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 plaintiffsappellees 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 plaintiffsappellees 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

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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. InUniversal 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.

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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 plaintiffsappellees had already paid an aggregate amount of P 4,533.38. To sanction the rescission made by the defendantsappellants 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."

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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. Melencio-Herrera, Plana, Relova, De la Fuente and Alampay, JJ., concur. Teehankee (Chairman), J., took no part.

the Court of First Instance of Quezon City on September 4, 1963 (Civil Case No. Q-7275). On January 20, 1964, said Court ordered: WHEREFORE, the plaintiff is declared entitled to a summary judgment and the defendants are hereby ordered to have the subdivision of Lot No. 6, Block No. 2, and Lot No. 11, Block No. 3, relocated and resurveyed and the subdivision plan approved and, if not possible for one reason or another, and in case of the absence or loss of said subdivision, to cause and effect the subdivision of the said lots and deliver the titles and possession thereof to the plaintiff. As to the claim and counterclaim for damages, let the hearing thereon be deferred until further move by the parties. 1 However, since execution of the foregoing Order was rendered impossible because of the judgment in Civil Case No. 174, which earlier declared the sale of the lots in question by Juan Porciuncula to defendants-appellants to be null and void, GENEROSA filed, on August 16, 1968, another suit in the Court of First Instance of Manila (Civil Case No. 73942) for rescission of the sale with damages. On June 7, 1969, the Court rendered judgment, the dispositive portion of which reads: WHEREFORE, judgment is rendered in favor of the plaintiff and against defendants, ordering the latter jointly and severally, to pay the former the sum of P7,600.00, the total amount received by them from her as purchase price of the two lots, with legal rate of interest from May 29, 1946 until fully paid; another sum of P800.00, with legal rate 6f interest from August 1, 1966 until fully paid; the sum of P1,000 for attorney's fees; and the costs of this suit. 2 Hence, the appeal before the Appellate Court on the ground that GENEROSA's action had prescribed, considering that she had only four years from May 29, 1946, the date of sale, within which to rescind said transaction, and that her complaint for specific performance may be deemed as a waiver of her right to rescission since the fulfillment and rescission of an obligation are alternative and not cumulative remedies. The appeal is without merit. The Trial Court presided by then Judge, later Court of Appeals Associate Justice Luis B. Reyes, correctly resolved the issues, reiterated in the assignments of error on appeal, as follows: Defendants contend (1) that the fulfillment and the rescission of the obligation in reciprocal ones are alternative remedies, and plaintiff having chosen fulfillment in Civil Case No. Q- 7525, she cannot now seek rescission; and (2) that even if plaintiff could seek rescission the action to rescind the obligation has prescribed. The first contention is without merit. The rule that the injured party can only choose between fulfillment and rescission of the obligation, and cannot have both, applies when the obligation is possible of fulfillment. If, as in this case, the fulfillment has become impossible, Article 1191 3 allows the injured party to seek rescission even after he has chosen fulfillment. True it is that in Civil Case No. 7275 the Court already rendered a Decision in favor of plaintiff, but since defendants cannot fulfill their obligation to deliver the titles to and possession of the lots to plaintiff, the portion of the decision requiring them to fulfill their obligations is without force and effect. Only that portion relative to the payment of damages remains in the dispositive part of the decision, since in either case (fulfillment or rescission) defendants may be required to pay damages. The next question to determine is whether the action to rescind the obligation has prescribed.

G.R. No. L-39378 August 28, 1984 GENEROSA AYSON-SIMON, plaintiff-appellee, vs. NICOLAS ADAMOS and VICENTA FERIA, defendants-appellants. Wenceslao V. Jarin for plaintiff-appellee. Arnovit, Lacre & Adamos for defendants-appellants. MELENCIO-HERRERA, J.: Originally, this was an appeal by defendants from the Decision of the then Court of First Instance of Manila, Branch XX, in Civil Case No. 73942, to the Court of Appeals (now Intermediate Appellate Court), which Tribunal, certified the case to us because the issue is a pure question of law. On December 13, 1943, Nicolas Adamos and Vicente Feria, defendants-appellants herein, purchased two lots forming part of the Piedad Estate in Quezon City, with an area of approximately 56,395 square meters, from Juan Porciuncula. Sometime thereafter, the successors-in-interest of the latter filed Civil Case No. 174 in the then Court of First Instance of Quezon City for annulment of the sale and the cancellation of Transfer Certificate of Title No. 69475, which had been issued to defendants-appellants by virtue of the disputed sale. On December 18, 1963, the Court rendered a Decision annulling the sale, cancelling TCT 69475, and authorizing the issuance of a new title in favor of Porciuncula's successors-in-interest. The said judgment was affirmed by the Appellate Court and had attained finality. In the meantime, on May 29, 1946, during the pendency of the above-mentioned case, defendants-appellants sold to GENEROSA Ayson Simon, plaintiff-appellee herein, the two lots in question for P3,800.00 each, plus an additional P800.00 paid subsequently for the purpose of facilitating the issuance of new titles in GENEROSA's name. Due to the failure of defendants-appellants to comply with their commitment to have the subdivision plan of the lots approved and to deliver the titles and possession to GENEROSA, the latter filed suit for specific performance before

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Article 1191 of the Civil Code provides that the injured party may also seek rescission, if the fulfillment should become impossible. The cause of action to claim rescission arises when the fulfillment of the obligation became impossible when the Court of First Instance of Quezon City in Civil Case No. 174 declared the sale of the land to defendants by Juan Porciuncula a complete nullity and ordered the cancellation of Transfer Certificate of Title No. 69475 issued to them. Since the two lots sold to plaintiff by defendants form part of the land involved in Civil Case No. 174, it became impossible for defendants to secure and deliver the titles to and the possession of the lots to plaintiff. But plaintiff had to wait for the finality of the decision in Civil Case No. 174, According to the certification of the clerk of the Court of First Instance of Quezon City (Exhibit "E-2"), the decision in Civil Case No. 174 became final and executory "as per entry of Judgment dated May 3, 1967 of the Court of Appeals." The action for rescission must be commenced within four years from that date, May 3, 1967. Since the complaint for rescission was filed on August 16, 1968, the four year period within which the action must be commenced had not expired. Defendants have the obligation to return to plaintiff the amount of P7,600.00 representing the purchase price of the two lots, and the amount of P800.00 which they received from plaintiff to expedite the issuance of titles but which they could not secure by reason of the decision in Civil Case No. 174. Defendant has to pay interest at the legal rate on the amount of P7,600.00 from May 29, 1946, when they received the amount upon the execution of the deeds of sale, and legal interest on the P800.00 from August 1, 1966, when they received the same from plaintiff. 4 WHEREFORE, the appealed judgment of the former Court of First Instance of Manila, Branch XX, in Civil Case No. 73942, dated June 7, 1969, is hereby affirmed in toto. Costs against defendants-appellants. SO ORDERED. Teehankee, Actg. C.J., Plana, Relova,Gutierrez, Jr. and De la Fuente, JJ., concur. Footnotes 1 Record on appeal, p. 38. 2 Ibid., pp. 68-69. 3 "Article 1191. ..." "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. ..." 4 Record on Appeal, pp. 66-68.

On 11 April 1981 a contract of Conditional Sale of Registered Lands was executed between the spouses Vivencio and Elena Babasa as vendors and Tabangao Realty, Inc. (TABANGAO) as a vendee over three (3) parcels of land, Lots Nos. 17827-A, 17827-B and 17827-C, situated in Brgy. Libjo, Batangas City. Since the certificates of title over the lots were in the name of third persons who had already executed deeds of reconveyance and disclaimer in favor of the BABASAS, it was agreed that the total purchase price ofP2,121,920.00 would be paid in the following manner: P300,000.00 upon signing of the contract, and P1,821,920.00 upon presentation by the BABASAS of transfer certificates of titles in their name, free from all liens and encumbrances, and delivery of registerable documents of sale in favor of TABANGAO within twenty (20) months from the signing of the contract. In the meantime, the retained balance of the purchase price would earn interest at seventeen percent (17%) per annum or P20,648.43 monthly payable to the BABASAS until 31 December 1982. It was expressly stipulated that TABANGAO would have the absolute and unconditional right to take immediate possession of the lots as well as introduce any improvements thereon. On 18 May 1981 TABANGAO leased the lots to Shell Gas Philippines, Inc., (SHELL), which immediately started the construction thereon of a Liquefied Petroleum Gas Terminal Project, an approved zone export enterprise of the Export Processing Zone. TABANGAO is the real estate arm of SHELL. The parties substantially complied with the terms of the contract. TABANGAO paid the first installment of P300,000.00 to the BABASAS while the latter delivered actual possession of the lots to the former. In addition, TABANGAO paid P379,625.00 to the tenants of the lots as disturbance compensation and as payment for existing crops as well asP334,700.00 to the owners of the house standing thereon in addition to granting them residential lots with the total area of 2,800 square meters. TABANGAO likewise paid the stipulated monthly interest for the 20 month period amounting to P408,580.80. Meanwhile, the BABASAS filed Civil Case No. 519[1] and Petition No. 373[2] for the transfer of titles of the lots in their name. However, two (2) days prior to the expiration of the 20-month period, specifically on 31 December 1982, the BABASAS asked TABANGAO for an indefinite extension within which to deliver clean title over the lots. They asked that TABANGAO continue paying monthly interest of P20,648.43 starting January 1983 on the ground that Civil Case no. 519 and Petition No. 373 had not been resolved with finality in their favor. TABANGAO refused the request. In retaliation the BABASAS executed a notarized unilateral rescission dated 28 February 1983 to which TABANGAO responded by reminding the BABASAS that they were the ones who did not comply with their contractual obligation to deliver clean titles within the stipulated 20-month period, hence, had no right to rescind their contract. The BABASAS insisted on the unilateral rescission and demanded the SHELL vacate the lots. On 19 July 1983 TABANGAO instituted an action for specific performance with damages in the Regional Trial Court of Batangas City to compel the spouses to comply with their obligation to deliver clean titles over the properties.[3] TABANGAO alleged that the BABASAS were already in a position to secure clean certificates of title and execute registerable document of sale since execution of judgment pending appeal had already been granted in their favor in Civil Case No. 519, while an order directing reconstitution of the original copies of TCT Nos. T-32565, T-32566 and T-32567 covering the lots had been issued in Petition No. 373. The BABASAS moved to dismiss the complaint on the ground that their contract with TABANGAO became null and void with the expiration of the 20month period given them within which to deliver clean certificates of title. SHELL entered the dispute as intervenor praying that its lease over the premises be respected by the BASABAS. Despite the pendency of the case the BASABAS put up several structures within the area in litigation to impede the movements of persons and vehicles therein, laid claim to twelve (12) heads of cattle belonging to intervenor SHELL and threatened to collect levy from all buyers of liquefied petroleum gas (LPG) for their alleged use of the BABASA estate in their business transactions with intervenor SHELL. As a result, SHELL applied for and was granted on 10 April 1990 a temporary restraining order against the Babasa spouses and anyone acting for and in their behalf upon filing of a P2-million bond.[4] Eventually, judgment was rendered in favor of TABANGAO and SHELL. [5] The court a quo ruled that the 20month period stipulated in the contract was never meant to be its term such that upon its expiration the respective

[G.R. No. 124045. May 21, 1998] SPOUSES VIVENCIO BABASA and ELENA CANTOS BABASA, petitioners, vs. COURT OF APPEALS, TABANGAO REALTY, INC., and SHELL GAS PHILIPPINES, INC., respondents. DECISION BELLOSILLO, J.:

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obligations of the parties would be extinguished. On the contrary, the expiration thereof merely gave rise to the right of TABANGAO to either rescind the contract or to demand that the BABASAS comply with their contractual obligation to deliver to it clean titles and registerable documents of sale. The notarial rescission executed by the BABASAS was declared void and of no legal effect xxxx 1. The unilateral rescission of contract, dated February 28, 1983, executed by the defendant-spouses is null and void, without any legal force and effect on the agreement dated April 11, 1981, executed between the plaintiff and the defendant-spouses; 2. The lease contract dated, May 18, 1981, executed by the plaintiff in favor of the intervenor is deemed legally binding on the defendant-spouses insofar as it affects the three lots subject of this case; 3. The defendant-spouses Vivencio Babasa and Elena Cantos are hereby ordered to deliver to the plaintiff Tabangao Realty, Inc., clean transfer certificates of title in their name and execute all the necessary deeds and documents necessary for the Register of Deeds of Batangas City to facilitate the issuance of Transfer Certificates of Title in the name of plaintiff, Tabangao Realty, Inc. In the event the defendant-spouses fail to do so, the Register of Deeds of Batangas City is hereby directed to cancel the present transfer certificates of title over the three lots covered by the Conditional Sale of Registered Lands executed by and between plaintiff, Tabangao Realty, Inc., and the defendant-spouses Vivencio Babasa and Elena Cantos-Babasa on April 11, 1981, upon presentation of credible proof that said defendant-spouses have received full payment for the lots or payment thereof duly consigned to the Court for the amount of the defendant-spouses; 4. Plaintiff Tabangao Realty, Inc., is directed to pay the defendant-spouses Vivencio Babasa and Elena CantosBabasa the remaining balance of P1,821,920.00 out of the full purchase price for these three lots enumerated in the agreement dated April 11, 1981 plus interest thereon of 17% per annum or P 20,648.43 a month compounded annually beginning January 1983 until fully paid; 5. The Order dated April 10, 1990 issued in favor of the intervenor enjoining and restraining defendant-spouses Vivencio Babasa and Elena Cantos-Babasa and/or anyone acting for and in their behalf from putting up any structure on the three lots or interfering in any way in the activities of the intervenor, its employees and agents, is made permanent, and the bond posted by the intervenor cancelled; and, 6. Defendant-spouses Vivencio Babasa and Elena Cantos-Babasa shall pay the costs of this proceeding as well as the premium the intervenor may have paid in the posting of the P2,000,000.00 bond for the issuance of the restraining order of April 10, 1990.[6] The BABASAS appealed to the Court of Appeals[7] which on 29 February 1996 affirmed the decision of the trial court court rejecting the contention of the BABASAS that the contract of 11 April 1981 was one of lease, not of sale;[8] and described it instead as one of absolute sale though denominated conditional. However, compounded interest was ordered paid from 19 July 1983 only, the date of filing of the complaint, not from January 1983 as decreed by the trial court. The BABASAS now come to us reiterating their contention that the contract of 11 April 1981 was in reality a contract of lease, not for sale; but even assuming that it was indeed a sale, its nature was conditional only, the efficacy of which was extinguished upon the non-happening of the condition, i.e., non-delivery of clean certificates of title and registerable documents of sale in favor of TABANGAO within twenty (20) months from the signing of the contract. We find no merit in the petition. Respondent appellate court has correctly concluded that the allegation of petitioners that the contract of 11 April 1981 is one of lease, not of sale, is simply incredible. First, the contract is

replete with terms and stipulations clearly indicative of a contract of sale. Thus, the opening whereas clause states that the parties desire and mutually agreed on the sale and purchase of the x x x three parcels of land; the BABASAS were described as the vendors while TABANGAO as the vendee from the beginning of the contract to its end; the amount of P2,121,920.00 was stated as the purchase price of the lots; TABANGAO, as vendee, was granted absolute and unconditional right to take immediate possession of the premises while the BABASAS, as vendors, warranted such peaceful possession forever; TABANGAO was to shoulder the capital gains tax, and; lastly, the BABASAS were expected to execute a Final Deed of Absolute Sale in favor of TABANGAO necessary for the issuance of transfer certificates of title the moment they were able to secure clean certificates of title in their name. Hence, with all the foregoing, we cannot give credence to the claim of petitioners that subject contract was one of lease simply because the word ownership was never mentioned therein. Besides, as correctly pointed out by respondent court, the BABASAS did not object to the terms and stipulations employed in the contract at the time of its execution when they could have easily done so considering that they were then ably assisted by their counsel, Atty. Edgardo M. Carreon, whose legal training negates their pretended ignorance on the matter. Hence, it is too late for petitioners to insist that the contract is not what they intended to be. But the BABASAS lament that they never intended to sell their ancestral lots but were merely forced to do so when TABANGAO dangled the threat of expropriation by the government (through the Export Processing Zone Authority) in the event voluntary negotiations failed. Although a cause to commiserate with petitioners may be perceived, it is not enough to provide them with an avenue to escape contractual obligations validly entered into. We have already held that contracts are valid even though one of the parties entered into it against his own wish and desire, or even against his better judgment.[9] Besides, a threat of eminent domain proceedings by the government cannot be legally classified as the kind of imminent, serious and wrongful injury to a contracting party as to vitiate his consent.[10] Private landowners ought to realize, and eventually accept, that property rights must yield to the valid exercise by the state of its all-important power of eminent domain.[11] Finally, petitioners contend that ownership over the three (3) lots was never transferred to TABANGAO and that the contract of 11 April 1981 was rendered lifeless when the 20-month period stipulated therein expired without them being able to deliver clean certificates of title to TABANGAO through no fault of their own. Consequently, their unilateral rescission dated 28 February 1983 should have been upheld as valid. We disagree. Although denominated Conditional Sale of Registered Lands, we hold, as did respondent court, that the contract of 11 April 1981 between petitioners and respondent TABANGAO is one of absolute sale. Aside from the terms and stipulations used therein indicating such kind of sale, there is absolutely no proviso reserving title in the BABASAS until full payment of the purchase price, nor any stipulation giving them the right to unilaterally rescind the contract in case of non-payment. A deed of sale is absolute in nature although denominated a conditional sale absent such stipulations.[12] In such cases, ownership of the thing sold passes to the vendee upon the constructive or actual delivery thereof. [13] In the instant case, ownership over Lots Nos. 17827A, 17827-B, and 17827-C passed to TABANGAO both by constructive and actual delivery. Constructive delivery was accomplished upon the execution of the contract of 11 April 1981 without any reservation of title on the part of the BABASAS while actual delivery was made when TABANGAO took unconditional possession of the lots and leased them to its associate company SHELL which constructed its multi-million peso LPG Project thereon.[14] We do not agree with petitioners that their contract with TABANGAO lost its efficacy when the 20-month period stipulated therein expired without petitioners being able to deliver clean certificates of title such that TABANGAO may no longer demand performance of their obligation. In Romero v. Court of Appeals[15] and Lim v. Court of Appeals[16] the Court distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party the option to either refuse to proceed with the sale or to waive the condition.[17] Here, a perfected contract of absolute sale exists between the BABASAS and TABANGAO when they agreed on the sale of a determinate subject matter, i.e., Lots no. 17827-A, 17827-B and 17827-C, and the price certain therefor without any condition or reservation of title on the part of the BABASAS. However, the obligation of TABANGAO as vendee to pay the full amount of the purchase price was made subject to the condition that petitioners first deliver the clean titles over the lots within twenty (20) months from the signing of the contract. If petitioners succeed in delivering the titles within the stipulated 20-month period, they would get P1,821,920.00

