Recently, a ruling by the Supreme Court (Agreement and Ruling N° 6, dated 02/20/2024) has clearly, concisely, and didactically confirmed certain classical concepts that law students traditionally learn but which, in recent times, particularly with the rise of real estate transactions, seem to have been forgotten to the point of being used interchangeably when they are not synonymous.
These terms are rescission and resolution of contracts. Although the tittle of this article specifically refers to sales contracts, rescission and resolution apply generally, that is, to all types of contracts as mechanism for their termination.
Lawyers often refrain from explaining the differences between these terms to clients, perhaps to avoid overwhelming them with technicalities. This may have contributed to their indiscriminate use.
What did the Supreme Court recently say about Recession and Resolution?
The Supreme Court confirmed that, under our current positive law, specifically the Civil Code, both terms are different. On one hand, they refer to recission (art. 718) as “The legal power vested in the parties to a contract to unilaterally terminate the contractual relationship without the need to invoke a justified cause,” clarifying that “it is used as a mode of termination of contracts by the common will of the parties, without the expression of a specific cause or reason without prejudice to certain cases regulated by law of unilateral rescission”
We have, then, that, except for the cases of unilateral rescission provided by law, rescission requires the common agreement of the parties to the contract to put an end to the contract.
Now, resolution (Arts. 722 et seq.), like rescission, also constitutes a means of terminating contracts; however, unlike the latter, resolution requires a breach of the obligations or the subsequent impossibility of fulfilling them due to the fault of the debtor of the same. Thus, what determines that we are dealing with a resolution of a contract is that “the extinction of the same is motivated by a breach.”
What was the case that motivated the Supreme Court’s ruling?
In this case, the seller of a property in installments had requested the rescission of a sales contract and its consequent recovery, basing their argument on a clue in the sales contract whereby they had agreed on the rescission of the contract for breach. They also noted that it had been agreed that the amount paid by the defendant would remain as rent and not as price and that, by the virtue of the principle of autonomy of will, fully in force in our Civil Code, one must abide by what was agreed in the sales contract.
Thus, the seller obtained a favorable ruling to their claims in the first instance. However, in the second instance, the story was different, as the court granted the defendant’s (buyer’s) appeal and revoked the first instance ruling, classifying the act as resolution and not rescission (which we have already seen what the differences are between both).
Without dwelling on the rich details and discussions of the ruling, what the seller of the property (plaintiff) sought was to avoid the application of art. 782 to the case, since this would not allow the contract to be resolved because, even though the breach of the debtor party could be alleged, the article in question establishes that (i) when the payment of the price is agreed in installments and (ii) provided that the buyer has paid 25% of the price or has made improvements for an equivalent value to said percentage, resolution will not proceed, in any case.
What were the Supreme Court’s arguments?
In the first place, the Supreme Court points out to the seller that the articles that support their request correspond to general provisions, applicable to the law of contracts in general, and that, in the Civil Code, there is another chapter that contains specific provisions that regulate sales contracts, whereby this latter chapter, which includes art. 782, would be the one that regulates this type of contracts.
With this, then, the Supreme Court warns the seller that, although the parties have the freedom to choose how to regulate their contracts, by the virtue of the principle of autonomy of will, this principle recognizes its limits in mandatory observance provisions (of public order). Therefore, even though the parties had agreed that the non-payment by the buyer would constitute a rescission (which would allow the seller to terminate the sales contract and recover the property), in reality, by virtue of art. 782 (which is of public order), what was agreed in the contract would yield to that.
Thus, and as the defendant had exceeded the payment of 25% of the sale price, the Supreme Court confirmed that the court had correctly classified the act as resolution of the contract and recover the property, was not appropriate: the possession of the property by the defendant is legitimate, considering the validity of the sales contract.
Conclusion
In conclusion, no matter under what name we stipulate the termination of sales contracts, in cases where the payment of the price must be made in installments and there is a breach of payment by the buyer, the judge will first verify what percentage of the price was paid and, as long as what was paid or the improvements made exceed 25% of the price, the resolution of the contract will not be permissible under any circumstances.
Adriana Sánchez Mussi
Lawyer – Altra Legal
