CHAPTER 6 - Rescissible Contracts (Arts. 1380-1389)

Chapter 6 – Rescissible Contracts (Articles 1380-1389)

CHAPTER 6 RESCISSIBLE CONTRACTS (Articles 1380-1389) 1. What is rescission?  Rescission is a remedy granted by law to contracting parties (Art. 1381, Nos. 1 & 2), and even to third persons (Art. 1381, Nos. 3 & 4), to render ineffective a contract validly entered into in order to secure reparation for pecuniary injury or damage caused them by the contract. 2. What are the rescissible contracts under Article 1381? A. Contracts which are entered into by guardians whenever the wards whom they represent suffer lesion by more than onefourth of the value of the things which are the object thereof. See Art. 1381 (1)

 Lesion is the injury suffered, as a result of inequality of conditions, by one party who does not receive the full equivalent for what he gives in a commutative contract, like a sale. (The contract of sale is commutative because the thing sold is considered the equivalent of the price paid and vice versa.)  A ward is a person under guardianship by reason of some incapacity such as a minor or an insane person. CASE No. 1: When the lesion is only one-fourth (1/4) or less, the contract is not rescissible. - M is the owner of a car worth P2M. G is the guardian of M. On March 8, 2013, M celebrated his 16th birthday. On the same day, G (in behalf of M) sells the car to B for P1.5M. DISCUSSION: The lesion here is P500,000 (P2M – P1.5M) which is the financial loss suffered by M arising from the sale of his car by G to M. P500,000 is exactly one-fourth of the value of the car of M. Since Article 1381 requires that the

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lesion suffered by the ward should be more than one-fourth, the sale of the car by G to B is not rescissible. CASE No. 2: When the lesion is more than one-fourth (1/4), the contract is rescissible. - In Case No. 1 above, G sold the car of M to B for P1.4M. Is the contract of sale rescissible? DISCUSSION: M’s car (which is worth P2M) was sold for P1.4M by the guardian G. The lesion suffered by M then amounts to P600,000 (P2M – P1.4M). One-fourth of the value of the car (object of the contract of sale) is P500,000. Since the lesion suffered by M in this case (P600,000) is more than one-fourth of the value of the car, the contract of sale is rescissible. When M reaches the age of majority, he can file an action to rescind the contract (Action for Rescission) on the ground that, at the time of his minority, his guardian G sold his property with a lesion of more than one-fourth of its value.

B. Contracts agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number. See Art. 1381 (2)

 An absentee is a person who disappears from his domicile (residence), his whereabouts (exact location) being unknown, and without leaving an agent to administer his property.  In order to avail of the remedy of rescission, the absentee must also suffer a lesion of more than one-fourth of the value of the thing which is the object of the contract sought to be rescinded. CASE No. 3: If an absentee suffers a lesion of more than one-fourth (1/4), the contract is rescissible. - On December 20, 1988, Abby borded the M/V Doña Paz bound for Manila. The following day, the vessel was reported to have sunk in the waters of Mindoro. Abby was not among the passengers who were rescued. Abby had a 500 square-meter lot in Bulacan worth P2M. On January 16, 1992, the sister of Abby, Aisha, sold the lot to Efren for P1.2M. On December 10, 1992, Abby suddenly appeared in their home in Bulacan. She was rescued by officers of the Philippine Coast Guard from an abandoned island near Taiwan. When Abby

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learned about the sale of her lot, she filed an action for rescission of the contract of sale between Aisha and Efren. Is the contract of sale rescissible? DISCUSSION: YES. This case involves the sale of the property of an absentee by a representative, which is what is referred to under Article 1381 (2). The absentee suffered lesion by more than one-fourth of the property amounting to P800,000 (P2M – P1.2) by reason of the contract of sale. Therefore, as soon as Abby appeared, she has the right to file an action for rescission of the contract of sale on the ground of lesion under Article 1381 (2).

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Under Article 1386, “the rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved by the courts.” In other words, if a contract entered into in behalf of a ward or absentee is approved by the court, rescission cannot take place. This is because, if the contract is approved by the court, the law presumes that the court is acting in the interests of the ward or absentee even if there is lesion.

