of obscure words 07 stipulation. Example: X insured his life to Y insurer. 'n the sonittast of insurance it was stated that upon deat, the bewieftciary may collect P100,000 or P200,000. After two (2) years, X died. How much is the insurer liable? Answer: P200,000, because itwas the i the obscurity or doubtful figure appearing in the poliy.Loy 250_ Mey 78. If principal object of the contract is doubtful, Ifthe doubt is on the principal object of the contra, ct, same shall be deciared void under Article 1409, Paragrape 6, and Article 1378, paragraph 2. Question: $ soldto B amotor vehicle for P1.5 milion Atay time, S owns three (8) motor vehicles: a Ford Expediigs valued at P1.6 mi at ol Nissan Patrol valued at P1.7 millon. Which one is the object Answer: The object cannot be determined, the Contract ig void because the principal object cannot be ascertainey 80. Doubtas to incidental circumstances of the contract, 1. onerous — in favor of the greatest reciprocity of interest Example 1: In case of doubt whether the contracts a sale or mortgage, the transaction shall be considered a mortgage because itinvolves greater reciprocity of interest Example 2: D borrowed from C P10,000 with 14% interest per annum. However, it was not made clear whether the loan is for three or six years. The loan is Presumed to be for six years, for this will favor the greatest reciprocity ofinterest since C can eam interest ‘ora longer period and D can also use the money fora longerterm, 2. Ifgratuitous —in favor ofthe least transmission of right. Example: if you are in need Save one to you, how would the transaction be (ansidered -aloan ora donation? This is a contract of loan (commodati lum), because this t transmission of rights, involves leas sx of a nail hammer, and | siness Law (For CPA Reviewees) wont rescission defined. sf fion gcacvola’s det Rescission is a process to ren; contract validly entered into and norm Srexternal conditions, causing an e party oF o his creditor. supreme Court's Defini Rescission is a felief to protect one of the parties or a third person from all injury and damages which the contract may cause, to protect some preferential ight. A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. Itis not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made. (Velarde, et.al, vs, Court of Appearis, et. al., GR. No. 108346, July 11, 2001) \der inefficacious a ally binding, by reason conomic prejudice toa 82. Requisites of Rescission. 1. The contract entered into is essentially valid 2. There is lesion or pecuniary prejudice. 83. The four kinds of defective contracts are: 1. Rescissible contracts valid until rescinded; the defect extrinsic consisting of an economic damage or lesion.idable contracts — V ab 2 antes if ratified, the contract is cleanseg one Jaret “This contract is effective now, but may pS invalidated. she euea able contracts - cannot be sued upon 8 nen ee seastis rated. These are validable contrac” Noeffeot now, butthey may be effective upon ratification fect at all; it Void contracts — is one that has no ef I it can + poeetiee oF validated. These are called inexistoct contracts. The following contracts are rescissible: 4, Those which are entered into by guardians whenever the waras whom they represent suffer lesion by more than one-fourth of the value of the things which are the. object thereof, 2. Those agreed upon in the representation of absentees, it the latter suffer the lesion stated in the preceding number, 3, Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them: 4. Those which refer to things under litigation if they have been entered into by the defendants without the knowledge end approvai ofthe litigants of competent judicial authority; and 5. Allotner contracts specially declared bylaw to be subje torescission. (Art. 1381) ” os No. 3 of Rescissible Contracts exemplified. ‘Tose undertaken in fraud of creditors w er n when the latter Cannot ini any manner collect the claims due them. Example: D owes © P 10,000 payable on Dect 5. He owns a parcel of land valued P10 O06. Cos Deseo this land og oat Ne cannot pay his obligation to C. he sold °% On the due date, C demanded payment from 85. 