- It 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 this should be valid, by means of restoration of things to their condition at the moment prior to the celebration of said contract.
- It is a relief for the protection of one of the contracting parties and third persons from all injury and damage the contract may cause, or to protect some incompatible and preferent right created by the contract.
- Nature of contract: Rescission is perfectly compatible with the validity of contract, but it does not require
such validity as an essential condition. Hence, a voidable contract may also be rescinded.
- Direct proceedings to rescind: Rescissible contracts are not void, and until set aside in a rescissory action
they are legally effective, convey title, and cannot be attacked collaterally upon the grounds for rescission in a land registration proceeding.
Requisites for Rescission:
1. The contract must be a rescissible contract, those mentioned in articles 1381 and 1382.
2. The party asking for rescission must have no other legal means to obtain reparation for damages suffered by him (Art. 1383)
3. The person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Art. 1385)
4. The things which are the object of the contract must not have passed legally to the possession of a third person acting in good faith (Art. 1385)
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Rescissible Contracts: 1. Lesion:
- Art 1381(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;
- Art. 1381(2): Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;
- Art. 1386: Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to
contracts approved by the courts.
- Lesion, defined: it is the injury which one of the parties suffers by virtue of a contract which is
disadvantageous for him.
- When: To give rise to rescission, the lesion must be known or could have been known at the time of
making the contract, and not due to circumstances subsequent thereto or unknown to the parties. - Contracts of guardian: As a rule, when a guardian enters into a contract, involving disposition of the
ward’s property, he must secure the approval of the guardianship court.
- Acts of administration only: A guardian is authorized only to manage the estate of his ward; hence, he
has no power to dispose of any portion thereof without the approval of the court.
- Acts of dominion without court approval, invalid: He cannot, without judicial approval, enter into any
contract which would be more than a mere act of administration.
- When unenforceable and not rescissible: If such contracts of disposition are not approved by the court,
they are unenforceable under par. 1 of Art. 1403, irrespective of whether there is lesion or not. They are not rescissible.
- When contract by guardian rescissible: The law here must be limited to contracts which constitute mere
ACTS OF ADMINISTRATION. These contracts do not need court approval, because they are made in the ordinary course of the management of the estate of the ward. If the required lesion exists, they are rescissible.
- When contract not rescissible even with lesion: But even if such lesion exists, the contract cannot be
rescinded, if the guardian has secured the approval of the guardianship court for such contract (Art. 1386)
- Contracts for Absentees: The power and duties of a legal representative of an absentee, appointed by
the court, are the same as of those guardians. Thus, same rules on contracts of guardians. - Start of prescriptive period of four years: From the discovery of lesion
2. In Fraud of Creditors / Accion Pauliana
- Art. 1381(3): Those undertaken in fraud of creditors when the latter cannot in any other manner collect
the claims due them;
- Meaning: These are the contracts with the intention to prejudice the rights of creditors.
- Requisite before a contract may be rescinded on ground of fraud of creditors:
1. That the plaintiff asking for rescission has a credit prior to alienation, although demandable later. 2. That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person 3. That the creditor has no other legal remedy to satisfy his claim, but would benefit by the rescission
of the conveyance to the third person. 4. That the act being impugned is fraudulent.
5. That the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.
- When there is presumption of fraud:
1. Art. 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.
2. 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.
3. Any sale made for fictitious or simulated considerations. 4. Any sale made for grossly inadequate considerations. 5. Any sale on credit made by insolvent debtor.
6. Any sale or transmission of property made after action is instituted against debtor. 7. Any sale where the buyer still have the exclusive possession of the things sold.
8. If the buyer knows that the property sold is the only property of the vendor who is indebted. 9. Transfer of all properties of insolvent debtors or debtor financially embarrassed
3. Contracts for Things Under Litigation:
- Art. 1381(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;
- What: It refers to a contract executed by the defendant in a suit involving the ownership or possession of
a thing, when such contract is made without the knowledge and approval of the plaintiff or of the court. - Right of Transferee: Where the claim of the plaintiff in the pending litigation has not been registered, and
there is no legal obstacles to the transfer, the transferee of a property in litigation, who acquires the same in good faith and for valuable consideration, without knowledge or notice of the litigation or claim of the plaintiff, cannot be deprived of such property by a rescissory action.
- But if transfer is gratuitous: The transferee loses nothing by the rescission, and the contract may be
rescinded even if he acted in good faith. - Examples:
1. Transfer of things in litigation whether or not there is notice of lis pendens 4. Declared by Law:
- Art. 1381(5): All other contracts specially declared by law to be subject to rescission.
- Examples:
1. Payment made 180 days prior to the insolvency (FRIA)
5. Payments in Insolvency:
- Art. 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.
- Payment When Insolvent: Where a debtor transfers property to a creditor allegedly in payment of a debt
which has not yet matured, at a time when the debtor is insolvent, and when the consideration for the transfer is grossly inadequate, compared to the actual value of the property transferred, the transfer is fraudulent and may be set aside by the creditors prejudiced thereby.
- Insolvency referred: The insolvency referred to in this article is insolvency in fact, not requiring any
judicial proceeding on insolvency.
Nature and Effects:
- Art. 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.
- No Other Remedy: The plaintiff asking for rescission must prove that he has no other legal means to
obtain reparation.
- Art. 1384: Rescission shall be only to the extent necessary to cover the damages caused.
- Extent of Rescission: The rescission is only in favor of the plaintiff creditor; not all the creditors.
- Who May Bring Action:
1. The person who is injured by the rescissible contract, such as the ward or absentee in the case of lesion, the creditors prejudiced by a fraudulent alienation, and the plaintiff in a case where a thing in litigation is alienated by the defendant.
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2. The heirs of these persons
3. Their creditors by virtue of the right granted by Art. 1177
- 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.
- Mutual Restitution: The only possible application of the rule that the party seeking rescission must offer
to restore that which he has received from the other, is in contracts executed by guardians or administrators in Ar. 1381 (1) and (2).
Prescriptive Period:
- Art. 1389. The action to claim rescission must be commenced within four years.
- Minority of Party: A minor who is a party to a contract of sale must bring the action for rescission within
four years after attaining the age of majority.