a. Rescissible Contracts

Triggers:

• The parties to the compromise had a case pending litigation
• Final judgement has been rendered on the case
• Parties are unaware of the existence of final judgement
• Parties have entered a compromise agreement

GR: The compromise agreement may be rescinded.

XPN: Ignorance of a judgment which may be revoked or set aside is not a valid ground for attacking a compromise. “This refers to the instance when the court’s decision is still appealable or otherwise subject to modification. Ignorance of the decision is not a ground to rescind a compromise agreement, because the parties are still unsure of the final outcome of the case at this time”. [Magbanua v. Uy, G.R. No. 161003 (2005)]

Exceptions:

• When, together with lesion, there has been: fraud, mistake or undue influence
• In cases specified by law (the ff. contracts may be rescinded)
• Those entered into by guardians when the wards suffer lesion by more than ¼ of the value of the things which are the object thereof (CIVIL CODE, art. 1381, par. 1)
• Those agreed upon in representation of absentee, if the latter suffer lesion stated in par. 1 (CIVIL CODE, art. 1381, par. 2)
• Partition among coheirs, when any one of them received things with a value less by at least ¼ than the share to which he is entitled (CIVIL CODE, art. 1098)

Requisites for Rescission

• The contract must be valid and effective until rescinded.
• The contract must fall within a ground for rescission specified by law. Lesion or prejudice must be shown where the applicable ground requires it.
• Requires mutual restitution.

Updated: When return of the contract object is impossible, damages may serve as restitution upon rescission (Yamauchi v. Suñiga, G.R. No. 199513, 18 April 2018).

Contracts that may be rescinded

• Under Art. 1381, those
• (A) Entered into by guardians whenever the wards whom they represent suffer lesion by more than ¼ of value of the property [NCC, Art. 1381(1)];

If a guardian alienates properties of the ward without judicial approval, the contract is ”unenforceable” for lack of authority. (NCC, Art. 1403,par. 1)

• (B) Agreed upon in representation of absentees, if absentee suffers lesion by more than ¼ of value of property [NCC, Art. 1381(2)];
• (C) Contracts where rescission is based on fraud committed on creditor and cannot collect the claim due (accion pauliana) [NCC, Art. 1381(3)];

NOTE: Contracts which are rescissible under the third paragraph of Art. 1381 are valid contracts, although undertaken in fraud of creditors. If the contract is ‘‘absolutely simulated’’, the contract is not merely rescissible but inexistent, although undertaken as well in fraud of creditors. (MBC v. Silverio, 466 SCRA 438, August 11, 2005) In the former, the remedy is rescission; in the latter, the remedy is an action to declare the contract inexistent which action is imprescriptible

• (D) Contracts where the object involved is the subject of litigation; contract entered into by defendant without knowledge or approval of litigants or judicial authority [NCC, Art. 1381(4)];
• (E) Payments made in a state of insolvency for obligations whose fulfillment the debtor could not be compelled to make at the time of payment are rescissible (NCC, Art. 1382);
• (F) Provided for by law. (NCC, Arts. 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 & 1659)

NOTE: C, D, and E are contracts that are not necessarily entered into by persons exercising fiduciary capacity. Under Art. 1381(1)–(2), the contract must have been entered into by a guardian for a ward or by a representative of an absentee, and must cause the specified lesion.

General requirements and limitations on rescission (NCC, Arts. 1383, 1385 & 1389):

• Plaintiff has no other means to maintain reparation;
• Plaintiff must be able to return whatever he may be obliged to return due to rescission;
• The things must not have been passed to third persons in good faith;
• It must be made within 4 years. (NCC, Art. 1389)

Characteristics of rescissible contract

• It has all the elements of a valid contract
• It has a defect consisting of an injury (generally in the form of economic damage or lesion, fraud, and alienation of the property) to one of the contracting parties or to a third person.
• It is valid and effective until rescinded.
• It can be attacked only directly
• It is susceptible of convalidation only by prescription.

Persons who may institute an action for the rescission of a rescissible contract

The action for rescission may be instituted by the following:

• Injured party;
• Contracts entered into by guardians – by ward, or by guardian ad litem of ward during the latter’s incapacity in an action against the original guardian;
• Contracts in representation of absentees – by the absentee;
• Contracts defrauding creditors – by the creditors;
• Contracts referring to things in litigation – by the party litigant;
• Their representatives;
• Their heirs;
• Their creditors by virtue of subrogatory action defined in Art. 1177, NCC.

Who may institute an action for annulment

• Real party in interest. – All who are principally or subsidiarily liable ; and
• One not responsible for the defect of the contract.

