CONTRACTS

CHAPTER 6

RESCISSIBLE CONTRACTS

Classes of Defective Contracts. — There are four classes

of defective contracts under the present Civil Code. They are: first,
rescissible contracts; second, voidable contracts; third, unenforceable
contracts; and fourth, void or inexistent contracts. Explaining
the reasons behind this new classification, the Code Commission
declared in its report:

“A great deal of confusion has been created by the faulty

terminology used by the Spanish Code as regards defective
contracts. There is no sufficient clarity as to ‘contratos nulos’
and ‘contratos anulables’ — void and voidable contracts.
“In order to put an end to the foregoing uncertainty and
other ambiguities in the Spanish Code, the project in a clear-cut
and unequivocal way classifies and defines the various kinds
of defective contracts, and states their consequences. There
are, under the recommended plan, four kinds of such contracts,
namely (in the order of defectiveness): (1) rescissible; (2)
voidable; (3) unenforceable; and (4) void or inexistent contracts.
“It is believed that with the explicit provisions of the
Project upon the subject of defective contracts, the present
nebulous state of the law will be dispelled. It is neither wise
nor just that parties should be left in doubt as to the degree of
effectiveness of their contractual relations. The legal profession
is also entitled to know in a positive and unequivocal manner
what contracts are rescissible, voidable, unenforceable, and
void. It is hoped that this clarification of the law on this most
far-reaching subject will go far toward forestalling many
controversies and litigations.’’1

1
Report of the Code Commission, pp. 138-140.

500
 RESCISSIBLE CONTRACTS

Idem; Essential features. — The essential features of the

different classes of defective contracts are:
1. As to defect:
(a) In rescissible contracts, there is damage or injury
either to one of the contracting parties or to third persons;
(b) In voidable contracts, there is vitiation of consent or
legal incapacity of one of the contracting parties;
(c) In unenforceable contracts, the contract is entered
into in excess or without any authority, or does not comply with
the Statute of Frauds, or both contracting parties are legally
incapacitated;
(d) In void or inexistent contracts, one or some of the
essential requisites of a valid contract are lacking either in fact
or in law.
2. As to effect:
(a) The first are considered valid and enforceable until
they are rescinded by a competent court;
(b) The second are considered valid and enforceable
until they are annulled by a competent court;
(c) The third cannot be enforced by a proper action in
court;
(d) The fourth do not, as a general rule, produce any
legal effect.
3. As to prescriptibility of action or defense:
(a) In the first, the action for rescission may prescribe;
(b) In the second, the action for annulment or the
defense of annulability may prescribe;
(c) In the third, the corresponding action for recovery,
if there was total or partial performance of the unenforceable
contract under No. 1 or No. 3 of Art. 1403, may prescribe.
(d) In the fourth, the action for declaration of nullity
or inexistence or the defense of nullity or inexistence does not
prescribed.

501
Art. 1380 CONTRACTS

4. As to susceptibility of ratification:
(a) The first are not susceptible of ratification;
(b) The second are susceptible of ratification;
(c) The third are susceptible of ratification;
(d) The fourth are not susceptible of ratification.
5. As to who may assail contracts:
(a) The first maybe assailed not only by a contracting
party but even by a third person who is prejudiced or damaged
by the contract;
(b) The second may be assailed only by a contracting
party;
(c) The third may be assailed only by a contracting
party;
(d) The fourth may be assailed not only by a contracting
party but even by a third person whose interest is directly
affected.
6. As to how contracts may be assailed:
(a) The first may be assailed directly only, and not
collaterally;
(b) The second may be assailed directly or collaterally;
(c) The third may be assailed directly or collaterally;
(d) The fourth may be assailed directly or collaterally.

Art. 1380. Contracts validly agreed upon may be re-

scinded in the cases established by law.2
Rescissible Contracts in General. — In a rescissible
contract, all of the essential requisites of a contract exist and the
contract is valid, but by reason of injury or damage to either of the
contracting parties or to third persons, such as creditors, it may be
rescinded.3 A rescissible contract is, therefore, a contract which is

2
Art. 1290, Spanish Civil Code.
3
Report of the Code Commission, p. 139.

502
 RESCISSIBLE CONTRACTS Art. 1380

valid because it contains all of the essential requisites prescribed

by law, but which is defective because of injury or damage to either
of the contracting parties or to third persons, as a consequence of
which it may be rescinded by means of a proper action for rescission.
Before it is rescinded, a rescissible contract is valid and,
therefore, legally effective. The only way by which it can be attacked
is by means of a direct action for rescission based on any of the causes
expressly specified by law; hence, it cannot be attacked collaterally.4
Idem; Characteristics. — Rescissible contracts, therefore,
possess the following characteristics:
(1) Their defect consists in injury or damage either to one of
the contracting parties or to third persons.
(2) Before rescission, they are valid and, therefore, legally
effective.
(3) They can be attacked directly only, and not collaterally.
(4) They can be attacked only either by a contracting party or
by a third person who is injured or defrauded.
(5) They are susceptible of convalidation only by prescription,
and not by ratification.
Idem; Concept of rescission. — Rescission is a remedy
granted by law to the contracting parties, and even to third persons,
to secure the reparation of damages caused to them by a contract,
even if the same should be valid, by means of the restoration of
things to their condition prior to the celebration of the contract.5
Idem; id. — Distinguished from resolution. — Rescission
of rescissible contracts must not be confused with the rescission
or resolution of reciprocal obligations under Art. 1191 of the Code.
Although there are similarities both with respect to validity and
effects, they are distinguished from each other in the following ways:
(1) As to party who may institute action: In rescission the
action may be instituted not only by a party to the contract but even
by a third person, while in resolution the action may be instituted
only by a party to the contract.

4
Borja vs. Addison, 44 Phil. 895.
5
8 Manresa, 5th Ed., Bk. 2, p. 545.

503
Art. 1380 CONTRACTS

(2) As to causes: In rescission there are several causes or

grounds such as lesion, fraud and others expressly specified by law,
while in resolution the only ground is failure of one of the parties to
comply with what is incumbent upon him.
(3) As to power of the courts: In rescission there is no
power of the courts to grant an extension of time for performance
of the obligation so long as there is a ground for rescission, while
in resolution the law expressly declares that courts shall have a
discretionary power to grant an extension for performance provided
that there is a just cause.
(4) As to contracts which may be rescinded or resolved: In
rescission any contract, whether unilateral or reciprocal, may be
rescinded, while in resolution only reciprocal contracts may be
resolved.
Idem; id. — Distinguished from rescission by mutual
consent. — Neither must rescission be confused with rescission of
a contract by mutual consent of the contracting parties. One must
be distinguished from the other — first, with respect to the causes
of rescisssion, second, with respect to the laws applicable, and third,
with respect to the effects. The following case will serve to illustrate
these distinctions:

Aquino vs. Tañedo

31 Phil. 517
The records show that plaintiff purchased some lands
from the defendant and, as a consequence, took possession of the
same and collected their products. Subsequently, they dissolved
the contract of sale, and, as a result thereof, plaintiff returned
the lands, while defendant bound himself to return the part of
the purchase price which plaintiff has paid. The question now is
whether or not the plaintiff is obliged to return to the defendant
the products of the lands which he had collected during his
possession. The defendant contends that he is obliged, invoking
the provisions of Art. 1295 (now Art. 1385) of the Civil Code. The
Supreme Court, however, ruled:
“The rescission mentioned in the contract is not the
rescission referred to in Article 1295 (now Art. 1385). Although
the plaintiff and the defendant employed the word rescind,
it has not, in the contract executed by them, either the scope
or the meaning of the word rescission to which Article 1295

504
 RESCISSIBLE CONTRACTS Art. 1381

(now Art. 1385) refers and which takes place only in the cases
mentioned in the preceding Articles, 1291 and 1292 (now Arts.
1381 and 1382). Rescission, in the light of these provisions, is
a relief which the law grants, on the premise that the contract
is valid, for the protection of one of the contracting parties and
third persons from all injury and damage that the contract may
cause, or to protect some incompatible and preferential right
created by the contract. Article 1295 (now Art. 1385) refers to
contracts that are rescissible in accordance with law in the cases
expressly fixed thereby, but it does not refer to contracts that
are rescinded by mutual consent and for the mutual convenience
of the contracting parties. The rescission in question was not
originated by any of the causes specified in Articles 1291 and
1292 (now Arts. 1381 and 1382), nor is it any relief for the
purposes sought by these articles. It is simply another contract
for the dissolution of a previous one, and its effects, in relation
to the contract so dissolved, should be determined by the
agreement made by the parties, or by the application of other
legal provisions, but not by Article 1295 (now Art. 1385), which
is not applicable.’’6

Art. 1381. The following contracts are rescissible:

(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 the
object thereof;
(2) Those agreed upon in representation of absentees,
if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the
latter cannot in any 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.7

6
To the same effect: Luneta Motor Co. vs. Richey, CA, 39 Off. Gaz. 1101.
7
Art. 1291, Spanish Civil Code, in modified form.

505
Art. 1382 CONTRACTS

Art. 1382. Payments made in a state insolvency for ob-

ligations to whose fulfillment the debtor could not be com-
pelled at the time they were effected, are also rescissible.8

Contracts in Behalf of Ward. — The first of the rescissible

contracts are those which are entered into by guardians whenever
the wards whom they represent suffer lesion or damage by more
than one-fourth of the value of the things which are the object
thereof.9 This is, however, without prejudice to the provision of Art.
1386 which states that rescission shall not take place with respect
to contracts approved by the courts.
It must be noted that under the Rules of Court, a judicial
guardian entering into a contract with respect to the property of
his ward must ordinarily secure the approval of a competent court.10
This is also true in the case of a father or mother considered as a
natural guardian of the property of a child under parental authority
where such property is worth more than two thousand pesos.11 As
a matter of fact, if the contract involves the sale or encumbrance of
real property, judicial approval is indispensable.12 Consequently, if
a guardian sells, mortgages or otherwise encumbers real property
belonging to his ward without judicial approval, the contract is
unenforceable,13 and not rescissible even if the latter suffers lesion
or damage of more than one-fourth of the value of the property.
However, if he enters into a contract falling within the scope of
his powers as guardian of the person and property, or only of the
property, of his ward, such as when the contract involves acts of
administration, express judicial approval is not necessary,14 in
which case the contract is rescissible if the latter suffers the lesion
or damage mentioned in No. 1 of Art. 1381 of the Code.
Contracts in Behalf of Absentees. — The second of the
rescissible contracts are those entered into in behalf of absentees,
if the latter suffer the lesion or damage stated in the preceding

8
Art. 1292, Spanish Civil Code.
9
Art. 1281, No. 1, Civil Code.
10
See Rules 95-96, New Rules of Court.
11
Art. 326, Civil Code.
12
Sec. 1, Rule 95, New Rules of Court.
13
Arts. 1403, No. 1, and 1317, Civil Code.
14
Sec. 1, et seq., Rule 96, New Rules of Court. See 2 Moran, 1957 Ed., p. 506.

506
 RESCISSIBLE CONTRACTS Art. 1382

number.15 However, such contracts are not rescissible if they have

been approved by the courts.16
Since the powers and duties of a legal representative of an
absentee are exactly the same as those of a guardian,17 the principles
enunciated in the preceding section are also applicable here.
Whether the contract is entered into by a guardian in behalf of
his ward or by a legal representative in behalf of an absentee, before
it can be rescinded on the ground of lesion, it is indispensable that
the following requisites must concur:
(1) The contract must have been entered into by a guardian
in behalf of his ward or by a legal representative in behalf of an
absentee;18
(2) The ward or absentee must have suffered lesion of more
than one-fourth of the value of the property which is the object of the
contract;19
(3) The contract must have been entered into without judicial
approval;20
(4) There must be no other legal means for obtaining
reparation for the lesion;21
(5) The person bringing the action must be able to return
whatever he may be obliged to restore;22 and
(6) The object of the contract must not be legally in the
possession of a third person who did not act in bad faith.23
If the object of the contract is legally in the possession of a third
person who did not act in bad faith, the remedy available to the
person suffering the lesion is indemnification for damages and not
rescission.24

15
Art. 1381, No. 2, Civil Code.
16
Art. 1386, Civil Code.
17
Art. 382, Civil Code.
18
Art. 1381, Nos. 1 and 2, Civil Code.
19
Ibid.
20
Art. 1386, Civil Code.
21
Art. 1383, Civil Code.
22
Art. 1385, par. 1, Civil Code.
23
Art. 1385, par. 2, Civil Code.
24
Art. 1385, par. 3, Civil Code.

507
Art. 1382 CONTRACTS

Contracts in Fraud of Creditors. — The third of the re-

scissible contracts are those undertaken in fraud of creditors when
the latter cannot in any other manner collect the claims due them.25
This complements Art. 1177 of the Code which states that one of
the remedies available to the creditor after he has exhausted all the
property in possession of the debtor is to impugn the acts which the
latter may have done to defraud him.
However, before a contract can be rescinded on the ground that
it has been entered into in fraud of creditors, it is indispensable that
the following requisites must concur:
(1) There must be a credit existing prior to the celebration of
the contract;
(2) There must be a fraud, or at least, the intent to commit
fraud, or at least, the intent to commit fraud to the prejudice of the
creditor seeking the rescission;
(3) The creditor cannot in any other legal manner collect his
credit;26 and
(4) The object of the contract must not be legally in the
possession of a third person who did not act in bad faith.27
If the object of the contract is legally in the possession of a
third person who did not act in bad faith, the remedy available to
the creditor is to proceed against the person causing the loss for
damages.28
Accion pauliana — Article 1381 of the Civil Code enumerates
the contracts which are rescissible, and among them are “those
contracts undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them.’’ The action to rescind
contracts in fraud of creditors is known as accion pauliana. For this
action to prosper, the following requisites must be present: (1) the
plaintiff asking for rescission has a credit prior to the alienation; (2)
the debtor has made a subsequent contract conveying a patrimonial
benefit to a third person; (3) the creditor has no other legal remedy
to satisfy his claim; (4) the act being impugned is fraudulent; (5) the

25
Art. 1381, No. 3, Civil Code.
26
3 Castan, 7th Ed., p. 422.
27
Art. 1385, par. 2, Civil Code.
28
Art. 1385, par. 3, Civil Code.