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Remember: Under Article 1381, Nos. 1 & 2, the contract is rescissible only if the contract was undertaken by a guardian of the ward, or a representative of an absentee, involving a property belonging to the ward or absentee. CASE No. 4: The contract is not rescissible even if the lesion is more than one-fourth of the value of the object of the contract if the contract was not made by a guardian or representative in behalf of his ward or an absentee, respectively. - Perla is the owner of a house and lot valued at P4M. Not knowing the actual market value of her property, she sold the house and lot to Choy for P2M. There is here a lesion of P2M, which is one-half of the value of the property object of the contract of sale. Is the contract rescissible under Article 1381? DISCUSSION: NO. The property object of the contract of sale in the instant case does not belong to a ward or an absentee. Neither was it sold by a guardian of the ward or a representative of an absentee. Hence, Article 1381 will not apply. The provision that will apply is Article 1355 which states that “Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence.”

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C. Contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them. See Article 1381 (3)

 Under this ground for rescission, so that the creditor can rescind the contract which was undertaken (perfected or made) by the debtor to defraud him, the creditor must prove two important facts : i. Fraud on the part of the debtor; and ii. There is no other way by which he can collect his claim or credit. CASE No. 5: A contract undertaken by the debtor to defraud the creditor CANNOT be rescinded if there is some other way for the creditor to collect his claim. - D owes C P5M due on March 30, 2013. D is the owner of a 1000 squaremeter lot in Caloocan City worth P7.5M. As of November 30, 2011, D was already insolvent and the only property left was his lot. He knew that C would run after the lot on maturity date of the obligation. Hence, on February 4, 2013, a few weeks before maturity date of the obligation, D sold his lot to B for P6M. As expected, D was not able to pay his P5M debt to C on March 30, 2013. On April 1, 2013, D received news from his relatives in Masbate that he had inherited the amount of P10M cash from his grandfather who just passed away. On April 5, 2013, C learned that D had earlier sold his lot to B shortly before maturity date of the obligation, obviously to evade his obligation to C. C then filed an action for annulment of the contract of sale between D and B, on the ground that the sale was undertaken by D to defraud him. Is the contract of sale rescissible under Article 1381 (3)? DISCUSSION: There is no doubt from the facts of this case that D sold his lot to B for the purpose of defrauding C – to evade his P5M debt which was almost due. A contract which is entered into by the debtor to defraud his creditor is definitely a rescissible contract under Article 1381 (3). However, it is also required under Article 1381 (3) that the creditor be deprived of any other means with which to collect his credit. This requirement is not supported by the facts of our case. D inherited the amount of P10M from his grandfather who just died; hence, he is now solvent. The rescission of the contract of sale will no longer be necessary, and will not be entertained by the court. C can collect his claim from D’s inheritance.

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D. Contracts 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. See Article 1381 (4)

 A thing is under litigation if it is the subject matter of a pending case.  A litigant refers to a party in a case (i.e., the plaintiff or defendant) CASE No. 6: When a thing is under litigation, it cannot be sold by the defendant without the approval of the complainant or the judge. - On January 1, 2012, Noli and his family moved to a 200 square-meter house and lot which he inherited from his parents. On August 12, 2012, Benny (the brother of his father) filed an action against Noli for recovery of ownership of the property. Benny states that the property was sold to him by Noli’s parents two years before they died in a car accident. On November 30, 2012, Noli sold the property to Esmeralda without the consent of Benny and the court handling the case. On August 15, 2013, the court rendered judgment declaring Benny the absolute owner of the house and lot. DISCUSSION: In this case, Noli sold the house and lot to Esmeralda while the case for recovery of ownership between him and his uncle was still pending. And the sale was undertaken without the consent of Benny or the court. The sale is, therefore, rescissible under Article 1381 (4). Now that judgment has been rendered, and Benny has been declared the absolute owner of the property, Benny can file an action for rescission of the contract of sale against Noli.

