Quiz No.

18 (April 23, 2018)

Coverage: Rescissible Contracts [Art. 1380-1389] and
(Voidable Contracts [Art. 1390-1402]
Cases:
1. Guzman, Bocaling and Co., Inc. vs. Bonnevie G.R. No.
86150, March 2, 1992

De Leon 1381
(6) Violation of right of first refusal. — The Supreme Court,
in a number of cases, upheld the rescission of a deed of sale
which violated a right of first refusal granted to one (lessee)
of the parties. The prevailing doctrine is that a right of first
refusal means identity of terms and conditions to be offered
to the lessee and all other prospective buyers and a contract
of sale entered into in violation of the right is rescissible
under Articles 1380 to 1381(3) (Guzman, Bocaling and Co.,
Inc. vs. Bonnevie, 206 SCRA 668 [1992]; Equatorial Realty
and Development, Inc. vs. Mayfair Theater, Inc., 264 SCRA
483 [1996]; Litonjua vs. L & R Corporation, 320 SCRA 405
[1999]; Riviera Filipina, Inc. vs. Court of Appeals, 380 SCRA
245 [2002].)
Such violation constitutes a valid cause of action
enforceable by an action for specific performance.
(Parañaque Kings Enterprises, Inc. vs. Court of Appeals, 268
SCRA 727 [1997]; Equatorial Realty and Development, Inc.
vs. Mayfair Theater, Inc., 370 SCRA 56 [2001].)
Where there is no showing of bad faith in the part of
the vendee, the sale may not be rescinded. The remedy of
the person with the right of first refusal is an action for
damages against the vendor. (Rosencor Development
Corporation vs. Inquing, 354 SCRA 119 [2001].)

Jurado
May a contract of sale entered into in violation of a
third party’s right of first refusal be rescinded in order that
such third party can exercise said right?
ANS: In Guzman, Bocaling and Co., Inc. vs. Bonnevie, the
Court upheld the decision of a lower court ordering the
rescission of a deed of sale which violated a right of first
refusal granted to one of the parties therein. The Court
held:
x x x Contract of Sale was not voidable but rescissible.
Under Arts. 1380 to 1381(3) of the Civil Code, a
contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly accorded
the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the
petitioner without recognizing their right of first priority
under the Contract of Lease.
According to Tolentino, rescission is a remedy granted
by law to the contracting parties and even to third persons,
to secure reparations for damages caused to them by a
contract, even if this should be valid) by means of the
restoration of things to their condition at the moment prior
to the celebration of said contract. It is a relief allowed for
the protection of one of the contracting parties and even
third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferent right
created by the contract. Rescission implies a contract
which, even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for reasons
of equity.
In the recent case of Litonjua vs. L&R Corporation, the
Court, also citing the case of Guzman, Bocaling & Co. vs.
Bonnevie, held that the sale made therein in violation of a
right of first refusal embodied in a mortgage contract, was
rescissible.
Thus, the prevailing doctrine, as enunciated in the cited
cases, is that a contract of sale entered into in violation of a
right of first refusal of another person, while valid, is
rescissible. (Rosencor Development Corporation vs.
Inquing, G.R. No. 140479, March 8, 2001.)

Alternative Answer:
ANS: A contract of sale entered into a violation of a third
party’s right of first refusal can be rescinded. In the case of
Guzman, Bocaling and Co., Inc. vs. Bonnevie (206 SCRA
668), the Court held that such contract of sale is not
voidable but rescissible. Under Arts. 1380 to 1381(3) of the
NCC, a valid contract may nonetheless be subsequently
rescinded by reason of injury to third persons, like
creditors. The parties could be validly accorded the status of
creditors.
The parties could be validly accorded the status of
creditors for they had substantial interests that were
prejudiced by the sale of the subject property to another
without recognizing their right of first priority under the
Contract of Lease.