36. fraud! the person tthe latter is already insolvent. C here ca bivact between D and X, because their tareeene te jylent and the creditor cannot in any manner collect claims due him. Itis assumed that X, the buyer, must thvin bad faith, for if he is in good faith ¢ cannot rescind Because the law states that rescission will not take place f ie object of the contract is in the possession of @ third who acted in good faith, Example of No. 5. All other contracts specially declared by the law to be subject to rescission The right to rescind as provided in Article 118 of deterioration of the thing to be delivered. ‘The right to rescind given to an unpaid selleras provided for in Article 1526. The right to rescind given to a vendee in sale of real property per unit of measure or lump sum price. case Requisites to concur before action for rescission can be instituted. 4 2. The party seeking rescission must retum what he received by virtue of the contract. The object of the contract is notin the legal possession ofa third person who acted in good faith. There must be no other legal remedy. The action must be brought within the proper prescriptive period. Question No. 1. S sold to B a parcel of land in fraud of C, acreditor of S. if, after a year, the contractwas cancelled or rescinded, wiiat are the obligations of S and B? Answer: S must return the money he received from B plus the interest, while B's obligation is to return the Property plus the fruits of the property sold.254 87. contr = —seataty : receding question, sup, 2:1n the pt right: of rescisgnd sstion No. Bis good faith, ean C exercise licable if th No, because rescission is app! 2 be ey faith, The night of Cis to ask for damages a oan S The measure of damages will be the amount of yt What are the requisites for rescission of contracts j, fraud of creditors? 1. The existence of a credit; 2. That said credit must be prior to the contract to be rescinded; 3. The existence of fraud or bad faith on the part of the debtor which can either be presumed or proved; ang 4. The creditors cannot recover their credits in any other manner. Enumerate some instances considered by the court as “badges of fraud”. 1. The fact that the consideration of the conveyance is fictitious or inadequate. 2. Atransfer made by a debtor after suit has begun and while itis pending against him. 3. Asale on credit by an insolvent debtor. Evidence of large indebtedness or complete insolvency. 5. Transfer of all or nearly all of his property by a debtor, expec iy ‘when he is insolvent or greatly embarrassed 6. The fact that the trans Son, when the above 7. The failure of the ofall the property 'sferis made between father and circumstances are present. vendee to take exclusive possession ,pusiness Law (For OPA Reviewees) 255 n Busine yi 255 what are the presumptions of fraud in a rescissible 9 Contract? 4 Gratuitous Contracts ~ Contracts entered into by the debtor when he did not reserve sufficient property to pay his debts before donation are considered fraudulent. 2, Onerous Contracts ~ a. Made by person against whom some judgment has been rendered even if not yet final b. Made by person against whom some writ of attachment has been issued. The decision or attachment has been issued. The decision or attachment need not refer to the Property alienated. Example of No. 2:D owns 2 parcels of land: one situated in Manila, the other in Bulacan. He also owes C P20,000. After failing to pay C, C filed an action and attached the land situated in Manila, After the writ of attachment was granted by the court, D sold the land situated in Bulacan to X. Here, the transaction was fraudulent because a writ of attachment has already been issued against him. The writ need not refer to the property attached 90. Give examples of contracts specially declared by law to be rescissible. 1. The unpaid seller's right to rescind if buyer failed to Pay the price of the sale. (Art. 1526) 2. Violation of warranty against hidden defects. (Art. 1567) 3. Sale of real estate for a lump sum price, if vendor cannot deliver what is stated within the boundaries.296 3. 92. 93. Prescriptive period for Rescission A. General Rule- Within four (4) years from the date it was entered in, dianship, within 4 son is under guar Vex 1 te pene guardianship ceases ra 2. Incase of absentees within 4 years from the t ime the domicile is known B. Exceptions — i‘ In certain contracts of sale which are speciay declared by lawto be rescissible, the period is6mont, oreven 40 days, counted from the day of delivery. (ar 1543, 1571, 157) The following persons can bring the action for rescission. 4. The injured party 2. The heirs of the injured party 3. Creditors, ifthe transaction is fraudulent idable contracts Those which possess all the essential requisites of a id contract but one of the parties is incapable of giving Consent, or consent was vitiated by mistake, violence, intimidation, undue influence or fraud. NULLITY DEFINED Its the imperfection of a contract derived from the determinate vices of a capacity or of the consent of the Barties which gives rise to an action of nullity which if itis, exercised successfully produces th t weed sucess le destruction of the ac of. 9. 