Chapter 6 Rescissible Contracts Contracts
Classification of Defective Contracts: 1.
2.
Rescissible contracts – contracts – valid contracts but may be rescinded for having: rd
a.
Caused economic damage or lesion to one of the parties or to a 3
b.
Entered into fraud of creditors
person
c.
(without knowledge and approval of the judicial authority)… custodial egis over the property involved
d.
Being specially declared by law as rescissible
Void or voidable contracts – where the consent of one party is defective either because of incapacity to g ive consent to contract or where consent is vitiated by mistake, violence, intimidation, undue influence or fraud. (consent vitiated by vices of consent).
3.
Unenforceable contracts – cannot be enforced in court because of: a.
They were entered into in behave of another w/o authority or in excess of authority;
b.
There is non-compliance with the Statute of Frauds; and
c.
Both contracting parties are incapacitated.
4.
May, however be ratified in accordance with the law.
Void or non-existent contracts – those which produce no legal effect for they do not exist in the eyes of the law.
RATIONALE BEHIND CLASSIFICATION - It is neither wise nor just that parties should be left in doubt as to the degree of effectiveness of their contractual relations. Legal profession is also entitled to know in a positive and unequivocal manner what contracts are rescissible, voidable, unenforceable and void. OTHER DEFECTIVE CONTRACTS NOT INCL UDED IN CLASSIFICATION (Contracts w/c are relatively ineffective): -
Contracts w/c are relatively ineffective are those ineffective only with respect to certain parties but effective as to o ther persons. Ex. Assignment of lease by l essee without consent of lessor is ineffective only as regards the lessor.
-
Relative ineffective contract – ineffectiveness with respect to party concerned is ipso jure. Voidable contract does not become inoperative unless an action to annul is inst ituted or allowed.
Distinctions Between and Among the Defective Contracts: Basis Origin of defect
Rescissible Economic damage or lesion to rd one of the parties or to a 3 person; a special declaration by law that the contract is subject to rescission (Art 1381)
Voidable Incapacity of one of the contractivng parties to give consent, or vitiated consent due to presence of “vi ces of consent.” Art 1390
Damage or prejudice
There must be damage /lesion or prejudice to one of the rd contracting parties or 3 person. Considered valid and legally enforceable until judicially rescinded. Art 1380
Damage or prejudice to other party not necessary.
Remedy/Action
Nature of action
Legal Effect
Persons who can file action
Susceptibility to ratification Susceptibility to prescription
Unenforceable It was entered into in behalf of another person w/o authority or in excess thereof; non-compliance w/ the Statute of Frauds; Frauds; incapacity of both contracting parties to give consent. Arts 1403 and 1407 Damage or prejudice not necessary.
Void Absence of any of the essential requisites of a contract (consent, object, cause) Art 1409.
Considered valid, binding, and enforceable until judicially annulled. Art 1390 last par.
Inoperative until ratified. Not enforceable in court w/o proper ratification. (Art 1405)
Rescission or rescissory action
Annulment of contract
Must be direct action. Collateral attack is not allowed Must be a contracting party. Exception: creditors who are defrauded.
Direct action needed either in the complaint or as a counter-claim. Generally must be a contracting party principally or subsidiarily obliged under the contract(Art 1397) rd Exception: 3 person who is prejudiced. Susceptible to ratification Art 1392
This is just a personal defense when plaintiff pursues a specific performance case or complaint for damages based on breach of contract. Indirect attack is allowed in the form of a defense. Must be a contracting party. rd 3 persons cannot assail it.
Generally do not produce legal effects; there are few exceptions (void marriages under Art 36 & 53, F.C. produce legitimate children (see FC Art 165) Declaration of nullity of contract
Susceptible to convalidation but not of ratification proper. Action for rescission prescribes after 4 year (Art 1389)
Action for annulment prescribes after 4 years (Art 1391)
Susceptible to ratification Art 1495 -
-
Action for recovery, or action for specific performance or for damages for breach of contract, also prescribe. There being no specified period, it could be 10 years if the basis of the action is a written contract, or 6 years if unwritten. Arts 1144 & 1145
Damage or prejudice not necessary.