508
 RESCISSIBLE CONTRACTS Art. 1382

third person who received the property conveyed, if it is by onerous

title, has been an accomplice in the fraud. The general rule is that
rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of
the judicial pronouncement setting aside the contract. Without any
prior existing debt, there can neither be injury nor fraud. While it is
necessary that the credit of the plaintiff in the accion pauliana must
exist prior to the fraudulent alienation, the date of the judgment
enforcing it is immaterial. Even if the judgment be subsequent to
the alienation, it is merely declaratory, with retraoctive effect to the
date when the credit was constituted. (Citations omitted.) (Chief
Justice Davide, Jr., First Division, Siguan vs. Lim, G.R. No. 134685,
November 19, 1999.)
Contracts Referring to Things Under Litigation. — The
fourth of the rescissible contracts are 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.29
The case contemplated in this number is different from that
contemplated in the preceding number. Here the purpose is to secure
the possible effectivity of a claim, while in the preceding number the
purpose is to guarantee an existing credit; here there is a real right
involved, while in the preceding number there is a personal right,
both of which deserve the protection of the law. They are, however,
similar in the sense that in both cases the person who can avail of
the remedy of rescission is a stranger to the contract.30
Contracts by Insolvent. — Under Art. 1382, 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.
In order that the payment can be rescinded, it is indispensable
(1) that it must have been made in a state of insolvency, and (2)
that the obligation must have been one which the debtor could not
be compelled to pay at the time such payment was effected. It is,
therefore, clear that the basis of the rescissible character of the
transaction is fraud as in the case of Nos. 3 and 4 of Art. 1381.

29
Art. 1381, No. 4, Civil Code.
30
8 Manresa, 5th Ed., Bk. 2, p. 558.

509
Art. 1382 CONTRACTS

Insolvency, as it is used in this article, should be understood

in its popular or vulgar, not technical, sense. Hence, it refers to the
financial situation of the debtor by virtue of which it is impossible
for him to fulfill his obligations.31 A judicial declaration of insolvency
is not, therefore, necessary.32
According to Manresa, the obligations contemplated by this
article comprehend not only those with a term or which are subject
to a suspensive condition, but even void and natural obligations as
well as those which are condoned or which have prescribed.33
An interesting question arises with respect to the payment of
an obligation which is subject to a suspensive period. Let us assume
that A is indebted to B for P10,000 and to C for P5,000. Let us say
that the obligation in favor of C is subject to a suspensive period.
While in a state of insolvency, A pays his obligation to C before the
expiration of the term or period. Can B rescind the payment? Under
Art. 1382, there is no question that the payment is rescissible, but
then this conclusion would be in direct conflict with the provision of
No. 1 of Art 1198 of the Code under which A can be compelled by C to
pay the obligation even before the expiration of the stipulated term
or period since by his insolvency he has already lost his right to the
benefit of such term or period. According to Manresa, however, the
conflict can easily be resolved by considering the priority of dates
between the two debts. If the obligation with a period became due
before the obligation to the creditor seeking the rescission became
due, then the latter cannot rescind the payment even if such payment
was effected before the expiration of the period; but if the obligation
with a period became due after the obligation to the creditor seeking
the rescission became due, then the latter can rescind the payment.34
Other Rescissible Contracts. — Besides those enumerated
in Arts. 1381 and 1382, there are also other contracts which are
specially declared by law to be subject to rescission.35 Examples of

31
Ibid., p. 561.
32
Under Sec. 70 of the Insolvency Law (Act No. 1956), any payment, pledge,
mortgage, conveyance, sale, assignment or transfer of property made by an insolvent
within one month before the filing of the petition in insolvency by or against him, is
void, except when made for a valuable consideration and in good faith.
33
8 Manresa, 5th Ed., Bk. 2, p. 562.
34
Ibid., p. 536. This is, of course, without prejudice to the provisions of the Civil
Code regarding preference of credits. See Arts. 2241, et seq., Civil Code.
35
Art. 1381, No. 5, Civil Code.

510
 RESCISSIBLE CONTRACTS Art. 1383

these contracts are those contemplated in Arts. 1098, 1189, 1526,

1534, 1539, 1542, 1556, 1560, 1567, and 1659 of the Code.

Art. 1383. The action for rescission is subsidiary; it can-

not be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.36
Subsidiary Character of Action. — The action for rescission
is subsidiary, consequently, it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation
for the same.37 Hence, before a party who is prejudiced can avail
himself of this remedy, it is essential that he has exhausted all of the
other legal means to obtain reparation.38 Thus, even where the fraud
charged which is the ground for an action for rescission actually did
exist, where there is no allegation or evidence that the creditor has
already exhausted all of legal remedies to obtain reparation from
the debtor, the action to rescind the sale in question made by said
debtor is not maintainable.39 Nevertheless, if it can be established
that the property which is alienated or transferred by the debtor
to another was his only property at the time of the transaction, an
action for rescission can certainly be maintained because it is clear
that in such case the creditor can have no other remedy.40
Parties Who May Institute Action. — According to Castan,
the action for rescission may be instituted by the following: (1) The
person who is prejudiced, such as the party suffering the lesion
in rescissory actions on the ground of lesion, the creditor who is
defrauded in rescissory actions on the ground of fraud, and other
persons authorized to exercise the same in other rescissory actions;
(2) their representatives; (3) their heirs; and (4) their creditors by
virtue of the subrogatory action defined in Art. 1177 of the Code.41
An heir, therefore, may institute an action for the rescission
of a rescissible contract. As a rule, he may do so as a representative
of the person who suffers from lesion or of the creditor who is

36
Art. 1294, Spanish Civil Code.
37
Art. 1383, Civil Code.
38
Art. 1177, Civil Code.
39
Goquiolay vs. Sycip, 9 SCRA 663.
40
Regalado vs. Luchsinger & Co., 5 Phil. 625; Guash vs. Espiritu, 11 Phil. 184;
Honrado vs. Mercayda, CA, 49 Off. Gaz. 1492.
41
3 Castan, 7th Ed., p. 433.

