G.R. No. 108129 September 23, 1999
—Our next inquiry is whether damages have been
AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner,
vs.
COURT OF APPEALS, PHILIPPINE PHOSPHATE
FERTILIZER, CORP., respondents.
Civil Law; Contracts; Court finds the appellate court’s
conclusion that petitioner violated the subject contract amply
supported by preponderant evidence.—While we agree with
petitioner that when the findings of the Court of Appeals are
contrary to those of the trial court, this Court may review those
findings, we find the appellate court’s conclusion that
petitioner violated the subject contract amply supported by
preponderant evidence. Petitioner’s claim was predicated
merely on the allegations of its employee, Melecio
Hernandez, that the storm or force majeure caused the
petitioner’s delay and failure to lift the cargo of sulfuric acid at
the designated loadports. In contrast, the appellate court
discounted Hernandez’ assertions. For on record, the storm
was not the proximate cause of petitioner’s failure to transport
its purchases on time. The survey report submitted by a third
party surveyor, SGS Far East Limited, revealed that the
vessel, which was unstable, was incapable of carrying the full
load of sulfuric acid. Note that there was a premature
termination of loading in Basay, Negros Oriental. The vessel
had to undergo several repairs before continuing its voyage to
pick-up the balance of cargo at Sangi, Cebu. Despite repairs,
the vessel still failed to carry the whole lot of 500 MT of
sulfuric acid due to ship defects like listing to one side. Its
unfortunate sinking was not due to force majeure. It sunk
because it was, based on SGS survey report, unstable and
unseaworthy.
Same; Same; A party who asserts that a contract of sale has
been changed or modified has the burden of proving the
change or modification by clear and convincing evidence;
Settled is the principle in law that proof of verbal agreements
offered to vary the terms of written agreements is
inadmissible, under the parol evidence rule.—Petitioner
claims that private respondent’s employee, Gil Belen, had
recommended to petitioner to fully utilize the vessel, hence
petitioner’s request for an additional order to complete the
vessel’s 500 MT capacity. This claim has no probative
pertinence nor solid basis. A party who asserts that a contract
of sale has been changed or modified has the burden of
proving the change or modification by clear and convincing
evidence. Repeated requests and additional orders were
contained in petitioner’s letters to private respondent. In
contrast, Belen’s alleged action was only verbal; it was not
substantiated at all during the trial. Note that, using the vessel
to full capacity could redound to petitioner’s advantage, not
the other party’s. If additional orders were at the instance of
private respondent, the same must be properly proved
together with its relevance to the question of delay. Settled is
the principle in law that proof of verbal agreements offered to
vary the terms of written agreements is inadmissible, under
the parol evidence rule. Belen’s purported recommendation
could not be taken at face value and, obviously, cannot
excuse petitioner’s default.
Same; Same; Damages; Where there has been breach of
contract by the buyer, the seller has a right of action for
damages.
properly awarded against petitioner for its unjustified delay in
the performance of its obligation under the contract. Where
there has been breach of contract by the buyer, the seller has
a right of action for damages. Following this rule, a cause of
action of the seller for damages may arise where the buyer
refuses to remove the goods, such that buyer has to remove
them.
Same; Same; Same; Requisites in order that the debtor may
be in default.—In order that the debtor may be in default, it is
necessary that the following requisites be present: (1) that the
obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires
the performance judicially or extrajudicially.
QUISUMBING, J.:
This petition for review assails the Decision 1 dated August 19,
1992, of the Court of Appeals, which set aside the judgment of
the Regional Trial Court of Pasig, Branch 151. The case
stemmed from a complaint filed by the buyer (herein
petitioner) against the seller (private respondent) for alleged
breach of contract. Although petitioner prevailed in the trial
court, the appellate court reversed and instead found
petitioner guilty of delay and therefore liable for damages, as
follows:
WHEREFORE, the Decision of the court a quo is SET ASIDE
and a new one rendered, dismissing the complaint with costs
against the plaintiff (herein petitioner) and, on the
counterclaim, ordering the plaintiff Aerospace Chemical
Industries, Inc. to pay the defendant, Philippine Phosphate
Fertilizer Corporation the sum of P324,516.63 representing
the balance of the maintenance cost and tank rental charges
incurred by the defendant for the failure of the plaintiff to haul
the rest of the rest of the sulfuric acid on the designated date.
Costs against plaintiff-appellee. 2
As gleaned from the records, the following are the
antecedents:
On June 27, 1986, petitioner Aerospace Industries, Inc.
(Aerospace) purchased five hundred (500) metric tons of
sulfuric acid from private respondent Philippine Phosphate
Fertilizer Corporation (Philphos). The contract 3 was in letter-
form as follows:
27 June 1986
AEROSPACE INDUSTRIES INC.
203 E. Fernandez St.
San Juan, Metro Manila
Attention: Mr. Melecio Hernandez
Manager
Subject : Sulfuric Acid Shipment
Gentlemen:
This is to confirm our agreement to supply your Sulfuric Acid
requirement under the following terms and conditions:
A. Commodity : Sulfuric Acid in Bulk
B. Concentration : 98-99% H2SO4
C. Quantity : 500 MT-100 MT Ex-Basay
400 MT Ex-Sangi
D. Price : US$ 50.00/MT-FOB Cotcot,
Basay, Negros Or.
US$ 54.00/MT-FOB Sangi, Cebu
E. Payment : Cash in Philippine currency
payable to Philippine Phosphate
Fertilizer Corp. (MAKATI) at
PCIB selling rate at the time of
payment at least five (5) days prior
to shipment date.
F. Shipping Conditions
1. Laycan : July
2. Load port : Cotcot, Basay, Negros Or. and
Atlas Pier, Sangi, Cebu
xxx xxx xxx
11. Other terms and Conditions: To be mutually agreed upon.
Very truly yours,
Philippine Phosphate Fertilizer Corp.
Signed: Herman J. Rustia
Sr. Manager, Materials & Logistics
CONFORME:
AEROSPACE INDUSTRIES, INC.
Signed: Mr. Melecio Hernandez
Manager
Initially set beginning July 1986, the agreement provided that
the buyer shall pay its purchases in equivalent Philippine
currency value, five days prior to the shipment date. Petitioner
as buyer committed to secure the means of transport to pick-
up the purchases from private respondent's loadports. Per
agreement, one hundred metric tons (100 MT) of sulfuric acid
should be taken from Basay, Negros Oriental storage tank,
while the remaining four hundred metric tons (400 MT) should
be retrieved from Sangi, Cebu.
On August 6, 1986, private respondent sent an advisory
letter 4 to petitioner to withdraw the sulfuric acid purchased at
Basay because private respondent had been incurring
incremental expense of two thousand (P2,000.00) pesos for
each day of delay in shipment.
On October 3, 1986, petitioner paid five hundred fifty-three
thousand, two hundred eighty (P553,280.00) pesos for 500
MT of sulfuric acid.
On November 19, 1986, petitioner chartered M/T Sultan
Kayumanggi, owned by Ace Bulk Head Services. The vessel
was assigned to carry the agreed volumes of freight from
designated loading areas. M/T Kayumanggi withdrew only
70.009 MT of sulfuric acid from Basay because said vessel
heavily tilted on its port side. Consequently, the master of the
ship stopped further loading. Thereafter, the vessel underwent
repairs.
In a demand letter 5 dated December 12, 1986, private
respondent asked petitioner to retrieve the remaining sulfuric
acid in Basay tanks so that said tanks could be emptied on or
before December 15, 1986. Private respondent said that it
would charge petitioner the storage and consequential costs
for the Basay tanks, including all other incremental expenses
due to loading delay, if petitioner failed to comply.
On December 18, 1986, M/T Sultan Kayumanggi docked at
Sangi, Cebu, but withdrew only 157.51 MT of sulfuric acid.
Again, the vessel tilted. Further loading was aborted. Two
survey reports conducted by the Societe Generale de
Surveillance (SGS) Far East Limited, dated December 17,
1986 and January 2, 1987, attested to these occurrences.
Later, on a date not specified in the record, M/T Sultan
Kayumanggi sank with a total of 227.51 MT of sulfuric acid on
board.1âwphi1.nêt
Petitioner chartered another vessel, M/T Don Victor, with a
capacity of approximately 500 MT. 6 On January 26 and
March 20, 1987, Melecio Hernandez, acting for the petitioner,
addressed letters to private respondent, concerning additional
orders of sulfuric acid to replace its sunken purchases, which
letters are hereunder excerpted:
January 26, 1987
xxx xxx xxx
We recently charter another vessel M/T DON VICTOR who
will be authorized by us to lift the balance approximately
272.49 MT.
We request your goodselves to grant us for another Purchase
Order with quantity of 227.51 MT and we are willing to pay the
additional order at the prevailing market price, provided the
lifting of the total 500 MT be centered/confined to only one
safe berth which is Atlas Pier, Sangi, Cebu. 7
March 20, 1987
This refers to the remaining balance of the above product
quantity which were not loaded to the authorized cargo
vessel, M/T Sultan Kayumanggi at your load port — Sangi,
Toledo City.
Please be advised that we will be getting the above product
quantity within the month of April 1987 and we are arranging
for a 500 MT Sulfuric Acid inclusive of which the remaining
balance: 272.49 MT an additional product quantity thereof of
227.51 MT. 8
Petitioner's letter 9 dated May 15, 1987, reiterated the same
request to private respondent.
On January 25, 1988, petitioner's counsel, Atty. Pedro T.
Santos, Jr., sent a demand letter 10 to private respondent for
the delivery of the 272.49 MT of sulfuric acid paid by his
client, or the return of the purchase price of three hundred
seven thousand five hundred thirty (P307,530.00) pesos.
Private respondent in reply, 11 on March 8, 1988, instructed
petitioner to lift the remaining 30 MT of sulfuric acid from
Basay, or pay maintenance and storage expenses
commencing August 1, 1986.
On July 6, 1988, petitioner wrote another letter, insisting on
picking up its purchases consisting of 272.49 MT and an
additional of 227.51 MT of sulfuric acid. According to
petitioner it had paid the chartered vessel for the full capacity
of 500 MT, stating that:
With regard to our balance of sulfuric acid — product at your
shore tank/plant for 272.49 metric ton that was left by M/T
Sultana Kayumanggi due to her sinking, we request for an
additional quantity of 227.51 metric ton of sulfuric acid, 98%
concentration.
The additional quantity is requested in order to complete the
shipment, as the chartered vessel schedule to lift the high
grade sulfuric acid product is contracted for her full
capacity/load which is 500 metric tons more or less.
We are willing to pay the additional quantity — 227.51 metric
tons high grade sulfuric acid in the prevailing price of the said
product. 12
x x x      x x x     x x x
By telephone, petitioner requested private respondent's
Shipping Manager, Gil Belen, to get its additional order of
227.51 MT of sulfuric acid at Isabel, Leyte. 13 Belen relayed
the information to his associate, Herman Rustia, the Senior
Manager for Imports and International Sales of private
respondent. In a letter dated July 22, 1988, Rustia replied:
Subject: Sulfuric Acid Ex-Isabel
Gentlemen:
Confirming earlier telcon with our Mr. G.B. Belen, we regret to
inform you that we cannot accommodate your request to lift
Sulfuric Acid ex-Isabel due to Pyrite limitation and delayed
arrival of imported Sulfuric Acid from Japan. 14
On July 25, 1988, petitioner's counsel wrote to private
respondent another demand letter for the delivery of the
purchases remaining, or suffer tedious legal action his client
would commence.
On May 4, 1989, petitioner filed a complaint for specific
performance and/or damages before the Regional Trial Court
of Pasig, Branch 151. Private respondent filed its answer with
counterclaim, stating that it was the petitioner who was remiss
in the performance of its obligation in arranging the shipping
requirements of its purchases and, as a consequence, should
pay damages as computed below:
Advanced Payment by Aerospace (Oct. 3, 1986) P553,280.00
Less Shipments
70.009 MT sulfuric acid P72,830.36
151.51 MT sulfuric acid 176,966.27 (249,796.63)
—————— ——————
Balance P303,483.37
Less Charges
Basay Maintenance Expense
from Aug. 15 to Dec. 15, 1986
(P2,000.00/day x 122 days) P244,000.00
Sangi — Tank Rental
from Aug. 15, 1986 to Aug. 15, 1987
(P32,000.00/mo. x 12 mos.) 384,000.00 (628,000.00)
—————— ——————
Receivable/Counterclaim (P324,516.63)
===========
Trial ensued and after due proceedings, judgment was
rendered by the trial court in petitioner's favor, disposing as
follows:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against defendant, directing the latter to pay the
former the following sums:
1. P306,060.77 — representing the value of the undelivered
272.49 metric tons of sulfuric acid plaintiff paid to defendant;
2. P91,818.23 — representing unrealized profits, both items
with 12% interest per annum from May 4, 1989, when the
complaint was filed until fully paid;
3. P30,000.00 — as exemplary damages; and
4. P30,000.00 — as attorney's fees and litigation expenses,
both last items also with 12% interest per annum from date
hereof until fully paid.
Defendant's counterclaims are hereby dismissed for lack of
merit.
Costs against defendant. 15
In finding for the petitioner, the trial court held that the
petitioner was absolved in its obligation to pick-up the
remaining sulfuric acid because its failure was due to force
majeure. According to the trial court, it was private respondent
who committed a breach of contract when it failed to
accommodate the additional order of the petitioner, to replace
those that sank in the sea, thus:
To begin with, even if we assume that it is incumbent upon the
plaintiff to "lift" the sulfuric acid it ordered from defendant, the
fact that  force majeure intervened when the vessel which was
previouly (sic) listing, but which the parties, including a
representative of the defendant, did not mind, sunk, has the
effect of absolving plaintiff from "lifting" the sulfuric acid at the
designated load port. But even assuming the plaintiff cannot
be held entirely blameless, the allegation that plaintiff agreed
to a payment of a 2,000-peso incremental expenses per day
to defendant for delayed "lifting has not been proven." . . .
Also, if it were true that plaintiff is indebted to defendant, why
did defendant accept a second additional order after the
transaction in litigation? Why also, did defendant not send
plaintiff statements of account until after 3 years?
All these convince the Court that indeed, defendant must
return what plaintiff has paid it for the goods which the latter
did not actually receive. 16
On appeal by private respondent, the Court of Appeals
reversed the decision of the trial court, as follows:
Based on the facts of this case as hereinabove set forth, it is
clear that the plaintiff had the obligation to withdraw the full
amount of 500 MT of sulfuric acid from the defendant's
loadport at Basay and Sangi on or before August 15, 1986. As
early as August 6, 1986 it had been accordingly warned by
the defendant that any delay in the hauling of the commodity
would mean expenses on the part of the defendant amounting
to P2,000.00 a day. The plaintiff sent its vessel, the "M/T
Sultan Kayumanggi", only on November 19, 1987. The vessel,
however; was not capable of loading the entire 500 MT and in
fact, with its load of only 227.519 MT, it sank.
Contrary to the position of the trial court, the sinking of the
"M/T Sultan Kayumanggi" did not absolve the plaintiff from its
obligation to lift the rest of the 272.481 MT of sulfuric acid at
the agreed time. It was the plaintiff's duty to charter another
vessel for the purpose. It did contract for the services of a new
vessel, the "M/T Don Victor", but did not want to lift the
balance of 272.481 MT only but insisted that its additional
order of 227.51 MT be also given by the defendant to
complete 500 MT. apparently so that the vessel may be
availed of in its full capacity.
xxx xxx xxx
We find no basis for the decision of the trial court to make the
defendant liable to the plaintiff not only for the cost of the
sulfuric acid, which the plaintiff itself failed to haul, but also for
unrealized profits as well as exemplary damages and
attorney's fees. 17
Respondent Court of Appeals found the petitioner guilty of
delay and negligence in the performance of its obligation. It
dismissed the complaint of petitioner and ordered it to pay
damages representing the counterclaim of private respondent.
The motion for reconsideration filed by petitioner was denied
by respondent court in its Resolution dated December 21,
1992, for lack of merit.
Petitioner now comes before us, assigning the following
errors:
I.
RESPONDENT COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT TO HAVE COMMITTED
A BREACH OF CONTRACT WHEN IT IS NOT DISPUTED
THAT PETITIONER PAID IN FULL THE VALUE OF 500 MT
OF SULFURIC ACID TO PRIVATE RESPONDENT BUT THE
LATTER WAS ABLE TO DELIVER TO PETITIONER ONLY
227.51 M.T.
II.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
HOLDING PETITIONER LIABLE FOR DAMAGES TO
PRIVATE RESPONDENT ON THE BASIS OF A XEROX
COPY OF AN ALLEGED AGREEMENT TO HOLD
PETITIONER LIABLE FOR DAMAGES FOR THE DELAY
WHEN PRIVATE RESPONDENT FAILED TO PRODUCE
THE ORIGINAL IN CONTRAVENTION OF THE RULES ON
EVIDENCE.
III.
RESPONDENT COURT OF APPEALS ERRED IN FAILING
TO CONSIDER THE UNDISPUTED FACTS THAT
PETITIONER'S PAYMENT FOR THE GOODS WAS
RECEIVED BY PRIVATE RESPONDENT WITHOUT ANY
QUALIFICATION AND THAT PRIVATE RESPONDENT
ENTERED INTO ANOTHER CONTRACT TO SUPPLY
PETITIONER 227.519 MT OF SULFURIC ACID IN ADDITION
TO THE UNDELIVERED BALANCE AS PROOF THAT ANY
DELAY OF PETITIONER WAS DEEMED WAIVED BY SAID
ACTS OF RESPONDENT.
IV.
RESPONDENT COURT OF APPEALS ERRED IN NOT
CONSIDERING THE LAW THAT WHEN THE SALE
INVOLVES FUNGIBLE GOODS AS IN THIS CASE THE
EXPENSES FOR STORAGE AND MAINTENANCE ARE FOR
THE ACCOUNT OF THE SELLER (ARTICLE 1504 CIVIL
CODE).
V.
RESPONDENT COURT OF APPEALS ERRED IN FAILING
TO RENDER JUDGMENT FOR PETITIONER AFFIRMING
THE DECISION OF THE TRIAL COURT.
From the assigned errors, we synthesize the pertinent issues
raised by the petitioner as follows:
1. Did the respondent court err in holding that the petitioner
committed breach of contract, considering that:
a) the petitioner allegedly paid the full value of its purchases,
yet received only a portion of said purchases?
b) petitioner and private respondent allegedly had also agreed
for the purchase and supply of an additional 227.519 MT of
sulfuric acid, hence prior delay, if any, had been waived?
2. Did the respondent court err in awarding damages to
private respondent?
3. Should expenses for the storage and preservation of the
purchased fungible goods, namely sulfuric acid, be on seller's
account pursuant to Article 1504 of the Civil Code?
To resolve these issues, petitioner urges us to review factual
findings of respondent court and its conclusion that the
petitioner was guilty of delay in the performance of its
obligation. According to petitioner, that conclusion is contrary
to the factual evidence. It adds that respondent court
disregarded the rule that findings of the trial court are given
weight, with the highest degree of respect. Claiming that
respondent court's findings conflict with those of the trial
court, petitioner prays that the trial court's findings be upheld
over those of the appellate court.
Petitioner argues that it paid the purchase price of sulfuric
acid, five (5) days prior to the withdrawal thereof, or on
October 3, 1986, hence, it had complied with the primary
condition set in the sales contract. Petitioner claims its failure
to pick-up the remaining purchases on time was due to a
storm, a  force majeure, which sank the vessel. It thus claims
exemption from liability to pay damages. Petitioner also
contends that it was actually the private respondent's shipping
officer, who advised petitioner to buy the additional 227.51 MT
of sulfuric acid, so as to fully utilize the capacity of the vessel
it chartered. Petitioner insists that when its ship was ready to
pick-up the remaining balance of 272.49 MT of sulfuric acid,
private respondent could not comply with the contract
commitment due to "pyrite limitation."
While we agree with petitioner that when the findings of the
Court of Appeals are contrary to those of the trial court, 18 this
Court may review those findings, we find the appellate court's
conclusion that petitioner violated the subject contract amply
supported by preponderant evidence. Petitioner's claim was
predicated merely on the allegations of its employee, Melecio
Hernandez, that the storm or  force majeure caused the
petitioner's delay and failure to lift the cargo of sulfuric acid at
the designated loadports. In contrast, the appellate court
discounted Hernandez' assertions. For on record, the storm
was not the proximate cause of petitioner's failure to transport
its purchases on time. The survey report submitted by a third
party surveyor, SGS Far East Limited, revealed that the
vessel, which was unstable, was incapable of carrying the full
load of sulfuric acid. Note that there was a premature
termination of loading in Basay, Negros Oriental. The vessel
had to undergo several repairs before continuing its voyage to
pick-up the balance of cargo at Sangi, Cebu. Despite repairs,
the vessel still failed to carry the whole lot of 500 MT of
sulfuric acid due to ship defects like listing to one side. Its
unfortunate sinking was not due to  force majeure. It sunk
because it was, based on SGS survey report, unstable and
unseaworthy.
Witness surveyor Eugenio Rabe's incident report, dated
December 13, 1986 in Basay, Negros Oriental, elucidated this
point:
Loading was started at 1500hrs. November 19. At 1600Hrs.
November 20, loading operation was temporarily stopped by
the vessel's master due to ships stability was heavily tilted to
port side, ship's had tried to transfer the loaded acid to
stbdside but failed to do so, due to their auxiliary pump on
board does not work out for acid.
xxx xxx xxx
Note. Attending surveyor arrived BMC Basay on November
22, due to delayed advice of said vessel Declared quantity
loaded onboard based on data's provided by PHILPHOS
representative.
On November 26, two representative of shipping company
arrived Basay to assist the situation, at 1300Hrs repairing
and/or welding of tank number 5 started at 1000Hrs
November 27, repairing and/or welding was suspended due to
the explosion of tank no. 5. Explosion ripped about two feet of
the double bottom tank.
November 27 up to date no progress of said vessel. 19
While at Sangi, Cebu, the vessel's condition (listing) did not
improve as the survey report therein noted:
Declared quantity loaded on board was based on shore tank
withdrawal due to ship's incomplete tank calibration table.
Barge displacement cannot be applied due to ship was listing
to Stboard side which has been loaded with rocks to control
her stability. 20
These two vital pieces of information were totally ignored by
trial court. The appellate court correctly took these into
account, significantly. As to the weather condition in Basay,
the appellate court accepted surveyor Rabe's testimony, thus:
Q. Now, Mr. Witness, what was the weather condition then at
Basay, Negros Oriental during the loading operation of sulfuric
acid on board the Sultana Kayumanggi?
A. Fair, sir. 21
Since the third party surveyor was neither petitioner's nor
private respondent's employee, his professional report should
carry more weight than that of Melecio Hernandez, an
employee of petitioner. Petitioner, as the buyer, was obligated
under the contract to undertake the shipping requirements of
the cargo from the private respondent's loadports to the
petitioner's designated warehouse. It was petitioner which
chartered M/T Sultan Kayumanggi. The vessel was
petitioner's agent. When it failed to comply with the necessary
loading conditions of sulfuric acid, it was incumbent upon
petitioner to immediately replace M/T Sultan Kayumanggi with
another seaworthy vessel. However, despite repeated
demands, petitioner did not comply seasonably.
Additionally, petitioner claims that private respondent's
employee, Gil Belen, had recommended to petitioner to fully
utilize the vessel, hence petitioner's request for additional
order to complete the vessel's 500 MT capacity. This claim
has no probative pertinence nor solid basis. A party who
asserts that a contract of sale has been changed or modified
has the burden of proving the change or modification by clear
and convincing evidence. 22 Repeated requests and additional
orders were contained in petitioner's letters to private
respondent. In contrast, Belen's alleged action was only
verbal; it was not substantiated at all during the trial. Note
that, using the vessel to full capacity could redound to
petitioner's advantage, not the other party's. If additional
orders were at the instance of private respondent, the same
must be properly proved together with its relevance to the
question of delay. Settled is the principle in law that proof of
verbal agreements offered to vary the terms of written
agreements is inadmissible, under the parol evidence
rule. 23 Belen's purported recommendation could not be taken
at face value and, obviously, cannot excuse petitioner's
default.
Respondent court found petitioner's default unjustified, and on
this conclusion we agree:
It is not true that the defendant was not in a position to deliver
the 272.481 MT which was the balance of the original 500 MT
purchased by the plaintiff. The whole lot of 500 MT was ready
for lifting as early as August 15, 1986. What the defendant
could not sell to the plaintiff was the additional 227.51 MT
which said plaintiff was ordering, for the reason that the
defendant was short of the supply needed. The defendant,
however, had no obligation to agree to this additional order
and may not be faulted for its inability to meet the said
additional requirements of the plaintiff. And the defendant's
incapacity to agree to the delivery of another 227.51 MT is not
a legal justification for the plaintiffs refusal to lift the remaining
272.481.
It is clear from the plaintiff's letters to the defendant that it
wanted to send the "M/T Don Victor" only if the defendant
would confirm that it was ready to deliver 500 MT. Because
the defendant could not sell another 227.51 MT to the plaintiff,
the latter did not send a new vessel to pick up the balance of
the 500 MT originally contracted for by the parties. This,
inspite the representations made by the defendant for the
hauling thereof as scheduled and its reminders that any
expenses for the delay would be for the account of the
plaintiff. 24
We are therefore constrained to declare that the respondent
court did not err when it absolved private respondent from any
breach of contract.
Our next inquiry is whether damages have been properly
awarded against petitioner for its unjustified delay in the
performance of its obligation under the contract. Where there
has been breach of contract by the buyer, the seller has a
right of action for damages. Following this rule, a cause of
action of the seller for damages may arise where the buyer
refuses to remove the goods, such that buyer has to remove
them. 25 Article 1170 of the Civil Code provides:
Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.
Delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of
the obligation. 26 Art. 1169 states:
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.
In order that the debtor may be in default, it is necessary that
the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the
performance judicially or extrajudicially. 27
In the present case, private respondent required petitioner to
ship out or lift the sulfuric acid as agreed, otherwise petitioner
would be charged for the consequential damages owing to
any delay. As stated in private respondent's letter to petitioner,
dated December 12, 1986:
Subject: M/T "KAYUMANGGI"
Gentlemen:
This is to reiterate our telephone advice and our letter HJR-
8612-031 dated 2 December 1986 regarding your sulfuric acid
vessel, M/T "KAYUMANGGI".
As we have, in various instances, advised you, our Basay
wharf will have to be vacated 15th December 1986 as we are
expecting the arrival of our chartered vessel purportedly to
haul our equipments and all other remaining assets in Basay.
This includes our sulfuric acid tanks. We
regret,  therefore, that if these tanks are not emptied on or
before the 15th of December, we either have to charge you
for the tanks waiting time at Basay and its consequential
costs  (i.e. chartering of another vessel for its second pick-up
at Basay,  handling,  etc.) as well as all other incremental
costs on account of the protracted loading
delay.  28  (Emphasis supplied)
Indeed the above demand, which was unheeded, justifies the
finding of delay. But when did such delay begin? The above
letter constitutes private respondent's extrajudicial demand for
the petitioner to fulfill its obligation, and its dateline is
significant. Given its date, however, we cannot sustain the
finding of the respondent court that petitioner's delay started
on August 6, 1986. The Court of Appeals had relied on private
respondent's earlier letter to petitioner of that date for
computing the commencement of delay. But as averred by
petitioner, said letter of August 6th is not a categorical
demand. What it showed was a mere statement of fact, that
"[F]for your information any delay in Sulfuric Acid withdrawal
shall cost us incremental expenses of P2,000.00 per day."
Noteworthy, private respondent accepted the full payment by
petitioner for purchases on October 3, 1986, without
qualification, long after the August 6th letter. In contrast to the
August 6th letter, that of December 12th was a categorical
demand.
Records reveal that a tanker ship had to pick-up sulfuric acid
in Basay, then proceed to get the remaining stocks in Sangi,
Cebu. A period of three days appears to us reasonable for a
vessel to travel between Basay and Sangi. Logically, the
computation of damages arising from the shipping delay
would then have to be from December 15, 1986, given said
reasonable period after the December 12th letter. More
important, private respondent was forced to vacate Basay
wharf only on December 15th. Its Basay expenses incurred
before December 15, 1986, were necessary and regular
business expenses for which the petitioner should not be
obliged to pay.
Note that private respondent extended its lease agreement for
Sangi, Cebu storage tank until August 31, 1987, solely for
petitioner's sulfuric acid. It stands to reason that petitioner
should reimburse private respondent's rental expenses of
P32,000 monthly, commencing December 15, 1986, up to
August 31, 1987, the period of the extended lease. Note
further that there is nothing on record refuting the amount of
expenses abovecited. Private respondent presented in court
two supporting documents: first, the lease agreement
pertaining to the equipment, and second a letter dated June
15, 1987, sent by Atlas Fertilizer Corporation to private
respondent representing the rental charges incurred. Private
respondent is entitled to recover the payment for these
charges. It should be reimbursed the amount of two hundred
seventy two thousand
(P272,000.00) 29 pesos, corresponding to the total amount of
rentals from December 15, 1986 to August 31, 1987 of the
Sangi, Cebu storage tank.
Finally, we note also that petitioner tries to exempt itself from
paying rental expenses and other damages by arguing that
expenses for the preservation of fungible goods must be
assumed by the seller. Rental expenses of storing sulfuric
acid should be at private respondent's account until
ownership is transferred, according to petitioner. However, the
general rule that before delivery, the risk of loss is borne by
the seller who is still the owner, is not applicable in this case
because petitioner had incurred delay in the performance of
its obligation. Article 1504 of the Civil Code clearly states:
Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but
when the ownership therein is transferred to the buyer the
goods are at the buyer's risk whether actual delivery has been
made or not, except that:
xxx xxx xxx
(2)  Where actual delivery has been delayed through the fault
of either the buyer or seller the goods are at the risk of the
party at fault. (emphasis supplied)
On this score, we quote with approval the findings of the
appellate court, thus:
. . . The defendant [herein private respondent] was not remiss
in reminding the plaintiff that it would have to bear the said
expenses for failure to lift the commodity for an unreasonable
length of time.
But even assuming that the plaintiff did not consent to be so
bound, the provisions of Civil Code come in to make it liable
for the damages sought by the defendant.
Art. 1170 of the Civil Code provides:
Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.
Certainly, the plaintiff [herein petitioner] was guilty of
negligence and delay in the performance of its obligation to lift
the sulfuric acid on August 15, 1986 and had contravened the
tenor of its letter-contract with the defendant. 30
As pointed out earlier, petitioner is guilty of delay, after private
respondent made the necessary extrajudicial demand by
requiring petitioner to lift the cargo at its designated loadports.
When petitioner failed to comply with its obligations under the
contract it became liable for its shortcomings. Petitioner is
indubitably liable for proven damages.
Considering, however, that petitioner made an advance
payment for the unlifted sulfuric acid in the amount of three
hundred three thousand, four hundred eighty three pesos and
thirty seven centavos (P303,483.37), it is proper to set-off this
amount against the rental expenses initially paid by private
respondent. It is worth noting that the adjustment and
allowance of private respondent's counterclaim or set-off in
the present action, rather than by another independent action,
is encouraged by the law. Such practice serves to avoid
circuitry of action, multiplicity of suits, inconvenience,
expense, and unwarranted consumption of the court's
time. 31 The trend of judicial decisions is toward a liberal
extension of the right to avail of counterclaims or set-
offs. 32 The rules on counterclaims are designed to achieve
the disposition of a whole controversy involving the conflicting
claims of interested parties at one time and in one action,
provided all parties can be brought before the court and the
matter decided without prejudicing the right of any
party. 33 Set-off in this case is proper and reasonable. It
involves deducting P272,000.00 (rentals) from P303,483.37
(advance payment), which will leave the amount of
P31,483.37 refundable to petitioner.
WHEREFORE, the petition is hereby DENIED. The assailed
decision of the Court of Appeals in CA G.R. CV No. 33802 is
AFFIRMED, with MODIFICATION that the amount of
damages awarded in favor of private respondent is
REDUCED to Two hundred seventy two thousand pesos
(P272,000.00). It is also ORDERED that said amount of
damages be OFFSET against petitioner's advance payment
of Three hundred three thousand four hundred eighty three
pesos and thirty-seven centavos (P303,483.37) representing
the price of the 272.481 MT of sulfuric acid not lifted. Lastly, it
is ORDERED that the excess amount of thirty one thousand,
four hundred eighty three pesos and thirty seven centavos
(P31,483.37) be RETURNED soonest by private respondent
to herein petitioner.1âwphi1.nêt
Costs against the petitioner.
SO ORDERED.
G.R. No. 153004       November 5, 2004
SANTOS VENTURA HOCORMA FOUNDATION,
INC., petitioner,
vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.
Actions; Compromise Agreements; Judgments; The general
rule is that a compromise has upon the parties the effect and
authority of res judicata, with respect to the matter definitely
stated therein, or which by implication from its terms should
be deemed to have been included therein, and this holds true
even if the agreement has not been judicially approved.—A
compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced. It is an agreement between two or more
persons, who, for preventing or putting an end to a lawsuit,
adjust their difficulties by mutual consent in the manner which
they agree on, and which everyone of them prefers in the
hope of gaining, balanced by the danger of losing. The
general rule is that a compromise has upon the parties the
effect and authority of res judicata, with respect to the matter
definitely stated therein, or which by implication from its terms
should be deemed to have been included therein. This holds
true even if the agreement has not been judicially approved.
Same; Same; Same; The compromise agreement as a
consensual contract becomes binding between the parties
upon its execution and not upon its court approval.—In the
case at bar, the Compromise Agreement was entered into by
the parties on October 26, 1990. It was judicially approved on
September 30, 1991. Applying existing jurisprudence, the
compromise agreement as a consensual contract became
binding between the parties upon its execution and not upon
its court approval. From the time a compromise is validly
entered into, it becomes the source of the rights and
obligations of the parties thereto. The purpose of the
compromise is precisely to replace and terminate
controverted claims.
Obligations and Contracts; Defaults; Delay as used in Art.
1169 of the New Civil Code is synonymous to default or mora
which means delay in the fulfillment of obligations—it is the
non-fulfillment of the obligation with respect to time.—Article
1169 of the New Civil Code provides: 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. [Emphasis supplied] Delay as used in this
article is synonymous to default or mora which means delay in
the fulfillment of obligations. It is the non-fulfillment of the
obligation with respect to time. In order for the debtor to be in
default, it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially.
Same; Same; Damages; Interests; When the debtor knows
the amount and period when he is to pay, interest as
damages is generally allowed as a matter of right.—When the
debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of right.
The complaining party has been deprived of funds to which he
is entitled by virtue of their compromise agreement. The goal
of compensation requires that the complainant be
compensated for the loss of use of those funds. This
compensation is in the form of interest. In the absence of
agreement, the legal rate of interest shall prevail. The legal
interest for loan as forbearance of money is 12% per annum
to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of
the Civil Code.
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the
Decision,1 dated January 30, 2002, as well as the April 12,
2002, Resolution2 of the Court of Appeals in CA-G.R. CV No.
55122. The appellate court reversed the Decision,3 dated
October 4, 1996, of the Regional Trial Court of Makati City,
Branch 148, in Civil Case No. 95-811, and likewise denied
petitioner's Motion for Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation,
Inc. (SVHFI) were the plaintiff and defendant, respectively, in
several civil cases filed in different courts in the Philippines.
On October 26, 1990, the parties executed a Compromise
Agreement4 which amicably ended all their pending
litigations. The pertinent portions of the Agreement read as
follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5
Million in the following manner:
a. P1.5 Million immediately upon the execution of this
agreement;
b. The balance of P13 Million shall be paid, whether in one
lump sum or in installments, at the discretion of the
Foundation, within a period of not more than two (2) years
from the execution of this agreement; provided, however, that
in the event that the Foundation does not pay the whole or
any part of such balance, the same shall be paid with the
corresponding portion of the land or real properties subject of
the aforesaid cases and previously covered by the notices of
lis pendens, under such terms and conditions as to area,
valuation, and location mutually acceptable to both parties;
but in no case shall the payment of such balance be later than
two (2) years from the date of this agreement; otherwise,
payment of any unpaid portion shall only be in the form of
land aforesaid;
2. Immediately upon the execution of this agreement (and
[the] receipt of the P1.5 Million), plaintiff Santos shall cause
the dismissal with prejudice of Civil Cases Nos. 88-743,
1413OR, TC-1024, 45366 and 18166 and voluntarily withdraw
the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598)
and 88-45366 (C.A.-G.R. No. 24304) respectively and for the
immediate lifting of the aforesaid various notices of lis
pendens on the real properties aforementioned (by signing
herein attached corresponding documents, for such lifting);
provided, however, that in the event that defendant
Foundation shall sell or dispose of any of the lands previously
subject of lis pendens, the proceeds of any such sale, or any
part thereof as may be required, shall be partially devoted to
the payment of the Foundation's obligations under this
agreement as may still be subsisting and payable at the time
of any such sale or sales;
...
5. Failure of compliance of any of the foregoing terms and
conditions by either or both parties to this agreement shall
ipso facto and ipso jure automatically entitle the aggrieved
party to a writ of execution for the enforcement of this
agreement. [Emphasis supplied]5
In compliance with the Compromise Agreement, respondent
Santos moved for the dismissal of the aforesaid civil cases.
He also caused the lifting of the notices of lis pendens on the
real properties involved. For its part, petitioner SVHFI, paid
P1.5 million to respondent Santos, leaving a balance of P13
million.
Subsequently, petitioner SVHFI sold to Development
Exchange Livelihood Corporation two real properties, which
were previously subjects of lis pendens. Discovering the
disposition made by the petitioner, respondent Santos sent a
letter to the petitioner demanding the payment of the
remaining P13 million, which was ignored by the latter.
Meanwhile, on September 30, 1991, the Regional Trial Court
of Makati City, Branch 62, issued a Decision6 approving the
compromise agreement.
On October 28, 1992, respondent Santos sent another letter
to petitioner inquiring when it would pay the balance of P13
million. There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of
Makati City, Branch 62, for the issuance of a writ of execution
of its compromise judgment dated September 30, 1991. The
RTC granted the writ. Thus, on March 10, 1993, the Sheriff
levied on the real properties of petitioner, which were formerly
subjects of the lis pendens. Petitioner, however, filed
numerous motions to block the enforcement of the said writ.
The challenge of the execution of the aforesaid compromise
judgment even reached the Supreme Court. All these efforts,
however, were futile.
On November 22, 1994, petitioner's real properties located in
Mabalacat, Pampanga were auctioned. In the said auction,
Riverland, Inc. was the highest bidder for P12 million and it
was issued a Certificate of Sale covering the real properties
subject of the auction sale. Subsequently, another auction
sale was held on February 8, 1995, for the sale of real
properties of petitioner in Bacolod City. Again, Riverland, Inc.
was the highest bidder. The Certificates of Sale issued for
both properties provided for the right of redemption within one
year from the date of registration of the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint
for Declaratory Relief and Damages7 alleging that there was
delay on the part of petitioner in paying the balance of P13
million. They further alleged that under the Compromise
Agreement, the obligation became due on October 26, 1992,
but payment of the remaining P12 million was effected only on
November 22, 1994. Thus, respondents prayed that petitioner
be ordered to pay legal interest on the obligation, penalty,
attorney's fees and costs of litigation. Furthermore, they
prayed that the aforesaid sales be declared final and not
subject to legal redemption.
In its Answer,8 petitioner countered that respondents have no
cause of action against it since it had fully paid its obligation to
the latter. It further claimed that the alleged delay in the
payment of the balance was due to its valid exercise of its
rights to protect its interests as provided under the Rules.
Petitioner counterclaimed for attorney's fees and exemplary
damages.
On October 4, 1996, the trial court rendered a
Decision9 dismissing herein respondents' complaint and
ordering them to pay attorney's fees and exemplary damages
to petitioner. Respondents then appealed to the Court of
Appeals. The appellate court reversed the ruling of the trial
court:
WHEREFORE, finding merit in the appeal, the appealed
Decision is hereby REVERSED and judgment is hereby
rendered ordering appellee SVHFI to pay appellants Santos
and Riverland, Inc.: (1) legal interest on the principal amount
of P13 million at the rate of 12% per annum from the date of
demand on October 28, 1992 up to the date of actual
payment of the whole obligation; and (2) P20,000 as
attorney's fees and costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner
assigns the following issues:
I already commenced.15 It is an agreement between two or
WHETHER OR NOT THE COURT OF APPEALS
COMMITTED REVERSIBLE ERROR WHEN IT AWARDED
LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR.
SANTOS AND RIVERLAND, INC., NOTWITHSTANDING
THE FACT THAT NEITHER IN THE COMPROMISE
AGREEMENT NOR IN THE COMPROMISE JUDGEMENT
OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT OF
INTEREST TO THE RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED IN
AWARDING LEGAL IN[T]EREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION
OF THE PETITIONER TO RESPONDENT SANTOS TO PAY
A SUM OF MONEY HAD BEEN CONVERTED TO AN
OBLIGATION TO PAY IN KIND – DELIVERY OF REAL
PROPERTIES OWNED BY THE PETITIONER – WHICH
HAD BEEN FULLY PERFORMED
III
WHETHER OR NOT RESPONDENTS ARE BARRED FROM
DEMANDING PAYMENT OF INTEREST BY REASON OF
THE WAIVER PROVISION IN THE COMPROMISE
AGREEMENT, WHICH BECAME THE LAW AMONG THE
PARTIES10
The only issue to be resolved is whether the respondents are
entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement
or compromise judgment does not provide for the payment of
interest, the legal interest by way of penalty on account of
fault or delay shall not be due and payable, considering that
the obligation or loan, on which the payment of legal interest
could be based, has been superseded by the compromise
agreement.11 Furthermore, the petitioner argues that the
respondents are barred by res judicata from seeking legal
interest on account of the waiver clause in the duly approved
compromise agreement.12 Article 4 of the compromise
agreement provides:
Plaintiff Santos waives and renounces any and all other
claims that he and his family may have on the defendant
Foundation arising from and in connection with the aforesaid
civil cases, and defendant Foundation, on the other hand,
also waives and renounces any and all claims that it may
have against plaintiff Santos in connection with such
cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise
agreement did not provide for a period within which the
obligation will become due and demandable, it is incumbent
upon respondent Santos to ask for judicial intervention for
purposes of fixing the period. It is only when a fixed period
exists that the legal interests can be computed.
Respondents profer that their right to damages is based on
delay in the payment of the obligation provided in the
Compromise Agreement. The Compromise Agreement
provides that payment must be made within the two-year
period from its execution. This was approved by the trial court
and became the law governing their contract. Respondents
posit that petitioner's failure to comply entitles them to
damages, by way of interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
more persons, who, for preventing or putting an end to a
lawsuit, adjust their difficulties by mutual consent in the
manner which they agree on, and which everyone of them
prefers in the hope of gaining, balanced by the danger of
losing.16
The general rule is that a compromise has upon the parties
the effect and authority of res judicata, with respect to the
matter definitely stated therein, or which by implication from
its terms should be deemed to have been included
therein.17 This holds true even if the agreement has not been
judicially approved.18
In the case at bar, the Compromise Agreement was entered
into by the parties on October 26, 1990.19 It was judicially
approved on September 30, 1991.20 Applying existing
jurisprudence, the compromise agreement as a consensual
contract became binding between the parties upon its
execution and not upon its court approval. From the time a
compromise is validly entered into, it becomes the source of
the rights and obligations of the parties thereto. The purpose
of the compromise is precisely to replace and terminate
controverted claims.21
In accordance with the compromise agreement, the
respondents asked for the dismissal of the pending civil
cases. The petitioner, on the other hand, paid the initial P1.5
million upon the execution of the agreement. This act of the
petitioner showed that it acknowledges that the agreement
was immediately executory and enforceable upon its
execution.
As to the remaining P13 million, the terms and conditions of
the compromise agreement are clear and unambiguous. It
provides:
...
b. The balance of P13 Million shall be paid, whether in one
lump sum or in installments, at the discretion of the
Foundation, within a period of not more than two (2) years
from the execution of this agreement…22 [Emphasis
supplied.]
...
The two-year period must be counted from October 26, 1990,
the date of execution of the compromise agreement, and not
on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand
letter to petitioner on October 28, 1992, the obligation was
already due and demandable. When the petitioner failed to
pay its due obligation after the demand was made, it incurred
delay.
Article 1169 of the New Civil Code provides:
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. [Emphasis
supplied]
Delay as used in this article is synonymous to default or mora
which means delay in the fulfillment of obligations. It is the
non-fulfillment of the obligation with respect to time.23
In order for the debtor to be in default, it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the
performance judicially or extrajudicially.24
In the case at bar, the obligation was already due and
demandable after the lapse of the two-year period from the
execution of the contract. The two-year period ended on
October 26, 1992. When the respondents gave a demand
letter on October 28, 1992, to the petitioner, the obligation
was already due and demandable. Furthermore, the
obligation is liquidated because the debtor knows precisely
how much he is to pay and when he is to pay it.
The second requisite is also present. Petitioner delayed in the
performance. It was able to fully settle its outstanding balance
only on February 8, 1995, which is more than two years after
the extra-judicial demand. Moreover, it filed several motions
and elevated adverse resolutions to the appellate court to
hinder the execution of a final and executory judgment, and
further delay the fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28,
1992, was in accordance with an extra-judicial demand
contemplated by law.
Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article
117025 of the New Civil Code.
When the debtor knows the amount and period when he is to
pay, interest as damages is generally allowed as a matter of
right.26 The complaining party has been deprived of funds to
which he is entitled by virtue of their compromise agreement.
The goal of compensation requires that the complainant be
compensated for the loss of use of those funds. This
compensation is in the form of interest.27 In the absence of
agreement, the legal rate of interest shall prevail.28 The legal
interest for loan as forbearance of money is 12% per
annum29 to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.30
WHEREFORE, the petition is DENIED for lack of merit. The
Decision dated January 30, 2002 of the Court of Appeals and
its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are
AFFIRMED. Costs against petitioner.
SO ORDERED.
TITAN-IKEDA CONSTRUCTION & DEVELOPMENT
CORPORATION, Petitioner, v. PRIMETOWN PROPERTY
GROUP, INC., Respondent.
Appeals; Factual issues are entertained only in petition for
review in exceptional cases such as where the findings of fact
of the Court of Appeals and the trial court are conflicting.—As
a general rule, only questions of law may be raised in a
petition for review on certiorari. Factual issues are entertained
only in exceptional cases such as where the findings of fact of
the CA and the trial court are conflicting.
Contracts; Words and Phrases; A contract is a meeting of the
minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some
service.—A contract is a meeting of the minds between two
persons whereby one binds himself, with respect to the other,
to give something or to render some service. This case
involved two contracts entered into by the parties with regard
to the project. The parties first entered into a contract for a
piece of work when they executed the supplemental
agreement. Petitioner as contractor bound itself to execute
the project for respondent, the owner/developer, in
consideration of a price certain (P130,000,000). The
supplemental agreement was reciprocal in nature because
the obligation of respondent to pay the entire contract price
depended on the obligation of petitioner to complete the
project (and vice versa). Thereafter, the parties entered into a
second contract. They agreed to extinguish the supplemental
agreement as evidenced by the October 12, 1995 letter-
agreement which was duly acknowledged by their respective
representatives.
Contracts; Quasi-Contracts; Solutio Indebiti; Requisites; If
something is received when there is no right to demand it and
it was unduly delivered through mistake, the obligation to
return it arises.—Because petitioner acknowledged that it had
been overpaid, it was obliged to return the excess to
respondent. Embodying the principle of solutio indebiti, Article
2154 of the Civil Code provides: Article 2154. If something is
received when there is no right to demand it and it was unduly
delivered through mistake, the obligation to return it arises.
For the extra-contractual obligation of solutio indebiti to arise,
the following requisites must be proven: 1. the absence of a
right to collect the excess sums and 2. the payment was
made by mistake.
Same; Same; Payment by Mistake; Presumptions; It is
presumed that there was a mistake in the payment if
something which had never been due or had already been
paid was delivered.—With regard to the first requisite,
because the supplemental agreement had been extinguished
by the mutual agreement of the parties, petitioner became
entitled only to the cost of services it actually rendered (i.e.,
that fraction of the project cost in proportion to the percentage
of its actual accomplishment in the project). It was not entitled
to the excess (or extent of overpayment). On the second
requisite, Article 2163 of the Civil Code provides: Article 2163.
It is presumed that there was a mistake in the payment if
something which had never been due or had already been
paid was delivered; but, he from whom the return is claimed
may prove that the delivery was made out of liberality or for
any other just cause. (emphasis supplied)
Same; Same; Same; He who accepts, in good faith, an undue
payment of a thing certain and determinate shall only be
responsible for the impairment or loss of the same or its
accessories and accessions insofar as he has thereby been
benefited; One who receives payment by mistake in good
faith is, as a general rule, only liable to return the thing
delivered.—Stated simply, respondent erroneously delivered
excess units to petitioner and the latter, pursuant to Article
2154, was obliged to the return them to respondent. Article
2160 of the Civil Code provides: Article 2160. He who in good
faith accepts an undue payment of a thing certain and
determinate shall only be responsible for the impairment or
loss of the same or its accessories and accessions insofar as
he has thereby been benefited. If he has alienated it, he shall
return the price or assign the action to collect the sum. One
who receives payment by mistake in good faith is, as a
general rule, only liable to return the thing delivered. If he
benefited therefrom, he is also liable for the impairment or
loss of the thing delivered and its accessories and
accessions. If he sold the thing delivered, he should either
deliver the proceeds of the sale or assign the action to collect
to the other party.
Obligations and Contracts; Words and Phrases; “Mora” or
“Delay,” Defined.—Mora or delay is the failure to perform the
obligation in due time because of dolo (malice) or culpa
(negligence). A debtor is deemed to have violated his
obligation to the creditor from the time the latter makes a
demand. Once the creditor makes a demand, the debtor
incurs mora or delay.
Same; Construction Contracts; Additional Costs; Unjust
Enrichment; A claim for the cost of additional work arising
from changes in the scope of work can only be allowed upon
the written authority from the developer/owner
ordering/allowing the changes in work and written agreement
of parties with regard to the increase in cost (or price) due to
the change in work or design modification; A contractor who
fails to secure the owner’s or developer’s written authority to
changes in the work or written assent to the additional cost to
be incurred cannot invoke the principle of unjust enrichment.
—In Powton Conglomerate, Inc. v. Agcolicol, we reiterated
that a claim for the cost of additional work arising from
changes in the scope of work can only be allowed upon the:
1. written authority from the developer/owner
ordering/allowing the changes in work; and 2. written
agreement of parties with regard to the increase in cost (or
price) due to the change in work or design
modification.Furthermore: Compliance with the two requisites
of Article 1724, a specific provision governing additional
works, is a condition precedent of the recovery. The absence
of one or the other bars the recovery of additional costs.
Neither the authority for the changes made nor the additional
price to be paid therefor may be proved by any other evidence
for purposes of recovery. (emphasis supplied) Petitioner
submitted neither one. In addition, petitioner’s project
coordinator Estellita Garcia testified that respondent never
approved any change order. Thus, under Article 1724 and
pursuant to our ruling in Powton Conglomerate, Inc., petitioner
cannot recover the cost it incurred in effecting the design
modifications. A contractor who fails to secure the owner or
developer’s written authority to changes in the work or written
assent to the additional cost to be incurred cannot invoke the
principle of unjust enrichment.
Damages; Indemnification for damages comprehends not only
the loss suffered (actual damages or damnum emergens) but
also the claimant’s lost profits (compensatory damages or
lucrum cessans).—Indemnification for damages comprehends
not only the loss suffered (actual damages or damnum
emergens) but also the claimant’s lost profits (compensatory
damages or lucrum cessans). For compensatory damages to
be awarded, it is necessary to prove the actual amount of the
alleged loss by preponderance of evidence.
CORONA, J.:
This petition for review on certiorari 1 seeks to set aside the
decision of the Court of Appeals (CA) in CA-G.R. CV No.
613532 and its resolution3 denying reconsideration.
In 1992, respondent Primetown Property Group, Inc. awarded
the contract for the structural works 4 of its 32-storey Makati
Prime Tower (MPT) to petitioner Titan-Ikeda Construction and
Development Corporation.5 The parties formalized their
agreement in a construction contract 6 dated February 4,
1993.7
Upon the completion of MPT's structural works, respondent
awarded the P130,000,000 contract for the tower's
architectural works8 (project) to petitioner. Thus, on January
31, 1994, the parties executed a supplemental
agreement.9 The salient portions thereof were:
1. the [project] shall cover the scope of work of the detailed
construction bid plans and specifications and bid documents
dated 28 September 1993, attached and forming an integral
part hereof as Annex A.
2. the contract price for the said works shall be P130 million.
3. the payment terms shall be "full swapping" or full payment
in condominium units. The condominium units earmarked for
the [petitioner] are shown in the attached Annex B.
4. the [respondent] shall transfer and surrender to [petitioner]
the condominium units abovestated in accordance with the
following schedule:
(a) 80% of units — upon posting and acceptance by
[respondent] of the performance bond [and]
(b) 20% or remaining balance — upon completion of the
project as provided in the construction contract and
simultaneous with the posting by [petitioner] of the
reglementary guarantee bond.
5. the contract period shall be fifteen (15) months reckoned
from the release of the condominium certificates of title
(CCTs) covering eighty percent (80%) of the units transferable
to [petitioner] as aforesaid[.]
Significantly, the supplemental agreement adopted those
provisions of the construction contract which it did not
specifically discuss or provide for. 10 Among those carried over
was the designation of GEMM Construction Corporation
(GEMM) as the project's construction manager. 11
Petitioner started working on the project in February 1994.
