THIRD DIVISION

[G.R. No. 108346. July 11, 2001.]

Spouses MARIANO Z. VELARDE and AVELINA

D. VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO, respondents.

Marciano J. Cagatan and Mariano R. Logarta for petitioners.

M.B. Tomacruz for private respondents.

SYNOPSIS

Petitioners entered into a deed of sale with assumption of mortgage with private respondents paying a
downpayment ofP800,000 and assuming the mortgage amount of P1.8M in favor of BPI. Petitioners 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 ofBPI . . . as if the same were originally signed and executed by the vendee." As
part of the deed, petitioner Avelina with her husband's consent executed an undertaking that during the
pendency of the application for the assumption of mortgage she agreed to continue paying said loan in accordance
with the mortgage deed and that in the event of violation of any of the terms and conditions of the deed of real estate
mortgage, she agreed that the P800,000 downpayment shall be forfeited as liquidated damages and the deed of sale
with assumption of mortgage shall be deemed automatically cancelled. When the bank denied the application for
assumption of mortgage, petitioners stopped making payments. Thus, notice ofcancellation/rescission was sent to
petitioners for non-performance of their obligation. Aggrieved, petitioners filed a complaint against private respondent
for specific performance, nullity of cancellation, writ of possession and damages. Both parties admitted that their
agreement mandated that petitioners should pay the purchase price balance of P1.8M to private respondents in case the
request to assume the mortgage would be disapproved. The trial court dismissed the complaint, but on reconsideration,
directed the parties to proceed with the sale. On appeal, the Court of Appeals upheld the validity of the rescission.
Hence, this recourse. ADCIca
The failure of the vendee to pay the balance of the purchase price constitutes a breach on the performance of a
reciprocal obligation, and not a violation of the terms and conditions of the mortgage contract. This gave rise to the
vendor's right to rescind the contract. However, the automatic rescission and forfeiture of payment clauses in the
mortgage contract does not apply. Considering that the rescission of the contract was based on Article 1191 of the
Civil Code, mutual restitution by the parties is required.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. In a contract of sale, the seller
obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price
certain in money or its equivalent. 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.
2. ID.; ID.; RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING OBLIGATION. 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. The breach contemplated in the said provision is the
obligor's failure to comply with an existing obligation. 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. IEHScT
3. ID.; ID.; ID.; ID.; CASE AT BAR. 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 respondents' right to rescind the same in accordance with law.
4. ID.; ID.; ID.; FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH WAS NON-
PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. 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.
5. ID.; ID.; ID.; OBLIGATION CREATED. Rescission creates the obligation to return the object of the contract. It
can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To
rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made. IDAEHT

DECISION
PANGANIBAN, J p:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract,
entitles 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 Certiorari 1 questioning the Decision 2 of the Court of Appeals (CA) in CA-GR
CV No. 32991 dated October 9, 1992, as well as its Resolution 3 dated December 29, 1992 denying petitioner's
motion for reconsideration. 4
The dispositive portion of the assailed Decision reads:
"WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the
Decision dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds posted
by plaintiffs-appellees and defendants-appellants are hereby RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
" . . .. 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 respondent] 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:
'xxx 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 ofONE 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 the 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 for the account of the VENDEE.' (Exh.
'A', pp. 11-12, 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). the
pertinent Portions of which read, as follows:
'xxx xxx xxx
'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.
'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. cCEAHT
'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. Velarde, 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 if (the)
same had never been executed or entered into.
'3. That I am executing this 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.
"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,
17 and 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.
"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 release 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 ofMakati, Branch 149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (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 petitioners'
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 Appeals
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 P1.8 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 P1.8 million, and the balance of P1.8 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 . . . 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 ofthe mortgage obligation of Raymundo in the amount of P1.8 million. This
would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state
[M]ortgage in 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 non-payment 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 ofP1.8 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 a 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
appellees' 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:
"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
Petitioners 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 ofactual 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 thing, 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. IHcTDA
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 cases 15 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:
"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 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 ofpetitioners 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
respondents' 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 cases 19 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 P1,000, 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.
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 ofP800,000 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. SDHCac
Melo, Vitug and Sandoval-Gutierrez, JJ ., concur.
Gonzaga-Reyes, J ., is on leave.
||| (Sps. Velarde v. Court of Appeals, G.R. No. 108346, [July 11, 2001], 413 PHIL 360-376)
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 23769 September 16, 1925

SONG FO & COMPANY, plaintiff-appellee,

vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.

Hilado and Hilado, Ross, Lawrence and Selph and Antonio T. Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.

MALCOLM, J.:

In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two causes of action
for breach of contract against the Hawaiian-Philippine Co., defendant, in which judgment was asked for P70,369.50,
with legal interest, and costs. In an amended answer and cross-complaint, the defendant set up the special defense that
since the plaintiff had defaulted in the payment for the molasses delivered to it by the defendant under the contract
between the parties, the latter was compelled to cancel and rescind the said contract. The case was submitted for
decision on a stipulation of facts and the exhibits therein mentioned. The judgment of the trial court condemned the
defendant to pay to the plaintiff a total of P35,317.93, with legal interest from the date of the presentation of the
complaint, and with costs.

From the judgment of the Court of First Instance the defendant only has appealed. In this court it has made the
following assignment of errors: "I. The lower court erred in finding that appellant had agreed to sell to the appellee
400,000, and not only 300,000, gallons of molasses. II. The lower court erred in finding that the appellant rescinded
without sufficient cause the contract for the sale of molasses executed by it and the appellee. III. The lower court erred
in rendering judgment in favor of the appellee and not in favor of the appellant in accordance with the prayer of its
answer and cross-complaint. IV. The lower court erred in denying appellant's motion for a new trial." The specified
errors raise three questions which we will consider in the order suggested by the appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons of molasses?
The trial court found the former amount to be correct. The appellant contends that the smaller amount was the
basis of the agreement.

The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G. The First
mentioned exhibit is a letter addressed by the administrator of the Hawaiian-Philippine Co. to Song Fo &
Company on December 13, 1922. It reads:

SILAY, OCC. NEGROS, P.I.

December 13, 1922

Messrs. SONG FO AND CO.

Iloilo, Iloilo.

DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this Central, we
wish to state as follows:

He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under the same
condition, and the same to start after the completion of our grinding season. He requested if possible to let you
have molasses during January, February and March or in other words, while we are grinding, and we agreed
with him that we would to the best of our ability, altho we are somewhat handicapped. But we believe we can
 let you have 25,000 gallons during each of the milling months, altho it interfere with the shipping of our own
and planters sugars to Iloilo. Mr. Song Fo also asked if we could supply him with another 100,000 gallons of
molasses, and we stated we believe that this is possible and will do our best to let you have these extra
100,000 gallons during the next year the same to be taken by you before November 1st, 1923, along with the
300,000, making 400,000 gallons in all.

Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would pay us at the end
of each month for molasses delivered to you.

Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.

Yours very truly,

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

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on December 16,
1922. This letter reads:

December 16th, 1922.

Messrs. HAWAIIAN-PHILIPPINE CO.,

Silay, Neg. Occ., P.I.

DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood all their
contents.

In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the one who visited
your Central, but it was not for he was Mr. Song Heng, the representative and the manager of Messrs. Song Fo
& Co.

With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements you have
stated and in order to make the contract clear, we hereby quote below our old contract as amended, as per our
new arrangements.

(a) Price, at 2 cents per gallon delivered at the central.

(b) All handling charges and expenses at the central and at the dock at Mambaguid for our account.

(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for the round trip
dock to central and central to dock. This service to be restricted to one trip for the six tanks.

Yours very truly,

SONG FO & COMPANY

By __________________________
Manager.
We agree with appellant that the above quoted correspondence is susceptible of but one interpretation. The Hawaiian-
Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The Hawaiian-Philippine Co.
also believed it possible to accommodate Song Fo & Company by supplying the latter company with an extra 100,000
gallons. But the language used with reference to the additional 100,000 gallons was not a definite promise. Still less
did it constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider itself obliged
to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written by the manager of
Song Fo & Company on October 17, 1922, expressly mentions an understanding between the parties of a contract for
P300,000 gallons of molasses.

We sustain appellant's point of view on the first question and rule that the contract between the parties provided for the
delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons of molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo & Company? The trial
judge answers No, the appellant Yes.

Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo (Mr. Song Heng)
gave us to understand that you would pay us at the end of each month for molasses delivered to you." In Exhibit G, we
find Song Fo & Company stating that they understand the contents of Exhibit F, and that they confirm all the
arrangements you have stated, and in order to make the contract clear, we hereby quote below our old contract as
amended, as per our new arrangements. (a) Price, at 2 cents per gallon delivered at the central." In connection with the
portion of the contract having reference to the payment for the molasses, the parties have agree on a table showing the
date of delivery of the molasses, the amount and date thereof, the date of receipt of account by plaintiff, and date of
payment. The table mentioned is as follows:

Date of
Date of receipt of Date of
Account and date thereof
delivery account by payment
plaintiff

1922 1923 1923

Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20

Dec. 29 206.16 Jan. 3/23 do Do

1923

Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31

Feb. 12 206.16 Mar. 12/23 do Do

Feb. 27 206.16 do do Do
 Mar. 5 206.16 do do Do

Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19

Mar. 24 206.16 Mar. 31/23 do Do

Mar. 29 206.16 do 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."

Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable deduction is that Song
Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of accounts at the end of each month.
Under this hypothesis, Song Fo & Company should have paid for the molasses delivered in December, 1922, and for
which accounts were received by it on January 5, 1923, not later than January 31 of that year. Instead, payment was
not made until February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time.

The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract should be
treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could easily be imagined,
the Hawaiian-Philippine Co. would have had the right to rescind the contract because of the breach of Song Fo &
Company. But actually, there is here present no outstanding fact which would legally sanction the rescission of the
contract by the Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. A delay
in payment for a small quantity of molasses for some twenty days is not such a violation of an essential condition of
the contract was warrants rescission for non-performance. Not only this, but the Hawaiian-Philippine Co. waived this
condition when it arose by accepting payment of the overdue accounts and continuing with the contract. Thereafter,
Song Fo & Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse for
writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song Fo &
Company to pay for the molasses within the time agreed upon by the parties. We sustain the finding of the trial judge
in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently breached by
the Hawaiian-Philippine Co., what is the measure of damages? We again turn to the facts as agreed upon by the
parties.
The first cause of action of the plaintiff is based on the greater expense to which it was put in being compelled to
secure molasses from other sources. Three hundred thousand gallons of molasses was the total of the agreement, as we
have seen. As conceded by the plaintiff, 55,006 gallons of molasses were delivered by the defendant to the plaintiff
before the breach. This leaves 244,994 gallons of molasses undelivered which the plaintiff had to purchase in the open
market. As expressly conceded by the plaintiff at page 25 of its brief, 100,000 gallons of molasses were secured from
the Central North Negros Sugar Co., Inc., at two centavos a gallon. As this is the same price specified in the contract
between the plaintiff and the defendant, the plaintiff accordingly suffered no material loss in having to make this
purchase. So 244,994 gallons minus the 100,000 gallons just mentioned leaves as a result 144,994 gallons. As to this
amount, the plaintiff admits that it could have secured it and more from the Central Victorias Milling Company, at
three and one-half centavos per gallon. In other words, the plaintiff had to pay the Central Victorias Milling company
one and one-half centavos a gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co.
Translated into pesos and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the conditions
existing at the central of the Hawaiian-Philippine Co. may have been different than those found at the Central North
Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as not alone through the delay but through
expenses of transportation and incidental expenses, the plaintiff may have been put to greater cost in making the
purchase of the molasses in the open market, we would concede under the first cause of action in round figures
P3,000.

The second cause of action relates to lost profits on account of the breach of the contract. The only evidence in the
record on this question is the stipulation of counsel to the effect that had Mr. Song Heng, the manager of Song Fo &
Company, been called as a witness, he would have testified that the plaintiff would have realized a profit of
P14,948.43, if the contract of December 13, 1922, had been fulfilled by the defendant. Indisputably, this statement
falls far short of presenting proof on which to make a finding as to damages.

In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the same line of
thought as found in the decision of the trial court, which we have found to be unsustainable. In the second place, had
Mr. Song Heng taken the witness-stand and made the statement attributed to him, it would have been insufficient
proof of the allegations of the complaint, and the fact that it is a part of the stipulation by counsel does not change this
result. And lastly, the testimony of the witness Song Heng, it we may dignify it as such, is a mere conclusion, not a
proven fact. As to what items up the more than P14,000 of alleged lost profits, whether loss of sales or loss of
customers, or what not, we have no means of knowing.