511
Art. 1384 CONTRACTS

defrauded. Suppose, however, that it can be established that the

decedent, during his lifetime, entered into a contract with another
in order to defraud him of his legitime, can he institute an action for
the rescission of such contract after the death of the decedent? It is
clear that in this case the compulsory heir does not have any right
to institute the action as a representative of the decedent, since
the decedent himself does not have the right. It would, however, be
possible for him to institute the action in his own right under No.
3 of Art. 1381 of the Civil Code. This was recognized in the case of
Concepcion vs. Sta. Ana. According to the Supreme Court:

“The reason why a forced heir has the right to institute an

action of rescission is that the right to the legitime is similar to a
credit of a creditor. As Manresa correctly states in commenting
on Article 1291 (now Art. 1381) of the Civil Code: “The rights
of a forced heir to the legitime are undoubtedly similar to a
credit of a creditor insofar as the right to the legitime may be
defeated by fraudulent contracts, and are superior to the will
of those bound to respect them. In its judgment of October 28,
1897, the Supreme Court of Spain held that the forced heirs
instituted as such by their father in the latter’s testament have
the undeniable right to institute an action to annul contracts
entered into by the father to their prejudice. As it is seen the
action is called action of nullity, but it is rather an action of
rescission taking into account the purpose for which it is
instituted and the confusion of ideas that has prevailed in this
matter.’’42

Art. 1384. Rescission shall be only to the extent necessary

to cover the damages caused.43
Extent of Rescission. — It must be observed that the primary
purpose of rescission is reparation for the damage or injury which
is suffered either by a party to the contract or by a third person.
In order that this purpose may be realized the rescission does not
necessarily have to be total in character; it may also be partial.
Consequently, according to Art. 1384, rescission shall be only to the
extent necessary to cover the damages caused. This precept, which

42
Concepcion vs. Sta. Ana, 87 Phil. 787. The opinion of Manresa quoted here is
found in Vol. 8, Bk. 2, 5th Ed., pp. 555-556. See Art. 221, No. 4, Civil Code.
43
New provision.

512
 RESCISSIBLE CONTRACTS Art. 1385

was not found in the old Code, is in accordance with the doctrine
enunciated by the Supreme Tribunal of Spain on December 10, 1904,
to the effect that a contract in fraud of creditors may be partially
rescinded to an extent which is sufficient to satisfy the damage
caused to the creditor.44

Art. 1385. Rescission creates the obligation to return the

things which were the object of the contract, together with
their fruits, and the price with its 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 posses-
sion 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.45

Effect of Rescission in Case of Lesion. — It is evident

that the first paragraph of Art. 1385 is applicable only to rescissory
actions on the ground of lesion and not to rescissory actions on the
ground of fraud. This is so because in the latter there can certainly be
no obligation on the part of the plaintiff-creditor to restore anything
since he has not received anything.46
Once a contract is rescinded on the ground of lesion, there
arises an obligation on the part of both contracting parties to return
to the other the object of the contract, including fruits or interests.
Consequently, rescission is not possible, unless he who demands it
can return whatever he may be obliged to restore. Thus, where a
guardian alienates certain properties of a minor for P85,000 to a
certain person, and subsequently, the minor, upon reaching the age
of majority, brings an action for the rescission of the contract on
the ground of lesion, the effect if rescission is granted would be the
restoration of things to their condition prior to the celebration of the
contract. But if the plaintiff cannot refund the amount including
interest, the action will certainly fail because positive statutory

44
8 Manresa, 5th Ed., Bk. 2, p. 572.
45
Art. 1295. Spanish Civil Code.
46
8 Manresa, 5th Ed., Bk. 2, p. 578.

513
Art. 1385 CONTRACTS

law, no less than uniform court decisions, require, as a condition

precedent to rescission, that the consideration received should be
refunded.47
The “fruits of the thing” stated in Art. 1385 refer not only
to natural, industrial and civil fruits but also to other accessions
obtained by the thing, while interest refers to legal interest. It
must be observed, however, that as far as the obligation to restore
the fruits is concerned, the rules on possession shall be applied.48
Consequently, the determination of the good or bad faith of the
party obliged to restore is of transcendental importance in order to
assess the fruits or the value thereof which must be returned as well
as the expenses which must be reimbursed.49 Thus, it has been held
that as a condition to the rescission of a contract of sale of a parcel of
land, the vendor must refund to the vendees (who are in good faith)
an amount equal to the purchase price, plus the sum expended by
them in improving the land.50
Effect of Rescission Upon Third Persons. — According to
the second paragraph of Art. 1385, rescission shall not take place
when the thing which constitutes the object of the contract is legally
in the possession of a third person who did not act in bad faith. It is
evident that this rule is applicable to all kinds of rescissible contracts.
There are, however, two indispensable requisites which must concur
in order that the acquisition of the thing which constitutes the object
of the contract by a third person shall defeat an action for rescission.
These requisites are: first, that the thing must be legally in the
possession of the third person; and second, that such third person
must not have acted in bad faith. Where the thing which constitutes
the object of the contract happens to be movable property, the
concurrence of these requisites offers no difficulty because of the
principle that possession of movable property acquired in good faith
is equivalent to a title.51 Where the thing happens to be immovable
property, however, it is indispensable that the right of the third
person must be registered or recorded in the proper registry before
we can say that the thing is legally in his possession, or what

47
Uy Soo Lim vs. Tan Unchuan, 38 Phil. 522.
48
Arts. 543, et seq., Civil Code.
49
8 Manresa, 5th Ed., Bk 2, pp. 577-578.
50
Gov’t. of the P.I. vs. Wagner, 54 Phil. 132.
51
Art. 559, Civil Code.

514
 RESCISSIBLE CONTRACTS Art. 1385

amounts to the same thing, before he is protected by law. Thus,

Manresa, commenting on the provision of the second paragraph of
Art. 1385, says:

“The acquisition by a third person is an obstacle to the

efficaciousness of the action for rescission, where the following
two circumstances are present, to wit, that such third person
is in lawful possession of the realty, that is to say that he is
protected by the law against said action by the registration in
the registry, and that he did not act in bad faith.’’52

Consequently, it has been held that a third person to whom the

realty has been transferred who has not registered his right in the
proper registry cannot be protected against the effects of a judgment
rendered in the action for rescission.53 However, where he has
registered his right over the realty under the Land Registration Act
(Act No. 496), there would then be no legal obstacle to the transfer
of the title of the said property, and for this special reason the said
transfer cannot be rescinded. This doctrine was enunciated by the
Supreme Court in the following case:

Sikatuna vs. Guevara

45 Phil. 371

The records show that a contract of a lease of certain lot

situated in Manila was entered into between the partnership
Jacinto, Palma y Hnos, as lessor, and Potenciana Guevara, as
lessee. This contract contained an option by which the lessor
is given the right to purchase within a period of one year from
the time of the execution thereof a house which the lessee had
constructed on the lot, but in case of failure to exercise such
right, the lessee is given the right to purchase the lot. The period
for the option having expired without the lessor exercising its
right, Guevara offered to purchase the lot, but the said lessor
refused. In view of such refusal, Guevara brought an action to
compel the lessor to sell the lot to her. There was, however, no
notice of the commencement of such action filed with the office
of the Register of Deeds. During the pendency of such case, the
aforesaid lessor sold the lot under litigation to the Sikatuna

52
8 Manresa, 5th Ed., Bk 2, pp. 379-380, quoted by the Supreme Court in Cord-
evero vs. Villaruz, 46 Phil. 473, and in Gatchalian vs. Manalo, 68 Phil. 608.
53
Cordevero vs. Villaruz, 46 Phil. 473.