On June 30, 1994, respondent executed a deed of
sale12 (covering 114 condominium units and 20 parking slots
of the MPT collectively valued by the parties
at P112,416,716.88)13 in favor of petitioner pursuant to the
"full-swapping" payment provision of the supplemental
agreement.
Shortly thereafter, petitioner sold some of its units to third
persons.14
In September 1995, respondent engaged the services of
Integratech, Inc. (ITI), an engineering consultancy firm, to
evaluate the progress of the project. 15 In its September 7,
1995 report,16 ITI informed respondent that petitioner, at that
point, had only accomplished 31.89% of the project (or was 11
months and six days behind schedule).17
Meanwhile, petitioner and respondent were discussing the
possibility of the latter’s take over of the project’s supervision.
Despite ongoing negotiations, respondent did not obtain
petitioner’s consent in hiring ITI as the project’s construction
manager. Neither did it inform petitioner of ITI’s September 7,
1995 report.
On October 12, 1995, petitioner sought to confirm
respondent's plan to take over the project. 18 Its letter stated:
The mutual agreement arrived at sometime in the last week of
August 1995 for [respondent] to take over the construction
supervision of the balance of the [project] from [petitioner's]
[e]ngineering staff and complete [the] same by December 31,
1995 as promised by [petitioner's] engineer.
The [petitioner's] accomplished works as of this date of [t]ake
over is of acceptable quality in materials and workmanship.
This mutual agreement on the take over should not be
misconstrued in any other way except that the take over
is part of the long range plan of [respondent] that
[petitioner], in the spirit of cooperation, agreed to hand over
the construction supervision to [respondent] as requested.
(emphasis supplied)19
Engineers Antonio Co, general construction manager of
respondent, and Luzon Y. Tablante, project manager of
petitioner, signed the letter.
Integratech’s (ITI’s) Report
In its September 7, 1995 report, ITI estimated that petitioner
should have accomplished 48.71% of the project as of the
October 12, 1995 takeover date.20 Petitioner repudiated this
figure21 but qualifiedly admitted that it did not finish the
project.22 Records showed that respondent did not merely
take over the supervision of the project but took full control
thereof.23
Petitioner consequently conducted an inventory. 24 On the
basis thereof, petitioner demanded from respondent the
payment of its balance amounting to P1,779,744.85.25
On February 19, 1996, petitioner sent a second letter to
respondent demanding P2,023,876.25. This new figure
included the cost of materials (P244,331.40) petitioner
advanced from December 5, 1995 to January 26, 1996. 26
On November 22, 1996, petitioner demanded from
respondent the delivery of MPT's management
certificate27 and the keys to the condominium units and the
payment of its (respondent's) balance.28
Because respondent ignored petitioner's demand, petitioner,
on December 9, 1996, filed a complaint for specific
performance29 in the Housing and Land Use Regulatory Board
(HLURB).
While the complaint for specific performance was pending in
the HLURB, respondent sent a demand letter to petitioner
asking it to reimburse the actual costs incurred in finishing the
project (or P69,785,923.47).30 In view of the pendency of the
HLURB case, petitioner did not heed respondent's demands.
On April 29, 1997, the HLURB rendered a decision in favor of
petitioner.31 It ruled that the instrument executed on June 30,
1994 was a deed of absolute sale because the conveyance of
the condominium units and parking slots was not subject to
any condition.32 Thus, it ordered respondent to issue MPT’s
management certificate and to deliver the keys to the
condominium units to petitioner.33 Respondent did not appeal
this decision. Consequently, a writ of execution was issued
upon its finality.34
Undaunted by the finality of the HLURB decision, respondent
filed a complaint for collection of sum of money 35 against
petitioner in the Regional Trial Court (RTC) of Makati City,
Branch 58 on July 2, 1997. It prayed for the reimbursement of
the value of the project’s unfinished portion amounting
to P66,677,000.36
During trial, the RTC found that because respondent modified
the MPT's architectural design, petitioner had to adjust the
scope of work.37 Moreover, respondent belatedly informed
petitioner of those modifications. It also failed to deliver the
concrete mix and rebars according to schedule. For this
reason, petitioner was not responsible for the project's
delay.38 The trial court thus allowed petitioner to set-off
respondent's other outstanding liabilities with respondent’s
excess payment in the project.39 It concluded that respondent
owed petitioner P2,023,876.25.40 In addition, because
respondent refused to deliver the keys to the condominium
units and the management certificate to petitioner, the RTC
found that petitioner lost rental income amounting to
US$1,665,260.41 The dispositive portion of the RTC decision
stated:
WHEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered dismissing [respondent's] [c]omplaint for lack
of merit. On the other hand, finding preponderance of
evidence to sustain [petitioner's] counterclaim, judgment is
hereby rendered in favor of [petitioner] ordering [respondent]
to pay the former:
1. The unpaid balance of the consideration for [petitioner's]
services in [the project] in the amount of P2,023,867.25 with
legal interest from the date of demand until fully paid;
2. Compensatory damages in the amount of US$1,665,260 or
its peso equivalent at the current foreign exchange rate
representing lost rental income due only as of July 1997 and
the accrued lost earnings from then on until the date of actual
payment, with legal interest from the date of demand until fully
paid; and
3. Attorney's fees in the amount of P100,000 as acceptance
fee, P1,000 appearance fee per hearing and 25% of the total
amount awarded to [petitioner].
With costs against the [respondent].
SO ORDERED.42
Respondent appealed the RTC decision to the CA. 43 The
appellate court found that respondent fully performed its
obligation when it executed the June 30, 1994 deed of
absolute sale in favor of petitioner.44 Moreover, ITI's report
clearly established that petitioner had completed only 48.71%
of the project as of October 12, 1995, the takeover date. Not
only did it incur delay in the performance of its obligation but
petitioner also failed to finish the project. The CA ruled that
respondent was entitled to recover the value of the unfinished
portion of the project under the principle of unjust
enrichment.45 Thus:
WHEREFORE, the appealed decision is REVERSED and a
new one entered dismissing [petitioner's] counterclaims
of P2,023,867.25 representing unpaid balance for [its]
services in [the project]; US$1,665,260 as accrued lost
earnings, and attorney's fees. [Petitioner] is hereby ordered to
return to [respondent] the amount of P66,677,000
representing the value of unfinished [portion of the project],
plus legal interest thereon until fully paid. Upon payment by
[petitioner] of the aforementioned amount, [respondent] is
hereby ordered to deliver the keys and [m]anagement
[c]ertificate of the [Makati Prime Tower] paid to [petitioner] as
consideration for the [project].46
Petitioner moved for reconsideration but it was denied.
Hence, this petition.
Petitioner contends that the CA erred in giving weight to ITI's
report because the project evaluation was commissioned only
by respondent,47 in disregard of industry practice. Project
evaluations are agreed upon by the parties and conducted by
a disinterested third party.48
We grant the petition.
Review of Conflicting Factual Findings
As a general rule, only questions of law may be raised in a
petition for review on certiorari. Factual issues are entertained
only in exceptional cases such as where the findings of fact of
the CA and the trial court are conflicting.49
Here, a glaring contradiction exists between the factual
findings of the RTC and the CA. The trial court found that
respondent contributed to the project's delay because it
belatedly communicated the modifications and failed to deliver
the necessary materials on time. The CA, however, found that
petitioner incurred delay in the performance of its obligation. It
relied on ITI's report which stated that petitioner had
accomplished only 48.71% of the project as of October 12,
1995.
January 31, 1994 Supplemental Agreement Was
Extinguished
A contract is a meeting of the minds between two persons
whereby one binds himself, with respect to the other, to give
something or to render some service.50 This case involved two
contracts entered into by the parties with regard to the project.
The parties first entered into a contract for a piece of
work51 when they executed the supplemental agreement.
Petitioner as contractor bound itself to execute the project for
respondent, the owner/developer, in consideration of a price
certain (P130,000,000). The supplemental agreement was
reciprocal in nature because the obligation of respondent to
pay the entire contract price depended on the obligation of
petitioner to complete the project (and vice versa).
Thereafter, the parties entered into a second contract. They
agreed to extinguish the supplemental agreement as
evidenced by the October 12, 1995 letter-agreement which
was duly acknowledged by their respective representatives. 52
While the October 12, 1995 letter-agreement stated that
respondent was to take over merely the supervision of the
project, it actually took over the whole project itself. In fact,
respondent subsequently hired two contractors in petitioner's
stead.53 Moreover, petitioner's project engineer at site only
monitored the progress of architectural works undertaken in
its condominium units.54 Petitioner never objected to this
arrangement; hence, it voluntarily surrendered its participation
in the project. Moreover, it judicially admitted in its answer that
respondent took over the entire project, not merely its
supervision, pursuant to its (respondent’s) long-range plans. 55
Because the parties agreed to extinguish the supplemental
agreement, they were no longer required to fully perform their
respective obligations. Petitioner was relieved of its obligation
to complete the project while respondent was freed of its
obligation to pay the entire contract price. However,
respondent, by executing the June 30, 1994 deed of absolute
sale, was deemed to have paid P112,416,716.88.
Nevertheless, because petitioner applied part of what it
received to respondent’s outstanding liabilities, 56 it admitted
overpayment.
Because petitioner acknowledged that it had been overpaid, it
was obliged to return the excess to respondent. Embodying
the principle of solutio indebiti, Article 2154 of the Civil Code
provides:
Article 2154. If something is received when there is no right to
demand it and it was unduly delivered through mistake, the
obligation to return it arises.
For the extra-contractual obligation of solutio indebiti to arise,
the following requisites must be proven:
1. the absence of a right to collect the excess sums and
2. the payment was made by mistake.57
With regard to the first requisite, because the supplemental
agreement had been extinguished by the mutual agreement
of the parties, petitioner became entitled only to the cost of
services it actually rendered (i.e.,  that fraction of the project
cost in proportion to the percentage of its actual
accomplishment in the project). It was not entitled to the
excess (or extent of overpayment).
On the second requisite, Article 2163 of the Civil Code
provides:
Article 2163. It is presumed that there was a mistake in the
payment if something which had never been due or had
already been paid was delivered; but, he from whom the
return is claimed may prove that the delivery was made out of
liberality or for any other just cause. (emphasis supplied)
In this instance, respondent paid part of the contract price
under the assumption that petitioner would complete the
project within the stipulated period. However, after the
supplemental agreement was extinguished, petitioner ceased
working on the project. Therefore, the compensation petitioner
received in excess of the cost of its actual accomplishment as
of October 12, 1995 was never due. The condominium units
and parking slots corresponding to the said excess were
mistakenly delivered by respondent and were therefore not
due to petitioner.
Stated simply, respondent erroneously delivered excess units
to petitioner and the latter, pursuant to Article 2154, was
obliged to the return them to respondent.58 Article 2160 of the
Civil Code provides:
Article 2160. He who in good faith accepts an undue payment
of a thing certain and determinate shall only be responsible
for the impairment or loss of the same or its accessories and
accessions insofar as he has thereby been benefited. If he
has alienated it, he shall return the price or assign the action
to collect the sum.
One who receives payment by mistake in good faith is, as a
general rule, only liable to return the thing delivered. 59 If he
benefited therefrom, he is also liable for the impairment or
loss of the thing delivered and its accessories and
accessions.60 If he sold the thing delivered, he should either
deliver the proceeds of the sale or assign the action to collect
to the other party.61
The situation is, however, complicated by the following facts:
a) the basis of the valuation (P112,416,716.99) of the
condominium units and parking slots covered by the June 30,
1994 deed of sale is unknown;
b) the percentage of petitioner's actual accomplishment in the
project has not been determined and
c) the records of this case do not show the actual number of
condominium units and parking slots sold by petitioners.
Because this Court is not a trier of facts, the determination of
these matters should be remanded to the RTC for reception of
further evidence.
The RTC must first determine the percentage of the project
petitioner actually completed and its proportionate cost. 62 This
will be the amount due to petitioner. Thereafter, based on the
stipulated valuation in the June 30, 1994 deed of sale, the
RTC shall determine how many condominium units and
parking slots correspond to the amount due to petitioner. It will
only be the management certificate and the keys to these
units that petitioner will be entitled to. The remaining units,
having been mistakenly delivered by respondent, will
therefore be the subject of solutio indebiti.
What exactly must petitioner give back to respondent? Under
Article 2160 in relation to Article 2154, it should return to
respondent the condominium units and parking slots in
excess of the value of its actual accomplishment (i.e., the
amount due to it) as of October 12, 1995. If these properties
include units and/or slots already sold to third persons,
petitioner shall deliver the proceeds of the sale thereof or
assign the actions for collection to respondent as required by
Article 2160.
Delay In The Completion Of The Project
Mora or delay is the failure to perform the obligation in due
time because of dolo  (malice) or culpa  (negligence).63 A
debtor is deemed to have violated his obligation to the creditor
from the time the latter makes a demand. Once the creditor
makes a demand, the debtor incurs mora or delay.64
The construction contract65 provided a procedure for
protesting delay:
Article XIV
DELAYS AND ABANDONMENT
15.1. If at any time during the effectivity of this contract,
[PETITIONER] shall incur unreasonable delay or
slippages of more than fifteen percent (15%) of the
scheduled work program, [RESPONDENT] should
notify [PETITIONER] in writing to accelerate the work and
reduce, if not erase, slippage. If after the lapse of sixty (60)
days from receipt of such notice, [PETITIONER] fails to rectify
the delay or slippage, [RESPONDENT] shall have the right to
terminate this contract except in cases where the same was
caused by force majeure. "FORCE MAJEURE" as
contemplated herein, and in determination of delay includes,
but is not limited to, typhoon, flood, earthquake, coup d'etat,
rebellion, sedition, transport strike, stoppage of work, mass
public action that prevents workers from reporting for work,
and such other causes beyond [PETITIONER'S]
control.66 (emphasis supplied)
xxx    xxx    xxx
Respondent never sent petitioner a written demand asking it
to accelerate work on the project and reduce, if not eliminate,
slippage. If delay had truly been the reason why respondent
took over the project, it would have sent a written demand as
required by the construction contract. Moreover, according to
the October 12, 1995 letter-agreement, respondent took over
the project for the sole reason that such move was part of its
(respondent's) long-term plan.
Respondent, on the other hand, relied on ITI's September 7,
1995 report. The construction contract named GEMM, not ITI,
as construction manager.67 Because petitioner did not consent
to the change of the designated construction manager, ITI's
September 7, 1995 report could not bind it.
In view of the foregoing, we hold that petitioner did not incur
delay in the performance of its obligation.
Recovery Of Additional Costs Resulting From Changes
The supplemental agreement was a contract for a stipulated
price.68 In such contracts, the recovery of additional costs
(incurred due to changes in plans or specifications) is
governed by Article 1724 of the Civil Code.
Article 1724. The contractor who undertakes to build a
structure or any other work for a stipulated price, in conformity
with plans and specifications agreed upon with the landowner,
can neither withdraw from the contract nor demand an
increase in the price on account of higher cost of labor or
materials, save when there has been a change in plans and
specifications, provided:
1. such change has been authorized by the proprietor in
writing; and
2. the additional price to be paid to the contractor has been
determined in writing by both parties.
In Powton Conglomerate, Inc. v. Agcolicol,69 we reiterated that
a claim for the cost of additional work arising from changes in
the scope of work can only be allowed upon the:
1. written authority from the developer/owner
ordering/allowing the changes in work; and
2. written agreement of parties with regard to the increase in
cost (or price) due to the change in work or design
modification. 70
Furthermore:
Compliance with the two requisites of Article 1724, a
specific provision governing additional works, is a
condition precedent of the recovery. The absence of one
or the other bars the recovery of additional costs. Neither the
authority for the changes made nor the additional price to be
paid therefor may be proved by any other evidence for
purposes of recovery.71 (emphasis supplied)
Petitioner submitted neither one. In addition, petitioner’s
project coordinator Estellita Garcia testified that respondent
never approved any change order. 72 Thus, under Article 1724
and pursuant to our ruling in Powton Conglomerate,
Inc., petitioner cannot recover the cost it incurred in effecting
the design modifications. A contractor who fails to secure the
owner or developer's written authority to changes in the work
or written assent to the additional cost to be incurred cannot
invoke the principle of unjust enrichment. 73
Recovery Of Compensatory Damages
Indemnification for damages comprehends not only the loss
suffered (actual damages or damnum emergens) but also the
claimant's lost profits (compensatory damages or lucrum
cessans). For compensatory damages to be awarded, it is
necessary to prove the actual amount of the alleged loss by
preponderance of evidence.74
The RTC awarded compensatory damages based on the
rental pool rates submitted by petitioner 75 and on the premise
that all those units would have been leased had respondent
only finished the project by December 31, 1995. 76 However,
other than bare assertions, petitioner submitted no proof that
the rental pool was in fact able to lease out the units. We thus
hold that the "losses" sustained by petitioner were merely
speculative and there was no basis for the award.
Remand Of Other Claims
Since respondent did not repudiate petitioner's other claims
stated in the inventory77 in the RTC and CA, it is estopped
from questioning the validity thereof.78 However, because
some of petitioner's claims have been disallowed, we remand
the records of this case to the RTC for the computation of
respondent's liability.79
WHEREFORE, the petition is hereby GRANTED.
The March 15, 2002 decision and May 29, 2003 resolution of
the Court of Appeals in CA-G.R. CV No. 61353 and the
August 5, 1998 decision of the Regional Trial Court, Branch
58, Makati City in Civil Case No. 97-1501 are hereby SET
ASIDE. New judgment is entered:
1. ordering petitioner Titan-Ikeda Construction and
Development Corporation to return to respondent Primetown
Property Group, Inc. the condominium units and parking slots
corresponding to the payment made in excess of the
proportionate (project) cost of its actual accomplishment as of
October 12, 1995, subject to its (petitioner’s) allowable claims
as stated in the inventory and
2. dismissing petitioner Titan-Ikeda Construction and
Development Corporation’s claims for the cost of additional
work (or change order) and damages.
The records of this case are remanded to the Regional Trial
Court of Makati City, Branch 58 for:
1. the reception of additional evidence to determine
(a) the percentage of the architectural work actually
completed by petitioner Titan-Ikeda Construction and
Development Corporation as of October 12, 1995 on the
Makati Prime Tower and
(b) the number of condominium units and parking slots sold
by petitioner Titan-Ikeda Construction and Development
Corporation to third persons;
2. the computation of petitioner Titan-Ikeda Construction and
Development Corporation's actual liability to respondent
Primetown Property Group, Inc. or vice-versa, and the
determination of imposable interests and/or penalties, if any.
SO ORDERED.
G.R. No. 149734       November 19, 2004
DR. DANIEL VAZQUEZ and MA. LUIZA M.
VAZQUEZ, petitioners,
vs.
AYALA CORPORATION, respondent.
TINGA, J.:
The rise in value of four lots in one of the country's prime
residential developments, Ayala Alabang Village in Muntinlupa
City, over a period of six (6) years only, represents big money.
The huge price difference lies at the heart of the present
controversy. Petitioners insist that the lots should be sold to
them at 1984 prices while respondent maintains that the
prevailing market price in 1990 should be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition
for Review on Certiorari2 dated October 11, 2001 assailing
the Decision3 of the Court of Appeals dated September 6,
2001 which reversed the Decision4 of the Regional Trial Court
(RTC) and dismissed their complaint for specific performance
and damages against Ayala Corporation.
Despite their disparate rulings, the RTC and the appellate
court agree on the following antecedents:5
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M.
Vasquez (hereafter, Vasquez spouses) entered into a
Memorandum of Agreement (MOA) with Ayala Corporation
(hereafter, AYALA) with AYALA buying from the Vazquez
spouses, all of the latter's shares of stock in Conduit
Development, Inc. (hereafter, Conduit). The main asset of
Conduit was a 49.9 hectare property in Ayala Alabang,
Muntinlupa, which was then being developed by Conduit
under a development plan where the land was divided into
Villages 1, 2 and 3 of the "Don Vicente Village." The
development was then being undertaken for Conduit by G.P.
Construction and Development Corp. (hereafter, GP
Construction).
Under the MOA, Ayala was to develop the entire property,
less what was defined as the "Retained Area" consisting of
18,736 square meters. This "Retained Area" was to be
retained by the Vazquez spouses. The area to be developed
by Ayala was called the "Remaining Area". In this "Remaining
Area" were 4 lots adjacent to the "Retained Area" and Ayala
agreed to offer these lots for sale to the Vazquez spouses at
the prevailing price at the time of purchase. The relevant
provisions of the MOA on this point are:
"5.7. The BUYER hereby commits that it will develop the
'Remaining Property' into a first class residential subdivision
of the same class as its New Alabang Subdivision, and that it
intends to complete the first phase under its amended
development plan within three (3) years from the date of this
Agreement. x x x"
5.15. The BUYER agrees to give the SELLERS a first option
to purchase four developed lots next to the "Retained Area" at
the prevailing market price at the time of the purchase."
The parties are agreed that the development plan referred to
in paragraph 5.7 is not Conduit's development plan, but
Ayala's amended development plan which was still to be
formulated as of the time of the MOA. While in the Conduit
plan, the 4 lots to be offered for sale to the Vasquez Spouses
were in the first phase thereof or Village 1, in the Ayala plan
which was formulated a year later, it was in the third phase, or
Phase II-c.
Under the MOA, the Vasquez spouses made several express
warranties, as follows:
"3.1. The SELLERS shall deliver to the BUYER:
xxx
3.1.2. The true and complete list, certified by the Secretary
and Treasurer of the Company showing:
xxx
D. A list of all persons and/or entities with whom the Company
has pending contracts, if any.
xxx
3.1.5. Audited financial statements of the Company as at
Closing date.
4. Conditions Precedent
All obligations of the BUYER under this Agreement are
subject to fulfillment prior to or at the Closing, of the following
conditions:
4.1. The representations and warranties by the SELLERS
contained in this Agreement shall be true and correct at the
time of Closing as though such representations and
warranties were made at such time; and
xxx
6. Representation and Warranties by the SELLERS
The SELLERS jointly and severally represent and warrant to
the BUYER that at the time of the execution of this Agreement
and at the Closing:
xxx
6.2.3. There are no actions, suits or proceedings pending, or
to the knowledge of the SELLERS, threatened against or
affecting the SELLERS with respect to the Shares or the
Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required
to be submitted at Closing in accordance with Par. 3.1.5
above, the SELLER jointly and severally warrant to the
BUYER that:
7.1.1 The said Audited Financial Statements shall show that
on the day of Closing, the Company shall own the "Remaining
Property", free from all liens and encumbrances and that the
Company shall have no obligation to any party except for
billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which
BUYER shall be responsible in accordance with Par. 2 of this
Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and
those disclosed to BUYER, the Company as of the date
thereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation,
tax liabilities due or to become due and whether incurred in
respect of or measured in respect of the Company's income
prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to
know of any basis for any assertion against the Company as
at closing or any liability of any nature and in any amount not
fully reflected or reserved against such Audited Financial
Statements referred to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing
on or before the Closing, the Company is not engaged in or a
party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before
any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation
relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach
exists in the due performance and observance by the
Company of any term, covenant or condition of any
instrument or agreement to which the company is a party or
by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or
breach."
After the execution of the MOA, Ayala caused the suspension
of work on Village 1 of the Don Vicente Project. Ayala then
received a letter from one Maximo Del Rosario of Lancer
General Builder Corporation informing Ayala that he was
claiming the amount of P1,509,558.80 as the subcontractor of
G.P. Construction...
G.P. Construction not being able to reach an amicable
settlement with Lancer, on March 22, 1982, Lancer sued G.P.
Construction, Conduit and Ayala in the then Court of First
Instance of Manila in Civil Case No. 82-8598. G.P.
Construction in turn filed a cross-claim against Ayala. G.P.
Construction and Lancer both tried to enjoin Ayala from
undertaking the development of the property. The suit was
terminated only on February 19, 1987, when it was dismissed
with prejudice after Ayala paid both Lancer and GP
Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots
adjacent to the "Retained Area" within 3 years from the date
of the MOA, the Vasquez spouses sent several "reminder"
letters of the approaching so-called deadline. However, no
demand after April 23, 1984, was ever made by the Vasquez
spouses for Ayala to sell the 4 lots. On the contrary, one of the
letters signed by their authorized agent, Engr. Eduardo Turla,
categorically stated that they expected "development of
Phase 1 to be completed by February 19, 1990, three years
from the settlement of the legal problems with the previous
contractor."
By early 1990 Ayala finished the development of the vicinity of
the 4 lots to be offered for sale. The four lots were then
offered to be sold to the Vasquez spouses at the prevailing
price in 1990. This was rejected by the Vasquez spouses who
wanted to pay at 1984 prices, thereby leading to the suit
below.
After trial, the court a quo rendered its decision, the
dispositive portion of which states:
"THEREFORE, judgment is hereby rendered in favor of
plaintiffs and against defendant, ordering defendant to sell to
plaintiffs the relevant lots described in the Complaint in the
Ayala Alabang Village at the price of P460.00 per square
meter amounting to P1,349,540.00; ordering defendant to
reimburse to plaintiffs attorney's fees in the sum of
P200,000.00 and to pay the cost of the suit."
In its decision, the court a quo concluded that the Vasquez
spouses were not obligated to disclose the potential claims of
GP Construction, Lancer and Del Rosario; Ayala's
accountants should have opened the records of Conduit to
find out all claims; the warranty against suit is with respect to
"the shares of the Property" and the Lancer suit does not
affect the shares of stock sold to Ayala; Ayala was obligated to
develop within 3 years; to say that Ayala was under no
obligation to follow a time frame was to put the Vasquezes at
Ayala's mercy; Ayala did not develop because of a slump in
the real estate market; the MOA was drafted and prepared by
the AYALA who should suffer its ambiguities; the option to
purchase the 4 lots is valid because it was supported by
consideration as the option is incorporated in the MOA where
the parties had prestations to each other. [Emphasis supplied]
Ayala Corporation filed an appeal, alleging that the trial court
erred in holding that petitioners did not breach their warranties
under the MOA6 dated April 23, 1981; that it was obliged to
develop the land where the four (4) lots subject of the option
to purchase are located within three (3) years from the date of
the MOA; that it was in delay; and that the option to purchase
was valid because it was incorporated in the MOA and the
consideration therefor was the commitment by Ayala
Corporation to petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the
RTC Decision. According to the appellate court, Ayala
Corporation was never informed beforehand of the existence
of the Lancer claim. In fact, Ayala Corporation got a copy of
the Lancer subcontract only on May 29, 1981 from G.P.
Construction's lawyers. The Court of Appeals thus held that
petitioners violated their warranties under the MOA when they
failed to disclose Lancer's claims. Hence, even conceding that
Ayala Corporation was obliged to develop and sell the four (4)
lots in question within three (3) years from the date of the
MOA, the obligation was suspended during the pendency of
the case filed by Lancer.
Interpreting the MOA's paragraph 5.7 above-quoted, the
appellate court held that Ayala Corporation committed to
develop the first phase of its own amended development plan
and not Conduit's development plan. Nowhere does the MOA
provide that Ayala Corporation shall follow Conduit's
development plan nor is Ayala Corporation prohibited from
changing the sequence of the phases of the property it will
develop.
Anent the question of delay, the Court of Appeals ruled that
there was no delay as petitioners never made a demand for
Ayala Corporation to sell the subject lots to them. According to
the appellate court, what petitioners sent were mere reminder
letters the last of which was dated prior to April 23, 1984 when
the obligation was not yet demandable. At any rate, the Court
of Appeals found that petitioners in fact waived the three (3)-
year period when they sent a letter through their agent, Engr.
Eduardo Turla, stating that they "expect that the development
of Phase I will be completed by 19 February 1990, three years
from the settlement of the legal problems with the previous
contractor."7
The appellate court likewise ruled that paragraph 5.15 above-
quoted is not an option contract but a right of first refusal there
being no separate consideration therefor. Since petitioners
refused Ayala Corporation's offer to sell the subject lots at the
reduced 1990 price of P5,000.00 per square meter, they have
effectively waived their right to buy the same.
In the instant Petition, petitioners allege that the appellate
court erred in ruling that they violated their warranties under
the MOA; that Ayala Corporation was not obliged to develop
the "Remaining Property" within three (3) years from the
execution of the MOA; that Ayala was not in delay; and that
paragraph 5.15 of the MOA is a mere right of first refusal.
Additionally, petitioners insist that the Court should review the
factual findings of the Court of Appeals as they are in conflict
with those of the trial court.
Ayala Corporation filed a Comment on the Petition8 dated
March 26, 2002, contending that the petition raises questions
of fact and seeks a review of evidence which is within the
domain of the Court of Appeals. Ayala Corporation maintains
that the subcontract between GP Construction, with whom
Conduit contracted for the development of the property under
a Construction Contract dated October 10, 1980, and Lancer
was not disclosed by petitioners during the negotiations.
Neither was the liability for Lancer's claim included in the
Audited Financial Statements submitted by petitioners after
the signing of the MOA. These justify the conclusion that
petitioners breached their warranties under the afore-quoted
paragraphs of the MOA. Since the Lancer suit ended only in
February 1989, the three (3)-year period within which Ayala
Corporation committed to develop the property should only be
counted thence. Thus, when it offered the subject lots to
petitioners in 1990, Ayala Corporation was not yet in delay.
In response to petitioners' contention that there was no action
or proceeding against them at the time of the execution of the
MOA on April 23, 1981, Ayala Corporation avers that the facts
and circumstances which gave rise to the Lancer claim were
already extant then. Petitioners warranted that their
representations under the MOA shall be true and correct at
the time of "Closing" which shall take place within four (4)
weeks from the signing of the MOA.9 Since the MOA was
signed on April 23, 1981, "Closing" was approximately the
third week of May 1981. Hence, Lancer's claims, articulated in
a letter which Ayala Corporation received on May 4, 1981, are
among the liabilities warranted against under paragraph 7.1.2
of the MOA.
Moreover, Ayala Corporation asserts that the warranties under
the MOA are not just against suits but against all kinds of
liabilities not reflected in the Audited Financial Statements. It
cannot be faulted for relying on the express warranty that
except for billings payable to GP Construction and advances
made by petitioner Daniel Vazquez in the amount of
P38,766.04, Conduit has no other liabilities. Hence,
petitioners cannot claim that Ayala Corporation should have
examined and investigated the Audited Financial Statements
of Conduit and should now assume all its obligations and
liabilities including the Lancer suit and the cross-claim of GP
Construction.
Furthermore, Ayala Corporation did not make a commitment
to complete the development of the first phase of the property
within three (3) years from the execution of the MOA. The
provision refers to a mere declaration of intent to develop the
first phase of its (Ayala Corporation's) own development plan
and not Conduit's. True to its intention, Ayala Corporation did
complete the development of the first phase (Phase II-A) of its
amended development plan within three (3) years from the
execution of the MOA. However, it is not obliged to develop
the third phase (Phase II-C) where the subject lots are located
within the same time frame because there is no contractual
stipulation in the MOA therefor. It is free to decide on its own
the period for the development of Phase II-C. If petitioners
wanted to impose the same three (3)-year timetable upon the
third phase of the amended development plan, they should
have filed a suit to fix the time table in accordance with Article
119710 of the Civil Code. Having failed to do so, Ayala
Corporation cannot be declared to have been in delay.
Ayala Corporation further contends that no demand was
made on it for the performance of its alleged obligation. The
letter dated October 4, 1983 sent when petitioners were
already aware of the Lancer suit did not demand the delivery
of the subject lots by April 23, 1984. Instead, it requested
Ayala Corporation to keep petitioners posted on the status of
the case. Likewise, the letter dated March 4, 1984 was merely
an inquiry as to the date when the development of Phase 1
will be completed. More importantly, their letter dated June 27,
1988 through Engr. Eduardo Turla expressed petitioners'
expectation that Phase 1 will be completed by February 19,
1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the
MOA is a right of first refusal and not an option contract.
Petitioners filed their Reply11 dated August 15, 2002
reiterating the arguments in their Petition and contending
further that they did not violate their warranties under the
MOA because the case was filed by Lancer only on April 1,
1982, eleven (11) months and eight (8) days after the signing
of the MOA on April 23, 1981. Ayala Corporation admitted that
it received Lancer's claim before the "Closing" date. It
therefore had all the time to rescind the MOA. Not having
done so, it can be concluded that Ayala Corporation itself did
not consider the matter a violation of petitioners' warranty.
Moreover, petitioners submitted the Audited Financial
Statements of Conduit and allowed an acquisition audit to be
conducted by Ayala Corporation. Thus, the latter bought
Conduit with "open eyes."
Petitioners also maintain that they had no knowledge of the
impending case against Conduit at the time of the execution
of the MOA. Further, the MOA makes Ayala Corporation liable
for the payment of all billings of GP Construction. Since
Lancer's claim was actually a claim against GP Construction
being its sub-contractor, it is Ayala Corporation and not
petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation
may change the sequence of its development plan, it is
obliged under the MOA to develop the entire area where the
subject lots are located in three (3) years.
They also assert that demand was made on Ayala
Corporation to comply with their obligation under the MOA.
Apart from their reminder letters dated January 24, February
18 and March 5, 1984, they also sent a letter dated March 4,
1984 which they claim is a categorical demand for Ayala
Corporation to comply with the provisions of the MOA.
The parties were required to submit their respective
memoranda in the Resolution12 dated November 18, 2002. In
compliance with this directive, petitioners submitted their
Memorandum13 dated February 14, 2003 on even date, while
Ayala Corporation filed its Memorandum14 dated February
14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the
instant petition.
It is well-settled that the jurisdiction of this Court in cases
brought to it from the Court of Appeals by way of petition for
review under Rule 45 is limited to reviewing or revising errors
of law imputed to it, its findings of fact being conclusive on this
Court as a matter of general principle. However, since in the
instant case there is a conflict between the factual findings of
the trial court and the appellate court, particularly as regards
the issues of breach of warranty, obligation to develop and
incurrence of delay, we have to consider the evidence on
record and resolve such factual issues as an exception to the
general rule.15 In any event, the submitted issue relating to
the categorization of the right to purchase granted to
petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners
breached their warranties under the MOA when they failed to
disclose the Lancer claim. The trial court declared they did
not; the appellate court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which
petitioners allegedly breached when they failed to disclose the
Lancer claim:
a) Clause 7.1.1. – that Conduit shall not be obligated to
anyone except to GP Construction for P38,766.04, and for
advances made by Daniel Vazquez;
b) Clause 7.1.2. – that except as reflected in the audited
financial statements Conduit had no other liabilities whether
accrued, absolute, contingent or otherwise;
c) Clause 7.2. – that there is no basis for any assertion
against Conduit of any liability of any value not reflected or
reserved in the financial statements, and those disclosed to
Ayala;
d) Clause 7.6.3. – that Conduit is not threatened with any
legal action or other proceedings; and
e) Clause 7.6.4. – that Conduit had not breached any term,
condition, or covenant of any instrument or agreement to
which it is a party or by which it is bound.16
The Court is convinced that petitioners did not violate the
foregoing warranties.
The exchanges of communication between the parties
indicate that petitioners substantially apprised Ayala
Corporation of the Lancer claim or the possibility thereof
during the period of negotiations for the sale of Conduit.
In a letter17 dated March 5, 1984, petitioner Daniel Vazquez
reminded Ayala Corporation's Mr. Adolfo Duarte (Mr. Duarte)
that prior to the completion of the sale of Conduit, Ayala
Corporation asked for and was given information that GP
Construction sub-contracted, presumably to Lancer, a greater
percentage of the project than it was allowed. Petitioners gave
this information to Ayala Corporation because the latter
intimated a desire to "break the contract of Conduit with GP."
Ayala Corporation did not deny this. In fact, Mr. Duarte's
letter18 dated March 6, 1984 indicates that Ayala Corporation
had knowledge of the Lancer subcontract prior to its
acquisition of Conduit. Ayala Corporation even admitted that it
"tried to explore…legal basis to discontinue the contract of
Conduit with GP" but found this "not feasible when information
surfaced about the tacit consent of Conduit to the sub-
contracts of GP with Lancer."
At the latest, Ayala Corporation came to know of the Lancer
claim before the date of Closing of the MOA. Lancer's
letter19 dated April 30, 1981 informing Ayala Corporation of its
unsettled claim with GP Construction was received by Ayala
Corporation on May 4, 1981, well before the
"Closing"20 which occurred four (4) weeks after the date of
signing of the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted
hereunder likewise indicate that certain matters pertaining to
the liabilities of Conduit were disclosed by petitioners to Ayala
Corporation although the specifics thereof were no longer
included in the MOA:
7.1.1 The said Audited Financial Statements shall show that
on the day of Closing, the Company shall own the "Remaining
Property", free from all liens and encumbrances and that the
Company shall have no obligation to any party except for
billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which
BUYER shall be responsible in accordance with Paragraph 2
of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and
those disclosed to BUYER, the Company as of the date
hereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation,
tax liabilities due or to become due and whether incurred in
respect of or measured in respect of the Company's income
prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to
know of any basis for any assertion against the Company as
at Closing of any liability of any nature and in any amount not
fully reflected or reserved against such Audited Financial
Statements referred to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing
on or before the Closing, the Company is not engaged in or a
party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before
any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation
relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach
exists in the due performance and observance by the
Company of any term, covenant or condition of any
instrument or agreement to which the Company is a party or
by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or
breach."21 [Emphasis supplied]
Hence, petitioners' warranty that Conduit is not engaged in, a
party to, or threatened with any legal action or proceeding is
qualified by Ayala Corporation's actual knowledge of the
Lancer claim which was disclosed to Ayala Corporation before
the "Closing."
At any rate, Ayala Corporation bound itself to pay all billings
payable to GP Construction and the advances made by
petitioner Daniel Vazquez. Specifically, under paragraph 2 of
the MOA referred to in paragraph 7.1.1, Ayala Corporation
undertook responsibility "for the payment of all billings of the
contractor GP Construction & Development Corporation after
the first billing and any payments made by the company
and/or SELLERS shall be reimbursed by BUYER on closing
which advances to date is P1,159,012.87."22
The billings knowingly assumed by Ayala Corporation
necessarily include the Lancer claim for which GP
Construction is liable. Proof of this is Ayala Corporation's
letter23 to GP Construction dated before "Closing" on May 4,
1981, informing the latter of Ayala Corporation's receipt of the
Lancer claim embodied in the letter dated April 30, 1981,
acknowledging that it is taking over the contractual
responsibilities of Conduit, and requesting copies of all sub-
contracts affecting the Conduit property. The pertinent
excerpts of the letter read:
…
In this connection, we wish to inform you that this morning we
received a letter from Mr. Maximo D. Del Rosario, President of
Lancer General Builders Corporation apprising us of the
existence of subcontracts that they have with your
corporation. They have also furnished us with a copy of their
letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of
Conduit Development, Inc., we believe that it is necessary, at
this point in time, that you furnish us with copies of all your
subcontracts affecting the property of Conduit, not only with
Lancer General Builders Corporation, but all subcontracts with
other parties as well…24
Quite tellingly, Ayala Corporation even attached to its Pre-Trial
Brief25 dated July 9, 1992 a copy of the letter26 dated May
28, 1981 of GP Construction's counsel addressed to Conduit
furnishing the latter with copies of all sub-contract agreements
entered into by GP Construction. Since it was addressed to
Conduit, it can be presumed that it was the latter which gave
Ayala Corporation a copy of the letter thereby disclosing to
the latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate
their warranties under the MOA. The Lancer sub-contract and
claim were substantially disclosed to Ayala Corporation before
the "Closing" date of the MOA. Ayala Corporation cannot
disavow knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala
Corporation did mention the filing of the Lancer suit as an
obstacle to its development of the property, it never actually
brought up nor sought redress for petitioners' alleged breach
of warranty for failure to disclose the Lancer claim until it filed
its Answer27 dated February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of
the MOA. Does this paragraph express a commitment or a
mere intent on the part of Ayala Corporation to develop the
property within three (3) years from date thereof? Paragraph
5.7 provides:
5.7. The BUYER hereby commits that it will develop the
'Remaining Property' into a first class residential subdivision
of the same class as its New Alabang Subdivision, and that it
intends to complete the first phase under its amended
development plan within three (3) years from the date of this
Agreement….28
Notably, while the first phrase of the paragraph uses the word
"commits" in reference to the development of the "Remaining
Property" into a first class residential subdivision, the second
phrase uses the word "intends" in relation to the development
of the first phase of the property within three (3) years from
the date of the MOA. The variance in wording is significant.
While "commit"29 connotes a pledge to do something,
"intend"30 merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala
Corporation's legal division who assisted in drafting the MOA,
testified:
COURT
You only ask what do you mean by that intent. Just answer on
that point.
ATTY. BLANCO
Don't talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to
emphasize the tentative character of the period of
development because it will be noted that the sentence refers
to and I quote "to complete the first phase under its amended
development plan within three (3) years from the date of this
agreement, at the time of the execution of this agreement,
your Honor." That amended development plan was not yet in
existence because the buyer had manifested to the seller that
the buyer could amend the subdivision plan originally
belonging to the seller to conform with its own standard of
development and second, your Honor, (interrupted)31
It is thus unmistakable that this paragraph merely expresses
an intention on Ayala Corporation's part to complete the first
phase under its amended development plan within three (3)
years from the execution of the MOA. Indeed, this paragraph
is so plainly worded that to misunderstand its import is
deplorable.
More focal to the resolution of the instant case is paragraph
5.7's clear reference to the first phase of Ayala Corporation's
amended development plan as the subject of the three (3)-
year intended timeframe for development. Even petitioner
Daniel Vazquez admitted on cross-examination that the
paragraph refers not to Conduit's but to Ayala Corporation's
development plan which was yet to be formulated when the
MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of
Agreement, it is stated as follows: "The Buyer hereby commits
that to develop the remaining property into a first class
residential subdivision of the same class as New Alabang
Subdivision, and that they intend to complete the first phase
under its amended development plan within three years from
the date of this agreement."
Now, my question to you, Dr. Vasquez is that there is no
dispute that the amended development plan here is the
amended development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit "D-5" which is the original
plan of Conduit?
A: No, it is not.
Q: This Exhibit "D-5" was the plan that was being followed by
GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the
date of the agreement, this amended development plan was
still to be formulated by Ayala?
A: Yes, sir.32
As correctly held by the appellate court, this admission is
crucial because while the subject lots to be sold to petitioners
were in the first phase of the Conduit development plan, they
were in the third or last phase of the Ayala Corporation
development plan. Hence, even assuming that paragraph 5.7
expresses a commitment on the part of Ayala Corporation to
develop the first phase of its amended development plan
within three (3) years from the execution of the MOA, there
was no parallel commitment made as to the timeframe for the
development of the third phase where the subject lots are
located.
Lest it be forgotten, the point of this petition is the alleged
failure of Ayala Corporation to offer the subject lots for sale to
petitioners within three (3) years from the execution of the
MOA. It is not that Ayala Corporation committed or intended to
develop the first phase of its amended development plan
within three (3) years. Whether it did or did not is actually
beside the point since the subject lots are not located in the
first phase anyway.
We now come to the issue of default or delay in the fulfillment
of the obligation.
Article 1169 of the Civil Code 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
(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 order that the debtor may be in default it is necessary that
the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the
performance judicially or extrajudicially.33
Under Article 1193 of the Civil Code, obligations for whose
fulfillment a day certain has been fixed shall be demandable
only when that day comes. However, no such day certain was
fixed in the MOA. Petitioners, therefore, cannot demand
performance after the three (3) year period fixed by the MOA
for the development of the first phase of the property since
this is not the same period contemplated for the development
of the subject lots. Since the MOA does not specify a period
for the development of the subject lots, petitioners should
have petitioned the court to fix the period in accordance with
Article 119734 of the Civil Code. As no such action was filed
by petitioners, their complaint for specific performance was
premature, the obligation not being demandable at that point.
Accordingly, Ayala Corporation cannot likewise be said to
have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala
Corporation to develop the subject lots within three (3) years
from date thereof, Ayala Corporation could still not be held to
have been in delay since no demand was made by petitioners
for the performance of its obligation.
As found by the appellate court, petitioners' letters which dealt
with the three (3)-year timetable were all dated prior to April
23, 1984, the date when the period was supposed to expire.
In other words, the letters were sent before the obligation
could become legally demandable. Moreover, the letters were
mere reminders and not categorical demands to perform.
More importantly, petitioners waived the three (3)-year period
as evidenced by their agent, Engr. Eduardo Turla's letter to
the effect that petitioners agreed that the three (3)-year period
should be counted from the termination of the case filed by
Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23,
1981, it was undertaken by your goodselves to complete the
development of Phase I within three (3) years. Dr. & Mrs.
Vazquez were made to understand that you were unable to
accomplish this because of legal problems with the previous
contractor. These legal problems were resolved as of
February 19, 1987, and Dr. & Mrs. Vazquez therefore expect
that the development of Phase I will be completed by
February 19, 1990, three years from the settlement of the
legal problems with the previous contractor. The reason for
this is, as you know, that security-wise, Dr. & Mrs. Vazquez
have been advised not to construct their residence till the
surrounding area (which is Phase I) is developed and
occupied. They have been anxious to build their residence for
quite some time now, and would like to receive assurance
from your goodselves regarding this, in compliance with the
agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the
intention of Dr. & Mrs. Vazquez to exercise their option to
purchase the two lots on each side (a total of 4 lots) adjacent
to their "Retained Area". They are concerned that although
over a year has elapsed since the settlement of the legal
problems, you have not presented them with the size,
configuration, etc. of these lots. They would appreciate being
provided with these at your earliest convenience.35
Manifestly, this letter expresses not only petitioners'
acknowledgement that the delay in the development of Phase
I was due to the legal problems with GP Construction, but
also their acquiescence to the completion of the development
of Phase I at the much later date of February 19, 1990. More
importantly, by no stretch of semantic interpretation can it be
construed as a categorical demand on Ayala Corporation to
offer the subject lots for sale to petitioners as the letter merely
articulates petitioners' desire to exercise their option to
purchase the subject lots and concern over the fact that they
have not been provided with the specifications of these lots.
The letters of petitioners' children, Juan Miguel and Victoria
Vazquez, dated January 23, 198436 and February 18,
198437 can also not be considered categorical demands on
Ayala Corporation to develop the first phase of the property
within the three (3)-year period much less to offer the subject
lots for sale to petitioners. The letter dated January 23, 1984
reads in part:
You will understand our interest in the completion of the roads
to our property, since we cannot develop it till you have
constructed the same. Allow us to remind you of our
Memorandum of Agreement, as per which you committed to
develop the roads to our property "as per the original plans of
the company", and that
1. The back portion should have been developed before the
front portion – which has not been the case.
2. The whole project – front and back portions be completed
by 1984.38
The letter dated February 18, 1984 is similarly worded. It
states:
In this regard, we would like to remind you of Articles 5.7 and
5.9 of our Memorandum of Agreement which states
respectively:…39
Even petitioner Daniel Vazquez' letter40 dated March 5, 1984
does not make out a categorical demand for Ayala
Corporation to offer the subject lots for sale on or before April
23, 1984. The letter reads in part:
…and that we expect from your goodselves compliance with
our Memorandum of Agreement, and a definite date as to
when the road to our property and the development of Phase I
will be completed.41
At best, petitioners' letters can only be construed as mere
reminders which cannot be considered demands for
performance because it must appear that the tolerance or
benevolence of the creditor must have ended.42
The petition finally asks us to determine whether paragraph
5.15 of the MOA can properly be construed as an option
contract or a right of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to
purchase four developed lots next to the "Retained Area" at
the prevailing market price at the time of the purchase.43
The Court has clearly distinguished between an option
contract and a right of first refusal. An option is a preparatory
contract in which one party grants to another, for a fixed
period and at a determined price, the privilege to buy or sell,
or to decide whether or not to enter into a principal contract. It
binds the party who has given the option not to enter into the
principal contract with any other person during the period
designated, and within that period, to enter into such contract
with the one to whom the option was granted, if the latter
should decide to use the option. It is a separate and distinct
contract from that which the parties may enter into upon the
consummation of the option. It must be supported by
consideration.44
In a right of first refusal, on the other hand, while the object
might be made determinate, the exercise of the right would be
dependent not only on the grantor's eventual intention to enter
into a binding juridical relation with another but also on terms,
including the price, that are yet to be firmed up.45
Applied to the instant case, paragraph 5.15 is obviously a
mere right of first refusal and not an option contract. Although
the paragraph has a definite object, i.e., the sale of subject
lots, the period within which they will be offered for sale to
petitioners and, necessarily, the price for which the subject
lots will be sold are not specified. The phrase "at the
prevailing market price at the time of the purchase" connotes
that there is no definite period within which Ayala Corporation
is bound to reserve the subject lots for petitioners to exercise
their privilege to purchase. Neither is there a fixed or
determinable price at which the subject lots will be offered for
sale. The price is considered certain if it may be determined
with reference to another thing certain or if the determination
thereof is left to the judgment of a specified person or
persons.46
Further, paragraph 5.15 was inserted into the MOA to give
petitioners the first crack to buy the subject lots at the price
which Ayala Corporation would be willing to accept when it
offers the subject lots for sale. It is not supported by an
independent consideration. As such it is not governed by
Articles 1324 and 1479 of the Civil Code, viz:
Art. 1324. When the offeror has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal, except
when the option is founded upon a consideration, as
something paid or promised.
Art. 1479. A promise to buy and sell a determinate thing for a
price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the
price.
Consequently, the "offer" may be withdrawn anytime by
communicating the withdrawal to the other party.47
In this case, Ayala Corporation offered the subject lots for sale
to petitioners at the price of P6,500.00/square meter, the
prevailing market price for the property when the offer was
made on June 18, 1990.48 Insisting on paying for the lots at
the prevailing market price in 1984 of P460.00/square meter,
petitioners rejected the offer. Ayala Corporation reduced the
price to P5,000.00/square meter but again, petitioners
rejected the offer and instead made a counter-offer in the
amount of P2,000.00/square meter.49 Ayala Corporation
rejected petitioners' counter-offer. With this rejection,
petitioners lost their right to purchase the subject lots.
It cannot, therefore, be said that Ayala Corporation breached
petitioners' right of first refusal and should be compelled by an
action for specific performance to sell the subject lots to
petitioners at the prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No
pronouncement as to costs.
SO ORDERED.
G.R. No. L-10394           December 13, 1958
CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-
appellees,
vs.
MANILA MOTOR CO., INC. and ARTURO
COLMENARES, defendants-appellants.
Hilado and Hilado for appellees.
Ozaeta, Gibbs and Ozaeta for appellant company.
Jose L. Gamboa and Napoleon Garcia for appellant Arturo
Colmenares.
REYES, J. B. L., J.:
Manila Motor Co., Inc., and Arturo Colmenares interpose this
appeal against the decision of the Court of First Instance of
Negros Occidental, in its Civil Case No. 648, ordering the
defendant Manila Motor Co., Inc. to pay to the plaintiffs
Villaruel the sum of (a) P11,900 with legal rest from May 18,
1953, on which date, the court below declared invalid the
continued operation of the Debt Moratorium, under the first
cause of action; (b) P38,395 with legal interest from the date
of filing of the original complaint on April 26, 1947, on the
second cause of action; and against both the Manila Motor
Co., Inc. and its co-defendant, Arturo Colmenares, the sum of
P30,000 to be paid, jointly and severally, with respect to the
third cause of action.
On May 31, 1940, the plaintiffs Villaruel and the defendant
Manila Motor Co., Inc. entered into a contract (Exhibit "A")
whereby, the former agreed to convey by way of lease to the
latter the following described premises;
(a) Five hundred (500) square meters of floor space of a
building of strong materials for automobile showroom, offices,
and store room for automobile spare parts;
(b) Another building of strong materials for automobile repair
shop; and
(c) A 5-bedroom house of strong materials for residence of the
Bacolod Branch Manager of the defendant company.
The term of the lease was five (5) years, to commence from
the time that the building were delivered and placed at the
disposal of the lessee company, ready for immediate
occupancy. The contract was renewable for an additional
period of five (5) years. The Manila Motor Company, in
consideration of the above covenants, agreed to pay to the
lessors, or their duly authorized representative, a monthly
rental of Three Hundred (P300) pesos payable in advance
before the fifth day of each month, and for the residential
house of its branch manager, a monthly rental not to exceed
Fifty (P50) pesos "payable separately by the Manager".
The leased premises were placed in the possession of the
lessee on the 31st day of October, 1940, from which date, the
period of the lease started to run under their agreement.
This situation, the Manila Motor Co., Inc. and its branch
manager enjoying the premises, and the lessors receiving the
corresponding rentals as stipulated, continued until the
invasion of 1941; and shortly after the Japanese military
occupation of the Provincial Capital of Bacolod the enemy
forces held and used the properties leased as part of their
quarters from June 1, 1942 to March 29, 1945, ousting the
lessee therefrom. No payment of rentals were made at any
time during the said period.
Immediately upon the liberation of the said city in 1945, the
American Forces occupied the same buildings that were
vacated by the Japanese, including those leased by the
plaintiffs, until October 31, 1945. Monthly rentals were paid by
the said occupants to the owners during the time that they
were in possession, as the same rate that the defendant
company used to pay.
Thereafter, when the United States Army finally gave up the
occupancy the premises, the Manila Motor Co., Inc., through
their branch manager, Rafael B. Grey, decided to exercise
their option to renew the contract for the additional period of
five (5) years, and the parties, agreed that the seven months
occupancy by the U. S. Army would not be counted as part of
the new 5-year term. Simultaneously with such renewal, the
company sublet the same buildings, except that used for the
residence of the branch manager, to the other defendant,
Arturo Colmenares.