We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the first cause of
action in the amount of P3,000 and on the second cause of action in no amount. Appellant's assignments of error are
accordingly found to be well taken in part and not well taken in part.

Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have and recover
from the defendant the sum of P3,000, with legal interest form October 2, 1923, until payment. Without special
finding as to costs in either instance, it is so ordered.

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

[G.R. No. 101762. July 6, 1993.]

VERMEN REALTY DEVELOPMENT

CORPORATION, petitioner, vs. THE COURT OF APPEALS and SENECA HARDWARE
CO., INC., respondents.

Ramon P. Gutierrez for petitioner.

Adriano Velasco for private respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATION AND CONTRACTS; RECIPROCAL OBLIGATION; ITS NATURE. Reciprocal
obligations are those created or established at the same time, out of the same cause, and which results in a mutual
relationship of creditor and debtor between parties. In reciprocal obligations, the performance of one is conditioned on
the simultaneous fulfillment ofthe other obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]).
Under the agreement, private respondent shall deliver to petitioner construction materials worth P552,000.00 under
the conditions set forth in the Offsetting Agreement. Petitioner's obligation under the agreement is three-fold: he shall
pay private respondent P276,000.00 in cash; he shall deliver possession of units 601 and 602, Phase I, Vermen Pines
Condominiums (with total value of P276,000.00) to private respondent; upon completion of Vermen Pines
Condominiums Phase II, private respondent shall be given option to transfer to similar units therein.
2. ID.; RESCISSION (BETTER TERM IS "RESOLUTION") OF RECIPROCAL OBLIGATION UNDER ARTICLE
1191 OF THE CIVIL CODE; GENERAL RULE; PETITIONER'S NON-FULFILLMENT OF ITS OBLIGATION
UNDER THE OFFSETTING AGREEMENT CONSTITUTES SUBSTANTIAL BREACH, NECESSITATING
RESOLUTION OF THE CONTRACT. Article 1191 of the Civil Code provides the remedy of rescission in (more
appropriately, the term is "resolution") in case of reciprocal obligations, where one of the obligors fails to comply with
what is incumbent upon him. The general rule is that rescission of a contract will not be permitted for a slight or causal
breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in
executing the agreement. The question of whether a breach of contract is substantial depends upon the attendant
circumstances (Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, [1970]). The
impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the contract for indeed,
the non-fulfillment of the obligation aforementioned constitutes substantial breach of the Offsetting Agreement. The
possibility of exercising the option ofwhether or not to transfer to condominium units in Phase II was one of the
factors which were considered by private respondent when it entered into the agreement. Since the
construction of the Vermen Pines Condominium Phase II has stopped, petitioner would be in no position to perform its
obligation to give private respondent the option to transfer to Phase II. It would be the height of injustice to make
private respondent wait for something that may never come.

DECISION

BIDIN, J p:

Petitioner seeks a review of the decision of the Court of Appeals in CA-G.R. CV No. 15730, which set aside the
decision of the Regional Trial Court of Quezon City, Branch 92 in Civil Case No. Q-45232. The dispositive
portion of the assailed decision reads as follows:
"WHEREFORE, the decision a quo is set aside. As prayed for by plaintiff-appellant, the 'Offsetting
Agreement' (Exhibit "E" or "2") is hereby rescinded. Room 601 of Phase I of the Vermen Pines
Condominium should be returned by plaintiff-appellant to defendant-appellee upon payment by the
latter of the sum of P330,855.25 to the former, plus damages in the sum of P5,000.00 and P50.00
for the furnishings of Phase I of Condo (sic) Units Nos. 601 and 602, and three (3) day
 rental of Room 402 during the Holy Week of 1982, respectively. In addition, defendant-appellee is
hereby ordered to pay plaintiff-appellant, who was compelled to litigate and hire the
services of counsel to protect its interests against defendant-appellee's violation of their Offsetting
Agreement, the sum of P10,000.00 as an award for attorney's fee (sic) and other
expenses of litigation. The claim for unrealized profits in a sum equivalent to 10% to 20% percent
or P522,000.00 not having been duly proved, is therefore DENIED. No costs." (Rollo, p. 31)
On March 2, 1981, petitioner Vermen Realty and Development Corporation, as First Party, and private respondent
Seneca Hardware Co., Inc., as Second Party, entered into a contract denominated as "Offsetting Agreement". The said
agreement contained the following stipulations:
"1. That the FIRST PARTY is the owner/developer of VERMEN PINES CONDOMINIUM located
at Bakakeng Road, Baguio City;
"2. That the SECOND PARTY is in business of construction materials and other hardware items;
"3. That the SECOND PARTY desires to buy from the FIRST PARTY two (2) residential
condominium units, studio type, with a total floor area of 76.22 square meter (sic) more or less
worth TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS only;
"4. That the FIRST PARTY desires to buy from the SECOND PARTY construction materials mostly
steel bars, electrical materials and other related items worth FIVE HUNDRED FIFTY TWO
THOUSAND (P552,000.00) PESOS only;
"5. That the FIRST PARTY shall pay the SECOND PARTY TWO HUNDRED SEVENTY SIX
THOUSAND (P276,000.00) PESOS in cash upon delivery of said construction materials and the
other TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS shall be paid in the
form of two (2) residential condominium units, studio type, with a total floor area of 76.22 square
meter (sic) more or less also worth P276,000.00;
"6. That, for every staggered delivery of construction materials, fifty percent (50%) shall be paid by
the FIRST PARTY to the SECOND PARTY C.O.D. and, fifty percent (50%) shall be credited to the
said condominium unit in favor of the SECOND PARTY;
"7. That the SECOND PARTY shall deliver to the FIRST PARTY said construction materials under
the agreed price and conditions stated in the price quotation approved by both parties and made an
integral part of this document;
"8. That the SECOND PARTY is obliged to start delivering to the FIRST PARTY all items in the
purchase order seven (7) days from receipt of said purchase order until such time that the whole
amount of P552,000.00 is settled;
"9. That the place of delivery shall be Vermen Pines Condominium at Bakakeng Road, Baguio City;
"10. That the freight cost of said materials shall be borne fifty percent (50%) by the FIRST PARTY
and fifty percent (50%) by the SECOND PARTY;
"11. That the FIRST PARTY pending completion of the VERMEN PINES CONDOMINIUM
PHASE II which is the subject ofthis contract, shall deliver to the SECOND PARTY the
possession of residential condominium, Phase I, Unit Nos. 601 and 602, studio type with a total
area of 76.2 square meters or less, worth P276,000.00;
"12. That after the completion of Vermen Pines Condominium Phase II, the SECOND PARTY shall
be given by the FIRST PARTY the first option to transfer from Phase I to Phase II under the same
price, terms and conditions." (Rollo, pp. 26-28).
As found by the appellate court and admitted by both parties, private respondent had paid petitioner the
amount ofP110,151.75, and at the same time delivered construction materials worth P219,727.00. Pending
completion of Phase II of the Vermen Pines Condominiums, petitioner delivered to private respondent units 601 and
602 at Phase I of the Vermen Pines Condominiums (Rollo, p. 28). In 1982, the petitioner repossessed unit 602. As a
consequence of the repossession, the officers of the private respondent corporation had to rent another unit for their
use when they went to Baguio on April 8, 1982. On May 10, 1982, the officers of the private respondent corporation
requested for a clarification of the petitioner's action ofpreventing them and their families from occupying
condominium unit 602.
In its reply dated May 24, 1982, the petitioner corporation averred that Room 602 was leased to another tenant
because private respondent corporation had not paid anything for purchase of the condominium unit. Petitioner
corporation demanded payment of P27,848.25 representing the balance of the purchase price of Room 601.
In 1983, the loan application for the construction of the Vermen Pines Condominium Phase II was denied.
Consequently, construction of the condominium project stopped and has not been resumed since then.
On June 21, 1985, private respondent filed a complaint with the Regional Trial Court of Quezon City (Branch 92) for
rescission of the Offsetting Agreement with damages. In said complaint, private respondent alleged that
petitioner Vermen RealtyCorporation had stopped issuing purchase orders of construction materials after April, 1982,
without valid reason, thus resulting in the stoppage of deliveries of construction materials on its (Seneca Hardware)
part, in violation of the Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the fault lay with private respondent (plaintiff therein):
although petitioner issued purchase orders, it was private respondent who could not deliver the supplies ordered,
alleging that they were out of stock. (However, during a hearing on January 28, 1987, the Treasurer of petitioner
corporation, when asked where the purchase orders were, alleged that she was going to produce the same in court, but
the same was never produced (Rollo. p. 30). Moreover, private respondent quoted higher prices for the construction
materials which were available. Thus, petitioner had to resort to its other suppliers. Anent the query as to why Unit
602 was leased to another tenant, petitioner averred that this was done because private respondent had not paid
anything for it. cdphil
As of December 16, 1986, private respondent had paid petitioner P110,151.75 in cash, made deliveries of construction
materials worth P219,727.00, leaving a balance of P27,848.25 representing the purchase price of unit 601 (Rollo, p.
28). The price of one condominium unit was P138,000.00.