3. What is the nature of an action for rescission?  Article 1383 states that : “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 expresses the rule that even if the contract is covered by any of the instances under Article 1381, the injured party cannot immediately file an action for rescission of the contract. This is because the remedy of rescission is NOT a principal remedy. The law states that it is merely a subsidiary remedy which can be resorted to by the injured party ONLY if he can prove that he has no other legal 5


means aside from rescinding the contract to obtain compensation for the damage caused to him.  CASE No. 5 of this lecture is an illustrative example of the nature of an action for rescission.  Also in CASE No. 2 of this lecture, if the buyer B is willing to make an additional payment of P100,000 on the purchase price for the car, rescission will not be granted. In such a case, the lesion will no longer amount to more than one-fourth of the value of the car, and there is no more ground to have the contract rescinded.  Reason why an action for rescission is only a subsidiary remedy: The policy of the law is to preserve or respect the parties’ contract, not to extinguish it. 4. Assuming that the contract sought to be rescinded falls under any of instances enumerated in Article 1381, will an action for rescission be automatically granted by the court to the injured party? NO. Even if the contract is rescissible under Article 1381 : A. The remedy of rescission will be allowed only if mutual restitution is still possible. See Article 1385, par. 1.  Mutual restitution means the obligation of the parties to give back to each other what they have received under the contract. For example, if a contract of sale is rescinded, the buyer will be obliged to give back to the seller the object of the contract, together with its fruits. On the other hand, the seller will be obliged to give back to the buyer the purchase price plus its legal interest.  Rationale : The main purpose of the law in granting the remedy of rescission is to restore the parties to their original situation before the perfection of the contract sought to be rescinded. Therefore, if mutual restitution is no longer possible, an action for rescission cannot be allowed.

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Example: Let us examine the facts in CASE No. 1 of this lecture. Assume that on June 30, 2016, M files an action for rescission of the contract of sale undertaken by his guardian G with B. The car is still in good condition and can be returned by B to M. However, M already spent the entire P1.5M purchase price which he received for the sale of the car. Discussion: In this case, even if M suffered a lesion of more than one-fourth of the value of his car because of its sale by his guardian G to B, the remedy of rescission cannot be granted. This is because M can no longer restore to B the purchase price for the sale in the amount of P1.5M. Common sense dictates that it would amount to unjust enrichment on the part of M if he were to get back possession of his car, and at the same time retain the purchase price paid by B for the object of the contract of sale rescinded. Note : In this case, the remedy of M is to demand indemnity for damages from G, the person who made possible the financial loss suffered by M. (Article 1387, par. 3)

B. The remedy of rescission will be allowed only if the property, object of the contract, is in the possession of third persons who acted in bad faith. See Article 1385, par. 2.  A person in good faith, for purposes of this discussion, is a person who acquired the property and registered it in the Registry of Property, not knowing the flaw or defect in his title or mode of acquisition. CASE No. 7: Rescission cannot take place when the things which are the object of the contract are in the legal possession of third persons who acted in good faith. - Dencio owes Concha P5M due on March 30, 2013. On February 15, 2013, Dencio sold a parcel of land (the only property that he had) to Teresa for P7.5M. Teresa was not aware of the intention of Dencio to evade his obligation to Concha. The contract of sale between Dencio and Concha was executed in a public instrument and subsequently registered in the Registry of Property. A new certificate of title to the property was issued to Teresa. On March 30, 2013, Dencio became insolvent and could not pay his debt to Concha. Later, Concha found out

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about the sale of Dencio’s only property to Teresa on February 15, 2013. Hence, on April 15, 2013, Concha filed an action for rescission of the contract of sale. Discussion: The action for rescission in this case cannot be allowed. It is true that the contract of sale here was undertaken by the debtor Dencio with intent to defraud his creditor Concha. Under Article 1381, No. 3, such a contract is rescissible. However, the purchaser of the land (the object of the contract of sale which Concha wants to rescind) acquired the land in good faith, and did not know of the intentions of Dencio. Hence, rescission cannot be granted. If Teresa had known of the intentions of Dencio, and connived with Dencio to help him evade his obligation to Concha, then Teresa would be considered a purchaser in bad faith, and rescission would still stand as a remedy to Concha. Note : To avail of the remedy of rescission, Concha must prove the intent to defraud on the part of Dencio, as well as bad faith on the part of the purchaser Teresa. Without sufficient proof of these facts, rescission under Article 1381, No. 3 cannot be granted by the court.