However, before resuming the collection of rentals, Dr. Alfredo
Villaruel, who was entrusted with the same, consulted Atty.
Luis Hilado on whether they (the lessors) had the right to
collect, from the defendant company, rentals corresponding to
the time during which the Japanese military forces had control
over the leased premises. Upon being advised that they had
such a right, Dr. Villaruel demanded payment thereof, but the
defendant company refused to pay. As a result, Dr. Villaruel
gave notice seeking the rescission of the contract of lease
and the payment of rentals from June 1, 1942 to March 31,
1945 totalling P11,900. This was also rejected by the
defendant company in its letter to Villaruel, dated July 27,
1946.
Sometime on that same month of July, Rafael B. Grey offered
to pay to Dr. Villaruel the sum of P350, for which, tenderer
requested a receipt that would state that it was in full payment
for the said month. The latter expressed willingness to accept
the tendered amount provided, however, that his acceptance
should be understood to be without prejudice to their demand
for the rescission of the contract, and for increased rentals
until their buildings were returned to them. Later, Dr. Villaruel
indicated his willingness to limit the condition of his
acceptance to be that "neither the lessee nor the lessors
admit the contention of the other by the mere fact of
payment". As no accord could still be reached between the
parties as to the context of the receipt, no payment was
thereafter tendered until the end of November, 1946. On
December 4, 1946 (the day after the defendant company
notified Dr. Villaruel by telegram, that it cancelled the power of
attorney given to Grey, and that it now authorized Arturo
Colmenares, instead, to pay the rent of P350 each month),
the Manila Motor Co., Inc. remitted to Dr. Villaruel by letter,
the sum of P350.00. For this payment, the latter issued a
receipt stating that it was "without prejudice" to their demand
for rents in arrears and for the rescission of the contract of
lease.
After it had become evident that the parties could not settle
their case amicably, the lessors commenced this action on
April 26, 1947 with the Court of First Instance of Negros
Occidental against the appellants herein. During the
pendency of the case, a fire originating from the projection
room of the City Theatre, into which Arturo Colmenares, (the
sublessee) had converted the former repair shop of the
Manila Motor Co. Inc., completely razed the building,
engulfing also the main building where Colmenares had
opened a soda fountain and refreshment parlor, and made
partitions for store spaces which he rented to other persons.
Because of the aforesaid occurrence, plaintiffs demanded
reimbursement from the defendants, but having been refused,
they filed a supplemental complaint to include as their third
cause of action, the recovery of the value of the burned
buildings.
Defendants filed their amended answer and also moved for
the dismissal of the plaintiffs' first and second causes of action
invoking the Debt Moratorium that was then in force. The
dismissal was granted by the trial court on February 5, 1951,
but hearing was set as regards the third cause of action.
On August 11, 1952, the defendant company filed a motion for
summary judgment dismissing the plaintiffs, third cause of
action, to which plaintiffs registered objection coupled with a
petition for reconsideration of the order of the court dismissing
the first and second causes of action. Pending the resolution
of this incident, plaintiffs, on October 2, 1953, called the
court's attention to the decision in the case of Rutter vs.
Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the
continued effectivity of the Moratorium Law (R. A. 342). On
November 25, 1953, the trial court denied the defendant
company's motion for summary judgment and set aside its
previous order dismissing the first and second causes of
action. The case was accordingly heard and thereafter,
judgment was rendered in plaintiffs' favor in the terms set in
the opening paragraph of this decision. Thereafter, the
defendants regularly appealed to this Court.
The defendants-appellants raise a number of procedural
points. The first of these relates to their contention that the
supplemental complaint which included a third cause of
action, should not have been admitted, as it brought about a
change in the original theory of the case and that it raised new
issues not theretofore considered. This argument cannot be
sustained under the circumstances. This action was
inceptionally instituted for the rescission of the contract of
lease and for the recovery of unpaid rentals before and after
liberation. When the leased buildings were destroyed, the
plaintiffs-lessors demanded from the defendants-lessees,
instead, the value of the burned premises, basing their right to
do so on defendants' alleged default in the payment of post-
liberation rentals (which was also their basis in formerly
seeking for rescission). This cannot be considered as already
altering the theory of the case which is merely a change in the
relief prayed for, brought about by circumstances occurring
during the pendency of the action, and is not improper.
(Southern Pacific Co. vs. Conway, 115 F. 2d 746; Suburban
Improvement Company vs. Scott Lumber Co., 87 A.L.R. 555,
59 F. 2d 711). The filing of the supplements complaint can
well be justified also under section 2, Rule 17 of the Rules of
Court (on amendments) "to the end that the real matter in
dispute and all matters in the action in dispute between the
parties may, as far as possible be completely determined in a
single proceedings". It is to be noted furthermore, that the
admission or rejection of this kind of pleadings is within the
sound discretion of the court that will not be disturbed on
appeal in the absence of abuse thereof (see Sec. 5, Rule 17,
Rules of Court), especially so, as in this case, where no
substantial procedural prejudice is caused to the adverse
party.
It is urged that the dismissal of the first and second causes of
action on February 5, 1951 had the effect of a dismissal "with
prejudice" as the court did not make any qualification in its
dismissal order. Appellants, apparently, lost sight of the fact
that the dismissal was premised on the existence of the "Debt
Moratorium" which suspended the enforcement of the
obligation up to a certain time. The reference thereto by the
lower court amounted to a dismissal "without prejudice", since
in effect it ruled that the plaintiffs could not, at the time they
sought it, enforce their right of action against the defendants,
but plaintiffs must wait until the moratorium was lifted. In this
way, the court qualified its dismissal.
Taking up the case on its merits, it is readily seen that the key
to the entire dispute is the question whether the defendant-
appellant Manila Motor Co., Inc. should be held liable for the
rentals of the premises leased corresponding to the lapse of
time that they were occupied as quarters or barracks by the
invading Japanese army, and whether said appellant was
placed in default by its refusal to comply with the demand to
pay such rents. For if the Motor Company was not so liable,
then it never was in default nor was it chargeable for the
accidental lose of the buildings, nor for any damages except
the rental at the contract rate from its reoccupation of the
premises leased until the same were accidentally destroyed
by fire on March 2, 1948.
The appellees contended, and the court below has held, that
the ouster of the least company by the Japanese occupation
forces from 1942 until liberation, while operating to deprive
the lessee of the enjoyment of the thing leased, was,
nevertheless, a mere act of trespass ("perturbacion de mero
hecho") that, under the Spanish Civil Code of 1889 (in force
here until 1950), did not exempt the lessee from the duty to
pay rent. We find that contention and ruling erroneous and
untenable.
The pertinent articles of the Civil Code of Spain of 1889
provide:
ART. 1554. It shall be the duty of the lessor;
1. To deliver to the lessee the thing which is the subject matter
of the contract;
2. To make thereon, during the lease, all repairs necessary in
order to keep it in serviceable condition for the purpose for
which it was intended;
3. To maintain the lessee in the peaceful enjoyment of the
lease during the entire term of the contract.
ART. 1560. The lessor shall not be liable for any act of mere
disturbance of a third person of the use of the leased
property; but the lessee shall have a direct action against the
trespasser.
It the third person, be it the Government or a private
individual, has acted in reliance upon a right, such action shall
not be deemed a mere act of disturbance. (Emphasis
supplied)
Under the first paragraph of article 1560 the lessor does not
answer for a mere act of trespass ( perturbacion de mero
hecho) as distinguished from trespass under color of title
( perturbacion de derecho). As to what would constitute a
mere act of trespass, this Court in the case of Goldstein vs.
Roces (34 Phil. 562), made this pronouncement:
Si el hecho perturbador no va acompañado ni precedido de
nada que revele una intencion propiamente juridica en el que
lo realiza, de tal suerte que el arrendatario solo pueda
apreciar el hecho material desnudo de toda forma o
motivacion de derecho, entendemos que se trata de una
perturbacion de mero hecho.
Upon the basis of the distinction thus established between
the  perturbacion de hecho and the  perturbacion de derecho,
it is demonstrable that the ouster of the appellant by the
Japanese occupying forces belongs to the second class of
disturbances, de derecho. For under the generally accepted
principles of international law (and it must be remembered
that those principles are made by our Constitution a part of
the law of our nation 1) a belligerent occupant (like the
Japanese in 1942-1945) may legitimately billet or quarter its
troops in privately owned land and buildings for the duration of
its military operations, or as military necessity should demand.
The well known writer Oppenheim, discoursing on the laws of
war on land, says upon this topic;
Immovable private enemy property may under no
circumstances or conditions be appropriated by an invading
belligerent. Should he confiscate and sell private land or
buildings, the buyer would acquire no right whatever to the
property. Article 46 of the Hague Regulations expressly
enacts that "private property may not be confiscated." But
confiscation differs from the temporary use of private land and
building for all kinds of purposes demanded by the
necessities of war. What has been said above with regard to
utilization of public buildings applied equally to private
buildings. If necessary, they maybe converted into hospital
barracks, and stables without compensation for the
proprietors, and they may also be converted into fortifications.
A humane belligerent will not drive the wretched inhabitants
into the street if he can help it. But under the pressure of
necessity he may be obliged to do this, and he is certainly not
prohibited from doing it. (Emphasis supplied) (Oppenheim &
Lauterpach, International Law, Vol. II, p. 312, 1944 Ed.)
The view thus expressed is concurred in by other writers.
Hyde (International Law, Vol. 3, p. 1893, 2nd Rev. Ed.) quotes
the U. S. War Department 1940 Rules of Land Warfare (Rule
No. 324) to the effect that —
The measure of permissible devastation is found in the strict
necessities of war. As an end in itself, as a separate measure
of war, devastation is not sanctioned by the law of war. There
must be some reasonably close connection between the
destruction of property and the overcoming of the enemy's
army. Thus the rule requiring respect for private property is
not violated through damage resulting from operations,
movements, or combats of the army; that is, real estate may
be utilized for marches, camp sites, construction of trenches,
etc. Buildings may be used for shelter for troops, the sick and
wounded, for animals, for reconnaissance, cover defense, etc.
Fence, woods, crops, buildings, etc., may be demolished, cut
down, and removed to clear a field of fire, to construct
bridges, to furnish fuel if imperatively needed for the army.
(Emphasis supplied)
Reference may also be made to Rule 336:
What may be requisitioned. — Practically everything may be
requisitioned under this article (art. LII of the regulations
above quoted) that is necessary for the maintenance of the
army and not of direct military use, such as fuel, food, forage,
clothing, tobacco, printing presses, type, leather, cloth,
etc. Billeting of troops for quarters and subsistence is also
authorized. (Emphasis supplied)
And Forest and Tucker state:
The billegerent occupant may destroy or appropriate public
property which may have a hostile purpose, as forts, arms,
armories, etc. The occupying force may enjoy the income
from the public sources. Strictly private property should be
inviolable, except so far as the necessity of war requires
contrary action. (Forest and Tucker, International Law, 9th
Ed., p. 277) (Emphasis supplied)
The distinction between confiscation and temporary
sequestration of private property by a belligerent occupant
was also passed upon by this Court in Haw Pia vs. China
Banking Corporation, 80 Phil. 604, wherein the right of Japan
to sequester or take temporary control over enemy private
property in the interest of its military effort was expressly
recognized.
We are thus forced to conclude that in evicting the lessee,
Manila Motor Co., Inc. from the leased buildings and
occupying the same as quarters for troops, the Japanese
authorities acted pursuant to a right recognized by
international and domestic law. Its act of dispossession,
therefore, did not constitute perturbacion de hecho but
a  perturbacion de derecho  for which the lessors Villaruel (and
not the appellants lessees) were liable (Art. 1560, supra) and
for the consequences of which said lessors must respond,
since the result of the disturbance was the deprivation of the
lessee of the peaceful use and enjoyment of the property
leased. Wherefore, the latter's corresponding obligation to pay
rentals ceased during such deprivation.
The Supreme Court of Spain, in its Sentencia of 6 December
1944, squarely declared the resolutory effect of the military
sequestration of properties under lease upon the lessee's
obligation to pay rent (Jurisprudencia Civil, Segunda Serie,
Tomo 8, pp. 583, 608):.
Considerando que para resolver acerca de la procedencia del
presente recurso es preciso partir de las bases de hecho
sentadas en la sentencia recurrida, y no impugnadas al
amparo del numero 7. del articulo 1.692 de la Ley de
Enjuiciamiento civil, es decir, de que hallandose vigente el
contrato de arrendamiento celebrado entre actor y
demandada, en fecha que no se precisa, entre los dias del 18
al 31 de julio de 1936, los locales objeto de dicho contrato de
arrendamiento, y en los que no funcionaba de tiempo anterior
la industria para cuyo ejercicio se arrendaron, fueron
requisados por el Ejercito Nacional, con motivo de la guerra
civil, para que se instalara en los mismos la Junta de
Donativos al Ejercito del Sur, aun cundo en dicha incautacion,
que se hizo a la propiedad de la finca, no se observaron las
formalidades legales, a causa de las circunstancias
extraordinarias por que a la sazon atravesaba Sevilla, hecho
que no consta se hiciera saber por los arrendatarios
demandados al actor, pero que fue notorio en aquella capital,
donde residia el actor, que de el debio tener conocimiento. Se
estima igualmente por la Sala que el hecho de que la
industria no funcionara en el local no tuvo influencia alguna
sobre su incautacion por el Ejercito.
Considerando que sobre tales bases de hecho es de
desestimar el primer motivo del recurso: violacion de los
articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan,
en terminos generales, la eficacia de los contratos, puesto
que en el presente caso de los que se trata en definitiva es de
determinar si por virtud de fuerza mayor, la requisa a que se
hace referencia, ajena, por lo tanto, a culpa, asi del
arrendatario como del arrendador, se vio aquel privado del
posible disfrute de la finca arrendada, y de si por virtud de
esta circunstancia esta o no exento de la obligacion de
abonar la renta pactada durante el tiempo que subsistio la
incautacion; y es indudable la afirmativa en cuanto al primer
extremo, puesto que la sentencia recurrida establece que el
hecho de que no funcionase la industria y estuvieran los
locales cerrados no actuo como causa de la requisa de estos
por el Ejercito.
Considerando que la sentencia recurrida, en cuanto no da
lugar al pago de las rentas correspondientes al tiempo que
duro la incautacion, lejos de infringir, por aplicacion indebida,
el art. 1.568 del Codigo civil, se ajusta la orientacion marcada
en el mismo, puesto que este precepto legal dispone que el
arrendatario tiene accion contra el tercero perturbador de
mero hecho en la posesion de la finca arrendada, pero no
contra la Administracion o contra los que obran en virtud de
un derecho que les corresponde; y aqui la perturbacion que
experimento el arrendador en su posesion, como
consecuencia de la requisa, no puede calificarse como de
mero hecho, conforme al citado articulo, puesto que la finca
fue requisada por la autoridad militar para fines de guerra, de
donde se sigue que el arrendatario tenia que soportar la
privacion de su tenencia material a traves del arrendador, con
quien ha de entenderse la requisa de la cosa arrendada.
In addition, the text of Art. 1560, in its first paragraph ( jam
quot.) assumes that in case of mere disturbance
( perturbacion de mero hecho) "the lessee shall have a direct
action against the trespasser." This assumption evidently
does not contemplate the case of dispossession of the lessee
by a military occupant, as pointed out by Mr. Chief Justice
Paras in his dissenting opinion in Reyes vs. Caltex (Phil.) Inc.,
84 Phil. 669; for the reason that the lessee could not have a
direct action against the military occupant. It would be most
unrealistic to expect that the occupation courts, place under
the authority of the occupying belligerent, should entertain at
the time a suit for forcible entry against the Japanese army.
The plaintiffs, their lawyers, and in all probability, the Judge
and court personnel, would face "severest penalties" for such
defiance of the invader.
The present case is distinguishable from Lo Ching vs.
Archbishop of Manila (81 Phil., 601) in that the act of the
Japanese military involved in the latter case clearly went
beyond the limits set by the Hague Conventions, in seizing
the property and delivering it to another private party; and
from Reyes vs. Caltex (Phil.) Inc., 84 Phil. 654, in that the
rights of the military occupant under international law were not
raised or put in issue in said case; and moreover, the lessee
there, by failing to rescind the lease upon seizure of the
premises by the Japanese military, despite the stipulated
power to do so, resumed business and decided to hold unto
the long term lease for the balance of its 20-year period,
starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army
covered the major portion of the five-year contractual period,
without any option to rescind by the lessee.
The lessor's position is not improved by regarding the military
seizure of the property under lease as a case of  force
majeure or fortuitous event. Ordinarily, a party may not be
held responsible therefor, despite the fact that it prevented
compliance of its obligations. But lease being a contract that
calls for prestations that are both reciprocal and repetitive
(tractum successivum), the obligations of either party are not
discharged at any given moment, but must be fulfilled all
throughout the term of the contract. As a result, any
substantial failure by one party to fulfill its commitments at any
time during the contract period gives rise to a failure of
consideration (causa) for the obligations of the other party and
excuses the latter from the correlative performance, because
the causa in lease must exist not only at the perfection but
throughout the term of the contract. No lessee would agree to
pay rent for premises he could not enjoy. As expressed by
Marcel Planiol (quoted in 4 Castan, Derecho Civil, 7th Edition,
p. 264) —
Como la obligacion del arrendador es sucesiva y se renueva
todos los dias, la subsistencia del arrendamiento se hace
imposible cuando, por cualquier razon, el arrendador no
puede ya procurar al arrendatario el disfrute de la cosa.
This effect of the failure of reciprocity appears whether the
failure is due to fault or to fortuitous event; the only difference
being that in case of fault, the other party is entitled to rescind
the contract in toto, and collect damages, while in casual non-
performance it becomes entitled only to a suspension pro
tanto of its own commitments. This rule is recognized in par. 2
of Art. 1558, authorizing the lessee to demand reduction of
the rent in case of repairs depriving him of the possession of
part of the property; and in Art. 1575, enabling the lessee of
rural property to demand reduction of the rent if more than
one-half of the fruits are lost by extraordinary fortuitous event.
Of course, where it becomes immediately apparent that the
loss of possession or enjoyment will be permanent, as in the
case of accidental destruction of a leased building, the lease
contract terminates.
Applying these principles, the Sentencia of December 1944,
already adverted to, ruled as follows:
Considerando que privado el arrendador, por tal hecho, del
disfrute de esta, es manifiesta la imposibilidad en que se vio
de cumplir la tercera de las obligaciones que el impone el
articulo 1.554 del Codigo Civil, obligacion (la de mantener al
arrendatario en el disfrute de la cosa arrendada) que ha de
entenderse reciproca de la de pago de renta pactada, que
impone al arrendatario el numero primero del art. 1.555 de
dicho Cuerpo legal, y por ello no puede ser exigida.
Considerando que, aunque no sean estrictamente aplicables
al caso los articulos 1.124, 1.556 y 1.568, que se citan como
infringidos por el recurrente, suponiendo que a ellos ha
entendido referirse la Audiencia (lo que impediria, en todo
caso, la estimacion del recurso por este motivo, ya que
dichos articulos no se citan en la sentencia de instancia), es
evidente que ellos proclaman la reciprocidad de las
obligaciones entre arrendatario y arrendador, y en este
sentido, tratandose de un incumplimiento inculpable
decontrato, pueden servir, como tambien el 1.558, en cuanto
preven la reduccion de rentas o posible restriccion del
contrato cuando el arrendatario se ve privado, por obras
realizadas en la finca arrendada, del disfrute de este, de
fundamento, con los demas preceptos invocados, a una
extencion de renta mientras subsiste la imposibilidad de
utilizar la cosa arrendada, sobre todo cuando los articulos 157
y 158 del Reglamento de Requisas de 13 de enero de 1921
estatuyen claramente que las requisas de edificio se hacen a
la propiedad, y es el propietario el que puede pedir
indemnization, uno de cuyos elementos es el precio del
alquiler que le sea satisfecho por el inmueble incautado.
We are aware that the rule in the common law is otherwise,
due to its regarding a lease as a conveyance to the lessee of
a temporary estate or title to the leased property so that loss
of possession due to war or other fortuitous event leaves the
tenant liable for the rent in the absence of stipulation. The
fundamental difference between the common law and the civil
law concepts has been outlined by the United States
in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in
this wise:
But as to the nature and effect of a lease for years, at a
certain rent which the lessee agrees to pay, and containing no
express covenant on the part of the lessor, the two systems
differ materially. The common law regards such a lease as the
grant of an estate for years, which the lessee takes a title in,
and is bound to pay the stipulated rent for, notwithstanding
any injury by flood, fire or external violence, at least unless
the injury is such a destruction of the land as to amount to an
eviction; and by that law the lessor is under no implied
covenant to repair, or even that the premises shall be fit for
the purpose for which they are leased. Fowler vs. Bott, 6
Mass. 63; 3 Kent, Com. 465, 466; Broom, Legal Maxims, 3d
ed. 213, 214; Doupe vs. Genin, 45 N. Y. 119; Kingbury vs.
Westfall, 61 N. Y. 356. Naumberg vs. Young, 15 Vroom,
331; Bowe vs. Hunking, 135 Mass. 380; Manchester
Warehouse Co. vs. Carr, L.R. 5 C.P.D. 507.
The civil law, on the other hand, regards a lease for years as
a mere transfer of the use and enjoyment of the property; and
holds the landlord bound, without any express covenant, to
keep it in repair and otherwise fit for use and enjoyment for
the purpose for which it is leased, even when the need of
repair or the unfitness is caused by an inevitable accident,
and if he does not do so, the tenant may have the lease
annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1, 2;
19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae Resolutiones c. 3,
secs. 1-3, 18, 19: Gregorio Lopez in 5 Partidas, tit. 8, 11. 8,
22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no. 1; sec. 3
nos. 1, 3, 6, Pothier, Contract de Louage, nos. 3, 6, 11, 22,
53, 103, 106, 139-155.
It is accordingly laid down in the Pandects, on the authority of
Julian, "If anyone has let an estate, that, even if anything
happens by vis major, he must make it good, he must stand
by his contract," si quis fundum locaverit, ut, etiamsi quid vi
majore accidisset, hoc ei praestaretur, pacto standum esse;
Dig. 19, 2, 9, 2; and on the authority of Ulpian, that "A lease
does not change the ownership," non solet locatio dominiun
mutare; Dig. 19, 2, 39; and that the lessee has a right of
action, if he cannot enjoy the thing which he has hired, si re
quam conduxit frui non liceat, whether because his
possession, either of the whole or of part of the field, is not
made good, or a house, or stable or sheepfold, is not
repaired; and the landlord ought to warrant the tenant,
dominum colono praestare debere, against every irresistible
force, omnim vim cui resisti non potest, such as floods, flocks
of birds, or any like cause, or invasion of enemies; and if the
whole crop should be destroyed by a heavy rainfall, or the
olives should be spoiled by blight, or by extraordinary heat of
the sun, solis fervore non assueto, it would be the loss of the
landlord, damnum domini futurum; and so if the field falls in by
an earthquake, for there must be made good to the tenant a
field that he can enjoy, oportere enim agrum praestari
conductori, ut frui possit; but if any loss arises from defects in
the thing itself, si qua tamen vitia ex ipsa re oriantur, as if wine
turns sour, or standing corn is spoiled by worms or weeds, or
if nothing extraordinary happens, si vero nihil extra
consuetudinem acciderit, it is the loss of the tenant, damnum
coloni esse. Dig. 19, 2; 15, 1, 2. (Emphasis supplied)
In short, the law applies to leases the rule enunciated by the
Canonists and the Bartolist School of Post glossatorse, that
"contractus qui tractum successivum habent et dependentiam
de futuro, sub conditione rebus sic stantibus intelliguntur,"
they are understood entered subject to the condition that
things will remain as they are, without material change.
It is also worthy of note that the lessors, through Dr. Javier
Villaruel, agreed after liberation to a renewal of the contract of
lease for another five years (from June 1, 1946 to May 31 of
1951) without making any reservation regarding the alleged
liability of the lessee company for the rentals corresponding to
the period of occupancy of the premises by the Japanese
army, and without insisting that the non-payment of such
rental was a breach of the contract of lease. This passivity of
the lessors strongly supports the claim of the lessees that the
rentals in question were verbally waived. The proffered
explanation is that the lessors could not refuse to renew the
lease, because the privilege of renewal had been granted to
the lessees in the original contract. Such excuse is untenable:
if the lessors deemed that the contract had been breached by
the lessee's non-payment of the occupation rents how could
they admit the lessee's right to renew a contract that the
lessee itself had violated?
But this is not all. The lessors accepted payment of current
rentals from October 1945 to June 1946. It was only in July
1946 that they insisted upon collecting also the 1942-1945
rents, and refused to accept further payments tendered by the
lessee unless their right to collect the occupation rental was
recognized or reserved. After refusing the rents from July to
November 1946, unless the lessee recognized their right to
occupation rentals, the appellees (lessors) demanded
rescission of the contract and a rental of P1,740 monthly in
lieu of the stipulated P350 per month. (Exhibit "C").
This attitude of the lessors was doubly wrongful: first, because
as already shown, the dispossession by the Japanese army
exempted the lessee from his obligation to pay rent for the
period of its ouster; and second, because even if the lessee
had been liable for that rent, its collection in 1946 was barred
by the moratorium order, Executive Order No. 32, that
remained in force until replaced by Rep. Act 342 in 1948. To
apply the current rentals to the occupation obligations would
amount to enforcing them contrary to the moratorium decreed
by the government.
Clearly, then, the lessor' insistence upon collecting the
occupation rentals for 1942-1945 was unwarranted in law.
Hence, their refusal to accept the current rentals without
qualification placed them in default (mora creditoris or
accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the
leased premises. While not expressly declared by the Code of
1889, this result is clearly inferable from the nature and
effects of mora, and from Articles 1185, 1452 [par. 3] and
1589).
ART. 1185. When the obligation to deliver a certain and
determinate thing arises from the commission of a crime or
misdemeanor the obligor shall not be exempted from the
payment of its value, whatever the cause of its loss may have
been, unless, having offered the thing to the person entitled to
receive it, the latter should have refused without reason to
accept it.
Art. 1452. . . . .
If fungible things should be sold for a price fixed with relation
to weight, number, or measure, they shall not be at the
purchaser's risk until they have been weighed, counted, or
measured, unless the purchaser should be in default.
ART. 1589. If the person who contracted to do the work bound
himself to furnish the materials, he shall bear the loss in case
of the destruction of the work before it is delivered, unless its
acceptance has been delayed by the default of the other
party.
While there is a presumption that the loss of the thing leased
is due to the fault of the lessee (Civil Code of 1889, Art. 1563),
it is noteworthy that the lessor have not invoked that
presumption either here or in the court below. On the contrary,
the parties and the trial court have all proceeded and
discussed the issues taking for granted that the destruction of
the leased buildings was purely fortuitous. We see no reason
for departing from that assumption and further prolonging this
litigation..
That the lessee and sublessee did not consign or deposit in
court the rentals tendered to and improperly rejected by the
lessors, did not render the debtor liable for default (mora
solvendi) nor answerable for fortuitous events because, as
explained by the Supreme Court of Spain in its Sentencia of 5
June 1944 —
Al exigir el art. 1176 del Codigo Civil la consignacion para
liberar al deudor no quiere decir que necesariamente haya de
practicarse, y no baste el ofrecimiento de pago que de
aquella no fuere seguido, a efectos de exclusion de las
consecuencias de la mora solvendi. (8 Manresa,
Comentarios, 5th Ed., Vol. 1, p. 136).
In other words, the only effect of the failure to consign the
rentals in court was that the obligation to pay them subsisted
(P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained
liable for the amount of the unpaid contract rent,
corresponding to the period from July to November, 1946; it
being undisputed that, from December 1946 up to March 2,
1948, when the commercial buildings were burned, the
defendants-appellants have paid the contract rentals at the
rate of P350 per month. But the failure to consign did not
eradicate the default (mora) of the lessors nor the risk of loss
that lay upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4
Puig Peña, Der. Civ., part. 1, p. 234; Diaz Pairo, Teoria Gen.
de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).
In view of the foregoing, we hold:lawphil.net
(a) That the dispossession of the lessee from the premises by
the Japanese army of occupation was not an act of mere
trespass (  perturbacion de mero hecho) but one de derecho
chargeable to the lessors;
(b) That such dispossession, though not due to fault of lessors
or lessee, nevertheless resulted in the exemption of the
lessee from its obligation to pay rent during the period that it
was deprived of the possession and enjoyment of the
premises leased;
(c) That the insistence of the lessors to collect such rentals
was unwarranted;
(d) That the lessors were not justified in refusing to accept the
tender of current rentals unless the lessee should recognize
their right to the rents corresponding to the period that the
lessee was not in possession;
(e) That by their improper refusal to accept the current rents
tendered by the lessee, the lessors incurred in default (mora)
and they must shoulder the subsequent accidental loss of the
premises leased;
(f) That the mora of the lessors was not cured by the failure of
the lessee to make the consignation of the rejected payments,
but the lessee remained obligated to pay the amounts
tendered and not consigned by it in court.
Consequently, it was reversible error to sentence the
appellants to pay P2,165 a month as reasonable value of the
occupation of the premises from July 1946, and the value of
the destroyed buildings amounting to P30,000.
Wherefore, the decision appealed from is modified in the
sense that the appellant Manila Motor Company should pay to
the appellees Villaruel only the rents for the leased premises
corresponding to the period from July up to November 1946,
at the rate of P350 a month, or a total of P1,750. Costs
against appellees in both instances. So ordered.
G.R. No. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC., petitioner,
vs.
COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner.
Martin D. Pantaleon for private respondents.
BELLOSILLO, J.:
The liability to a holder in due course of the drawer of checks
issued to another merely as security, and the right of a real
estate mortgagee after extrajudicial foreclosure to recover the
balance of the obligation, are the issues in this Petition for
Review of the Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon
Victoriano, as security for pieces of jewelry to be sold on
commission, two (2) post-dated Equitable Banking
Corporation checks in the amount of Fifty Thousand Pesos
(P50,000.00) each, one dated 30 August 1979 and the other,
30 September 1979. Thereafter, the payee negotiated the
checks to petitioner State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned
them to the payee before maturity of the checks. The checks,
however, could no longer be retrieved as they had already
been negotiated. Consequently, before their maturity dates,
MOULIC withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored
for insufficiency of funds. On 20 December 1979, STATE
allegedly notified MOULIC of the dishonor of the checks and
requested that it be paid in cash instead, although MOULIC
avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the
checks plus attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no
obligation on the checks because the jewelry was never sold
and the checks were negotiated without her knowledge and
consent. She also instituted a Third-Party Complaint against
Corazon Victoriano, who later assumed full responsibility for
the checks.
On 26 May 1988, the trial court dismissed the Complaint as
well as the Third-Party Complaint, and ordered STATE to pay
MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of
Appeals, but the appellate court affirmed the trial court on the
ground that the Notice of Dishonor to MOULIC was made
beyond the period prescribed by the Negotiable Instruments
Law and that even if STATE did serve such notice on
MOULIC within the reglementary period it would be of no
consequence as the checks should never have been
presented for payment. The sale of the jewelry was never
effected; the checks, therefore, ceased to serve their purpose
as security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably,
they were negotiable. After all, at the pre-trial, the parties
agreed to limit the issue to whether or not STATE was a
holder of the checks in due course.1
In this regard, Sec. 52 of the Negotiable Instruments Law
provides —
Sec. 52. What constitutes a holder in due course. — A holder
in due course is a holder who has taken the instrument under
the following conditions: (a) That it is complete and regular
upon its face; (b) That he became the holder of it before it was
overdue, and without notice that it was previously dishonored,
if such was the fact; (c) That he took it in good faith and for
value; (d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title of
the person negotiating it.
Culled from the foregoing, a prima facie presumption exists
that the holder of a negotiable instrument is a holder in due
course.2 Consequently, the burden of proving that STATE is
not a holder in due course lies in the person who disputes the
presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-
dated checks were complete and regular: (b) petitioner bought
these checks from the payee, Corazon Victoriano, before their
due dates;3 (c) petitioner took these checks in good faith and
for value, albeit at a discounted price; and, (d) petitioner was
never informed nor made aware that these checks were
merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As
such, it holds the instruments free from any defect of title of
prior parties, and from defenses available to prior parties
among themselves; STATE may, therefore, enforce full
payment of the checks.4
MOULIC cannot set up against STATE the defense that there
was failure or absence of consideration. MOULIC can only
invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a
holder in due course.
That the post-dated checks were merely issued as security is
not a ground for the discharge of the instrument as against a
holder in due course. For the only grounds are those outlined
in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. — A negotiable
instrument is discharged: (a) By payment in due course by or
on behalf of the principal debtor; (b) By payment in due
course by the party accommodated, where the instrument is
made or accepted for his accommodation; (c) By the
intentional cancellation thereof by the holder; (d) By any other
act which will discharge a simple contract for the payment of
money; (e) When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
Obviously, MOULIC may only invoke paragraphs (c) and (d)
as possible grounds for the discharge of the instrument. But,
the intentional cancellation contemplated under paragraph (c)
is that cancellation effected by destroying the instrument
either by tearing it up,5 burning it,6 or writing the word
"cancelled" on the instrument. The act of destroying the
instrument must also be made by the holder of the instrument
intentionally. Since MOULIC failed to get back possession of
the post-dated checks, the intentional cancellation of the said
checks is altogether impossible.
On the other hand, the acts which will discharge a simple
contract for the payment of money under paragraph (d) are
determined by other existing legislations since Sec. 119 does
not specify what these acts are, e.g., Art. 1231 of the Civil
Code7 which enumerates the modes of extinguishing
obligations. Again, none of the modes outlined therein is
applicable in the instant case as Sec. 119 contemplates of a
situation where the holder of the instrument is the creditor
while its drawer is the debtor. In the present action, the payee,
Corazon Victoriano, was no longer MOULIC's creditor at the
time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge
herself from her liability by the mere expediency of
withdrawing her funds from the drawee bank. She is thus
liable as she has no legal basis to excuse herself from liability
on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of
Dishonor to MOULIC is of no moment. The need for such
notice is not absolute; there are exceptions under Sec. 114 of
the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. — Notice
of dishonor is not required to be given to the drawer in the
following cases: (a) Where the drawer and the drawee are the
same person; (b) When the drawee is a fictitious person or a
person not having capacity to contract; (c) When the drawer is
the person to whom the instrument is presented for payment:
(d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument; (e) Where the
drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She
did not retrieve the checks when she returned the jewelry.
She simply withdrew her funds from her drawee bank and
transferred them to another to protect herself. After
withdrawing her funds, she could not have expected her
checks to be honored. In other words, she was responsible for
the dishonor of her checks, hence, there was no need to
serve her Notice of Dishonor, which is simply bringing to the
knowledge of the drawer or indorser of the instrument, either
verbally or by writing, the fact that a specified instrument,
upon proper proceedings taken, has not been accepted or
has not been paid, and that the party notified is expected to
pay it.8
In addition, the Negotiable Instruments Law was enacted for
the purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said statute
should not be tampered with haphazardly or lightly. Nor
should it be brushed aside in order to meet the necessities in
a single case.9
The drawing and negotiation of a check have certain effects
aside from the transfer of title or the incurring of liability in
regard to the instrument by the transferor. The holder who
takes the negotiated paper makes a contract with the parties
on the face of the instrument. There is an implied
representation that funds or credit are available for the
payment of the instrument in the bank upon which it is
drawn.10 Consequently, the withdrawal of the money from the
drawee bank to avoid liability on the checks cannot prejudice
the rights of holders in due course. In the instant case, such
withdrawal renders the drawer, Nora B. Moulic, liable to
STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment
as MOULIC left no funds with the drawee bank to meet her
obligation on the checks,11 so that Notice of Dishonor would
be futile.
The Court of Appeals also held that allowing recovery on the
checks would constitute unjust enrichment on the part of
STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account
Assistant, testified that the obligation of Corazon Victoriano
and her husband at the time their property mortgaged to
STATE was extrajudicially foreclosed amounted to P1.9
million; the bid price at public auction was only P1
million.12 Thus, the value of the property foreclosed was not
even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the
debt in an extrajudicial foreclosure of mortgage, the
mortgagee is entitled to claim the deficiency from the
debtor.13 The step thus taken by the mortgagee-bank in
resorting to an extra-judicial foreclosure was merely to find a
proceeding for the sale of the property and its action cannot
be taken to mean a waiver of its right to demand payment for
the whole debt.14 For, while Act 3135, as amended, does not
discuss the mortgagee's right to recover such deficiency, it
does not contain any provision either, expressly or impliedly,
prohibiting recovery. In this jurisdiction, when the legislature
intends to foreclose the right of a creditor to sue for any
deficiency resulting from foreclosure of a security given to
guarantee an obligation, it so expressly provides. For
instance, with respect to pledges, Art. 2115 of the Civil
Code15 does not allow the creditor to recover the deficiency
from the sale of the thing pledged. Likewise, in the case of a
chattel mortgage, or a thing sold on installment basis, in the
event of foreclosure, the vendor "shall have no further action
against the purchaser to recover any unpaid balance of the
price. Any agreement to the contrary will be void".16
It is clear then that in the absence of a similar provision in Act
No. 3135, as amended, it cannot be concluded that the
creditor loses his right recognized by the Rules of Court to
take action for the recovery of any unpaid balance on the
principal obligation simply because he has chosen to
extrajudicially foreclose the real estate mortgage pursuant to
a Special Power of Attorney given him by the mortgagor in the
contract of mortgage.17
The filing of the Complaint and the Third-Party Complaint to
enforce the checks against MOULIC and the VICTORIANO
spouses, respectively, is just another means of recovering the
unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the
checks she issued to the holder in due course, STATE,
without prejudice to any action for recompense she may
pursue against the VICTORIANOs as Third-Party Defendants
who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision
appealed from is REVERSED and a new one entered
declaring private respondent NORA B. MOULIC liable to
petitioner STATE INVESTMENT HOUSE, INC., for the value
of EBC Checks Nos. 30089658 and 30089660 in the total
amount of P100,000.00, P3,000.00 as attorney's fees, and the
costs of suit, without prejudice to any action for recompense
she may pursue against the VICTORIANOs as Third-Party
Defendants.
Costs against private respondent.
SO ORDERED.
G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-
appellants.
GUTIERREZ, JR., J.:
This is an appeal from the decision of the Court of First
Instance of Rizal, Seventh Judicial District, Branch X,
declaring the contract to sell as not having been validly
cancelled and ordering the defendants-appellants to execute
a final deed of sale in favor of the plaintiffs-appellees, to pay
P500.00 attorney's fees and costs.
The facts being undisputed, the Court of Appeals certified the
case to us since only pure questions of law have been raised
for appellate review.
On December 19, 1957, defendants-appellants Ursula Torres
Calasanz and Tomas Calasanz and plaintiffs-appellees
Buenaventura Angeles and Teofila Juani entered into a
contract to sell a piece of land located in Cainta, Rizal for the
amount of P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00
upon the execution of the contract. They promised to pay the
balance in monthly installments of P 41.20 until fully paid, the
installments being due and payable on the 19th day of each
month. The plaintiffs-appellees paid the monthly installments
until July 1966, when their aggregate payment already
amounted to P4,533.38. On numerous occasions, the
defendants-appellants accepted and received delayed
installment payments from the plaintiffs-appellees.
On December 7, 1966, the defendants-appellants wrote the
plaintiffs-appellees a letter requesting the remittance of past
due accounts.
On January 28, 1967, the defendants-appellants cancelled
the said contract because the plaintiffs-appellees failed to
meet subsequent payments. The plaintiffs' letter with their
plea for reconsideration of the said cancellation was denied
by the defendants-appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the
Court of First Instance of Rizal, Seventh Judicial District,
Branch X to compel the defendants-appellants to execute in
their favor the final deed of sale alleging inter alia that after
computing all subsequent payments for the land in question,
they found out that they have already paid the total amount of
P4,533.38 including interests, realty taxes and incidental
expenses for the registration and transfer of the land.
The defendants-appellants alleged in their answer that the
complaint states no cause of action and that the plaintiffs-
appellees violated paragraph six (6) of the contract to sell
when they failed and refused to pay and/or offer to pay the
monthly installments corresponding to the month of August,
1966 for more than five (5) months, thereby constraining the
defendants-appellants to cancel the said contract.
The lower court rendered judgment in favor of the plaintiffs-
appellees. The dispositive portion of the decision reads:
WHEREFORE, based on the foregoing considerations, the
Court hereby renders judgment in favor of the plaintiffs and
against the defendants declaring that the contract subject
matter of the instant case was NOT VALIDLY cancelled by the
defendants. Consequently, the defendants are ordered to
execute a final Deed of Sale in favor of the plaintiffs and to
pay the sum of P500.00 by way of attorney's fees. Costs
against the defendants.
A motion for reconsideration filed by the defendants-
appellants was denied.
As earlier stated, the then Court of Appeals certified the case
to us considering that the appeal involves pure questions of
law.
The defendants-appellants assigned the following alleged
errors of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING THE
CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS
HAVING BEEN LEGALLY AND VALIDLY CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID
CONTRACT TO SELL HAS NOT BEEN LEGALLY AND
VALIDLY CANCELLED, THE LOWER COURT ERRED IN
ORDERING DEFENDANTS TO EXECUTE A FINAL DEED
OF SALE IN FAVOR OF THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING DEFENDANTS
TO PAY PLAINTIFFS THE SUM OF P500.00 AS
ATTORNEY'S FEES.
The main issue to be resolved is whether or not the contract
to sell has been automatically and validly cancelled by the
defendants-appellants.
The defendants-appellants submit that the contract was
validly cancelled pursuant to paragraph six of the contract
which provides:
xxx xxx xxx
SIXTH.—In case the party of the SECOND PART fails to
satisfy any monthly installments, or any other payments
herein agreed upon, he is granted a month of grace within
which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood,
however, that should the month of grace herein granted to the
party of the SECOND PART expired; without the payments
corresponding to both months having been satisfied, an
interest of 10% per annum will be charged on the amounts he
should have paid; it is understood further, that should a period
of 90 days elapse, to begin from the expiration of the month
of grace herein mentioned, and the party of SECOND PART
has not paid all the amounts he should have paid with the
corresponding interest up to that date, the party of the FIRST
PART has the right to declare this contract cancelled and of
no effect, and as consequence thereof, the party of the FIRST
PART may dispose of the parcel of land covered by this
contract in favor of other persons, as if this contract had never
been entered into. In case of such cancellation of the contract,
all the amounts paid in accordance with this agreement
together with all the improvements made on the premises,
shall be considered as rents paid for the use and occupation
of the above mentioned premises, and as payment for the
damages suffered by failure of the party of the SECOND
PART to fulfill his part of the agreement; and the party of the
SECOND PART hereby renounces all his right to demand or
reclaim the return of the same and obliges himself to
peacefully vacate the premises and deliver the same to the
party of the FIRST PART. (Emphasis supplied by appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-appellees
failed to pay the August, 1966 installment despite demands
for more than four (4) months. The defendants-appellants
point to Jocson v. Capitol Subdivision (G.R. No. L-6573,
February 28, 1955) where this Court upheld the right of the
subdivision owner to automatically cancel a contract to sell on
the strength of a provision or stipulation similar to paragraph 6
of the contract in this case. The defendants-appellants also
argue that even in the absence of the aforequoted provision,
they had the right to cancel the contract to sell under Article
1191 of the Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that
the Jocson ruling does not apply. They state that paragraph 6
of the contract to sell is contrary to law insofar as it provides
that in case of specified breaches of its terms, the sellers
have the right to declare the contract cancelled and of no
effect, because it granted the sellers an absolute and
automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal
obligations provides:
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.
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either party
the right to rescind the contract upon the failure of the other to
perform the obligation assumed thereunder. Moreover, there
is nothing in the law that prohibits the parties from entering
into an agreement that violation of the terms of the contract
would cause its cancellation even without court intervention
(Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276)—
Well settled is, however, the rule that a judicial action for the
rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation of
any of its terms and conditions' (Lopez v. Commissioner of
Customs, 37 SCRA 327, and cases cited therein)
Resort to judicial action for rescission is obviously not
contemplated . . . The validity of the stipulation can not be
seriously disputed. It is in the nature of a facultative resolutory
condition which in many cases has been upheld by this Court.
(Ponce Enrile v. Court of Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured party to
resort to court for rescission of the contract when the contract
itself provides that it may be rescinded for violation of its
terms and conditions, was qualified by this Court in University
of the Philippines v. De los Angeles, (35 SCRA 102) where we
explained that:
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
many 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. ... .
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring
that judicial action is necessary for the resolution of a
reciprocal obligation; (Ocejo, Perez & Co. v. International
Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan
de Dios, et al., 84 Phil. 820) since in every case where the
extrajudicial resolution is contested only the final award of the
court of competent jurisdiction can conclusively settle whether
the resolution was proper or not. It is in this sense that judicial
action will be necessary, as without it, the extrajudicial
resolution will remain contestable and subject to judicial
invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.
The right to rescind the contract for non-performance of one
of its stipulations, therefore, is not absolute. In Universal Food
Corp. v. Court of Appeals (33 SCRA 1) the Court stated that—
The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in making the agreement. (Song Fo & Co.
v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of
whether a breach of a contract is substantial depends upon
the attendant circumstances. (Corpus v. Hon. Alikpala, et al.,
L-23707 & L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees
violated Section two of the contract to sell which provides:
SECOND.—That in consideration of the agreement of sale of
the above described property, the party of the SECOND PART
obligates himself to pay to the party of the FIRST PART the
Sum of THREE THOUSAND NINE HUNDRED TWENTY
ONLY (P3,920.00), Philippine Currency, plus interest at the
rate of 7% per annum, as follows:
(a) The amount of THREE HUNDRED NINETY TWO only
(P392.00) when this contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or
before the 19th day of each month, from this date until the
total payment of the price above stipulated, including interest.
because they failed to pay the August installment, despite
demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-
appellants is so slight and casual when we consider that apart
from the initial downpayment of P392.00 the plaintiffs-
appellees had already paid the monthly installments for a
period of almost nine (9) years. In other words, in only a short
time, the entire obligation would have been paid. Furthermore,
although the principal obligation was only P 3,920.00
excluding the 7 percent interests, the plaintiffs- appellees had
already paid an aggregate amount of P 4,533.38. To sanction
the rescission made by the defendants-appellants will work
injustice to the plaintiffs- appellees. (See J.M. Tuazon and
Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the
defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the
obligee.
also militates against the unilateral act of the defendants-
appellants in cancelling the contract.
We agree with the observation of the lower court to the effect
that:
Although the primary object of selling subdivided lots is
business, yet, it cannot be denied that this subdivision is
likewise purposely done to afford those landless, low income
group people of realizing their dream of a little parcel of land
which they can really call their own.
The defendants-appellants cannot rely on paragraph 9 of the
contract which provides:
NINTH.-That whatever consideration of the party of the FIRST
PART may concede to the party of the SECOND PART, as not
exacting a strict compliance with the conditions of paragraph
6 of this contract, as well as any other condonation that the
party of the FIRST PART may give to the party of the
SECOND PART with regards to the obligations of the latter,
should not be interpreted as a renunciation on the part of the
party of the FIRST PART of any right granted it by this
contract, in case of default or non-compliance by the party of
the SECOND PART.
The defendants-appellants argue that paragraph nine clearly
allows the seller to waive the observance of paragraph 6 not
merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We
agree with the plaintiffs-appellees that when the defendants-
appellants, instead of availing of their alleged right to rescind,
have accepted and received delayed payments of
installments, though the plaintiffs-appellees have been in
arrears beyond the grace period mentioned in paragraph 6 of
the contract, the defendants-appellants have waived and are
now estopped from exercising their alleged right of rescission.
In De Guzman v. Guieb  (48 SCRA 68), we held that:
xxx xxx xxx
But defendants do not deny that in spite of the long
arrearages, neither they nor their predecessor, Teodoro de
Guzman, even took steps to cancel the option or to eject the
appellees from the home-lot in question. On the contrary, it is
admitted that the delayed payments were received without
protest or qualification. ... Under these circumstances, We
cannot but agree with the lower court that at the time
appellees exercised their option, appellants had already
forfeited their right to invoke the above-quoted provision
regarding the nullifying effect of the non-payment of six
months rentals by appellees by their having accepted without
qualification on July 21, 1964 the full payment by appellees of
all their arrearages.
The defendants-appellants contend in the second assignment
of error that the ledger of payments show a balance of
P671,67 due from the plaintiffs-appellees. They submit that
while it is true that the total monthly installments paid by the
plaintiffs-appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied to the
interests since the contract specifically provides for a 7%
interest per annum on the remaining balance. The
defendants-appellants rely on paragraph 2 of the contract
which provides:
SECOND.—That in consideration of the agreement of sale of
the above described property, the party of the SECOND PART
obligates himself to pay to the party of the FIRST PART the
Sum of THREE THOUSAND NINE HUNDRED TWENTY
ONLY (P 3,920.00), Philippine Currency, plus interest at the
rate of 7% per annum ... . (Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their
submission that since they have already paid the defendants-
appellants a total sum of P4,533.38, the defendants-
appellants must now be compelled to execute the final deed
of sale pursuant to paragraph 12 of the contract which
provides:
TWELFTH.—That once the payment of the sum of P3,920.00,
the total price of the sale is completed, the party to the FIRST
PART will execute in favor of the party of the SECOND PART,
the necessary deed or deeds to transfer to the latter the title
of the parcel of land sold, free from all hens and
encumbrances other than those expressly provided in this
contract; it is understood, however, that au the expenses
which may be incurred in the said transfer of title shall be paid
by the party of the SECOND PART, as above stated.
Closely related to the second assignment of error is the
submission of the plaintiffs-appellees that the contract herein
is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell
entered into by the parties has some characteristics of a
contract of adhesion. The defendants-appellants drafted and
prepared the contract. The plaintiffs-appellees, eager to
acquire a lot upon which they could build a home, affixed their
signatures and assented to the terms and conditions of the
contract. They had no opportunity to question nor change any
of the terms of the agreement. It was offered to them on a
"take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83
SCRA 36 1), we held that:
xxx xxx xxx
... (W)hile generally, stipulations in a contract come about
after deliberate drafting by the parties thereto. . . . there are
certain contracts almost all the provisions of which have been
drafted only by one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only
participation of the party is the signing of his signature or his
"adhesion" thereto. Insurance contracts, bills of
lading, contracts of sale of lots on the installment plan fall into
this category. (Paras, Civil Code of the Philippines, Seventh
ed., Vol. 1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the
plaintiffs-appellees to pay the defendants-appellants the sum
of P3,920.00 plus 7% interest per annum, it is likewise true
that under paragraph 12 the seller is obligated to transfer the
title to the buyer upon payment of the P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be
construed against the party causing it. We agree with the
observation of the plaintiffs-appellees to the effect that "the
terms of a contract must be interpreted against the party who
drafted the same, especially where such interpretation will
help effect justice to buyers who, after having invested a big
amount of money, are now sought to be deprived of the same
thru the prayed application of a contract clever in its
phraseology, condemnable in its lopsidedness and injurious in
its effect which, in essence, and in its entirety is most unfair to
the buyers."
Thus, since the principal obligation under the contract is only
P3,920.00 and the plaintiffs-appellees have already paid an
aggregate amount of P4,533.38, the courts should only order
the payment of the few remaining installments but not uphold
the cancellation of the contract. Upon payment of the balance
of P671.67 without any interest thereon, the defendants-
appellants must immediately execute the final deed of sale in
favor of the plaintiffs-appellees and execute the necessary
transfer documents as provided in paragraph 12 of the
contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of
merit. The decision appealed from is AFFIRMED with the
modification that the plaintiffs-appellees should pay the
balance of SIX HUNDRED SEVENTY ONE PESOS AND
SIXTY-SEVEN CENTAVOS (P671.67) without any interests.
Costs against the defendants-appellants.
SO ORDERED.
G.R. No. 129018      November 15, 2001
CARMELITA LEAÑO, assisted by her husband
GREGORIO CUACHON, petitioner,
vs.
COURT OF APPEALS and HERMOGENES
FERNANDO, respondents.
PARDO, J.:
The Case
The case is a petition for review on certiorari of the
decision1 of the Court of Appeals affirming that of the Regional
Trial Court, Malolos, Branch 72 ordering petitioner Leaño to
pay respondent Hermogenes Fernando the sum of
P183,687.70 corresponding to her outstanding obligations
under the contract to sell, with interest and surcharges due
thereon, attorney's fees and costs.1âwphi1.nêt
The Facts
On November 13, 1985, Hermogenes Fernando, as vendor
and Carmelita Leaño, as vendee executed a contract to sell
involving a piece of land, Lot No. 876-B, with an area of 431
square meters, located at Sto. Cristo, Baliuag, Bulacan. 3
In the contract, Carmelita Leaño bound herself to pay
Hermogenes Fernando the sum of one hundred seven
thousand and seven hundred and fifty pesos (P107,750.00)
as the total purchase price of the lot. The manner of paying
the total purchase price was as follows:
"The sum of TEN THOUSAND SEVEN HUNDRED SEVENTY
FIVE (P10,775.00) PESOS, shall be paid at the signing of this
contract as DOWN PAYMENT, the balance of NINETY SIX
THOUSAND NINE HUNDRED SEVENTY FIVE PESOS
(P96,975.00) shall be paid within a period of TEN (10) years
at a monthly amortization of P1,747.30 to begin from
December 7, 1985 with interest at eighteen per cent (18%)
per annum based on balances."4
The contract also provided for a grace period of one month
within which to make payments, together with the one
corresponding to the month of grace. Should the month of
grace expire without the installments for both months having
been satisfied, an interest of 18% per annum will be charged
on the unpaid installments.5
Should a period of ninety (90) days elapse from the expiration
of the grace period without the overdue and unpaid
installments having been paid with the corresponding
interests up to that date, respondent Fernando, as vendor,
was authorized to declare the contract cancelled and to
dispose of the parcel of land, as if the contract had not been
entered into. The payments made, together with all the
improvements made on the premises, shall be considered as
rents paid for the use and occupation of the premises and as
liquidated damages.6
After the execution of the contract, Carmelita Leaño made
several payments in lump sum. 7 Thereafter, she constructed a
house on the lot valued at P800,000.00. 8 The last payment
that she made was on April 1, 1989.
