DEFINITION OF RESCISSION:

Rescission is a remedy granted by law to the contracting parties, and even to third persons, to secure
the reparation of damages caused to them by a contract, even if the same should be valid, by means
of the restoration of things to their condition prior to the celebration of the contract.
In a Rescissible Contract:
- All essential requisites of a contract exist and contract is valid
- Defective by reason of injury or damage to either of the contracting parties or to third persons
- Requires mutual restitution except for creditors who seek to impugn fraudulent transactions of
their debtors for instance third party in good faith!
What if the parties agree to mutually cancel the contract, is this rescission?
"#. $his is mutual withdrawal. %n rescission, it is the law that constitutes the basis.
CHARACTERISTICS OF A RESCISSIBLE CONTRACTS
&. As to defect: In rescissible contracts: there is damage or injury either to one of the contracting
parties or to third persons
'. As to efect: (onsidered valid and enforceable until they are rescinded by a competent court
). Prescritabilit!: *ay prescribe +eneral Rule, - years
-. As to s"scetibilit! of rati#cation: "ot susceptible of rati.cation
/. As to $%o &a! assail contracts: *aybe assailed not only by a contracting party but even by a
third person who is prejudiced or damaged by the contract
0. As to %o$ contracts &a! be assailed: *ay be assailed directly only, and not collaterally
12ecause rescissible contract is a valid contract, the only way it may be attacked is by means
of direct action based on any of the causes speci.ed by law
CONTRACTS THAT ARE RESCISSIBLE'(RO)NDS
&. Contracts in Be%alf of *ard+ $hose which are
entered into by guardians whenever the wards whom they
represent su3er lesion by more than one1fourth of the
value of the things which are the object thereof4
(eneral R"le: $o be covered by this provision, you must
be appointed by the court. +uardian may only exercise
acts of administration not acts of ownership.
15nder Rules of (ourt, a judicial guardian entering into
contract with respect to the property of his ward must
secure approval of a competent court
1%n case of natural guardian ie. *other or father! of the
property of a child under parental authority where such
property is worth more than 676 ',888.
E,A-PLE
$he guardian of a ward
who owns harvest with
value of 6&889 sells it for
6:89.
Is t%ere lesion. ;<=
Is t%ere rescissible
lesion. "o, because
6'89 is less than > of
the harvest?s property.
=ale of fruits and
personalties are acts of
administration. $hese do
not need judicial
approval, so lesion can
result. 2ut for sale of
real property, for
instance, where there
must be court approval,
there can be no
rescission.
E,A-PLE
$he guardian of a ward
who owns harvest with
value of 6&889 sells it for
6:89.
Is t%ere lesion. ;<=
Is t%ere rescissible
lesion. "o, because
6'89 is less than > of
the harvest?s property.
=ale of fruits and
personalties are acts of
administration. $hese do
not need judicial
approval, so lesion can
result. 2ut for sale of
real property, for
instance, where there
must be court approval,
there can be no
rescission.
NOTE: Ultravires acts of Guardian. Do not mix with unenforceable contract. %f a guardian sells
mortgages or otherwise encumbers real property belonging to his ward without judicial approval, the
contract is unenforceable.
RE/)ISITE:
&. +uardian entering into a contract FALLIN( *ITHIN SCOPE OF HIS PO*ERS as guardian
of the person and property, or property, of his ward ie. Acts of administration wherein judicial
approval is not necessary
'. Damage or @esion be -ORE THAN 0 of the value of the property which is the object of the
contract
). $here must be no other legal means of obtaining reparation for the lesion or damage
-. 6erson bringing action must be able to return whatever he may be obliged to restore
What if your guardian has spent the money? %nstitute action against guardian
because of breach of .duciary duty.
/. $he object of the contract must not be legally in the possession of a third person who did not
act in bad faith.
1$he remedy available is not rescission but indemni.cation for damages.
E,E-PTION: (ontracts approved by the courts subsequent court approval will cure the defect of the
contract!
