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Rescissble Contract

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Nicole John Tomes

on 10 October 2013

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Transcript of Rescissble Contract

Rescissible Contract
Article 1380- 1389
1. Rosencor Vs. Inquing
2. Khe Hong Cheng Vs. CA
3. Union Banks Vs. Spouses Ong
4. Heirs of Sophia Quirong Vs. DPB
5. Ada Vs. Baylon
Case 3
G. R. No. 140479 March 8, 2001 ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners


Cases of Rescissible Contracts
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 object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
Rescissible Contract
Group 1
Melvin Clemente
Charmaine Custodio
Liezel Lianza
Anjanette Morato
Joyce Ann Pagirigan
Mary Nicole Roa
Nicole John Tomes

Article 1380
meaning of rescissible contracts, binding force of rescissible contracts, meaning of rescission, requisites of rescission
Contracts validly agreed upon may be rescinded in the cases established by law.
Article 1380
Meaning of Rescission
Article 1380
Remedy granted by law to the contracting parties and sometimes even to third persons in order to secure reparation of damages caused them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of said contract.
Article 1380
Requisites of rescission
1. The contract must be validly agreed upon
2. There must be lesion or pecuniary prejudice to one of the parties or to a third person
3. The rescission must be based upon a case especially provided by law
4. There must be no other legal remedy to obtain reparation for the damage
5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract
6. The object of the contract must not be legally in the possession of third persons who did not act in bad faith
7. The period for filing the action for rescission must not have prescribed.
Requisites of Rescission
Requisites of Rescission
Article 1380
3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
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.
Article 1382
Payments made in a state of insolvency
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.
Article 1383
Nature of Action for Rescission
Rescission is not a principal remedy. It is only subsidiary, meaning that it can be availed of only if the injured party proves that he has no other legal means aside from rescinding the contract to obtain redress for the damage caused even if the contract is covered by article 1381.
If the damage is repaired, rescission cannot take place.
Article 1383
Nature of Action for Rescission
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.
Article 1384
Extent of rescission
Rescission shall be only to the extent necessary to cover the damages caused.
The entire contract need not be set aside by rescission if the damage can be repaired or covered by partial rescission.
The rescission shall only be to the extent of the creditor’s unsatisfied credit. The policy of the law is to preserve or respect the contract, not to extinguish it.
Article 1384
Extent of rescission
Article 1385
Rescission creates obligation of mutual restitution; Obligation of third person to restore; When rescission not allowed
Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with 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.
Article 1385
Rescission creates obligation of mutual restitution.
The object of the contract with its fruits