May be attacked directly or indirectly rd 3 persons cannot assail contract unless his interests are directly affected.
Not susceptible to ratification Art 1409 last par Action for declaration of nullity or the putting of the defense of nullity of the contract does not prescribe (Art 1410)
Art. 1380 Contracts validly agreed upon may be rescinded in the cases established by law.
Rescissible contract – contract – one w/c contains all essential requisites of a contract w/c make it valid, but by reason of injury or damage to either of the contracting parties or to 3 such as creditors, may be rescinded. Action to rescind (accion pauliana) must be of last resort, availed only after all other legal remedies have been exhausted and proven futile.
Characteristics:
rd
persons,
1.
It has all elements of valid contract;
2.
It has a defect consisting of injury to o ne of the contracting parties or 3
rd
persons generally in form of economic damage or lesion, fraud, and alienation o f property subject of
case in court w/o consent of the litigants or o f the court; 3.
It is valid and effective until rescinded;
4.
It can be attacked only directly, either by one of the con tracting parties or by an affected 3
5.
It is susceptible of convalidation only by prescription. Ratification proper does not apply.
rd
person, who is injured or defrauded by the contract;
Voidable contract can be annulled or rescinded.
Difference between Rescission proper and Rescission (Resolution) implied in Reciprocal Obligations under Art 1191. Basis Nature Ground/s for rescission
Rescission in Art 1191 It is a Principal action retaliatory in character Only ground is Non- performance of one’s obligation/s or what is incumbent upon him. Applies only to reciprocal obligations Only a party to the contract may demand fulfillment or seek the rescission (cancellation) of the contract. Court may fix period or grant extension of time for the fulfillment of the obligation. To cancel the contract
Applicability Person who can institute action Fixing of period by the court Purpose
Rescission Proper in Art 1381 It is a subsidiary remedy. There are 5 grounds to rescind a rescissible contract enumerated in Art 1381. Non-performance by other party not important. Applies to both unilateral and reciprocal obligations rd Even 3 party who is prejudiced by the contract may demand the rescission of the contract Court cannot grant extension of time for fulfillment of the obligation.
To seek reparation for the damage or injury caused, thus allowing partial rescission of contract.
Mutual rescission – when parties mutually agree to back out from contract. - this is not rescission proper coz it is not based on any of the grounds for rescission stated in Arts 1381 & 1382 but based on will of parties w/drawing from contract.
Requisites for action for rescission: 1.
Contract subject of action must be one of those mentioned in Arts 1381 & 1382;
2.
Plaintiff must have no other recourse to obtain reparation for the damages he s uffered except rescission of contract. action is o nly subsidiary;
3.
Plaintiff must be able to return whatever he is obliged to restore, if actio n would be sustained. Art 1 385
4.
Object/s of contract must not have legally passed unto the ownership or possession of a 3
5.
Action must be brought w/in prescriptive period, ie w/in 4 years from accrual of cause of action.
rd
person who is acting in good faith. Art 1385
Direct action needed to attack a rescissible contract. If real estate is involved and covered by title, right to rescind may be noted in Certificate of Title.
Extrajudicial rescission allowed when contract itself provides that it may be revoked and cancelled for violation of any of its terms and conditions.
Art. 1381 The following contracts are rescissible contracts: 1.
Rescissible contracts due to Economic Lesion or Damage of More than 25 % of the value of the Thing/s: Contracts entered into by guardians whenever their wards may suffer lesio n by more than ¼ of the value of the things disposed of can be rescinded. There is no judicial approval of the contracts entered into by guardians because if there is, whether the contracts involve acts of ownership or administration, the contracts will not be rescissible. Ex. If guardian is managing hacienda belonging to ward and sol d the crops harvested at price lower than 35% of value thereof, the sale is rescissible coz of the economic lesion of more than ¼ of the value of the crops.
2.
Acts of representatives of absentees also governed by principles in no. 1, there being a parity of reasoning and identical law applicable.