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representing the entire balance of the purchase price retained by TABANGAO. Otherwise, the deed of sale itself provides that G.R. Nos. 81100-01 February 7, 1990 x x x upon the expiration of the 20-month period from the signing of the contract the Vendee is hereby authorized to settle out of the balance retained by the Vendee all legally valid and existing obligations on the properties x x x and whatever balance remaining after said settlement shall be paid to the Vendor. Clearly then, the BABASAS act of unilaterally rescinding their contract with TABANGAO is unwarranted. Even without the abovequoted stipulation in the deed, the failure of petitioners to deliver clean titles within twenty (20) months from the signing of the contract merely gives TABANGAO the option to either refuse to proceed with the sale of to waive the condition in consonance with Art. 1545 of the New Civil Code.[18] Besides, it would be the height of inequity to allow the BABASAS to rescind their contract of sale with TABANGAO by invoking as a ground therefor their own failure to deliver the titles over the lots within the stipulated period. WHEREFORE , the petition is DENIED. The appealed decision of the Court of Appeals in CA-G.R. CV No. 39554 affirming that of the Regional Trial Court of Batangas City, Br. 4, is AFFIRMED. No Costs. SO ORDERED. Davide, Jr. (Chairman), Vitug, Panganiban, and Quisumbing, JJ., concur. PARAS, J.:
[1]

BACOLOD-MURCIA MILLING CO., INC., petitioner, vs. HON. COURT OF APPEALS AND ALONSO GATUSLAO, respondents. BACOLOD-MURCIA MILLING CO., INC., petitioner, vs. HON. COURT OF APPEALS, ALONSO GATUSLAO, AGRO-INDUSTRIAL DEVELOPMENT OF SILAY-SARAVIA (AIDSISA) AND BACOLOD-MURCIA AGRICULTURAL COOPERATIVE MARKETING ASSOCIATION (BMACMA), respondents. Jalandoni, Herrera, Del Castillo & Associates for petitioner. Taada, Vico & Tan for respondent AIDSISA. San Juan, Gonzalez, San Agustin & Sinense for respondents Alfonso Gatuslao and BM-ACMA.

Babasa v. Lopez, Jr., an Action for Declaration of Nullity of Real Estate Mortgage filed with the Regional Trial Court of Batangas City. [2] In re: Judicial Reconstitution of TCT Nos. T-32565, T-32566 and T-32567, Batangas City, filed with the Regional Trial Court of Batangas City. [3] Docketed as Civil Case No. 2310 of the RTC-Batangas City, Br. 4. [4] Original Records, Vol. 2, pp. 962-963. [5] Decision penned by Judge Conrado R. Antona, dated 23 December 1992; Rollo, pp. 56-74. [6] Id., pp. 71-74. [7] Docketed as CA-G.R. CV No. 39554. [8] Decision penned by Justice Jose C. dela Rama with Justices Jaime M. Lantin and Eduardo G. Montenegro concurring; id., pp. 45-55. [9] Lagunzad v. Soto Vda de Gonzales, No. L-32066, 6 August 1979, 92 SCRA 476; see also Clarin v. Rulona, No. L30786, 20 February 1984, 127 SCRA 512. [10] Alarcon v. Kasilag, 40 O.G. Supp. 11, p. 203 [1940], citing Manresa. [11] J.M. Tuason & Co., Inc., v. Land Tenure Administration, No. L-21064, 18 February 1970, 31 SCRA 413. [12] Dignos v. Court of Appeals, G.R. No. 59266, 29 February 1988, 158 SCRA 375, 382; see also Pingol v.Court of Appeals, G.R. No. 102909, 6 September 1993, 226 SCRA 118, 127, and Taguba v. Vda. De De Leon, G.R. No. 59980, 23 October 1984, 132 SCRA 722, 727; Luzon Brokerage Co., Inc. v. Maritime Building Co. Inc., No. L-25885, 16 November 1978, 86 SCRA 305. [13] Art: 1477, New Civil Code. [14] See Manuel R. Dulay Enterprises, Inc., v. Court of Appeals, G.R. No. 91889, 27 August 1993, 225 SCRA 678. [15] G.R. No. 107207, 23 November 1995, 250 SCRA 223. [16] G.R. No. 118347, 24 October 1996, 263 SCRA 569. [17] Lim v. Court of Appeals, supra, at p. 577. [18] 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 non performance of the condition as a breach of warranty x x x x.

This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. CV Nos. 59716-59717 promulgated on September 11, 1987 affirming in toto the decision of the Court of First Instance of Negros Occidental in two consolidated civil cases, the dispositive portion of which reads as follows: PREMISES CONSIDERED, the decision appealed from is hereby affirmed in toto. The uncontroverted facts of the case 1 are as follows: 1. xxx xxx xxx 2. BMMC is the owner and operator of the sugar central in Bacolod City, Philippines; 3. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill District with Plantation Audit No. 3-79, being a registered owner of Lot Nos. 310, 140, 141 and 101-A of the Cadastral Survey of Murcia, Negros Occidental, otherwise known as Hda. San Roque; 4. On May 24, 1957 BMMC and Alonso Gatuslao executed an 'Extension and Modification of Milling Contract (Annex 'A' of the complaint in both cases) which was registered on September 17, 1962 in the Office of the Register of Deeds of Negros Occidental, and annotated on Transfer Certificates of Title Nos. T-24207, RT-2252, RT-12035, and RT-12036 covering said Lot Nos. 310, 140, 141 and 101-A; 5. That since the crop year 1957-1958 up to crop year 1967-1968, inclusive, Alonso Gatuslao has been milling all the sugarcane grown and produced on said Lot Nos. 310, 140, 141 and 101A with the Mill of BMMC;.

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6. Since the crop year 1920-21 to crop year 1967-1968, inclusive, the canes of planters adhered to the mill of BMMC were transported from the plantation to the mill by means of cane cars and through railway system operated by BMMC; 7. The loading points at which planters Alonso Gatuslao was and should deliver and load all his canes produced in his plantation, Hda. San Roque, were at the Arimas Line, Switch 2, and from which loading stations, BMMC had been hauling planter Gatuslao's sugar cane to its mill or factory continuously until the crop year 1967-68; 8. BMMC had not been able to use its cane cars and railway system for the cargo crop year 1968-1969; 9. Planter Alonso Gatuslao on various dates requested transportation facilities of BMMC to be sent to his loading stations or switches for purposes of hauling and milling his sugarcane crops of crop year 1968-1969; 10. The estimated gross production of Hda. San Roque for the crop year 1968-1969 is 4,500 piculs. The records show that since the crop year 1920-1921 to the crop year 1967-1968, the canes of the adhered planters were transported from the plantation to the mill of BMMC by means of cane cars and through a railway system operated by BMMC which traversed the land of the adherent planters, corresponding to the rights of way on their lands granted by the planters to the Central for the duration of the milling contracts which is for "un periodo de cuarenta y cinco anos o cosechas a contar desde la cosecha de 1920-1921" 2 (a period of 45 years or harvests, beginning with a harvest of 1920-1921). BMMC constructed the railroad tracks in 1920 and the adherent planters granted the BMMC a right of way over their lands as provided for in the milling contracts. The owners of the hacienda Helvetia were among the signatories of the milling contracts. When their milling contracts with petitioner BMMC expired at the end of the 1964-1965 crop year, the corresponding right of way of the owners of the hacienda Helvetia granted to the Central also expired. Thus, the BMMC was unable to use its railroad facilities during the crop year 1968-1969 due to the closure in 1968 of the portion of the railway traversing the hacienda Helvetia as per decision of the Court in Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First Instance of Negros Occidental,G.R. No. L-27084, (24 SCRA 500 [1968]). In the same case the Court ruled that the Central's conventional right of way over the hacienda Helvetia ceased with the expiration of its amended milling contracts with the landowners of the hacienda at the end of the 1964-1965 crop year and that in the absence of a renewal contract or the establishment of a compulsory servitude of right of way on the same spot and route which must be predicated on the satisfaction of the preconditions required by law, there subsists no right of way to be protected. Consequently, the owners of the hacienda Helvetia required the Central to remove the railway tracks in the hacienda occupying at least 3,245 lineal meters with a width of 7 meters or a total of 22,715 square meters, more or less. That was the natural consequence of the expiration of the milling contracts with the landowners of the hacienda Helvetia (Angela Estate, Inc. and Fernando Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid). BMMC filed a complaint for legal easement against the owners of the hacienda, with the Court of First Instance of Negros Occidental which issued on October 4, 1965 an ex parte writ of preliminary injunction restraining the landowners from reversing and/or destroying the railroad tracks in question and from impeding, obstructing or in any way preventing the passage and operation of plaintiffs locomotives and cane cars over defendants' property during the pendency of the litigation and maintained the same in its subsequent orders of May 31, and November 26, 1966. The outcome of the case, however, was not favorable to the plaintiff BMMC. In the same case the landowners asked this Court to restrain the lower court from enforcing the writ of preliminary injunction it issued, praying that after the hearing on the

merits, the restraining order be made permanent and the orders complained of be annulled and set aside. The Court gave due course to the landowner's petition and on August 10, 1967 issued the writ of preliminary injunction enjoining the lower court from enforcing the writ of preliminary injunction issued by the latter on October 4, 1965. The writ of preliminary injunction issued by the Court was lifted temporarily on motion that through the mediation of the President of the Philippines the Angela Estate and the Gonzaga Estate agreed with the Central to allow the use of the railroad tracks passing through the hacienda Helvetia during the 1967-1968 milling season only, for the same purpose for which they had been previously used, but it was understood that the lifting of the writ was without prejudice to the respective rights and positions of the parties in the case and not deemed a waiver of any of their respective claims and allegations in G.R. No. L-27084 or in any other case between the same parties, future or pending. The Court resolved to approve the motion only up to and including June 30, 1968 to give effect to the agreement but to be deemed automatically reinstated beginning July 1, 1968 (Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid.). The temporary lifting of the writ of preliminary injunction assured the milling of the 1967-1968 crop but not the produce of the succeeding crop years which situation was duly communicated by the President and General Manager of the BMMC to the President of Bacolod-Murcia Sugar Farmers Corporation (BMSFC) on January 2, 1968. 3 On October 30, 1968, Alonso Gatuslao, one of private respondents herein, and his wife, Maria H. Gatuslao, filed Civil Case No. 8719 in the Court of First Instance of Negros Occidental, against petitioner herein, Bacolod-Murcia Milling Co., Inc. (BMMC), for breach of contract, praying among others, for the issuance of a writ of preliminary mandatory injunction ordering defendant to immediately send transportation facilities and haul the already cut sugarcane to the mill site and principally praying after hearing, that judgment be rendered declaring the rescission of the milling contract executed by plaintiffs and defendant in 1957 for seventeen (17) years or up to crop year 1973-74, invoking as ground the alleged failure and/or inability of defendant to comply with its specific obligation of providing the necessary transportation facilities to haul the sugarcane of Gatuslao from plaintiffs plantation specifically for the crop year 1967-1968. Plaintiffs further prayed for the recovery of actual and compensatory damages as well as moral and exemplary damages and attorney's fees. 4 In answer, defendant BMMC claimed that despite its inability to use its railways system for its locomotives and cane cars to haul the sugarcanes of all its adhered planters including plaintiffs for the 1968-69 crop year allegedly due to force majeure, in order to comply with its obligation, defendant hired at tremendous expense, private trucks as prime movers for its trailers to be used for hauling of the canes, especially for those who applied for and requested transportation facilities. Plaintiffs, being one of said planters, instead of loading their cut canes for the 1968-69 crop on the cargo trucks of defendant, loaded their cut canes on trucks provided by the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) which transported plaintiffs' canes of the 1968-69 sugarcanes crop. Defendant prayed in its counterclaim for the dismissal of Civil Case No. 8719 for the recovery of actual damages, moral and exemplary damages and for attorney's fees. 5 On November 21, 1968, BMMC filed in the same court Civil Case No. 8745 against Alonso Gatuslao, the AgroIndustrial Development of Silay-Saravia (AIDSISA) and the Bacolod-Murcia Agricultural Cooperative Marketing Associations, Inc. (B-M ACMA), seeking specific performance under the mining contract executed on May 24, 1957 between plaintiff and defendant Alonso Gatuslao praying for the issuance of writs of preliminary mandatory injunction to stop the alleged violation of the contract by defendant Alonso Gatuslao in confederation, collaboration and connivance with defendant BM-ACMA, AIDSISA, and for the recovery of actual, moral and exemplary damages and attorney's fees. 6 Defendant Alonso Gatuslao and the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. filed their answer on January 27, 1969 with compulsory counter-claims, stating by way of special and affirmative defense, among others, that the case is barred by another action pending between the same parties for the same cause of action. 7

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Defendant Agro-Industrial Development Corporation of Silay-Saravia, Inc. filed its answer on February 8, 1969, alleging among others by way of affirmative defense that before it agreed to mill the sugarcane of its co-defendant Alonso Gatuslao, it carefully ascertained and believed in good faith that: (a) plaintiff was incapable of the sugarcane of AIDSISA's co-defendant planters as well as the sugarcane of other planters formerly adherent to plaintiff, (b) plaintiff had in effect agreed to a rescission of its milling contracts with its adhered planters, including the defendant planter, because of inadequate means of transportation. and had warned and advised them to mill their sugarcane elsewhere, and had thus induced them to believe and act on the belief, that it could not mill their sugarcane and that it would not object to their milling with other centrals; and (c) up to now plaintiff is incapable of hauling the sugarcane of AIDSISA's co-defendants to plaintiffs mill site for milling purposes. The two cases, Civil Cases Nos. 8719 and 8745 were consolidated for joint trial before Branch II of the Court of First Instance of Negros Occidental. 8 On September 8, 1969, the parties in both civil cases filed their partial stipulation of facts which included a statement of the issues raised by the parties. 9 On February 6, 1976, the lower court rendered judgment declaring the milling contract dated May 24, 1957 rescinded. The dispositive portion of the decision 10 reads: WHEREFORE, judgment is hereby rendered as follows: (1) In Civil Case No. 8719 the milling contract (Exh. "121") dated May 24, 1957 is hereby declared rescinded or resolved and the defendant Bacolod-Murcia Company, Inc. is hereby ordered to pay plaintiffs Alonso Gatuslao and Maria H. Gatuslao the amount of P2,625.00 with legal interest from the time of the filing of the complaint by way of actual damages; P5,000.00 as attorney's fees and the costs of the suit; defendant's counterclaim is dismissed; and (2) The complaint in Civil Case No. 8745 as well as the counterclaims therein are ordered dismissed, without costs. Bacolod-Murcia Milling Co., Inc. defendant in Civil Case No. 8719 and plaintiff in Civil Case No. 8745 appealed the case to respondent Court of Appeals which affirmed in toto (Rollo, p. 81) the decision of the lower court. The motion for reconsideration filed by defendant-appellant Bacolod-Murcia Milling Company, petitioner herein, was denied by the appellate court for lack of merit. 11 Hence, this petition. The issues 12 raised by petitioner are as follows: I WHETHER OR NOT THE CLOSURE OF PETITIONER'S RAIL ROAD LINES CONSTITUTE FORCE MAJEURE. II WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO HAS THE RIGHT TO RESCIND THE MILLING CONTRACT WITH PETITIONER UNDER ARTICLE 1191 OF THE CIVIL CODE. III WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO WAS JUSTIFIED IN VIOLATING HIS MILLING CONTRACT WITH PETITIONER. IV WHETHER OR NOT PRIVATE RESPONDENTS GATUSLAO AND B-M ACMA ARE GUILTY OF BAD FAITH IN THE EXERCISE OF THEIR DUTIES AND ARE IN ESTOPPEL TO QUESTION THE ADEQUACY OF THE TRANSPORTATION FACILITIES OF PETITIONER AND ITS CAPACITY TO MILL AND HAUL THE CANES OF ITS ADHERENT PLANTERS.