On September 16, 1991, the trial court rendered a decision in
an ejectment case9 earlier filed by respondent Fernando
ordering petitioner Leaño to vacate the premises and to pay
P250.00 per month by way of compensation for the use and
occupation of the property from May 27, 1991 until she
vacated the premises, attorney's fees and costs of the
suit.10 On August 24, 1993, the trial court issued a writ of
execution which was duly served on petitioner Leaño.
On September 27, 1993, petitioner Leaño filed with the
Regional Trial Court of Malolos, Bulacan a complaint for
specific performance with preliminary injunction. 11 Petitioner
Leaño assailed the validity of the judgment of the municipal
trial court12 for being violative of her right to due process and
for being contrary to the avowed intentions of Republic Act
No. 6552 regarding protection to buyers of lots on
installments. Petitioner Leaño deposited P18,000.00 with the
clerk of court, Regional Trial Court, Bulacan, to cover the
balance of the total cost of Lot 876-B.13
On November 4, 1993, after petitioner Leaño posted a cash
bond of P50,000.00,14 the trial court issued a writ of
preliminary injunction15 to stay the enforcement of the decision
of the municipal trial court.16
On February 6, 1995, the trial court rendered a decision, the
dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered as follows:
"1. The preliminary injunction issued by this court per its order
dated November 4, 1993 is hereby made permanent;
"2. Ordering the plaintiff to pay to the defendant the sum of
P103,090.70 corresponding to her outstanding obligations
under the contract to sell (Exhibit "A" – Exhibit "B") consisting
of the principal of said obligation together with the interest and
surcharges due thereon as of February 28, 1994, plus interest
thereon at the rate of 18% per annum in accordance with the
provision of said contract to be computed from March 1, 1994,
until the same becomes fully paid;
"3. Ordering the defendant to pay to plaintiff the amount of
P10,000 as and by way of attorney's fees;
"4. Ordering the defendant to pay to plaintiff the costs of the
suit in Civil Case No. 1680 aforementioned.
"SO ORDERED.
"Malolos, Bulacan, February 6, 1995.
"(sgd.) DANILO A. MANALASTAS
Judge"17
On February 21, 1995, respondent Fernando filed a motion
for reconsideration18 and the supplement19 thereto. The trial
court increased the amount of P103,090.70 to P183,687.00
and ordered petitioner Leaño ordered to pay attorney's fees. 20
According to the trial court, the transaction between the
parties was an absolute sale, making petitioner Leaño the
owner of the lot upon actual and constructive delivery thereof.
Respondent Fernando, the seller, was divested of ownership
and cannot recover the same unless the contract is rescinded
pursuant to Article 1592 of the Civil Code which requires a
judicial or notarial demand. Since there had been no
rescission, petitioner Leaño, as the owner in possession of
the property, cannot be evicted.
On the issue of delay, the trial court held:
"While the said contract provides that the whole purchase
price is payable within a ten-year period, yet the same
contract clearly specifies that the purchase price shall be
payable in monthly installments for which the corresponding
penalty shall be imposed in case of default. The plaintiff
certainly cannot ignore the binding effect of such stipulation
by merely asserting that the ten-year period for payment of
the whole purchase price has not yet lapsed. In other words,
the plaintiff has clearly defaulted in the payment of the
amortizations due under the contract as recited in the
statement of account (Exhibit "2") and she should be liable for
the payment of interest and penalties in accordance with the
stipulations in the contract pertaining thereto."21
The trial court disregarded petitioner Leaños claim that she
made a downpayment of P10,000.00, at the time of the
execution of the contract.
The trial court relied on the statement of account 22 and the
summary23 prepared by respondent Fernando to determine
petitioner Leaño's liability for the payment of interests and
penalties.
The trial court held that the consignation made by petitioner
Leaño in the amount of P18,000.00 did not produce any legal
effect as the same was not done in accordance with Articles
1176, 1177 and 1178 of the Civil Code.
In time, petitioner Leaño appealed the decision to the Court of
Appeals.24 On January 22, 1997, Court of Appeals
promulgated a decision affirming that of the Regional Trial
Court in toto.25 On February 11, 1997, petitioner Leaño filed a
motion for reconsideration.26 On April 18, 1997, the Court of
Appeals denied the motion.27
Hence, this petition.28
The Issues
The issues to be resolved in this petition for review are (1)
whether the transaction between the parties in an absolute
sale or a conditional sale; (2) whether there was a proper
cancellation of the contract to sell; and (3) whether petitioner
was in delay in the payment of the monthly amortizations.
The Court's Ruling
Contrary to the findings of the trial court, the transaction
between the parties was a conditional sale not an absolute
sale. The intention of the parties was to reserve the ownership
of the land in the seller until the buyer has paid the total
purchase price.
Consider the following:
First, the contract to sell makes the sale, cession and
conveyance "subject to conditions" set forth in the contract to
sell.29
Second, what was transferred was the possession of the
property, not ownership. The possession is even limited by
the following: (1) that the vendee may continue therewith "as
long as the VENDEE complies with all the terms and
conditions mentioned, and (2) that the buyer may not sell,
cede, assign, transfer or mortgage or in any way encumber
any right, interest or equity that she may have or acquire in
and to the said parcel of land nor to lease or to sublease it or
give possession to another person without the written consent
of the seller.30
Finally, the ownership of the lot was not transferred to
Carmelita Leaño. As the land is covered by a torrens title, the
act of registration of the deed of sale was the operative act
that could transfer ownership over the lot. 31 There is not even
a deed that could be registered since the contract provides
that the seller will execute such a deed "upon complete
payment by the VENDEE of the total purchase price of the
property" with the stipulated interest.32
In a contract to sell real property on installments, the full
payment of the purchase price is a positive suspensive
condition, the failure of which is not considered a breach,
casual or serious, but simply an event that prevented the
obligation of the vendor to convey title from acquiring any
obligatory force.33 The transfer of ownership and title would
occur after full payment of the price.34
In the case at bar, petitioner Leaño's non-payment of the
installments after April 1, 1989, prevented the obligation of
respondent Fernando to convey the property from arising. In
fact, it brought into effect the provision of the contract on
cancellation.
Contrary to the findings of the trial court, Article 1592 of the
Civil Code is inapplicable to the case at bar. 35 However, any
attempt to cancel the contract to sell would have to comply
with the provisions of Republic Act No. 6552, the "Realty
Installment Buyer Protection Act."
R.A. No. 6552 recognizes in conditional sales of all kinds of
real estate (industrial, commercial, residential) the right of the
seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from
acquiring binding force.36 The law also provides for the rights
of the buyer in case of cancellation. Thus, Sec. 3 (b) of the
law provides that:
"If the contract is cancelled, the seller shall refund to the
buyer the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made
and, after five years of installments, an additional five percent
every year but not to exceed ninety percent of the total
payment made:  Provided, That the actual cancellation of the
contract shall take place after thirty days from receipt by the
buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full
payment of the cash surrender value to the buyer." [Emphasis
supplied]
The decision in the ejectment case 37 operated as the notice of
cancellation required by Sec. 3(b). As petitioner Leaño was
not given then cash surrender value of the payments that she
made, there was still no actual cancellation of the contract.
Consequently, petitioner Leaño may still reinstate the contract
by updating the account during the grace period and before
actual cancellation.38
Should petitioner Leaño wish to reinstate the contract, she
would have to update her accounts with respondent Fernando
in accordance with the statement of account39 which amount
was P183,687.00.40
On the issue of whether petitioner Leaño was in delay in
paying the amortizations, we rule that while the contract
provided that the total purchase price was payable within a
ten-year period, the same contract specified that the purchase
price shall be paid in monthly installments for which the
corresponding penalty shall be imposed in case of default.
Petitioner Leaño cannot ignore the provision on the payment
of monthly installments by claiming that the ten-year period
within which to pay has not elapsed.
Article 1169 of the Civil Code provides that 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.1âwphi1.nêt
In the case at bar, respondent Fernando performed his part of
the obligation by allowing petitioner Leaño to continue in
possession and use of the property. Clearly, when petitioner
Leaño did not pay the monthly amortizations in accordance
with the terms of the contract, she was in delay and liable for
damages.41 However, we agree with the trial court that the
default committed by petitioner Leaño in respect of the
obligation could be compensated by the interest and
surcharges imposed upon her under the contract in
question.42
It is a cardinal rule in the interpretation of contracts 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
stipulation shall control.43 Thus, as there is no ambiguity in the
language of the contract, there is no room for construction,
only compliance.
The Fallo
IN VIEW WHEREOF, we DENY the petition and AFFIRM the
decision of the Court of Appeals44 in toto.
No costs.
SO ORDERED.
G.R. No. 127695       December 3, 2001
HEIRS OF LUIS BACUS, namely: CLARA RESMA BACUS,
ROQUE R. BACUS, SR., SATURNINO R. BACUS,
PRISCILA VDA. DE CABANERO, CARMELITA B. SUQUIB,
BERNARDITA B. CARDENAS, RAUL R. BACUS,
MEDARDO R. BACUS, ANSELMA B. ALBAN, RICARDO R.
BACUS, FELICISIMA B. JUDICO, and DOMINICIANA B.
TANGAL, petitioners,
vs.
HON. COURT OF APPEALS and SPOUSES FAUSTINO
DURAY and VICTORIANA DURAY, respondents.
QUISUMBING, J.:
This petition assails the decision dated November 29, 1996,
of the Court of Appeals in CA-G.R. CV No. 37566, affirming
the decision dated August 3, 1991, of the Regional Trial Court
of Cebu City, Branch 6, in Civil Case No. CEB-8935.
The facts, as culled from the records, are as follows:
On June 1, 1984, Luis Bacus leased to private respondent
Faustino Duray a parcel of agricultural land in Bulacao,
Talisay, Cebu. Designated as Lot No. 3661-A-3-B-2, it had an
area of 3,002 square meters, covered by Transfer Certificate
of Title No. 48866. The lease was for six years, ending May
31, 1990. The contract contained an option to buy clause.
Under said option, the lessee had the exclusive and
irrevocable right to buy 2,000 square meters of the property
within five years from a year after the effectivity of the
contract, at P200 per square meter. That rate shall be
proportionately adjusted depending on the peso rate against
the US dollar, which at the time of the execution of the
contract was fourteen pesos.1
Close to the expiration of the contract, Luis Bacus died on
October 10, 1989. Thereafter, on March 15, 1990, the Duray
spouses informed Roque Bacus, one of the heirs of Luis
Bacus, that they were willing and ready to purchase the
property under the option to buy clause. They requested
Roque Bacus to prepare the necessary documents, such as a
Special Power of Attorney authorizing him to enter into a
contract of sale,2 on behalf of his sisters who were then
abroad.
On March 30, 1990, due to the refusal of petitioners to sell the
property, Faustino Duray's adverse claim was annotated by
the Register of Deeds of Cebu, at the back of TCT No. 63269,
covering the segregated 2,000 square meter portion of Lot
No. 3661-A-3-B-2-A.3
Subsequently, on April 5, 1990, Duray filed a complaint for
specific performance against the heirs of Luis Bacus with
the Lupon Tagapamayapa of Barangay Bulacao, asking that
he be allowed to purchase the lot specifically referred to in the
lease contract with option to buy. At the hearing, Duray
presented a certification4 from the manager of Standard
Chartered Bank, Cebu City, addressed to Luis Bacus, stating
that at the request of Mr. Lawrence Glauber, a bank client,
arrangements were being made to allow Faustino Duray to
borrow funds of approximately P700,000 to enable him to
meet his obligations under the contract with Luis Bacus.5
Having failed to reach an agreement before the Lupon, on
April 27, 1990, private respondents filed a complaint for
specific performance with damages against petitioners before
the Regional Trial Court, praying that the latter, (a) execute a
deed of sale over the subject property in favor of private
respondents; (b) receive the payment of the purchase price;
and (c) pay the damages.
On the other hand, petitioners alleged that before Luis Bacus'
death, private respondents conveyed to them the former's
lack of interest to exercise their option because of
insufficiency of funds, but they were surprised to learn of
private respondents' demand. In turn, they requested private
respondents to pay the purchase price in full but the latter
refused. They further alleged that private respondents did not
deposit the money as required by the Lupon and instead
presented a bank certification which cannot be deemed legal
tender.
On October 30, 1990, private respondents manifested in court
that they caused the issuance of a cashier's check in the
amount of P650,0006 payable to petitioners at anytime upon
demand.
On August 3, 1991, the Regional Trial Court ruled in favor of
private respondents, the dispositive portion of which reads:
Premises considered, the court finds for the plaintiffs and
orders the defendants to specifically perform their obligation in
the option to buy and to execute a document of sale over the
property covered by Transfer Certificate of Title # T-63269
upon payment by the plaintiffs to them in the amount of Six
Hundred Seventy-Five Thousand Six Hundred Seventy-Five
(P675,675.00) Pesos within a period of thirty (30) days from
the date this decision becomes final.
SO ORDERED.7
Unsatisfied, petitioners appealed to the respondent Court of
Appeals which denied the appeal on November 29, 1996, on
the ground that the private respondents exercised their option
to buy the leased property before the expiration of the
contract of lease. It held:
. . . After a careful review of the entire records of this case, we
are convinced that the plaintiffs-appellees validly and
effectively exercised their option to buy the subject property.
As opined by the lower court, "the readiness and
preparedness of the plaintiff on his part, is manifested by his
cautionary letters, the prepared bank certification long before
the date of May 31, 1990, the final day of the option, and his
filing of this suit before said date. If the plaintiff-appellee
Francisco Duray had no intention to purchase the property, he
would not have bothered to write those letters to the
defendant-appellants (which were all received by them) and
neither would he be interested in having his adverse claim
annotated at the back of the T.C.T. of the subject property, two
(2) months before the expiration of the lease. Moreover, he
even went to the extent of seeking the help of the Lupon
Tagapamayapa to compel the defendants-appellants to
recognize his right to purchase the property and for them to
perform their corresponding obligation.8
xxx      xxx      xxx
We therefore find no merit in this appeal.
WHEREFORE, the decision appealed from is hereby
AFFIRMED.9
Hence, this petition where petitioners aver that the Court of
Appeals gravely erred and abused its discretion in:
I. . . . UPHOLDING THE TRIAL COURT'S RULING IN THE
SPECIFIC PERFORMANCE CASE BY ORDERING
PETITIONERS (DEFENDANTS THEREIN) TO EXECUTE A
DOCUMENT OF SALE OVER THE PROPERTY IN
QUESTION (WITH TCT NO. T-63269) TO THEM IN THE
AMOUNT OF P675,675.00 WITHIN THIRTY (30) DAYS
FROM THE DATE THE DECISION BECOMES FINAL;
II. . . . DISREGARDING LEGAL PRINCIPLES, SPECIFIC
PROVISIONS OF LAW AND JURISPRUDENCE IN
UPHOLDING THE DECISION OF THE TRIAL COURT TO
THE EFFECT THAT PRIVATE RESPONDENTS HAD
EXERCISED THEIR RIGHT OF OPTION TO BUY ON TIME;
THUS THE PRESENTATION OF THE CERTIFICATION OF
THE BANK MANAGER OF A BANK DEPOSIT IN THE NAME
OF ANOTHER PERSON FOR LOAN TO RESPONDENTS
WAS EQUIVALENT TO A VALID TENDER OF PAYMENT
AND A SUFFICIENT COMPLAINCE (SIC) OF A CONDITION
FOR THE EXERCISE OF THE OPTION TO BUY; AND
III. . . . UPHOLDING THE TRIAL COURT'S RULING THAT
THE PRESENTATION OF A CASHER'S (SIC) CHECK BY
THE RESPONDENTS IN THE AMOUNT OF P625,000.00
EVEN AFTER THE TERMINATION OF THE TRIAL ON THE
MERITS WITH BOTH PARTIES ALREADY HAVING RESTED
THEIR CASE, WAS STILL VALID COMPLIANCE OF THE
CONDITION FOR THE PRIVATE RESPONDENTS'
(PLAINTIFFS THEREIN) EXERCISE OF RIGHT OF OPTION
TO BUY AND HAD A FORCE OF VALID AND FULL TENDER
OF PAYMENT WITHIN THE AGREED PERIOD.10
Petitioners insist that they cannot be compelled to sell the
disputed property by virtue of the nonfulfillment of the
obligation under the option contract of the private
respondents.
Private respondents first aver that petitioners are unclear if
Rule 65 or Rule 45 of the Rules of Court govern their petition,
and that petitioners only raised questions of facts which this
Court cannot properly entertain in a petition for review. They
claim that even assuming that the instant petition is one under
Rule 45, the same must be denied for the Court of Appeals
has correctly determined that they had validly exercised their
option to buy the leased property before the contract expired.
In response, petitioners state that private respondents erred in
initially classifying the instant petition as one under Rule 65 of
the Rules of Court. They argue that the petition is one under
Rule 45 where errors of the Court of Appeals, whether
evidentiary or legal in nature, may be reviewed.
We agree with private respondents that in a petition for review
under Rule 45, only questions of law may be
raised.11 However, a close reading of petitioners' arguments
reveal the following legal issues which may properly be
entertained in the instant petition:
a) When private respondents opted to buy the property
covered by the lease contract with option to buy, were they
already required to deliver the money or consign it in court
before petitioner executes a deed of transfer?
b) Did private respondents incur in delay when they did not
deliver the purchase price or consign it in court on or before
the expiration of the contract?
On the first issue, petitioners contend that private respondents
failed to comply with their obligation because there was
neither actual delivery to them nor consignation in court or
with the Municipal, City or Provincial Treasurer of the
purchase price before the contract expired. Private
respondents' bank certificate stating that arrangements were
being made by the bank to release P700,000 as a loan to
private respondents cannot be considered as legal tender that
may substitute for delivery of payment to petitioners nor was it
a consignation.
Obligations under an option to buy are reciprocal
obligations.12 The performance of one obligation is
conditioned on the simultaneous fulfillment of the other
obligation.13 In other words, in an option to buy, the payment
of the purchase price by the creditor is contingent upon the
execution and delivery of a deed of sale by the debtor. In this
case, when private respondents opted to buy the property,
their obligation was to advise petitioners of their decision and
their readiness to pay the price. They were not yet obliged to
make actual payment. Only upon petitioners' actual execution
and delivery of the deed of sale were they required to pay. As
earlier stated, the latter was contingent upon the former.
In Nietes vs. Court of Appeals, 46 SCRA 654 (1972), we held
that notice of the creditor's decision to exercise his option to
buy need not be coupled with actual payment of the price, so
long as this is delivered to the owner of the property upon
performance of his part of the agreement. Consequently,
since the obligation was not yet due, consignation in court of
the purchase price was not yet required.
Consignation is the act of depositing the thing due with the
court or judicial authorities whenever the creditor cannot
accept or refuses to accept payment and it generally requires
a prior tender of payment. In instances, where no debt is due
and owing, consignation is not proper. 14 Therefore, petitioners'
contention that private respondents failed to comply with their
obligation under the option to buy because they failed to
actually deliver the purchase price or consign it in court before
the contract expired and before they execute a deed, has no
leg to stand on.
Corollary, private respondents did not incur in delay when
they did not yet deliver payment nor make a consignation
before the expiration of the contract. 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. Only from the moment one of the parties
fulfills his obligation, does delay by the other begin. 15
In this case, private respondents, as early as March 15, 1990,
communicated to petitioners their intention to buy the property
and they were at that time undertaking to meet their obligation
before the expiration of the contract on May 31, 1990.
However, petitioners refused to execute the deed of sale and
it was their demand to private respondents to first deliver the
money before they would execute the same which prompted
private respondents to institute a case for specific
performance in the Lupong Tagapamayapa and then in the
RTC. On October 30, 1990, after the case had been
submitted for decision but before the trial court rendered its
decision, private respondents issued a cashier's check in
petitioners' favor purportedly to bolster their claim that they
were ready to pay the purchase price. The trial court
considered this in private respondents' favor and we believe
that it rightly did so, because at the time the check was
issued, petitioners had not yet executed a deed of sale nor
expressed readiness to do so. Accordingly, as there was no
compliance yet with what was incumbent upon petitioners
under the option to buy, private respondents had not incurred
in delay when the cashier's check was issued even after the
contract expired.
WHEREFORE, the instant petition is DENIED. The decision
dated November 29, 1996 of the Court of Appeals is hereby
AFFIRMED.
Costs against petitioners.
SO ORDERED.
G.R. No. 115117        June 8, 2000
INTEGRATED PACKAGING CORP., petitioner,
vs.
COURT OF APPEALS and FIL-ANCHOR PAPER CO.,
INC., respondents.
QUISUMBING, J.:
This is a petition to review the decision of the Court of
Appeals rendered on April 20, 1994 reversing the judgment of
the Regional Trial Court of Caloocan City in an action for
recovery of sum of money filed by private respondent against
petitioner. In said decision, the appellate court decreed:
WHEREFORE, in view of all the foregoing, the appealed
judgment is hereby REVERSED and SET ASIDE. Appellee
[petitioner herein] is hereby ordered to pay appellant [private
respondent herein] the sum of P763,101.70, with legal interest
thereon, from the date of the filing of the Complaint, until fully
paid.
SO ORDERED.1
The RTC judgment reversed by the Court of Appeals had
disposed of the complain as follows:
WHEREFORE, judgment is hereby rendered:
Ordering plaintiff [herein private respondent] to pay defendant
[herein petitioner] the sum of P27,222.60 as compensatory
and actual damages after deducting P763,101.70 (value of
materials received by defendant) from P790,324.30
representing compensatory damages as defendant's
unrealized profits;
Ordering plaintiff to pay defendant the sum of P100,000.00 as
moral damages;
Ordering plaintiff to pay the sum of P30,000.00 for attorney's
fees; and to pay the costs of suit.
SO ORDERED.2
The facts, as culled from the records, are as follows:
Petitioner and private respondent executed on May 5, 1978,
an order agreement whereby private respondent bound itself
to deliver to petitioner 3,450 reams of printing paper, coated, 2
sides basis, 80 lbs., 38" x 23", short grain, worth
P1,040,060.00 under the following schedule: May and June
1978 — 450 reams at P290.00/ream; August and September
1978 — 700 reams at P290/ream; January 1979 — 575
reams at P307.20/ream; March 1979 — 575 reams at
P307.20/ream; July 1979 — 575 reams at 307.20/ream; and
October 1979 — 575 reams at P307.20/ream. In accordance
with the standard operating practice of the parties, the
materials were to be paid within a minimum of thirty days and
maximum of ninety days from delivery.
Later, on June 7, 1978, petitioner entered into a contract with
Philippine Appliance Corporation (Philacor) to print three
volumes of "Philacor Cultural Books" for delivery on the
following dates: Book VI, on or before November 1978; Book
VII, on or before November 1979 and; Book VIII, on or before
November 1980, with a minimum of 300,000 copies at a price
of P10.00 per copy or a total cost of P3,000,000.00.
As of July 30, 1979, private respondent had delivered to
petitioner 1,097 reams of printing paper out of the total 3,450
reams stated in the agreement. Petitioner alleged it wrote
private respondent to immediately deliver the balance
because further delay would greatly prejudice petitioner. From
June 5, 1980 and until July 23, 1981, private respondent
delivered again to petitioner various quantities of printing
paper amounting to P766,101.70. However, petitioner
encountered difficulties paying private respondent said
amount. Accordingly, private respondent made a formal
demand upon petitioner to settle the outstanding account. On
July 23 and 31, 1981 and August 27, 1981, petitioner made
partial payments totalling P97,200.00 which was applied to its
back accounts covered by delivery invoices dated September
29-30, 1980 and October 1-2, 1980.3
Meanwhile, petitioner entered into an additional printing
contract with Philacor. Unfortunately, petitioner failed to fully
comply with its contract with Philacor for the printing of books
VIII, IX, X and XI. Thus, Philacor demanded compensation
from petitioner for the delay and damage it suffered on
account of petitioner's failure.
On August 14, 1981, private respondent filed with the
Regional Trial Court of Caloocan City a collection suit against
petitioner for the sum of P766,101.70, representing the unpaid
purchase price of printing paper bought by petitioner on credit.
In its answer, petitioner denied the material allegations of the
complaint. By way of counterclaim, petitioner alleged that
private respondent was able to deliver only 1,097 reams of
printing paper which was short of 2,875 reams, in total
disregard of their agreement; that private respondent failed to
deliver the balance of the printing paper despite demand
therefor, hence, petitioner suffered actual damages and failed
to realize expected profits; and that petitioner's complaint was
prematurely filed.
After filing its reply and answer to the counterclaim, private
respondent moved for admission of its supplemental
complaint, which was granted. In said supplemental
complaint, private respondent alleged that subsequent to the
enumerated purchase invoices in the original complaint,
petitioner made additional purchases of printing paper on
credit amounting to P94,200.00. Private respondent also
averred that petitioner failed and refused to pay its
outstanding obligation although it made partial payments in
the amount of P97,200.00 which was applied to back
accounts, thus, reducing petitioner's indebtedness to
P763,101.70.
On July 5, 1990, the trial court rendered judgment declaring
that petitioner should pay private respondent the sum of
P763,101.70 representing the value of printing paper
delivered by private respondent from June 5, 1980 to July 23,
1981. However, the lower court also found petitioner's
counterclaim meritorious. It ruled that were it not for the failure
or delay of private respondent to deliver printing paper,
petitioner could have sold books to Philacor and realized profit
of P790,324.30 from the sale. It further ruled that petitioner
suffered a dislocation of business on account of loss of
contracts and goodwill as a result of private respondent's
violation of its obligation, for which the award of moral
damages was justified.
On appeal, the respondent Court of Appeals reversed and set
aside the judgment of the trial court. The appellate court
ordered petitioner to pay private respondent the sum of
P763,101.70 representing the amount of unpaid printing
paper delivered by private respondent to petitioner, with legal
interest thereon from the date of the filing of the complaint
until fully paid.4 However, the appellate court deleted the
award of P790,324.30 as compensatory damages as well as
the award of moral damages and attorney's fees, for lack of
factual and legal basis.
Expectedly, petitioner filed this instant petition contending that
the appellate court's judgment is based on erroneous
conclusions of facts and law. In this recourse, petitioner
assigns the following errors:
[I]
THE COURT OF APPEALS ERRED IN CONCLUDING THAT
PRIVATE RESPONDENT DID NOT VIOLATE THE ORDER
AGREEMENT.
[II]
THE COURT OF APPEALS ERRED IN CONCLUDING THAT
RESPONDENT IS NOT LIABLE FOR PETITIONER'S
BREACH OF CONTRACT WITH PHILACOR.
[III]
THE COURT OF APPEALS ERRED IN CONCLUDING THAT
PETITIONER IS NOT ENTITLED TO DAMAGES AGAINST
PRIVATE RESPONDENT. 5
In our view, the crucial issues for resolution in this case are as
follows:
(1) Whether or not private respondent violated the order
agreement, and;
(2) Whether or not private respondent is liable for petitioner's
breach of contract with Philacor.
Petitioner's contention lacks factual and legal basis, hence,
bereft of merit.
Petitioner contends, firstly, that private respondent violated
the order agreement when the latter failed to deliver the
balance of the printing paper on the dates agreed upon.
The transaction between the parties is a contract of sale
whereby private respondent (seller) obligates itself to deliver
printing paper to petitioner (buyer) which, in turn, binds itself
to pay therefor a sum of money or its equivalent (price).6 Both
parties concede that the order agreement gives rise to a
reciprocal obligations7 such that the obligation of one is
dependent upon the obligation of the other. Reciprocal
obligations are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous
fulfillment of the other.8 Thus, private respondent undertakes
to deliver printing paper of various quantities subject to
petitioner's corresponding obligation to pay, on a maximum
90-day credit, for these materials. Note that in the contract,
petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of
private respondent to deliver the materials is conditional upon
payment by petitioner within the prescribed period. Clearly,
petitioner did not fulfill its side of the contract as its last
payment in August 1981 could cover only materials covered
by delivery invoices dated September and October 1980.
There is no dispute that the agreement provides for the
delivery of printing paper on different dates and a separate
price has been agreed upon for each delivery. It is also
admitted that it is the standard practice of the parties that the
materials be paid within a minimum period of thirty (30) days
and a maximum of ninety (90) days from each
delivery.9 Accordingly, the private respondent's suspension of
its deliveries to petitioner whenever the latter failed to pay on
time, as in this case, is legally justified under the second
paragraph of Article 1583 of the Civil Code which provides
that:
When there is a contract of sale of goods to be delivered by
stated installments, which are to be separately paid for, and
the seller makes defective deliveries in respect of one or more
installments, or the buyer neglects or refuses without just
cause to take delivery of or  pay for one or more installments,
it depends in each case on the terms of the contract and the
circumstances of the case, whether the breach of contract is
so material as to justify the injured party in refusing to
proceed further and suing for damages for breach of the
entire contract, or whether the breach is severable, giving rise
to a claim for compensation but not to a right to treat the
whole contract as broken. (Emphasis supplied)
In this case, as found a quo petitioner's evidence failed to
establish that it had paid for the printing paper covered by the
delivery invoices on time. Consequently, private respondent
has the right to cease making further delivery, hence the
private respondent did not violate the order agreement. On
the contrary, it was petitioner which breached the agreement
as it failed to pay on time the materials delivered by private
respondent. Respondent appellate court correctly ruled that
private respondent did not violate the order agreement.
On the second assigned error, petitioner contends that private
respondent should be held liable for petitioner's breach of
contract with Philacor. This claim is manifestly devoid of merit.
As correctly held by the appellate court, private respondent
cannot be held liable under the contracts entered into by
petitioner with Philacor. Private respondent is not a party to
said agreements. It is also not a contract pour autrui.
Aforesaid contracts could not affect third persons like private
respondent because of the basic civil law principle of relativity
of contracts which provides that contracts can only bind the
parties who entered into it, and it cannot favor or prejudice a
third person, 10 even if he is aware of such contract and has
acted with knowledge thereof. 11
Indeed, the order agreement entered into by petitioner and
private respondent has not been shown as having a direct
bearing on the contracts of petitioner with Philacor. As pointed
out by private respondent and not refuted by petitioner, the
paper specified in the order agreement between petitioner
and private respondent are markedly different from the paper
involved in the contracts of petitioner with
Philacor. 12 Furthermore, the demand made by Philacor upon
petitioner for the latter to comply with its printing contract is
dated February 15, 1984, which is clearly made long after
private respondent had filed its complaint on August 14, 1981.
This demand relates to contracts with Philacor dated April 12,
1983 and May 13, 1983, which were entered into by petitioner
after private respondent filed the instant case.lawphi1
To recapitulate, private respondent did not violate the order
agreement it had with petitioner. Likewise, private respondent
could not be held liable for petitioner's breach of contract with
Philacor. It follows that there is no basis to hold private
respondent liable for damages. Accordingly, the appellate
court did not err in deleting the damages awarded by the trial
court to petitioner.
The rule on compensatory damages is well established. True,
indemnification for damages comprehends not only the loss
suffered, that is to say actual damages (damnum emergens),
but also profits which the obligee failed to obtain, referred to
as compensatory damages (lucrum cessans). However, to
justify a grant of actual or compensatory damages, it is
necessary to prove with a reasonable degree of certainty,
premised upon competent proof and on the best evidence
obtainable by the injured party, the actual amount of
loss. 13 In the case at bar, the trial court erroneously
concluded that petitioner could have sold books to Philacor at
the quoted selling price of P1,850,750.55 and by deducting
the production cost of P1,060,426.20, petitioner could have
earned profit of P790,324.30. Admittedly, the evidence relied
upon by the trial court in arriving at the amount are mere
estimates prepared by petitioner. 14 Said evidence is highly
speculative and manifestly hypothetical. It could not provide
sufficient legal and factual basis for the award of P790,324.30
as compensatory damages representing petitioner's self-
serving claim of unrealized profit.
Further, the deletion of the award of moral damages is proper,
since private respondent could not be held liable for breach of
contract. Moral damages may be awarded when in a breach
of contract the defendant acted in bad faith, or was guilty of
gross negligence amounting to bad faith, or in wanton
disregard of his contractual obligation. 15 Finally, since the
award of moral damages is eliminated, so must the award for
attorney's fees be also deleted. 16
WHEREFORE, the instant petition is DENIED. The decision
of the Court of Appeals is AFFIRMED. Costs against
petitioner.
SO ORDERED.
G.R. No. 137552        June 16, 2000
ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA,
MICHAEL Z. LAFORTEZA, DENNIS Z. LAFORTEZA, and
LEA Z. LAFORTEZA, petitioners,
vs.
ALONZO MACHUCA, respondent.
GONZAGA-REYES, J.:
This Petition for Review on Certiorari  seeks the reversal of
the Decision of the Court of Appeals 1 in CA G.R. CV No.
147457 entitled "ALONZO MACHUCA versus ROBERTO Z.
LAFORTEZA, GONZALO Z. LAFORTEZA, LEA ZULUETA-
LAFORTEZA, MICHAEL Z. LAFORTEZA, and DENNIS Z.
LAFORTEZA".
The following facts as found by the Court of Appeals are
undisputed:
The property involved consists of a house and lot located at
No. 7757 Sherwood Street, Marcelo Green Village,
Parañaque, Metro Manila, covered by Transfer Certificate of
Title (TCT) No. (220656) 8941 of the Registered of Deeds of
Parañaque (Exhibit "D", Plaintiff, record, pp. 331-332). The
subject property is registered in the name of the late
Francisco Q. Laforteza, although it is conjugal in nature
(Exhibit "8", Defendants, record pp. 331-386).
On August 2, 1988, defendant Lea Zulueta-Laforteza
executed a Special Power of Attorney in favor of defendants
Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr., appointing
both as her Attorney-in-fact authorizing them jointly to sell the
subject property and sign any document for the settlement of
the estate of the late Francisco Q. Laforteza (Exh. "A",
Plaintiff, record, pp. 323-325).
Likewise on the same day, defendant Michael Z. Laforteza
executed a Special Power of Attorney in favor of defendants
Roberto Z. Laforteza and Gonzalo Laforteza, Jr., likewise,
granting the same authority (Exh. "B", record, pp. 326-328)
Both agency instruments contained a provision that in any
document or paper to exercise authority granted, the
signature of both attorneys- in-fact must be affixed.
On October 27, 1988, defendant Dennis Z. Laforteza
executed a Special Power of Attorney in favor of defendant
Roberto Z. Laforteza for the purpose of selling the subject
property (Exh. "C", Plaintiff, record, pp. 329-330). A year later,
on October 30, 1989, Dennis Z. Laforteza executed another
Special Power of Attorney in favor of defendants Roberto Z.
Laforteza and Gonzalo Laforteza, Jr. naming both attorneys-
in-fact for the purpose of selling the subject property and
signing any document for the settlement of the estate of the
late Francisco Q. Laforteza. The subsequent agency
instrument (Exh, "2", record, pp. 371-373) contained similar
provisions that both attorneys-in-fact should sign any
document or paper executed in the exercise of their
authority.1âwphi1.nêt
In the exercise of the above authority, on January 20, 1989,
the heirs of the late Francisco Q. Laforteza represented by
Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr. entered
into a Memorandum of Agreement (Contract to Sell) with the
plaintiff 2 over the subject property for the sum of SIX
HUNDRED THIRTY THOUSAND PESOS (P630,000.00)
payable as follows:
(a) P30,000.00 as earnest money, to be forfeited in favor of
the defendants if the sale is not effected due to the fault of the
plaintiff;
(b) P600,000.00 upon issuance of the new certificate of title in
the name of the late Francisco Q. Laforteza and upon
execution of an extra-judicial settlement of the decedent's
estate with sale in favor of the plaintiff (Par. 2, Exh. "E",
record, pp. 335-336).
Significantly, the fourth paragraph of the Memorandum of
Agreement (Contract to Sell) dated January 20, 1989 (Exh.
"E", supra.) contained a provision as follows:
. . . . Upon issuance by the proper Court of the new title, the
BUYER-LESSEE shall be notified in writing and said BUYER-
LESSEE shall have thirty (30) days to produce the balance of
P600,000.00 which shall be paid to the SELLER-LESSORS
upon the execution of the Extrajudicial Settlement with sale.
On January 20, 1989, plaintiff paid the earnest money of
THIRTY THOUSAND PESOS (P30,000.00), plus rentals for
the subject property (Exh. "F", Plaintiff, record, p. 339).
On September 18, 1998 3 , defendant heirs, through their
counsel wrote a letter (Exh. 1, Defendants, record, p. 370) to
the plaintiff furnishing the latter a copy of the reconstituted title
to the subject property, advising him that he had thirty (3)
days to produce the balance of SIX HUNDRED PESOS (sic)
(P600,000.00) under the Memorandum of Agreement which
plaintiff received on the same date.
On October 18, 1989, plaintiff sent the defendant heirs a letter
requesting for an extension of the THIRTY (30) DAYS
deadline up to November 15, 1989 within which to produce
the balance of SIX HUNDRED THOUSAND PESOS
(P600,000.00) (Exh. "G", Plaintiff, record, pp. 341-342).
Defendant Roberto Z. Laforteza, assisted by his counsel Atty.
Romeo L. Gutierrez, signed his conformity to the plaintiff's
letter request (Exh. "G-1 and "G-2", Plaintiff, record, p. 342).
The extension, however, does not appear to have been
approved by Gonzalo Z. Laforteza, the second attorney-in-fact
as his conformity does not appear to have been secured.
On November 15, 1989, plaintiff informed the defendant heirs,
through defendant Roberto Z. Laforteza, that he already had
the balance of SIX HUNDRED THOUSAND PESOS
(P600,000.00) covered by United Coconut Planters Bank
Manager's Check No. 000814 dated November 15, 1989
(TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344;
"M", records p. 350; and "N", record, p. 351). However, the
defendants, refused to accept the balance (TSN, August 24,
1992, p. 14; Exhs. "M-1", Plaintiff, record, p. 350; and "N-1",
Plaintiff, record, p. 351). Defendant Roberto Z. Laforteza had
told him that the subject property was no longer for sale (TSN,
October 20, 1992, p. 19; Exh. "J", record, p. 347).
On November 20, 1998 4 , defendants informed plaintiff that
they were canceling the Memorandum of Agreement
(Contract to Sell) in view of the plaintiff's failure to comply with
his contractual obligations (Exh. "3").
Thereafter, plaintiff reiterated his request to tender payment of
the balance of SIX HUNDRED THOUSAND PESOS
(P600,000.00). Defendants, however, insisted on the
rescission of the Memorandum of Agreement. Thereafter,
plaintiff filed the instant action for specific performance. The
lower court rendered judgment on July 6, 1994 in favor of the
plaintiff, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff Alonzo Machuca and against the defendant heirs of
the late Francisco Q. Laforteza, ordering the said defendants.
(a) To accept the balance of P600,000.00 as full payment of
the consideration for the purchase of the house and lot
located at No. 7757 Sherwood Street, Marcelo Green Village,
Parañaque, Metro Manila, covered by Transfer Certificate of
Title No. (220656) 8941 of the Registry of Deeds of Rizal
Parañaque, Branch;
(b) To execute a registrable deed of absolute sale over the
subject property in favor of the plaintiff;
(c) Jointly and severally to pay the plaintiff the sum of
P20,000.00 as attorney's fees plus cost of suit.
SO ORDERED. (Rollo, pp. 74-75). 5
Petitioners appealed to the Court of Appeals, which affirmed
with modification the decision of the lower court; the
dispositive portion of the Decision reads:
WHEREFORE, the questioned decision of the lower court is
hereby AFFIRMED with the MODIFICATION that defendant
heirs Lea Zulueta-Laforteza, Michael Z. Laforteza, Dennis Z.
Laforteza and Roberto Z. Laforteza including Gonzalo Z.
Laforteza, Jr. are hereby ordered to pay jointly and severally
the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral
damages.
SO ORDERED. 6
Motion for Reconsideration was denied but the Decision was
modified so as to absolve Gonzalo Z. Laforteza, Jr. from
liability for the payment of moral damages. 7 Hence this
petition wherein the petitioners raise the following issues:
I. WHETHER THE TRIAL AND APPELLATE COURTS
CORRECTLY CONSTRUED THE MEMORANDUM OF
AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.
II. WHETHER THE COURTS A QUO  CORRECTLY RULED
THAT RESCISSION WILL NOT LIE IN THE INSTANT CASE.
III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL
FROM RAISING THE ALLEGED DEFECT IN THE SPECIAL
POWER OF ATTORNEY DATED 30 OCTOBER 1989
EXECUTED BY DENNIS LAFORTEZA.
IV. SUPPOSING EX GRATIA ARGUMENTI  THE
MEMORANDUM OF AGREEMENT IMPOSES RECIPROCAL
OBLIGATIONS, WHETHER THE PETITIONERS MAY BE
COMPELLED TO SELL THE SUBJECT PROPERTY WHEN
THE RESPONDENT FAILED TO MAKE A JUDICIAL
CONSIGNATION OF THE PURCHASE PRICE?
V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO
TO AS MAKE THEM LIABLE FOR MORAL DAMAGES? 8
The petitioners contend that the Memorandum of Agreement
is merely a lease agreement with "option to purchase". As it
was merely an option, it only gave the respondent a right to
purchase the subject property within a limited period without
imposing upon them any obligation to purchase it. Since the
respondent's tender of payment was made after the lapse of
the option agreement, his tender did not give rise to the
perfection of a contract of sale.
It is further maintained by the petitioners that the Court of
Appeals erred in ruling that rescission of the contract was
already out of the question. Rescission implies that a contract
of sale was perfected unlike the Memorandum of Agreement
in question which as previously stated is allegedly only an
option contract.
Petitioner adds that at most, the Memorandum of Agreement
(Contract to Sell) is a mere contract to sell, as indicated in its
title. The obligation of the petitioners to sell the property to the
respondent was conditioned upon the issuance of a new
certificate of title and the execution of the extrajudicial
partition with sale and payment of the P600,000.00. This is
why possession of the subject property was not delivered to
the respondent as the owner of the property but only as the
lessee thereof. And the failure of the respondent to pay the
purchase price in full prevented the petitioners' obligation to
convey title from acquiring obligatory force.
Petitioners also allege that assuming for the sake of argument
that a contract of sale was indeed perfected, the Court of
Appeals still erred in holding that respondent's failure to pay
the purchase price of P600,000.00 was only a "slight or
casual breach".
The petitioners also claim that the Court of Appeals erred in
ruling that they were not ready to comply with their obligation
to execute the extrajudicial settlement. The Power of Attorney
to execute a Deed of Sale made by Dennis Z. Laforteza was
sufficient and necessarily included the power to execute an
extrajudicial settlement. At any rate, the respondent is
estopped from claiming that the petitioners were not ready to
comply with their obligation for he acknowledged the
petitioners' ability to do so when he requested for an
extension of time within which to pay the purchase price. Had
he truly believed that the petitioners were not ready, he would
not have needed to ask for said extension.
Finally, the petitioners allege that the respondent's
uncorroborated testimony that third persons offered a higher
price for the property is hearsay and should not be given any
evidentiary weight. Thus, the order of the lower court
awarding moral damages was without any legal basis.
The appeal is bereft of merit.
A perusal of the Memorandum Agreement shows that the
transaction between the petitioners and the respondent was
one of sale and lease. The terms of the agreement read:
1. For and in consideration of the sum of PESOS: SIX
HUNDRED THIRTY THOUSAND (P630,000.00) payable in a
manner herein below indicated, SELLER-LESSOR hereby
agree to sell unto BUYER-LESSEE the property described in
the first WHEREAS of this Agreement within six (6) months
from the execution date hereof, or upon issuance by the Court
of a new owner's certificate of title and the execution of
extrajudicial partition with sale of the estate of Francisco
Laforteza, whichever is earlier;
2. The above-mentioned sum of PESOS: SIX HUNDRED
THIRTY THOUSAND (P630,000.00) shall be paid in the
following manner:
P30,000.00 — as earnest money and as consideration for this
Agreement, which amount shall be forfeited in favor of
SELLER-LESSORS if the sale is not effected because of the
fault or option of BUYER-LESSEE;
P600,000.00 — upon the issuance of the new certificate of
title in the name of the late Francisco Laforteza and upon the
execution of an Extrajudicial Settlement of his estate with sale
in favor of BUYER-LESSEE free from lien or any
encumbrances.
3. Parties reasonably estimate that the issuance of a new title
in place of the lost one, as well as the execution of
extrajudicial settlement of estate with sale to herein BUYER-
LESSEE will be completed within six (6) months from the
execution of this Agreement. It is therefore agreed that during
the six months period, BUYER-LESSEE will be leasing the
subject property for six months period at the monthly rate of
PESOS: THREE THOUSAND FIVE HUNDRED
(P3,500.00). Provided however, that if the issuance of new
title and the execution of Extrajudicial Partition is completed
prior to the expiration of the six months period, BUYER-
LESSEE shall only be liable for rentals for the corresponding
period commencing from his occupancy of the premises to the
execution and completion of the Extrajudicial Settlement of
the estate, provided further that if after the expiration of six (6)
months, the lost title is not yet replaced and the extra judicial
partition is not executed, BUYER-LESSEE shall no longer be
required to pay rentals and shall continue to occupy, and use
the premises until subject condition is complied by SELLER-
LESSOR;
4. It is hereby agreed that within reasonable time from the
execution of this Agreement and the payment by BUYER-
LESSEE of the amount of P30,000.00 as herein above
provided, SELLER-LESSORS shall immediately file the
corresponding petition for the issuance of a new title in lieu of
the lost one in the proper Courts. Upon issuance by the
proper Courts of the new title, the BUYER-LESSEE shall have
thirty (30) days to produce the balance of P600,000.00 which
shall be paid to the SELLER-LESSORS upon the execution of
the Extrajudicial Settlement with sale. 9
A contract of sale is a consensual contract and is perfected at
the moment there is a meeting of the minds upon the thing
which is the object of the contract and upon the
price. 10 From that moment the parties may reciprocally
demand performance subject to the provisions of the law
governing the form of contracts. 11 The elements of a valid
contract of sale under Article 1458 of the Civil Code are (1)
consent or meeting of the minds; (2) determinate subject
matter and (3) price certain money or its equivalent. 12
In the case at bench, there was a perfected agreement
between the petitioners and the respondent whereby the
petitioners obligated themselves to transfer the ownership of
and deliver the house and lot located at 7757 Sherwood St.,
Marcelo Green Village, Parañaque and the respondent to pay
the price amounting to six hundred thousand pesos
(P600,000.00). All the elements of a contract of sale were
thus present. However, the balance of the purchase price was
to be paid only upon the issuance of the new certificate of title
in lieu of the one in the name of the late Francisco Laforteza
and upon the execution of an extrajudicial settlement of his
estate. Prior to the issuance of the "reconstituted" title, the
respondent was already placed in possession of the house
and lot as lessee thereof for six months at a monthly rate of
three thousand five hundred pesos (P3,500.00). It was
stipulated that should the issuance of the new title and the
execution of the extrajudicial settlement be completed prior to
expiration of the six-month period, the respondent would be
liable only for the rentals pertaining to the period commencing
from the date of the execution of the agreement up to the
execution of the extrajudicial settlement. It was also expressly
stipulated that if after the expiration of the six month period,
the lost title was not yet replaced and the extrajudicial partition
was not yet executed, the respondent would no longer be
required to pay rentals and would continue to occupy and use
the premises until the subject condition was complied with the
petitioners.
The six-month period during which the respondent would be
in possession of the property as lessee, was clearly not a
period within which to exercise an option. An option is a
contract granting a privilege to buy or sell within an agreed
time and at a determined price. An option contract is a
separate and distinct contract from that which the parties may
enter into upon the consummation of the option. 13 An option
must be supported by consideration.14 An option contract is
governed by the second paragraph of Article 1479 of the Civil
Code 15 , which reads:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the
price.
In the present case, the six-month period merely delayed the
demandability of the contract of sale and did not determine its
perfection for after the expiration of the six-month period,
there was an absolute obligation on the part of the petitioners
and the respondent to comply with the terms of the sale. The
parties made a "reasonable estimate" that the reconstitution
the lost title of the house and lot would take approximately six
months and thus presumed that after six months, both parties
would be able to comply with what was reciprocally incumbent
upon them. The fact that after the expiration of the six-month
period, the respondent would retain possession of the house
and lot without need of paying rentals for the use therefor,
clearly indicated that the parties contemplated that ownership
over the property would already be transferred by that time.
The issuance of the new certificate of title in the name of the
late Francisco Laforteza and the execution of an extrajudicial
settlement of his estate was not a condition which determined
the perfection of the contract of sale. Petitioners' contention
that since the condition was not met, they no longer had an
obligation to proceed with the sale of the house and lot is
unconvincing. The petitioners fail to distinguish between a
condition imposed upon the perfection of the contract and a
condition imposed on the performance of an obligation.
Failure to comply with the first condition results in the failure
of a contract, while the failure to comply with the second
condition only gives the other party the option either to refuse
to proceed with the sale or to waive the condition. Thus, Art.
1545 of the Civil Code states:
Art. 1545. Where the obligation of either party to a contract of
sale is subject to any condition which is not performed, such
party may refuse to proceed with the contract or he may
waive performance of the condition. If the other party has
promised that the condition should happen or be performed,
such first mentioned party may also treat the nonperformance
of the condition as a breach of warranty.
Where the ownership in the things has not passed, the buyer
may treat the fulfillment by the seller of his obligation to
deliver the same as described and as warranted expressly or
by implication in the contract of sale as a condition of the
obligation of the buyer to perform his promise to accept and
pay for the thing. 16
In the case at bar, there was already a perfected contract. The
condition was imposed only on the performance of the
obligations contained therein. Considering however that the
title was eventually "reconstituted" and that the petitioners
admit their ability to execute the extrajudicial settlement of
their father's estate, the respondent had a right to demand
fulfillment of the petitioners' obligation to deliver and transfer
ownership of the house and lot.
What further militates against petitioners' argument that they
did not enter into a contract or sale is the fact that the
respondent paid thirty thousand pesos (P30,000.00) as
earnest money. Earnest money is something of value to show
that the buyer was really in earnest, and given to the seller to
bind the bargain.17 Whenever earnest money is given in a
contract of sale, it is considered as part of the purchase price
and proof of the perfection of the contract. 18
We do not subscribe to the petitioners' view that the
Memorandum Agreement was a contract to sell. There is
nothing contained in the Memorandum Agreement from which
it can reasonably be deduced that the parties intended to
enter into a contract to sell, i.e. one whereby the prospective
seller would explicitly reserve the transfer of title to the
prospective buyer, meaning, the prospective seller does not
as yet agree or consent to transfer ownership of the property
subject of the contract to sell until the full payment of the
price, such payment being a positive suspensive condition,
the failure of which is not considered a breach, casual or
serious, but simply an event which prevented the obligation
from acquiring any obligatory force. 19 There is clearly no
express reservation of title made by the petitioners over the
property, or any provision which would impose non-payment
of the price as a condition for the contract's entering into
force. Although the memorandum agreement was also
denominated as a "Contract to Sell", we hold that the parties
contemplated a contract of sale. A deed of sale is absolute in
nature although denominated a conditional sale in the
absence of a stipulation reserving title in the petitioners until
full payment of the purchase price. 20 In such cases,
ownership of the thing sold passes to the vendee upon actual
or constructive delivery thereof. 21 The mere fact that the
obligation of the respondent to pay the balance of the
purchase price was made subject to the condition that the
petitioners first deliver the reconstituted title of the house and
lot does not make the contract a contract to sell for such
condition is not inconsistent with a contract of sale. 22
The next issue to be addressed is whether the failure of the
respondent to pay the balance of the purchase price within
the period allowed is fatal to his right to enforce the
agreement.
We rule in the negative.
Admittedly, the failure of the respondent to pay the balance of
the purchase price was a breach of the contract and was a
ground for rescission thereof. The extension of thirty (30) days
allegedly granted to the respondent by Roberto Z. Laforteza
(assisted by his counsel Attorney Romeo Gutierrez) was
correctly found by the Court of Appeals to be ineffective
inasmuch as the signature of Gonzalo Z. Laforteza did not
appear thereon as required by the Special Powers of
Attorney. 23 However, the evidence reveals that after the
expiration of the six-month period provided for in the contract,
the petitioners were not ready to comply with what was
incumbent upon them, i.e. the delivery of the reconstituted title
of the house and lot. It was only on September 18, 1989 or
nearly eight months after the execution of the Memorandum
of Agreement when the petitioners informed the respondent
that they already had a copy of the reconstituted title and
demanded the payment of the balance of the purchase price.
