G.R. No.
187521 March 14, 2012 The terms of the Subcontract Agreement
F.F. CRUZ & CO., INC., Petitioner, v. HR
CONSTRUCTION CORP., Respondent
ISSUES: In sum, the crucial issues for this
Courts resolution are: first, what is the effect
of FFCCIs non-compliance with the
stipulation in the Subcontract Agreement
requiring a joint quantification of the works
completed by HRCC on the payment of the
progress billings submitted by the latter; and
second, whether there was a valid
rescission of the Subcontract Agreement by
HRCC
RULING: The petition is not meritorious.
First Substantive Issue: Effect of Non-
compliance with the Joint Quantification
Requirement on the Progress Billings of
HRCC
Basically, the instant issue calls for a
determination as to which of the parties
respective valuation of accomplished works
should be given credence. FFCCI claims
that its valuation should be upheld since the
same was the result of a measurement of
the completed works conducted by it and
the DPWH. On the other hand, HRCC
maintains that its valuation should be upheld
on account of FFCCIs failure to observe the
joint measurement requirement in
ascertaining the extent of its completed
works.
with the representative of the DPWH and
should prevail.
In resolving the dispute as to the proper
valuation of the works accomplished by
HRCC, the primordial consideration
should be the terms of the Subcontract
Agreement. It is basic that if the terms of a
contract are clear and leave no doubt upon
the intention of the contracting parties, the
literal meaning of its stipulations shall
control.
In Abad v. Goldloop Properties, Inc.,[31] we
stressed that:
A courts purpose in examining a contract is
to interpret the intent of the contracting
parties, as objectively manifested by them.
The process of interpreting a contract
requires the court to make a preliminary
inquiry as to whether the contract before it is
ambiguous. A contract provision is
ambiguous if it is susceptible of two
reasonable alternative interpretations.
Where the written terms of the contract are
not ambiguous and can only be read one
way, the court will interpret the contract as a
matter of law. If the contract is determined
to be ambiguous, then the interpretation of
the contract is left to the court, to resolve the
ambiguity in the light of the intrinsic
evidence.
It bears stressing that the joint
measurement contemplated under the
Subcontract Agreement should be
conducted by the parties herein together
Case Digests for Cases under Articles 1189-1198 Page | 1
the consultants. Indubitably, FFCCI, being
the main contractor of DPWH, has the
responsibility to request the representative
of DPWH to conduct the said joint
measurement.
The CIAC held that FFCCI, on account of its
failure to demand the joint measurement of
HRCCs completed works, had effectively
waived its right to ask for the conduct of the
same as a condition sine qua non to HRCCs
submission of its monthly progress billings.
The Supreme Court agree.
In People of the Philippines v. Donato,
this Court explained the doctrine of waiver in
this wise:
Waiver is defined as "a voluntary and
intentional relinquishment or
abandonment of a known existing legal
right, advantage, benefit, claim or
privilege, which except for such waiver
the party would have enjoyed; the
voluntary abandonment or surrender, by a
capable person, of a right known by him to
exist, with the intent that such right shall be
surrendered and such person forever
deprived of its benefit; or such conduct as
warrants an inference of the relinquishment
of such right; or the intentional doing of an
act inconsistent with claiming it."
As to what rights and privileges may be
waived, the authority is settled:
x x x the doctrine of waiver extends to rights
and privileges of any character, and, since
the word waiver covers every conceivable
right, it is the general rule that a person may
waive any matter which affects his
property, and any alienable right or
privilege of which he is the owner or
which belongs to him or to which he is
legally entitled, whether secured by
contract, conferred with statute, or
guaranteed by constitution, provided such
rights and privileges rest in the individual,
are intended for his sole benefit, do not
infringe on the rights of others, and further
provided the waiver of the right or privilege
is not forbidden by law, and does not
contravene public policy; and the principle is
recognized that everyone has a right to
waive, and agree to waive, the advantage of
a law or rule made solely for the benefit and
protection of the individual in his private
capacity, if it can be dispensed with and
relinquished without infringing on any public
right, and without detriment to the
community at large.
Here, it is undisputed that the joint
measurement of HRCCs completed works
contemplated by the parties in the
Subcontract Agreement never materialized.
Essentially, the question that should be
resolved is this: In view of FFCCIs waiver of
its right to demand a joint measurement of
HRCCs completed works, is FFCCI now
barred from disputing the claim of HRCC in
its monthly progress billings?
We rule in the affirmative.
As intimated earlier, the joint measurement
requirement is a mechanism essentially
granting FFCCI the opportunity to verify
and, if necessary, contest HRCCs valuation
of its completed works prior to the
submission of the latter’s monthly progress
billings.
In the final analysis, the joint measurement
requirement seeks to limit the dispute
between the parties with regard to the
valuation of HRCCs completed works.
Accordingly, any issue which FFCCI may
have with regard to HRCCs valuation of the
works it had completed should be raised
and resolved during the said joint
measurement instead of raising the same
after HRCC had submitted its monthly
progress billings. Thus, having relinquished
its right to ask for a joint measurement of
HRCCs completed works, FFCCI had
necessarily waived its right to dispute
HRCCs valuation of the works it had
accomplished.
Second Substantive Issue:
Validity of HRCCs Rescission of the
Subcontract Agreement.
Both the CA and the CIAC held that the work
stoppage of HRCC was justified as the
same is but an exercise of its right to rescind
the Subcontract Agreement in view of
FFCCIs failure to pay the formers monthly
Case Digests for Cases under Articles 1189-1198 Page | 2
progress billings. Further, the CIAC stated
that FFCCI could no longer assail the work
stoppage of HRCC as it failed to file any
counterclaim against HRCC pursuant to the
terms of the Subcontract Agreement.
For its part, FFCCI asserted that the work
stoppage of HRCC was not justified and, in
any case, its failure to raise a counterclaim
against HRCC for liquidated damages
before the CIAC does not amount to a
ratification of the latter’s work stoppage.
The determination of the validity of HRCCs
work stoppage depends on a determination
of the following: first, whether HRCC has
the right to extrajudicially rescind the
Subcontract Agreement; and second,
whether FFCCI is already barred from
disputing the work stoppage of HRCC.
HRCC had waived its right to rescind the
Subcontract Agreement.
The right of rescission is statutorily
recognized in reciprocal obligations.
Article 1191 of the Civil Code pertinently
reads:
Art. 1191. The power to rescind obligations
is implied in reciprocal ones, in case one of
the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the
obligation, with the payment of damages in
either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
The court shall decree the rescission
claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to
the rights of third persons who have
acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage
Law.
The rescission referred to in this article,
more appropriately referred to as resolution
is on the breach of faith by the defendant
which is violative of the reciprocity between
the parties. The right to rescind, however,
may be waived, expressly or impliedly.
While the right to rescind reciprocal
obligations is implied, that is, that such
right need not be expressly provided in
the contract, nevertheless the contracting
parties may waive the same.
Contrary to the respective dispositions of
the CIAC and the CA, we find that HRCC
had no right to rescind the Subcontract
Agreement in the guise of a work
stoppage, the latter having waived such
right. Apropos is Article 11.2 of the
Subcontract Agreement, which reads:
11.2 Effects of Disputes and Continuing
Obligations
Notwithstanding any dispute, controversy,
differences or arbitration proceedings
relating directly or indirectly to this
SUBCONTRACT Agreement and without
prejudice to the eventual outcome thereof,
[HRCC] shall at all times proceed with the
prompt performance of the Works in
accordance with the directives of FFCCI and
this SUBCONTRACT Agreement.
Hence, in spite of the existence of dispute
or controversy between the parties during
the course of the Subcontract Agreement,
HRCC had agreed to continue the
performance of its obligations pursuant
to the Subcontract Agreement. In view of
the provision of the Subcontract Agreement
quoted above, HRCC is deemed to have
effectively waived its right to effect
extrajudicial rescission of its contract
with FFCCI. Accordingly, HRCC, in the
guise of rescinding the Subcontract
Agreement, was not justified in
implementing a work stoppage.
G.R. No. 168522 December 19, 2007
UNIWIDE HOLDINGS, INC., Petitioner, vs.
JANDECS TRANSPORTATION CO., INC.,
Respondent
RULING:
Right of Rescission When Available
Article 1191 of the Civil Code provides:
Case Digests for Cases under Articles 1189-1198 Page | 3
The power to rescind obligations is implied
in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the
obligation, with the payment of damages in
either case. He may also seek rescission,
even after he had chosen fulfillment, if the
latter should become impossible.
xxx xxx xxx
From the foregoing, the right of rescission
is implied in every reciprocal obligation
where one party fails to perform what is
incumbent upon him while the other is
willing and ready to comply.
Certainly, petitioner's failure to deliver the
units on the commencement date of the
lease on October 1, 1997 gave respondent
the right to rescind the contract after the
latter had already paid the contract price in
full.
Furthermore, respondent's right to
rescind the contract cannot be prevented
by the fact that petitioner had the option
to substitute the stalls.
Even if petitioner had that option, it did not,
however, mean that it could insist on the
continuance of the contract by forcing
respondent to accept the substitution.
Neither did it mean that its previous default
had been obliterated completely by the
exercise of that option.
However, so as not to run counter to or
depart from the well-established doctrines in
BF Homes, Inc. and PAL, and considering
further the SEC's appointment of a
receivership committee, we will defer the
entry of judgment in this case even after this
resolution attains finality. In effect, the
execution of the RTC decision (which the
CA and this Court have affirmed) is
suspended until further advice from us.
One final note. Petitioner's extreme bad
faith in dealing with respondent was too
glaring for the Court to ignore.
Petitioner’s lack of good and honest
intentions, as well as the evasive manner by
which it was able to frustrate respondent's
claim for a decade, should not go
unsanctioned. Parties in a contract cannot
be allowed to engage in double-dealing
schemes to dupe those who transact with
them in good faith.
G.R. No. 149338 July 28, 2008
UNLAD RESOURCES DEVELOPMENT
CORPORATION, UNLAD RURAL BANK
OF NOVELETA, INC., UNLAD
COMMODITIES, INC., HELENA Z.
BENITEZ, and CONRADO L. BENITEZ II,
Petitioners, vs. RENATO P. DRAGON,
TARCISIUS R. RODRIGUEZ, VICENTE D.
CASAS, ROMULO M. VIRATA, FLAVIANO
PERDITO, TEOTIMO BENITEZ, ELENA
BENITEZ, and ROLANDO SUAREZ,
Respondents
RULING: The Petition is bereft of merit. We
uphold the Decision of the CA affirming that
of the RTC.
Petitioners, without conceding the propriety
of the judgment of rescission, also argue
that the subject Memorandum of Agreement
could not just be ordered rescinded without
the corresponding order for the restitution of
the parties’ total contributions and/or
investments in the Rural Bank.
On the other hand, respondents declare that
immediately after the signing of the
Memorandum of Agreement, they complied
with their obligation and transferred control
of the Rural Bank to petitioner Unlad
Resources and its nominees, but that,
despite repeated demands, petitioners have
failed and refused to comply with their
concomitant obligations under the
Agreement.
The main issue in this case is the
rescission of the Memorandum of
Agreement.
This is to be distinguished from
respondent’s allegation of the alleged
mismanagement and dissipation of
corporate assets by the petitioners which is
based on the prayer for receivership over
the bank. The two issues, albeit related, are
obviously separate, as they pertain to
Case Digests for Cases under Articles 1189-1198 Page | 4
different acts of the parties involved. The
issue of receivership does not arise from the
parties’ obligations under the Memorandum
of Agreement, but rather from specific acts
attributed to petitioners as members of the
Board of Directors of the Bank.
Clearly, the rescission of the
Memorandum of Agreement is a cause of
action within the jurisdiction of the trial
courts, notwithstanding the fact that the
parties involved are all directors of the same
corporation.
Still, the petitioners insist that the trial court
had no jurisdiction over the complaint
because the issues involved are intra-
corporate in nature.
This argument miserably fails to persuade.
The law in force at the time of the filing of
the case was Presidential Decree (P.D.)
902-A, Section 5(b) of which vested the
Securities and Exchange Commission with
original and exclusive jurisdiction to hear
and decide cases involving controversies
arising out of intra-corporate relations.