The price thereof with legal interest.
Obligation of third person to restore
The clause “he who demands rescission” applies also to a third person.
- The remedy of rescission cannot be availed of if the party who demands rescission cannot return what he is obliged to restore under the contact.
- Neither shall rescission take place if the property is legally in the possession of a third person who acted in good faith.
Article 1386
Contracts Approved by the Courts
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.
Alienation by onerous title are also presumed fraudulent when made by persons against whom some judgement has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.
Article 1387
Article 1388
Liability of purchaser in bad faith
Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.
If there are two or more alienations, the first acquirer shall be liable firs, and so on successively.
Article 1389
Period for filing action for rescission; persons entitled to bring action
The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known.
Persons entitled to bring action:
The injured party or the defrauded creditor;His heirs, assigns, or successors in interest; orThe creditors of the above entitled to subrogation
Case 1
The case was originally filed on December 10, 1993 by Paterno Inquing, Irene Guillermo and Federico Bantugan, herein respondents, against Rosencor Development Corporation (hereinafter "Rosencor"), Rene Joaquin, and Eufrocina de Leon.
Plaintiffs claimed that they are the lessees since 1971 of a two-story residential apartment owned by spouses Faustino and Cresencia Tiangco. The lease was not covered by any contract. The lessees were renting the premises then for P150.00 a month and were allegedly verbally granted by the lessors the pre-emptive right to purchase the property if ever they decide to sell the same.
Upon the death of the spouses Tiangcos in 1975, the management of the property was adjudicated to their heirs who were represented by Eufrocina de Leon. The lessees were allegedly promised the same pre-emptive right by the heirs of Tiangcos since the latter had knowledge that this right was extended to the former by the late spouses Tiangcos. The lessees continued to stay in the premises and allegedly spent their own money amounting from P50,000.00 to P100,000.00 for its upkeep. These expenses were never deducted from the rentals which already increased to P1,000.00.
In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding that they vacate the premises so that the demolition of the building be undertaken. They refused to leave the premises. In that same month, de Leon refused to accept the lessees’ rental payment claiming that they have run out of receipts and that a new collector has been assigned to receive the payments. Thereafter, they received a letter from Eufrocina de Leon offering to sell to them the property they were leasing for P2,000,000.00. The lessees offered to buy the property from de Leon for the amount of P1,000,000.00. De Leon told them that she will be submitting the offer to the other heirs. Since then, no answer was given by de Leon as to their offer to buy the property. However, in November 1990, Rene Joaquin came to the leased premises introducing himself as its new owner.
In January 1991, the lessees again received another letter from Atty. Aguila demanding that they vacate the premises. A month thereafter, the lessees received a letter from de Leon advising them that the heirs of the late spouses Tiangcos have already sold the property to Rosencor.
May a contract of sale entered into in violation of a third person’s right of first refusal be rescinded in order that such third person can exercise said right
Courts' Ruling
The factual findings of the Court of Appeals showed that the respondents have adequately proven the existence of their right of first refusal. Thus, in order for them to exercise their right, the original contract of sale must be rescinded.
Courts' Ruling
Rescission is a remedy granted by law to contracting parties and even to third persons, to secure reparations for damages caused to them by a contract, even if this should be valid by means of the restoration of the things to their condition at the moment prior to the celebration of said contract. However, rescission is available as a remedy only if the original sale was fraudulent. In this case, there was no proof that Rosencor, the third person who bought the property, was aware of the right of first refusal that the plaintiffs should have exercised. Good faith is always presumed unless the contrary was proved, and as the respondents were not able to prove the contrary, it was considered an unfraudulent sale. Therefore, the Court of Appeals erred in ordering the rescission of the Deed of Absolute Sale between the appellees because the third person who bought the property did not act in bad faith. The remedy for the unjustified violation of the respondents’ right of first refusal is thus not one for rescission but an action for damages against the heirs of the spouses Tiangco for the unjustified disregard of their right of first refusal.
Khe Hong cheng is the owner of Butuan Shipping Lines.
On October 4, 1985, Butuan Shipping was consigned to deliver 3400 tons of Copra by consignee Philippine Agricultural Trading Corporation.
The shipment was covered by an insurance of PhilAm insurance company Inc.
The shipment of Copra was lost during the delivery, Philam then the insurer, paid the amount of P354,000 to Phil. Agriculture Trading Corp.
Later, being subrogated the rights of the consignee, Philam insurance company filed a case in RTC, to recover damages, against Khe Hong Cheng, who was allegedly in fraud of creditors due to the breach of contract of carriage
On Dec. 20, 1989 while the case was still pending, Khe Hong Cheng executed deeds of Donation in favor to his children Sandra and Ray Steven Khe and the titles were already transferred in their names.
On December 29, 1993 RTC ruled that Khe Hong Cheng pay the amount of P354,000 plus damages to complaint PhilAm Insurance.
The petition is without merit. Article 1389 of the civil code simply provides that, “ the action for rescission must be commenced within four years.” since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e., from the moment the cause of action accrues, therefore, applies . Article 1150 of the civil code is particularly instructive:
Indeed, the court enunciated the principle that it is the legal possibility of bringing the action which determines the starting point for computation of the prescriptive period for the action. Article 1383 of civil code provides.