3.
Contracts undertaken deliberately in Fraud of Creditors:
Contract must be intended to defraud the creditor/s and that t he creditor/s cannot in any ma nner collect the claim due him/them.
Fraudulent intent must be proved. Without the needed proof establishing this, the contract cannot be rescinded.
Test as to whether or not a conveyance is fraudulent is – “Does it prejudice the rights of Creditors?”
Badges of Fraud – fraudulent character of the transactions may be determined by this .
a.
The fact that the consideration of the conveyance is fictitious or is inadequate.
b.
Transfer made by debtor after suit has been begun and while it is pending against him.
c.
A sale upon credit by an insolvent debtor.
d.
Evidence of large indebtedness or complete insolvency.
e.
Transfer of all or nearly all of his property by debtor, especially when he is insolvent or greatly embarrassed financially.
f.
The fact that the transfer is made between father and son, where there are present other of the above circumstances.
g.
Failure of vendee to make exclusive possession of all the property (Oria v McMick ing, supra)
Accion Pauliana a.
Requisites: 1.
The plaintiff asking for rescission has a credit prior to t he alienation;
2.
Debtor has made a subsequent contract conveying patrimonial benefit to a 3
3.
Creditor has no other legal remedy to satisfy his claim;
4.
Act being impugned is fraudulent;
5.
3 person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.
rd
person;
rd
b.
Jurisdiction – accion pauliana is incapable of pecuniary estimation. Jurisdiction is with the RTC – court of general jurisdiction.
c.
Accion Pauliana distinguished from Action to Declare Nullity of An Absolutely Simulated Contract Nature
Basis
Accion Pauliana There is a true alteration of property.
Purpose
To set aside a contract validly entered into.
Action to Declare Nullity…. There is NO alteration of property but only pretention of alteration. To declare the inexistence of the absolutely simulated rd contract which prejudices the rights of a 3 person and/or is intended contrary to law, morals, good customs, public
Possibility of Satisfaction Creditors who can pursue case
d. 4.
order or public policy. Non-satisfaction of plaintiff’s claim is not required
Satisfaction of plaintif f’s claim is not possible except through the rescission. Only creditors prior to the alienation may file the action.
All creditors, whether before or after the simulation may file the action.
Accion Pauliana complements Art 1177 which is authorized under Art 1381.
Alienation of thing/s under litigation: Ex. A sues B 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, B sells the land to C w/o approval of A or of the court, the sale is rescissible at the instance of A in case he wins in his suit for the recovery of said land unless C is in legal possession of t he land in good faith. A, however, may protect his right by filing a notice of lis pendens. If the action involves a personal property, A may petition the court for the issuance of an order of attachment or the appointment of a receiver to place the property in custodial egis.
5.
Contracts specially declared as Rescissible By Lay may also be Rescinded: Art 1098 – A partition, judicial or extrajudicial, may also be rescinded on account of lesion, when any one of the co-heirs received things whose value is less, by at least ¼, than the share to w/c he is entitled, considering the value of the th ings at the time they were adjudicated. Art. 1382 – Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time the y were effected, are also rescissible. See also Arts. 1526, 1534, 1539, 1542, 1556, 1560, 1567, 1599, 1659, 1189.
Violation of Right of First Refusal – prevailing doctrine is that a contract of sale entered into in violation of right of first refusal of another person is rescissible.
Art. 1382
Article refers to payments made. What is rescissible are the payments for obligations w/c are not yet due. Payment must have been made by a payer-debtor who is in a state of insolvency.
State of Insolvency – A person is considered insolvent when it is impossible for him to fulfill his obligations because of financial constraints. He has more obligatio ns than assets.
Requisites for Action for Rescission under Art 1382 –
- law does not require judicial declaration of insolvency to make the payments rescis sible.
1.
Payment or payments were made by the debtor to a creditor;
2.
Payment or payments were made while the debtor is in state of insolvency;
3.
Obligations paid were not yet due and demandable.
