Rescissible contracts – Contracts Law

1. Concept

Contracts validly agreed upon may be rescinded in the cases established by law. (Article 1380, Civil Code)

The term “rescission” is found in:

1) Article 1191 of the Civil Code, the general provision on rescission of reciprocal obligations;

2) Article 1659, which authorizes rescission as an alternative remedy, insofar as the rights and obligations of the lessor and the lessee in contracts of lease are concerned; and

3) Article 1380 with regard to the rescission of contracts. (Pryce Corporation v. PAGCOR, G.R. No. 157480, 06 May 2005)

a. Rescissible contracts

The following contracts are rescissible:

1) Those which are entered into by guardians whenever the wards 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 representation of absentees, if 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 defendant without the knowledge and approval of the litigants or of competent judicial authority;

5) All other contracts specially declared by law to be subject to rescission. (Article 1381, Civil Code)

Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. (Article 1386, Ibid.)

b. Payments made in a state of insolvency

Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (Article 1382, Ibid.)

c. Subsidiary action

The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (Article 1383, Ibid.)

2. 4-year prescription

The action to claim rescission must be commenced within four years.(Article 1389, Ibid.)

For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known. (Paragraph 2, Article 1389, Ibid.)

3. Effects of rescission

a. Scope of rescission

Rescission shall be only to the extent necessary to cover the damages caused. (Article 1384, Ibid.)

b. Return of things

Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. (Article 1385, Ibid.)

Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.(Paragraph 2, Article 1385, Ibid.)

In this case, indemnity for damages may be demanded from the person causing the loss. (Paragraph 3, Article 1385, Ibid.)

c. Resolution v. Rescission

Resolution was originally used in Article 1124 of the old Civil Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also Article 1659). (Pryce Corporation v. PAGCOR, G.R. No. 157480, 06 May 2005)

There is a distinction in law between cancellation of a contract and its rescission. To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied had no contract ever been made. (Huibonhoa v. CA, G.R. Nos. 95897 and 102604, 14 December 1999)

The termination or cancellation of a contract would necessarily entail enforcement of its terms prior to the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However, termination of a contract need not undergo judicial intervention. (Huibonhoa v. CA, G.R. Nos. 95897 and 102604, 14 December 1999)

1) Article 1191

a) Breach of faith

b) Principal action

The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations to the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: “Non servanti fidem, non est fides servanda.” Hence, the reparation of damages for the breach is purely secondary. (JBL Ryes, Concurring Opinion, in Universal Food Corporation v. CA, G.R. No. L-29155, 13 May 1970, cited in Pryce Corporation v. PAGCOR, supra.)

2) Article 1381

a) Based on lesion or economic prejudice

b) Subsidiary action

On the contrary, in rescission by reason of lesion or economic prejudice [under Article 1381], the cause of action is subordinated to the existence of that prejudice, because it is the raison d’etre as well as the measure of the right to rescind. (JBL Ryes, Concurring Opinion, in Universal Food Corporation v. CA, G.R. No. L-29155, 13 May 1970, cited in Pryce Corporation v. PAGCOR, supra.)

Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under Article 1191. (JBL Ryes, Concurring Opinion, in Universal Food Corporation v. CA, G.R. No. L-29155, 13 May 1970, cited in Pryce Corporation v. PAGCOR, supra.)

4. In fraud of creditors

a. Alienation by gratuitous title

PRESUMPTION: All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. (Article 1387, Ibid.)

b. Alienation by onerous title

PRESUMPTION: Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. (Paragraph 2, Article 1387, Ibid.)

c. Liability of transferee in bad faith

Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. (Article 1388, Ibid.)

If there are two or more alienations, the first acquirer shall be liable first, and so on successively.(Paragraph 2, Article 1388, Ibid.)

References

⦁ Book IV, Republic Act No. 386, Civil Code

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