The Supreme Court considered, the petition is hereby DENIED for lack of merit.
The lessees offered to reimburse de Leon the selling price of P726,000 plus an additional P274,000 complete their P1,000,000 earlier offered but their offer was refused.
Courts' Ruling
Spouses Alfredo Ong and Susana Ong own the majority capital stock of Baliwag Mahogany Corporation (BMC).
On October 10, 1990, the spouses executed a Continuing Surety Agreement in favor of Union Bank to secure a P40,000,000.00-credit line facility made available to BMC.
October 22, 1991, the spouses Ong, for P12,500,000.00, sold their 974-square meter lot located in Greenhills, San Juan, Metro Manila, together with the house and other improvements standing thereon, to their co-respondent, Jackson Lee.
The following day, Lee registered the sale and was then issued Transfer Certificate of Title (TCT) No. 4746-R. At about this time, BMC had already availed itself of the credit facilities, and had in fact executed a total of twenty-two (22) promissory notes in favor of Union Bank.
On November 22, 1991, BMC filed a Petition for Rehabilitation and for Declaration of Suspension of Payments with the Securities and Exchange Commission (SEC).
To protect its interest, Union Bank lost no time in filing with the RTC of Pasig City an action for rescission of the sale between the spouses Ong and Jackson Lee for purportedly being in fraud of creditors
Whether or not the Ong-Lee contract of sale partakes of a conveyance to defraud Union Bank 
The Ong-Lee contract of sale partakes a conveyance of bona fide transaction and not a trick to defeat creditors.
In the present case, respondent spouses Ong, had sufficiently established the legitimacy of the sale. It was supported by sufficient consideration. The disparity between the price and the real value of the property was not as gross to support a conclusion of fraud.
There was no evidence to prove that the spouses Ong and Lee were conniving cheats.
It could not also be contended that Lee was not financially capable of purchasing the property, since mere income for a specific year is not sufficient to establish his incapacity
It is true that respondent spouses, as surety for BMC, bound themselves to answer for the latter’s debt.
Nonetheless, for purposes of recovering what the eventually insolvent BMC owed the bank, it behooved the petitioner to show that it had exhausted all the properties of the spouses Ong. UB failed to show that it has no other legal recourse to obtain satisfaction for its claim; hence, it is not entitled to the rescission asked.
The Insolvency Law cannot be applied in this case.
- First, the spouses Ong had not filed a petition for a declaration of their own insolvency.
- Second, the real debtor of petitioner bank in this case is BMC.
- Third, the twin elements of good faith and valuable and sufficient consideration have been duly established.
By this petition for review under Rule 45 of the Rules of Court, petitioner Union Bank of the Philippines (Union Bank) seeks to set aside the decision1 dated December 5, 2001 of the Court of Appeals (CA) in CA-G.R. No. 66030 reversing an earlier decision of the Regional Trial Court (RTC) of Pasig City in Civil Case No. 61601, a suit thereat commenced by the petitioner against the herein respondents for annulment or rescission of sale in fraud of creditors.
The petitioners, who were estate of the Spouses Baylon alleged that the Spouses Baylon acquired 43 parcels of land during their lifetime.
The petitioners alleged that after their death, Rita took possession of the said parcels of land and appropriated for herself the income from the same
Using the income, Rita allegedly purchased two parcels of land Lot No, 4709 and half of Lot No. 4706.
During the pendency of the case, Rita through a Deed of Donation date July 6, 1997, passed on Lot No. 4709 and half of Lot No. 4706 to Florante
Rita died intestate and without any issue and the petitioner filed a supplemental pleading dated 2 that the said donation be rescinded.
Whether the CA erred in ruling that the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may only be rescinded if there is already a judicial determination that the same actually belonged to the estate of Spouses Baylon.
Contracts which refer to things subject of litigation is rescissible pursuant to Article 1381(4) of the Civil Code
Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial determination as to the ownership of the thing subject of litigation