The respondent could not therefore be considered in delay for
in reciprocal obligations, neither party incurs in delay if the
other party does not comply or is not ready to comply in a
proper manner with what was incumbent upon him. 24
Even assuming for the sake of argument that the petitioners
were ready to comply with their obligation, we find that
rescission of the contract will still not prosper. The rescission
of a sale of an immovable property is specifically governed by
Article 1592 of the New Civil Code, which reads:
In the sale of immovable property, even though it may have
been stipulated that upon failure to pay the price 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. 25
It is not disputed that the petitioners did not make a judicial or
notarial demand for rescission.1avvphi1 The November 20,
1989 letter of the petitioners informing the respondent of the
automatic rescission of the agreement did not amount to a
demand for rescission, as it was not notarized. 26 It was also
made five days after the respondent's attempt to make the
payment of the purchase price. This offer to pay prior to the
demand for rescission is sufficient to defeat the petitioners'
right under article 1592 of the Civil Code. 27 Besides, the
Memorandum Agreement between the parties did not contain
a clause expressly authorizing the automatic cancellation of
the contract without court intervention in the event that the
terms thereof were violated. A seller cannot unilaterally and
extrajudicially rescind a contract or sale where there is no
express stipulation authorizing him to extrajudicially
rescind. 28 Neither was there a judicial demand for the
rescission thereof. Thus, when the respondent filed his
complaint for specific performance, the agreement was still in
force inasmuch as the contract was not yet rescinded. At any
rate, considering that the six-month period was merely an
approximation of the time if would take to reconstitute the lost
title and was not a condition imposed on the perfection of the
contract and considering further that the delay in payment
was only thirty days which was caused by the respondents
justified but mistaken belief that an extension to pay was
granted to him, we agree with the Court of Appeals that the
delay of one month in payment was a mere casual breach
that would not entitle the respondents to rescind the contract.
Rescission of a contract will not be permitted for a slight or
casual breach, but only such substantial and fundamental
breach as would defeat the very object of the parties in
making the agreemant. 29
Petitioners' insistence that the respondent should have
consignated the amount is not determinative of whether
respondent's action for specific performance will lie.
Petitioners themselves point out that the effect of cansignation
is to extinguish the obligation. It releases the debtor from
responsibility therefor. 30 The failure of the respondent to
consignate the P600,000.00 is not tantamount to a breach of
the contract for by the fact of tendering payment, he was
willing and able to comply with his obligation.
The Court of Appeals correctly found the petitioners guilty of
bad faith and awarded moral damages to the respondent. As
found by the said Court, the petitioners refused to comply
with, their obligation for the reason that they were offered a
higher price therefor and the respondent was even offered
P100,000.00 by the petitioners' lawyer, Attorney Gutierrez, to
relinquish his rights over the property. The award of moral
damages is in accordance with Article 1191 31 of the Civil
Code pursuant to Article 2220 which provides that moral
damages may be awarded in case of breach of contract
where the defendant acted in bad faith. The amount awarded
depends on the discretion of the court based on the
circumstances of each
case. 32 Under the circumstances, the award given by the
Court of Appeals amounting to P50,000.00 appears to us to
be fair and reasonable.
ACCORDINGLY, the decision of the Court of Appeals in CA
G.R. CV No. 47457 is AFFIRMED and the instant petition is
hereby DENIED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 23769      September 16, 1925
SONG FO & COMPANY, plaintiff-appellee,
vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.
Hilado and Hilado, Ross, Lawrence and Selph and Antonio T.
Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company,
plaintiff, presented a complaint with two causes of action for
breach of contract against the Hawaiian-Philippine Co.,
defendant, in which judgment was asked for P70,369.50, with
legal interest, and costs. In an amended answer and cross-
complaint, the defendant set up the special defense that since
the plaintiff had defaulted in the payment for the molasses
delivered to it by the defendant under the contract between
the parties, the latter was compelled to cancel and rescind the
said contract. The case was submitted for decision on a
stipulation of facts and the exhibits therein mentioned. The
judgment of the trial court condemned the defendant to pay to
the plaintiff a total of P35,317.93, with legal interest from the
date of the presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the
defendant only has appealed. In this court it has made the
following assignment of errors: "I. The lower court erred in
finding that appellant had agreed to sell to the appellee
400,000, and not only 300,000, gallons of molasses. II. The
lower court erred in finding that the appellant rescinded
without sufficient cause the contract for the sale of molasses
executed by it and the appellee. III. The lower court erred in
rendering judgment in favor of the appellee and not in favor of
the appellant in accordance with the prayer of its answer and
cross-complaint. IV. The lower court erred in denying
appellant's motion for a new trial." The specified errors raise
three questions which we will consider in the order suggested
by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000
gallons of molasses or 300,000 gallons of molasses? The trial
court found the former amount to be correct. The appellant
contends that the smaller amount was the basis of the
agreement.
The contract of the parties is in writing. It is found principally in
the documents, Exhibits F and G. The First mentioned exhibit
is a letter addressed by the administrator of the Hawaiian-
Philippine Co. to Song Fo & Company on December 13,
1922. It reads:
SILAY, OCC. NEGROS, P.I.
       December 13, 1922
Messrs. SONG FO AND CO.
Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today with
your Mr. Song Fo, who visited this Central, we wish to state as
follows:
He agreed to the delivery of 300,000 gallons of molasses at
the same price as last year under the same condition, and the
same to start after the completion of our grinding season. He
requested if possible to let you have molasses during
January, February and March or in other words, while we are
grinding, and we agreed with him that we would to the best of
our ability, altho we are somewhat handicapped. But we
believe we can let you have 25,000 gallons during each of the
milling months, altho it interfere with the shipping of our own
and planters sugars to Iloilo. Mr. Song Fo also asked if we
could supply him with another 100,000 gallons of molasses,
and we stated we believe that this is possible and will do our
best to let you have these extra 100,000 gallons during the
next year the same to be taken by you before November 1st,
1923, along with the 300,000, making 400,000 gallons in all.
Regarding the payment for our molasses, Mr. Song Fo gave
us to understand that you would pay us at the end of each
month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer
regarding this matter, we remain.
Yours very truly,
HAWAIIAN-PHILIPPINE COMPANY
   BY R. C. PITCAIRN
    Administrator.
Exhibit G is the answer of the manager of Song Fo &
Company to the Hawaiian-Philippine Co. on December 16,
1922. This letter reads:
December 16th, 1922.
Messrs. HAWAIIAN-PHILIPPINE CO.,
         Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th
and the 13th inst. and understood all their contents.
In connection to yours of the 13th inst. we regret to hear that
you mentioned Mr. Song Fo the one who visited your Central,
but it was not for he was Mr. Song Heng, the representative
and the manager of Messrs. Song Fo & Co.
With reference to the contents of your letter dated the 13th
inst. we confirm all the arrangements you have stated and in
order to make the contract clear, we hereby quote below our
old contract as amended, as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.
(b) All handling charges and expenses at the central and at
the dock at Mambaguid for our account.
(c) For services of one locomotive and flat cars necessary for
our six tanks at the rate of P48 for the round trip dock to
central and central to dock. This service to be restricted to
one trip for the six tanks.
Yours very truly,
   SONG FO & COMPANY
By __________________________
             Manager.
We agree with appellant that the above quoted
correspondence is susceptible of but one interpretation. The
Hawaiian-Philippine Co. agreed to deliver to Song Fo &
Company 300,000 gallons of molasses. The Hawaiian-
Philippine Co. also believed it possible to accommodate Song
Fo & Company by supplying the latter company with an extra
100,000 gallons. But the language used with reference to the
additional 100,000 gallons was not a definite promise. Still
less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is
simply that the defendant did not consider itself obliged to
deliver to the plaintiff molasses in any amount. On the other
hand, Exhibit A, a letter written by the manager of Song Fo &
Company on October 17, 1922, expressly mentions an
understanding between the parties of a contract for P300,000
gallons of molasses.
We sustain appellant's point of view on the first question and
rule that the contract between the parties provided for the
delivery by the Hawaiian-Philippine Co. to song Fo &
Company of 300,000 gallons of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the
contract of sale made with Song Fo & Company? The trial
judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the
payment for our molasses, Mr. Song Fo (Mr. Song Heng)
gave us to understand that you would pay us at the end of
each month for molasses delivered to you." In Exhibit G, we
find Song Fo & Company stating that they understand the
contents of Exhibit F, and that they confirm all the
arrangements you have stated, and in order to make the
contract clear, we hereby quote below our old contract as
amended, as per our new arrangements. (a) Price, at 2 cents
per gallon delivered at the central." In connection with the
portion of the contract having reference to the payment for the
molasses, the parties have agree on a table showing the date
of delivery of the molasses, the amount and date thereof, the
date of receipt of account by plaintiff, and date of payment.
The table mentioned is as follows:
Some doubt has risen as to when Song Fo & Company was
expected to make payments for the molasses delivered.
Exhibit F speaks of payments "at the end of each month."
Exhibit G is silent on the point. Exhibit M, a letter of March 28,
1923, from Warner, Barnes & Co., Ltd., the agent of the
Hawaiian-Philippine Co. to Song Fo & Company, mentions
"payment on presentation of bills for each delivery." Exhibit O,
another letter from Warner, Barnes & Co., Ltd. to Song Fo &
Company dated April 2, 1923, is of a similar tenor. Exhibit P, a
communication sent direct by the Hawaiian-Philippine Co. to
Song Fo & Company on April 2, 1923, by which the Hawaiian-
Philippine Co. gave notice of the termination of the contract,
gave as the reason for the rescission, the breach by Song Fo
& Company of this condition: "You will recall that under the
arrangements made for taking our molasses, you were to
meet our accounts upon presentation and at each delivery."
Not far removed from this statement, is the allegation of
plaintiff in its complaint that "plaintiff agreed to pay defendant,
at the end of each month upon presentation accounts."
Resolving such ambiguity as exists and having in mind
ordinary business practice, a reasonable deduction is that
Song Fo & Company was to pay the Hawaiian-Philippine Co.
upon presentation of accounts at the end of each month.
Under this hypothesis, Song Fo & Company should have paid
for the molasses delivered in December, 1922, and for which
accounts were received by it on January 5, 1923, not later
than January 31 of that year. Instead, payment was not made
until February 20, 1923. All the rest of the molasses was paid
for either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The
time of payment stipulated for in the contract should be
treated as of the essence of the contract. Theoretically,
agreeable to certain conditions which could easily be
imagined, the Hawaiian-Philippine Co. would have had the
right to rescind the contract because of the breach of Song Fo
& Company. But actually, there is here present no outstanding
fact which would legally sanction the rescission of the contract
by the Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted for a
slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental as to defeat
the object of the parties in making the agreement. A delay in
payment for a small quantity of molasses for some twenty
days is not such a violation of an essential condition of the
contract was warrants rescission for non-performance. Not
only this, but the Hawaiian-Philippine Co. waived this
condition when it arose by accepting payment of the overdue
accounts and continuing with the contract. Thereafter, Song
Fo & Company was not in default in payment so that the
Hawaiian-Philippine co. had in reality no excuse for writing its
letter of April 2, 1923, cancelling the contract. (Warner, Barnes
& Co. vs. Inza [1922], 43 Phil., 505.)
We rule that the appellant had no legal right to rescind the
contract of sale because of the failure of Song Fo & Company
to pay for the molasses within the time agreed upon by the
parties. We sustain the finding of the trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of
molasses, and second, of a contract imprudently breached by
the Hawaiian-Philippine Co., what is the measure of
damages? We again turn to the facts as agreed upon by the
parties.
The first cause of action of the plaintiff is based on the greater
expense to which it was put in being compelled to secure
molasses from other sources. Three hundred thousand
gallons of molasses was the total of the agreement, as we
have seen. As conceded by the plaintiff, 55,006 gallons of
molasses were delivered by the defendant to the plaintiff
before the breach. This leaves 244,994 gallons of molasses
undelivered which the plaintiff had to purchase in the open
market. As expressly conceded by the plaintiff at page 25 of
its brief, 100,000 gallons of molasses were secured from the
Central North Negros Sugar Co., Inc., at two centavos a
gallon. As this is the same price specified in the contract
between the plaintiff and the defendant, the plaintiff
accordingly suffered no material loss in having to make this
purchase. So 244,994 gallons minus the 100,000 gallons just
mentioned leaves as a result 144,994 gallons. As to this
amount, the plaintiff admits that it could have secured it and
more from the Central Victorias Milling Company, at three and
one-half centavos per gallon. In other words, the plaintiff had
to pay the Central Victorias Milling company one and one-half
centavos a gallon more for the molasses than it would have
had to pay the Hawaiian-Philippine Co. Translated into pesos
and centavos, this meant a loss to the plaintiff of
approximately P2,174.91. As the conditions existing at the
central of the Hawaiian-Philippine Co. may have been
different than those found at the Central North Negros Sugar
Co., Inc., and the Central Victorias Milling Company, and as
not alone through the delay but through expenses of
transportation and incidental expenses, the plaintiff may have
been put to greater cost in making the purchase of the
molasses in the open market, we would concede under the
first cause of action in round figures P3,000.
The second cause of action relates to lost profits on account
of the breach of the contract. The only evidence in the record
on this question is the stipulation of counsel to the effect that
had Mr. Song Heng, the manager of Song Fo & Company,
been called as a witness, he would have testified that the
plaintiff would have realized a profit of P14,948.43, if the
contract of December 13, 1922, had been fulfilled by the
defendant. Indisputably, this statement falls far short of
presenting proof on which to make a finding as to damages.
In the first place, the testimony which Mr. Song Heng would
have given undoubtedly would follow the same line of thought
as found in the decision of the trial court, which we have
found to be unsustainable. In the second place, had Mr. Song
Heng taken the witness-stand and made the statement
attributed to him, it would have been insufficient proof of the
allegations of the complaint, and the fact that it is a part of the
stipulation by counsel does not change this result. And lastly,
the testimony of the witness Song Heng, it we may dignify it
as such, is a mere conclusion, not a proven fact. As to what
items up the more than P14,000 of alleged lost profits,
whether loss of sales or loss of customers, or what not, we
have no means of knowing.
We rule that the plaintiff is entitled to recover damages from
the defendant for breach of contract on the first cause of
action in the amount of P3,000 and on the second cause of
action in no amount. Appellant's assignments of error are
accordingly found to be well taken in part and not well taken in
part.
Agreeable to the foregoing, the judgment appealed from shall
be modified and the plaintiff shall have and recover from the
defendant the sum of P3,000, with legal interest form October
2, 1923, until payment. Without special finding as to costs in
either instance, it is so ordered.
G.R. No. L-22590 March 20, 1987
SOLOMON BOYSAW and ALFREDO M. YULO,
JR., plaintiffs-appellants,
vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR.,
and MANUEL NIETO, JR., defendants-appellees.
Felipe Torres and Associates for plaintiffs-appellants.
V.E. Del Rosario & Associates for defendant-appellee M.
Nieto, Jr.
A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee
Interphil Promotions, Inc.
RESOLUTION
FERNAN, J.:
This is an appeal interposed by Solomon Boysaw and Alfredo
Yulo, Jr., from the decision dated July 25, 1963 and other
rulings and orders of the then Court of First Instance [CFI] of
Rizal, Quezon City, Branch V in Civil Case No. Q-5063,
entitled "Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs
versus Interphil Promotions, Inc., Lope Sarreal, Sr. and
Manuel Nieto, Jr., Defendants," which, among others, ordered
them to jointly and severally pay defendant-appellee Manuel
Nieto, Jr., the total sum of P25,000.00, broken down into
P20,000.00 as moral damages and P5,000.00 as attorney's
fees; the defendants-appellees Interphil Promotions, Inc. and
Lope Sarreal, Sr., P250,000.00 as unrealized profits,
P33,369.72 as actual damages and P5,000.00 as attorney's
fees; and defendant-appellee Lope Sarreal, Sr., the additional
amount of P20,000.00 as moral damages aside from costs.
The antecedent facts of the case are as follows:
On May 1, 1961, Solomon Boysaw and his then Manager,
Willie Ketchum, signed with Interphil Promotions, Inc.
represented by Lope Sarreal, Sr., a contract to engage
Gabriel "Flash" Elorde in a boxing contest for the junior
lightweight championship of the world.
It was stipulated that the bout would be held at the Rizal
Memorial Stadium in Manila on September 30, 1961 or not
later than thirty [30] days thereafter should a postponement
be mutually agreed upon, and that Boysaw would not, prior to
the date of the boxing contest, engage in any other such
contest without the written consent of Interphil Promotions,
Inc.
On May 3, 1961, a supplemental agreement on certain details
not covered by the principal contract was entered into by
Ketchum and Interphil. Thereafter, Interphil signed Gabriel
"Flash" Elorde to a similar agreement, that is, to engage
Boysaw in a title fight at the Rizal Memorial Stadium on
September 30, 1961.
On June 19, 1961, Boysaw fought and defeated Louis Avila in
a ten-round non-title bout held in Las Vegas, Nevada, U.S.A.
[pp. 26-27, t.s.n., session of March 14, 1963].
On July 2, 1961, Ketchum on his own behalf and on behalf of
his associate Frank Ruskay, assigned to J. Amado Araneta
the managerial rights over Solomon Boysaw.
Presumably in preparation for his engagement with Interphil,
Solomon Boysaw arrived in the Philippines on July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned to Alfredo
J. Yulo, Jr. the managerial rights over Boysaw that he earlier
acquired from Ketchum and Ruskay. The next day, September
2, 1961, Boysaw wrote Lope Sarreal, Sr. informing him of his
arrival and presence in the Philippines.
On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal
informing him of his acquisition of the managerial rights over
Boysaw and indicating his and Boysaw's readiness to comply
with the boxing contract of May 1, 1961. On the same date,
on behalf of Interphil Sarreal wrote a letter to the Games and
Amusement Board [GAB] expressing concern over reports
that there had been a switch of managers in the case of
Boysaw, of which he had not been formally notified, and
requesting that Boysaw be called to an inquiry to clarify the
situation.
The GAB called a series of conferences of the parties
concerned culminating in the issuance of its decision to
schedule the Elorde-Boysaw fight for November 4, 1961. The
USA National Boxing Association which has supervisory
control of all world title fights approved the date set by the
GAB
Yulo, Jr. refused to accept the change in the fight date,
maintaining his refusal even after Sarreal on September 26,
1961, offered to advance the fight date to October 28, 1961
which was within the 30-day period of allowable
postponements provided in the principal boxing contract of
May 1, 1961.
Early in October 1961, Yulo, Jr. exchanged communications
with one Mamerto Besa, a local boxing promoter, for a
possible promotion of the projected Elorde-Boysaw title bout.
In one of such communications dated October 6, 1961, Yulo
informed Besa that he was willing to approve the fight date of
November 4,1961 provided the same was promoted by Besa.
While an Elorde-Boysaw fight was eventually staged, the fight
contemplated in the May 1, 1961 boxing contract never
materialized.
As a result of the foregoing occurrences, on October 12,
1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and
Manuel Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for
damages allegedly occasioned by the refusal of Interphil and
Sarreal, aided and abetted by Nieto, Jr., then GAB Chairman,
to honor their commitments under the boxing contract of May
1,1961.
On the first scheduled date of trial, plaintiff moved to disqualify
Solicitor Jorge Coquia of the Solicitor General's Office and
Atty. Romeo Edu of the GAB Legal Department from
appearing for defendant Nieto, Jr. on the ground that the latter
had been sued in his personal capacity and, therefore, was
not entitled to be represented by government counsel. The
motion was denied insofar as Solicitor General Coquia was
concerned, but was granted as regards the disqualification of
Atty. Edu.
The case dragged into 1963 when sometime in the early part
of said year, plaintiff Boysaw left the country without informing
the court and, as alleged, his counsel. He was still abroad
when, on May 13, 1963, he was scheduled to take the witness
stand. Thus, the lower court reset the trial for June 20, 1963.
Since Boysaw was still abroad on the later date, another
postponement was granted by the lower court for July 23,
1963 upon assurance of Boysaw's counsel that should
Boysaw fail to appear on said date, plaintiff's case would be
deemed submitted on the evidence thus far presented.
On or about July 16, 1963, plaintiffs represented by a new
counsel, filed an urgent motion for postponement of the July
23, 1963 trial, pleading anew Boysaw's inability to return to
the country on time. The motion was denied; so was the
motion for reconsideration filed by plaintiffs on July 22, 1963.
The trial proceeded as scheduled on July 23, 1963 with
plaintiff's case being deemed submitted after the plaintiffs
declined to submit documentary evidence when they had no
other witnesses to present. When defendant's counsel was
about to present their case, plaintiff's counsel after asking the
court's permission, took no further part in the proceedings.
After the lower court rendered its judgment dismissing the
plaintiffs' complaint, the plaintiffs moved for a new trial. The
motion was denied, hence, this appeal taken directly to this
Court by reason of the amount involved.
From the errors assigned by the plaintiffs, as having been
committed by the lower court, the following principal issues
can be deduced:
1. Whether or not there was a violation of the fight contract of
May 1, 1961; and if there was, who was guilty of such
violation.
2. Whether or not there was legal ground for the
postponement of the fight date from September 1, 1961, as
stipulated in the May 1, 1961 boxing contract, to November
4,1961,
3. Whether or not the lower court erred in the refusing a
postponement of the July 23, 1963 trial.
4. Whether or not the lower court erred in denying the
appellant's motion for a new trial.
5. Whether or not the lower court, on the basis of the
evidence adduced, erred in awarding the appellees damages
of the character and amount stated in the decision.
On the issue pertaining to the violation of the May 1, 1961
fight contract, the evidence established that the contract was
violated by appellant Boysaw himself when, without the
approval or consent of Interphil, he fought Louis Avila on June
19, 1961 in Las Vegas Nevada. Appellant Yulo admitted this
fact during the trial. [pp. 26-27, t.s.n., March 14, 1963].
While the contract imposed no penalty for such violation, this
does not grant any of the parties the unbridled liberty to
breach it with impunity. Our law on contracts recognizes the
principle that actionable injury inheres in every contractual
breach. Thus:
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the terms thereof, are liable for damages. [Art.
1170, Civil Code].
Also:
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. [Part 1, Art. 1191, Civil Code].
There is no doubt that the contract in question gave rise to
reciprocal obligations. "Reciprocal obligations are those which
arise from the same cause, and in 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. They are to
be performed simultaneously, so that the performance of one
is conditioned upon the simultaneous fulfillment of the other"
[Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1
The power to rescind is given to the injured party. "Where the
plaintiff is the party who did not perform the undertaking
which he was bound by the terms of the agreement to
perform 4 he is not entitled to insist upon the performance of
the contract by the defendant, or recover damages by reason
of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581,
Emphasis supplied].
Another violation of the contract in question was the
assignment and transfer, first to J. Amado Araneta, and
subsequently, to appellant Yulo, Jr., of the managerial rights
over Boysaw without the knowledge or consent of Interphil.
The assignments, from Ketchum to Araneta, and from Araneta
to Yulo, were in fact novations of the original contract which,
to be valid, should have been consented to by Interphil.
Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. [Art. 1293, Civil Code, emphasis
supplied].
That appellant Yulo, Jr., through a letter, advised Interphil on
September 5, 1961 of his acquisition of the managerial rights
over Boysaw cannot change the fact that such acquisition,
and the prior acquisition of such rights by Araneta were done
without the consent of Interphil. There is no showing that
Interphil, upon receipt of Yulo's letter, acceded to the
"substitution" by Yulo of the original principal obligor, who is
Ketchum. The logical presumption can only be that, with
Interphil's letter to the GAB expressing concern over reported
managerial changes and requesting for clarification on the
matter, the appellees were not reliably informed of the
changes of managers. Not being reliably informed, appellees
cannot be deemed to have consented to such changes.
Under the law when a contract is unlawfully novated by an
applicable and unilateral substitution of the obligor by another,
the aggrieved creditor is not bound to deal with the substitute.
The consent of the creditor to the change of debtors, whether
in expromision or delegacion is an, indispensable
requirement . . . Substitution of one debtor for another may
delay or prevent the fulfillment of the obligation by reason of
the inability or insolvency of the new debtor, hence, the
creditor should agree to accept the substitution in order that it
may be binding on him.
Thus, in a contract where x is the creditor and y is the debtor,
if y enters into a contract with z, under which he transfers to z
all his rights under the first contract, together with the
obligations thereunder, but such transfer is not consented to
or approved by x, there is no novation. X can still bring his
action against y for performance of their contract or damages
in case of breach. [Tolentino, Civil Code of the
Philippines, Vol. IV, p. 3611.
From the evidence, it is clear that the appellees, instead of
availing themselves of the options given to them by law of
rescission or refusal to recognize the substitute obligor Yulo,
really wanted to postpone the fight date owing to an injury that
Elorde sustained in a recent bout. That the appellees had the
justification to renegotiate the original contract, particularly the
fight date is undeniable from the facts aforestated. Under the
circumstances, the appellees' desire to postpone the fight
date could neither be unlawful nor unreasonable.
We uphold the appellees' contention that since all the rights
on the matter rested with the appellees, and appellants'
claims, if any, to the enforcement of the contract hung entirely
upon the former's pleasure and sufferance, the GAB did not
act arbitrarily in acceding to the appellee's request to reset the
fight date to November 4, 1961. It must be noted that
appellant Yulo had earlier agreed to abide by the GAB ruling.
In a show of accommodation, the appellees offered to
advance the November 4, 1961 fight to October 28, 1961 just
to place it within the 30- day limit of allowable postponements
stipulated in the original boxing contract.
The refusal of appellants to accept a postponement without
any other reason but the implementation of the terms of the
original boxing contract entirely overlooks the fact that by
virtue of the violations they have committed of the terms
thereof, they have forfeited any right to its enforcement.
On the validity of the fight postponement, the violations of the
terms of the original contract by appellants vested the
appellees with the right to rescind and repudiate such contract
altogether. That they sought to seek an adjustment of one
particular covenant of the contract, is under the
circumstances, within the appellee's rights.
While the appellants concede to the GAB's authority to
regulate boxing contests, including the setting of dates
thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is their contention
that only Manuel Nieto, Jr. made the decision for
postponement, thereby arrogating to himself the prerogatives
of the whole GAB Board.
The records do not support appellants' contention. Appellant
Yulo himself admitted that it was the GAB Board that set the
questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it
must be stated that one of the strongest presumptions of law
is that official duty has been regularly performed. In this case,
the absence of evidence to the contrary, warrants the full
application of said presumption that the decision to set the
Elorde-Boysaw fight on November 4, 1961 was a GAB Board
decision and not of Manuel Nieto, Jr. alone.
Anent the lower court's refusal to postpone the July 23, 1963
trial, suffice it to say that the same issue had been raised
before Us by appellants in a petition for certiorari and
prohibition docketed as G.R. No. L-21506. The dismissal by
the Court of said petition had laid this issue to rest, and
appellants cannot now hope to resurrect the said issue in this
appeal.
On the denial of appellant's motion for a new trial, we find that
the lower court did not commit any reversible error.
The alleged newly discovered evidence, upon which the
motion for new trial was made to rest, consists merely of
clearances which Boysaw secured from the clerk of court prior
to his departure for abroad. Such evidence cannot alter the
result of the case even if admitted for they can only prove that
Boysaw did not leave the country without notice to the court or
his counsel.
The argument of appellants is that if the clearances were
admitted to support the motion for a new trial, the lower court
would have allowed the postponement of the trial, it being
convinced that Boysaw did not leave without notice to the
court or to his counsel. Boysaw's testimony upon his return
would, then, have altered the results of the case.
We find the argument without merit because it confuses the
evidence of the clearances and the testimony of Boysaw. We
uphold the lower court's ruling that:
The said documents [clearances] are not evidence to offset
the evidence adduced during the hearing of the defendants. In
fact, the clearances are not even material to the issues raised.
It is the opinion of the Court that the 'newly discovered
evidence' contemplated in Rule 37 of the Rules of Court, is
such kind of evidence which has reference to the merits of the
case, of such a nature and kind, that if it were presented, it
would alter the result of the judgment. As admitted by the
counsel in their pleadings, such clearances might have
impelled the Court to grant the postponement prayed for by
them had they been presented on time. The question of the
denial of the postponement sought for by counsel for plaintiffs
is a moot issue . . . The denial of the petition for certiorari and
prohibition filed by them, had he effect of sustaining such
ruling of the court . . . [pp. 296-297, Record on Appeal].
The testimony of Boysaw cannot be considered newly
discovered evidence for as appellees rightly contend, such
evidence has been in existence waiting only to be elicited
from him by questioning.
We cite with approval appellee's contention that "the two
qualities that ought to concur or dwell on each and every of
evidence that is invoked as a ground for new trial in order to
warrant the reopening . . . inhered separately on two
unrelated species of proof" which "creates a legal monstrosity
that deserves no recognition."
On the issue pertaining to the award of excessive damages, it
must be noted that because the appellants wilfully refused to
participate in the final hearing and refused to present
documentary evidence after they no longer had witnesses to
present, they, by their own acts prevented themselves from
objecting to or presenting proof contrary to those adduced for
the appellees.
On the actual damages awarded to appellees, the appellants
contend that a conclusion or finding based upon the
uncorroborated testimony of a lone witness cannot be
sufficient. We hold that in civil cases, there is no rule requiring
more than one witness or declaring that the testimony of a
single witness will not suffice to establish facts, especially
where such testimony has not been contradicted or rebutted.
Thus, we find no reason to disturb the award of P250,000.00
as and for unrealized profits to the appellees.
On the award of actual damages to Interphil and Sarreal, the
records bear sufficient evidence presented by appellees of
actual damages which were neither objected to nor rebutted
by appellants, again because they adamantly refused to
participate in the court proceedings.
The award of attorney's fees in the amount of P5,000.00 in
favor of defendant-appellee Manuel Nieto, Jr. and another
P5,000.00 in favor of defendants-appellees Interphil
Promotions, Inc. and Lope Sarreal, Sr., jointly, cannot also be
regarded as excessive considering the extent and nature of
defensecounsels' services which involved legal work for
sixteen [16] months.
However, in the matter of moral damages, we are inclined to
uphold the appellant's contention that the award is not
sanctioned by law and well- settled authorities. Art. 2219 of
the Civil Code provides:
Art. 2219. Moral damages may be recovered in the following
analogous cases:
1) A criminal offense resulting in physical injuries;
2) Quasi-delict causing physical injuries;
3) Seduction, abduction, rape or other lascivious acts;
4) Adultery or concubinage;
5) Illegal or arbitrary detention or arrest;
6) Illegal search;
7) Libel, slander or any other form of defamation;
8) Malicious prosecution;
9) Acts mentioned in Art. 309.
10) Acts and actions referred to in Arts., 21, 26, 27, 28, 29, 30,
32, 34 and 35.
The award of moral damages in the instant case is not based
on any of the cases enumerated in Art. 2219 of the Civil Code.
The action herein brought by plaintiffs-appellants is based on
a perceived breach committed by the defendants-appellees of
the contract of May 1, 1961, and cannot, as such, be
arbitrarily considered as a case of malicious prosecution.
Moral damages cannot be imposed on a party litigant
although such litigant exercises it erroneously because if the
action has been erroneously filed, such litigant may be
penalized for costs.
The grant of moral damages is not subject to the whims and
caprices of judges or courts. The court's discretion in granting
or refusing it is governed by reason and justice. In order that a
person may be made liable to the payment of moral damages,
the law requires that his act be wrongful. The adverse result
of an action does not per se make the act wrongful and
subject the actor to the payment of moral damages. The law
could not have meant to impose a penalty on the right to
litigate; such right is so precious that moral damages may not
be charged on those who may exercise it erroneously. For
these the law taxes costs. [Barreto vs. Arevalo, et. al. No. L-
7748, Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]
WHEREFORE, except for the award of moral damages which
is herein deleted, the decision of the lower court is hereby
affirmed.
SO ORDERED.
G.R. No. L-28602 September 29, 1970
UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE
of the COURT OF FIRST INSTANCE IN QUEZON CITY, et
al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor
Augusto M. Amores and Special Counsel Perfecto V.
Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
REYES, J.B.L., J.:
Three (3) orders of the Court of First Instance of Rizal
(Quezon City), issued in its Civil Case No. 9435, are sought to
be annulled in this petition for certiorari and prohibition, filed
by herein petitioner University of the Philippines (or UP)
against the above-named respondent judge and the
Associated Lumber Manufacturing Company, Inc. (or
ALUMCO). The first order, dated 25 February 1966, enjoined
UP from awarding logging rights over its timber concession
(or Land Grant), situated at the Lubayat areas in the
provinces of Laguna and Quezon; the second order, dated 14
January 1967, adjudged UP in contempt of court, and directed
Sta. Clara Lumber Company, Inc. to refrain from exercising
logging rights or conducting logging operations on the
concession; and the third order, dated 12 December 1967,
denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction
against the enforcement or implementation of the three (3)
questioned orders was issued by this Court, per its resolution
on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from
the public domain and given as an endowment to UP, an
institution of higher learning, to be operated and developed for
the purpose of raising additional income for its support,
pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO
entered into a logging agreement under which the latter was
granted exclusive authority, for a period starting from the date
of the agreement to 31 December 1965, extendible for a
further period of five (5) years by mutual agreement, to cut,
collect and remove timber from the Land Grant, in
consideration of payment to UP of royalties, forest fees, etc.;
that ALUMCO cut and removed timber therefrom but, as of 8
December 1964, it had incurred an unpaid account of
P219,362.94, which, despite repeated demands, it had failed
to pay; that after it had received notice that UP would rescind
or terminate the logging agreement, ALUMCO executed an
instrument, entitled "Acknowledgment of Debt and Proposed
Manner of Payments," dated 9 December 1964, which was
approved by the president of UP, and which stipulated the
following:
3. In the event that the payments called for in Nos. 1 and 2 of
this paragraph are not sufficient to liquidate the foregoing
indebtedness of the DEBTOR in favor of the CREDITOR, the
balance outstanding after the said payments have been
applied shall be paid by the DEBTOR in full no later than June
30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply with any of its
promises or undertakings in this document, the DEBTOR
agrees without reservation that the CREDITOR shall have the
right and the power to consider the Logging Agreement dated
December 2, 1960 as rescinded without the necessity of any
judicial suit, and the CREDITOR shall be entitled as a matter
of right to Fifty Thousand Pesos (P50,000.00) by way of and
for liquidated damages;
ALUMCO continued its logging operations, but again incurred
an unpaid account, for the period from 9 December 1964 to
15 July 1965, in the amount of P61,133.74, in addition to the
indebtedness that it had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent
ALUMCO that it had, as of that date, considered as rescinded
and of no further legal effect the logging agreement that they
had entered in 1960; and on 7 September 1965, UP filed a
complaint against ALUMCO, which was docketed as Civil
Case No. 9435 of the Court of First Instance of Rizal (Quezon
City), for the collection or payment of the herein before stated
sums of money and alleging the facts hereinbefore specified,
together with other allegations; it prayed for and obtained an
order, dated 30 September 1965, for preliminary attachment
and preliminary injunction restraining ALUMCO from
continuing its logging operations in the Land Grant.
That before the issuance of the aforesaid preliminary
injunction UP had taken steps to have another concessionaire
take over the logging operation, by advertising an invitation to
bid; that bidding was conducted, and the concession was
awarded to Sta. Clara Lumber Company, Inc.; the logging
contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to
discharge the writs of attachment and preliminary injunction
but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin
petitioner University from conducting the bidding; on 27
November 1965, it filed a second petition for preliminary
injunction; and, on 25 February 1966, respondent judge
issued the first of the questioned orders, enjoining UP from
awarding logging rights over the concession to any other
party.
That UP received the order of 25 February 1966 after it had
concluded its contract with Sta. Clara Lumber Company, Inc.,
and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one
Jose Rico, the court, in an order dated 14 January 1967,
declared petitioner UP in contempt of court and, in the same
order, directed Sta. Clara Lumber Company, Inc., to refrain
from exercising logging rights or conducting logging
operations in the concession.
The UP moved for reconsideration of the aforesaid order, but
the motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the Land
Grant, which purpose, anyway, is embodied in Act 3608 and,
therefore, conclusively known, respondent ALUMCO did not
deny the foregoing allegations in the petition. In its answer,
respondent corrected itself by stating that the period of the
logging agreement is five (5) years - not seven (7) years, as it
had alleged in its second amended answer to the complaint in
Civil Case No. 9435. It reiterated, however, its defenses in the
court below, which maybe boiled down to: blaming its former
general manager, Cesar Guy, in not turning over management
of ALUMCO, thereby rendering it unable to pay the sum of
P219,382.94; that it failed to pursue the manner of payments,
as stipulated in the "Acknowledgment of Debt and Proposed
Manner of Payments" because the logs that it had cut turned
out to be rotten and could not be sold to Sta. Clara Lumber
Company, Inc., under its contract "to buy and sell" with said
firm, and which contract was referred and annexed to the
"Acknowledgment of Debt and Proposed Manner of
Payments"; that UP's unilateral rescission of the logging
contract, without a court order, was invalid; that petitioner's
supervisor refused to allow respondent to cut new logs unless
the logs previously cut during the management of Cesar Guy
be first sold; that respondent was permitted to cut logs in the
middle of June 1965 but petitioner's supervisor stopped all
logging operations on 15 July 1965; that it had made several
offers to petitioner for respondent to resume logging
operations but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can
treat its contract with ALUMCO rescinded, and may disregard
the same before any judicial pronouncement to that effect.
Respondent ALUMCO contended, and the lower court, in
issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings
in this regard), that it is only after a final court decree
declaring the contract rescinded for violation of its terms that
U.P. could disregard ALUMCO's rights under the contract and
treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in
the "Acknowledgment of Debt and Proposed Manner of
Payments" that, upon default by the debtor ALUMCO, the
creditor (UP) has "the right and the power to consider, the
Logging Agreement dated 2 December 1960 as rescinded
without the necessity of any judicial suit." As to such special
stipulation, and in connection with Article 1191 of the Civil
Code, this Court stated in Froilan vs. Pan Oriental Shipping
Co., et al.,  L-11897, 31 October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from
entering into agreement that violation of the terms of the
contract would cause cancellation thereof, even without court
intervention. In other words, it is not always necessary for the
injured party to resort to court for rescission of the contract.
Of course, it must be understood that the act of 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 other's 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).
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring
that judicial action is necessary for the resolution of a
reciprocal obligation,1 since in every case where the
extrajudicial resolution is contested only the final award of the
court of competent jurisdiction can conclusively settle whether
the resolution was proper or not. It is in this sense that judicial
action will be necessary, as without it, the extrajudicial
resolution will remain contestable and subject to judicial
invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a
unilateral rescission in case of breach of contract may render
nugatory the general rule requiring judicial action (v. Footnote,
Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page
140) but, as already observed, in case of abuse or error by
the rescinder the other party is not barred from questioning in
court such abuse or error, the practical effect of the stipulation
being merely to transfer to the defaulter the initiative of
instituting suit, instead of the rescinder.
In fact, even without express provision conferring the power of
cancellation upon one contracting party, the Supreme Court of
Spain, in construing the effect of Article 1124 of the Spanish
Civil Code (of which Article 1191 of our own Civil; Code is
practically a reproduction), has repeatedly held that, a
resolution of reciprocal or synallagmatic contracts may be
made extrajudicially unless successfully impugned in court.
El articulo 1124 del Codigo Civil establece la facultad de
resolver las obligaciones reciprocas para el caso de que uno
de los obligados no cumpliese lo que le incumbe, facultad
que, segun jurisprudencia de este Tribunal, surge
immediatamente despuesque la otra parte incumplio su
deber, sin necesidad de una declaracion previa de los
Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929;
106 Jur. Civ. 897).
Segun reiterada doctrina  de esta Sala, el Art. 1124 regula la
resolucioncomo una "facultad" atribuida a la parte perjudicada
por el incumplimiento del contrato, la cual tiene derecho do
opcion entre exigir el cumplimientoo la resolucion de lo
convenido, que puede ejercitarse, ya en la via judicial,  ya
fuera de ella, por declaracion del acreedor, a reserva, claro
es, que si la declaracion de resolucion hecha por una de las
partes se impugna por la otra, queda aquella sometida el
examen y sancion de los Tribunale, que habran de declarar,
en definitiva, bien hecha la resolucion o por el contrario, no
ajustada a Derecho. (Sent. TS of Spain, 16 November 1956;
Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el
incumplimiento por una de las partes de su respectiva
prestacion, puedetener lugar con eficacia" 1. o Por la
declaracion de voluntad de la otra hecha extraprocesalmente,
si no es impugnada en juicio luego con exito. y 2. 0 Por la
demanda de la perjudicada, cuando no opta por el
cumplimientocon la indemnizacion de danos y perjuicios
realmente causados, siempre quese acredite, ademas, una
actitud o conducta persistente y rebelde de laadversa o la
satisfaccion de lo pactado, a un hecho obstativo que de un
modoabsoluto, definitivo o irreformable lo impida, segun el
art. 1.124, interpretado por la jurisprudencia de esta Sala,
contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre
otras, inspiradas por el principio del Derecho intermedio,
recogido del Canonico, por el cual fragenti fidem, fides non
est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis
supplied).
In the light of the foregoing principles, and considering that
the complaint of petitioner University made out a prima
facie case of breach of contract and defaults in payment by
respondent ALUMCO, to the extent that the court below
issued a writ of preliminary injunction stopping ALUMCO's
logging operations, and repeatedly denied its motions to lift
the injunction; that it is not denied that the respondent
company had profited from its operations previous to the
agreement of 5 December 1964 ("Acknowledgment of Debt
and Proposed Manner of Payment"); that the excuses offered
in the second amended answer, such as the misconduct of its
former manager Cesar Guy, and the rotten condition of the
logs in private respondent's pond, which said respondent was
in a better position to know when it executed the
acknowledgment of indebtedness, do not constitute on their
face sufficient excuse for non-payment; and considering that
whatever prejudice may be suffered by respondent ALUMCO
is susceptibility of compensation in damages, it becomes plain
that the acts of the court a quo in enjoining petitioner's
measures to protect its interest without first receiving
evidence on the issues tendered by the parties, and in
subsequently refusing to dissolve the injunction, were in grave
abuse of discretion, correctible by certiorari, since appeal was
not available or adequate. Such injunction, therefore, must be
set aside.
For the reason that the order finding the petitioner UP in
contempt of court has open appealed to the Court of Appeals,
and the case is pending therein, this Court abstains from
making any pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and
the order of the respondent court of 25 February 1966,
granting the Associated Lumber Company's petition for
injunction, is hereby set aside. Let the records be remanded
for further proceedings conformably to this opinion.
G.R. No. 47206 September 27, 1989
GLORIA M. DE ERQUIAGA, administratrix of the estate of
the late SANTIAGO DE ERQUIAGA & HON. FELICIANO S.
GONZALES, petitioners,
vs.
HON. COURT OF APPEALS, AFRICA VALDEZ VDA. DE
REYNOSO, JOSES V. REYNOSO, JR., EERNESTO ,
SYLVIA REYNOSO, LOURDES REYNOSO, CECILE
REYNOSO, EDNA REYNOSO, ERLINDA REYNOSO &
EMILY REYNOSO, respondents.
Agrava, Lucero, Gineta & Roxas for petitioners.
Bausa, Ampil, Suarez, Parades & Bausa for private
respondents.
GRINO-AQUINO, J.:
This is a case that began in the Court of First Instance of
Sorsogon in 1970. Although the decision dated September 30,
1972 of the trial court (pp. 79-106, Rollo) became final and
executory because none of the parties appealed, its execution
has taken all of the past seventeen (17) years with the end
nowhere in sight. The delay in writing finis to this case is
attributable to several factors, not the least of which is the
intransigence of the defeated party. Now, worn down by this
attrital suit, both have pleaded for a decision to end this case.
Assailed in this petition for review are:
(a) the decision of the Court of Appeals dated May 31, 1976 in
CA-G.R. No. SP 04811, entitled "Africa Valdez Vda. de
Reynoso et al. vs. Hon. Feliciano S. Gonzales and Santiago
de Erquiaga" (pp. 275-290, Rollo);
(b) its resolution dated August 3, 1976, denying the motion for
reconsideration (p. 298, Rollo);
(c) its resolution of August 24, 1977, ordering entry of
judgment (p. 316, Rollo); and
(d) its resolution of October 4, 1977, denying the motion to set
aside the entry of judgment.
Santiago de Erquiaga was the owner of 100% or 3,100 paid-
up shares of stock of the Erquiaga Development Corporation
which owns the Hacienda San Jose in Irosin, Sorsogon (p.
212, Rollo). On November 4,1968, he entered into an
Agreement with Jose L. Reynoso to sell to the latter his 3,100
shares (or 100%) of Erquiaga Development Corporation for
P900,000 payable in installments on definite dates fixed in the
contract but not later than November 30, 1968. Because
Reynoso failed to pay the second and third installments on
time, the total price of the sale was later increased to
P971,371.70 payable on or before December 17, 1969. The
difference of P71,371.70 represented brokers' commission
and interest (CFI Decision, pp. 75, 81, 90, 99,Rollo).
As of December 17, 1968, Reynoso was able to pay the total
sum of P410,000 to Erquiaga who thereupon transferred all
his shares (3,100 paid-up shares) in Erquiaga Development
Corporation to Reynoso, as well as the possession of the
Hacienda San Jose, the only asset of the corporation (p. 100,
Rollo). However, as provided in paragraph 3, subparagraph
(c) of the contract to sell, Reynoso pledged 1,500 shares in
favor of Erquiaga as security for the balance of his obligation
(p. 100, Rollo). Reynoso failed to pay the balance of
P561,321.70 on or before December 17, 1969, as provided in
the promissory notes he delivered to Erquiaga. So, on March
2, 1970, Erquiaga, through counsel, formally informed
Reynoso that he was rescinding the sale of his shares in the
Erquiaga Development Corporation (CFI Decision, pp. 81-
100, Rollo).
As recited by the Court of Appeals in its decision under
review, the following developments occurred thereafter:
On March 30, 1970, private respondent Santiago de Erquiaga
filed a complaint for rescission with preliminary injunction
against Jose L. Reynoso and Erquiaga Development
Corporation, in the Court of First Instance of Sorsogon,
Branch I (Civil Case No. 2446).** After issues have been
joined and after trial on the merits, the lower court rendered
judgment (on September 30, 1972),*** the dispositive portion
of which reads as follows:
In view of the foregoing, judgment is hereby rendered in favor
of the plaintiff and against the defendant Jose L. Reynoso,
rescinding the sale of 3,100 paid up shares of stock of the
Erquiaga Development Corporation to the defendant, and
ordering:
(a) The defendant to return and reconvey to the plaintiff the
3,100 paid up shares of stock of the Erquiaga Development
Corporation which now stand in his name in the books of the
corporation;
(b) The defendant to render a full accounting of the fruits he
received by virtue of said 3,100 paid up shares of stock of the
Erquiaga Development Corporation, as well as to return said
fruits received by him to plaintiff Santiago de Erquiaga;
(c) The plaintiff to return to the defendant the amount of
P100,000.00 plus legal interest from November 4,1968, and
the amount of P310,000.00 plus legal interest from December
17, 1968, until paid;
(d) The defendant to pay the plaintiff as actual damages the
amount of P12,000.00;
(e) The defendant to pay the plaintiff the amount of
P50,000.00 as attorney's fees; and
(f) The defendant to pay the costs of this suit and expenses of
litigation. (Annex A-Petition.)
The parties did not appeal therefrom and it became final and
executory.
On March 21, 1973, the CFI of Sorsogon issued an Order,
pertinent portions of which reads:
It will be noted that both parties having decided not to appeal,
the decision has become final and executory.
Nevertheless, the Court finds merit in the contention of the
plaintiff that the payment to the defendant of the total sum of
P410,000.00 plus the interest, should be held in abeyance
pending rendition of the accounting by the defendant of the
fruits received by him on account of the 3,100 shares of the
capital stock of Erquiaga Development Corporation. The
same may be said with respect to the sums due the plaintiff
from the defendant for damages and attorney's fees. Indeed it
is reasonable to suppose, as contended by the plaintiff, that
when such accounting is made and the accounting, as urged
by plaintiff, should refer not only to the dividends due from the
shares of stock but to the products of the hacienda which is
the only asset of the Erquiaga Development Corporation,
certain sums may be found due to the plaintiff from the
defendant which may partially or entirely off set (sic) the
amount adjudged against him in the decision.
It is the sense of the court that the fruits referred to in the
decision include not only the dividends received, if any, on the
3,100 shares of stocks but more particularly the products
received by the defendant from the hacienda. The hacienda
and the products thereon produced constitute the physical
assets of the Erquiaga Development Corporation represented
by the shares of stock and it would be absurd to suppose that
any accounting could be made by the defendant without
necessarily taking into account the products received which
could be the only basis for determining whether dividends are
due or not on account of the investment. The hacienda and its
natural fruits as represented by the shares of stock which the
defendant received as manager and controlling stockholder of
the Erquiaga Development Corporation can not be divorced
from the certificates of stock in order to determine whether the
defendant has correctly reported the income of the
corporation or concealed part of it for his personal advantage.
It is hardly necessary for the Court to restate an obvious fact
that on both legal and equitable grounds, the Erquiaga
Development Corporation and defendant Jose Reynoso are
one and the same persons as far as the obligation to account
for the products of the hacienda is concerned,' (pp. 4-6,
Annex 1, Answer.)
In the same Order, the CFI of Sorsogon appointed a receiver
upon the filing of a bond in the amount of P100,000.00. The
reasons of the lower court for appointing a receiver 'were that
the matter of accounting of the fruits received by defendant
Reynoso as directed in the decision will take time; that plaintiff
Erquiaga has shown sufficient and justifiable ground for the
appointment of a receiver in order to preserve the Hacienda
which has obviously been mismanaged by the defendant to a
point where the amortization of the loan with the Development
Bank of the Philippines has been neglected and the arrears in
payments have risen to the amount of P503,510.70 as of
October 19, 1972, and there is danger that the Development
Bank of the Philippines may institute foreclosure proceedings
to the damage and prejudice of the plaintiff.' (p. 7, Id.)
On April 26, 1973, defendant Jose L. Reynoso died and he
was substituted by his surviving spouse Africa Valdez Vda. de
Reynoso and children, as party defendants.
Defendants filed a petition for  certiorari with a prayer for a writ
of preliminary injunction seeking the annulment of the
aforementioned Order of March 21, 1973. On June 28, 1973,
the Court of Appeals rendered judgment dismissing the
petition with costs against the petitioners, ruling that said
Order is valid and the respondent court did not commit any
grave abuse of discretion in issuing the same (Annex 2,
Id.). Petitioners brought the case up to the Supreme Court on
a petition for review on certiorari which was denied by said
tribunal in a Resolution dated February 5, 1974 (Annex 3, Id.).
Petitioners' motion for reconsideration thereof was likewise
denied by the Supreme Court on March 29,1974.
Upon motion of Erquiaga, the CFI of Sorsogon issued an
order, dated February 12,1975, dissolving the receivership
and ordering the delivery of the possession of the Hacienda
San Jose to Erquiaga, the filing of bond by said Erquiaga in
the amount of P410,000.00 conditioned to the payment of
whatever may be due to the substituted heirs of deceased
defendant Reynoso (petitioners herein) after the approval of
the accounting report submitted by Reynoso. Said order
further directed herein petitioners to allow counsel for
Erquiaga to inspect, copy and photograph certain documents
related to the accounting report (Annex B, Petition).
On March 3,1975, the CFI of Sorsogon approved the
P410,000.00 bond submitted by Erquiaga and the
possession, management and control of the hacienda were
turned over to Erquiaga (Annex C, Petition). Petitioners
(Reynosos) filed their motion for reconsideration which the
CFI of Sorsogon denied in an Order, dated June 23, 1975
(Annex D, Id.).
In an Omnibus Motion, dated July 25,1975, filed by Erquiaga,
and over the objections interposed thereto by herein
petitioners (Reynosos), the CFI of Sorsogon issued an Order,
dated October 9, 1975, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, on the first count, the
defendants are directed (to deliver) to the plaintiff or his
counsel within five (5) days from receipt of this order the
1,600 shares of stock of the Erquiaga Development
Corporation which are in their possession. Should the
defendants refuse or delay in delivering such shares of stock,
as prayed for, the plaintiff is authorized:
(a) To call and hold a special meeting of the stockholders of
the Erquiaga Development Corporation to elect the members
of the Board of Directors;
(b) In the said meeting the plaintiff is authorized to vote not
only the 1,500 shares of stock in his name but also the 1,600
shares in the name and possession of the defendants;
(c) The question as to who shall be elected members of the
Board of Directors and officers of the board is left to the
discretion of the plaintiff;
(d) The members of the board and the officers who are
elected are authorized to execute any and all contracts or
agreements under such conditions as may be required by the
Development Bank for the purpose of restructuring the loan of
the Erquiaga Development Corporation with the said bank.
On the second count, the prayer to strike out all expenses
alleged[ly] incurred by the defendants in the production of the
fruits of Hacienda San Jose and declaring the obligation of the
plaintiff under paragraph (c) of the judgment to pay the
defendant the sum of P410,000.00 with interest as fully
compensated by the fruits earned by the defendants from the
property, as well as the issuance of a writ of execution against
the defendants to pay the plaintiffs P62,000.00 under
paragraphs (e) and (d) and costs of litigation under paragraph
(f) of the judgment of September 30, 1972, is denied.
The defendants are once more directed to comply with the
order of February 12, 1975, by answering the interrogatories
propounded by counsel for the plaintiff and allowing said
counsel or his representative to inspect, copy and photograph
the documents mentioned by the plaintiff during reasonable
hours of any working day within twenty (20) days from receipt
of this order, should the defendants persist in their refusal or
failure to comply with the order, the plaintiff may inform the
court seasonably so that the proper action may be taken.
(Annex J, Id.)
Hence, the present petition for certiorari, prohibition and
mandamus instituted by the substituted defendants, heirs of
the deceased defendant Jose L. Reynoso against the CFI of
Sorsogon and (plaintiff) Santiago de Erquiaga. (pp. 276- 281,
Rollo.)
