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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a) Rescissible valid until rescinded; there is a sort of extrinsic defect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 Contracts validly agreed upon may be rescinded in the cases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(NOTE: Even a voidable contract may be rescinded, for example, by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;
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.
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
Badges of Fraud
a.
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.
4.
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.
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.)
2.
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.)