Rescission under Article 1191
Rescission or resolution refers to the cancellation of an reciprocal obligation.
Rescission is a remedy granted by law to the contracting parties, and even to third persons, to secure the reparation of damages caused to them by a contract, even if the same should be valid, by means of the restoration of things to their condition prior to the celebration of the contract.
Note: Rescission of rescissible contracts must not be confused with the rescission or resolution of reciprocal obligations under Art. 1191 of the Code. Although there are similarities both with respect to validity and effects, they are distinguished from each other in the following ways:
- As to party who may institute action: In rescission the action may be instituted not only by a party to the contract but even by a third person, while in resolution the action may be instituted only by a party to the contract.
- As to causes: In rescission there are several causes or grounds such as lesion, fraud and others expressly specified by law, while in resolution the only ground is failure of one of the parties to comply with what is incumbent upon him.
- As to power of the courts: In rescission there is no power of the courts to grant an extension of time for performance of the obligation so long as there is a ground for rescission, while in resolution the law expressly declares that courts shall have a discretionary power to grant an extension for performance provided that there is a just cause.
- As to contracts which may be rescinded or resolved: In rescission any contract, whether unilateral or reciprocal, may be rescinded, while in resolution only reciprocal contracts may be resolved.
Article 1191 (a)
The power to rescind obligations is implied in reciprocal obligations in case one of the obligors should not comply with his obligation.
General Rule #1: Article 1191 only applies to reciprocal obligations/contracts with no resolutory provision by virtue of which obligation may be cancelled or extinguished by the injured party in case of breach.
- Reciprocal obligations/contracts with resolutory provision by virtue of which obligation may be cancelled or extinguished by the injured party in case of breach.
- Contract of Partnership: only in cases where there are obligation to contribute in common fund because it is governed by Article 1786 and 1788 of Law on Partnership.
- Contract of Lease: As this is governed by Article 1659.
- Contract of Sales of Real Property: Governed by the Recto Law (Article 1484-1486)
- Contract of Sales of Personal Property by installments: Governed by the Maceda Law (RA. 6552)
Rationale for the non-applicability: Special provisions prevail over general provisions.
General Rule #2: Rescission will not be permitted for a slight or casual breach of contract but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement.
Hence, a mere delay is not a violation of an essential condition of the contract as warrants rescission for non-performance.
Article 1191 (b)
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
General Rule #3: The right for rescission is incumbent upon the injured party and he may choose:
- Fulfillment of obligation + damages; or
- Rescission of obligation + damages
General Rule # 4: Both remedies are alternative in nature, not cumulative. Thus, injured party cannot sought both remedies.
XPN: where, initially, fulfillment is sought but such fulfillment became impossible; in such case, the injured party may seek for rescission.
Note: Right to choose between the two is not incompatible with alternative prayer for both remedies. Meaning, if injured party seeks to avail both remedies the presumption is that he is leaving the matter to the sound discretion of the court. (Mindanao Prospecting Ass. Inc vs. Golden Gate Mining Co.)
Article 1191 (c)
The court shall decree the rescission claimed unless there be just cause authorizing the fixing of a period.
General Rule # 5: mere failure of the party to comply with his obligation does not ipso jure produce the rescission of obligation. It is the judgment of the court not the mere will of the party produces rescission of obligation.
XPN: Where the contract itself contains a resolutory provision by virtue of which obligation may be cancelled or extinguished by the injured party in case of breach.
Note: If the exception applies, Judicial decree to cancel or rescind is no longer necessary.
Article 1191 (c)
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
Effects of Rescission:
Between Contracting Parties: Upon rescission, it is the duty of of the court to require the parties to surrender the values that they may have received from each other and they must be placed as far as practicable to their original situation.
General Rule # 6: In case of breach of both parties, the first infractor shall be equitably tempered by the courts.
XPN: if the court cannon be determined who violated first, same shall be extinguished and each shall bear their own expenses.
Rescission can no longer be demanded in the ff:
1.) When he who demands it is no longer in position to return whatever he may be obliged to restore;
2.) When the thing which is the object of the contract is already legally in possession of a third person who did not act in bad faith.
XPN for 2: Third party acquired the thing in bad faith, in which case, injured party may still go after the property.
XPN to the XPN for 2: If the thing can no longer be recovered, he may avail for damages as the only remedy.
Principal Remedy: Creditor to exhaust all properties in the possession of the debtor.
Subsidiary remedies – defined as the exhaustion of all remedies by the prejudicial creditor to collect claims due him before rescission is resorted to.
- Accion Subrogatoria (Action for Subrogation)
– the right or remedy wherein, the law expressly grants to the creditor the right to exercise (to be subrogated to) all of his rights & bring all of the actions which debtor may have against the third persons.
Rationale: Because of the inaction or failure to comply in proceeding against 3rd persons, the debtor’s creditors are prejudiced. In order to prevent this, law expressly recognizes the right of a creditor to proceed against such 3rd persons invested as it were the personality of the debtor.
- Debtor to whom the right or action properly pertains must be indebted to the creditor.
- Creditor must be prejudiced by the inaction or failure of debtor to proceed against 3rd person.
- Creditor must have first pursued or exhausted all of the properties of the debtor which are not exempted from execution.
XPN: Rights which are purely personal to the debtor or right which are inherent only to the debtor. (example: inofficious donation)
2. Accion Pauliana (action to rescind contracts entered in fraud of creditors)
– Right available to the creditor by virtue of which he can secure the rescission of any act of debtor which is in fraud and to the prejudice of his rights as a creditor.
- Plaintiff asking for rescission has a credit prior to the alienation, although demandable later.
- Debtor has made a subsequent contract conveying a patrimonial benefit to a third person.
- Creditor has no other legal remedy to satisfy his claim.
- The act being impugned is fraudulent.
- Third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.
Note: The Action to rescind contracts entered in fraud of creditors is subsidiary in character and may only be availed after exhausting all other remedies available or in the absence of any other legal remedy to obtain reparation to the injury sustained.
3. Accion Directa (Direct Action)
- The right of lessor to go directly to a sub-lessee for unpaid rents of the lessee. (1652)
XPN: Sub-lessee not liable beyond the amount of rent due to him in accordance with the term of the sublease.
- The right of laborers or persons who furnish materials for a piece of work undertaken by a contractor to go directly to the owner for any unpaid claim due to the contractor. (1729)
- The right of vendor against every possessor whose right is derived from the vendee. (1608)
- The right of principal against a substitution appropriately by an agent. (1893)