Albano
X and Y entered into a lease contract over a house and
lot of X, the lessor, giving Y, the lessee, the right of first
refusal to purchase the premises in case X decides to sell the
property. When X decided to sell, he offered it to Y for P5M
payable within one (1) year. Since Y could not afford, Y
communicated the inability to pay, hence, X offered it to Z
for P5M payable in four (4) years. Title was later acquired
by Z, thus, be filed an ejectment suit against Y who
discovered the manner of payment. Discuss the
remedy/remedies of Y, if any, as against X and Z. State
whether the action will prosper and why.
ANS. The remedy is to file an action for rescission because
the sale was made in fraud of creditors. In Guzman,
Bocaling & Co. vs. Bonnevie, which is similarly situated
with the case at bar, it was said that the lessee can be
considered a creditor because of the substantial right he
acquired from the contract giving him the right to buy
under equal terms and conditions as are offered to others in
case he cannot avail of such right. (206 SCRA 668 [1992]).

Ulep
FACTS: Bonnevie leased from the estate of Jose Reynoso
two parcels of land with a stipulation on right of first refusal
in case of its sale. Reynoso sold these lots to Guzman,
Bocaling & Co. without notifying Bonnevie, so the latter
filed a complaint for annulment of sale. In answer to the
complaint, Bocaling said that Bonnevie has no legal
personality since he is not a party to the Sale. However, the
trial court sustained Bonnevie and declared the sale void.
This was also affirmed by the Court of Appeals. Is this
correct?
HELD: Yes. Rescission is a remedy granted by law to the
contracting parties and even to third persons to secure
reparation for damages caused to them by a contract, even if
they should be valid, by means of the restoration of things
to their condition at the moment prior to the celebration of
said contract. Rescission implies a contract which, even if
initially valid, produces a lesion or pecuniary damage to
someone that justifies its invalidation for reasons of equity.
 2. Pilipinas Bank vs. IAC, June 30, 1987
Paras 1382
FACTS: HB, Inc. sold to JWD a 5,000-square-meter lot for
P47,000 payable in installments. On many occasions, HB,
Inc. sent letters of demand to pay the balance or unpaid
installments and on each occasion, HB, Inc. granted JWD
extensions and never called attention to the proviso on
“automatic rescission.”
Finally, HB, Inc. wrote a letter to JWD telling that the
contract to sell had been rescinded/cancelled by a notarial
act, to which letter was annexed a “demand for rescission of
contract.” JWD filed a complaint for specific performance
with damages to compel HB, Inc. to execute a deed of sale
in his favor and to deliver to him the title of the lot in
question.
The trial court held that HB, Inc. cannot rescind the
contract to sell because it waived the automatic rescission
clause and by sending letters advising JWD of the balances
due, thus looking forward to receiving payments on it.
Moreover, when JWD made arrangement for the
acquisition of additional 870 square meters, HB, Inc. could
not have delivered the entire area contracted for, so neither
could the buyer (JWD) be liable in default.
HELD: The trial court is correct. There is here a clear
waiver of the stipulated right of “automatic rescission,” as
evidenced by the many extensions granted the buyer by the
seller.
Albano
X and Y entered into a contract of sale over a parcel of
land. X, the owner-seller, reserved the right to rescind in
case Y would not comply. Y failed to comply but X gave
him a series of extensions. Thereafter, he wanted to rescind
the contract. Can he validly do so? Why?
ANS. No more. In Pilipinas Bank vs. IAC, June 30,1987, it
was said that a contractual provision allowing automatic
rescission is valid. However, it can also be waived. If there
was a series of extensions given to the vendee the same can
be considered as a waiver of the contractual provision
allowing automatic rescission.
 3. Siguan vs. Rosa Lim, et. al., G.R. No. 134685, November
19, 1999, 115 SCAD 833
De Leon 1381
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 retroactive effect to
the date when the credit was constituted. (Siguan vs. Lim,
318 SCRA 725 [1999], citing Tolentino, A.M., Civil Code of
the Phils., 1991 Ed., 576-577.)