The crux of the issue is whether or not the termination of petitioner's right of way over the hacienda Helvetia caused by the expiration of its amended milling contracts with the landowners of the lands in question is a fortuitous event or force majeure which will exempt petitioner BMMC from fulfillment of its contractual obligations. It is the position of petitioner Bacolod-Murcia Milling Co., Inc. (BMMC) that the closure of its railroad lines constitute force majeure, citing Article 1174 of the Civil Code, exempting a person from liability for events which could not be foreseen or which though foreseen were inevitable. This Court has consistently ruled that when an obligor is exempted from liability under the aforecited provision of the Civil Code for a breach of an obligation due to an act of God, the following elements must concur: (a) the cause of the breach of the obligation must be independent of the wig of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor (Vasquez v. Court of Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 [1986]). Applying the criteria to the instant case, there can be no other conclusion than that the closure of the railroad tracks does not constitute force majeure. The terms of the milling contracts were clear and undoubtedly there was no reason for BAMC to expect otherwise. The closure of any portion of the railroad track, not necessarily in the hacienda Helvetia but in any of the properties whose owners decided not to renew their milling contracts with the Central upon their expiration, was forseeable and inevitable. Petitioner Central should have anticipated and should have provided for the eventuality before committing itself. Under the circumstances it has no one to blame but itself and cannot now claim exemption from liability. In the language of the law, the event must have been impossible to foresee, or if it could be foreseen, must have been impossible to avoid. There must be an entire exclusion of human agency from the cause of the injury or loss (Vasquez v. Court of Appeals, supra). In the case at bar, despite its awareness that the conventional contract of lease would expire in Crop Year 1964-1965 and that refusal on the part of any one of the landowners to renew their milling contracts and the corresponding use of the right of way on their lands would render impossible compliance of its commitments, petitioner took a calculated risk that all the landowners would renew their contracts. Unfortunately, the sugar plantation of Angela Estate, Inc. which is located at the entrance of the mill was the one which refused to renew its milling contract. As a result, the closure of the railway located inside said plantation paralyzed the entire transportation system. Thus, the closure of the railway lines was not an act of God nor does it constitute force majeure. It was due to the termination of the contractual relationships of the parties, for which petitioner is charged with knowledge. Verily, the lower court found that the Angela Estate, Inc. notified BMMC as far back as August or September 1965 of its intention not to allow the passage of the railway system thru its land after the aforesaid crop year. Adequate measures should have been adopted by BMMC to forestall such paralyzation but the records show none. All its efforts were geared toward the outcome of the court litigation but provided no solutions to the transport problem early enough in case of an adverse decision. The last three issues being inter-related will be treated as one. Private respondent Gatuslao filed an action for rescission while BMMC filed in the same court an action against Gatuslao, the Agro Industrial Development Silay Saravia (AIDSISA) and the Bacolod-Murcia Agricultural Cooperative Marketing Associations, Inc. (B-M ACMA) for specific performance under the milling contract. There is no question that the contract in question involves reciprocal obligations; as such party is a debtor and 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 (Boysaw v. Interphil Promotions, Inc., 148 SCRA 643 [1987]).

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Under Article 1191 of the 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. In fact, it is well established that the party who deems the contract violated may consider it revoked or rescinded pursuant to their agreement and act accordingly, even without previous court action (U.P. v. de los Angeles, 35 SCRA 102 [1970]; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 94 [1972]). It is the general rule, however, 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 (Universal Food Corporation v. Court of Appeals, et al., 33 SCRA 1 [1970]). The issue therefore, hinges on who is guilty of the breach of the milling contract. Both parties are agreed that time is of the essence in the sugar industry; so that the sugarcanes have to be milled at the right time, not too early or too late, if the quantity and quality of the juice are to be assured. As found by the trial court, upon the execution of the amended milling contract on May 24, 1957 for a period of 17 crop years, BMMC undertook expressly among its principal prestations not only to mill Gatuslao's canes but to haul them by railway from the loading stations to the mill. Atty. Solidum, Chief Legal Counsel and in Charge of the Legal-Crop Loan Department of the BMMC Bacolod City admits that the mode of transportation of canes from the fields to the mill is a vital factor in the sugar industry; precisely for this reason the mode of transportation or hauling the canes is embodied in the milling contract. 13 But BMMC is now unable to haul the canes by railways as stipulated because of the closure of the railway lines; so that resolution of this issue ultimately rests on whether or not BMMC was able to provide adequate and efficient transportation facilities of the canes of Gatuslao and the other planters milling with BMMC during the crop year 1968-1969. As found by both the trial court and the Court of Appeals, the answer is in the negative. Armando Guanzon, Dispatcher of the Transportation Department of BMMC testified that when the Central was still using the railway lines, it had between 900 to 1,000 cane cars and 10 locomotives, each locomotive pulling from 30 to 50 cane cars with maximum capacity of 8 tons each. 14 This testimony was corroborated by Rodolfo Javelosa, Assistant Crop Loan Inspector in the Crop Loan Department of petitioner. 15 After the closure of the railway lines, petitioner on February 5, 1968 through its President and General Manager, informed the National Committee of the National Federation of Sugarcane Planters that the trucking requirement for hauling adherent planters produce with a milling average of 3,500 tons of canes daily at an average load of 5 tons per truck is not less than 700 trucks daily plus another 700 empty trucks to be shuttled back to the plantations to be available for loading the same day. 16 Guanzon, however, testified that petitioner had only 280 units of trailers, 20 tractors and 3 trucks plus 20 trucks more or less hired by the Central and given as repartos (allotments) to the different planters. 17 The 180 trailers that the Central initially had were permanently leased to some planters who had their own cargo trucks while out of the 250 BMMC trailers existing during the entire milling season only 70 were left available to the rest of the planters pulled by 3 trucks. 18 It is true that BMMC purchased 20 units John Deere Tractors (prime movers) and 230 units, Vanguard Trailers with land capacity of 3 tons each but that was only on October 1968 as registered in the Land Transportation Commission, Bacolod City. 19 The evidence shows that great efforts had been exerted by the planters to enter into some concrete understanding with BMMC with a view of obtaining a reasonable assurance that the latter would be able to haul and mill their canes for the 1968-1969 crop year, but to no avail. 20 As admitted by BMMC itself, in its communications with the planters, it is not in a position to provide adequate transportation for the canes in compliance with its commitment under the milling contract. Said communications 21 were quoted by the Court of Appeals as follows: and

We are sorry to inform you that unless we can work out a fair and equitable solution to this problem of closure of our railroad lines, the milling of your canes for the crop year 1968-69 would be greatly hampered to the great detriment of our economy and the near elimination of the means of livelihood of most planters and the possible starvation of thousands of laborers working in the sugar District of Bacolod-Murcia Milling Co.

We are fully conscious of our contractual obligations to our existing Milling Contract. But, if prevented by judicial order we will find ourselves unable to serve you in the hauling of the canes through our railroad lines. It is for this reason that we suggest you explore other solutions to the problem in the face of such an eventuality so that you may be able to proceed with the planting of your canes with absolute peace of mind and the certainty that the same will be properly milled and not left to rot in the fields. also, In the meantime, and before July 1, 1968, the end of the temporary arrangement we have with Fernando Gonzaga, Inc. and the Angela Estate, Inc. for the use of the rights of ways, our lawyers are studying the possibility of getting a new injunction from the Supreme Court or the Court of First Instance of Negros Occidental based on the new grounds interposed in said memorandum not heretofore raised previously nor in the Capitol Subdivision case. And if we are doing this, it is principally to prevent any injury to your crops or foreclosure of your property, which is just in line with the object of your plans. On March 26, 1968 the President of the Bacolod-Murcia Sugar Farmer's Corporation writing on behalf of its plantermembers demanded to know the plans of the Central for the crop year 1968-1969, stating that if they fail to hear from the Central on or before the 15th of April they will feel free to make their own plans in order to save their crops and the possibility of foreclosure of their properties. 22 In its letter dated April 1, 1968, the president of BMMC simply informed the Bacolod-Murcia Sugar Farmer's Corporation that they were studying the possibility of getting a new injunction from the court before expiration of their temporary arrangement with Fernando Gonzaga, Inc. and the Angela Estate, Inc. 23 Pressing for a more definite commitment (not a mere hope or expectation), on May 30, 1968 the Bacolod-Murcia Sugar Farmer's Corporation requested the Central to put up a performance bond in the amount of P13 million within a 5-day period to allay the fears of the planters that their sugar canes can not be milled at the Central in the coming milling season. 24 BMMC's reply was only to express optimism over the final outcome of its pending cases in court. Hence, what actually happened afterwards is that petitioner failed to provide adequate transportation facilities to Gatuslao and other adherent planters. As found by the trial court, the experience of Alfonso Gatuslao at the start of the 1968-1969 milling season is reflective of the inadequacies of the reparto or trailer allotment as well as the state of unpreparedness on the part of BMMC to meet the problem posed by the closure of the railway lines. It was established that after Gatuslao had cut his sugarcanes for hauling, no trailers arrived and when two trailers finally arrived on October 20, 1968 after several unheeded requests, they were left on the national highway about

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one (1) kilometer away from the loading station. Such fact was confirmed by Carlos Butog the driver of the truck that hauled the trailers. 25 Still further, Javelosa, Assistant Crop Loan Inspector, testified that the estimated production of Gatuslao for the crop year 1968-1969 was 4,400 piculs hauled by 10 cane cars a week with a maximum capacity of 8 tons. 26 Compared with his later schedule of only one trailer a week with a maximum capacity of only 3 to 4 tons, 27 there appears to be no question that the means of transportation provided by BMMC is very inadequate to answer the needs of Gatuslao. Undoubtedly, BMMC is guilty of breach of the conditions of the milling contract and that Gatuslao is the injured party. Under the same Article 1191 of the Civil Code, the injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. In fact, he may also seek rescission even after he had chosen fulfillment if the latter should become impossible. Under the foregoing, Gatuslao has the right to rescind the milling contract and neither the court a quoerred in decreeing the rescission claimed nor the Court of Appeals in affirming the same. Conversely, BMMC cannot claim enforcement of the contract. As ruled by this Court, by virtue of the violations of the terms of the contract, the offending party has forfeited any right to its enforcement (Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]). Likewise, the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) cannot be faulted for organizing itself to take care of the needs of its members. Definitely, it was organized at that time when petitioner could not assure the planters that it could definitely haul and mill their canes. More importantly, as mentioned earlier in a letter dated January 12, 1968, J. Araneta, President & General Manager of the Central itself suggested to the Bacolod-Murcia Sugar Farmer's Corporation that it explore solutions to the problem of hauling the canes to the milling station in the face of the eventuality of a judicial order permanently closing the railroad lines so that the planters may be able to proceed with their planting of the canes with absolute peace of mind and the certainty that they will be properly milled and not left to rot in the fields. As a result, the signing of the milling contract between private respondents AIDSISA and B-M-ACMA on June 19, 1968 28 was a matter of self-preservation inasmuch as the sugarcanes were already matured and the planters had crop loans to pay. Further delay would mean tremendous losses. 29 In its defense AIDSISA stressed as earlier stated, that it agreed to mill the sugarcanes of Gatuslao only after it had carefully ascertained and believed in good faith that BMMC was incapable of milling the sugarcanes of the adherent planters because of inadequate transportation and in fact up to now said Central is incapable of hauling the sugarcanes of the said planters to its mill site for milling purposes. As an extra precaution, AIDSISA provided in paragraph 15 30 of its milling contract that If any member of the planter has an existing milling contract with other sugar central, then this milling contract with the Central shall be of no force and effect with respect to that member or those members having such contract, if that other sugar central is able, ready and willing, to mill said member or members' canes in accordance with their said milling contract. (Emphasis supplied) The President of BANC himself induced the planters to believe and to act on the belief that said Central would not object to the milling of their canes with other centrals. Under the circumstances, no evidence of bad faith on the part of private respondents could be found much less any plausible reason to disturb the findings and conclusions of the trial court and the Court of Appeals.

PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals is hereby AFFIRMED in toto. SO ORDERED. Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado, JJ., concur. Footnotes 1 Record on Appeal, p. 234, Rollo. 2 Milling Contract, par. 9, p. 335, Rollo. 3 Exhibits, p. 13. 4 Rollo, p. 116. 5 Rollo, p. 148. 6 Rollo, p. 157. 7 Rollo, p. 293. 8 Rollo, p. 233. 9 Rollo, p. 234. 10 Rollo, p. 238. 11 Rollo, p. 113. 12 Rollo, p. 445. 13 Rollo, p. 97. 14 TSN, June 29, 1971, pp. 21-22. 15 TSN, January 24, 1973, pp. 16-18. 16 Exhibits, p. 51. 17 TSN, June 29, 1971, p, 13. 18 TSN, July 29, 1971, pp. 13-20. 19 Exhibits, p. 34. 20 Rollo, pp. 97-98. 21 Rollo, p. 108. 22 Exhibits, p. 17. 23 Exhibits, p. 18. 24 Exhibits, p. 21. 25 TSN, February 23, 1971, pp. 7-12. 26 TSN, January 24, 1973, pp. 24, 30. 27 TSN, January 15, 1970, p. 25. 28 Exhibits, p. 30. 29 TSN, September 9, 1969, pp. 36-37. 30 Rollo, p. 91.

G.R. No. L-45710 October 3, 1985 CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents. I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners. Antonio R. Tupaz for private respondent.

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MAKASIAR, CJ.: This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction. On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision. On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.). On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which provides: In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as follows: 1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible; xxx xxx xxx (p. 46, rec.). On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec). On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969. On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank

failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.). On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.). On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.). On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec. On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.). Hence, this instant petition by the central Bank. The issues are: 1. Can the action of Sulpicio M. Tolentino for specific performance prosper? 2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note? 3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount? When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question. The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is

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never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650) The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other. The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court. Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino. Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages. Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of

Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon. WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt. The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code). The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180). Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt. The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. Article 2089 provides: A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor. Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply

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WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND 1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID; 2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND 3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO. NO COSTS. SO ORDERED. Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur. Aquino (Chairman) and Abad Santos, JJ., took no part.

reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to rescind or cancel the contract. Article 1725 cannot support the petitioner's position either, for this contemplates a voluntary withdrawal by the owner without fault on the part of the contractor, who is therefore entitled to indemnity, and even damages, for the work he has already commenced. There is no such voluntary withdrawal in the case at bar. On the contrary, the Carungays have been constrained to ask for judicial rescission because of the petitioner's failure to comply with the terms and conditions of their contract. The other applicable provisions are: Article 1714 . . . Article 1715 . . . Article 1727 . . . It is a basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every person must, in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." This admonition is reiterated in Article 1159, which states that "obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." The petitioner has ignored these exhortations and is therefore not entitled to the relief he seeks. 3. ADMINISTRATIVE LAW; THE PHILIPPINE DOMESTIC CONSTRUCTION BOARD HAS NO POWER TO ADJUDICATE A CASE FOR RESCISSION OF CONSTRUCTION CONTRACT. The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic Construction Board are meant to apply only to public construction contracts. Its power over private construction contracts is limited to the formulation and recommendation of rules and procedures for the adjudication and settlement of disputes involving such (private) contracts. It therefore has no jurisdiction over cases like the one at bar which remain cognizable by the regular courts of justice. 4. LEGAL AND JUDICIAL ETHICS; COUNSEL WHO TRIES TO MISLEAD THE COURT BY DELIBERATELY MISQUOTING THE LAW IS SUBJECT TO DISCIPLINE. Counsel is obviously trying to mislead the Court. First, he purposely misquotes Section 6(b), paragraph 3, substituting the word "the" for "public," . . . Second, he makes the wrong emphasis in paragraph 5, . . . For deliberately changing the language of the above-quoted paragraph 3, Atty. Gregorio B. Escasinas has committed contempt of this Court and shall be disciplined. As for paragraph 5, the correct stress should be on the words "formulate and recommend," which is all the body can do, rather than on adjudication and settlement." DECISION CRUZ, J p: This case involves not only the factual issue of breach of contract and the legal questions of jurisdiction and rescission. The basic inquiry is whether the building subject of this litigation is safe enough for its future occupants. The petitioner says it is, but the private respondents demur. They have been sustained by the trial court and the appellate court. The petitioner says they have all erred. The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto Deiparine, Jr. on August 13, 19B2, for the construction of a three-story dormitory in Cebu City. 1 The Carungays agreed to pay P970,000.00, inclusive of contractor's fee, and Deiparine bound himself to erect the building "in strict accordance to (sic) plans and specifications." Nicanor Trinidad, Jr., a civil engineer, was designated as the representative of the Carungay spouses, with powers of inspection and coordination with the contractor. Deiparine started the construction on September 1, 1982. 2 On November 6, 1982, Trinidad sent him a document entitled General Conditions and Specifications which inter alia prescribed 3,000 psi (pounds per square inch) as the minimum acceptable compressive strength of the building. 3 In the course of the construction, Trinidad reported to Cesario Carungay that Deiparine had been deviating from the plans and specifications, thus impairing the strength and safety of the building. On September 25, 1982, Carungay ordered Deiparine to first secure approval from him before pouring cement. 4 This order was not heeded, prompting Carungay to send Deiparine another memorandum complaining that the "construction works are faulty and done