96. vrs in gusiness Lew (For CPA Reviewsss sz following contracts are yo) The though there may have be contracting parties: 4, Those where one of the consent to a contract 2, Those where the consent violence, intimidation, undue i These contracts are binding, a proper action in court. T! Py fication. (Art. 1390) idable or annullable en no damage to the Parties is incapable of giving is vitiated by mistake, influence or fraud. unless they are annulled hey are susceptible of Distinguish rescission from annul Iment or rescissible from voidable contract). 1. In rescissible, the basis is lesion or damage: while in voidable, itis vitiated consent or incapacity to consent 2. Inrescissible, the basis is external; while in voidable, it is intrinsic (in the meeting of minds), 3. Inescissible, the action is subsidiary; while in voidable, the action is principal 4. Rescission is a remedy; while annuimentis a sanction. 5. Intescission, there must be damage to the plaintif: while in annulment, damage is immaterial 6. Toprevent rescission, ratification is not required; while in annulment, ratification is required. Voidable contracts and unenforceable contracts distinguished. 1. Voidable contracts are valid and enforceable until annulled, while unenforceable contracts are not enforceable unless ratified. 2. Voidable contracts are capable of being sued upon until annulled, while unenforceable contracts cannot be sued pon unless they are ratified.97. Voidable contracts and void ab initio contract, distinguished. valid until annulled by a 1 Voidable conte in Void ab initio contracts n acto action is required 2. Invoidable contra Prope, © Court cts, all the essential requisite S ar 's a defect in the consent, while ¢ but there ': a le a present because either the consent is missin, PGfttcus, orthere is want of cause or the cause is f ratification, Je contracts are susceptible of While, . Wigan contracts cannot be ratified. ontracts can be attacked only by the partie ‘ bene oer while void ab initio contracts can Be Sacked by thi persons whose interests are directly affected. 5. Invoidable contracts, the action to declare the nulty prescribes, while the action to declare a contract void ab initio does not prescribe. 98. Effect of prescriptions. The action for annulment must commence within four years, otherwise, the action will prescribe, hence it can no longer be set aside. (Art. 1391) 99. Qualification of the rules on annulmentas stated. In case of inimidation, violence or undue influence, from the time the defect of the consent ceases, Example: 8 intimidated S into signing a contract of sale 9p January 1,2017. The intimidation continued until January 25,2016 ggg what time should we compute the four- Inlimilston cece “anuary 25, 2018, the time the In case of mistake discovery of the same oF fraud, from the time of the 400. 101. es! pusiness Law (For CPARevewses) 259. ample: S and B entered into a Contract of Sale on exnuary 1, 2018. B entered into the contract because S induced him (B) by using words or machinations, making the contract voidable. 8 discovered the fraud only on ‘january 25, 2018. Within what time must B bring the action jorannulment? Within 4 years from January 25 2018, that js. atthe time B discovered the fraud. IfB does not fle the Sesion within this period, he loses his right forever. Whatis ratification, confirmation and acknowledgment? RATIFICATION PROPER — is that which cures the defect ‘of the contracts celebrated in the name of another without Suthority or in excess of authority CONFIRMATION — is the act of purging the voidable contracts of its defect through the renunciation of the action ‘of nullity made by the person who can invoke the vice or defect of said contract. ACKNOWLEDGMENT - is the act of remedying the deficiency of proof as when in a document an agreement made verbally is admitted or a private document is made a public document. Note: Under the New Civil Code, all the three terms are now uniformly called Ratification. Kinds of Ratification: 1. Express (oral orwritten) 2. Tacit (implied) Example of No. 2: M, a minor, bought a parcel of land. After reaching the age of majority, he sold it to X. In here, he could no longer file the action because the act of selling is considered an act of ratification. Likewise, if S, minor, sold his land, and upon reaching the age of majority collected the unpaid balance, he is considered to have waived his right to file the action for annulment.260 103. 