G.R. No. 178610               November 17, 2010 continued benefits under their retirement plans.
continued benefits under their retirement plans. Thus, the loans secured by their future retirement
HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN, Retirement
Trust Fund, Inc.) Petitioner, 
vs.
SPOUSES BIENVENIDO AND EDITHA BROQUEZA, Respondents.
CARPIO, J.:
G.R. No. 178610 is a petition for review1 assailing the Decision2 promulgated on 30 March 2006 by the Court of Appeals (CA) in CA-G.R. SP
No. 62685. The appellate court granted the petition filed by Fe Gerong (Gerong) and Spouses Bienvenido and Editha Broqueza (spouses
Broqueza) and dismissed the consolidated complaints filed by Hongkong and Shanghai Banking Corporation, Ltd. - Staff Retirement Plan
(HSBCL-SRP) for recovery of sum of money. The appellate court reversed and set aside the Decision3 of Branch 139 of the Regional Trial
Court of Makati City (RTC) in Civil Case No. 00-787 dated 11 December 2000, as well as its Order 4 dated 5 September 2000. The RTC’s
decision affirmed the Decision5 dated 28 December 1999 of Branch 61 of the Metropolitan Trial Court (MeTC) of Makati City in Civil Case No.
52400 for Recovery of a Sum of Money.
The Facts
The appellate court narrated the facts as follows:
Petitioners Gerong and [Editha] Broqueza (defendants below) are employees of Hongkong and
Shanghai Banking Corporation (HSBC). They are also members of respondent Hongkong Shanghai
Banking Corporation, Ltd. Staff Retirement Plan (HSBCL-SRP, plaintiff below). The HSBCL-SRP is a
retirement plan established by HSBC through its Board of Trustees for the benefit of the employees.
On October 1, 1990, petitioner [Editha] Broqueza obtained a car loan in the amount of
Php175,000.00. On December 12, 1991, she again applied and was granted an appliance loan in
the amount of Php24,000.00. On the other hand, petitioner Gerong applied and was granted an
emergency loan in the amount of Php35,780.00 on June 2, 1993. These loans are paid through
automatic salary deduction.
Meanwhile [in 1993], a labor dispute arose between HSBC and its employees. Majority of HSBC’s
employees were terminated, among whom are petitioners Editha Broqueza and Fe Gerong. The
employees then filed an illegal dismissal case before the National Labor Relations Commission
(NLRC) against HSBC. The legality or illegality of such termination is now pending before this
appellate Court in CA G.R. CV No. 56797, entitled Hongkong Shanghai Banking Corp. Employees
Union, et al. vs. National Labor Relations Commission, et al.
Because of their dismissal, petitioners were not able to pay the monthly amortizations of their
respective loans. Thus, respondent HSBCL-SRP considered the accounts of petitioners delinquent.
Demands to pay the respective obligations were made upon petitioners, but they failed to pay.6
HSBCL-SRP, acting through its Board of Trustees and represented by Alejandro L. Custodio, filed
Civil Case No. 52400 against the spouses Broqueza on 31 July 1996. On 19 September 1996,
HSBCL-SRP filed Civil Case No. 52911 against Gerong. Both suits were civil actions for recovery and
collection of sums of money.
The Metropolitan Trial Court’s Ruling
On 28 December 1999, the MeTC promulgated its Decision 7 in favor of HSBCL-SRP. The MeTC ruled
that the nature of HSBCL-SRP’s demands for payment is civil and has no connection to the ongoing
labor dispute. Gerong and Editha Broqueza’s termination from employment resulted in the loss of
benefits to which they are no longer entitled are reduced to unsecured and pure civil obligations. As
unsecured and pure obligations, the loans are immediately demandable.
The dispositive portion of the MeTC’s decision reads:
WHEREFORE, premises considered and in view of the foregoing, the Court finds that the plaintiff
was able to prove by a preponderance of evidence the existence and immediate demandability of
the defendants’ loan obligations as judgment is hereby rendered in favor of the plaintiff and against
the defendants in both cases, ordering the latter:
1. In Civil Case No. 52400, to pay the amount of Php116,740.00 at six percent interest per
annum from the time of demand and in Civil Case No. 52911, to pay the amount of Php25,344.12
at six percent per annum from the time of the filing of these cases, until the amount is fully paid;
2. To pay the amount of Php20,000.00 each as reasonable attorney’s fees;
3. Cost of suit.
Gerong and the spouses Broqueza filed a joint appeal of the MeTC’s decision before the RTC.
Gerong’s case was docketed Civil Case No. 00-786, while the spouses Broqueza’s case was
docketed as Civil Case No. 00-787.
The Regional Trial Court’s Ruling
The RTC initially denied the joint appeal because of the belated filing of Gerong and the spouses
Broqueza’s memorandum. The RTC later reconsidered the order of denial and resolved the issues in
the interest of justice.
On 11 December 2000, the RTC affirmed the MeTC’s decision in toto.9
The RTC ruled that Gerong and Editha Broqueza’s termination from employment disqualified them
from availing of benefits under their retirement plans. As a consequence, there is no longer any
security for the loans. HSBCL-SRP has a legal right to demand immediate settlement of the unpaid
balance because of Gerong and Editha Broqueza’s continued default in payment and their failure to
provide new security for their loans. Moreover, the absence of a period within which to pay the loan
allows HSBCL-SRP to demand immediate payment. The loan obligations are considered pure
obligations, the fulfillment of which are demandable at once.
Gerong and the spouses Broqueza then filed a Petition for Review under Rule 42 before the CA.
The Ruling of the Court of Appeals
On 30 March 2006, the CA rendered its Decision10 which reversed the 11 December 2000 Decision
of the RTC. The CA ruled that the HSBCL-SRP’s complaints for recovery of sum of money against
Gerong and the spouses Broqueza are premature as the loan obligations have not yet matured.
Thus, no cause of action accrued in favor of HSBCL-SRP. The dispositive portion of the appellate
court’s Decision reads as follows:
WHEREFORE, the assailed Decision of the RTC is REVERSED and SET ASIDE. A new one is hereby
rendered DISMISSING the consolidated complaints for recovery of sum of money.
HSBCL-SRP filed a motion for reconsideration which the CA denied for lack of merit in its
Resolution12 promulgated on 19 June 2007.
On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing the petition against Gerong
because she already settled her obligations. In a Resolution13 of this Court dated 10 September
2007, this Court treated the manifestation as a motion to withdraw the petition against Gerong,
granted the motion, and considered the case against Gerong closed and terminated.
Issues
HSBCL-SRP enumerated the following grounds to support its Petition:
I. The Court of Appeals has decided a question of substance in a way not in accord with law and
applicable decisions of this Honorable Court; and
II. The Court of Appeals has departed from the accepted and usual course of judicial proceedings
in reversing the decision of the Regional Trial Court and the Metropolitan Trial Court.14
Editha Broqueza, however, defaulted in her monthly loan payment due to her dismissal. Despite the
spouses Broqueza’s protestations, the payroll deduction is merely a convenient mode of payment
and not the sole source of payment for the loans. HSBCL-SRP never agreed that the loans will be
paid only through salary deductions. Neither did HSBCL-SRP agree that if Editha Broqueza ceases to
be an employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-SRP can
immediately demand payment of the loans at anytime because the obligation to pay has no period.
Moreover, the spouses Broqueza have already incurred in default in paying the monthly
installments.
Finally, the enforcement of a loan agreement involves "debtor-creditor relations founded on
contract and does not in any way concern employee relations. As such it should be enforced
through a separate civil action in the regular courts and not before the Labor Arbiter."17

The Court’s Ruling WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. SP No.
62685 promulgated on 30 March 2006 is REVERSED and SET ASIDE. The decision of Branch 139
of the Regional Trial Court of Makati City in Civil Case No. 00-787, as well as the decision of Branch
The petition is meritorious. We agree with the rulings of the MeTC and the RTC.
61 of the Metropolitan Trial Court of Makati City in Civil Case No. 52400 against the spouses
Bienvenido and Editha Broqueza, are AFFIRMED. Costs against respondents.
The Promissory Notes uniformly provide:

PROMISSORY NOTE

P_____ Makati, M.M. ____ 19__

FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to pay to THE HSBC RETIREMENT PLAN
(hereinafter called the "PLAN") at its office in the Municipality of Makati, Metro Manila, on or before until fully
paid the sum of PESOS ___ (P___) Philippine Currency without discount, with interest from date hereof at the rate
of Six per cent (6%) per annum, payable monthly.
I/WE agree that the PLAN may, upon written notice, increase the interest rate stipulated in this note at any time
depending on prevailing conditions.
I/WE hereby expressly consent to any extensions or renewals hereof for a portion or whole of the principal without
notice to the other(s), and in such a case our liability shall remain joint and several.1avvphi1

In case collection is made by or through an attorney, I/WE jointly and severally agree to pay ten percent (10%) of
the amount due on this note (but in no case less than P200.00) as and for attorney’s fees in addition to expenses
and costs of suit.
In case of judicial execution, I/WE hereby jointly and severally waive our rights under the provisions of Rule 39,
Section 12 of the Rules of Court.15

In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil Code:
Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past
event unknown to the parties, is demandable at once.

We affirm the findings of the MeTC and the RTC that there is no date of payment indicated in the
Promissory Notes. The RTC is correct in ruling that since the Promissory Notes do not contain a
period, HSBCL-SRP has the right to demand immediate payment. Article 1179 of the Civil Code
applies. The spouses Broqueza’s obligation to pay HSBCL-SRP is a pure obligation. The fact that
HSBCL-SRP was content with the prior monthly check-off from Editha Broqueza’s salary is of no
moment. Once Editha Broqueza defaulted in her monthly payment, HSBCL-SRP made a demand to
enforce a pure obligation.

In their Answer, the spouses Broqueza admitted that prior to Editha Broqueza’s dismissal from
HSBC in December 1993, she "religiously paid the loan amortizations, which HSBC collected
through payroll check-off."16 A definite amount is paid to HSBCL-SRP on a specific date. Editha
Broqueza authorized HSBCL-SRP to make deductions from her payroll until her loans are fully paid.
[G.R. No. 131784. September 16, 1999.]
FELIX L. GONZALES, Petitioner, v. THE HEIRS OF THOMAS and PAULA CRUZ, herein
represented by ELENA C. TALENS, Respondents.
DECISION
PANGANIBAN, J.:
If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import most adequate to render it effectual.
An obligation cannot be enforced unless the plaintiff has fulfilled the condition upon which it is premised. Hence, an obligation to purchase
cannot be implemented unless and until the sellers have shown their title to the specific portion of the property being
sold.chanroblesvirtuallawlibrary:red
The Case
Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision 1 of the Court of Appeals 2 in
CA GR-CV No. 303754, which disposed as follows:
"WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby REVERSED. The appellee FELIX
GONZALES is hereby ordered to surrender possession of the property covered by the Contract of Lease/Purchase
to the appellants, Heirs of Thomas and Paula Cruz, and to pay to the appellants the following amounts:
1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall have recovered
possession of the property subject of the Contract of Lease/Purchase;
2. P15,000.00 as attorney’s fees; and
3. Costs of suit."
On the other hand, the trial court 4 Decision, 5 which was reversed by the CA, ruled as follows:
"WHEREFORE, premises considered, this Court hereby renders judgment in favor of the defendant, Felix Gonzales,
and against the plaintiffs, as follows:chanrob1es virtual 1aw library
(1) Ordering the dismissal of the case;
(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and the other sum
of P10,000.00 as and for attorney’s fees; and
(3) To pay the costs."
The Facts
We hereby reproduce, unedited, the Court of Appeals’ summary of the facts of this case as follows:
"On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula Cruz,
namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C. Victoria, Leticia C. Salvador
and Elena C. Talens, entered into a Contract of Lease/Purchase with the defendant, Felix L.
Gonzales, the sole proprietor and manager of Felgon Farms, of a half-portion of a ‘parcel of land
containing an area of 12 hectares, more or less, and an accretion of 2 hectares, more or less,
situated in Rodriguez Town, Province of Rizal’ and covered by Transfer Certificate of Title No. 12111
(Exhibit A, p. 157, Records). The contract of Lease/Purchase contains the following provisions:
‘1. The terms of this Contract is for a period of one year upon the signing thereof. After the period
of this Contract, the LESSEE shall purchase the property on the agreeable price of One Million Pesos
(P1,000,000.00) payable within Two (2) Years period with an interest of 12% per annum subject to
the devalued amount of the Philippine Peso, according to the following schedule of payment:
Upon the execution of the Deed of Sale 50% — and thereafter 25% every six (6) months
thereafter, payable within the first ten (10) days of the beginning of each period of six (6) months.
‘2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand Five
Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1, 1983.
‘9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct
T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which shall
not in any case exceed four (4) years, after which a new Contract shall be executed by the herein
parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the
terms and conditions are concerned.
"The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental on the half-
portion of the property covered by Transfer Certificate of Title No. 12111 in accordance with the
second provision of the Contract of Lease/Purchase (p. 12, TSN, September 14, 1989) and
thereafter took possession of the property, installing thereon the defendant Jesus Sambrano as his
caretaker (pp. 16-17, 27, TSN, December 12, 1989). The defendant Gonzales did not, however,
exercise his option to purchase the property immediately after the expiration of the one-year lease
on November 30, 1984 (pp. 19-20, TSN, September 14, 1989). He remained in possession of the
property without paying the purchase price provided for in the Contract of Lease/Purchase (Ibid.)
and without paying any further rentals thereon (p. 36, TSN, November 7, 1989).
"A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales informing
him of the lessors’ decision to rescind the Contract of Lease/Purchase due to a breach thereof
committed by the defendant (Exhibit C; p. 162, Records). The letter also served as a demand on
the defendant to vacate the premises within 10 days from receipt of said letter (Ibid.).
"The defendant Gonzales refused to vacate the property and continued possession thereof (p. 2,
Record). The matter was therefore brought before the barangay captain of San Isidro, but owing to
the defendant’s refusal to appear before the barangay, a certification allowing the case to be
brought to Court was issued on March 18, 1987 (Exhibit E; p. 165, Records).
"The lessor, Paula Año Cruz died the following day, March 19, 1987 (p. 9, TSN, September 14,
1989).
"A final demand letter to vacate the premises was sent by the remaining lessors who are also the
heirs of the deceased lessor Paula Año Cruz, through their counsel on August 24, 1987 which the
defendant Gonzales received but did not heed (Exhibits D and D-1; pp. 163-164, Records).
"The property subject of the Contract of Lease/Purchase is currently the subject of an Extra-Judicial
Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property remains in the name of
the plaintiffs’ predecessors-in-interest, Bernardina Calixto and Severo Cruz (Exhibit B; p. 160,
Records).
"Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a complaint
for recovery of possession of the property — subject of the contract with damages, both moral and
compensatory and attorney’s fees and litigation expenses (p. 3, Records).
"Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of only
P50,000.00 of the P500,000.00 agreed down payment on the purchase price of P1,000,000.00, the
defendant Gonzales filed his answer on November 23, 1987 praying for a dismissal of the complaint
filed against him and an award of moral, exemplary and actual damages, as well as litigation
expenses.
"The defendant Sambrano was, upon motion, declared in default for failure to file an answer despite
valid service of summons (p. 30, Records).
"The parties limited the issues to be resolved to:
(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is to
pay the down payment;
(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and
(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262,
Records)
"After the termination of the pre-trial conference, the trial court proceeded to hear the case on the
merits and arrived at its appealed decision based on the following findings and conclusions:
‘Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a Transfer
Certificate of Title in the name of the lessee within 4 years before a new contract is to be entered
into under the same terms and conditions as the original Contract of Lease/Purchase. Thus,
before a deed of Sale can be entered into between the plaintiffs and the defendant, the plaintiffs
have to obtain the Transfer Certificate of Title in favor of the defendant. Article 1181 of the New
Civil Code states that: ‘In conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition.’ When the obligation assumed by a party to a contract is
expressly subjected to a condition, the obligation cannot be enforced against him unless the
condition is complied with (Wise & Co. v. Kelly, 37 Phil. 695; PNB v. Philippine Trust Co., 68 Phil.
48).
‘The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in the
contract, does not entitle them to rescind the contract[.] Article 1191 of the New Civil Code states
that: ‘The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him. The injured party may choose between the
fulfillment of the obligation, with the payment of damages in either case. He may seek rescission,
even after he has chosen fulfillment, if the latter should become impossible . . .’ The power to
rescind is given to the injured party. Where the plaintiff is the party who did not perform, he is not
entitled to insist upon the performance of the contract by the defendant or recover damages by
reason of his own breach (Mateos v. Lopez, 6 Phil. 206; Borque v. Yu Chipco, 14 Phil. 95). An
action for specific performance of a contract is an equitable proceeding, and he who seeks to
enforce it must himself be fair and reasonable, and do equity (Seva v. Berwin, 48 Phil. 581). In this
case, plaintiffs failed to comply with the conditions precedent after 2-1/2 years from the execution
of the contract so as to entitle them to rescind the contract. Although the contract stated that the
same be done within 4 years from execution, still, the defendant has to be assured that the land
subject of the case will be transferred in his name without any encumbrances, as the Extra-Judicial
Partition dated July 17, 1989 was being processed, and continues to be in process to this date. The
failure to secure the Transfer Certificate of Title in favor of the defendant entitles not the plaintiffs
but, rather, the defendant to either rescind or to ask for specific performances.
‘Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New Civil Code
states that:
If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days
with the acquies[c]ence of the lessor and unless a notice to the contrary by either party has
previously been given, it is understood that there is an implied new lease, not for the period of
the original contract, but for the time established in Articles 1682 and 1687. The other terms of
the original contract shall be revived.
‘Article 1682 of the New Civil Code states that:
The lease of a piece of rural land, when its duration has not been fixed, is understood to have
been made for all the time necessary for the gathering of the fruits which the whole estate leased
may yield in one year, or which it may yield once, although two or more years may have to
elapse for the purpose.
‘The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial demand on
July 2, 1986. The contract was entered into on December 1, 1983. The demand was thus made
more than a year and a half from the expiry date of the original lease considering that there was no
payment made for the second year of the lease. If one has to consider the fact that the defendant
was given the option to purchase the property after two years, then, the lease would presumably
run for at least two years. If that is so, then, the demand was made seven months after the
expiration of the two-year lease. Still, this demand by the plaintiffs will come under the implied new
lease of Articles 1682 and 1670 so that the plaintiffs are not entitled to terminate the Contract of
Lease.
‘In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify the
defendant in due time of their intention to that effect. Nor can they rescind the Contract of
Purchase in view of the fact that there is a condition precedent which the plaintiffs have not
fulfilled. It is the defendant now who has the option to either rescind or demand the performance of
the contract. Moreover, according to Article 1654 of the New Civil Code, the lessor is obliged to
deliver the thing which is the object of the contract in such condition as to render it fit for the use
intended. Considering that the lessors-plaintiffs have not delivered the property in whole over the
protest of the defendant, the latter suffered damages therefor.’ (p. 4-6, Decision; pp. 262-264,
Records)
"Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of having
committed the following errors:
I. THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS COULD NOT
VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT (EXHIBIT ‘A’) AND
THEREAFTER TO TAKE POSSESSION OF THE LAND IN QUESTION AND EJECT THEREFROM
DEFENDANTS-APPELLEES.
II. THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED AND PRAYED FOR
BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)
"The case was submitted for decision without the appellee’s brief as per the Court’s resolution dated
July 8, 1992 (p. 71, Rollo)."
Ruling of the Court of Appeals
The Court of Appeals reversed the trial court in this wise:
"The trial court, in its decision interpreted the ninth provision of the Contract of Lease/Purchase to
mean that before the appellee exercises his option to purchase the property by paying the 50%
plus interest on the P1,000,000.00 purchase price, the appellants must first transfer the title to the
property in the appellee’s name. The Court finds this interpretation of the provision strained if not
altogether absurd. The transfer of title to the property in the appellee’s name cannot be interpreted
as a condition precedent to the payment of the agreed purchase price because such interpretation
not only runs counter [to] the explicit provisions of the contract but also is contrary to the normal
course of things anent the sale of real properties. The terms of the contract [are] explicit and
require no interpretation. Upon the expiration of the lease, the lessee shall purchase the property.
Besides, the normal course of things anent the sale of real properties dictates that there must first
be payment of the agreed purchase price before transfer of title to the vendee’s name can be
made.
"This was precisely what the appellants and Paula Año Cruz had in mind when they had the ninth
provision incorporated in the Contract of Lease/Purchase. They had asked for a period of 4 years
from the time they receive the downpayment of 50% within which to have [the] title to the
property transferred in the name of the appellee. The reason for this four (4) year period is [that]
title to the property still remains in the name of the original owners, the predecessors-in-interest of
the herein appellants and [transferring] the title to their names and eventually to the lessee-
purchaser, appellee herein, would take quite some time.
"The appellee wanted to have the title to the property transferred in his name first before he
exercises his option to purchase allegedly in accordance with the ninth provision of the contract.
But the ninth provision does not give him this right. A reading of the contract in its entirety shows
that the 4 year period asked for by the appellants within which to have title to the property
transferred in the appellee’s name will only start to run when the appellee exercises his option to
purchase. Since the appellee never exercised his option to purchase, then appellee is not entitled to
have the title to the property transferred in his name."
Attributing reversible errors to the appellate court, petitioner elevated the case to this Court.
The Issues
In his Memorandum, 8 petitioner submits the "following main issues":
"I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of
discretion in the interpretation of [the] law between the parties.
"II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts which
resulted [in] departing from the usual course of judicial proceedings."
For these issues to be resolved, petitioner asks this Court to answer the following questions:
"1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Contract and
that [in] paragraph No. 9 thereof?
"2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could
exercise his option to buy the property?
"3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?"  In fact, they admit that extrajudicial proceedings were still ongoing. Hence, when the Contract of
In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of the
Contract.
The Court’s Ruling
The Petition is meritorious.
Main Issue: Interpretation of Paragraph Nine
In its first paragraph, the disputed agreement provides that petitioner shall lease the property for
one year, after which he "shall purchase" it. Paragraph nine, on the other hand, requires herein
respondents to obtain a separate and distinct Transfer Certificate of Title (TCT) over the property,
viz:
"9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct
T.C.T. over the lease portion to the LESSEE within a reasonable period of time which shall not in
any case exceed four (4) years, after which a new Contract shall be executed by the herein parties
which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms
and conditions are concerned."
Alleging that petitioner has not purchased the property after the lapse of one year, respondents
seek to rescind the Contract and to recover the property. Petitioner, on the other hand, argues that
he could not be compelled to purchase the property, because respondents have not complied with
paragraph nine, which obligates them to obtain a separate and distinct title in their names. He
contends that paragraph nine was a condition precedent to the purchase of the property.
To be sure, this paragraph — and the entire agreement, for that matter — is not a model of how a
contract should be worded. It is an invitation to a litigation, as in fact the parties had to go all to
way up to this Court to plead for a resolution of their conflict which is rooted in their failure to
express themselves clearly. Small wonder, even the two lower courts gave contradictory
understanding of this provision, thereby necessitating the intervention of the highest court of the
land.
Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that the
respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial
court held that this obligation was a condition precedent to petitioner’s purchase of the property.
Since respondents had not performed their obligation, they could not compel petitioner to buy the
parcel of land. The CA took the opposite view, holding that the property should be purchased first
before respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.
As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains that
respondents were obligated to procure a TCT in their names before he could be obliged to purchase
the property in question.
Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of
several meanings, it shall be understood as bearing that import most adequate to render it
effectual. 9 Considering the antecedents of the ownership of the disputed lot, it appears that
petitioner’s interpretation renders clause nine most effectual.
The record shows that at the time the contract was executed, the land in question was still
registered in the name of Bernardina Calixto and Severo Cruz, respondents’ predecessors-in-
interest. There is no showing whether respondents were the only heirs of Severo Cruz or whether
the other half of the land in the name of Bernardina Calixto was adjudicated to them by any means.
Lease/Purchase was executed, there was no assurance that the respondents were indeed the
owners of the specific portion of the lot that petitioner wanted to buy, and if so, in what concept
and to what extent.
Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct
TCT in their names. This was necessary to enable them to show their ownership of the stipulated
portion of the land and their concomitant right to dispose of it. Absent any title in their names, they
could not have sold the disputed parcel of land.
It is a well-settled principle in law that no one can give what one does not have — nemo dat quod
non habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can
acquire no more than what the seller can transfer legally. 10 
Because the property remained registered in the names of their predecessors-in-interest, private
respondents could validly sell only their undivided interest in the estate of Severo Cruz, the extent
of which was however not shown in the records. There being no partition of the estate thus far,
there was no guarantee as to how much and which portion would be adjudicated to respondents.
In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing
sold. 11 In this case, the respondent could not deliver ownership or title to a specific portion of the
yet undivided property. True, they could have intended to sell their hereditary interest, but in the
context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific
portion of the land to be segregated, identified and specifically titled. Hence, by the said Contract,
the respondents as sellers were given a maximum of four years within which to acquire a separate
TCT in their names, preparatory to the execution of the deed of sale and the payment of the agreed
price in the manner described in paragraph nine.chanrobles.com.ph : virtual law library
This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to help
them expedite the transfer of the TCT to their names. Ineluctably, the intention of the parties was
to have the title transferred first to respondents’ names as a condition for the completion of the
purchase.
In holding that clause nine was not a condition precedent to the purchase of the property, the CA
relied on a literal interpretation to the effect that the TCT should be obtained in the name of the
petitioner-vendee. It reasoned that the title could be transferred to the name of the buyer only purchase the property. "When the consent of a party to a contract is given subject to the fulfillment
after the completion of the purchase. Thus, petitioner should first purchase the property before of a suspensive condition, the contract is not perfected unless that condition is first complied with."
respondents could be obliged to transfer the TCT to his name. 15 

We disagree. The literal interpretation not only ignores the factual backdrop of the case; it also
utilizes a faulty parsing of paragraph nine, which should purportedly read as follows: "The
lessors . . . shall undertake to obtain a separate and distinct TCT . . . to the LESSEE within a
reasonable period of time which shall not in any case exceed four (4) years . . ." Read in its
entirety, however, paragraph nine does not say that the TCT should be obtained in the name of the
lessee. In fact, paragraph nine requires respondents to obtain a "TCT over the herein leased portion
to the LESSEE," thereby showing that the crucial phrase "to the LESSEE" adverts to "the leased
portion" and not to the name which should appear in the new TCT.
Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after a
separate TCT had been obtained, "a new contract shall be executed by the herein parties which
shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and
conditions are concerned.”
If, as the CA held, petitioner should purchase the property first before the title can be transferred to
his name, why should there be a waiting period of four years before the parties can execute the
new contract evidencing the sale? Why should the petitioner still be required to pay rentals after it
purchases and pays for the property? The Contract could not have envisioned this absurd scenario.
Clearly, the appellate court’s literal interpretation of the first portion of paragraph nine renders the
latter portion thereof ineffectual. In other words, that portion can only mean that the respondents
should first obtain a TCT in their names, after which petitioner is given time to purchase and pay for
the property.
Respondents insist that "the obligation of petitioner to buy the disputed land immediately after the
termination of the one year lease period is explicit." 12 However, it is more reasonable to state that
the first paragraph was effectively modified by the ninth. To repeat, petitioner can be compelled to
perform his obligation under the first paragraph, only after respondents have complied with the
ninth. Unless and until respondents have done so, the first paragraph cannot be enforced against
petitioner.
The Court has held that" [w]hen the obligation assumed by a party to a contract is expressly
subjected to a condition, the obligation cannot be enforced against him unless the condition is
complied with." 16 Furthermore," [t]he obligatory force of a conditional obligation is subordinated
to the happening of a future and uncertain event, so that if that event does not take place, the
parties would stand as if the conditional obligation had never existed." 17 
In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents
comply with the suspensive condition that they acquire first a separate and distinct TCT in their
names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to
purchase the land has not arisen.
Respondents Cannot Rescind the Contract
In the same vein, respondents cannot rescind the contract, because they have not caused the
transfer of the TCT to their names, which is a condition precedent to petitioner’s obligation. This
Court has held that "there can be no rescission (or more properly, resolution) of an obligation as
yet non-existent, because the suspensive condition has not happened." 18 
Since the reversal of the CA Decision is inevitable, the trial court’s judgment should be reinstated.
However, we find no sufficient factual or legal justifications for the awards of moral damages and
attorney’s fees.
WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET ASIDE. The
Decision of the trial court is REINSTATED, but the award of moral damages and attorney’s fees is
DELETED for lack of basis. No costs.

In sum, we hold that the ninth provision was intended to ensure that respondents would have a
valid title over the specific portion they were selling to petitioner. Only after the title is assured may
the obligation to buy the land and to pay the sums stated in the Contract be enforced within the
period stipulated. Verily, the petitioner’s obligation to purchase has not yet ripened and cannot be
enforced until and unless respondents can prove their title to the property subject of the Contract.

Secondary Issues:

Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in their names
and not in the name of petitioner, it logically follows that such undertaking was a condition
precedent to the latter’s obligation to purchase and pay for the land. Put differently, petitioner’s
obligation to purchase the land is a conditional one and is governed by Article 1181 of the Civil
Code. 13 

Condition has been defined as "every future and uncertain event upon which an obligation or
provision is made to depend. It is a future and uncertain event upon which the acquisition or
resolution of rights is made to depend by those who execute the juridical act." 14 Without it, the
sale of the property under the Contract cannot be perfected, and petitioner cannot be obliged to

