Saturday, July 30, 2011

Rescission of contract defined and classified - G.R. No. 185440

G.R. No. 185440


"Second. Invoking the RTC ruling, the Lalicons claim that under Article 1389 of the Civil Code the “action to claim rescission must be commenced within four years” from the time of the commission of the cause for it.

But an action for rescission can proceed from either Article 1191 or Article 1381. It has been held that Article 1191 speaks of rescission in reciprocal obligations within the context of Article 1124 of the Old Civil Code which uses the term “resolution.” Resolution applies only to reciprocal obligations such that a breach on the part of one party constitutes an implied resolutory condition which entitles the other party to rescission. Resolution grants the injured party the option to pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of damages in either case.

Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code, which is a subsidiary action, not based on a party’s breach of obligation.[4] The four-year prescriptive period provided in Article 1389 applies to rescissions under Article 1381.


Here, the NHA sought annulment of the Alfaros’ sale to Victor because they violated the five-year restriction against such sale provided in their contract. Thus, the CA correctly ruled that such violation comes under Article 1191 where the applicable prescriptive period is that provided in Article 1144 which is 10 years from the time the right of action accrues. The NHA’s right of action accrued on February 18, 1992 when it learned of the Alfaros’ forbidden sale of the property to Victor. Since the NHA filed its action for annulment of sale on April 10, 1998, it did so well within the 10-year prescriptive period.

Third. The Court also agrees with the CA that the Lalicons and Chua were not buyers in good faith. Since the five-year prohibition against alienation without the NHA’s written consent was annotated on the property’s title, the Lalicons very well knew that the Alfaros’ sale of the property to their father, Victor, even before the release of the mortgage violated that prohibition.

As regards Chua, she and a few others with her took the property by way of mortgage from Victor in 1995, well within the prohibited period. Chua knew, therefore, based on the annotated restriction on the property, that Victor had no right to mortgage the property to her group considering that the Alfaros could not yet sell the same to him without the NHA’s consent. Consequently, although Victor later sold the property to Chua after the five-year restriction had lapsed, Chua cannot claim lack of awareness of the illegality of Victor’s acquisition of the property from the Alfaros.

Lastly, since mutual restitution is required in cases involving rescission under Article 1191,[5] the NHA must return the full amount of the amortizations it received for the property, plus the value of the improvements introduced on the same, with 6% interestper annum from the time of the finality of this judgment. The Court will no longer dwell on the matter as to who has a better right to receive the amount from the NHA: the Lalicons, who paid the amortizations and occupied the property, or Chua, who bought the subject lot from Victor and obtained for herself a title to the same, as this matter was not raised as one of the issues in this case. Chua’s appeal to the Court in a separate case[6] having been denied due course and NHA failing to file its own petition for review, the CA decision ordering the restitution in favor of the Lalicons has now become final and binding against them."