102. Reqi .s of ratification: 1. The contract must be voidable. 2. The person ratifying knew the reason why the contrag, is voidable 3. The ratification must have been made expressly 4, impliedly, 4. The ratification is made by the injured party, Illustrative Cases in voidable contracts: 2) Pedro sold a piece of land to his nephew Quiritin minor. One month later, Pedro died. Pedro's heirs the brought an action to annul the sale on the ground that Quintin was a minora therefore without legal capaciy to contract. Is the contract voidable? Why? No. Under the principle of relativity of contracts the law states that @ contract takes effect not only between the contracting parties but also between their assigns and heirs. Besides, under voidable contracts it is stated that persons who are capacitated cannot allege the incapacity of the other under the principle of estoppel. ») X, of age, entered into a contract with Y, a minor. X knew and the contract specifically stated the age of Y. May X Successfully demand annulment of the contract? Reason. No, because persons who are capacitated cannot allege the incapacity of the person with whom he contracted under the principle of estoppel. Maminor misrepresented himself to be of age entered ito @ contract with C, a @ person who ik May Mlateron ask forannulment? ae poi d) gusiness Lew For CPARevewees) 261 In the first case decided, the c cannot ask for anmulmont baraace nee nat M estoppel. In the second case, the court ruled that M can file an action for annulment because he cannot be guilty of estoppel since he is not liable for his conduct, act or omission. In the third case, the court changed its stand and reiterated the first decision that minor cannot annul because he is quity of estoppel. The age of the minor in this case is 17 years old, We can conclude therefore that a minor if uilty of misrepresentation cannot ask for annulment because under the rules on statutory construction, the latest decision shall prevail. D borrowed P20,000.00 from C. D and his 17-year old son S, signed the promissory note for the loan, which note did not say anything about the capacity of the signatories. D made partial payments little by lttle. After seven years, D died leaving a balance of 10,000.00 on the note. C demanded payment from $ who refused topay. When sued for the amount, S raised the defense that when he signed the note, he was still a minor. Is S iable? Why? Yes. S is liable because the defense of minority has already prescribed. If the contract is voidable by reason of minority the prescriptive period of four years shall be counted from the time guardianshio ceases. The defense of minority is correct if the action is filed against $ within four years after reaching the age of majority. In the latter Case, if the contract is annulled, Sis still liable to return the money received by him to the extent he was benefited. (Art. 1397) (Braganza vs. Villa Abrille 105 Phil 456)entry J ofland,is indebted to C for P19, 99 1D, who owns a parcel 8 Ue ie interested in buying the land, intimidated — j, sign a deed of sale transfernng the land to X. annul the contract between D and X? F Gan doin order to protect his interest? +. No, because he is not a party to the contract. short, Cis not obliged by the terms of the contract either principally or subsidiary. , 2. Ccan ask for the rescission because the contra Seared and X prejudices him if D could ng jonger pay the obligation to C. 404, What is the effect of the annulment of a voidable contract? +. Ifthe contractis executory, the parties are not bound to comply with their prestation. 2. if the contract was already executed, the parties shal restore to each other the object of the contract, thats, the ‘money plus interest, the property together with its fruits, However, f the ground for annulment is incapacity of the other party, the party incapacitated is bound to return only tothe extenthe was benefited. (Arts, 1398 and 1402) 3. The guilty partys liable to answer for damages, 105. Illustrative Case: S, a minor, owns a parcel of land planted with kamote. S sold this land to B for P10,000. After reaching the age of majority, but within four (4) years, S filed an action for annulment and the court annulled the contract. Question No. 1: What are th ree rights and obligations of the Answer: S must return th rst lam nse 10.000 plus the intrest B land plus the fruits of the land. N(' ~ ; 406. 