De Leon 1384
Under Article 1384, only the creditor who brought
action for rescission benefit from the rescission; those who
are strangers to the action cannot benefit from its effects.
(Siguan vs. Lim, 318 SCRA 725 [1999].)

Albano
X has a property. He donated it to Y on March27, 1999.
On March 27, 2000, X incurred an obligation from Z. Can Z
file an action for rescission of the donation after a judgment
is rendered holding X liable? Why?
ANS. No, because at the time of the donation, there was no
credit yet existing. It is a requirement that for rescission to
prosper, the person asking for it has a credit prior to the
alienation. Without any prior existing debt, there can be
neither 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 is
immaterial. Even if the judgment be subsequent to the
alienation, it is merely declaratory, without retroactive
effect to the date when the credit was constituted. (Siquan
vs. Rosa Lim, et al.,G.R. No. 134685, November 19, 1999, 115
SCAD 833).

Albano
X obtains a loan from Y. As security for the payment of
the obligation, X executes a real estate mortgage with the
condition that if X fails to pay Y could foreclose the
mortgage. In case X does not pay the loan, can Y rescind the
contract? Why?
ANS. No. The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no
other legal means to obtain reparation for the same. (Art.
1383, NCC). It must be recalled that in rescission based on
lesion, the cause of action is subordinated to the existence of
that prejudice because it is the raison d’etre as well as the
measure of the right to rescind. (Suria vs. IAC, G.R. No.
73893, June 30, 1987; Siquan, et al. vs. Lim, et al., G. R. No.
134685, November 19, 1999).

ULEP
Under Article 1381 of the Civil Code, contracts entered
into in fraud of creditors may be rescinded only when the
creditors cannot in any manner collect the claims due them.
Also, Article 1383 of the same Code provides that the
action for rescission is but a subsidiary remedy which
cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for
the same. The term “subsidiary remedy” has been defined as
“the exhaustion of all remedies by the prejudiced creditor to
collect claims due him before rescission is resorted to.
It is therefore, essential that the party asking for
rescission prove that he has exhausted all other legal means
to obtain satisfaction of his claim. Petitioner neither alleged
nor proved that she did so. On this score, her action for the
rescission of the questioned deed is not maintainable even if
the fraud charged actually did exist.
 4. Tayag, et. al. vs. CA, et. al., G.R. No. 96053, March 3,
1993
Albano
X bought a car from Y valued at P200,000.00 payable in
three (3) monthly installments. Upon the signing of the
contract, X paid P100,000.00. The balance was payable in
May and June 1993 with an extension of one (1) month. X
failed to pay. Demands were made for the payment, hence,
X paid Y the amount of P10,000.00 in August 1993;
P20,000.00 in September 1993; and P10,000.00 in October
1993. On November 3, 1993, Y notified X that he has
rescinded the contract for X’s failure to pay the balance on
time. Is the action of Y proper? Why?
ANS. No, because when Y accepted and received delayed
payments of installments, though X had been in arrears
beyond the grace period, Y waived the right of rescission.
(Tayag, et al. vs. CA, et al., G.R. No. 96053, March 3, 1993).
 5. House Int’l. Bldg. Tenants Association vs. IAC, June 30,
1987; Bastida vs. Dy Buncio and Co., 93 Phil. 195
Paras 1397
Persons Who May Ask for Annulment
The victim (principal or subsidiary party) may ask for
annulment, not the guilty person or his successor. Reason:
He who comes to equity must come with clean hands.
(Bastida v. Dy Buncio and Co., 93 Phil. 195).

