CHAPTER 7 - Voidable Contracts (Arts. 1390-1402)

Chapter 7 – Voidable Contracts (Articles 1390-1402)

CHAPTER 7 VOIDABLE CONTRACTS (Articles 1390-1402) 1. What is a voidable contract?  A voidable or annullable contract possesses all the essential requisites of a valid contract but one of the parties is incapable of giving consent (Art. 1327), or consent is vitiated by mistake, violence, intimidation, undue influence, or fraud (Art. 1330). “ART. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification.” (emphasis supplied)

2. From a reading of Article 1390, what are the characteristics of a voidable contract? (A) (B) (C) (D)

It is valid and binding unless annulled by a proper action in court. It is susceptible of ratification. It requires no damage to the contracting parties unlike in rescissible contracts. It is defective because :

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ONE of the parties to the contract is incapacitated; or The consent of the parties to the contract is vitiated by mistake, violence, intimidation undue influence or fraud.

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Chapter 7 – Voidable Contracts (Articles 1390-1402)

3. What is annulment? What is its main purpose or objective?  It is a remedy granted by law, for reason of public interest, for the declaration of the inefficacy (ineffectiveness) 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 before the contract was executed. 4. When should an action for annulment be filed? (Art. 1391)

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In order to prosper, an action for annulment must be filed by the injured party WITHIN the prescriptive period of four (4) years counted from the time: (a) the defect of the consent ceases – in case of intimidation, violence or undue influence (b) it is discovered – in case of mistake or fraud (c) the guardianship ceases – in case of contracts entered into by incapacitated persons

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Remember that even if the prescriptive period of four (4) years has not yet expired, an action for annulment of a voidable contract will no longer prosper if there has already been ratification (confirmation or validation) of the contract by the injured party. 5. What is ratification?  By ratification, the injured party in a voidable contract voluntarily approves the defective contract which, without such subsequent approval or consent, would not be binding on him. To be an effective ratification, it is required that : (a) There must be knowledge of the reason which renders the contract voidable. (b) Such reason must have ceased. (c) The ratification must have been made expressly or impliedly. (Art. 1393) (d) The ratification is made by the injured party. (Arts. 1394 & 1395) 2

Chapter 7 – Voidable Contracts (Articles 1390-1402)

 The ratification by the injured party of a voidable contract has a RETROACTIVE EFFECT.  Ratification cleanses the contract from all its defects from the time of its perfection (Art. 1396). After ratification, the effect is as if the contract was validly perfected without any defect whatsoever from the beginning. Hence, after ratification, the injured party loses the right to file an action to annul a voidable contract (Art. 1392).  The ratification of a voidable contract may be made by : (a) Under Article 1390, No. 1  the guardian; OR  the incapacitated party himself BUT ONLY WHEN he is already capacitated. (b) Under Article 1390, No. 2  the party whose consent is vitiated. 6. Who may ask for annulment? Who is the proper party who can file an action for annulment of a voidable contract? (Art. 1397)

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Also applying Article 1311 (relativity of contracts), only the contracting parties to the voidable contract, their assigns and heirs, can file an action for its annulment. However, only the incapacitated or the victim, and not the capacitated or the party responsible for the defect, is given the right to bring an action for annulment of a voidable contract. Hence, in a voidable contract, only the following can file an action for annulment under Article 1397: (a) The incapacitated (i.e., the contracting party who was a minor or insane at the time the contract was made); or (b) The victim whose consent was vitiated by mistake, violence, intimidation, undue influence or fraud. 7. After a voidable contract is annulled by proper action in court, what are the obligations of the parties to each other?

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Chapter 7 – Voidable Contracts (Articles 1390-1402)

(A) Mutual Restitution - Under Article 1398, the parties are obliged to return to each other the object of the contract with its fruits, and the consideration for the contract with legal interest.  Like in rescission, the purpose of the law in annulment is to restore or bring back the parties to their original situation by mutual restitution. Example: after a contact of sale of land is annulled, the buyer should give back to the seller the land and its fruits (which may include harvested fruits or rentals from the land). On the other hand, the seller is obliged to give back to the buyer the purchase price paid for the land plus legal interest. (B) Restitution by the incapacitated party - Under Article 1399, if the ground for annulment of the contract is incapacity under Article 1390, No. 1, the incapacitated is obliged to restore to the other party only to the extent that he was benefited by the thing or price received by him under the contract. Therefore, even if the incapacitated party has lost the thing object of the contract and can no longer return it to the other party, BUT THE LOSS was WITHOUT FRAUD or FAULT on his part, the other party (the capacitated party) will still be obliged to restore what he has received under the contract. See CASE NO. 6 below.

