b. Voidable Contracts

Voidable Compromise

A compromise in which there is mistake, fraud, violence, intimidation, undue influence, or falsity of documents, is subject to the provisions of article 1330 of this Code. However, one of the parties cannot set up a mistake of fact as against the other if the latter, by virtue of the compromise, has withdrawn from a litigation already commenced. [Art. 2038, CC]

GR: Mistake, fraud, violence, intimidation, undue influence or falsity of documents are grounds to annul the compromise agreement.

XPN: Mistake of fact cannot be set up if the other party, by virtue of the compromise has already withdrawn from the litigation

Types of Fraud

NOTE: Future fraud CANNOT be waived. However, the law does NOT prohibit renunciation of the action for damages on the ground of past fraud. (CIVIL CODE, art. 1171)

Characteristics of a voidable contract

• Effective until set aside
• Can be ratified;
• Can be assailed only by the party whose consent was defective or his heirs or assigns.

NOTE: Third persons may assail if they are prejudiced. (Development Bank vs. CA, 96 SCRA 342)

• A voidable contract, unlike unenforceable and void contracts may be attacked indirectly or collaterally, by way of defense to an action under the contract by way of a counterclaim

Classes of voidable contracts

• Those where one of the parties is incapable of giving consent; and

NOTE: If both parties are incapacitated to give consent, the contract is unenforceable and not merely voidable.

• Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. (NCC, Art. 1390)

Q: Sometime in March 2001, Poole-Blunden came across an advertisement of Unit 2-C of T-Tower Condominium. The Unit was advertised to have an area of 95 square meters. Thinking that it was sufficient and spacious enough for his residential needs, Poole-Blunden won the bid and entered into a Contract to Sell with UnionBank. PooleBlunden started occupying. Thereafter, he decided to construct two (2) additional bedrooms in the Unit. Upon examining it, he noticed apparent problems in its dimensions. He took rough measurements of the Unit, which indicated that its floor area was just about 70 square meters, not 95 square meters, as advertised by UnionBank. PooleBlunden wrote to UnionBank, informing it of the discrepancy. He asked for a rescission of the Contract to Sell, along with a refund of the amounts he had paid, in the event that it was conclusively established that the area of the unit was less than 95 square meters which was denied by the UnionBank. Aggrieved, he filed an action for rescission of the Contract to Sell under Article 1390 of the Civil Code.

Will the action prosper?

A: YES. Article 1390 of the Civil Code stipulates that a contract is voidable or annullable even if there is no damage to the contracting parties where "consent is vitiated by mistake, violence, intimidation, undue influence or fraud." Under Article 1338 of the Civil Code "[t]here is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to."

The fraud required to annul or avoid a contract "must be so material that had it not been present, the defrauded party would not have entered into the contract." Poole-Blunden's contention on how crucial the dimensions and area of the Unit are to his decision to proceed with the purchase is well-taken. As he emphasized, he opted to register for and participate in the auction for the Unit only after determining that its advertised area was spacious enough for his residential needs. Therefore, there is fraud for the reason that had Poole-Blunden was informed by the UnionBank that the floor area was actually less than the stipulated, he would not have entered the Contract to Sell. (Joseph Harry Walter PooleBlunden v. Union Bank Of The Philippines, Respondent, G.R. No. 205838, November 29, 2017)

Prescriptive period for an annulment of a voidable contract

The action for annulment shall be brought within 4 years, reckoned from:

• In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases;
• In case of mistake or fraud, from the time of the discovery of the same;
• And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (NCC, Art. 1391)

Ratification

It is the act or means by virtue of which, efficacy is given to a contract which suffers from a vice of curable nullity. (Manresa)

NOTE: Ratification extinguishes the action to annul a voidable contract. (NCC, Art. 1392)

Requisites of ratification

• The contract involved must be voidable;
• Person ratifying must know the reason for the voidability;
• The cause for the voidability must have ceased at the time of ratification; and
• Ratification must be express or through an act implying a waiver of the action to annul;

NOTE: A voidable contract entered into by an incapacitated person may be ratified by that person’s guardian. (NCC, Art. 1394) However, this rule does not pertain to a rescissible contract entered into by the guardian in behalf of his ward.

The right to ratify is transmitted to the heirs of the party entitled to such right.

Party who may ratify

• In contracts entered into by incapacitated persons.
• guardian ;
• injured party himself, provided he is already capacitated.
• In contracts voidable on the ground of mistake. – party whose consent was vitiated.

Effects of ratification

Ratification cleanses the contract from all its defects from the moment it was constituted, thereby extinguishing the action to annul a voidable contract. It results therefore that after a contract is validly ratified, no action to annul the same can be maintained based upon defects relating to its original validity.

Confirmation v. Recognition

Voidable contract v. Rescissible contract

UNENFORCEABLE CONTRACTS

Unenforceable contracts cannot be enforced by action or complaint unless ratified. They include contracts entered into without or beyond authority, agreements covered by the Statute of Frauds that fail its requirements, and contracts in which both parties are incapable of giving consent (Civil Code, Art. 1403).