Explanation of Article 112
The default is that rescission removes the effect of the contract both in relation to the parties and the substance of the contract; however, this article and the following article (113) include two exceptions to this default; the first relates to the parties and the second relates to the substance of the contract. The default is that the effect of rescission is not limited to the contracting parties only; rather, it extends to third parties. If the contract is rescinded, its effect is nullified for the contracting parties and third parties retroactively if it is an instantaneous contract, and from the time of rescission if it is a time-based contract. For instance, if the contract was a sale and the buyer established a real right in the sold item, the seller retrieves the item upon rescission free from the real rights established by the buyer. Similarly, if the buyer sold the item to another, the seller retrieves it from the second party. However, the article clarifies that this effect does not extend to the special successor of either party; neither contracting party can invoke rescission against the successor of either party concerning any real right established in the subject matter of the contract, whether through ownership transfer, usufruct right, mortgage, or other real rights. The article stipulates two conditions for protecting the successor upon rescission of the contract: The first condition: The successor must be a special successor, such as a buyer or mortgagee from one of the contracting parties, a beneficiary of a usufruct right, or a legatee of a specific item. As for the general successor, the effect of the contract in terms of rights and obligations extends to them as it does to the contracting party themselves. The second condition: The right must be acquired in good faith, and the successor is considered in good faith based on what is established in article (86) regarding nullification - since rescission is akin to nullification in this context if the successor, at the time of contracting, was unaware of the reason leading to the rescission of their predecessor's contract and could not have known even if they exercised the diligence expected under the circumstances from a reasonable person. This ruling is based on two considerations: The first consideration: Although rescission has a retroactive effect, the right of the third party takes precedence because they acquired the right at a time when the contract was producing its effects, and rescission is an incident to the contract. The second consideration: This achieves stability in transactions; if this effect extended and continued, it would lead to transaction instability, and no person would be safe from having the item taken from them or their right nullified on the grounds that their predecessor or the one before them acquired the right through a contract that was subsequently rescinded. Contrary to contract nullification, where the inability to invoke it is limited to the special successor of the contracting party if they acquired a real right in exchange in good faith, the scope of protection for the special successor of the contracting party whose contract was rescinded extends to include anyone who acquired a right from their predecessor on a specific item, whether through exchange or donation, such as the buyer, the donee, the mortgagee, the beneficiary of a usufruct right, and the legatee of a specific item. The difference between rescission and nullification is evident; the former is an incident to the contract, whereas the latter accompanies the contract from its formation. If the subject of the real right is real estate, the contracting party can invoke it against the successor if they acquired the right after the annotation of the rescission lawsuit in the real estate register, as this is considered negligence on their part in verifying the property's freedom from third-party rights. This is stipulated in article (17) of the Real Estate Registration System, which states that the annotation of the lawsuits referred to in article sixteen of the system results in any right established by a final judgment in these lawsuits being binding on those whose rights were established or whose data was recorded in the real estate register after the mentioned annotation, provided the judgment is registered within (ninety) days from the date the judgment became final.
Related To
Article 112
Termination of a contract may not be invoked against the particular successor of a contracting party if the successor acquires in good faith a right in rem.