107. in business Law(For CPARevewses) 263, yestion No. 2: Supposing S, after receiving th Quessted the P4,000 at Banco Fino, while he ren P4000 wastaken unlawfully by X. Up to what amount is he obliged yoreturn? nswer: P4,000 only, because the law states that “if the ground for annulment is incapacity, the person oapacitated is only bound fo retum to the extent he was benefited”. qualifying illustrative case: S and B, both of age, Shtered into a contract of sale, regarding a parcel of fand for P10,000. B intimidated S, rendering the lesntract voidable. Of the P10,000 received by §, the 4,000 was deposited at Banco Fino, while the P6,000 was taken unlawfully by X. Question: How much is S obliged to retum to B ifthe contract isannulled? ‘Answer. P10,000, because the beneficial interest stated in Article 1399 is applicable only if the ground for ‘annulmentis incapacity of one of the parties. Ifthe ground for annulment is of the five (5) causes, the party who is bound to return is obliged to retum even to the extent he was not benefited. Loss of the thing while in the possession of the party who can annul the contract. 4. If due to his fault the right to annus extinguished. In short, the party has no more right to annul 2. If due to fortuitous event — the contract can still be annulled, unless if the innocent party could no longer restore what, by virtue of the decree of annulment, he is bound to return. lustrative Case: S forced B to sign a contract of sale of a specific house for P10,000. In here, B got the house and destroyed it.108. 109. 110. 111. Contr Contac, Question: Can Bst sion for annulment? the act of dest ver: No more, because by answer No morte ine acon for annulment 7 fic house to B, a mi Illustrative Case: S sold a speci minor for P10,000 Later, the house was destroyeq by fortuitous event. Question: Can Bsti “Answer. Yes. If the right of action is based upon the incapacity of anyone of the contracting parties, the logs of the thing shall not be an obstacle to the Success of the sation Bet noted that the loss is due fo fortuitous every and the minor is not guilty of fraud or fault. lean act rOYING he le an action for annulment? Unenforceable contracts Those that cannot be enforced in court or sued upon by reason of defects provided by law, until and unless they are ratified according to law. Concept of unenforceable contracts. ‘An unenforceable contract is one which cannot be enforced unless ttis first ratified. These are called contracts without effect, but if ratified, they are valid contracts. Sometimes, these are called ‘validable” contracts. Distinguish unenforceable from voidable and rescissible contract Voidable and rescissible are valid and binding until annulled or rescinded; while unenforceé without effect unless ratified. able contracis are Kinds of unenforceable contracts. 1. Those executed by y one in the name of an ith any authority orn excess of such author. want iness Law (For CPA Revi von business Law (For CPA Reviewses) 265 2, Those that do not comply with the Statute of Frauds. 3, Those where both partes are incapable of giving consent. TE; The enumeration under Article Mie is exclusive 1403 of the authorized or disauthorized contracts. Contracts entered into in the name of another person py one who has been given no authority or legal fapresentation or who has acted beyond his power are (nenforceable unless ratified Example: Os the owner of a specific car. X sold the carto Bwithout authority from O. In this case, B cannot demand §elivery from O because the contract is unenforceable. However, if B gave X the purchase price and X gave it to O who accepted the contract becomes enforceable because there was ratification. 12. UR 443. What is theStatute of Frauds? Itis a law which requires that certain contracts must be inwiiting, otherwise, unenforceable. 414. Whatis its purpose? In the case of Facturan vs. Sabonal, 81 Philippine Report 512, the Court has this to say: Since memory is many times unreliable, oral agreement may sometimes result in injustice. To aid human memory, to prevent the commission of injustice due to faulty memory, to discourage intentional misrepresentations, are the principal aims of the Statute of Frauds. 415. Form required. Contracts falling under the Statute of Frauds are required to be in writing or there should be a note or memorandum subscribed by the party charged, or his agent. Failure to execute the contract in writing does not tender the contract void, but merely unenforceable.