515
Art. 1385 CONTRACTS

Corporation. This sale was recorded in the Registry in accordance

with Act No. 496, otherwise known as the Land Registration
Act. Subsequently, judgment was rendered in the civil case in
favor of Guevara, but it was not executed because the lot had
already been sold to the Sikatuna Corporation. Later, the new
owner ordered Guevara to vacate the premises. Having declined
to do so, the corporation commenced these proceedings against
her for unlawful detainer. In her answer, she contended that
since the contract involves the sale of property under litigation
without the approval of the litigants or of competent judicial
authority, it should be rescinded. This contention was upheld by
the lower court. The Supreme Court, speaking through Justice
Romualdez, however, ruled:
“As the appellant rightfully contends the rescission
of the sale does not lie in the present case because the
property is now in the legal possession of a third person
who has not acted in bad faith. There is no doubt but that
in this case the plaintiff corporation has the character of a
third person, and it has not been shown that it had acted
in bad faith.
“This case has a special circumstance in that it deals
with property registered under the Land Registration Act
No. 496, Section 78, which provides that acts concerning
properties registered under the law shall affect only the
parties litigant, unless a notice of the commencement of
the action is recorded, which does not appear to have been
done in the case before us. There was, therefore, no legal
obstacle to the transfer of the title of the said property,
and for this special reason the said transfer cannot be
rescinded.’’54

In spite of the impossibility of maintaining an action for the

rescission of the contract where the object thereof is legally in the
possession of a third person who did not act in bad faith, the person
who is prejudiced is not left without any remedy. He may still
bring an action for indemnity for damages against the person who
caused the loss.55 This action may be directed against the guardian,

54
From this case, it is clear that when the law speaks of “third persons,” it refers
not only to subsequent transferees who are strangers to the contract which is sought
to be rescinded, but even to the immediate transferees who are not strangers to the
contract.
55
Art. 1385, par. 3, Civil Code.

516
 RESCISSIBLE CONTRACTS Arts. 1386-1388

representative of the absentee or litigant who transferred the

thing, as the case may be.56 It may even be directed against a third
person who, in bad faith, had previously acquired the thing and,
subsequently, had alienated it to an innocent purchaser for value.57

Art. 1386. Rescission referred to in Nos. 1 and 2 of Article

1381 shall not take place with respect to contracts approved
by the courts.58
Art. 1387. 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.
Alienations by onerous title are also presumed fraudu-
lent when made by persons against whom some judgment
has been rendered in any instance or some writ of attach-
ment has been issued. The decision or attachment need not
refer to the property alienated, and need not have been ob-
tained 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.59
Art. 1388. 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 first, and so on successively.60

Proof of Fraud. — As we have seen in a previous section one

of the requisites which must be established in order that a contract
may be rescinded on the ground that it has been entered into in

56
8 Manresa, 5th Ed., Bk. 2, p. 582.
57
Art. 1388, par. 1, Civil Code.
58
Art. 1296, Spanish Civil Code, in modified form.
59
Art. 1297, Spanish Civil Code, in modified form.
60
Art. 1298, Spanish Civil Code, in modified form.

517
Arts. 1386-1388 CONTRACTS

fraud of creditors is the existence of fraud, or at least, the intent to

defraud. Such fraud or intent to defraud may be either presumed in
accordance with Art. 1387 of the Code or duly proved in accordance
with the ordinary rules of evidence.
Idem; Presumptions of fraud. — The law presumes that
there is fraud of creditors in the following cases:
(1) Alienations of property by gratuitous title if the debtor
has not reserved sufficient property to pay all of his debts contracted
before such alienations.61
(2) Alienations of property by onerous title if made by a
debtor against whom some judgment 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.62 Thus,
where the debtor alienated a certain property, which was his only
attachable property, to his son after judgment had been rendered
against him and a writ of execution had been issued, there is a
presumption that such alienation is fraudulent in accordance
with the rule stated in the second paragraph of Art. 1387.63 This
presumption becomes stronger when it is established that the
conveyance by the judgment debtor is for the purpose of preventing
the judgment creditor or other creditors from seizing the property.64
But where no judgment or preliminary attachment exists against
the debtor, the presumption is not applicable.65

Cabaliw vs. Sadorra

64 SCRA 310
Isidora Cabaliw was the wife of Benigno Sadorra by his
second marriage solemnized on May 5, 1915, before the Justice
of the Peace of Bayambang, Pangasinan. This couple had a
daughter named Soledad Sadorra. During their marriage, the

61
Art. 1387, par. 1, Civil Code.
62
Art. 1387, par. 2, Civil Code.
63
Regalado vs. Luchsinger & Co., 5 Phil. 25. To the same effect: see Cabaliw vs.
Sadorra, 64 SCRA 310.
64
Bachrach vs. Peterson, 7 Phil. 571. To the same effect: Panlileo vs. Victorio, 36
Phil. 706; Saavedra vs. Martinez, 68 Phil. 676; Contreras vs. China Banking Corp.,
76 Phil. 709.
65
Manila Mercantile Co. vs. Flores, 50 Phil. 759.

518
 RESCISSIBLE CONTRACTS Arts. 1386-1388

spouses acquired two (2) parcels of land situated in Iniangan,

Dupax, Nueva Vizcaya. One parcel with an area of 14.4847
hectares was acquired by a Sales Patent and covered by Original
Certificate of Title No. 1 of the Land Records of Nueva Vizcaya
issued in the name of Benigno Sadorra. The other piece of land
about 1-1/2 hectares and covered by Tax Declaration Nos. 6209
and 6642 was secured through purchase.
Having been abandoned by her husband, Isidora Cabaliw
instituted an action for support with the Court of First Instance
of Manila, entitled “Isidora Cabaliw de Orden versus Benigno
Sadorra’’ docketed therein as Civil Case No. 43193. On January
30, 1933, judgment was rendered requiring Benigno Sadorra to
pay his wife, Isidora Cabaliw, the amount of P75.00 a month in
terms of support as of January 1, 1933, and P150.00 in concept
of attorney’s fees and the costs.
Unknown to Isidora Cabaliw, on August 19, 1933, Benigno
Sadorra executed two (2) deeds of sale over the two parcels of
land above described in favor of his son-in-law, Sotero Sadorra,
the latter being married to Encarnacion Sadorra, a daughter of
Benigno Sadorra by his first marriage. These deeds were duly
registered and Original Certificate of Title No. 1 was cancelled
and replaced with T.C.T. No. 522 of the Register of Deeds of
Nueva Vizcaya.
Because of the failure of her husband to comply with
the judgment of support, Isidora Cabaliw filed in Civil Case
43192 a motion to cite Benigno Sadorra for contempt and the
Court of First Instance of Manila in its Order of May 12, 1937,
authorized Isidora to take possession of the conjugal property,
to administer the same, and to avail herself of the fruits thereof
in payment of the monthly support in arrears. With this order of
the Court, Isidora proceeded to Nueva Vizcaya to take possession
of the aforementioned parcels of land, and it was then that she
discovered that her husband had sold them to his son-in-law
Sotero.
On February 1, 1940, Isidora filed with the Court of First
Instance of Nueva Vizcaya Civil Case No. 449 against her
husband and Sotero Sadorra for the recovery of the lands in
question on the ground that the sale was fictitious; at the same
time a notice of lis pendens was filed with the Register of Deeds
of Nueva Vizcaya.
In May of 1940, Benigno Sadorra died.
On June 7, 1948, the above-mentioned notice of lis pendens
was cancelled by the Register of Deeds of Nueva Viscaya upon