PRACTICE QUESTIONS (part 2 of 5)

A: NO. Jurisprudence is clear that the following successive measures must be taken by a creditor before he may bring an action for rescission of an allegedly fraudulent contract:

(1) exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution;

(2) exercise all the rights and actions of the debtor, save those personal to him (acción subrogatoria); and

(3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana)

It is thus, apparent that an action to rescind, or an acción pauliana, must be of last resort, availed of only after the creditor has exhausted all the properties of the debtor not exempted from execution or after all other legal remedies have been exhausted and have been proven futile. (Metropolitan Bank and Trust Company v. International Exchange Bank, G.R. No. 176008, 10 Aug. 2011)

Q: Jebson entered into a Joint Venture Agreement (JVA) with Sps. Salonga obligated the former to construct ten (10) residential units on the latter’s three parcels of land. Out of the ten units, seven (7) units will belong to Jebson. It was also allowed to sell its allocated units under such terms as it may deem fit, subject to the condition that the price agreed upon was with the conformity of Sps. Salonga. Thereafter, Jebson entered into a Contract to Sell with Buenviaje over one of its units without the conformity of Sps. Salonga. Buenviaje was able to fully pay for Jebson’s unit through a swapping arrangement, which allows the vendee to convey certain properties as consideration for the sale. Despite this full payment, Jebson was unable to complete said unit.

This prompted Buenviaje to demand the unit’s immediate completion and delivery. Jebson, having failed to comply with the demand, Buenviaje filed an action before the HLURB against Jebson and Sps. Salonga for specific performance praying for the unit’s completion and delivery and rescission in the alternative. Jebson, in its defense, claimed that they were not able to secure the necessary permits because Sps. Salonga stubbornly refused to cause the consolidation and partition of the parcels of land. Sps. Salonga averred that they were not liable to the complainants since there was no privity of contract between them, adding that the contracts to sell were unenforceable against them as they were entered into by Jebson without their conformity, in violation of the JVA. HLURB rescinded the Contract to Sell and held Sps. Salonga Solidarily liable with Jebson. HLURB-BOC reversed the former ruling and instead rescinded the swapping arrangement and maintaining the validity of the Contract to Sell, thereby granting specific performance instead. Is the grant of the remedy of specific performance in Buenviaje’s favor proper?

A: YES. As between the two remedies made available to him, Buenviaje had chosen the remedy of specific performance and, therefore, ought to be bound by the choice he had made. To add, the fundamental rule is that reliefs granted a litigant are limited to those specifically prayed for in the complaint. Buenviaje’s alternative prayer for resolution is textually consistent with that portion of Art. 1191 of the NCC provides that an injured party “may also seek rescission, even after he has chosen fulfillment if the latter should become impossible.” Nevertheless, the impossibility of fulfillment was not sufficiently demonstrated in the proceedings conducted in this case.

Besides, mutual restitution is the proper consequence of the remedy of resolution. It cannot arise – as it is, in fact, theoretically incompatible – with the remedy of specific performance, which is the relief prayed for and consequently, granted to the injured party herein. (Buenviaje v. Sps. Salonga, GR No. 216023, 05 Oct. 2016)

Q: While the case was pending, Felix donated his parcels of land in favor of his children. Judgment was rendered against Felix. Four years after the said donation, the sheriff sought to enforce the alias writ of execution and discovered that Felix no longer had any property and had conveyed the subject properties to his children. Thus, Philam filed an accion pauliana for rescission of the donations. Felix countered that an action for rescission of the donation had already prescribed since the time of prescription has to run from the date of registration. Has the action filed by Philam prescribed?

A: NO. Philam only learned about the unlawful conveyances made by Felix more than four years after the donations were effected, when its counsel accompanied the sheriff to Butuan City to attach the properties. There they found that he no longer had any properties in his name. It was only then that Philam’s action for rescission of the deeds of donation accrued because then it could be said that Philam had exhausted all legal means to satisfy the trial court’s judgment in its favor. Since Philam filed its complaint for accion pauliana against petitioners barely a month from its discovery that Felix had no other property to satisfy the judgment award against him, its action for rescission of the subject deeds clearly had not yet prescribed. (Khe Hong Cheng v. CA, G.R. No. 144169, 28 Mar. 2001)

NOTE: The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (De Leon, 2003)

Q: Pinkian Mining Company (PMC) entered into an Operating Agreement (OA) with Golden Valley Exploration, Inc. (GVEI), granting the latter "full, exclusive and irrevocable possession, use, occupancy, and control over the mining claims and the processing and marketing of the products for a period of 25 years.” Later, PMC extrajudicially rescinded the OA upon GVEI’s violation of Sec. 5.01, Art. V thereof. GVEI contested PMC’s extra-judicial rescission of the OA, averring therein that its obligation to pay royalties to PMC arises only when the mining claims are placed in commercial production, which condition has not yet taken place. PMC no longer responded to GVEI’s letter. Is the rescission of the Operating Agreement valid?