G.R. No. 96643. April 23, 1993. ERNESTO DEIPARINE, JR., petitioner, vs. THE HON. COURT OF APPEALS, CESARIO CARUNGAY and ENGR. NICANOR TRINIDAD, respondents. Gregorio B. Escasinas for petitioner. Florido and Associates for respondents. SYLLABUS 1. CIVIL LAW; CONTRACTS; RESCISSION IS USED IN TWO DIFFERENT CONTEXTS IN THE CIVIL CODE. Deiparine seems to be confused over the right of rescission, which is used in two different contexts in the Civil Code. Under the law on contracts, there are what are called "rescissible contracts" which are enumerated in Article 1381 . . . There is also a right of rescission under the law on obligations as granted in Article 1191. 2. ID.; ID.; ARTICLES 19, 1159, 1191, 1714, 1715 AND 1727, CIVIL CODE ARE APPLICABLE, WHILE ARTICLES 1381, 1385 AND 1725, SAME CODE ARE NOT, IN CASE OF BREACH OF CONSTRUCTION CONTRACT. The petitioner challenges the application by the lower court of Article 1191 of the Civil Code in rescinding the construction agreement. His position is that the applicable rules are Articles 1385 and 1725 of the Civil Code . . . Article 1385, upon which Deiparine relies, deals with the rescission of the contracts enumerated above, which do not include the construction agreement in question . . . The construction contract falls squarely under the coverage of Article 1191 because it imposes upon Deiparine the obligation to build the structure and upon the Carungays the obligation to pay for the project upon its completion. Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the parties but on breach of faith by one of them that violates the reciprocity between them. The violation of

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haphazardly . . . mainly due to lax supervision coupled with . . . inexperienced and unqualified staff." 5 This memorandum was also ignored. After several conferences, the parties agreed to conduct cylinder tests to ascertain if the structure thus far built complied with safety standards. Carungay suggested core testing. Deiparine was reluctant at first but in the end agreed. He even promised that if the tests should show total failure, or if the failure should exceed 10%, he would shoulder all expenses; otherwise, the tests should be for the account of Carungay. The core testing was conducted by Geo-Testing International, a Manila-based firm, on twenty-four core samples. On the basis of 3,000 psi, all the samples failed; on the basis of 2,500 psi, only three samples passed; and on the basis of 2,000 psi, nineteen samples failed. 6 This meant that the building was structurally defective. In view of this finding, the spouses Carungay filed complaint with the Regional Trial Court of Cebu for the rescission of the construction contract and for damages. Deiparine moved to dismiss, alleging that the court had no jurisdiction over construction contracts, which were now cognizable by the Philippine Construction Development Board pursuant to Presidential Decree No. 1746. The motion was denied in an order dated April 12, 1984. After trial on the merits, Judge Juanito A. Bernad rendered judgment: a) declaring the construction agreement rescinded; b) condemning Deiparine to have forfeited his expenses in the construction in the same of P244,253.70; c) ordering Deiparine to reimburse to the spouses Carungay the sum of P15,104.33 for the core testing; d) ordering Deiparine to demolish and remove all the existing structures and restore the premises to their former condition before the construction began, being allowed at the same time to take back with him all the construction materials belonging to him; and e) ordering Deiparine to pay the Carungay spouses attorney's fees in the amount of P10,000.00 as well as the costs of the suit. 7 On appeal, the decision was affirmed in toto by the respondent court on August 14, 1990. 8 His motion for reconsideration having been denied, petitioner Ernesto Deiparine, Jr. has come to this Court to question once more the jurisdiction of the regular courts over the case and the power of the trial court to grant rescission. He will lose again. The challenge to the jurisdiction of the trial court is untenable. P.D. 1746 created the Construction Industry Authority of the Philippines (CIAP) as the umbrella organization which shall exercise jurisdiction and supervision over certain administrative bodies acting as its implementing branches. The implementing body in this case is the Philippine Domestic Construction Board (PDCB) and not the inexistent Philippine Construction Development Board as maintained by Deiparine. Among the functions of the PDCB under Section 6 of the decree are to: xxx xxx xxx 3. Adjudicate and settle claims and implementation of public construction contracts and for this purpose, formulate and adopt the necessary rules and regulations subject to the approval of the President: xxx xxx xxx 5. Formulate and recommend rules and procedures for the adjudication and settlement of claims and disputes in the implementation of contracts in private construction; (Emphasis supplied)

Deiparine argues that the Philippine Construction Development Board (that is, the Philippine Domestic Construction Board) has exclusive jurisdiction to hear and try disputes arising from domestic constructions. He invokes the abovementioned functions to prove his point. His counsel is obviously trying to mislead the Court. First, he purposely misquotes Section 6(b), paragraph 3, substituting the word "the" for "public," thus: 3. Adjudicate and settle claims and disputes in the implementation of the construction contracts and for this purpose, formulate and adopt the necessary rules and regulations subject to the approval of the President; (Emphasis ours). Second, he makes the wrong emphasis in paragraph 5, thus: 5. Formulate and recommend rules and procedures for the ADJUDICATION and SETTLEMENT of CLAIMS and DISPUTES in the implementation of CONTRACTS in PRIVATE CONSTRUCTIONS. For deliberately changing the language of the abovequoted paragraph 3, Atty. Gregorio P. Escasinas has committed contempt of this Court and shall be disciplined. As for paragraph 5, the correct stress should be on the words "formulate and recommend," which is all the body can do, rather than on "adjudication and settlement." The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic Construction Board are meant to apply only to public construction contracts. Its power over private construction contracts is limited to the formulation and recommendation of rules and procedures for the adjudication and settlement of disputes involving such (private) contracts. It therefore has no jurisdiction over cases like the one at bar which remain cognizable by the regular courts of justice. On the issue of rescission, Deiparine insists that the construction agreement does not specify any compressive strength for the structure nor does it require that the same be subjected to any kind of stress test. Therefore, since he did not breach any of his covenants under the agreement, the court erred in rescinding the contract. The record shows that Deiparine commenced the construction soon after the signing of the contract, even before Trinidad had submitted the contract documents, including the General Conditions and Specifications. According to Eduardo Logarta, the petitioner's own project engineer, Deiparine actually instructed him and some of the other workers to ignore the specific orders or instructions of Carungay or Trinidad relative to the construction. 9 Most of these orders involved safety measures such as: (1) the use of two concrete vibrators in the pouring of all columns, beams and slabs; (2) making PVC pipes well-capped to prevent concrete from setting inside them; (3) the use of 12-mm reinforcement bars instead of 10-mm bars; (4) the use of mixed concrete reinforcements instead of hollow block reinforcements; and (5) securing the approval of the owner or his representative before any concretepouring so that it could be determined whether the cement mixture complied with safety standards. Deiparine obviously wanted to avoid additional expenses which would reduce his profit. Parenthetically, it is not disputed that Deiparine is not a civil engineer or an architect but a master mariner and former ship captain; 10 that Pio Bonilla, a retainer of Deiparine Construction, was not the supervising architect of the protect; 11 that the real supervisor of the construction was Eduardo-Logarta, who was only a third year civil engineering student at the time; 12 that his understudy was Eduardo Martinez, who had then not yet passed the board examinations; 13 and that the supposed project engineer, Nilo Paglinawan, was teaching full-time at the University of San Jose-Recoletos, and had in fact entered the construction site only after November 4, 1982, although the construction had already begun two months earlier. 14

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It was after discovering that the specifications and the field memorandums were not being followed by Deiparine that Carungay insisted on the stress tests. There were actually two sets of specifications. The first "Specifications" are labeled as such and are but a general summary of the materials to be used in the construction. These were prepared by Trinidad prior to the execution of the contract for the purpose only of complying with the document requirements of the loan application of Cesario Carungay with the Development Bank of the Philippines. The other specifications, which were also prepared by Trinidad, are entitled "General Conditions and Specifications" and laid down in detail the requirements of the private respondent in the construction of his building. In his testimony, Deiparine declared that when the contract was signed on August 13, 1982, it was understood that the plans and specifications would be given to him by Trinidad later. 15 Deiparine thus admitted that the plans and specifications referred to in the construction agreement were not the first Specifications but the General Conditions and Specifications submitted by Trinidad in November 1982. This second set of specifications required a structural compressive strength of 3,000 psi. 16 It completely belies Deiparine's contention that no compressive strength of the dormitory was required. Deiparine further argues that by following the concrete mixture indicated in the first specifications, that is, 1:2:4, the structure would still attain a compressive strength of 2,500 psi, which was acceptable for dormitories. According to him, the 3,000 psi prescribed in the General Conditions and Specifications was recommended for roads, not for buildings. In so arguing, he is interpreting the two specifications together but applying only the first and rejecting the second. Deiparine also avers that the contract does not also require any kind of test to be done on the structure and that, test or no test, he has not violated the agreement. Nevertheless, he subjected the building to a cylinder test just to convince Carungay that the unfinished dormitory was structurally sound. A cylinder test is done by taking samples from fresh concrete, placing them in a cylinder mold and allowing them to harden for a maximum of 28 days, following which they are subjected to compression to determine if the cement mixture to be poured conforms to accepted standards in construction. 17 Carungay was not satisfied with the results of the cylinder test because they were inconsistent and could easily be falsified by the simple expedient of replacing the samples with a good mixture although a different mixture had been used in the actual pouring. Consequently, Carungay requested core testing, a more reliable procedure because the specimens obtained by extracting concrete from the hardened existing structure would determine its actual strength. The core test is less prone to manipulation than the cylinder test because the samples in the former are taken from the building which is already standing. 18 Deiparine vehemently refused to go along with the core test, insisting that the results of the cylinder test earlier made were conclusive enough to prove that the building was structurally sound. What was the real reason for this refusal? After all, Carungay would shoulder the expenses if the specimens passed the core test, unlike the cylinder test, which was for the petitioner's account. The only logical explanation would be that Deiparine was not sure that the core test would prove favorable to him. We see no reason to disturb the factual finding of the courts below that Deiparine did not deal with the Carungays in good faith. His breach of this duty constituted a substantial violation of the contract correctible by judicial rescission. The petitioner challenges the application by the lower court of Article 1191 of the Civil Code in rescinding the construction agreement. His position is that the applicable rules are Articles 1385 and 1725 of the Civil Code. Article 1385 states:

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. Article 1725 provides that in a contract for a piece of work: The owner may withdraw at will from the construction of the work, although it may have been commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness which the owner may obtain therefrom, and damages. Deiparine seems to be confused over the right of rescission, which is used in two different contexts in the Civil Code. Under the law on contracts, there are what are called "rescissible contracts" which are enumerated in Article 1381 thus: (1) Those which are entered into by guardians whenever the wards who 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 later cannot in any other manner collect the claims due them: (4) Those which refer to things under litigation if they have been entered into by the defendants 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. Article 1385, upon which Deiparine relies, deals with the rescission of the contracts enumerated above, which do not include the construction agreement in question. There is also a right of rescission under the law on obligations as granted in Article 1191, providing as follows: "Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. This was the provision the trial court and the respondent court correctly applied because it relates to contracts involving reciprocal obligations like the subject construction contract. The construction contract fails squarely under

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the coverage of Article 1191 because it imposes upon Deiparine the obligation to build the structure and upon the Carungays the obligation to pay for the project upon its completion. Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the, parties but on breach of faith by one of them that violates the reciprocity between them. 19 The violation of reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to rescind or cancel the contract. Article 1725 cannot support the petitioner's position either, for this contemplates a voluntary withdrawal by the owner without fault on the part of the contractor, who is therefore entitled to indemnity, and even damages, for the work he has already commenced. there is no such voluntary withdrawal in the case at bar. On the contrary, the Carungays have been constrained to ask for judicial rescission because of the petitioner's failure to comply with the terms and conditions of their contract. The other applicable provisions are: Article 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the thing. This contract shall be governed by the following articles as well as by the pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale. Article 1715. The contractor shall execute the work in such a manner that it has the qualities agreed upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the work be not of such quality, the employer may require that the contractor remove the defect or execute another work. If the contractor fails or refuses to comply with this obligation, the employer may have the defect removed or another work executed, at the contractor's cost. Article 1727. The contractor is responsible for the work done by persons employed by him. While it is true that the stress test was not required in any of the contract documents, conducting the test was the only manner by which the owner could determine if the contractor had been faithfully complying with his presentations under their agreement. Furthermore, both parties later agreed in writing that the core test should be conducted. When the structure failed under this test the Carungay spouses were left with no other recourse than to rescind their contract. It is a basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every person must, in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." This admonition is reiterated in Article 1159, which states that "obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." The petitioner has ignored these exhortations and is therefore not entitled to the relief he seeks. WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition for review is DENIED, with costs against the petitioner. For deliberately changing the language of Section 6(b), paragraph 3, of P.D. No. 1746, Atty. Gregorio B. Escasinas is hereby fined P1,000.00, with the warning that repetition of a similar offense will be dealt with more severely. It is so ordered. Concur.

1. Exhibit "A," Records, p. 7. 2. TSN, June 9, 1983, p. 19. 3. Exhibits "B" and "19," Records, Bundle of Exhibits, p. 31. 4. Exhibit "D," Records, Vol. I, p. 2. 5. Exhibits "E" and "E-1," Records, Vol. I, p. 4. 6. Exhibits "H" to "H-6," Records, Vol. I, pp. 14-19. 7. Rollo, pp. 362-376. 8. Ibid., pp. 30-37A. Decision penned by Justice Antonio M. Martinez, with Melo and Lapea, JJ., concurring. 9. TSN, January 16, 1985, pp. 77-87; 93-94. 10. TSN, August 17, 1984, pp. 4, 47. 11. TSN, March 17, 1986, pp. 36-40. 12. TSN, January 16, 1985, p. 13. 13. Ibid., pp. 42, 46. 14. Id., pp. 48-51; 104. 15. TSN, August 30, 1954, pp. 70-72. 16. Exhibits "B" and "19," Records, Bundle of Exhibits, p. 31. 17. TSN, January 3, 1984, p. 21. The definitions are derived from the 1980 Annual Book of ASTM Standards, Part 14. 18. Ibid., pp. 21, 28, 48. 19. Universal Food Corporation v. Court of Appeals, L-29155, May 13, 1970.

G.R. No. 119777 March 26, 1998 THE HEIRS OF PEDRO ESCANLAR, FRANCISCO HOLGADO and the SPOUSES DR. EDWIN A. JAYME and ELISA TAN-JAYME, petitioners, vs. THE HON. COURT OF APPEALS, GENEROSA MARTINEZ, CARMEN CARI-AN, RODOLFO CARI-AN, NELLY CHUA CARI-AN, for herself and as guardian ad litem of her minor son, LEONELL C. CARI-AN, FREDISMINDA CARI-AN, the SPOUSES PAQUITO CHUA and NEY SARROSA-CHUA and THE REGISTER OF DEEDS OF NEGROS OCCIDENTAL, respondents. G.R. No. 120690 March 26, 1998 FRANCISCO HOLGADO and HRS. OF PEDRO ESCANLAR, namely BERNARDO, FELY, SONIA, LILY, DYESEBEL and NOEMI all surnamed ESCANLAR, petitioners, vs. HON. COURT OF APPEALS, GENEROSA MARTINEZ, CARMEN CARI-AN, RODOLFO CARI-AN, NELLY CHUA CARI-AN, for herself and as guardian ad litem of her minor son, LEONELL C. CARI-AN and FREDISMINDA CARI-AN, and SP. PAQUITO CHUA and NEY SARROSA CHUA and REGISTER OF DEEDS OF NEGROS OCCIDENTAL, respondents. RESOLUTION ROMERO, J.:

Grio-Aquino, Bellosillo and Quiason, JJ ., concur. Footnotes Before this Court are the following motions: (a) [First] Motion 1 dated November 29, 1997, filed by petitioners heirs of Pedro Escanlar and Francisco Holgado; (b) Motion for Leave to File Second Motion for Partial Reconsideration and Clarification 2 dated February 9, 1998; and (c) Second Motion for Partial Reconsideration and Clarification 3of even

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date, the latter two motions having been filed by petitioners Edwin and Elisa Jayme (the "Jaymes"). These motions all pertain to this Court's decision 4 promulgated on October 23, 1997, the decretal portion of which states: WHEREFORE, the petitions are hereby GRANTED. The decision of the Court of Appeals under review is hereby REVERSED AND SET ASIDE. The case is REMANDED to the Regional Trial Court of Negros Occidental, Branch 61 for petitioners and private respondents Cari-an or their successors-in-interest to determine exactly which 1/2 portion of Lot Nos. 1616 and 1617 will be owned by each party, at the option of petitioners. The trial court is DIRECTED to order the issuance of the corresponding certificates of title in the name of the respective parties and to resolve the matter of rental payments of the land not delivered to the Chua spouses subject to the rates specified above with legal interest from date of demand. wherein we ruled, inter alia, that the first sale to petitioners Francisco Holgado and the late Pedro Escanlar by the Cari-an heirs (the "Cari-ans") of the one-half portions of Lots 1616 and 1617 pertaining to the share in the conjugal estate of their predecessor Victoriana Cari-an was valid while the subsequent conveyance of the same to respondents Paquito Chua and Ney Sarrosa-Chua (the "Chuas") was not. In particular, petitioners are seeking clarification of that part of the decision which states: 5. Recapitulating, we have held that the September 15, 1978 deed of sale of rights, interests and participations is valid and that the sellers-private respondents Cari-an were fully paid the contract price. However, it must be emphasized that what was sold was only the Cari-an's hereditary shares in Lot Nos. 1616 and 1617 being held pro indiviso by them and is thus a valid conveyance only of said ideal shares. Specific or designated portions of land were not involved. Consequently, the subsequent sale of 8 parcels of land, including Lot Nos. 1616 and 1617, to the spouses Chua is valid except to the extent of what was sold to petitioners in the September 15, 1978 conveyance. It must be noted, however, that the probate court in Special Proceeding No. 7-7279 desisted from awarding the individual shares of each heir because all the properties belonging to the estate had already been sold. Thus it is not certain how much private respondents Cari-an were entitled to with respect to the two lots, or if they were even going to be awarded shares in said lots. The proceedings surrounding the estate of Nombre and Cari-an having attained finality for nearly a decade now, the same cannot be re-opened. The protracted proceedings which have undoubtedly left the property under a cloud and the parties involved in a state of uncertainty compels us to resolve it definitively. The decision of the probate court declares private respondents Cari-an as the sole heirs by representation of Victoriana Cari-an who was indisputably entitled to half of the estate. There being no exact apportionment of the shares of each heir and no competent proof that the heirs received unequal shares in the disposition of the estate, it can be assumed that the heirs of Victoriana Cari-an collectively are entitled to half of each property in the estate. More particularly, private respondents Cari-an are entitled to half of Lot Nos. 1616 and 1617, i.e. 14,675 square meters of Lot No. 1616 and 230,474 square meters of Lot No. 1617. Consequently, petitioners, as their successors-in-interest, own said half of the subject lots and ought to deliver the possession of the other half, as well as pay rents thereon, to the private respondents Ney Sarrosa Chua and Paquito Chua but only if the former (petitioners) remained in possession thereof .