Interpreting this statutorily conferred
jurisdiction on the SEC, this Court had
occasion to state:
Nowhere in said decree do we find even so
much as an [intimation] that absolute
jurisdiction and control is vested in the
Securities and Exchange Commission in all
matters affecting corporations. To uphold
the respondents’ arguments would remove
without legal imprimatur from the regular
courts all conflicts over matters involving or
affecting corporations, regardless of the
nature of the transactions which give rise to
such disputes. The courts would then be
divested of jurisdiction not by reason of the
nature of the dispute submitted to them for
adjudication, but solely for the reason that
the dispute involves a corporation. This
cannot be done.
It is well to remember that the respondents
had actually filed with the SEC a case
against the petitioners which, however, was
dismissed for lack of jurisdiction due to the
pendency of the case before the RTC. The
SECs Order dismissing the respondents
complaint is instructive:
From the foregoing allegations, it is
apparent that the present action involves
two separate causes of action which are
interrelated, and the resolution of which
hinges on the very document sought to be
rescinded. The assertion that the
defendants failed to comply with their
contractual undertaking and the claim for
rescission of the contract by the plaintiffs
has, in effect, put in issue the very status of
the herein defendants as stockholders of the
Rural Bank. The issue as to whether or not
the defendants are stockholders of the Rural
Bank is a pivotal issue to be determined on
the basis of the Memorandum of
Agreement. It is a prejudicial question
and a logical antecedent to confer
jurisdiction to this Commission.
It is to be noted, however, that determination
of the contractual undertaking of the parties
under a contract lies with the Regional Trial
Courts and not with this Commission.
Be that as it may, this point has been
rendered moot by Republic Act (R.A.) No.
8799, also known as the Securities
Regulation Code. This law, which took effect
in 2000, has transferred jurisdiction over
such disputes to the RTC.
Consequently, whether the cause of action
stems from a contractual dispute or one that
involves intra-corporate matters, the RTC
already has jurisdiction over this case. In
this light, the question of whether the
doctrine of estoppel by laches applies, as
enunciated by this Court in Tijam v.
Sibonghanoy, no longer finds relevance.
Second, the issue of prescription.
Petitioners further contend that the
action for rescission has prescribed
under Article 1398 of the Civil Code,
which provides:
Article 1389. The action to claim rescission
must be commenced within four years x x x.
This is an erroneous proposition.
Article 1389 specifically refers to
rescissible contracts as, clearly, this
provision is under the chapter entitled
Rescissible Contracts.
Case Digests for Cases under Articles 1189-1198 Page | 5
In a previous case, this Court has held that
Article 1389:
applies to rescissible contracts, as
enumerated and defined in Articles 1380
and 1381.
We must stress however, that the
rescission in Article 1381 is not akin to
the term rescission in Article 1191 and
Article 1592.
In Articles 1191 and 1592, the rescission
is a principal action which seeks the
resolution or cancellation of the contract
while in Article 1381, the action is a
subsidiary one limited to cases of rescission
for lesion as enumerated in said article.
The prescriptive period applicable to
rescission under Articles 1191 and 1592,
is found in Article 1144, which provides
that the action upon a written contract
should be brought within ten years from the
time the right of action accrues.
Article 1381 sets out what are rescissible
contracts, to wit:
Article 1381. The following contracts are
rescissible:
(1) Those which are entered into by
guardians whenever the wards whom they
represent suffer lesion by more than one-
fourth of the value of the things which are
the object thereof;
(2) Those agreed upon in representation of
absentees, if the latter suffer the lesion
stated in the preceding number;
(3) Those undertaken in fraud of creditors
when the latter cannot in any other manner
collect the claims due them;
(4) Those which refer to things under
litigation if they have been entered into by
the defendant without the knowledge and
approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by
law to be subject to rescission.
The Memorandum of Agreement subject
of this controversy does not fall under
the above enumeration. Accordingly, the
prescriptive period that should apply to
this case is that provided for in Article
1144, to wit:
Article 1144. The following actions must be
brought within ten years from the time the
right of action accrues:
(1) Upon a written contract;
xxxx
Based on the records of this case, the action
was commenced on July 3, 1987, while the
Memorandum of Agreement was entered
into on December 29, 1981. Article 1144
specifically provides that the 10-year period
is counted from the time the right of
action accrues. The right of action
accrues from the moment the breach of
right or duty occurs. Thus, the original
Complaint was filed well within the
prescriptive period.
We now proceed to determine if the trial
court, as affirmed by the CA, correctly
ruled for the rescission of the subject
Agreement.
Petitioners contend that they have fully
complied with their obligation under the
Memorandum of Agreement. They allege
that due to respondents’ failure to increase
the capital stock of the corporation to an
amount that will accommodate their
undertaking, it had become impossible for
them to perform their end of the Agreement.
Again, petitioners’ contention is untenable.
There is no question that petitioners herein
failed to fulfill their obligation under the
Memorandum of Agreement. Even they
admit the same, albeit laying the blame on
respondents.
It is true that respondents increased the
Rural Banks authorized capital stock to only
P5 million, which was not enough to
accommodate the P4.8 million worth of
stocks that petitioners were to subscribe to
and pay for. However, respondents’ failure
to fulfill their undertaking in the agreement
would have given rise to the scenario
Case Digests for Cases under Articles 1189-1198 Page | 6
contemplated by Article 1191 of the Civil
Code, which reads:
Article 1191. The power to rescind
reciprocal obligations is implied in reciprocal
ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between
the fulfillment and the rescission of the
obligation, with the payment of damages in
either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
The court shall decree the rescission
claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to
the rights of third persons who have
acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage
Law.
Thus, petitioners should have exacted
fulfillment from the respondents or asked for
the rescission of the contract instead of
simply not performing their part of the
Agreement. But in the course of things, it
was the respondents who availed of the
remedy under Article 1191, opting for the
rescission of the Agreement in order to
regain control of the Rural Bank.
Having determined that the rescission of the
subject Memorandum of Agreement was in
order, the trial court ordered petitioner Unlad
Resources to return to respondents the
management and control of the Rural Bank
and for the latter to return the sum of
P1,003,070.00 to petitioners.
Mutual restitution is required in cases
involving rescission under Article 1191.
This means bringing the parties back to
their original status prior to the inception of
the contract. Article 1385 of the Civil Code
provides, thus:
ART. 1385. Rescission creates the
obligation to return the things which
were the object of the contract, together
with their fruits, and the price with its
interest; consequently, it can be carried out
only when he who demands rescission
can return whatever he may be obligated
to restore.
Neither shall rescission take place when
the things which are the object of the
contract are legally in the possession of
third persons who did not act in bad faith.
In this case, indemnity for damages may
be demanded from the person causing
the loss.
This Court has consistently ruled that this
provision applies to rescission under
Article 1191:
[S]ince Article 1385 of the Civil Code
expressly and clearly states that rescission
creates the obligation to return the things
which were the object of the contract,
together with their fruits, and the price with
its interest, the Court finds no justification
to sustain petitioners’ position that said
Article 1385 does not apply to rescission
under Article 1191.
Rescission has the effect of unmaking a
contract, or its undoing from the beginning,
and not merely its termination.
Hence, rescission creates the obligation
to return the object of the contract.
It can be carried out only when the one
who demands rescission can return
whatever he may be obliged to restore.
To rescind is to declare a contract void at its
inception and to put an end to it as though it
never was.
It is not merely to terminate it and release
the parties from further obligations to each
other, but to abrogate it from the beginning
and restore the parties to their relative
positions as if no contract has been made.
Accordingly, when a decree for rescission is
handed down, it is the duty of the court to
require both parties to surrender that
which they have respectively received
and to place each other as far as
practicable in his original situation. The
Case Digests for Cases under Articles 1189-1198 Page | 7
rescission has the effect of abrogating the
contract in all parts.
Clearly, the petitioners failed to fulfill their
end of the agreement, and thus, there was
just cause for rescission. With the
contract thus rescinded, the parties must be
restored to the status quo ante, that is,
before they entered into the Memorandum
of Agreement.
G.R. No. 130913. June 21, 2005
OLIVERIO LAPERAL and FILIPINAS
GOLF & COUNTRY CLUB INC.,
petitioners, vs. SOLID HOMES, INC.,
respondent. SOUTHRIDGE VILLAGE
HOMEOWNERS ASSOCIATION,
intervenor
RULING: The Court finds merit in the
petition.
While this Court does not agree with
petitioners that the right to rescind under
Article 1191 of the Civil Code does not carry
with it the corresponding obligation for
restitution, we do not subscribe to the Court
of Appeals conclusion that: (1) the
forfeiture/penalty clause under paragraphs
Nos. 2 and 3 of the Addendum to the
Revised Development and Management
Agreements is, under the factual milieu of
this case, unreasonable and
unconscionable and, therefore, void for
being contrary to morals and good
customs[15]; and (2) petitioners must
reimburse respondent the actual cost of
development and completed improvements
on the project in the total amount of
P5,200,833.27.[16]
It is petitioners’ thesis that inasmuch as the
rescission of the Revised Agreements and
its Addendum was made pursuant to Article
1191 of the Civil Code, the provision of
Article 1385[17] of the same Code, which
requires mutual restitution should not apply
because Article 1385 applies only if the
rescission is made under the instances
enumerated in Article 1381[18] of the Code.
We do not agree.
Mutual restitution is required in cases
involving rescission under Article 1191.
In Velarde vs. Court of Appeals, this Court,
in no uncertain terms, squarely ruled on this
matter:
Considering that the rescission of the
contract is based on Article 1191 of the Civil
Code, mutual restitution is required to
bring back the parties to their original
situation prior to the inception of the
contract.
Accordingly, the initial payment of P800,000
and the corresponding mortgage payments
in the amounts of P27,225, P23,000 and
P23,925 (totaling P874,150.00) advanced
by petitioners should be returned by private
respondents, lest the latter unjustly enrich
themselves at the expense of the former.
Rescission creates the obligation to
return the object of the contract.
It can be carried out only when the one
who demands rescission can return
whatever he may be obliged to restore
(citing Co v. Court of Appeals, 312 SCRA
528, August 17, 1999; and Vitug,
Compendium of Civil Law and
Jurisprudence, 1993 revised ed., p. 556).
To rescind is to declare a contract void at its
inception and to put an end to it as though it
never was. It is not merely to terminate it
and release the parties from further
obligations to each other, but to abrogate it
from the beginning and restore the parties
to their relative positions as if no contract
has been made (citing Ocampo v. Court of
Appeals, 233 SCRA 551, June 30, 1994).
Article 1191 of the Civil Code provides:
Art. 1191. The power to rescind obligations
is implied in reciprocal ones, in case one of
the obligors should not comply with what is
incumbent upon him.
The injured party may choose between
the fulfillment and the rescission of the
obligation, with the payment of damages in
either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
Case Digests for Cases under Articles 1189-1198 Page | 8
The court shall decree the rescission
claimed, unless there be just cause
authorizing the fixing of the period.
This is understood without prejudice to the
rights of third persons who have acquired
the thing, in accordance with articles 1385
and 1388 and the Mortgage Law. (1124)
Despite the fact that Article 1124 of the old
Civil Code from whence Article 1191 was
taken, used the term resolution, the
amendment thereto (presently, Article 1191)
explicitly and clearly used the term
rescission. Unless Article 1191 is
subsequently amended to revert back to the
term resolution, this Court has no alternative
but to apply the law, as it is written.
Again, since Article 1385 of the Civil Code
expressly and clearly states that
rescission creates the obligation to
return the things which were the object of
the contract, together with their fruits, and
the price with its interest, the Court finds
no justification to sustain petitioners’
position that said Article 1385 does not
apply to rescission under Article 1191.
In Palay, Inc. vs. Clave, this Court applied
Article 1385 in a case involving resolution
under Article 1191, thus:
Regarding the second issue on refund of the
installment payments made by private
respondent. Article 1385 of the Civil Code
provides:
ART. 1385. Rescission creates the
obligation to return the things which were
the object of the contract, together with their
fruits, and the price with its interest;
consequently, it can be carried out only
when he who demands rescission can
return whatever he may be obliged to
restore.
Neither shall rescission take place when
the things which are the object of the
contract are legally in the possession of
third persons who did not act in bad
faith.
