Chapter 6 RESCISSIBLE CONTRACTS

ART. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Meaning of rescissible contracts.

Rescissible contracts are those validly agreed upon because all the essential elements exist and, therefore,
legally effective, but in the cases established by law, the remedy of rescission is granted in the interest of
equity.
Binding force of rescissible contracts.
They are valid and enforceable although subject to rescission by the court when there is damage or
prejudice to one of the parties or to a third person. In a rescissible contract, there is no defect at all but by
reason of some external facts, its enforcement would cause injustice.
Meaning of rescission.
Rescission is an equitable remedy granted by law to the contracting parties and sometimes even to third
persons in order to secure reparation of damages caused them by a valid contract, 2 by means of the
restoration of things to their condition prior to the celebration of said contract.

Requisites of rescission.
The following are the requisites in order that the remedy of rescission under this Chapter may be availed
of:
(1) The contract must be validly agreed upon
(2) There must be lesion or pecuniary prejudice or damage to one of the parties or to a third person
(3) The rescission must be based upon a case especially provided by law
(4) There must be no other legal remedy to obtain reparation for the damage
(5) The party asking for rescission must be able to return what he is obliged to restore by reason of
the contract
(6) The object of the contract must not legally be in the possession of third persons who did not act in
bad faith
(7) The period for fi ling the action for rescission must not have prescribed.

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. (1291a)

Cases of rescissible contracts.

The subsidiary action for rescission (Art. 1383.) is limited to the rescissible contracts under Article 1381.
(1) Contracts entered into in behalf of wards.
(2) Contracts agreed upon in representation of absentees.
(3) Contracts undertaken in fraud of creditors.
(4) Contracts which refer to things under litigation.
(5) Other instances.
 (6) Violation of right of first refusal.

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 affected, are also rescissible. (1292)

Payments made in a state of insolvency.

The present article speaks of “payments” not exactly of a contract. A debtor is insolvent if he does
not have sufficient properties to meet his obligations. It is not necessary that debtor’s insolvency be
judicially declared.

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. (1294)

Nature of action for rescission.

Rescission of contracts under Article 1383 should be distinguished from rescission of reciprocal
obligations under Article 1191. Although both presuppose contracts validly entered into and subsisting
and both require mutual institution when proper, they are not entirely identical.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

Extent of rescission.
The entire contract need not be set aside by rescission if the damage can be repaired or covered by
partial rescission. The rescission shall only be to the extent of the creditor’s unsatisfied credit. The policy
of the law is to preserve or respect the contract, not to extinguish it.

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. (1295)
Effect of rescission.
(1) Obligation of mutual restitution.
(2) Abrogation of contract.
(3) Obligation of third person to restore.

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. (1296a)

Contracts approved by the courts.

If a contract entered into in behalf of a ward or absentee has been approved by the court, rescission
cannot take place because it is valid whether there is lesion or not. The law presumes that the court is
acting in the interests of the ward or absentee when it approves the contract in spite of the lesion.

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.
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. (1297a)

When alienation presumed in fraud

of creditors.
The general rule is that fraud is not presumed. As fraud is criminal in nature, it must be proved by
clear and preponderance of evidence.
(1) Instances not exclusive.
(2) Presumption not applicable in the absence of transfer.
(3) Only actual creditors can ask for rescission.
(4) Vendor, an indispensable party in action for rescission of sale.

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. (1298a)

Liability of purchaser in bad faith.

The purchaser in bad faith, who acquired the object of the contract alienated in fraud of creditors,
must return the same if the sale is rescinded (see Art. 1383.) and should it be impossible for him to return
it due to any cause, he must indemnify the former.
Should there be two or more alienations, the first acquirer shall be liable first, and so on
successively.

Meaning of bad faith.

Bad faith does not simply connote bad judgments or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means breach of a known duty through some
motive or interest or ill-will. It partakes of the nature of fraud.
Bad faith is a state of mind indicated by acts and circumstances and can be demonstrated, not only
by direct proof, but also by circumstantial evidence.

Meaning of purchaser in good faith.

A purchaser in good faith is one who buys the property of another without notice that some other
person has a right to, or interest in, such property and pays a full and fair price for the same, at the time of
such purchase, or before he has notice of the claim or interest of some other person in the property.

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. (1299)

Period for fi ling action for rescission.

As a general rule, the action to rescind contracts must be commenced within four (4) years from the date
the contract was entered into. The exceptions are:
(1) For persons under guardianship, the period shall begin from the termination of incapacity; and
(2) For absentees, from the time the domicile is known. Laches bars an action for rescission or
annulment of a contract.