Characteristics of Rescissible Contracts

1. Their defect consists in injury or damage either to one of the contracting parties or to third persons.
2. Before rescission, they are valid and, therefore, legally effective.
3. They can be attacked directly only, and not collaterally.
4. They can be attacked only either by a contracting party or by a third person who is injured or defrauded.
5. They are susceptible of convalidation only by prescription, and not by ratification.
Rescission vs Resolution (Art 1191)
Rescission (1381) Resolutionb(1191)
may be instituted not only by a party to the only by a party to the contract
contract but even by a third person,
there are several causes or only ground is failure of one of the parties
grounds such as lesion, fraud and others to
expressly specified by law. comply with what is incumbent upon him.
No power of the courts to grant an courts shall have a discretionary power to
extension of time for performance of the grant an extension for performance
obligation so long as there is a ground for
rescission
may be unilateral or reciprocal contracts only reciprocal contracts
rescinded
subsidiary

Rescission vs Mutual Consent

- Different in:
o Causes of the rescission
o Laws applicable
o Effects

A. Article 1181 and 1182

a. Requisites before rescission if contract is entered into by a guardian in behalf of
his ward or by a legal representative in behalf of an absentee
1. contract must have been entered into by a guardian in behalf of his ward or by a
legal representative in behalf of an absentee.
2. ward or absentee must have suffered lesion of more than one-fourth of the value
of the property which is the object of the contract.
3. no other legal means for obtaining reparation for the lesion
4. person bringing the action must be able to return whatever he may be obliged to
restore
5. object of the contract must not be legally in the possession of a third person who
did not act in bad faith

Remedy if the object of the contract is legally in the possession of a third person who
did not act in bad faith: indemnification for damages.
b. Requisites before rescission of contract entered into in fraud of creditors
1. There must be a credit existing prior to the celebration of the contract.
2. There must be a fraud, or at least, the intent to commit fraud, or at least, the intent
to commit fraud to the prejudice of the creditor seeking the rescission.
3. creditor cannot in any other legal manner collect his credit
4. object of the contract must not be legally in the possession of a third person who
did not act in bad faith

Remedy if the object of the contract is legally in the possession of a third person who
did not act in bad faith: to proceed against the person causing the loss for
damages.

Accion Pauliana- action to rescind contracts in fraud of creditors

Requisites:
1. the plaintiff asking for rescission has a credit prior to the alienation;
2. the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person;
3. the creditor has no other legal remedy to satisfy his claim;
4. the act being impugned is fraudulent;
5. the third person who received the property conveyed, if it is by
onerous title, has been an accomplice in the fraud
c. Contracts Referring to Things Under Litigation

o purpose is to secure the possible effectivity of a claim, while in the preceding

number the purpose is to guarantee an existing credit
o there is a real right involved, while in the preceding number there is a personal
right
o Person who can avail of the remedy of rescission is a stranger to the contract.

d. Contracts by Insolvent
Insolvency- it refers to the financial situation of the debtor by virtue of which it is
impossible for him to fulfill his obligations.
 Juridical declaration of insolvency is not necessary.

Requisites in order that payment may be rescinded.

1. that it must have been made in a state of insolvency, and
2. that the obligation must have been one which the debtor could not be compelled to
pay at the time such payment was effected.

Basis of rescission: FRAUD

e. Other rescissible contracts

1. 1098
2. 1189
3. 1526
 4. 1534
5. 1539
6. 1542
7. 1556
8. 1560
9. 1567
10. 1659
B. Article 1383
- action for rescission is subsidiary, consequently, it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same
- it is essential that he has exhausted all of the other legal means to obtain reparation
Who may institute
1. The person who is prejudiced, such as the party suffering the lesion in rescissory
actions on the ground of lesion, the creditor who is defrauded in rescissory actions on
the ground of fraud, and other persons authorized to exercise the same in other
rescissory actions;
2. their representatives.
3. their heirs; and
4. their creditors by virtue of the subrogatory action defined in Art. 1177 of the Code

C. Article 1384
- Rescission shall be only to the extent necessary to cover the damages caused.
D. Article 1385
- First paragraph- is applicable only to rescissory actions on the ground of lesion
o Once contract is rescinded on the ground of lesion, there arises an obligation on
the part of both contracting parties to return to the other the object of the contract,
including fruits or interests.
o Fruit of the thing- refer not only to natural, industrial and civil fruits but also to
other accessions obtained by the thing
o Interest- legal interest
- Second paragraph- rescission shall not take place when the thing which constitutes the
object of the contract is legally in the possession of a third person who did not act in bad
faith
Two requisites
1. that the thing must be legally in the possession of the third person;
2. that such third person must not have acted in bad faith
- Remedy: Action for Indemnity of damages against the guardian, representative of an
absentee or the litigant who transferred the thing.
Sikatuna vs Guevarra –

E. Article 1386, 1387, 1388

Presumptions of fraud
1. Alienations of property by gratuitous title if the debtor has not reserved sufficient
property to pay all of his debts contracted before such alienations.
 2. Alienations of property by onerous title if made by a debtor against whom some
judgment has been rendered in any instance or some writ of attachment has been
issued.
- Stronger- purpose of preventing the judgment creditor or other creditors from seizing the
property
- Creditor has the burden of proving the existence of fraud or the intention to defraud.
- GR: Test- whether the conveyance was a bona fi de transaction or merely a trick or
contrivance to defeat creditors/ does it prejudice the rights of creditors?
- XPN: Not applicable if
o Test would not be applicable if the conveyance is made in good faith or with a
bona fi de intent and for a valuable cause or consideration.
 Not rescissible- Right of such purchaser over the property is legally
superior to that of any other person even as against the creditor who is
prejudiced by the conveyance
 Rescissible- the property is acquired by one who is not a purchaser in
good faith and for value, it is clear that the contract or conveyance is
rescissible.
 If impossible for the acquirer in bad faith to return the property-
INDEMNIFY CREDITOR
 If it happens that there are two or more alienations, the first
acquirer shall be liable first, and so on successively
Prove:
o Good or valuable cause or consideration
o Intent
Badges of Fraud
o Circumstances to consider of WON the transfer or conveyances are fraudulent.
1. The fact that the cause or consideration of the conveyance is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending
against him.
3. A sale on credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present
others of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property.

Cabaliw vs Sadorra
Honrado vs Marcayda
o Purchaser in good faith- who buys property of another without notice that some
other person has a right to, or an 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.
o Good faith - consists in an honest intention to abstain from taking any
unconscientious advantage of another. It is an opposite of fraud.
F. Article 1389
Prescription- four years
1. Ward- must be counted from the time of the termination of the incapacity of the ward;
2. Guardianship and absentee- from the time the domicile of the absentee is known
3. Fraud ( Art 1389 (3,4), and 1382- from the time of the discovery of fraud
4. Certain cases of contract of sale- six months or forty days from the day of the delivery