The rate of rental payments to be made were given in evidence by Ney Sarrosa Chua in her unrebutted testimony on July 24, 1989: For the fishpond (Lot No. 1617) From 1982 up to 1986, rental payment of P3,000.00 per hectare; from 1986-1989 (and succeeding years), rental payment of P10,000.00 per hectare. For the riceland (Lot No. 1616) - 15 cavans per hectare per year; from 1982-1986, P125.00 per cavan, 1987 -1988, P175.00 per cavan; and 1989 and succeeding years, P200.00 per cavan. (Emphasis supplied). Petitioners would have this Court take a second look at its supposed automatic award to the Chuas of the other halves representing the late Guillermo Nombre's shares in Lot Nos. 1616 and 1617 on the grounds that: (a) these other halves have never been the subject of the present litigation or the double sale complained of by petitioners; and (b) there are certain undivided interests in these other halves which have been conveyed by some Nombre heirs to Escanlar who in turn sold the same to the Jaymes. In other words, the Jaymes, according to petitioners, are actually entitled to the one-half portions of Lot Nos. 1616 and 1617 previously sold by the Cari-ans to Escanlar and Holgado and the validity of which have been upheld by this Court plus certain portions of the other halves of the same lots sold this time by some Nombre heirs to Escanlar. For these reasons, petitioners argue that there is no basis at all in fact and in law for the Court to award the entire one-half portions of the said lots to the Chuas, as well as to charge the Jaymes rental payments thereon. Upon closer scrutiny and re-examination of the records, the Court is convinced that there is merit in the above contentions. It is a fact that the other ideal one-half shares of the late Guillermo Nombre in Lot Mos. 1616 and 1617 have never been entirely sold to the Chuas because some of the Nombre heirs who are composed of the descendants of Guillermo Nombre's brothers and sisters 5 likewise sold their undivided shares to Escanlar who in turn conveyed them to the Jaymes. All these transactions are duly evidenced by several deeds of sale 6 and a Memorandum of Agreement 7 dated August 31, 1984, whose validity and authenticity have not been impugned by any party. As a matter of fact, there were also some shares which were not conveyed at all to either Chuas or Jaymes. In any event, these sales by the Nombre heirs to Escanlar whose interests were eventually acquired by the Jaymes had the effect of increasing the latter's ownership beyond the one-half portions of the subject lots originally sold by the Cari-ans. Correspondingly, the Chuas are entitled only to those portions as have been conveyed to them which actually amount to less than the one-half participation of Guillermo Nombre in each of said lots. Mole particularly, these are the ideal shares which they have acquired from Lazaro Nombre, Victorio Madalag, Domingo Campillanos, and Sofronio Campillanos by virtue of the September 21, 1982 deed of sale, as well as from Felicidad Nombre, Potencia Brillas, and Enrique Campillanos, through instruments other than said deed. In view of the foregoing findings, it necessarily follows that there is no justification for the Jaymes to be compelled to turn over one-half of Lot No. 1616 and one-half of Lot No. 1617, and be held liable to pay the Chuas rentals with respect to those portions. On the contrary, we find it equitable instead to hold the Chuas answerable for reasonable rentals to the extent of their possession of portions of Lot Nos. 1616 and 1617 which now properly belong to the Jaymes by virtue of the above findings. ACCORDINGLY, the Court hereby resolves to GRANT the above motions of petitioners heirs of Pedro Escanlar and Francisco Holgado, as well as that of the spouses Edwin A. Jayme and Elisa T. Jayme. The decision of this Court dated October 23, 1997, insofar as it awarded one-half of Lot No. 1616 and one-half of Lot No. 1617 to the spouses Paquito and Ney Sarrosa-Chua, and which made the spouses Jayme liable for rental payments thereon, is VACATED and SET ASIDE. In lieu thereof, a new one is entered to read as follows: WHEREFORE, the petitions are hereby GRANTED. The decision of the Court of Appeals under review is hereby REVERSED AND SET ASIDE. The case is REMANDED to the Regional Trial Court of Negros Occidental, Branch 61, for petitioners and private respondents or their successors-in-interest to determine exactly the portions which will be owned by each party in accordance with the foregoing resolution, at the option of petitioners. The trial court is likewise DIRECTED to order the issuance of the corresponding certificates of title in the name of the respective parties and to determine how much rentals the Chuas have to pay the Jaymes from

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the time the former possessed, if they did at all, the portions pertaining to the latter up to the time the same are restored. SO ORDERED. Narvasa, C.J., Kapunan and Purisima, JJ., concur. Footnotes 1 Rollo, pp. 418-121. 2 Ibid., pp. 426-427. 3 Id., pp. 428-435. 4 Id., pp. 291-311. 5 These are: Sotero Nombre, Hermogenes Nombre, Luis Nombre, Vidal Nombre, Juliana Nombre-Campillanos, and Maria Nombre-Madalag. One sister, Manuela Nombre, appeared not to have sold her rights at all in Guillermo Nombre's estate. 6 Motion for Partial Reconsideration filed by the Jaymes, Annexes "B" to "G", Rollo, pp. 327-403. 7 Ibid., pp. 414-415.

When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent a letter4 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 reimbursed8 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 Complaint10 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.

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 Decision1 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 Sale2 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

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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 letter 15 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. InEscueta 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 factoerased 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 138033 and 1381.34We 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.

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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 rescission38 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 exception40 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 petitioner41 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.1wphi1.nt 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. Bellosillo, Mendoza, Buena, De Leon, Jr., JJ., concur.

24

Tan v. CA, 175 SCRA 656, 662 (1989); Philippine Amusement Enterprises, Inc. v. Natividad, 21 SCRA 284, 289 (1967). 25 Ocejo, Perez & Go. v. International Bank, 37 Phil 631, 642 (1918). 26 Supra, note 10. 27 Records, pp. 1-12. 28 Id. at 10. 29 43 SCRA 93 (1972). 30 Id. at 104 (1972).
31

Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known.

32

Chapter 6, Title II, Book IV of the Civil Code. Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. Article 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

33

34

Footnotes

Rollo, pp. 31-39. 2 Records, pp.13-14. 3 Id. at 13. 4 Id. at 15. 5 Id. at 16. 6 Ibid. 7 Id. at 19-20. 8 Id. at 21. 9 Id. at 22. 10 Id. at 1-12. 11 Id. at 53-64. 12 Id. at 180-184. 13 Id. at 184. 14 Ro!lo, p. 18. 15 supra, note 4. 16 Villaruel v. Tan King, 43 Phil. 251, 256 (1922). 17 43 Phil. 251 (1922); See also Dignos v. Court of Appeals, 158 SCRA 375 (1988). 18 Id. at 255; See also Bucoy v. Paulino, 23 SCRA 248 (1968). 19 Id. at 257. 20 E. Paras. CIVIL CODE OF THE PHILIPPINES ANNOTATED 230 (14th ed. 2000) 21 76 Phi1256, 260 (1946). 22 Mateos v. Lopez, 6 Phil. 206, 210 (1906); Bosque v. Yu Chipco, 14 Phil. 95, 98 (1910). 23 Rubio de Larena v. Villanueva, 53 Phil 923, 929 (1928).

(5) All other contracts specially declared by law to be subject to rescission.

35 36 37

Ong v. CA, 310 SCRA 1, 9 (1999). Ibid. Art. 1144. The following actions must be brought within ten years from the time the right of action accrues: (1) upon a written contract; xxx 38 Supra, note 1 at 38. 39 Ibid. 40 Fuentes v. CA, 268 SCRA 703, 708 (1997); Solid Homes, Inc v. CA, 275 SCRA 267, 279 (1997). 41 TSN, June17,1992, p.81. 42 Records pp. 107-122. 43 Id. at 109-110, 15. 44 See Art. 1256-1261, Civil Code, on Tender of Payment and Consignation.

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G.R. No. L-47774

March 14, 1941

MAGDALENA ESTATE, INC., petitioner-appellant, vs. LOUIS J. MYRICK, respondent-appellee. Felipe Ysmael and Eusebio C. Encarnacion for petitioner. Andres C. Aguilar for respondent. LAUREL, J.: On January 2, 1928, the Magdalena Estate, Inc., sold to Louis J. Myrick lots Nos. 28 and 29 of Block 1, Parcel 9 of the San Juan Subdivision, San Juan Rizal, their contract of sale No. SJ-639 (Exhibits B and 1) providing that the price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each on the second day of every month beginning the date of execution of the agreement. Simultaneously, the vendee executed and delivered to the vendor a promissory note (Exhibits C and 2) for the whole purchase price, wherein it was stipulated that "si cualquier pago o pagos de este pagare quedasen en mora por mas de dos meses, entonces todos el saldo no pagado del mismo con cualesquiera intereses que hubiese devengado, vercera y sera exigible inmediatamente y devengara intereses al mismo tipo de 9 por ciento al ao hasta su completo pago, y en tal caso me comprometo, ademas, a pagar al tenedor de este pagare el 10 por ciento de la cantidad en concepto de honorarios de abogado." In pursuance of said agreement, the vendee made several monthly payments amounting to P2,596.08, the last being on October 4, 1930, although the first installment due and unpaid was that of May 2, 1930. By reason of this default, the vendor, through its president, K.H. Hemady, on December 14, 1932, notified the vendee that, in view of his inability to comply with the terms of their contract, said agreement had been cancelled as of that date, thereby relieving him of any further obligation thereunder, and that all amounts paid by him had been forfeited in favor of the vendor, who assumes the absolute right over the lots in question. To this communication, the vendee did not reply, and it appears likewise that the vendor thereafter did not require him to make any further disbursements on account of the purchase price. On July 22, 1936, Louis J. Myrick, respondent herein, commenced the present action in the Court of First Instance of Albay, praying for an entry of judgment against the Magdalena Estate, Inc. for the sum of P2,596.08 with legal interest thereon from the filing of the complaint until its payment, and for costs of the suit. Said defendant, the herein petitioner, on September 7, 1936, filed his answer consisting in a general denial and a cross-complaint and counterclaim, alleging that contract SJ-639 was still in full force and effect and that, therefore, the plaintiff should be condemned to pay the balance plus interest and attorneys' fees. After due trial, the Court of First Instance of Albay, on January 31, 1939, rendered its decision ordering the defendant to pay the plaintiff the sum of P2,596.08 with legal interest from December 14, 1932 until paid and costs, and dismissing defendant's counterclaim. From this judgment, the Magdalena Estate, Inc. appealed to the Court of Appeals, where the cause was docketed as CA-G.R. No. 5037, and which, on August 23, 1940, confirmed the decision of the lower court, with the only modification that the payment of interest was to be computed from the date of the filing of the complaint instead of from the date of the cancellation of the contract. A motion for reconsideration was presented, which was denied on September 6, 1940. Hence, the present petition for a writ of certiorari. Petitioner-appellant assigns several errors which we proceed to discuss in the course of this opinion. Petitioner holds that contract SJ-639 has not been rendered inefficacious by its letter to the respondent, dated December 14, 1932, and submits the following propositions: (1) That the intention of the author of a written instrument shall always prevail over the literal sense of its wording; (2) that a bilateral contract may be resolved or

cancelled only by the prior mutual agreement of the parties, which is approved by the judgment of the proper court; and (3) that the letter of December 14, 1932 was not assented to by the respondent, and therefore, cannot be deemed to have produced a cancellation, even if it ever was intended. Petitioner contends that the letter in dispute is a mere notification and, to this end, introduced in evidence the disposition of Mr. K.H. Hemady, president of the Magdalena Estate, Inc. wherein he stated that the word "cancelled" in the letter of December 14, 1932, "es un error de mi interpretacion sin ninguna intencion de cancelar," and the testimony of Sebastian San Andres, one of its employees, that the lots were never offered for sale after the mailing of the letter aforementioned. Upon the other hand, the Court of Appeals, in its decision of August 23, 1940, makes the finding that "notwithstanding the deposition of K.H. Hemady, president of the defendant corporation, to the effect that the contract was not cancelled nor was his intention to do so when he wrote the letter of December 14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition Exhibit 1-a), faith and credit cannot be given to such testimony in view of the clear terms of the letter which evince his unequivocal intent to resolve the contract. His testimony is an afterthought. The intent to resolve the contract is expressed unmistakably not only in the letter of December 14, 1932, already referred to (Exhibit 6 and D), but is reiterated in the letters which the president of the defendant corporation states that plaintiff lost his rights for the land for being behind more than two years, and of April 10, 1035 (Exhibit G), where defendant's president makes the following statements: "Confirming the verbal arrangement had between you and our Mr. K.H. Hemady regarding the account of Mr. Louis J. Myrick under contract No. SJ-639, already cancelled." This conclusion of fact of the Court of Appeals is final and should not be disturbed. (Guico vs. Mayuga and Heirs of Mayuga, 63 Phil., 328; Mamuyac vs. Abena, XXXVIII Off. Gaz. 84.) Where the terms of a writing are clear, positive and unambiguous, the intention of the parties should be gleaned from the language therein employed, which is conclusive in the absence of mistake (13 C.J. 524; City of Manila vs. Rizal Park Co., 52 Phil. 515). The proposition that the intention of the writer, once ascertained, shall prevail over the literal sense of the words employed is not absolute and should be deemed secondary to and limited by the primary rule that, when the text of the instrument is explicit and leaves no doubt as to its intention, the court may not read into it any other which would contradict its plain import. Besides, we have met with some circumstances of record which demonstrate the unequivocal determination of the petitioner to cancel their contract. They are: (1) the act of the petitioner in immediately taking possession of the lots in question and offering to resell them to Judge M.V. del Rosario, as demonstrated by his letter marked Exhibit G, shortly after December 14, 1932; (2) his failure to demand from the respondent the balance of the account after the mailing of the disputed letter; and (3) the letters of January 10, 1933 (Exhibit F-2) and April 10, 1935 (Exhibit G) reiterate, in clear terms, the intention to cancel first announced by petitioner since December 14, 1932. It is next argued that contract SJ-639, being a bilateral agreement, in the absence of a stipulation permitting its cancellation, may not be resolved by the mere act of the petitioner. The fact that the contracting parties herein did not provide for resolution is now of no moment, for the reason that the obligations arising from the contract of sale being reciprocal, such obligations are governed by article 1124 of the Civil Code which declares that the power to resolve, in the event that one of the obligors should not perform his part, is implied. (Mateos vs. Lopez, 6 Phil., 206; Cortez vs. Bibao & Beramo, 41 Phil. 298; Cui. vs. Sun Chan, 41 Phil., 523; Po Pauco vs. Siguenza, 49 Phil., 404.) Upon the other hand, where, as in this case, the petitioner cancelled the contract, advised the respondent that he has been relieved of his obligations thereunder, and led said respondent to believe it so and act upon such belief, the petitioner may not be allowed, in the language of section 333 of the Code of Civil Procedure (now section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the course of litigation or in dealings in nais, be permitted to repudiate his representations, or occupy inconsistent positions, or, in the letter of the Scotch law, to "approbate and reprobate." (Bigelow on Estoppel, page 673; Toppan v. Cleveland, Co. & C.R. Co., Fed. Cas. 14,099.) The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase price. The claim, therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under article 1124 of the Civil Code, however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are alternative and not cumulative, and the petitioner in this case, having to cancel the contract, cannot avail himself of the other remedy of exacting performance. (Osorio & Tirona vs. Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua Jamco, 14 Phil., 602.) As a consequence of the resolution, the parties should be restored, as far as practicable, to their original situation (Po Pauco vs.