A: YES. The rescission is valid. A party may resolve a reciprocal obligation extrajudicially, even without an express cancellation clause, but does so at its own risk: if challenged, the court determines whether a substantial breach justified resolution. An express cancellation clause may also authorize extrajudicial cancellation under its terms. PMC’s unilateral rescission of the Operating Agreement (OA) due to GVEI’s nonpayment of royalties considering the parties’ express stipulation in the OA that said agreement may be canceled on such ground. (Golden Valley Exploration, Inc. v. Pinkian Mining Company, G.R. No. 190080, 11 June 2014)

Q: Vermen and Seneca entered into an “offsetting agreement,” where Seneca is obliged to deliver construction materials to Vermen, who is obliged to pay Seneca and to deliver possession of two condominium units to Seneca upon its completion. Seneca filed a complaint for rescission of the offsetting against Vermen, alleging that the latter had stopped issuing purchase orders of construction materials without a valid reason, thus resulting in the stoppage of deliveries of construction materials on its part, in violation of the Offsetting Agreement. Can the agreement be rescinded?

A: YES because the provisions of the offsetting agreement are reciprocal in nature. Art. 1191 of the NCC provides the remedy of rescission (more appropriately, the term is “resolution”) in case of reciprocal obligations, where one of the obligors fails to comply with that is incumbent upon him. (Vermen Realty Development Corp. v. CA, G.R. No. 101762, 06 July 1993)

Q: Ong and Sps. Robles executed an “agreement of purchase and sale” of two parcels of land. Ong partially paid the spouses by depositing sums of money with the BPI in accordance with their stipulation that Ong will pay the loan of Sps. Robles with BPI. To answer for Ong’s balance, he issued four (4) post-dated checks which were dishonored. Ong failed to replace the checks and to pay the loan in full. Can the contract entered into by Ong and the spouses be rescinded?

A: NO. The agreement of the parties, in this case, may be set aside, but not because of a breach on the part of Ong for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation that prevented the obligation of the spouses to convey title from acquiring an obligatory force.

The agreement of purchase and sale shows that it is in the nature of a contract to sell. Ong’s failure to complete payment of the purchase price is a non- fulfillment of the condition of full payment which rendered the contract to sell ineffective and without force and effect. The breach contemplated in Art. 1191 is the obligor’s failure to comply with an obligation. In this case, Ong’s failure to pay is not even a breach but merely an event that prevents the vendor’s obligation to convey title from acquiring binding force. (Ong v. CA, G.R. No. 97347, 06 July 1999)

Qtn: Petitioners and respondents entered into a Contract to Sell (subject contract) over the subject land. The subject contract provides, inter alia, that: (a) the consideration for the sale is P33,155,000.00 payable as follows: down payment in the amount of P11,604,250.00 inclusive of the amount of P2,000,000.00 previously paid by respondents as earnest money or reservation fee, and the remaining balance of P21,550,750.00 payable in 36 monthly installments, each in the amount of P598,632.00 through post-dated checks; (b) in case any of the checks is dishonored, the amounts already paid shall be forfeited in petitioners' favor, and the latter shall be entitled to cancel the subject contract without judicial recourse in addition to other appropriate legal action; (c) respondents are not entitled to possess the subject land until full payment of the purchase price; (d) petitioners shall transfer the title over the subject land from a certain Edilberta N. Santos to petitioners' names, and, should they fail to do so, respondents may cause the said transfer and charge the costs incurred against the monthly amortizations; and (e) upon full payment of the purchase price, petitioners shall transfer title over the subject land to respondents. However, respondents sent petitioners a letter seeking to rescind the subject contract on the ground of financial difficulties. They also sought the return of the amount they had paid.

As their letter went unheeded, respondents filed a complaint for rescission. Petitioners countered that respondents' act is a unilateral cancellation of the subject contract as the former did not consent to it. Moreover, the ground of financial difficulties is not a ground to effect a valid rescission. The RTC ruled in favor of respondents and, accordingly, ordered the rescission of the subject contract; and the return of the amounts already paid as well as the remaining post-dated checks issued by respondent representing the remaining monthly amortizations. The CA affirmed. Is the CA correct?