G.R. No. 103577 October 7, 1996
ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C.
GONZALES (for herself and on behalf of Florida C. Tupper, as attorney-in-fact), CIELITO
A. CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners, 
vs.
THE COURT OF APPEALS, CONCEPCION D. ALCARAZ, and RAMONA PATRICIA ALCARAZ,
assisted by GLORIA F. NOEL as attorney-in-fact, respondents.
MELO, J.:p
The petition before us has its roots in a complaint for specific performance to compel herein petitioners (except the last named, Catalina
Balais Mabanag) to consummate the sale of a parcel of land with its improvements located along Roosevelt Avenue in Quezon City entered
into by the parties sometime in January 1985 for the price of P1,240,000.00.
The undisputed facts of the case were summarized by respondent court in this wise:
On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as
Coronels) executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff
Ramona Patricia Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:
RECEIPT OF DOWN PAYMENT
P1,240,000.00 — Total amount
50,000 — Down payment
———————————
P1,190,000.00 — Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 119627 of the
Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
We bind ourselves to effect the transfer in our names from our deceased father, Constancio P.
Coronel, the transfer certificate of title immediately upon receipt of the down payment above-
stated.
On our presentation of the TCT already in or name, We will immediately execute the deed of
absolute sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the
balance of the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of
the document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property registered in
the name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down
payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the deed
of absolute sale in favor of Ramona and the latter will pay the former the whole balance of One
Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.
On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter
referred to as Concepcion), mother of Ramona, paid the down payment of Fifty Thousand
(P50,000.00) Pesos (Exh. "B", Exh. "2").
On February 6, 1985, the property originally registered in the name of the Coronels' father was
transferred in their names under TCT No. 327043 (Exh. "D"; Exh. "4")
On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-
appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five Hundred
Eighty Thousand (P1,580,000.00) Pesos after the latter has paid Three Hundred Thousand
(P300,000.00) Pesos (Exhs. "F-3"; Exh. "6-C")
For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by
depositing the down payment paid by Concepcion in the bank in trust for Ramona Patricia
Alcaraz.
On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the
Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403
(Exh. "E"; Exh. "5").
On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same
property with the Registry of Deeds of Quezon City (Exh. "F"; Exh. "6").
On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in
favor of Catalina (Exh. "G"; Exh. "7").
On June 5, 1985, a new title over the subject property was issued in the name of Catalina under
TCT No. 351582 (Exh. "H"; Exh. "8").
In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties
agreed to submit the case for decision solely on the basis of documentary exhibits. Thus, plaintiffs
therein (now private respondents) proffered their documentary evidence accordingly marked as
Exhibits "A" through "J", inclusive of their corresponding submarkings. Adopting these same
exhibits as their own, then defendants (now petitioners) accordingly offered and marked them as
Exhibits "1" through "10", likewise inclusive of their corresponding submarkings. Upon motion of
the parties, the trial court gave them thirty (30) days within which to simultaneously submit their
respective memoranda, and an additional 15 days within which to submit their corresponding
comment or reply thereof, after which, the case would be deemed submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was
then temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989,
judgment was handed down by Judge Roura from his regular bench at Macabebe, Pampanga for the
Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to
execute in favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and
covered by Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of
Deeds for Quezon City, together with all the improvements existing thereon free from all liens
and encumbrances, and once accomplished, to immediately deliver the said document of sale to
 plaintiffs and upon receipt thereof, the said document of sale to plaintiffs and upon receipt
thereof, the plaintiffs are ordered to pay defendants the whole balance of the purchase price
amounting to P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the Registry of
Deeds for Quezon City in the name of intervenor is hereby canceled and declared to be without
force and effect. Defendants and intervenor and all other persons claiming under them are hereby
ordered to vacate the subject property and deliver possession thereof to plaintiffs. Plaintiffs' claim
for damages and attorney's fees, as well as the counterclaims of defendants and intervenors are
hereby dismissed.
Macabebe, Pampanga for Quezon City, March 1, 1989.
A motion for reconsideration was filed by petitioner before the new presiding judge of the Quezon
City RTC but the same was denied by Judge Estrella T. Estrada, thusly:
The prayer contained in the instant motion, i.e., to annul the decision and to render anew
decision by the undersigned Presiding Judge should be denied for the following reasons: (1) The
instant case became submitted for decision as of April 14, 1988 when the parties terminated the
presentation of their respective documentary evidence and when the Presiding Judge at that time
was Judge Reynaldo Roura. The fact that they were allowed to file memoranda at some future
date did not change the fact that the hearing of the case was terminated before Judge Roura and
therefore the same should be submitted to him for decision; (2) When the defendants and
intervenor did not object to the authority of Judge Reynaldo Roura to decide the case prior to the
rendition of the decision, when they met for the first time before the undersigned Presiding Judge
at the hearing of a pending incident in Civil Case No. Q-46145 on November 11, 1988, they were
deemed to have acquiesced thereto and they are now estopped from questioning said authority of
Judge Roura after they received the decision in question which happens to be adverse to them;
(3) While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch of the
Court, he was in all respects the Presiding Judge with full authority to act on any pending incident
submitted before this Court during his incumbency. When he returned to his Official Station at
Macabebe, Pampanga, he did not lose his authority to decide or resolve such cases submitted to
him for decision or resolution because he continued as Judge of the Regional Trial Court and is of
co-equal rank with the undersigned Presiding Judge. The standing rule and supported by
jurisprudence is that a Judge to whom a case is submitted for decision has the authority to decide
the case notwithstanding his transfer to another branch or region of the same court (Sec. 9, Rule
135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered
in the instant case, resolution of which now pertains to the undersigned Presiding Judge, after a
meticulous examination of the documentary evidence presented by the parties, she is convinced
that the Decision of March 1, 1989 is supported by evidence and, therefore, should not be
disturbed.
IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and
Render Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is hereby
DENIED.
Quezon City, Philippines, July 12, 1989.
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals
(Buena, Gonzaga-Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial
court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading, private
respondents' Reply Memorandum, was filed on September 15, 1993. The case was, however, re-
raffled to undersigned  ponente  only on August 28, 1996, due to the voluntary inhibition of the
Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of respondent court
in the affirmance of the trial court's decision, we definitely find the instant petition bereft of merit.
The heart of the controversy which is the ultimate key in the resolution of the other issues in the
case at bar is the precise determination of the legal significance of the document entitled "Receipt
of Down Payment" which was offered in evidence by both parties. There is no dispute as to the fact
that said document embodied the binding contract between Ramona Patricia Alcaraz on the one
hand, and the heirs of Constancio P. Coronel on the other, pertaining to a particular house and lot
covered by TCT No. 119627, as defined in Article 1305 of the Civil Code of the Philippines which
reads as follows:
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service.
While, it is the position of private respondents that the "Receipt of Down Payment" embodied a
perfected contract of sale, which perforce, they seek to enforce by means of an action for specific
performance, petitioners on their part insist that what the document signified was a mere executory
contract to sell, subject to certain suspensive conditions, and because of the absence of Ramona P.
Alcaraz, who left for the United States of America, said contract could not possibly ripen into a
contract absolute sale.
Plainly, such variance in the contending parties' contentions is brought about by the way each
interprets the terms and/or conditions set forth in said private instrument. Withal, based on
whatever relevant and admissible evidence may be available on record, this, Court, as were the
courts below, is now called upon to adjudge what the real intent of the parties was at the time the
said document was executed.
The Civil Code defines a contract of sale, thus:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The
essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the
price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to  Sell may not be considered as a Contract of  Sale because the
first essential element is lacking. In a contract to sell, the prospective seller explicity reserves the
transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree or
consent to transfer ownership of the property subject of the contract to sell until the happening of
an event, which for present purposes we shall take as the full payment of the purchase price. What
the seller agrees or obliges himself to do is to fulfill is promise to sell the subject property when the
entire amount of the purchase price is delivered to him. In other words the full payment of the
purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the
obligation to sell from arising and thus, ownership is retained by the prospective seller without
further remedies by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741 [1980]), this Court
had occasion to rule:
Hence, We hold that the contract between the petitioner and the respondent was a contract to
sell where the ownership or title is retained by the seller and is not to pass until the full payment
of the price, such payment being a positive suspensive condition and failure of which is not a
 breach, casual or serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the
purchase price, the prospective seller's obligation to sell the subject property by entering into a
contract of sale with the prospective buyer becomes demandable as provided in Article 1479 of the
Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon
fulfillment of the condition agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract of
sale where the seller may likewise reserve title to the property subject of the sale until the
fulfillment of a suspensive condition, because in a conditional contract of sale, the first element of
consent is present, although it is conditioned upon the happening of a contingent event which may
or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of sale is
completely abated (cf. Homesite and housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]).
However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that
if there had already been previous delivery of the property subject of the sale to the buyer,
ownership thereto automatically transfers to the buyer by operation of law without any further act
having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of
the purchase price, ownership will not automatically transfer to the buyer although the property
may have been previously delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional contract of sale specially in
cases where the subject property is sold by the owner not to the party the seller contracted with,
but to a third person, as in the case at bench. In a contract to sell, there being no previous sale of
the property, a third person buying such property despite the fulfillment of the suspensive condition
such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith
and the prospective buyer cannot seek the relief of reconveyance of the property. There is no
double sale in such case. Title to the property will transfer to the buyer after registration because
there is no defect in the owner-seller's title per se, but the latter, of course, may be used for
damages by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale
becomes absolute and this will definitely affect the seller's title thereto. In fact, if there had been
previous delivery of the subject property, the seller's ownership or title to the property is
automatically transferred to the buyer such that, the seller will no longer have any title to transfer
to any third person. Applying Article 1544 of the Civil Code, such second buyer of the property who
may have had actual or constructive knowledge of such defect in the seller's title, or at least was
charged with the obligation to discover such defect, cannot be a registrant in good faith. Such
second buyer cannot defeat the first buyer's title. In case a title is issued to the second buyer, the
first buyer may seek reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task of deciphering the real nature
of the contract entered into by petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be given their
natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court of
Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in the said "Receipt of Down
Payment" that they —
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos  purchase price of our inherited house and lot, covered by TCT No. 1199627 of
the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural and
ordinary idea conveyed is that they sold their property.
When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that
there was a clear intent on the part of petitioners to transfer title to the buyer, but since the
transfer certificate of title was still in the name of petitioner's father, they could not fully effect such
transfer although the buyer was then willing and able to immediately pay the purchase price.
Therefore, petitioners-sellers undertook upon receipt of the down payment from private respondent
Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names from that of
their father, after which, they promised to present said title, now in their names, to the latter and
to execute the deed of absolute sale whereupon, the latter shall, in turn, pay the entire balance of
the purchase price.
The agreement could not have been a contract to sell because the sellers herein made no express
reservation of ownership or title to the subject parcel of land . Furthermore, the circumstance which
prevented the parties from entering into an absolute contract of sale pertained to the sellers
themselves (the certificate of title was not in their names) and not the full payment of the purchase
price. Under the established facts and circumstances of the case, the Court may safely presume
that, had the certificate of title been in the names of petitioners-sellers at that time, there would
have been no reason why an absolute contract of sale could not have been executed and
consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell
the properly to private respondent upon the fulfillment of the suspensive condition. On the
contrary, having already agreed to sell the subject property, they undertook to have the certificate
of title changed to their names and immediately thereafter, to execute the written deed of absolute
sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by
the buyer with certain terms and conditions, promised to sell the property to the latter. What may
be perceived from the respective undertakings of the parties to the contract is that petitioners had
already agreed to sell the house and lot they inherited from their father, completely willing to
transfer full ownership of the subject house and lot to the buyer if the documents were then in
order. It just happened, however, that the transfer certificate of title was then still in the name of
their father. It was more expedient to first effect the change in the certificate of title so as to bear
their names. That is why they undertook to cause the issuance of a new transfer of the certificate of
title in their names upon receipt of the down payment in the amount of P50,000.00. As soon as the
new certificate of title is issued in their names, petitioners were committed to immediately execute
the deed of absolute sale. Only then will the obligation of the buyer to pay the remainder of the
purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered into so as to
protect the seller against a buyer who intends to buy the property in installment by withholding
ownership over the property until the buyer effects full payment therefor, in the contract entered
into in the case at bar, the sellers were the one who were unable to enter into a contract of
absolute sale by reason of the fact that the certificate of title to the property was still in the name
of their father. It was the sellers in this case who, as it were, had the impediment which prevented,
so to speak, the execution of an contract of absolute sale.
What is clearly established by the plain language of the subject document is that when the said
"Receipt of Down Payment" was prepared and signed by petitioners Romeo A. Coronel, et al., the
parties had agreed to a conditional contract of sale, consummation of which is subject only to the
successful transfer of the certificate of title from the name of petitioners' father, Constancio P.
Coronel, to their names.
The Court significantly notes this suspensive condition was, in fact, fulfilled on February 6, 1985
(Exh. "D"; Exh. "4"). Thus, on said date, the conditional contract of sale between petitioners and
private respondent Ramona P. Alcaraz became obligatory, the only act required for the
consummation thereof being the delivery of the property by means of the execution of the deed of
absolute sale in a public instrument, which petitioners unequivocally committed themselves to do as
evidenced by the "Receipt of Down Payment."
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at
bench. Thus,
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.
From the moment, the parties may reciprocally demand performance, subject to the provisions of
the law governing the form of contracts.
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition.
Since the condition contemplated by the parties which is the issuance of a certificate of title in
petitioners' names was fulfilled on February 6, 1985, the respective obligations of the parties under
the contract of sale became mutually demandable, that is, petitioners, as sellers, were obliged to
present the transfer certificate of title already in their names to private respondent Ramona P.
Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the buyer on her
part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners
conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from our
deceased father Constancio P. Coronel, the transfer certificate of title immediately upon receipt of
the downpayment above-stated". The sale was still subject to this suspensive condition.
Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive
condition. Only, they contend, continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied  with this condition of first transferring the title to the
property under their names, there could be no perfected contract of sale. (Emphasis supplied.)
not aware that they set their own trap for themselves, for Article 1186 of the Civil Code expressly
provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.
Besides, it should be stressed and emphasized that what is more controlling than these mere
hypothetical arguments is the fact that the condition herein referred to was actually and
indisputably fulfilled on February 6, 1985, when a new title was issued in the names of petitioners
as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").
The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated
as "Receipt of Down Payment" (Exh. "A"; Exh. "1"), the parties entered into a contract of sale
subject only to the suspensive condition that the sellers shall effect the issuance of new certificate
title from that of their father's name to their names and that, on February 6, 1985, this condition
was fulfilled (Exh. "D"; Exh. "4").
We, therefore, hold that, in accordance with Article 1187 which pertinently provides —
Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation . . .
In obligation to do or not to do, the courts shall determine, in each case, the retroactive effect
of the condition that has been complied with.
the rights and obligations of the parties with respect to the perfected contract of sale became
mutually due and demandable as of the time of fulfillment or occurrence of the suspensive
condition on February 6, 1985. As of that point in time, reciprocal obligations of both seller and
buyer arose.
Petitioners also argue there could been no perfected contract on January 19, 1985 because they
were then not yet the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:
Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to be extent and value of the inheritance of a person are transmitted through his
death to another or others by his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P.
Coronel are compulsory heirs who were called to succession by operation of law. Thus, at the
point their father drew his last breath, petitioners stepped into his shoes insofar as the subject
property is concerned, such that any rights or obligations pertaining thereto became binding and
enforceable upon them. It is expressly provided that rights to the succession are transmitted from
the moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850
[1952]).
Be it also noted that petitioners' claim that succession may not be declared unless the creditors
have been paid is rendered moot by the fact that they were able to effect the transfer of the title to
the property from the decedent's name to their names on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into
an agreement at that time and they cannot be allowed to now take a posture contrary to that which
they took when they entered into the agreement with private respondent Ramona P. Alcaraz. The
Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject property at the time of sale,
petitioners cannot claim now that they were not yet the absolute owners thereof at that time.
Petitioners also contend that although there was in fact a perfected contract of sale between them
and Ramona P. Alcaraz, the latter breached her reciprocal obligation when she rendered impossible
the consummation thereof by going to the United States of America, without leaving her address,
telephone number, and Special Power of Attorney (Paragraphs 14 and 15, Answer with Compulsory
Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners
conclude, they were correct in unilaterally rescinding rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the
instant case. We note that these supposed grounds for petitioners' rescission, are mere allegations
found only in their responsive pleadings, which by express provision of the rules, are deemed
controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The
records are absolutely bereft of any supporting evidence to substantiate petitioners' allegations. We
have stressed time and again that allegations must be proven by sufficient evidence (Ng Cho Cio
vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]. Mere allegation is not
an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]).
Even assuming arguendo  that Ramona P. Alcaraz was in the United States of America on February
6, 1985, we cannot justify petitioner-sellers' act of unilaterally and extradicially rescinding the
contract of sale, there being no express stipulation authorizing the sellers to extarjudicially rescind
the contract of sale. (cf. Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132 SCRA
722 [1984])
Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because
although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the
buyer, the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted
for and in behalf of her daughter, if not also in her own behalf. Indeed, the down payment was
made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and in behalf
of Ramona P. Alcaraz. There is no evidence showing that petitioners ever questioned Concepcion's
authority to represent Ramona P. Alcaraz when they accepted her personal check. Neither did they
raise any objection as regards payment being effected by a third person. Accordingly, as far as
petitioners are concerned, the physical absence of Ramona P. Alcaraz is not a ground to rescind the
contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to
pay the full purchase price is concerned. Petitioners who are precluded from setting up the defense
of the physical absence of Ramona P. Alcaraz as above-explained offered no proof whatsoever to
show that they actually presented the new transfer certificate of title in their names and signified
their willingness and readiness to execute the deed of absolute sale in accordance with their
agreement. Ramona's corresponding obligation to pay the balance of the purchase price in the
amount of P1,190,000.00 (as buyer) never became due and demandable and, therefore, she
cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations
may be considered in default, to wit:
Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfill his obligation, delay by the other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and
respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a
case of double sale where Article 1544 of the Civil Code will apply, to wit:
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should
be movable property.
Should if be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in the possession; and, in the absence thereof to the person who presents the oldest title,
provided there is good faith.
The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the
second contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the
issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the
second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the
exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first
buyer, and (b) should there be no inscription by either of the two buyers, when the second buyer,
in good faith, acquires possession of the property ahead of the first buyer. Unless, the second buyer
satisfies these requirements, title or ownership will not transfer to him to the prejudice of the first
buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished
member of the Court, Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure  (first in time, stronger in right). Knowledge
by the first buyer of the second sale cannot defeat the first buyer's rights except when the second
buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33).
Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is
first to register, since knowledge taints his registration with bad faith (see also Astorga vs. Court
of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs. Cabana  (G.R. No. 56232, 22 June
1984, 129 SCRA 656), it has held that it is essential, to merit the protection of Art. 1544, second
paragraph, that the second realty buyer must act in good faith in registering his deed of sale
(citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02
September 1992).
Petitioner point out that the notice of lis pendens  in the case at bar was annoted on the title of the
subject property only on February 22, 1985, whereas, the second sale between petitioners Coronels
and petitioner Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea
conveyed is that at the time petitioner Mabanag, the second buyer, bought the property under a
clean title, she was unaware of any adverse claim or previous sale, for which reason she is buyer in
good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or not the second
buyer was a buyer in good faith but whether or not said second buyer registers such second sale in
good faith, that is, without knowledge of any defect in the title of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith,
registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a
notice of lis pendens  had been annotated on the transfer certificate of title in the names of
petitioners, whereas petitioner Mabanag registered the said sale sometime in April, 1985. At the
time of registration, therefore, petitioner Mabanag knew that the same property had already been
previously sold to private respondents, or, at least, she was charged with knowledge that a
previous buyer is claiming title to the same property. Petitioner Mabanag cannot close her eyes to
the defect in petitioners' title to the property at the time of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers that sale after he has acquired knowledge that there was a
previous sale of the same property to a third party or that another person claims said property in
a pervious sale, the registration will constitute a registration in bad faith and will not confer upon
him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land, 43
Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected
on February 6, 1985, prior to that between petitioners and Catalina B. Mabanag on February 18,
1985, was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an agency between Ramona as
principal and Concepcion, her mother, as agent insofar as the subject contract of sale is concerned,
the issue of whether or not Concepcion was also acting in her own behalf as a co-buyer is not
squarely raised in the instant petition, nor in such assumption disputed between mother and
daughter. Thus, We will not touch this issue and no longer disturb the lower courts' ruling on this
point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed
judgment AFFIRMED.
G.R. No. L-24190             July 13, 1926
GEORGE L. PARKS, plaintiff-appellant, 
vs.
PROVINCE OF TARLAC, MUNICIPALITY OF TARLAC, CONCEPCION CIRER, and JAMES HILL,
her husband,defendants-appellees.
AVANCEÑA, C. J.:
On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2 referred
to in the complaint, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under
certain conditions specified in the public document in which they made this donation. The donation
was accepted by Mr. Santiago de Jesus in the same document on behalf of the municipal council of
Tarlac of which he was the municipal president. The parcel thus donated was later registered in the
name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion Cirer and James
Hill sold this parcel to the herein plaintiff George L. Parks. On August 24, 1923, the municipality of
Tarlac transferred the parcel to the Province of Tarlac which, by reason of this transfer, applied for
and obtained the registration thereof in its name, the corresponding certificate of title having been
issued to it.
The plaintiff, George L. Parks, alleging that the conditions of the donation had not been complied
with and invoking the sale of this parcel of land made by Concepcion Cirer and James Hill in his
favor, brought this action against the Province of Tarlac, the municipality of Tarlac, Concepcion
Cirer and James Hill and prayed that he be declared the absolute owner entitled to the possession
of this parcel, that the transfer of the same by the municipality of Tarlac to the Province of Tarlac
be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.
The lower court dismissed the complaint.
The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this parcel made
by Concepcion Cirer and James Hill in his favor on January 15, 1921, but that sale cannot have any
effect. This parcel having been donated by Concepcion Cirer and James Hill to the municipality of
Tarlac, which donation was accepted by the latter, the title to the property was transferred to the
municipality of Tarlac. It is true that the donation might have been revoked for the causes, if any,
provided by the law, but the fact is that it was not revoked when Concepcion Cirer and James Hill
made the sale of this parcel to the plaintiff. Even supposing that causes existed for the revocation
of this donation, still, it was necessary, in order to consider it revoked, either that the revocation
had been consented to by the donee, the municipality of Tarlac, or that it had been judicially
decreed. None of these circumstances existed when Concepcion Cirer and James Hill sold this parcel
to the plaintiff. Consequently, when the sale was made Concepcion Cirer and James Hill were no
longer the owners of this parcel and could not have sold it to the plaintiff, nor could the latter have
acquired it from them.
But the appellant contends that a condition precedent having been imposed in the donation and the
same not having been complied with, the donation never became effective. We find no merit in this
contention. The appellant refers to the condition imposed that one of the parcels donated was to be
used absolutely and exclusively for the erection of a central school and the other for a public park,
the work to commence in both cases within the period of six months from the date of the
ratification by the partes of the document evidencing the donation. It is true that this condition has
not been complied with. The allegation, however, that it is a condition precedent is erroneous. The
characteristic of a condition precedent is that the acquisition of the right is not effected while said
condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and
there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of
which cannot be effected except when the right is deemed acquired, such condition cannot be a
condition precedent. In the present case the condition that a public school be erected and a public
park made of the donated land, work on the same to commence within six months from the date of
the ratification of the donation by the parties, could not be complied with except after giving effect
to the donation. The donee could not do any work on the donated land if the donation had not
really been effected, because it would be an invasion of another's title, for the land would have
continued to belong to the donor so long as the condition imposed was not complied with.
The appellant also contends that, in any event, the condition not having been complied with, even
supposing that it was not a condition precedent but subsequent, the non-compliance thereof is
sufficient cause for the revocation of the donation. This is correct. But the period for bringing an
action for the revocation of the donation has prescribed. That this action is prescriptible, there is no
doubt. There is no legal provision which excludes this class of action from the statute of limitations.
And not only this, — the law itself recognizes the prescriptibility of the action for the revocation of a
donation, providing a special period of five years for the revocation by the subsequent birth of
children (art. 646, Civil Code), and one year for the revocation by reason of ingratitude. If no
special period is provided for the prescription of the action for revocation for noncompliance of the
conditions of the donation (art. 647, Civil Code), it is because in this respect the donation is
considered onerous and is governed by the law of contracts and the general rules of prescription.
Under the law in force (sec. 43, Code of Civ. Proc.) the period of prescription of this class of action
is ten years. The action for the revocation of the donation for this cause arose on April 19, 1911,
that is six months after the ratification of the instrument of donation of October 18, 1910. The
complaint in this action was presented July 5, 1924, more than ten years after this cause accrued.
By virtue of the foregoing, the judgment appealed from is affirmed, with the costs against the
appellant.

G.R. No. 112127 July 17, 1995
CENTRAL PHILIPPINE UNIVERSITY, petitioner, 
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE
LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents.
BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing petitioner to
reconvey to private respondents the property donated to it by their predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]), executed a
deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the
subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title
No. T-3910-A was issued in the name of the donee CPU with the following annotations copied from
the deed of donation —
1. The land described shall be utilized by the CPU exclusively for the establishment and use of a
medical college with all its buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in any way encumber
said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under
obligation to erect a cornerstone bearing that name. Any net income from the land or any of its
parks shall be put in a fund to be known as the "RAMON LOPEZ CAMPUS FUND" to be used for
improvements of said campus and erection of a building thereon.1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action
for annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to
the time the action was filed the latter had not complied with the conditions of the donation. Private
respondents also argued that petitioner had in fact negotiated with the National Housing Authority
(NHA) to exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had
prescribed; that it did not violate any of the conditions in the deed of donation because it never
used the donated property for any other purpose than that for which it was intended; and, that it
did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the
donation and declared it null and void. The court a quo further directed petitioner to execute a deed
of the reconveyance of the property in favor of the heirs of the donor, namely, private respondents
herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the
back of petitioner's certificate of title were resolutory conditions breach of which should terminate
the rights of the donee thus making the donation revocable.
The appellate court also found that while the first condition mandated petitioner to utilize the
donated property for the establishment of a medical school, the donor did not fix a period within
which the condition must be fulfilled, hence, until a period was fixed for the fulfillment of the
condition, petitioner could not be considered as having failed to comply with its part of the bargain.
Thus, the appellate court rendered its decision reversing the appealed decision and remanding the
case to the court of origin for the determination of the time within which petitioner should comply
with the first condition annotated in the certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in
the certificate of title of petitioner are onerous obligations and resolutory conditions of the donation
which must be fulfilled non-compliance of which would render the donation revocable; (b) in holding
that the issue of prescription does not deserve "disquisition;" and, (c) in remanding the case to the
trial court for the fixing of the period within which petitioner would establish a medical college.2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of
donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his
donation was onerous, one executed for a valuable consideration which is considered the equivalent
of the donation itself, e.g., when a donation imposes a burden equivalent to the value of the
donation. A gift of land to the City of Manila requiring the latter to erect schools, construct a
children's playground and open streets on the land was considered an onerous donation. 3 Similarly,
where Don Ramon Lopez donated the subject parcel of land to petitioner but imposed an obligation
upon the latter to establish a medical college thereon, the donation must be for an onerous
consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition. Thus, when a person donates land to another on the condition that
the latter would build upon the land a school, the condition imposed was not a condition precedent
or a suspensive condition but a resolutory one. 4 It is not correct to say that the schoolhouse had to
be constructed before the donation became effective, that is, before the donee could become the
owner of the land, otherwise, it would be invading the property rights of the donor. The donation
had to be valid before the fulfillment of the condition. 5 If there was no fulfillment or compliance with
the condition, such as what obtains in the instant case, the donation may now be revoked and all
rights which the donee may have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is unavailing.
 The condition imposed by the donor, i.e., the building of a medical school upon the land donated, No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A
depended upon the exclusive will of the donee as to when this condition shall be fulfilled. When within thirty (30) days from the finality of this judgment.
petitioner accepted the donation, it bound itself to comply with the condition thereof. Since the
time within which the condition should be fulfilled depended upon the exclusive will of the Costs against petitioner.
petitioner, it has been held that its absolute acceptance and the acknowledgment of its obligation
provided in the deed of donation were sufficient to prevent the statute of limitations from barring
the action of private respondents upon the original contract which was the deed of donation.6

Moreover, the time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of
action arises when that which should have been done is not done, or that which should not have
been done is done.7 In cases where there is no special provision for such computation, recourse
must be had to the rule that the period must be counted from the day on which the corresponding
action could have been instituted. It is the legal possibility of bringing the action which determines
the starting point for the computation of the period. In this case, the starting point begins with the
expiration of a reasonable period and opportunity for petitioner to fulfill what has been charged
upon it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of the
presence of several factors and circumstances involved in the erection of an educational institution,
such as government laws and regulations pertaining to education, building requirements and
property restrictions which are beyond the control of the donee.

Thus, when the obligation does not fix a period but from its nature and circumstances it can be
inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies,
which provides that the courts may fix the duration thereof because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for compliance therewith and
such period has arrived.8
This general rule however cannot be applied considering the different set of circumstances existing
in the instant case. More than a reasonable period of fifty (50) years has already been allowed
petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to
make the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no
more need to fix the duration of a term of the obligation when such procedure would be a mere
technicality and formality and would serve no purpose than to delay or lead to an unnecessary and
expensive multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the
obligors cannot comply with what is incumbent upon him, the obligee may seek rescission and the
court shall decree the same unless there is just cause authorizing the fixing of a period. In the
absence of any just cause for the court to determine the period of the compliance, there is no more
obstacle for the court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring
to incidental circumstances of a gratuitous contract should be resolved in favor of the least
transmission of rights and interests. 10Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant action, petitioner has failed
to comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable
length of time. Hence, it is only just and equitable now to declare the subject donation already
ineffective and, for all purposes, revoked so that petitioner as donee should now return the donated
property to the heirs of the donor, private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is
accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private respondents Lot
G.R. No. 126444 December 4, 1998
ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO QUIJADA,
ELIUTERIA QUIJADA, EULALIO QUIJADA, and WARLITO QUIJADA, petitioners, 
vs.
COURT OF APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN, ALBERTO ASIS,
SEGUNDINO RAS, ERNESTO GOLORAN, CELSO ABISO, FERNANDO BAUTISTA, ANTONIO
MACASERO, and NESTOR MAGUINSAY, respondents.
MARTINEZ, J.:
Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for
quieting of title, recovery of possession and ownership of parcels of land with claim for attorney's
fees and damages. The suit was premised on the following facts found by the court of Appeals
which is materially the same as that found by the trial court:
Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda, de Quijada.
Trinidad was one of the heirs of the late Pedro Corvera and inherited from the latter the two-
hectare parcel of land subject of the case, situated in the barrio of San Agustin, Talacogon,
Agusan del Sur. On April 5, 1956, Trinidad Quijada together with her sisters Leonila Corvera Vda.
de Sequeña and Paz Corvera Cabiltes and brother Epapiadito Corvera executed a conditional deed
of donation (Exh. C) of the two-hectare parcel of land subject of the case in favor of the
Municipality of Talacogon, the condition being that the parcel of land shall be used solely and
exclusively as part of the campus of the proposed provincial high school in Talacogon. Apparently,
Trinidad remained in possession of the parcel of land despite the donation. On July 29, 1962,
Trinidad sold one (1) hectare of the subject parcel of land to defendant-appellant Regalado
Mondejar (Exh. 1). Subsequently, Trinidad verbally sold the remaining one (1) hectare to
defendant-appellant (respondent) Regalado Mondejar without the benefit of a written deed of sale
and evidenced solely by receipts of payment. In 1980, the heirs of Trinidad, who at that time was
already dead, filed a complaint for forcible entry (Exh. E) against defendant-appellant
 (respondent) Regalado Mondejar, which complaint was, however, dismissed for failure to
prosecute (Exh. F). In 1987, the proposed provincial high school having failed to materialize, the
Sangguniang Bayan of the municipality of Talacogon enacted a resolution reverting the two (2)
hectares of land donated back to the donors (Exh. D). In the meantime, defendant-appellant
(respondent) Regalado Mondejar sold portions of the land to defendants-appellants (respondents)
Fernando Bautista (Exh. 5), Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and Ernesto Goloran
(Exh. 8).
On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-appellants
(respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that their deceased
mother never sold, conveyed, transferred or disposed of the property in question to any person or
entity much less to Regalado Mondejar save the donation made to the Municipality of Talacogon
in 1956; that at the time of the alleged sale to Regalado Mondejar by Trinidad Quijada, the land
still belongs to the Municipality of Talacogon, hence, the supposed sale is null and void.
Defendants-appellants (respondents), on the other hand, in their answer claimed that the land in
dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and the remaining
one (1) hectare on installment basis until fully paid. As affirmative and/or special defense,
defendants-appellants (respondents) alleged that plaintiffs action is barred by laches or has
prescribed.
The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly because
"Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966,
1967 and 1968, the same not being hers to dispose of because ownership belongs to the
Municipality of Talacogon (Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale
executed by Trinidad Quijada in favor of Mondejar did not carry with it the conformity and
acquiescence of her children, more so that she was already 63 years old at the time, and a widow
(Decision, p. 6; Rollo, p. 41)."1
The dispositive portion of the trial court's decision reads:
WHEREFORE, viewed from the above perceptions, the scale of justice having tilted in favor of the
plaintiffs, judgment is, as it is hereby rendered:
1) ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as
described in Tax Declaration No. 1209 in the name of Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful
possession of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in favor
of Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments executed by
Mondejar in favor of the other Defendants;
4) ordering Defendants to remove their improvements constructed on the questioned lot;
5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;
6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and
7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.
On appeal, the Court of Appeals reversed and set aside the judgment a quo3 ruling that the sale
made by Trinidad Quijada to respondent Mondejar was valid as the former retained an inchoate
interest on the lots by virtue of the automatic reversion clause in the deed of donation. 4 Thereafter,
petitioners filed a motion for reconsideration. When the CA denied their motion, 5 petitioners
instituted a petition for review to this Court arguing principally that the sale of the subject property
made by Trinidad Quijada to respondent Mondejar is void, considering that at that time, ownership
was already transferred to the Municipality of Talacogon. On the contrary, private respondents
contend that the sale was valid, that they are buyers in good faith, and that petitioners' case is
barred by laches. 6
We affirm the decision of the respondent court.
The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters 7 was subject to
the condition that the donated property shall be "used solely and exclusively as a part of the
campus of the proposed Provincial High School in Talacogon." 8 The donation further provides that
should "the proposed Provincial High School be discontinued or if the same shall be opened but for
some reason or another, the same may in the future be closed" the donated property shall
automatically revert to the donor.9 Such condition, not being contrary to law, morals, good
customs, public order or public policy was validly imposed in the donation. 10
When the Municipality's acceptance of the donation was made known to the donor, the former
became the new owner of the donated property — donation being a mode of acquiring and
transmitting ownership 11 — notwithstanding the condition imposed by the donee. The donation is
perfected once the acceptance by the donee is made known to the donor. 12 According, ownership is
immediately transferred to the latter and that ownership will only revert to the donor if the
resolutory condition is not fulfilled.
In this case, that resolutory condition is the construction of the school. It has been ruled that when
a person donates land to another on the condition that the latter would build upon the land a
school, the condition imposed is not a condition precedent or a suspensive condition but a
resolutory one. 13 Thus, at the time of the sales made in 1962 towards 1968, the alleged seller
(Trinidad) could not have sold the lots since she had earlier transferred ownership thereof by virtue
of the deed of donation. So long as the resolutory condition subsists and is capable of fulfillment,
the donation remains effective and the donee continues to be the owner subject only to the rights
of the donor or his successors-in-interest under the deed of donation. Since no period was imposed
by the donor on when must the donee comply with the condition, the latter remains the owner so
long as he has tried to comply with the condition within a reasonable period. Such period, however,
became irrelevant herein when the donee-Municipality manifested through a resolution that it
cannot comply with the condition of building a school and the same was made known to the donor.
Only then — when the non-fulfillment of the resolutory condition was brought to the donor's
knowledge — that ownership of the donated property reverted to the donor as provided in the
automatic reversion clause of the deed of donation.
The donor may have an inchoate interest in the donated property during the time that ownership of
the land has not reverted to her. Such inchoate interest may be the subject of contracts including a
contract of sale. In this case, however, what the donor sold was the land itself which she no longer
owns. It would have been different if the donor-seller sold her interests over the property under the
deed of donation which is subject to the possibility of reversion of ownership arising from the non-
fulfillment of the resolutory condition.
As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect for
an unreasonable and unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier; 14 "it is negligence or omission to assert a right within a
reasonable time, thus, giving rise to a presumption that the party entitled to assert it either has
abandoned or declined to assert it." 15 Its essential elements of:
a) Conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation complained of;
b) Delay in asserting complainant's right after he had knowledge of the defendant's conduct
and after he has an opportunity to sue;
c) Lack of knowledge or notice on the part of the defendant that the complainant would assert
the right on which he bases his suit; and,
d) Injury or prejudice to the defendant in the event relief is accorded to the complainant. 16
are absent in this case. Petioners' cause of action to quiet title commenced only when the
property reverted to the donor and/or his successors-in-interest in 1987. Certainly, when the suit
 was initiated the following year, it cannot be said that petioners had slept on their rights for a
long time. The 1960's sales made by Trinidad Quijada cannot be the reckoning point as to when
petitioners' cause of action arose. They had no interest over the property at that time except
under the deed of donation to which private respondents were not privy. Moreover, petitioners
had previously filed an ejectment suit against private respondents only that it did not prosper on
a technicality.

Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being a
consensual contract, is perfected by mere consent, which is manifested the moment there is a
meeting of the minds17 as to the offer and acceptance thereof on three (3) elements: subject
matter, price and terms of payment of the price. 18 Ownership by the seller on the thing sold at the
time of the perfection of the contract of sale is not an element for its perfection. What the law
requires is that the seller has the right to transfer ownership at the time the thing sold is
delivered. 19 Perfection  per se does not transfer ownership which occurs upon the actual or
constructive delivery of the thing sold. 20 A perfected contract of sale cannot be challenged on the
ground of non-ownership on the part of the seller at the time of its perfection; hence, the sale is
still valid.