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Siguenza, supra) which can be approximated only by ordering, as we do now, the return of the things which were the object of the contract, with their fruits and of the price, with its interest (article 1295, Civil Code), computed from the date of the institution of the action. (Verceluz vs. Edao, 46 Phil. 801.) The writ prayed for is hereby denied, with costs against the petitioner. So ordered. Imperial, Diaz, Moran, and Horrilleno, JJ., concur.

meters of the Victoria Valley Subdivision in Antipolo, Rizal, subject to the following terms and conditions, among others, relevant to this petition: (a) The total contract price for the entire 5,936 square-meter-lot was P47,488.00; (b) Of the total sum, an amount of Pl2,182.00 was applied thereto so as to reduce the balance on the principal to P35,306.00; (c) The aforesaid balance, together with the stipulated interest of 6% per annum, was to be paid over a period of 8-1/2 years starting on May 1, 1961 at a monthly installment of P446.10 until fully paid-although this monthly installment was later adjusted to the higher amount of P797.86, starting on April 1, 1965; (d) Upon complete payment by the vendee of the total price of the lot the vendor shall execute a deed of sale in favor of the vendee; (e) The contract shall be considered automatically rescinded and cancelled and of no further force and effect upon failure of the vendee to pay when due, three or more consecutive installments as stipulated therein or to comply with any of the terms and conditions thereof, in which case the vendor shall have right to resell the said parcel of land to any person interested, forfeiting payments made by the vendee as liquidated damages. 2. On July 27, 1965, petitioner sent to private respondents a Statement of Account (Exh. F-1) requesting remittance of installment arrears showing partial payments for the month of April 1965 and May 1965 and complete default for June, July and August, 1965; 3. Likewise, on August 31, 1965, petitioner sent to private respondents another Statement of Account with the additional entries of interests and the incoming installment for September, 1965; 4. In partial compliance with the aforesaid Statements of Account, private respondents paid on September 3, 1965 the sum of Pl,397.00 which answers for the installments for the months of June 1965 to August 1965; 5. On March 17, 1967, petitioner sent private respondents a simple demand letter showing a delinquency in their monthly amortizations for 19 months (Exh. 9); 6. On April 17, 1967, petitioner again sent private respondents a demand letter showing total arrearages of 20 months as of April 1965, but this time advising that unless they up-date their installment payments, petitioner shall be constrained to avail of the automatic rescission clause (Exh. 10); 7. On May 17, 1967, private respondents made a partial payment of P2,000.00 with the request for an extension of 60 days from May 17, 1967 within which to up-date their account (Exh. 10-a); 8. On July 17, 1967, private respondents wrote a letter to petitioner asking another extension of sixty (60) days to pay all their arrearages and update their payments under Contract No. VV-18 (a); 9. On September 18, 1967, private respondents paid P5,000.00 as partial payment and requested an extension of another 30 days from September 18, 1967 within which to update their account (Exh. 10-c);

G.R. No. L-67881 June 30, 1987 PILIPINAS BANK as Successor-In-Interest Of And/Or In substitution to, The MANUFACTURERS BANK AND TRUST COMPANY, petitioner-appellant vs. INTERMEDIATE APPELLATE COURT (Fourth Civil Cases Division), and JOSE W. DIOKNO and CARMEN I. DIOKNO, respondents-appellees. PARAS, J.: This is an appeal by certiorari from the Decision 1 of the respondent court dated May 31, 1984 in CA-G.R. CV No. 67205 entitled "Jose W. Diokno and Carmen I. Diokno, plaintiffs-appellees, vs. The Manufacturers Bank and Trust Company, defendant-appellant" which affirmed the decision 2 of the Court of First Instance of Rizal (Pasig Branch XXI) in Civil Case No. 19660, the dispositive portion of which reads: WHEREFORE, judgment is rendered in favor of the plaintiffs and against the defendant, ordering the defendant Manufacturers Bank & Trust Company: 1. To deliver to the plaintiffs the parcel of land described in Contract to Sell No. VV-18-(a) in the total area of 5,936 square meters and to execute in their favor the necessary deed of absolute sale therefor; 2. To pay the sum of P556,160.00 less the amount due on the contract (i.e., the unpaid installments from December, 1966 until the contract would have been fully paid together with interest thereon up to March 25, 1974) with legal interest on said balance from April 22, 1974 until the same is fully paid; 3. P50,000.00 by way of moral damages; 4. P50,000.00 by way of exemplary damages; 5. Ten per cent (10%) of the judgment by way of attorney's fees; and 6. Costs of suit. SO ORDERED. (Rollo, pp. 14-15) The following are the undisputed facts of the case: 1. On April 18, 1961, Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and private respondents, as vendees executed Contract to Sell No. VV-18 (a) (Exh. A) over a parcel of land with an area of 5,936 square

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10. On October 19, 1967, however, private respondents failed to update their arrearages and did not request for any further extension of time within which to update their account; 11. After almost three (3) years, or on July 16, 1970, private respondents wrote a letter to petitioner requesting for a Statement of Account as of date in arrears and interests(Exh. 10-d), to which petitioner made a reply on July 22, 1970 (Exh. 11); 12. On May 19, 1971, petitioner wrote a letter to private respondents, reminding them of their balance which will be due on the 31st instant (Exh. J); 13. More than two (2) years from May 19, 1971 or on July 5, 1973, private respondents wrote a letter to petitioner expressing their desire to fully settle their obligation, requesting for a complete statement of all the balance due including interests; 14. On March 14, 1974, private respondents wrote a letter reiterating their request in their letter dated July 5, 1973, which has not been complied with despite several follow-ups (Exh. O); 15. On March 25, 1974, private respondent Carmen I. Diokno went to see the Chairman of petitioner's Board of Directors on the matter informing him that she had a buyer who was ready to purchase the property, 16. On March 27, 1974, petitioner wrote a letter to private respondents, informing them that the contract to sell had been rescinded/cancelled by a notarial act, to which letter was annexed a "Demand for Rescission of Contract", notarized on March 25, 1974 (Exh. 12); 17. In view of the foregoing, private respondents filed Complaint for Specific Performance with Damages to compel petitioner to execute a deed of sale in their favor, and to deliver to them the title of the lot in question. 18. Petitioner filed an Answer with counterclaim for damages in the form of attorney's fees, claiming that Contract to Sell No. VV-18(a) has been automatically rescinded or cancelled by virtue of private respondents' failure to pay the installments due in the contract under the automatic rescission clause. 19. After trial, the lower court rendered a decision in private respondents' favor, holding that petitioner could not rescind the contract to sell, because: (a) petitioner waived the automatic rescission clause by accepting payment on September 1967, and by sending letters advising private respondents of the balances due, thus, looking forward to receiving payments thereon; (b) in any event, until May 18, 1977 (when petitioner made arrangements for the acquisition of additional 870 square meters) petitioner could not have delivered the entire area contracted for, so, neither could private respondents be liable in default, citing Art. 1 189 of the New Civil Code. (Decision, pp. 141-148, Amended Record on Appeal). Said decision was affirmed on appeal. Hence, this Petition For Review on Certiorari, raising the main issue of whether or not the Contract to Sell No. VV18(a) was rescinded or cancelled, under the automatic rescission clause contained therein. We find the petition meritless. While it is true that in the leading case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., 43 SCRA 93 the Supreme Court reiterated among other things that a contractual provision allowing "automatic rescission" (without prior need of judicial rescission, resolution or cancellation) is VALID, the remedy of one who feels aggrieved being to go to Court for the cancellation of the rescission itself, in case the rescission is found unjustified under the circumstances, still in the instant case there is a

clear WAIVER of the stipulated right of "automatic rescission," as evidenced by the many extensions granted private respondents by the petitioner. In all these extensions, the petitioner never called attention to the proviso on "automatic rescission." WHEREFORE the assailed decision is hereby AFFIRMED but the actual damages are hereby reduced to P250,000.00 (the profit private respondents could have earned had the land been delivered to them at the time they were ready to pay all their arrearages) minus whatever private respondents still owe the petitioner (with the stipulated 6% annual interest up to March 25, 1974) as a result of the contract. SO ORDERED. Fernan (Chairman), Gutierrez, Jr., Padilla and Cortes, JJ., concur. Bidin, J., took no part.

Footnotes 1 Penned by Justice Porfirio V. Sison concurred in by Justices Abdulwahid A. Bidin, Marcelino R. Veloso, and Desiderio P. Jurado. 2 Penned by Judge Gregorio G. Pineda.

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.

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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:

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,

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,

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 HawaiianPhilippine 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.

HAWAIIAN-PHILIPPINE COMPANY BY R. C. PITCAIRN Administrator.

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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:

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

Date of delivery

Account and date thereof

Date of receipt of account by plaintiff 1923

Date of payment

1922 Dec. 18 Dec. 29 1923 Jan. 5 Feb. 12 Feb. 27 Mar. 5 Mar. 16 Mar. 24 Mar. 29 206.16 206.16 206.16 206.16 206.16 206.16 206.16 Jan. 9/23 Mar. 12/23 do do Mar. 20/23 Mar. 31/23 do P206.16 206.16 Dec. 26/22 Jan. 3/23 Jan. 5 do

1923 Feb. 20 Do

Mar. 7 or 8 do do do Apr. 2/23 do do

Mar. 31 Do Do Do Apr. 19 Do Do

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."

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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. Avancea, C.J., Johnson, Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or corrective damages. On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the present recourse. The Court of Appeals arrived at the following "uncontroverted" findings of fact: That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and in the same year plaintiff registered his trademark in his name as owner and inventor with the Bureau of Patents; that due to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1). Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor and superintendent with a salary of P250.00 a month. Since the start of the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret to himself. However, said plaintiff expressed a willingness to give the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly approved by the President and General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960, President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him to report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with the orders of the corporation's various distributors and dealers, and with

G.R. No. L-29155 May 13, 1970 UNIVERSAL FOOD CORPORATION, petitioner, vs. THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents. Wigberto E. Taada for petitioner. Teofilo Mendoza for respondents. CASTRO, J.: Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1 On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1

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instructions to take only the necessary daily employees without employing permanent employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees who are connected in the production of Mafran Sauce and also some additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation including its trademarks, formula and assets at a price of not less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action on February 14, 1961. About a month afterwards, in a letter dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present action was already filed in court (Exhibit J). 1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169 of the same Code, 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; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been guilty of default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of Assignment. The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2 The Bill of Assignment sets forth the following terms and conditions: THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE; THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production of MAFRAN SAUCE and other food products and from other business which the Party of the Second Part may engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine and declare, said Party of the First Part hereby assign, transfer, and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part; THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end

of the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of the Second Part and after a competent auditor designated by the Board of Directors shall have duly examined and audited its books of accounts and shall have certified as to the correctness of its Financial Statement; THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the Party of the First Part and to increase its production, shall endeavor or undertake such research, study, experiments and testing, to invent or cause to invent additional formula or formulas, the property rights and interest thereon shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in consideration of the foregoing premises, covenants and stipulations: THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be entitled to the following Participation: (a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief Chemist of the Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor thereof and in the event that the Treasurer or any officer who may have the custody of the funds, assets and other properties of the Party of the Second Part comes from the Party of the First Part, then the Auditor shall not be appointed from the latter; furthermore should the Auditor be appointed from the Party representing the majority shares of the Party of the Second Part, then the Treasurer shall be appointed from the Party of the First Part; (b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of their respective position, then, their shares or assigns and who may have necessary qualifications shall be preferred to succeed them; (c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of Directors of the Party of the Second Part; (d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the preparation of said products; THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in which case then the property rights and interests over said trademark and formula shall automatically revert the Party of the First Part. Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula."

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However, a perceptive analysis of the entire instrument and the language employed therein 3 would lead one to the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the parties, 4 as we shall presently show. Firstly, one of the principal considerations of the Bill of Assignment is the payment of " royalty of TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for the use of a patented invention. 'Royalty,' when used in connection with a license under a patent, means the compensation paid by the licensee to the licensor for the use of the licensor's patented invention ." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5 Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping of the chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6 Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark and formula and not merely the right to use it for then such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become part of the property in the hands of the receiver thereof. 7 Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below for ready reference: 3. ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights over the said trademark and formula so that the defendant corporation could use the formula in the preparation and manufacture of the mafran sauce, and the trade name for the marketing of said project, as appearing in said contract .... 3. Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint. Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent patentee. Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the least transmission of right," 9 and is there a better example of least transmission of rights than allowing or permitting only the use, without transfer of ownership, of the formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce." 2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character." The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position as chief chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to retain only a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was even designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he could draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the petitioner had to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides, the records will show that the respondent patentee had knowledge of the resumption of production by the corporation, but in spite of such knowledge he did not report for work. The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work, considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist, while the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of the resumption of operations. The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received a copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no weight because the president and general manager of the corporation had no power to make the designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father. In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time being until the corporation resumed operations. This measure was taken

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allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twenty-three days afterwards, or on December 29, the same president and general manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full blast production. And finally, at the hearing held on October 24, 1961, the same president and general manager admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation pay." The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers, 11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission, the petitioner corporation, thru its president and general manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff." 3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the following articles of the new Civil Code governing rescission of contracts: ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 of the Mortgage Law. ART. 1383. 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. ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused. At the moment, we shall concern ourselves with the first two paragraphs of 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 fulfillment and rescission of the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause. Upon the factual milieu, is rescission of the Bill of Assignment proper? 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. 12The question of whether a breach of a contract is substantial depends upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the legal principle that the option to demand performance or ask for rescission of a contract belongs to the injured party, 14 the fact remains that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to appoint him as its Second VicePresident and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the purchase and safeguarding of said products;" and that only by all these measures could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second Vice-President and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said product all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of the rest. 4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is that the said respondent patentee refused to go back to work, notwithstanding the call for him to return which negates his right to be paid his back salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already formally called him back to work. The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second VicePresident and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation.

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5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and formula." ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its assigns and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur. Teehankee J., took no part.

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. 1 But the terminological vagueness does not justify confusing one case with the other, considering the patent difference in causes and results of either action.

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:

Separate Opinions REYES, J.B.L., J., concurring: I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be denied because under Article 1383 of the Civil Code of the Philippines rescission can not be demanded except when the party suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesion or economic prejudice, under Article 1381, et seq. 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 in 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

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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

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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. Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur. Reyes, J.B.L., Actg. C.J., is on leave. # Footnotes 1 Ocejo Perez & Co. vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan de Dios, et al., 84 Phil. 820.

[G.R. No. 137909. December 11, 2003] FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner, vs. Spouses BERNARDINO NAGUIAT and MARIA PAULINA GERONA-NAGUIAT, respondents. DECISION PANGANIBAN, J.: The failure to pay in full the purchase price stipulated in a deed of sale does not ipso facto grant the seller the right to rescind the agreement. Unless otherwise stipulated by the parties, rescission is allowed only when the breach of the contract is substantial and fundamental to the fulfillment of the obligation. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the October 31, 1997 Decision[2] and the February 23, 1999 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 51067. The assailed Decision disposed as follows: WHEREFORE, modified as indicated above, the decision of the Regional Trial Court is hereby AFFIRMED.[4] The assailed Resolution denied petitioners Motion for Reconsideration. The Facts The facts of the case are summarized by the CA as follows: Eulalio Mistica, predecessor-in-interest of herein [petitioner], is the owner of a parcel of land located at Malhacan, Meycauayan, Bulacan. A portion thereof was leased to [Respondent Bernardino Naguiat] sometime in 1970.
[1]

Page 33 of 45

On 5 April 1979, Eulalio Mistica entered into a contract to sell with [Respondent Bernardino Naguiat] over a portion of the aforementioned lot containing an area of 200 square meters. This agreement was reduced to writing in a document entitled Kasulatan sa Pagbibilihan which reads as follows: NAGSASALAYSAY: Na ang NAGBIBILI ay nagmamay-aring tunay at naghahawak ng isang lagay na lupa na nasa Nayon ng Malhacan, Bayan ng Meycauayan, Lalawigan ng Bulacan, na ang kabuuan sukat at mga kahangga nito gaya ng sumusunod: xxx xxx xxx

Eulalio Mistica, he offered to pay the remaining balance to [petitioner] but the latter refused and hence, there is no breach or violation committed by them and no damages could yet be incurred by the late Eulalio Mistica, his heirs or assigns pursuant to the said document; that he is presently the owner in fee simple of the subject lot having acquired the same by virtue of a Free Patent Title duly awarded to him by the Bureau of Lands; and that his title and ownership had already become indefeasible and incontrovertible. As counterclaim, [respondents] pray for moral damages in the amount of P50,000.00; exemplary damages in the amount of P30,000.00; attorneys fees in the amount of P10,000.00 and other litigation expenses. On 8 July 1992, [respondents] also filed a motion to dismiss which was denied by the court on 29 July 1992. The motion for reconsideration was likewise denied per its Order of 17 March 1993. After the presentation of evidence, the court on 27 January 1995 rendered the now assailed judgment, the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered: 1. Dismissing the complaint and ordering the [petitioner] to pay the [respondents] attorneys fee in the amount of P10,000.00 and costs of the suit; 2. Ordering the [respondents]: a. To pay [petitioner] and the heirs of Eulalio Mistica the balance of the purchase price in the amount of P17,000.00, with interest thereon at the rate of 12% per annum computed from April 5, 1989 until full payment is made, subject to the application of the consigned amount to such payment; To return to [petitioner] and the heirs of Eulalio Mistica the extra area of 58 square meters from the land covered by OCT No. 4917 (M), the corresponding price therefor based on the prevailing market price thereof.[5] (Citations omitted)

Na alang-alang sa halagang DALAWANG PUNG LIBONG PISO (P20,000.00) Kualtang Pilipino, ang NAGBIBILI ay nakipagkasundo ng kanyang ipagbibili ang isang bahagi o sukat na DALAWANG DAAN (200) METROS PARISUKAT, sa lupang nabanggit sa itaas, na ang mga kahangga nito ay gaya ng sumusunod: xxx xxx xxx

Na magbibigay ng paunang bayad ang BUMIBILI SA NAGBIBILI na halagang DALAWANG LIBONG PISO (P2,000.00) Kualtang Pilipino, sa sandaling lagdaan ang kasulatang ito. Na ang natitirang halagang LABING WALONG LIBONG PISO (P18,000.00) Kualtang Pilipino, ay babayaran ng BUM[I]BILI sa loob ng Sampung (10) taon, na magsisimula sa araw din ng lagdaan ang kasulatang ito. Sakaling hindi makakabayad ang Bumibili sa loob ng panahon pinagkasunduan, an[g] BUMIBILI ay magbabayad ng pakinabang o interes ng 12% isang taon, sa taon nilakaran hanggang sa itoy mabayaran tulu yan ng Bumibili:

b. Sa katunayan ng lahat ay nilagdaan ng Magkabilang Panig ang kasulatang ito, ngayon ika 5 ng Abril, 1979, sa Bayan ng Meycauayan. Lalawigan ng Bulacan, Pilipinas. (signed) Bumibili (signed) BERNARDINO NAGUIAT EULALIO MISTICA Nagbibili

CAs Decision Disallowing rescission, the CA held that respondents did not breach the Contract of Sale. It explained that the conclusion of the ten-year period was not a resolutory term, because the Contract had stipulated that payment -- with interest of 12 percent -- could still be made if respondents failed to pay within the period. According to the appellate court, petitioner did not disprove the allegation of respondents that they had tendered payment of the balance of the purchase price during her husbands funeral, which was well within the ten -year period. Moreover, rescission would be unjust to respondents, because they had already transferred the land title to their names. The proper recourse, the CA held, was to order them to pay the balance of the purchase price, with 12 percent interest. As to the matter of the extra 58 square meters, the CA held that its reconveyance was no longer feasible, because it had been included in the title issued to them. The appellate court ruled that the only remedy available was to order them to pay petitioner the fair market value of the usurped portion. Hence, this Petition.[6]

Pursuant to said agreement, [Respondent Bernardino Naguiat] gave a downpayment of P2,000.00. He made another partial payment of P1,000.00 on 7 February 1980. He failed to make any payments thereafter. Eulalio Mistica died sometime in October 1986. On 4 December 1991, [petitioner] filed a complaint for rescission alleging inter alia: that the failure and refusal of [respondents] to pay the balance of the purchase price constitutes a violation of the contract which entitles her to rescind the same; that [respondents] have been in possession of the subject portion and they should be ordered to vacate and surrender possession of the same to [petitioner] ; that the reasonable amount of rental for the subject land is P200.00 a month; that on account of the unjustified actuations of [respondents], [petitioner] has been constrained to litigate where she incurred expenses for attorneys fees and lit igation expenses in the sum of P20,000.00. In their answer and amended answer, [respondents] contended that the contract cannot be rescinded on the ground that it clearly stipulates that in case of failure to pay the balance as stipulated, a yearly interest of 12% is to be paid. [Respondent Bernardino Naguiat] likewise alleged that sometime in October 1986, during the wake of the late

Issues In her Memorandum, petitioner raises the following issues:

[7]

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1.

Whether or not the Honorable Court of Appeals erred in the application of Art. 1191 of the New Civil Code, as it ruled that there is no breach of obligation inspite of the lapse of the stipulated period and the failure of the private respondents to pay. Whether or not the Honorable Court of Appeals [e]rred in ruling that rescission of the contract is no longer feasible considering that a certificate of title had been issued in favor of the private respondents. Whether or not the Honorable Court of Appeals erred in ruling that since the 58 sq. m. portion in question is covered by a certificate of title in the names of private respondents reconveyance is no longer feasible and proper.[8] The Courts Ruling

fact that they already made partial payment thereof only shows that the parties intended to be bound by the Kasulatan. Both the trial and the appellate courts arrived at this finding. Well-settled is the rule that findings of fact by the CA are generally binding upon this Court and will not be disturbed on appeal, especially when they are the same as those of the trial court.[16] Petitioner has not given us sufficient reasons to depart from this rule. Second Issue: Rescission Unrelated to Registration The CA further ruled that rescission in this case would be unjust to respondents, because a certificate of title had already been issued in their names. Petitioner nonetheless argues that the Court is still empowered to order rescission. We clarify. The issuance of a certificate of title in favor of respondents does not determine whether petitioner is entitled to rescission. It is a fundamental principle in land registration that such title serves merely as an evidence of an indefeasible and incontrovertible title to the property in favor of the person whose name appears therein. [17] While a review of the decree of registration is no longer possible after the expiration of the one-year period from entry, an equitable remedy is still available to those wrongfully deprived of their property. [18] A certificate of title cannot be subject to collateral attack and can only be altered, modified or canceled in direct proceedings in accordance with law.[19] Hence, the CA correctly held that the propriety of the issuance of title in the name of respondents was an issue that was not determinable in these proceedings. Third Issue: Reconveyance of the Portion Importunately Included

2.

3.

The Petition is without merit. First Issue: Rescission in Article 1191 Petitioner claims that she is entitled to rescind the Contract under Article 1191 of the Civil Code, because respondents committed a substantial breach when they did not pay the balance of the purchase price within the tenyear period. She further avers that the proviso on the payment of interest did not extend the period to pay. To interpret it in that way would make the obligation purely potestative and, thus, void under Article 1182 of the Civil Code. We disagree. The transaction between Eulalio Mistica and respondents, as evidenced by the Kasulatan, was clearly a Contract of Sale. A deed of sale is considered absolute in nature when there is neither a stipulation in the deed that title to the property sold is reserved to the seller until the full payment of the price; nor a stipulation giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period. [9] In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. [10] Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on the violation of the reciprocity between parties, brought about by a breach of faith by one of them. [11] Rescission, however, is allowed only where the breach is substantial and fundamental to the fulfillment of the obligation. [12] In the present case, the failure of respondents to pay the balance of the purchase price within ten years from the execution of the Deed did not amount to a substantial breach. In theKasulatan, it was stipulated that payment could be made even after ten years from the execution of the Contract, provided the vendee paid 12 percent interest. The stipulations of the contract constitute the law between the parties; thus, courts have no alternative but to enforce them as agreed upon and written.[13] Moreover, it is undisputed that during the ten-year period, petitioner and her deceased husband never made any demand for the balance of the purchase price. Petitioner even refused the payment tendered by respondents during her husbands funeral, thus showing that she was not exactly blameless for the lapse of the ten -year period. Had she accepted the tender, payment would have been made well within the agreed period. If petitioner would like to impress upon this Court that the parties intended otherwise, she has to show competent proof to support her contention. Instead, she argues that the period cannot be extended beyond ten years, because to do so would convert the buyers obligation to a purely potestative obligation that would annul the contract under Article 1182 of the Civil Code. This contention is likewise untenable. The Code prohibits purely potestative, suspensive, conditional obligations that depend on the whims of the debtor, because such obligations are usually not meant to be fulfilled.[14] Indeed, to allow the fulfillment of conditions to depend exclusively on the debtors will would be to sanction illusory obligations. [15] The Kasulatan does not allow such thing. First , nowhere is it stated in the Deed that payment of the purchase price is dependent upon whether respondents want to pay it or not. Second, the

Petitioner argues that it would be reasonable for respondents to pay her the value of the lot, because the CA erred in ruling that the reconveyance of the extra 58-square meter lot, which had been included in the certificate of title issued to them, was no longer feasible. In principle, we agree with petitioner. Registration has never been a mode of acquiring ownership over immovable property, because it does not create or vest title, but merely confirms one already created or vested.[20] Registration does not give holders any better title than what they actually have. [21] Land erroneously included in the certificate of title of another must be reconveyed in favor of its true and actual owner. [22] Section 48 of Presidential Decree 1529, however, provides that the certificate of title shall not be subject to collateral attack, alteration, modification, or cancellation except in a direct proceeding. [23] The cancellation or removal of the extra portion from the title of respondents is not permissible in an action for rescission of the contract of sale between them and petitioners late husband, because such action is tantamount to allowing a collateral attack on the title. It appears that an action for cancellation/annulment of patent and title and for reversion was already filed by the State in favor of petitioner and the heirs of her husband.[24] Hence, there is no need in this case to pass upon the right of respondents to the registration of the subject land under their names. For the same reason, there is no necessity to order them to pay petitioner the fair market value of the extra 58-square meter lot importunately included in the title. WHEREFORE, the assailed Decision and Resolution are AFFIRMED with the MODIFICATION that the payment for the extra 58-square meter lot included in respondents title is DELETED. SO ORDERED. Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Page 35 of 45

[1] [2]

Rollo, pp. 22-33. Id., pp. 49-56. Fourth Division. Penned by Justice Antonio M. Martinez (Division chairman), with the concurrence of Justices Corona Ibay-Somera and Oswaldo D. Agcaoili (members). Id., p. 65; penned by Justice Corona Ibay-Somera and concurred in by Justices Oswaldo D. Agcaoili and Mariano M. Umali. CA Decision, p. 7; rollo, p. 55. Id., pp. 1-4 & 49-52. The case was deemed submitted for decision on December 13, 2001, upon this Courts receipt of respondents Memorandum signed by Atty. Ernesto S. Salunat. It was noted in the Courts Resolution dated February 6, 2002. Petitioners Memorandum, signed by Atty. Manuel P. Punzalan, was received by this Court on October 26, 2000. Rollo, pp. 92-105. Petitioners Memorandum, p. 5; rollo, p. 96. Peoples Industrial and Commercial Corp. v. Court of Appeals, 346 Phil. 189, 203, October 24, 1997; Sps. Babasa v. Court of Appeals, 352 Phil. 1142, May 21, 1998. Jacinto v. Kaparaz, 209 SCRA 246, 257, May 22, 1992; Heirs of Escanlar v. Court of Appeals, 346 Phil. 158, 172, October 23, 1997. Uy v. Court of Appeals, 372 Phil. 743, September 9, 1999. Power Commercial and Industrial Corp. v. Court of Appeals, 274 SCRA 597, 608, June 20, 1997; Development Bank of the Philippines v. Court of Appeals, 344 SCRA 492, 509, October 30, 2000. Valarao v. Court of Appeals, 363 Phil. 495, 506, March 3, 1999. Vitug, Compendium of Civil Law & Jurisprudence (1993 rev. ed.), p. 488; Perez v. Court of Appeals, 380 Phil. 592, 600, January 28, 2000. Tolentino, Commentaries and Jurisprudence on the Civil Code, Vol. IV (1991 ed.), p. 152. Lubos v. Galupo, 373 SCRA 618, January 16, 2002; Manufacturers Building, Inc. v. CA, 354 SCRA 521, March 16, 2001; Xentrex Automotive, Inc. v. CA, 353 Phil. 258, June 18, 1998. Vda. de Retuerto v. Barz, 372 SCRA 712, 719, December 19, 2001; Heirs of Brusas v. Court of Appeals, 372 Phil. 47, August 26, 1999; Liao v. Court of Appeals, 380 Phil. 400, January 27, 2000. Villanueva-Mijares v. Court of Appeals, 386 Phil. 555, April 12, 2000; Heirs of Ramon Durano Sr. v. Uy, 344 SCRA 238, 263, October 24, 2000. Seville v. National Development Company, 351 SCRA 112, 125, February 2, 2001; Zaragoza v. Court of Appeals, 341 SCRA 309, 317, September 29, 2000; Tan v. Philippine Banking Corporation, 355 SCRA 292, 299, March 26, 2001; Vda. de Retuerto v. Barz, supra, p. 722; Mallilin Jr. v. Castillo, 389 Phil. 153, June 16, 2000. Development Bank of the Philippines v. Court of Appeals, 387 Phil. 283, April 28, 2000; Republic v. Court of Appeals, 335 SCRA 693, 700, July 14, 2000; Republic of the Phils. v. Court of Appeals, 361 Phil. 319, January 21, 1999; Garcia v. Court of Appeals, 371 Phil. 107, August 10, 1999. Heirs of Ingjug-Tiro v. Sps. Casals, 415 Phil. 665, August 20, 2001.

[22]

Development Bank of the Philippines v. Court of Appeals, supra, p. 285; Republic v. CA, supra, p. 384; De Ocampo v. Arlos, 343 SCRA 716, 727, October 19, 2000. Mallilin Jr. v. Castillo, supra. Docketed as Civil Case No. 182-M-95 and filed with the RTC of Malolos, Bulacan (Branch 12); rollo, pp. 106-112.

[23] [24]

[3]

[4] [5] [6]

G.R. No. 108346

July 11, 2001

[7] [8] [9]

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents. PANGANIBAN, J.: A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitled the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received. The Case Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution3 dated December 29, 1992 denying petitioner's motion for reconsideration.4 The dispositive portion of the assailed Decision reads: "WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted by plaintiffsappellees and defendants-appellants are hereby RELEASED."5 The Facts The factual antecedents of the case, as found by the CA, are as follows: "x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land, together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein private petitioners] is David's father who negotiated with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said property, which was, however, under lease (Exh. '6', p. 232, Record of Civil Case No. 15952). "On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms and conditions:

[10]

[11] [12]

[13] [14]

[15] [16]

[17]

[18]

[19]

[20]

[21]

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'x x x

xxx

xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described above, together with the house and other improvements thereon. 'That the aforesaid parcel of land, together with the house and other improvements thereon, were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ and which Real Estate Mortgage was ratified before Notary Public for Makati, _____, as Doc. No. ______, Page No. _____, Book No. ___, Series of 1986 of his Notarial Register. 'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI, including interests and other charges for late payment levied by the Bank, as if the same were originally signed and executed by the VENDEE. 'It is further agreed and understood by the parties herein that the capital gains tax and documentary stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp. 1112, Record).' "On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).' 'x x x xxx xxx

'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting and confirming our private understanding concerning the said mortgage obligations to be assumed. 'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the consent of my husband, Mariano Z. Velardo, do hereby bind and obligate myself, my heirs, successors and assigns, to strictly and faithfully comply with the following terms and conditions: '1. That until such time as my assumption of the mortgage obligations on the property purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor. '2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr. David A. Raymundo shall resume total and complete ownership and possession of the property sold by way of Deed of Sale with Assumption of Mortgage, and the same shall be deemed automatically cancelled and be of no further force or effect, in the same manner as it (the) same had never been executed or entered into. '3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and assigns, to strictly and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the Philippine Islands, and the covenants, stipulations and provisions of this Undertaking. 'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14, Record).' "This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and conditions of the Deed of Real Estate Mortgage dated _____, signed and executed by Mr. David A. Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No. _____, Series of 1986 of his Notarial Register. 'WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said Deed of Real Estate Mortgage, including all interests and other charges for late payment.

"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of a loan that plaintiffs were to secure from a bank with defendant's help. Defendants had a standing approved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of an application for assumption of mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue paying the monthly interests of the loan secured by a real estate mortgage. "Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record). "On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment.