In this case, indemnity for damages may
be demanded from the person causing
the loss.
As a consequence of the resolution by
petitioners, rights to the lot should be
restored to private respondent or the same
should be replaced by another acceptable
lot. However, considering that the
property had already been sold to a third
person and there is no evidence on
record that other lots are still available,
private respondent is entitled to the
refund of installments paid plus interest
at the legal rate of 12% computed from
the date of the institution of the action. It
would be most inequitable if petitioners were
to be allowed to retain private respondent's
payments and at the same time appropriate
the proceeds of the second sale to another.
Applying the clear language of the law and
the consistent jurisprudence on the matter,
therefore, the Court rules that rescission
under Article 1191 in the present case,
carries with it the corresponding
obligation of restitution.
This notwithstanding, the Court does not
agree with the Court of Appeals that, as a
consequence of the obligation of mutual
restitution in this case, petitioners should
return the amount of P5,200,833.27 to
respondent.
Article 1191 states that the injured party
may choose between fulfillment and
rescission of the obligation, with the
payment of damages in either case. In other
words, while petitioners are indeed obliged
to return the said amount to respondent
under Article 1385, assuming said figure is
correct, respondent is at the same time
liable to petitioners in the same amount as
liquidated damages by virtue of the
forfeiture/penalty clause as freely stipulated
upon by the parties in the Addendum,
paragraphs 1 and 2 of which respectively
read:
WHEREAS, included as part of said
agreement are the following:
1. Further to the stipulations on paragraph
10, upon default of performances, violations
and/or non-compliance with the terms and
conditions herein agreed upon by the
DEVELOPER wherein it appears that the
Case Digests for Cases under Articles 1189-1198 Page | 9
DEVELOPER deliberately abandoned or
discontinued the work on the project, said
party shall lose any entitlement, if any, to
any refund and/or advances it may have
incurred in connection with or relative to
previous development works in the
subdivision; likewise, all improvements of
whatever nature and kind introduced by the
DEVELOPER on the property, existing as of
the date of default or violation, shall
automatically belong to the OWNER without
obligation on his part to pay for the costs
thereof.
2. Similarly with the same condition of
default or violation obtaining, as stated in
paragraph 10 of said agreement, all
advances made and remittances of
proceeds from reservations and sales given
by the DEVELOPER to the OWNER as
provided for in this agreement shall be
deemed absolutely forfeited in favor of the
OWNER, resulting to waiver of
DEVELOPERs rights, if any, with respect to
said amount(s).
If this Court recognized the right of the
parties to stipulate on an extrajudicial
rescission under Article 1191, there is no
reason why this Court will not allow the
parties to stipulate on the matter of
damages in case of such rescission under
Book IV, Title VIII, Chapter 3, Section 2 of
the Civil Code governing liquidated
damages.
G.R. No. 157480. May 6, 2005
PRYCE CORPORATION (formerly
PRYCE PROPERTIES CORPORATION),
petitioner, vs. PHILIPPINE AMUSEMENT
AND GAMING CORPORATION,
respondent
RULING: The Petition is partly meritorious.
Collection of Remaining Rentals
PPC anchors its right to collect future rentals
upon the provisions of the Contract.
Likewise, it argues that termination, as
defined under the Contract, is different from
the remedy of rescission prescribed under
Article 1659 of the Civil Code. On the other
hand, PAGCOR contends, as the CA ruled,
that Article 1659 of the Civil Code governs;
hence, PPC is allegedly no longer entitled to
future rentals, because it chose to rescind
the Contract.
Contract Provisions Clear and Binding
Article 1159 of the Civil Code provides that
obligations arising from contracts have
the force of law between the contracting
parties and should be complied with in
good faith.
In deference to the rights of the parties, the
law allows them to enter into stipulations,
clauses, terms and conditions they may
deem convenient; that is, as long as these
are not contrary to law, morals, good
customs, public order or public policy.
Likewise, it is settled that if the terms of the
contract clearly express the intention of the
contracting parties, the literal meaning of the
stipulations would be controlling.
In this case, Article XX of the parties
Contract of Lease provides in part as
follows:
XX. BREACH OR DEFAULT
a) The LESSEE agrees that all the terms,
conditions and/or covenants herein
contained shall be deemed essential
conditions of this contract, and in the event
of default or breach of any of such terms,
conditions and/or covenants, or should the
LESSEE become bankrupt, or insolvent, or
compounds with his creditors, the LESSOR
shall have the right to terminate and cancel
this contract by giving them fifteen (15 days)
prior notice delivered at the leased premises
or posted on the main door thereof. Upon
such termination or cancellation, the
LESSOR may forthwith lock the premises
and exclude the LESSEE therefrom,
forcefully or otherwise, without incurring any
civil or criminal liability. During the fifteen
(15) days notice, the LESSEE may prevent
the termination of lease by curing the events
or causes of termination or cancellation of
the lease.
b) x x x x x x x x x
c) Moreover, the LESSEE shall be fully
liable to the LESSOR for the rentals
Case Digests for Cases under Articles 1189-1198 Page | 10
corresponding to the remaining term of the
lease as well as for any and all damages,
actual or consequential resulting from such
default and termination of this contract.
d) x x x x x x x x x. (Italics supplied)
The above provisions leave no doubt that
the parties have covenanted 1) to give PPC
the right to terminate and cancel the
Contract in the event of a default or breach
by the lessee; and 2) to make PAGCOR fully
liable for rentals for the remaining term of
the lease, despite the exercise of such right
to terminate. Plainly, the parties have
voluntarily bound themselves to require
strict compliance with the provisions of the
Contract by stipulating that a default or
breach, among others, shall give the lessee
the termination option, coupled with the
lessors’ liability for rentals for the remaining
term of the lease.
For sure, these stipulations are valid and are
not contrary to law, morals, good customs,
public order or public policy. Neither is there
anything objectionable about the inclusion in
the Contract of mandatory provisions
concerning the rights and obligations of the
parties. Being the primary law between the
parties, it governs the adjudication of their
rights and obligations. A court has no
alternative but to enforce the contractual
stipulations in the manner they have been
agreed upon and written. It is well to recall
that courts, be they trial or appellate, have
no power to make or modify contracts.
Neither can they save parties from
disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioner’s insistence that it
had the right to ask for termination plus the
full payment of future rentals under the
provisions of the Contract, rather than just
rescission under Article 1659 of the Civil
Code.
This Court is not unmindful of the fact that
termination and rescission are terms that
have been used loosely and
interchangeably in the past.
But distinctions ought to be made,
especially in this controversy, in which
the terms mean differently and lead to
equally different consequences.
The term rescission is found in:
1) Article 1191 of the Civil Code, the general
provision on rescission of reciprocal
obligations;
2) Article 1659, which authorizes rescission
as an alternative remedy, insofar as the
rights and obligations of the lessor and the
lessee in contracts of lease are concerned;
and;
3) Article 1380 with regard to the rescission
of contracts.
In his Concurring Opinion in Universal Food
Corporation v. CA, Justice J. B. L. Reyes
differentiated rescission under Article
1191 from that under Article 1381 et seq.
as follows:
x x x. The rescission on account of breach
of stipulations is not predicated on injury to
economic interests of the party plaintiff but
on the breach of faith by the defendant, that
violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191
may be scanned without disclosing
anywhere that the action for rescission
thereunder is subordinated to anything other
than the culpable breach of his obligations
to the defendant. This rescission is a
principal action retaliatory in character, it
being unjust that a party be held bound to
fulfill his promises when the other violates
his. As expressed in the old Latin aphorism:
Non servanti fidem, non est fides servanda.
Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in rescission by reason of
lesion or economic prejudice, the cause of
action is subordinated to the existence of
that prejudice, because it is the raison detre
as well as the measure of the right to
rescind. x x x.[18]
Relevantly, it has been pointed out that
resolution was originally used in Article 1124
of the old Civil Code, and that the term
became the basis for rescission under
Case Digests for Cases under Articles 1189-1198 Page | 11
Article 1191 (and, conformably, also Article
1659).
Now, as to the distinction between
termination (or cancellation) and
rescission (more properly, resolution),
Huibonhoa v. CA held that, where the
action prayed for the payment of rental
arrearages, the aggrieved party actually
sought the partial enforcement of a lease
contract. Thus, the remedy was not
rescission, but termination or cancellation,
of the contract. The Court explained:
x x x. By the allegations of the complaint, the
Gojoccos aim was to cancel or terminate the
contract because they sought its partial
enforcement in praying for rental
arrearages. There is a distinction in law
between cancellation of a contract and its
rescission. To rescind is to declare a
contract void in its inception and to put an
end to it as though it never were. It is not
merely to terminate it and release parties
from further obligations to each other but
to abrogate it from the beginning and restore
the parties to relative positions which they
would have occupied had no contract ever
been made.
x x x. The termination or cancellation of a
contract would necessarily entail
enforcement of its terms prior to the
declaration of its cancellation in the same
way that before a lessee is ejected under
a lease contract, he has to fulfill his
obligations thereunder that had accrued
prior to his ejectment. However,
termination of a contract need not undergo
judicial intervention. x x x.
Rescission has likewise been defined as
the unmaking of a contract, or its undoing
from the beginning, and not merely its
termination.
Rescission may be effected by both
parties by mutual agreement; or
unilaterally by one of them declaring a
rescission of contract without the
consent of the other, if a legally sufficient
ground exists or if a decree of rescission is
applied for before the courts.
On the other hand, termination refers to
an end in time or existence; a close,
cessation or conclusion. With respect to a
lease or contract, it means an ending,
usually before the end of the anticipated
term of such lease or contract, that may
be effected by mutual agreement or by one
party exercising one of its remedies as a
consequence of the default of the other.
Thus, mutual restitution is required in a
rescission (or resolution), in order to
bring back the parties to their original
situation prior to the inception of the
contract.
Applying this principle to this case, it means
that PPC would re-acquire possession of
the leased premises, and PAGCOR would
get back the rentals it paid the former for the
use of the hotel space.
In contrast, the parties in a case of
termination are not restored to their
original situation; neither is the contract
treated as if it never existed.
Prior to its termination, the parties are
obliged to comply with their contractual
obligations. Only after the contract has
been cancelled will they be released from
their obligations.
In this case, the actions and pleadings of
petitioner show that it never intended to
rescind the Lease Contract from the
beginning. This fact was evident when it
first sought to collect the accrued rentals
from September to November 1993
because, as previously stated, it actually
demanded the enforcement of the Lease
Contract prior to termination. Any intent to
rescind was not shown, even when it
abrogated the Contract on November 25,
1993, because such abrogation was not the
rescission provided for under Article 1659.
G.R. No. 153820 October 16, 2009
DELFIN TAN, Petitioner, vs. ERLINDA C.
BENOLIRAO, ANDREW C. BENOLIRAO,
ROMANO C. BENOLIRAO, DION C.
BENOLIRAO, SPS. REYNALDO
TANINGCO and NORMA D. BENOLIRAO,
EVELYN T. MONREAL, and ANN KARINA
TANINGCO, Respondents
Case Digests for Cases under Articles 1189-1198 Page | 12
ISSUES:
Tan argues that the CA erred in affirming the
RTCs ruling to cancel the lis pendens
annotation on TCT No. 27335. Due to the
unauthorized novation of the agreement,
Tan presented before the trial court two
alternative remedies in his complaint either
the rescission of the contract and the return
of the down payment, or the reformation of
the contract to adjust the payment period, so
that Tan will pay the remaining balance of
the purchase price only after the lapse of the
required two-year encumbrance on the title.
Tan posits that the CA erroneously
disregarded the alternative remedy of
reformation of contract when it affirmed the
removal of the lis pendens annotation on the
title.
Tan further contends that the CA erred
when it recognized the validity of the
forfeiture of the down payment in favor of the
vendors. While admitting that the Deed of
Conditional Sale contained a forfeiture
clause, he insists that this clause applies
only if the failure to pay the balance of the
purchase price was through his own fault or
negligence. In the present case, Tan claims
that he was justified in refusing to pay the
balance price since the vendors would not
have been able to comply with their
obligation to deliver a clean title covering the
property.