The consummation, however, of the perfected contract is another matter. It occurs upon the
constructive or actual delivery of the subject matter to the buyer when the seller or her successors-
in-interest subsequently acquires ownership thereof. Such circumstance happened in this case
when petitioners — who are Trinidad Quijada's heirs and successors-in-interest — became the
owners of the subject property upon the reversion of the ownership of the land to them.
Consequently, ownership is transferred to respondent Mondejar and those who claim their right
from him. Article 1434 of the New Civil Code supports the ruling that the seller's "title passes by
operation of law to the buyer." 21 This rule applies not only when the subject matter of the contract
of sale is goods,22 but also to other kinds of property, including real property. 23
There is also no merit in petitioners' contention that since the lots were owned by the municipality
at the time of the sale, they were outside the commerce of men under Article 1409 (4) of the
NCC;24 thus, the contract involving the same is inexistent and void from the beginning. However,
nowhere in Article 1409 (4) is it provided that the properties of a municipality, whether it be those
for public use or its patrimonial property 25 are outside the commerce of men. Besides, the lots in
this case were conditionally owned by the municipality. To rule that the donated properties are
outside the commerce of men would render nugatory the unchallenged reasonableness and
justness of the condition which the donor has the right to impose as owner thereof. Moreover, the
objects referred to as outsides the commerce of man are those which cannot be appropriated, such
as the open seas and the heavenly bodies.
With respect to the trial court's award of attorney's fees, litigation expenses and moral damages,
there is neither factual nor legal basis thereof. Attorney's fees and expenses of litigation cannot,
following the general rule in Article 2208 of the New Civil Code, be recovered in this case, there
being no stipulation to that effect and the case does not fall under any of the
exceptions. 26 It cannot be said that private respondents had compelled petitioners to litigate with
third persons. Neither can it be ruled that the former acted in "gross and evident bad faith" in
refusing to satisfy the latter's claims considering that private respondents were under an honest
belief that they have a legal right over the property by virtue of the deed of sale. Moral damages
cannot likewise be justified as none of the circumstances enumerated under Articles 2219. 27 and
2220 28 of the New Civil Code concur in this case
WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is AFFIRMED.
G.R. No. 87047 October 31, 1990
FRANCISCO LAO LIM, petitioner, 
vs.
COURT OF APPEALS and BENITO VILLAVICENCIO DY, respondents.
The records show that private respondent entered into a contract of lease with petitioner for a
period of three (3) years, that is, from 1976 to 1979. After the stipulated term expired, private
respondent refused to vacate the premises, hence, petitioner filed an ejectment suit against the
former in the City Court of Manila, docketed therein as Civil Case No. 051063-CV. The case was
terminated by a judicially approved compromise agreement of the parties providing in part:
3. That the term of the lease shall be renewed every three years retroacting from October 1979
to October 1982; after which the abovenamed rental shall be raised automatically by 20% every
three years for as long as defendant needed the premises and can meet and pay the said
increases, the defendant to give notice of his intent to renew sixty (60) days before the expiration
of the term; 2
By reason of said compromise agreement the lease continued from 1979 to 1982, then from 1982
to 1985. On April 17, 1985, petitioner advised private respondent that he would no longer renew
the contract effective October, 1985.3However, on August 5, 1985, private respondent informed
petitioner in writing of his intention to renew the contract of lease for another term, commencing
November, 1985 to October, 1988. 4 In reply to said letter, petitioner advised private respondent
that he did not agree to a renewal of the lease contract upon its expiration in October, 1985. 5
On January 15, 1986, because of private respondent's refusal to vacate the premises, petitioner
filed another ejectment suit, this time with the Metropolitan Trial Court of Manila in Civil Case No.
114659-CV. In its decision of September 24, 1987, said court dismissed the complaint on the
grounds that (1) the lease contract has not expired, being a continuous one the period whereof
depended upon the lessee's need for the premises and his ability to pay the rents; and (2) the
compromise agreement entered into in the aforesaid Civil Case No. 051063-CV constitutes res
judicata to the case before it. 6
Petitioner appealed to the Regional Trial Court of Manila which, in its decision of January 28, 1988
in Civil Case No. 87-42719, affirmed the decision of the lower court. 7
As stated at the outset, respondent Court of Appeals affirmed in full said decision of the Regional
Trial Court and held that (1) the stipulation in the compromise agreement which, in its formulation,
allows the lessee to stay on the premises as long as he needs it and can pay rents is valid, being a
resolutory condition and, therefore, beyond the ambit of Article 1308 of the Civil Code; and (2) that
a compromise has the effect of res judicata. 8
Petitioner's motion for reconsideration having been denied by respondent Court of Appeals, this
present petition is now before us. We find the same to be meritorious.
Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant
needed the premises and can meet and pay said increases" is a purely potestative condition
because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of
the lessee. It is likewise a suspensive condition because the renewal of the lease, which gives rise
to a new lease, depends upon said condition. It should be noted that a renewal constitutes a new
contract of lease although with the same terms and conditions as those in the expired lease. It
should also not be overlooked that said condition is not resolutory in nature because it is not a
condition that terminates the lease contract. The lease contract is for a definite period of three (3)
years upon the expiration of which the lease automatically terminates.
The invalidity of a condition in a lease contract similar to the one at bar has been resolved
in Encarnacion vs. Baldomar, et al. 9 where we ruled that in an action for ejectment, the defense
interposed by the lessees that the contract of lease authorized them to continue occupying the
premises as long as they paid the rents is untenable, because it would leave to the lessees the sole
power to determine whether the lease should continue or not. As stated therein, "(i)f this defense
were to be allowed, so long as defendants elected to continue the lease by continuing the payment
of the rentals, the owner would never be able to discontinue it; conversely, although the owner
should desire the lease to continue, the lessees could effectively thwart his purpose if they should
prefer to terminate the contract by the simple expedient of stopping payment of the rentals. This,
of course, is prohibited by the aforesaid article of the Civil Code.
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of
the rentals or not, completely depriving the owner of any say in the matter. Mutuality does not
obtain in such a contract of lease and no equality exists between the lessor and the lessee since the
life of the contract is dictated solely by the lessee.
The interpretation made by respondent court cannot, therefore, be upheld. Paragraph 3 of the
compromise agreement, read and interpreted in its entirety, is actually to the effect that the last
portion thereof, which gives the private respondent sixty (60) days before the expiration of the
term the right to give notice of his intent to renew, is subject to the first portion of said paragraph
that "the term of the lease shall be renewed every three (3) years," thereby requiring the mutual
agreement of the parties. The use of the word "renew" and the designation of the period of three
(3) years clearly confirm that the contract of lease is limited to a specific period and that it is not a
continuing lease. The stipulation provides for a renewal of the lease every three (3) years; there
could not be a renewal if said lease did not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby construed as providing for a definite
period of three (3) years and that the automatic increase of the rentals by twenty percent (20%)
will take effect only if the parties decide to renew the lease. A contrary interpretation will result in a
situation where the continuation and effectivity of the contract will depend only upon the will of the
lessee, in violation of Article 1308 of the Civil Code and the aforesaid doctrine in Encarnacion. The
compromise agreement should be understood as bearing that import which is most adequate to
render it effectual. 10 Where the instrument is susceptible of two interpretations, one which will
make it invalid and illegal and another which will make it valid and legal, the latter interpretation
should be adopted. 11
Moreover, perpetual leases are not favored in law, nor are covenants for continued renewals
tending to create a perpetuity, and the rule of construction is well settled that a covenant for
renewal or for an additional term should not be held to create a right to repeated grants in
perpetuity, unless by plain and unambiguous terms the parties have expressed such intention. 12 A
lease will not be construed to create a right to perpetual renewals unless the language employed
indicates dearly and unambiguously that it was the intention and purpose of the parties to do
so. 13 A portion in a lease giving the lessee and his assignee the right to perpetual renewals is not
favored by the courts, and a lease will be construed as not making such a provision unless it does
so clearly. 14
As we have further emphasized:
It is also important to bear in mind that in a reciprocal contract like a lease, the period of the
lease must be deemed to have been agreed upon for the benefit of both parties, absent language
showing that the term was deliberately set for the benefit of the lessee or lessor alone. We are
not aware of any presumption in law that the term of a lease is designed for the benefit of the
lessee alone. Koh andCruz in effect rested upon such a presumption. But that presumption
cannot reasonably be indulged in casually in an era of rapid economic change, marked by, among
other things, volatile costs of living and fluctuations in the value of the domestic currency. The
longer the period the more clearly unreasonable such a presumption would be. In an age like that
we live in, very specific language is necessary to show an intent to grant a unilateral faculty to
extend or renew a contract of lease to the lessee alone, or to the lessor alone for that matter. We
hold that the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are
overruled. 15
In addition, even assuming that the clause "for as long as the defendant needed the premises and
can meet and pay, said increases" gives private respondent an option to renew the lease, the same
will be construed as providing for but one renewal or extension and, therefore, was satisfied when
the lease was renewed in 1982 for another three (3) years. A general covenant to renew is satisfied
by one renewal and will not be construed to confer the right to more than one renewal unless
provision is clearly and expressly made for further renewals. 16 Leases which may have been
intended to be renewable in perpetuity will nevertheless be construed as importing but one renewal
if there is any uncertainty in that regard. 17
The case of Buccat vs. Dispo et al., 18 relied upon by responddent court, to support its holding that
respondent lessee can legally stay on the premises for as long as he needs it and can pay the rents,
is not in point. In said case, the lease contract provides for an indefinite period since it merely
stipulates "(t)hat the lease contract shall remain in full force and effect as long as the land will
serve the purpose for which it is intended as a school site of the National Business Institute, but the
rentals now stipulated shall be subject to review every after ten (10) years by mutual agreement of
the parties." This is in clear contrast to the case at bar wherein, to repeat, the lease is fixed at a
period of three (3) years although subject to renewal upon agreement of the parties, and the clause
"for as long as defendant needs the premises and can meet and pay the rents" is not an
independent stipulation but is controlled by said fixed term and the option for renewal upon
agreement of both parties.
On the second issue, we agree with petitioner that respondent court erred in holding that the action
for ejectment is barred by res judicata. While it is true that a compromise agreement has the effect
of res judicata this doctrine does not apply in the present case. It is elementary that for a judgment
to be a bar to a subsequent case, (1) it must be a final judgment, (2) the court which rendered it
had jurisdiction over the subject matter and the parties, (3) it must be a judgment on the merits,
and (4) there must be identity between the two cases as to parties, subject matter and cause of
action. 19
In the case at bar, the fourth requisite is lacking. Although there is identity of parties, there is no
identity of subject matter and cause of action. The subject matter in the first ejectment case is the
original lease contract while the subject matter in the case at bar is the lease created under the
terms provided in the subsequent compromise agreement. The lease executed in 1978 is one thing;
the lease constituted in 1982 by the compromise agreement is another.
There is also no identity, in the causes of action. The test generally applied to determine the
identity of causes of action is to consider the identity of facts essential to their maintenance, or
whether the same evidence would sustain both causes of action. 20 In the case at bar, the delict or
the wrong in the first case is different from that in the second, and the evidence that will support
and establish the cause of action in the former will not suffice to support and establish that in the
latter.
In the first ejectment case, the cause of action was private respondent's refusal to comply with the lease contract
which expired on December 31, 1978. In the present case, the cause of action is a similar refusal but with respect to
the lease which expired in October, 1985 under the compromise agreement. While the compromise agreement may
be res judicata as far as the cause of action and issues in the first ejectment case is concerned, any cause of action
that arises from the application or violation of the compromise agreement cannot be said to have been settled in
said first case. The compromise agreement was meant to settle, as it did only settle, the first case. It did not, as it
could not, cover any cause of action that might arise thereafter, like the present case which was founded on the
expiration of the lease in 1985, which necessarily requires a different set of evidence. The fact that the compromise
agreement was judicially approved does not foreclose any cause of action arising from a violation of the terms
thereof.
WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET ASIDE. Private respondent is hereby ordered to
immediately vacate and return the possession of the leased premises subject of the present action to petitioner and to pay the monthly
rentals due thereon in accordance with the compromise agreement until he shall have actually vacated the same. This judgment is
immediately executory.
G.R. No. 107112 February 24, 1994
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners, 
vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC.
(CASURECO II), respondents.
NOCON, J.:
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his
contract charges himself with an obligation possible to be performed, he must perform it, unless its
performance is rendered impossible by the act of God, by the law, or by the other party, it being
the rule that in case the party desires to be excused from performance in the event of
contingencies arising thereto, it is his duty to provide the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision was included therein, namely, Article
1267 which provides:
When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
In the report of the Code Commission, the rationale behind this innovation was explained, thus:
The general rule is that impossibility of performance releases the obligor. However, it is submitted
that when the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in whole or in part. The intention of
the parties should govern and if it appears that the service turns out to be so difficult as to have
been beyond their contemplation, it would be doing violence to that intention to hold their
contemplation, it would be doing violence to that intention to hold the obligor still responsible.2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of
Article 1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated
differently, the former insists that the complaint should have been dismissed for failure to state a
cause of action.
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as
long distance telephone service in Naga City while private respondent Camarines Sur II Electric
Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating
an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in
the operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections
for the use by private respondent in the following places:
(a) 3 units — The Main Office of (private respondent);
(b) 2 Units — The Warehouse of (private respondent);
(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;
(d) 1 Unit — The Residence of (private respondent's) President;
(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &
(f) 2 Units — To be determined by the General Manager.3
Said contract also provided:
(a) That the term or period of this contract shall be as long as the party of the first part has need
for the electric light posts of the party of the second part it being understood that this contract
shall terminate when for any reason whatsoever, the party of the second part is forced to stop,
abandoned [sic] its operation as a public service and it becomes necessary to remove the electric
lightpost; (sic)4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a
member of the Board of Directors of private respondent and at the same time the legal counsel of
petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on January 2,
1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for
reformation of the contract with damages, on the ground that it is too one-sided in favor of
petitioners; that it is not in conformity with the guidelines of the National Electrification
Administration (NEA) which direct that the reasonable compensation for the use of the posts is
P10.00 per post, per month; that after eleven (11) years of petitioners' use of the posts, the
telephone cables strung by them thereon have become much heavier with the increase in the
volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at
which points those posts were broken during typhoons; that a post now costs as much as
P2,630.00; so that justice and equity demand that the contract be reformed to abolish the
inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981, petitioners
have used 319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside
Naga City, without any contract with it; that at the rate of P10.00 per post, petitioners should pay
private respondent for the use thereof the total amount of P267,960.00 from 1981 up to the filing
of its complaint; and that petitioners had refused to pay private respondent said amount despite
demands.
And as third cause of action, private respondent complained about the poor servicing by petitioners
of the ten (10) telephone units which had caused it great inconvenience and damages to the tune
of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed because
(1) it does not sufficiently state a cause of action for reformation of contract; (2) it is barred by
prescription, the same having been filed more than ten (10) years after the execution of the
contract; and (3) it is barred by estoppel, since private respondent seeks to enforce the contract in
the same action. Petitioners further alleged that their utilization of private respondent's posts could
not have caused their deterioration because they have already been in use for eleven (11) years;
and that the value of their expenses for the ten (10) telephone lines long enjoyed by private
respondent free of charge are far in excess of the amounts claimed by the latter for the use of the
posts, so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for
telephone lines in areas outside Naga City for which its posts were used by them; and that if
petitioners had refused to comply with private respondent's demands for payment for the use of the
posts outside Naga City, it was probably because what is due to them from private respondent is
more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone
service had been categorized by the National Telecommunication Corporation (NTC) as "very high"
and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it
was petitioner Maggay who prepared the contract; that the understanding between private
respondent and petitioners was that the latter would only use the posts in Naga City because at
that time, petitioners' capability was very limited and they had no expectation of expansion because
of legal squabbles within the company; that private respondent agreed to allow petitioners to use
its posts in Naga City because there were many subscribers therein who could not be served by
them because of lack of facilities; and that while the telephone lines strung to the posts were very
light in 1977, said posts have become heavily loaded in 1989.
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department,
declared that the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which
were in the towns of Pili, Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that
petitioners' cables strung to the posts in 1989 are much bigger than those in November, 1977; that
in 1987, almost 100 posts were destroyed by typhoon Sisang: around 20 posts were located
between Naga City and the town of Pili while the posts in barangay Concepcion, Naga City were
broken at the middle which had been bored by petitioner's linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977 was only from P700.00 to P1,000.00, their
costs in 1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines that
were strung to the posts did not follow the minimum vertical clearance required by the National
Building Code, so that there were cases in 1988 where, because of the low clearance of the cables,
passing trucks would accidentally touch said cables causing the posts to fall and resulting in brown-
outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and
Manager of Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the
use by private telephone systems of electric cooperatives' posts, they should pay a minimum
monthly rental of P4.00 per post, and considering the escalation of prices since 1985, electric
cooperatives have been charging from P10.00 to P15.00 per post, which is what petitioners should
pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent,
testified on the poor service rendered by petitioner's telephone lines, like the telephone in their
Complaints Section which was usually out of order such that they could not respond to the calls of
their customers. In case of disruption of their telephone lines, it would take two to three hours for
petitioners to reactivate them notwithstanding their calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors
asked him to study the contract sometime during the latter part of 1982 or in 1983, as it had
appeared very disadvantageous to private respondent. Notwithstanding his recommendation for the
filing of a court action to reform the contract, the former general managers of private respondent
wanted to adopt a soft approach with petitioners about the matter until the term of General
Manager Henry Pascual who, after failing to settle the matter amicably with petitioners, finally
agreed for him to file the present action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private respondent and at the same
time the lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was
also a member of the Board of Directors of private respondent, was the one who saw to it that the
contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying anything therefor except for long distance calls
through PLDT out of which the latter get only 10% of the charges.
(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which
posts have remained erect up to the present;
(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they
need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are
according to standard and comparable to those of PLDT. The accidents mentioned by private
respondent involved trucks that were either overloaded or had loads that protruded upwards,
causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into the
contract was that the coverage thereof would include the whole area serviced by petitioners
because at that time, they already had subscribers outside Naga City. Private respondent, in fact,
had asked for telephone connections outside Naga City for its officers and employees residing there
in addition to the ten (10) telephone units mentioned in the contract. Petitioners have not been
charging private respondent for the installation, transfers and re-connections of said telephones so
that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be
in accordance with engineering standards and practice and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as
regards private respondent's first cause of action, that while the contract appeared to be fair to
both parties when it was entered into by them during the first year of private respondent's
operation and when its Board of Directors did not yet have any experience in that business, it had
become disadvantageous and unfair to private respondent because of subsequent events and
conditions, particularly the increase in the volume of the subscribers of petitioners for more than
ten (10) years without the corresponding increase in the number of telephone connections to
private respondent free of charge. The trial court concluded that while in an action for reformation
of contract, it cannot make another contract for the parties, it can, however, for reasons of justice
and equity, order that the contract be reformed to abolish the inequities therein. Thus, said court
ruled that the contract should be reformed by ordering petitioners to pay private respondent
compensation for the use of their posts in Naga City, while private respondent should also be
ordered to pay the monthly bills for the use of the telephones also in Naga City. And taking into
consideration the guidelines of the NEA on the rental of posts by telephone companies and the
increase in the costs of such posts, the trial court opined that a monthly rental of P10.00 for each
post of private respondent used by petitioners is reasonable, which rental it should pay from the
filing of the complaint in this case on January 2, 1989. And in like manner, private respondent
should pay petitioners from the same date its monthly bills for the use and transfers of its
telephones in Naga City at the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the contract does not
mention anything about the use by petitioners of private respondent's posts outside Naga City.
Therefore, the trial court held that for reason of equity, the contract should be reformed by
including therein the provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this
case was filed, or on January 2, 1989, and private respondent should also pay petitioners the
monthly dues on its telephone connections located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court found the claim not
sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of
the agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in Naga City and
in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where
defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's
pole, per month beginning January, 1989 and ordering also the plaintiff to pay defendant
NATELCO the monthly dues of all its telephones including those installed at the residence of its
officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr. Jesus
Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's claim for attorney's fees
and expenses of litigation and defendants' counterclaim are both hereby ordered dismissed.
Without pronouncement as to costs.
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In
the decision dated May 28, 1992, respondent court affirmed the decision of the trial court, 5 but
based on different grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2)
that the contract was subject to a potestative condition which rendered said condition void. The
motion for reconsideration was denied in the resolution dated September 10, 1992.6 Hence, the
present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for reformation of the contract in this case commenced
from the time it became disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily
because the contract does not involve the rendition of service or a personal prestation and it is not
for future service with future unusual change. Instead, the ruling in the case of Occeña, et al. v.
Jabson, etc., et al.,7 which interpreted the article, should be followed in resolving this case. Besides,
said article was never raised by the parties in their pleadings and was never the subject of trial and
evidence.
In applying Article 1267, respondent court rationalized:
We agree with appellant that in order that an action for reformation of contract would lie and may
prosper, there must be sufficient allegations as well as proof that the contract in question failed to
express the true intention of the parties due to error or mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
Equity dictates the reformation of an instrument in order that the true intention of the
contracting parties may be expressed. The courts by the reformation do not attempt to make a
new contract for the parties, but to make the instrument express their real agreement. The
rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a
written instrument which does not reflect or disclose the real meeting of the minds of the
parties. The rigor of the legalistic rule that a written instrument should be the final and
inflexible criterion and measure of the rights and obligations of the contracting parties is thus
tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident. (pp. 55-56,
Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that
where through mistake or accident on the part of either or both of the parties or mistake or
fraud on the part of the clerk or typist who prepared the instrument, the true intention of the
parties is not expressed therein, then the instrument may be reformed at the instance of either
party if there was mutual mistake on their part, or by the injured party if only he was mistaken.
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there
was a mistake on its part or mutual mistake on the part of both parties when they entered into
the agreement Exh. "A", and that because of this mistake, said agreement failed to express
their true intention. Rather, plaintiff's evidence shows that said agreement was prepared by
Atty. Luciano Maggay, then a member of plaintiff's Board of Directors and its legal counsel at
that time, who was also the legal counsel for defendant-appellant, so that as legal counsel for
both companies and presumably with the interests of both companies in mind when he
prepared the aforesaid agreement, Atty. Maggay must have considered the same fair and
equitable to both sides, and this was affirmed by the lower court when it found said contract to
have been fair to both parties at the time of its execution. In fact, there were no complaints on
the part of both sides at the time of and after the execution of said contract, and according to
73-year old Justino de Jesus, Vice President and General manager of appellant at the time who
signed the agreement Exh. "A" in its behalf and who was one of the witnesses for the plaintiff
(sic), both parties complied with said contract "from the very beginning" (p. 5, tsn, April 17,
1989).
That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the
plaintiff with the expansion of the business of appellant and the increase in the volume of its
subscribers in Naga City and environs through the years, necessitating the stringing of more
and bigger telephone cable wires by appellant to plaintiff's electric posts without a
corresponding increase in the ten (10) telephone connections given by appellant to plaintiff free
of charge in the agreement Exh. "A" as consideration for its use of the latter's electric posts in
Naga City, appear, however, undisputed from the totality of the evidence on record and the
lower court so found. And it was for this reason that in the later (sic) part of 1982 or 1983 (or
five or six years after the subject agreement was entered into by the parties), plaintiff's Board
of Directors already asked Atty. Luis General who had become their legal counsel in 1982, to
study said agreement which they believed had become disadvantageous to their company and
to make the proper recommendation, which study Atty. General did, and thereafter, he already
recommended to the Board the filing of a court action to reform said contract, but no action
was taken on Atty. General's recommendation because the former general managers of plaintiff
wanted to adopt a soft approach in discussing the matter with appellant, until, during the term
of General Manager Henry Pascual, the latter, after failing to settle the problem with Atty.
Luciano Maggay who had become the president and general manager of appellant, already
agreed for Atty. General's filing of the present action. The fact that said contract has become
inequitous or disadvantageous to plaintiff as the years went by did not, however, give plaintiff a
cause of action for reformation of said contract, for the reasons already pointed out earlier. But
this does not mean that plaintiff is completely without a remedy, for we believe that the
allegations of its complaint herein and the evidence it has presented sufficiently make out a
cause of action under Art. 1267 of the New Civil Code for its release from the agreement in
question.
The understanding of the parties when they entered into the Agreement Exh. "A" on November
1, 1977 and the prevailing circumstances and conditions at the time, were described by
Dioscoro Ragragio, the President of plaintiff in 1977 and one of its two officials who signed said
agreement in its behalf, as follows:
Our understanding at that time is that we will allow NATELCO to utilize the posts of
CASURECO II only in the City of Naga because at that time the capability of NATELCO was
very limited, as a matter of fact we do [sic] not expect to be able to expand because of the
legal squabbles going on in the NATELCO. So, even at that time there were so many
subscribers in Naga City that cannot be served by the NATELCO, so as a mater of public
service we allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff
were very light and that very few telephone lines were attached to the posts of CASURECO II
in 1977, said posts have become "heavily loaded" in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the volume of
appellant's subscribers and the corresponding increase in the telephone cables and wires
strung by it to plaintiff's electric posts in Naga City for the more 10 years that the agreement
Exh. "A" of the parties has been in effect, there has been no corresponding increase in the
ten (10) telephone units connected by appellant free of charge to plaintiff's offices and other
places chosen by plaintiff's general manager which was the only consideration provided for in
said agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even
started using plaintiff's electric posts outside Naga City although this was not provided for in
the agreement Exh. "A" as it extended and expanded its telephone services to towns outside
said city. Hence, while very few of plaintiff's electric posts were being used by appellant in
1977 and they were all in the City of Naga, the number of plaintiff's electric posts that
appellant was using in 1989 had jumped to 1,403,192 of which are outside Naga City (Exh.
"B"). Add to this the destruction of some of plaintiff's poles during typhoons like the strong
typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the
escalation of the costs of electric poles from 1977 to 1989, and the conclusion is indeed
ineluctable that the agreement Exh. "A" has already become too one-sided in favor of
appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it
should now be released therefrom under Art. 1267 of the New Civil Code to avoid appellant's
unjust enrichment at its (plaintiff's) expense. As stated by Tolentino in his commentaries on
the Civil Code citing foreign civilist Ruggiero, "equity demands a certain economic equilibrium
between the prestation and the counter-prestation, and does not permit the unlimited
impoverishment of one party for the benefit of the other by the excessive rigidity of the
principle of the obligatory force of contracts  (IV Tolentino, Civil Code of the Philippines, 1986
ed.,
pp. 247-248).
We therefore, find nothing wrong with the ruling of the trial court, although based on a
different and wrong premise (i.e., reformation of contract), that from the date of the filing of
this case, appellant must pay for the use of plaintiff's electric posts in Naga City at the
reasonable monthly rental of P10.00 per post, while plaintiff should pay appellant for the
telephones in the same City that it was formerly using free of charge under the terms of the
agreement Exh. "A" at the same rate being paid by the general public. In affirming said
ruling, we are not making a new contract for the parties herein, but we find it necessary to do
so in order not to disrupt the basic and essential services being rendered by both parties
herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff,
said arrangement to continue only until such time as said parties can re-negotiate another
agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and
executed by the parties, the aforesaid ruling of the lower court and affirmed by us shall cease
to exist and shall be substituted and superseded by their new agreement. . . ..8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the
rationale behind this provision, 9 the term "service" should be understood as referring to the
"performance" of the obligation. In the present case, the obligation of private respondent consists
in allowing petitioners to use its posts in Naga City, which is the service contemplated in said
article. Furthermore, a bare reading of this article reveals that it is not a requirement thereunder
that the contract be for future service with future unusual change. According to Senator Arturo M.
Tolentino,10 Article 1267 states in our law the doctrine of unforseen events. This is said to be based
on the discredited theory of rebus sic stantibus in public international law; under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these conditions cease to
exist the contract also ceases to exist. Considering practical needs and the demands of equity and
good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the
party prejudiced.
In a nutshell, private respondent in the Occeña case filed a complaint against petitioner before the
trial court praying for modification of the terms and conditions of the contract that they entered
into by fixing the proper shares that should pertain to them out of the gross proceeds from the
sales of subdivided lots. We ordered the dismissal of the complaint therein for failure to state a
sufficient cause of action. We rationalized that the Court of Appeals misapplied Article 1267
because:
. . . respondent's complaint seeks not release from the subdivision contract but that the court
"render judgment modifying the terms and conditions of the contract . . . by fixing the  proper
shares that should pertain to the herein parties out of the gross proceeds  from the sales of
subdivided lots of subject subdivision". The cited article (Article 1267) does not grant the courts
(the) authority to remake, modify or revise the contract or to fix the division of shares between
the parties as contractually stipulated with the force of law between the parties, so as to
substitute its own terms for those covenanted by the parties themselves. Respondent's complaint
for modification of contract manifestly has no basis in law and therefore states no cause of action.
Under the particular allegations of respondent's complaint and the circumstances therein averred,
the courts cannot even in equity grant the relief sought.11
The ruling in the Occeña case is not applicable because we agree with respondent court that the
allegations in private respondent's complaint and the evidence it has presented sufficiently made
out a cause of action under Article 1267. We, therefore, release the parties from their correlative
obligations under the contract. However, our disposition of the present controversy does not end
here. We have to take into account the possible consequences of merely releasing the parties
therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent,
resulting in disruption of their service to the public; while private respondent, in consonance with
the contract12 will return all the telephone units to petitioners, causing prejudice to its business. We
shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to
pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman,
Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's
posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private
respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by
the public beginning January, 1989. The peculiar circumstances of the present case, as
distinguished further from the Occeña case, necessitates exercise of our equity jurisdiction. 13 By
way of emphasis, we reiterate the rationalization of respondent court that:
. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find
it necessary to do so in order not to disrupt the basic and essential services being rendered by
both parties herein to the public and to avoid unjust enrichment by appellant at the expense of
plaintiff
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was
never the subject of trial and evidence has been passed upon by respondent court in its well
reasoned resolution, which we hereunder quote as our own:
First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code
to this case, we have changed its theory and decided the same on an issue not invoked by
plaintiff in the lower court. For basically, the main and pivotal issue in this case is whether the
continued enforcement of the contract Exh. "A" between the parties has, through the years (since
1977), become too inequitous or disadvantageous to the plaintiff and too one-sided in favor of
defendant-appellant, so that a solution must be found to relieve plaintiff from the continued
operation of said agreement and to prevent defendant-appellant from further unjustly enriching
itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears to
plaintiffs requests for renegotiation, constraining the latter to go to court. But although plaintiff
cannot, as we have held, correctly invoke reformation of contract as a proper remedy (there
having been no showing of a mistake or error in said contract on the part of any of the parties so
as to result in its failure to express their true intent), this does not mean that plaintiff is
absolutely without a remedy in order to relieve itself from a contract that has gone far beyond its
contemplation and has become so highly inequitous and disadvantageous to it through the years
because of the expansion of defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in
the best way and manner it can in the light of the proven facts and the law or laws applicable
thereto.
It is settled that when the trial court decides a case in favor of a party on a certain ground, the
appellant court may uphold the decision below upon some other point which was ignored or
erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro,
76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has the
discretion to consider an unassigned error that is closely related to an error properly assigned
(Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also been held that
the Supreme Court (and this Court as well) has the authority to review matters, even if they are
not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving
at a just decision of the case (Saura Import & Export Co., Inc. v. Phil. International Surety Co.
and PNB, 8 SCRA 143). For it is the material allegations of fact in the complaint, not the legal
conclusion made therein or the prayer, that determines the relief to which the plaintiff is entitled,
and the plaintiff is entitled to as much relief as the facts warrant although that relief is not
specifically prayed for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v.
Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but very illuminating
decision of our Supreme Court through the pen of American jurist Adam C. Carson:
"Under our system of pleading it is the duty of the courts to grant the relief to which the parties
are shown to be entitled by the allegations in their pleadings and the facts proven at the trial,
and the mere fact that they themselves misconstrue the legal effect of the facts thus alleged
and proven will not prevent the court from placing the just construction thereon and
adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme
Court also held:
We rule that the respondent court did not commit any error in taking cognizance of the
aforesaid issues, although not raised before the trial court. The presence of strong
consideration of substantial justice has led this Court to relax the well-entrenched rule that,
except questions on jurisdiction, no question will be entertained on appeal unless it has been
raised in the court below and it is within the issues made by the parties in their pleadings
(Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .
We believe that the above authorities suffice to show that this Court did not err in applying Art.
1267 of the New Civil Code to this case. Defendant-appellant stresses that the applicability of said
provision is a question of fact, and that it should have been given the opportunity to present
evidence on said question. But defendant-appellant cannot honestly and truthfully claim that it
(did) not (have) the opportunity to present evidence on the issue of whether the continued
operation of the contract Exh. "A" has now become too one-sided in its favor and too inequitous,
unfair, and disadvantageous to plaintiff. As held in our decision, the abundant and copious
evidence presented by both parties in this case and summarized in said decision established the
following essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this
case:
On the issue of prescription of private respondent's action for reformation of contract, petitioners
allege that respondent court's ruling that the right of action "arose only after said contract had
already become disadvantageous and unfair to it due to subsequent events and conditions, which
must be sometime during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of
contracts, what is reformed is not the contract itself, but the instrument embodying the contract. It
follows that whether the contract is disadvantageous or not is irrelevant to reformation and
therefore, cannot be an element in the determination of the period for prescription of the action to
reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must
be brought within ten (10) years from the time the right of action accrues. Clearly, the ten (10)
year period is to be reckoned from the time the right of action accrues  which is not necessarily the
date of execution of the contract. As correctly ruled by respondent court, private respondent's right
of action arose "sometime during the latter part of 1982 or in 1983 when according to Atty. Luis
General, Jr. . . ., he was asked by (private respondent's) Board of Directors to study said contract
as it already appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private
respondent's) cause of action to ask for reformation of said contract should thus be considered to
have arisen only in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint in this
case was filed, ten (10) years had not yet elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the
prestations of either party because petitioner's permission for free use of telephones is not made to
depend purely on their will, neither is private respondent's permission for free use of its posts
dependent purely on its will.
Apart from applying Article 1267, respondent court cited another legal remedy available to private
respondent under the allegations of its complaint and the preponderant evidence presented by it:
. . . we believe that the provision in said agreement —
 (a) That the term or period of this contract shall be as long as the party of the first part  [herein
appellant] has need for the electric light posts of the party of the second part [herein plaintiff] it
being understood that this contract shall terminate when for any reason whatsoever, the party
of the second part is forced to stop, abandoned [sic] its operation as a public service and it
becomes necessary to remove the electric light post [sic]"; (Emphasis supplied)

is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity
of the aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is in
operation. A similar provision in a contract of lease wherein the parties agreed that the lessee
could stay on the leased premises "for as long as the defendant needed the premises and can
meet and pay said increases" was recently held by the Supreme Court in Lim v. C.A., 191 SCRA
150, citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a
purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to
the sole and exclusive will of the lessee." Further held the High Court in the Lim case:
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee between continuing the payment
of the rentals or not, completely depriving the owner of any say in the matter. Mutuality does
not obtain in such a contract of lease of no equality exists between the lessor and the lessee
since the life of the contract is dictated solely by the lessee.

The above can also be said of the agreement Exh. "A" between the parties in this case. There is
no mutuality and equality between them under the afore-quoted provision thereof since the life
and continuity of said agreement is made to depend as long as appellant needs plaintiff's electric
posts. And this is precisely why, since 1977 when said agreement was executed and up to 1989
when this case was finally filed by plaintiff, it could do nothing to be released from or terminate
said agreement notwithstanding that its continued effectivity has become very disadvantageous
and inequitous to it due to the expansion and increase of appellant's telephone services within
Naga City and even outside the same, without a corresponding increase in the ten (10) telephone
units being used by plaintiff free of charge, as well as the bad and inefficient service of said
telephones to the prejudice and inconvenience of plaintiff and its customers. . . . 18

Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the
fulfillment of which depends upon the sole will of the debtor, in which case, the conditional
obligation is void. 19 Based on this definition, respondent court's finding that the provision in the
contract, to wit:
(a) That the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the party of the second part (private
respondent) . . ..

is a potestative condition, is correct. However, it must have overlooked the other conditions in the
same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever, the G.R. No. 4437           September 9, 1909
party of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a
TOMAS OSMEÑA, plaintiff-appellee, 
public service and it becomes necessary to remove the electric light post (sic);
vs.
which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In CENONA RAMA, defendant-appellant.
sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the
JOHNSON, J.:
debtor and partly on chance, hazard or the will of a third person, which do not invalidate the
aforementioned provision. 21 Nevertheless, in view of our discussions under the first and second
It appears from the record that upon the 15th day of November, 1890, the defendant herein
issues raised by petitioners, there is no reason to set aside the questioned decision and resolution
executed and delivered to Victoriano Osmeña the following contract:
of respondent court.
EXHIBIT A.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28,
1992 and its resolution dated September 10, 1992 are AFFIRMED. P200.00.
 CEBU, November 15, 1890.                The defendant not having paid the amount due on said contracts; the plaintiff, upon the 26th day of
June, 1906, commenced the present action in the Court of First Instance of the Province of Cebu.
I, Doña Cenona Rama, a resident of this city, and of legal age, have received from Don Victoriano Osmeña the
The complaint filed in said cause alleged the execution and delivery of the above contracts, the
sum of two hundred pesos in cash which I will pay in sugar in the month of January or February of the coming
year, at the price ruling on the day of delivering the sugar into his warehouse, and I will pay him interest at the demand for payment, and the failure to pay on the part of the defendant, and the prayer for a
rate of half a cuartillo per month on each peso, beginning on this date until the day of the settlement; and if I can judgment for the amount due on the said contracts. The defendant answered by filing a general
not pay in full, a balance shall be struck, showing the amount outstanding at the end of each June, including denial and setting up the special defense of prescription.
interest, and such as may be outstanding against me shall be considered as capital which I will always pay in
sugar, together with the interest mentioned above. I further promise that I will sell to the said Señor Osmeña all The case was finally brought on to trial in the Court of First Instance, and the only witness produced
the sugar that I may harvest, and as a guarantee, pledge as security all of my present and future property, and during the trial was the plaintiff himself. The defendant did not offer any proof whatever in the
as special security the house with tile roof and ground floor of stone in which I live in Pagina; in proof whereof, I
lower court.
sign this document, and he shall be entitled to make claim against me at the expiration of the term stated in this
document.
After hearing the evidence adduced during the trial, the lower court rendered a judgment in favor of
(Signed) CENON RAMA. the plaintiff and against the defendant for the sum of P200 with interest at the rate of 18 3/4 per
cent per annum, from the 15th day of November, 1890, and for the sum of P20 with interest at the
Witnesses: rate of 18 3/4 per cent per annum, from the 27th day of October, 1891, until the said sums were
FAUSTO PEÑALOSA.  paid. From this judgment the defendant appealed.
FRANCISCO MEDALLE.

The lower court found that P50 of the P70 mentioned in Exhibit B had been borrowed by the
On the 27th day of October, 1891, the defendant executed and delivered to the said Victoriano Osmeña the
following contract: defendant, but by one Evaristo Peñares; therefore the defendant had no responsibility for the
payment of the said P50.
EXHIBIT B.
The only questions raised by the appellant were questions of fact. The appellant alleges that the
CEBU, October 27, 1891.                proof adduced during the trial of the cause was not sufficient to support the findings of the lower
court. It was suggested during the discussion of the case in this court that, in the acknowledgment
On this date I have asked for further loan and have received from Don Victoriano Osmeña the sum of seventy
pesos in cash, fifty pesos of which I have loaned to Don Evaristo Peñares, which we will pay in sugar in the month
above quoted of the indebtedness made by the defendant, she imposed the condition that she
of January of the coming year according to the former conditions. would pay the obligation if she sold her house. If that statement found in her acknowledgment of
the indebtedness should be regarded as a condition, it was a condition which depended upon her
(Signed) CENONA RAMA. exclusive will, and is therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was
an absolute acknowledgment of the obligation and was sufficient to prevent the statute of limitation
From Don Evaristo Peñares P50 from barring the action upon the original contract.

Doña Cenona Rama 20 We are satisfied, from all of the evidence adduced during the trial, that the judgment of the lower
court should be affirmed. So ordered.
P70

Received — Evaristo Peñares.