'. Contracts in Be%alf of Absentees+ $hose agreed upon in representation of absentees, if the
latter su3er the lesion stated in the preceding number
(eneral R"le: $o be covered by this provision, you must be appointed by the court. @egal
Representative may only exercise acts of administration not acts of ownership.
1=ame principles apply as contacts entered into in behalf of ward because duties of a legal
representative of an absentee as exactly the same as guardian
RE/)ISITE:
&. @egal Representative entering into a contract FALLIN( *ITHIN SCOPE OF HIS PO*ERS
as legal representative of the person and property, or property, of the absentee. Acts of
administration wherein judicial approval is not necessary.
'. Damage or @esion be -ORE THAN 0 of the value of the property which is the object of the
contract
). $here must be no other legal means of obtaining reparation for the lesion or damage
-. 6erson bringing action must be able to return whatever he may be obliged to restore
/. $he object of the contract must not be legally in the possession of a third person who did not
act in bad faith.
1$he remedy available is not rescission but indemni.cation for damages.
E,E-PTION: (ontracts approved by the courts
). Contracts in Fra"d of Creditors+ $hose undertaken in fraud of creditors when the latter cannot in
any manner collect the claims due them. Aould basically involve when debtors entered into a contract
so that the creditors cannot get anything from him.
RE/)ISITE:
&. $here must be a credit existing prior to the celebration of the contract
'. $here must be alienation made subsequent to such credit
). $here must be fraud or atleast intent to commit fraud
-. (reditor cannot in any manner collect his credit
/. $he object of the contract must not be legally in the possession of a third person who did not
act in bad faith.
1$he remedy available is not rescission but to proceed against the person causing the loss for
damages
1%n order that a property be not taken away from a third person, said person must be in legal
possession and must have good faith
0. $here must be no other remedy for the prejudiced creditor
NOTE:
1$he party desiring to rescind must show that conveyance
or alienation was fraudulent, he has the burden of proof,
except in cases when there is a presumption of fraud.
*enBi C (o. v 2astida, 0) 6hil. &0!
1 $he obligation of restitution does not obviously apply to
creditors who seek to impugn fraudulent transactions of
their debtors.
*HEN IS THERE FRA)D'PRES)-PTION OF
FRA)D:
What to do? Rely in presumptions
&. (rat"ito"s Alienation
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 suDcient property to pay all debts
contracted before the donation.
1Donation made by debtor after entering into a
contract with creditor, wherein debtor did no reserve
suDcient property for payment of the debt.
1%f you enter into a gratuitous contract, it is
presumed fraudulent if he did not reserve enough
assets for purpose of paying his prior creditors
6R#2@<*, $o
defraud his
creditor, A sold his
house to X. Ahen
however the
creditor wanted to
collect his credit,
somebody lent A
enough money.
=hould the sale of
the house still be
rescindedE
ANS.: "o, it should
not be rescinded,
because here the
creditor can
collect the claim
due him.
6R#2@<*, $o
defraud his
creditor, A sold his
house to X. Ahen
however the
creditor wanted to
collect his credit,
somebody lent A
enough money.
=hould the sale of
the house still be
rescindedE
ANS.: "o, it should
not be rescinded,
because here the
creditor can
collect the claim
due him.
!ample:
A donated his land to
". 2efore the time he
made the donation,
he had several debts,
but he did not reserve
enough property to
pay all these debts.
%nstead, he made the
donation. %s the
donation presumed
fraudulent.
ANS.: ;es, the
donation is presumed
in fraud of creditors.
2ut, of course, this
presumption may be
rebutted by adequate
proof.
!ample:
A donated his land to
". 2efore the time he
made the donation,
he had several debts,
but he did not reserve
enough property to
pay all these debts.
%nstead, he made the
donation. %s the
donation presumed
fraudulent.
ANS.: ;es, the
donation is presumed
in fraud of creditors.