Lastly, Tan maintains that the CA erred in
ordering him to pay the respondents
P30,000.00, plus P1,000.00 per court
appearance as attorneys fees, since he filed
the foregoing action in good faith, believing
that he is in the right.
The respondents, on the other hand, assert
that the petition should be dismissed for
raising pure questions of fact, in
contravention of the provisions of Rule 45 of
the Rules which provides that only
questions of law can be raised in petitions
for review on certiorari.
RULING: The petition is granted.
Tans complaint prayed for either the
rescission or the reformation of the Deed of
Conditional Sale.
Contract is a mere contract to sell
A contract is what the law defines it to be,
taking into consideration its essential
elements, and not what the contracting
parties call it. Article 1485 of the Civil Code
defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the
contracting parties obligates himself to
transfer the ownership and to deliver a
determinate thing, and the other to pay
therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or
conditional.
The very essence of a contract of sale is
the transfer of ownership in exchange for
a price paid or promised.
In contrast, a contract to sell is defined
as a bilateral contract whereby the
prospective seller, while expressly
reserving the ownership of the property
despite delivery thereof to the prospective
buyer, binds himself to sell the property
exclusively to the prospective buyer
upon fulfillment of the condition agreed,
i.e., full payment of the purchase price.
A contract to sell may not even be
considered as a conditional contract of sale
where the seller may likewise reserve title to
the property subject of the sale until the
fulfillment of a suspensive condition,
because in a conditional contract of sale, the
first element of consent is present, although
it is conditioned upon the happening of a
contingent event which may or may not
occur.
In the present case, the true nature of the
contract is revealed by paragraph D thereof,
which states:
xxx
d) That in case, BUYER has complied with
the terms and conditions of this contract,
then the SELLERS shall execute and deliver
to the BUYER the appropriate Deed of
Absolute Sale;
Case Digests for Cases under Articles 1189-1198 Page | 13
xxx
Jurisprudence has established that where
the seller promises to execute a deed of
absolute sale upon the completion by the
buyer of the payment of the price, the
contract is only a contract to sell.[12] Thus,
while the contract is denominated as a Deed
of Conditional Sale, the presence of the
above-quoted provision identifies the
contract as being a mere contract to sell.
A Section 4, Rule 74 annotation is an
encumbrance on the property
While Tan admits that he refused to pay the
balance of the purchase price, he claims
that he had valid reason to do so the sudden
appearance of an annotation on the title
pursuant to Section 4, Rule 74 of the Rules,
which Tan considered an encumbrance on
the property.
We find Tans argument meritorious.
The annotation placed on TCT No. 27335,
the new title issued to reflect the
extrajudicial partition of Lamberto
Benoliraos estate among his heirs, states:
x x x any liability to creditors (sic), excluded
heirs and other persons having right to the
property, for a period of two (2) years, with
respect only to the share of Erlinda, Andrew,
Romano and Dion, all surnamed Benolirao.
This annotation was placed on the title
pursuant to Section 4, Rule 74 of the Rules,
which reads:
Sec. 4. Liability of distributees and estate. -
If it shall appear at any time within two (2)
years after the settlement and distribution of
an estate in accordance with the provisions
of either of the first two sections of this rule,
that an heir or other person has been unduly
deprived of his lawful participation in the
estate, such heir or such other person may
compel the settlement of the estate in the
courts in the manner hereinafter provided
for the purpose of satisfying such lawful
participation. And if within the same time of
two (2) years, it shall appear that there are
debts outstanding against the estate which
have not been paid, or that an heir or other
person has been unduly deprived of his
lawful participation payable in money, the
court having jurisdiction of the estate may,
by order for that purpose, after hearing,
settle the amount of such debts or lawful
participation and order how much and in
what manner each distributee shall
contribute in the payment thereof, and may
issue execution, if circumstances require,
against the bond provided in the preceding
section or against the real estate belonging
to the deceased, or both. Such bond and
such real estate shall remain charged with a
liability to creditors, heirs, or other persons
for the full period of two (2) years after such
distribution, notwithstanding any transfers of
real estate that may have been made.
Senator Vicente Francisco discusses this
provision in his book The Revised Rules of
Court in the Philippines, where he states:
The provision of Section 4, Rule 74
prescribes the procedure to be followed if
within two years after an extrajudicial
partition or summary distribution is made, an
heir or other person appears to have been
deprived of his lawful participation in the
estate, or some outstanding debts which
have not been paid are discovered. When
the lawful participation of the heir is not
payable in money, because, for instance, he
is entitled to a part of the real property that
has been partitioned, there can be no other
procedure than to cancel the partition so
made and make a new division, unless, of
course, the heir agrees to be paid the value
of his participation with interest. But in case
the lawful participation of the heir consists in
his share in personal property of money left
by the decedent, or in case unpaid debts are
discovered within the said period of two
years, the procedure is not to cancel the
partition, nor to appoint an administrator to
re-assemble the assets, as was allowed
under the old Code, but the court, after
hearing, shall fix the amount of such debts
or lawful participation in proportion to or to
the extent of the assets they have
respectively received and, if circumstances
require, it may issue execution against the
real estate belonging to the decedent, or
both. The present procedure is more
expedient and less expensive in that it
dispenses with the appointment of an
Case Digests for Cases under Articles 1189-1198 Page | 14
administrator and does not disturb the
possession enjoyed by the distributees.
An annotation is placed on new certificates
of title issued pursuant to the distribution
and partition of a decedents real properties
to warn third persons on the possible
interests of excluded heirs or unpaid
creditors in these properties. The
annotation, therefore, creates a legal
encumbrance or lien on the real property in
favor of the excluded heirs or creditors.
Where a buyer purchases the real property
despite the annotation, he must be ready for
the possibility that the title could be subject
to the rights of excluded parties. The
cancellation of the sale would be the logical
consequence where: (a) the annotation
clearly appears on the title, warning all
would-be buyers; (b) the sale unlawfully
interferes with the rights of heirs; and (c) the
rightful heirs bring an action to question the
transfer within the two-year period provided
by law.
As we held in Vda. de Francisco v. Carreon:
And Section 4, Rule 74 xxx expressly
authorizes the court to give to every heir his
lawful participation in the real estate
notwithstanding any transfers of such real
estate and to issue execution thereon. All
this implies that, when within the
amendatory period the realty has been
alienated, the court in re-dividing it among
the heirs has the authority to direct
cancellation of such alienation in the same
estate proceedings, whenever it becomes
necessary to do so. To require the institution
of a separate action for such annulment
would run counter to the letter of the above
rule and the spirit of these summary
settlements.
Similarly, in Sps. Domingo v. Roces, we
said:
The foregoing rule clearly covers transfers
of real property to any person, as long as the
deprived heir or creditor vindicates his rights
within two years from the date of the
settlement and distribution of estate.
Contrary to petitioners’ contention, the
effects of this provision are not limited to the
heirs or original distributees of the estate
properties, but shall affect any transferee of
the properties. [Emphasis supplied.]
Indeed, in David v. Malay, although the title
of the property had already been registered
in the name of the third party buyers, we
cancelled the sale and ordered the
reconveyance of the property to the estate
of the deceased for proper disposal among
his rightful heirs.
By the time Tans obligation to pay the
balance of the purchase price arose on May
21, 1993 (on account of the extensions
granted by the respondents), a new
certificate of title covering the property had
already been issued on March 26, 1993,
which contained the encumbrance on the
property; the encumbrance would remain so
attached until the expiration of the two-year
period. Clearly, at this time, the vendors
could no longer compel Tan to pay the
balance of the purchase since considering
they themselves could not fulfill their
obligation to transfer a clean title over the
property to Tan.
Contract to sell is not rescinded but
terminated
What then happens to the contract?
We have held in numerous cases that the
remedy of rescission under Article 1191
cannot apply to mere contracts to sell.
We explained the reason for this in Santos
v. Court of Appeals, where we said:
[I]n a contract to sell, title remains with the
vendor and does not pass on to the vendee
until the purchase price is paid in full. Thus,
in a contract to sell, the payment of the
purchase price is a positive suspensive
condition. Failure to pay the price agreed
upon is not a mere breach, casual or
serious, but a situation that prevents the
obligation of the vendor to convey title from
acquiring an obligatory force. This is entirely
different from the situation in a contract of
sale, where non-payment of the price is a
negative resolutory condition. The effects in
law are not identical. In a contract of sale,
the vendor has lost ownership of the thing
sold and cannot recover it, unless the
contract of sale is rescinded and set aside.
In a contract to sell, however, the vendor
Case Digests for Cases under Articles 1189-1198 Page | 15
remains the owner for as long as the vendee
has not complied fully with the condition of
paying the purchase price. If the vendor
should eject the vendee for failure to meet
the condition precedent, he is enforcing the
contract and not rescinding it. x x x Article
1592 speaks of non-payment of the
purchase price as a resolutory condition. It
does not apply to a contract to sell. As to
Article 1191, it is subordinated to the
provisions of Article 1592 when applied to
sales of immovable property. Neither
provision is applicable [to a contract to sell].
We, therefore, hold that the contract to
sell was terminated when the vendors
could no longer legally compel Tan to
pay the balance of the purchase price as
a result of the legal encumbrance which
attached to the title of the property. Since
Tans refusal to pay was due to the
supervening event of a legal encumbrance
on the property and not through his own fault
or negligence, we find and so hold that the
forfeiture of Tans down payment was clearly
unwarranted.
G.R. No. 173441 December 3, 2009
HEIRS OF SOFIA QUIRONG,
Represented by ROMEO P. QUIRONG,
Petitioners, vs. DEVELOPMENT BANK
OF THE PHILIPPINES, Respondents
RULINGS:
The CA held that the Quirong heir’s action
for rescission of the sale between DBP and
their predecessor, Sofia Quirong, is barred
by prescription reckoned from the date of
finality of the December 16, 1992 RTC
decision in Civil Case D-7159 and applying
the prescriptive period of four years set by
Article 1389 of the Civil Code.
Unfortunately, the CA did not state in its
decision the date when the RTC decision in
Civil Case D-7159 became final and
executory, which decision resulted in the
Quirong heir’s loss of 80% of the lot that the
DBP sold to Sofia Quirong. Petitioner heirs
claim that the prescriptive period should be
reckoned from January 17, 1995, the date
this Courts resolution in G.R. 116575
became final and executory.
But the incident before this Court in G.R.
116575 did not deal with the merit of the
RTC decision in Civil Case D-7159. That
decision became final and executory on
January 28, 1993 when the DBP failed to
appeal from it within the time set for such
appeal. The incident before this Court in
G.R. 116575 involved the issuance of the
writ of execution in that case. The DBP
contested such issuance supposedly
because the dispositive portion of the
decision failed to specify details that were
needed for its implementation. Since this
incident did not affect the finality of the
decision in Civil Case D-7159, the
prescriptive period remained to be reckoned
from January 28, 1993, the date of such
finality.
The next question that needs to be resolved
is the applicable period of prescription. The
DBP claims that it should be four years as
provided under Article 1389 of the Civil
Code. Article 1389 provides that the action
to claim rescission must be commenced
within four years. The Quirong heirs, on the
other hand, claim that it should be 10 years
as provided under Article 1144 which states
that actions upon a written contract must be
brought within 10 years from the date the
right of action accrues.
Now, was the action of the Quirong heirs
for rescission or upon a written
contract?
There is no question that their action was
for rescission, since their complaint in Civil
Case CV-98-02399-D asked for the
rescission of the contract of sale between
Sofia Quirong, their predecessor, and the
DBP and the reimbursement of the price of
P78,000.00 that Sofia Quirong paid the
bank plus damages. The prescriptive
period for rescission is four years.
But it is not that simple. The remedy of
rescission is not confined to the
rescissible contracts enumerated under
Article 1381.
Article 1191 of the Civil Code gives the
injured party in reciprocal obligations,
Case Digests for Cases under Articles 1189-1198 Page | 16
such as what contracts are about, the option
to choose between fulfillment and
rescission.
Arturo M. Tolentino, a well-known authority
in civil law, is quick to note, however, that
the equivalent of Article 1191 in the old
code actually uses the term resolution
rather than the present rescission. The
calibrated meanings of these terms are
distinct.
Rescission is a subsidiary action based on
injury to the plaintiff’s economic
interests as described in Articles 1380 and
1381.