On May 31, 1976, the Court of Appeals rendered judgment
holding that:
IN VIEW OF ALL THE FOREGOING, this court finds that the
respondent court had acted with grave abuse of discretion or
in excess of jurisdiction in issuing the assailed order of
October 9, 1975 (Annex A, Petition) insofar only as that part of
the Order (1) giving private respondent voting rights on the
3,100 shares of stock of the Erquiaga Development
Corporation without first divesting petitioners of their title
thereto and ordering the registration of the same in the
corporation books in the name of private respondent,
pursuant to Section 10, Rule 39 of the Revised Rules of
Court; (2) authorizing corporate meetings and election of
members of the Board of Directors of said corporation and (3)
refusing to order the reimbursement of the purchase price of
the 3,100 shares of stock in the amount of P410,000.00 plus
interests awarded in said final decision of September 30,
1972 and the set-off therewith of the amount of P62,000.00 as
damages and attorney's fees in favor of herein private
respondent are concerned. Let writs of certiorari and
prohibition issue against the aforesaid acts, and the writ of
preliminary injunction heretofore issued is hereby made
permanent only insofar as (1), (2) and (3) above are
concerned. As to all other matters involved in said Order of
October 9, 1975, the issuance of writs prayed for in the
petition are not warranted and therefore denied.
FINALLY, to give effect to all the foregoing, with a view of
putting an end to a much protracted litigation and for the best
interest of the parties, let a writ of mandamus issue,
commanding the respondent Judge to order (1) the Clerk of
Court of the CFI of Sorsogon to execute the necessary deed
of conveyance to effect the transfer of ownership of the entire
3,100 shares of stock of the Erquiaga Development
Corporation to private respondent Santiago Erquiaga in case
of failure of petitioners to comply with the Order of October 9,
1975 insofar as the delivery of the 1,600 shares of stock to
private respondent is concerned, within five (5) days from
receipt hereof; and (2) upon delivery by petitioners or transfer
by the Clerk of Court of said shares of stock to private
respondent, as the case may be, to issue a writ of execution
ordering private respondent to pay petitioners the amount of
P410,000.00 plus interests in accordance with the final
decision of September 30, 1972 in Civil Case No. 2448,
setting-off therewith the amount of P62,000.00 adjudged in
favor of private respondent, and against petitioners'
predecessor-in-interest, Jose L. Reynoso, in the same
decision, as damages and attorney's fees. (pp. 289-290,
Rollo.)
It may be seen from the foregoing narration of facts that as of
the time the Court of Appeals rendered its decision on May
31, 1976 (now under review) only the following have been
done by the parties in compliance with the final judgment in
the main case (Civil Case No. 2446):
1. The Hacienda San Jose was returned to Erquiaga on
March 3, 1975 upon approval of Erquiaga's surety bond of
P410,000 in favor of Reynoso;
2. Reynoso has returned to Erquiaga only the pledged 1,500
shares of stock of the Erquiaga Development Corporation,
instead of 3,100 shares, as ordered in paragraph (a) of the
final judgment.
What the parties have not done yet are:
1. Reynoso has not returned 1,600 shares of stock to
Erquiaga as ordered in paragraph (a,) of the decision;
2. Reynoso has not rendered a full accounting of the fruits he
has received from Hacienda San Jose by virtue of the 3,100
shares of stock of the Erquiaga Development Corporation
delivered to him under the sale, as ordered in paragraph (b) of
the decision;
3. Erquiaga has not returned the sum of P100,000 paid by
Reynoso on the sale, with legal interest from November 4,
1968 and P310,000 plus legal interest from December 17,
1968, until paid (total: P410,000) as ordered in paragraph (c)
of the decision;
4. Reynoso has not paid the judgment of Pl2,000 as actual
damages in favor of Erquiaga, under paragraph (d) of the
judgment;
5. .Reynoso has not paid the sum of P50,000 as attorney's
fees to Erquiaga under paragraph (e) of the judgment; and
6. Reynoso has not paid the costs of suit and expenses of
litigation as ordered in paragraph (f) of the final judgment.
The petitioner alleges, in her petition for review, that:
I. The decision of the Court of Appeals requiring the petitioner
to pay the private respondents the sum of P410,000 plus
interest, without first awaiting Reynoso's accounting of the
fruits of the Hacienda San Jose, violates the law of the case
and Article 1385 of the Civil Code, alters the final order dated
February 12, 1975 of the trial court, and is inequitous.
II. The Court of Appeals erroneously applied the Corporation
Law.
III. The Court of Appeals erred in ordering entry of its
judgment.
We address first the third assignment of error for it will be
futile to discuss the first and second if, after all, the decision
complained of is already final, and the entry of judgment
which the Court of Appeals directed to be made in its
resolution of August 24,1977 (p. 316, Rollo) was proper. After
examining the records, we find that the Court of Appeals'
decision is not yet final. The entry of judgment was
improvident for the Court of Appeals, in its resolution of
December 13, 1976, suspended the proceedings before it
"pending the parties' settlement negotiations" as prayed for in
their joint motion (p. 313, Rollo). Without however giving them
an ultimatum or setting a deadline for the submission of their
compromise agreement, the Court of Appeals, out of the blue,
issued a resolution on August 24, 1977 ordering the Judgment
Section of that Court to enter final judgment in the case (p.
316, Rollo).
We hold that the directive was precipitate and premature.
Erquiaga received the order on September 2, 1977 and filed
on September 12, 1977 (p. 317, Rollo) a motion for
reconsideration which the Court of Appeals denied on October
4, 1977 (p. 322, Rollo). The order of denial was received on
October 14, 1977 (p. 7, Rollo). On October 28, 1977,
Erquiaga filed in this Court a timely motion for extension of
time to file a petition for review, and the petition was filed
within the extension granted by this Court.
We now address the petitioners' first and second assignments
of error.
After deliberating on the petition for review, we find no
reversible error in the Court of Appeals' decision directing the
clerk of court of the trial court to execute a deed of
conveyance to Erquiaga of the 1,600 shares of stock of the
Erquiaga Development Corporation still in Reynoso's name
and/or possession, in accordance with the procedure in
Section 10, Rule 39 of the Rules of Court. Neither did it err in
annulling the trial court's order: (1) allowing Erquiaga to vote
the 3,100 shares of Erquiaga Development Corporation
without having effected the transfer of those shares in his
name in the corporate books; and (2) authorizing Erquiaga to
call a special meeting of the stockholders of the Erquiaga
Development Corporation and to vote the 3,100 shares,
without the pre-requisite registration of the shares in his
name. It is a fundamental rule in Corporation Law (Section 35)
that a stockholder acquires voting rights only when the shares
of stock to be voted are registered in his name in the
corporate books.
Until registration is accomplished, the transfer, though valid
between the parties, cannot be effective as against the
corporation. Thus, the unrecorded transferee cannot enjoy the
status of a stockholder; he cannot vote nor be voted for, and
he will not be entitled to dividends. The Corporation will be
protected when it pays dividend to the registered owner
despite a previous transfer of which it had no knowledge. The
purpose of registration therefore is two-fold; to enable the
transferee to exercise all the rights of a stockholder, and to
inform the corporation of any change in share ownership so
that it can ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder. (Corporation Code,
Comments, Notes and Selected cases by Campos & Lopez-
Campos, p. 838,1981 Edition.)
The order of respondent Court directing Erquiaga to return the
sum of P410,000 (or net P348,000 after deducting P62,000
due from Reynoso under the decision) as the price paid by
Reynoso for the shares of stock, with legal rate of interest,
and the return by Reynoso of Erquiaga's 3,100 shares with
the fruits(construed to mean not only dividends but also fruits
of the corporation's Hacienda San Jose) is in full accord with
Art. 1385 of the Civil Code which 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.
The Hacienda San Jose and 1,500 shares of stock have
already been returned to Erquiaga. Therefore, upon the
conveyance to him of the remaining 1,600 shares, Erquiaga
(or his heirs) should return to Reynoso the price of P410,000
which the latter paid for those shares. Pursuant to the
rescission decreed in the final judgment, there should be
simultaneous mutual restitution of the principal object of the
contract to sell (3,100 shares) and of the consideration paid
(P410,000). This should not await the mutual restitution of
the  fruits, namely: the legal interest earned by Reynoso's
P410,000 while in the possession of Erquiaga and its
counterpart: the fruits of Hacienda San Jose which Reynoso
received from the time the hacienda was delivered to him on
November 4,1968 until it was placed under receivership by
the court on March 3, 1975. However, since Reynoso has not
yet given an accounting of those fruits, it is only fair that
Erquiaga's obligation to deliver to Reynoso the legal interest
earned by his money, should await the rendition and approval
of his accounting. To this extent, the decision of the Court of
Appeals should be modified. For it would be inequitable and
oppressive to require Erquiaga to pay the legal interest
earned by Reynoso's P410,000 since 1968 or for the past 20
years (amounting to over P400,000 by this time) without first
requiring Reynoso to account for the fruits of Erquiaga's
hacienda which he allegedly squandered while it was in his
possession from November 1968 up to March 3, 1975.
WHEREFORE, the petition for review is granted. The
payment of legal interest by Erquiaga to Reynoso on the price
of P410,000 paid by Reynoso for Erquiaga's 3,100 shares of
stock of the Erquiaga Development Corporation should be
computed as provided in the final judgment in Civil Case No.
2446 up to September 30,1972, the date of said judgment.
Since Reynoso's judgment liability to Erquiaga for attorney's
fees and damages in the total sum of P62,000 should be set
off against the price of P410,000 that Erquiaga is obligated to
return to Reynoso, the balance of the judgment in favor of
Reynoso would be only P348,000 which should earn legal
rate of interest after September 30,1972, the date of the
judgment. However, the payment of said interest by Erquiaga
should await Reynoso's accounting of the fruits received by
him from the Hacienda San Jose. Upon payment of P348,000
by Erquiaga to Reynoso, Erquiaga's P410,000 surety bond
shall be deemed cancelled. In all other respects, the decision
of the Court of Appeals in CA-G.R. No, 04811-SP is affirmed.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 73893
MARGARITA SURIA AND GRACIA R. JOVEN, petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT, HON. JOSE
MAR GARCIA (Presiding Judge of the RTC of Laguna,
Branch XXIV, Biñan, Laguna), and SPOUSES HERMINIO
A. CRISPIN and NATIVIDAD C. CRISPIN, respondents.
De Castro & Cagampang Law Offices for petitioners.
Nelson A. Loyola for private respondents.
RESOLUTION
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the decision of the
Court of Appeals dismissing for lack of merit the petition for
certiorari filed therein.
As factual background, we quote from the Court of Appeals'
decision:
The factual and procedural antecedents of this case may be
briefly stated as follows:
On June 20, 1983, private-respondents filed a complaint
before the Regional Trial Court of Laguna, Branch XXIV, for
rescission of contract and damages, alleging among others:
1. x x x
2. That on March 31, 1975, plaintiffs being the owners of a
parcel of land situated at Barrio San Antonio, San Pedro,
Laguna, entered into a contract denominated as DEED OF
SALE WITH MORTGAGE, with herein defendants, a true
copy of said contract (which is made an integral part hereof) is
hereto attached as ANNEX ."A":
3. x x x
4. That the defendants violated the terms and conditions of
the contract by failing to pay the stipulated installments and in
fact only one installment due in July 1975 (paid very late in
the month of September, 1975) was made all the others
remaining unsettled to the present time;
5. That repeated verbal and written demands were made by
plaintiff upon the defendants for the payment of the
installments, some of said written demands having been
made on September 24, 1981, February 7, 1982, February
24, 1983, March 13, 1983, and April 12, 1983, but defendants
for no justifiable reason failed to comply with the demands of
plaintiffs;
6. x x x
On November 14, 1983, petitioners filed their answer with
counterclaim.
On July 16, 1984, petitioners filed a motion to disniiss
complaint, alleging that:
1. That plaintiffs are not entitled to the subsidiary remedy of
rescission because of the presence of remedy of
foreclosure in the Deed of Sale with Mortgage (Annex "A",
Complaint);
2. That, assuming arguendo that rescission were a proper
remedy, it is apparent in the face of the Complaint that the
plaintiffs failed to comply with the requirements of law, hence
the rescission was ineffective, illegal, null and void, and
invalid.
On July 26, 1984, private-respondents filed their opposition to
the above motion.
In the meantime, on August 6, 1984, petitioners formerly
offered to pay private-respondents all the outstanding balance
under the Deed of Sale with Mortgage, which offer was
rejected by private respondents on August 7, 1984.
On November 26, 1984, the respondent-Court denied the
motion to dismiss. The order reads:
Defendants through counsel filed a Second Motion to Dismiss
dated July 24, 1984 based on an affirmative defense raised in
their answer, that is, that the complaint fails to state a cause
of action for rescission against defendants because (1) —
plaintiffs are not entitled to the subsidiary remedy of
rescission because of the presence of the remedy of
foreclosure in the Deed of Sale with Mortgage (Annex "A",
Complaint) and (2) — assuming arguendo that rescission
were a proper remedy, it is apparent from the face of the
Complaint that the plaintiffs failed to comply with the
requirements of law, hence the rescission was ineffective,
illegal, null and void, and invalid.
After a careful perusal of the allegations of the complaint
considered in the light of existing applicable law and
jurisprudence touching on the matters in issue, and mindful of
the settled rule that in a motion to dismiss grounded on lack of
cause of action the allegations of the complaint must be
assumed to be true, the Court finds and holds that the motion
to dismiss dated July 24, 1984 filed by defendants lacks merit
and therefore denied the same.
SO ORDERED.
On January 31, 1985, petitioners filed a motion for
reconsideration to which private-respondents filed their
opposition on February 11, 1985. On February 19, 1985,
petitioners filed their reply.
On March 13, 1985, the respondent-Court denied the motion
for reconsideration. The order reads in part:
x x x      x x x     x x x
Perusing the grounds invoked by the defendants in their
Motion for Reconsideration and Reply as well as the
objections raised by plaintiffs in their opposition, and it
appearing that in its Order dated November 26, 1984, the
Court has sufficiently, althou (sic) succinctly stated its reason
for denying the motion to dismiss dated July 16, 1984, that is,
for lack of merit, the Court finds no overriding reason or
justification from the grounds invoked in the said Motion for
Reconsideration for it to reconsider, change, modify, or set
aside its Order dated November 26, 1984. The Court still
believes that the two (2) grounds invoked by defendants in
their Motion to Dismiss dated July 16, 1984 are not
meritorious when considered in the light of prevailing law and
jurisprudence and the hypothetically admitted allegations of
the complaint, and for that reason it denied the motion to
dismiss in its said order of November 26, 1984.
The instant Motion for Reconsideration is therefore denied for
lack of merit. (Pp, 29-32, Rollo)
The questions raised by petitioner are as follows:
I
IN A DEED OF SALE, WHICH IS COUPLED WITH A
MORTGAGE TO SECURE PAYMENT OF THE BALANCE OF
THE PURCHASE PRICE, MAY THE SELLER RESORT TO
THE REMEDY OF RESCISSION UNDER ARTICLE 1191 OF
THE CIVIL CODE WHICH PROVIDES FOR THE
SUBSIDIARY AND EQUITABLE REMEDY OF RESCISSION
IN CASE OF BREACH OF RECIPROCAL OBLIGATIONS?
Otherwise stated,
IS THE SUBSIDIARY AND EQUITABLE REMEDY OF
RESCISSION AVAILABLE IN THE PRESENCE OF A
REMEDY OF FORECLOSURE IN THE LIGHT OF THE
EXPRESS PROVISION OF ARTICLE 1383 OF THE CIVIL
CODE THAT: 'THE ACTION FOR RESCISSION IS
SUBSIDIARY; IT CANNOT BE INSTITUTED EXCEPT WHEN
THE PARTY SUFFERING DAMAGE HAS NO OTHER LEGAL
MEANS TO OBTAIN REPARATION FOR THE SAME?
x x x      x x x     x x x
II
MAY THE SELLER LEGALLY DEMAND RESCISSION OF
THE DEED OF SALE WITH MORTGAGE WITHOUT
OFFERING TO RESTORE TO THE BUYER WHAT HE HAS
PAID, AS REQUIRED BY ARTICLE 1385, OR COMPLYING
WITH THE REQUIREMENTS OF THE MACEDA LAW
(REPUBLIC ACT 6552) GRANTING THE BUYER A GRACE
PERIOD TO PAY WITHOUT INTEREST, AND, IN CASE OF
CANCELLATION IN CASE THE BUYER STILL COULD NOT
PAY WITHIN THE GRACE PERIOD, REQUIRING THE
SELLER TO ORDER PAYMENT OF THE CASH
SURRENDER VALUE BEFORE THE CANCELLATION MAY
LEGALLY TAKE EFFECT (SEC. 3[b], LAST PAR., REP. ACT
6552)?
The petition was denied in a minute resolution on June 13,
1986 but was given due course on September 29, 1986 on a
motion for reconsideration.
The petition is impressed with merit.
The respondent court rejected the petitioners' reliance on
paragraph (H) of the contract which grants to the vendors
mortgagees the right to foreclose "in the event of the failure of
the vendees-mortgagors to comply with any provisions of this
mortgage." According to the appellate court, this stipulation
merely recognizes the right of the vendors to foreclose and
realize on the mortgage but does not preclude them from
availing of other remedies under the law, such as rescission of
contract and damages under Articles 1191 and 1170 of the
Civil Code in relation to Republic Act No. 6552.
The appellate court committed reversible error. As will be
explained later, Art. 1191 on reciprocal obligations is not
applicable under the facts of this case. Moreover, Art. 1383 of
the Civil Code provides:
The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal
means to obtain reparation for the same.
The concurring opinion of Justice J.B.L. Reyes in Universal
Food Corp. v. Court of Appeals (33 SCRA 22) was cited by
the appellate court.
In that case, Justice J.B.L. Reyes explained:
x x x      x x x     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 by
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 the 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 d 'etre as
well as the measure of the right to rescind. Hence, where the
defendant makes good the damages caused, the action
cannot be maintained or continued, as expressly provided in
Articles 1383 and 1384. But the operation of these two articles
is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not
apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the
defective technique of the new Code that terms both
instances as "rescission" without distinctions between them;
unlike the previous Spanish Civil Code of 1889, that
differentiated "resolution" for breach of stipulations from
"rescission" by reason of lesion or damage. But the
terminological vagueness does not justify confusing one case
with the other, considering the patent difference in causes and
results of either action.
According to the private respondents, the applicable law is
Article 1191 of the Civil Code which provides:
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 fulfilment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfiument, 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.
There is no dispute that the parties entered into a contract of
sale as distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to
transfer the ownership of and to deliver a determinate thing to
the buyer, who in turn, is obligated to pay a price certain in
money or its equivalent (Art. 1458, Civil Code). From the
respondents' own arguments, we note that they have fully
complied with their part of the reciprocal obligation. As a
matter of fact, they have already parted with the title as
evidenced by the transfer certificate of title in the petitioners'
name as of June 27, 1975.
The buyer, in tum, fulfilled his end of the bargain when he
executed the deed of mortgage. The payments on an
installment basis secured by the execution of a mortgage took
the place of a cash payment. In other words, the relationship
between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and
consummated. It is already one of a mortgagor and a
mortgagee. In consideration of the petitioners'promise to pay
on installment basis the sum they owe the respondents, the
latter have accepted the mortgage as security for the
obligation.
The situation in this case is, therefore, different from that
envisioned in the cited opinion of Justice J.B.L. Reyes. The
petitioners' breach of obligations is not with respect to the
perfected contract of sale but in the obligations created by the
mortgage contract. The remedy of rescission is not a principal
action retaliatory in character but becomes a subsidiary one
which by law is available only in the absence of any other
legal remedy. (Art. 1384, Civil Code).
Foreclosure here is not only a remedy accorded by law but,
as earlier stated, is a specific provision found in the contract
between the parties.
The petitioners are correct in citing this Court's ruling
in Villaruel v. Tan King (43 Phil. 251) where we Stated:
At the outset it must be said that since the subject-matter of
the sale in question is real property, it does not come strictly
within the provisions of article 1124 of the Civil Code, but is
rather subjected to the stipulations agreed upon by the
contracting parties and to the provisions of Article 1504 of the
Civil Code.
The "pacto comisorio" of "ley comisoria" is nothing more than
a condition subsequent of the contract of purchase and sale.
Considered carefully, it is the very condition subsequent that
is always attached to all bilateral obligations according to
article 1124; except that when applied to real property it is not
within the scope of said article 1124, and it is subordinate to
the stipulations made by the contracting parties and to the
provisions of the article on which we are now commenting"
(article 1504). (Manresa, Civil Code, volume 10, page 286,
second edition.)
Now, in the contract of purchase and sale before us, the
parties stipulated that the payment of the balance of one
thousand pesos (P1,000) was guaranteed by the mortgage of
the house that was sold. This agreement has the two-fold
effect of acknowledging indisputably that the sale had been
consummated, so much so that the vendee was disposing of
it by mortgaging it to the vendor, and of waiving the pacto
comisorio,  that is, the resolution of the sale in the event of
failure to pay the one thousand pesos (P1,000) such waiver
being proved by the execution of the mortgage to guarantee
the payment, and in accord therewith the vendor's adequate
remedy, in case of nonpayment, is the foreclosure of such
mortgage. (at pp. 255-256).
x x x      x x x     x x x
There is, therefore, no cause for the resolution of the sale as
prayed for by the plaintiff. His action, at all events, should
have been one for the foreclosure of the mortgage, which is
not the action brought in this case.
Article 1124 of the Civil Code, as we have seen, is not
applicable to this case. Neither is the doctrine enunciated in
the case of Ocejo, Perez & Co. v. International Banking
Corporation (37 Phil. 631), which plaintiff alleges to be
applicable, because that principle has reference to the sale of
personal property. (at p. 257)
The petitioners have offered to pay au past due accounts.
Considering the lower purchasing value of the peso in terms
of prices of real estate today, the respondents are correct in
stating they have suffered losses. However, they are also to
blame for trusting persons who could not or would not comply
with their obligations in time. They could have foreclosed on
the mortgage immediately when it fell due instead of waiting
all these years while trying to enforce the wrong remedy.
WHEREFORE, the petition is hereby GRANTED. The
Intermediate Appellate Court's decision dated November 8,
1985 and the resolution dated December 6, 1985 and
February 28, 1986 are REVERSED and SET ASIDE. The
petitioners are ordered to pay the balance of their
indebtedness under the Deed of Absolute Sale with Mortgage
with legal interests from the second installment due on
October 24, 1975 until fully paid, failing which the respondents
may resort to foreclosure.
SO ORDERED.
G.R. No. 97347 July 6, 1999
JAIME G. ONG, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SPOUSES
MIGUEL K. ROBLES and ALEJANDRO M.
ROBLES, respondents.
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari from the
judgment rendered by the Court of Appeals which, except as
to the award of exemplary damages, affirmed the decision of
the Regional Trial Court of Lucena City, Branch 60, setting
aside the "Agreement of Purchase and Sale" entered into by
herein petitioner and private respondent spouses in Civil Case
No. 85-85.1âwphi1.nêt
On May 10, 1983, petitioner Jaime Ong, on the one hand, and
respondent spouses Miguel K. Robles and Alejandra Robles,
on the other hand, executed an "Agreement of Purchase and
Sale" respecting two parcels of land situated at Barrio Puri,
San Antonio, Quezon. The terms and conditions of the
contract read:"
1. That for and in consideration of the agreed purchase price
of TWO MILLION PESOS (P2,000,000.00), Philippine
currency, the mode and manner of payment is as follows:
A. The initial payment of SIX HUNDRED THOUSAND PESOS
(P600,000.00) as verbally agreed by the parties, shall be
broken down as follows:
1. P103,499.91 shall be paid, and as already paid by
the BUYER to the SELLERS on March 22, 1983, as stipulated
under the Certification of undertaking dated March 22, 1983
and covered by a check of even date.
2. That the sum of P496,500.09 shall be paid directly by
the BUYER to the Bank of Philippine Islands to answer for the
loan of the SELLERS which as of March 15, 1983 amounted
to P537,310.10, and for the interest that may accrued (sic)
from March 15, 1983, up to the time said obligation of
the SELLERS with the said bank has been settled, provided
however that the amount in excess of P496,500.09, shall be
chargeable from the time deposit of the SELLERS with the
aforesaid bank.
B. That the balance of ONE MILLION FOUR HUNDRED
THOUSAND (P1,400,000.00) PESOS shall be paid by
the BUYER to the SELLERS in four (4) equal quarterly
installments of THREE HUNDRED FIFTY THOUSAND
PESOS (P350,000.00), the first to be due and payable on
June 15, 1983, and every quarter thereafter, until the whole
amount is fully paid, by these presents promise to sell to said
BUYER the two (2) parcels of agricultural land including the
rice mill and the piggery which are the most notable
improvements thereon, situated at Barangay Puri, San
Antonio Quezon, . . .
2. That upon the payment of the total purchase price by
the BUYER the SELLERS bind themselves to deliver to the
former a good and sufficient deed of sale and conveyance for
the described two (2) parcels of land, free and clear from all
liens and encumbrances.
3. That immediately upon the execution of this document,
the SELLERS shall deliver, surrender and transfer possession
of the said parcels of land including all the improvements that
may be found thereon, to the BUYER, and the latter shall take
over from the SELLER the possession, operation, control and
management of the RICEMILL and PIGGERY found on the
aforesaid parcels of land.
4. That all payments due and payable under this contract shall
be effected in the residence of the SELLERS located at
Barangay Puri, San Antonio, Quezon unless another place
shall have been subsequently designated by both parties in
writing.
xxx xxx xxx 1
On May 15, 1983, petitioner Ong took possession of the
subject parcels of land together with the piggery, building,
ricemill, residential house and other improvements thereon.
Pursuant to the contract they executed, petitioner paid
respondent spouses the sum of P103,499.91 2 by depositing
it with the United Coconut Planters Bank. Subsequently,
petitioner deposited sums of money with the Bank of
Philippine Islands (BPI), 3 in accordance with their stipulation
that petitioner pay the loan of respondents with BPI.
To answer for his balance of P1,400,000.00 petitioner issued
four (4) post-dated Metro Bank checks payable to respondent
spouses in the amount of P350,0000.00 each, namely: Check
No. 157708 dated June 15, 1983, 4 Check No. 157709 dated
September 15, 1983, 5 Check No. 157710 dated December
15, 1983 6 and Check No. 157711 dated March 15,
1984. 7 When presented for payment, however, the checks
were dishonored due to insufficient funds. Petitioner promised
to replace the checks but failed to do so. To make matters
worse, out of the P496,500.00 loan of respondent spouses
with the Bank of the Philippine Islands, which petitioner, as
per agreement, should have paid, petitioner only managed to
dole out no more than P393,679.60. When the bank
threatened to foreclose the respondent spouses' mortgage,
they sold three transformers of the rice mill worth P51,411.00
to pay off their outstanding obligation with said bank, with the
knowledge and conformity of petitioner. 8 Petitioner, in return,
voluntarily gave the spouses authority to operate the rice
mill. 9 He, however, continued to be in possession of the two
parcels of land while private respondents were forced to use
the rice mill for residential purposes.
On August 2, 1985, respondent spouses, through counsel,
sent petitioner a demand letter asking for the return of the
properties. Their demand was left unheeded, so, on
September 2, 1985, they filed with the Regional Trial Court of
Lucena City, Branch 60, a complaint for rescission of contract
and recovery of properties with damages. Later, while the
case was still pending with the trial court, petitioner introduced
major improvements on the subject properties by constructing
a complete fence made of hollow blocks and expanding the
piggery. These prompted the respondent spouses to ask for a
writ of preliminary injunction. 10 The trial court granted the
application and enjoined petitioner from introducing
improvements on the properties except for repairs. 11
On June 1, 1989 the trial court rendered a decision, the
dispositive portion of which reads as follows:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered:
a) Ordering that the contract entered into by plaintiff spouses
Miguel K. Robles and Alejandra M. Robles and the defendant,
Jaime Ong captioned "Agreement of Purchase and Sale,"
marked as Exhibit "A" set aside;
b) Ordering defendant, Jaime Ong to deliver the two (2)
parcels of land which are the subject matter of Exhibit "A"
together with the improvements thereon to the spouses
Miguel K. Robles and Alejandro M. Robles;
c) Ordering plaintiff spouses, Miguel Robles and Alejandra
Robles to return to Jaime Ong the sum of P497,179.51;
d) Ordering defendant Jaime Ong to pay the plaintiffs the sum
of P100,000.00 as exemplary damages; and
e) Ordering defendant Jaime Ong to pay the plaintiffs spouses
Miguel K. Robles and Alejandra Robles the sum of
P20,000.00 as attorney's fees and litigation expenses.
The motion of the plaintiff spouses Miguel K. Roles and
Alejandra Robles for the appointment of receivership is
rendered moot and academic.
SO ORDERED. 12
From this decision, petitioner appealed to the Court of
Appeals, which affirmed the decision of the Regional Trial
Court but deleted the award of exemplary damages. In
affirming the decision of the trial court, the Court of Appeals
noted that the failure of petitioner to completely pay the
purchase price is a substantial breach of his obligation which
entitles the private respondents to rescind their contract under
Article 1191 of the New Civil Code. Hence, the instant petition.
At the outset, it must be stated that the issues raised by the
petitioner are generally factual in nature and were already
passed upon by the Court of Appeals and the trial court. Time
and again, we have stated that it is not the function of the
Supreme Court to assess and evaluate all over again the
evidence, testimonial and documentary, adduced by the
parties to an appeal, particularly where, such as in the case at
bench, the findings of both the trial court and the appellate
court on the matter coincide. There is no cogent reason
shown that would justify the court to discard the factual
findings of the two courts below and to superimpose its
own. 13
The only pertinent legal issues raised which are worthy of
discussion are (1) whether the contract entered into by the
parties may be validly rescinded under Article 1191 of the
New Civil Code; and (2) whether the parties had novated their
original contract as to the time and manner of payment.
Petitioner contends that Article 1191 of the New Civil Code is
not applicable since he has already paid respondent spouses
a considerable sum and has therefore substantially complied
with his obligation. He cites Article 1383 instead, to the effect
that where specific performance is available as a remedy,
rescission may not be resorted to.
A discussion of the aforesaid articles is in order.
Rescission, as contemplated in Articles 1380, et seq., of the
New Civil Code, is a remedy granted by law to the contracting
parties and even to third persons, to secure the reparation of
damages caused to them by a contract, even if this should be
valid, by restoration of things to their condition at the moment
prior to the celebration of the contract. 14 It implies a contract,
which even if initially valid, produces a lesion or a pecuniary
damage to someone. 15
On the other hand, Article 1191 of the New Civil Code refers
to rescission applicable to reciprocal obligations. Reciprocal
obligations are those which arise from the same cause, and in
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. 16 They are to be performed simultaneously such
that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal
obligations under Article 1191 of the New Civil Code should
be distinguished from rescission of contracts under Article
1383. Although both presuppose contracts validly entered into
and subsisting and both require mutual restitution when
proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term
which was used in the old Civil Code, from which the article
was based, was "resolution. 17" Resolution is a principal
action which is based on breach of a party, while rescission
under Article 1383 is a subsidiary action limited to cases of
rescission for lesion under Article 1381 of the New Civil Code,
which expressly enumerates the following rescissible
contracts:
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 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.
Obviously, the contract entered into by the parties in the case
at bar does not fall under any of those mentioned by Article
1381. Consequently, Article 1383 is inapplicable.
May the contract entered into between the parties, however,
be rescinded based on Article 1191?
A careful reading of the parties' "Agreement of Purchase and
Sale" shows that it is in the nature of a contract to sell, as
distinguished from a contract of sale. In a contract of sale, the
title to the property passes to the vendee upon the delivery of
the thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass to the
vendee until full payment of the purchase price. 18 In a
contract to sell, the payment of the purchase price is a
positive suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an
obligatory force. 19
Respondents in the case at bar bound themselves to deliver a
deed of absolute sale and clean title covering the two parcels
of land upon full payment by the buyer of the purchase price
of P2,000,000.00. This promise to sell was subject to the
fulfillment of the suspensive condition of full payment of the
purchase price by the petitioner. Petitioner, however, failed to
complete payment of the purchase price. The non-fulfillment
of the condition of full payment rendered the contract to sell
ineffective and without force and effect. It must be stressed
that the breach contemplated in Article 1191 of the New Civil
Code is the obligor's failure to comply with an
obligation. 20 Failure to pay, in this instance, is not even a
breach but merely an event which prevents the vendor's
obligation to convey title from acquiring binding
force. 21 Hence, the agreement of the parties in the case at
bench may be set aside, but not because of a breach on the
part of petitioner for failure to complete payment of the
purchase price. Rather, his failure to do so brought about a
situation which prevented the obligation of respondent
spouses to convey title from acquiring an obligatory force.
Petitioner insists, however, that the contract was novated as
to the manner and time of payment.
We are not persuaded. Article 1292 of the New Civil Code
states that, "In order that an obligation may be extinguished
by another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each
other."
Novation is never presumed, it must be proven as a fact either
by express stipulation of the parties or by implication derived
from an irreconcilable incompatibility between the old and the
new obligation. 22 Petitioner cites the following instances as
proof that the contract was novated: the retrieval of the
transformers from petitioner's custody and their sale by the
respondents to MERALCO on the condition that the proceeds
thereof be accounted for by the respondents and deducted
from the price of the contract; the take-over by the
respondents of the custody and operation of the rice mill; and
the continuous and regular withdrawals by respondent Miguel
Robles of installment sums per vouchers (Exhs. "8" to "47")
on the condition that these installments be credited to
petitioner's account and deducted from the balance of the
purchase price.
Contrary to petitioner's claim, records show that the parties
never even intended to novate their previous agreement. It is
true that petitioner paid respondents small sums of money
amounting to P48,680.00, in contravention of the manner of
payment stipulated in their contract. These installments were,
however, objected to by respondent spouses, and petitioner
replied that these represented the interest of the principal
amount which he owed them. 23 Records further show that
petitioner agreed to the sale of MERALCO transformers by
private respondents to pay for the balance of their subsisting
loan with the Bank of Philippine Islands. Petitioner's letter of
authorization reads:
xxx xxx xxx
Under this authority, it is mutually understood that whatever
payment received from MERALCO as payment to the
transfromers will be considered as partial payment of the
undersigned's obligation to Mr. and Mrs. Miguel K. Robles.
The same will be utilized as partial payment to existing loan
with the Bank of Philippine Islands.
It is also mutually understood that this payment to the Bank of
Philippine Islands will be reimbursed to Mr. and Mrs. Miguel K.
Robles by the undersigned. [Emphasis supplied] 24
It should be noted that while it was. agreed that part of the
purchase price in the sum of P496,500.00 would be directly
deposited by petitioner to the Bank of Philippine Islands to
answer for the loan of respondent spouses, petitioner only
managed to deposit P393,679.60. When the bank threatened
to foreclose the properties, petitioner apparently could not
even raise the sum needed to forestall any action on the part
of the bank. Consequently, he authorized respondent spouses
to sell the three (3) transformers. However, although the
parties agreed to credit the proceeds from the sale of the
transformers to petitioner's obligation, he was supposed to
reimburse the same later to respondent spouses. This can
only mean that there was never an intention on the part of
either of the parties to novate petitioner's manner of payment.
Petitioner contends that the parties verbally agreed to novate
the manner of payment when respondent spouses proposed
to operate the rice mill on the condition that they will account
for its earnings. We find that this is unsubstantiated by the
evidenced on the record. The tenor of his letter dated August
12, 1984 to respondent spouses, in fact, shows that petitioner
had a "little misunderstanding" with respondent spouses
whom he was evidently trying to appease by authorizing them
to continue temporarily with the operation of the rice mill.
Clearly, while petitioner might have wanted to novate the
original agreement as to his manner of payment, the records
are bereft of evidence that respondent spouses willingly
agreed to modify their previous arrangement.
In order for novation to take place, the concurrence of the
following requisites is indispensable: (1) there must be a
previous valid obligation; (2) there must be an agreement of
the parties concerned to a new contract; (3) there must be the
extinguishment of the old contract; and (4) there must be the
validity of the new contract. 25 The aforesaid requisites are
not found in the case at bench. The subsequent acts of the
parties hardly demonstrate their intent to dissolve the old
obligation as a consideration for the emergence of the new
one. We repeat to the point of triteness, novation is never
presumed, there must be an express intention to novate.
As regards the improvements introduced by petitioner to the
premises and for which he claims reimbursement, we see no
reason to depart from the ruling of the trial court and the
appellate court that petitioner is a builder in bad faith. He
introduced the improvements on the premises knowing fully
well that he has not paid the consideration of the contract in
full and over the vigorous objections of respondent spouses.
Moreover, petitioner introduced major improvements on the
premises even while the case against him was pending before
the trial court.
The award of exemplary damages was correctly deleted by
the Court of Appeals in as much as no moral, temperate,
liquidated or compensatory damages in addition to exemplary
damages were awarded.
WHEREFORE, the decision rendered by the Court of Appeals
is hereby AFFIRMED with the MODIFICATION that
respondent spouses are ordered to return to petitioner the
sum of P48,680.00 in addition to the amounts already
awarded. Costs against petitioner.1âwphi1.nêt
SO ORDERED.
G.R. No. 133632        February 15, 2002
BPI INVESTMENT CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and ALS MANAGEMENT &
DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February
28, 1997, of the Court of Appeals and its resolution dated April
21, 1998, in CA-G.R. CV No. 38887. The appellate court
affirmed the judgment of the Regional Trial Court of Pasig
City, Branch 151, in (a) Civil Case No. 11831, for foreclosure
of mortgage by petitioner BPI Investment Corporation (BPIIC
for brevity) against private respondents ALS Management and
Development Corporation and Antonio K.
Litonjua,1 consolidated with (b) Civil Case No. 52093, for
damages with prayer for the issuance of a writ of preliminary
injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in
default in the payment of their monthly amortization, hence,
the extrajudicial foreclosure conducted by BPIIC was
premature and made in bad faith. It awarded private
respondents the amount of ₱300,000 for moral damages,
₱50,000 for exemplary damages, and ₱50,000 for attorney’s
fees and expenses for litigation. It likewise dismissed the
foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per
annum from Ayala Investment and Development Corporation
(AIDC), the predecessor of petitioner BPIIC, for the
construction of a house on his lot in New Alabang Village,
Muntinlupa. Said house and lot were mortgaged to AIDC to
secure the loan. Sometime in 1980, Roa sold the house and
lot to private respondents ALS and Antonio Litonjua for
₱850,000. They paid ₱350,000 in cash and assumed the
₱500,000 balance of Roa’s indebtedness with AIDC. The
latter, however, was not willing to extend the old interest rate
to private respondents and proposed to grant them a new
loan of ₱500,000 to be applied to Roa’s debt and secured by
the same property, at an interest rate of 20% per annum and
service fee of 1% per annum on the outstanding principal
balance payable within ten years in equal monthly
amortization of ₱9,996.58 and penalty interest at the rate of
21% per annum per day from the date the amortization
became due and payable.
Consequently, in March 1981, private respondents executed a
mortgage deed containing the above stipulations with the
provision that payment of the monthly amortization shall
commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roa’s
arrearages by paying BPIIC the sum of ₱190,601.35. This
reduced Roa’s principal balance to ₱457,204.90 which, in
turn, was liquidated when BPIIC applied thereto the proceeds
of private respondents’ loan of ₱500,000.
On September 13, 1982, BPIIC released to private
respondents ₱7,146.87, purporting to be what was left of their
loan after full payment of Roa’s loan.
In June 1984, BPIIC instituted foreclosure proceedings
against private respondents on the ground that they failed to
pay the mortgage indebtedness which from May 1, 1981 to
June 30, 1984, amounted to Four Hundred Seventy Five
Thousand Five Hundred Eighty Five and 31/100 Pesos
(₱475,585.31). A notice of sheriff’s sale was published on
August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No.
52093 against BPIIC. They alleged, among others, that they
were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they
should not be made to pay amortization before the actual
release of the ₱500,000 loan in August and September 1982.
Further, out of the ₱500,000 loan, only the total amount of
₱464,351.77 was released to private respondents. Hence,
applying the effects of legal compensation, the balance of
₱35,648.23 should be applied to the initial monthly
amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in
Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS
Management and Development Corporation and Antonio K.
Litonjua and against BPI Investment Corporation, holding that
the amount of loan granted by BPI to ALS and Litonjua was
only in the principal sum of P464,351.77, with interest at 20%
plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten
(10) years or one hundred twenty (120) months. The
amortization schedule attached as Annex "A" to the "Deed of
Mortgage" is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered
compensable damages when BPI caused their publication in
a newspaper of general circulation as defaulting debtors, and
therefore orders BPI to pay ALS and Litonjua the following
sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorney’s fees and expenses of
litigation.
The foreclosure suit (Civil Case No. 11831) is hereby
DISMISSED for being premature.
Costs against BPI.
SO ORDERED.2
Both parties appealed to the Court of Appeals. However,
private respondents’ appeal was dismissed for non-payment
of docket fees.
On February 28, 1997, the Court of Appeals promulgated its
decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the
same is hereby AFFIRMED in toto.
SO ORDERED.3
In its decision, the Court of Appeals reasoned that a simple
loan is perfected only upon the delivery of the object of the
contract. The contract of loan between BPIIC and ALS &
Litonjua was perfected only on September 13, 1982, the date
when BPIIC released the purported balance of the ₱500,000
loan after deducting therefrom the value of Roa’s
indebtedness. Thus, payment of the monthly amortization
should commence only a month after the said date, as can be
inferred from the stipulations in the contract. This, despite the
express agreement of the parties that payment shall
commence on May 1, 1981. From October 1982 to June
1984, the total amortization due was only ₱194,960.43.
Evidence showed that private respondents had an
overpayment, because as of June 1984, they already paid a
total amount of ₱201,791.96. Therefore, there was no basis
for BPIIC to extrajudicially foreclose the mortgage and cause
the publication in newspapers concerning private
respondents’ delinquency in the payment of their loan. This
fact constituted sufficient ground for moral damages in favor
of private respondents.
The motion for reconsideration filed by petitioner BPIIC was
likewise denied, hence this petition, where BPIIC submits for
resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A
CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE
LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125
SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR
MORAL AND EXEMPLARY DAMAGES AND ATTORNEY’S
FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY
ALS AND OPPOSED TO THE RULE LAID DOWN
IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS,
120 SCRA 707.
On the first issue, petitioner contends that the Court of
Appeals erred in ruling that because a simple loan is
perfected upon the delivery of the object of the contract, the
loan contract in this case was perfected only on September
13, 1982. Petitioner claims that a contract of loan is a
consensual contract, and a loan contract is perfected at the
time the contract of mortgage is executed conformably with
our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In
the present case, the loan contract was perfected on March
31, 1981, the date when the mortgage deed was executed,
hence, the amortization and interests on the loan should be
computed from said date.
Petitioner also argues that while the documents showed that
the loan was released only on August 1982, the loan was
actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roa’s loan. This finds
support in the registration on March 31, 1981 of the Deed of
Absolute Sale executed by Roa in favor of ALS, transferring
the title of the property to ALS, and ALS executing the
Mortgage Deed in favor of BPIIC. Moreover, petitioner claims,
the delay in the release of the loan should be attributed to
private respondents. As BPIIC only agreed to extend a
₱500,000 loan, private respondents were required to reduce
Frank Roa’s loan below said amount. According to petitioner,
private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on
Article 1934 of the Civil Code,4 a simple loan is perfected
upon the delivery of the object of the contract, hence a real
contract. In this case, even though the loan contract was
signed on March 31, 1981, it was perfected only on
September 13, 1982, when the full loan was released to
private respondents. They submit that petitioner
misread Bonnevie.  To give meaning to Article 1934, according
to private respondents, Bonnevie  must be construed to mean
that the contract to extend the loan was perfected on March
31, 1981 but the contract of loan itself was only perfected
upon the delivery of the full loan to private respondents on
September 13, 1982.
Private respondents further maintain that even
granting, arguendo, that the loan contract was perfected on
March 31, 1981, and their payment did not start a month
thereafter, still no default took place. According to private
respondents, a perfected loan agreement imposes reciprocal
obligations, where the obligation or promise of each party is
the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the
promise of private respondents to pay the monthly
amortization. For the latter, it is the promise of BPIIC to deliver
the money. 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. Therefore,
private respondents conclude, they did not incur in delay
when they did not commence paying the monthly amortization
on May 1, 1981, as it was only on September 13, 1982 when
petitioner fully complied with its obligation under the loan
contract.
We agree with private respondents. A loan contract is not a
consensual contract but a real contract. It is perfected only
upon the delivery of the object of the contract.5 Petitioner
misapplied Bonnevie. The contract in Bonnevie  declared by
this Court as a perfected consensual contract falls under the
first clause of Article 1934, Civil Code. It is an accepted
promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of
the Philippines, 44 SCRA 445, petitioner applied for a loan of
₱500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered.
However, because of acts attributable to petitioner, the loan
was not released. Later, petitioner instituted an action for
damages. We recognized in this case, a perfected consensual
contract which under normal circumstances could have made
the bank liable for not releasing the loan. However, since the
fault was attributable to petitioner therein, the court did not
award it damages.
A perfected consensual contract, as shown above, can give
rise to an action for damages. However, said contract does
not constitute the real contract of loan which requires the
delivery of the object of the contract for its perfection and
which gives rise to obligations only on the part of the
borrower.6
In the present case, the loan contract between BPI, on the
one hand, and ALS and Litonjua, on the other, was perfected
only on September 13, 1982, the date of the second release
of the loan. Following the intentions of the parties on the
commencement of the monthly amortization, as found by the
Court of Appeals, private respondents’ obligation to pay
commenced only on October 13, 1982, a month after the
perfection of the contract.7
We also agree with private respondents that a contract of loan
involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the
other.8 As averred by private respondents, the promise of
BPIIC to extend and deliver the loan is upon the consideration
that ALS and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the supposed
release of the loan. It is a basic principle in reciprocal
obligations that 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.9 Only when a party has
performed his part of the contract can he demand that the
other party also fulfills his own obligation and if the latter fails,
default sets in. Consequently, petitioner could only demand
for the payment of the monthly amortization after September
13, 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing
the amount due as of the date when BPIIC extrajudicially
caused the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first
issue, such as the date of actual release of the loan and
whether private respondents were the cause of the delay in
the release of the loan, are factual. Since petitioner has not
shown that the instant case is one of the exceptions to the
basic rule that only questions of law can be raised in a petition
for review under Rule 45 of the Rules of Court,10 factual
matters need not tarry us now. On these points we are bound
by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be
held liable for moral and exemplary damages for it did not act
maliciously when it initiated the foreclosure proceedings. It
merely exercised its right under the mortgage contract
because private respondents were irregular in their monthly
amortization.1âwphi1 It invoked our ruling in Social Security
System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate
damages. As concluded by the Court of Appeals "the
negligence of the appellant is not so gross as to warrant moral
and temperate damages," except that, said Court reduced
those damages by only P5,000.00 instead of eliminating
them. Neither can we agree with the findings of both the Trial
Court and respondent Court that the SSS had acted
maliciously or in bad faith. The SSS was of the belief that it
was acting in the legitimate exercise of its right under the
mortgage contract in the face of irregular payments made by
private respondents and placed reliance on the automatic
acceleration clause in the contract. The filing alone of the
foreclosure application should not be a ground for an award of
moral damages in the same way that a clearly unfounded civil
action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith
and should be liable for said damages because it insisted on
the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction
in the monthly amortization to conform to the actual amount of
loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely
payment.
But as admitted by private respondents themselves, they
were irregular in their payment of monthly amortization.
Conformably with our ruling in  SSS,  we can not properly
declare BPIIC in bad faith. Consequently, we should rule out
the award of moral and exemplary damages.11
However, in our view, BPIIC was negligent in relying merely
on the entries found in the deed of mortgage, without
checking and correspondingly adjusting its records on the
amount actually released to private respondents and the date
when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages
should be given in recognition of their rights which were
violated by BPIIC.12 For this purpose, the amount of ₱25,000
is sufficient.
Lastly, as in SSS  where we awarded attorney’s fees because
private respondents were compelled to litigate, we sustain the
award of ₱50,000 in favor of private respondents as attorney’s
fees.
WHEREFORE, the decision dated February 28, 1997, of the
Court of Appeals and its resolution dated April 21, 1998, are
AFFIRMED WITH MODIFICATION as to the award of
damages. The award of moral and exemplary damages in
favor of private respondents is DELETED, but the award to
them of attorney’s fees in the amount of ₱50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private
respondents ₱25,000 as nominal damages. Costs against
petitioner.
SO ORDERED.
G.R. No. 129107      September 26, 2001
ALFONSO L. IRINGAN, petitioner,
vs.
HON. COURT OF APPEALS and ANTONIO PALAO,
represented by his Attorney-in-Fact, FELISA P. DELOS
SANTOS, respondents.
QUISUMBING, J.:
This petition assails the Decision 1 dated April 30, 1997 of the
Court of Appeals in CA G.R. CV No. 39949, affirming the
decision of the Regional Trial Court and deleting the award of
attorney's fee.
The facts of the case are based on the records.
On March 22, 1985, private respondent Antonio Palao sold to
petitioner Alfonso Iringan, an undivided portion of Lot No. 992
of the Tuguegarao Cadastre, located at the Poblacion of
Tuguegarao and covered by Transfer Certificate of Title No. T-
5790. The parties executed a Deed of Sale 2 on the same date
with the purchase price of P295,000.00, payable as follows:
(a) P10,000.00 - upon the execution of this instrument, and for
this purpose, the vendor acknowledges having received the
said amount from the vendee as of this date;
(b) P140,000.00 - on or before April 30, 1985;
(c) P145,000.00 - on or before December 31, 1985. 3
When the second payment was due, Iringan paid only
P40,000. Thus, on July 18, 1985, Palao sent a letter 4 to
Iringan stating that he considered the contract as rescinded
and that he would not accept any further payment considering
that Iringan failed to comply with his obligation to pay the full
amount of the second installment.
On August 20, 1985, Iringan through his counsel Atty. Hilarion
L. Aquino,5 replied that they were not opposing the revocation
of the Deed of Sale but asked for the reimbursement of the
following amounts:
(a) P50,000.00 - cash received by you;
(b) P3,200.00 - geodetic engineer's fee;
(c) P500.00 - attorney's fee;
(d) the current interest on P53,700.00.6
In response, Palao sent a letter dated January 10, 1986, 7 to
Atty. Aquino, stating that he was not amenable to the
reimbursements claimed by Iringan.
On February 21, 1989, Iringan, now represented by anew
counsel - Atty. Carmelo Z. Lasam, proposed that the P50,000
which he had already paid Palao be reimbursed 8 or Palao
could sell to Iringan, an equivalent portion of the land.
Palao instead wrote Iringan that the latter's standing
obligation had reached P61,600, representing payment of
arrears for rentals from October 1985 up to March 1989. 9 The
parties failed to arrive at an agreement.
On July 1, 1991, Palao filed a Complaint 10 for Judicial
Confirmation of Rescission of Contract and Damages against
Iringan and his wife.
In their Answer,11 the spouses alleged that the contract of sale
was a consummated contract, hence, the remedy of Palao
was for collection of the balance of the purchase price and not
rescission. Besides, they said that they had always been
ready and willing to comply with their obligations in
accordance with said contract.
In a Decision12 dated September 25, 1992, the Regional Trial
Court of Cagayan, Branch I, ruled in favor of Palao and
affirmed the rescission of the contract. It disposed,
WHEREFORE, the Court finds that the evidence
preponderates in favor of the plaintiff and against the
defendants and judgment is hereby rendered as follows:
(a) Affirming the rescission of the contract of sale;
(b) Cancelling the adverse claim of the defendants annotated
at the back of TCT No. T-5790;
(c) Ordering the defendants to vacate the premises;
(d) Ordering the defendants to pay jointly and severally the
sum of P100,000.00 as reasonable compensation for use of
the property minus 50% of the amount paid by them; and to
pay P50,000.00 as moral damages; P10,000.00 as exemplary
damages; and P50,000.00 as attorney's fee; and to pay the
costs of suit.
SO ORDERED.13
As stated, the Court of Appeals affirmed the above decision.
Hence, this petition for review.
Iringan avers in this petition that the Court of Appeals erred:
1. In holding that the lower court did not err in affirming the
rescission of the contract of sale; and
2. In holding that defendant was in bad faith for "resisting"
rescission and was made liable to pay moral and exemplary
damages.14
We find two issues for resolution: (1) whether or not the
contract of sale was validly rescinded, and (2) whether or not
the award of moral and exemplary damages is proper.
On the first issue, petitioner contends that no rescission was
effected simply by virtue of the letter15 sent by respondent
stating that he considered the contract of sale rescinded.
Petitioner asserts that a judicial or notarial act is necessary
before one party can unilaterally effect a rescission.
Respondent Palao, on the other hand, contends that the right
to rescind is vested by law on the obligee and since petitioner
did not oppose the intent to rescind the contract, Iringan in
effect agreed to it and had the legal effect of a mutually
agreed rescission.
Article 1592 of the Civil Code is the applicable provision
regarding the sale of an immovable property.
Article 1592. In the sale of immovable property, even though it
may have been stipulated that upon failure to pay the price 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. (Italics supplied)
Article 1592 requires the rescinding party to serve judicial or
notarial notice of his intent to resolve the contract. 16
In the case of Villaruel v. Tan King,17  we ruled in this wise,
...since the subject-matter of the sale in question is real
property, it does not come strictly within the provisions of
article 1124 (now Article 1191) of the Civil Code, but is rather
subjected to the stipulations agreed upon by the contracting
parties and to the provisions of article 1504 (now Article 1592)
of the Civil Code."18
Citing Manresa, the Court said that the requirement of then
Article 1504, "refers to a demand that the vendor makes upon
the vendee for the latter to agree to the resolution of the
obligation and to create no obstacles to this contractual mode
of extinguishing obligations."19
Clearly, a judicial or notarial act is necessary before a valid
rescission can take place, whether or not automatic rescission
has been stipulated. It is to be noted that the law uses the
phrase "even though"20 emphasizing that when no stipulation
is found on automatic rescission, the judicial or notarial
requirement still applies.