After conducting hearings, the trial court rendered a decision dismissing the complaint and ordering the plaintiff
(private respondent in this petition) to pay defendant (petitioner in this petition) on its counterclaim in the
amount of P27,848.25 representing the balance due on the purchase price of condominium unit 601.
On appeal, respondent court reversed the trial court's decision as adverted to above.
Petitioner now comes before Us with the following assignment of errors:
I
"THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY
THIS HONORABLE COURT, WHEN IT SUPPLANTED CONTRARY TO THE EVIDENCE ON
RECORD, THE TRIAL COURT'S CONCLUSIONS THAT PETITIONER DID NOT VIOLATE
THE 'OFFSETTING AGREEMENT' IT ENTERED INTO WITH THE SENECA HARDWARE
CO., INC. WITH ITS TOTALLY BASELESS 'PERCEPTION' THAT IT WAS PETITIONER
WHICH DISCONTINUED TO ISSUE PURCHASE ORDERS DUE TO THE
STOPPAGE OF THE CONSTRUCTION OF PHASE II OF THE CONDOMINIUM PROJECT
WHEN THE LOAN ON THE SAID PROJECT WAS STOPPED.
II
"THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY
THIS HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE 'OFFSETTING AGREEMENT' BECAUSE IT DID NOT SEND PURCHASE
ORDERS TO PRIVATE RESPONDENT AND DISCONTINUED THE
CONSTRUCTION OF THE CONDOMINIUM PROJECT DESPITE THE FACT THAT THE
EXHIBITS ATTESTING TO THIS FACT WAS FORMALLY OFFERED IN EVIDENCE
IN COURT AND MENTIONED BY IT IN ITS DECISION.
III
"THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY
THIS HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE 'OFFSETTING AGREEMENT' DESPITE THE ADMISSION MADE BY
PRIVATE RESPONDENT'S OWN WITNESS THAT PETITIONER HAD THE DISCRETION TO
ORDER OR NOT TO ORDER THE CONSTRUCTION MATERIAL (SIC) FROM THE
FORMER." (Rollo, p. )
The issue presented before the Court is whether or not the circumstances of the case warrant rescission of the
Offsetting Agreement as prayed for by Private Respondent when he instituted the case before the trial court.
We rule in favor of private respondent. There is no controversy that the provisions of the Offsetting Agreement are
reciprocal in nature. Reciprocal obligations are those created or established at the same time, out of the same cause,
and which results in a mutual relationship of creditor and debtor between parties. In reciprocal obligations, the
performance of one is conditioned on the simultaneous fulfillment of the other obligation (Abaya vs. Standard Vacuum
Oil Co., 101 Phil. 1262 [1957]). Under the agreement, private respondent shall deliver to petitioner construction
materials worth P552,000.00 under the conditions set forth in the Offsetting Agreement. Petitioner's obligation under
the agreement is three-fold: he shall pay private respondent P276,000.00 in cash; he shall deliver possession of units
601 and 602, Phase I, Vermen Pines Condominiums (with total value of P276,000.00) to private respondent; upon
completion of Vermen Pines Condominiums Phase II, private respondent shall be given option to transfer to similar
units therein.
Article 1191 of the Civil Code provides the remedy of rescission in (more appropriately, the term is "resolution") in
case ofreciprocal obligations, where one of the obligors fails to comply with what is incumbent upon him.
The general rule is that rescission of a contract will not be permitted for a slight or causal breach, but only for such
substantial and fundamental breach as would defeat the very object of the parties in executing the agreement. The
question of whether a breach of contract is substantial depends upon the attendant circumstances (Universal Food
Corp. vs. Court ofAppeals, 33 SCRA 1, [1970]).
In the case at bar, petitioner argues that it was private respondent who failed to perform its obligation in the Offsetting
Agreement. It averred that contrary to the appellate court's ruling, the mere stoppage of the loan for the
construction ofPhase II of the Vermen Pines Condominiums should not have had any effect on the fulfillment of the
obligations set forth in the Offsetting Agreement. Petitioner moreover stresses that contrary to private respondent's
averments, purchase orders were sent, but there was failure to deliver the materials ordered because they were
allegedly out of stock. Petitioner points out that, as admitted by private respondent's witness, petitioner had the
discretion to order or not to order constructions materials, and that it was only after petitioner approved the price, after
making a canvass from other suppliers, that the latter would issue a purchase order. Petitioner argues that this was the
agreement, and therefore the law between the parties, hence, when no purchase orders were issued, no provision of the
agreement was violated. llcd
Private respondent, on the other hand, points out that the subject of the Offsetting Agreement is Phase
II of the VermenPines Condominiums. It alleges that since construction of Phase II of the Vermen Pines
Condominiums has failed to begin (Rollo, p. 104), it has reason to move for rescission of the Offsetting Agreement, as
it cannot forever wait for the delivery ofthe condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its obligation in the Offsetting
Agreement. The discontinuance of delivery of construction materials to petitioner stemmed from the
failure of petitioner to send purchase orders to private respondent. The allegation that petitioner had been sending
purchase orders to private respondent, which the latter could not fill, cannot be given credence. Perhaps in the
beginning, it would send purchase orders to private respondent (as evidenced by the purchase orders presented
in court), and the latter would deliver the construction materials ordered. However, according to private respondent,
after April, 1982, petitioner stopped sending purchase orders. Petitioner failed to refute this allegation. When
petitioner's witness, Treasurer of the petitioner corporation, was asked to produce the purchase orders in court, the
latter promised to do so, but this was never complied with.
On the other hand, petitioner would never be able to fulfill its obligation in allowing private respondent to exercise the
option to transfer from Phase I to Phase II, as the construction of Phase II has ceased and the subject condominium
units will never be available.
The impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the contract for
indeed, the non-fulfillment of the obligation aforementioned constitutes substantial breach of the Offsetting
Agreement. The possibility of exercising the option of whether or not to transfer to condominium units in Phase II was
one of the factors which were considered by private respondent when it entered into the agreement. Since the
construction of the VermenPines Condominium Phase II has stopped, petitioner would be in no position to perform its
obligation to give private respondent the option to transfer to Phase II. It would be the height of injustice to make
private respondent wait for something that may never come.
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner. LexLib
SO ORDERED.
Feliciano, Davide, Jr., Romero and Melo, JJ., concur.
||| (Vermen Realty Development Corp. v. Court of Appeals, G.R. No. 101762, [July 6, 1993])
 EN BANC

