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From the lectures of Atty. Bruneson AlabastroArt. 1191 (in relation 1192) – more specifically called as resolution Art. 1380 – rescission properWe are talking about contracts in cases where it can be rescinded in cases established by law.REQUISITES FOR CONTRACTS TO BE RESCINDED: It must be a complet...

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OBLIGATIONS & CONTRACTS (3rd EXAM TSN) From the lectures of Atty. Bruneson Alabastro

RESCISSIBLE CONTRACTS

ART. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Art. 1191 (in relation 1192) – more specifically called as resolution Art. 1380 – rescission proper We are talking about contracts in cases where it can be rescinded in cases established by law.

That embodies or covers mere acts of administration (mere management, maintenance, upkeep, and taking care of the property). They cannot do acts of ownership (transfer, convey or introduce burdens of a property such as a mortage, lease, pledge, etc.). They are not authorized to do acts such as selling, mortgaging, or donating the property without proper judicial approval. What if the guardian or the representative does not have the authority of the ward or the absentee? What if the guardian or representative did not acquire judicial approval before they made a sale, donation, or mortgage? What if they did acts of ownership? The status of the contract is not rescissible. It is unenforceable. 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;

REQUISITES FOR CONTRACTS TO BE RESCINDED: 1. It must be a completely valid and enforceable contract – it must contain all the essential requisites of a contract and its formality (if it requires formality for its enforceability) These are defective contracts. Rescissible contracts – contracts that are completely valid and enforceable. It’s just that, one can file an action for its rescission. There is a defect on account of certain economic injury or lesion. Can it be convalidated (completely valid and enforceable without being susceptible to rescission)? YES. There is a prescriptive period provided for actions that are filed for the rescission of that contract. By the lapse of that period (4 years), rescissible contracts can be convalidated. All of the defects will be lost by the lapse of time. There is also a possibility that there can be a waiver, condonation, or renunciation of an action to rescind. If a person condones an economic injury on their part, that is not ratification, that is a waiver of the right to bring an action for rescission. Many authors may say that rescissible contracts are subject to ratification. That is true, but not all rescissible contracts. There are certain types of rescissible contracts that are subject to ratification.

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; The guardian here entered into a contract involving a thing of an object which belongs to the ward upon whom they exercise guardianship over. It covers contracts entered into by the guardian for and in behalf of the ward or representatives for and in behalf of the absentee. What happens when the guardian or the representative himself/herself are the ones who purchased the property of the ward or the absentee? The law says “which are entered into.” Art. 1381 paragraphs 1 and 2 we are talking about instances where guardians sell the property of the absentee. What is the status of their purchase of the property? This provided for under Art. 1491. ART. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another:

ART. 1381. The following contracts are rescissible:

(1) The guardian, the property of the person or persons who may be under his guardianship;

(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) Agents, the property whose administration or sale may have been intrusted to them, unless the consent of the principal has been given;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

(3) Executors and administrators, the property of the estate under administration;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale;

(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) Suffering lesion has a particular extent or scope, it’s not just any other economic injury (because mere inadequacy of the price or cause will not bring about the invalidity of the contract except when otherwise provided by law). Instances under the law where the law says that there is specific type of lesion that can affect the validity of the contract is found in Art. 1381. According to Art 1381, the scope of lesion must be more than one-fourth.

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession; (6) Any others specially disqualified by law. (1459a)

When we talk about representatives in relation to their absentees, and when we talk about guardians with respect to their ward, Art. 1381 presumes that these representatives, and these guardians have authority to administer the property belonging to their absentees and their wards.

In Art. 1381, we are talking about contracts that are entered into by the guardian or by the representative. What is now the issue with respect to paragraph 1 and 2? Are there instances where the guardian sold the property of the absentee and they went beyond

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OBLIGATIONS & CONTRACTS (3rd EXAM TSN) From the lectures of Atty. Bruneson Alabastro

their authority of doing their acts of administration? Is there a way that these contracts can be ratified? With respect to the first and 2nd paragraph, please take note of Art. 1386. ART. 1386. Rescission referred to in Nos. 1 and 2 of Art. 1381 shall not take place with respect to contracts approved by the courts. (1296a) These contracts, which may have been entered into by guardians or representatives in behalf of their wards or absentees, may be susceptible to ratification by the court.

embarrassed, or that your liabilities are greater than your assets, you are already in a state of insolvency. Any payment you make, or conveyance of your property are rescissible, because it may damage the interest of persons who can pursue those property which you convey. INSTANCES WHERE A CONTRACT IS DECLARED BY LAW AS RESCISSIBLE: (1) Sale of animals with hidden defects:

3rd paragraph of 1381 - Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them.

