The concept of rescission in obligations and contracts can be understood through its definition, nature, grounds, requisites, and effects. It is often distinguished from resolution.
Definition and Nature of Rescission
Rescission is a process designed to render an ineffective contract ineffective, which was validly entered into, usually due to external conditions causing economic prejudice to a party or their creditors. It is a remedy granted by law to contracting parties and third persons to secure reparation for damages caused by a contract. Rescission serves as a relief to protect a party or a third person from injury and damages. Rescissible contracts are considered valid until they are rescinded. They possess an extrinsic defect, often involving economic damage or lesion. Rescission presupposes a valid contract.
Distinction from Resolution (Art. 1191)
Rescission is distinguished under Article 1380 from rescission or resolution under Article 1191. While both lead to mutual restitution, they differ in basis and nature.
- Rescission (Art. 1380) is based on an extrinsic defect, such as lesion or fraud of creditors. It is generally a subsidiary remedy, available only when the injured party has no other legal means to obtain reparation for the damage suffered. The action for rescission under Article 1380 may be instituted by the injured party or a third person prejudiced. The court does not grant a period for compliance in this type of rescission.
- Resolution (Art. 1191) is implied in reciprocal obligations and is based on non-performance or non-fulfillment of the obligation by one party. The injured party has the option to demand fulfillment or resolution (rescission) of the obligation. The court may grant a period for compliance unless there is a just cause for immediate resolution. Resolution under Article 1191 is considered a principal remedy. The action under Article 1191 can only be instituted by the injured party to the contract.
Grounds for Rescission (Art. 1381)
Contracts that are rescissible under Article 1381 include:
- Those entered into by guardians whenever the wards they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof.
- Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number.
- Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them (known as accion pauliana).
- 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.
- All other contracts specially declared by law to be subject to rescission.
Requisites for Rescission
To bring an action for rescission under Article 1380/1381, the following requisites must generally be met:
- The contract is valid or voidable.
- There is economic or financial prejudice or damage to a party or third person.
- Mutual restitution is generally required. The plaintiff must be able to return what they have received by virtue of the rescissible contract.
- The object of the contract is not legally in the possession of a third person who acquired it in good faith. If the property is in the hands of a third party in good faith, rescission is not possible, but the party causing the loss may be liable for damages.
- There is no other legal remedy to obtain reparation for the damage suffered; the action is subsidiary.
For accion pauliana specifically, requisites include that the creditor's credit must exist prior to the alienation, the alienation must be subsequent, the party alienating must be in bad faith, and there must be no other legal remedy.
Violation of a right of first refusal can also render a sale rescissible.
Effects of Rescission
When a contract is rescinded, the parties must return the things which were the object of the contract, along with their fruits, and the price with its interest. Rescission obliges the contracting parties to return to their original situation prior to the inception of the contract. Consequences of rescission may be anticipated and provided for by the contract and shall be respected.
Prescriptive Period
The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period begins from the termination of the former's incapacity or until the domicile of the latter is known. For accion pauliana, the prescriptive period runs from the time the action accrues, which for unknown fraud is generally reckoned from the registration of the fraudulent alienation or discovery of the fraud.