On the first issue, both the trial and appellate courts affirmed
the validity of the alleged mutual agreement to rescind based
on Article 1191 of the Civil Code, particularly paragraphs 1
and 2 thereof.
Article 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 payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible. [Emphasis ours.]
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.
But in our view, even if Article 1191 were applicable, petitioner
would still not be entitled to automatic rescission. In Escueta
v. Pando,21 we ruled that under Article 1124 (now Article 1191)
of the Civil Code, the right to resolve reciprocal obligations, is
deemed implied in case one of the obligors shall fail to comply
with what is incumbent upon him. But that right must be
invoked judicially. The same article also provides: "The Court
shall decree the resolution demanded, unless there should be
grounds which justify the allowance of a term for the
performance of the obligation."
This requirement has been retained in the third paragraph of
Article 1191, which states that "the court shall decree the
rescission claimed, unless there be just cause authorizing the
fixing of a period."
Consequently, even if the right to rescind is made available to
the injured party,22 the obligation is not ipso facto erased by
the failure of the other party to comply with what is incumbent
upon him. The party entitled to rescind should apply to the
court for a decree of rescission. 23 The right cannot be
exercised solely on a party's own judgment that the other
committed a breach of the obligation. 24 The operative act
which produces the resolution of the contract is the decree of
the court and not the mere act of the vendor. 25 Since a judicial
or notarial act is required by law for a valid rescission to take
place, the letter written by respondent declaring his intention
to rescind did not operate to validly rescind the contract.
Notwithstanding the above, however, in our view when private
respondent filed an action for Judicial Confirmation of
Rescission and Damages26 before the RTC, he complied with
the requirement of the law for judicial decree of rescission.
The complaint27 categorically stated that the purpose was 1)
to compel appellants to formalize in a public document, their
mutual agreement of revocation and rescission; and/or 2) to
have a judicial confirmation of the said revocation/rescission
under terms and conditions fair, proper and just for both
parties.28 In Luzon Brokerage Co., Inc.  v. Maritime Building
Co., Inc.,29 we held that even a crossclaim found in the
Answer could constitute a judicial demand for rescission that
satisfies the requirement of the law.30
Petitioner contends that even if the filing of the case were
considered the judicial act required, the action should be
deemed prescribed based on the provisions of Article 1389 of
the Civil Code.31
This provision of law applies to rescissible contracts, 32 as
enumerated and defined in Articles 1380 33 and 1381.34 We
must stress however, that the "rescission" in Article 1381 is
not akin to the term "rescission" in Article 1191 and Article
1592.35 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.36
The prescriptive period applicable to rescission under Articles
1191 and 1592, is found in Article 1144, 37 which provides that
the action upon a written contract should be brought within ten
years from the time the right of action accrues. The suit was
brought on July 1, 1991, or six years after the default. It was
filed within the period for rescission. Thus, the contract of sale
between the parties as far as the prescriptive period applies,
can still be validly rescinded.
On the issue of moral and exemplary damages, petitioner
claims that the Court of Appeals erred in finding bad faith on
his part when he resisted the rescission 38 and claimed he was
ready to pay but never actually paid respondent,
notwithstanding that he knew that appellee's principal
motivation for selling the lot was to raise money to pay his
SSS loan.39 Petitioner would have us reverse the said CA
findings based on the exception 40 that these findings were
made on a misapprehension of facts.
The records do not support petitioner's claims. First, per the
records, petitioner knew respondent's reason for selling his
property. As testified to by petitioner 41 and in the
deposition42 of respondent, such fact was made known to
petitioner during their negotiations as well as in the letters
sent to petitioner by Palao.43 Second, petitioner adamantly
refused to formally execute an instrument showing their
mutual agreement to rescind the contract of sale,
notwithstanding that it was petitioner who plainly breached the
terms of their contract when he did not pay the stipulated
price on time, leaving private respondent desperate to find
other sources of funds to payoff his loan. Lastly, petitioner did
not substantiate by clear and convincing proof, his allegation
that he was ready and willing to pay respondent. We are more
inclined to believe his claim of readiness to pay was an
afterthought intended to evade the consequence of his
breach. There is no record to show the existence of such
amount, which could have been reflected, at the very least, in
a bank account in his name, if indeed one existed; or,
alternatively, the proper deposit made in court which could
serve as a formal tender of payment. 44 Thus, we find the
award of moral and exemplary damages proper.1âwphi1.nêt
WHEREFORE, the petition is DENIED. The assailed decision
dated April 30, 1997 of the Court of Appeals in CA G.R. CV
No. 39949, affirming the Regional Trial Court decision and
deleting the award of attorney's fees, is hereby AFFIRMED.
Costs against the petitioner.
SO ORDERED.
G.R. No. 83851. March 3, 1993.
VISAYAN SAWMILL COMPANY, INC., and ANG TAY,
petitioners, vs. THE HONORABLE COURT OF APPEALS and
RJH TRADING, represented by RAMON J. HIBIONADA,
proprietor, respondents.
Saleto J. Erames and Edilberto V. Logronio for petitioners.
Eugenio O. Original for private respondent.
SYLLABUS
1. CIVIL LAW; CONTRACT TO SELL; EFFECT OF
VENDEE'S FAILURE TO COMPLY WITH POSITIVE
SUSPENSIVE CONDITION; CASE AT BAR. — The petitioner
corporation's obligation to sell is unequivocally subject to a
positive suspensive condition, i.e., the private respondent's
opening, making or indorsing of an irrevocable and
unconditional letter of credit. The former agreed to deliver the
scrap iron only upon payment of the purchase price by means
of an irrevocable and unconditional letter of credit. Otherwise
stated, the contract is not one of sale where the buyer
acquired ownership over the property subject to the resolutory
condition that the purchase price would be paid after delivery.
Thus, there was to be no actual sale until the opening, making
or indorsing of the irrevocable and unconditional letter of
credit. Since what obtains in the case at bar is a mere
promise to sell, the failure of the private respondent to comply
with the positive suspensive condition cannot even be
considered a breach — casual or serious — but simply an
event that prevented the obligation of petitioner corporation to
convey title from acquiring binding force. In Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc., this Court stated: ". . .
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. It is elementary that, as stated by Castan,
-- 'b) Si la condicion suspensiva llega a faltar, la obligacion se
tiene por no existente, y el acreedor pierde todo derecho,
incluso el de utilizar las medidas conservativas.'(3 Castan,
Derecho Civil, 7a Ed., p. 107). (Also Puig Peña, Der. Civ., T.
IV (1), p. 113).'"
2. ID.; ID.; ID.; RESCISSION. — The obligation of the
petitioner corporation to sell did not arise; it therefore cannot
be compelled by specific performance to comply with its
prestation. In short, Article 1191 of the Civil Code does not
apply; on the contrary, pursuant to Article 1597 of the Civil
Code, the petitioner corporation may totally rescind, as it did
in this case, the contract. Said Article provides: "ART. 1597.
Where the goods have not been delivered to the buyer, and
the buyer has repudiated the contract of sale, or has
manifested his inability to perform his obligations, thereunder,
or has committed a breach thereof, the seller may totally
rescind the contract of sale by giving notice of his election so
to do to the buyer."
3. ID.; ID.; IN CASE AT BAR, VENDOR'S CONSENT TO
DIGGING UP AND GATHERING OF SCRAP IRON NOT
CONSTRUED AS DELIVERY THEREOF; REASONS
THEREFOR. — Paragraph 6 of the Complaint reads: "6. That
on May 17, 1983 Plaintiff with the consent of defendant Ang
Tay sent his men to the stockyard of Visayan Sawmill Co., Inc.
at Cawitan, Sta. Catalina, Negros Oriental to dig and gather
the scrap iron and stock the same for weighing." This
permission or consent can, by no stretch of the imagination,
be construed as delivery of the scrap iron in the sense that, as
held by the public respondent, citing Article 1497 of the Civil
Code, petitioners placed the private respondent in control and
possession thereof. In the first place, said Article 1497 falls
under the Chapter Obligations of the Vendor, which is found in
Title VI (Sales), Book IV of the Civil Code. As such, therefore,
the obligation imposed therein is premised on an existing
obligation to deliver the subject of the contract. In the instant
case, in view of the private respondent's failure to comply with
the positive suspensive condition earlier discussed, such an
obligation had not yet arisen. In the second place, it was a
mere accommodation to expedite the weighing and hauling of
the iron in the event that the sale would materialize. The
private respondent was not thereby placed in possession of
and control over the scrap iron. Thirdly, We cannot even
assume the conversion of the initial contract or promise to sell
into a contract of sale by the petitioner corporation's alleged
implied delivery of the scrap iron because its action and
conduct in the premises do not support this conclusion.
Indeed, petitioners demanded the fulfillment of the suspensive
condition and eventually cancelled the contract.
4. ID.; CONTRACTS; DAMAGES; MORAL DAMAGES;
PURPOSE OF AWARD THEREOF; EXEMPLARY
DAMAGES. — In contracts, such as in the instant case, moral
damages may be recovered if defendants acted fraudulently
and in bad faith, while exemplary damages may only be
awarded if defendants acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. In the instant case, the
refusal of the petitioners to deliver the scrap iron was founded
on the non-fulfillment by the private respondent of a
suspensive condition. It cannot, therefore, be said that the
herein petitioners had acted fraudulently and in bad faith or in
a wanton, reckless, oppressive or malevolent manner. What
this Court stated in Inhelder Corp. vs. Court of Appeals needs
to be stressed anew: "At this juncture, it may not be amiss to
remind Trial Courts to guard against the award of exhorbitant
(sic) damages that are way out of proportion to the
environmental circumstances of a case and which, time and
again, this Court has reduced or eliminated. Judicial discretion
granted to the Courts in the assessment of damages must
always be exercised with balanced restraint and measured
objectivity." For, indeed, moral damages are emphatically not
intended to enrich a complainant at the expense of the
defendant. They are awarded only to enable the injured party
to obtain means, diversion or amusements that will serve to
obviate the moral suffering he has undergone, by reason of
the defendant's culpable action. Its award is aimed at the
restoration, within the limits of the possible, of the spiritual
status quo ante, and it must be proportional to the suffering
inflicted.
ROMERO, J., dissenting:
1. CIVIL LAW; CONTRACT OF SALE; DEFINED; WHEN
PERFECTED; CASE AT BAR. — Article 1458 of the Civil
Code has this definition: "By a contract of sale, one of the
contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing and the other to pay
therefor a price certain in money or its equivalent." Article
1475 gives the significance of this mutual undertaking of the
parties, thus: "The contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the object
of the contract and upon the price. From that moment, the
parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts." Thus,
when the parties entered into the contract entitled "Purchase
and Sale of Scrap Iron" on May 1, 1983, the contract reached
the stage of perfection, there being a meeting of the' minds
upon the object which is the subject matter of the contract and
the price which is the consideration. Applying Article 1475 of
the Civil Code, from that moment, the parties may reciprocally
demand performance of the obligations incumbent upon them,
i.e., delivery by the vendor and payment by the vendee.
2. ID.; ID.; DELIVERY; HOW ACCOMPLISHED; CASE AT
BAR. — From the time the seller gave access to the buyer to
enter his premises, manifesting no objection thereto but even
sending 18 or 20 people to start the operation, he has placed
the goods in the control and possession of the vendee and
delivery is effected. For according to Article 1497, "The thing
sold shall be understood as delivered when it is placed in the
control and possession of the vendee." Such action or real
delivery (traditio) is the act that transfers ownership. Under
Article 1496 of the Civil Code, "The ownership of the thing
sold is acquired by the vendee from the moment it is delivered
to him in any of the ways specified in Articles 1497 to 1501, or
in any other manner signifying an agreement that the
possession is transferred from the vendor to the vendee."
3. ID.; ID.; PROVISION IN CONTRACT REGARDING MODE
OF PAYMENT NOT ESSENTIAL REQUISITE THEREOF;
WHEN PROVISION CONSIDERED A SUSPENSIVE
CONDITION. — a provision in the contract regarding the
mode of payment, like the requirement for the opening of the
Letter of Credit in this case, is not among the essential
requirements of a contract of sale enumerated in Articles 1305
and 1474, the absence of any of which will prevent the
perfection of the contract from happening. Likewise, it must be
emphasized that not every provision regarding payment
should automatically be classified as a suspensive condition.
To do so would change the nature of most contracts of sale
into contracts to sell. For a provision in the contract regarding
the payment of the price to be considered a suspensive
condition, the parties must have made this clear in certain and
unambiguous terms, such as for instance, by reserving or
withholding title to the goods until full payment by the buyer.
This was a pivotal circumstance in the Luzon Brokerage case
where the contract in question was replete with very explicit
provisions such as the following: "Title to the properties
subject of this contract remains with the Vendor and shall
pass to, and be transferred in the name of the Vendee only
upon complete payment of the full price . . .;" 10 the Vendor
(Myers) will execute and deliver to the Vendee a definite and
absolute Deed of Sale upon full payment of the Vendee . . .;
and "should the Vendee fail to pay any of the monthly
installments, when due, or otherwise fail to comply with any of
the terms and conditions herein stipulated, then this Deed of
Conditional Sale shall automatically and without any further
formality, become null and void." It is apparent from a careful
reading of Luzon Brokerage, as well as the cases which
preceded it and the subsequent ones applying its doctrines,
that the mere insertion of the price and the mode of payment
among the terms and conditions of the agreement will not
necessarily make it a contract to sell. The phrase in the
contract "on the following terms and conditions" is standard
form which is not to be construed as imposing a condition,
whether suspensive or resolutory, in the sense of the
happening of a future and uncertain event upon which an
obligation is made to depend. There must be a manifest
understanding that the agreement is in what may be referred
to as "suspended animation" pending compliance with
provisions regarding payment. The reservation of title to the
object of the contract in the seller is one such manifestation.
Hence, it has been decided in the case of Dignos v. Court of
Appeals that, absent a proviso in the contract that the title to
the property is reserved in the vendor until full payment of the
purchase price or a stipulation giving the vendor the right to
unilaterally rescind the contract the moment the vendee fails
to pay within the fixed period, the transaction is an absolute
contract of sale and not a contract to sell.
4. ID.; ID.; CONTRACT OF SALE DISTINGUISHED FROM
CONTRACT TO SELL; EFFECT OF NON-PAYMENT OF
PURCHASE PRICE; EFFECT OF DELIVERY ON
OWNERSHIP OF OBJECT OF CONTRACT. — In a contract
of sale, the non-payment of the price is a resolutory condition
which extinguishes the transaction that, for a time, existed
and discharges the obligations created thereunder. On the
other hand, "the parties may stipulate that ownership in the
thing shall not pass to the purchaser until he has fully paid the
price." In such a contract to sell, the full payment of the price
is a positive suspensive condition, such that in the event of
non-payment, the obligation of the seller to deliver and
transfer ownership never arises. Stated differently, in a
contract to sell, ownership is not transferred upon delivery of
property but upon full payment of the purchase price.
Consequently, in a contract of sale, after delivery of the object
of the contract has been made, the seller loses ownership and
cannot recover the same unless the contract is rescinded. But
in the contract to sell, the seller retains ownership and the
buyer's failure to pay cannot even be considered a breach,
whether casual or substantial, but an event that prevented the
seller's duty to transfer title to the object of the contract.
5. ID.; ID.; CASE OF SYCIP V. NATIONAL COCONUT
CORPORATION, ET AL., G.R. NO. L-6618, APRIL 28, 1956,
DISTINGUISHED FROM CASE AT BAR. — Worthy of
mention before concluding is Sycip v. National Coconut
Corporation, et al. since, like this case, it involves a failure to
open on time the Letter of Credit required by the seller. In
Sycip, after the buyer offered to buy 2,000 tons of copra, the
seller sent a telegram dated December 19, 1946 to the buyer
accepting the offer but on condition that the latter opens a
Letter of Credit within 48 hours. It was not until December 26,
1946, however, that the Letter of Credit was opened. The
Court, speaking through Justice Bengzon, held that because
of the delay in the opening of the Letter of Credit; the seller
was not obliged to deliver the goods. Two factors distinguish
Sycip from the case at bar. First, while there has already been
a perfected contract of sale in the instant case, the parties in
Sycip were still undergoing the negotiation process. The
seller's qualified acceptance in Sycip served as a counter
offer which prevented the contract from being perfected. Only
an absolute and unqualified acceptance of a definite offer
manifests the consent necessary to perfect a contract.
Second, the Court found in Sycip that time was of the
essence for the seller who was anxious to sell to other buyers
should the offeror fail to open the Letter of Credit within the
stipulated time. In contrast, there are no indicia in this case
that can lead one to conclude that time was of the essence for
petitioner as would make the eleven-day delay a fundamental
breach of the contract.
6. ID.; OBLIGATIONS AND CONTRACTS; RESCISSION
UNDER ARTICLE 1191 OF THE CIVIL CODE; WHEN
PROPER; DELAY IN PAYMENT FOR TWENTY DAYS NOT
CONSIDERED A SUBSTANTIAL BREACH OF CONTRACT;
CASE AT BAR. — The right to rescind pursuant to Article
1191 is not absolute. Rescission will not be permitted for slight
or casual breach of the contract. Here, petitioners claim that
the breach is so substantial as to justify rescission . . . I am
not convinced that the circumstances may be characterized
as so substantial and fundamental as to defeat the object of
the parties in making the agreement. None of the alleged
defects in the Letter of Credit would serve to defeat the object
of the parties. It is to be stressed that the purpose of the
opening of a Letter of Credit is to effect payment. The above-
mentioned factors could not have prevented such payment. It
is also significant to note that petitioners sent a telegram to
private respondents on May 23, 1983 cancelling the contract.
This was before they had even received on May 26, 1983 the
notice from the bank about the opening of the Letter of Credit.
How could they have made a judgment on the materiality of
the provisions of the Letter of Credit for purposes of
rescinding the contract even before setting eyes on said
document? To be sure, in the contract, the private
respondents were supposed to open the Letter of Credit on
May 15, 1983 but, it was not until May 26, 1983 or eleven (11)
days later that they did so. Is the eleven-day delay a
substantial breach of the contract as could justify the
rescission of the contract? In Song Fo and Co. v. Hawaiian-
Philippine Co., it was held that a delay in payment for twenty
(20) days was not a violation of an essential condition of the
contract which would warrant rescission for non-performance.
In the instant case, the contract is bereft of any suggestion
that time was of the essence. On the contrary, it is noted that
petitioners allowed private respondents' men to dig and
remove the scrap iron located in petitioners' premises
between May 17, 1983 until May 30, 1983 or beyond the May
15, 1983 deadline for the opening of the Letter of Credit.
Hence, in the absence of any indication that the time was of
the essence, the eleven-day delay must be deemed a casual
breach which cannot justify a rescission.
DECISION
DAVIDE, JR., J p:
By this petition for review under Rule 45 of the Rules of Court,
petitioners urge this Court to set aside the decision of public
respondent Court of Appeals in C.A.-G.R. CV No. 08807, 1
promulgated on 16 March 1988, which affirmed with
modification, in respect to the moral damages, the decision of
the Regional Trial Court (RTC) of Iloilo in Civil Case No.
15128, an action for specific performance and damages, filed
by the herein private respondent against the petitioners. The
dispositive portion of the trial court's decision reads as
follows:
"IN VIEW OF THE ABOVE FINDINGS, judgment is hereby
rendered in favor of plaintiff and against the defendants
ordering the latter to pay jointly and severally plaintiff, to wit:
1) The sum of Thirty-Four Thousand Five Hundred Eighty
Three and 16/100 (P34,583.16), as actual damages;
2) The sum of One Hundred Thousand (P100,000.00) Pesos,
as moral damages;
3) The sum of Ten Thousand (P10,000.00) Pesos, as
exemplary damages;
4) The sum of TWENTY Five Thousand (P25,000.00) Pesos,
as attorney's fees; and
5) The sum of Five Thousand (P5,000.00) Pesos as actual
litis expenses." 2
The public respondent reduced the amount of moral damages
to P25,000.00.
The antecedent facts, summarized by the public respondent,
are as follows:
"On May 1, 1983, herein plaintiff-appellee and defendants-
appellants entered into a sale involving scrap iron located at
the stockyard of defendant-appellant corporation at Cawitan,
Sta. Catalina, Negros Oriental, subject to the condition that
plaintiff-appellee will open a letter of credit in the amount of
P250,000.00 in favor of defendant-appellant corporation on or
before May 15, 1983. This is evidenced by a contract entitled
`Purchase and Sale of Scrap Iron' duly signed by both parties.
On May 17, 1983, plaintiff-appellee through his man (sic),
started to dig and gather and (sic) scrap iron at the defendant-
appellant's (sic) premises, proceeding with such endeavor
until May 30 when defendants-appellants allegedly directed
plaintiff-appellee's men to desist from pursuing the work in
view of an alleged case filed against plaintiff-appellee by a
certain Alberto Pursuelo. This, however, is denied by
defendants-appellants who allege that on May 23, 1983, they
sent a telegram to plaintiff-appellee cancelling the contract of
sale because of failure of the latter to comply with the
conditions thereof.
On May 24, 1983, plaintiff-appellee informed defendants-
appellants by telegram that the letter of credit was opened
May 12, 1983 at the Bank of the Philippine Islands main office
in Ayala, but then (sic) the transmittal was delayed.
On May 26, 1983, defendants-appellants received a letter
advice from the Dumaguete City Branch of the Bank of the
Philippine Islands dated May 26, 1983, the content of which is
quited (sic) as follows:
'Please be advised that we have received today cable advise
from our Head Office which reads as follows:
'Open today our irrevocable Domestic Letter of Credit No.
01456-d fot (sic) P250,000.00 favor ANG TAY c/o Visayan
Sawmill Co., Inc. Dumaguete City, Negros Oriental Account of
ARMACO-MARSTEEL ALLOY CORPORATION 2nd Floor
Alpap 1 Bldg., 140 Alfaro stp (sic) Salcedo Village, Makati,
Metro Manila Shipments of about 500 MT of assorted steel
scrap marine/heavy equipment expiring on July 24, 1983
without recourse at sight draft drawn on Armaco Marsteel
Alloy Corporation accompanied by the following documents:
Certificate of Acceptance by Armaco-Marsteel Alloy
Corporation shipment from Dumaguete City to buyer's
warehouse partial shipment allowed/transhipment (sic) not
allowed'.
For your information'.
On July 19, 1983, plaintiff-appellee sent a series of telegrams
stating that the case filed against him by Pursuelo had been
dismissed and demanding that defendants-appellants comply
with the deed of sale, otherwise a case will be filed against
them.
In reply to those telegrams, defendants-appellants' lawyer, on
July 20, 1983 informed plaintiff-appellee's lawyer that
defendant-appellant corporation is unwilling to continue with
the sale due to plaintiff-appellee's failure to comply with
essential pre-conditions of the contract.
On July 29, 1983, plaintiff-appellee filed the complaint below
with a petition for preliminary attachment. The writ of
attachment was returned unserved because the defendant-
appellant corporation was no longer in operation and also
because the scrap iron as well as other pieces of machinery
can no longer be found on the premises of the corporation." 3
In his complaint, private respondent prayed for judgment
ordering the petitioner corporation to comply with the contract
by delivering to him the scrap iron subject thereof; he further
sought an award of actual, moral and exemplary damages,
attorney's fees and the costs of the suit. 4
In their Answer with Counterclaim, 5 petitioners insisted that
the cancellation of the contract was justified because of
private respondent's non-compliance with essential pre-
conditions, among which is the opening of an irrevocable and
unconditional letter of credit not later than 15 May 1983.
During the pre-trial of the case on 30 April 1984, the parties
defined the issues to be resolved; these issues were
subsequently embodied in the pre-trial order, to wit:
"1. Was the contract entitled Purchase and Sale of Scrap Iron,
dated May 1, 1983 executed by the parties cancelled and
terminated before the Complaint was filed by anyone of the
parties; if so, what are the grounds and reasons relied upon
by the cancelling parties; and were the reasons or grounds for
cancelling valid and justified?
2. Are the parties entitled to damages they respectively claim
under the pleadings?" 6
On 29 November 1985, the trial court rendered its judgment,
the dispositive portion of which was quoted earlier.
Petitioners appealed from said decision to the Court of
Appeals which docketed the same as C.A.-G.R. CV No.
08807. In their Brief, petitioners, by way of assigned errors,
alleged that the trial court erred:
"1. In finding that there was delivery of the scrap iron subject
of the sale;
2. In not finding that plaintiff had not complied with the
conditions in the contract of sale;
3. In finding that defendants-appellants were not justified in
cancelling the sale;
4. In awarding damages to the plaintiff as against the
defendants-appellants;
5. In not awarding damages to defendants-appellants." 7
Public respondent disposed of these assigned errors in this
wise:
"On the first error assigned, defendants-appellants argue that
there was no delivery because the purchase document states
that the seller agreed to sell and the buyer agreed to buy 'an
undetermined quantity of scrap iron and junk which the seller
will identify and designate.' Thus, it is contended, since no
identification and designation was made, there could be no
delivery. In addition, defendants-appellants maintain that their
obligation to deliver cannot be completed until they furnish the
cargo trucks to haul the weighed materials to the wharf.
The arguments are untenable. Article 1497 of the Civil Code
states:
'The thing sold shall be understood as delivered when it is
placed in the control and possession of the vendee.'
In the case at bar, control and possession over the subject
matter of the contract was given to plaintiff-appellee, the
buyer, when the defendants-appellants as the sellers allowed
the buyer and his men to enter the corporation's premises and
to dig-up the scrap iron. The pieces of scrap iron then (sic)
placed at the disposal of the buyer. Delivery was therefore
complete. The identification and designation by the seller
does not complete delivery.
On the second and third assignments of error, defendants-
appellants argue that under Articles 1593 and 1597 of the
Civil Code, automatic rescission may take place by a mere
notice to the buyer if the latter committed a breach of the
contract of sale.
Even if one were to grant that there was a breach of the
contract by the buyer, automatic rescission cannot take place
because, as already (sic) stated, delivery had already been
made. And, in cases where there has already been delivery,
the intervention of the court is necessary to annul the
contract.
As the lower court aptly stated:
'Respecting these allegations of the contending parties, while
it is true that Article 1593 of the New Civil Code provides that
with respect to movable property, the rescission of the sale
shall of right take place in the interest of the vendor, if the
vendee fails to tender the price at the time or period fixed or
agreed, however, automatic rescission is not allowed if the
object sold has been delivered to the buyer (Guevarra vs.
Pascual, 13 Phil. 311; Escueta vs. Pando, 76 Phil 256), the
action being one to rescind judicially and where (sic) Article
1191, supra, thereby applies. There being already an implied
delivery of the items, subject matter of the contract between
the parties in this case, the defendant having surrendered the
premises where the scraps (sic) were found for plaintiff's men
to dig and gather, as in fact they had dug and gathered, this
Court finds the mere notice of resolution by the defendants
untenable and not conclusive on the rights of the plaintiff
(Ocejo Perez vs. Int. Bank, 37 Phi. 631). Likewise, as early as
in the case of Song Fo vs. Hawaiian Philippine Company, it
has been ruled that rescission cannot be sanctioned for a
slight or casual breach (47 Phil. 821).'
In the case of Angeles vs. Calasanz (135 (1935) SCRA 323),
the Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either party
has the right to rescind the contract upon failure of the other
to perform the obligation assumed thereunder.
Of course, it must be understood that the right 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.'
Thus, rescission in cases falling under Article 1191 of the Civil
Code is always subject to review by the courts and cannot be
considered final.
In the case at bar, the trial court ruled that rescission is
improper because the breach was very slight and the delay in
opening the letter of credit was only 11 days.
'Where time is not of the essence of the agreement, a slight
delay by one party in the performance of his obligation is not a
sufficient ground for rescission of the agreement. Equity and
justice mandates (sic) that the vendor be given additional (sic)
period to complete payment of the purchase price.' (Taguda
vs. Vda. de Leon, 132 SCRA (1984), 722).'
There is no need to discuss the fourth and fifth assigned
errors since these are merely corollary to the first three
assigned errors." 8
Their motion to reconsider the said decision having been
denied by public respondent in its Resolution of 4 May 1988,
9 petitioners filed this petition reiterating the abovementioned
assignment of errors.
There is merit in the instant petition.
Both the trial court and the public respondent erred in the
appreciation of the nature of the transaction between the
petitioner corporation and the private respondent. To this
Court's mind, what obtains in the case at bar is a mere
contract to sell or promise to sell, and not a contract of sale.
The trial court assumed that the transaction is a contract of
sale and, influenced by its view that there was an "implied
delivery" of the object of the agreement, concluded that Article
1593 of the Civil Code was inapplicable; citing Guevarra vs.
Pascual 10 and Escueta vs. Pando, 11 it ruled that rescission
under Article 1191 of the Civil Code could only be done
judicially. The trial court further classified the breach
committed by the private respondent as slight or casual,
foreclosing, thereby, petitioners' right to rescind the
agreement.
Article 1593 of the Civil Code provides:
"ARTICLE 1593. With respect to movable property, the
rescission of the sale shall of right take place in the interest of
the vendor, if the vendee, upon the expiration of the period
fixed for the delivery of the thing, should not have appeared to
receive it, or, having appeared, he should not have tendered
the price at the same time, unless a longer period has been
stipulated for its payment."
Article 1191 provides:
"ARTICLE 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."
xxx xxx xxx
Sustaining the trial court on the issue of delivery, public
respondent cites Article 1497 of the Civil Code which
provides:
"ARTICLE 1497. The thing sold shall be understood as
delivered, when it is placed in the control and possession of
the vendee."
In the agreement in question, entitled PURCHASE AND SALE
OF SCRAP IRON, 12 the seller bound and promised itself to
sell the scrap iron upon the fulfillment by the private
respondent of his obligation to make or indorse an irrevocable
and unconditional letter of credit in payment of the purchase
price. Its principal stipulation reads, to wit:
xxx xxx xxx
"Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to
buy, an undetermined quantity of scrap iron and junk which
the SELLER will identify and designate now at Cawitan, Sta.
Catalina, Negros Oriental, at the price of FIFTY CENTAVOS
(P0.50) per kilo on the following terms and conditions:
1. Weighing shall be done in the premises of the SELLER at
Cawitan, Sta. Catalina, Neg. Oriental.
2. To cover payment of the purchase price, BUYER will open,
make or indorse an irrevocable and unconditional letter of
credit not later than May 15, 1983 at the Consolidated Bank
and Trust Company, Dumaguete City, Branch, in favor of the
SELLER in the sum of TWO HUNDRED AND FIFTY
THOUSAND PESOS (P250,000.00), Philippine Currency.
3. The SELLER will furnish the BUYER free of charge at least
three (3) cargo trucks with drivers, to haul the weighed
materials from Cawitan to the TSMC wharf at Sta. Catalina for
loading on BUYER's barge. All expenses for labor, loading
and unloading shall be for the account of the BUYER.
4. SELLER shall be entitled to a deduction of three percent
(3%) per ton as rust allowance." (Emphasis supplied).
The petitioner corporation's obligation to sell is unequivocally
subject to a positive suspensive condition, i.e., the private
respondent's opening, making or indorsing of an irrevocable
and unconditional letter of credit. The former agreed to deliver
the scrap iron only upon payment of the purchase price by
means of an irrevocable and unconditional letter of credit.
Otherwise stated, the contract is not one of sale where the
buyer acquired ownership over the property subject to the
resolutory condition that the purchase price would be paid
after delivery. Thus, there was to be no actual sale until the
opening, making or indorsing of the irrevocable and
unconditional letter of credit. Since what obtains in the case at
bar is a mere promise to sell, the failure of the private
respondent to comply with the positive suspensive condition
cannot even be considered a breach — casual or serious —
but simply an event that prevented the obligation of petitioner
corporation to convey title from acquiring binding force. In
Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 13
this Court stated:
" . . . 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. It is elementary that, as stated by Castan,
— Civil Code. As such, therefore, the obligation imposed therein
'b) Si la condicion suspensiva llega a faltar, la obligacion se
tiene por no existente, y el acreedor pierde todo derecho,
incluso el de utilizar las medidas conservativas.' (3 Cast n,
Derecho Civil, 7a Ed., p. 107). (Also Puig Peña, Der. Civ., T.
IV (1), p. 113)'."
In the instant case, not only did the private respondent fail to
open, make or indorse an irrevocable and unconditional letter
of credit on or before 15 May 1983 despite his earlier
representation in his 24 May 1983 telegram that he had
opened one on 12 May 1983, the letter of advice received by
the petitioner corporation on 26 May 1983 from the Bank of
the Philippine Islands Dumaguete City branch explicitly makes
reference to the opening on that date of a letter of credit in
favor of petitioner Ang Tay c/o Visayan Sawmill Co. Inc.,
drawn without recourse on ARMACO-MARSTEEL ALLOY
CORPORATION and set to expire on 24 July 1983, which is
indisputably not in accordance with the stipulation in the
contract signed by the parties on at least three (3) counts: (1)
it was not opened, made or indorsed by the private
respondent, but by a corporation which is not a party to the
contract; (2) it was not opened with the bank agreed upon;
and (3) it is not irrevocable and unconditional, for it is without
recourse, it is set to expire on a specific date and it stipulates
certain conditions with respect to shipment. In all probability,
private respondent may have sold the subject scrap iron to
ARMACO-MARSTEEL ALLOY CORPORATION, or otherwise
assigned to it the contract with the petitioners. Private
respondent's complaint fails to disclose the sudden entry into
the picture of this corporation.
Consequently, the obligation of the petitioner corporation to
sell did not arise; it therefore cannot be compelled by specific
performance to comply with its prestation. In short, Article
1191 of the Civil Code does not apply; on the contrary,
pursuant to Article 1597 of the Civil Code, the petitioner
corporation may totally rescind, as it did in this case, the
contract. Said Article provides:
"ARTICLE 1597. Where the goods have not been delivered to
the buyer, and the buyer has repudiated the contract of sale,
or has manifested his inability to perform his obligations,
thereunder, or has committed a breach thereof, the seller may
totally rescind the contract of sale by giving notice of his
election so to do to the buyer."
The trial court ruled, however, and the public respondent was
in agreement, that there had been an implied delivery in this
case of the subject scrap iron because on 17 May 1983,
private respondent's men started digging up and gathering
scrap iron within the petitioner's premises. The entry of these
men was upon the private respondent's request. Paragraph 6
of the Complaint reads:
"6. That on May 17, 1983 Plaintiff with the consent of
defendant Ang Tay sent his men to the stockyard of Visayan
Sawmill Co., Inc. at Cawitan, Sta. Catalina, Negros Oriental to
dig and gather the scrap iron and stock the same for
weighing." 14
This permission or consent can, by no stretch of the
imagination, be construed as delivery of the scrap iron in the
sense that, as held by the public respondent, citing Article
1497 of the Civil Code, petitioners placed the private
respondent in control and possession thereof. In the first
place, said Article 1497 falls under the Chapter 15 Obligations
of the Vendor, which is found in Title VI (Sales), Book IV of the
is premised on an existing obligation to deliver the subject of
the contract. In the instant case, in view of the private
respondent's failure to comply with the positive suspensive
condition earlier discussed, such an obligation had not yet
arisen. In the second place, it was a mere accommodation to
expedite the weighing and hauling of the iron in the event that
the sale would materialize. The private respondent was not
thereby placed in possession of and control over the scrap
iron. Thirdly, We cannot even assume the conversion of the
initial contract or promise to sell into a contract of sale by the
petitioner corporation's alleged implied delivery of the scrap
iron because its action and conduct in the premises do not
support this conclusion. Indeed, petitioners demanded the
fulfillment of the suspensive condition and eventually
cancelled the contract.
All told, Civil Case No. 15128 filed before the trial court was
nothing more than the private respondent's preemptive action
to beat the petitioners to the draw.
One last point. This Court notes the palpably excessive and
unconscionable moral and exemplary damages awarded by
the trial court to the private respondent despite a clear
absence of any legal and factual basis therefor. In contracts,
such as in the instant case, moral damages may be recovered
if defendants acted fraudulently and in bad faith, 16 while
exemplary damages may only be awarded if defendants acted
in a wanton, fraudulent, reckless, oppressive or malevolent
manner. 17 In the instant case, the refusal of the petitioners to
deliver the scrap iron was founded on the non-fulfillment by
the private respondent of a suspensive condition. It cannot,
therefore, be said that the herein petitioners had acted
fraudulently and in bad faith or in a wanton, reckless,
oppressive or malevolent manner. What this Court stated in
Inhelder Corp. vs. Court of Appeals 18 needs to be stressed
anew:
"At this juncture, it may not be amiss to remind Trial Courts to
guard against the award of exhorbitant (sic) damages that are
way out of proportion to the environmental circumstances of a
case and which, time and again, this Court has reduced or
eliminated. Judicial discretion granted to the Courts in the
assessment of damages must always be exercised with
balanced restraint and measured objectivity."
For, indeed, moral damages are emphatically not intended to
enrich a complainant at the expense of the defendant. They
are awarded only to enable the injured party to obtain means,
diversion or amusements that will serve to obviate the moral
suffering he has undergone, by reason of the defendant's
culpable action. Its award is aimed at the restoration, within
the limits of the possible, of the spiritual status quo ante, and
it must be proportional to the suffering inflicted. 19
WHEREFORE, the instant petition is GRANTED. The
decision of public respondent Court of Appeals in C.A.-G.R.
CV No. 08807 is REVERSED and Civil Case No. 15128 of the
Regional Trial Court of Iloilo is ordered DISMISSED.
Costs against the private respondent.
SO ORDERED.
Narvasa, C .J ., Cruz, Feliciano, Padilla, Bidin and Bellosillo,
JJ ., concur.
Gutierrez, Jr., J ., On terminal leave.
Melo and Quiason, JJ ., No part.
Separate Opinions
ROMERO, J., dissenting:
I vote to dismiss the petition.
Petitioner corporation, Visayan Sawmill Co., Inc., entered into
a contract on May 1, 1983 with private respondent RJH
Trading Co. represented by private respondent Ramon J.
Hibionada. The contract, entitled "PURCHASE AND SALE OF
SCRAP IRON," stated:
This contract for the Purchase and Sale of Scrap Iron, made
and executed at Dumaguete City, Phil., this 1st day of May,
1983 by and between:
VISAYAN SAWMILL CO., INC., . . . hereinafter called the
SELLER, and
RAMON J. HIBIONADA, . . . hereinafter called the BUYER,
witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to
buy, an undetermined quantity of scrap iron and junk which
the SELLER will identify and designate now at Cawitan, Sta.
Catalina, Negros Oriental, at the price of FIFTY CENTAVOS
(P.50) per kilo on the following terms and conditions:
1. Weighing shall be done in the premises of the SELLER at
Cawitan, Sta. Catalina, Negros Oriental.
2. To cover payment of the purchase price BUYER will open,
make or indorse an irrevocable and unconditional letter of
credit not later than May 15, 1983 at the Consolidated Bank
and Trust Company, Dumaguete City Branch, in favor of the
SELLER in the sum of TWO HUNDRED AND FIFTY
THOUSAND PESOS (P250,000.00), Philippine currency.
3. The SELLER will furnish the BUYER free of charge at least
three (3) cargo trucks with drivers, to haul the weighed
materials from Cawitan to the TSMC wharf at Sta. Catalina for
loading on BUYER'S barge. All expenses for labor, loading
and unloading shall be for the account of the BUYER.
4. SELLER shall be entitled to a deduction of three percent
(3%) per ton as rust allowance.
xxx xxx xxx
On May 17, 1983, the workers of private respondents were
allowed inside petitioner company's premises in order to
gather the scrap iron. However, on May 23, 1983, petitioner
company sent a telegram which stated:
"RAMON HIBIONADA
RJH TRADING
286 QUEZON STREET
ILOILO CITY
DUE YOUR FAILURE TO COMPLY WITH CONDITIONS
BEFORE DEADLINE OUR CONTRACT FOR PURCHASE
SCRAP IRON CANCELLED
VISAYAN SAWMILL CO., INC."
Hibionada wired back on May 24, 1983 the following:
"ANG TAY VISAYAN SAWMILL
DUMAGUETE CITY
LETTER OF CREDIT AMOUNTING P250,000.00 OPENED
MAY 12, 1983 BANK OF PI MAIN OFFICE AYALA AVENUE
MAKATI METRO MANILA BUT TRANSMITTAL IS DELAYED
PLEASE CONSIDER REASON WILL PERSONALLY
FOLLOW-UP IN MANILA THANKS REGARDS.
RAMON HIBIONADA"
On May 26, 1983, petitioner company received the following
advice from the Dumaguete City Branch of The Bank of
Philippine Islands: cdll
"Opened today our Irrevocable Domestic Letter of Credit 2-
01456-4 for P250,000.00 in favor ANG TAY c/o Visayan
Sawmill Co., Inc. Dumaguete City Negros Oriental Account of
ARMACO-MARSTEEL ALLOW (sic) CORPORATION 2nd
Floor Alpap 1 Bldg., 140 Alfaro st. Salcedo Village Makati
Metro Manila Shipments of about 500 MT of assorted steel
scrap marine/heavy equipment expiring on July 23, 1983
without recourse at slight draft drawn on Armaco-Marsteel
Alloy Corporation accompanied by the following documents:
Certificate of acceptance by Armaco-Marsteel Allow (sic)
Corporation shipment from Dumaguete City to buyer's
warehouse partial shipment allowed/transhipment not
allowed."
Subsequently, petitioners' counsel sent another telegram to
private respondents stating that:
"VISAYAN SAWMILL COMPANY UNWILLING TO CONTINUE
SALE OF SCRAP IRON TO HIBIONADA DUE TO NON
COMPLIANCE WITH ESSENTIAL PRE CONDITIONS"
Consequently, private respondents filed a complaint for
specific performance and damages with the Regional Trial
Court (RTC) of Iloilo (Branch XXXV) which decided in favor of
private respondents. The RTC decision having been affirmed
by the Court of Appeals, the present petition was filed.
Finding the petition meritorious, the ponencia reversed the
decision of the Court of Appeals. Based on its appreciation of
the contract in question, it has arrived at the conclusion that
herein contract is not a contract of sale but a contract to sell
which is subject to a positive suspensive condition, i.e., the
opening of a letter of credit by private respondents. Since the
condition was not fulfilled, the obligation of petitioners to
convey title did not arise. The lengthy decision of Luzon
Brokerage Co., Inc. v. Maritime Co. Inc. 1 penned by Justice
J.B.L. Reyes, was cited as authority on the assumption that
subject contract is indeed a contract to sell but which will be
shown herein as not quite accurate.
Evidently, the distinction between a contract to sell and a
contract of sale is crucial in this case. Article 1458 of the Civil
Code has this definition: "By a contract of sale, one of the
contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing and the other to pay
therefor a price certain in money or its equivalent."
Article 1475 gives the significance of this mutual undertaking
of the parties, thus: "The contract of sale is perfected at the
moment there is a meeting of minds upon the thing which is
the object of the contract and upon the price. From that
moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of
contracts."
Thus, when the parties entered into the contract entitled
"Purchase and Sale of Scrap Iron" on May 1, 1983, the
contract reached the stage of perfection, there being a
meeting of the' minds upon the object which is the subject
matter of the contract and the price which is the consideration.
Applying Article 1475 of the Civil Code, from that moment, the
parties may reciprocally demand performance of the
obligations incumbent upon them, i.e., delivery by the vendor
and payment by the vendee.
Petitioner, in its petition, admits that "[b]efore the opening of
the letter of credit, buyer Ramon Hibionada went to Mr. Ang
Tay and informed him that the letter of credit was forthcoming
and if it was possible for him (buyer) to start cutting and
digging the scrap iron before the letter of credit arrives and
the former (seller) manifested no objection, and he
immediately sent 18 or 20 people to start the operation." 2
From the time the seller gave access to the buyer to enter his
premises, manifesting no objection thereto but even sending
18 or 20 people to start the operation, he has placed the
goods in the control and possession of the vendee and
delivery is effected. For according to Article 1497, "The thing
sold shall be understood as delivered when it is placed in the
control and possession of the vendee." 3
Such action or real delivery (traditio) is the act that transfers
ownership. Under Article 1496 of the Civil Code, "The
ownership of the thing sold is acquired by the vendee from the
moment it is delivered to him in any of the ways specified in
Articles 1497 to 1501, or in any other manner signifying an
agreement that the possession is transferred from the vendor
to the vendee."
That payment of the price in any form was not yet effected is
immaterial to the transfer of the right of ownership. In a
contract of sale, the non-payment of the price is a resolutory
condition which extinguishes the transaction that, for a time,
existed and discharges the obligations created thereunder. 4
On the other hand, "the parties may stipulate that ownership
in the thing shall not pass to the purchaser until he has fully
paid the price." 5 In such a contract to sell, the full payment of
the price is a positive suspensive condition, such that in the
event of non-payment, the obligation of the seller to deliver
and transfer ownership never arises. Stated differently, in a
contract to sell, ownership is not transferred upon delivery of
property but upon full payment of the purchase price. 6
Consequently, in a contract of sale, after delivery of the object
of the contract has been made, the seller loses ownership and
cannot recover the same unless the contract is rescinded. But
in the contract to sell, the seller retains ownership and the
buyer's failure to pay cannot even be considered a breach,
whether casual or substantial, but an event that prevented the
seller's duty to transfer title to the object of the contract.
At the outset, it must be borne in mind that a provision in the
contract regarding the mode of payment, like the requirement
for the opening of the Letter of Credit in this case, is not
among the essential requirements of a contract of sale
enumerated in Articles 1305 7 and 1474, 8 the absence of any
of which will prevent the perfection of the contract from
happening. Likewise, it must be emphasized that not every
provision regarding payment should automatically be
classified as a suspensive condition. To do so would change
the nature of most contracts of sale into contracts to sell. For
a provision in the contract regarding the payment of the price
to be considered a suspensive condition, the parties must
have made this clear in certain and unambiguous terms, such
as for instance, by reserving or withholding title to the goods
until full payment by the buyer. 9 This was a pivotal
circumstance in the Luzon Brokerage case where the contract
in question was replete with very explicit provisions such as
the following: "Title to the properties subject of this contract
remains with the Vendor and shall pass to, and be transferred
in the name of the Vendee only upon complete payment of the
full price . . .;" 10 the Vendor (Myers) will execute and deliver
to the Vendee a definite and absolute Deed of Sale upon full
payment of the Vendee . . .; 11 and "should the Vendee fail to
pay any of the monthly installments, when due, or otherwise
fail to comply with any of the terms and conditions herein
stipulated, then this Deed of Conditional Sale shall
automatically and without any further formality, become null
and void." 12
It is apparent from a careful reading of Luzon Brokerage, as
well as the cases which preceded it 13 and the subsequent
ones applying its doctrines, 14 that the mere insertion of the
price and the mode of payment among the terms and
conditions of the agreement will not necessarily make it a
contract to sell. The phrase in the contract "on the following
terms and conditions" is standard form which is not to be
construed as imposing a condition, whether suspensive or
resolutory, in the sense of the happening of a future and
uncertain event upon which an obligation is made to depend.
There must be a manifest understanding that the agreement
is in what may be referred to as "suspended animation"
pending compliance with provisions regarding payment. The
reservation of title to the object of the contract in the seller is
one such manifestation. Hence, it has been decided in the
case of Dignos v. Court of Appeals 15 that, absent a proviso
in the contract that the title to the property is reserved in the
vendor until full payment of the purchase price or a stipulation
giving the vendor the right to unilaterally rescind the contract
the moment the vendee fails to pay within the fixed period, the
transaction is an absolute contract of sale and not a contract
to sell. 16
In the instant case, nowhere in the contract did it state that the
petitioners reserve title to the goods until private respondents
have opened a letter of credit. Nor is there any provision
declaring the contract as without effect until after the
fulfillment of the condition regarding the opening of the letter
of credit.
Examining the contemporaneous and subsequent conduct of
the parties, which may be relevant in the determination of the
nature and meaning of the contract, 17 it is significant that in
the telegram sent by petitioners to Hibionada on May 23,
1983, it stated that "DUE [TO] YOUR FAILURE TO COMPLY
WITH CONDITIONS BEFORE DEADLINE OUR CONTRACT
FOR PURCHASE SCRAP IRON CANCELLED." And in some
of the pleadings in the course of this litigation, petitioners
referred to the transaction as a contract of sale. 18
In light of the provisions of the contract, contemporaneous
and subsequent acts of the parties and the other relevant
circumstances surrounding the case, it is evident that the
stipulation for the buyer to open a Letter of Credit in order to
cover the payment of the purchase price does not bear the
marks of a suspensive condition. The agreement between the
parties was a contract of sale and the "terms and conditions"
embodied therein which are standard form, are clearly
resolutory in nature, the breach of which may give either party
the option to bring an action to rescind and/or seek damages.
Contrary to the conclusions arrived at in the ponencia, the
transaction is not a contract to sell but a contract of sale.
However, the determination of the nature of the contract does
not settle the controversy. A breach of the contract was
committed and the rights and liabilities of the parties must be
established. The ponencia, notwithstanding its conclusion that
no contract of sale existed, proceeded to state that petitioner
company may rescind the contract based on Article 1597 of
the Civil Code which expressly applies only to a contract of
sale. It provides:
"ARTICLE 1597. Where the goods have not been delivered to
the buyer, and the buyer has repudiated the contract of sale,
or has manifested his inability to perform his obligations,
thereunder, or has committed a breach thereof, the seller may
totally rescind the contract of sale by giving notice of his
election so to do to the buyer." (Emhasis supplied).
The ponencia was then confronted with the issue of delivery
since Article 1597 applies only "[w]here the goods have not
yet been delivered." In this case, as aforestated, the workers
of private respondents were actually allowed to enter the
petitioners' premises, thus, giving them control and
possession of the goods. At this juncture, it is even
unnecessary to discuss the issue of delivery in relation to the
right of rescission nor to rely on Article 1597. In every contract
which contains reciprocal obligations, the right to rescind is
always implied under Article 1191 of the Civil Code in case
one of the parties fails to comply with his obligations. 19
The right to rescind pursuant to Article 1191 is not absolute.
Rescission will not be permitted for slight or casual breach of
the contract. 20 Here, petitioners claim that the breach is so
substantial as to justify rescission, not only because the Letter
of Credit was not opened on May 15, 1983 as stipulated in the
contract but also because of the following factors: (1) the
Letter of Credit, although opened in favor of petitioners was
made against the account of a certain Marsteel Alloy
Corporation, instead of private respondent's account; (2) the
Letter of Credit referred to "assorted steel scrap" instead of
"scrap iron and junk" as provided in the contract; (3) the Letter
of Credit placed the quantity of the goods at "500 MT" while
the contract mentioned "an undetermined quantity of scrap
iron and junk"; (4) no amount from the Letter of Credit will be
released unless accompanied by a Certificate of Acceptance;
and (5) the Letter of Credit had an expiry date.
I am not convinced that the above circumstances may be
characterized as so substantial and fundamental as to defeat
the object of the parties in making the agreement. 21 None of
the alleged defects in the Letter of Credit would serve to
defeat the object of the parties. It is to be stressed that the
purpose of the opening of a Letter of Credit is to effect
payment. The above-mentioned factors could not have
prevented such payment. It is also significant to note that
petitioners sent a telegram to private respondents on May 23,
1983 cancelling the contract. This was before they had even
received on May 26, 1983 the notice from the bank about the
opening of the Letter of Credit. How could they have made a
judgment on the materiality of the provisions of the Letter of
Credit for purposes of rescinding the contract even before
setting eyes on said document?
To be sure, in the contract, the private respondents were
supposed to open the Letter of Credit on May 15, 1983 but, it
was not until May 26, 1983 or eleven (11) days later that they
did so. Is the eleven-day delay a substantial breach of the
contract as could justify the rescission of the contract?
In Song Fo and Co. v. Hawaiian-Philippine Co. 22 it was held
that a delay in payment for twenty (20) days was not a
violation of an essential condition of the contract which would
warrant rescission for non-performance. In the instant case,
the contract is bereft of any suggestion that time was of the
essence. On the contrary, it is noted that petitioners allowed
private respondents' men to dig and remove the scrap iron
located in petitioners' premises between May 17, 1983 until
May 30, 1983 or beyond the May 15, 1983 deadline for the
opening of the Letter of Credit. Hence, in the absence of any
indication that the time was of the essence, the eleven-day
delay must be deemed a casual breach which cannot justify a
rescission.
Worthy of mention before concluding is Sycip v. National
Coconut Corporation, et al. 23 since, like this case, it involves
a failure to open on time the Letter of Credit required by the
seller. In Sycip, after the buyer offered to buy 2,000 tons of
copra, the seller sent a telegram dated December 19, 1946 to
the buyer accepting the offer but on condition that the latter
opens a Letter of Credit within 48 hours. It was not until
December 26, 1946, however, that the Letter of Credit was
opened. The Court, speaking through Justice Bengzon, held
that because of the delay in the opening of the Letter of
Credit; the seller was not obliged to deliver the goods.