A: NO. It cannot be said that petitioners' failure to undertake their obligation under paragraph 7 to cause the transfer of the property to their names from one Edilberta N. Santos within 90 days from the execution of the said contract defeats the object of the parties in entering into the subject contract, considering that the same paragraph provides respondents contractual recourse in the event of petitioners' non-performance of the aforesaid obligation, that is, to cause such transfer themselves in behalf and at the expense of petitioners. Indubitably, there is no substantial breach of paragraph 7 on the part of petitioners that would necessitate a rescission (or resolution) of the subject contract.

Notwithstanding the foregoing facts, the Court cannot grant petitioners' prayer to order the cancellation of the subject contract and the forfeiture of the amounts already paid by respondents on account of the latter's failure to pay its monthly amortizations, simply because petitioners neither prayed for this specific relief nor argued that they were entitled to the same. Worse, petitioners were declared "as in default" for failure to file the required pre-trial brief and, thus, failed to present any evidence in support of their defense. (Nolasco v. Cuerpo, GR No. 210215, 09 Dec. 2015)

NOTE: If the case involves a contract to sell, wherein full payment of the purchase price is a positive suspensive condition, the non-fulfillment of which is not a breach of contract, but merely an event that prevents the seller from conveying title to the purchaser. (Royal Plains View, Inc. v. Mejia, G.R. No. 230832, 12 Nov. 2018)

Q: Can a contract be rescinded extrajudicially despite the absence of a special contractual obligation therefor?

A: YES. An extrajudicial rescission based on grounds not specified in the contract would not preclude a party to treat the same as rescinded. The rescinding party, however, by such course of action, subjects himself to the risk of being held liable for damages when the extrajudicial rescission is questioned by the opposing party in court. In other words, the party who deems the contract violated may consider it resolved or rescinded, and accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. (Nissan Car Lease Phils, Inc., v. LICA Management and Proton Pilipinas, Inc., G.R. No. 176986, 13 Jan. 2016)

Q: Ramon, the judicial administrator of the estate of Juan, found out that Rodriguez had enlarged the area of the land which he purchased from Juan before his death. Thus, Ramon demanded Rodriguez to vacate the portion allegedly encroached by him. Rodriguez refused and contested there was indeed a conditional sale with the balance of the purchase price payable within five years from the execution of the deed of sale. Ramon then filed an action for recovery of possession of the disputed lot. Is the contract of sale a conditional one?

A: NO. The stipulation that the "payment of the full consideration based on a survey shall be due and payable in five years from the execution of a formal deed of sale" is not a condition that affects the efficacy of the contract of sale. It merely provides the manner by which the full consideration is to be computed and the time within which the same is to be paid. But it does not affect in any manner the effectivity of the contract. (Heirs of San Andres v. Rodriguez, G.R. No. 135634, 31 May 2000)

Q: The late Don Lopez, Sr., who was then a member of the Board of Trustees of CPU, executed a deed of donation in favor of the latter involving a parcel of land subject to the condition that it shall be utilized for the establishment and use of a medical college. However, the heirs of Don Lopez, Sr., filed an action for annulment of the donation, reconveyance, and damages against CPU, alleging that CPU did not comply with the conditions of the donation. Are the conditions imposed resolutory or suspensive?

A: Under Art. 1181 of the NCC, on conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. Thus, when a person donates land to another on the condition that the latter would build upon the land a school, the condition imposed was not a condition precedent or a suspensive condition but resolutory. It is not correct to say that the schoolhouse (or the establishment and use of a medical college in this case) had to be constructed before the donation became effective, that is, before the donee could become the owner of the land, otherwise, it would be invading the property rights of the donor. The donation had to be valid before the fulfillment of the condition. If there was no fulfillment or compliance with the condition, the donation may now be revoked and all rights which the donee may have acquired under it shall be deemed lost and extinguished. (Central Philippine University v. CA, G.R. No. 112127, 17 July 1995)

Q: Suppose that the debtor executed a promissory note promising to pay his obligation to the creditor as soon as he has received funds derived from the sale of his property in a certain place, is the condition potestative or mixed?

A: The condition is mixed because its fulfillment depends not only upon the will of the debtor but also upon the concurrence of other factors, such as the acceptability of the price and other conditions of the sale, as well as the presence of a buyer, ready, able, and willing to purchase the property.

NOTE: The existing rule in a mixed conditional obligation is that when the condition was not fulfilled but the obligor did all in his power to comply with the obligation, the condition should be deemed satisfied. (Intl. Hotel Corp. v. Joaquin, Jr., G.R. No. 158361, 10 Apr. 2013)