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Rescissible Contracts (A. 1380-1389) A rescissible contract has all the essential elements of a valid contract.

However, by virtue of an extrinsic defect which causes inequity or economic inequity, also known as lesion, to one of the parties or to third persons, it can be rescinded. Regardless of said defect, a rescissible contract remains enforceable until the legal remedy of rescission is effected. Rescission (A. 1380) v. Resolution (A. 1191) Article 1191 speaks of the legal remedies of resolution and specific performance in case of the non-performance of the obligation by one of the parties. Although the article used rescission, instead of the correct term resolution, it is different from the concept of rescission used in Article 1380. In the case of Heirs of Quirong vs. DBP1, the court distinguished rescission as defined in Article 1380 from rescission as described in Article 1191. Resolution is the proper remedy in case of breach of faith in a reciprocal obligation, whereas rescission finds application when the offended party suffers an economic injury from the contract. Differences 1. Cause of action: For resolution to be availed of, there must be nonperformance or non-fulfilment of the obligation by one of the parties. On the other hand, said cause of action is immaterial for the rescission of a contract. The controlling factor for rescission is the presence of lesion or economic injury to either of the parties or to third persons 2. Proper party/parties to institute the action: Only the injured party can institute the proceedings for resolution, whereas an action for rescission can be filed by any of the parties to the contract or by a third person or persons, who are prejudiced from the existence of the contract.

Heirs of Quirong v. DBP, G.R. No. 173441, 2009

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3. Imposition of terms or period by the courts: The courts have absolutely no power to impose a period or a term to which the parties should comply in an action for rescission, unlike in resolution where the courts, in some case, can set the period within which the parties should comply. Kinds of Rescissble Contracts 1. Lesion ( A. 1381 [1] & [2], A. 1386) Lesion, also known as economic inequity, occurs when a party suffers economic injury due to a disparity between the purchase price and the actual value of the subject property. The general rule is that the presence of lesion does not make a contract ipso facto rescissible, unless the law so provides as in these cases: a. Contracts entered into by guardian in behalf of their ward b. Contracts entered into by a representative of an absentee The lesion contemplated in these cases shall be for at least one fourth or 25% more than the real value of the subject of the obligation. However, as provided in Article 1386, a court approval of the contract entered into by the guardian of the ward or by the representative of the absentee will not make the contract rescissible, even if the same suffers from the contemplated lesion. The presumption is that the court acted in the best interest of the ward or of the absentee when it approved the contract, notwithstanding the lesion. 2. In Fraud of Creditors/ Accion Pauliana (A. 1381 [3], 1387-1388 in relation to A. 1177)

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Accion pauliana is the rescission of contracts, which were made in fraud of creditors. These are the requisites for before said action can prosper: a. There must be a prior credit before the creation of the contract to be rescinded b. There must be fraud, which maybe presumed or proved, on the part of the debtor Presumptions of Fraud in Case of Alienation i. Alienation by gratuitous title: It is presumed that a debtor intends to defraud its creditor when he donates a property to another, leaving his assets insufficient for the payment of his obligation to the latter. In the case of Siguan v. Lim2, the court was not convinced that the donation was done to defraud the Siguan as the Deed of Donation was executed a year before respondent even incurred the debt. The first requisite for accion pauliana was already absent, thus an action for the same should fail. ii. Alienation by onerous title: This presumption apply to any person who received a judgment,

regardless if it was final or not; or a writ of attachment, whether or not the alienated property was the one attached or not, and who shall alienate any of his property.

Siguan v. Lim, G.R. No. 134685, 1999

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Aside from these presumptions provided in Article 1387, there are other circumstances which shed doubt as to the purpose of the alienation of properties by debtors. These are called badges of fraud, as provided in the case of Oria v. McMicking.3

i. The fact that the consideration of the conveyance is fictitious or is inadequate. ii. A transfer made by a debtor after suit has been begun and while it is pending against him. iii. A sale upon credit by an insolvent debtor. iv. Evidence of large indebtedness or complete

insolvency. v. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially. vi. The fact that the transfer is made between father and son, when there are present other of the above circumstances. vii. The failure of the vendee to take exclusive possession of all the property.

