1. RESCISSION OF RECIPROCAL OBLIGATIONS UNDER ART.
1191 Equitable Determination: If the contract becomes evidently inequitable, courts
may decide what is fair under the circumstances.
General Rule: Example: A loan contract allowing the lender to increase or decrease interest
The power to rescind obligations is implied in reciprocal contracts when one party rates at its discretion violates mutuality.
fails to fulfill their duty. (Article 1191) Escalation Clauses:
o Not automatically invalid but must not be purely potestative
Remedies for the Injured Party (dependent solely on one party's discretion).
1. Fulfillment of the obligation with payment of damages o Must be based on reasonable and valid standards.
2. Rescission of the obligation with payment of damages
3. Rescission after fulfillment (if fulfillment becomes impossible) Judicial Interpretation
Allied Banking Corp. v. CA (G.R. No. 124290, January 16, 1998)
Rescission Process Contracts have the force of law between the parties.
General Rule: The court shall decree rescission if claimed. Mutuality ensures equality—one party cannot be bound while the other is
Exception: If there is just cause, the court may authorize a grace period. free.
A contract allowing one party to unilaterally decide fulfillment is void.
When Rescission Is Not Permitted
Slight or casual breaches do not justify rescission. BAR QUESTION (2016)
Only substantial and fundamental breaches that defeat the purpose of the Scenario:
contract allow rescission. B Bank, a large universal bank, regularly extends revolving credit lines to business
establishments under what it terms as socially responsible banking and private
Article 1191 Does Not Apply To: business partnership relations.
Partnership contracts where a partner fails to contribute their full share.
(Articles 1786 & 1788) All loans extended to clients include a common “Escalation Clause”, which states:
Sales of real or personal property by installments, which are governed by "B Bank hereby reserves its right to make successive increases in interest rates in
Recto Law & Maceda Law. accordance with the bank’s adopted policies as approved by the Monetary Board;
Compromise agreements, as Article 2041 allows the affected party to provided that each successive increase shall be with the written assent of the depositor."
consider the contract rescinded and revert to the original demand without the
need for a rescission action. X, a regular client of the bank, argues that the Escalation Clause is:
Unfair and unconscionable
time that influences an obligation due to a juridical act, either by: Contrary to law, morals, public policy, and customs
1. Suspending its demandability (obligation is not yet due)
investor, sold tobacco leaves to Homer for delivery within a month, but the Rule on the Issue and Explanation
delivery period was not guaranteed. Due to transportation issues and
government red tape, Gary could only deliver after 30 days. Homer refused to Suggested Answer:
accept the delivery. The escalation clause is valid because each successive increase requires the
As a lending investor, Gary loaned Isaac ₱1,000,000, payable within two years. written assent of the depositor.
Isaac promised to deliver his Toyota Innova as security within seven days but This stipulation does not violate the principle of mutuality of contracts since
failed to do so. Gary then demanded immediate payment before the two-year the depositor’s explicit consent is required for any increase in interest rates.
term ended. The clause would have been void if the depositor’s consent was presumed
Issues: before the interest rate increase.
1. Was Homer justified in refusing to accept the tobacco leaves?
2. Can Gary compel Isaac to pay his loan before the two-year period ends? 8.PRESUMPTION OF FRAUD
Suggested Answers:
1. No. Homer was not justified in refusing the delivery since the period was not PRESUMED IN FRAUD OF CREDITORS
Third-Party Decision (Article 1309): A contract’s fulfillment may depend on a Article 1387 of the Civil Code
third person, but their decision is not binding until communicated to both parties. General Rule:
1. Chance: A contract’s fulfillment may be left to chance.
All contracts where a debtor alienates property by gratuitous title are Modes of Extinguishment of Obligations
presumed fraudulent when the donor did not reserve sufficient property to 1. Payment or performance
pay all debts contracted before the donation. 2. Loss of the thing due
Alienations by Onerous Title: 3. Condonation or remission of debt
These are also presumed fraudulent when made by persons: 4. Confusion or merger
o Against whom some judgment has been rendered in any instance, or 5. Compensation
o Against whom some writ of attachment has been issued. 6. Novation
Important Notes: 7. Annulment, rescission, fulfillment of a resolutory condition, and
The decision or attachment does not need to refer to the property alienated. prescription
The decision or attachment does not need to have been obtained by the party
seeking rescission. 1. PAYMENT
In addition to these legal presumptions, fraud may be proven by any other Definition
means recognized by the law of evidence. Payment means not only the delivery of money but also the performance of an
obligation in any other manner. (Article 1232)
Siguan v. Lim
G.R. No. 134685, November 19, 1999 Requisites of Payment
Chief Justice Davide, Jr. 1. Integrity (Must be complete and regular)
Acción Pauliana (Action to Rescind Contracts in Fraud of Creditors) 2. Tendered by the proper party
For acción pauliana to prosper, the following requisites must be present: 3. Paid to the proper person
1. The plaintiff has a prior credit before the alienation (even if demandable later). 4. Party must have the capacity to pay
2. The debtor has subsequently conveyed a patrimonial benefit to a third person. 5. Recipient must have the capacity to receive
3. The creditor has no other legal remedy to satisfy the claim. 6. Identity of prestation must be preserved
4. The impugned act is fraudulent. 7. Tendered in the proper place
5. If the third person received the property by onerous title, they must have
been an accomplice in the fraud. 1. Integrity of Payment (Must Be Complete and Regular)
A debt is not considered paid unless the thing or service due has been
General Rule on Rescission completely delivered or rendered. (Article 1233)
Rescission requires the existence of creditors at the time of the fraudulent
alienation. General Rule
A prior existing debt must be proven as a basis for judicial rescission. Partial performance = Breach
Without a prior debt, there can be neither injury nor fraud. A creditor can refuse partial performance
The credit of the plaintiff in acción pauliana must exist before the alienation. A debtor cannot demand to make partial payments
The date of judgment enforcing the credit is immaterial. Even if the judgment
is issued after the alienation, it has retroactive effect to when the credit was Exceptions
constituted. 1. Partly liquidated debts (Article 1248)
2. Substantial performance in good faith (Article 1234)
o If an obligation has been substantially performed in good faith, the
Application of Presumption of Fraud
obligor may recover as though there had been full compliance,
To apply the presumption, it must be proven that the donor did not leave
minus damages suffered by the obligee.
adequate property for creditors to collect their claims existing before the
3. Waiver by the creditor (Article 1235)
donation.
o If the creditor accepts incomplete performance without protest, the
In this case, the petitioner's credit arose a year after the donation, meaning:
obligation is considered fully complied with.
o The petitioner was not prejudiced by the donation.
4. Application of Payment (Article 1254)
o The alienation cannot be considered fraudulent as to the petitioner.
2. Tendered by the Proper Party
9.Payment The creditor is not required to accept payment from a third person with no
EXTINGUISHMENT OF OBLIGATIONS (CIVIL CODE, ARTS. 1231-1304) interest in the obligation unless there is an agreement to the contrary. (Article
1236)
Who Can Make Payment?
1. The debtor or an authorized representative
2. A third person authorized by the parties to pay
3. A third person with an interest in the obligation (e.g., guarantor, surety,
creditor paying a preferred creditor)
Legal Basis: Article 1186, Civil Code of the Philippines
A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
Case Law: International Hotel Corporation v. Francisco B. Joaquin, Jr. and Rafael
Suarez G.R. No. 158361, April 10, 2013
Ponente: Justice Bersamin
For the doctrine of constructive fulfillment of a suspensive condition to apply, two
requisites must be present:
1. The intent of the obligor to prevent the fulfillment of the condition.
2. The actual prevention of the fulfillment of the condition.
A mere intention to prevent the fulfillment of the condition, or the placing of ineffective
obstacles to its compliance, is insufficient. There must be actual prevention of the
fulfillment of the condition.
This doctrine is intended to prevent an obligor from taking advantage of their own wrongful
acts to evade the obligation that would have arisen had the condition been fulfilled.
