Compromise Agreements and Rescission: Lessons from a Supreme Court Ruling

A compromise agreement is meant to end disputes, not prolong them. But when one side stops performing its obligations, the other side may be left with no choice but to seek rescission. In a 2021 ruling, the Supreme Court laid down clear guidance on when a compromise agreement can be rescinded for non-performance — and why parties should draft these agreements with care.

What Is a Compromise Agreement?

Under Article 2028 of the Civil Code, a compromise agreement is a contract where parties make reciprocal concessions to avoid or end litigation. Courts encourage these agreements as an efficient and amicable way to settle disputes without prolonged litigation.

Once approved by a court, a compromise agreement takes on the effect of a final judgment, a principle known as res judicata. This means the agreement is binding and conclusive between the parties. However, that finality does not make the agreement immune from rescission when one party fails to comply.

The Rule on Rescission: Article 2041

Article 2041 of the Civil Code provides the remedy: if one party fails and refuses to abide by the compromise agreement, the other party may either enforce the agreement or regard it as rescinded and insist on their original demand.

This provision balances two important values: the sanctity of contracts and fairness in their execution. A party who has complied with their obligations should not be left without recourse when the other side reneges.

The Case: A Family Dispute Over Shares and Properties

The case involved Emilio Solco and his brother Francis, along with other family members, who were locked in disputes over shares in St. Francis Plaza Corporation (SFPC) and other properties. To settle the matter, the parties executed a comprehensive compromise agreement on May 4, 2013.

Under the agreement, Emilio was obligated to execute affidavits of desistance to terminate criminal cases and to make certain payments. Francis and the other family members, in turn, were to transfer shares and settle property claims.

The agreement fell apart when Emilio failed to execute the required affidavits of desistance and did not make the stipulated payments. The case moved from the Regional Trial Court to the Court of Appeals, and eventually to the Supreme Court.

The Supreme Court's Ruling

The Supreme Court ruled in favor of rescission, applying Article 2041 squarely to the facts. The Court held that Emilio's failure to execute the affidavits of desistance over a long period constituted a substantial breach that defeated the very purpose of the agreement.

The Court also noted that the Department of Justice had already dismissed the criminal cases, making Emilio's obligation to execute affidavits of desistance legally impossible. This further justified rescinding the unimplemented portions of the agreement.

The ruling underscores an important point: a compromise agreement is not a mere formality. Substantial compliance is expected, and a material breach can unravel the agreement, allowing the aggrieved party to return to their original claims.

Practical Takeaways

• Draft clear terms and timelines. Specify each party's obligations, deadlines, and the consequences of non-compliance. Vague terms invite disputes.
• Monitor compliance actively. Do not assume the other party will perform. Track obligations and address delays early.
• Consider a separability clause. A clause stating that implemented portions survive rescission can protect completed obligations from being undone.
• Act promptly on breach. If the other party fails to perform, decide whether to enforce the agreement or rescind it. Delay can complicate your position.
• Understand that rescission is not automatic. Courts will examine whether the breach is substantial and whether it defeats the purpose of the agreement.

Frequently Asked Questions

Can a compromise agreement be rescinded? Yes. Under Article 2041 of the Civil Code, if one party fails to abide by the agreement, the other party may enforce it or treat it as rescinded.

Does rescission affect all parts of the agreement? Not necessarily. A separability clause can protect implemented portions from being affected by the rescission of unimplemented parts.

What should parties consider before signing a compromise agreement? Ensure the terms are clear, the timelines are realistic, and the consequences of non-compliance are stated in writing.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.