AT A GLANCE:

According to the principle laid down in Article 1315 of the Civil Code, a contract is perfected by the consent of the contracting parties upon the object and the cause of the obligation. However, under Article 1159 of the Civil Code once a contract is perfect, it becomes binding and is recognized as law between the parties.

Does Signing a Contract Make It Final?

Not necessarily. According to the principle laid down in Article 1315 of the Civil Code, a contract is perfected by the consent of the contracting parties upon the object and the cause of the obligation. However, under Article 1159 of the Civil Code once a contract is perfect, it becomes binding and is recognized as law between the parties.

Thus, signing a contract generally creates a binding obligation, but the law recognizes circumstances under which a contract may subsequently be terminated, resolved, rescinded, annulled, or declared void. 

When May a Contract Be Cancelled?

1. Through Mutual Agreement

The parties may agree on the terms and conditions governing their contractual relationship, provided that these are not contrary to law, morals, good customs, public order, or public policy. Thus, the parties may agree to modify or terminate their contractual relationship, subject to applicable law and the rights of third persons. (Article 1306, Civil Code)

The contract must nevertheless bind both contracting parties, and its validity or compliance cannot be left to the will of only one of them. (Article 1308, Civil Code)

2. Through Resolution Under Article 1191

In reciprocal obligations, the power to rescind is implied in case one of the obligors fails to comply with what is incumbent upon him or her. The injured party may choose between fulfillment and rescission of the obligation, with payment of damages in either case. (Article 1191, Civil Code)

The Supreme Court has explained that the “rescission” contemplated under Article 1191 is more accurately distinguished as resolution and is available for a substantial and fundamental breach of a reciprocal obligation, rather than a slight or casual breach. (Universal Food Corporation v. Court of Appeals, G.R. No. L-29155, May 13, 1970).

3. Through Rescission Under Articles 1380 et seq.

Rescission in its technical sense is governed by Articles 1380 to 1389 of the Civil Code. Article 1381 identifies contracts that are rescissible, including those entered into by guardians or representatives of absentees under the circumstances specified by law, those undertaken in fraud of creditors, and those involving things under litigation entered into under the circumstances provided by law.

This rescission is distinct from the resolution contemplated under Article 1191. The Supreme Court has held that rescission under Articles 1380 et seq. is a subsidiary remedy based on lesion or pecuniary prejudice, whereas resolution under Article 1191 is based on substantial breach of a reciprocal obligation. (E.D.S. Manufacturing, Inc. v. Healthcheck International, Inc., G.R. No. 162802; Universal Food Corporation v. Court of Appeals, G.R. No. L-29155, May 13, 1970) 

4. Through Annulment

A contract may be annulled when it is voidable under Article 1390 of the Civil Code. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

1. Those where one of the parties is incapable of giving consent to a contract;
2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (Article 1390, Civil Code)

5. When the Contract is Void

Under Article 1409 of the Civil Code, the following contracts are inexistent and void from the beginning. 

1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
2. Those which are absolutely simulated or fictitious;
3. Those whose cause or object did not exist at the time of the transaction;
4. Those whose object is outside the commerce of men;
5. Those which contemplate an impossible service;
6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;
7. Those expressly prohibited or declared void by law.

Contracts falling under Article 1409 cannot be ratified, nor can the right to set up the defense of illegality be waived. (Article 1409, Civil Code)

Can a Party Cancel a Contract Simply Because It Has Become Disadvantageous?

Generally, no. Under Article 1159 of the Civil Code, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

Article 1308 further provides that the contract must bind both contracting parties, and its validity or compliance cannot be left to the will of only one of them. Accordingly, the fact that a contract has become disadvantageous to one party does not, by itself, authorize that party to disregard the contractual obligations.

Where a reciprocal obligation is involved, Article 1191 provides the injured party with the remedies of fulfillment or rescission, with damages in either case, when the other party fails to comply with what is incumbent upon him or her. The Supreme Court has held that the breach must be substantial and fundamental, rather than slight or casual, before rescission under Article 1191 may be granted.  (Universal Food Corporation v. Court of Appeals, G.R. No. L-29155, May 13, 1970)

On the other hand, Articles 1380 et seq. govern rescission in cases established by law; Article 1390 governs voidable contracts subject to annulment; and Article 1409 identifies contracts that are void from the beginning. These remedies arise from different legal grounds and should not be treated as interchangeable.

Thus, a party cannot unilaterally cancel a perfected contract merely because it has become unfavorable or disadvantageous. The availability of termination, resolution, rescission, annulment, or declaration of nullity depends upon the specific contractual or legal ground applicable to the agreement.

Related article: What are Exemplary or Corrective Damages?

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.

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