519
Arts. 1386-1388 CONTRACTS

the filing of an affidavit by Sotero Sadorra to the effect that Civil

Case No. 449 had been decided in his favor and that he was
adjudged the owner of the land covered by T.C.T. No. 522, but
that his copy of the decision was lost during the war.
On October 1, 1954, Isidora and her daughter Soledad
filed with the Court of First Instance of Nueva Vizcaya Civil
Case 634 to recover from the spouses Sotero and Encarnacion
Sadorra the aforementioned two parcels of land; they also
caused the annotation of a cautionary notice and notice of lis
pendens over T.C.T. 522.
On November 22, 1955, the complaint was amended
and named additional party-defendants were the children of
Benigno Sadorra by his first marriage. The amended complaint
prayed among others: (1) that the deeds of sale executed by
Benigno Sadorra be declared null and void; (2) that defendant-
spouses Sotero and Encarnacion Sadorra be directed to yield
the possession of the lands in question; and (3) that said lands
be ordered partitioned among plantiffs and defendants who
are children by the first marriage of Benigno Sadorra in the
proportions provided by law.
During the pendency of Civil Case 634 certain parties
intervened claiming that they had purchased parts of the land
covered by T.C.T. 522.
After trial, the lower court rendered judgment and among
other things: (1) declared the deed of sale executed by Benigno
Sadorra to be simulated and fictitious; (2) recognized and upheld
the rights of the intervenor-purchasers who acquired their
portions prior to the registration of the notice of lis pendens on
October 1, 1954, but dismissed the claims of the intervenors who
allegedly bought parts of the land subsequent thereto; and (3)
ordered the partition of the remaining unsold lands between
Isidora Cabaliw, Sotero Sadorra, on one hand and the children
by the first marriage of Benigno Sadorra on the other.
From the foregoing decision of the lower court in Civil
Case 634 spouses Sotero and Encarnacion Sadorra appealed to
the Court of Appeals and so did the intervenors whose claims
were dismissed. (CA-G.R. No. 26956-R.) On November 29, 1965,
the appellate court by a vote of 3 to 2 reversed the decision of
the trial court, and dismissed the amended complaint of Isidora
Cabaliw.
Hence, this petition filed by Isidora Cabaliw and her
daughter, Soledad Sadorra, for the Court to review the adverse
judgment of the Court of Appeals.

520
 RESCISSIBLE CONTRACTS Arts. 1386-1388

The Supreme Court, speaking through Justice Muñoz

Palma, held:

The Court of Appeals sustained the validity and

efficacy of the deeds of sale executed by Benigno Sadorra
in favor of his son-in-law (Exhibits I and I-1) on the
ground that these are public documents and as such are
presumed by law to have been fair and legal; that the
vendee Sotero Sadorra is presumed to have acted in good
faith, citing Art. 44, Spanish Civil Code, Art. 627, New
Civil Code; that fraud is never presumed, and it is settled
in this jurisdiction that strong and convincing evidence is
necessary to overthrow the validity of an existing public
instrument. The appellate court continued that inasmuch
as under the old Civil Code in force at the time of the sale,
the husband was empowered to dispose of the conjugal
property without the consent of the wife, the sales made by
Benigno Sadorra were valid, and the wife Isidora cannot
now recover the property from the vendee.
The judgment of the Court of Appeals cannot be sustained.
The facts narrated in the first portion of this Decision
which are not disputed, convincingly show or prove that the
conveyances made by Benigno Sadorra in favor of his son-in-law
were fraudulent. For the heart of the matter is that about seven
months after a judgment was rendered against him in Civil Case
No. 43192 of the Court of First Instance of Manila and without
paying any part of that judgment, Benigno Sadorra sold the only
two parcels of land belonging to the conjugal partnership to his
son-in-law. Such a sale even if made for a valuable consideration
is presumed to be in fraud of the judgment creditor who in this
case happens to be the offended wife.
Article 1297 of the old Civil Code (now Art. 1387 of the
New Civil Code) which was the law in force at the time of the
transaction provides:
“Contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to be made in
fraud of creditors.
“Alienations by onerous title are also presumed
fraudulent when made by persons against whom some
judgment 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 rescission.’’ (Emphasis
supplied.)

521
Arts. 1386-1388 CONTRACTS

The above-quoted legal provision was totally disregarded

by the appellate court, and there lies its basic error.
We agree with petitioners that the parties here do not stand
in equipoise, for the petitioners have in their favor, by a specific
provision of law, the presumption of fraudulent transaction
which is not overcome by the mere fact that the deeds of sale
in question were in the nature of public instruments. As well
said in the dissenting opinion of Justice Magno Gatmaitan, the
principle invoked by the majority opinion that to destroy the
validity of an existing public document “strong and convincing
evidence is necessary” operates “where the action was brought
by one party against the other to impugn the contract . . . but
that rule can not operate and does not, where the case is one
wherein in the suit is not between the parties inter se but is
one instituted by a third person, not a party to the contract but
precisely the victim of it because executed to his prejudice and
behind his back; neither law, nor justice, nor reason, nor logic,
should so permit, otherwise, in such case, the courts would be
furnishing a most effective shield of defense to the aggressor.”
(pp. 30-31, CA Decision)
Furthermore, the presumption of fraud established by the
law in favor of petitioners is bolstered by other indicia of bad
faith on the part of the vendor and vendee. Thus (1) the vendee
is the son-in-law of the vendor. In the early case of Regalado
vs. Luchsinger & Co., 5 Phil. 625, this Court held that the close
relationship between the vendor and the vendee is one of the
known badges of fraud. (2) At the time of the conveyance, the
vendee, Sotero, was living with his father-in-law, the vendor,
and he knew that there was a judgment directing the latter to
give a monthly support to his wife Isidora and that his father-
in-law was avoiding payment and execution of the judgment.
(3) It was known to the vendee that his father-in-law had no
properties other than those two parcels of land which were
being sold to him. The fact that a vendor transfers all of his
property to a third person when there is a judgment against him
is a strong indication of a scheme to defraud one who may have
a valid interest over his properties.
Added to the above circumstances is the undisputed fact
that the vendee Sotero Sadorra secured the cancellation of the
lis pendens on No. O.C.T. 1, which was annotated in 1940 at
the instance of Isidora Cabaliw, and the issuance of a transfer
certificate of title in his favor, by executing an affidavit (Exhibit
H) on June 7, 1948, wherein he referred to Isidora as “the late
Isidora Cabaliw’’ when he knew for a fact that she was alive,

