Rescissible Contract:

Everything You Need to Know

A rescissible contract is one that was entered into legally by the
contracting parties but has resulted in economic damage to one of the
parties or an outside party. The court can therefore rescind, or set
aside, the contract for equitable reasons.3 min read
A rescissible contract is one that was entered into legally by the
contracting parties but has resulted in economic damage to one of the
parties or an outside party. The court can therefore rescind, or set
aside, the contract for equitable reasons.

What Types of Contracts Are Rescissible?

Valid contracts can be legally rescinded under certain circumstances.
Types of contracts that are rescissible under Article 1381 include:

 Any contracts entered into by guardians when their wards suffer

lesion by more than one-fourth of the items that are the object
thereof.
 A contract agreed to in representation of an absentee, if the
absentee suffered the lesion mentioned above.
 Any contracts relating to fraud of creditors when the creditors
cannot collect what is owed to him or her in any other manner.
 Anything in litigation if it was entered into by the defendant
without the knowledge or approval of the litigants themselves or
a competent judicial authority.
 Any other type of contract the law declares subject to rescission.

Under Article 1382, if one party is unable to pay debts owed, the

injured party can rescind the contract. Rescission is only necessary to
the extent that it is required to cover damages. The offending party
must return the items that were the subject of the contract, along with
interest. Therefore, rescission can only occur if the person can return
what he or she is required to return. 
If those things that are the subject of the contract are in the legal
possession of a third party who wasn't acting in bad faith, rescission
won't take place. In this situation, the injured party can demand
reimbursement of damages from the person or persons who caused the
loss.
What Must Occur Before a Contract Entered
Into in Fraud of Creditors Can Be Rescinded?
To rescind a contract for fraud of creditors: 

 Credit must exist prior to the contract's creation.

 There must be an element of fraud, or at least the intent to
commit fraud, to the creditor seeking rescission.
 Creditors cannot legally collect their credit.
 The object in dispute cannot be in the hands of a third party who
hasn't acted in bad faith.

How Defective Contracts Are Classified

Defective contracts can be classified in several ways:

 Voidable and Annullable Contracts: These can be defective if one

party was incapable of giving consent or if consent was granted
by mistake, threat, violence, fraud, or undue influence.
 Unenforceable contracts: These are contracts that can't be
enforced for a variety of reasons.
 Void or Inexistent Contracts: These have no legal effect because
they don't legally exist.

Other defective contracts include those that are partially ineffective

and partially valid. They don't fall under any of the above
classifications, are only ineffective with respect to certain persons, but
can be effective to other parties. These are known as Relatively
Ineffective Contracts.

Distinctions in Defective Contracts

Contracts become defective typically by: 

 Defect itself
 Damage or prejudice
 Effect
 Remedy

Contracts that are void due to defect itself include:  

 Void contracts that are caused by illegality or lack of essential

elements.
 Voidable contracts that are defective because of their methods of
consent.
  Rescissible contracts that are caused by damages or lesion to
one of the contract parties or another third party.
 Unenforceable contracts that lack authority, capacity, or both
parties' consent.
 Contracts that are not compliant with the Statute of Frauds or
entered into on behalf of another party without their authority. 

Void contracts cannot be ratified, but voidable contracts can be

ratified in some circumstances. Rescissible contracts might be subject
to convalidation, but not official ratification. Unenforceable contracts
are also subject to ratification in some cases. 
Under Article 1410, void contracts cannot be cured by prescription,
but voidable ones can. Rescissible contracts can also be cured by
prescription while unenforceable ones cannot.

Obligations Created by Contract Rescission

Rescinding a contract creates something called mutual restitution.
Mutual restitution is not applicable if a creditor received nothing from
the contract and the thing owed is already in possession of a party in
good faith. It is subject to indemnification only if two more alienations
of liability exist from the first party in violation.

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.

What are the kinds of simulation of contract?

1. Absolute – the contracting parties do not intend to be bound by the contract at all,
thus the contract is void.

2. Relative – the real transaction is hidden; the contracting parties conceal their true
agreement; binds the parties to their real agreement when it does not prejudice third
persons or is not intended for any purpose contrary to law, morals, etc. If the
concealed contract is lawful, it is absolutely enforceable, provided it has all the
essential requisites: consent, object, and cause. As to third persons without notice,
the apparent contract is valid for purposes beneficial to them.

As to third persons with notice of the simulation, they acquire no better right to the
simulated contract than the original parties to the same.
What are the elements of consent?
1. Legal capacity of the contracting parties;

2. Manifestation of the conformity of the contracting parties;

3. Parties’ Conformity to the object, cause, terms and condition of the contract must
be intelligent, spontaneous and free from all vices of consent; and

4. The conformity must be Real.

Note: We follow the theory of cognition and not the theory of manifestation. Under
our Civil Law, the offer & acceptance concur only when the offeror comes to know,
and not when the offeree merely manifests his acceptance.

