Rescission Of Contract – When Can A Contract Be Rescinded

In contract law, one of the many questions that may arise is when can a contract be rescinded, especially so, when one of the parties thereto breaches his or her obligation in the aforesaid contract.

What is the definition of rescission? Rescission is the revocation, cancellation, or repeal of a law, order, or agreement.¹

In the Philippines’ legal parlance, this term is commonly used as a form or a manner of extinguishment of contracts, obligations and agreements. As we go on dealing with other people in our daily lives, there are times we do transactions through stipulated contracts, where concomitant obligations may arise therefrom.

We know for a fact that not all perfected agreements will result into a happy ending. There is a tendency that people who enter into a contract or oblige themselves to do things as mandated by its provisions are unable to deliver what is being asked from them. This may be due to some reason  within their control or not or done intentionally or negligently or in good faith or bad faith.

Hence, our law addressed such detriment or inconveniences by giving some remedies and options to the contracting parties to avoid such things to happen, so as not to prejudice their respective rights; or, at the very the least, the injured or aggrieved party somehow can receive just, fair, and equitable compensation for damages.

What is rescission of contract? | Article 1191 of the Civil Code

Article 1191² of the Civil Code prescribes the following:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.³

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.³

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.³

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.³

To explain the doctrine of this provision, in the case of Spouses Arturo and Niceta Serrano vs Court of Appeals and Heirs of Emilio S. Geli, 457 SCRA 415,⁴ the Supreme Court ascribes the rule when rescission of contract takes place. Hence:

Generally, the rule is that to rescind a contract is not merely to terminate it, but to abrogate and undo it from the beginning; that is, not merely to release the parties from further obligations to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made. Rescission necessarily involves a repudiation of the contract and a refusal of the moving party to be further bound by it.⁵

When can a contract be rescinded?

In reciprocal obligation, as what is contemplated under the above provisions of Article 1191 of the New Civil Code, the power to rescind an obligation is implied in reciprocal ones. Obligations may arise from the five sources such as law, contracts, quasi-contracts, quasi-delicts, and delicts.⁶

Hence, if there is a breach of an obligation arising from contract, which may happen if there is a violation of any contractual provisions in a stipulated reciprocal agreements, then, rescission can be availed of as a legal remedy by the aggrieved party.

The breach of an obligation arising from contract is the operative fact where an aggrieved party can utilize the legal remedy of rescission, plus damages, as the case may be.

What happens if a contract is rescinded? 

In Armand O. Raquel-Santos and Annalissa Mallari vs. Court of Appeals and Filinvest Securities Co., Inc.,⁷ it was explained that:

“To rescind is to declare a contract void at its inception and to put an end to it as though it never was. Rescission does not merely terminate the contract and release the parties from further obligations to each other, but abrogates it from the beginning and restores the parties to their relative positions as if no contract has been made.”⁸

The High Court further expound on this in the case of Spouses Mariano Z. Velarde and Avelina D. Velarde vs. Court of Appeals, David A. Raymundo and George Raymundo;⁹ hence, it ruled:

“Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. x x x x . . . .”¹⁰

Further:

“Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.”¹⁰

In addition, the aggrieved party has the option between the fulfillment of the obligation in a contract or rescission. In both cases, the aggrieved party is entitled to a claim for damages.

Is rescission a remedy for breach of contract?

In Spouses Pajares vs. Remarkable Laundry and Dry Cleaning,¹¹ the Supreme Court, while it did not apply the remedy in the said case, held that breach of contract may give rise to an action for specific performance or rescission of contract. This has been the consistent objective of the provisions of Article 1191 of the New Civil Code. Thus:

“Specific performance is ”[t]he remedy of requiring exact performance of a contract in the specific form in which it was made, or according to the precise terms agreed upon. [It is t]he actual accomplishment of a contract by a party bound to fulfill it.” Rescission of contract under Article 1191 of the Civil Code, on the other hand, is a remedy available to the obligee when the obligor cannot comply with what is incumbent upon him. It is predicated on a breach of faith by the other party who violates the reciprocity between them. Rescission may also refer to a 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 restoration of things to their condition in which they were prior to the celebration of the contract.”¹²

As elucidated in Golden Valley Exploration, Inc vs. Pinkian Mining Company and Copper Valley, Inc.,¹³ the right of rescission under Article 1191 is predicated on a breach of faith that violates the reciprocity between parties to the contract. This retaliatory remedy is given to the contracting party who suffers the injurious breach on the premise that it is “unjust that a party be held bound to fulfill his promises when the other violates his.¹⁴

However, for rescission to be a remedy for breach of contract, it must be clear that the contract has a reciprocal obligation.

