Short answer. When a contract is annulled, both sides must give back what they received. Article 1398 of the Civil Code requires each party to return the thing that was the subject of the contract together with its fruits, and the price together with its interest. Where the obligation was to render service, the value of that service is used instead.
What the law says
An obligation having been annulled, 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, except in cases provided by law.
Civil Code, Article 1398 — Mutual Restitution on Annulment. Read the full provision →
Restitution runs in both directions
Annulment is not a one-way remedy. The point is to put both parties back where they stood before they signed, so the buyer returns the thing and the seller returns the money at the same time. A party asking a court to annul a contract should therefore expect to be ordered to restore what they received, and should be ready to do it. This is why annulment is rarely the free escape route people imagine: if you no longer have the thing, or have spent the money, restitution still has to be made in some form.
Fruits, interest and services
The Code goes further than the bare exchange. The thing goes back with its fruits — the harvest, the rent collected, the offspring of animals — and the price goes back with its interest, so that neither party keeps the benefit of having held the other’s property or money in the meantime.
Services cannot be handed back. Where what was owed was work rather than a thing, the Code substitutes value: the worth of the service becomes the measure of what has to be accounted for, so a party who received the benefit of labour does not keep it for nothing simply because it cannot be physically returned.
The exceptions, and what if the thing is gone
The duty to restore applies except in cases provided by law. The clearest exception concerns parties who could not validly bind themselves, such as minors and other incapacitated persons; the Code limits what they must restore, generally to the extent they were actually enriched.
If the thing has been lost, restitution does not simply vanish. Where the loss was the fault of the party bound to return it, Art. 1400 makes them account for the fruits received and the value of the thing at the time of the loss, with interest from that date. Keep records of what was delivered, what was paid and what the property produced; these are exactly the figures a court will ask for.
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 →