What are the vices of consent?

1. Mistake – substantial mistake and not merely an accidental mistake; must refer to
the:

     a. substance of the thing which is the subject of the contract; or

 b. to those conditions which have principally moved one or both parties to enter the
contract.

Note: Mistake as to identity or qualifications of one of the parties will vitiate consent

only when such identity or qualifications have been the principal cause of the
contract.

2. Intimidation – An internal moral force operating in the will and inducing

performance of an act.

3. Violence – An external, serious or irresistible physical force exerted upon a person

to prevent him from doing something or to compel him to do an act.

4. Undue influence – Any means employed upon a party which, under the
circumstances could not be resisted and has the effect of controlling his volition and
inducing him to give his consent to the contract, which otherwise, he would not have
entered into.

5. Fraud – Use of insidious words or machinations in inducing another party to enter

into the contract, which without them, he would not have agreed.

What is compensation?
 
It is a mode of extinguishing to the concurrent amount, the obligations of those
persons who in their own right are reciprocally debtors and creditors of each other
(Art. 1232, NCC). It involves the simultaneous balancing of two obligations in order to
extinguish them to the extent in which the amount of one is covered by that of the
other.

What are the requisites of compensation?

1. Both parties must be mutually creditors and debtors in their own right and as
principals;

2. Both debts must consist in sum of money or if consumable, of the same kind or
quality;

3. Both debts are due;

4. Both debts are liquidated and demandable;

5. Neither debt must be retained in a controversy commenced by third person and

communicated with debtor (neither debt is garnished); and

6. Compensation must not be prohibited by law.

Note: When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or
knowledge of the creditors and debtors. When one or both debts are rescissible or
voidable, they may be compensated against each other before they are judicially
rescinded or avoided. (Art. 1284)

What are the debts not subject to compensation?

1. Debts arising from contracts of deposit

2. Debts arising from contracts of commodatum

3. Claims for support due by gratuitous title

4. Obligations arising from criminal offenses

5. Certain obligations in favor of government (e.g. taxes, fees, duties, and others of a
similar nature)
Note: If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation. (Art. 1289, NCC)

ESSENTIAL REQUISITES OF A CONTRACT

State the essential elements of contracts.

1. Consent;

2. Object or subject matter; and

3. Cause or consideration.

What is the principle of relativity of contracts?

General Rule:

A contract is binding not only between parties but extends to the heirs, successors in
interest, and assignees of the parties, provided that the contract involves
transmissible rights by their nature, or by stipulation or by provision of law.

Exceptions:

1. Stipulation pour autrui (stipulation in favor of a third person) – benefits deliberately

conferred by parties to a contract upon third persons.

Requisites:

a. The stipulation must be part, not whole of the contract;

b. Contracting parties must have clearly and deliberately conferred a favor upon third
person;

c. Third person must have communicated his acceptance; and

d. Neither of the contracting parties bears the legal representation of the third person.

2. When a third person induces a party to violate the contract

Requisites:

a. Existence of a valid contract

b. Third person has knowledge of such contract

c. Third person interferes without justification

3. Third persons coming into possession of the object of the contract creating real
rights

4. Contracts entered into in fraud of creditors

SPECIAL FORM OF
PAYMENT: CONDONATION
What are the requisites of condonation?
 

1. Must be Gratuitous;

2. Acceptance by the debtor;

3. Must not be Inofficious;

4. Formalities provided by law on Donations must be complied with if condonation is

express; and

5. An Existing demandable debt.

Can there be a unilateral condonation?

No. Since it is a donation of an existing credit, considered a property right, in favor of

the debtor, it is required that the DR gives his consent thereto by making an
acceptance. If there is no acceptance, there is no condonation. (Pineda, Obligations
and Contracts, 2000 ed, p. 267)

OBLIGATIONS WITH A
PERIOD
For whose benefit is the period constituted?
General Rule:
When a period has been agreed upon for the performance or fulfillment of an
obligation, it is presumed to have been established for the benefit of both the creditor
and the debtor.

Exception:

When it appears from the tenor of the period or other circumstances that it was
established for the benefit of one of the parties.

What is the effect of the term being for the benefit of

either the creditor or the debtor?
 

1. When it is for the benefit of the Creditor – Creditor may demand the performance
of the obligation at any time but the debtor cannot compel him to accept payment
before the expiration of the period (e.g. “on demand”)

2. When it is for the benefit of the Debtor – Debtor may oppose any premature
demand on the part of the creditor for performance of the obligation, or if he so
desires, he may renounce the benefit of the period by performing his obligation in
advance. (Manresa)

What is the effect of a fortuitous event in an obligation

with a period?
 

It only relieves the contracting parties from the fulfillment of their respective obligation
during the term or period.