Some time after the execution and delivery of the above contracts, the said Victoriano Osmeña
died. In the settlement and division of the property of his estate the above contracts became the
property of one of his estate the above contracts became the property of one of his heirs, Agustina
Rafols. Later, the date does not appear, the said Agustina Rafols ceded to the present plaintiff all of
her right and interest in said contracts. G.R. No. L-16109             October 2, 1922

On the 15th day of March, 1902 the plaintiff presented the contracts to the defendant for payment M. D. TAYLOR, plaintiff-appellant, 
and she acknowledged her responsibility upon said contracts by an indorsement upon them in the vs.
following language: UY TIENG PIAO and TAN LIUAN, doing business under the firm name and style of Tan
Liuan & Company,defendants. 
EXHIBIT C.
Uy TIENG PIAO, defendant-appellant.
CEBU, March 15, 1902.                STREET, J.:

On this date I hereby promise, in the presence of two witness, that if the house of strong This case comes by appeal from the Court of First Instance of the city of Manila, in a case where the court awarded to the plaintiff the sum
of P300, as damages for breach of contract. The plaintiff appeals on the ground that the amount of damages awarded is inadequate; while
materials in which I live in Pagina is sold, I will pay my indebtedness to Don Tomas Osmeña as
the defendant Uy Tieng Piao appeals on the ground that he is not liable at all. The judgment having been heretofore affirmed by us in a
set forth in this document. brief opinion, we now avail ourselves of the occasion of the filing of a motion to rehear by the attorneys for the plaintiff to modify the
judgment in a slight measure and to state more fully the reasons underlying our decision.
(Signed) CENONA RAMA.             
It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan and Co., as
superintendent of an oil factory which the latter contemplated establishing in this city. The period of
the contract extended over two years from the date mentioned; and the salary was to be at the
rate of P600 per month during the first year and P700 per month during the second, with electric
light and water for domestic consumption, and a residence to live in, or in lieu thereof P60 per
month.
At the time this agreement was made the machinery for the contemplated factory had not been
acquired, though ten expellers had been ordered from the United States; and among the
stipulations inserted in the contract with the plaintiff was a provision to the following effect:
It is understood and agreed that should the machinery to be installed in the said factory fail, for
any reason, to arrive in the city of Manila within a period of six months from date hereof, this
contract may be cancelled by the party of the second part at its option, such cancellation,
however, not to occur before the expiration of such six months.
The machinery above referred to did not arrive in the city of Manila within the six months
succeeding the making of the contract; nor was other equipment necessary for the establishment of
the factory at any time provided by the defendants. The reason for this does not appear with
certainty, but a preponderance of the evidence is to the effect that the defendants, in the first
months of 1919, seeing that the oil business no longer promised large returns, either cancelled the
order for the machinery from choice or were unable to supply the capital necessary to finance the
project. At any rate on June 28, 1919, availing themselves in part of the option given in the clause
above quoted, the defendants communicated in writing to the plaintiff the fact that they had
decided to rescind the contract, effective June 30th then current, upon which date he was
discharged. The plaintiff thereupon instituted this action to recover damages in the amount of
P13,000, covering salary and perquisites due and to become due under the contract.
The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to the
defendants the right to cancel the contract upon the contingency of the nonarrival of the machinery
in Manila within six months, must be understood as applicable only in those cases where such
nonarrival is due to causes not having their origin in the will or act of the defendants, as delays
caused by strikes or unfavorable conditions of transporting by land or sea; and it is urged that the
right to cancel cannot be admitted unless the defendants affirmatively show that the failure of the
machinery to arrive was due to causes of that character, and that it did not have its origin in their
own act or volition. In this connection the plaintiff relies on article 1256 of the Civil Code, which is
to the effect that the validity and fulfillment of contracts cannot be left to the will of one of the
contracting parties, and to article 1119, which says that a condition shall be deemed fulfilled if the
obligor intentially impedes its fulfillment.
It will be noted that the language conferring the right of cancellation upon the defendants is broad
enough to cover any case of the nonarrival of the machinery, due to whatever cause; and the
stress in the expression "for any reason" should evidently fall upon the word "any." It must follow
of necessity that the defendants had the right to cancel the contract in the contingency that
occurred, unless some clear and sufficient reason can be adduced for limiting the operation of the
words conferring the right of cancellation. Upon this point it is our opinion that the language used in
the stipulation should be given effect in its ordinary sense, without technicality or circumvention;
and in this sense it is believed that the parties to the contract must have understood it.
Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a contract for
personal service of a resolutory condition permitting the cancellation of the contract by one of the
parties. Such a stipulation, as can be readily seen, does not make either the validity or the
fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of
cancellation; for where the contracting parties have agreed that such option shall exist, the exercise
of the option is as much in the fulfillment of the contract as any other act which may have been the
subject of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed
upon beforehands is fulfillment.
In this connection, we note that the commentator Manresa has the following observation with
respect to article 1256 of the Civil Code. Says he: "It is entirely licit to leave fulfillment to the will of
either of the parties in the negative form of rescission, a case frequent in certain contracts (the
letting of service for hire, the supplying of electrical energy, etc.), for in such supposed case neither
is the article infringed, nor is there any lack of equality between the persons contracting, since they
remain with the same faculties in respect to fulfillment." (Manresa, 2d ed., vol. 8, p. 610.) 1awph!
l.net
Undoubtedly one of the consequences of this stipulation was that the employers were left in a
position where they could dominate the contingency, and the result was about the same as if they
had been given an unqualified option to dispense with the services of the plaintiff at the end of six
months. But this circumstance does not make the stipulation illegal.
The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially
somewhat analogous, is not precisely in point. In that case one Hardaker had contracted to render
competent and efficient service as manager of a corporation, to which position it was understood he
was to be appointed. In the same contract it was stipulated that if "for any reason" Hardaker should
not be given that position, or if he should not be permitted to act in that capacity for a stated
period, certain things would be done by Hall. Upon being installed in the position aforesaid,
Hardaker failed to render efficient service and was discharged. It was held that Hall was released
from the obligation to do the things that he had agreed to perform. Some of the judges appear to
have thought that the case turned on the meaning of the phrase "for any reason," and the familiar
maxim was cited that no man shall take advantage of his own wrong. The result of the case must
have been the same from whatever point of view, as there was an admitted failure on the part of
Hardaker to render competent service. In the present case there was no breach of contract by the
defendants; and the argument to the contrary apparently suffers from the logical defect of
assuming the very point at issue.
But it will be said that the question is not so much one concerning the legality of the clause referred
to as one concerning the interpretation of the resolutory clause as written, the idea being that the
court should adjust its interpretation of said clause to the supposed precepts of article 1256, by
restricting its operation exclusively to cases where the nonarrival of the machinery may be due to
extraneous causes not referable to the will or act of the defendants. But even when the question is
viewed in this aspect their result is the same, because the argument for the restrictive
interpretation evidently proceeds on the assumption that the clause in question is illegal in so far as
it purports to concede to the defendants the broad right to cancel the contract upon nonarrival of
the machinery due to any cause; and the debate returns again to the point whether in a contract
for the prestation of service it is lawful for the parties to insert a provision giving to the employer
the power to cancel the contract in a contingency which may be dominated by himself. Upon this
point what has already been said must suffice.
As we view the case, there is nothing in article 1256 which makes it necessary for us to warp the
language used by the parties from its natural meaning and thereby in legal effect to restrict the
words "for any reason," as used in the contract, to mean "for any reason not having its origin in the
will or acts of the defendants." To impose this interpretation upon those words would in our opinion
constitute an unjustifiable invasion of the power of the parties to establish the terms which they
deem advisable, a right which is expressed in article 1255 of the Civil Code and constitutes one of
the most fundamental conceptions of contract right enshrined in the Code.
The view already expressed with regard to the legality and interpretation of the clause under
consideration disposes in a great measure of the argument of the appellant in so far as the same is
based on article 1119 of the Civil Code. This provision supposes a case where the obligor
intentionally impedes the fulfillment of a condition which would entitle the obligee to exact
performance from the obligor; and an assumption underlying the provision is that the obligor
prevents the obligee from performing some act which the obligee is entitled to perform as a
condition precedent to the exaction of what is due to him. Such an act must be considered
unwarranted and unlawful, involving per se  a breach of the implied terms of the contract. The
article can have no application to an external contingency which, like that involved in this case, is
lawfully within the control of the obligor.
In Spanish jurisprudence a condition like that here under discussion is designated by Manresa a
facultative condition (vol. 8, p. 611), and we gather from his comment on articles 1115 and 1119 of
the Civil Code that a condition, facultative as to the debtor, is obnoxious to the first sentence
contained in article 1115 and renders the whole obligation void (vol. 8, p. 131). That statement is
no doubt correct in the sense intended by the learned author, but it must be remembered that he
evidently has in mind the suspensive condition, such as is contemplated in article 1115. Said article
can have no application to the resolutory condition, the validity of which is recognized in article
1113 of the Civil Code. In other words, a condition at once facultative and resolutory may be valid
even though the condition is made to depend upon the will of the obligor.
If it were apparent, or could be demonstrated, that the defendants were under a positive obligation
to cause the machinery to arrive in Manila, they would of course be liable, in the absence of
affirmative proof showing that the nonarrival of the machinery was due to some cause not having
its origin in their own act or will. The contract, however, expresses no such positive obligation, and
its existence cannot be implied in the fact of stipulation, defining the conditions under which the
defendants can cancel the contract.
Our conclusion is that the Court of First Instance committed no error in rejecting the plaintiff's claim
in so far as damages are sought for the period subsequent to the expiration of the first six months,
but in assessing the damages due for the six-month period, the trial judge evidently overlooked the
item of P60, specified in the plaintiff's fourth assignment of error, which represents commutation of
house rent for the month of June, 1919. This amount the plaintiff is clearly entitled to recover, in
addition to the P300 awarded in the court below.
We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the judgment
holding him liable as a member of the firm of Tan Liuan and Co.; and it is insisted in his behalf that
he was not bound by the act of Tan Liuan as manager of Tan Liuan and Co. in employing the
plaintiff. Upon this we will merely say that the conclusion stated by the trial court in the next to the
last paragraph of the decision with respect to the liability of this appellant in our opinion in
conformity with the law and facts.
The judgment appealed from will be modified by declaring that the defendants shall pay to the
plaintiff the sum of P360, instead of P300, as allowed by the lower court, and as thus modified the
judgment will be affirmed with interest from November 4, 1919, as provided in section 510 of the
Code of Civil Procedure, and with costs. So ordered.
G.R. No. 107207 November 23, 1995
VIRGILIO R. ROMERO, petitioner,  immediately sign, execute, acknowledged (sic) and deliver the corresponding deed of absolute sale in favor
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.
VITUG, J.:
The parties pose this question: May the vendor  demand the rescission of a contract for the sale of a parcel of land for a cause traceable to
his own failure to have the squatters on the subject property evicted within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production,
manufacture and exportation of perlite filter aids, permalite insulation and processed perlite ore. In
1988, petitioner and his foreign partners decided to put up a central warehouse in Metro Manila on
a land area of approximately 2,000 square meters. The project was made known to several
freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered
a parcel of land measuring 1,952 square meters. Located in Barangay San Dionisio, Parañaque,
Metro Manila, the lot was covered by TCT No. 361402 in the name of private respondent Enriqueta
Chua vda. de Ongsiong. Petitioner visited the property and, except for the presence of squatters in
the area, he found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of
P50,000.00 which could be used in taking up an ejectment case against the squatters, private
respondent would agree to sell the property for only P800.00 per square meter. Petitioner
expressed his concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional Sale,"
was executed between petitioner and private respondent. The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of June,
1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and residing at 105
Simoun St., Quezon City, Metro Manila, hereinafter referred to as the VENDOR;
-and-
VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and residing at 110
San Miguel St., Plainview Subd., Mandaluyong Metro Manila, hereinafter referred to as the
VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE THOUSAND NINE
HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less, located in Barrio San Dionisio, Municipality of
Parañaque, Province of Rizal, covered by TCT No. 361402 issued by the Registry of Deeds of Pasig and more
particularly described as follows:
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR has accepted the offer,
subject to the terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED SIXTY ONE THOUSAND
SIX HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency, payable by VENDEE to in to (sic) manner set
forth, the VENDOR agrees to sell to the VENDEE, their heirs, successors, administrators, executors, assign, all
her rights, titles and interest in and to the property mentioned in the FIRST WHEREAS CLAUSE, subject to the
following terms and conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is to be paid upon
signing and execution of this instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45 days after the removal of all squatters from the
above described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR without necessity of demand shall
of the VENDEE free from all liens and encumbrances and all Real Estate taxes are all paid and updated.
It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60 days from the
date of the signing of this contract the VENDOR shall not be able to remove the squatters from the property being
purchased, the downpayment made by the buyer shall be returned/reimbursed by the VENDOR to the VENDEE.
 That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the purchase price of ONE
MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from
written notification to the VENDEE of the removal of the squatters from the property being purchased, the FIFTY
THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer fee, assurances and such
other fees and expenses as may be necessary to transfer the title to the name of the VENDEE shall be for the
account of the VENDEE while capital gains tax shall be paid by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of Makati MM, Philippines on
this 9th day of June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.
DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz1
Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for P50,000.00 2from
petitioner.3
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No.
7579) against Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of
Parañaque. A few months later, or on 21 February 1989, judgment was rendered ordering the
defendants to vacate the premises. The decision was handed down beyond the 60-day period
(expiring 09 August 1988) stipulated in the contract. The writ of execution of the judgment was
issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received
from petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F.
Apostol, counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering the favorable
decision rendered by the Court and the writ of execution issued pursuant thereto, it is now
possible to eject the squatters from the premises of the subject property, for which reason, he
proposes that he shall take it upon himself to eject the squatters, provided, that expenses which
shall be incurred by reason thereof shall be chargeable to the purchase price of the land.4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director
for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a grace period of 45
days from 21 April 1989 within which to relocate and transfer the squatter families. Acting favorably
on the request, the court suspended the enforcement of the writ of execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace
period and his client's willingness to "underwrite the expenses for the execution of the judgment
and ejectment of the occupants."5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised
Atty. Apostol that the Deed of Conditional Sale had been rendered null  and void by virtue of his
client's failure to evict the squatters from the premises within the agreed 60-day period. He added
that private respondent had "decided to retain the property."6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very moment that there was a
meeting of the minds of the parties upon the subject lot and the price in the amount of
P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed upon
receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its binding
effects relying upon her inability to eject the squatters from the premises of subject property
during the agreed period. Suffice it to state that, the provision of the Deed of Conditional Sale do
not grant her the option or prerogative to rescind the contract and to retain the property should
she fail to comply with the obligation she has assumed under the contract. In fact, a perusal of
the terms and conditions of the contract clearly shows that the right to rescind the contract and
to demand the return/reimbursement of the downpayment is granted to our client for his
protection.
Instead, however, of availing himself of the power to rescind the contract and demand the return,
reimbursement of the downpayment, our client had opted to take it upon himself to eject the
squatters from the premises. Precisely, we refer you to our letters addressed to your client dated
April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given to the injured
party. Undoubtedly, under the circumstances, our client is the injured party.
Furthermore, your client has not complied with her obligation under their contract in good faith. It
is undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the squatters from
the premises of the subject property and her decision to retain the property was brought about
by the sudden increase in the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to execute the
absolute Deed of Sale.7
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued
refusal to accept the return of the P50,000.00 advance payment, filed with the Regional Trial Court
of Makati, Branch 133, Civil Case No. 89-4394 for rescission of the deed of "conditional" sale, plus
damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil
Case No. 7579 on motion of private respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered
decision holding that private respondent had no right to rescind the contract since it was she who
"violated her obligation to eject the squatters from the subject property" and that petitioner, being
the injured party, was the party who could, under Article 1191 of the Civil Code, rescind the
agreement. The court ruled that the provisions in the contract relating to (a) the
return/reimbursement of the P50,000.00 if the vendor were to fail in her obligation to free the
property from squatters within the stipulated period or (b), upon the other hand, the sum's
forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price, amounted to
"penalty clauses". The court added:
This Court is not convinced of the ground relied upon by the plaintiff in seeking the rescission,
namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to eject them
from the premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her profession of good faith
is plaintiffs conduct which is not in accord with the rules of fair play and justice. Notably, she
caused the issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment
suit which was almost two months after she filed the complaint before this Court on June 27,
1989. If she were really afraid of the squatters, then she should not have pursued the issuance
of an alias  writ of execution. Besides, she did not even report to the police the alleged phone
threats from the squatters. To the mind of the Court, the so-called squatter factor is simply
factuitous (sic).9
 The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to
eject or cause the ejectment of the squatters from the property and to execute the absolute deed
of conveyance upon payment of the full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered
its decision. 10It opined that the contract entered into by the parties was subject to a resolutory
condition, i.e., the ejectment of the squatters from the land, the non-occurrence of which resulted
in the failure of the object of the contract; that private respondent substantially complied with her
obligation to evict the squatters; that it was petitioner who was not ready to pay the purchase price
and fulfill his part of the contract, and that the provision requiring a mandatory
return/reimbursement of the P50,000.00 in case private respondent would fail to eject the
squatters within the 60-day period was not a penal clause. Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one entered
declaring the contract of conditional sale dated June 9, 1988 cancelled and ordering the
defendant-appellee to accept the return of the downpayment in the amount of P50,000.00 which
was deposited in the court below. No pronouncement as to costs.11
Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues
that, in fine, center on the nature of the contract adverted to and the P50,000.00 remittance made
by petitioner.
A perfected contract of sale may either be absolute or conditional 12 depending on whether the
agreement is devoid of, or subject to, any condition imposed on the  passing of title of the thing to
be conveyed or on the obligation of a party thereto. When ownership is retained until the fulfillment
of a positive condition the breach of the condition will simply prevent the duty to convey title from
acquiring an obligatory force. If the condition is imposed on an obligationof a party which is not
complied with, the other party may either refuse to proceed or waive said condition (Art. 1545,
Civil Code). Where, of course, the condition is imposed upon the  perfection of the contract itself,
the failure of such condition would prevent the juridical relation itself from coming into existence.13
In determining the real character of the contract, the title given to it by the parties is not as much
significant as its substance. For example, a deed of sale, although denominated as a deed of
conditional sale, may be treated as absolute in nature, if title to the property sold is not reserved in
the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated  Article 159223 of the Civil Code, would likewise suffice to defeat private respondent's prerogative to
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition.14
The term "condition" in the context of a  perfected contract of sale pertains, in reality, to the
compliance by one party of an undertaking the fulfillment of which would beckon, in turn, the
demandability of the reciprocal prestation of the other party. The reciprocal obligations referred to
would normally be, in the case of vendee, the payment of the agreed purchase price and, in the
case of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the
timely eviction of the squatters on the property).
It would be futile to challenge the agreement here in question as not being a duly perfected
contract. A sale is at once perfected when a person (the seller) obligates himself, for a price certain,
to deliver and to transfer ownership of a specified thing or right to another (the buyer) over which
the latter agrees.15
The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter
lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the
Registry of Deeds for Pasig and therein technically described. The purchase price was fixed at
P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document of sale
and the balance of P1,511,600.00 payable "45 days after the removal of all squatters from the
above described property."
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. Under the agreement, private respondent is
obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own
obligation,  i.e., to pay the balance of the purchase price. Private respondent's failure "to remove
the squatters from the property" within the stipulated period gives petitioner the right to either
refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the
Civil Code.16 This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent
does not constitute a "potestative condition dependent solely on his will" that might, otherwise, be
void in accordance with Article 1182 of the Civil Code 17 but a "mixed" condition "dependent not on
the will of the vendor alone but also of third persons like the squatters and government agencies
and personnel concerned."18 We must hasten to add, however, that where the so-called "potestative
condition" is imposed not on the birth of the obligation but on its fulfillment, only the obligation is
avoided, leaving unaffected the obligation itself.19
In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee
to choose between proceeding with the agreement or waiving the performance of the condition. It
is this provision which is the pertinent rule in the case at bench. Here, evidently, petitioner has
waived the performance of the condition imposed on private respondent to free the property from
squatters.20
In any case, private respondent's action for rescission is not warranted. She is not the injured
party.21 The right of resolution of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party that violates the reciprocity between them.22 It is
private respondent who has failed in her obligation under the contract. Petitioner did not breach the
agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in
the ejectment case and to make arrangements with the sheriff to effect such execution. In his letter
of 23 June 1989, counsel for petitioner has tendered payment and demanded forthwith the
execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to
the demand for rescission, assuming for the sake of argument that such a demand is proper under
rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance payment is
reimbursable to petitioner or forfeitable by private respondent, since, on the basis of our foregoing
conclusions, the matter has ceased to be an issue. Suffice it to say that petitioner having opted to
proceed with the sale, neither may petitioner demand its reimbursement from private respondent
nor may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE,
and another is entered ordering petitioner to pay private respondent the balance of the purchase
price and the latter to execute the deed of absolute sale in favor of petitioner. No costs.
G.R. No. 146839               March 23, 2011
ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA
CATUNGAL-WESSEL, Petitioners, 
vs.
ANGEL S. RODRIGUEZ, Respondent.
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of Appeals in CA-G.R. CV No. 40627
consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000 Decision, 1 which affirmed the Decision2 dated May 30, 1992 of the
Regional Trial Court (RTC), Branch 27 of Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30, 2001 Resolution,  denying
herein petitioners’ motion for reconsideration of the August 8, 2000 Decision.
The relevant factual and procedural antecedents of this case are as follows:
This controversy arose from a Complaint for Damages and Injunction with Preliminary
Injunction/Restraining Order4filed on December 10, 1990 by herein respondent Angel S. Rodriguez
(Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L
against the spouses Agapita and Jose Catungal (the spouses Catungal), the parents of petitioners.
In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot
10963) with an area of 65,246 square meters, covered by Original Certificate of Title (OCT) No.
1055 in her name situated in the Barrio of Talamban, Cebu City. The said property was allegedly the
exclusive paraphernal property of Agapita.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to
Sell6 with respondent Rodriguez. Subsequently, the Contract to Sell was purportedly "upgraded"
into a Conditional Deed of Sale7 dated July 26, 1990 between the same parties. Both the Contract
to Sell and the Conditional Deed of Sale were annotated on the title.
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:
1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS
(₱25,000,000.00) payable as follows:
a. FIVE HUNDRED THOUSAND PESOS (₱500,000.00) downpayment upon the signing of this agreement, receipt of
which sum is hereby acknowledged in full from the VENDEE.
b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS (₱24,500,000.00) shall be
payable in five separate checks, made to the order of JOSE Ch. CATUNGAL, the first check shall be for FOUR
MILLION FIVE HUNDRED THOUSAND PESOS (₱4,500,000.00) and the remaining balance to be paid in four checks
in the amounts of FIVE MILLION PESOS (₱5,000,000.00) each after the VENDEE have (sic) successfully
negotiated, secured and provided a Road Right of Way consisting of 12 meters in width cutting across Lot 10884
up to the national road, either by widening the existing Road Right of Way or by securing a new Road Right of
Way of 12 meters in width. If however said Road Right of Way could not be negotiated, the VENDEE shall give
notice to the VENDOR for them to reassess and solve the problem by taking other options and should the
situation ultimately prove futile, he shall take steps to rescind or cancel the herein Conditional Deed of Sale.
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the VENDEE to
secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall,
however, be accorded with enough time necessary for the success of his endeavor, granting him a free hand in
negotiating for the passage.
BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED
OF SALE to VENDEE, his heirs, successors and assigns, the real property described in the Original
Certificate of Title No. 105 x x x.
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his
option to rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way
of a written notice relinquishing his rights over the property. The VENDEE shall then be reimbursed
by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00) representing the
downpayment, interest free, payable but contingent upon the event that the VENDOR shall have
been able to sell the property to another party.8
In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary
surveys and plans and through his efforts, the property was reclassified from agricultural land into
residential land which he claimed substantially increased the property’s value. He likewise alleged
that he actively negotiated for the road right of way as stipulated in the contract.9
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of
₱5,000,000.00 on the purchase price for personal reasons. Rodriquez allegedly refused on the
ground that the amount was substantial and was not due under the terms of their agreement.
Shortly after his refusal to pay the advance, he purportedly learned that the Catungals were
offering the property for sale to third parties.10
Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24, 199012 and October
29, 1990,13 all signed by Jose Catungal who was a lawyer, essentially demanding that the former
make up his mind about buying the land or exercising his "option" to buy because the spouses
Catungal allegedly received other offers and they needed money to pay for personal obligations and
for investing in other properties/business ventures. Should Rodriguez fail to exercise his option to
buy the land, the Catungals warned that they would consider the contract cancelled and that they
were free to look for other buyers.
In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he termed the
Catungals’ unwarranted demands in view of the terms of the Conditional Deed of Sale which
allowed him sufficient time to negotiate a road right of way and granted him, the vendee, the
exclusive right to rescind the contract. Still, on November 15, 1990, Rodriguez purportedly received
a letter dated November 9, 1990 15 from Atty. Catungal, stating that the contract had been cancelled
and terminated.
Contending that the Catungals’ unilateral rescission of the Conditional Deed of Sale was unjustified,
arbitrary and unwarranted, Rodriquez prayed in his Complaint, that:
1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the
spouses Catungal], their employees, agents, representatives or other persons acting in their
behalf from offering the property subject of this case for sale to third persons; from entertaining
offers or proposals by third persons to purchase the said property; and, in general, from
performing acts in furtherance or implementation of defendants’ rescission of their Conditional
Deed of Sale with plaintiff [Rodriguez].
2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be
fixed by the court enjoining defendants and other persons acting in their behalf from performing
any of the acts mentioned in the next preceding paragraph.
3. After trial, a Decision be rendered:
a) Making the injunction permanent;
b) Condemning defendants to pay to plaintiff, jointly and solidarily:
Actual damages in the amount of ₱400,000.00 for their unlawful rescission of the Agreement and
their performance of acts in violation or disregard of the said Agreement;
Moral damages in the amount of ₱200,000.00;
Exemplary damages in the amount of ₱200,000.00; Expenses of litigation and attorney’s fees in the
amount of ₱100,000.00; and
Costs of suit.16
On December 12, 1990, the trial court issued a temporary restraining order and set the application
for a writ of preliminary injunction for hearing on December 21, 1990 with a directive to the
spouses Catungal to show cause within five days from notice why preliminary injunction should not
be granted. The trial court likewise ordered that summons be served on them.17
Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of preliminary
injunction and later filed a motion to dismiss19 on the ground of improper venue. According to the
Catungals, the subject property was located in Cebu City and thus, the complaint should have been
filed in Cebu City, not Lapu-lapu City. Rodriguez opposed the motion to dismiss on the ground that
his action was a personal action as its subject was breach of a contract, the Conditional Deed of
Sale, and not title to, or possession of real property.20
In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and ruled that
the complaint involved a personal action, being merely for damages with a prayer for injunction.
Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary
injunction upon posting by Rodriguez of a bond in the amount of ₱100,000.00 to answer for
damages that the defendants may sustain by reason of the injunction.
On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim 22 alleging that they
had the right to rescind the contract in view of (1) Rodriguez’s failure to negotiate the road right of
way despite the lapse of several months since the signing of the contract, and (2) his refusal to pay
the additional amount of ₱5,000,000.00 asked by the Catungals, which to them indicated his lack of
funds to purchase the property. The Catungals likewise contended that Rodriguez did not have an
exclusive right to rescind the contract and that the contract, being reciprocal, meant both parties
had the right to rescind.23 The spouses Catungal further claimed that it was Rodriguez who was in
breach of their agreement and guilty of bad faith which justified their rescission of the contract. 24 By
way of counterclaim, the spouses Catungal prayed for actual and consequential damages in the
form of unearned interests from the balance (of the purchase price in the amount) of
₱24,500,000.00, moral and exemplary damages in the amount of ₱2,000,000.00, attorney’s fees in
the amount of ₱200,000.00 and costs of suits and litigation expenses in the amount of
₱10,000.00.25 The spouses Catungal prayed for the dismissal of the complaint and the grant of their
counterclaim.
The Catungals amended their Answer twice, 26 retaining their basic allegations but amplifying their
charges of contractual breach and bad faith on the part of Rodriguez and adding the argument that
in view of Article 1191 of the Civil Code, the power to rescind reciprocal obligations is granted by
the law itself to both parties and does not need an express stipulation to grant the same to the
injured party. In the Second Amended Answer with Counterclaim, the spouses Catungal added a
prayer for the trial court to order the Register of Deeds to cancel the annotations of the two
contracts at the back of their OCT.27
On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to the effect that
the Catungals were guilty of several misrepresentations which purportedly induced Rodriguez to
buy the property at the price of ₱25,000,000.00. Among others, it was alleged that the spouses
Catungal misrepresented that their Lot 10963 includes a flat portion of land which later turned out
to be a separate lot (Lot 10986) owned by Teodora Tudtud who sold the same to one Antonio
Pablo. The Catungals also allegedly misrepresented that the road right of way will only traverse two
lots owned by Anatolia Tudtud and her daughter Sally who were their relatives and who had already
agreed to sell a portion of the said lots for the road right of way at a price of ₱550.00 per square
meter. However, because of the Catungals’ acts of offering the property to other buyers who
offered to buy the road lots for ₱2,500.00 per square meter, the adjacent lot owners were no longer
willing to sell the road lots to Rodriguez at ₱550.00 per square meter but were asking for a price of
₱3,500.00 per square meter. In other words, instead of assisting Rodriguez in his efforts to
negotiate the road right of way, the spouses Catungal allegedly intentionally and maliciously
defeated Rodriguez’s negotiations for a road right of way in order to justify rescission of the said
contract and enable them to offer the property to other buyers.
Despite requesting the trial court for an extension of time to file an amended Answer, 29 the
Catungals did not file an amended Answer and instead filed an Urgent Motion to Dismiss 30 again
invoking the ground of improper venue. In the meantime, for failure to file an amended Answer
within the period allowed, the trial court set the case for pre-trial on December 20, 1991.
During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals’
Urgent Motion to Dismiss for violation of the rules and for being repetitious and having been
previously denied.31 However, Atty. Catungal refused to enter into pre-trial which prompted the trial
court to declare the defendants in default and to set the presentation of the plaintiff’s evidence on
February 14, 1992.32
On December 23, 1991, the Catungals filed a motion for reconsideration 33 of the December 20,
1991 Order denying their Urgent Motion to Dismiss but the trial court denied reconsideration in an
Order dated February 3, 1992.34Undeterred, the Catungals subsequently filed a Motion to Lift and to
Set Aside Order of Default 35 but it was likewise denied for being in violation of the rules and for
being not meritorious.36 On February 28, 1992, the Catungals filed a Petition for Certiorari and
Prohibition37 with the Court of Appeals, questioning the denial of their motion to dismiss and the
order of default. This was docketed as CA-G.R. SP No. 27565.
Meanwhile, Rodriguez proceeded to present his evidence before the trial court.
In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under
the contract it was complainant (Rodriguez) that had the option to rescind the sale; (b) Rodriguez’s
obligation to pay the balance of the purchase price arises only upon successful negotiation of the
road right of way; (c) he proved his diligent efforts to negotiate the road right of way; (d) the
spouses Catungal were guilty of misrepresentation which defeated Rodriguez’s efforts to acquire the
road right of way; and (e) the Catungals’ rescission of the contract had no basis and was in bad
faith. Thus, the trial court made the injunction permanent, ordered the Catungals to reduce the
purchase price by the amount of acquisition of Lot 10963 which they misrepresented was part of
the property sold but was in fact owned by a third party and ordered them to pay ₱100,000.00 as
damages, ₱30,000.00 as attorney’s fees and costs.
The Catungals appealed the decision to the Court of Appeals, asserting the commission of the
following errors by the trial court in their appellants’ brief38 dated February 9, 1994:
I. THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF
IMPROPER VENUE AND LACK OF JURISDICTION.
II. THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL
ACTION.
III. GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A
PERSONAL ACTION, THE COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT
DURING THE PRE-TRIAL WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR
ANSWER TO THE COMPLAINT.
IV. THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL
STANDING IN COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND
STILL ENTITLED TO NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED
THE MOTION TO LIFT THE ORDER OF DEFAULT.
V. THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION RESTRAINING
THE EXERCISE OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF
THE COURT’S TERRITORIAL JURISDICTION AND INCLUDING PERSONS WHO WERE NOT BROUGHT
UNDER ITS JURISDICTION, THUS THE NULLITY OF THE WRIT.
VI. THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING
WITH THE PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR
REASON OF COURTESY AND FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL
JUSTICE TO ALL AND SUNDRY WITHOUT FEAR OR FAVOR IT HAVING BEEN SERVED EARLIER WITH
A COPY OF THE PETITION FOR CERTIORARI QUESTIONING ITS VENUE AND JURISDICTION IN CA-
G.R. NO. SP 27565 IN FACT NOTICES FOR THE FILING OF COMMENT THERETO HAD ALREADY BEEN
SENT OUT BY THE HONORABLE COURT OF APPEALS, SECOND DIVISION, AND THE COURT A QUO
WAS FURNISHED WITH COPY OF SAID NOTICE.
VII. THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST
THE DEFENDANTS ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND
DEVOID OF TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR ERROR,
AND, THEREFORE, THE DECISION IS REVERSIBLE.39
On August 31, 1995, after being granted several extensions, Rodriguez filed his appellee’s
brief,40 essentially arguing the correctness of the trial court’s Decision regarding the foregoing
issues raised by the Catungals. Subsequently, the Catungals filed a Reply Brief41 dated October 16,
1995.
From the filing of the appellants’ brief in 1994 up to the filing of the Reply Brief, the spouses
Catungal were represented by appellant Jose Catungal himself. However, a new counsel for the
Catungals, Atty. Jesus N. Borromeo (Atty. Borromeo), entered his appearance before the Court of
Appeals on September 2, 1997.42 On the same date, Atty. Borromeo filed a Motion for Leave of
Court to File Citation of Authorities 43 and a Citation of Authorities. 44 This would be followed by Atty.
Borromeo’s filing of an Additional Citation of Authority and Second Additional Citation of Authority
both on November 17, 1997.45
During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and
thus, her husband, Jose, filed on February 17, 1999 a motion for Agapita’s substitution by her
surviving children.46
On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV
No. 40627 and CA-G.R. SP No. 27565,47 affirming the trial court’s Decision.
In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals, Atty.
Borromeo, argued for the first time that paragraphs 1(b) and 5 49 of the Conditional Deed of Sale,
whether taken separately or jointly, violated the principle of mutuality of contracts under Article
1308 of the Civil Code and thus, said contract was void ab initio. He adverted to the cases
mentioned in his various citations of authorities to support his argument of nullity of the contract
and his position that this issue may be raised for the first time on appeal.
Meanwhile, a Second Motion for Substitution 50 was filed by Atty. Borromeo in view of the death of
Jose Catungal.
In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the
deceased Agapita and Jose Catungal by their surviving heirs and denied the motion for
reconsideration for lack of merit
Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition for
review,51 which essentially argued that the Court of Appeals erred in not finding that paragraphs
1(b) and/or 5 of the Conditional Deed of Sale, violated the principle of mutuality of contracts under
Article 1308 of the Civil Code. Thus, said contract was supposedly void ab initio and the Catungals’
rescission thereof was superfluous.
In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that cannot
be passed upon on appeal; (b) the validity of the Conditional Deed of Sale was already admitted
and petitioners cannot be allowed to change theories on appeal; (c) the questioned paragraphs of
the Conditional Deed of Sale were valid; and (d) petitioners were the ones who committed fraud
and breach of contract and were not entitled to relief for not having come to court with clean
hands.
The Court gave due course to the Petition53 and the parties filed their respective Memoranda.
The issues to be resolved in the case at bar can be summed into two questions:
I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the
first time on appeal?
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of
contracts under Article 1308 of the Civil Code?
On petitioners’ change of theory
Petitioners claimed that the Court of Appeals should have reversed the trial courts’ Decision on the
ground of the alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale
notwithstanding that the same was not raised as an error in their appellants’ brief. Citing Catholic
Bishop of Balanga v. Court of Appeals, 54 petitioners argued in the Petition that this case falls under
the following exceptions:
(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at
a just decision and complete resolution of the case or to serve the interest of justice or to avoid
dispensing piecemeal justice;
(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue submitted which the parties failed to raise or
which the lower court ignored;
(5) Matters not assigned as errors on appeal but closely related to an error assigned; and
(6) Matters not assigned as errors but upon which the determination of a question properly
assigned is dependent.55
We are not persuaded.
This is not an instance where a party merely failed to assign an issue as an error in the brief nor
failed to argue a material point on appeal that was raised in the trial court and supported by the
record. Neither is this a case where a party raised an error closely related to, nor dependent on the
resolution of, an error properly assigned in his brief. This is a situation where a party completely
changes his theory of the case on appeal and abandons his previous assignment of errors in his
brief, which plainly should not be allowed as anathema to due process.
Petitioners should be reminded that the object of pleadings is to draw the lines of battle between
the litigants and to indicate fairly the nature of the claims or defenses of both parties.56 In Philippine
National Construction Corporation v. Court of Appeals,57 we held that "[w]hen a party adopts a
certain theory in the trial court, he will not be permitted to change his theory on appeal, for to
permit him to do so would not only be unfair to the other party but it would also be offensive to the
basic rules of fair play, justice and due process."58
We have also previously ruled that "courts of justice have no jurisdiction or power to decide a
question not in issue. Thus, a judgment that goes beyond the issues and purports to adjudicate
something on which the court did not hear the parties, is not only irregular but also extrajudicial
and invalid. The rule rests on the fundamental tenets of fair play."59
During the proceedings before the trial court, the spouses Catungal never claimed that the
provisions in the Conditional Deed of Sale, stipulating that the payment of the balance of the
purchase price was contingent upon the successful negotiation of a road right of way (paragraph
1[b]) and granting Rodriguez the option to rescind (paragraph 5), were void for allegedly making
the fulfillment of the contract dependent solely on the will of Rodriguez.
On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its
amended versions) that the payment of the purchase price was subject to the will of Rodriguez but
rather they claimed that paragraph 1(b) in relation to 1(c) only presupposed a reasonable time be
given to Rodriguez to negotiate the road right of way. However, it was petitioners’ theory that more
than sufficient time had already been given Rodriguez to negotiate the road right of way.
Consequently, Rodriguez’s refusal/failure to pay the balance of the purchase price, upon demand,
was allegedly indicative of lack of funds and a breach of the contract on the part of Rodriguez.
Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguez’s option to rescind, it was
petitioners’ theory in the court a quo that notwithstanding such provision, they retained the right to
rescind the contract for Rodriguez’s breach of the same under Article 1191 of the Civil Code.
Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in
view of the questioned provisions was only in their Motion for Reconsideration of the Court of
Appeals’ Decision, affirming the trial court’s judgment. The previous filing of various citations of
authorities by Atty. Borromeo and the Court of Appeals’ resolutions noting such citations were of no
moment. The citations of authorities merely listed cases and their main rulings without even any
mention of their relevance to the present case or any prayer for the Court of Appeals to consider
them.1âwphi1 In sum, the Court of Appeals did not err in disregarding the citations of authorities or
in denying petitioners’ motion for reconsideration of the assailed August 8, 2000 Decision in view of
the proscription against changing legal theories on appeal.
Ruling on the questioned provisions of the Conditional Deed of Sale
Even assuming for the sake of argument that this Court may overlook the procedural misstep of
petitioners, we still cannot uphold their belatedly proffered arguments.
At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale,
whereby the spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned
on the payment of a certain price but the payment of the purchase price was additionally made
contingent on the successful negotiation of a road right of way. It is elementary that "[i]n
conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition." 60
Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed
nullity of the aforementioned provisions. Article 1308 states that "[t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them."
Article 1182 of the Civil Code, in turn, provides:
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person,
the obligation shall take effect in conformity with the provisions of this Code.
In the past, this Court has distinguished between a condition imposed on the perfection of a
contract and a condition imposed merely on the performance of an obligation. While failure to
comply with the first condition results in the failure of a contract, failure to comply with the second
merely gives the other party the option to either refuse to proceed with the sale or to waive the
condition.61 This principle is evident in Article 1545 of the Civil Code on sales, which provides in
part:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the contract or he may waive
performance of the condition x x x.
Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the
purchase price when he has successfully negotiated and secured a road right of way, is not a
condition on the perfection of the contract nor on the validity of the entire contract or its
compliance as contemplated in Article 1308. It is a condition imposed only on respondent’s
obligation to pay the remainder of the purchase price. In our view and applying Article 1182, such a
condition is not purely potestative as petitioners contend. It is not dependent on the sole will of the
debtor but also on the will of third persons who own the adjacent land and from whom the road
right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on
chance as there is no guarantee that respondent and the third party-landowners would come to an
agreement regarding the road right of way. This type of mixed condition is expressly allowed under
Article 1182 of the Civil Code.
Analogous to the present case is Romero v. Court of Appeals, 62 wherein the Court interpreted the
legal effect of a condition in a deed of sale that the balance of the purchase price would be paid by
the vendee when the vendor has successfully ejected the informal settlers occupying the property.
In Romero, we found that such a condition did not affect the perfection of the contract but only
imposed a condition on the fulfillment of the obligation to pay the balance of the purchase price, to
wit:
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law. Under the agreement, private respondent is
obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own
obligation, i.e., to pay the balance of the purchase price. Private respondent's failure "to remove
the squatters from the property" within the stipulated period gives petitioner the right to either
refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the
Civil Code. This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent
does not constitute a "potestative condition dependent solely on his will" that might, otherwise, be
void in accordance with Article 1182 of the Civil Code but a "mixed" condition "dependent not on
the will of the vendor alone but also of third persons like the squatters and government agencies
and personnel concerned." We must hasten to add, however, that where the so-called "potestative
condition" is imposed not on the birth of the obligation but on its fulfillment, only the condition is
avoided, leaving unaffected the obligation itself.63 (Emphases supplied.)
From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee
(Rodriguez) that had the obligation to successfully negotiate and secure the road right of way.
However, in the decision of the trial court, which was affirmed by the Court of Appeals, it was found
that respondent Rodriguez diligently exerted efforts to secure the road right of way but the spouses
Catungal, in bad faith, contributed to the collapse of the negotiations for said road right of way. To
quote from the trial court’s decision:
It is therefore apparent that the vendee’s obligations (sic) to pay the balance of the purchase
price arises only when the road-right-of-way to the property shall have been successfully
negotiated, secured and provided. In other words, the obligation to pay the balance is conditioned
upon the acquisition of the road-right-of-way, in accordance with paragraph 2 of Article 1181 of
the New Civil Code. Accordingly, "an obligation dependent upon a suspensive condition cannot be
demanded until after the condition takes place because it is only after the fulfillment of the
condition that the obligation arises." (Javier v[s] CA 183 SCRA) Exhibits H, D, P, R, T, FF and JJ
show that plaintiff [Rodriguez] indeed was diligent in his efforts to negotiate for a road-right-of-
way to the property. The written offers, proposals and follow-up of his proposals show that
plaintiff [Rodriguez] went all out in his efforts to immediately acquire an access road to the
property, even going to the extent of offering ₱3,000.00 per square meter for the road lots (Exh.
Q) from the original ₱550.00 per sq. meter. This Court also notes that defendant (sic) [the
Catungals] made misrepresentation in the negotiation they have entered into with plaintiff
[Rodriguez]. (Exhs. F and G) The misrepresentation of defendant (sic) [the Catungals] as to the
third lot (Lot 10986) to be part and parcel of the subject property [(]Lot 10963) contributed in
defeating the plaintiff’s [Rodriguez’s] effort in acquiring the road-right-of-way to the property.
Defendants [the Catungals] cannot now invoke the non-fulfillment of the condition in the contract
as a ground for rescission when defendants [the Catungals] themselves are guilty of preventing
the fulfillment of such condition.
From the foregoing, this Court is of the considered view that rescission of the conditional deed of
sale by the defendants is without any legal or factual basis.64 x x x. (Emphases supplied.)
In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.
Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for
respondent’s obligation to pay the balance of the purchase price to arise) in itself partly involves an
obligation to do, i.e., the undertaking of respondent to negotiate and secure a road right of way at
his own expense.65 It does not escape our notice as well, that far from disclaiming paragraph 1(b)
as void, it was the Catungals’ contention before the trial court that said provision should be read in
relation to paragraph 1(c) which stated:
c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of
the VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne solely
by the VENDEE. He shall, however, be accorded with enough time necessary for the success of
his endeavor, granting him a free hand in negotiating for the passage.66 (Emphasis supplied.)
The Catungals’ interpretation of the foregoing stipulation was that Rodriguez’s obligation to
negotiate and secure a road right of way was one with a period and that period, i.e., "enough time"
to negotiate, had already lapsed by the time they demanded the payment of ₱5,000,000.00 from
respondent. Even assuming arguendo that the Catungals were correct that the respondent’s
obligation to negotiate a road right of way was one with an uncertain period, their rescission of the
Conditional Deed of Sale would still be unwarranted. Based on their own theory, the Catungals had
a remedy under Article 1197 of the Civil Code, which mandates:
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can
be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by
them.
What the Catungals should have done was to first file an action in court to fix the period within
which Rodriguez should accomplish the successful negotiation of the road right of way pursuant to
the above quoted provision. Thus, the Catungals’ demand for Rodriguez to make an additional
payment of ₱5,000,000.00 was premature and Rodriguez’s failure to accede to such demand did
not justify the rescission of the contract.
With respect to petitioners’ argument that paragraph 5 of the Conditional Deed of Sale likewise
rendered the said contract void, we find no merit to this theory. Paragraph 5 provides:
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his
option to rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by
way of a written notice relinquishing his rights over the property. The VENDEE shall then be
reimbursed by the VENDOR the sum of FIVE HUNDRED THOUSAND PESOS (₱500,000.00)
representing the downpayment, interest free, payable but contingent upon the event that the
VENDOR shall have been able to sell the property to another party.67
Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed
of Sale for violating the principle of mutuality of contracts since it purportedly rendered the contract
subject to the will of respondent.
We do not agree.
It is petitioners’ strategy to insist that the Court examine the first sentence of paragraph 5 alone
and resist a correlation of such sentence with other provisions of the contract. Petitioners’ view,
however, ignores a basic rule in the interpretation of contracts – that the contract should be taken
as a whole.
Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them
taken jointly." The same Code further sets down the rule that "[i]f some stipulation of any contract
should admit of several meanings, it shall be understood as bearing that import which is most
adequate to render it effectual."68
Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument
where there are several provisions or particulars, such a construction is, if possible, to be adopted
as will give effect to all"69 and "for the proper construction of an instrument, the circumstances
under which it was made, including the situation of the subject thereof and of the parties to it, may
be shown, so that the judge may be placed in the position of those whose language he is to
interpret."70
Bearing in mind the aforementioned interpretative rules, we find that the first sentence of
paragraph 5 must be taken in relation with the rest of paragraph 5 and with the other provisions of
the Conditional Deed of Sale.
Reading paragraph 5 in its entirety will show that Rodriguez’s option to rescind the contract is not
absolute as it is subject to the requirement that there should be written notice to the vendor and
the vendor shall only return Rodriguez’s downpayment of ₱500,000.00, without interest, when the
vendor shall have been able to sell the property to another party. That what is stipulated to be
returned is only the downpayment of ₱500,000.00 in the event that Rodriguez exercises his option
to rescind is significant. To recall, paragraph 1(b) of the contract clearly states that the installments
on the balance of the purchase price shall only be paid upon successful negotiation and
procurement of a road right of way. It is clear from such provision that the existence of a road right
of way is a material consideration for Rodriguez to purchase the property. Thus, prior to him being
able to procure the road right of way, by express stipulation in the contract, he is not bound to
make additional payments to the Catungals. It was further stipulated in paragraph 1(b) that: "[i]f
however said road right of way cannot be negotiated, the VENDEE shall give notice to the VENDOR
for them to reassess and solve the problem by taking other options and should the situation
ultimately prove futile, he [Rodriguez] shall take steps to rescind or [cancel] the herein Conditional
Deed of Sale." The intention of the parties for providing subsequently in paragraph 5 that Rodriguez
has the option to rescind the sale is undeniably only limited to the contingency that Rodriguez shall
not be able to secure the road right of way. Indeed, if the parties intended to give Rodriguez the
absolute option to rescind the sale at any time, the contract would have provided for the return of
all payments made by Rodriguez and not only the downpayment. To our mind, the reason only the
downpayment was stipulated to be returned is that the vendee’s option to rescind can only be
exercised in the event that no road right of way is secured and, thus, the vendee has not made any
additional payments, other than his downpayment.
In sum, Rodriguez’s option to rescind the contract is not purely potestative but rather also subject
to the same mixed condition as his obligation to pay the balance of the purchase price – i.e., the
negotiation of a road right of way. In the event the condition is fulfilled (or the negotiation is
successful), Rodriguez must pay the balance of the purchase price. In the event the condition is not
fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not proceed with the sale
and demand return of his downpayment or (b) considering that the condition was imposed for his
benefit, to waive the condition and still pay the purchase price despite the lack of road access. This
is the most just interpretation of the parties’ contract that gives effect to all its provisions.
In any event, even if we assume for the sake of argument that the grant to Rodriguez of an option
to rescind, in the manner provided for in the contract, is tantamount to a potestative condition, not
being a condition affecting the perfection of the contract, only the said condition would be
considered void and the rest of the contract will remain valid. In Romero, the Court observed that
"where the so-called ‘potestative condition’ is imposed not on the birth of the obligation but on its
fulfillment, only the condition is avoided, leaving unaffected the obligation itself."71
It cannot be gainsaid that "contracts have the force of law between the contracting parties and
should be complied with in good faith." 72 We have also previously ruled that "[b]eing the primary
law between the parties, the contract governs the adjudication of their rights and obligations. A
court has no alternative but to enforce the contractual stipulations in the manner they have been
agreed upon and written." 73 We find no merit in petitioners’ contention that their parents were
merely "duped" into accepting the questioned provisions in the Conditional Deed of Sale. We note
that although the contract was between Agapita Catungal and Rodriguez, Jose Catungal
nonetheless signed thereon to signify his marital consent to the same. We concur with the trial
court’s finding that the spouses Catungals’ claim of being misled into signing the contract was
contrary to human experience and conventional wisdom since it was Jose Catungal who was a
practicing lawyer while Rodriquez was a non-lawyer. 74 It can be reasonably presumed that Atty.
Catungal and his wife reviewed the provisions of the contract, understood and accepted its
provisions before they affixed their signatures thereon.
After thorough review of the records of this case, we have come to the conclusion that petitioners
failed to demonstrate that the Court of Appeals committed any reversible error in deciding the
present controversy. However, having made the observation that it was desirable for the Catungals
to file a separate action to fix the period for respondent Rodriguez’s obligation to negotiate a road
right of way, the Court finds it necessary to fix said period in these proceedings. It is but equitable
for us to make a determination of the issue here to obviate further delay and in line with the
judicial policy of avoiding multiplicity of suits.
If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this decision to
negotiate a road right of way. In the event no road right of way is secured by Rodriquez at the end
of said period, the parties shall reassess and discuss other options as stipulated in paragraph 1(b)
of the Conditional Deed of Sale and, for this purpose, they are given a period of thirty (30) days to
agree on a course of action. Should the discussions of the parties prove futile after the said thirty
(30)-day period, immediately upon the expiration of said period for discussion, Rodriguez may (a)
exercise his option to rescind the contract, subject to the return of his downpayment, in accordance
with the provisions of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b) waive the road
right of way and pay the balance of the deducted purchase price as determined in the RTC Decision
dated May 30, 1992.
WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January 30, 2001 of
the Court of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565 are
AFFIRMED with the following modification:
If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days from the
finality of this Decision to negotiate a road right of way. In the event no road right of way is
secured by respondent at the end of said period, the parties shall reassess and discuss other
options as stipulated in paragraph 1(b) of the Conditional Deed of Sale and, for this purpose, they
are given a period of thirty (30) days to agree on a course of action. Should the discussions of the
parties prove futile after the said thirty (30)-day period, immediately upon the expiration of said
period for discussion, Rodriguez may (a) exercise his option to rescind the contract, subject to the
return of his downpayment, in accordance with the provisions of paragraphs 1(b) and 5 of the
Conditional Deed of Sale or (b) waive the road right of way and pay the balance of the deducted
purchase price as determined in the RTC Decision dated May 30, 1992.
G.R. No. 77425             June 19, 1991
THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF IMUS, and the
SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners, 
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO and MARTINA
RIETA, represented by MARINA RIETA GRANADOS and THERESA RIETA TOLENTINO, respondents.
G.R. No. 77450             June 19, 1991
THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF IMUS, and the SPOUSES FLORENCIO
IGNAO and SOLEDAD C. IGNAO, petitioners,  reconveyance of real property.6
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE CASTRO and MARTINA RIETA, represented by
MARINA RIETA GRANADOS and THERESA RIETA TOLENTINO, respondents.
REGALADO, J.:
These two petitions for review on certiorari1 seek to overturn the decision of the Court of Appeals in CA-G.R. CV No. 05456 2 which reversed
and set aside the order of the Regional Trial Court of Imus, Cavite dismissing Civil Case No. 095-84, as well as the order of said respondent
court denying petitioner's motions for the reconsideration of its aforesaid decision.
On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of deed
of donation, rescission of contract and reconveyance of real property with damages against
petitioners Florencio and Soledad C. Ignao and the Roman Catholic Bishop of Imus, Cavite, together
with the Roman Catholic Archbishop of Manila, before the Regional Trial Court, Branch XX, Imus,
Cavite and which was docketed as Civil Case No. 095-84 therein.3
In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio de
Castro and Martina Rieta, now both deceased, executed a deed of donation in favor of therein
defendant Roman Catholic Archbishop of Manila covering a parcel of land (Lot No. 626, Cadastral
Survey of Kawit), located at Kawit, Cavite, containing an area of 964 square meters, more or less.
The deed of donation allegedly provides that the donee shall not dispose or sell the property within
a period of one hundred (100) years from the execution of the deed of donation, otherwise a
violation of such condition would render ipso facto null and void the deed of donation and the
property would revert to the estate of the donors.
It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to
dispose of the property, petitioner Roman Catholic Bishop of Imus, in whose administration all
properties within the province of Cavite owned by the Archdiocese of Manila was allegedly
transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the
donation in favor of petitioners Florencio and Soledad C. Ignao in consideration of the sum of
P114,000. 00. As a consequence of the sale, Transfer Certificate of Title No. 115990 was issued by
the Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner spouses.
What transpired thereafter is narrated by respondent court in its assailed decision.4
On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to dismiss
based on the grounds that (1) herein private respondents, as plaintiffs therein, have no legal
capacity to sue; and (2) the complaint states no cause of action.
On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss on
three (3) grounds, the first two (2) grounds of which were identical to that of the motion to dismiss
filed by the Ignao spouses, and the third ground being that the cause of action has prescribed.
On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss on
the ground that he is not a real party in interest and, therefore, the complaint does not state a
cause of action against him.
After private respondents had filed their oppositions to the said motions to dismiss and the
petitioners had countered with their respective replies, with rejoinders thereto by private
respondents, the trial court issued an order dated January 31, 1985, dismissing the complaint on
the ground that the cause of action has prescribed.5
Private respondents thereafter appealed to the Court of Appeals raising the issues on (a) whether
or not the action for rescission of contracts (deed of donation and deed of sale) has prescribed; and
(b) whether or not the dismissal of the action for rescission of contracts (deed of donation and deed
of sale) on the ground of prescription carries with it the dismissal of the main action for
On December 23, 1986, respondent Court of Appeals, holding that the action has not yet prescibed,
rendered a decision in favor of private respondents, with the following dispositive portion:
WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET ASIDE and
Civil Case No. 095-84 is hereby ordered REINSTATED and REMANDED to the lower court for
further proceedings. No Costs.7
Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for
reconsideration which were denied by respondent Court of Appeals in its resolution dated February
6, 1987,8 hence, the filing of these appeals by certiorari.
It is the contention of petitioners that the cause of action of herein private respondents has already
prescribed, invoking Article 764 of the Civil Code which provides that "(t)he donation shall be
revoked at the instance of the donor, when the donee fails to comply with any of the conditions
which the former imposed upon the latter," and that "(t)his action shall prescribe after four years
from the non-compliance with the condition, may be transmitted to the heirs of the donor, and may
be exercised against the donee's heirs.
We do not agree.
Although it is true that under Article 764 of the Civil Code an action for the revocation of a donation
must be brought within four (4) years from the non-compliance of the conditions of the donation,
the same is not applicable in the case at bar. The deed of donation involved herein expressly
provides for automatic reversion of the property donated in case of violation of the condition
therein, hence a judicial declaration revoking the same is not necessary, As aptly stated by the
Court of Appeals:
By the very express provision in the deed of donation itself that the violation of the condition
thereof would render ipso facto null and void the deed of donation, WE are of the opinion that
there would be no legal necessity anymore to have the donation judicially declared null and void
for the reason that the very deed of donation itself declares it so. For where (sic) it otherwise and
that the donors and the donee contemplated a court action during the execution of the deed of
donation to have the donation judicially rescinded or declared null and void should the condition
be violated, then the phrase reading "would render ipso facto null and void"would not appear in
the deed of donation.9
In support of its aforesaid position, respondent court relied on the rule that a judicial action for
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions. 10 It called attention to the holding that
there is nothing in the law that prohibits the parties from entering into an agreement that a
violation of the terms of the contract would cause its cancellation even without court intervention,
and that it is not always necessary for the injured party to resort to court for rescission of the
contract.11 It reiterated the doctrine that a judicial action is proper only when there is absence of a
special provision granting the power of cancellation.12
It is true that the aforesaid rules were applied to the contracts involved therein, but we see no
reason why the same should not apply to the donation in the present case. Article 732 of the Civil
Code provides that donations  inter vivosshall be governed by the general provisions on contracts
and obligations in all that is not determined in Title III, Book III on donations. Now, said Title III
does not have an explicit provision on the matter of a donation with a resolutory condition and
which is subject to an express provision that the same shall be considered ipso facto revoked upon
the breach of said resolutory condition imposed in the deed therefor, as is the case of the deed
presently in question. The suppletory application of the foregoing doctrinal rulings to the present
controversy is consequently justified.
The validity of such a stipulation in the deed of donation providing for the automatic reversion of
the donated property to the donor upon non-compliance of the condition was upheld in the recent
case of De Luna, et al. vs. Abrigo, et al.13 It was held therein that said stipulation is in the nature of
an agreement granting a party the right to rescind a contract unilaterally in case of breach, without
need of going to court, and that, upon the happening of the resolutory condition or non-compliance
with the conditions of the contract, the donation is automatically revoked without need of a judicial
declaration to that effect. While what was the subject of that case was an onerous donation which,
under Article 733 of the Civil Code is governed by the rules on contracts, since the donation in the
case at bar is also subject to the same rules because of its provision on automatic revocation upon
the violation of a resolutory condition, from parity of reasons said pronouncements in De
Luna pertinently apply.
The rationale for the foregoing is that in contracts providing for automatic revocation, judicial
intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement providing for rescission even without judicial
intervention, but in order to determine whether or not the rescission was proper.14
When a deed of donation, as in this case, expressly provides for automatic revocation and reversion
of the property donated, the rules on contract and the general rules on prescription should apply,
and not Article 764 of the Civil Code. Since Article 1306 of said Code authorizes the parties to a
contract to establish such stipulations, clauses, terms and conditions not contrary to law, morals,
good customs, public order or public policy, we are of the opinion that, at the very least, that
stipulation of the parties providing for automatic revocation of the deed of donation, without prior
judicial action for that purpose, is valid subject to the determination of the propriety of the
rescission sought. Where such propriety is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not in itself the revocatory act.
On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the cause
of action of herein private respondents has not yet prescribed since an action to enforce a written
contract prescribes in ten (10) years.15 It is our view that Article 764 was intended to provide a
judicial remedy in case of non-fulfillment or contravention of conditions specified in the deed of
donation if and when the parties have not agreed on the automatic revocation of such donation
upon the occurrence of the contingency contemplated therein. That is not the situation in the case
at bar.
Nonetheless, we find that although the action filed by private respondents may not be dismissed by
reason of prescription, the same should be dismissed on the ground that private respondents have
no cause of action against petitioners.
The cause of action of private respondents is based on the alleged breach by petitioners of the
resolutory condition in the deed of donation that the property donated should not be sold within a
period of one hundred (100) years from the date of execution of the deed of donation. Said
condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of
petitioners and is, therefore, contrary to public policy.
Donation, as a mode of acquiring ownership, results in an effective transfer of title over the
property from the donor to the donee. Once a donation is accepted, the donee becomes the
absolute owner of the property donated. Although the donor may impose certain conditions in the
deed of donation, the same must not be contrary to law, morals, good customs, public order and
public policy. The condition imposed in the deed of donation in the case before us constitutes a
patently unreasonable and undue restriction on the right of the donee to dispose of the property
donated, which right is an indispensable attribute of ownership. Such a prohibition against
alienation, in order to be valid, must not be perpetual or for an unreasonable period of time.
Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered applicable
by analogy.1âwphi1Under the third paragraph of Article 494, a donor or testator may prohibit
partition for a period which shall not exceed twenty (20) years. Article 870, on its part, declares
that the dispositions of the testator declaring all or part of the estate inalienable for more than
twenty (20) years are void.
It is significant that the provisions therein regarding a testator also necessarily involve, in the main,
the devolution of property by gratuitous title hence, as is generally the case of donations, being an
act of liberality, the imposition of an unreasonable period of prohibition to alienate the property
should be deemed anathema to the basic and actual intent of either the donor or testator. For that
reason, the regulatory arm of the law is or must be interposed to prevent an unreasonable
departure from the normative policy expressed in the aforesaid Articles 494 and 870 of the Code.
In the case at bar, we hold that the prohibition in the deed of donation against the alienation of the
property for an entire century, being an unreasonable emasculation and denial of an integral
attribute of ownership, should be declared as an illegal or impossible condition within the
contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said statutory
provision, such condition shall be considered as not imposed. No reliance may accordingly be placed
on said prohibitory paragraph in the deed of donation. The net result is that, absent said
proscription, the deed of sale supposedly constitutive of the cause of action for the nullification of
the deed of donation is not in truth violative of the latter hence, for lack of cause of action, the case
for private respondents must fail.
It may be argued that the validity of such prohibitory provision in the deed of donation was not
specifically put in issue in the pleadings of the parties. That may be true, but such oversight or
inaction does not prevent this Court from passing upon and resolving the same.
It will readily be noted that the provision in the deed of donation against alienation of the land for
one hundred (100) years was the very basis for the action to nullify the deed of d donation. At the
same time, it was likewise the controverted fundament of the motion to dismiss the case a
quo, which motion was sustained by the trial court and set aside by respondent court, both on the
issue of prescription. That ruling of respondent court interpreting said provision was assigned as an
error in the present petition. While the issue of the validity of the same provision was not squarely
raised, it is ineluctably related to petitioner's aforesaid assignment of error since both issues are
grounded on and refer to the very same provision.
This Court is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it
finds that their consideration is necessary in arriving at a just decision of the case: 16 Thus, we have held that an
unassigned error closely related to an error properly assigned, 17 or upon which the determination of the question
properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as
error.18
Additionally, we have laid down the rule that the remand of the case to the lower court for further reception of
evidence is not necessary where the Court is in a position to resolve the dispute based on the records before it. On
many occasions, the Court, in the public interest and for the expeditious administration of justice, has resolved
actions on the merits instead of remanding them to the trial court for further proceedings, such as where the ends
of justice, would not be subserved by the remand of the case.19 The aforestated considerations obtain in and apply
to the present case with respect to the matter of the validity of the resolutory condition in question.
WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is hereby rendered
DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX, Imus, Cavite.
G.R. No. L-56076 September 21, 1983
PALAY, INC. and ALBERT ONSTOTT, petitioner,  bar.
vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and
NAZARIO DUMPIT respondents.
MELENCIO-HERRERA, J.:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners
Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12%
interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the
Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are being assailed in this
petition.
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of
private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the
Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by
TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully
paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace
period of one month, without need of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The
last payment was made on December 5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to
update all his overdue accounts with interest, and seeking its written consent to the assignment of
his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973
reiterating the same request. Replying petitioners informed respondent that his Contract to Sell had
long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been
resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with
the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case
No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence
of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as
President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974.
Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated
October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary
to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed
the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit.
Thus, the present petition wherein the following issues are raised:
I. Whether notice or demand is not mandatory under the circumstances and, therefore, may be
dispensed with by stipulation in a contract to sell.
II. Whether petitioners may be held liable for the refund of the installment payments made by
respondent Nazario M. Dumpit.
III. Whether the doctrine of piercing the veil of corporate fiction has application to the case at
IV. Whether respondent Presidential Executive Assistant committed grave abuse of discretion in
upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the
installment payments made by respondent Nazario M. Dumpit thereby denying substantial justice
to the petitioners, particularly petitioner Onstott
We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the
questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On
October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the
dismissal and gave due course to the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without
prior notice or demand upon respondent in view of paragraph 6 thereof which provides-
6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein
agreed upon, the BUYER shall be granted a month of grace within which to make the payment of
the t in arrears together with the one corresponding to the said month of grace. -It shall be
understood, however, that should the month of grace herein granted to the BUYER expire,
without the payment & corresponding to both months having been satisfied, an interest of ten
(10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is
understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration
of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the
amounts that the BUYER should have paid with the corresponding interest up to the date, the
SELLER shall have the right to declare this contract cancelled and of no effect without notice, and
as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in
favor of other persons, as if this contract had never been entered into. In case of such
cancellation of this Contract, all the amounts which may have been paid by the BUYER in
accordance with the agreement, together with all the improvements made on the premises, shall
be considered as rents paid for the use and occupation of the above mentioned premises and for
liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this
agreement : and the BUYER hereby renounces his right to demand or reclaim the return of the
same and further obligates peacefully to vacate the premises and deliver the same to the SELLER.
Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of
a contract is not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. However, even in the cited cases, there was at least a
written notice sent to the defaulter informing him of the rescission. As stressed in University of the
Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should
be made known to the other. We quote the pertinent excerpt:
Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved in account of infractions by the other contracting party must be made known to the
other and is always provisional being ever subject to scrutiny and review by the proper court. If
the other party denies that rescission is justified it is free to resort to judicial action in its own
behalf, and bring the matter to court.Then, should the court, after due hearing, decide that the
 resolution of the contract was not warranted, the responsible party will be sentenced to damages;
in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to
the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded,
and act accordingly, without previous court action, but it  proceeds at its own risk.  For it is only
the final judgment of the corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. But the law definitely does not require that the
contracting party who believes itself injured must first file suit and wait for a judgment before
taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's
breach will have to passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation
(Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San
Juan De Dios, et al., 84 Phil 820) since in every case where the extrajudicial resolution is
contested only the final award of the court of competent jurisdiction can conclusively settle
whether the resolution was proper or not. It is in this sense that judicial action win be necessary,
as without it, the extrajudicial resolution will remain contestable and subject to judicial
invalidation unless attack thereon should become barred by acquiescense, estoppel or
prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach
of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla
Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of
abuse or error by the rescinder the other party is not barred from questioning in court such abuse
or error, the practical effect of the stipulation being merely to transfer to the defaulter the
initiative of instituting suit, instead of the rescinder  (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante 4 , reading:
A stipulation entitling one party to take possession of the land and building if the other party
violates the contract does not  ex propio vigore  confer upon the former the right to take
possession thereof if objected to without judicial intervention and determination.
This was reiterated in Zulueta vs. Mariano  5 where we held that extrajudicial rescission has legal
effect where the other party does not oppose it. 6 Where it is objected to, a judicial determination of
the issue is still necessary.
In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial
determination. 7
In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioners was
warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra
Petitioner relies on Torralba vs. De los Angeles  8 where it was held that "there was no contract to
rescind in court because from the moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso facto rescinded." However, it
should be noted that even in that case notice in writing was made to the vendee of the cancellation
and annulment of the contract although the contract entitled the seller to immediate repossessing
of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later underscored in Republic
Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14, 1972, when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt
by the buyer of the notice of cancellation or the demand for rescission of the contract by a
notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied).
The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment payments.
Regarding the second issue on refund of the installment payments made by private respondent.
Article 1385 of the Civil Code provides:
ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return whatever he may be obliged to
restore.
Neither sham rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that
the property had already been sold to a third person and there is no evidence on record that other
lots are still available, private respondent is entitled to the refund of installments paid plus interest
at the legal rate of 12% computed from the date of the institution of the action. 10 It would be most
inequitable if petitioners were to be allowed to retain private respondent's payments and at the
same time appropriate the proceeds of the second sale to another.
We come now to the third and fourth issues regarding the personal liability of petitioner Onstott
who was made jointly and severally liable with petitioner corporation for refund to private
respondent of the total amount the latter had paid to petitioner company. It is basic that a
corporation is invested by law with a personality separate and distinct from those of the persons
composing it as wen as from that of any other legal entity to which it may be related. 11 As a
general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be connected and vice versa. However, the veil of
corporate fiction may be pierced when it is used as a shield to further an end subversive of
justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to
defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud
or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16; or as an alter
ego, adjunct or business conduit for the sole benefit of the stockholders. 17
We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President of the
corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said
petitioner used the corporation to defraud private respondent. He cannot, therefore, be made
personally liable just because he "appears to be the controlling stockholder". Mere ownership by a
single stockholder or by another corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 18 In this respect then, a modification of the Resolution under G.R. No. L-21876             September 29, 1967
review is called for.
PHILIPPINE AMUSEMENT ENTERPRISES, INC., plaintiff-appellant, 
vs.
WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby SOLEDAD NATIVIDAD and MARIANO NATIVIDAD, defendants-appellees.
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of CASTRO, J.:

the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.
This is an appeal from the decision of the Court of First Instance of Davao dated May 31, 1962, rescinding, in favor of the defendants, the
lease agreement entered into by the plaintiff Philippine Amusement Enterprises, Inc. and the defendant Soledad Natividad relative to an
automatic phonograph, ordering the latter to restore the phonograph to the former, denying the plaintiff's claim for liquidated and
exemplary damages, attorney's fees and costs of suit, and dismissing the defendants' counterclaim. The plaintiff took the appeal to the
Court of Appeals which, however, certified it to this Court because the questions involved are of law.

On January 6, 1961 the plaintiff, a domestic corporation with main office in Quezon City and a
branch office in Davao City, entered into a contract with the defendant Soledad Natividad, owner of
the Irene's Refreshment Parlor in Davao City, whereby the former leased to the latter an automatic
phonograph (Seeburg Selectomatic 100-R), more popularly known as "jukebox". The pertinent
provisions of the contract are as follows:

2. The OPERATOR1 agrees to supply and replace parts that may have been damaged as a result of
ordinary wear and tear without any cost to the PROPRIETOR;2

xxx     xxx     xxx

5. The PROPRIETOR shall pay to the OPERATOR, by way of rental for the use of the aforesaid
automatic phonograph, an amount equal to 75% of the Gross Receipts for the period of one
week, but in no case shall the amount be less than P50.00 a week;

xxx     xxx     xxx

9. The PROPRIETOR agrees that during the term of this agreement, the OPERATOR shall have the
exclusive right to maintain an automatic phonograph in the premises, and the PROPRIETOR shall
not permit anyone to install or maintain any phonograph or any other devices for the
reproduction or the transmission of music in any part of the premises;

xxx     xxx     xxx

11. It is mutually agreed that the duration of this agreement shall be for the period of three (3)
years from the date hereof and shall renew itself automatically for a like period under the same
terms and conditions, unless either of the parties hereto gives to the other written notice of his
intention to cancel this agreement by registered mail within thirty (30) days before the expiration
of this agreement or any renewal thereof.