Resolution, the action referred to in
Article 1191, on the other hand, is based
on the defendant’s breach of faith, a
violation of the reciprocity between the
parties. As an action based on the binding
force of a written contract, therefore,
rescission (resolution) under Article
1191 prescribes in 10 years. Ten years is
the period of prescription of actions based
on a written contract under Article 1144.
The distinction makes sense.
Article 1191 gives the injured party an
option to choose between, first,
fulfillment of the contract and, second,
its rescission. An action to enforce a
written contract (fulfillment) is definitely an
action upon a written contract, which
prescribes in 10 years (Article 1144). It will
not be logical to make the remedy of
fulfillment prescribe in 10 years while the
alternative remedy of rescission (or
resolution) is made to prescribe after only
four years as provided in Article 1389 when
the injury from which the two kinds of actions
derive is the same.
Here, the Quirong heirs alleged in their
complaint that they were entitled to the
rescission of the contract of sale of the lot
between the DBP and Sofia Quirong
because the decision in Civil Case D-7159
deprived her heirs of nearly the whole of that
lot.
But what was the status of that contract
at the time of the filing of the action for
rescission?
Apparently, that contract of sale had
already been fully performed when Sofia
Quirong paid the full price for the lot and
when, in exchange, the DBP executed
the deed of absolute sale in her favor.
There was a turnover of control of the
property from DBP to Sofia Quirong since
she assumed under their contract, the
ejectment of squatters and/or occupants on
the lot, at her own expense.
Actually, the cause of action of the Quirong
heirs stems from them having been ousted
by final judgment from the ownership of the
lot that the DBP sold to Sofia Quirong, their
predecessor, in violation of the warranty
against eviction that comes with every sale
of property or thing. Article 1548 of the Civil
Code provides:
Article 1548. Eviction shall take place
whenever by a final judgment based on a
right prior to the sale or an act imputable to
the vendor, the vendee is deprived of the
whole or of a part of thing purchased.
xxxx
With the loss of 80% of the subject lot to the
Dalopes by reason of the judgment of the
RTC in Civil Case D-7159, the Quirong heirs
had the right to file an action for rescission
against the DBP pursuant to the provision of
Article 1556 of the Civil Code which
provides:
Article 1556. Should the vendee lose, by
reason of the eviction, a part of the thing
sold of such importance, in relation to the
whole, that he would not have bought it
without said part, he may demand the
rescission of the contract; but with the
obligation to return the thing without other
encumbrances than those which it had
when he acquired it. x x x
And that action for rescission, which is
based on a subsequent economic loss
suffered by the buyer, was precisely the
action that the Quirong heirs took against
the DBP. Consequently, it prescribed as
Article 1389 provides in four years from
the time the action accrued. Since it
accrued on January 28, 1993 when the
Case Digests for Cases under Articles 1189-1198 Page | 17
decision in Civil Case D-7159 became final
and executory and ousted the heirs from a
substantial portion of the lot, the latter had
only until January 28, 1997 within which to
file their action for rescission. Given that
they filed their action on June 10, 1998, they
did so beyond the four-year period.
With the conclusion that the Court has
reached respecting the first issue presented
in this case, it would serve no useful
purpose for it to further consider the issue of
whether or not the heirs of Quirong would
have been entitled to the rescission of the
DBPs sale of the subject lot to Sofia Quirong
as a consequence of her heirs having been
evicted from it. As the Court has ruled
above, their action was barred by
prescription. The CA acted correctly in
reversing the RTC decision and dismissing
their action.
Parenthetically, the Quirong heirs were
allowed by the RTC to intervene in the
original action for annulment of sale in Civil
Case D-7159 that the Dalopes filed against
the DBP and the Funcions. Not only did the
heirs intervene in defense of the sale, they
likewise filed a cross claim against the DBP.
And they were apparently heard on their
defense and cross claim but the RTC did not
adjudicate their claim for the reason that
they failed to make a formal offer of their
documentary exhibits. Yet, they did not
appeal from this omission or from the
judgment of the RTC, annulling the DBPs
sale of the subject lot to Sofia Quirong. This
point is of course entirely academic but it
shows that the Quirong heirs have
themselves to blame for the loss of
whatever right they may have in the case.
G.R. No. 176868 July 26, 2010
SOLAR HARVEST, INC., Petitioner, vs.
DAVAO CORRUGATED CARTON
CORPORATION, Respondent
ISSUE: In this petition, petitioner insists that
respondent did not completely manufacture
the boxes and that it was respondent which
was obliged to deliver the boxes to
TADECO.
RULING: We find no reversible error in the
assailed Decision that would justify the grant
of this petition.
Petitioners claim for reimbursement is
actually one for rescission (or resolution)
of contract under Article 1191 of the Civil
Code, which reads:
Art. 1191. The power to rescind obligations
is implied in reciprocal ones, in case one of
the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the
obligation, with the payment of damages in
either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
The court shall decree the rescission
claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to
the rights of third persons who have
acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage
Law.
The right to rescind a contract arises
once the other party defaults in the
performance of his obligation.
In determining when default occurs, Art.
1191 should be taken in conjunction with
Art. 1169 of the same law, which provides:
Art. 1169. Those obliged to deliver or to do
something incur in delay from the time the
obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
However, the demand by the creditor shall
not be necessary in order that delay may
exist:
(1) When the obligation or the law
expressly so declares; or
(2) When from the nature and the
circumstances of the obligation it appears
that the designation of the time when the
thing is to be delivered or the service is to be
rendered was a controlling motive for the
establishment of the contract; or
Case Digests for Cases under Articles 1189-1198 Page | 18
(3) When demand would be useless,
as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party
incurs in delay if the other does not
comply or is not ready to comply in a
proper manner with what is incumbent
upon him. From the moment one of the
parties fulfills his obligation, delay by the
other begins.
In reciprocal obligations, as in a contract of
sale, the general rule is that the fulfillment
of the parties’ respective obligations
should be simultaneous.
Hence, no demand is generally necessary
because, once a party fulfills his obligation
and the other party does not fulfill his, the
latter automatically incurs in delay.
But when different dates for performance
of the obligations are fixed, the default
for each obligation must be determined
by the rules given in the first paragraph
of the present article, that is, the other
party would incur in delay only from the
moment the other party demands fulfillment
of the formers obligation.
Thus, even in reciprocal obligations, if the
period for the fulfillment of the obligation is
fixed, demand upon the obligee is still
necessary before the obligor can be
considered in default and before a cause of
action for rescission will accrue.
Evident from the records and even from
the allegations in the complaint was the
lack of demand by petitioner upon
respondent to fulfill its obligation to
manufacture and deliver the boxes. The
Complaint only alleged that petitioner made
a follow-up upon respondent, which,
however, would not qualify as a demand for
the fulfillment of the obligation. Petitioners
witness also testified that they made a
follow-up of the boxes, but not a demand.
Note is taken of the fact that, with respect to
their claim for reimbursement, the
Complaint alleged and the witness testified
that a demand letter was sent to
respondent. Without a previous demand for
the fulfillment of the obligation, petitioner
would not have a cause of action for
rescission against respondent as the latter
would not yet be considered in breach of its
contractual obligation.
Even assuming that a demand had been
previously made before filing the present
case, petitioners claim for reimbursement
would still fail, as the circumstances would
show that respondent was not guilty of
breach of contract.
The existence of a breach of contract is a
factual matter not usually reviewed in a
petition for review under Rule 45. The Court,
in petitions for review, limits its inquiry only
to questions of law. After all, it is not a trier
of facts, and findings of fact made by the trial
court, especially when reiterated by the CA,
must be given great respect if not
considered as final. In dealing with this
petition, we will not veer away from this
doctrine and will thus sustain the factual
findings of the CA, which we find to be
adequately supported by the evidence on
record.
As correctly observed by the CA, aside from
the pictures of the finished boxes and the
production report thereof, there is ample
showing that the boxes had already been
manufactured by respondent. There is the
testimony of Estanislao who accompanied
Que to the factory, attesting that, during
their first visit to the company, they saw the
pile of petitioner’s boxes and Que took
samples thereof. Que, petitioners witness,
himself confirmed this incident. He testified
that Tan pointed the boxes to him and that
he got a sample and saw that it was blank.
Ques absolute assertion that the boxes
were not manufactured is, therefore,
implausible and suspicious.
In fact, we note that respondent’s counsel
manifested in court, during trial, that his
client was willing to shoulder expenses for a
representative of the court to visit the plant
and see the boxes. Had it been true that the
boxes were not yet completed, respondent
would not have been so bold as to challenge
the court to conduct an ocular inspection of
their warehouse. Even in its Comment to
this petition, respondent prays that
Case Digests for Cases under Articles 1189-1198 Page | 19
petitioner be ordered to remove the boxes
from its factory site, which could only mean
that the boxes are, up to the present, still in
respondent’s premises.
We also believe that the agreement
between the parties was for petitioner to
pick up the boxes from respondent’s
warehouse, contrary to petitioner’s
allegation. Thus, it was due to petitioner’s
fault that the boxes were not delivered to
TADECO.
Petitioner had the burden to prove that the
agreement was, in fact, for respondent to
deliver the boxes within 30 days from
payment, as alleged in the Complaint. Its
sole witness, Que, was not even competent
to testify on the terms of the agreement and,
therefore, we cannot give much credence to
his testimony. It appeared from the
testimony of Que that he did not personally
place the order with Tan.
G.R. No. 171076 August 1, 2012
GOLDLOOP PROPERTIES INC.,
Petitioner, vs. GOVERNMENT SERVICE
INSURANCE SYSTEM, Respondent
ISSUE: Goldloop faults the CA in rescinding
the MOA and the Addendum, in
extinguishing the obligations of the parties
relative thereto, in declaring that each party
should bear its own damage and, in
discarding the findings of facts and
conclusions of the RTC.
RULING: The Court upholds the rescission
but for a reason different from that upon
which the CA based its conclusion.
Reciprocal obligations of the parties under
the MOA.
"Reciprocal obligations are those which
arise from the same cause, and which
each party is a debtor and a creditor of
the other, such that the obligation of one
is dependent upon the obligation of the
other." Here, the parties’ reciprocal
obligations are embodied in Article I of the
MOA, viz:
ARTICLE I
ABSOLUTE SALE
Section 1.1 That GOLDLOOP
PROPERTIES INC. will pay the GSIS a
guaranteed amount of ONE HUNDRED
FORTY MILLION EIGHT HUNDRED
NINETY THOUSAND PESOS (₱
140,890,000.00) as payment for the 1,195
sq. m. portion of the lot on which the second
tower will stand in accordance with the
following schedule:
Period from signing of the Agreement
Percentage of Total Amount
Amount to be Remitted
Six Months 10% ₱ 14,089,000.00
Twelve Months 15% 21,133,500.00
Eighteen Months 15%
21,133,500.00
Twenty-four Months 15%
21,133,500.00
Thirty Months 15% 21,133,500.00
Thirty-Six Months 10%
14,089,000.00
Forty-Two Months 10%
14,089,000.00
Forty-Eight Months 10%
14,089,000.00
100% ₱ 140,890,000.00
Without prejudice to the right of GSIS to
collect the interest provided for in Section
1.3 hereof, the aforesaid periods may be
extended in the event that GOLDLOOP
PROPERTIES INC. fails to obtain all the
necessary permits and licenses for causes
beyond the control of GOLDLOOP or by
reason of force majeure.
It is expressly agreed that extension of time
[/] period provided for herein may not be
claimed unless GOLDLOOP has, prior to
the expiration of the contract time and within
fifteen (15) calendar days after the
circumstances leading to such claim have
arisen, delivered an appropriate written
notice to the GSIS to enable the latter to
have [the] reason for extension investigated.
The GSIS shall, on the basis of the facts and
circumstances and of the merits or lack of
merit of the request, grant or deny the
request for extension, as it may deem
proper. The decision of the GSIS on this
matter shall be final and binding. Failure to
provide such notice constitutes a waiver by
x x x GOLDLOOP of any claim for extension.