When may the court fix the period?

 

1. If the obligation does not fix a period, but from its nature and circumstances it can
be inferred that a period was intended by the parties

2. If the duration of the period depends upon the will of the debtor

3. In case of reciprocal obligations, when there is a just cause for fixing the period

4. If the debtor binds himself when his means permit him to do so

 

When may a debtor lose his right to make use of the

period?
 

1. Insolvency of the debtor, unless security is provided

2. Did not deliver security promised

3. Impaired security through his own acts or through fortuitous event, unless he gives
a new security equally satisfactory (if impairment is without the fault of DR, he shall
retain the right)

4. Violates undertaking in consideration of extension of period

5. Debtor attempts to abscond (Art. 1198, NCC)

ACT OF GOD - FORTUITOUS

EVENT
What are the requisites of a fortuitous event?
 

1. Cause is independent of the will of the debtor;

2. The event is unforeseeable or unavoidable;

3. Occurrence renders it absolutely impossible for the debtor to fulfill his obligation in
a normal manner; impossibility must be absolute not partial, otherwise not force
majeure; and

4. Debtor is free from any participation in the aggravation of the injury to the creditor.

Note: The fortuitous event must not only be the proximate cause but it must also be
the only and sole cause. Contributory negligence of the debtor renders him liable
despite the fortuitous event. (Pineda, Obligations and Contracts, 2000 ed, p. 62)

Is there liability for loss due to fortuitous event?

 

General Rule:
There is no liability for loss in case of fortuitous event.

Exceptions:

1. Law

2. Nature of the obligation requires the assumption of risk

3. Stipulation

4. The debtor is guilty of dolo, malice or bad faith, has Promised the same thing to
two or more persons who does not have the same interest

5. The debtor Contributed to the loss (Tan v. Inchausti & Co., G.R. No. L-6472, Mar.
7, 1912)

6. The possessor is in Bad faith (Art. 552)

7. The obligor is Guilty of fraud, negligence or delay or if he contravened the tenor of

the obligation (Juan Nakpil v. United Construction Co., Inc. v. CA, G.R. No. L-47851,
Apr. 15, 1988)

CHARACTERISTICS OF
DEFAULT, DELAY OR MORA
When does delay or default arise?
 

Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extra-judicially demands from them the fulfilment of their obligation. In
reciprocal obligations, neither party incurs in delay if the other does not comply in a
proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligations, delay by the other begins. (Art. 1169, NCC)

What are the requisites of delay?

 

1. Obligation must be due, demandable and liquidated;

2. Debtor fails to perform his positive obligation on the date agreed upon;

3. A judicial or extra-‐judicial demand made by the creditor upon the debtor to fulfill,
perform or comply with his obligation; and
4. Failure of the debtor to comply with such demand. Note: In reciprocal obligations,
the moment one party is ready to comply with his obligation, delay by the other
begins. There is no need for demand from either party.

What are the kinds of delay or default?

 

1. Mora solvendi – default on the part of the debtor/obligor

a. Ex re – default in real obligations (to give)

b. Ex personae – default in personal obligations (to do)

2. Mora accipiendi – default on the part of the creditor/obligee

3. Compensatio morae – default on the part of both the debtor and creditor in
reciprocal obligations

OBLIGATIONS WITH A
PENAL CLAUSE
What is a penal clause?

It is an accessory obligation attached to the principal obligation to assure greater

responsibility in case of breach.

Note: Proof of actual damages suffered by the creditor is not necessary in order that
the penalty may be demanded. (Art. 1228, NCC)

What is the effect of incorporating a penal clause in an

obligation?
 

General Rule:
The penalty fixed by the parties is a compensation or substitute for damages in case
of breach.

Exceptions:

Damages shall still be paid even if there is a penal clause if:

1. there is a stipulation to the contrary

2. the debtor refuses to pay the agreed penalty

3. the debtor is guilty of fraud in the fulfillment of the obligation. (Art. 1126, NCC)

Note: The nullity of the penal clause does not carry with it that of the principal
obligation. The nullity of the principal obligation carries with it that of the penal
clause. (Art. 1230, NCC)

When may penalty be reduced by the courts?

 

1. Partial performance of the obligation;

2. Irregular performance of the obligation; or

3. Penalty is Unconscionable even if there has been no performance.

JOINT OR SOLIDARY
CHARACTER OF AN
OBLIGATION
What is the rule as regards the joint or solidary
character of an obligation?
 

General Rule:

When two or more creditors or two or more debtors concur in one and the same obligation, the
presumption is that the obligation is joint.

Exceptions:

The obligation shall be solidary when:

1. Expressly stipulated that there is solidarity;

2. Law requires solidarity;

3. Nature of the obligation requires solidarity;

4. Charge or condition is imposed upon heirs or legatees and the will expressly makes the charge or
condition in solidum (Manresa); or

5. solidary responsibility is imputed by a final Judgment upon several defendants.(Gutierrez v.