What if you purchase an animal through an authorized retailer or a friend and what if that animal had a hidden defect (e.g. ailing or terminally ill)?

You must remember the different types of fraud, (dolo causante and dolo incidente). The 3rd paragraph of 1381 is incidental fraud. The law provides that these contracts are rescissible.

In sale of animals with hidden defects, the remedy on the part of the buyer is accion redhibitoria, which is actually an action to rescind.

You have to remember Art. 1177 on what are the remedies that can be exhausted by the creditors. First, make a demand. Second, pursue leviable property. Third is accion subrogatoria, fourth is accion pauliana. The 3rd paragraph of 1381 actually talks about accion pauliana, where the contracts should be rescinded because they are in fraud of creditors. How do we determine if they are entered into to defraud creditors? - Explained in Union Bank v. Spouses Ong. The SC said, in determining whether or not a certain conveying contract is fraudulent, what comes to mind first is the question of whether the conveyance was a bona fide transaction, or a trick and contrivance to defeat the claims of just creditors. 4th paragraph of 1381 - 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. Take note: What is important here is that these contracts under paragraph 4 have been entered into by a certain defendant despite the fact that a case is pending in court. Example: You file a case for forcible entry or unlawful detainer involving a parcel of land. Then, the owner of the parcel of land would like to sell the property which is a subject matter of a suit, pending litigation. The status of the contract entered into in favor of the buyer would be rescissible. To distinguish the 3rd paragraph from the 4th paragraph, take note that in the 3rd paragraph, the purpose of the law is to declare that contract in fraud of creditors as rescissible—in order to guarantee an existing and just claim of a creditor. In the 4th paragraph, the purpose is to secure the possible effectivity of a claim pending in court. In par. 3, you are talking about a personal right of a creditor to make a demand or claim against his or her debtor. In par. 4, you are talking about a real right involving ownership or possession, involving property which is sold, despite the fact that it is pending litigation. 5th paragraph of 1381 - All other contracts specially declared by law to be subject to rescission. Par. 5 is very broad. First, let us take a look at Art. 1382. ART. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292) Under the fifth instance, it is the law itself that specifically declares these contracts as rescissible. Examples are those payments made in the state of insolvency. Is there a need of judicial declaration of insolvency for these payments under art 1382 to be rescissible? - The answer is NO, there is no need for any judicial declaration that you are in a state of insolvency. By a sheer fact that you are greatly financially

ART. 1579. If the sale be rescinded, the animal shall be returned in the condition in which it was sold and delivered, the vendee being answerable for any injury due to his negligence, and not arising from the redhibitory fault or defect. (2) Breach of warranty by the seller: If you’re a seller and in the warranty of certain goods, what if you breach the warranty? What is the remedy on the part of the buyer? The buyer may rescind the contract, as provided in Art. 1599 (4). ART. 1599. Where there is a breach of warranty by the seller, the buyer may, at his election: (4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. (3) A contract of lease under Art. 1662: ART. 1662. If during the lease it should become necessary to make some urgent repairs upon the thing leased, which cannot be deferred until the termination of the lease, the lessee is obliged to tolerate the work, although it may be very annoying to him, and although during the same, he may be deprived of a part of the premises. If the repairs last more than forty days the rent shall be reduced in proportion to the time - including the first forty days - and the part of the property of which the lessee has been deprived. When the work is of such a nature that the portion which the lessee and his family need for their dwelling becomes uninhabitable, he may rescind the contract if the main purpose of the lease is to provide a dwelling place for the lessee. (4) A contract of partnership under Art. 1838: ART. 1838. Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled: (1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; (2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and (3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership. (4) Compromise agreements under Art. 2040:

