Contracts and Rescission

Posted by Admin | Posted in Obligations and Contracts | Posted on 13-09-2010

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What is a contract? What is its nature and effects?

A contract is a meeting of minds between two persons whereby one binds himself with respect to the other, to give something or to render some service. (Article 1305, Civil Code of the Philippines)

There is no contract unless the following requisites concur: (1) consent of the contracting parties, (2) object certain which is the subject matter of the contract, and (3) cause of the obligation which is established. (Article 1318, Civil Code)

Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to the consequences which according to their nature, may be in keeping with good faith, usage and law. (Article 1315, Civil Code)

A contract is an agreement, written or not, between persons whereby they bind themselves to give, to do or not to do something. It may be for free or gratuitous as in donations or it could be for a price like in sales.

The perfection of a contract means that parties are already expected to perform their part of the bargain. Perfection takes place when all the essential elements (stated in Article 1318) are present.  Most contracts are perfected by mere consent, or from the moment there is an agreement as to the subject matter and the consideration for the contract.  For example in a contract of sale, it is perfected from the moment the seller and the buyer agree that the buyer will take a particular item in exchange for a certain price.  Some contracts, however, require delivery of the object of the contract (e.g. property) before it is perfected, like in a contract of deposit or pledge. pinoylegal

Once perfected, parties are bound not only to those that have been expressly stated in the contract but also those which are in keeping with good faith, usage and law.  This means, for example, performing your obligation within reasonable time, if there is no fixed time for you to do it, or packing an item to be delivered to a buyer with reasonable care to avoid breakage or damage. In the contract of carriage, common carriers (airlines or public utility vehicles) are required by law to exert the highest degree of care (extraordinary diligence) in transporting goods or passengers.  According to an authority in civil law, in contracts, “there is an implied obligation or duty to do an act contracted to be performed with reasonable care in order that the person or property of others may not be injured by any force which he sets in motion or by any agent or agency for which he is responsible.” (Elliot, Commentaries on the Law of Contracts, Volume II, p. 659, 1913, cited in Sta. Maria, Obligations and Contracts, Text and Cases, p. 313, 2003) www.pinoylegal.com

What is rescission of contract?

When we speak of rescission, it may refer to contracts which are rescissible as provided by law (Articles 1380, 1381 and 1382, Civil Code) or to a contract with reciprocal obligations, where one of the parties fail to comply with his obligations under the contract (Article 1191, Civil Code). Rescission under Article 1191 is a result of what people usually call as breach of contract.  In reciprocal contracts, parties have mutual obligations and the obligation by either party to do, not to do or to give something is actually the cause for the other party to agree to also do, not do or give something in return.  So when one does not perform his obligations under his contract, the other party has remedies under the law.  Under the said Article 1191, the injured party can choose between fulfillment and rescission, with payment of damages in either case.  This means that the injured party can either compel the guilty party to perform his part of the contract and claim for damages as a result of the breach, or it can rescind the contract and also claim for damages. pinoylegal

However, the Supreme Court says that this power to rescind is not absolute, it must be based on a serious and substantial breach of an obligation as to defeat the object of the parties.  To rescind not only means to end a contract; rescission in this case means to have it declared void from the beginning, as if there was no contract at all (Spouses Velarde vs. Court of Appeals, GR No. 108346, July 11, 2001).  Parties will be restored to their former status or condition. Considering its serious consequences, in order to justify rescission, the breach must be serious and substantial.  And this is where court intervention comes in.  The fact that the injured party is given the option to rescind the contract does not mean that if he does choose to rescind it, such unilateral rescission is final and binding on the other party.  It is still subject to review and confirmation by the courts. www.pinoylegal.com

While Article 1191 says that the power to rescind is “implied” it does not mean that the power excludes judicial confirmation.  It only gave the injured party the right to rescind the contract even if he did not previously file a case in court. To require him to file first a case would be unjust because by the time the court issues its final decision, he might have already suffered a greater damage or injury.  Rescission at such later time would be useless or impracticable, if not impossible. www.pinoylegal.com

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