Gutierrez, 56 Phil 177)

Article 1381
April 2, 2019Kristia Capio

Article 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.
By: Kristia Capio

Artikulo 1381. Ang sumusunod na mga kontrata ay

maaring ikansila:
(1) Yaong mga ipinasok ng mga tagapangalaga kapag ang
kanilang inaalagaan na kanilang kinakatawan ay walang
kakayahan mahigit sa ika apat ng halaga ng mga bagay na
siyang kadahilanan;
 (2) Yaong mga napagkasunduan na patungkol sa wala,
kung ang huli ay mayroon kwalang kakayahan na
nakasaad sa naunang bilang;
(3) Yaong mga pagsasaayos na maypanlinlang sa mga
nagpapautang ang nahuli ay hindi na sa anu man paraan
makaka singil pa;
(4) Yaong mga nauukol sa mga bagay na napapailalim ng
hukuman kung iyon ay pinasok ng nasasakdal na walang
kaalaman at pagsang-ayon ng mga nasasakdal  o ng
hukuman may karampatan kapangyarihan;
(5) Lahat nang ibang mga kontrata na lalong itinakda ng
batas na maaring ipawalang bisa/ ikansila.

CASES OF RESCISSBLE CONTRACTS

(1) Contracts entered into in behalf of wards. — A ward is a
person under guardianship by reason of some incapacity. As a
rule, the powers of the guardian with respect to the property of
the ward are limited to mere acts of administration. 
EXAMPLE:
Gina is the guardian of Wendell (ward). Gina sells the property of
Wendell worth 20M for only 14M. The contract of sale can be
rescinded because the lesion is more than one-fourth. Wendell
can rescind the sale by proper action in court upon reaching the
age of majority.
(2) Contracts agreed upon in representation of
absentees. — An absentee is a person who disappears from his
domicile, his whereabouts being unknown, and without leaving an
agent to administer his property. Likewise, the absentee must
suffer lesion by more than one-fourth of the value of the property
object of the contract to entitle him to the remedy of rescission.
It must be noted that paragraphs 1 and 2 refer only to
transactions by guardians and absentees’ representatives.
Rescission cannot take place if the contracts have been approved
by the court. As a general rule, lesion does not invalidate a
contract except only in special cases specified by law.
EXAMPLE:
Wendell, the owner of a resort in Laguna, left his property without
notice and without leaving a representative to take care of his
property.
Bea, a family friend, volunteered in taking over Wendell’s
business. Due to a storm, Wendell’s business is greatly affected
due to destruction of some of the buildings of the resort
and needs additional funds to recover from such distress. Bes
decided to sell one property of Wendell worth 15M and sold it for
only 10M. When Wendell returned, Wendell can rescind the
contract of sale made by Bea because the lesion is more than
one-fourth.

(3) Contracts undertaken in fraud of creditors. — The action

to rescind in fraud of creditors is known as accion pauliana. Here,
as in No. (4), the remedy of rescission may be availed of by a third
person. Such contracts are usually made without the knowledge of
the creditors. In order that fraud of creditors may be a valid
ground for rescission, the following requisites must also be
present:
(a) There must be an existing credit prior to the contract to be
rescinded, although it is not yet due or demandable later;
(b) The subsequent contract made by the debtor conveys a
patrimonial benefit to a third person;
(c) There must be fraud on the part of the debtor which may be
presumed or proved;
(d) The creditor has no other legal remedy to satisfy his claim,
that is, he cannot recover his credit in any other manner, it not
being required that the debtor be insolvent.
EXAMPLE:
Gina made a donation of a parcel of land to Wendell. Before the
date of the donation, Gina had contracted several debts. With the
donation to Wendell, the remaining property of Gina is not
sufficient to pay all her debts. The donation can be rescinded
because the alienation is presumed in fraud of creditors.
(4) Contracts which refer to things under litigation. — In No.
(3), the purpose of the remedy is to secure the payment of an
existing credit of a third person against a party to a contract
sought to be rescinded. Here, the purpose is to make effective the
claim of a party litigant over a thing under litigation which was the
object of a contract entered into by the other party with another
person.
The right to file the action for rescission arises in favor of the
plaintiff when the defendant enters into a contract over the thing
in litigation without the knowledge or approval of the plaintiff or
the court.
EXAMPLE:
Sandy sues Ben for the recovery of a parcel of land. In this case,
the land is a “thing under litigation.”
If, during the pendency of the case, Ben sells the land to Cathy
without the approval of Sandy or of the court, the sale is
rescissible at the instance of Sandy in case she wins in her suit for
the recovery of said land unless Cathy is in legal possession of the
land in good faith.  Sandy, however, may protect his right by filing
a notice of lis pendens.