5. Are there cases when the defrauded creditor, under Article 1381, No. 3, need not present evidence to prove the fact of fraud on the part of the debtor?  We said that under Article 1381, No. 3, if the creditor wants to avail of the remedy of rescission, one of the essential facts that he must prove is the fact of fraud on the part of the debtor. Without proof of the debtor’s intention to defraud the creditor, the action for rescission will not prosper. There are, however, some situations where there is a presumption of fraud on the part of the debtor. In this situations, the creditor need not present proof of the fact of fraud. The “burden of proof” (the duty to prove) is shifted to the debtor, who is now obliged to present proof that he was in good faith. The situations are stated in paragraphs 1 and 2 of Article 1387. A. A donation by the debtor of his property is presumed to be fraudulent if he did not set aside some property which will be enough to pay for all his debts made before the donation. See Article 1387, par. 1.

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CASE No. 8: There is a presumption that the debtor intended to defraud the creditor if the debtor gratuitously alienates (donates) his property without leaving sufficient property to pay for his debts. - Danilo owes Crisanta P2M due on June 30, 2013. On February 18, 2013, Danilo donated his P3M lot to Gracia who accepted it. On June 30, 2013, Danilo could not pay his obligation to Crisanta. It also appears that the only property that Danilo had was the P3M lot he donated to Gracia. Crisanta then filed an action for rescission of the contract of donation between Danilo and Gracia on the ground that the donation was made by Danilo to defraud Crisanta by escaping from his obligation. Discussion: In this case, Crisanta has in her favour the presumption that the contract of donation was made by Danilo in bad faith. The presumption arises from the fact that Danilo did not leave enough property to pay for his existing debts. Because of the presumption, it is now Danilo’s duty to prove before the court in the action for rescission that he had made the gratuitous alienation in good faith, and not for the purpose of defrauding his creditor Crisanta.

B. The sale or onerous alienation by the debtor of his property is presumed fraudulent if (1) a judgment has already been rendered against him, or (2) a writ of attachment has been issued against him. See Article 1387, par. 2.  If a debtor fails to pay his obligation on maturity date, the creditor may decide to file an action for specific performance in court to compel the debtor to comply with his obligation. If the debtor has an existing property, the creditor may ask the court for the issuance of a “writ of attachment” on the property. Once granted, the property of the debtor which is attached by the court will be subject to the court’s custody and cannot be sold by the debtor while the case against him is still pending, and until final judgment has been rendered in the case. If the creditor wins the case and the debtor is insolvent, the attached property will be ordered sold by the court at public auction to pay for the debtor’s obligation. Example : Dino is the owner of a 200 square-meter lot situated in Manila which is valued at P4M (“the Manila lot”). Dino also owns a 300 square-meter lot in Parañaque which is worth P4.5M (“the Parañaque lot”). Dino owes Crissa P3M due on March 30, 2013. Dino also owes Charlie P4M due on April 30, 2013. On April 1, 2013, despite repeated demands from Crissa, Dino failed to pay his debt. On April 20, 2013, Crissa filed an action in court against Dino for collection of her credit.

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Crissa also filed a petition with the court for the issuance of a “writ of attachment” over the Manila lot owned by Dino so that if judgment is rendered in her favour, the Manila lot may be sold at public auction to cover Dino’s obligation. A “writ of attachment” was then issued by the court over Dino’s Manila lot on April 25, 2013. After several hearings, the court rendered judgment on September 14, 2013, ordering Dino to pay Crissa his obligation plus damages.

 We now apply the provisions of Article 1387, par. 2, on onerous alienations of the debtor which are presumed to be fraudulent and, therefore, rescissible under Article 1381, No. 3 : (a) After a “writ of attachment” is issued by the court, Dino will be prohibited from selling his properties, including the Parañaque property which was not attached by the court in the collection case. If Dino sells either the Manila lot or the Parañaque lot, an action for rescission may be filed by Crissa or Charlie. This is because under the last portion of the 2nd paragraph of Article 1387, it is stated that an onerous alienation made by the debtor against whom a “writ of attachment” was issued is presumed fraudulent (intended to defraud the creditor), even if the property sold was not the property attached. An action for rescission may also be filed by Charlie (also a creditor of Dino) because it is not necessary that the creditor filing the action for rescission was the complainant in the case where the “writ of attachment” was issued. (b) After judgment is rendered by the court in favour of Crissa, Dino will also be prohibited from selling either of his lots (Manila or Parañaque) until the judgment is satisfied, or the obligation to Crissa is paid. Even if no “writ of attachment” was issued against any of Dino’s properties, if Dino sells either the Manila lot or the Parañaque lot after judgment is rendered against him in the collection case filed by Crissa, the sale will be presumed fraudulent under the 2nd paragraph of Article 1387. An action for rescission may be filed by Crissa, and even by Charlie (also a creditor of Dino), because it is not necessary that the creditor filing the action for rescission was the complainant in the case where the judgment was issued.