In Congregation of the Religious of the Virgin Mary, et al. vs Orola et al.,¹⁵ the Supreme Court held that:

“Article 1191, as presently worded, speaks of the remedy of rescission in reciprocal obligations within the context of Article 1124 of the Old Civil Code which uses the term “resolution.” The remedy of resolution applies only to reciprocal obligations such that a party’s breach thereof partakes of a tacit resolutory condition which entitles the injured party to rescission. The present article, as in the Old Civil Code, contemplates alternative remedies for the injured party who is granted the option to pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of damages in each case. On the other hand, rescission under Article 1381 of the Civil Code, taken from Article 1291 of the Old Civil Code, is a subsidiary action, and is not based on a party’s breach of obligation.”¹⁶

What is the effect if there is breach of contract committed by both parties?

The effect of breach of contract committed by both parties is explained in Article 1192 of the Civil Code.

Article 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages.¹⁷

In this instance, the Court shall step in. It shall have the power and authority to equitably reduce the responsibility and liability of the one who first violated the contract, when the opposing other party is at fault as well.

In addition, if the Court shall fail to ascertain, owing to lack of evidence, who first committed the breach, the contract shall be considered extinguished and each party shall bear his own loss or damages.

Thus, the courts will equitably temper the liability of the first infractor in case of both parties have committed a breach of the obligation. However, it cannot be identified, the contracting parties who both violated the stipulations in the contract shall extinguish their obligations and shall shoulder their own damages.

Can a contract be terminated without a termination clause?

Contract can be terminated without a termination clause. There are several ways to terminate a contract even without a termination clause. One, and this is the ideal, when the obligations under the contract has been fully performed or consummated or the prestation has been fully complied with, leaving nothing more to perform.

Hence, the contract will be extinguished upon the fulfillment or performance of the terms agreed upon. It may not be necessary that termination clause is stipulate to validly and effectively terminate a contract. When there is consummation, there is termination. Consummation occurs upon the performance of the terms agreed by the contracting parties whether or not termination clause is indicated therein.

The other termination is when one or both of the parties failed to perform their respective obligations under the contract. This is in accordance with power given to the aggrieved party to rescind an obligation in reciprocal contract.

While it is ideal to have a black and white termination clause in the written agreement between the parties, the same is merely an additional stipulation to give either of them the specific and categorical power to terminate the contract in case of breach thereof.

Contracting parties can add clauses such as termination clause in their contract as they may deem convenient. This is granted under the provision Article 1306 of the new Civil Code:

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient provided, they are not contrary to law, morals, good customs, public order, or public policy.¹⁸

Automatic vs. Judicial Rescission

In the mentioned Article 1191 of the New Civil Code, it appears therein that judicial intervention is necessary to rescind the contract, when either of the parties failed to fulfill his or her obligation.

In Golden Valley vs. Pinkian, supra., the Supreme Court has this to state:

“As a general rule, the power to rescind an obligation must be invoked judicially and cannot be exercised solely on a party’s own judgment that the other has committed a breach of the obligation. This is so because rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in making the agreement.”¹⁹

On the other hand, the Court has provided an exception, and it went on to explain:

“As a well-established exception, however, an injured party need not resort to court action in order to rescind a contract when the contract itself provides that it may be revoked or cancelled upon violation of its terms and conditions. As elucidated in Froilan v. Pan Oriental Shipping Co., “there is x x x nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention.” Similarly, in Dela Rama Steamship Co., Inc. v. Tan, it was held that judicial permission to rescind an obligation is not necessary if a contract contains a special provision granting the power of cancellation to a party.”¹⁴

Consequently, automatic rescission of contract is allowed provided such axiomatic rescission is stipulated in the contract itself. The only caveat is that if such automatic rescission is questioned before a competent court.

