Rescission (vs. resolution) of contract

If the heirs of a lot buyer were evicted from the lot because of a final judgment based on a right prior to the sale (i.e., the seller did not validly acquire the lot from the person who sold the lot to the seller), should the evicted heirs file an action for rescission under article 1381 or an action for rescission/resolution under Article 1191? Within what period should the appropriate action be filed? Should the prescriptive period be four years as provided under Article 1389 of the Civil Code, which states that “the action to claim rescission must be commenced within four years”? Or should the prescriptive period be 10 years as provided under Article 1144 of the Civil Code, which states that actions “upon a written contract” must be brought “within 10 years from the date the right of action accrues”?

In Heirs of Sofia Quirong, etc. vs. Development Bank of the Philippines, G.R. No. 173441, December 3, 2009, the late Emillo Daloppe left a parcel of land to his wife Felisa and nine children. To enable one of the children (Rosa Dalope-Funcion) to get a loan from the Development Bank of the Philippines (DBP), Felisa sold the parcel of land to Funcions. The Funcions failed to pay the loan. DBP subsequently foreclosed the mortgage and made a conditional sale of the land to Sofia Quirong for PhP78,000. In their contract of sale, Sofia Quirong waived any warranty against eviction. The contract provided that the DBP did not guarantee possession of the property and that it would not be liable for any lien or encumbrance on the same.  Quirong gave a down payment of P14,000.00.

Two months after the conditional sale to Quirong, Felisa and her eight other children subsequently filed an action for partition and declaration of nullity of documents with damages against DBP and the Funcions before the Regional Trial Court (RTC) of Dagupan City. Notwithstanding the suit, the DBP executed a deed of absolute sale of the subject lot in Sofia Quirong’s favor. The deed of sale carried substantially the same waiver of warranty against eviction and of any adverse lien or encumbrance.

Sofia Quirong having since died, her heirs filed an answer in intervention in which they asked the RTC to award the lot to them and, should it instead be given to the Dalopes, to allow the Quirong heirs to recover the lot’s value from the DBP. Because the heirs failed to file a formal offer of evidence, the trial court did not rule on the merits of their claim to the lot and, alternatively, to relief from DBP.

The RTC rendered a decision, declaring DBP’s sale to Sofia Quirong valid only with respect to the shares of Felisa and Rosa Funcion in the property. It declared Felisa’s sale to the Funcions, the latter’s mortgage to the DBP, and the latter’s sale to Sofia Quirong void insofar as they prejudiced the shares of the eight other children of Emilio and Felisa who were each entitled to a tenth share in the subject lot.

The Quirong heirs then filed an action against DBP before the RTC of Dagupan City for rescission of the contract of sale between Sofia Quirong, their predecessor, and the DBP and praying for the reimbursement of the price of P78,000.00 that she paid the bank plus damages. The heirs alleged that they were entitled to the rescission of the sale because the decision in Civil Case D-7159 stripped them of nearly the whole of the lot that Sofia Quirong, their predecessor, bought from DBP. DBP filed a motion to dismiss the action on ground of prescription and res judicata but the RTC denied their motion.

After hearing the case, the RTC rendered a decision, rescinding the sale between Sofia Quirong and DBP and ordering the latter to return to the Quirong heirs the PhP78,000.00 Sofia Quirong paid the bank. On appeal by DBP, Court of Appeals (CA) reversed the RTC decision and dismissed the heirs’ action on the ground of prescription. The CA concluded that, reckoned from the finality of the December 16, 1992 decision in Civil Case D-7159, the complaint filed on June 10, 1998 was already barred by the 4-year prescriptive period under Article 1389 of the Civil Code. The Quirong heirs filed a motion for reconsideration of the decision but the CA court denied it.

According to DBP, the prescriptive period should be 4 years as provided under Article 1389 of the Civil Code, which provides that “the action to claim rescission must be commenced within four years.” On the other hand, the Quirong heirs argue that it should be 10 years as provided under Article 1144 which states that actions “upon a written contract” must be brought “within 10 years from the date the right of action accrues.”

The Supreme Court agreed with DBP that the prescriptive period was 4 years because the action involved was one for rescission under Article 1381. The Court distinguished between a rescission under Article 1381 and a rescission under Article 1191:

The remedy of “rescission” is not confined to the rescissible contracts enumerated under Article 1381. Article 1191 of the Civil Code gives the injured party in reciprocal obligations, such as what contracts are about, the option to choose between fulfillment and “rescission.” Arturo M. Tolentino, a well-known authority in civil law, is quick to note, however, that the equivalent of Article 1191 in the old code actually uses the term “resolution” rather than the present “rescission.” The calibrated meanings of these terms are distinct.

“Rescission” is a subsidiary action based on injury to the plaintiff’s economic interests as described in Articles 1380 and 1381. “Resolution,” the action referred to in Article 1191, on the other hand, is based on the defendant’s breach of faith, a violation of the reciprocity between the parties. As an action based on the binding force of a written contract, therefore, rescission (resolution) under Article 1191 prescribes in 10 years. Ten years is the period of prescription of actions based on a written contract under Article 1144.

The distinction makes sense. Article 1191 gives the injured party an option to choose between, first, fulfillment of the contract and, second, its rescission. An action to enforce a written contract (fulfillment) is definitely an “action upon a written contract,” which prescribes in 10 years (Article 1144). It will not be logical to make the remedy of fulfillment prescribe in 10 years while the alternative remedy of rescission (or resolution) is made to prescribe after only four years as provided in Article 1389 when the injury from which the two kinds of actions derive is the same.

The Court noted that the action filed by the Quirong heirs was an action for rescission (not resolution):

Here, the Quirong heirs alleged in their complaint that they were entitled to the rescission of the contract of sale of the lot between the DBP and Sofia Quirong because the decision in Civil Case D-7159 deprived her heirs of nearly the whole of that lot. But what was the status of that contract at the time of the filing of the action for rescission? Apparently, that contract of sale had already been fully performed when Sofia Quirong paid the full price for the lot and when, in exchange, the DBP executed the deed of absolute sale in her favor. There was a turnover of control of the property from DBP to Sofia Quirong since she assumed under their contract, “the ejectment of squatters and/or occupants” on the lot, at her own expense.

Actually, the cause of action of the Quirong heirs stems from their having been ousted by final judgment from the ownership of the lot that the DBP sold to Sofia Quirong, their predecessor, in violation of the warranty against eviction that comes with every sale of property or thing. Article 1548 of the Civil Code provides:

Article 1548. Eviction shall take place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of thing purchased.

x x x x

With the loss of 80% of the subject lot to the Dalopes by reason of the judgment of the RTC in Civil Case D-7159, the Quirong heirs had the right to file an action for rescission against the DBP pursuant to the provision of Article 1556 of the Civil Code which provides:

Article 1556. Should the vendee lose, by reason of the eviction, a part of the thing sold of such importance, in relation to the whole, that he would not have bought it without said part, he may demand the rescission of the contract; but with the obligation to return the thing without other encumbrances than those which it had when he acquired it. x x x

Finally, the Court concluded that the action for rescission was barred by prescription as it was filed beyond the 4-year prescriptive period:

And that action for rescission, which is based on a subsequent economic loss suffered by the buyer, was precisely the action that the Quirong heirs took against the DBP. Consequently, it prescribed as Article 1389 provides in four years from the time the action accrued. Since it accrued on January 28, 1993 when the decision in Civil Case D-7159 became final and executory and ousted the heirs from a substantial portion of the lot, the latter had only until January 28, 1997 within which to file their action for rescission. Given that they filed their action on June 10, 1998, they did so beyond the four-year period.

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