12. In the event that the PROPRIETOR shall fail to comply with any of the terms and conditions of
this contract, the OPERATOR, at any time during the existence of the agreement, shall be entitled
as a matter of right to immediately repossess, and the PROPRIETOR binds himself to voluntarily
surrender the said phonograph; and hereby expressly grants permission to representatives of the
OPERATOR any time for such purposes thereby waiving any action for trespass or damages.
 xxx     xxx     xxx
15. In the event of a breach of this agreement by the PROPRIETOR, the parties hereto agree that
the OPERATOR shall be entitled to recover as liquidated damages and not as a penalty or
forfeiture, a sum equal to P50.00 per week for each week remaining of the unexpired term of this
agreement; AND IN THE EVENT OF JUDICIAL PROCEEDINGS TO ENFORCE ANY OF THE
PROVISIONS OF THIS CONTRACT, the OPERATOR shall be entitled to attorney's fees of not less
than P200.00, costs of the action, premiums for bonds, and other expenses and damages which
OPERATOR may suffer or incur by reason thereof, as well as to the immediate issuance of
preliminary writ of mandatory injunction.1awphîl.nèt
On July 17, 1961, Mariano Natividad, husband of the defendant Soledad Natividad, wrote the
following letter to the plaintiff's branch office in Davao City:
For two (2) weeks ago, I had advised your representative here in Davao to get back your
jukebox, but until today said representative did not mind us.
So upon receipt of this letter, you are hereby again advised to get the said Jukebox and failure on
your part to get it, we shall not be responsible anymore for the said Jukebox.
On July 27, 1961 Mariano Natividad wrote another letter to the plaintiff, this time addressed to its
main office in Quezon City, informing it of his letter of July 17 and of the reasons for requesting the
return of the jukebox to the company. This letter reads as follows:
Please may you hear our revelations or relations prior to the advice we had made to your
company regarding our slight difference from your agent, stationed here in Davao City.
1. We requested your agent that the said Jukebox should be inspected once in a while there are
times when the said Jukebox stock up and the coins which will be dropped will just be
confiscated due to the selected record which will not give our selected music.
2. About a year ago, we asked your agent here in Davao City if we could buy your Jukebox. He
replied, "yes" and he will inform the Manila office. From that time, we made always an inquiry if
said matter was already referred to. But we were surprised why until last May we did not hear
any word from your agent. So we decided to order one from the United States.
3. On July 3rd, we advised personally your agent that the said Jukebox should be taken from
our establishment. He answered us that he will report the matter to your Central Office. From
July 3rd until July 16th, we had not met your agent. On the following day, July 17th, we met
your agent because he accounted the income of the said Jukebox and we again told him that
the Jukebox should be taken. He replied that he could not act because there is no letter from us
for the Manila office advising the return of the said Jukebox. So we made a discussion why he
did not tell us if our letter was necessary; so we wrote a letter on July 17th. At that time when
he received our letter, he requested for an extension of one (1) week for he would forward our
letter to Manila. But according to my wife, your agent told her that he forwarded our letter last
July 22nd. On July 24th, we finally decided to return the said Jukebox and even have ready
laborers to help us load the Jukebox on your pick-up. Your agent, Mr. Gonzales, remarked
angrily that he would not accept the said Jukebox but will just deposit it in our establishment
until the Manila office will act on it. According to him, your agent, Mr. Gonzales, we could not
remove the said Jukebox from the place because there was a contract. Later on, Mr. Gonzales
calmly requested us again to have an additional extension of one (1) more week. In this
situation we were very embarrassed because there were many customers and other persons
present during our discussions. Right on that day, we transferred your Jukebox inside our
airconditioned room without any business because Mr. Gonzales told us that the said Jukebox
should be deposited only in our establishment. Your agent, Mr. Gonzales, is a good agent on
the other world but not in this world where we are living. Beginning July 24th until the time you
will get the Jukebox, we are going to collect a monthly rental of Fifty Pesos (P50.00) for the
space occupying the Jukebox.
In its reply of August 4, 1961 the plaintiff stated that —
the stocking up of coins is quite normal in any coin-operated phonograph, as well as failure to get
the desired selection. It has been the policy of our company, however, to give top priority to the
complaints of our customers. It is not clear from your letter whether our Branch Manager for
Davao City has been remiss in his duties. We are willing to give the benefit of the doubt by
concluding that he might have failed to respond to your calls in time and I assure you that
immediate instructions will be issued from this office directing him to give personal attention to
any service that you might wish in connection with the said Jukebox.
It as well denied knowledge of the defendants' desire to buy a jukebox and deplored the fact that
the defendants ordered one from the United States without first sending the request to buy directly
to it since the plaintiff was anyway willing to sell a jukebox to any interested person. Calling
attention to paragraph 9 of the lease contract which gave it the exclusive right to maintain an
automatic phonograph in the defendants' premises, the plaintiff asked the defendants to re-install
its jukebox and remove the other one which the defendants had installed in their premises.
On August 4 and October 16, 1961, the plaintiff, through counsel, wrote the defendant spouses,
demanding anew compliance with the lease contract and the payment of damages, and warning
them that it would file the corresponding action in court if they did not comply with its demand. As
the defendants refused the demand, the plaintiff brought action in the Court of First Instance of
Davao on November 21, 1961, praying for the return to it of the automatic phonograph, subject of
the contract of lease and the payment of P5,850 as liquidated damages, P5,000 as exemplary
damages, P500 as attorney's fees and P400 as expenses of litigation.
Upon the parties' stipulation of facts, their pleadings and the documentary evidence submitted by
them as annexes to the stipulation of facts and pleadings, the lower court rendered the decision
hereinbefore adverted to.
The plaintiff imputes four errors to the lower court, the vital one being the court's holding that the
facts fully warrant a rescission of the contract of lease in favor of the defendants by reason of the
plaintiff's failure to perform its obligation to render the automatic phonograph suitable for the
purpose for which it was intended.
It is our view that the decision of the lower court should be reversed on three grounds.
First. 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. So the Civil Code provides. 3 But it is equally
settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment that the other has committed a breach of the
obligation.4 Hence, as there is nothing in the contract of lease empowering the defendants to
rescind it without resort to the courts, the defendants' action in unilaterally terminating the contract
is unjustified. As this Court said in Escueta v. Pando:5
The defendant could not, by himself alone and without judicial intervention, resolve or annul the
agreement. Under article 1124 [now art. 1191] of the Civil Code, the right to resolve reciprocal
obligations, in case one of the obligors shall fail to comply with that which is incumbent upon him,
is deemed to be implied. But that right must be invoked judicially for the same article also
provides: "The court shall decree the resolution demanded, unless there should be grounds which
justify the allowance of a term for the performance of the obligation."
Second. Rescission will be ordered only where the breach complained of is substantial as to defeat
the object of the parties in entering into the agreement. It will not be granted where the breach is
slight or casual.6 The defendants asked the plaintiff to retrieve its phonograph, claiming that there
were times when the coins dropped into the slot would get stuck, resulting in its failure to play the
desired music. But apart from this bare statement, there is nothing in the evidence which shows the
frequency with which the jukebox failed to function properly. The expression "there are times"
connotes occasional failure of the phonograph to operate, not frequent enough to render it
unsuitable and unserviceable. As a matter of fact, there is not even a claim that, as a result of
unsatisfactory performance thereof, the income therefrom dropped to such a level that the
defendants could not even pay the plaintiff its guaranteed share of P50 a week. On the contrary,
the evidence (Stipulation of Facts, Annexes J, K, L, M, N, and O) shows that, during the period
complained of, the operation of the jukebox was quite profitable to both parties.7
Third. We believe that the defendants actually bought a jukebox only in 1961 after they had signed
the lease contract in question, although they might have expressed a desire to buy one the year
before, for otherwise they would not have entered into a three-year lease. But certainly their
decision to buy a jukebox and operate it themselves was made long before they ever complained in
July, 1961 of any defect in the rented jukebox. To be sure, it is not shown when the rented
phonograph supposedly developed trouble; presumably it was early in July, 1961, since the
defendants' first letter of complaint was written on July 17. But if, as defendants admit, they began
operating their own jukebox "sometime in July, 1961" (presumably on July 24, 1961 when they
removed the rented jukebox from where it was installed), then the defendants' pretense that they
decided to buy their own jukebox only after the rented one had failed to function properly becomes
highly improbable. The jukebox which they ordered from the United States could not have arrived
in so short a time as to enable them to operate it on July 24.
We are rather inclined to believe that the decision to buy a jukebox was made because the
defendants found it more profitable to operate one themselves. Their letter of July 17, 1961, in
which they demanded the removal of the rented jukebox from their premises, with the warning that
they would not be "responsible anymore" for it, and their other letter of July 27 of like tenor, betray
the haste with which they wanted to get out of their contractual obligations to the plaintiff. We note
that they did not even ask the plaintiff to service the rented jukebox; they asked the plaintiff to
remove the jukebox or they would charge rental for the use of the space occupied by it. The
conviction cannot be avoided that the jukebox which the defendants had ordered from the United
States had arrived and the latter thereafter conjured up a reason for operating it without being
charged with violation of the lease contract. The defendants' pretenses cannot excuse their culpable
violation of the lease contract; their conduct fully justifies the award of liquidated damages to the
plaintiff.
ACCORDINGLY, the judgment a quo is reversed, and the contract of lease between the plaintiff and
the defendant Soledad Natividad is hereby rescinded in favor of the plaintiff. The defendants are
ordered to return to the plaintiff the automatic phonograph subject of the contract, and to pay the
plaintiff liquidated damages in the total amount of P5,850, plus 6 per cent interest from the date of
the filing of the complaint until the amount shall have been fully paid, and attorney's fees in the
amount of P200. Costs against the defendants.
G.R. No. 23769           September 16, 1925
SONG FO & COMPANY, plaintiff-appellee, 
vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.
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.
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.

Yours very truly, 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.
HAWAIIAN-PHILIPPINE COMPANY
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo
      BY R. C. PITCAIRN
      Administrator. (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
Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on the contents of Exhibit F, and that they confirm all the arrangements you have stated, and in order
December 16, 1922. This letter reads: 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
December 16th, 1922. 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
Messrs. HAWAIIAN-PHILIPPINE CO., receipt of account by plaintiff, and date of payment. The table mentioned is as follows:
            Silay, Neg. Occ., P.I.
Date of receipt of
Date of delivery Account and date thereof Date of payment
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood all account by plaintiff

their contents.
1922 1923 1923

In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20
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. Dec. 29 206.16 Jan. 3/23 do Do

With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements 1923

you have stated and in order to make the contract clear, we hereby quote below our old contract
Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31
as amended, as per our new arrangements.
Feb. 12 206.16 Mar. 12/23 do Do
(a) Price, at 2 cents per gallon delivered at the central.
Feb. 27 206.16 do do Do
(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account. Mar. 5 206.16 do do Do

(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19
the round trip dock to central and central to dock. This service to be restricted to one trip for the
Mar. 24 206.16 Mar. 31/23 do Do
six tanks.
Mar. 29 206.16 do do Do
Yours very truly,
      SONG FO & COMPANY Some doubt has risen as to when Song Fo & Company was expected to make payments for the
By __________________________
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on
                        Manager.
the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the
We agree with appellant that the above quoted correspondence is susceptible of but one Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills for
interpretation. The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 each delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo & Company
gallons of molasses. The Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo dated April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-
& Company by supplying the latter company with an extra 100,000 gallons. But the language used 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.
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.

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 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.

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

G.R. No. L-28602 September 29, 1970
UNIVERSITY OF THE PHILIPPINES, petitioner, 
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE
IN QUEZON CITY, et al., respondents.
REYES, J.B.L., J.:
Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to
be annulled in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or
UP) against the above-named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or
ALUMCO). The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber
concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order,
dated 14 January 1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain
from exercising logging rights or conducting logging operations on the concession; and the third order, dated 12
December 1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three
(3) questioned orders was issued by this Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose
of raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which
the latter was granted exclusive authority, for a period starting from the date of the agreement to
31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut,
collect and remove timber from the Land Grant, in consideration of payment to UP of royalties,
forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it
had incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to
pay; that after it had received notice that UP would rescind or terminate the logging agreement,
ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of
Payments," dated 9 December 1964, which was approved by the president of UP, and which
stipulated the following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to
liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance
outstanding after the said payments have been applied shall be paid by the DEBTOR in full no
later than June 30, 1965;
5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this
document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and
the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the
necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Fifty
Thousand Pesos (P50,000.00) by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from
9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness
that it had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had entered
in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as
Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or
payment of the herein before stated sums of money and alleging the facts hereinbefore specified,
together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for
preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging
operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging
contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting
the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25
February 1966, respondent judge issued the first of the questioned orders, enjoining UP from
awarding logging rights over the concession to any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara
Lumber Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta.
Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging
operations in the concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12
December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is
embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the
foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the
period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its
second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its
defenses in the court below, which maybe boiled down to: blaming its former general manager,
Cesar Guy, in not turning over management of ALUMCO, thereby rendering it unable to pay the
sum of P219,382.94; that it failed to pursue the manner of payments, as stipulated in the
"Acknowledgment of Debt and Proposed Manner of Payments" because the logs that it had cut
turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its
contract "to buy and sell" with said firm, and which contract was referred and annexed to the
"Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the
logging contract, without a court order, was invalid; that petitioner's supervisor refused to allow
respondent to cut new logs unless the logs previously cut during the management of Cesar Guy be
first sold; that respondent was permitted to cut logs in the middle of June 1965 but petitioner's
supervisor stopped all logging operations on 15 July 1965; that it had made several offers to the practical effect of the stipulation being merely to transfer to the defaulter the initiative of
petitioner for respondent to resume logging operations but respondent received no reply. instituting suit, instead of the rescinder.

The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded,
and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings in this regard), that it is only after a
final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has
"the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded
without the necessity of any judicial suit." As to such special stipulation, and in connection with
Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al.,  L-
11897, 31 October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from entering into agreement that violation
of the terms of the contract would cause cancellation thereof, even without court intervention. In
other words, it is not always necessary for the injured party to resort to court for rescission of the
contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved
on account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other party
denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring
the matter to court. Then, should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to damages; in the contrary
case, the resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded,
and act accordingly, without previous court action, but it  proceeds at its own risk. For it is only the
final judgment of the corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during the pendency of the suit until the
final judgment of rescission is rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article 2203).
In fact, even without express provision conferring the power of cancellation upon one contracting
party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code
(of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held
that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless
successfully impugned in court.
In the light of the foregoing principles, and considering that the complaint of petitioner University
made out a prima facie case of breach of contract and defaults in payment by respondent ALUMCO,
to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
respondent company had profited from its operations previous to the agreement of 5 December
1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in
the second amended answer, such as the misconduct of its former manager Cesar Guy, and the
rotten condition of the logs in private respondent's pond, which said respondent was in a better
position to know when it executed the acknowledgment of indebtedness, do not constitute on their
face sufficient excuse for non-payment; and considering that whatever prejudice may be suffered
by respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts
of the court a quo in enjoining petitioner's measures to protect its interest without first receiving
evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the
injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not
available or adequate. Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to
the Court of Appeals, and the case is pending therein, this Court abstains from making any
pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of
25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set
aside. Let the records be remanded for further proceedings conformably to this opinion.

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal
obligation,1 since in every case where the extrajudicial resolution is contested only the final award
of the court of competent jurisdiction can conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial
resolution will remain contestable and subject to judicial invalidation, unless attack thereon should
become barred by acquiescence, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach
of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil
Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or
error by the rescinder the other party is not barred from questioning in court such abuse or error,

G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET
vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.
GUTIERREZ, JR., J.:
This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell
as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-
appellees, to pay P500.00 attorney's fees and costs.
The facts being undisputed, the Court of Appeals certified the case to us since only pure questions
of law have been raised for appellate review.
On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of
land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments
being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly
installments until July 1966, when their aggregate payment already amounted to P4,533.38. On
numerous occasions, the defendants-appellants accepted and received delayed installment
payments from the plaintiffs-appellees.
On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting
the remittance of past due accounts.
On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-
appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for
reconsideration of the said cancellation was denied by the defendants-appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh
Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final
deed of sale alleging inter alia that after computing all subsequent payments for the land in
question, they found out that they have already paid the total amount of P4,533.38 including
interests, realty taxes and incidental expenses for the registration and transfer of the land.
The defendants-appellants alleged in their answer that the complaint states no cause of action and
that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and
refused to pay and/or offer to pay the monthly installments corresponding to the month of August,
1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the
said contract.
The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:
WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor
of the plaintiffs and against the defendants declaring that the contract subject matter of the
instant case was NOT VALIDLY cancelled by the defendants. Consequently, the defendants are
ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by
way of attorney's fees. Costs against the defendants.
A motion for reconsideration filed by the defendants-appellants was denied.
As earlier stated, the then Court of Appeals certified the case to us considering that the appeal
involves pure questions of law.
The defendants-appellants assigned the following alleged errors of the lower court:
First Assignment of Error: THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL
AL., plaintiffs-appellees,  (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED.
Second Assignment of Error: EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL
HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING
DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF.
Third Assignment of Error: THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY
PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES.
The main issue to be resolved is whether or not the contract to sell has been automatically and
validly cancelled by the defendants-appellants.
The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six
of the contract which provides:
SIXTH.—In case the party of the SECOND PART fails to satisfy any monthly installments, or any
other payments herein agreed upon, he is granted a month of grace within which to make the
retarded payment, together with the one corresponding to the said month of grace; it is
understood, however, that should the month of grace herein granted to the party of the SECOND
PART expired; without the payments corresponding to both months having been satisfied, an
interest of 10% per annum will be charged on the amounts he should have paid; it is understood
further, that should a period of 90 days elapse, to begin from the expiration of the month of
grace herein mentioned, and the party of SECOND PART has not paid all the amounts he should
have paid with the corresponding interest up to that date, the party of the FIRST PART has the
right to declare this contract cancelled and of no effect, and as consequence thereof, the party of
the FIRST PART may dispose of the parcel of land covered by this contract in favor of other
persons, as if this contract had never been entered into. In case of such cancellation of the
contract, all the amounts paid in accordance with this agreement together with all the
improvements made on the premises, shall be considered as rents paid for the use and
occupation of the above mentioned premises, and as payment for the damages suffered by failure
of the party of the SECOND PART to fulfill his part of the agreement; and the party of the
SECOND PART hereby renounces all his right to demand or reclaim the return of the same and
obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST
PART. (Emphasis supplied by appellant)
The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966
installment despite demands for more than four (4) months. The defendants-appellants point
to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the
right of the subdivision owner to automatically cancel a contract to sell on the strength of a
provision or stipulation similar to paragraph 6 of the contract in this case. The defendants-
appellants also argue that even in the absence of the aforequoted provision, they had the right to
cancel the contract to sell under Article 1191 of the Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state
that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of
specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no
effect, because it granted the sellers an absolute and automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon
the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in
the law that prohibits the parties from entering into an agreement that violation of the terms of the
contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental
Shipping, Co., et al., 12 SCRA 276)—
Well settled is, however, the rule that a judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and cancelled for violation of any
of its terms and conditions'
Resort to judicial action for rescission is obviously not contemplated . . . The validity of the
stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition
which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA
504).
The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA
102) where we explained that:
Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review by the proper court. If
the other party denies that rescission is justified, it is free to resort to judicial action in its own
behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party will be sentenced to damages;
in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to
the party prejudiced.
In other words, the party who deems the contract violated many consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For
it is only the final judgment of the corresponding court that will conclusively and finally settle
whether the action taken was or was not correct in law. ... .
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation;
(Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan
de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested
only the final award of the court of competent jurisdiction can conclusively settle whether the
resolution was proper or not. It is in this sense that judicial action will be necessary, as without it,
the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless
attack thereon should become barred by acquiescence, estoppel or prescription.
The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that—
The general rule is that rescission of a contract will not be permitted for a slight or casual breach,
but only for such substantial and fundamental breach as would defeat the very object of the
parties in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827)
The question of whether a breach of a contract is substantial depends upon the attendant
circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to
sell which provides:
SECOND.—That in consideration of the agreement of sale of the above described property, the
party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of
THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency, plus interest
at the rate of 7% per annum, as follows:
(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed;
and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each
month, from this date until the total payment of the price above stipulated, including interest.
because they failed to pay the August installment, despite demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-appellants is so slight and casual when
we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already
paid the monthly installments for a period of almost nine (9) years. In other words, in only a short
time, the entire obligation would have been paid. Furthermore, although the principal obligation
was only P 3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an
aggregate amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will
work injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It
would unjustly enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee.
also militates against the unilateral act of the defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business, yet, it cannot be denied that
this subdivision is likewise purposely done to afford those landless, low income group people of
realizing their dream of a little parcel of land which they can really call their own.
The defendants-appellants cannot rely on paragraph 9 of the contract which provides:
NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of
the SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this
contract, as well as any other condonation that the party of the FIRST PART may give to the party
of the SECOND PART with regards to the obligations of the latter, should not be interpreted as a
renunciation on the part of the party of the FIRST PART of any right granted it by this contract, in
case of default or non-compliance by the party of the SECOND PART.
The defendants-appellants argue that paragraph nine clearly allows the seller to waive the
observance of paragraph 6 not merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted
and received delayed payments of installments, though the plaintiffs-appellees have been in arrears
beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have
waived and are now estopped from exercising their alleged right of rescission. In De Guzman v.
Guieb  (48 SCRA 68), we held that:
But defendants do not deny that in spite of the long arrearages, neither they nor their
predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the appellees
from the home-lot in question. On the contrary, it is admitted that the delayed payments were
received without protest or qualification. ... Under these circumstances, We cannot but agree with
the lower court that at the time appellees exercised their option, appellants had already forfeited
their right to invoke the above-quoted provision regarding the nullifying effect of the non-
payment of six months rentals by appellees by their having accepted without qualification on July
21, 1964 the full payment by appellees of all their arrearages.
The defendants-appellants contend in the second assignment of error that the ledger of payments
show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that
the total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied to the interests since the contract specifically
provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:
SECOND.—That in consideration of the agreement of sale of the above described property, the
party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of
THREE THOUSAND NINE HUNDRED TWENTY ONLY (P 3,920.00), Philippine Currency, plus
interest at the rate of 7% per annum ... . (Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their submission that since they have already
paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be
compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which
provides:
TWELFTH.—That once the payment of the sum of P3,920.00, the total price of the sale is
completed, the party to the FIRST PART will execute in favor of the party of the SECOND PART,
the necessary deed or deeds to transfer to the latter the title of the parcel of land sold, free from
all hens and encumbrances other than those expressly provided in this contract; it is understood,
however, that au the expenses which may be incurred in the said transfer of title shall be paid by
the party of the SECOND PART, as above stated.
Closely related to the second assignment of error is the submission of the plaintiffs-appellees that
the contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home,
affixed their signatures and assented to the terms and conditions of the contract. They had no
opportunity to question nor change any of the terms of the agreement. It was offered to them on a
"take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:
... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties
thereto. . . . there are certain contracts almost all the provisions of which have been drafted only
by one party, usually a corporation. Such contracts are called contracts of adhesion, because the
only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance
contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category.
(Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that
under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the
P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be construed against the party causing it.
We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract
must be interpreted against the party who drafted the same, especially where such interpretation
will help effect justice to buyers who, after having invested a big amount of money, are now sought
to be deprived of the same thru the prayed application of a contract clever in its phraseology,
condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is
most unfair to the buyers."
Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the courts should only order the payment of
the few remaining installments but not uphold the cancellation of the contract. Upon payment of
the balance of P671.67 without any interest thereon, the defendants-appellants must immediately
execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer
documents as provided in paragraph 12 of the contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the
plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any
interests. Costs against the defendants-appellants.
G.R. No. 96643. April 23, 1993.
ERNESTO DEIPARINE, JR., petitioner, 
vs.
THE HON. COURT OF APPEALS, CESARIO CARUNGAY and ENGR. NICANOR TRINIDAD,
respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; RESCISSION IS USED IN TWO DIFFERENT CONTEXTS IN THE CIVIL CODE. —
Deiparine seems to be confused over the right of rescission, which is used in two different contexts in
the Civil Code. Under the law on contracts, there are what are called "rescissible contracts" which are
enumerated in Article 1381 . . . There is also a right of rescission under the law on obligations as
granted in Article 1191.
2. ID.; ID.; ARTICLES 19, 1159, 1191, 1714, 1715 AND 1727, CIVIL CODE ARE APPLICABLE, WHILE
ARTICLES 1381, 1385 AND 1725, SAME CODE ARE NOT, IN CASE OF BREACH OF CONSTRUCTION
CONTRACT. — The petitioner challenges the application by the lower court of Article 1191 of the Civil
Code in rescinding the construction agreement. His position is that the applicable rules are Articles 1385
and 1725 of the Civil Code . . . Article 1385, upon which Deiparine relies, deals with the rescission of the
contracts enumerated above, which do not include the construction agreement in question . . . The
construction contract falls squarely under the coverage of Article 1191 because it imposes upon
Deiparine the obligation to build the structure and upon the Carungays the obligation to pay for the
project upon its completion. Article 1191, unlike Article 1385, is not predicated on economic prejudice to
one of the parties but on breach of faith by one of them that violates the reciprocity between them. The
violation of reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by
Deiparine's failure to follow the stipulated plans and specifications, has given the Carungay spouses the
right to rescind or cancel the contract. Article 1725 cannot support the petitioner's position either, for
this contemplates a voluntary withdrawal by the owner without fault on the part of the contractor, who
is therefore entitled to indemnity, and even damages, for the work he has already commenced. There is
no such voluntary withdrawal in the case at bar. On the contrary, the Carungays have been constrained
to ask for judicial rescission because of the petitioner's failure to comply with the terms and conditions
of their contract. The other applicable provisions are: Article 1714 . . . Article 1715 . . . Article 1727 . . .
It is a basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every
person must, in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith." This admonition is reiterated in Article 1159, which states that "obligations
arising from contracts have the force of law between the contracting parties and should be complied
with in good faith." The petitioner has ignored these exhortations and is therefore not entitled to the
relief he seeks.
3. ADMINISTRATIVE LAW; THE PHILIPPINE DOMESTIC CONSTRUCTION BOARD HAS NO POWER TO
ADJUDICATE A CASE FOR RESCISSION OF CONSTRUCTION CONTRACT. — The wording of P.D. 1746 is
clear. The adjudicatory powers of the Philippine Domestic Construction Board are meant to apply only to
public construction contracts. Its power over private construction contracts is limited to the formulation
and recommendation of rules and procedures for the adjudication and settlement of disputes involving
such (private) contracts. It therefore has no jurisdiction over cases like the one at bar which remain
cognizable by the regular courts of justice.
4. LEGAL AND JUDICIAL ETHICS; COUNSEL WHO TRIES TO MISLEAD THE COURT BY DELIBERATELY
MISQUOTING THE LAW IS SUBJECT TO DISCIPLINE. — Counsel is obviously trying to mislead the Court.
First, he purposely misquotes Section 6(b), paragraph 3, substituting the word "the" for "public," . . .
Second, he makes the wrong emphasis in paragraph 5, . . . For deliberately changing the language of the
above-quoted paragraph 3, Atty. Gregorio B. Escasinas has committed contempt of this Court and shall
be disciplined. As for paragraph 5, the correct stress should be on the words "formulate and
recommend," which is all the body can do, rather than on adjudication and settlement."
This case involves not only the factual issue of breach of contract and the legal questions of
jurisdiction and rescission. The basic inquiry is whether the building subject of this litigation is safe
enough for its future occupants. The petitioner says it is, but the private respondents demur. They
have been sustained by the trial court and the appellate court. The petitioner says they have all
erred.
The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto Deiparine, Jr.
on August 13, 19B2, for the construction of a three-story dormitory in Cebu City. 1 The Carungays
agreed to pay P970,000.00, inclusive of contractor's fee, and Deiparine bound himself to erect the
building "in strict accordance to (sic) plans and specifications." Nicanor Trinidad, Jr., a civil
engineer, was designated as the representative of the Carungay spouses, with powers of inspection
and coordination with the contractor.
Deiparine started the construction on September 1, 1982. 2 On November 6, 1982, Trinidad sent
him a document entitled General Conditions and Specifications which inter alia prescribed 3,000 psi
(pounds per square inch) as the minimum acceptable compressive strength of the building. 3
In the course of the construction, Trinidad reported to Cesario Carungay that Deiparine had been
deviating from the plans and specifications, thus impairing the strength and safety of the building.
On September 25, 1982, Carungay ordered Deiparine to first secure approval from him before
pouring cement. 4 This order was not heeded, prompting Carungay to send Deiparine another
memorandum complaining that the "construction works are faulty and done haphazardly . . . mainly
due to lax supervision coupled with . . . inexperienced and unqualified staff." 5 This memorandum
was also ignored.
After several conferences, the parties agreed to conduct cylinder tests to ascertain if the structure
thus far built complied with safety standards. Carungay suggested core testing. Deiparine was
reluctant at first but in the end agreed. He even promised that if the tests should show total failure,
or if the failure should exceed 10%, he would shoulder all expenses; otherwise, the tests should be
for the account of Carungay.
The core testing was conducted by Geo-Testing International, a Manila-based firm, on twenty-four
core samples. On the basis of 3,000 psi, all the samples failed; on the basis of 2,500 psi, only three
samples passed; and on the basis of 2,000 psi, nineteen samples failed. 6 This meant that the
building was structurally defective.
In view of this finding, the spouses Carungay filed complaint with the Regional Trial Court of Cebu
for the rescission of the construction contract and for damages. Deiparine moved to dismiss,
alleging that the court had no jurisdiction over construction contracts, which were now cognizable
by the Philippine Construction Development Board pursuant to Presidential Decree No. 1746. The
motion was denied in an order dated April 12, 1984.
After trial on the merits, Judge Juanito A. Bernad rendered judgment: a) declaring the construction
agreement rescinded; b) condemning Deiparine to have forfeited his expenses in the construction in
the same of P244,253.70; c) ordering Deiparine to reimburse to the spouses Carungay the sum of
P15,104.33 for the core testing; d) ordering Deiparine to demolish and remove all the existing
structures and restore the premises to their former condition before the construction began, being
allowed at the same time to take back with him all the construction materials belonging to him; and
e) ordering Deiparine to pay the Carungay spouses attorney's fees in the amount of P10,000.00 as
well as the costs of the suit. 7
On appeal, the decision was affirmed in toto by the respondent court on August 14, 1990. 8 His
motion for reconsideration having been denied, petitioner Ernesto Deiparine, Jr. has come to this
Court to question once more the jurisdiction of the regular courts over the case and the power of
the trial court to grant rescission. He will lose again.
The challenge to the jurisdiction of the trial court is untenable.
P.D. 1746 created the Construction Industry Authority of the Philippines (CIAP) as the umbrella
organization which shall exercise jurisdiction and supervision over certain administrative bodies
acting as its implementing branches. The implementing body in this case is the Philippine Domestic
Construction Board (PDCB) and not the inexistent Philippine Construction Development Board as
maintained by Deiparine.
Among the functions of the PDCB under Section 6 of the decree are to:
3. Adjudicate and settle claims and implementation of public construction contracts and for this
purpose, formulate and adopt the necessary rules and regulations subject to the approval of the
President:
5. Formulate and recommend rules and procedures for the adjudication and settlement of claims
and disputes in the implementation of contracts in private construction; (Emphasis supplied)
Deiparine argues that the Philippine Construction Development Board (that is, the Philippine
Domestic Construction Board) has exclusive jurisdiction to hear and try disputes arising from
domestic constructions. He invokes the above-mentioned functions to prove his point.
His counsel is obviously trying to mislead the Court. First, he purposely misquotes Section 6(b),
paragraph 3, substituting the word "the" for "public," thus:
3. Adjudicate and settle claims and disputes in the implementation of the construction contracts
and for this purpose, formulate and adopt the necessary rules and regulations subject to the
approval of the President; (Emphasis ours).
Second, he makes the wrong emphasis in paragraph 5, thus:
5. Formulate and recommend rules and procedures for the ADJUDICATION and SETTLEMENT of
CLAIMS and DISPUTES in the implementation of CONTRACTS in PRIVATE CONSTRUCTIONS.
For deliberately changing the language of the abovequoted paragraph 3, Atty. Gregorio P. Escasinas
has committed contempt of this Court and shall be disciplined. As for paragraph 5, the correct
stress should be on the words "formulate and recommend," which is all the body can do, rather
than on "adjudication and settlement."
The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic Construction
Board are meant to apply only to public construction contracts. Its power over private construction
contracts is limited to the formulation and recommendation of rules and procedures for the
adjudication and settlement of disputes involving such (private) contracts. It therefore has no
jurisdiction over cases like the one at bar which remain cognizable by the regular courts of justice.
On the issue of rescission, Deiparine insists that the construction agreement does not specify any
compressive strength for the structure nor does it require that the same be subjected to any kind of
stress test. Therefore, since he did not breach any of his covenants under the agreement, the court
erred in rescinding the contract.
The record shows that Deiparine commenced the construction soon after the signing of the
contract, even before Trinidad had submitted the contract documents, including the General
Conditions and Specifications.
According to Eduardo Logarta, the petitioner's own project engineer, Deiparine actually instructed
him and some of the other workers to ignore the specific orders or instructions of Carungay or
Trinidad relative to the construction. 9 Most of these orders involved safety measures such as: (1)
the use of two concrete vibrators in the pouring of all columns, beams and slabs; (2) making PVC
pipes well-capped to prevent concrete from setting inside them; (3) the use of 12-mm
reinforcement bars instead of 10-mm bars; (4) the use of mixed concrete reinforcements instead of
hollow block reinforcements; and (5) securing the approval of the owner or his representative
before any concrete-pouring so that it could be determined whether the cement mixture complied
with safety standards. Deiparine obviously wanted to avoid additional expenses which would reduce
his profit.
Parenthetically, it is not disputed that Deiparine is not a civil engineer or an architect but a master
mariner and former ship captain; 10 that Pio Bonilla, a retainer of Deiparine Construction, was not
the supervising architect of the protect; 11 that the real supervisor of the construction was
Eduardo-Logarta, who was only a third year civil engineering student at the time; 12 that his
understudy was Eduardo Martinez, who had then not yet passed the board examinations; 13 and
that the supposed project engineer, Nilo Paglinawan, was teaching full-time at the University of San
Jose-Recoletos, and had in fact entered the construction site only after November 4, 1982, although
the construction had already begun two months earlier. 14
It was after discovering that the specifications and the field memorandums were not being followed
by Deiparine that Carungay insisted on the stress tests.
There were actually two sets of specifications. The first "Specifications" are labeled as such and are
but a general summary of the materials to be used in the construction. These were prepared by
Trinidad prior to the execution of the contract for the purpose only of complying with the document
requirements of the loan application of Cesario Carungay with the Development Bank of the
Philippines. The other specifications, which were also prepared by Trinidad, are entitled "General
Conditions and Specifications" and laid down in detail the requirements of the private respondent in
the construction of his building.
In his testimony, Deiparine declared that when the contract was signed on August 13, 1982, it was
understood that the plans and specifications would be given to him by Trinidad later. 15 Deiparine
thus admitted that the plans and specifications referred to in the construction agreement were not
the first Specifications but the General Conditions and Specifications submitted by Trinidad in
November 1982. This second set of specifications required a structural compressive strength of
3,000 psi. 16 It completely belies Deiparine's contention that no compressive strength of the
dormitory was required.
Deiparine further argues that by following the concrete mixture indicated in the first specifications,
that is, 1:2:4, the structure would still attain a compressive strength of 2,500 psi, which was
acceptable for dormitories. According to him, the 3,000 psi prescribed in the General Conditions and
Specifications was recommended for roads, not for buildings. In so arguing, he is interpreting the
two specifications together but applying only the first and rejecting the second.
Deiparine also avers that the contract does not also require any kind of test to be done on the
structure and that, test or no test, he has not violated the agreement. Nevertheless, he subjected
the building to a cylinder test just to convince Carungay that the unfinished dormitory was
structurally sound.
A cylinder test is done by taking samples from fresh concrete, placing them in a cylinder mold and
allowing them to harden for a maximum of 28 days, following which they are subjected to
compression to determine if the cement mixture to be poured conforms to accepted standards in
construction. 17 Carungay was not satisfied with the results of the cylinder test because they were
inconsistent and could easily be falsified by the simple expedient of replacing the samples with a
good mixture although a different mixture had been used in the actual pouring. Consequently,
Carungay requested core testing, a more reliable procedure because the specimens obtained by
extracting concrete from the hardened existing structure would determine its actual strength. The
core test is less prone to manipulation than the cylinder test because the samples in the former are
taken from the building which is already standing. 18
Deiparine vehemently refused to go along with the core test, insisting that the results of the
cylinder test earlier made were conclusive enough to prove that the building was structurally sound.
What was the real reason for this refusal? After all, Carungay would shoulder the expenses if the
specimens passed the core test, unlike the cylinder test, which was for the petitioner's account. The
only logical explanation would be that Deiparine was not sure that the core test would prove
favorable to him.
We see no reason to disturb the factual finding of the courts below that Deiparine did not deal with
the Carungays in good faith. His breach of this duty constituted a substantial violation of the
contract correctible by judicial rescission.
The petitioner challenges the application by the lower court of Article 1191 of the Civil Code in
rescinding the construction agreement. His position is that the applicable rules are Articles 1385
and 1725 of the Civil Code.
Article 1385 states:
Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.
Article 1725 provides that in a contract for a piece of work:
The owner may withdraw at will from the construction of the work, although it may have been
commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness
which the owner may obtain therefrom, and damages.
Deiparine seems to be confused over the right of rescission, which is used in two different contexts
in the Civil Code.
Under the law on contracts, there are what are called "rescissible contracts" which are enumerated
in Article 1381 thus:
(1) Those which are entered into by guardians whenever the wards who they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number:
(3) Those undertaken in fraud of creditors when the later cannot in any other manner collect the
claims due them:
(4) Those which refer to things under litigation if they have been entered into by the defendants
without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1385, upon which Deiparine relies, deals with the rescission of the contracts enumerated
above, which do not include the construction agreement in question.
Article 1715. The contractor shall execute the work in such a manner that it has the qualities
agreed upon and has no defects which destroy or lessen its value or fitness for its ordinary or
stipulated use. Should the work be not of such quality, the employer may require that the
contractor remove the defect or execute another work. If the contractor fails or refuses to comply
with this obligation, the employer may have the defect removed or another work executed, at the
contractor's cost.
Article 1727. The contractor is responsible for the work done by persons employed by him.
While it is true that the stress test was not required in any of the contract documents, conducting
the test was the only manner by which the owner could determine if the contractor had been
faithfully complying with his presentations under their agreement. Furthermore, both parties later
agreed in writing that the core test should be conducted. When the structure failed under this test
the Carungay spouses were left with no other recourse than to rescind their contract.