(C) Restitution by the defendant - The defendant in an action for annulment refers either to the capacitated party, or the party who employed any of the vices of consent (mistake, violence, intimidation, undue influence and fraud) on the innocent party. After a case is annulled, if the thing to be returned by the defendant under the contract is lost (whether due to a fortuitous event or due to the fault of the defendant), the obligation of the defendant 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, and the fruits received from the time the thing was given to the defendant up to the time of its loss (Article 1400). See CASE No. 7 below. 4

Chapter 7 – Voidable Contracts (Articles 1390-1402)

(D) Restitution by the complainant- The complainant in an action for annulment refers either to the incapacitated party, or the party who suffered from any of the vices of consent (mistake, violence, intimidation, undue influence and fraud).

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Under Article 1400, if the thing to be returned by the complainant under the contract is lost DUE TO A FORTUITOUS EVENT, his action for annulment can still prosper. The contract will be annulled but the defendant cannot be compelled to return what he has received under the contract. Under Article 1399, however, if the complainant is the incapacitated and has lost what he is obliged to return due to a fortuitous event, the defendant is still obliged to restore what he has received under the contract to the incapacitated. See CASE NO. 6 below.

 Under Article 1401, if the thing to be returned by the complainant under the contract is lost DUE TO FRAUD OR FAULT ON HIS PART, his right to file an action for annulment of the contract will be extinguished. The same rule applies even if the complainant is the incapacitated party who has lost what he is obliged to return due to his fault. See CASE NO. 7 below. 8. CASE DISCUSSION :

 CASE NO. 1:

M, a minor, is the owner of a 500 square-meter land valued at P4M. M sold the land to B for P2.5M. The lesion suffered by M here is P1.5M which is more than one-fourth of the value of the land object of the contract of sale. Is the contract of sale rescissible under Article 1381? DISCUSSION: Under Article 1381, to be rescissible, the contract is required to have been entered into by the guardian with respect to property owned by the ward, and there is lesion of more than one-fourth of the value of the object of the contract. This contract is not rescissible because although there was lesion by more than one-fourth of the value of the land, the contract was entered into by the minor M himself. Hence, it falls under the provisions of Article 1390 and is, therefore, voidable. After M reaches the age of majority, he can file an action for annulment of the contract of sale. 5

Chapter 7 – Voidable Contracts (Articles 1390-1402)

 CASE NO. 2:

M is the owner of a 500 square-meter land valued at P4M. M celebrated his 16th birthday on June 1, 2009. On the same date, M sold the land to B for P6M. Is the contract of sale voidable even if M profited P2M from the sale of his property to B? If YES, until when is M given the right to file an action for annulment of the contract of sale. DISCUSSION: damage not required in annulment; prescriptive period if ground is incapacity; Under Article 1390, for the contract to be voidable or annullable, it is only required that one of the parties to the contract was incapacitated at the time of its perfection, or that the consent of any of the parties to the contract was vitiated by mistake, violence, intimidation, undue influence or fraud. It is not required, like in rescissible contracts, that there be pecuniary prejudice or financial loss to the injured party in order that an action for annulment of a contract may prosper. This is very clear from the first paragraph of Article 1390 itself. Therefore, even if M gained P2M from the sale of his land, when he turns 18 on June 1, 2011, he can choose to file an action for annulment of the contract of sale on the ground that he was still a minor at the time that the sale was perfected. In order for the action to be timely filed within the prescriptive period provided under Article 1391, M must file the action not later than June 1, 2014, which is four (4) years from the time M attained capacity.

 CASE NO. 3:

Gloria is the owner of a parcel of land valued at P6M located in the heart of Makati. Pepe, Gloria’s neighbour, offered to buy Gloria’s property for P7M because he wanted to convert his property together with that of Gloria’s into a 6storey car park building. Gloria, however, refused to sell the property to Pepe. Hence, on February 15, 2008, Pepe went to the house of Gloria and, at the point of a revolver on her head, forced Gloria to sign a Deed of Sale transferring ownership of her land to Pepe for P7M. On February 20, 2011, Pepe died of a heart attack leaving her only daughter Ellen as sole heir. On March 30, 2012, after Ellen found out that Gloria was forced to sign the contract of sale, Ellen filed an action for its annulment? Will the action filed by Ellen prosper? DISCUSSION: voidable contract; prescriptive period if ground is intimidation; proper party to file annulment; In this case, the consent of Gloria to the contract of sale was vitiated by intimidation when she was forced by Pepe to sign the Deed of Sale by threatening her with a gun. Gloria would not have sold the land to Pepe if she had not been intimidated into selling it to him. Hence, the contract of sale between 6

Chapter 7 – Voidable Contracts (Articles 1390-1402)

the parties is voidable under Article 1390, No. 2. In case of intimidation, the prescriptive period for filing an action for annulment is four (4) years from the time the intimidation ceased. In this case, the four (4) year prescriptive period will start to run from the time of the death of Pepe because then, the intimidation employed on Gloria would have already ceased. Hence, an action for the annulment of the contract filed on March 30, 2012 would have been timely filed. However, Ellen (an heir of the guilty party Pepe) is not the proper party to file the action for annulment. Only Gloria, the victim of the intimidation, is given the right in this case to file the action for annulment of the contract of sale under Article 1391. Gloria has until February 20, 2015 within which to file the action.

