Rescission: Meaning
Quick answer
Rescission is the cancellation of a contract, after which each party must return what it received. The Civil Code uses the word in two settings. Under Article 1191, a party may rescind a reciprocal contract when the other party does not comply with its obligation. Under Articles 1380 and 1381, some contracts that were validly made may be rescinded in the cases the law lists, such as lesion or fraud on creditors.
Also called: Resolution of a contract, Cancelling a contract for breach, Rescissible contract
What does Article 1191 say?
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.
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.
The article adds that the court shall decree rescission "unless there be just cause authorizing the fixing of a period", and that rescission does not prejudice third persons who acquired the thing under Articles 1385 and 1388 and the Mortgage Law. See Article 1191.
Reciprocal obligations are mutual ones, as in a sale, where the seller must deliver and the buyer must pay.
Is every breach enough?
No. In Spouses Kaw v. Heirs of Nodalo (2024), the Supreme Court said: "As a rule, rescission is not permitted for a slight or casual breach of the contract, but only for such breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement." Rescission is not granted where the breach is only slight or casual, where there has been substantial compliance, or where the court finds a valid reason to give a period to comply.
In Verga v. Harbor Star Shipping Services (2024), a seller's failure to deliver stock certificates was a substantial breach that gave the buyer the right to rescind the sale.
Can a party rescind on its own?
A contract may give one party the right to rescind. But in Kaw, the Court said "judicial validation of such unilateral rescission is necessary, for it is only the final judgment of a court that will conclusively settle whether the action taken was correct in law." Kaw also said that in a contract to sell, nonpayment of the full price prevents the duty to sell from arising, so rescission is not the remedy for that; it is available for another substantial breach.
What happens after rescission?
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.
In The Wellex Group v. U-Land Airlines (2015), the Court said this duty to return "pertains to rescission or resolution under Article 1191, as well as the provisions governing all forms of rescissible contracts."
What are rescissible contracts?
Contracts validly agreed upon may be rescinded in the cases established by law.
Article 1381 lists them, including contracts entered into by guardians when the ward suffers lesion of more than one-fourth of the value of the things involved, and contracts made "in fraud of creditors when the latter cannot in any other manner collect the claims due them." This is different from rescission for breach under Article 1191, and both are different from voidable contracts. See Void vs voidable contracts.
Example
Made-up illustration: Ana sells her delivery van to Leo, who pays half and promises to pay the rest in three months. Leo never pays the balance, even after Ana's written demand. This is a substantial breach of a reciprocal obligation, so Ana may ask the court either to order Leo to pay or to rescind the sale, with damages in either case. If the sale is rescinded, Leo returns the van and Ana returns what she received, with interest. If Leo had paid all but a very small amount, a court might find substantial compliance and refuse rescission. See The other party did not pay: can you cancel the contract?.
See also the topic page on contracts and obligations.
Which provisions use this term?
Frequently asked questions
What is rescission of a contract?
It is the cancellation of a contract, after which the parties must return to each other what they received. In Civil Code terms it is used in two settings: rescission for breach of a reciprocal obligation (Article 1191) and rescission of contracts the law declares rescissible (Articles 1380 and 1381).
When can a contract be rescinded for breach?
Under Article 1191, when one party to a reciprocal obligation does not comply. In Spouses Kaw v. Heirs of Nodalo (2024), the Supreme Court said rescission is allowed only for breaches so substantial and fundamental as to defeat the object of the parties, not for a slight or casual breach.
Can a party rescind without going to court?
A contract may provide for it, but in Kaw (2024) the Court said judicial validation of a unilateral rescission is necessary, because only a final judgment conclusively settles whether the rescission was correct.
What must be returned after rescission?
Article 1385 says rescission creates the obligation to return the things that were the object of the contract, with their fruits, and the price with its interest.
Can the injured party also get damages?
Yes. Article 1191 says the injured party may choose between fulfillment and rescission, with the payment of damages in either case.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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