There is also a right of rescission under the law on obligations as granted in Article 1191, providing It is a basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every
as follows: person must, in the performance of his duties, act with justice, give everyone his due, and observe
"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the honesty and good faith." This admonition is reiterated in Article 1159, which states that "obligations
obligors should not comply with what is incumbent upon him. arising from contracts have the force of law between the contracting parties and should be complied
The injured party may choose between the fulfillment and the rescission of the obligation, with with in good faith." The petitioner has ignored these exhortations and is therefore not entitled to
the payment of damages in either case. He may also seek rescission, even after he has chosen the relief he seeks.
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition for review is
a period.
DENIED, with costs against the petitioner. For deliberately changing the language of Section 6(b),
This is understood to be without prejudice to the rights of third persons who have acquired the
paragraph 3, of P.D. No. 1746, Atty. Gregorio B. Escasinas is hereby fined P1,000.00, with the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
warning that repetition of a similar offense will be dealt with more severely. It is so ordered.
Concur.
This was the provision the trial court and the respondent court correctly applied because it relates
to contracts involving reciprocal obligations like the subject construction contract. The construction
contract fails squarely under the coverage of Article 1191 because it imposes upon Deiparine the
obligation to build the structure and upon the Carungays the obligation to pay for the project upon
its completion.

Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the, parties but
on breach of faith by one of them that violates the reciprocity between them. 19 The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's
failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to
rescind or cancel the contract.

Article 1725 cannot support the petitioner's position either, for this contemplates a voluntary
withdrawal by the owner without fault on the part of the contractor, who is therefore entitled to
indemnity, and even damages, for the work he has already commenced. there is no such voluntary
withdrawal in the case at bar. On the contrary, the Carungays have been constrained to ask for
judicial rescission because of the petitioner's failure to comply with the terms and conditions of their
contract.

The other applicable provisions are:

Article 1714. If the contractor agrees to produce the work from material furnished by him, he
shall deliver the thing produced to the employer and transfer dominion over the thing. This
contract shall be governed by the following articles as well as by the pertinent provisions on
warranty of title and against hidden defects and the payment of price in a contract of sale.
 In response, Palao sent a letter dated January 10, 1986,7 to Atty. Aquino, stating that he was not
amenable to the reimbursements claimed by Iringan.

On February 21, 1989, Iringan, now represented by anew counsel - Atty. Carmelo Z. Lasam,
proposed that the P50,000 which he had already paid Palao be reimbursed 8 or Palao could sell to
Iringan, an equivalent portion of the land.

Palao instead wrote Iringan that the latter's standing obligation had reached P61,600, representing
payment of arrears for rentals from October 1985 up to March 1989. 9 The parties failed to arrive at
an agreement.

On July 1, 1991, Palao filed a Complaint 10 for Judicial Confirmation of Rescission of Contract and
Damages against Iringan and his wife.

In their Answer,11 the spouses alleged that the contract of sale was a consummated contract,
hence, the remedy of Palao was for collection of the balance of the purchase price and not
rescission. Besides, they said that they had always been ready and willing to comply with their
G.R. No. 129107      September 26, 2001 obligations in accordance with said contract.

ALFONSO L. IRINGAN, petitioner,  In a Decision12 dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I, ruled in
vs. favor of Palao and affirmed the rescission of the contract. It disposed,
HON. COURT OF APPEALS and ANTONIO PALAO, represented by his Attorney-in-Fact, WHEREFORE, the Court finds that the evidence preponderates in favor of the plaintiff and against
FELISA P. DELOS SANTOS, respondents. the defendants and judgment is hereby rendered as follows:
(a) Affirming the rescission of the contract of sale;
QUISUMBING, J.: (b) Cancelling the adverse claim of the defendants annotated at the back of TCT No. T-5790;
(c) Ordering the defendants to vacate the premises;
This petition assails the Decision1 dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949, affirming the decision of the (d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as reasonable
Regional Trial Court and deleting the award of attorney's fee.
compensation for use of the property minus 50% of the amount paid by them; and to pay
P50,000.00 as moral damages; P10,000.00 as exemplary damages; and P50,000.00 as
The facts of the case are based on the records. attorney's fee; and to pay the costs of suit.

On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review.
undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of
Tuguegarao and covered by Transfer Certificate of Title No. T-5790. The parties executed a Deed of
Iringan avers in this petition that the Court of Appeals erred:
Sale2 on the same date with the purchase price of P295,000.00, payable as follows:
1. In holding that the lower court did not err in affirming the rescission of the contract of sale;
(a) P10,000.00 - upon the execution of this instrument, and for this purpose, the vendor
and
acknowledges having received the said amount from the vendee as of this date;
2. In holding that defendant was in bad faith for "resisting" rescission and was made liable to pay
(b) P140,000.00 - on or before April 30, 1985;
moral and exemplary damages.14
(c) P145,000.00 - on or before December 31, 1985.3

We find two issues for resolution: (1) whether or not the contract of sale was validly rescinded, and
When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent
(2) whether or not the award of moral and exemplary damages is proper.
a letter4 to Iringan stating that he considered the contract as rescinded and that he would not
accept any further payment considering that Iringan failed to comply with his obligation to pay the
full amount of the second installment. On the first issue, petitioner contends that no rescission was effected simply by virtue of the
letter15 sent by respondent stating that he considered the contract of sale rescinded. Petitioner
asserts that a judicial or notarial act is necessary before one party can unilaterally effect a
On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino, 5 replied that they were
rescission.
not opposing the revocation of the Deed of Sale but asked for the reimbursement of the following
amounts:
(a) P50,000.00 - cash received by you; Respondent Palao, on the other hand, contends that the right to rescind is vested by law on the
(b) P3,200.00 - geodetic engineer's fee; obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect
(c) P500.00 - attorney's fee; agreed to it and had the legal effect of a mutually agreed rescission.
(d) the current interest on P53,700.00.6
Article 1592 of the Civil Code is the applicable provision regarding the sale of an immovable
property.
Article 1592. In the sale of immovable property, even though it may have been stipulated that
upon failure to pay the price at the time agreed upon the rescission of the contract shall of right
take place, the vendee may pay, even after the expiration of the period, as long as no demand
for rescission of the contract has been made upon him either judicially or by a notarial act. After
the demand, the court may not grant him a new term. (Italics supplied)
Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve
the contract.16
In the case of Villaruel v. Tan King,17  we ruled in this wise,
...since the subject-matter of the sale in question is real property, it does not come strictly within
the provisions of article 1124 (now Article 1191) of the Civil Code, but is rather subjected to the
stipulations agreed upon by the contracting parties and to the provisions of article 1504 (now
Article 1592) of the Civil Code."18
Citing Manresa, the Court said that the requirement of then Article 1504, "refers to a demand that
the vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to
create no obstacles to this contractual mode of extinguishing obligations."19
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or
not automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even
though"20 emphasizing that when no stipulation is found on automatic rescission, the judicial or
notarial requirement still applies.
On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual
agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2
thereof.
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible. [Emphasis ours.]
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to
automatic rescission. In Escueta v. Pando,21 we ruled that under Article 1124 (now Article 1191) of
the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of the
obligors shall fail to comply with what is incumbent upon him. But that right must be invoked
judicially. The same article also provides: "The Court shall decree the resolution demanded, unless
there should be grounds which justify the allowance of a term for the performance of the
obligation."
This requirement has been retained in the third paragraph of Article 1191, which states that "the
court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period."
Consequently, even if the right to rescind is made available to the injured party,22 the obligation is
not ipso facto erased by the failure of the other party to comply with what is incumbent upon him.
The party entitled to rescind should apply to the court for a decree of rescission. 23 The right cannot
be exercised solely on a party's own judgment that the other committed a breach of the
obligation.24 The operative act which produces the resolution of the contract is the decree of the
court and not the mere act of the vendor.25 Since a judicial or notarial act is required by law for a
valid rescission to take place, the letter written by respondent declaring his intention to rescind did
not operate to validly rescind the contract.
Notwithstanding the above, however, in our view when private respondent filed an action for
Judicial Confirmation of Rescission and Damages26 before the RTC, he complied with the
requirement of the law for judicial decree of rescission. The complaint 27 categorically stated that the
purpose was 1) to compel appellants to formalize in a public document, their mutual agreement of
revocation and rescission; and/or 2) to have a judicial confirmation of the said revocation/rescission
under terms and conditions fair, proper and just for both parties. 28 In Luzon Brokerage Co.,
Inc. v. Maritime Building Co., Inc., 29 we held that even a crossclaim found in the Answer could
constitute a judicial demand for rescission that satisfies the requirement of the law.30
Petitioner contends that even if the filing of the case were considered the judicial act required, the
action should be deemed prescribed based on the provisions of Article 1389 of the Civil Code.31
This provision of law applies to rescissible contracts, 32 as enumerated and defined in Articles
138033 and 1381.34We must stress however, that the "rescission" in Article 1381 is not akin to the
term "rescission" in Article 1191 and Article 1592.35 In Articles 1191 and 1592, the rescission is a
principal action which seeks the resolution or cancellation of the contract while in Article 1381, the
action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article.36
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article
1144,37 which provides that the action upon a written contract should be brought within ten years
from the time the right of action accrues. The suit was brought on July 1, 1991, or six years after
the default. It was filed within the period for rescission. Thus, the contract of sale between the
parties as far as the prescriptive period applies, can still be validly rescinded.
On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals erred in
finding bad faith on his part when he resisted the rescission 38 and claimed he was ready to pay but
never actually paid respondent, notwithstanding that he knew that appellee's principal motivation
for selling the lot was to raise money to pay his SSS loan. 39 Petitioner would have us reverse the
said CA findings based on the exception 40 that these findings were made on a misapprehension of
facts.
The records do not support petitioner's claims. First,  per the records, petitioner knew respondent's
reason for selling his property. As testified to by petitioner 41 and in the deposition42 of respondent,
such fact was made known to petitioner during their negotiations as well as in the letters sent to
petitioner by Palao.43 Second, petitioner adamantly refused to formally execute an instrument
showing their mutual agreement to rescind the contract of sale, notwithstanding that it was
petitioner who plainly breached the terms of their contract when he did not pay the stipulated price
on time, leaving private respondent desperate to find other sources of funds to payoff his
loan. Lastly, petitioner did not substantiate by clear and convincing proof, his allegation that he was
ready and willing to pay respondent. We are more inclined to believe his claim of readiness to pay
was an afterthought intended to evade the consequence of his breach. There is no record to show
the existence of such amount, which could have been reflected, at the very least, in a bank account
in his name, if indeed one existed; or, alternatively, the proper deposit made in court which could
serve as a formal tender of payment.44 Thus, we find the award of moral and exemplary damages
proper.1âwphi1.nêt
WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court of
Appeals in CA G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting the
award of attorney's fees, is hereby AFFIRMED. Costs against the petitioner.
‘NAGSASALAYSAY:
‘Na ang NAGBIBILI ay nagmamay-aring tunay at naghahawak ng isang lagay na lupa na nasa Nayon ng Malhacan,
Bayan ng Meycauayan, Lalawigan ng Bulacan, na ang kabuuan sukat at mga kahangga nito gaya ng sumusunod:
‘Na alang-alang sa halagang DALAWANG PUNG LIBONG PISO (₱20,000.00) Kualtang Pilipino, ang NAGBIBILI ay
nakipagkasundo ng kanyang ipagbibili ang isang bahagi o sukat na DALAWANG DAAN (200) METROS PARISUKAT, sa
lupang nabanggit sa itaas, na ang mga kahangga nito ay gaya ng sumusunod:

‘Na magbibigay ng paunang bayad ang BUMIBILI SA NAGBIBILI na halagang DALAWANG LIBONG PISO (₱2,000.00)
Kualtang Pilipino, sa sandaling lagdaan ang kasulatang ito.

‘Na ang natitirang halagang LABING WALONG LIBONG PISO (₱18,000.00) Kualtang Pilipino, ay babayaran ng
BUM[I]BILI sa loob ng Sampung (10) taon, na magsisimula sa araw din ng lagdaan ang kasulatang ito.

‘Sakaling hindi makakabayad ang Bumibili sa loob ng panahon pinagkasunduan, an[g] BUMIBILI ay magbabayad ng
pakinabang o interes ng 12% isang taon, sa taon nilakaran hanggang sa ito’y mabayaran tuluyan ng Bumibili:

‘Sa katunayan ng lahat ay nilagdaan ng Magkabilang Panig ang kasulatang ito, ngayon ika 5 ng Abril, 1979, sa
Bayan ng Meycauayan. Lalawigan ng Bulacan, Pilipinas.

(signed) (signed)
BERNARDINO NAGUIAT EULALIO MISTICA
Bumibili Nagbibili'

"Pursuant to said agreement, [Respondent Bernardino Naguiat] gave a downpayment of ₱2,000.00.

G.R. No. 137909               December 11, 2003 He made another partial payment of ₱1,000.00 on 7 February 1980. He failed to make any
payments thereafter. Eulalio Mistica died sometime in October 1986.
FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner, 
vs. "On 4 December 1991, [petitioner] filed a complaint for rescission alleging inter alia: that the
Spouses BERNARDINO NAGUIAT and MARIA PAULINA GERONA-NAGUIAT, respondents. failure and refusal of [respondents] to pay the balance of the purchase price constitutes a violation
of the contract which entitles her to rescind the same; that [respondents] have been in possession
PANGANIBAN, J.: of the subject portion and they should be ordered to vacate and surrender possession of the same
to [petitioner] ; that the reasonable amount of rental for the subject land is ₱200.00 a month; that
The failure to pay in full the purchase price stipulated in a deed of sale does not ipso facto grant the on account of the unjustified actuations of [respondents], [petitioner] has been constrained to
seller the right to rescind the agreement. Unless otherwise stipulated by the parties, rescission is litigate where she incurred expenses for attorney’s fees and litigation expenses in the sum of
allowed only when the breach of the contract is substantial and fundamental to the fulfillment of the ₱20,000.00.
obligation.
"In their answer and amended answer, [respondents] contended that the contract cannot be
The Case
rescinded on the ground that it clearly stipulates that in case of failure to pay the balance as
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to nullify the October 31, 1997 Decision 2 and the February
stipulated, a yearly interest of 12% is to be paid. [Respondent Bernardino Naguiat] likewise alleged
23, 1999 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 51067. The assailed Decision disposed as follows: that sometime in October 1986, during the wake of the late Eulalio Mistica, he offered to pay the
"WHEREFORE, modified as indicated above, the decision of the Regional Trial Court is hereby AFFIRMED."4
remaining balance to [petitioner] but the latter refused and hence, there is no breach or violation
The assailed Resolution denied petitioner’s Motion for Reconsideration. committed by them and no damages could yet be incurred by the late Eulalio Mistica, his heirs or
assigns pursuant to the said document; that he is presently the owner in fee simple of the subject
The Facts lot having acquired the same by virtue of a Free Patent Title duly awarded to him by the Bureau of
Lands; and that his title and ownership had already become indefeasible and incontrovertible. As
The facts of the case are summarized by the CA as follows: counterclaim, [respondents] pray for moral damages in the amount of ₱50,000.00; exemplary
damages in the amount of ₱30,000.00; attorney’s fees in the amount of ₱10,000.00 and other
"Eulalio Mistica, predecessor-in-interest of herein [petitioner], is the owner of a parcel of land
litigation expenses.
located at Malhacan, Meycauayan, Bulacan. A portion thereof was leased to [Respondent
Bernardino Naguiat] sometime in 1970. "On 8 July 1992, [respondents] also filed a motion to dismiss which was denied by the court on 29
July 1992. The motion for reconsideration was likewise denied per its Order of 17 March 1993.
"On 5 April 1979, Eulalio Mistica entered into a contract to sell with [Respondent Bernardino
Naguiat] over a portion of the aforementioned lot containing an area of 200 square meters. This "After the presentation of evidence, the court on 27 January 1995 rendered the now assailed
agreement was reduced to writing in a document entitled ‘Kasulatan sa Pagbibilihan’ which reads as judgment, the dispositive portion of which reads:
follows: ‘WHEREFORE, premises considered, judgment is hereby rendered:
 ‘1. Dismissing the complaint and ordering the [petitioner] to pay the [respondents] attorney’s
fee in the amount of ₱10,000.00 and costs of the suit;
‘2. Ordering the [respondents]:
‘a. To pay [petitioner] and the heirs of Eulalio Mistica the balance of the purchase price in the
amount of ₱17,000.00, with interest thereon at the rate of 12% per annum computed from
April 5, 1989 until full payment is made, subject to the application of the consigned amount
to such payment;
‘b. To return to [petitioner] and the heirs of Eulalio Mistica the extra area of 58 square meters
from the land covered by OCT No. 4917 (M), the corresponding price therefor based on the
prevailing market price thereof.’"5 (Citations omitted)
CA’s Decision
Disallowing rescission, the CA held that respondents did not breach the Contract of Sale. It
explained that the conclusion of the ten-year period was not a resolutory term, because the
Contract had stipulated that payment -- with interest of 12 percent -- could still be made if
respondents failed to pay within the period. According to the appellate court, petitioner did not
disprove the allegation of respondents that they had tendered payment of the balance of the
purchase price during her husband’s funeral, which was well within the ten-year period.
Moreover, rescission would be unjust to respondents, because they had already transferred the land
title to their names. The proper recourse, the CA held, was to order them to pay the balance of the
purchase price, with 12 percent interest.
As to the matter of the extra 58 square meters, the CA held that its reconveyance was no longer
feasible, because it had been included in the title issued to them. The appellate court ruled that the
only remedy available was to order them to pay petitioner the fair market value of the usurped
portion.
Hence, this Petition.6
Issues
In her Memorandum,7 petitioner raises the following issues:
"1. Whether or not the Honorable Court of Appeals erred in the application of Art. 1191 of the
New Civil Code, as it ruled that there is no breach of obligation inspite of the lapse of the
stipulated period and the failure of the private respondents to pay.
"2. Whether or not the Honorable Court of Appeals [e]rred in ruling that rescission of the contract
is no longer feasible considering that a certificate of title had been issued in favor of the private
respondents.
"3. Whether or not the Honorable Court of Appeals erred in ruling that since the 58 sq. m. portion
in question is covered by a certificate of title in the names of private respondents reconveyance is
no longer feasible and proper."8
The Court’s Ruling
The Petition is without merit.
First Issue: Rescission in Article 1191
Petitioner claims that she is entitled to rescind the Contract under Article 1191 of the Civil Code,
because respondents committed a substantial breach when they did not pay the balance of the
purchase price within the ten-year period. She further avers that the proviso on the payment of
interest did not extend the period to pay. To interpret it in that way would make the obligation
purely potestative and, thus, void under Article 1182 of the Civil Code.
We disagree. The transaction between Eulalio Mistica and respondents, as evidenced by the
Kasulatan, was clearly a Contract of Sale. A deed of sale is considered absolute in nature when
there is neither a stipulation in the deed that title to the property sold is reserved to the seller until
the full payment of the price; nor a stipulation giving the vendor the right to unilaterally resolve the
contract the moment the buyer fails to pay within a fixed period.9
In a contract of sale, the remedy of an unpaid seller is either specific performance or
rescission. Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on
the violation of the reciprocity between parties, brought about by a breach of faith by one of
them.11 Rescission, however, is allowed only where the breach is substantial and fundamental to the
fulfillment of the obligation.12
In the present case, the failure of respondents to pay the balance of the purchase price within ten
years from the execution of the Deed did not amount to a substantial breach. In the Kasulatan, it
was stipulated that payment could be made even after ten years from the execution of the
Contract, provided the vendee paid 12 percent interest. The stipulations of the contract constitute
the law between the parties; thus, courts have no alternative but to enforce them as agreed upon
and written.13
Moreover, it is undisputed that during the ten-year period, petitioner and her deceased husband
never made any demand for the balance of the purchase price. Petitioner even refused the payment
tendered by respondents during her husband’s funeral, thus showing that she was not exactly
blameless for the lapse of the ten-year period. Had she accepted the tender, payment would have
been made well within the agreed period.
If petitioner would like to impress upon this Court that the parties intended otherwise, she has to
show competent proof to support her contention. Instead, she argues that the period cannot be
extended beyond ten years, because to do so would convert the buyer’s obligation to a purely
potestative obligation that would annul the contract under Article 1182 of the Civil Code.
This contention is likewise untenable. The Code prohibits purely potestative, suspensive, conditional
obligations that depend on the whims of the debtor, because such obligations are usually not meant
to be fulfilled.14 Indeed, to allow the fulfillment of conditions to depend exclusively on the debtor’s
will would be to sanction illusory obligations. 15 The Kasulatan does not allow such thing. First,
nowhere is it stated in the Deed that payment of the purchase price is dependent upon whether
respondents want to pay it or not. Second, the fact that they already made partial payment thereof
only shows that the parties intended to be bound by the Kasulatan.
Both the trial and the appellate courts arrived at this finding.1âwphi1 Well-settled is the rule that
findings of fact by the CA are generally binding upon this Court and will not be disturbed on appeal,
especially when they are the same as those of the trial court. 16 Petitioner has not given us sufficient
reasons to depart from this rule.
Second Issue: Rescission Unrelated to Registration
The CA further ruled that rescission in this case would be unjust to respondents, because a
certificate of title had already been issued in their names. Petitioner nonetheless argues that the
Court is still empowered to order rescission.
We clarify. The issuance of a certificate of title in favor of respondents does not determine whether
petitioner is entitled to rescission. It is a fundamental principle in land registration that such title
serves merely as an evidence of an indefeasible and incontrovertible title to the property in favor of
the person whose name appears therein.17

While a review of the decree of registration is no longer possible after the expiration of the one-
year period from entry, an equitable remedy is still available to those wrongfully deprived of their
property.18 A certificate of title cannot be subject to collateral attack and can only be altered,
modified or canceled in direct proceedings in accordance with law. 19 Hence, the CA correctly held
that the propriety of the issuance of title in the name of respondents was an issue that was not
determinable in these proceedings.

Third Issue: Reconveyance of the Portion Importunately Included

Petitioner argues that it would be reasonable for respondents to pay her the value of the lot,
because the CA erred in ruling that the reconveyance of the extra 58-square meter lot, which had
been included in the certificate of title issued to them, was no longer feasible.

In principle, we agree with petitioner. Registration has never been a mode of acquiring ownership
over immovable property, because it does not create or vest title, but merely confirms one already
created or vested.20 Registration does not give holders any better title than what they actually
have.21 Land erroneously included in the certificate of title of another must be reconveyed in favor
of its true and actual owner.22

Section 48 of Presidential Decree 1529, however, provides that the certificate of title shall not be
subject to collateral attack, alteration, modification, or cancellation except in a direct
proceeding.23 The cancellation or removal of the extra portion from the title of respondents is not
permissible in an action for rescission of the contract of sale between them and petitioner’s late
husband, because such action is tantamount to allowing a collateral attack on the title.
G.R. No. 187521               March 14, 2012

It appears that an action for cancellation/annulment of patent and title and for reversion was
F.F. CRUZ & CO., INC., Petitioner, 
already filed by the State in favor of petitioner and the heirs of her husband. 24 Hence, there is no
vs.
need in this case to pass upon the right of respondents to the registration of the subject land under
HR CONSTRUCTION CORP., Respondent.
their names. For the same reason, there is no necessity to order them to pay petitioner the fair
market value of the extra 58-square meter lot importunately included in the title. REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by petitioner F.F. Cruz & Co., Inc. (FFCCI) assailing the
WHEREFORE, the assailed Decision and Resolution are AFFIRMED with the MODIFICATION that the
Decision1 dated February 6, 2009 and Resolution2 dated April 13, 2009 issued by the Court of Appeals (CA) in CA-G.R. SP No. 91860.
payment for the extra 58-square meter lot included in respondents’ title is DELETED.
The Antecedent Facts

Sometime in 2004, FFCCI entered into a contract with the Department of Public Works and
Highways (DPWH) for the construction of the Magsaysay Viaduct, known as the Lower Agusan
Development Project. On August 9, 2004, FFCCI, in turn, entered into a Subcontract
Agreement3 with HR Construction Corporation (HRCC) for the supply of materials, labor, equipment,
tools and supervision for the construction of a portion of the said project called the East Bank Levee
and Cut-Off Channel in accordance with the specifications of the main contract.

The subcontract price agreed upon by the parties amounted to ₱31,293,532.72. Pursuant to the
Subcontract Agreement, HRCC would submit to FFCCI a monthly progress billing which the latter
would then pay, subject to stipulated deductions, within 30 days from receipt thereof.

