FOUR (4) TYPES OF DEFFECTIVE CONTRACTS

Obligation and Contracts

VOID OR INEXISTENT CONTRACTS

What are Void or Inexistent Contracts?

 A void contract, also known as a void agreement, is not actually a contract. A

void contract cannot be enforced by law. Void contracts are different from
voidable contracts, which are contracts may be (but not necessarily will be)
nullified.

 An agreement to carry out an illegal act is an example of a void contract or void

agreement. For example, a contract between drug dealers and buyers is a void
contract simply because the terms of the contract are illegal. In such a case,
neither party can go to court to enforce the contract, although some drug users
mistakenly believe the opposite, and therefore take their disputes to court.

Lack of Essential Elements

 Inexistent and void contracts cannot be ratified neither can the right to set up the
defense of illegality be waived, they are the following:

1. Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained;

1. This relates to Indeterminate object under Article 1349 of the New Civil

Codewhich states;

1. “The object of every contract must be determinate as to its kind.

The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between
the parties.

7. Those expressly prohibited or declared void by law.

Prohibited Contracts
  This relates to the following persons who cannot acquire by purchase, even at a
public or judicial auction, either in person or through the mediation of another
under article 1491 paragraph four (4) and five (5) of the New Civil Code which
states;

o ”Public officers and employees, the property of the State or of any

subdivision thereof, or of any government owned or controlled
corporation , or institution, the administration of which has been entrusted
to them; this provision shall apply to judges and government experts who,
in any manner whatsoever, take part in the sale;”

o ”Justices, judges, prosecuting attorneys, clerks of superior and inferior

courts, and other officers and employees connected with the
administration of justice, the property and rights in litigation or levied upon
an execution before the court within whose jurisdiction or territory includes
the act of acquiring by assignment and shall apply to lawyers, with respect
to the property and rights which may be the object of any litigation in which
they may take part by virtue of their profession.”

What is it to be filed in court?

 In order to follow the rules of law regarding void or inexistent contract, the action
to be filed in court is an “Action for the Declaration of Nullity”.

According to Article 1410 of the New Civil Code:

o “The action or defense for the declaration of the inexistence of a contract

does not prescribe.”

 However, it does not apply to last will and testaments.

How Illegal Contracts with Criminal Offense should be treated?

 Article 1411 of the New Civil Code states:

o “When the nullity proceeds from the illegality of the cause or object of the
contract, and the act constitute a criminal offense, both parties being in
pari delicto, they shall have no action against each other, and both shall
be prosecuted. Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable to the
things or the price of the contract.

 This rule shall be applicable when only one of the parties is guilty; but the
innocent one may claim what he has given, and shall not be bound to comply
with his promise.”
  The rule mentioned in the above second paragraph of Article 1411 of the New
Civil Code is related to Article 45 of the Revised Penal Code which states:

 “Confiscation and forfeiture of the proceeds or instruments of the crime: Every

penalty imposed for the commission of a felony shall carry with it the forfeiture of
the proceeds of the crime and the instruments or tools with which it was
committed.

 Such proceeds and instruments or tools shall be confiscated and forfeited in

favor of the Government, unless they be the property of a third person not liable
for the offense, but those articles which are not subject of lawful commerce shall
by destroyed.”

How Illegal Contracts without Criminal Offense should be treated?

 Article 1412 of the New Civil Code states:

o “If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:

1. When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the other’s undertaking;

2. When only one of the contracting parties is at fault, he cannot recover

what he has given by reason of the contract, or ask for the fulfillment of
what has been promised him. The other, who is not a fault, may
demand the return of what he has given without any obligation to
comply with his promise.”

No Consideration: Restitution after Void Contracts (pp 195-234)

 Those who transfer value under void contracts have no remedy in contract and
little to expect from the law of property, since nullity does not in general prevent
property passing. However, it has been recently held in litigation following void
interest swaps that the value transferred under a void contract, because it passes
for ‘no consideration’, becomes an unjust enrichment of the recipient at the
transferor’s expense, so that restitution must follow even where the void contract
has been fully executed on both sides.

