Understanding Contract Rescission: Legal Grounds and Procedures

Rescission of the Contract

Rescission is an exceptional and subsidiary measure. Article 1290 of the Civil Code states that validly concluded contracts can be terminated in cases provided by law. Furthermore, Article 1294 of the Civil Code provides that the termination action is secondary; it can only be exercised when the injured party has no other legal remedy to obtain damages. Nothing prevents this action from being exercised jointly with another, in the event that the latter is not successful.

Contracts Subject to Rescission

Article 1291 of the Civil Code defines the contracts subject to rescission, which include:

• a) Those that guardians cannot conclude without court approval, provided that the people they represent have been injured by more than a quarter of the value.
• b) Contracts signed on behalf of the absent, provided they have been injured by more than a quarter of the value of the items involved.
• c) Contracts held in fraud of creditors, when they cannot otherwise collect what is owed.
• d) Agreements relating to items held by the defendant without the knowledge and approval of the litigants or the competent judicial authority.
• e) Any others specially provided by law.

Entitlement to Contract Termination

Right of Action

The right of action belongs solely to the injured party and their successors. Section 1295.1 of the Civil Code stipulates that the party seeking a refund must be able to return what was required on their part. This condition does not apply to the termination of contracts in fraud of creditors or the disposition of infringing items. In both cases, the legitimate parties have received nothing, and therefore, nothing must be repaid.

Passive Legitimation

Passive legitimation applies to those who were parties to the contract, as well as their respective successors and purchasers in bad faith.

Restitution and Compensation

Termination requires the repayment of items under contract, including their fruits and the price of their interests. Alternatively, the defendant can choose to prevent termination by paying compensation for damages. The rescissory action becomes a claim for damages when items covered by the contract are lawfully within the power of third parties who have not acted in bad faith, as stated in Article 1295.2 of the Civil Code.

It should be noted that third parties who are not part of the voidable contract—such as sub-acquirers—are protected if they act in good faith and hold legal ownership. The deadline for exercising this legal action is four years.