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 In summary, if a writ of attachment or a judgment has already been issued by the court against the debtor, the debtor cannot sell ANY of his properties. If he does, the sale will be presumed fraudulent, and an action for rescission may be filed by ANY of his creditors. 6. What is the prescriptive period (time limit or cut-off date) for filing an action for rescission?  It does not mean that because the contract sought to be rescinded falls under any of the instances under Article 1381, the injured party can file an action for rescission any time he wants. For an action for rescission to prosper, it must be filed within the prescriptive period provided by law.  Article 1389 states : “ART. 1389. The action to claim rescission must be commenced within four years. 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.”

 As a general rule, under Article 1389, an action for rescission must be filed by the injured party within four years from the time of the perfection of the contract. (a) In CASE No. 5 of this lecture, rescission must be filed by C within four years counting from February 4, 2013, the date when D and B perfected the contract of sale. Therefore, C has until February 4, 2017 within which to file an action for rescission. If C files his action for rescission on February 5, 2016, the action will be dismissed due to prescription (because the action has already prescribed). (b) In CASE No. 6 of this lecture, Benny has until November 30, 2016 (4 years counted from the perfection of the contract of sale between Noli and Esmeralda) within which to file an action for rescission of the contract of sale.

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 Article 1389, par. 2, provides for the exceptions to the general rule, as follows : (a) If the ground for rescission is Article 1381, No. 1, the prescriptive period is four (4) years counted from the time the ward attains capacity.  In CASE No. 1 of this lecture, M celebrated his 16th birthday on March 8, 2013 which is the same date his guardian G sold his car to B for P1.5M. The prescriptive period here is four (4) years counted from the time M attains legal age on March 8, 2015. Therefore, after M’s 18th birthday, he has until March 8, 2019 within which to file an action in court for the rescission of the contract of sale between G and B. (b) If the ground for rescission is Article 1381, No. 2, the prescriptive period is four (4) years counted from the time the absentee appears.  In CASE No. 3 of this lecture, the four-year prescriptive period will NOT be counted from January 16, 1992 which is the date when the contract of sale of Abby’s lot was made between Aisha and Efren. The four-year prescriptive period will start to run from the time the whereabouts of Abby became known already, which is on December 10, 1992. Therefore, Abby has until December 10, 1996 within which to file an action in court for the rescission of the contract of sale between Aisha and Efren. 7. What is the binding force of rescissible contracts? Being one of the defective contracts subject to rescission by the injured party, is a rescissible contract valid and binding between the parties?  A rescissible contract is a valid and binding contract, unless rescinded by a proper action in court by the injured party. Therefore, if the injured party chooses not to question the defectiveness of the contract by filing an action for rescission, a rescissible contract can be enforced between the parties. In fact, if an injured party does not file an action for rescission within the prescriptive period of four years, a rescissible contract attains the status of a contract which has no defect whatsoever and can no longer be invalidated by the injured party. 8. From the above discussion, the following are the requisites before the remedy of rescission may be availed of : 12


(a) The contract must be valid. (Art. 1380) (b) There must be lesion or pecuniary prejudice to one of the parties or to a third person. (Art. 1381) (c) The rescission must be based upon a case especially provided by law. (Arts. 1380, 1381 & 1382) (d) There must be no other legal remedy to obtain reparation for the damage. (Art. 1383) (e) Mutual restitution must still be possible. (Art. 1385, par. 1) (f) The thing object of the contract must not be in the legal possession of third persons who acted in good faith. (Art. 1385, par. 2) 1389)

(g) The action must have been timely filed, i.e., not yet prescribed. (Art.

Prepared by : Atty. Harriet Reyes Linsangan September 13, 2013

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CHAPTER 6 - Rescissible Contracts (Arts. 1380-1389)

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