[G.R. No. L-4811. July 31, 1953.]

CHARLES F. WOODHOUSE, plaintiff-appellant, vs. FORTUNATO F. HALILI, defendant-

appellant.

Taada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

SYLLABUS

1. EVIDENCE; PAROL EVIDENCE RULE; INTEGRATION OF JURAL ACTS. Plaintiff entered into
a written agreement with the defendant to the effect that they shall organize a partnership for the bottling and
distribution of soft drinks, plaintiff to act as industrial partner or manager, and the defendant a capitalist furnishing
the capital necessary therefor. The defendant claims that his consent to the agreement was secured by the
representation of plaintiff that he was the owner, or was about to become owner, of an exclusive bottling franchise,
which representation was false. The fraud and false representation is sought to be proven by means, among others,
of the drafts of the agreement prior to the final one, which drafts are presumed to have already been integrated into
the final agreement. Are those prior drafts excluded from the prohibition of the parol evidence rule? Held: The
purpose of considering the drafts is not to vary, alter, or modify the agreement, but to discover the intent of the
parties thereto and the circumstances surrounding the execution of the contract. The issue of fact is, did plaintiff
represent to defendant that he had an exclusive franchise? Certainly, his acts or statements prior to the agreement
are essential and relevant to the determination of said issue. The act or statement of the plaintiff was not sought to
be introduced to change or alter the terms of the agreement, but to prove how he induced the defendant to enter
into it - to prove the representations or inducements, or fraud, with which or by which he secured the other party's
consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough vs. Cantiveros and
Hanopol, 40 Phil., 209; Port Banga Lumber Co., vs. Export & Import Lumber Co., 26 Phil., 602; 3 Moran 221,
1952 rev. ed.) Fraud and false representation are an incident to the creation of a jural act, not to its integration, and
are not governed by the rules on integration. Where parties prohibited from proving said representations or
inducements, on the ground that the agreement had already been entered into, it would be impossible to prove
misrepresentation or fraud. The parol evidence rule expressly allows the evidence to be introduced when the
validity of an instrument is put in issue by the pleadings (sec. 22-a of Rule 123).
2. ID.; INTERPRETATION OF DOCUMENTS. AS plaintiff knew what defendant believed about his
(plaintiff's exclusive franchise, as he induced him to that belief, plaintiff may not be allowed to deny that
defendant was induced by that belief (sec. 63 of Rule 123).
3. FRAUD; FALSE REPRESENTATION; DOLO CAUSANTE AND DOLO INCIDENTE; IT IS THE
FORMER THAT VITIATES CONSENT. Fraud is manifested in illimitable number of degrees or gradations
from the innocent praises of a salesman about the excellence of his wares to those malicious machinations and
representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil
Code distinguishes two kinds of (civil) fraud, the causal fraud which may be a ground for the annulment of a
contract, and the incidental deceit which only renders the party who employs it liable for damages. In order that
fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract (art. 1270, Span. Civ. Code; Hill vs. Veloso, 31 Phil., 160). In the case at
bar, inasmuch as the principal consideration, the main cause that induced defendant to enter into the partnership
agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the
defendant or for the partnership, the false representation made by the plaintiff was not the casual consideration, or
the principal inducement, that led the defendant to enter into the partnership agreement.
4. ID.; ID.; ID.; DAMAGES FOR DOLO INCIDENTE; PARTNERSHIP. While the representation that
plaintiff had the exclusive franchise did not vitiate defendant' consent to the contract, it was used by plaintiff to get
from defendant a share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive
franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a
big slice in the net profits. This is the dolo incidente defined in article 1270 of the Spanish Civil Code, because it
 was used to get the other party's consent to a big share in the profits, an incidental matter in the agreement. (8
Manresa, 602.)
5. CONTRACTS AND OBLIGATIONS; CONSENT, NOT VITIATED BY DOLO INCIDENTE;
PARTNERSHIP; AGREEMENT TO FORM PARTNERSHIP, CANNOT BE ENFORCED. Having arrived at
the conclusion that the agreement to organize a partnership may not be declared null and void, may the agreement
be carried out or executed? Held: Under the Spanish Civil Code, the defendant has an obligation to do, not to give.
The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not to do it, as he
pleases. This is a very personal act (acto personalisimo) of which courts may not compel compliance, as it is
considered as an act of violence to do so. (29 as it is considered as an act of violence to do so. (19 Scaevolla, 428,
431-432.)
6. FALSE REPRESENTATION; DAMAGES FOR DOLO INCIDENTE. Plaintiff is entitled under the
terms of the agreement to 30 per cent of the net profits of the business. Against this amount of damages, the
damage the defendant suffered by plaintiff's misrepresentation that he had the exclusive franchise, must be set off.
(Art. 1101, Span. Civ. Code.) When the defendant learned, in Los Angeles, California, that plaintiff did not have
the exclusive franchise which he pretended he had and which he had agreed to transfer to the partnership, his
spontaneous reaction was to reduce the plaintiff's share from 30 per cent to 15 per cent only, to which reduction
plaintiff appears to have readily given his assent.Held: By the misrepresentation of the plaintiff, he obtained a very
high percentage (30%) of share in the profits. Upon learning of the misrepresentation, defendant reduced
plaintiff's share to 15 per cent, to which defendant assented. The court can do no better than follow such appraisal
of the damages as the parties themselves had adopted.