In this instance, the Court, where such automatic rescission is questioned, has to decided whether such is proper or not, under the circumstances.

Final Thoughts

Article 1191 of the Civil Code is the primary provision regulating the rescission of reciprocal obligations. It prescribes the right of the aggrieved contracting party to select between performance and fulfillment of the obligation stipulated in a contract or to rescind the same. In both occasion, there is a right to demand damages.

Aside from rescinding a contract or putting it to end and abrogating it in all as if it was never perfected, mutual restitution is also required to put back the contracting parties to their original status quo before the perfection of their agreement. Hence, it creates an obligation for the contracting parties to return the object and consideration of the contract.

The remedies of the aggrieved party stipulated in the provision are alternative and not cumulative. The aggrieved party is only eligible to select only of the remedies, and not both, subject only to the exception in paragraph 2, as stated in the provision of Article 1191, to wit:

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.²⁰

However, he can no longer choose and demand the compliance or fulfillment of the object after choosing to rescind the obligation, nor the partial performance such as asking to recover the damages.

The Supreme Court in Virgilio Siy vs Court of Appeals²¹ 138 SCRA 536, has made a categorical pronouncement on this, to wit:

Under Article 1191 of the Civil Code, “the injured party may choose between the fulfillment and 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 … .” The law, however, does not authorize the injured party to rescind the obligation and at the same time seek its partial fulfillment under the guise of recovering damages.²²

Since the aggrieved party is not allowed to go after both incompatible remedies, in evaluating the damages to be provided in the case of rescission, only those kinds of damages that are well suited to rescission can be given.

In the same manner, if the aggrieved party has decided to choose specific performance, the damages that be granted should be appurtenant thereto. Damages that will only be compatible with the idea of specific performance cannot be provided when rescission is opted, and vice versa.

The aggrieved party’s right to rescind is subject for limitations. It is emphasized in Delta Motor Corp vs Guino,²³ 170 SCRA 29, that the power to rescind under Art. 1191 is not absolute.

“The act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court.”²⁴

The Court has the power to decide to allow a period within in which a person in default may be permitted to perform his obligation.²⁵

In addition, as reiterated in Binalbagan Tech Inc. vs Court of Appeals,²⁶ a party to a contract cannot demand performance of the other party’s obligations unless he is in a position to comply with his own obligations. Similarly, the right to rescind a contract can be demanded only if a party thereto is ready, willing and able to comply with his own obligations thereunder.²⁷

1. Rescission, Definition[↩]
2. Article 1191, New Civil Code[↩]
3. Id.[↩][↩][↩][↩]
4. G.R. No. 133883, December 10, 2003[↩]
5. Ibid.[↩]
6. Article 1157, New Civil Code[↩]
7. G. R. No. 174986, July 7, 2009[↩]
8. Ibid.[↩]
9. G. R. No. 108346, July 11, 2001[↩]
10. Ibid.[↩][↩]
11. G.R. No. 212690, February 20, 2017[↩]
12. Ibid.[↩]
13. G.R. No. 190080, June 11, 2014[↩]
14. Ibid.[↩][↩]
15. G. R. NO. 169790, April 30, 2008[↩]
16. Ibid.[↩]
17. Article 1192, New Civil Code[↩]
18. Article 1306, New Civil Code[↩]
19. Golden Valley vs. Pinkian, Supra.[↩]
20. Article 1191, paragraph 2, New Civil Code[↩]
21. G.R. No. L-39778, September 13, 1985[↩]
22. Ibid.[↩]
23. G.R. No. L-55665 February 8, 1989[↩]
24. Ibid.[↩]
25. Kapasinan Banahaw vs Deharme, G.R. No. L-32908, November 28, 1930[↩]
26. G.R. No. 100594 March 10, 1993[↩]
27. Ibid.[↩]