Chapter 6. Rescissible Contracts

Rescission- canceling a contract and treating it as though it never existed by ensuring that all its effects are eliminated

Rescissible Contract - could be rescinded by economic injury or damage to one of the parties or third person

Requisites of Rescission

• • The contract must be validly agreed upon (Art.1380).

  • There must be lesion or pecuniary prejudice to one of the parties or to a third person (Art.1381). 

  • The rescission must be based upon a case especially provided by law (Art.1380, 1381, 1382).

  • There must be no other legal remedy to obtain reparation for damage (Art.1383).

  • The party asking for rescission must be able to return what he obliged to restore by reason of the contract (par.1, Art.1380).

  • The object of the contract must not legally be in the possession of third persons who did not act in bad faith (Ibid., par. 2).

  • The period for filing the action for rescission must not have been prescribed (Art.1389).

Types of rescissible contracts:

• Contracts entered into in behalf of wards 

• Contracts agreed upon in representation of absentees 

• Contracts undertaken in fraud of creditors 

• Contracts which refer to things under litigation

• Other instances 

This article most likely tackles payment not exactly of a contract.

• A debtor is considered insolvent if he does not have a sufficient properties to comply his obligations

• A debtor’s insolvency is not necessary to be judicially declared

Nature of action for rescission.

• Rescission is not a principal remedy it is only subsidiary

• Rescission could be only availed if the injured party prove that he has no other legal means

• Rescission can’t take place if the damages was repaired

The Person allowed to file for rescission:

• Parties who suffered economic injury or damages

• The affected creditor

• Others authorized by law

Extent of rescission

• The entire contract need not be set aside by rescission if the damage can be repaired or covered by partial rescission.

• The rescission shall only be to the extent of the creditor’s unsatisfied credit. The policy of the law is to preserve or respect the contract, not to extinguish it.

EXAMPLES:

1. Anna, the guardian of Mia, a minor was authorized by the court to sell two parcels of land valued at P200,000.00 each. Anna sold the two properties to Honey for only P200,000.00.

In this case, the entire contract need not be rescinded. Rescission may properly be applied only to one parcel to cover the damage caused by Anna. (See Art. 1381[1].) But if Anna or Honey is willing to pay the difference of P200,000.00, rescission is precluded.

2. Jay sold his only property, a parcel of land with an area of 5,000 square meters, to Dave to defraud Kyle, a creditor of Jay. 

If the value of 1/3 of the land is sufficient to cover the damage caused to Kyle, then the rescission shall only be to that extent. The alienation with respect to the 2/3 portion is valid even if Dave acted in bad faith.

Rescission creates an obligation of mutual restitution.

• When the court declares a contract rescinded, the parties must return to each other:

1. Object of the contract with its fruits 

2. Price thereof with legal interest

Purpose:

• Restore the parties to their original situation. 

• The party who received the object of the contract has enjoyed the fruits thereof while the other has used the money that made up the object’s price. With respect to the fruits, the rules on possession shall govern.

Obligation of third person to restore.

The clause “he who demands rescission” applies to a third person. If the third person has nothing to restore, the article does not apply. 

When rescission not allowed.

1. The remedy of rescission cannot be availed of if the party who demands rescission cannot return what he is obliged to restore under the contract. 

2. Neither shall rescission take place if the property is legally in the possession of a third person who acted in good faith. 

Reminder: Mutual Restitution also applies to voidable contracts.

Contracts approved by the courts.

• These are contracts entered into by the guardian OR representative where the ward OR absentee suffers a lesion of more than 1/4 of the value of the property.

If the contract is approved by the court, rescission CANNOT be availed of even if lesion of more than 1/4 the value of the property be suffered by the ward OR absentee.

• When a contract is entered into in behalf of a ward for an act of ownership, the approval of the court is required.

Absent this approval, the contract is unenforceable, whether there is lesion or NOT.

• As regards a contract dealing with an act of administration, court approval renders the contract valid, lesion or NO lesion.

Absent this approval, the contract is unenforceable, whether there is lesion or NOT.

EXAMPLE:

Beth is the guardian of Diana, a minor. Beth sells the ₱20,000-worth property of Diana amounting to ₱15,000. Here, the contract of sale cannot be rescinded because the lesion is NOT more than 1/4, unless the contract of sale is approved by the court.

However, if the property is sold for less than ₱15,000, Diana can rescind the sale by proper action in court upon reaching the age of majority.

The general rule is that fraud is not presumed. As fraud is criminal in nature, it must be proved by clear and preponderance of evidence.

• Instances not exclusive. — Article 1387 establishes presumptions of fraud in the case of alienation by the debtor of his property. (pars. 1 and 2.) However, the instances mentioned are not exclusive of others that may be proved in any other manner recognized by the law of evidence. (par. 3; see Art. 1177.) The presumptions are disputable and may be rebutted by contrary evidence. (Infra.)