DECISION

LABRADOR, J p:

On November 29, 1947, the plaintiff entered into a written agreement, Exhibit A, with the defendant, the
most important provisions of which are (1) that they shall organize a partnership for the bottling and distribution
of Mission soft drinks, plaintiff to act as industrial partner or manager, and the defendant as a capitalist, furnishing
the capital necessary therefor; (2) that the defendant was to decide matters of general policy regarding the
business, while the plaintiff was to attend to the operation and development of the bottling plant; (3) that the
plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that
the plaintiff was to receive 30 per cent of the net profits of the business. The above agreement was arrived at after
various conferences and consultations by and between them, with the assistance of their respective attorneys. Prior
to entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los Angeles, California, U.
S. A., manufacturers of the bases and ingredients of the beverages bearing its name, that he had interested a
prominent financier (defendant herein) in the business, who was willing to invest half a million dollars in the
bottling and distribution of the said beverages, and requested, in order that he may close the deal with him, that the
right to bottle and distribute be granted him for a limited time under the condition that it will finally be transferred
to the corporation (Exhibit H). Pursuant to this request, plaintiff was given "a thirty days' option on exclusive
bottling and distribution rights for the Philippines" (Exhibit H). Formal negotiations between plaintiff and
defendant began at a meeting on November 27, 1947, at the Manila Hotel, with their lawyers attending. Before
this meeting plaintiff's lawyer had prepared a draft of the agreement, Exhibit II or OO, but this was not
satisfactory because a partnership, instead of a corporation, was desired. Defendant's lawyer prepared after the
meeting his own draft, Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.
The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the United
States without the agreement being first signed. On that day plaintiff and defendant went to the United States, and
on December 10, 1947, a franchise agreement (Exhibit V) was entered into between the Mission Dry Corporation
and Fortunato F. Haliliand/or Charles F. Woodhouse, granting defendant the exclusive right, license, and authority
to produce, bottle, distribute, and sell Mission beverages in the Philippines. The plaintiff and the defendant
thereafter returned to the Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun
until the first week of February, 1948. In January plaintiff was given as advance, on account of profits, the sum of
P2,000, besides the use of a car; in February, 1948, also P2,000, and in March only P1,000. The car was
withdrawn from plaintiff on March 9, 1948.
When the bottling plant was already in operation, plaintiff demanded of defendant that the partnership
papers be executed. At first defendant excused himself, saying there was no hurry. Then he promised to do so after
the sales of the products had been increased to P50,000. As nothing definite was forthcoming, after this condition
was attained, and as defendant refused to give further allowances to plaintiff, the latter caused his attorneys to take
up the matter with defendant with a view to a possible settlement. As none could be arrived at, the present action
was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the profits,
and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his answer defendant alleges
by way of defense (1) that defendant's consent to the agreement, Exhibit A, was secured by the representation of
plaintiff that he was the owner, or was about to become owner of an exclusive bottling franchise, which
representation was false, and that plaintiff did not secure the franchise, but was given to defendant himself; (2)
that defendant did not fail to carry out his undertakings, bus that it was plaintiff who failed; (3) that plaintiff
agreed to contribute the exclusive franchise to the partnership, but plaintiff failed to do so. He also presented a
counterclaim for P200,000 as damages. On these issues the parties went to trial, and thereafter the Court of First
Instance rendered judgment ordering defendant to render an accounting of the profits of the bottling and
distribution business, subject of the action, and to pay plaintiff 15 per cent thereof. It held that the execution of the
contract of partnership could not be enforced upon the parties, but it also held that the defense of fraud was not
proved. Against this judgment both parties have appealed.
The most important question of fact to be determined is whether defendant had falsely represented that he
had an exclusive franchise to bottle Mission beverages, and whether this false representation or fraud, if it existed,
annuls the agreement to form the partnership. The trial court found that it is improbable that defendant was never
shown the letter, Exhibit J, granting plaintiff the option; that defendant would not have gone to the United States
without knowing what authority plaintiff had; that the drafts of the contract prior to the final one can not be
considered for the purpose of determining the issue, as they are presumed to have been already integrated into the
final agreement; that fraud is never presumed and must be proved; that the parties were represented by attorneys,
and that if any party thereto got the worse part of the bargain, this fact alone would not invalidate the agreement.
On this appeal the defendant, as appellant, insists that plaintiff did represent to the defendant that he had an
exclusive franchise, when as a matter of fact, at the time of its execution, he no longer had it as the same had
expired, and that, therefore, the consent of the defendant to the contract was vitiated by fraud and it is,
consequently, null and void.
Our study of the record and a consideration of all the surrounding circumstances lead us to believe that
defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that Woodhouse presented
himself as being the exclusive grantee of a franchise, thus:
"A. I don't recall any discussion about that matter. I took along with me the file of the office
with regards to this matter. I notice from the first draft of the document which I prepared which calls
for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented as
being the exclusive grantee of a franchise from the Mission Dry Corporation. . . . "(t.s.n., p. 518)
As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila Hotel
conference on November 27th, expressly states that plaintiff had the exclusive franchise. Thus, the first paragraph
states:
'Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry
Corporation San Francisco, California, for the bottling of Mission products and their sale to the
public throughout the Philippines;
xxx xxx xxx
"3. That the manager, upon the organization of the said corporation, shall forthwith transfer
to the said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines."
xxx xxx xxx
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the principle of integration of jural acts. We find that the
principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter, or modify
the agreement, but to discover the intent of the parties thereto and the circumstances surrounding the execution of
the contract. The issue of fact is: Did plaintiff represent to defendant that he had an exclusive franchise? Certainly,
his acts or statements prior to the agreement are essential and relevant to the determination of said issue. The act
or statement of the plaintiff was not sought to be introduced to change or alter the terms of the agreement, but to
prove how he induced the defendant to enter into it to prove the representations or inducements, or fraud, with