 CASE NO. 4:

Monina, is the owner of a parcel of land valued at P5M. On January 6, 2008, Monina sold the land for P3.5M to Teofisto who paid her with a post dated check dated February 15, 2008. On January 30, 2008, Teofisto died in a car accident. On February 15, 2008, Monina encashed the check and put up a health spa business in Makati. On January 5, 2011, Monina filed an action for the annulment of the contract of sale in favour of Teofisto. She alleges that the only reason why she executed the sale on January 6, 2009 was because Teofisto threatened to kill her at that time if she will not sign the Deed of Sale. DISCUSSION: In this case, it appears that there is a valid ground for annulment of the contract of sale because Monina’s consent was vitiated when she was forced to sign the sale by Teofisto by threatening to kill her (Article 1390, No. 2). Monina’s action also appears to have been filed within the prescriptive of four (4) years from the time the initimidation ceased on January 30, 2009 after Teofisto died (Article 1389). Despite these considerations, however, Monina’s action for annulment of the contract of sale will not prosper. After Teofisto died, the intimidation on her person is deemed to have ceased already. Monina, however, never took steps to have the contract annulled. Instead, she encashed the check she received from Teofisto as payment for the purchase price, and used the money to put up a spa business in Makati. These acts of Monina constitute tacit (implied) ratification (Article 1393) on her part of the validity and binding force of her contract of sale with Teofisto. The contract is now ratified and extinguishes the right of Monina to file an action for its annulment (Article 1396).

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Chapter 7 – Voidable Contracts (Articles 1390-1402)

 CASE NO. 5: M, a minor, is the owner of a parcel of land valued at P6M.

G is the legal guardian of M. M sold the land to B for P4M. After G was informed of the sale, G ratified the contract of sale between M and B. QUESTIONS: Can G ratify the contract of sale between M and B? If YES, is the contract now cleansed from all its defects? DISCUSSION: parties authorized to ratify contracts; status of a voidable contract after ratification by a guardian when the minor suffers lesion by more than one-fourth of the value of the object of the contrat; Under Article 1390, the contract of sale between M, a minor, and the buyer B is voidable. Under Article 1394, the minor himself (after reaching the age of majority) or his guardian may ratify a voidable contract. Ratification will have the effect of cleansing the contract from all its defects from the moment it was constituted (Article 1396). In this case, M himself can ratify the contract after he reaches the age of majority. G is also authorized to ratify a contract for a minor in the same manner that he is authorized to enter into a contract for and in behalf of a minor. However, in this particular case, if G ratifies the contract of sale executed by M to B, the contract will not really be cleansed from all its defects. This is because the sale here involves a lesion to M of more than one-fourth of the value of the land. Hence, the contract will become a rescissible contract. And when M reaches the age of majority, he can file an action for rescission of the contract ratified by his guardian on the ground of lesion under Article 1381, No. 1.

 CASE NO. 6:

B traded his Toyota Altis car with the Toyota Fortuner car of M who was a minor. While being driven by M, the Altis car, was hit by a 10-wheeler truck beating the red light in an intersection along Quirino Avenue. Later, M filed an action for annulment of the contract on the ground of his incapacity at the time of the perfection of the contract. QUESTIONS: Considering that the Toyota Altis car which M is obliged to return under the contract has already been lost, will his action for annulment still prosper? If YES, can the defendant B be compelled to return the Toyota Fortuner to M? DISCUSSION: action for annulment not extinguished by loss of the thing to be returned by the incapacitated through a fortuitous event; defendant still obliged to restore; Under Article 1400, if the complainant loses what he is obliged to return due to a fortuitous event, the annulment action can still prosper except that the 8

Chapter 7 – Voidable Contracts (Articles 1390-1402)

defendant cannot be compelled to return what he has received under the contract. Ordinarily, B would not be compelled to return the Toyota Fortuner since M is no longer capable of restoring to B his Toyota Altis which was lost without the fault of M. However, this case falls within the exception stated under Article 1399 which requires the incapacitated to restore only insofar as he has been benefited under the contract. Since the Toyota Altis has already been lost, M has not been benefited and there is nothing to return under the contract. REMEMBER: The rule under Article 1399 (that the incapacitated is required to restore only to the extent of his beneficial interest) does not apply to the injured party when the ground for annulment is Article 1390, No. 2.

 CASE NO. 7:

In CASE NO. 6 above, if M was drunk at the time the Toyota Altis car figured in an accident, the loss would have been due to the fault of M. In such a case, the right of M to file an action for annulment will have been extinguished. The contract between B and M will not be annulled and B will be respected in his possession of the Toyota Fortuner.

Prepared by : Atty. Harriet Reyes Linsangan September 17, 2011

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