Rescission

- is a remedy granted by law to contracting parties and to

third persons in order to secure reparation of damages
caused them by a contract, even if the contract be valid, by
means of the restoration of things to their condition prior to
the celebration of said contract
Requisites for Rescission
1. There must be at the beginning either a valid or a voidable
contract (not a void one);
2. But there is an economic or financial prejudice to someone
(a party or a third person);
3. Requires mutual restitution
Two Kinds of Rescission
1. Rescission in general (Art. 1380)
a) Is based on lesion or fraud upon creditors;
b) Here, the action is instituted by either of the contracting
parties or by third persons;
c) here, the courts cannot grant a period or term within
which to comply;
d) Here, non-performance by the other party is immaterial
2. Rescission under Art. 1191 (resolution)
a) Is based on non-performance or non-fulfillment of the
obligation;
b) Here, the action may be instituted only by the injured
party to the contract;
c) Here, in some cases, the courts may grant a term;
d) Here, non-performance by the other party is important.]

Art. 1381. The following contracts are rescissible:

1. Those which are entered into by the guardians whenever

the wards whom they represent suffer lesion by more than onefourth 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
* Lesion damage or injury to the party asking for
rescission (generally, disparity between the price and the
value).
Requisites before accion pauliana can be brought:
1) There must be a creditor who became such PRIOR to the
contract sought to be rescinded (whether the party asking for
rescission is a judgment creditor already or not, is likewise
immaterial).
2) There must be an alienation made subsequent to such
credit.
3) The party alienating must be in BAD FAITH (that is, he
knew that damages would be caused his creditors whether or not
he intended to cause such damage).
4) There must be no other remedy for the prejudiced creditor
inability to collect the claims due them

Premature Payments Made in a State of Insolvency

Two requisites are essential under this Article:

(a) The debtor-payer must have been insolvent

(the insolvency need not be a judicially declared one);
(b) The debt was not yet due and demandable
Necessity of Mutual Restitution
The obligation of restitution does not obviously apply to
creditors who seek to impugn fraudulent transactions of their
debtors. The obligation of mutual restitution applies to OTHERS so
that the status quo may be restored.
Requisites
Brought

Before

the

Action

for

Rescission

Can

Be

(a) Generally, the plaintiff must be able to RETURN what has

been received by virtue of the rescissible contract.
(Exception: prejudiced creditors.)
(b) The thing object of the contract is not in the legal
possession of third persons in good faith.
(c) There must be no other legal remedy
(d) The action must be brought within the proper prescriptive
period
Badges of Fraud
- There are some circumstances indicating that a certain
alienation has been made in fraud of creditors. These are
called BADGES OF FRAUD.
The following are some of the circumstances attending sales
which have been denominated by the courts as badges of fraud:
1) The fact that the consideration of the conveyance is
fictitious or inadequate;
2) A transfer made by a debtor after suit has been begun
and while it is pending against him;

3) A sale upon credit by an insolvent debtor;

4) The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed financially;
5) Evidence of large indebtedness or complete insolvency;
6) The fact that the transfer is made between father and son
(when this fact is considered together with preceding
circumstances);
7) The failure of the vendee to take exclusive possession of
all the property.
Bad Faith has been defined as a state of mind affirmatively
operating with furtive design or with some motive or self-interest
or ill-will or for an ulterior purpose, and implies a conscious and
intentional design to do a wrongful act for a dishonest purpose or
moral obliquity.
Effect of Bad Faith
(a) The acquirer must return or indemnify.
(b) Due to any cause includes a fortuitous event.
Subsequent Transfers
(a) If the first transferee is in good faith, the good or bad
faith of the next transferee is not important.
(b) If the first transferee is in bad faith, the next transferee is
liable only if he is also in bad faith

Prescriptive Period for Rescission

(a) General rule 4 years from the date the contract was
entered into.
(b) Exceptions:
1) Persons under guardianship 4 years from
termination of incapacity

2) Absentees 4 years from the time the domicile is

known
Who Can Bring the Action?
(a) The injured party (or the defrauded creditor).
(b) His heir or successor-in-interest.
(c) Creditors of (a) and (b) by virtue of Art. 1177 of the Civil
Code (accion subrogatoria)
Art. 1390. The following contracts are voidable or
annullable, even though there may have been no damage
to the contracting parties:
(1) Those where one of the parties is incapable of giving
consent to a contract;
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper
action in court. They are susceptible of ratification.
A contract where consent is vitiated, such as by violence or
intimidation, is not void ab initio but only voidable, and is binding
upon the parties unless annulled by proper action in court.
Grounds for Annulment (Declaration of Nullity)
(a) incapacity to consent
(b) vitiated consent
Confirmation to cure a defect in a voidable contract
(Art.1396, Civil Code)
Ratification to cure the defect of lack of authority in an
authorized contract (entered into by another). (Arts. 1317 and
1405, Civil Code)
Acknowledgment to remedy a deficiency of proof (Art. 1405,
Civil Code) (thus, an oral loan may be put in writing, or when a
private instrument is made a public instrument)

Requisites of Ratification (Properly, Confirmation of a Voidable

Contract)
(a) The contract must be a voidable one.
(b) The person ratifying must know the reason for the
contract being voidable (that is, the cause must be known).
(c) The cause must not exist or continue to exist anymore at
the time of ratification.
(d) The ratification must have been made expressly or by an
act implying a waiver of the action to annul.
(e) The person ratifying must be the injured party.
Unenforceable contracts cannot be sued upon or enforced
unless ratified; thus, it is as if they have no effect yet. But they
may be ratified; hence, they can have in such a case the effect of
valid contracts. In one sense, therefore, they may be called
validable.
Voidable and rescissible contracts, upon the other hand,
produce legal effects until they are annulled or rescinded.
Thus, unenforceable contracts are nearer absolute nullity than the
other two.
Kinds of Unenforceable Contracts
(a) Unauthorized contracts.
(b) Those that fail to comply with the Statute of Frauds.
(c) Those where both parties are incapable of giving consent
to a contract.
The Statute of Frauds
(a) Purpose to prevent fraud, and not to encourage the same.
Thus, certain agreements are required to be in writing so
that they may be enforced.
(b) How the Statute of Frauds Prevents Fraud
Since memory is many times unreliable, oral agreements
may sometimes result in injustice.

Specific Agreements of Statute of Frauds

1. An Agreement that by its terms is not to be performed within a
year from the making thereof.
2. A special promise to answer for the debt, default, or
miscarriage of another
3. An agreement made in consideration of marriage other than a
mutual promise to marry
4. An agreement for the sale of goods, chattels, or things in
action, at a price not less than five hundred pesos
5. An agreement for the leasing for a longer period than one year,
or for the sale of real property or of an interest therein
6. A representation as to the credit of a third person.

Art. 1409. The following contracts are inexistent and void

from the beginning:
(1) Those whose cause, object or purpose is contrary to law,
morals, good customs, public order, or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of
the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the
principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up

the defense of illegality be waived.