rescissible contracts. Flashcards
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.
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. (see 8 Manresa 748-749.)
Requisites of Rescission
The following are the requisites in order that the remedy of rescis- sion under this Chapter may be availed of:
(1) The contract must be validly agreed upon (Art. 1380; see Onglengco vs. Ozaeta and Hernandez, 70 Phil. 43 [1940].);
(2) There must be lesion or pecuniary prejudice or damage to one of the parties or to a third person (Art. 1381.);
(3) The rescission must be based upon a case especially provided by law (Arts. 1380, 1381, 1382.);
(4) There must be no other legal remedy to obtain reparation for the damage (Art. 1383.);
(5) The party asking for rescission must be able to return what he is obliged to restore by reason of the contract (Art. 1385, par. 1.);
(6) The object of the contract must not legally be in the possession of third persons who did not act in bad faith (Ibid., par. 2.); and
(7) The period for filing the action for rescission must not have prescribed. (Art. 1389.)
What contracts are rescissible?
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)
Facts: The spouses H and W mortgaged to B (bank) the property in question in order to defeat the effectiveness of the decision declaring 1/2 as belonging to C, and to frustrate the collection of the monetary claims of C for which H and W were sentenced to pay.
Issue: Is Article 1381 applicable?
Held: Yes. Paragraph 3 of Article 1381 is applicable, it appearing that C was not able to collect said monetary claims in view of the third party claim filed by B based on the deed of mortgage in question. Said deed as to the 1/2 belonging to the spouses must, therefore, be cancelled and rescinded.
Although there is no direct evidence to the effect that they executed the deed with the purpose of defrauding C, said purpose may, however, be deduced from the fact that the deed was executed after an adverse decision had been rendered against them. But if any doubt is to be entertained as to the applicability of paragraph 3, there cannot be any question as to the applicability of paragraph 4 of the same article.
The deed of mortgage in question has for its object a property in litigation, and it was executed by H and W without the knowledge and approval of neither the plaintiff (C) nor the court having cognizance of the litigation. (Contreras and Gingco vs. China Banking Corp., 70 Phil. 709 [1940].)
Rescission for breach of contract and rescission by reason of lesion distinguished.
(1) The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. Hence, the reparation of damages for the breach is purely secondary.
(2) On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is raison d’etre 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.
From the foregoing, it is clear that rescission under Article 1191 is a principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach by the other party that violates the reciprocity between the parties, while the latter is not.
Extent of rescission.
ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused.
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.
Effect of rescission.
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.
(1) Obligation of mutual restitution. — Rescission creates the obligation of mutual restitution.
(2) Abrogation of contract. — When a rescission is granted, it has the effect of abrogating the contract in all respects.
(3) Obligation of third person to restore. — The clause “he who demands rescission” applies also to a third person.
Facts: Respondent MT, Inc. leased portions of a commercial building together with the land owned by CB, lessor, which it used as a movie theater. Under two contracts of lease inter alia, MT, Inc. “shall be given 30-days exclusive option to purchase the same,’’ if CB should desire to sell the leased premises.
CB sold the building to ERD, petitioner, which received rents from MT, Inc. for sometime.
Subsequently, MT, Inc., claiming it had been denied its right to purchase the leased property in accordance with the lease contracts with CB, filed a suit for specific performance and annulment of sale with prayer to enforce its “exclusive option to purchase’’ the property.
The dispute between MT, Inc., CB and ERD reached the Supreme Court (referred to as “Mother case’’) which rescinded the absolute sale to ERD, ordered CB to return to ERD the purchase price, directed ERD to execute the documents necessary to return ownership of the disputed lots to CB, and ordered CB to allow MT, Inc. to buy the said lots for P11,300,000. This decision became final and executory on March 17, 1997.
MT, Inc. filed with the trial court a motion for execution which was granted. Subsequently, the Clerk of Court of the Manila Regional Trial Court, as Sheriff, executed a deed of conveyance in favor of CB and a deed of sale in favor of MT, Inc. On the basis of these documents, the Registry of Deeds of Manila cancelled ERD’s titles and issued new certificates of title in the name of MT, Inc.
On September 18, 1997, or after the execution of the decision of the Supreme Court, ERD filed with the Regional Trial Court an action for collection of a sum of money, to wit: (1) the sum of P11,548,941.76 plus legal interest, representing the total amount of unpaid monthly rentals/ reasonable compensation from June 1, 1987 to July 31, 1997; (2) the sums of P849,567.12 and P458,853.44 a month, plus legal interest as rental/ reasonable compensation for the use and occupation of the property from August 1, 1997 to May 1, 1997; and (3) the sum of P500,000 as and for attorney’s fees, plus other expenses of litigation, and the costs of the suit.