The one who acquires the alienated property in bad faith has the obligation to return the same when the contract is rescinded.

In the event that the subject of the obligation can no longer be returned, the same shall indemnify the defrauded creditor. Should there be more than one alienation, the liability

Oria v. McMicking, G.R. No. L-7003, 1912

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shall be accorded to the first one who obtained the property in his possession and so on.

c. There must be no other legal remedy available to the creditor

The legal remedy of accion pauliana will be deemed premature if there were other remedies available. It should be the last and only resort before it can be given due course.

3. Contracts for Things under Litigation (A. 1381 [4])

Properties that are under litigation cannot be alienated without prejudicing the right of the other party; therefore any form of alienation of properties under litigation can be rescinded.

4. Declared by Law (A. 1381 [5]) Examples a. Partition (A. 1098): This article provides for the right of an heir, who received at least lesser of the proper value to which he is entitled, to rescind the partition, whether done judicially or extra-judicially. b. Result of deterioration (A. 1189 [4]): When the object of the obligation deteriorates due to the fault of the debtor, the creditor can either choose between specific performance of the obligation or rescission of the same. In either option, the creditor has the right to demand for damages. c. Right given to an unpaid seller (A. 1526 & 1534): An unpaid seller has a right to rescind the contract of sale. 5. Payments in Insolvency (A. 1382) The payments embraced in this article are those that are not yet due and demandable, and those that are not legally demandable like natural obligations. The law does not mandate that the erring debtor
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should have been judicially declared insolvent at the time said kinds of payments were made. Nature of Rescission (A. 1383-1384) Rescission is only a subsidiary remedy, which means that there should be no other recourse for the injured party but to rescind the contract. It shall cover only the extent of the lesion and not the whole obligation. The contract can still exist as long as the extrinsic defect of the contract can be repaired. Effect of Rescission (A. 1385) Mutual restitution is the purpose of rescission. The object of the obligation, together with its fruits, and the purchase price, together with interest, shall be returned by the debtor and creditor to each other. Provided, however, that the stipulated object can still be returned by the one who filed for the rescission. Provided further that said object has not yet passed onto a third person, who acquired it in good faith. In the case of Equatorial Realty v. Mayfair4, petitioner corporation acquired the subject property from its original owner with full knowledge of the contract of lease between respondent and the owner, with a stipulation granting respondent Mayfair the right of first refusal.

The Deed of Absolute Sale executed by the legal owner of the property in favor of the petitioner was rescinded, even when petitioner, a third person, had already acquired the property. This is because petitioner was a buyer in bad faith, thus allowing the legal remedy of rescission to prosper.

Prescription of Action (A. 1389)

Equatorial Realty v. Mayfair Theatre, G.R. No. 133879, 2001

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The prescriptive period of filing for an action for rescission is within four years from the exhaustion of all remedies possible to repair the extrinsic defect of the contract, as rescission is only a subsidiary remedy. In the case of Cheng v. CA5, private respondent sued petitioners for a collection of sum of money. During the pendency of the case, deeds of donation were executed by the original petitioner. When the judgment was rendered in favor of the respondent, there were no longer properties to satisfy what was due to it.

Respondent corporation then instituted an action for the rescission of the donations. Petitioner raised the defense of prescription as the filing was done more than four years since the perfection of the deeds of donation.

The Court held that there was no way for respondent to know what the outcome of their prior action would be and thus, without exhausting all the remedies available, they could not file an action for accion pauliana even with the knowledge of the donations. Also, respondent could have not known that there was no property left to be levied or garnished. Thus only from the time of acquisition of said knowledge would the prescription start to run.

In case of incapacity of the injured party, the period for filing shall be reckoned from the time said incapacity terminates. As to an absentee, the prescriptive period shall not begin to run until his whereabouts are known.

Rescission can be brought by the injured party, his heirs, assigns, or successors in interest, or the creditors who are entitled to subrogation of any of those mentioned before as provided in Article 1177.

Cheng v. CA, G.R. No. 144169, 2001

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De Leon, Hector S. The Law on Obligations and Contracts. Quezon City: Rex, 2010. Paras, Edgardo L. Civil Code of the Philippines Annotated. 16th ed. Vol. 4. Quezon City: Rex, 2008.


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