Restitution for ‘no consideration’ is alien to the law of unjust enrichment in the
common law. In particular:

1. Parties to a fully executed contract, though it be void, have no substantial

reason for restitution;
 2. ‘Failure of consideration’, property understood, can explain all cases of
restitution where the defendant has not completed his part;
3. Cases advanced as warranting a new ground for restitution, called ‘no
consideration’ and distinct from failure of consideration, turn out on closer
inspection not to go beyond failure of consideration;
4. The new doctrine creates an unacceptable discontinuity with the past,
unsettling the foundations on which leading cases have been argued and
decided, departing from the previous treatment of void contracts and
contradicting the leading treatise on restitution.

 These arguments notwithstanding, it will be true that in a jurisdiction which allows

restitution for mistake of law, the results illegitimately attained through ‘no
consideration’ will be largely attainable through mistake.

 Nevertheless, the further progress of ‘no consideration’ should be resisted

because it constitutes a standing invitation to borrow the language of civilian
systems (‘sine causes’, ‘sans cause’, ‘ohne Rechtsgrund’), and civilian
terminology can only do harm if it is imported without civilian substance.

Related Links
o http://www.answers.com/topic/void-contract
o http://www.lawreview.law.uwa.edu.au/law_review/contents/law_review_vol_23(2)
o http://en.wikipedia.org/wiki/Void_%28law%29
o http://en.wikipedia.org/wiki/Void_contrac

VOIDABLE CONTRACTS

 A voidable or annulable contract is an agreement with legal validity but may be

invalidated by a court action on the grounds of invalidity of consent or incapacity
of one of the parties to give consent.  

 This defective contract may either be annulled or ratified by a court. 

Characteristics of Voidable Contract

 A contract is voidable:

 if one of the parties has no capacity to give consent.

 if the consent is invalidated by mistake, violence, intimidation, undue
influence, or fraud.

 Such contract raises an action for:

 annulment to invalidate it.

 ratification to verify its validity.
Annulment of Voidable Contract

 A voidable contract may be invalidated through the remedy of annulment, which

restores the parties to the positions they would have had if the contract had not
been made. Such annulment is applicable even though the contract has not yet
cause damage to the contracting parties.

 A direct court action for annulment must be brought within a four-year period,
which begins:

 in case of intimidation, violence, or undue influence, from the time such defect
ends.
 in case of mistake or fraud, from the time of the discovery of such defect.
 in case of incapacity to give consent, from the time the guardianship ends.

Ratification of Voidable Contract

 A voidable contract may be verified as valid through the remedy of ratification,

which extinguishes the action for annulment. Such ratification is retroactive from
the moment the contract was constituted, subject to the prior rights of third
persons.

The court action for ratification must be brought by:

 the aggrieved or injured party himself.

 the guardian of the incapacitated injured party.

RESCISSIBLE CONTRACTS

What are rescissible contracts?

 Those which have caused a particular economic damage either to one of the
parties or to a third person and which may be set aside even if valid. It may be
set aside in whole or in part, to the extent of the damage caused. (Art. 1381,
NCC)
 
Which contracts are rescissible?

1. Entered into by persons exercising fiduciary capacity:

a) Entered into by guardian whenever ward suffers damage more than ¼ of

value of property.
 b) Agreed upon in representation of absentees, if absentee suffers lesion by
more than ¼ of value of property.

c) Contracts where rescission is based on fraud committed on creditor (accion

pauliana).

d) Objects of litigation; contract entered into by defendant without knowledge or

approval of litigants or judicial authority

e) Payment by an insolvent – on debts which are not yet due; prejudices claim of
others f. Provided for by law (Arts. 1526, 1534, 1538, 1539, 1542, 1556,
1560, 1567 & 1659, NCC).

2. Payments made in state of insolvency:

a) Plaintiff has no other means to maintain reparation

b) Plaintiff must be able to return whatever he may be obliged to return due to
rescission
c) The things must not have been passed to third persons in good faith
d) It must be made within 4 yrs.
 
What are the requisites before a contract entered into in fraud of creditors may be
rescinded?

1. There must be credit existing prior to the celebration of the contract;

2. There must be fraud, or at least, the intent to commit fraud to the prejudice
of the creditor seeking rescission;
3. The creditor cannot in any legal manner collect his credit (subsidiary
character of rescission); and
4. The object of the contract must not be legally in possession of a third
person in good faith.