2ut, of course, this
presumption may be
rebutted by adequate
proof.
'. Onero"s Alienation
Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. $he decision
or attachment need not refer to the property alienated, and need not have been obtained by the party
seeking the rescission.
1Alienating for value of a property when properties of debtor has been subjected to writ of
attachment or judgment.
1%f =#@D the property, the presumption can only arise if the debtor enters in to an onerous
contract only after there has been a writ of attachment or judgment against his favor in a prior
proceeding
NOTE: 1Regardless which property was speci.cally alienated for attachment, debtor may not alienate
any of his properties as long as he is subjected to some writ of attachment.
). #ther manners recogniBed by the law of evidence
$<=$, Does it prejudice the rights of creditorsE
BAD(ES OF FRA)D 1 circumstances indicating that certain alienation has been made in fraud of
creditors
&. $he fact that the cause or consideration of the conveyance is inadequate.
'. $ransfer made by a debtor after suit has been begun and while
it is pending against him.
). A sale on credit by an insolvent debtor.
-. <vidence of large indebtedness or complete insolvency.
/. $he transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed .nancially.
0. $he fact that the transfer is made between father and son
when this fact is considered together with preceding
circumstances!4
F. $he failure of the vendee to take exclusive possession of all the
property.
badges of fraud taken in the case of #ria v. *c*icking '&
phil '-), pg. F/- of #bligations and (ontracts by 6aras!
EFFECT OF BAD FAITH
1Ahoever acquires in bad faith the things alienated in fraud
of creditors shall indemnify the latter or damages su3ered
by them on account of the alienation, whenever, due to any
cause, it should be impossible for him to return them. %f
there are two or more alienations, the .rst acquirer shall be
liable .rst, and so on successively.
&. $he acquirer must return or indemnify.
!ample:
After a judgment had been
rendered against him, A sold
his property to ". %s the sale
presumed fraudulentE
ANS.: ;es, the sale here is
presumed fraudulent because
it was made after a judgment
had been issued against
A. 5pon the other hand, if the
sale had been made 2<G#R<
the judgment, the
presumption of fraud cannot
apply. $his is so even if,
unknown to the buyer, the suit
had already been brought, but
=$%@@ 6<"D%"+ as long as of
course no attachment had
been issued.
!ample:
After a judgment had been
rendered against him, A sold
his property to ". %s the sale
presumed fraudulentE
ANS.: ;es, the sale here is
presumed fraudulent because
it was made after a judgment
had been issued against
A. 5pon the other hand, if the
sale had been made 2<G#R<
the judgment, the
presumption of fraud cannot
apply. $his is so even if,
unknown to the buyer, the suit
had already been brought, but
=$%@@ 6<"D%"+ as long as of
course no attachment had
been issued.
!ample:
$o defraud his
creditors, X sold his
house to #, who knew
of X$s purpose. %f the
sale is rescinded, #
must indemnify,
even if the house be
destroyed by a
fortuitous event, but
only if X himself
cannot pay.
Remember that
rescission is merely a
secondary remedy
available only when X
cannot pay.!
!ample:
$o defraud his
creditors, X sold his
house to #, who knew
of X$s purpose. %f the
sale is rescinded, #
must indemnify,
even if the house be
destroyed by a
fortuitous event, but
only if X himself
cannot pay.
Remember that
rescission is merely a
secondary remedy
available only when X
cannot pay.!
'. HDue to any causeI includes a fortuitous event.
1=ubsequent $ransfers
&. %f the .rst transferee is in good faith, the good or bad faith of the next transferee is not
important.
'. %f the .rst transferee is in bad faith, the next transferee is liable only if he is also in bad faith.
-. Contracts Referrin2 to T%in2s )nder Liti2ation+ $hose 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
Di3erent from presumption. $his is rescissible as prescribed by law.
NOTE: #nly plainti3 in the litigation can invoke this. #bjects of litigations are those objects involved
when summons have been served and the object is in legal custody
6R<J<"$%#", Registration of claim in registry of property pending litigation if it is about real property.