Ex: An insolvent corp owed Jose P70k. Although debt not yet enforceable, corp delivered deed of sale covering one of its properties to Jose as payment for debt. However, value of property is much greater than amount of indebtedness. Sale is rescissible coz it was made by the debtor who is in a state of insolvency, in payment o f an obli w/c is not yet due. (Asia Banking Corp v Nable Jose)
Kinds of premature obligations which was paid by the insolvent debtor may include a void, natural, condoned or prescribed obl igation.
Art 1383 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.
It is necessary for the plaintiff to have exhausted all means to o btain reparation. Otherwise, the action will not prosper. This is a condition precedent.(see Art 1177)
If the damage is repaired, as in the case of lesion suffered by ward or absentee, rescission cannot take place (see Art 1355, 1381)
Goquilay v Sycip – plaintiff must allege and prove that he had exhausted all available legal remedies to obtain reparation from the debtor, otherwise, the action is not maintainable.
What to allege and consequences of failure to do so: Creditor who seeks rescission of contract as fraudulent must prove
1.
That he really is a creditor; and
2.
That he could not collect his credit in any other way.
Exception to rule: if it can be proven that the property alienated was the only property of debtor at time of transaction, the actio n for rescission is certainly maintainable coz it is clear that the creditor has no other remedy under the circumstances (Regalado v Luchsinger)
Persons allowed to institute action: 1.
Parties who suffered economic lesion;
2.
Affected creditor; and
3.
Others authorized by law.
In case of their death or incapacity, their heirs can institute or continue action.
Heirs can rescind the contracts if the deceased person alienated his properties during his lifetime for purpos e of depriving or d iminishing their legitimes.
Prescription to rescind fraudulent contract: 4 years which must be co unted from the time the action accrues and not from date of registration of conveyance.
Art. 1385
Applicability of Mutual Restitution – when he who demands rescission can return whatever he may be obliged to restore, only when there is delivery on both sides.
If complaining party cannot return whatever he may be obliged to restore, he is not entitle d to rescission. His case will be dismissed for lack of con dition precedent.
If property has already been alienated in favor of 3
rd
person, ie. Sale, and he is in good faith, the t ransfer of property to 3
rd
person will be respected. If in bad faith, property transferred
to him could still be recovered, aside from imposition of damages for injury suffered by complaining party.
Transferee in Good Faith who acquired property gratuitously not f ully protected: he is obliged to return the thing u nder the principle that no person shall be enriched at the expense and prejudice of other persons like creditors. He will however not have liability for the fruits he had received and will be reimbursed for necessary and useful expenses he incurred. Also, he is not liable for the deterioration or loss of the thing possessed except when he acted with fraudulent intent or negligence after judicial summons had been received by him.
Persons liable for indemnity for damages: the person who caused the loss. Ex. Guardian caused loss, he is liable to indemnify ward for the value of economic damage or lesion suffered by the latter.
Persons who can benefit from rescission: 1.
only the particular creditor/s who instituted the action.
2.
If rescission is partial and there is remainder after satisfying claims of creditors, the balance remains with transferee.
Art 1385 has parallel in art 1402
Art 1386
Contracts entered into by guardians and representatives of Absentees – if approved by court having jurisdiction over the matter could not be rescinded. Opposition to t hese should have been timely made before the court. Failure to do so is deemed to be a waiver of the right to rescind.
Art 1387
Fraud – deception - consists of any means or ways, usually thr ough insidious words or machinations perpetrated by one of the contracting parties, by reason of w/c, the ot her party is persuaded to enter into contract w/c, w/o them, he would not a gree to.
Presumptions of Good Faith: generally, when a person acts he is presumed to be acting in good faith. Burden of proof to the contrary rests with he who alleges and imputes bad faith.
Statutory Presumptions of Fraud in Art 1387 regarding alienation of property: 1.
By gratuitous title – when debtor alienates his property w/o reserving sufficient property to pay all his ex isting debts.
2.
By onerous title – alienation even for a valuable consideration, contract is presumed fraudulent if at time of alienation a) some judgment has been rendered against him, whether it is on appeal or already become final and executor or b) some writ of attachment has been issued against him in any case.