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OBLIGATIONS & CONTRACTS (3rd EXAM TSN) From the lectures of Atty. Bruneson Alabastro

ART. 2040. If after a litigation has been decided by a final judgment, a compromise should be agreed upon, either or both parties being unaware of the existence of the final judgment, the compromise may be rescinded. Ignorance of a judgment which may be revoked or set aside is not a valid ground for attacking a compromise. ATTRIBUTES OF AN ACTION FOR RESCISSION: Rescission under Art. 1191 is a principal action. This means that the moment that there is a substantial breach in a reciprocal obligation, the injured person can rescind that contract. ART. 1383. The 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. Under Art. 1383, rescission is a subsidiary action. You cannot file an action for rescission right away. You have to observe the order of preference under Art. 1177. 1. Make a demand 2. Pursue leviable property 3. File an action for subrogation 4. Impugn contracts which are rescissible If you are not a defrauded creditor, what is required under the law? At the minimum, you must make a demand. NOTE: Art. 1177 is more particularly proper in cases of defrauded creditors. However, if any other ground is interposed, it is enough that you make a demand first. If that demand is unheeded, then you can file an action for rescission under Art. 1383. Only the party suffering the damage may file an action. The difference with Art. 1383 is that this injured party is not necessarily a contracting party. It may be a third person, depending on which ground he falls under Art. 1381.

NOTE: The damages caused under this Article are actual damages. 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. (1295) Example: X, with respect to A, is a complete stranger. X does not know of any subsisting obligation that A has with respect to B. A sold the parcel of land in favor X and X registered it under his name, without knowledge of any defect in his title. X further sold it in favor of Y, who was a buyer in good faith. When B filed an action for rescission of the contract, the property is already registered under Y’s name. Can the property given back to B? No. Despite filing an action for rescission, that property is already in the hands of a purchaser in good faith. The moment they registered it under their name, the property cannot be taken away from them. What is the right of the injured party, or the right of B against A? Only an action to claim damages. Consequently, rescission is only possible if the property or subject matter of the contract can still be returned or if there is a possibility of restitution.

Art. 1383 also requires that the injured party has no other legal means to obtain reparation for the same.

If that property cannot be returned, such that it is already in the hands of an innocent purchaser of value, the action for rescission is converted to a mere case for damages. He who demands the return of whatever the subject matter of the contract, he must have the capability to restore or return it.

What is the extent of this rescission? Under Art. 1384, it must be to the extent necessary to cover the damages caused.

Consequently, rescission is only possible if the property or thing that is the is the subject matter of the contract or agreement can still be returned. Meaning, there is still a possibility of restitution.

ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) Example: A is the debtor of B, the creditor, for the amount of 100k. Despite demand, no other properties are available and no right to be subrogated is available. A only has 100k in the bank. So, A, the debtor, donated it in favor of X. Further, X divided the 100k to Y and Z (so, 50k each). Despite the fact that the amount was divided between Y and Z, the extent of the claim should be the credit or the claim of the creditor, which is 100k. Example: What if the only property belonging to A is a parcel of land in the amount of 100k? So, the creditor wanted to exhaust all the remedies. B, the creditor, can pursue leviable property under Art. 1177. Let’s say that A made it seem that the property was sold in favor of X and that property is already in the amount of 120k because of certain valuation. So, there is an increase in the value of the property. What is the remedy on the part of B, the creditor? The creditor may file an action for the rescission of the contract of sale between A and X because that contract was undertaken to defraud him. Can B claim up to the extent of 120k? No. Under Art. 1384, it is only up to the amount claimed by the creditor. In this case, it is only up to 100k. So, the contract between A and X may be valid but only up to the extent of 20k.

What is the rule when the property cannot be returned such that it is already registered or it is in the hands of a 3rd person who is in good faith or an innocent purchaser for value? It converts the action for rescission to a mere case for damages. It cannot be anymore an action for rescission but a mere action for damages. Rule: He who demands the subject matter of an agreement or contract, there must be capability to restore it or return it. Otherwise, an action for rescission is not possible, only an action for indemnity.

ART. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not ...