Case Digests for Cases under Articles 1189-1198 Page | 20
Section 1.2 That after the project has been
completed and sold but not later than six (6)
months after the 48-month period, in
reference to the schedule of payment in
Item 1 above, a calculation of the gross
sales net of the 8% marketing fee will be
made. The GSIS will be entitled (in addition
to the guaranteed amount in excess of
P140.89 Million) to 9.86% of the amount in
excess of the P1,428.28 Million (the
guaranteed revenue for sharing) while
GOLDLOOP will be entitled to the balance
of 90.14% in case the gross sales net of the
8% marketing fee does not exceed
P1,428.28 Million, the GSIS will not be
entitled to any additional amount.
GSIS has the right to full information as to
all matter’s requisite in the determination of
the gross sales relative to this project that
may be in its possession and a full
disclosure of any information that it may
deem material and relevant for the purpose.
Section 1.3 Payment to GSIS of the
amounts provided for in the preceding
paragraphs shall be remitted by
GOLDLOOP within the periods stated
therein without need of prior notice or
demand; and failure to so pay within said
periods shall entitle the GSIS to an interest
of 18% per annum, compounded monthly,
without prejudice to the other rights and
remedies of the GSIS under the Agreement
and under applicable laws.
Section 1.4 GSIS warrants that it has title
over the subject property and subject to the
obligation of GOLDLOOP to undertake the
conversion of the same to a condominium
property and the identification of the 1,195
sq. m. of vacant lot as a unit thereof capable
of being legally sold by GSIS to
GOLDLOOP, that same is transferable, free
from all liens and encumbrances
whatsoever.
Section 1.5 After full compliance by
GOLDLOOP of its obligations under the
preceding Section, GSIS shall execute [in]
its favor, or in favor of its nominee a Deed of
Absolute Sale for the 1,195 sq. m. portion of
the subject property.47 (Emphasis
supplied.)
Clearly, Goldloop’s obligation is to pay
for the portion of the property on which
the second tower shall stand and to
construct and develop thereon a
condominium building. On the other
hand, GSIS is obliged to deliver to
Goldloop the property free from all liens
and encumbrances and to execute a
deed of absolute sale in Goldloop’s
favor.
Goldloop failed to complete its payment of
the guaranteed amount in the manner
prescribed in the contract.
Under Sec. 1.1 of the MOA, Goldloop
undertook to pay GSIS the guaranteed
amount of P140,890,000.00, in eight
installments, the first installment of which
would fall due on December 16, 1995 and
the subsequent payments every six months
thereafter until June 16, 1999. The dates of
payment may be extended if Goldloop fails
to obtain all the necessary permits and
licenses for causes beyond its control or by
reason of force majeure. However, such
request for extension must be in writing and
made prior to the expiration of the contract
and within 15 calendar days after the
circumstances leading to such claim for
extension have arisen.
Sec. 1.3, on the other hand, provides for the
remittance to GSIS of such payments
without need of demand as well as for the
consequence of nonpayment.
Admittedly, Goldloop failed to pay the first
installment on time; hence, the parties
stipulated in the Addendum that Goldloop
shall advance the payment for expense
items which were for GSIS’s account. The
money advanced shall then be credited as
full payment of the first installment and the
excess therefrom, as partial payment of the
second. By way of said expense items,
Goldloop claimed to have already advanced
in favor of GSIS the sum of ₱
24,824,683.00.48
Assuming said figure is correct for purposes
of this discussion, the same only covers the
full payment of the first installment which is
P14,089,000.00 and the excess therefrom,
the partial payment for the P21,133,500.00
Case Digests for Cases under Articles 1189-1198 Page | 21
second installment. However, we note that
the Addendum was executed on June 18,
1996 or two days after the second
installment payment was supposed to be
remitted (June 16, 1996). Hence, by that
time, Goldloop’s duty to complete the
payment for the second installment had
already arisen. However, the records fail to
show that Goldloop, from that time on,
endeavored to at least complete such
second installment. Worse, it totally failed to
remit the other subsequent installments.
The RTC ratiocinated that Goldloop’s failure
to comply with the said obligation was due
to the non-issuance of permits. According to
it, Goldloop experienced financial difficulty
when the construction did not push thru
since it had to return the deposits, some with
interest, of would-be buyers and had
already paid the commission of brokers and
agents of the condominium units, and these
amounted to millions of pesos. Hence, its
failure to pay was justified.
While the Court is inclined to agree with the
RTC that the non-issuance of permits
indeed affected Goldloop’s ability to pay, it
cannot, however, ignore the fact that
Goldloop itself failed to avail of the
protection granted to it by the MOA in case
of failure to obtain the necessary permits
and licenses. Under the circumstances,
Goldloop could have applied for an
extension within which to pay the
installments of the guaranteed amount as
clearly provided for under the second and
third paragraphs of said Sec. 1.1. Yet again,
the records are bereft of any showing that it
ever availed of such extension.
From the above, it is clear that said section
did not extend the four-year period within
which to pay the guaranteed amount. In fact,
no mention was made regarding this. What
was extended was the period within which
Goldloop should have started the
construction, which was changed from six
months from the date of the execution of the
MOA to six months from the date of
execution of the Addendum. This is very
plain from the said provision.
Be that as it may, it would be too late in the
day for Goldloop to request for an extension.
As may be recalled, such request must be
made not only prior to the expiration of the
contract but also within 15 calendar days
after the event leading to such claim for
extension has arisen. And since the problem
with the non-issuance of permits had long
arisen during that time, Goldloop cannot
anymore avail of the extension even if by
then the contract has not yet expired.
At this point, it bears to stress that:
It is basic that a contract is the law
between the parties, and the stipulations
therein – provided that they are not
contrary to law, morals, good customs,
public order or public policy – shall be
binding as between the parties. In
contractual relations, the law allows the
parties much leeway and considers their
agreement to be the law between them. This
is because ‘courts cannot follow one every
step of his life and extricate him from bad
bargains x x x relieve him from one-sided
contracts, or annul the effects of foolish
acts.’ The courts are obliged to give
effect to the agreement and enforce the
contract to the letter.
Here, as the parties voluntarily and freely
executed the MOA and the Addendum, the
terms contained therein are the law between
them. Hence, Goldloop should have
completed its payment of the guaranteed
amount in the manner prescribed by the
contract. When it could not do so as a
consequence of the non-issuance of
permits, it should have asked for an
extension within which to pay the same.
However, since Goldloop neither
completed the payment nor sought for
an extension, it is considered to have
breached its commitment and obligation
under Sec. 1.1 of the MOA.
GSIS rescinded the contract pursuant to
its right to rescind under the relevant
provisions of the MOA.
Concededly, parties may validly stipulate
the unilateral rescission of a contract."
Such is the case here since the parties
conferred upon GSIS the right to unilaterally
Case Digests for Cases under Articles 1189-1198 Page | 22
rescind the MOA in the earlier quoted Sec.
2.4 and hereinafter reproduced:
Section 2.4. Should GOLDLOOP fail to start
the construction works within the thirty (30)
working days from date all relevant permits
and licenses from concerned agencies are
obtained, or within six (6) months from the
date of the execution of this Agreement,
whichever is earlier, or at any given time
abandon the same or otherwise commit any
breach of their obligations and commitments
under this Agreement, this agreement shall
be deemed terminated and cancelled
without need of judicial action by giving thirty
(30) days written notice to that effect to
GOLDLOOP who hereby agrees to abide by
the decision of the GSIS. x x x
Under the above-quoted provision, one
of the grounds under which GSIS may
validly rescind the MOA is if at any given
time, Goldloop abandons the
construction or otherwise commit any
breach of its obligations and
commitments thereunder.
The February 23, 2000 notice clearly
specified that GSIS is rescinding the
contract for failure of Goldloop to pay the
guaranteed amount of P140,890,000.00
under Sec. 1.1 of the MOA.
This falls under the said ground, it being a
breach of an obligation and commitment
under the said agreement. Because of said
breach, Sec. 1.3 of the MOA which provides
for the consequence of the nonpayment
thereof should be read in relation to Sec.
2.4.
Under Sec. 1.3, Goldloop’s failure to pay
the guaranteed amount within the
periods provided for in Sec. 1.1 of the
MOA shall entitle GSIS to interest, without
prejudice to its other rights and remedies
under the agreement and applicable laws.
This right referred to is the right of rescission
under Sec. 2.4 authorizing GSIS to exercise
the same upon Goldloop’s breach of any of
its obligations and commitments. Clearly
therefore, when GSIS rescinded the MOA
and the Addendum, it merely exercised its
right to rescind under Sec. 2.4 in relation to
Sec. 1.3 of the MOA.
However, GSIS is not entirely faultless
since it likewise failed in its obligation to
deliver the property free from burden.
GSIS is, however, not entirely faultless. It
also failed to comply with its obligation,
although it cannot be conclusively
determined when it actually begun as the
same only became apparent to Goldloop
after the execution of the MOA and the
Addendum. This was when the City of Pasig
formally notified GSIS that it was holding in
abeyance any action on the latter’s
application for building permits due to its
outstanding real estate taxes in the amount
of P54 million. The fact that GSIS disputes
such tax liability because of its firm stand
that it was tax exempt is beside the point.
What is plain is that the property was by then
not free from burden since real estate taxes
were imposed upon it and these taxes
remained unpaid. There was, therefore, on
the part of GSIS, a failure to comply with
its obligation to deliver the property free
from burden.
This is not to say, however, that Goldloop’s
obligation to pay the guaranteed amount, as
discussed above, did not arise considering
that GSIS could not comply with its
concurrent obligation to deliver the property
free from burden. It is well to note that even
before Goldloop became aware of GSIS’s
supposed tax liability with the City of
Pasig through the latter’s October 8, 1997
letter, Goldloop was already in default in
its payment of the guaranteed amount.
As can be recalled and again under the
assumption that Goldloop advanced
P24,824,683.00 on behalf of GSIS which
amount was credited as full and partial
payment of the first and second
installments, the remaining balance for the
second installment should have been paid
as early as June 16, 1996. No such payment
was, however, made. The same thing is true
with respect to the third and fourth
installments which respectively became due
on December 16, 1996 and June 16, 1997.
Clearly, Goldloop had already defaulted in
its payments even before it became aware
of GSIS’s tax issues. In short, even before
such failure of GSIS became apparent to
Case Digests for Cases under Articles 1189-1198 Page | 23
Goldloop, the latter had already committed
a breach of its own obligation.
As to when GSIS actually committed its
breach of failing to deliver the property free
from any burden, the same is a different
matter which will be discussed later.
In view of the rescission, mutual
restitution is required.
As correctly observed by the RTC, the
rescissory action taken by GSIS is pursuant
to Article 119157 of the Civil Code. In cases
involving rescission under the said
provision, mutual restitution is required.
The parties should be brought back to their
original position prior to the inception of the
contract. "Accordingly, when a decree of
rescission is handed down, it is the duty of
the court to require both parties to surrender
that which they have respectively received
and to place each other as far as practicable
in [their] original situation."60 Pursuant to
this, Goldloop should return to GSIS the
possession and control of the property
subject of their agreements while GSIS
should reimburse Goldloop whatever
amount it had received from the latter by
reason of the MOA and the Addendum.
Here, out of the total amount of expenses
which Goldloop claims to have incurred for
the project, it appears that the only sum it
paid to GSIS was that amount it expended
by way of change order of expense items
supposed to be for GSIS’s account and,
which under the Addendum was to be
credited as full payment and partial payment
of the first and second installments of the
guaranteed amount, respectively. The
figure, however, remains disputed. Goldloop
alleges that the same amounts to
P24,824,683.00. Yet, there is nothing in the
records to support the same. Said amount
was not clearly specified in Goldloop’s
Consolidated Financial Statements for
years 1995 to 2000 and Auditor’s Report.
What is in the records is a mere self-serving
list of expenses that it submitted and which
indicates the said figure as
"Expenses/Charges on Change Orders".
GSIS, on the other hand, asserts that the
expense items for its account, per Annex "C"
of the Addendum, is only ₱ 21,225,521.08
and provided that the works for which the
items were supposed to be used, that is, the
relocation of the powerhouse and cistern
tank, were indeed completed. Unfortunately,
said Annex "C" is likewise not part of the
records of this case and GSIS merely
quoted the relevant portion of the same in its
Answer. Be that as it may, Zapanta testified
that the installation of the cistern tank was
already 100% complete,63 although there
was no mention regarding the status of the
powerhouse. In view of this, the Court can
only consider the sum spent with respect to
the completed installation of the cistern tank
which the GSIS admitted in its Answer as
amounting to ₱ 4,122,133.19.64 Aside from
the said amount, GSIS must also return to
Goldloop all equipment, machineries and
other properties of the latter which may be
found in the premises of the subject
property.
Damages
As discussed, both parties failed to comply
with their respective obligations under their
agreements. Hence, relevant is the
provision of Article 1192 of the Civil
Code which reads:
Art. 1192. In case both parties have
committed a breach of the obligation, the
liability of the first infractor shall be
equitably tempered by the courts. If it
cannot be determined which of the parties
first violated the contract, the same shall be
deemed extinguished, and each shall bear
his own damages.
In this case, it cannot be determined with
certainty which between the parties is the
first infractor. It could be GSIS because of
the high probability that even before the
execution of the agreements, real property
taxes were already imposed and unpaid
such that when GSIS applied for building
permits, the tax liability was already in the
substantial amount of P54 million. It was just
that GSIS could not have been mindful of
the same because of its stand that it is tax
exempt. But as this cannot be
conclusively presumed, there exists an
uncertainty as to which between the
failure to comply on the part of each
party came first; hence, the last portion
of Article 1192 finds application. Pursuant
Case Digests for Cases under Articles 1189-1198 Page | 24
thereto, the parties’ respective claims for
damages are thus deemed extinguished
and each of them shall bear its own
damage.
G.R. No. 201167 February 27, 2013
GOTESCO PROPERTIES, INC., JOSE C.
GO, EVELYN GO, LOURDES G. ORTIGA,
GEORGE GO, and VICENTE GO,
Petitioners, vs. SPOUSES EUGENIO and
ANGELINA FAJARDO, Respondents
RULING: The petition is partly meritorious.
A. Spouses Fajardo’s right to rescind
It is settled that in a contract to sell, the
seller's obligation to deliver the
corresponding certificates of title is
simultaneous and reciprocal to the
buyer's full payment of the purchase price.
In this relation, Section 25 of PD 957, which
regulates the subject transaction, imposes
on the subdivision owner or developer the
obligation to cause the transfer of the
corresponding certificate of title to the buyer
upon full payment, to wit:
Sec. 25. Issuance of Title. The owner or
developer shall deliver the title of the lot or
unit to the buyer upon full payment of the lot
or unit. No fee, except those required for the
registration of the deed of sale in the
Registry of Deeds, shall be collected for the
issuance of such title. In the event a
mortgage over the lot or unit is outstanding
at the time of the issuance of the title to the
buyer, the owner or developer shall redeem
the mortgage or the corresponding portion
thereof within six months from such
issuance in order that the title over any fully
paid lot or unit may be secured and
delivered to the buyer in accordance
herewith.
In the present case, Sps. Fajardo claim
that GPI breached the contract due to its
failure to execute the deed of sale and to
deliver the title and possession over the
subject lot, notwithstanding the full
payment of the purchase price made by
Sps. Fajardo on January 17, 2000 as well
as the latter’s demand for GPI to comply
with the aforementioned obligations per the
letter dated September 16, 2002. For its
part, petitioners proffer that GPI could
not have committed any breach of
contract considering that its purported
non-compliance was largely impelled by
circumstances beyond its control i.e., the
legal proceedings concerning the
subdivision of the property into individual
lots. Hence, absent any substantial breach,
Sps. Fajardo had no right to rescind the
contract.
The Court does not find merit in petitioners’
contention.
A perusal of the records shows that GPI
acquired the subject property on March 10,
1992 through a Deed of Partition and
Exchange executed between it and Andres
Pacheco (Andres), the former registered
owner of the property. GPI was issued TCT
No. 244220 on March 16, 1992 but the same
did not bear any technical description.
However, no plausible explanation was
advanced by the petitioners as to why the
petition for inscription (docketed as LRC
Case No. 4211) dated January 6, 2000,25
was filed only after almost eight (8) years
from the acquisition of the subject property.
Neither did petitioners sufficiently explain
why GPI took no positive action to cause the
immediate filing of a new petition for
inscription within a reasonable time from
notice of the July 15, 2003 CA Decision
which dismissed GPI’s earlier petition based
on technical defects, this notwithstanding
Sps. Fajardo's full payment of the
purchase price and prior demand for
delivery of title. GPI filed the petition before
the RTC-Caloocan, Branch 122 (docketed
as LRC Case No. C-5026) only on
November 23, 2006 following receipt of the
letter dated February 10, 2006 and the filing
of the complaint on May 3, 2006,
alternatively seeking refund of payments.
While the court a quo decided the latter
petition for inscription in its favor, there is no
showing that the same had attained finality
or that the approved technical description
had in fact been annotated on TCT No.
244220, or even that the subdivision plan
had already been approved.
Case Digests for Cases under Articles 1189-1198 Page | 25
Moreover, despite petitioners’ allegation
that the claim of BSP had been settled, there
appears to be no cancellation of the
annotations in GPI’s favor. Clearly, the long
delay in the performance of GPI's obligation
from date of demand on September 16,
2002 was unreasonable and unjustified. It
cannot therefore be denied that GPI
substantially breached its contract to
sell with Spouses Fajardo which thereby
accords the latter the right to rescind the
same pursuant to Article 1191 of the
Code, viz:
ART. 1191. The power to rescind
obligations is implied in reciprocal ones, in
case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the
obligation, with the payment of damages in
either case. He may also seek rescission,
even after he has chosen fulfillment, if the
latter should become impossible.
The court shall decree the rescission
claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to
the rights of third persons who have
acquired the thing, in accordance with
articles 1385 and 1388 and the Mortgage
Law.
B. Effects of rescission
At this juncture, it is noteworthy to point out
that rescission does not merely terminate
the contract and release the parties from
further obligations to each other, but
abrogates the contract from its inception
and restores the parties to their original
positions as if no contract has been
made. Consequently, mutual restitution,
which entails the return of the benefits that
each party may have received as a result of
the contract, is thus required. To be sure, it
has been settled that the effects of
rescission as provided for in Article 1385 of
the Code are equally applicable to cases
under Article 1191, to wit:
xxxx
Mutual restitution is required in cases
involving rescission under Article 1191. This
means bringing the parties back to their
original status prior to the inception of the
contract. Article 1385 of the Civil Code
provides, thus:
ART. 1385. Rescission creates the
obligation to return the things which were
the object of the contract, together with their
fruits, and the price with its interest;
consequently, it can be carried out only
when he who demands rescission can
return whatever he may be obligated to
restore.
Neither shall rescission take place when the
things which are the object of the contract
are legally in the possession of third persons
who did not act in bad faith.
In this case, indemnity for damages may be
demanded from the person causing the
loss.
This Court has consistently ruled that this
provision applies to rescission under Article
1191:
Since Article 1385 of the Civil Code
expressly and clearly states that "rescission
creates the obligation to return the things
which were the object of the contract,
together with their fruits, and the price with
its interest," the Court finds no justification to
sustain petitioners’ position that said Article
1385 does not apply to rescission under
Article 1191. x x x
In this light, it cannot be denied that only GPI
benefited from the contract, having received
full payment of the contract price plus
interests as early as January 17, 2000,
while Spouses Fajardo remained
prejudiced by the persisting non-delivery
of the subject lot despite full payment. As
a necessary consequence, considering the
propriety of the rescission as earlier
discussed, Sps. Fajardo must be able to
recover the price of the property pegged at
its prevailing market value consistent with
the Court’s pronouncement in Solid Homes,
viz:
Case Digests for Cases under Articles 1189-1198 Page | 26
Indeed, there would be unjust enrichment if
respondents Solid Homes, Inc. & Purita
Soliven are made to pay only the purchase
price plus interest. It is definite that the value
of the subject property already escalated
after almost two decades from the time the
petitioner paid for it. Equity and justice
dictate that the injured party should be paid
the market value of the lot, otherwise,
respondents Solid Homes, Inc. & Purita
Soliven would enrich themselves at the
expense of herein lot owners when they sell
the same lot at the present market value.
Surely, such a situation should not be
countenanced for to do so would be contrary
to reason and therefore, unconscionable.
Over time, courts have recognized with
almost pedantic adherence that what is
inconvenient or contrary to reason is not
allowed in law.
On this score, it is apt to mention that it is
the intent of PD 957 to protect the buyer
against unscrupulous developers, operators
and/or sellers who reneged on their
obligations. Thus, in order to achieve this
purpose, equity and justice dictate that the
injured party should be afforded full
recompense and as such, be allowed to
recover the prevailing market value of the
undelivered lot which had been fully paid for.
G.R. No. 81158 May 22, 1992
OSCAR A. JACINTO and LIBRADA
FRANCO-JACINTO, petitioners, vs.
ROGELIO KAPARAZ, RAUL KAPARAZ
and ROSE MARIET KAPARAZ,
respondents
RULING: The petition is impressed with
merit.
Vital to the resolution of the controversy is
the determination of the true nature of the
questioned agreement. Is it a contract of
sale or a contract to sell?
The two are not, of course, the same.
In the latter case, ownership is retained by
the seller and is not to pass until full
payment of the price. Such payment is a
positive suspensive condition the failure
of which is not a breach, casual or serious,
but simply an event that prevents the
obligation of the vendor to convey title
from acquiring binding force.
In such a situation, to argue that there was
only a casual breach is to proceed from the
assumption that the contract is one of
absolute sale, where non-payment is a
resolutory question. Otherwise stated, as
capsulized in Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc., "there can be
no rescission or resolution of an
obligation as yet non-existent, because
the suspensive condition did not
happen." Expanding on this point, this
Court, in said case, made the following
disquisitions:
. . . The upshot of all these stipulations is
that in seeking the ouster of Maritime for
failure to pay the price as agreed upon,
Myers was not rescinding (or more properly,
resolving) the contract, but precisely
enforcing it according to its express terms.
In its suit Myers was not seeking restitution
to it of the ownership of the thing sold (since
it was never disposed of), such restoration
being the logical consequence of the
fulfillment of a resolutory condition,
express or implied (Article 1190); neither
was it seeking a declaration that its
obligation to sell was extinguished. What it
sought was a judicial declaration that
because the suspensive condition (full and
punctual payment) had not been fulfilled, its
obligation to sell to Maritime never arose or
never became effective and, therefore, it
(Myers) was entitled to repossess the
property object of the contract,
possession being a mere incident to its
right of ownership.
On the other hand, since in a contract of
sale, the non-payment of the price is a
resolutory condition, the remedy of the
seller under Article 1191 of the Civil Code
is to exact fulfillment or to rescind the
contract. In respect, however, to the sale of
immovable property, this Article must be
read together with Article 1592 of the same
Code:
Art. 1592. In the sale of immovable
property, even though it may have been
stipulated that upon failure to pay the price
Case Digests for Cases under Articles 1189-1198 Page | 27
at the time agreed upon the rescission of the
contract shall of right take place, the vendee
may pay, even after the expiration of the
period, as long as no demand for rescission
of the contract has been made upon him
either judicially or by a notarial act. After the
demand, the court may not grant him a new
term.
This Article applies to instances where
no stipulation for automatic rescission is
made because it says "even though".
The agreement in the instant case has all
the earmarks of a contract of sale. The
possession of the portion sold was
immediately delivered to the petitioners.
They were granted the right to enjoy all the
improvements therein effective from the
date of the execution of the agreement.
Private respondents unqualifiedly bound
themselves to execute the final deed of sale
"as soon as the settlement or partition of the
estate of the deceased Narcisa R. Kaparaz
shall have been consummated and effected,
but not later than March 31, 1967" and only
upon full payment of the unpaid portion of
the purchase price. The private
respondents did not reserve unto
themselves the ownership of the
property until full payment of the unpaid
balance of P1,000.00. Finally, there is no
stipulation giving the private
respondents the right to unilaterally
rescind the contract the moment the
vendee fails to pay within a fixed period.
In reality, the agreement was an absolute
sale which allowed the petitioners to pay
the remaining balance of the purchase
price in installment. We agree with the
submission of petitioners that Dignos vs.
