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Chapter VI

RESCISSIBLE CONTRACTS
The Four Kinds of Defective Contracts there are four kinds of
defective contracts (contracts which may be invalidated):
a) Rescissible valid until rescinded; there is a sort of extrinsic defect
consisting of an economic damage or lesion.
b) Voidable valid till annulled. It can be annulled. It cannot be annulled,
however, if there has been a ratification. The defect is more or less
intrinsic, as in the case of vitiated consent.
c) Unenforceable cannot be sued upon or enforced, unless it is ratified. In a
way, it may be considered as a valid transaction, that is, it has no effect
now, but it may be effective upon ratification.
(NOTE: On the other hand, a voidable contract has effect now, but
it may be invalid; hence, it is deemed valid unless annulled.)
d) Void has no effect at all; it cannot be ratified or valid
(NOTE: The above-named defective contracts are arranged in order
of decreasing validity.)

Art. 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.
1) Rescission (Supreme Court) it is a relief to protect one of the parties or a
third person from all injury and damages which the contract may cause, to
protect some preferential right.
(NOTE: Even a voidable contract may be rescinded, for example, by
prejudiced creditors. This is particularly true if the injured party
does not care to ask for annulment.)
2) Requisites for Rescission
There must be at the beginning either a valid or a voidable contract
(not a void one)
But there is an economic or financial prejudice to someone (a party
or a third person)
Requires mutual restitution.
3) 2 Kinds of Rescission
a) What is mentioned in Art. 1380 of the New Civil Code. This is,
properly speaking, rescission.
Based on lesion or fraud upon creditors;
The action is instituted by either of the contracting parties or
by third persons;

The courts cannot grant a period or term within which to


comply;
Non-performance by the other party is immaterial.
b) What is mentioned in Art. 1191 of the New Civil Code. Although
in this article, the new Code used the term rescission, the term,
properly speaking, should be resolution.
Based on non-performance or non-fulfillment of the
obligation;
Action may only be instituted by the injured party to the
contract;
In some cases, the courts may grant a term;
Non-performance by the other party is important.
Art. 1381 The following contracts are rescissible:
1) Those which are entered into by the guardians whenever
the wards whom they represent suffer lesion by more than
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 or 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.
First Case (1)
Lesion damage or injury to the party asking for rescission
(generally, disparity between the price and the value).
Modern legislation generally does not favor rescission on account of
lesion, because goods do not have a fixed true value; value is
always variable and fluctuating, being a function of supply and
demand.
Effects of Contracts Entered into in Behalf of Ward
- If an act of ownership, court approval is required, otherwise,
contract is unenforceable (Art. 1403), whether there is lesion or not.
e.g. sale of mortgage of minors land.
- If merely an act of administration,
1) If with court approval valid, regardless of lesion. (Art.
1386)
2) if without court approval resccisible, if lesion is more than
(Art. 1381)
e.g. buying of fertilizers for land cultivation, or materials for
repair.

Second Case (2) another contract which may be rescinded on the


ground of lesion is a partition of inheritance, when the lesion is for one
heir. (Art. 1098, Civil Code)
Third Case (3) Those Undertaken in Fraud of Creditors, When the Latter
Cannot in Any Other Manner Collect Claims Due Them
a) accion pauliana the action to rescind contracts made in fraud
of creditors.
b) Requisites of accion pauliana
There must be a creditor who became such PRIOR to the
contract sought to be rescinded.
Alienation made subsequent to such credit.
Alienating party must be in BAD FAITH
No other remedy for the prejudiced creditor (thus
rescission is merely a subsidiary remedy)
(NOTE: An action to rescind may be brought even if the
debtor has not ben judicially declared insolvent and even if
the creditor has not yet brought an action to collect his credit.
The law makes no distinction, both secured and unsecured
creditors may bring the action; the important thing is that
they be prejudiced.)
(NOTE: Generally, the party desiring to rescind must show
that the conveyance or alienation was fraudulent. He has the
burden of proof, except in cases when there is a presumption
of fraud.
Fourth Case (4) Things in Litigation
a) Example: A sues B for recovery of a diamond ring. B sells the
ring to C without the approval of A or the court. The sale to C is
rescissible at As instance in case A wins in the original litigation,
unless C is in good faith.
b) The property is said to be in litigation here after the defendant
has received the service of summons.
c) To protect himself, the plaintiff must register his claims in the
registry of property, pending litigation, if the suit is about real
property. This is the notice of lis pendens. The purpose is to give
notice to the whole world. If personal property is involved, the
property may be levied upon by, a writ of preliminary
attachment or else, it may be placed in the hands of a receiver.
Fifth Case (5) Other Instances

Article 1382. 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.
1) Premature Payments Made in a State of Insolvency
Two Requisites are essential under this Article:

a) The debtor-payer must have been insolvent ( the insolvency need not
be a judicially declared one);
b) The debt was not yet due and demandable.
(NOTE: both conditions are required; otherwise, Art. 1382 cannot
apply.)
(NOTE: Art. 1382 does not exactly speak of a contract; it refers to a
payment; hence, it is not included under Art. 1381)
Article 1383. 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.
1) Rescission Not a Principal Remedy
- It is only subsidiary and can only be availed of by the injured
party if it has no other legal means of seeking redress or
reparation for the damages caused. If, therefore, it is found out
that the debtor has no other property than that which is the
object of the rescindable contract, rescission can merely be
applied provided that all the essential requisites for rescission
are present.
- In one case, the Supreme Court held that when a creditor seeks
to set aside a contract as fraudulent, he must prove first that he
really is a creditor, and secondly, that he cannot collect his debt
in any other way.
Art. 1384. Rescission shall be only to the extent necessary to cover the
damages caused.
Extent of Rescission - Not necessary total but may be partial Person
benefited- Only the creditor who asked for rescission
Art. 1385. 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.
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.
In this case, indemnity for damages may be demanded from the person
causing the loss.
Effect of Rescission
Obligation of mutual restitution
Abrogation of contract
Obligation of third person to restore Requisites for rescission a.
Generally, the plaintiff must be able to return what has been received of
the rescissible contract.
Exception:

a) Prejudiced creditors
b) The thing object of the contract is not in the legal possession of third
person in good faith. ( Sikatuna vs. Guevarra 45 Phil 371)
c) There must be no other legal remedy
d) The action must be brought within the proper prescriptive period.

Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall


not take place with respect to contracts approved by the courts.

If a contract entered into in behalf of a ward or absentee has been


approved by court, rescission cannot take place because it is valid,
whether there is lesion or not.
Presumption the court is acting in the interest of the ward or absentee
when it approves the contract, in spite of the lesion.

Article 1387. 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.
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. The decision
or attachment need not refer to the property alienated, and need not
have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may
be proved in any other manner recognized by the law of evidence.

Gratuitous Allienation

a.
Presumed fraudulent when the debtor did not reserve sufficient
property to pay all debts contracted before the donation.
b.
Presumed valid a gratuitous conveyance or donation validly executed
(prima facie). It cannot be declared fraudulent and be subject to rescission,
unless it can be shown that at the time of the execution of the conveyance,
there was a creditor whom said transaction may affect adversely.
Example: A donated his land to B. Before the time he made the donation, he had
several debts but he did not reserve enough property to pay all these debts.
Instead he made the donation. Is the donation presumed fraudulent?
The donation is presumed fraudulent. However the presumption may be rebutted
by adequate proof.

Onerous Alienation

A) Presumed fraudulent when made by persons:


1. Against whom some judgment has been rendered in any instance (even if
not yet a final judgment); or

2. Against whom some writ of attachment has been issued.


Example: A brought an action against B, his debtor. A won, Bs property was
attached by the court. After judgment, B sold to C another property which has
not been levied upon or attached. D, another creditor of B, wants to rescind this
sale to C.
The sale to C is also presumed fraudulent because the law says that the decision
need not have been obtained by the party seeking rescission; and the
attachment need not refer to the property attached.

Badges of Fraud
a.

Existence of fraud may be shown by circumstantial evidence

b.
Direct evidence of fraud is seldom available because of the
concomitant deceit, deception and cunning, which are usually hidden.
c.
Courts have laid down certain rules by which the fraudulent
character of the transaction may be determined.
The following are some of the circumstances attending sales which have been
denominated by the courts as badges of fraud:
1.
The fact that the consideration of the conveyances is fictitious or is
inadequate;
2.
A transfer made by the debtor after suit has begun and while it is pending
against him;
3.

A sale upon credit by an insolvent debtor;

4.

Evidence of large indebtedness or complete insolvency;

5.
The transfer of all or nearly all his properties by the debtor, especially
when he is insolvent or greatly embarrassed financially;
6.
The fact that the transfer is made between father and son, where there
are present some or any of the above circumstances;
7.

The failure of the vendee to take exclusive possession of all the property;

8.
At the time of the conveyance, the vendee was living with the vendor and
the former knew that there was a judgment against the latter;
9.
It was known to the vendee that the vendor has no properties other than
that sold to him;
The above enumeration is not an exclusive list. When clear and unmistakable,
badges of fraud will serve to destroy the camouflage of validity of a contract.
Example: To defraud his creditors, a father sold a certain real property to his son
for a very small sum. That property, although apparently sold, was nevertheless
still occupied by the father. The transfer was made after suit by the creditors had
been instituted against the father. It was also proved that the father had no other
property.
The contract may be rescinded as being in fraud of creditors.

Evidence to Overcome Presumption of Fraud

a.
The presumption are disputable and may be rebutted by contrary
evidence.
b.
It is incumbent upon the transferee to establish affirmatively by
satisfactory and convincing evidence that the conveyance was executed in
good faith for a good and valuable consideration.

Art. 1388. 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.
If there are two or more alienations, the first acquirer shall be liable first, and so
on successively.
1. Effects of Bad Faith
The acquirer must return or indemnify
"Due to any cause includes a fortuitous event
2. Subsequent Transfers
If the first transferee is in good faith, the good or bad faith of the next
transferee is not important
If the first transferee is in bad faith, the next transferee is liable only if he
is also in bad faith
Alienate A generic term applicable to the various methods of transferring
property from one person to another.
Bad Faith An intent to deceive or mislead another intentionally which results
in some advantage.
Example: To defraud his creditors, X sold his house to Y, who knew of Xs
purpose. If the sale is rescinded, Y 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.)

Art. 1389. The action to claim rescission must be commenced within


four years.
For person under guardianship and for absentees, the period of four
years shall not begin until the termination of the formers incapacity, or
until the domicile of the latter is known.
1.

2.

Prescriptive Period for Rescission


General rule 4 years from the date the contract was entered into.
Exceptions:
persons under guardianship 4 years from termination of incapacity
absentees 4 years from the time the domicile is known

Example: 5 years after a rescindable contract was made, action was brought for
its rescission. The person who asked for the rescission was neither a ward nor an
absentee at the time of the transaction of the rescindable contract. Will
rescission still be allowed?

ANS: No, the rescission will no longer be allowed because the action has
already prescribed. The action to claim rescission must be commenced within
four years. (1st paragraph, Art. 1389, Civil Code.)

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