$his is a notice of lis pendens, which is a notice to the whole world. %f personal property, writ of
preliminary attachment.
#$7<R <KA*6@<,
*r. =noops sues *r. 2oops for the recovery of parcel of land. %n this case, the land is a Hthing under
litigation.I
%f during the pendency of the case, *r. 2oops sells the land to *r. (hoi without the approval of A or the
court, the sale is rescissible at the instance of *r. =noops in case he wins in his suit for the recovery of
said land unless *r. (hoi is in legal possession of the land in good faith.
/. Ot%er Rescissible Contracts+ All other contracts specially declared by law to be subject to
rescission.
a. Art. &8L:1 6artition
b. Art &&:L1 Result of deterioration
c. Art. &/'0 and &/)-1 Right given to an unpaid seller
d. Art. &/)L1 =ale of Real <state
0. Contracts b! Insol3ent+ 6ayments made in a state insolvency
for obligations to whose ful.llment the debtor could not be
compelled at the time they were e3ected
RE/)ISITE:
&. =tate of %nsolvency
-ortera 3+ -artine4
56 P%il+ 765
%A&'S: A piece of land was the subject of a litigation between *artineB and the *unicipality of =an
6ablo. After the case had been decided in favor of *artineB, he sold it to another.
(ssue: %s the sale rescindable on the ground that the property was in litigationE
)*+: "o, the sale cannot be rescinded. $rue, it had been the subject of a litigation, but that
litigation had already been decided in favor of *artineB prior to the sale.
!ample:
A sues " for
recovery of a
diamond ring.
,endente lite,
" sells the ring
to & without
the approval of
A or of the
court. $he sale
to & is
rescissible at
A$s instance in
case A wins in
the original
litigation,
unless & is in
good faith.
!ample:
A sues " for
recovery of a
diamond ring.
,endente lite,
" sells the ring
to & without
the approval of
A or of the
court. $he sale
to & is
rescissible at
A$s instance in
case A wins in
the original
litigation,
unless & is in
good faith.
1A judicial declaration of insolvency is not necessary
'. #bligation must have been one which the debtor could not be compelled to pay at the time
such payment was e3ected.
*HO -A8 INSTIT)TE ACTION
(eneral R"le: 6erson who is prejudiced
1party su3ering the lesion
1creditor who is defrauded in rescissory to exercise
the same in other rescissory actions
1their representatives
1their heirs
1their creditors by virtue of the subrogatory action Art &&FF!
*HEN IS RESCISSION NOT A9AILABLE AS RE-ED8
&. (ontracts approved by the courts
'. $he object of the contract is legally in the possession of a third person who did not act in bad faith
). Jalue of Damage or @esion
-. 6erson bringing action cannot return whatever he may be obliged to restore
/. 5ltravires acts of guardian or representative
Accion ,auliana
- 2ring back the property until it gets back to the debtor
- $he moment it hits a person in good faith, the right to rescind stops
- Remedy is to claim damages against the debtor
- %f cannot recover from debtor then go after those who were in bad faith
E,TENT OF RESCISSION
Asia Ban:in2 Cororation 3+ Corc"era
75 P%il+ ;<5
%A&'S: $he @ichauco (orporation owed "oble Mose 6F8,888. $he (orporation was involvent and although
the debt was not yet enforceable, the (orporation gave to "oble Mose a deed of sale to one of its
properties the value of which was much greater than the debt! in payments for the debt. At the same
time, the (orporation paid o3 a certain (orcuera its debt of 6'-,888 by giving him a piece of land. $his
latter debt was already due and demandable at the time payment was made.
(ssue: Are the two transactions rescindableE
)*+: $he . rst is rescindable because it was made in a state of insolvency for an obligation to whose
ful.llment the debtor could not be compelled at the time it was e3ected. 2ut the second debt is not
rescindable because at the time of payment, even if the (orporation was already insolvent, the debt was
already due, owing and enforceable.