Court of Appeals applies in this case. In said
case, this Court stated:
Thus, it has been held that a deed of sale
is absolute in nature although
denominated as a "Deed of Conditional
Sale" where nowhere in the contract in
question is a proviso or stipulation to the
effect that title to the property sold is
reserved in the vendor until full payment
of the purchase price, nor is there a
stipulation giving the vendor the right to
unilaterally rescind the contract the moment
the vendee fails to pay within a fixed period
(Taguba v. Vda. de Leon, 132 SCRA 722;
Luzon Brokerage Co., Inc. v. Maritime
Building Co., Inc., 86 SCRA 305).
As stated earlier, in a contract of sale, the
remedy of an unpaid seller is either
specific performance or rescission. The
latter, with respect to the sale of
immovables, is specifically governed by
Article 1592 of the Civil Code.
In the case at bar, there was non-
compliance with the requirements
prescribed in these provisions. It is not
controverted that private respondents had
neither filed an action for specific
performance nor demanded the rescission
of the agreement either judicially or by a
notarial act before the filing of the complaint
in Civil Case No. 586. It is only in their
Answer that they belatedly raised the
defense of resolution of the contract
pursuant to Article 1191 by reason of
petitioners' breach of their obligation.
Even if the general law on resolution, Article
1191 of the Civil Code, is to be applied, Our
decision would still be for the petitioners.
The third paragraph of this Article reads:
xxx xxx xxx
The Court shall decree the rescission
claimed, unless there be just cause
authorizing the fixing of a period.
It is not denied that petitioners made two (2)
payments in the sums of P200.00 and
P300.00 at a time when what remained
unsettled under the agreement was only
P400.00. There was then an excess
payment of P100.00. These payments were
made to the DBP which applied them to an
outstanding account of the private
respondents. Private respondents neither
complained of the delay in these payments
nor rejected their application to their
account. They were, undoubtedly, benefited
by the application because it either satisfied
their account or correspondingly reduced it.
The claim that the account to which it was
applied was not the account stipulated in the
agreement is without merit. In the first place,
the agreement fails to disclose an express
agreement that the monthly amortizations
on the P1,000.00 unpaid balance of the
Case Digests for Cases under Articles 1189-1198 Page | 28
purchase price to be made to the DBP
should be applied exclusively to the
agricultural loan indicated in the exordium of
the agreement. The loan was mentioned
only to lay the basis for private respondents'
need for the downpayment. In the second
place, to allow private respondents to reject
the payment of P400.00, plus the excess of
P100.00 after they benefited therefrom,
would be unjust.
Then too, at no time before the filing of their
Answer did private respondents declare
their intention to rescind the agreement, or if
they did, communicate such intention to the
petitioners. It was necessary for private
respondents to have done so. As this Court
held in University of the Philippines vs. De
los Angeles:
Of course, it must be understood that the act
of a party in treating a contract as cancelled
or resolved on account of infractions by the
other contracting party must be made
known to the other and is always
provisional, being ever subject to scrutiny
and review by the proper court. If the other
party denies that rescission is justified, it is
free to resort to judicial action in its own
behalf, and bring the matter to court. Then,
should the court, after due hearing, decide
that the resolution of the contract was not
warranted, the responsible party will be
sentenced to damages; in the contrary case,
the resolution will be affirmed, and the
consequent indemnity awarded to the party
prejudiced.
In other words, the party who deems the
contract violated may consider it resolved or
rescinded, and act accordingly, without
previous court action, but it proceeds at its
own risk. For it is only the final judgment of
the corresponding court that will
conclusively and finally settle whether the
action taken was or was not correct in law.
But the law definitely does not require that
the contracting party who believes itself
injured must first file suit and wait for a
judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party
injured by the others' breach will have to
passively sit and watch its damages
accumulate during the pendency of the suit
until the final judgment of rescission is
rendered when the law itself requires that he
should exercise due diligence to minimize
its own damages (Civil Code, Article 2203).
G.R. No. L-45656. May 5, 1989
PACIFIC BANKING CORPORATION and
CHESTER G. BABST, Petitioners, v. THE
COURT OF APPEALS, JOSEPH C. HART
and ELEANOR HART, Respondents
SYLLABUS:
1. OBLIGATIONS AND CONTRACTS;
RULE THAT AN ORAL AGREEMENT TO
EXTEND TIME OF PAYMENT MUST BE
FOR A DEFINITE TIME TO BE VALID, NOT
ABSOLUTE. — The rule which states that
there can be no valid extension of time by
oral agreement unless the extension is for a
definite time, is not absolute but admits of
qualifications and exceptions. "The general
rule is that an agreement to extend the time
of payment, in order to be valid, must be for
a definite time, although it seems that no
precise date be fixed, it being sufficient that
the time can be readily determined." (8 C.J.
425). In case the period of extension is not
precise, the provisions of Article 1197 of the
Civil Code should apply.
2. ID.; AGREEMENT TO EXTEND
PERIOD OF PAYMENT; CONDITIONS
AND ARRANGEMENTS CHANGING
TERMS OF PAYMENT MAY BE
INTRODUCED. — There was an agreement
to extend the payment of the loan, including
the first installment thereon which was due
on or before July 1957. The pledge
executed as collateral security on February
9, 1958 no longer contained the provision on
an installment of P50,000.00 due on or
before July 1957. This can mean no other
thing than that the time of payment of the
said installment of P50,000.00 was
extended. It is settled that bills and notes
may be varied by subsequent agreement.
Thus, conditions may be introduced and
arrangements made changing the terms of
payment (10 CJS 758). The agreement for
extension of the parties is clearly indicated
and may be inferred from the acts and
declarations of the parties, as testified to in
court.
5. OBLIGATIONS AND CONTRACTS;
PLEDGE WITHOUT FIXED DATE OF
Case Digests for Cases under Articles 1189-1198 Page | 29
MATURITY; TO BE DETERMINED BY THE
PROPER COURT; FORECLOSURE AND
SALE OF SECURITY, PREMATURE. —
Even the pledge which modified the fixed
period in the original promissory note, did
not provide for dates of payment of
installments, nor of any fixed date of
maturity of the whole amount of
indebtedness. Accordingly, the date of
maturity of the indebtedness should be as
may be determined by the proper court
under Art. 1197 of the Civil Code. Hence,
the disputed foreclosure and the
subsequent sale were premature. The Court
of Appeals noted that no demand for
payment of the P50,000.00 was made right
after it allegedly fell due. It was only on
March 4, 1958 or 13 days after the execution
of the pledge instrument on February 19,
1958 that PBC presented its demand for
payment to Insular Farms.
6. ID.; RIGHT TO REIMBURSEMENT
FROM THE EMPLOYEE FOR WHAT IS
PAID FOR DAMAGES ATTRIBUTABLE TO
HIM, NOT MANDATORY. — Article 2181
does not make recovery from the employee
a mandatory requirement. A right to relief
shall be recognized only when the party
concerned asserts it through a proper
pleading filed in court. In this case, the
employer, Pacific Banking Corporation did
not manifest any claim against Babst by
filing a cross-claim before the trial court;
thus, it cannot make its right automatically
enforceable. Babst was made a party to the
case upon the complaint of the private
respondents in his official capacity as
Executive Vice President of the bank. In the
absence of a cross-claim against Babst, the
court has no basis for enforcing a right
against him to which his co-defendant may
be entitled.
RULING: We find for the respondents on
the following grounds.
In the case at bar, the parties to the
purported agreement, Hart and Babst, were
still alive, and both testified in the trial court
regarding the purported extension. Their
testimonies are in fact, quoted in the
decision of the respondent Court of
Appeals.
We also note, that the rule which states that
there can be no valid extension of time by
oral agreement unless the extension is for a
definite time, is not absolute but admits of
qualifications and exceptions.
"The general rule is that an agreement to
extend the time of payment, in order to be
valid, must be for a definite time, although
it seems that no precise date be fixed, it
being sufficient that the time can be readily
determined."
In case the period of extension is not
precise, the provisions of Article 1197 of
the Civil Code should apply.
In this case, there was an agreement to
extend the payment of the loan, including
the first installment thereon which was due
on or before July 1957. As the Court of
Appeals stated:
". . . — and here, this court is rather well
convinced that Hart had been given the
assurance by the conduct of Babst,
Executive Vice President of Pacific Bank,
that payment would not as yet be pressed,
and under 1197 New Civil Code, the
meaning must be that there having been
intended a period to pay — modifying the
fixed period in original promissory note,
really, the cause of action of Pacific Bank
would have been to ask the Courts for
the fixing of the term;"
The pledge executed as collateral security
on February 9, 1958 no longer contained the
provision on an installment of P50,000.00
due on or before July 1957. This can mean
no other thing than that the time of
payment of the said installment of
P50,000.00 was extended.
It is settled that bills and notes may be
varied by subsequent agreement. Thus,
conditions may be introduced and
arrangements made changing the terms of
payment. The agreement for extension of
the parties is clearly indicated and may be
inferred from the acts and declarations of
the parties, as testified to in court.
The pledge constituted on February 19,
1958 on the shares of stocks of Insular
Farms, Inc. was sufficient consideration for
Case Digests for Cases under Articles 1189-1198 Page | 30
the extension, considering that this pledge
was the additional collateral required by
Pacific Banking in addition to the continuing
guarantee of Clarkin.
The presumption of good faith of possession
provided in Article 527, is only a
presumption juris tantum. Said presumption
cannot stand in the light of the evidence to
the contrary in the record.
It was established that there was an
agreement to extend indefinitely the
payment of the installment of P50,000.00
in July 1957 as provided in the promissory
note. Consequently, Pacific Banking
Corporation was precluded from enforcing
the payment of the said installment of July
1957, before the expiration of the indefinite
period of extension, which period had to be
fixed by the court as provided in Art. 1197 of
the Civil Code (10 CJS p. 7611, citing Drake
v. Pueblo Nat. Bank, 96 P. 999, 44 Colo.
49).
Even the pledge which modified the fixed
period in the original promissory note,
did not provide for dates of payment of
installments, nor of any fixed date of
maturity of the whole amount of
indebtedness.
Accordingly, the date of maturity of the
indebtedness should be as may be
determined by the proper court under Art.
1197 of the Civil Code. Hence, the
disputed foreclosure and the subsequent
sale were premature.
The whole indebtedness was guaranteed by
the continuing guaranty of Clarkin, who had
a corresponding deposit with Pacific
Banking which guaranty and deposit, Babst
and Charles Chua, president of Pacific
Banking, had actual knowledge of.
The Court of Appeals noted that no demand
for payment of the P50,000.00 was made
right after it allegedly fell due. It was only on
March 4, 1958 or 13 days after the execution
of the pledge instrument on February 19,
1958 that PBC presented its demand for
payment to Insular Farms.
As found by the Court of Appeals, there was
really no investigation of Insular Farms’
ability to pay the loan after the pledge was
executed but before the demand for
payment, considering that the latter was
made barely two weeks after the execution
of the pledge.
The inconsistency of the petitioner’s
position vis-a-vis the evidence on record
is apparent.
According to Babst, the investigation was
made by Mr. Joseph Tupaz, who rendered
his report (TSN, IX: 6-9, C Babst). The
report, however, as found by the Court of
Appeals, was dated August 28, 1957 way
before the pledge was executed on
February 19, 1958.
Babst also identified an auditor’s report by
Sycip, Gorres and Velayo dated March 17,
1958. The first paragraph of the report
states that the auditors went to inspect
Insular Farms pursuant to a request of
Babst dated March 5, 1958 that is, as found
by the Court of Appeals just one day after
Babst had through his letter of March 4,
1958, threatened Insular Farms, Clarkin and
Hart, with the remedies available to Pacific
Bank if the whole loan was not paid within
48 hours. This can also mean that the
investigation by the auditing firm was a well
conceived subterfuge, when all the while,
foreclosure was already intended against
private respondents.
On account of the foregoing, the Court of
Appeals concluded that the foreclosure was
an act of bad faith:
"5th — Foregoing cannot but convince this
Court that the foreclosure was not an act of
good faith on the part of the Pacific Banking,
— for it must be bound by the acts or
representations, active or tacit of its agent or
its Executive Vice-President Babst, . . . ."
Case Digests for Cases under Articles 1189-1198 Page | 31