Even if the donation inter vivos is validly rescinded, a determination as to the ownership of Lot No. 4709 and half of Lot No. 4706 is still necessary.
Case 4
Whether or not the Quirong heirs’ action for rescission of respondent DBP’s sale of the subject property to Sofia Quirong was already barred by prescription
When the late Emilio Dalope died, he left a 589-square meter untitled lot in Sta. Barbara, Pangasinan, to his wife, Felisa Dalope (Felisa) and their nine children, one of whom was Rosa Dalope-Funcion. To enable Rosa and her husband Antonio Funcion (the Funcions) get a loan from respondent Development Bank of the Philippines (DBP), Felisa sold the whole lot to the Funcions. With the deed of sale in their favor and the tax declaration transferred in their names, the Funcions mortgaged the lot with the DBP
After the Funcions failed to pay their loan, the DBP foreclosed the mortgage on the lot and consolidated ownership in its name.
Four years later or on September 20, 1983 the DBP conditionally sold the lot to Sofia Quirong for the price of P78,000.00. In their contract of sale, Sofia Quirong waived any warranty against eviction. The contract provided that the DBP did not guarantee possession of the property and that it would not be liable for any lien or encumbrance on the same. Quirong gave a down payment of P14,000.00.
Two months after that sale or on November 28, 1983 Felisa and her eight children (collectively, the Dalopes) filed an action for partition and declaration of nullity of documents with damages against the DBP and the Funcions before the Regional Trial Court (RTC)
On May 11, 1985, Sofia Quirong having since died, her heirs (petitioner Quirong heirs) filed an answer in intervention in Civil Case D-7159 in which they asked the RTC to award the lot to them and, should it instead be given to the Dalopes, to allow the Quirong heirs to recover the lot’s value from the DBP. But, because the heirs failed to file a formal offer of evidence, the trial court did not rule on the merits of their claim to the lot and, alternatively, to relief from the DBP.
On December 16, 1992 the RTC rendered a decision, declaring the DBP’s sale to Sofia Quirong valid only with respect to the shares of Felisa and Rosa Funcion in the property. It declared Felisa’s sale to the Funcions, the latter’s mortgage to the DBP, and the latter’s sale to Sofia Quirong void insofar as they prejudiced the shares of the eight other children of Emilio and Felisa who were each entitled to a tenth share in the subject lot.
On December 16, 1992 the RTC rendered a decision, declaring the DBP’s sale to Sofia Quirong valid only with respect to the shares of Felisa and Rosa Funcion in the property. It declared Felisa’s sale to the Funcions, the latter’s mortgage to the DBP, and the latter’s sale to Sofia Quirong void insofar as they prejudiced the shares of the eight other children of Emilio and Felisa who were each entitled to a tenth share in the subject lot.
On June 14, 2004, after hearing the case, the RTC rendered a decision, rescinding the sale between Sofia Quirong and the DBP and ordering the latter to return to the Quirong heirs the P78,000.00 Sofia Quirong paid the bank. On appeal by the DBP, the Court of Appeals (CA) reversed the RTC decision and dismissed the heirs’ action on the ground of prescription. The CA concluded that, reckoned from the finality of the December 16, 1992 decision in Civil Case D-7159, the complaint filed on June 10, 1998 was already barred by the four-year prescriptive period under Article 1389 of the Civil Code. The Quirong heirs filed a motion for reconsideration of the decision but the appellate court denied it, thus, this petition.
Wherefore, The Court DENIES the petition and AFFIRMS the November 30, 2005 decision of the Court Appeals in CA-G.R. CV 83897
Unfortunately, on January 17, 1997 Philam insurance discovered that Khe Hong Cheng is already insolvent and doesnt have properties under his name.
On February 25, 1997, PhilAm filed for a recission of Deeds of Donation and nullification of the Transfer Certificate of Title (TCT) in the name of Khe Hong Cheng children.
Khe Hong Cheng petitioned that PhilAm's action had already prescribed because it had been more than four years that the donation was done.
The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former’s incapacity, or until the domicile of the latter is known.
Full transcript