A sold to " a piece of land in
fraud of his -A$s. creditors. "
took legal possession. %f no
other means are found to exact
the satisfaction of the credits
owing the creditors, may the
sale to " be rescindedE
ANS.: %t depends upon whether
" was in good faith or in bad
faith.
&! %f " was in good faith,
rescission cannot take place,
because the object of the
contract is legally in the
possession of a third person
who did not act in bad faith.
$heir remedy in this case would
be to demand indemnity for
damages from the person
causing the loss.
'! %f " was in bad faith,
rescission is proper.
A sold to " a piece of land in
fraud of his -A$s. creditors. "
took legal possession. %f no
other means are found to exact
the satisfaction of the credits
owing the creditors, may the
sale to " be rescindedE
ANS.: %t depends upon whether
" was in good faith or in bad
faith.
&! %f " was in good faith,
rescission cannot take place,
because the object of the
contract is legally in the
possession of a third person
who did not act in bad faith.
$heir remedy in this case would
be to demand indemnity for
damages from the person
causing the loss.
'! %f " was in bad faith,
rescission is proper.
6artial rescission is possible. Rescission shall be only to the extent necessary to cover the damages
caused. $he right to rescind by the creditor to a contract whom he is not a party, then only to the
extent that he was prejudiced.
=ubsequent transactions. #nce the object is transferred to a third person in good faith, the contract is
validated. %njured party can no longer go after the subsequent transactions.
EFFECTS'CONSE/)ENCES OF RESCISSION
In case of Lesion
An obligation on the part of the contracting parties to return to the other the object of the contract,
including fruits or interests.
Ahat should be returned in rescinding a contractE
&! $he object of the contract, with its fruits, must be returned.
'! $he price, with its interest, must be returned.
NOTE:
- Rescission is only possible if he who demands it can
return whatever he may be obliged to restore.
- Gruits of the thing includes natural, industrial and
civil fruits and other accessions obtained by the
thing4 %nterest refers to legal interest
)on T%ird Parties
NOTE: Rescission shall not take place when the thing which
constitutes the object of the contract is legally in the possession
of a third person who did not act in bad faith
%n case of movable property, principle of possession
%n case of immovable property, Registered in the property
registry
%n case the property is in the possession of a third person who is
in good faith, the remedy is to bring an action for indemnity for damages against person who caused
the loss. for instance, action may be directed against the guardian, representative of the absentee or
litigant who transferred the thing, as the case may be.!
PRESCRIPTI9E PERIOD
(ENERAL R)LE: $he action for the rescission of a contract must be commenced within four years
E,E-PTION:
&. %n case of ward, period must be counted from the time of the termination of the incapacity of the
ward
'. %n case of absentee, period must be counted from the time the domicile of the absentee is known
). %n case of fraud, period must be counted from the time of the discovery of the fraud
At the time he was &' years
old, A was under a guardian
who sold, in behalf of the
ward but without judicial
authority, the harvest of the
ward?s farm, and in so doing
the ward su3ered a lesion of
more than one1fourth of the
property. 7ow many years
will be given the ward to
rescind the contractE
ANS.: $he ward will be given
- years after reaching the
age of majority the time the
guardianship ceases!4
hence, before reaching ''
years of age, the former
ward should already have
sued for the rescission of the
contract.
"#$<, Age of *ajority is &:
now.
At the time he was &' years
old, A was under a guardian
who sold, in behalf of the
ward but without judicial
authority, the harvest of the
ward?s farm, and in so doing
the ward su3ered a lesion of
more than one1fourth of the
property. 7ow many years
will be given the ward to
rescind the contractE
ANS.: $he ward will be given
- years after reaching the
age of majority the time the
guardianship ceases!4
hence, before reaching ''
years of age, the former
ward should already have
sued for the rescission of the
contract.
"#$<, Age of *ajority is &:
now.