UNENFORCEABLE CONTRACTS

 The following contracts are unenforceable unless they are ratified:

 
i. Those entered into without or in excess of authority;
ii. Those that do not comply with the Statute of Frauds i.e., are not in
writing nor subscribed by the party charged or by his agent; or
iii. Those where both contracting parties are incapable of giving
consent.

Unenforceable Contract
  An unenforceable contract is a written or oral agreement that will not be enforced
by courts. There are many different reasons that a court may not enforce a
contract. Contracts may be unenforceable because of their subject matter,
because one party to the agreement unfairly took advantage of the other party, or
because there is not enough proof of the agreement.

What are the Requirements for Enforceable Contracts?

 To understand why a contract might not be enforced, it is important to first

understand the requirements of a valid, enforceable contract. An enforceable
contract is a legally binding agreement between two or more people or business
entities. The people or entities entering into the agreement are called the
“parties” to the contract. With a few exceptions, contracts do not need to be in
writing to be enforceable but oral contracts are more difficult to prove.

 A legally binding enforceable contract requires an offer to enter into an

agreement, acceptance of that offer, consideration, and no defenses for not
enforcing the agreement. Consideration is an exchange of promises to do or not
do something. One of the most common forms of consideration is money. In a
common enforceable contract, one party promises to pay another party money in
exchange for a promise that the party receiving the money will receive a service.

 Some common defenses to enforcing a contract are lack of capacity, duress,

undue influence, misrepresentation, nondisclosure, unconscionability, public
policy, mistake, and impossibility. If these exist an otherwise valid contract may
be unenforceable.

Lack of Capacity

 All parties to a contract must have legal capacity to enter into the agreement.
Parties who are under 18 years old, who are mentally impaired, who are
intoxicated on drugs or alcohol, or who otherwise do not fully understand what
they are doing when they agree to a contract may lack capacity. If all parties do
not have legal capacity, the agreement may not be enforced.

Duress, Undue Influence

 If one party uses an unfair advantage during contract negotiations to pressure

the other party into entering into a contract, the contract will not be enforced.
The pressure used must be extreme for a contract to be considered
unenforceable because of duress or undue influence. For example, if one
person uses a threat of violence to get the other person to sign a contract that
contract will not be enforced.

Misrepresentation, Nondisclosure, and Fraud

  Courts do not look favorably upon persons who use trickery to get another to
enter into an agreement. A contract may be deemed unenforceable if one party
obtains the other party’s agreement by making false or misleading statements or
omitting important information during discussions about entering into the
agreement.

Unconscionability

 A contract is considered unconscionable when something about its terms or how

it was formed are so unfair that it would “shock the conscience” if it were
enforced. A contract is not unconscionable just because one party had more
bargaining power. Employment contracts, for example, are routinely found
enforceable even though the employer usually has more power to shape the
terms of the agreement. Contracts have been found unconscionable in situations
where a very sophisticated business took advantage of a barely literate,
uneducated consumer.

 Depending on the circumstances, a court might decide the entire agreement is

unenforceable or might just strike the parts it considers unconscionable from the
agreement and enforce the rest of the contract.

Public Policy, Illegality

 Courts won’t enforce contracts that agree to something against the law or the
best interest of the public. For example, courts will not enforce an agreement to
purchase illegal drugs. Nor will courts enforce a landlord-tenant agreement that
requires a tenant to agree to live in conditions that do not meet health and safety
code requirements. The purpose of public policy and illegality grounds for non-
enforcement is to protect society as a whole.

Mistake

 Not all mistakes make a contract unenforceable but some will. Mistakes can be
“unilateral,” where only one party makes a mistake about the contract or
“mutual.” Contracts are more likely to be considered unenforceable where the
mistake is mutual but sometimes even a unilateral mistake can serve as a basis
for not enforcing a contract. Only mistakes that are important to the agreement
and impacted its creation or performance in a significant way can make a
contract unenforceable.

Impossibility

 Sometimes a contract that was valid when formed becomes impossible to carry
out and for this reason will be unenforceable. Impossibility that is the fault of one
party usually does not make a contract unenforceable.
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