Presumptions of fraud are rebuttable: they may be overcom e by clear, strong and convincing evidence. Unless controverted, presumptions will maintain existence of fraud with all consequences attendant thereto. Presumption of fraudulent transaction is not overcome by mere fact that mere deed of sale in question were in nature of public instruments. Their being notarized does not render them immune and free from their fraudulent a nd deceptive elements.
Requisites to overcome statutory presumption of fraud: 1.
Must be proved affirmatively that the conveyance was done i n good faith.
2.
Must be established that the conveyance was for a sufficient and valuable consideration (Gana v S heriff of Laguna, 36 P 236)
Establishment of these 2 requisites will mean that the presumption of fraud has been overthrown.
Effect if there is no judgment against alienating debtor nor writ of preliminary attachment: presumption of fraud will not ap ply.
Complaining creditor is not confined to the statutory presumptions to prove existence of the fraud: He may present other evidence to establish existence of fraud more convincingly, although he already enjoys favorable presumption.
Presumption of Fraud in this Art not applicable to registered lands if judgment or preliminary attachment is not registered at the back of the title.
A rescissible contract is valid before its rescission. It is legally effective and can transfer or convey title. It cannot be attacked collaterally; there is a need for direct atta ck (specific action for rescission).
Badges of Fraud listed by courts: 1.
Fact that the consideration paid for the conveyance is inadequate;
2.
Transfer made by a debtor after suit has been filed and while it is pending a gainst him;
3.
Sale on credit by an insolvent debtor;
4.
Presence of evidence of large indebtedness or complete insolvency of debtor;
5.
Transfer of all or nearly all of debtor’s property especially when insolvent or financially embarrassed;
6.
Transfer is made between father and son and any of the above circumstances are present;
7.
Failure of the buyer to take exclusive possession o f all the property he had purchased from the seller.
Existence of fraud does not necessarily bring about rescission - if transferee acted in good faith and transaction was for a valuable consideration, rescission will not be granted.
Art 1388
When transferee acted in bad faith – liable to return the same to the particular creditor/s who had s uccessfully instituted the complaint for rescission. If resti tution not possible, transferee being in bad faith will be liable to pay indemnity to suing creditor for damages creditor suffered by reason of alienation even if loss or destruction of property is due to fortuitous event.
Rule when there is a 2
nd
transferee of more – will be liable only if an action lies against the 1
the patrimony of the debtor, and the latter’s creditor cannot do anything to recover it. If 1
st
st
st
transferee. When the 1 transferee was in good faith, the property ceases to be part of
transferee in bad faith, liability of 2
nd
transferee will depend upon his good faith or bad
faith. If in bad faith, he is liable to restore the thing. If that is no longer possible, he will pay indemnity fo r the damages suffered by the creditor/s occasioned by the act of alienation of the property. Art 1389
Prescriptive period for rescissory actions: generally 4 years
Reckoning time: varies depending upon the circumstances… a)
If complaining party is 3
rd
person who has no participation in the contract, prescriptive period is 4 years reckoned from discovery of the fraudulent contract, or from registration
thereof, if real property is involved. b)
If complaining party is a ward who intends to rescind the contracts entered into by his guardian w/c prejudiced him, there being a sufferance of economic lesion up to at least ¼ of the value of the thing disposed of, action must be filed w/in 4 years from time of attainment of age of majority.
c)
If complaining party is an absentee, w/in 4 years from time his dom icile has been known. Absentee – one who disappears from his domicile and his whereabouts are unkno wn, w/o leaving agent to administer h is properties. When he reappears in his domicile, he ceases to be absentee as long as he informs the court of his presence.
d)
When the contract is one of those specially declared by law as rescissible, prescriptive period of 4 years shall run from e xecution of contract.
Nature of Liability of Transferee in Bad Faith is solidary with that of the transferring debtor as both of them are guilty of fraud. They may be liable criminally for “fraudulent insolvency” punishable under Art. 314 of RPC.