Two factors distinguish Sycip from the case at bar. First, while
there has already been a perfected contract of sale in the
instant case, the parties in Sycip were still undergoing the
negotiation process. The seller's qualified acceptance in Sycip
served as a counter offer which prevented the contract from
being perfected. Only an absolute and unqualified acceptance
of a definite offer manifests the consent necessary to perfect
a contract. 24 Second, the Court found in Sycip that time was
of the essence for the seller who was anxious to sell to other
buyers should the offeror fail to open the Letter of Credit
within the stipulated time. In contrast, there are no indicia in
this case that can lead one to conclude that time was of the
essence for petitioner as would make the eleven-day delay a
fundamental breach of the contract.
In sum, to my mind, both the trial court and the respondent
Court of Appeals committed no reversible error in their
appreciation of the agreement in question as a contract of
sale and not a contract to sell, as well as holding that the
breach of the contract was not substantial and, therefore,
petitioners were not justified in law in rescinding the
agreement.
PREMISES CONSIDERED, the Petition must be DISMISSED
and the decision of the Court of Appeals AFFIRMED.
AEROSPACE CHEMICAL Vs CA Case Digest
AEROSPACE CHEMICAL Vs CA  appellate court, thus: The defendant [herein private
g.r.no. 108129 September 23, 1999  respondent] was not remiss in reminding the plaintiff that it
FACTS: On June 27, 1986, petitioner Aerospace Industries,
Inc. (Aerospace) purchased five hundred (500) metric tons of
sulfuric acid from private respondent Philippine Phosphate
Fertilizer Corporation (Philphos). Initially set beginning July
1986, the agreement provided that the buyer shall pay its
purchases in equivalent Philippine currency value, five days
prior to the shipment date. Petitioner as buyer committed to
secure the means of transport to pick-up the purchases from
private respondent's loadports. Per agreement, one hundred
metric tons (100 MT) of sulfuric acid should be taken from
Basay, Negros Oriental storage tank, while the remaining four
hundred metric tons (400 MT) should be retrieved from Sangi,
Cebu. On December 18, 1986, M/T Sultan Kayumanggi
docked at Sangi, Cebu, but withdrew only 157.51 MT of
sulfuric acid. Again, the vessel tilted. Further loading was
aborted. Two survey reports conducted by the Societe
Generale de Surveillance (SGS) Far East Limited, dated
December 17, 1986 and January 2, 1987, attested to these
occurrences. Later, on a date not specified in the record, M/T
Sultan Kayumanggi sank with a total of 227.51 MT of sulfuric
acid on board. Petitioner chartered another vessel, M/T Don
Victor, with a capacity of approximately 500 MT.6 [TSN,
September 1, 1989, pp. 28-29.] On January 26 and March 20,
1987, Melecio Hernandez, acting for the petitioner, addressed
letters to private respondent, concerning additional orders of
sulfuric acid to replace its sunken purchases.  letter to the petitioner demanding the payment of the
ISSUE: Should expenses for the storage and preservation of
the purchased fungible goods, namely sulfuric acid, be on
seller's account pursuant to Article 1504 of the Civil Code?  applied with the Regional Trial Court of Makati City for the
RULING: Petitioner tries to exempt itself from paying rental
expenses and other damages by arguing that expenses for
the preservation of fungible goods must be assumed by the
seller. Rental expenses of storing sulfuric acid should be at
private respondent's account until ownership is transferred,
according to petitioner. However, the general rule that before
delivery, the risk of loss is borne by the seller who is still the
owner, is not applicable in this case because petitioner had
incurred delay in the performance of its obligation. Article
1504 of the Civil Code clearly states: "Unless otherwise
agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the
ownership therein is transferred to the buyer the goods are at
the buyer's risk whether actual delivery has been made or not,
except that: (2) Where actual delivery has been delayed
through the fault of either the buyer or seller the goods are at
the risk of the party at fault."  RULING:
On this score, we quote with approval the findings of the
would have to bear the said expenses for failure to lift the
commodity for an unreasonable length of time.But even
assuming that the plaintiff did not consent to be so bound, the
provisions of Civil Code come in to make it liable for the
damages sought by the defendant.
Santos Ventura Hocorma Foundation, Inc. vs. Ernesto V.
Santos
G.R. No. 153004 (November 5, 2004)
FACTS:
On October 26, 1990, the parties executed a Compromise
Agreement wherein Foundation shall pay Santos P14.5
Million in the following manner: (a) P1.5 Million immediately
upon the execution of this agreement; and (b) the balance of
P13 Million shall be paid, whether in lump sum or in
installments, at the discretion of the Foundation, within a
period of not more than two (2) years from the execution of
this agreement.
In compliance with the Compromise Agreement, respondent
Santos moved for the dismissal of the aforesaid civil cases.
He also caused the lifting of the notices of lis pendens on the
real properties involved. For its part, petitioner SVHFI, paid
P1.5 million to respondent Santos, leaving a balance of P13
million. Subsequently, petitioner SVHFI sold to Development
Exchange Livelihood Corporation two real properties, which
were previously subjects of lis pendens. Discovering the
disposition made by the petitioner, respondent Santos sent a
remaining P13 million, which was ignored by the latter.
Respondent Santos sent another letter to petitioner inquiring
when it would pay the balance of P13 million. There was no
response from petitioner. Consequently, respondent Santos
issuance of a writ of execution.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint
for Declaratory Relief and Damages alleging delay on the part
of SVHFI in paying the balance. They further alleged that
under the Compromise Agreement, the obligation became
due on October 26, 1992, but payment of the remaining
balance was effected only on November 22, 1994. Thus,
respondents prayed that petitioner be ordered to pay legal
interest on the obligation, penalty, attorney’s fees and costs of
litigation. SVHFI alleged that the legal interest on account of
fault or delay was not due and payable, considering that the
obligation had been superseded by the compromise
agreement. Moreover, SVHFI argued that absent a stipulation,
Santos must ask for judicial intervention for purposes of fixing
the period.
ISSUE:
Whether or not SVHFI incurred in delay based on the
compromise agreement and thereby liable for legal interest
Yes. SVHFI is liable for legal interest as penalty on account of
delay. The general rule is that a compromise has upon the
parties the effect and authority of res judicata, with respect to
the matter definitely stated therein, or which by implication
from its terms should be deemed to have been included
therein. This holds true even if the agreement has not been
judicially approved. Article 1169 of the New Civil Code
provides that 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.
In order for the debtor to be in default, it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the
performance judicially or extrajudicially.
In the case at bar, the obligation was already due and
demandable after the lapse of the two-year period from the
execution of the contract. The Compromise Agreement was
entered into by the parties on October 26, 1990. It was
judicially approved on September 30, 1991. Applying existing
jurisprudence, the compromise agreement as a consensual
contract became binding between the parties upon its
execution and not upon its court approval. From the time a
compromise is validly entered into, it becomes the source of
the rights and obligations of the parties thereto. Hence, the
two-year period must be counted from October 26, 1990.
Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article
1170 of the New Civil Code.
TITAN-IKEDA VS. PRIMETOWN  terminated only on 1987. Taking the position that Ayala was
G.R No. 158768. February 12, 2008  obligated to sell the 4 lots adjacent to the "Retained Area"
FACTS: The respondent Primetown Property Corporation
entered into contract weith the petitioner Titan-Ikeda
Construction Corporation for the structural works of a 32-
storey prime tower. After the construction of the tower,
respondent again awarded to the petitioner the amount of P
130,000,000.00 for the tower’s architectural design and
structure. Howevere, in 1994, the respondent entered inot a
contract of sale of the tower in favor of the petitioner in a
manner called full-swapping. Since the respondent had
allegedly constructed almost one third of the project as weel
as selling some units to third persons unknown to the
petitioner. Integrated Inc. took over the project, thus the
petitioner is demanding for the return of its advanced payment
in the amount of P2, 000,000.00 as weel as the keys of the
unit.  HELD:
ISSUE: Whether or not the petitioner is entitled to damages.  obligation be demandable and already liquidated; (2) that the
RULING: No, because in a contract necessarily that there is a
meeting of the minds of the parties in which this will be the
binding law upon them. Thus, in a reciprocal obligation. Both
parties are obliged to perform their obligation simultaneously
and in good faith. In this case, petitioner, Titan-Ikeda can not
recover damages because it was found out there was no
solutio indebiti or mistake in payment in this case since the
latter is just entitled to the actual services it rendered to the
respondent and thus it is ordered to return the condominium
units to the respondent.
Vasquez v Ayala Corporation
GR No. 149734
Tinga, J.:
FACTS:
      On April 23, 1981, spouses Vasquez entered into a MOA
with Ayala Corp. with Ayala buying from the Vazquez spouses
all of the latter's shares of stock in Conduit Development, Inc.
The main asset was a property in Ayala Alabang which was
then being developed by Conduit under a development plan
where the land was divided into Villages 1, 2 and 3. The
development was then being undertaken by G.P. Construction
and Development Corp. Under the MOA, Ayala was to
develop the entire property, less what was defined as the
"Retained Area". This "Retained Area" was to be retained by
the Vazquez spouses. The area to be developed by Ayala was
called the "Remaining Area". In this "Remaining Area" were 4
lots adjacent to the "Retained Area" and Ayala agreed to offer
these lots for sale to the spouses at the prevailing price at the
time of purchase. After the execution of the MOA, Ayala
caused the suspension of work on Village 1 of the project.
Ayala then received a letter from Lancer General Builder
Corp. in which the latter was claiming a certain amount as
subcontractor. G.P. Construction not being able to reach an
amicable settlement with Lancer, Lancer sued G.P.
Construction, Conduit and Ayala in the court. G.P.
Construction and Lancer both tried to enjoin Ayala from
undertaking the development of the property. The suit was
within 3 years from the date of the MOA, the Vasquez
spouses sent several "reminder" letters of the approaching
so-called deadline. However, no demand after 1984, was ever
made by the Vasquez spouses for Ayala to sell the 4 lots. On
the contrary, one of the letters signed by their authorized
agent categorically stated that they expected development of
Phase 1 to be completed 3 years from the settlement of the
legal problems with the previous contractor. By early 1990,
Ayala finished the development of the vicinity. The 4 lots were
then offered to be sold to the Vasquez spouses at the
prevailing price in 1990. This was rejected by the Vasquez
spouses who wanted to pay at 1984 prices, thereby leading to
the suit below.
ISSUE:
      Whether or not respondent incurred default or delay in the
fulfillment of its obligation.
      No. In order that the debtor may be in default it is
necessary that the following requisites be present: (1) that the
debtor delays performance; and (3) that the creditor requires
the performance judicially or extrajudicially. Under Article 1193
of the Civil Code, obligations for whose fulfillment a day
certain has been fixed shall be demandable only when that
day comes. However, no such day certain was fixed in the
MOA. Petitioners, therefore, cannot demand performance
after the 3 year period fixed by the MOA for the development
of the first phase of the property since this is not the same
period contemplated for the development of the subject lots.
Since the MOA does not specify a period for the development
of the subject lots, petitioners should have petitioned the court
to fix the period in accordance with Article 1197 of the Civil
Code. As no such action was filed by petitioners, their
complaint for specific performance was premature, the
obligation not being demandable at that point. Accordingly,
Ayala Corp. cannot likewise be said to have delayed
performance of the obligation. Even assuming that the MOA
imposes an obligation on Ayala Corp. to develop the subject
lots, within 3 years from date thereof, Ayala Corp. could still
not be held to have been in delay since no demand was made
by petitioners for the performance of its obligation. Moreover,
the letters were mere reminders and not categorical demands
to perform. These letters were sent before the obligation could
become legally demandable. More importantly, petitioners
waived the 3 year period as evidenced by their agent's letter
to the effect that petitioners agreed that the 3 year period
should be counted from the termination of the case filed by
Lancer.
CLAUDINA VDA. DE VILLARUEL, ET AL. VS. MANILA
MOTOR CO., INC. 104 PHIL. 926
FACTS: On May 31, 1940, the plaintiffs Villaruel and
defendant Manila Motor Co. Inc. entered into a contract
whereby the defendant agreed to lease plaintiffs building
premises. On October 31, 1940, the leased premises were
placed in the possession of the defendant until the invasion of
1941. The Japanese military occupied and used the property
leased as part of their quarters from June, 1942 to March,
1945, in which no payment of rentals were made. Upon the
liberation of the said city, the American forces occupied the
same buildings that were vacated by the Japanese. When the
United States gave up the occupancy of the premises,
defendant decided to exercise their option to renew the
contract, in which they agreed. However, before resuming the
collection of rentals, Dr. Alfredo Villaruel upon advice
demanded payment of rentals corresponding to the time the
Japanese military occupied the leased premises, but the
defendant refused to pay. As a result plaintiff gave notice
seeking the rescission of the contract and the payment of
rentals from June, 1942 to March, 1945; this was rejected by
the defendant. Despite the fact the defendant under new
branch manager paid to plaintiff the sum of P350 for the rent,
the plaintiff still demanded for rents in arrears and for the
rescission of the contract of lease. The plaintiff commenced
an action before the CFC of Neg. Occidental against
defendant company. During the pendency of the case, the
leased building was burned down. Because of the occurrence,
plaintiffs demanded reimbursement from the defendants, but
having been refused, they filed a supplemental complaint to
include a 3rd cause of action, the recovery of the value of the
burned building. The trial court rendered judgment in favor of
the plaintiff. Hence the defendants appeal.
ISSUE: Is Manila Motor Co. Inc. liable for the loss of the
leased premises?
RULING: No. Clearly, the lessor’s insistence upon collecting
the occupation rentals for 1942-1945 was unwarranted in law.
Hence, their refusal to accept the current rentals without
qualification placed them in default (mora creditoris or
accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the
leased premises. While not expressly declared by the Code of
1889, this result is clearly inferable from the nature and
effects of mora. In other words, the only effect of the failure to
consign the rentals in court was that the obligation to pay
them subsisted and the lessee remained liable for the amount
of the unpaid contract rent, corresponding to the period from
July to November, 1946; it being undisputed that, from
December 1946 up to March 2, 1948, when the commercial
buildings were burned, the defendants appellants have paid
the contract rentals at the rate of P350 per month. But the
failure to consign did not eradicate the default (mora) of the
lessors nor the risk of loss that lay upon them.
STATE INVESTMENT HOUSE INC vs. COURT OF
APPEALS Case Digest
G.R. No. 115548 March 5, 1996 
STATE INVESTMENT HOUSE INC vs. COURT OF
APPEALS
FACTS:
On October 15, 1969, Contract to Sell No. 36 was executed
by the Spouses Canuto and Ma. Aranzazu Oreta, and the
Solid Homes, Inc. (SOLID), involving a parcel of land
identified as Block No. 8, Lot No. 1, Phase of the Capitol Park
Homes Subdivision, Quezon City, containing 511 square
meters for a consideration of P39,347.00. Upon signing of the
contract, the spouses  Oreta made payment amounting to
P7,869.40, with the agreement that the balance shall
be payable in monthly installments of P451.70, at 12%
interest per annum.
On November 4, 1976, SOLID executed several real estate
mortgage contracts in favor of State Investment Homes, (sic)
Inc. (STATE) over its subdivided parcels of land, one of which
is the subject lot.
For Failure of SOLID to comply with its mortgage obligations
contract, STATE extrajudicially foreclosed the mortgaged
properties including the subject lot on April 6, 1983, with
the corresponding certificate of sale issued therefor to STATE
annotated at the back of the titles covering the said properties
on October 13, 1983.
On June 23, 1984; SOLID thru a Memorandum of Agreement
negotiated for the deferment of consolidation of ownership
over the foreclosed properties by committing to redeem
the properties from STATE.
On August 15, 1988, the spouses filed a complaint before the
Housing and Land Use Regulatory Board, HLRB, against the
developer SOLID and STATE for failure on the part of SOLID
"to execute the necessary absolute deed of sale as well as to
deliver title to said property . . . in violation of the contract to
sell . . .," despite full payment of the purchase price as of
January 7, 1981. In its Answer, SOLID, by way of alternative
defense, alleged that the obligations under the Contract to
Sell has become so difficult . . . the herein respondents
be partially released from said obligation by substituting
subject lot with another suitable residential lot from another
subdivision which respondents own/operates". Upon the
other hand, STATE, to which the subject lot was mortgaged,
averred that unless SOLID pays the redemption price of
P125,1955.00, (sic) it has "a right to hold on and not release
the foreclosed properties.

ISSUES:  Appellate Court,  the Court noting petitioner therein to be a
1.) WON Sps. Oreta’s unregistered rights over the subject
property are superior to the registered mortgage rights of
petitioner State Investment House, Inc. (STATE) 
2.) WON the CA erred in not applying the settled rule that
persons dealing with property covered by torrens certificate of
title are not required to go beyond what appears on the face
of the title.
HELD:  real
1.) YES! STATE's registered mortgage right over the property
is inferior to that of respondents spouses' unregistered right.
The unrecorded sale between respondents-spouses and
SOLID is preferred for the reason that if the original owner
(SOLID, in this case) had parted with his ownership of the
thing sold then he no longer had ownership and free disposal
of that thing so as to be able to mortgage it again.
Registration of the mortgage is of no moment since it is
understood to be without prejudice to the better right of third
parties.
2.) NO! As a general rule, where there is nothing in the
certificate of title to indicate any cloud or vice in the ownership
of the property, or any encumbrance thereon, the purchaser is
not required to explore further than what the Torrens Title
upon its face indicates in quest for any hidden defect or
inchoate right that may subsequently defeat his right thereto.
This rule, however, admits of an exception as where the
purchaser or mortgagee, has knowledge of a defect or lack of
title in his vendor, or that he was aware of sufficient facts to
induce a reasonably prudent man to inquire into the status of
the title of the property in litigation. 7 In this case, petitioner
was well aware that it was dealing with SOLID, a business
entity engaged in the business of selling subdivision lots. In
fact, the OAALA found that at the time the lotwas mortgaged,
respondent State Investment House Inc., [now petitioner] had
been aware of the lot's location and that the said lot formed
part of Capital Park/Homes Subdivision."   ISSUE:
In Sunshine Finance and Investment Corp. v. Intermediate
financing corporation, deviated from the general rule that a
purchaser or mortgagee of a land is not required to look
further that what appears on theface of the Torrens Title. 
The above-enunciated rule should apply in this case as
petitioner admits of being a financing 
institution. We take judicial notice of the uniform practice of
financing institutions to investigate, examine and assess the
property offered as security for any loan
application especially where, as in this case, the subject
property is a subdivision lot located at Quezon City, M.M. It is
a settled rule that a purchaser or mortgagee cannot close its
eyes to facts which should put a reasonable man upon his
guard, and then claim that he acted in good faith under the
belief that there was no defect in the title of the vendor or
mortgagor. Petitioner's constructive knowledge of the defect in
the title of the subject property, or lack of such knowledge due
to its negligence, takes the place of registration of the rights of
respondents-spouses. Respondent Court thus correctly ruled
that petitioner was not a purchaser or mortgagee in good
faith; hence petitioner can not solely rely on what merely
appears on the face of the Torrens Title.
Angeles V Calasanz
FACTS:
Ursula and Tomas Calasanz sold a piece of land to
Buenaventura Angeles and Teofila Juani covered by a
contract to sell. Angeles paid a down payment upon the
execution of the contract and started paying the balance in
monthly installments for nine years with only a few remaining
installments left to pay. Although Calasanz accepted late
payments before, Angeles was now five months late.
Calasanz demanded payment of past due accounts, but did
not receive any. Eventually, Calansanz canceled the said
contract and Angeles asked for reconsideration, but was
denied.
A provision in the contract to sell gave Calasanz the right to
cancel the contract and consider the amounts paid as rent for
the property. However, the lower court ruled that the contract
was not validly canceled and ordered Calasanz to execute a
final Deed of Sale in favor of Angeles.
Was the contract to sell validly canceled?
RULING:
No. The act of a party in treating a contract as canceled or
resolved on account of infractions by the other 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 bring the
matter to court. Then, should the court 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 indemnity awarded to the party
prejudiced.
The right to rescind the contract for non-performance of one
of its stipulations is not absolute. The general rule is that
rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental
breach as would defeat the very object of the parties in
making the agreement. The question of whether a breach of a
contract is substantial depends upon the attendant
circumstances.
The breach of the contract alleged by Calasanz is so slight
considering that Angeles had already paid monthly
installments for almost nine years. In only a short time, the
entire obligation would have been paid.
To mitigate the unilateral act of Calasanz in cancelling the
contract, Article 1234 of the Civil Code provides that: If the
obligation has been substantially performed in good faith, the
obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
CARMELITA LEANO Vs. COURT OF APPEALS
G.R. No. 129018  on the simultaneous fulfillment of the other obligation. The
NOVEMBER 15- 2001
FACTS:
Hermogenes Fernando, as vendor and Carmelita Leano, as
vendee executed a contract tosell involving a piece of land. In
the contract, Leano bound herself to pay Fernando P10,775
at the signing of the contract with the balance of P96,965.00
to be paid within a period of TEN(10) years at a monthly
amortization of P1747.30. The contract also provided for a
grace periodof one month within which to make payments,
together with the one corresponding to the monthof
grace. Should the month of grace expire without the
installments for both months having beensatisfied, an interest
of 18% per annum will be charged on the unpaid installments.
ISSUE;
Whether petitioner was in delay in the payment of the monthly
amortizations.
RULING;
On the issue of whether petitioner Leano was in delay in
paying the amortizations, we rule that while the contract
provides that the total purchase price was payable within
a ten/year period, the same contract specified that the
purchase price shall be paid in monthly installments for which
the corresponding penalty shall be imposed in case
of default. Petitioner Leano cannot ignore the provision on the
payment of monthly installments by claiming that the ten/year
period within which to pay has not elapsed.
Article 1169 of the Civil Code provides that in reciprocal
obligations, neither party incurs in delay if the other does not
comply or if 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 the case
at bar, respondent Fernando performed his part of the
obligation by allowing petitioner Leano to continue in
possession and use of the property. Clearly, when petitioner
Leano did not pay the monthly amortizations in accordance
with the terms of the contract, she was in delay and liable for
damages. However, we agree with the trial court that the
default committed by petitioner Leano in respect of the
obligation could be compensated by the interest and
surcharges impo!ed upon her under the contract in question.
Heirs of Luis Bacus Vs. CA
Facts: Bacus leased a parcel of land to Faustino Duray in
Cebu. The lease was for 6 years ending in 1990, the contract
contained an option to buy clause. Under such option the
lessee had the exclusive and irrevocable right to buy 2000 sq
meters within 5 years after the effectivity of the contract.
Close to the expiration of the contract, Bacus died after Duray
informed the heirs of Bacus that they are willing to purchase
the property under the option to buy clause. The heirs refused
to sell, thus Duray filed a complaint for specific performance
against the heirs of Bacus. RTC ruled in favor of Duray, CA
affirmed.
Issue: W/o the heirs of Bacus be compelled to sell the portion
of the lot under the option to buy clause.
Held: Yes. Obligation under an option to buy is a reciprocal
obligation. The performance of one obligation is conditioned
payment of the purchase price is contingent upon the
execution and delivery of the deed of sale by the debtor.
When Duray exercised their option to buy, their obligation was
to advise the Bacus’ heirs of their decision and readiness to
pay the price. Upon the actual execution of Bacus were they
required to pay. Duray did not incur delay when they did not
yet deliver the payment nor make a consignation before the
expiration of the contract.
Laforteza vs. Machuca
Facts:
Roberto Laforteza and Gonzalo Laforteza, Jr., in their
capacities as attorneys-in-fact of Dennis Laforteza, entrered
into a MOA (Contract to Sell) with Alonzo Machuca over a
house and lot registered in the name of the late Francisco
Laforteza. Machuca was able to pay the earnest money but
however failed to pay the balance on time. Upon a request of
an extension of time, Machuca informed petitioner heirs that
the balance was already covered, but petitioners refused to
accept the balance and told Machuca that the subject
property is no longer for sale. The petitioners contend that the
Memorandum of Agreement is merely a lease agreement with
“option to purchase”; hence, it only gave the respondent a
right to purchase the subject property within a limited period
without imposing upon them any obligation to purchase it. And
since the respondent’s tender of payment was made after the
lapse of the option agreement, his tender did not give rise to
the perfection of a contract of sale.
Issue:
(1) WON the tender of payment after the lapse of the option
agreement gave rise to the perfection of a contract of sale.
(2) WON the six-moth period during which the respondent
would be in possession of the property as lessee was a period
within which to exercise an option.
Held:
(1) It did. A perusal of the Memorandum Agreement shows
that the transaction between the petitioners and the
respondent was one of sale and lease.
 A contract of sale is a consensual contract and is perfected at
the moment there is a meeting of the minds upon the thing
which is the object of the contract and upon the price. From
that moment the parties may reciprocally demand
performance subject to the provisions of the law governing the
form of contracts. In the case at bench, all the elements of a
contract of sale were thus present.
(1) The six-month period during which the respondent would
be in possession of the property as lessee, was clearly not a
period within which to exercise an option. An option is a
contract granting a privilege to buy or sell within an agreed
time and at a determined price. An option contract is a
separate and distinct contract from that which the parties may
enter into upon the consummation of the option. An option
must be supported by consideration.   An option contract is
governed by the second paragraph of Article 1479 of the Civil
Code, which reads:
Art. 1479… .
An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the
price.
In the present case, the six-month period merely delayed the
demandability of the contract of sale and did not determine its
perfection for after the expiration of the six-month period,
there was an absolute obligation on the part of the petitioners
and the respondent to comply with the terms of the sale.
Song Fo & Company V. Hawaiian Philippine Co.
G.R. No. 23769 – September 16, 1925
FACTS:
Hawaiian-Philippine Co (HPC) entered into a contract with
Song Fo and Co (SFC) where it would deliver molasses to the
latter evidenced by a letter containing their contract. The
same states that Mr. Song Fo agreed to the delivery of
300,000 gallons of molasses and the same requested for an
additional 100,000 molasses which the HPC promised that it
will do its best to comply with the additional shipment.
However, the HPC was only able to deliver 55,006 gallons.
SFC thereafter filed a complaint with two causes of action for
breach of contract against the HPC and asked for
P70,369.50. HPC answered that there was a delay in the
payment from
SFC and that HPC has the right to rescind the contract
because of the same· The trial court condemned HPC to pay
SFC a total of P35,317.93, with legal interest.
ISSUES:
1. Whether or not SFC is entitled to damages
2. Whether or not HPC has a right to rescind the contract?
RULING:
As to the first question, yes, SFC is entitled to damages.
Article 1170 of the Civil Code provides “Those who in the
performance of their obligations are guilty of fraud,
negligence, or delay, and those who in  any manner
contravene the tenor thereof, are liable for damages”
The failure of HPC to deliver the rest of the molasses
constitutes a breach of contract by contravention of tenor and
is thus liable for damages. The bases for damages is the cost
in excess of the agreed price in the contract when SFC was
made to acquire the needed molasses from another supplier
and the expenses related to the transportation of the same.
Loss of profits would have been included as part of damages
had SFC been able to substantiate such a claim.
As to the second question, no, HPC has no right to rescind
the contract.
The court provided that the general rule is that rescission
will not be permitted for a slight or casual breach of the
contract, but only for such breaches as are so substantial
and fundamental as to defeat the object of the parties in
making the agreement.
It should be noted that the time of payment stipulated for in
the contract should be treated as of the essence of the
contract. There was only a slight breach of contract when the
payment was delayed for 20 days and does not violate
essential condition of the contract which warrants rescission
for non-performance. Furthermore, HPC accepted the
payment of the overdue accounts and continued with the
contract, waiving its right to rescind the same.
Petition of partly granted, and the judgment appealed is
modified. Plaintiff shall have and recover from the defendant
the sum of P3,000, with legal interest from date of judgment,
no special costs.
Boysaw vs. Interphil Promotions
Summary: A boxer signed an agreement with a promotions
agency to arrange and promote a boxing match with Flash
Elorde. The boxer violated the terms of the contract, but in
spite of these, the agency proceeded except it negotiated for
a new date for the match. Eventually, the match as originally
stated in the contract did not materialize. Boxer and manager
is now suing the promotion agency for breach of contract.
Rule of Law: Where one party did not perform the
undertaking which he was bound by the terms of the
agreement to perform, he is not entitled to insist upon the
performance of the contract by the other party, or recover
damages by reason of his own breach.
Facts: Solomon Boysaw (P), signed with Interphil
Promotions, Inc. (D), a contract to engage Gabriel "Flash"
Elorde in a boxing contest for the junior lightweight
championship of the world. Thereafter, Interphil (D) signed
Gabriel "Flash" Elorde to a similar agreement—that is, to
engage Boysaw in a title fight.
The managerial rights over Boysaw (P) was assigned and
eventually reassigned to Alfredo Yulo, Jr. (P) without the
consent of Interphil (D) in violation of their contract. When
informed of the change, Interphil (D) referred the matter to the
Games and Amusement Board culminating to a decision by
the board to approve a new date for the match. Yulo (P)
protested against the new date even when another proposed
date was within the 30-day allowable postponements.
Boysaw (P) and Yulo (P) filed for breach of contract when the
fight contemplated in the original boxing contract did not
materialize.
Issues: May the offending party in a reciprocal obligation
compel the other party for specific performance?
Ruling: No. Evidence established that the contract was
violated by Boysaw (P) when, without the approval or consent
of Interphil (D), he fought a boxing match in Las Vegas.
Another violation was the assignment and transfer of the
managerial rights over Boysaw (P) without the knowledge or
consent of Interphil (D).
While the contract imposed no penalty for such violation, this
does not grant any of the parties the unbridled liberty to
breach it with impunity. Our law on contracts recognizes the
principle that actionable injury inheres in every contractual
breach.
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the terms thereof, are liable for damages.
   —Article 1170, Civil Code.
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.
   —Article 1191, Civil Code.
The contract in question gave rise to reciprocal obligations.
Reciprocal obligations are those which arise from the same
cause, and in 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. They are to be performed
simultaneously, so that the performance of one is conditioned
upon the simultaneous fulfillment of the other.
   —Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.
The power to rescind is given to the injured party.
Where the plaintiff is the party who did not perform the
undertaking which he was bound by the terms of the
agreement to perform, he is not entitled to insist upon the
performance of the contract by the defendant, or recover
damages by reason of his own breach.
   —Seva vs. Alfredo Berwin, 48 Phil. 581.
Under the law, when a contract is unlawfully novated by an
applicable and unilateral substitution of the obligor by another,
the aggrieved creditor is not bound to deal with the substitute.
However, from the evidence, it is clear that the Interphil (D),
instead of availing themselves of the options given to them by
law of rescission or refusal to recognize the substitute obligor,
really wanted to postpone the fight date owing to an injury that
Elorde sustained in a recent bout. That Interphil (D) had
justification to renegotiate the original contract, particularly the
fight date is undeniable from the facts. Under the
circumstances, Interphil's (D) desire to postpone the fight date
could neither be unlawful nor unreasonable.
UNIVERSITY OF THE PHILIPPINES VS. DE LOS
ANGELES
35 SCRA 102
FACTS:
On November 2, 1960, UP and ALUMCO entered into a
logging agreement whereby the latter was granted exclusive
authority to cut, collect and remove timber from the Land
Grant for a period starting from the date of agreement to
December 31, 1965, extendible for a period of 5 years by
mutual agreement.
On December 8, 1964, ALUMCO incurred an unpaid account
of P219,362.94. Despite repeated demands, ALUMCO still
failed to pay, so UP sent a notice to rescind the logging
agreement. On the other hand, ALUMCO executed an
instrument entitled “Acknowledgment of Debt and Proposed
Manner of Payments. It was approved by the president of UP,
which
stipulated the following:
3. In the event that the payments called for are not sufficient
to liquidate the foregoing indebtedness, the balance
outstanding after the said payments have been applied shall
be paid by the debtor in full no later than June 30, 1965.
5. In the event that the debtor fails to comply with any of its
promises, the Debtor agrees without reservation that Creditor
shall have the right to consider the Logging Agreement
rescinded,
without the necessity of any judicial suit…
ALUMCO continued its logging operations, but again incurred
an unpaid account. On July 19,1965, UP informed ALUMCO
that it had, as of that date, considered rescinded and of no
further legal effect the logging agreement, and that UP had
already taken steps to have another concessionaire take over
the logging operation. ALUMCO filed a petition to enjoin UP
from conducting the bidding. The lower court ruled in favor of
ALUMCO, hence, this appeal.
ISSUE:
Can petitioner UP treat its contract with ALUMCO rescinded,
and may disregard the same before any judicial
pronouncement to that effect?
RULING:
Yes. In the first place, UP and ALUMCO had expressly
stipulated that upon default by the debtor, UP has the right
and the power to consider the Logging
Agreement of December 2, 1960 as rescinded without the
necessity of any judicial suit. As to such special stipulation
and in connection with Article 1191 of the Civil Code, the
Supreme Court, stated in Froilan vs. Pan Oriental Shipping
Co:
“There is nothing in the law that prohibits the parties from
entering into agreement that violation of the terms of the
contract would cause cancellation thereof, even without court
intervention. In other words, it is not always
necessary for the injured party to resort to court for rescission
of the contract.”
De Erquiaga V CA
G.R. No. 47206, September 27, 1989, 178 SCRA 1
FACTS:
Santiago de Erquiaga was the owner of 100% or 3,100 paid-
up shares of stock of the Erquiaga Development Corporation
(EDC) which owns the Hacienda San Jose in Irosin,
Sorsogon.
On November 4, 1968, he entered into an Agreement with
Jose L. Reynoso to sell to the latter his 3,100 shares (or
100%) of EDC for P900,000, payable in installments on
definite dates fixed in the contract but not later than
November 30, 1968.
Reynoso failed to pay the second and third installments on
time. Thus, the total price of the sale was increased to
P971,371.70 payable on or before December 17, 1969. The
increase represented brokers’ commission and interest.
As of December 17, 1968, Reynoso was able to pay
P410,000 to Erquiaga who thereupon transferred all his
shares to Reynoso, as well as the possession of the Hacienda
San Jose, EDC’s only asset. However, as provided in
paragraph 3, subparagraph (c) of the contract to sell,
Reynoso pledged 1,500 shares in favor of Erquiaga as
security for the balance of his obligation.
Reynoso failed to pay the balance of P561,321.70 on or
before December 17, 1969, as provided in the promissory
notes he delivered to Erquiaga. So, on March 2, 1970,
Erquiaga, through counsel, formally informed Reynoso that he
was rescinding the sale of his shares in EDC.
Erquiaga filed a complaint for rescission with preliminary
injunction against Reynoso and EDC, in CFI Sorsogon,
Branch I. The CFI ruled in favor of Erquiaga, rescinded the
sale, and ordered Reynoso to: (a) return and reconvey to
Erquiaga the 3,100 paid up shares of stock of the EDC; (b)
render a full accounting of the fruits he received by virtue of
said shares, and to return said fruits received by him to
Erquiaga; (c) and pay Erquiaga P12,000 as actual damages,
P50,000 as attorney’s fees, the costs of this suit and
expenses of litigation (P62,000). Erquiaga was ordered to
return to Reynoso P100,000 plus legal interest from
November 4, 1968, and P310,000 plus legal interest from
December 17, 1968, until paid (P410,000 total).
The CFI decision became final and executory. However, it
issued another order holding in abeyance Erquiaga’s payment
of P410,000 plus interest, pending Reynoso’s accounting of
the fruits he received on account of the shares. In the same
order, the CFI appointed a receiver since (a) the accounting of
the fruits received by Reynoso would take time; and (b)
Erquiaga has shown sufficient and justifiable ground for the
appointment of a receiver ‘in order to preserve the Hacienda
which has obviously been mismanaged by Reynoso (arrears
in DBP loan amounting to P503,510.70 and danger of
foreclosure to Erquiaga’s damage).
On April 26, 1973, Jose L. Reynoso died and he was
substituted by his surviving spouse Africa Valdez Vda. de
Reynoso and children, as defendants. The Reynoso heirs
(Reynosos) filed a petition for certiorari in the CA against the
CFI order. The CA dismissed the petition. The SC affirmed.
Upon Erquiaga’s motion, the CFI issued an order on February
12, 1975: (a) dissolving the receivership and ordering the
delivery of the possession of the Hacienda San Jose to
Erquiaga, (b) ordering Erquiaga to file a P410,000 bond
conditioned to the payment of whatever may be due to the
Reynoso heirs after the approval of Reynoso’s accounting
report; and (c) allowing Erquiaga’s counsel to inspect, copy
and photograph certain documents related to the accounting
report.
The CFI approved Erquiaga’s submitted bond and turned over
the possession, management and control of the hacienda to
him. Upon Erquiaga’s Omnibus Motion, opposed by
Reynosos, the CFI ordered the latter to deliver to Erquiaga
within 5 days from receipt of the order the 1,600 shares which
are in their possession. The CFI also denied the prayer to (a)
strike out all expenses allegedly incurred by Reynosos in the
production of the fruits of Hacienda San Jose; (b) declare
Erquiaga’s obligation to pay Reynosos P410,000 with interest
as fully compensated by the fruits earned by Reynosos from
the property; and (c) issue a writ of execution against
Reynosos to pay Erquiaga P62,000.
Reynosos filed a petition for certiorari against the last order.
The CA ruled in their favor, holding that the CFI acted with
GADALEJ in refusing to order the reimbursement of the
P410,000 purchase price plus interests awarded in the final
decision and the setoff therewith of P62,000 as damages and
attorney’s fees in Erquiaga’s favor. Thus, the CA directed
Erquiaga to return P410,000 (or net P348,000 after deducting
P62,000 due from Reynoso) as the price paid by Reynoso for
the shares of stock, with legal rate of interest, and the return
by Reynoso of Erquiaga’s 3,100 shares with the fruits.
At the time of the CA decision:
o Hacienda San Jose was returned to Erquiaga;
o Reynoso has returned to Erquiaga only the pledged 1,500
shares of stock;
o Reynoso has not complied with (b) and (c) of the decision;
o Erquiaga has not returned P410k required by the decision.
Erquiaga alleged that the CA decision of requiring him to pay
Reynosos P410,000 plus interest, without first awaiting
Reynoso’s accounting of the fruits of the Hacienda San Jose,
violates the law of the case and Art. 1385, CC, alters the final
order dated February 12, 1975 of the trial court, and is
inequitous.
ISSUE:
WON Erquiaga’s allegation has merit
HELD:
NO. The CA order is in full accord with Art. 1385, CC:
“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.”
The Hacienda San Jose and 1,500 shares of stock have
already been returned to Erquiaga. Therefore, upon the return
to him of the remaining 1,600 shares, Erquiaga should return
to Reynoso P410,000 which the latter paid for those shares.
Pursuant to the rescission decreed in the final judgment, there
should be simultaneous mutual restitution of the principal
object of the contract to sell (3,100 shares) and of the
consideration paid (P410,000). This should not await the
mutual restitution of the fruits, namely: the legal interest
earned by Reynoso’s P410,000 while in the possession of
Erquiaga, and its counterpart: the fruits of Hacienda San Jose
which Reynoso received from the time the hacienda was
delivered to him on November 4, 1968 until it was placed
under receivership by the court on March 3, 1975.
However, since Reynoso has not yet given an accounting of
those fruits, it is only fair that Erquiaga’s obligation to deliver
to Reynoso the legal interest earned by his money, should
await the rendition and approval of his accounting. To this
extent, the decision of the Court of Appeals should be
modified. For it would be inequitable and oppressive to
require Erquiaga to pay the legal interest earned by
Reynoso’s P410,000 since 1968 or for the past 20 years
(amounting to over P400,000 by this time) without first
requiring Reynoso to account for the fruits of Erquiaga’s
hacienda which he allegedly squandered while it was in his
possession from November 1968 up to March 3, 1975.
Margarita Suria vs Court of Appeals & Herminom/
Natividad Crispin
FACTS
That on March 31, 1975, plaintiffs being the owners of a
parcel of land situated at Barrio San Antonio, San Pedro,
Laguna, entered into a contract denominated as DEED OF
SALE WITH MORTGAGE, with herein defendants, a true
copy of said contract.
That the defendants violated the terms and conditions of the
contract by failing to pay the stipulated installments and in fact
only one installment due in July 1975 (paid very late in the
month of September, 1975) was made all the others
remaining unsettled to the present time;
That repeated verbal and written demands were made by
plaintiff upon the defendants for the payment of the
installments, some of said written demands having been
made on September 24, 1981, February 7, 1982, February
24, 1983, March 13, 1983, and April 12, 1983, but defendants
for no justifiable reason failOn November 14, 1983, petitioners
filed their answer with counterclaim.
On July 16, 1984, petitioners filed a motion to dismiss
complaint, alleging that:That plaintiffs are not entitled to the
subsidiary remedy of rescission because of the presence of
remedy of foreclosure in the Deed of Sale with Mortgage ,
secondly that, assuming arguendo that rescission were a
proper remedy, it is apparent in the face of the Complaint that
the plaintiffs failed to comply with the requirements of law,
hence the rescission was ineffective, illegal, null and void, and
invalid.
On July 26, 1984, private-respondents filed their opposition to
the above motion.In the meantime, on August 6, 1984,
petitioners formerly offered to pay private-respondents all the
outstanding balance under the Deed of Sale with Mortgage,
which offer was rejected by private respondents on August 7,
1984. On November 26, 1984, the respondent-Court denied
the motion to dismiss.
ISSUE
Whether or not the seller can resort to the remedy of
rescission under Art 1191 which provides that the subsidiary
and equitable remedy of rescission in case of breach of
reciprocal obligation.
HELD 
The petition is hereby GRANTED. The Intermediate Appellate
Court’s decision is REVERSED and SET ASIDE. The
petitioners are ordered to pay the balance of their
indebtedness under the Deed of Absolute Sale with Mortgage
with legal interests from the second installment due on
October 24, 1975 until fully paid,
1.) There is no dispute that the parties entered into a contract
of sale as distinguished from a contract to sell. By the contract
of sale, the vendor obligates himself to transfer the ownership
of and to deliver a determinate thing to the buyer, who in turn,
is obligated to pay a price certain in money or its equivalent
(Art. 1458, Civil Code). From the respondents’ own
arguments, we note that they have fully complied with their
part of the reciprocal obligation. 2.) The petitioners’ breach of
obligations is not with respect to the perfected contract of sale
but in the obligations created by the mortgage contract. The
remedy of rescission is not a principal action retaliatory in
character but becomes a subsidiary one which by law is
available only in the absence of any other legal remedy. The
relationship between the parties is no longer one of buyer and
seller because the contract of sale has been perfected and
consummated. It is already one of a mortgagor and a
mortgagee. In consideration of the petitioners’ promise to pay
on installment basis the sum they owe the respondents, the
latter have accepted the mortgage as security for the
obligation. 3)The petitioners have offered to pay au past due
accounts. Considering the lower purchasing value of the peso
in terms of prices of real estate today, the respondents are
correct in stating they have suffered losses. However, they
are also to blame for trusting persons who could not or would
not comply with their obligations in time. They could have
foreclosed on the mortgage immediately when it fell due
instead of waiting all these years while trying to enforce the
wrong remedy.
Ong v. CA
Facts:
Petitioner Jaime Ong, on the one hand, and respondent
spouses Miguel K. Robles and Alejandra Robles, on the other
hand, executed an "Agreement of Purchase and Sale"
respecting two parcels of land situated at Barrio Puri, San
Antonio, Quezon. On May 15, 1983, petitioner Ong took
possession of the subject parcels of land together with the
piggery, building, ricemill, residential house and other
improvements thereon.
For failure of the vendee to pay the price as agreed upon, a
complaint for rescission of contract and recovery of properties
with damages. Later, while the case was still pending with the
trial court, petitioner introduced major improvements on the
subject properties. These prompted the respondent spouses
to ask for a writ of preliminary injunction. The trial court
granted the application and enjoined petitioner from
introducing improvements on the properties except for repairs.
Eventually, the trial court ordered the rescission of the
contract.
Issues:
(1) whether the contract entered into by the parties may be
validly rescinded under Article 1191 of the New Civil Code
(2) whether the parties had novated their original contract as
to the time and manner of payment
Held:
Article 1191 of the New Civil Code refers to rescission
applicable to reciprocal obligations. Reciprocal obligations are
those which arise from the same cause, and in 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. They are to be performed simultaneously such that the
performance of one is conditioned upon the simultaneous
fulfillment of the other.
A careful reading of the parties' "Agreement of Purchase and
Sale" shows that it is in the nature of a contract to sell, as
distinguished from a contract of sale. In a contract of sale, the
title to the property passes to the vendee upon the delivery of
the thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass to the
vendee until full payment of the purchase price. In a contract
to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a breach,
casual or serious, but a situation that prevents the obligation
of the vendor to convey title from acquiring an obligatory
force. The non-fulfillment of the condition of full payment
rendered the contract to sell ineffective and without force and
effect. It must be stressed that the breach contemplated in
Article 1191 of the New Civil Code is the obligor's failure to
comply with an obligation. Failure to pay, in this instance, is
not even a breach but merely an event which prevents the
vendor's obligation to convey title from acquiring binding
force. Hence, the agreement of the parties in the case at
bench may be set aside, but not because of a breach on the
part of petitioner for failure to complete payment of the
purchase price. Rather, his failure to do so brought about a
situation which prevented the obligation of respondent
spouses to convey title from acquiring an obligatory force.
Novation is never presumed, it must be proven as a fact either
by express stipulation of the parties or by implication derived
from an irreconcilable incompatibility between the old and the
new obligation. In order for novation to take place, the
concurrence of the following requisites is indispensable: (1)
there must be a previous valid obligation; (2) there must be an
agreement of the parties concerned to a new contract; (3)
there must be the extinguishment of the old contract; and (4)
there must be the validity of the new contract. The aforesaid
requisites are not found in the case at bench. The subsequent
acts of the parties hardly demonstrate their intent to dissolve
the old obligation as a consideration for the emergence of the
new one.
BPI Investment V CA.
obligations and contracts: Reciprocal Obligations: It is a basic
principle in reciprocal obligations that 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.
FACTS:
Frank Roa obtained a loan at 16 1/4% interest rate per annum
from Ayala Investment and Development Corporation. For
security, Roa's house and lot were mortgaged. Later, Roa sold
the house and lot to ALS and Antonio Litonjua, who assumed
Roa's debt to Ayala Investment. Ayala Investment, however,
granted a new loan to be applied to Roa's debt, secured by
the same property at a different interest rate of 20% per
annum.
When ALS and Litonjua failed to pay, BPIIC, successor to
Ayala Investment, filed for foreclosure of mortgage.
ISSUE:
 W/N a contract of loan is a consensual contract
HELD:
A loan contract is not a consensual contract but a real
contract. It is perfected upon delivery of the object of the
contract. Although a perfected consensual contract can give
rise to an action for damages, it does not constitute a real
contract which requires delivery for perfection. A perfected
real contract gives rise only to obligations on the part of the
borrower.
In the present case, the loan contract was only perfected on
the date of the second release of the loan.
A contract of loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration for
that of the other. It is a basic principle in reciprocal obligations
that 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. Only when a party has performed his
part of the contract can he demand that the other party also
fulfills his own obligation and if the latter fails, default sets in.
DECISION:
The payment of amortization should accrue from the time
BPIIC released the loan amount to ALS and Litonjua because
it was only at that time (the delivery of the amount -- the
object of the contract) that the loan contract was perfected.
Iringan v. Court of Appeals
G.R. No. 129107,
September 26, 2001,
366 SCRA 41
FACTS:
Private respondent Antonio Palao sold to petitioner Alfonso
Iringan, an undivided portion of Lot No. 992 of the
Tuguegarao Cadastre, located at the Poblacion of
Tuguegarao and covered Transfer Certificate of Title No. The
parties executed a Deed of on the same date with the
purchase price of as follows:(a) upon the execution of this
instrument on or before April 30, on or before December 31,
1985.
When the second payment was due, Iringan paid only Thus,
Palao sent a letter to Iringan stating that he considered the
contract as rescinded and that he would not accept any
further payment considering that Iringan failed to comply with
his obligation to pay the full amount of the second installment.
Iringan through his counsel Atty. Hilarion L. Aquino, replied
that they were not opposing the revocation of the Deed of
Sale but asked for the reimbursement of the following
amounts:(a) cash P3,200.00 geodetic engineers P500.00
attorneys the current interest on P53,700.00. In response,
Palao sent a letter dated January 10, 1986 to Atty. Aquino,
stating that he was not amenable to the reimbursements
claimed Iringan.
On February 21, 1989, Iringan, now represented a new
counsel Atty. Carmelo Z. Lasam, proposed that the which he
had already paid Palao be reimbursed or Palao could sell to
Iringan, an equivalent portion of the land. Palao instead wrote
Iringan that the latters standing obligation had reached
P61,600, representing payment of arrears for rentals from
October 1985 up to March The parties failed to arrive at an
agreement. On July 1, 1991, Palao filed a for Judicial
Confirmation of Rescission of Contract and Damages against
Iringan and his wife.
ISSUE:
Whether or not the contract of sale was validly rescinded.
RULING:
Article 1592 of the Civil Code is the applicable provision
regarding the sale of an immovable property. Article 1592. In
the sale of immovable property, even though it may have
been stipulated that upon failure to pay the price 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 a notarial
act.After the demand, the court may not grant him a new term.
Article 1592 requires the rescinding party to serve judicial or
notarial notice of his intent to resolve the contract.
Article 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 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.
But in our view, even if Article 1191 were applicable, petitioner
would still not be entitled to automatic rescission. In Escueta
v. Pando, we ruled that under Article 1124 (now Article 1191)
of the Civil Code, the right to resolve reciprocal obligations, is
deemed implied in case one of the obligors shall fail to comply
with what is incumbent upon him. But that right must be Yes. The reasons or grounds for cancelling the contract are
invoked judicially. The same article also provides: The Court valid and justified. Both the trial court and the public
shall decree the resolution demanded, unless there should be respondent erred in the appreciation of the nature of the
grounds, which justify the allowance of a term for the transaction between the petitioner corporation and the private
performance of the obligation. This requirement has been respondent. To this Court’s mind, what obtains in the case at
retained in the third paragraph of Article 1191, which states bar is a mere contract to sell or promise to sell, and not a
that the court shall decree the rescission claimed, unless
contract of sale.
there be just cause authorizing the fixing of a period.
The injured party may choose between the fulfillment and the
Consequently, even if the right to rescind is made available to rescission of the obligation, with the payment of damages in
the injured party, the obligation is not ipso facto erased the either case. He may also seek rescission, even after he has
failure of the other party to comply with what is incumbent chosen fulfillment, if the latter should become impossible. The
upon him. The party entitled to rescind should apply to the Civil Code provides:
court for a decree of rescission.The right cannot be exercised Article 1593. With respect to movable property, the rescission
solely on a own judgment that the other committed a breach of the sale shall of right take place in the interest of the
of the obligation.The operative act which produces the vendor, if the vendee, upon the expiration of the period fixed
resolution of the contract is the decree of the court and not the for the delivery of the thing, should not have appeared to
mere act of the vendor. Since a judicial or notarial act is receive it, or, having appeared, he should not have tendered
required law for a valid rescission to take place, the letter the price at the same time, unless a longer period has been
written respondent declaring his intention to rescind did not stipulated for its payment.
operate to validly rescind the contract. Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
Visayan Sawmill V CA with what is incumbent upon him.
In this case, there was to be no actual sale until the opening,
G.R. No. 83851 (March 3, 1993) making or indorsing of the irrevocable and unconditional LOC.
FACTS: Since what obtains here is a mere promise to sell, RJH’s
On May 1, 1983, RJH Trading and Visayan Sawmill Company failure to comply with the positive suspensive condition cannot
(VSC) entered into a sale involving scrap iron located at even be considered a breach casual or serious but simply an
VSC’s stockyard at Negros Oriental, subject to the condition event that prevented the obligation of petitioner corporation to
that RJH will open a Letter of Credit (LOC) of P250,000 in convey title from acquiring binding force. Consequently, the
favor of VSC on or before May 15, 1983. This is evidenced by obligation of the petitioner corporation to sell did not arise; it
a contract entitled `Purchase and Sale of Scrap Iron’ duly therefore cannot be compelled by specific performance to
signed by both parties. On May 17, 1983, RJH through his comply with its prestation. In short, Article 1191 of the Civil
men started to dig and gather and scrap iron at the VSC’s Code does not apply; on the contrary, pursuant to Article 1597
premises, proceeding until May 30 when VSC allegedly of the Civil Code, the petitioner corporation may totally
directed RJH’s men to desist from pursuing the work in view rescind, as it did in this case, the contract.
of an alleged case filed against RJH by Alberto Pursuelo. VSC
denied this, alleging that on May 23, 1983, they sent a
telegram to RJH cancelling the contract of sale because of the
failure of the latter to comply with the conditions thereof. On
May 24, 1983, RJH informed VSC that the LOC was opened
May 12, 1983 at BPI main office in Ayala, but then the
transmittal was delayed.
On May 26, 1983, VSC received a letter advice from BPI
Dumaguete stating that an irrevocable domestic LOC
P250,000 was opened in favor of Ang Tay c/o VSC on
account of Armaco-Armsteel Alloy Corporation. On July 19,
1983, RJH Trading sent a series of telegrams stating that the
case filed against him by Pursuelo had been dismissed and
demanding that VSC comply with the deed of sale, otherwise
a case will be filed against them. On July 20, 1983, VSC
informed RJH that they were unwilling to continue with the
sale due to RJH’s failure to comply with essential pre-
conditions of the contract. On July 29, 1983, RJH filed the
complaint, praying for judgment ordering VSC to comply with
the contract by delivering to him the scrap iron subject
thereof. VSC insisted that the cancellation of the contract was
justified because of RJH’s noncompliance with essential pre-
conditions. The RTC ruled in RJH’s favor. The CA affirmed.
Hence, this appeal.
ISSUE:
Whether or not the reasons or grounds for cancelling the
contract valid and justified.
RULING: