Economic loss is a term of art which refers to financial loss and damage suffered by a person

such as can be seen only on a balance sheet rather than as physical injury to the person or
destruction of property.

What are rescissible contracts?

Those which have caused a particular economic damage either to one of the parties or to a third
person and which may be set aside even if valid. It may be set aside in whole or in part, to the extent
of the damage caused. (Art. 1381, NCC)

Which contracts are rescissible?

1. Entered into by persons exercising fiduciary capacity:
a. Entered into by guardian whenever ward suffers damage more than ¼ of value of property.
b. Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of
value of property.
c. Contracts where rescission is based on fraud committed on creditor (accion pauliana)
d. Objects of litigation; contract entered into by defendant without knowledge or approval of
litigants or judicial authority
e. Payment by an insolvent – on debts which are not yet due; prejudices claim of others f.
Provided for by law (Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 & 1659, NCC)
2. Payments made in state of insolvency:
a. Plaintiff has no other means to maintain reparation
b. Plaintiff must be able to return whatever he may be obliged to return due to rescission
c. The things must not have been passed to third persons in good faith
d. It must be made within 4 yrs.

What are the requisites before a

contract entered into in fraud of
creditors may be rescinded?
1. There must be credit existing prior to the celebration of the contract;
2. There must be fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking
rescission;
3. The creditor cannot in any legal manner collect his credit (subsidiary character of rescission); and
4. The object of the contract must not be legally in possession of a third person in good faith.

Article 1382
FEBRUARY 3, 2015 / JAIME ROBILLON

Mga kabayaran ginawa sa kadahilanan nang karukhaan para sa mga obligasyon na

kung saan ang pagtupad ng may pagkakautang ay hindi na mapipilit doon sa panahon
na sila ay apektado ay dapat ikansila na. Halimbawang kaso: Asian Banking v Nable
Jose (51Phil 763)/Asian Banking Corp v Corcuera(51 Phil. 781)

CASE DIGEST BY BONG REYES

ASIA BANKING CORPORATION VS. NABLE JOSE

FACTS:

Lichauco Corporation is the owner of Hacienda Sevitana and Sapangbalen.

Stockholders of the said corporation were Faustino Lichauco and her sister Nable
Jose. Faustino contracted a loan to Asia Baking Corporation amounting to P70,
000.00 to save their farm of sugarcane because of business troubles. Since the
business of Faustino did not do well and he did not even pay his loan to the bank. Asia
Banking Corporation file a complaint against Faustino for recovery of P146,242.11
due and owing it to Lichauco Corporation. The bank upon their agreement wanted to
get the hacienda from Faustino.

Without the knowledge of her sister Nable Jose that Faustino contracted an agreement
concerning the hacienda, she questioned it since the property was also owned by her.
A certificate of registry was issued in her favor as the sole and exclusive owner of the
property.

ISSUE:

Whether or not the agreement between Faustino and Asia Banking Corporation was
valid?

HELD:
No, because Faustino owed the bank amounting to P70,000.00 only and the value of
the hacienda was about P400,000.00 the property maybe dispose in consideration of
its value.The property will not be permitted to alienate and his possessions because
any transferred made because of insolvency is invalid under some circumstances.

A rescissiblecontract is one, which, though possessing all the essential

requisites of contracts, has caused a particular economic damage either to
one of the contracting parties or to a third person.

A voidablecontract is one in which the consent of one party is

defective, either because of want of capacity, or because consent is vitiated.

An unenforceablecontract is one that, for lack of authority or of the

required writing, or for incompetence of both parties, cannot be given effect
unless properly ratified.

A voidcontract is one which suffers from absence of object or cause

and is therefore an absolute nullity and produces no effect.

I. Rescissible Contracts

A rescissible contract has all the requisites required by law for valid
contracts (Art. 1380). What makes it rescissible is economic damage, not just
any economic damage, but those kinds of economic damage enumerated
under Arts. 1381 and 1382.

For a contract to be rescissible, four requisites are required:

1. it must fall under either Art. 1381 or 1382 (Causapin v. CA, 233 SCRA
615 [1994]);
2. the party seeking rescission must have no other legal means to obtain
reparation for damages suffered by him (Art. 1383);
3. the party seeking rescission must be able to return whatever he may
have obtained by reason of the contract (Art. 1385, par. 1); and
4. the things object of the contract must not have passed legally to a third
person in good faith (Art. 1385, pars. 2 and 3).

Let us now take the requisites one by one.

 1. The contract must be one of those enumerated under Art. 1381 or
1382.

“Art. 1381. The following contracts are rescissible:

(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;
(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;
(3) Those undertaken in fraud of 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.”

“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.”

1. The first two contracts enumerated in Art. 1381 are entered into by
representatives (guardians on behalf of wards, and administrators
representing absentees) where the ward or absentee suffers lesion
exceeding 25% of the value of the property which he parts with.

Lesionhas been defined as the “injury which one of the parties suffers
by virtue of a contract which is disadvantageous to him” (IV Arturo M.
Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines 574 (1987), citing 3 Camus 205-06). For the contract to be
rescissible, the lesion must exceed 25% of the value of the thing owned by the
ward or absentee.

The theory of lesion is simple enough but its application has been
strongly criticized. Foremost among the critics is Justice JBL Reyes, perhaps
the Philippines’ greatest civilist, who, in his comments on the Civil Code,
observed: “Modern doctrine does not regard favorably the rule of economic
prejudice (lesion) being a ground of rescission, considering that goods do not
have a fixed true value because value is always variable and fluctuating,
being a function of supply and demand. The modern codes tend to view
lesion of certain proportions (1/4, etc.) as merely raising a presumption of
undue influence, that vitiates consent and renders the contract
voidable…whenever the lesion is coupled with exploitation of one party by the
other. (cf. German Civ. C., Art. 138; Mexico, Art. 17).” (JBL
Reyes, Observations on the New Civil Code, Fifth Installment, Lawyers J.,
Jan. 31, 1951; [c.f. Ruben F. Balane, JBL Ipse Loquitur 239 (2002)]).

This provision on lesion had been hotly debated by the framers of the
French Code, the reason for its final inclusion being the personal intervention
of Napoleon Bonaparte. Manresa criticizes its adoption in the Spanish Code in
no uncertain terms. He calls lesion “un absurdo económico evidente” (a patent
economic absurdity).

It must be noted that, as a rule, dispositions by guardians or

administrators of real property of wards or absentees require court approval
(Rules 95, 96, and 107, Rules of Court [1964]), and without such approval, the
contract would be unenforceable (Art. 1403[1]), and not rescissible. On the
other hand, if prior court approval is obtained, the contract would be valid,
regardless of the presence of lesion (Art. 1386).

“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.”

The only instance, it seems, in which these paragraphs will apply is

when no court approval is required for the contract, as in dispositions
amounting to mere acts of administration (Rule 95, Sec. 1 and Rule 96, Sec.
2, Rules of Court).

1. The third paragraph (Art. 1381)—contracts in fraud of creditors—refers

to the ancient remedy of actio pauliana. [Arts. 1177 and 1313 provide
for the same thing.]

The requisites for actio pauliana are given in Siguan v. Lim (318 SCRA 725
[1999]):

1. the plaintiff asking for rescission has a credit prior to the alienation,
although demandable later;
2. the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person;
3. the creditor has no other legal remedy to satisfy his claim;
4. the act being impugned is fraudulent; and
5. the third person who received the property conveyed, if it is by
onerous title, has been an accomplice in the fraud.
 1. The fourth paragraph has essentially the same purpose as the third, i.e.
to prevent injury to a third person (in this case the party who has lodged
a claim over the property).

1. Some specially declared rescissible contracts are found in the Title on

Sales, viz: Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, and 1567.

1. Re: rescissible contracts under Art. 1382, the insolvency there

contemplated is factual insolvency, not necessarily involving an
insolvency proceeding.

B. The party seeking rescission must have no other legal means to obtain
reparation for damages suffered by him.

The remedy of rescission is subsidiary. This is clear from Art. 1383:

“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.”

In this connection, a careful distinction must be made between

rescission of a properly rescissible contract and rescission under Art. 1191.