De Leon 1397
Right of a party who has capacity to contract to invoke
the incapacity of the contracting party as a defense against
performance.
Facts: R (owner) leased his factory to E (lessee) for two
years, giving the latter an option to buy the said factory
within the same period. R changed his mind and objected to
the exercise of the option given to E contending that the
option has no valid effect because, being a Spanish citizen, E
has no right to buy the factory under the Constitution.
Issue: Is this contention of R tenable?
Held: No. “To dispute it now on the technical ground that
E, being a Spanish citizen, cannot be given that option, is
more unfair considering the time and effort he has spent in
the transaction. There is no doubt that this objection is but
a mere afterthought motivated by R’s desire to retain the
factory considering its future and the handsome
improvements made thereon by P (E’s partner).
This R cannot do. There are certain legal and moral
considerations that stand on his way. He is barred from
doing so not only by the rule of equity which requires that
whoever goes to court must do so with clean hands but by
the well-known rule of law that he who has capacity to
contract may not invoke the incapacity of the party with
whom he contracted as a defense against performance.”
(Bastida and Ysmael & Co., Inc. vs. Dy Buncio & Co., Inc., 93
Phil. 195 [1953].)

Albano
X mortgaged his land and building to GSIS as security
for the payment of his obligation. Since he failed to pay his
obligation, GSIS foreclosed the mortgage. Centertown, Inc.
was the highest bidder. Since the GSIS was not authorized
to engage in the real estate business, it organized a
corporation known as Towers, Inc.. The Tenants
Association sued the GSIS, Centertown, and Towers for
annulment of the title on the ground that it is void because
it is ultra vires. Will the action prosper? Why?
ANS. No, because the Association was neither a party nor
privy to the contract of sale or assignment. It has therefore
no right to question the contract. (House Int’l- Bldg. Tenants
Assn. vs. IAC, June 30, 1987). The action for the annulment
of contracts may be instituted by all who are thereby
obliged principally or subsidiarily. (Art. 1397, NCC). The
reason for the rule that the person prejudiced can question
the validity of a contract is that, he who comes to court
must come with clean hands. (Bastida vs. Dy Buncio and
Co., 93 Phil. 195).
Albano
A is the owner of a building with about 1,000 tenants.
He borrowed money from the GSIS using the building as
security by way of a real estate mortgage. He failed to pay;
hence, GSIS foreclosed the mortgage with it as the highest
bidder. A failed to redeem it; thus, the sheriff issued a final
sale. GSIS sold the building to XYZ Corporation which was
not authorized to engage in any realty business. The tenants
association of the building questioned the sale as ultra vires.
Will the action prospoer? Why?
ANS: No, because the tenants association cannot question
the validity of the sale. Under the law, the action for
annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily. (Art. 1397, NCC;
House International Bldg. Tenants Assn. vs IAC, June 30,
1987; Atlas Consolidated Mining vs CA, GR No. 54305,
February 14, 1990). Note that the tenants association was
not a party to the contract.

Albano
X and Y entered into a contract of sale. X failed to
deliver the object of the contract, and yet, he was the one
who filed a suit to annul the contract. Will the action
prosper? Why?
Ans: No, because the guilty party cannot file an action for
annulment. He who comes to court must come with clean
hands. (Bastida vs. Dy Buncio and Co., 93 Phil. 195).
 6. Aquino vs. Tanedo, 39 Phil. 517 [1919]; see PAGCOR
vs. Court of Appeals, 231 SCRA 354 [1994]
Paras 1380
Rescission Defined
Supreme Court:
It is a relief to protect one of the parties or a third
person from all injury and damages which the contract may
cause, to protect some preferential right. (See Aquino v.
Tañedo, 39 Phil. 517).
(NOTE: Even a voidable contract may be rescinded, for
example, by prejudiced creditors. This is particularly true if
the injured party does not care to ask for annulment.)