which or by which he secured the other party's consent thereto. These are expressly excluded from the parol
evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; Port Banga Lumber Co. vs. Export &
Import Lumber Co., 26 Phil., 602; III Moran 221, 1952 rev. ed.) Fraud and false representation are an incident to
the creation of a jural act, not to its integration, and are not governed by the rules on integration. Were parties
prohibited from proving said representations or inducements, on the ground that the agreement had already been
entered into, it would be impossible to prove misrepresentation or fraud. Furthermore, the parol evidence rule
expressly allows the evidence to be introduced when the validity of an instrument is put in issue by the pleadings
(section 22, par. (a), Rule 123, Rules of Court), as in this case.
That plaintiff did make the representation can also be easily gleaned from his own letters and his own
testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:
". . . He told me to come back to him when I was able to speak with authority so that we
could come to terms as far as he and I were concerned. That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining position. . . .
"I would propose that you grant me the exclusive bottling and distributing rights for a
limited period of time, during which I may consummate my plans. . . .. "
By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947. (See Exhibit
J.) If this option for an exclusive franchise was intended by plaintiff as an instrument with which to bargain with
defendant and close the deal with him, he must have used his said option for the above-indicated purpose,
especially as it appears that he was able to secure, through its use, what he wanted.
Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that when
plaintiff called on the latter, the latter answered, "Well, come back to me when you have the authority to operate. I
am definitely interested in the bottling business." (t.s.n., pp. 60-61). When after the elections of 1949 plaintiff
went to see the defendant (and at the time he had already the option), he must have exultantly told defendant that
he had the authority already. It is improbable and incredible for him to have disclosed the fact that he had only an
option to the exclusive franchise, which was to last thirty days only, and still more improbable for him to have
disclosed that, at the time of the signing of the formal agreement, his option had already expired. Had he done so,
he would have destroyed all his bargaining power and authority, and in all probability lost the deal itself.
The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the
agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The existence of
this provision in the final agreement does not militate against plaintiff having represented that he had the exclusive
franchise; it rather strengthens belief that he did actually make the representation. How could plaintiff assure
defendant that he would get the franchise for the latter if he had not actually obtained it for himself? Defendant
would not have gone into the business unless the franchise was raised in his name, or at least in the name of the
partnership. Plaintiff assured defendant he could get the franchise. Thus, in the draft prepared by defendant's
attorney, Exhibit HH, the above provision is inserted, with the difference that instead of securing the franchise for
the defendant, plaintiff was to secure it for the partnership. To show that the insertion of the above provision does
not eliminate the probability of plaintiff representing himself as the exclusive grantee of the franchise, the final
agreement contains in its third paragraph the following:
". . . and the manager is ready and willing to allow the capitalists to use the exclusive
franchise . . . .
and in paragraph 11 it also expressly states:
"1. In the event of dissolution or termination of the partnership, . . . the franchise from
Mission Dry Corporation shall be reassigned to the manager."
These statements confirm the conclusion that defendant believed, or was made to believe, the plaintiff was the
grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was to be transferred to
the name of the partnership, and that, upon its dissolution or termination, the same shall be reassigned to the
plaintiff.
Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have the
exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits to one half of
that agreed upon. He could not have had such a feeling had not plaintiff actually made him believe that he
(plaintiff) was the exclusive grantee of the franchise.
The learned trial judge reasons in his decision that the assistance of counsel in the making of the contract
made fraud improbable. Not necessarily, because the alleged representation took place before the conferences
were had; in other words, plaintiff had already represented to defendant, and the latter had already believed in, the
existence of plaintiff's exclusive franchise before the formal negotiations, and they were assisted by their lawyers
only when said formal negotiations actually took place. Furthermore, plaintiff's attorney testified that plaintiff had
said that he had the exclusive franchise; and defendant's lawyer testified that plaintiff explained to him, upon
being asked for the franchise, that he had left the papers evidencing it. (t. s. n., p. 266.)
 We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the holder
of the exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff had the
exclusive franchise. Defendant would not perhaps have gone to California and incurred expenses for the trip,
unless he believed that plaintiff did have that exclusive privilege, and that the latter would be able to get the same
from the Mission Dry Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive
franchise, as he induced him to that belief, and he may not be allowed to deny that defendant was induced by that
belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)
We now come to the legal aspect of the false representation. Does it amount to a fraud that would vitiate
the contract? It must be noted that fraud is manifested in illimitable number of degrees or gradations, from the
innocent praises of a salesman about the excellence of his wares to those malicious machinations and
representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil
Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be a ground for the annulment of a
contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court has
held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental
(dolo incidente), inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31
Phil. 160.) The record abounds with circumstances indicative of the fact that the principal consideration, the main
cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to
get the exclusive franchise to bottle and distribute for the defendant or for the partnership. The original draft
prepared by defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the
defendant. Correction appears in this same original draft, but the change is made not as to the said obligation but
as to the grantee. In the corrected draft the word "capitalist" (grantee) is changed to "partnership." The contract in
its final form retains the substituted term "partnership." The defendant was, therefore, led to the belief that
plaintiff had the exclusive franchise, but that the same was to be secured for or transferred to the partnership. The
plaintiff no longer had the exclusive franchise, or the option thereto, at the time the contract was perfected. But
while he had already lost his option thereto (when the contract was entered into), the principal obligation that he
assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the
Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this was not
the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration
or price plaintiff gave in exchange for the share of 30 per cent granted him in the net profits of the partnership
business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring his
exclusive franchise to the partnership. Thus, in the draft prepared by plaintiff's lawyer, Exhibit II, the following
provision exists:
"3. That the MANAGER, upon the organization of the said corporation, shall
forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell
them throughout the Philippines. As a consideration for such transfer, the CAPITALIST shall
transfer to the Manager full paid non-assessable shares of the said corporation . . . twenty-five per
centum of the capital stock of the said corporation." (Par. 3, Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of
beverages. As a matter of fact, when the bottling plant was being built, all that he suggested was about the toilet
facilities for the laborers.
We conclude from the above that while the representation that plaintiff had the exclusive franchise did not
vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per cent of
the net profits; in other words, by pretending that he had the exclusive franchise and promising to transfer it to
defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net profits. This is the dolo
incidente defined in article 1270 of the Spanish Civil Code, because it was used to get the other party's consent to
a big share in the profits, an incidental matter in the agreement.
"El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendo en el consentimiento, o precediendolo, no influyo para arrancar
por si solo el consentimiento ni en la totalidad de la obligacion, sino en algun extremo o accidente
de esta, dando lugar tan solo a una accion para reclamar indemnizacion de perjuicios." (8 Manresa
602.)
Having arrived at the conclusion that the agreement may not be declared null and void, the question that
next comes before us is, May the agreement be carried out or executed? We find no merit in the claim of plaintiff
that the partnership was already a fiat accompli from the time of the operation of the plant, as it is evident from the
very language of the agreement that the parties intended that the execution of the agreement to form a partnership
was to be carried out at a later date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit
A.) As a matter of fact, from the time that the franchise from the Mission Dry Corporation was obtained in
California, plaintiff himself had been demanding that defendant comply with the agreement. And plaintiff's
present action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with their
intention and incompatible with his own conduct and suit.
As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the
agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to
do, not to give. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not to
do it, as he pleases. It falls within what Spanish commentators call a very personal act (acto personalisimo), of
which courts may not compel compliance, as it is considered an act of violence to do so.
"Efectos de las obligaciones consistentes en hechos personalisimo. Tratamos de la
ejecucion de las obligaciones de hacer en el solo caso de su incumplimiento por parte del deudor, y
sean los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento
espontaneo de las mismas esta regido por los preceptos relativos al pago, y en nada les afectan las
disposiciones del art. 1.098.
"Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y por que medios.
"Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el
pricipio romano nemo potest precise cogi ad factum. Los que perciben la posibilidad de la
destruccion de este principio, aaden que, aun cuando se pudiera obligar al deudor, no deberia
hacerse, porque esto constituiria una violencia, y no es la violencia modo propio de cumplir las
obligaciones (Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuando decia que
obligar por la violencia seria infringir la libertad e imponer una especie de esclavitud."
xxx xxx xxx
"En efecto; las obligaciones contractuales no se acomodan bien con el empleo de la fuerza
fisica, no ya precisamente porque se constituya de este modo una especie de esclavitud, segun el
dicho de Antonio Gomez, sino porque se supone que el acreedor tuvo en cuenta el caracter
personalisimo del hecho ofrecido, y calculo sobre la posibilidad de que por alguna razon no se
realizase. Repugna, ademas, a la conciencia social el empleo de la fuerza publica, mediante
coaccion sobre las pesonas, en las relaciones puramente particulares; porque la evolucion de las
ideas ha ido poniendo mas de relieve cada dia el respeto a la personalidad humana, y no se admite
bien la violencia sobre el indivicuo la cual tiene caracter visiblemente penal, sino por motivos que
interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia cuando se trata de
las obligaciones que hemos llamado ex lege, que afectan al orden social y a la entidad de Estado, y
aparecen impuestas sin consideracion a las conveniencias particulares, y sin que por este motivo
puedan tampoco ser modificadas; pero no debe serlo cuando la obligacion reviste un interes
puramente particular, como sucede en las contractuales, y cuando, por consecuencia, pareceria
salirse el Estado de su esfera propia, entrado a dirimir, con apoyo de la fuerza colectiva, las
diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431- 432.)"
The last question for us to decide is that of damages, damages that plaintiff is entitled to receive because
of defendant's refusal to form the partnership, and damages that defendant is also entitled to collect because of the
falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under article 1106 of the Spanish Civil
Code the measure of damages is the actual loss suffered and the profits reasonably expected to be received,
embraced in the terms dao emergente and lucro cesante. Plaintiff is entitled under the terms of the agreement to
30 per cent of the net profits of the business. Against this amount of damages, we must set off the damage
defendant suffered by plaintiff's misrepresentation that he had the exclusive franchise, by which misrepresentation
he obtained a very high percentage of share in the profits. We can do no better than follow the appraisal that the
parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he
pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction was to reduce
plaintiff's share from 30 per cent to 15 per cent only, to which reduction defendant appears to have readily given
his assent. It was under this understanding, which amounts to a virtual modification of the contract, that the
bottling plant was established and plaintiff worked as Manager for the first three months. If the contract may not
be considered modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to one-
half and the assent thereto of plaintiff, then we may consider the said amount as a fair estimate of the damages
plaintiff is entitled to under the principle enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46
 Phil. 176. Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto amount to an admission on
the part of each of the reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial
court. The agreement contains the stipulation that upon the termination of the partnership, defendant was to
convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does not fix the period
within which these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A, we declare that
plaintiff's share of 15 per cent of the net profits shall continue to be paid while defendant uses the franchise from
the Mission Dry Corporation.
With the modification above indicated, the judgment appealed from is hereby affirmed. Without costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.

||| (Woodhouse v. Halili, G.R. No. L-4811, [July 31, 1953], 93 PHIL 526-542)