522
 RESCISSIBLE CONTRACTS Arts. 1386-1388

and alleged that Civil Case 449 of the Court of First Instance
of Nueva Vizcaya was decided in his favor where in truth there
was no such decision because the proceedings in said case
were interrupted by the last world war. Such conduct of Sotero
Sadorra reveals, as stated by the lower court, an “utter lack of
sincerity and truthfulness” and belies his pretensions of good
faith.
On the part of the transferee, he did not present satis-
factory and convincing evidence sufficient to overthrow the
presumption and evidence of a fraudulent transaction. His is
the burden of rebutting the presumption of fraud established
by law, and having failed to do so, the fraudulent nature of the
conveyance in question prevails.
The decision of the Court of Appeals makes mention of Art.
1413 of the old Civil Code (now Art. 166 of the New Civil Code)
which authorizes the husband as administrator to alienate and
bind by onerous title the property of the conjugal partnership
without the consent of the wife, and by reason thereof concludes
that petitioner Isidora Cabaliw can not now seek annulment
of the sale made by her husband. On this point, counsel for
petitioners rightly claims that the lack of consent of the wife
to the conveyances made by her husband was never invoked
nor placed in issue before the trial court. What was claimed all
along by plaintiff, Isidora Cabaliw now petitioner, was that the
conveyances or deeds of sale were executed by her husband to
avoid payment of the monthly support adjudged in her favor and
to deprive her of the means to execute said judgment. In other
words, petitioner seeks relief not so much as an aggrieved wife
but more as a judgment creditor of Benigno Sadorra. Art. 1413
therefore is inapplicable; but even if it were, the result would
be the same because the very article reserves to the wife the
right to seek redress in court for alienations which prejudice her
or her heirs. The undisputed facts before Us clearly show that
the sales made by the husband were merely a scheme to place
beyond the reach of the wife the only properties belonging to the
conjugal partnership and deprive her of what rightly belongs to
her and her only daughter Soledad.
PREMISES CONSIDERED, We find merit to this Petition
for Review and We set aside the decision of the appellate court
for being contrary to the law applicable to the facts of the case.
The decision of the trial court stands affirmed with costs against
private respondents.
So Ordered.

523
Arts. 1386-1388 CONTRACTS

It must be observed, however, that the above presumptions

are disputable, and therefore, may be rebutted by satisfactory and
convincing evidence to the contrary.66 Thus, if it can be established
that the transferee acquired the property in good faith, without the
least intention of impairing the judgment obtained by the creditor
against the transferor, and that he paid the purchase price in the
belief that the latter could freely dispose of the said property, the
presumption of fraud is overthrown.67

Honrado vs. Marcayda, et al.

49 Off. Gaz. 1492, C.A.
This is an action commenced by plaintiff against the
defendants for the rescission of a contract of sale on the ground
that such contract was entered into in fraud of creditors. The
records show that Felipe Lotivio purchased a parcel of land from
Luisa Marcayda for P1,000, although at the time the contract
was executed there was already a judgment in favor of the
plaintiff against the latter with regard to the property and a writ
of attachment had already been issued. The plaintiff contends
that the sale is fraudulent in accordance with the rule stated in
the second paragraph of Art. 1297 (now Art. 1387) of the Civil
Code; the defendant Felipe Lotivio, on the other hand, contends
that he is a purchaser in good faith and for value. Consequently,
the questions upon which this case hinges are (1) whether or not
Felipe Lotivio was a purchaser in good faith and for value, and
(2) if he is, whether or not the contract of sale executed could be
rescinded.
Held: “The sale was consummated on January 6, 1936, in
consideration of P1,000. Original certificate of title No. 14567
showed that the land was free from any lien or encumbrance.
Felipe Lotivio was not, under the law, supposed to go farther to
find out whether the land has any other lien not appearing on
the face of the title as held in the cases of Reynes vs. Barrera, 68
Phil. 656; Hernandez vs. Vda. de Salas, 69 Phil. 744; Visayan
Surety and Insurance Corp. vs. Verzosa, 72 Phil. 362. It is well
settled that when the property sold on execution is registered
under the Torrens system, registration is the operative act

66
Peña vs. Mitchell, 9 Phil. 587 & Streiff vs. Coll. of Customs, 31 Phil. 643; Na-
tional Exchange Co. vs. Katigbak, 54 Phil. 599; Buencamino vs. Bantug, 58 Phil. 521;
Gatchalian vs. Manalo, 68 Phil. 708.
67
Buencamino vs. Bantug, 58 Phil. 521. To the same effect: Peña vs. Mitchell, 9
Phil. 587; Gatchalian vs. Manalo, 68 Phil. 706.

524
 RESCISSIBLE CONTRACTS Arts. 1386-1388

that gives validity to the transfer or creates a lien on the land

and a purchaser on execution is not required to go behind the
registry to determine the condition of the property, and he is
only charged with notice of the burdens of the certificate of title.
To require him to do more is to defeat one of the primary objects
of the Torrens system.
“In the present case, the writ of attachment issued by the
justice of the peace court of Daraga, Albay was not annotated
on the back of the original certificate of title. True enough that
it was filed with the office of the Register of Deeds of Albay,
but such fact is not a notice to the whole world. Consequently,
such unregistered order of attachment does not create any lien
or burden upon the land in question.
“The valuable consideration of P1,000 paid to Luisa
Marcayda by Felipe Lotivio, who does not appear to be her
relative is, in our opinion, not small for the property since its
improvements are assessed at no less than P800. It is fitting to
apply in this case the principle of ‘innocent purchaser for value’
as declared and applied in the case of Bailon vs. Cacias, et al.,
40 Off. Gaz., p. 1896, August, 1941.
“ ‘According to our Supreme Court in the case of Cui, et
al. vs. Henson, 51 Phil. 600: ‘A purchaser in good faith is one
who buys property of another without notice that some other
person has a right to, or an interest in, such property and pays a
full and fair price for the same, at the time of such purchase, or
before he has notice of the claim or interest of some other person
in the property. Good faith consists in an honest intention to
abstain from taking any unconscientious advantage of another.
Good faith is the opposite of fraud and of bad faith and its
nonexistence must be established by competent proofs.’
“Tested by these doctrines, we hold and declare that
defendant Felipe Lotivio was, under the foregoing circumstances,
a purchaser in good faith and for value; and for this reason, we
also hold that the presumption of fraud as contemplated in
Article 1297 of the old Civil Code (now Art. 1387 of the new
Civil Code) can be considered overcome and overthrown as held
in the cases of Peña vs. Mitchell, 9 Phil. 587; Guash vs. Espiritu,
11 Phil. 184; Kuenkle vs. Watson & Co., 13 Phil. 26; Golinko vs.
Monjardin, 31 Phil. 643; Asia Banking Corp. vs. Corcuera, 51
Phil. 781.
“Therefore, the contract of sale, for the reasons above
stated, is not rescissible.’’

525
Arts. 1386-1388 CONTRACTS

Idem; Badges of fraud. — It is not, however, indispensable

that the creditor shall have to depend upon the two presumptions
established in the first and second paragraphs of Art. 1387 in order
to prove the existence of fraud or the intention to defraud. According
to the third paragraph of the same article, the design to defraud
creditors may be proved in any other manner recognized by the law of
evidence.68 Thus, in determining whether or not a certain conveyance
is fraudulent the question in every case, in the words of Justice
Moreland, is whether the conveyance was a bona fide transaction or
merely a trick or contrivance to defeat creditors. It is not sufficient
that it is founded on a good or valuable cause or consideration or is
made with bona fide intent: it must have both elements. If defective
in either of these particulars, although good between the parties,
it is rescissible as far as the creditors are concerned. The rule is
universal both at law and in equity that whatever fraud creates
justice will destroy. The test as to whether or not a conveyance is
fraudulent is — does it prejudice the rights of creditors?69
In the consideration of whether or not certain transfers or
conveyances are fraudulent, the following circumstances have been
denominated by the courts as badges of fraud.70
(1) The fact that the cause or consideration of the conveyance
is inadequate.
(2) A transfer made by a debtor after suit has been begun and
while it is pending against him.
(3) A sale on credit by an insolvent debtor.
(4) Evidence of large indebtedness or complete insolvency.
(5) The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed financially.
(6) The fact that the transfer is made between father and
son, when there are present others of the above circumstances.
(7) The failure of the vendee to take exclusive possession of
all the property.