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"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record). "In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows: 'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January 21, 1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987 for her immediate occupancy; (b) you cause the re- lease of title and mortgage from the Bank of P.I. and make the title available and free from any liens and encumbrances; and (c) you execute an absolute deed of sale in her favor free from any liens or encumbrances not later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record). "On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended sale of the subject property allegedly due to the latter's failure to comply with the terms and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6 Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo YnaresSantiago (now an associate justice of this Court), who dismissed the Complaint in a Decision dated November 14, 1990.7 Thereafter, petitioners filed a Motion for Reconsideration.8 Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991, 9 Judge Abad Santos granted petitioner's Motion for Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender possession of the disputed property to petitioners. Private respondents appealed to the CA. Ruling of the Court of Appeal The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier Decision dismissing petitioners' Complaint. Upholding the validity of the rescission made by private respondents, the CA explained its ruling in this wise: "In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage obligation on the subject property in the amount of P 1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage obligation on the subject property. In other words, the assumption of the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed 'to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally signed and executed by the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the document entitled 'Undertaking' wherein the latter agreed to continue paying said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan would

be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp 13-14, Record). "From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the approval of the assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in the name of Velarde. And in the event said application is disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the nonpayment of the mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, Civil Code). "The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for Velarde's non-payment of the balance of the purchase price. As borne out by the evidence, Velarde had to pay in full in case of BPI's disapproval of the application for assumption of mortgage. What Velarde should have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given weight by the lower court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, would constitute a new undertaking or new agreement which is subject to the consent or approval of Raymundo. These 3 conditions were not among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to novate. But then again, there can be no novation because there was no agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493). "It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption of Mortgage would be deemed 'automatically cancelled and of no further force and effect, as if the same had never been executed or entered into.' While it is true that even if the contract expressly provided for automatic rescission upon failure to pay the price, the vendee may still pay, he may do so only for as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde notarial notice dated January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to comply with their obligation. The rescission was justified in view of Velarde's failure to pay the price (balance) which is substantial and fundamental as to defeat the object of the parties in making the agreement. As adverted to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost their right to its enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)."10 Hence, this appeal. 11 The Issues Petitioners, in their Memorandum,12 interpose the following assignment of errors:

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"I. The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach of the contract. "II The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was justified. "III The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new conditions' constituting mere offers or an attempt to novate necessitating a new agreement between the parties." The Court's Ruling The Petition is partially meritorious. First Issue: Breach of Contract Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents again. However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price balance of P1.8 million to private respondents in case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received notice of the bank's disapproval of their application to assume respondents' mortgage, they should have paid the balance of the P1.8 million loan. Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a buyer under a contract of sale. In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the buyer to pay therefor a price certain in money or its equivalent.13 Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery. 14 Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase price.

Second Issue Validity of the Rescission Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a rescission. They cite several cases15 in which this Court declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith, considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments. As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly provides as follows: "Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between 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 right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. 16 The breach contemplated in the said provision is the obligor's failure to comply with an existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. 18 In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's right to rescind the same in accordance with law. True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance by private respondents of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude the exercise of the right to rescind. Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in those cases are not analogous to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the seller. In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid. In Tan, the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title to the property; there was no reference whatsoever to the nonpayment of the contract price.

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In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their own interest. Mutual Restitution Required in Rescission As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this controversy. Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former. Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. 20 To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.21 Third Issue Attempt to Novate In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of petitioners to private respondents were not part of the original contract. By that time, it was already incumbent upon the former to pay the balance of the sale price. They had no right to demand preconditions to the fulfillment of their obligation, which had become due. WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of rescission. No pronouncement as to costs. SO ORDERED.1wphi1.nt

Rollo, pp. 68-78. Penned by Justice Regina G. Ordoez-Benitez and concurred in by Justices Gloria C. Paras (Division chairman) and Eduardo G. Montenegro (member).
3 4

Rollo, p. 81. Rollo, pp. 21-33. 5 CA Decision, p. 11; Rollo, p. 20. 6 Rollo, pp. 68-73. 7 Records, pp. 280-284. 8 Records, pp. 285-293. 9 Records, pp. 339-341. 10 Rollo, pp. 75-78.
11

To eradicate its backlog of old cases, the Court m Februry 27, 2001 resolved to redistribute longpending cases to justices who had no backlog, and who were thus tasked to prioritize them. Consequently, this case was raffled and assigned to the undersigned ponente for study and report.
12 13 14

Rollo, p. 227. Coronel v. CA, 263 SCRA 15, October 7, 1996. Power Commercial and Industrial Corp. v. CA, 274 SCRA 597, June 20, 1997.

15

Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, September 16, 1925; Tan v. Court of Appeals,175 SCRA 656, July 28, 1989; and Zepeda v. Court of Appeals, 216 SCRA 293, December 9, 1992.
16

Uy v. Court of Appeals, 314 SCRA 69, September 9, 1999; Romeo v. Court of Appeals, 250 SCRA 223, November 23, 1995.
17 18 19

Cheng v. Genato, 300 SCRA 722, December 29, 1998. Central Philippine University v. Court of Appeals, 246 SCRA 511, July 17, 1995. See footnote 15.

20

Co v. Court of Appeals, 312 SCRA 528, August 17,1999. Vitug, Compendium of Civil Law and Jurisprudence, 1993 revised ed., p. 556.
21

0campo v. Court of Appeals, 233 SCRA 551, June 30, 1994.

G.R. No. L-29360 January 30, 1982 Melo, Vitug, and Sandoval-Gutierrez, JJ., concur. JOSE C. ZULUETA, petitioner, vs. HON. HERMINIO MARIANO, in his capacity as Presiding Judge of Branch X of the Court of First Instance of Rizal; and LAMBERTO AVELLANA, respondents. MELENCIO-HERRERA, J.:

Footnotes:
1

Rollo, pp. 37-53.

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In this action for mandamus and Prohibition, petitioner seeks to compel respondent Judge to assume appellate, not original jurisdiction over an Ejectment case appealed from the Municipal Court of Pasig (CC No. 1190 entitled Jose C. Zulueta vs. Lamberto Avellana), and to issue a Writ of Execution in said case. The antecedental facts follow: Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the Antonio Subdivision, Pasig, Rizal. On November 6, 1964, petitioner Zulueta and private respondent Lamberto Avellana, a movie director, entered into a "Contract to Sell" the aforementioned property for P75,000.00 payable in twenty years with respondent buyer assuming to pay a down payment of P5,000.00 and a monthly installment of P630.00 payable in advance before the 5th day of the corresponding month, starting with December, 1964. It was further stipulated: 12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER automatically and irrevocably authorizes OWNER to recover extra-judicially, physical possession of the land, building and other improvements which are the subject of this contract, and to take possession also extra-judicially whatever personal properties may be found within the aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary obligations BUYER may have with OWNER; and this contract shall be considered as without force and effect also from said date; all payments made by the BUYER to OWNER shall be deemed as rental payments without prejudice to OWNER's right to collect from BUYER whatever other monthly installments and other money obligations which may have been paid until BUYER vacates the aforesaid premises; upon his failure to comply with any of the herein conditions BUYER forfeits all money claims against OWNER and shall pay a monthly rental equivalent to his monthly installment under Condition 1 of this Contract from the date of the said failure to the date of recovery of physical possession by OWNER of the land, building and other improvements which are the subject of this Contract; BUYER shall not remove his personal properties without the previous written consent of OWNER, who, should he take possession of such properties following the aforesaid failure of BUYER, shall return the same to BUYER only after the latter shall have fulfilled all money claims against him by OWNER; in all cases herein, demand is waived; Respondent Avellana occupied the property from December, 1964, but title remained with petitioner Zulueta. Upon the allegation that respondent Avellana had failed to comply with the monthly amortizations stipulated in the contract, despite demands to pay and to vacate the premises, and that thereby the contract was converted into one of lease, petitioner, on June 22, 1966, commenced an Ejectment suit against respondent before the Municipal Court of Pasig (CC No. 1190), praying that judgment be rendered ordering respondent 1) to vacate the premises; 2) to pay petitioner the sum of P11,751.30 representing respondent's balance owing as of May, 1966; 3) to pay petitioner the sum of P 630.00 every month after May, 1966, and costs. Respondent controverted by contending that the Municipal Court had no jurisdiction over the nature of the action as it involved the interpretation and/or rescission of the contract; that prior to the execution of the contract to sell, petitioner was already indebted to him in the sum of P31,269.00 representing the cost of two movies respondent made for petitioner and used by the latter in his political campaign in 1964 when petitioner ran for Congressman, as well as the cost of one 16 millimeter projector petitioner borrowed from respondent and which had never been returned, which amounts, according to their understanding, would be applied as down payment for the property and to whatever obligations respondent had with petitioner. The latter strongly denied such an understanding.

Respondent's total counterclaim against petitioner was in the amount of P42,629.99 representing petitioner's pleaded indebtedness to private respondent, claim for moral damages, and attorney's fees. The counterclaim was dismissed by the Municipal Court for being in an amount beyond its jurisdiction. However, as a special defense, private respondent sought to offset the sum of P31,269.00 against his obligations to petitioner. Deciding the case on May 10, 1967, the Municipal Court found that respondent Avellana had failed to comply with his financial obligations under the contract and ordered him to vacate the premises and deliver possession thereof to petitioner; to pay petitioner the sum of P21,093.88 representing arrearages as of April, 1967, and P630.00 as monthly rental from and after May, 1967 until delivery of possession of that premises to petitioner. That conclusion was premised on title finding that breach of any of the conditions by private respondent converted the agreement into a lease contractual and upon the following considerations: The question involved herein is that of possession, that who of the contending parties has the better right to possession of the properly in question. The issue in this case being that of possession, the claim of defendant against plaintiff or P 31,269.00 indebtedness, has no place as a defense here. It should be the subject- matter of a separate action against, plaintiff Jose C. Zulueta. As it is, said indebtedness is only a claim still debatable and controversial and not a final judgment. 'It is our considered opinion that to admit and to allow such a defense would be tantamount to prejuding the claim on its merits prematurely in favor of defendant. This court can not do without violating some rules of law. This is not the proper court and this is not the proper case in which to ventilate the claim. Respondent Avellana appealed to the Court of First Instance of Rizal presided by respondent Judge. Thereat, petitioner summoned for execution alleging private respondent's failure to deposit in accordance the monthly rentals, which the latter denied. Respondent Judge held resolution thereof in abeyance. On February 19, 1968, respondent Avellana filed a Motion to Dismiss Appeal alleging that, inasmuch as the defense set up in his Answer was that he had not breached his contract with petitioner, the case necessarily involved the interpretation and/or rescission of the contract and, therefore, beyond the jurisdiction of the Municipal Court. Petitioner opposed claiming that the Complaint had set out a clear case of unlawful detainer considering that judicial action for the rescission of the contract was unnecessary due to the automatic rescission clause therein and the fact that petitioner had cancelled said contract so that respondent's right to remain in the premises had ceased. On March 21, 1968, respondent Judge dismissed the case on the ground of lack of jurisdiction of the Municipal Court, explaining: The decision of the lower court declared said Contract to Sell to have been converted into a contract of lease. It is the contention of the defendant that the lower court had no jurisdiction to entertain the case as the same involves the interpretation of contract as to whether or not the same has been converted to lease contract. Although the contract to sell object of this case states that the same may be converted into a lease contract upon the failure of the defendant to pay the amortization of the property in question, there is no showing that before filing this case in the lower court, the plaintiff has exercised or has pursued his right pursuant to the contract which should be the basis of the action in the lower court. Petitioner's Motion for Reconsideration was denied by respondent Judge as follows: The plaintiff having filed a motion for reconsideration of this Court's Order dismissing the appeal, the Court, while standing pat on its Order dismissing this case for lack of jurisdiction of the lower

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court over the subject matter, hereby takes cognizance of the case and will try the case as if it has been filed originally in this Court. WHEREFORE, let this case be set for pre-trial on July 12, 1968 at 8:30 a.m. with notice to an parties. Petitioner then availed of the instant recourse. Was the action before the Municipal Court of Pasig essentially for detainer and, therefore, within its exclusive original jurisdiction, or one for rescission or annulment of a contract, which should be litigated before a Court of First Instance? Upon a review of the attendant circumstances, we uphold the ruling of respondent Judge that the Municipal Court of Pasig was bereft of jurisdiction to take cognizance of the case filed before it. In his Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their agreement to sell and thus unilaterally considered the contract rescinded. Respondent Avellana denied any breach on his part and argued that the principal issue was one of interpretation and/or rescission of the contract as well as of set-off. Under those circumstances, proof of violation is a condition precedent to resolution or rescission. It is only when the violation has been established that the contract can be declared resolved or rescinded. Upon such rescission, in turn, hinges a pronouncement that possession of the realty has become unlawful. Thus, the basic issue is not possession but one of rescission or annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and determine. A violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle the other party to resolved or rescind it. An allegation of such violation in a detainer suit may be proved by competent evidence. And if proved a justice of the peace court might make a finding to that effect, but it certainly cannot declare and hold that the contract is resolved or rescinded. It is beyond its power so to do. And as the illegality of the possession of realty by a party to a contract to sell is premised upon the resolution of the contract, it follows that an allegation and proof of such violation, a condition precedent to such resolution or rescission, to render unlawful the possession of the land or building erected thereon by the party who has violated the contract, cannot be taken cognizance of by a justice of the peace court. ... 1 True, the contract between the parties provided for extrajudicial rescission. This has legal effect, however, where the other party does not oppose it. 2 Where it is objected to, a judicial determination of the issue is still necessary. A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and' determination. 3 But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case and correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of the objection interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this point: Section 11. Lack of jurisdiction A case tried by an inferior court without jurisdiction over the subject matter shall be dismiss on appeal by the Court of First Instance. But instead of dismissing the case, the Court of First Instance may try the case on the merits, if the parties therein file their pleadings and go to trial without any objection to such jurisdiction. There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal.

If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the only authority of the CFI is to declare the inferior court to have acted without jurisdiction and dismiss the case, unless the parties agree to the exercise by the CFI of its original jurisdiction to try the case on the merits. 4 The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the Municipal Court of Pasig must perforce be denied. WHEREFORE, the Writ of mandamus is denied, but the Writ of Prohibition is granted and respondent Court hereby permanently enjoined from taking cognizance of Civil Case No. 10595 in the exercise of its original jurisdiction. No costs. SO ORDERED. Makasiar, Fernandez, Guerrero and Plana, JJ., concur. Teehankee, J., concur in the result. Footnotes 1 Nera vs. Vacante, 3 SCRA 505, 511 (1961). 2 Tolentino, Civil Code of the Phil., Vol. IV, 1962 ed, p. 168, 3 Nera vs. Vacante, supra. 4 Ganancial vs. Atillo, 14 SCRA 460 (1965).

G.R. No. L-56076 September 21, 1983 PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT respondents. Santos, Calcetas-Santos & Geronimo Law Office for petitioner. Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.: The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are being assailed in this petition. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by TCT No. 90454, and owned by said

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corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all installments paid. Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on December 5, 1967 for installments up to September 1967. On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same request. Replying petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold. Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23, 1979. 1 On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised: I Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with by stipulation in a contract to sell. II Whether petitioners may be held liable for the refund of the installment payments made by respondent Nazario M. Dumpit. III Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar. IV Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly petitioner Onstott We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982. On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed upon, the BUYER shall be granted a month of grace within which to make the payment

of the t in arrears together with the one corresponding to the said month of grace. -It shall be understood, however, that should the month of grace herein granted to the BUYER expire, without the payment & corresponding to both months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in accordance with the 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 for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his right to demand or reclaim the return of the same and further obligates peacefully to vacate the premises and deliver the same to the SELLER. Well settled is the rule, as held in previous jurisprudence, 2 that 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. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We quote the pertinent excerpt: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in 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 (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. 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 win be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription.

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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 (Emphasis supplied). Of similar import is the ruling in Nera vs. Vacante 4, reading: A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and determination. This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is still necessary. In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7 In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of the contract by petitioners was warranted. We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the buyer. The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided: Sec. 3(b) ... 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 contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments. Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither sham rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another. We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17 We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person. In this case, petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality. 18 In this respect then, a modification of the Resolution under review is called for. WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted. No costs. SO ORDERED. Plana, Relova and Gutierrez, Jr., JJ., concur. Teehankee, J., concurs in the result.

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Footnotes 1 pp. 103-104, Rollo. 2 Torralba vs. De los Angeles, 96 SCRA 69; Luzon Brokerage Co., Inc. vs. Maritime Building Co., 43 SCRA 93 and 86 SCRA 305; Lopez vs. Commissioner of Customs, 37 SCRA 327; U.P. vs. De los Angeles, 35 SCRA 102; Ponce Enrile vs. CA, 29 SCRA 504; Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276; Taylor vs. Uy Tieng Piao, 43 Phil. 873. 3 35 SCRA 102 (1970). 4 3 SCRA 505 ( 1961). 5 111 SCRA 206(1982). 6 Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., p. 168, citing Magdalena Estate vs. Myrick ,71 Phil. 344 (1941). 7 U.P. vs. De los Angeles, supra. 8 96 SCRA 69 (1980). 9 Chavez vs. Court of Appeals, 24 SCRA 663, 682-683 (1968). 10 Verceluz vs. Edano, 46 Phil. 801 (1924). 11 Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160 (1961). 12 Emilio Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 (1965). 13 McConnel vs. CA, 1 SCRA 722,726 (1961). 14 Yutivo Sons Hardware Co. vs. CTA, supra McConnel vs. CA, supra. 15 R. F. Sugay & Co., Inc. vs. Reyes 12 SCRA 700 (1964). 16 Gregorio Araneta, Inc. vs. De Paterno & Vidal, 91 Phil. 786 (1952). 17 McConnel vs. CA, supra Commissioner of Internal Revenue vs. Norton Harrison Co., 120 Phil. 684 (1964). 18 Liddel & Co. vs. Collector of Internal Revenue, 2 SCRA 632, 640 (1961).

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