Short answer. When a contract is annulled, both parties must restore to each other the things that were the subject of the contract, along with their fruits, and the price with interest. Article 1398 of the Civil Code makes this a mutual obligation — neither side keeps what they received.
What the law says
the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest
Civil Code, Article 1398 — Mutual Restitution on Annulment. Read the full provision →
The mutual restitution principle
Article 1398 of the Civil Code establishes that annulment operates both ways simultaneously. The party who received an object must return it along with any fruits it produced — harvests, rents, dividends, or other proceeds generated while the item was in that party's possession. The party who received the purchase price must return it with interest from the date it was paid. Neither side is allowed to keep what they received under a contract that the law no longer recognizes. This mutual-restoration principle is meant to put both parties back in the position they occupied before the contract was made.
Fruits of the thing and interest on the price
The restitution obligation is not limited to the bare item or the bare price. Fruits — meaning the produce, income, or earnings that the thing generated during the period the receiving party held it — must be returned along with the thing itself. On the other side, interest on the price must accompany the return of the money. This prevents either party from profiting from the period they held property or money under an annulled contract. If the object generated rental income while one party held it, that income goes back. If the seller held the purchase price and earned on it, interest offsets that advantage.
Services are valued differently
Not every contractual obligation involves a physical object or a sum of money. Some contracts require a party to render services. Article 1398 addresses this separately: in obligations to render service, the value thereof shall be the basis for damages. If services were already performed under the annulled contract, they cannot be literally "returned," so their monetary value is used to compute what must be compensated. The party who received the services owes an amount equivalent to their value; the party who performed them is entitled to recover that amount.
Exceptions under law and what they cover
Article 1398 preserves exceptions "as provided by law" — a reminder that not every annulment produces identical restitution consequences. Where a party was incapacitated, the obligation to restore may be limited to the extent the incapacitated party actually benefited. Where one party was at fault in a way the law specifically addresses, different rules apply. The baseline, though, is full mutual restitution. If you are in a situation where a contract has been annulled and you are unsure whether an exception applies to your particular case, the specific circumstances — the ground for annulment, the nature of what was exchanged, and the current condition of the items — will determine the exact scope of what each party must restore.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Alberto C. Hidalgo vs. Conrado Bascuguin and Evelyn Flaminiano Hidalgo, G.R. No. 233217, October 6, 2021 — read the decision on LawPhil →
- Fontana Resort and County Club, Inc. and RN Development Corporation vs. Spouses Roy S. Tan and Susan C. Tan, G.R. No. 154670, January 30, 2012 — read the decision on LawPhil →
- Unlad Resources Devt., Corp., et al. vs. Renato P. Dragon, et al, G.R. No. 149338, July 28, 2008 — read the decision on LawPhil →
- Walter Villanueva, et al. vs. Florentino Chong, et al, G.R. No. 159889, June 5, 2008 — read the decision on LawPhil →