Issue: Is ERD entitled to back rentals?
When rescission not allowed.
Facts: B, on account of having purchased lands from S, took possession of the same and collected their products. Subsequently, B and S, by virtue of another contract, “rescinded” the sale, and as a result thereof, B returned the lands to S who, in turn, bound himself to return to B the part of the price that the latter has paid.
Issue: Is B obliged to return to S the products of the land that B collected during his possession?
Held: No. Rescission, in the light of Articles 1381, 1382, and 1385, is a relief which the law grants, on the premise that the contract is valid, for the protection of one of the contracting parties and third persons from any injury and damage the contract may cause, or to protect some incompatible and preferential rights created by the contract. Article 1385 refers to contracts that are rescissible in accordance with law in the cases expressly fixed thereby but does not refer to contracts that are rescinded by mutual consent and for the mutual convenience of the contracting parties.
The rescission in question did not originate in any of the causes specified in Articles 1381 and 1382, nor is it any relief for the purposes sought by these articles. Its effects should be determined by the agreement of the parties or by the application of other legal provisions not by Article 1385.
The possession of B, until the contract of sale was dissolved, and the lands returned by him, was in good faith. As such possessor in good faith, he is entitled to the fruits received before his possession was legally interrupted (Art. 541.), and, therefore, he is not obliged to return them to B in the absence of any covenant. (Aquino vs. Tanedo, 39 Phil. 517 [1919]; see PAGCOR vs. Court of Appeals, 231 SCRA 354 [1994].)
Facts: A big fire totally burned the furniture store of X and its contents. X was then a furniture dealer under the business name and style “Modern Furniture Store.” Not long thereafter, Y, X’s brother, put on the same site a new furniture store, adopting the same business name and style. Y secured a new license and privilege tax to operate the store.
On the same date, X verbally transferred the “Modern Furniture Store” to Y. Subsequently, a judgment was rendered against X in favor of Z in an action for recovery of a sum of money filed by Z when X was then a furniture dealer.
Issue: Does Article 1387 on presumption of fraud apply?
Held: No, since there was in fact no transfer of the store or its furniture or its contents. The transfer refers merely to the business name and style “Modern Furniture Store.” The store of Y and its contents are completely new coming from his own capital. (Provincial Sheriff of Pampanga vs. Court of Appeals, supra.)
Facts: The house in question was originally entered in the assessment rolls in the name of S, judgment debtor of C to whom the house was sold at public auction pursuant to a writ of execution. Later, it was registered in the name of B son of S who mortgaged it to a bank to secure the payment of a loan. The bank foreclosed the mortgage and bought the land together “with all the buildings and improvements” thereon.
C charges that any transfer by from S to B is fictitious, fraudulent and null and void and claims damages against B and the Bank.
Issue: Would the action by C for rescission of the transfer of the house from S to B and the claim for damages prosper?
Held: No. The bank’s registered mortgage is superior to the judg- ment and levy and sale in favor of C. Furthermore, S is not a party to the suit against B and the bank. S is an indispensable party. For any decision on either action would affect him. He is entitled to be heard, to defend the validity of the transfer to his son, B. (Gigante vs. Republic Saving Bank, supra.)
Facts: S sold to B a lot on January 4, 1956. The sale was inscribed in the land registry on February 15, 1956. Meantime, since November, 1955, there was pending against S a complaint filed by C for the collection of a sum of money. Judgment was rendered in favor of C on February 27, 1956. The land was sold at public auction on October 17, 1956. The sheriff’s certificate of sale was executed on October 29, 1956, followed by a definite deed of sale on January 9, 1959 in C’s favor.
C seeks to have the prior sale to B set aside on the ground that it was executed in fraud of C upon the presumption set forth in Article 1387.
Issue: Does the presumption of fraud apply?
Held: No. The judgment obtained by C against S, owner of the land in dispute, was rendered after the sale of the same to B. Nor was a writ of attachment issued. It is true that the sale to B was made after suit had been begun by C against S. This lone circumstance itself alone, however, is not sufficient to prove fraud. There is no showing that B knew of the pending action. (Gaspar vs. Dorado, 15 SCRA 331 [1965].)
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.