“Art. 1191. The power to rescind obligations is implied in reciprocal ones, in

case one of the obligors should not comply with what is incumbent upon him.”

“The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages, in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.”

“The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.”

“This is understood to be without prejudice to the rights of third persons who

have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.”

The rescission under Art. 1191, properly called resolution, is

essentially different from rescission under Art. 1383. It is unfortunate that the
distinction in terminology, so scrupulously observed in the Spanish Code
[resolver (Art. 1124) versus rescindir (Art. 1290)] was so carelessly discarded
in the Philippine Code, leading to confusion, even on the part of people who
should know better.

Again, Justice JBL Reyes steps in to clear up the mess, in his

concurring opinion in UFC v. CA (33 SCRA 1 [1970]). The relevant portion of
that concurring opinion is:

“‘…the argument of petitioner, that the rescission demanded by

the respondent-appellee….should be denied because under Article 1383 of
the Civil Code of the Philippines rescission can not be demanded except
when the party suffering damage has no other legal means to obtain
reparation, is predicated on a failure to distinguish between a rescission for
breach of contract under Article 1191 of the Civil Code and a rescission by
reason of lesión or economic prejudice, Article 1381, et. seq. The rescission
on account of breach of stipulation is not predicated on injury to the economic
interests of the party plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that the action for
rescission thereunder is subordinated to anything other than the culpable
breach of his obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old Latin
aphorism:‘Non servanti fidem, non est fides servanda.’ Hence, the reparation
of damages for the breach is purely secondary.’”

On the contrary, in the rescission by reason of lesión or economic prejudice,

the cause of action is subordinated to the existence of that prejudice, because
it is the raison d’être as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But
the operation of these two articles is limited to the cases of rescission
for lesiónenumerated in Article 1381 of the Civil Code of the Philippines, and
does not apply to cases under Article 1191.

“It is probable (JBL concludes) that the petitioner’s confusion

arose from the defective technique of the new Code that terms both instances
as ‘rescission’ without distinctions between them; unlike the previous Spanish
Civil Code of 1889 that differentiated ‘resolution’ for breach of stipulation from
‘rescission’ by reason of lesión or damage. But the terminological vagueness
does not justify confusing one case with the other, considering the patent
difference in causes and results of either action.’” 1
“The last comment—parenthetically—is apropos, and codifiers will do well to
avoid, as far as possible, the same identical terms for different
concepts. Such terms as rescission, fraud, collation, ratification, etc.—all
used in the Code in varying or equivocal senses—can only ensnare students,
professors, practitioners, and courts.” (Ruben F. Balane, A Harvest of
Eighteen Years: A Survey of Jose B.L. Reyes’ Leading Supreme Court
Decisions on Civil Law, Part II, in Civil Law Florilegium: Essays on the
Philippine Variant of the Civil Code Traditions 512 (2012)).

In a nutshell, the essential distinctions between rescission under Arts. 1380-

1389 and rescission (resolution) under Art. 1191 are two:

1. Rescission is predicated on economic injury; resolution, on breach; and

2. Rescission is a subsidiary action; resolution, a principal one retaliatory
in character.

This important differentiation was reiterated in Ong v. CA (310 SCRA

1 [1999]).

C. The party seeking rescission must be able to return whatever he may

have obtained by reason of the contract.

This is required by Art. 1385, Par. 1.

“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.”

Rescission cancels the contract; consequently, the parties must be

returned to the status quo ante.Hence, the need for mutual restitution.

D. The things object of the contract must not have passed legally to a
third person in good faith.

The basis for this requirement is found in Art. 1385, Paragraphs 2 and
3:

“Art. 1385. xxx xxx x x x”

“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.”

Ang mga pagbabayad na ginawa sa isang estado ng kawalan ng kalayaan para sa mga
obligasyon na kung saan ang katuparan ng may utang ay hindi mapilit sa panahon na sila ay
maapektuhan, ay maaari ding mapawalang bias

equirements
required:1.
Debtor is
insolvent2.
Debt is not yet
due &
demandableA
rticle 1382