Mutual Dissent
Query: Suppose the parties to a contract mutually agreed to
cancel the contract, is this “rescission” properly so-called?
ANS.: No. Of course, in a loose sense “rescission” may be
used here. But strictly speaking, this is “mutual backing
out,” and not the rescission referred to in Art. 1380 of the
new Civil Code. In mutual withdrawal, it is the will of the
parties that constitutes the basis, whereas in rescission
(properly called), it is the law that constitutes the basis.
Authority:
“The rescission of the contract between the plaintiff and the
defendant was not originated by any of the causes specified
in Arts. 1291 and 1292 (now Arts. 1381 and 1382 of the new
Civil Code), nor is it a relief for the purposes sought by
these articles. It is simply another contract for the
dissolution of the 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 of the new Civil Code) which is not applicable.”
(Aquino v. Tañedo, 39 Phil. 517, which was about a sale
mutually cancelled by both parties. A question arose as to
whether the buyer had to return the fruits, said obligation
being required in an ordinary case for rescission. Here, the
Court said that the duty to return the fruits depended on
the agreement of the parties and not on the legal provisions
on rescission, and
this is so, even if the parties had erroneously referred to
their
act as one of rescission.)

De Leon 1385
Applicability of Article 1385 to contracts “rescinded” by
mutual consent.
Facts: B, on account of having purchased lands from S, took
possession of the same and collected their products.
Subsequently, B and S, by virtue of another contract,
“rescinded” the sale, and as a result thereof, B returned the
lands to S who, in turn, bound himself to return to B the
part of the price that the latter has paid.
Issue: Is B obliged to return to S the products of the land
that B collected during his possession?
Held: No. Rescission, in the light of Articles 1381, 1382, and
1385, 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 any injury and
damage the contract may cause, or to protect some
incompatible and preferential rights created by the
contract. Article 1385 refers to contracts that are rescissible
in accordance with law in the cases expressly fi xed thereby
but does not refer to contracts that are rescinded by mutual
consent and for the mutual convenience of the contracting
parties.
The rescission in question did not originate in any of
the causes specified in Articles 1381 and 1382, nor is it any
relief for the purposes sought by these articles. Its effects
should be determined by the agreement of the parties or by
the application of other legal provisions not by Article 1385.
The possession of B, until the contract of sale was
dissolved, and the lands returned by him, was in good faith.
As such possessor in good faith, he is entitled to the fruits
received before his possession was legally interrupted (Art.
541.), and, therefore, he is not obliged to return them to B
in the absence of any covenant. (Aquino vs. Tanedo, 39 Phil.
517 [1919]; see PAGCOR vs. Court of Appeals, 231 SCRA 354
[1994].)
 7. Gigante vs. Republic Savings Bank, 26 SCRA 328 [1968]
De Leon 1387
Purchaser at auction sale of property of his judgment
debtor brings suit against latter’s son for rescission of
transfer of the same property made by the father to the son.
Facts: The house in question was originally entered in the
assessment rolls in the name of S, judgment debtor of C to
whom the house was sold at public auction pursuant to a
writ of execution. Later, it was registered in the name of B
son of S who mortgaged it to a bank to secure the payment
of a loan. The bank foreclosed the mortgage and bought the
land together “with all the buildings and improvements”
thereon.
C charges that any transfer by from S to B is fictitious,
fraudulent and null and void and claims damages against B
and the Bank.
Issue: Would the action by C for rescission of the transfer of
the house from S to B and the claim for damages prosper?
Held: No. The bank’s registered mortgage is superior to the
judgment and levy and sale in favor of C. Furthermore, S is
not a party to the suit against B and the bank. S is an
indispensable party. For any decision on either action
would affect him. He is entitled to be heard, to defend the
validity of the transfer to his son, B. (Gigante vs. Republic
Saving Bank, supra.)
 8. Gorospe vs. Santos, 69 SCRA 191 [1976]
De Leon 1397
Right of mortgagee to question the transfer by
mortgagor of his right of redemption.
Facts: D, mortgagor, transferred his right to redeem an
extrajudicially foreclosed property to B. C, the mortgagee-
purchaser, questions the redemption made by B, claiming
that the assignment of the right to redeem was simulated
and fictitious.
Issue: Has C a cause of action to challenge the transfer by D
of his right to redeem to B?
Held: No. Even assuming that the transfer was fi ctitious,
the same could not affect the mortgagee nor cause him any
damage. It matters not to him that the transfer was or was
not fraudulently executed. (Gorospe vs. Santos, 69 SCRA 191
[1976].)