In the Philippines, a signed contract is generally considered the "law between the parties." However, the law recognizes that certain circumstances may render a contract inequitable or damaging. The Civil Code of the Philippines (Republic Act No. 386) provides a specific remedy known as Rescission, which allows for the cancellation of a valid contract to repair damages caused to a party or a third person.
What is Rescission?
Rescission is a remedy granted by law to the contracting parties and sometimes to third persons to secure the reparation of damages caused by a valid contract. Its primary goal is the restoration of things to their condition prior to the celebration of the contract (mutual restitution).
It is important to distinguish between Rescission (Article 1381) and Resolution (Article 1191). While often used interchangeably in casual conversation:
- Resolution (Art. 1191): Is based on a breach of faith or failure to comply with reciprocal obligations.
- Rescission (Art. 1381): Is based on lesion (economic damage) or fraud against creditors, even if the contract is technically valid.
Grounds for Rescission (Article 1381)
The Civil Code enumerates specific instances where a contract may be legally rescinded:
1. Contracts Entered into by Guardians
When a guardian enters into a contract on behalf of a ward (e.g., a minor), and the ward suffers lesion by more than one-fourth (1/4) of the value of the object of the contract.
2. Contracts Agreed upon in Representation of Absentees
Similar to guardians, if a representative of an absentee enters into a contract where the absentee suffers lesion by more than one-fourth (1/4) of the value of the thing.
3. Contracts Undertaken in Fraud of Creditors
Known as Accion Pauliana, this occurs when a debtor enters into a contract to alienate property so that creditors cannot reach it to satisfy their claims. This applies only if the creditor cannot collect the debt in any other manner.
4. Contracts Referring to Things Under Litigation
If a contract involves property that is currently the subject of a court case, and the contract was entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority.
5. Payments Made in a State of Insolvency
Payments made by a debtor for obligations which the debtor could not be compelled to pay at the time they were effected (Article 1382).
6. Other Cases Declared by Law
Various special laws may provide for rescission, such as certain provisions in the Law on Sales regarding the quality or area of real estate.
Requirements for a Valid Rescission
For a court to grant rescission, several conditions must be met:
- The contract must be valid: A void contract cannot be rescinded because it never legally existed.
- There must be lesion or pecuniary prejudice: Except in cases specifically provided by law, there must be actual damage.
- No other legal remedy: Rescission is a subsidiary remedy. It can only be availed of when the injured party has no other legal means to obtain reparation for the damage.
- Mutual Restitution: The party seeking rescission must be able to return whatever they may be obliged to restore.
- The object is not with a third party in good faith: Rescission cannot take place if the object of the contract is legally in the possession of a third person who acted in good faith. In such cases, the remedy is an action for indemnity for damages against the person who caused the loss.
The Prescriptive Period
An action for rescission must be commenced within four (4) years. The reckoning point for this period varies:
- For persons under guardianship: From the time the guardianship ceases (e.g., the minor reaches the age of majority).
- For absentees: From the time their domicile is known.
- In fraud of creditors: From the time the fraud is discovered.
- For contracts under litigation: From the time the knowledge of the contract is acquired.
Summary of Rescissible vs. Voidable Contracts
| Feature | Rescissible Contract | Voidable Contract |
|---|---|---|
| Defect | External (Damage/Lesion) | Internal (Vitiated Consent) |
| Basis | Equity and Damage | Law and Public Interest |
| Nature of Remedy | Subsidiary (Last Resort) | Principal |
| Status | Valid until rescinded | Valid until annulled |
The Effect of Rescission
Once a contract is rescinded, the parties are obligated to return to each other the things which were the object of the contract, together with their fruits, and the price with its interest. Consequently, rescission can only be carried out when the person demanding it can return what they are bound to restore. If the object cannot be returned due to loss or transfer to a third party in good faith, the action is converted into a claim for damages.