• Presumption not applicable in the absence of transfer. — The presumption in Article 1387 applies only when there has in fact been an alienation or transfer, whether gratuitously or by onerous title. The effect of the presumption is to shift the burden to the one who alienated to prove that the transfer was not fraudulently made.

• Only actual creditors can ask for rescission. — Under the Civil Code (Arts. 1381[3], 1387.), only actual creditors can ask for the rescission of the conveyance made by their debtors in favor of strangers. The waiver and release made previously by the creditor of the credit he held against the debtor operate to deprive the rescissory action of any legal basis.

• Vendor, an indispensable party in action for rescission of sale. — An action for rescission of sale under Article 1387 cannot be finally determined without the presence in court of the vendor. For any decision on the action or claim for damage would affect him. He is entitled to be heard.

EXAMPLES:

(1) Alienation by gratuitous title. 

 Sarah made a donation of a parcel of land to Hany. Before the date of the donation, Sarah had contracted several debts. With the donation to Hany, the remaining property of Sarah is not sufficient to pay all her debts.

Under the first paragraph, the donation is presumed to be fraudulent unless proved otherwise.

(2) Alienation by onerous title. 

(a) Suppose in the preceding example, the contract is a sale. Under the second paragraph, the sale to Hany is not presumed fraudulent. The creditors of Sarah must show that the conveyance will prejudice their rights.

However, the presumption of fraud will arise in case the sale was made by Princess after some judgment has been rendered against him or some writ of attachment has been issued against him.

(b) Suppose again that Andy, a creditor of Sarah, has obtained a judgment or writ of attachment in his favor. Then Princess sold to Bea another parcel of land which has not been levied upon or attached. The sale to Bea is also presumed fraudulent because the law says “the decision or attachment need not refer to the property alienated.”

(c) Hany is another creditor of Sarah. Does she have the right to rescind the sale to Bea? Yes, because the law says that “the decision or attachment . . . need not have been obtained by the party seeking the rescission.”

Liability of purchaser in bad faith

• Return the same if the sale is rescinded.

• Should it be impossible for him to return it due to any cause, he must indemnify the former.

• Should there be two or more alienations, the first acquirer shall be liable first, and so on successively.

EXAMPLES:

(1) Baby sold her car to Jonaf to avoid the payment of her debt to Angela, her creditor. Jonah knew of Baby’s purpose.

If the sale is rescinded, Jonaf must return the car. Should the car be destroyed with or without his fault, then Angela is entitled to be indemnified for damages by Jonaf.

(2) Suppose, Jonaf transferred the car to Mike who also acted in bad faith. Then Mike sold it to George who did not know of the purpose behind the previous conveyance.

As the first acquirer. Jonah is liable first. If he cannot pay, then Mike will be liable.

If Jonaf acted in good faith, the good or bad faith of Mike is not important, except where Mike connived with Baby to make Jonaf a mere innocent intermediary in which case Mike can be held liable.

General rule

• Within four years from the date the contract was entered into. 

Exceptions

• Persons under guardianship- period shall begin from the termination of incapacity (when ward reaches the age of majority)

• Absentees- from the time the domicile is known.

Persons entitled to bring the actions for rescission.

• Injured party or the defrauded creditor.

• His heirs, assigns, or successors-in-interest or

• Creditor of 1 and 2 entitled to subrogation(accion subrogatoria under Art.1177)

EXAMPLE:

1. Person A left and B was in charge of his property, B sells this property to C for less

and causes damages to A, the period of 4 years will only begin once A was informed

of the lesion. A came back from being absent immediately after being notified,

therefore the contract was rescissible.

2. Person A died and left his properties to his heirs, B and C, Bis an adult while C is

still a minor. B secretly formed a contract with D and sold the property, unfortunately,

B died and C is now the person in charge, in 2015, C terminated his incapacity, or in

other words, C is now in the age of majority, but C only filed the rescission of the

contract during 2020, 5 years after C became mature enough, the appeal of C was not

entertained because 5 years has already passed and there was a 4 year limit.

EXAMPLES:

1. Person A left and B was in charge of his property, B sells this property to C for less and causes damages to A, the period of 4 years will only begin once A was informed of the lesion. A came back from being absent immediately after being notified, therefore the contract was rescissible. 

2.  Person A died and left his properties to his heirs, B and C, B is an adult while C is still a minor. B secretly formed a contract with D and sold the property, unfortunately, B died and C is now the person in charge, in 2015, C terminated his incapacity, or in other words, C is now in the age of majority, but C only filed the rescission of the contract during 2020, 5 years after C became mature enough, the appeal of C was not entertained because 5 years has already passed and there was a 4 year limit.