68
Ayles vs. Reyes, 18 Phil. 243.
69
Oria vs. McMicking, 21 Phil. 243.
70
Ibid.

526
 RESCISSIBLE CONTRACTS Arts. 1386-1388

Thus, where it is proved that a certain corporation, which is

heavily indebted to a certain bank, sold a large tract of land worth
P400,000 to the vendee for only P36,000 in spite of the fact that at
the time of such sale it did not have any liquidated assets and that
all of its other assets were pledged or mortgaged, some of which were
for far more than their actual value, such circumstances would be
sufficient to establish the fraudulent character of the conveyance.71
Consequently, the sale can be set aside by means of an action for
rescission at the instance of the creditor. But where the sale is
founded on a fictitious cause or consideration it would be futile for
such creditor to invoke its rescission since such action presupposes
the existence of a valid, not inexistent, contract.72 The remedy of the
creditor in such case would be to ask for a declaration of nullity of
the conveyance.
Similarly, where it is proved that the person to whom the
property conveyed is a son of the transferor or a mother-in-law or a
near relative, coupled with the fact that at the time of the transfer
or conveyance the said transferor was financially embarrassed
or had no other means with which he could settle his personal
obligations, the weight of evidence would be sufficient to justify a
decree of rescission on the ground of fraud.73 The evidence becomes
more conclusive if the fact of relationship between the vendor
and the vendee is aggravated by the fact that the conveyance was
made in secrecy and for an inadequate consideration at a time
when the vendor had no other means with which he could settle
his obligations.74 It must be noted, however, that the mere fact of
relationship between vendor and vendee, as when the vendor is the
vendee’s mother, is not in itself an element of fraud, if the sale was
made for a valuable consideration and said vendor was not at the
time of the conveyance insolvent.75

71
Asia Banking Corp. vs. Nable Jose, 51 Phil. 763.
72
Onglengco vs. Ozaeta, 70 Phil. 43.
73
Gaston vs. Hernaez, 58 Phil. 823.
74
Ayles vs. Reyes, 18 Phil. 243; Alpuerto vs. Perez, 38 Phil. 785.
75
Standard Oil Co. vs. Castro, 64 Phil. 716.

527
Arts. 1386-1388 CONTRACTS

Rivera vs. Li Tam & Co.

4 SCRA 1072

Rafael Li Tam died intestate, survived by his wife, Marcosa

Rivera, and several children by a Chinese wife. Marcosa filed
a claim for P252,658.33 against the intestate which the court
approved on the strength of a deed wherein the decedent
acknowledged said indebtedness to his wife. Thereafter,
Arminio Rivera, administrator of the estate, proceeded against
the defendant company for an accounting of the income derived
from the shares of stock owned by the decedent in said company.
In answer, defendant company alleged that the decedent was
no longer a stockholder in said company, having transferred
his shares to his children by his Chinese wife. Hence, Rivera
brought this action asking for the rescission of the transfer on
the ground that it was made in fraud of creditors.
Held: The fraudulent character of the transfer is clearly
inferable from the facts that the transferees are the decedents’
own children, that no consideration was given for the transfer,
that the corporation was the business of the decedent, and
that he has an outstanding obligation of more than P250,000
with his wife which he had invested in the corporation. And to
complete the fraudulent scheme, the defendants dissolved the
old corporation and formed a new one for no apparent reason. In
view of such fraud, the transfer is, therefore, of no effect.

Idem; id. — Acquisition by third person in good faith.

— While it is true that the test as to whether or not a conveyance
is fraudulent is to determine whether or not it is prejudicial to the
rights of the creditors, nevertheless, it is also true that such a test
would not be applicable if the conveyance is made in good faith or
with a bona fide intent and for a valuable cause or consideration.76 In
other words, if the property is acquired by a purchaser in good faith
and for value, the acquisition as far as the law is concerned is not
fraudulent. The right of such purchaser over the property is legally
superior to that of any other person even as against the creditor
who is prejudiced by the conveyance. Consequently, the contract or
conveyance is not rescissible.77

76
Oria vs. McMicking, 21 Phil. 243.
77
See Honrado vs. Marcayda, supra, for definition of “purchaser in good faith and
for value” and also for authorities

528
 RESCISSIBLE CONTRACTS Art. 1389

Idem; id. — Acquisition by third person in bad faith. —

On the other hand, if the property is acquired by one who is not a
purchaser in good faith and for value, it is clear that the contract or
conveyance is rescissible. In such case the creditor who is prejudiced
can still proceed after the property. This is so, even though the said
property may have been transferred or conveyed to other persons
who are not innocent purchasers for value. However, if for any cause
or reason, it should be impossible for the acquirer in bad faith to
return the property, he shall indemnify the creditor seeking the
rescission for damages suffered on account of the alienation. If it
happens that there are two or more alienations, the first acquirer
shall be liable first, and so on successively.78 Thus, if A, against
whom a judgment for the payment of a certain debt in favor of X has
been rendered, conveys his only property to B in fraud of X, and B,
who is aware of the fraud, in turn, conveys the property to C, and
the latter, who is also aware of the fraud, also conveys the property
to D, who is a purchaser in good faith and for value, although
the conveyance to D cannot be rescinded, yet X can still proceed
against B for damages suffered by him on account of the fraudulent
alienation, and if he fails to recover he can still proceed against C.
It must be noted, however, that if the reason for the impossibility of
returning the property acquired in bad faith is a fortuitous event,
then under the principle announced in Art. 1174 of the Code, there
can be no liability of the acquirer.79

Art. 1389. The action to claim rescission must be com-

menced 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.80

Prescriptive Period. — As a general rule, the action for the

rescission of a contract must be commenced within four years. Under
No. 1 of Art. 1391, this period must be counted from the time of the
termination of the incapacity of the ward; under No. 2, it must be

78
Art. 1388, Civil Code.
79
8 Manresa, 5th Ed., Bk. 2, p. 549.
80
Art. 1299, Spanish Civil Code.

529
Art. 1389 CONTRACTS

counted from the time the domicile of the absentee is known; under
Nos. 3 and 4 and also under Art. 1382, it must be counted from the
time of the discovery of the fraud. In certain cases of contracts of
sale which are specially declared by law to be rescissible, however,
the prescriptive period for the commencement of the action is six
months or even forty days, counted from the day of delivery.81

81
Arts. 1543, 1571, 1577, Civil Code.

530