The parties agreed that the requests of HRCC for payment should include progress accomplishment
of its completed works as approved by FFCCI. Additionally, they agreed to conduct a joint
measurement of the completed works of HRCC together with the representative of DPWH and
consultants to arrive at a common quantity.
Thereafter, HRCC commenced the construction of the works pursuant to the Subcontract
Agreement.
On September 17, 2004, HRCC submitted to FFCCI its first progress billing in the amount of
₱2,029,081.59 covering the construction works it completed from August 16 to September 15,
2004.4 However, FFCCI asserted that the DPWH was then able to evaluate the completed works of
HRCC only until July 25, 2004. Thus, FFCCI only approved the gross amount of ₱423,502.88 for
payment. Pursuant to the Subcontract Agreement, FFCCI deducted from the said gross amount
₱42,350.29 for retention and ₱7,700.05 for expanded withholding tax leaving a net payment in the
amount of ₱373,452.54. This amount was paid by FFCCI to HRCC on December 3, 2004.5
FFCCI and the DPWH then jointly evaluated the completed works of HRCC for the period of July 26
to September 25, 2004. FFCCI claimed that the gross amount due for the completed works during
the said period was ₱2,008,837.52. From the said gross amount due, FFCCI deducted therefrom
₱200,883.75 for retention and ₱36,524.07 for expanded withholding tax leaving amount of
₱1,771,429.45 as the approved net payment for the said period. FFCCI paid this amount on
December 21, 2004.6
On October 29, 2004, HRCC submitted to FFCCI its second progress billing in the amount of
₱1,587,760.23 covering its completed works from September 18 to 25, 2004. 7 FFCCI did not pay
the amount stated in the second progress billing, claiming that it had already paid HRCC for the
completed works for the period stated therein.
On even date, HRCC submitted its third progress billing in the amount of ₱2,569,543.57 for its
completed works from September 26 to October 25, 2004. 8 FFCCI did not immediately pay the
amount stated in the third progress billing, claiming that it still had to evaluate the works
accomplished by HRCC.
On November 25, 2004, HRCC submitted to FFCCI its fourth progress billing in the amount of
₱1,527,112.95 for the works it had completed from October 26 to November 25, 2004.
Subsequently, FFCCI, after it had evaluated the completed works of HRCC from September 26 to
November 25, 2004, approved the payment of the gross amount of ₱1,505,570.99 to HRCC. FFCCI
deducted therefrom ₱150,557.10 for retention and ₱27,374.02 for expanded withholding tax
leaving a net payment of ₱1,327,639.87, which amount was paid to HRCC on March 11, 2005.9
Meanwhile, HRCC sent FFCCI a letter10 dated December 13, 2004 demanding the payment of its
progress billings in the total amount of ₱7,340,046.09, plus interests, within three days from
receipt thereof. Subsequently, HRCC completely halted the construction of the subcontracted
project after taking its Christmas break on December 18, 2004.
On March 7, 2005, HRCC, pursuant to the arbitration clause in the Subcontract Agreement, filed
with the Construction Industry Arbitration Commission (CIAC) a Complaint11 against FFCCI praying
for the payment of the following: (1) overdue obligation in the reduced amount of ₱4,096,656.53 as
of December 15, 2004 plus legal interest; (2) ₱1,500,000.00 as attorney’s fees; (3) ₱80,000.00 as
acceptance fee and representation expenses; and (4) costs of litigation.
In its Answer,12 FFCCI claimed that it no longer has any liability on the Subcontract Agreement as
the three payments it made to HRCC, which amounted to ₱3,472,521.86, already represented the
amount due to the latter in view of the works actually completed by HRCC as shown by the survey
it conducted jointly with the DPWH. FFCCI further asserted that the delay in the payment
processing was primarily attributable to HRCC inasmuch as it presented unverified work
accomplishments contrary to the stipulation in the Subcontract Agreement regarding requests for
payment.
Likewise, FFCCI maintained that HRCC failed to comply with the condition stated under the
Subcontract Agreement for the payment of the latter’s progress billings, i.e. joint measurement of
the completed works, and, hence, it was justified in not paying the amount stated in HRCC’s
progress billings.
On June 16, 2005, an Arbitral Tribunal was created composed of Engineer Ricardo B. San Juan,
Joven B. Joaquin and Attorney Alfredo F. Tadiar, with the latter being appointed as the Chairman.
In a Preliminary Conference held on July 5, 2005, the parties defined the issues to be resolved in
the proceedings before the CIAC as follows:
1. What is the correct amount of [HRCC’s] unpaid progress billing?
2. Did [HRCC] comply with the conditions set forth in subparagraph 4.3 of the Subcontract
Agreement for the submission, evaluation/processing and release of payment of its progress
billings?
3. Did [HRCC] stop work on the project?
3.1 If so, is the work stoppage justified?
3.2 If so, what was the percentage and value of [HRCC’s] work accomplishment at the time it
stopped work on the project?
4. Who between the parties should bear the cost of arbitration or in what proportion should it be
shared by the parties?13
Likewise, during the said Preliminary Conference, HRCC further reduced the amount of overdue
obligation it claimed from FFCCI to ₱2,768,916.66. During the course of the proceedings before the
CIAC, HRCC further reduced the said amount to ₱2,635,397.77 – the exact difference between the
total amount of HRCC’s progress billings (₱6,107,919.63) and FFCCI’s total payments in favor of
the latter (₱3,472,521.86).
The CIAC Decision
On September 6, 2005, after due proceedings, the CIAC rendered a Decision 14 in favor of HRCC, the
decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the Claimant HR CONSTRUCTION
CORPORATION and AWARD made on its monetary claim against Respondent F.F. CRUZ & CO., INC.,
as follows:
[₱]2,239,452.63 as the balance of its unpaid billings and
101,161.57 as reimbursement of the arbitration costs.
[₱]2,340,614.20 Total due the Claimant
Interest on the foregoing amount [₱]2,239,452.63 shall be paid at the rate of 6% per annum from
the date of this Decision. After finality of this Decision, interest at the rate of 12% per annum shall
be paid thereon until full payment of the awarded amount shall have been made x x x.
The CIAC held that the payment method adopted by FFCCI is actually what is known as the "back-
to-back payment scheme" which was not agreed upon under the Subcontract Agreement. As such,
the CIAC ruled that FFCCI could not impose upon HRCC its valuation of the works completed by the
latter. The CIAC gave credence to HRCC’s valuation of its completed works as stated in its progress
billings. Thus:
During the trial, [FFCCI’s] Aganon admitted that [HRCC’s] accomplishments are included in its own
billings to the DPWH together with a substantial mark-up to cover overhead costs and profit. He
further admitted that it is only when DPWH approves its (Respondent’s) billings covering [HRCC’s]
scope of work and pays for them, that [FFCCI] will in turn pay [HRCC] for its billings on the sub-
contracted works.
On clarificatory questioning by the Tribunal, [FFCCI] admitted that there is no "back-to-back"
provision in the sub-contract as basis for this sequential payment arrangement and, therefore,
[FFCCI’s] imposition thereof by withholding payment to [HRCC] until it is first paid by the project
owner on the Main Contract, clearly violates said sub-contract. It [is] this unauthorized
implementation of a back-to-back payment scheme that is seen to be the reason for [FFCCI’s] non-
payment of the third progress billings.
It is accordingly the holding of this Arbitral Tribunal that [FFCCI] is not justified in withholding
payment of [HRCC’s] third progress billing for this scheme that [HRCC] has not agreed to in the
sub-contract agreement x x x.
The total retention money deducted by [FFCCI] from [HRCC’s] three progress billings, amounts to
[₱]395,945.14 x x x. The retention money is part of [HRCC’s] progress billings and must, therefore,
be credited to this account. The two amounts (deductions and net payments) total [₱]3,868,467.00
x x x. This represents the total gross payments that should be credited and deducted from the total
gross billings to arrive at what has not been paid to the [HRCC]. This results in the amount of
[₱]2,239,452.63 ([₱]6,107,919.63 - [₱]3,868,467.00) as the correct balance of [HRCC’s] unpaid
billings.16
Further, the CIAC ruled that FFCCI had already waived its right under the Subcontract Agreement
to require a joint measurement of HRCC’s completed works as a condition precedent to the
payment of the latter’s progress billings. Hence:
[FFCCI] admits that in all three instances where it paid [HRCC] for its progress billings, it never
required compliance with the aforequoted contractual provision of a prior joint quantification.
Such repeated omission may reasonably be construed as a waiver by [FFCCI] of its contractual
right to require compliance of said condition and it is now too late in the day to so impose it.
Article 6 of the Civil Code expressly provides that "rights may be waived unless the waiver is
contrary to law, public order, public policy, morals or good customs". The tribunal cannot see any
such violation in this case.
[FFCCI’s] omission to enforce the contractually required condition of payment, has led [HRCC] to
believe it to be true that indeed [FFCCI] has waived the condition of joint quantification and,
therefore, [FFCCI] may not be permitted to falsify such resulting position.17
Likewise, the CIAC held that FFCCI’s non-payment of the progress billings submitted by HRCC gave
the latter the right to rescind the Subcontract Agreement and, accordingly, HRCC’s work stoppage
was justified. It further opined that, in effect, FFCCI had ratified the right of HRCC to stop the
construction works as it did not file any counterclaim against HRCC for liquidated damages arising
therefrom.
FFCCI then filed a petition for review with CA assailing the foregoing disposition by the CIAC.
The CA Decision
On February 6, 2009, the CA rendered the herein assailed Decision 18 denying the petition for review
filed by FFCCI. The CA agreed with the CIAC that FFCCI had waived its right under the Subcontract
Agreement to require a joint quantification of HRCC’s completed works.
The CA further held that the amount due to HRCC as claimed by FFCCI could not be given credence
since the same was based on a survey of the completed works conducted without the participation
of HRCC. Likewise, being the main contractor, it ruled that it was the responsibility of FFCCI to
include HRCC in the joint measurement of the completed works. Furthermore, the CA held that
HRCC was justified in stopping its construction works on the project as the failure of FFCCI to pay
its progress billings gave the former the right to rescind the Subcontract Agreement.
FFCCI sought a reconsideration 19 of the said February 6, 2009 Decision but it was denied by the CA
in its Resolution20 dated April 13, 2009.
Issues
In the instant petition, FFCCI submits the following issues for this Court’s resolution:
[I.] x x x First, [d]oes the act of [FFCCI] in conducting a verification survey of [HRCC’s] billings in
the latter’s presence amount to a waiver of the right of [FFCCI] to verify and approve said
billings? What, if any, is the legal significance of said act?
[II.] x x x Second, [d]oes the payment of [FFCCI] to [HRCC] based on the results of the above
mentioned verification survey result in the former being obliged to accept whatever
accomplishment was reported by the latter?
[III.] x x x Third, [d]oes the mere comparison of the payments made by [FFCCI] with the
contested progress billings of [HRCC] amount to an adjudication of the controversy between the
parties?
[IV.] x x x Fourth, [d]oes the failure of [FFCCI] to interpose a counterclaim against [HRCC] for
liquidated damages due to the latter’s work stoppage, amount to a ratification of such work
stoppage?
[V.] x x x Fifth, [d]id the [CA] disregard or overlook significant and material facts which would
affect the result of the litigation?21
In sum, the crucial issues for this Court’s resolution are: first, what is the effect of FFCCI’s non-
compliance with the stipulation in the Subcontract Agreement requiring a joint quantification of the
works completed by HRCC on the payment of the progress billings submitted by the latter; and
second, whether there was a valid rescission of the Subcontract Agreement by HRCC.
The Court’s Ruling
The petition is not meritorious.
Procedural Issue: Finality and Conclusiveness of the CIAC’s Factual Findings
Before we delve into the substantial issues raised by FFCCI, we shall first address the procedural
issue raised by HRCC. According to HRCC, the instant petition merely assails the factual findings of
the CIAC as affirmed by the CA and, accordingly, not proper subjects of an appeal under Rule 45 of
the Rules of Court. It likewise pointed out that factual findings of the CIAC, when affirmed by the
CA, are final and conclusive upon this Court.
Generally, the arbitral award of CIAC is final and may not be appealed except on questions of law.
Executive Order (E.O.) No. 100822 vests upon the CIAC original and exclusive jurisdiction over
disputes arising from, or connected with, contracts entered into by parties involved in construction
in the Philippines. Under Section 19 of E.O. No. 1008, the arbitral award of CIAC "shall be final and
inappealable except on questions of law which shall be appealable to the Supreme Court."23
In Hi-Precision Steel Center, Inc. v. Lim Kim Steel Builders, Inc.,24 we explained raison d’ etre for
the rule on finality of the CIAC’s arbitral award in this wise:
Voluntary arbitration involves the reference of a dispute to an impartial body, the members of
which are chosen by the parties themselves, which parties freely consent in advance to abide by
the arbitral award issued after proceedings where both parties had the opportunity to be heard. The
basic objective is to provide a speedy and inexpensive method of settling disputes by allowing the
parties to avoid the formalities, delay, expense and aggravation which commonly accompany
ordinary litigation, especially litigation which goes through the entire hierarchy of courts. Executive
Order No. 1008 created an arbitration facility to which the construction industry in the Philippines
can have recourse. The Executive Order was enacted to encourage the early and expeditious
settlement of disputes in the construction industry, a public policy the implementation of which is
necessary and important for the realization of national development goals.
Aware of the objective of voluntary arbitration in the labor field, in the construction industry, and in
any other area for that matter, the Court will not assist one or the other or even both parties in any
effort to subvert or defeat that objective for their private purposes. The Court will not review the
factual findings of an arbitral tribunal upon the artful allegation that such body had
"misapprehended the facts" and will not pass upon issues which are, at bottom, issues of fact, no
matter how cleverly disguised they might be as "legal questions." The parties here had recourse to
arbitration and chose the arbitrators themselves; they must have had confidence in such
arbitrators. x x x25 (Citation omitted)
Thus, in cases assailing the arbitral award rendered by the CIAC, this Court may only pass upon
questions of law. Factual findings of construction arbitrators are final and conclusive and not
reviewable by this Court on appeal. This rule, however, admits of certain exceptions.
In Spouses David v. Construction Industry and Arbitration Commission, we laid down the
26 
instances when this Court may pass upon the factual findings of the CIAC, thus:
We reiterate the rule that factual findings of construction arbitrators are final and conclusive and
not reviewable by this Court on appeal, except when the petitioner proves affirmatively that: (1)
the award was procured by corruption, fraud or other undue means; (2) there was evident
partiality or corruption of the arbitrators or of any of them; (3) the arbitrators were guilty of
misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; (4) one or more of the arbitrators were
disqualified to act as such under section nine of Republic Act No. 876 and willfully refrained from
disclosing such disqualifications or of any other misbehavior by which the rights of any party have
been materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly
executed them, that a mutual, final and definite award upon the subject matter submitted to
them was not made. x x x27 (Citation omitted)
Issues on the proper interpretation of the terms of the Subcontract Agreement involve questions of
law.
A question of law arises when there is doubt as to what the law is on a certain state of facts, while
there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a
question to be one of law, the same must not involve an examination of the probative value of the
evidence presented by the litigants or any of them. The resolution of the issue must rest solely on
what the law provides on the given set of circumstances. Once it is clear that the issue invites a
review of the evidence presented, the question posed is one of fact.28
On the surface, the instant petition appears to merely raise factual questions as it mainly puts in
issue the appropriate amount that is due to HRCC. However, a more thorough analysis of the issues
raised by FFCCI would show that it actually asserts questions of law.
FFCCI primarily seeks from this Court a determination of whether amount claimed by HRCC in its
progress billing may be enforced against it in the absence of a joint measurement of the former’s
completed works. Otherwise stated, the main question advanced by FFCCI is this: in the absence of
the joint measurement agreed upon in the Subcontract Agreement, how will the completed works of
HRCC be verified and the amount due thereon be computed?
The determination of the foregoing question entails an interpretation of the terms of the
Subcontract Agreement vis-à-vis the respective rights of the parties herein. On this point, it should
be stressed that where an interpretation of the true agreement between the parties is involved in
an appeal, the appeal is in effect an inquiry of the law between the parties, its interpretation
necessarily involves a question of law.29
Moreover, we are not called upon to examine the probative value of the evidence presented before
the CIAC. Rather, what is actually sought from this Court is an interpretation of the terms of the
Subcontract Agreement as it relates to the dispute between the parties.
First Substantive Issue: Effect of Non-compliance with the Joint Quantification Requirement on the
Progress Billings of HRCC
Basically, the instant issue calls for a determination as to which of the parties’ respective valuation
of accomplished works should be given credence. FFCCI claims that its valuation should be upheld
since the same was the result of a measurement of the completed works conducted by it and the
DPWH. On the other hand, HRCC maintains that its valuation should be upheld on account of
FFCCI’s failure to observe the joint measurement requirement in ascertaining the extent of its
completed works.
The terms of the Subcontract Agreement should prevail.
In resolving the dispute as to the proper valuation of the works accomplished by HRCC, the
primordial consideration should be the terms of the Subcontract Agreement. It is basic that if the
terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.30
In Abad v. Goldloop Properties, Inc.,31 we stressed that:
A court’s purpose in examining a contract is to interpret the intent of the contracting parties, as
objectively manifested by them. The process of interpreting a contract requires the court to make
a preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written
terms of the contract are not ambiguous and can only be read one way, the court will interpret
the contract as a matter of law. If the contract is determined to be ambiguous, then the
interpretation of the contract is left to the court, to resolve the ambiguity in the light of the
intrinsic evidence.32(Emphasis supplied and citation omitted)
Article 4 of the Subcontract Agreement, in part, contained the following stipulations:
ARTICLE 4
SUBCONTRACT PRICE
4.1 The total SUBCONTRACT Price shall be THIRTY ONE MILLION
TWO HUNDRED NINETY THREE THOUSAND FIVE HUNDRED THIRTY TWO PESOS & 72/100 ONLY
([₱]31,293,532.72) inclusive of Value Added Tax x x x.
4.3 Terms of Payment
FFCCI shall pay [HRCC] within thirty (30) days upon receipt of the [HRCC’s] Monthly Progress
Billings subject to deductions due to ten percent (10%) retention, and any other sums that may be
due and recoverable by FFCCI from [HRCC] under this SUBCONTRACT. In all cases, however, two
percent (2%) expanded withholding tax on the [HRCC’s] income will be deducted from the monthly
payments.
Requests for the payment by the [HRCC] shall include progress accomplishment of completed
works (unit of work accomplished x unit cost) as approved by [FFCCI]. Cut-off date of monthly
billings shall be every 25th of the month and joint measurement shall be conducted with the
DPWH’s representative, Consultants, FFCCI and [HRCC] to arrive at a common/agreed
quantity.33 (Emphasis supplied)
Pursuant to the terms of payment agreed upon by the parties, FFCCI obliged itself to pay the
monthly progress billings of HRCC within 30 days from receipt of the same. Additionally, the
monthly progress billings of HRCC should indicate the extent of the works completed by it, the
same being essential to the valuation of the amount that FFCCI would pay to HRCC.
The parties further agreed that the extent of HRCC’s completed works that would be indicated in
the monthly progress billings should be determined through a joint measurement conducted by
FFCCI and HRCC together with the representative of DPWH and the consultants.
Progress Billing
It is the responsibility of FFCCI to call for the joint measurement of HRCC’s completed works. 1st Progress Billing dated September 17, 2004
2nd Progress Billing dated October 29, 200438
It bears stressing that the joint measurement contemplated under the Subcontract Agreement
should be conducted by the parties herein together with the representative of the DPWH and the 3rd Progress Billing dated October 29, 2004
consultants. Indubitably, FFCCI, being the main contractor of DPWH, has the responsibility to
4th Progress Billing dated November 25, 2004
request the representative of DPWH to conduct the said joint measurement.
On this score, the testimony of Engineer Antonio M. Aganon, Jr., project manager of FFCCI, during
the reception of evidence before the CIAC is telling, thus:
MR. J. B. JOAQUIN: Engr. Aganon, earlier there was a stipulation that in all the four billings, there
never was a joint quantification.
PROF. A. F. TADIAR: He admitted that earlier. Pinabasa ko sa kanya.
ENGR. R. B. SAN JUAN: The joint quantification was done only between them and DPWH.
ENGR. AGANON: Puwede ko po bang i-explain sandali lang po regarding lang po doon sa quantification na iyon?
Basically po as main contractor of DPWH, we are the ones who [are] requesting for joint survey quantification
with the owner, DPWH. Ngayon po, although wala sa papel na nag-witness and [HRCC] still the same po, nandoon
din po sila during that time, kaya lang ho . . .
MR. J. B. JOAQUIN: Hindi pumirma?
ENGR. AGANON: Hindi sila puwede pumirma kasi ho kami po ang contractor ng DPWH hindi sila.34 (Emphasis
supplied)
FFCCI had waived its right to demand for a joint measurement of HRCC’s completed works under
the Subcontract Agreement.
The CIAC held that FFCCI, on account of its failure to demand the joint measurement of HRCC’s
completed works, had effectively waived its right to ask for the conduct of the same as a condition
sine qua non to HRCC’s submission of its monthly progress billings.
We agree.
In People of the Philippines v. Donato,35 this Court explained the doctrine of waiver in this wise:
Waiver is defined as "a voluntary and intentional relinquishment or abandonment of a known
existing legal right, advantage, benefit, claim or privilege, which except for such waiver the party
would have enjoyed; the voluntary abandonment or surrender, by a capable person, of a right
known by him to exist, with the intent that such right shall be surrendered and such person
forever deprived of its benefit; or such conduct as warrants an inference of the relinquishment of
such right; or the intentional doing of an act inconsistent with claiming it."
As to what rights and privileges may be waived, the authority is settled:
x x x the doctrine of waiver extends to rights and privileges of any character, and, since the word
‘waiver’ covers every conceivable right, it is the general rule that a person may waive any matter
which affects his property, and any alienable right or privilege of which he is the owner or which
belongs to him or to which he is legally entitled, whether secured by contract, conferred with
statute, or guaranteed by constitution, provided such rights and privileges rest in the individual,
are intended for his sole benefit, do not infringe on the rights of others, and further provided the
waiver of the right or privilege is not forbidden by law, and does not contravene public policy; and
the principle is recognized that everyone has a right to waive, and agree to waive, the advantage
of a law or rule made solely for the benefit and protection of the individual in his private capacity,
if it can be dispensed with and relinquished without infringing on any public right, and without
detriment to the community at large. x x x36 (Emphasis supplied and citations omitted)
Here, it is undisputed that the joint measurement of HRCC’s completed works contemplated by the
parties in the Subcontract Agreement never materialized. Indeed, HRCC, on separate occasions,
submitted its monthly progress billings indicating the extent of the works it had completed sans
prior joint measurement. Thus:
Period Covered Amount
37
August 16 to September 15, 2004 ₱2,029,081.59
September 18 to 25, 2004 ₱1,587,760.23
39
September 26 to October 25, 2004 ₱2,569,543.57
October 26 to November 25, 2004 ₱1,527,112.95
FFCCI did not contest the said progress billings submitted by HRCC despite the lack of a joint
measurement of the latter’s completed works as required under the Subcontract Agreement.
Instead, FFCCI proceeded to conduct its own verification of the works actually completed by HRCC
and, on separate dates, made the following payments to HRCC:
Date of Payment Period Covered Amount
December 3, 2004 40
April 2 to July 25, 2004 ₱373,452.24
December 21, 200441 July 26 to September 25, 2004 ₱1,771,429.45
March 11, 200542 September 26 to November 25, 2004 ₱1,327,639.87
FFCCI’s voluntary payment in favor of HRCC, albeit in amounts substantially different from those
claimed by the latter, is a glaring indication that it had effectively waived its right to demand for the
joint measurement of the completed works. FFCCI’s failure to demand a joint measurement of
HRCC’s completed works reasonably justified the inference that it had already relinquished its right
to do so. Indeed, not once did FFCCI insist on the conduct of a joint measurement to verify the
extent of HRCC’s completed works despite its receipt of the four monthly progress billings
submitted by the latter.
FFCCI is already barred from contesting HRCC’s valuation of the completed works having waived its
right to demand the joint measurement requirement.
In view of FFCCI’s waiver of the joint measurement requirement, the CA, essentially echoing the
CIAC’s disposition, found that FFCCI is obliged to pay the amount claimed by HRCC in its monthly
progress billings. The CA reasoned thus:
Verily, the joint measurement that [FFCCI] claims it conducted without the participation of [HRCC],
to which [FFCCI] anchors its claim of full payment of its obligations to [HRCC], cannot be applied,
nor imposed, on [HRCC]. In other words, [HRCC] cannot be made to accept a quantification of its
works when the said quantification was made without its participation. As a consequence, [FFCCI’s]
claim of full payment cannot be upheld as this is a result of a quantification that was made contrary
to the express provisions of the Subcontract Agreement.
The Court is aware that by ruling so, [FFCCI] would seem to be placed at a disadvantage because it
would result in [FFCCI] having to pay exactly what [HRCC] was billing the former. If, on the other
hand, the Court were to rule otherwise[,] then [HRCC] would be the one at a disadvantage because
it would be made to accept payment that is less than what it was billing.
Circumstances considered, however, the Court deems it proper to rule in favor of [HRCC] because
of the explicit provision of the Subcontract Agreement that requires the participation of the latter in
the joint measurement. If the Court were to rule otherwise, then the Court would, in effect, be
disregarding the explicit agreement of the parties in their contract.43
Essentially, the question that should be resolved is this: In view of FFCCI’s waiver of its right to
demand a joint measurement of HRCC’s completed works, is FFCCI now barred from disputing the
claim of HRCC in its monthly progress billings?
We rule in the affirmative.
As intimated earlier, the joint measurement requirement is a mechanism essentially granting FFCCI
the opportunity to verify and, if necessary, contest HRCC’s valuation of its completed works prior to
the submission of the latter’s monthly progress billings.
In the final analysis, the joint measurement requirement seeks to limit the dispute between the
parties with regard to the valuation of HRCC’s completed works. Accordingly, any issue which FFCCI
may have with regard to HRCC’s valuation of the works it had completed should be raised and
resolved during the said joint measurement instead of raising the same after HRCC had submitted
its monthly progress billings. Thus, having relinquished its right to ask for a joint measurement of
HRCC’s completed works, FFCCI had necessarily waived its right to dispute HRCC’s valuation of the
works it had accomplished.
Second Substantive Issue: Validity of HRCC’s Rescission of the Subcontract Agreement
Both the CA and the CIAC held that the work stoppage of HRCC was justified as the same is but an
exercise of its right to rescind the Subcontract Agreement in view of FFCCI’s failure to pay the
former’s monthly progress billings. Further, the CIAC stated that FFCCI could no longer assail the
work stoppage of HRCC as it failed to file any counterclaim against HRCC pursuant to the terms of
the Subcontract Agreement.
For its part, FFCCI asserted that the work stoppage of HRCC was not justified and, in any case, its
failure to raise a counterclaim against HRCC for liquidated damages before the CIAC does not
amount to a ratification of the latter’s work stoppage.
The determination of the validity of HRCC’s work stoppage depends on a determination of the
following: first, whether HRCC has the right to extrajudicially rescind the Subcontract Agreement;
and second, whether FFCCI is already barred from disputing the work stoppage of HRCC.
HRCC had waived its right to rescind the Subcontract Agreement.
The right of rescission is statutorily recognized in reciprocal obligations. Article 1191 of the Civil
Code pertinently reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The rescission referred to in this article, more appropriately referred to as resolution is on the
breach of faith by the defendant which is violative of the reciprocity between the parties.44 The right
to rescind, however, may be waived, expressly or impliedly.45
While the right to rescind reciprocal obligations is implied, that is, that such right need not be
expressly provided in the contract, nevertheless the contracting parties may waive the same.46
Contrary to the respective dispositions of the CIAC and the CA, we find that HRCC had no right to
rescind the Subcontract Agreement in the guise of a work stoppage, the latter having waived such
right. Apropos is Article 11.2 of the Subcontract Agreement, which reads:
11.2 Effects of Disputes and Continuing Obligations
Notwithstanding any dispute, controversy, differences or arbitration proceedings relating directly or
indirectly to this SUBCONTRACT Agreement and without prejudice to the eventual outcome thereof,
[HRCC] shall at all times proceed with the prompt performance of the Works in accordance with the
directives of FFCCI and this SUBCONTRACT Agreement.47 (Emphasis supplied)
Hence, in spite of the existence of dispute or controversy between the parties during the course of
the Subcontract Agreement, HRCC had agreed to continue the performance of its obligations
pursuant to the Subcontract Agreement. In view of the provision of the Subcontract Agreement
quoted above, HRCC is deemed to have effectively waived its right to effect extrajudicial rescission
of its contract with FFCCI.1âwphi1 Accordingly, HRCC, in the guise of rescinding the Subcontract
Agreement, was not justified in implementing a work stoppage.
The costs of arbitration should be shared by the parties equally.
Section 1, Rule 142 of the Rules of Court provides:
Section 1. Costs ordinarily follow results of suit. – Unless otherwise provided in these rules, costs
shall be allowed to the prevailing party as a matter of course, but the court shall have power, for
special reasons, to adjudge that either party shall pay the costs of an action, or that the same be
divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines
unless otherwise provided by law. (Emphasis supplied)
Although, generally, costs are adjudged against the losing party, courts nevertheless have
discretion, for special reasons, to decree otherwise.
Here, considering that the work stoppage of HRCC is not justified, it is only fitting that both parties
should share in the burden of the cost of arbitration equally. HRCC had a valid reason to institute
the complaint against FFCCI in view of the latter’s failure to pay the full amount of its monthly
progress billings. However, we disagree with the CIAC and the CA that only FFCCI should shoulder
the arbitration costs. The arbitration costs should be shared equally by FFCCI and HRCC in view of
the latter’s unjustified work stoppage.
WHEREFORE, in consideration of the foregoing disquisitions, the Decision dated February 6, 2009
and Resolution dated April 13, 2009 of the Court of Appeals in CA-G.R. SP No. 91860 are
hereby AFFIRMED with MODIFICATION that the arbitration costs shall be shared equally by the
parties herein.
G.R. No. 160025               April 23, 2014
SANGGUNIANG PANLUNGSOD NG BAGUIO CITY, Petitioner,  and installation of parking meters on Baguio City’s streets was published in the Philippine Daily Inquirer on 8, 9 and
vs.
JADEWELL PARKING SYSTEMS CORPORATION, Respondent.
x-----------------------x
SERENO, CJ:
Before this Court are nine (9) Petitions involving essentially the same parties - officials of the City Government of Baguio and Jadewell
Parking Systems Corporation (Jadewell). The only party here that is neither an official of the City Government of Baguio nor an officer of
Jadewell is former Judge Fernando Vil Pamintuan.
The two principal parties executed a Memorandum of Agreement (MOA) on 26 June 2000, whereby the City of Baguio authorized Jadewell
to regulate and collect parking fees for on-street parking in the city, as well as to implement the installation of modern parking meters.
The legal disputes embodied in the nine Petitions began when the Sangguniang Panlungsod of Baguio City (Sanggunian) revoked the MOA
through City Resolution No. 037, Series of 2002 (Resolution 37), alleging substantial breach of the MOA on the part of Jadewell. Then
Mayor Alfredo Vergara vetoed the Resolution. The Sanggunian Panlungsod overrode the veto through an unnumbered Resolution dated 17
April 2002. These twin Resolutions constitute what we call here as the first act of Rescission 1 of the MOA by the city officials of Baguio.
Jadewell denied the breach and commenced an action before the Regional Trial Court (RTC) of Baguio, 2questioning the validity of the MOA’s
revocation and the Sanggunian’s capacity to pass a resolution revoking the MOA.
There was a second act of rescission that the city officials of Baguio performed in 2006, the circumstances of which will be narrated later
on.
While the main case was under litigation, and then under appeal, the parties filed contempt charges against each other. Six of these cases
are part of the consolidated Petitions before us.
These nine highly-voluminous cases, however, all boil down essentially to just these five sets of legal questions requiring resolution:
(a) The validity or invalidity and legal efficacy of Saggunian’s two distinct acts of rescission of the MOA;
(b) The duty of a trial judge to dismiss a case assailing the validity of the MOA and the city resolution approving it in view of the
pendency of the various petitions before this Court;
(c) the liability of : (i) respondent city officials of Baguio, for various counts of indirect contempt of this court, (ii) some respondents,
who are lawyers at the same time, for acts that require the disciplinary action of disbarment, (iii) respondent Judge Pamintuan, for
taking cognizance of a civil case allegedly in defiance of this Court’s authority;
(d) the validity of the administrative suspension of one of the respondents herein, former Mayor Braulio Yaranon, by the Office of the
President in relation to his acts of non-recognition of the MOA; and
(e) the nullification of certain acts of officials of Baguio City directed against Jadewell pursuant to their belief that the latter had no
authority to continue implementing the terms of the MOA.
THE ANTECEDENT FACTS
On 1 March 1999, Jadewell proposed the privatization 3 of the administration of on-street parking in Baguio City
using Schlumberger’s DG4S Pay and Display Parking Meter (hereinafter "DG4S P&D"), which it touted as
"technologically advanced, up to the level of more progressive countries and which would make the city as the first
and only city in the Philippines, if not in Asia, to have metered parking as an important part of its traffic and parking
system."4
Respondent Sanggunian acted favorably on the proposal. 5 On 31 May 2000, it passed Resolution No. 159, Series of
1999, authorizing the City Mayor of Baguio to negotiate and enter into a Memorandum of Agreement with Jadewell
for the installation of its proposed DG4S parking technology.6
On 16 July 1999, the City Mayor of Baguio wrote to Jadewell, transmitting to it the finalized draft of the MOA, with
amendments emanating from his office. The City Mayor informed Jadewell that the finalization of the MOA would be
subject to the appropriate action of the Sanggunian and the passage of an enabling ordinance.7
On 27 March 2000, respondent Sanggunian enacted City Ordinance No. 003, Series of 2000 (Ordinance No. 003-
2000) amending Ordinance No. 13, Series of 1983, outlining the rules and policy on the privatization of the
administration of on-street parking in the city streets of Baguio. 8 For this purpose, the City of Baguio authorized the
intervention of a private operator for the regulation, charging and collection of parking fees and the installation of
modern parking meters, among others.
On 10 April 2000, the City Legal Officer of Baguio City advised the City Mayor that the project for the regulation of
on-street parking and installation of parking meters was not an infrastructure. Hence, the project was not covered
by the Build-Operate-Transfer Law9 and did not require publication of a notice for its validity.10
Nevertheless, for the sake of transparency, the City Legal Officer recommended the publication of the appropriate
notice on the project and an invitation to bid. An invitation to bid for the proposed regulation of on-street parking
10 May 2000. Four interested bidders submitted their proposals, but three were disqualified. The bid of Jadewell was
the only one not disqualified; hence, it was awarded the project.11
On 26 June 2000, the MOA was finally executed between Jadewell and the City of Baguio – through its then City
Mayor, Mauricio G. Domogan – for the installation, management and operation of the DG4S P&D parking meters.12
On 17 July 2000, the Sanggunian confirmed the MOA through its Resolution No. 205-2000.13
On 31 August 2000, the parties executed a supplemental MOA to include the Ganza/Burnham parking space, owned
by the Philippine Tourism Authority and managed by the City of Baguio, in the project.14 This supplemental
agreement was neither confirmed nor ratified by the Sanggunian.
In September of 2000, Jadewell began to mobilize and take over the parking facilities at the Ganza/Burnham Park
area.15 Around this time, questions arose regarding the compliance by Jadewell with the provisions of the MOA,
notably on matters such as obtaining the recommendation from the Department of Public Works and Highways
(DPWH) for the installation of the parking meters and the legality of the collection of parking fees being done by its
parking attendants prior to the installation of the parking meters at Burnham Park.16
On 20 December 2000, Jadewell wrote then Vice-Mayor Daniel T. Fariñas to inform him of the progress of the
deputization by the Department of Transportation and Communications–Land Transportation Office (DOTC-LTO) of
parking attendants required for the implementation of the MOA. Jadewell explained that they were still working on
the required deputization of Jadewell’s parking attendants. Nevertheless, it claimed that its parking attendants were
authorized to collect parking fees pending the actual installation of the parking meters. It also claimed that the
parking meters had not yet been installed because the necessary civil works were yet to be completed.17
Shortly thereafter, a case was filed by Edgar M. Avila, et al. with the RTC-Baguio City (Branch 61), assailing
Ordinance No. 003-2000 as unconstitutional and seeking to restrain the City Government of Baguio from
implementing the provisions of the MOA. It further alleged that the City Government could not delegate the
designation of pay parking zones to Jadewell, that the parking attendants deployed by Jadewell were not deputized,
and that the questioned ordinance creates class legislation as the designated taxi and jeepney stands were
discriminatorily removed. The case was docketed as Civil Case No. 4892-R.18 This was dismissed on motion by
Jadewell joined by the City Government of Baguio. The lower court declared that Ordinance No. 003-2000 is
constitutional and that all acts emanating from it are deemed "reasonable and non-discriminatory...having been
enacted in accordance with the powers granted to Baguio City by law." 19 Complainants’ Motion for Reconsideration
(MR) was denied.
On 24 August 2001, Edgar Avila, et al., filed a Rule 65 Petition for Certiorari, Prohibition and Mandamus with the
Supreme Court assailing the RTC’s dismissal of their Complaint. The case was docketed as G.R. No. 149642. On 10
October 2001, this Court issued a Resolution dismissing the petition of Avila, et al. for failure to state in their
petition the material dates when they received the appealed resolution and order, and to append the original or
certified true copies of the questioned resolution and order subject of their petition. 20 There was no resolution on the
merits. The Resolution became final and executory on 2 April 2002.21
A case was also filed by Nelia G. Cid against then Mayor Bernardo Vergara, et al. when her vehicle was clamped,
towed away, and impounded by Jadewell after the latter found her car to be illegally parked. She refused to pay the
corresponding fees to Jadewell and as a result, the latter refused to release her vehicle. 22 Cid filed a case for
replevin and questioned the validity of Ordinance No. 003-2000 and the MOA, as well as the authority of Jadewell to
clamp down/tow away vehicles whose owners refuse to pay parking fees. The case was docketed as Civil Case No.
5165-R and was assigned to Branch 7 of RTC-Baguio. On 24 May 2002, an Omnibus Order was issued by this RTC
that addressed several pending incidents related to the authority of Jadewell to clamp down/tow away vehicles. The
Omnibus Order upheld Jadewell’s authority to retain the vehicle of petitioner Nelia G. Cid pending her payment of
the parking and towage fees to Jadewell, and held that the authority of Jadewell was lawfully provided in Ordinance
No. 003-2000 and the MOA. Also, the RTC-Baguio took cognizance of the ruling by this Court in G.R. No. 149642
which, in its mistaken view, upheld the validity of the questioned ordinance and the MOA.23
Ultimately, Jadewell was able to install no more than 14 parking meters in three (3) areas of Baguio City: six (6) on
Session Road, five (5) on Harrison Road and three (3) on Lake Drive. 24 At the time that these meters were installed,
there were already verbal complaints being raised against Jadewell by the Sanggunian for the following alleged
violations:
a. Failure to install parking meters for each parking space as specified in Section 3-F of Ordinance No. 003-
2000;25
b. Failure to install a convenient and technologically advanced parking device that is solar-powered and can
measure the time a vehicle stays in a parking slot;26
c. Failure to give the City of Baguio the latter's share of the collected parking fee;27
d. Failure to post a performance bond in the amount of ₱1 million after its previous bond expired.28
The Sanggunian passed Resolution No. 395, Series of 2000, directing Jadewell to comply with its obligations under
the MOA for the installation of the necessary number of parking meters.29
On 15 March 2001, Jadewell wrote to the City Mayor in response to the mentioned Resolution, informing the said
office that the former had started operation of the off-street parking on 2 December 2000 and of the on-street
parking on 15 December 2000.30 On 27 January 2001, Jadewell also wrote the City Treasurer that the former had
completed installation of the parking meters.31
In response to the letter of Jadewell, the City Treasurer demanded the remittance of Baguio’s share of the parking
fees collected by Jadewell since it started operations. Jadewell responded by saying that it had complied with this
obligation.32
On 19 February 2002, the Sanggunian passed Resolution 37, 33 expressing its intent to rescind the MOA with
Jadewell. The said Resolution enumerated in the "Whereas" clauses the alleged violations of Jadewell prompting it to
rescind the MOA. It reads:
WHEREAS, it now appears from verified facts that:
1. contrary to its commitment to install a technologically based P & D parking system, at no cost to the City,
including "such equipment and paraphernalia to meter the length of usage of the affected parking spaces for
purposes of payment of the parking fees", Jadewell has installed only fourteen (14) parking meters (only 12 of
which are working) in only three (3) streets, and Jadewell does not intend to install anymore [sic]; instead it has
resorted as a rule to an exceptional circumstance of manual collection of parking fees by parking attendants who,
despite express provisions of the Ordinance, are not duly deputized by the DOTC-LTO. Despite assurances to the
Honorable City Mayor that Jadewell would stop collection of parking fees until the parking meters have been duly
installed, Jadewell continues to collect parking fees manually by using undeputized parking attendants to do the
collection;
2. contrary to its commitment to install a technologically based P & D parking system, at no cost to the City,
Jadewell has charged the cost of such and similar equipment as direct costs, thus substantially eroding the share
of the City in the parking fees;
3. contrary to its obligation to post a performance bond, Jadewell has not fully complied, and when required to
update its performance bond Jadewell refused to do so rationalizing its non-compliance by the assertion that they
are already performing and therefore are no longer obligated to post a performance bond;
4. contrary to its obligation to remit the share of the City within the first ten (10) days of the following month,
Jadewell had initially resisted making payments to the City on the pretext that the profits cannot be determined
until after the end of the fiscal year and initially failed to have their tickets pre-numbered and registered with the
Office of the City Treasurer;
5. contrary to its promise that the City would derive substantial revenue from the on-street pay parking system,
Jadewell has not paid a single centavo of the City share in on-street parking operation; whatever Jadewell has
remitted to the City are properly chargeable against the share of the City in the MOA on off-street parking (the
Burnham Parking Area near Ganza), and it appears less than what the City is entitled thereto; and
6. contrary to its representations that the P & D System which it proposed would eliminate fraud in the collection
of parking fees, Jadewell has perpetrated fraud on the City by, according to the affidavit of its former bookkeeper,
Mr. Adonis Cabungan, doctoring the financial statements before the same are submitted to City authorities.34
WHEREAS, there has been no substantial improvement of the traffic situation in the City even with the introduction
of the P & D Parking System and thus it increasingly appears that the system introduced by Jadewell is more for
revenue raising than for regulatory purposes. As a consequence the legal principle applies that the collection of
taxes cannot be let to any person. In other words, government cannot allow private persons to collect public funds
for themselves with the agreement that part thereof or as it turned out in this case no part thereof is shared with
the City;
WHEREAS, in its financial reports to the City showing substantial loses [sic] and in its statement to other persons
that it is losing money on the project, the kindest thing that the City can do for Jadewell is to prevent Jadewell from
incurring anymore [sic] loses.
NOW THEREFORE, on motion of Hon. Bautista, and Hon. Cariño, seconded by Hon. Yaranon, Hon. Weygan and Hon.
Tabora, be it RESOLVED, as it is hereby resolved, to rescind the Memorandum of Agreement (MOA) executed
between the City of Baguio and Jadewell Parking System Corporation dated 26 June 2000 on the basis of the
foregoing premises and exercising its rights under Section 12 of the MOA on the subject of On-Street Parking
executed between the City of Baguio and Jadewell Parking Systems Corporation dated 26 June 2000 and, more
importantly, performing its duty to protect and promote the general welfare of the people of Baguio City.
RESOLVED FURTHER, to direct the City Legal Officer to cause the proper notice of rescission to Jadewell Parking
Systems Corporation forthwith and to take all appropriate steps to implement and enforce the intent of this
Resolution.
RESOLVED FURTHERMORE, to inform all City officials and employees and all other persons concerned to be guided
accordingly.35
On 1 March 2002, the then City Mayor of Baguio, Bernardo M. Vergara, vetoed Resolution 37, through a letter dated
1 March 2002 addressed to the Vice-Mayor, as Presiding Officer of the Sanggunian, and its members. Mayor Vergara
reasoned that it was premature for the Sangguniang Panlungsod to rescind the MOA, because the latter provides for
a minimum period of five years before the right of rescission can be exercised; and, that the right of Jadewell to due
process was violated due to the lack of opportunity to hear the latter’s side. The City Mayor proposed a re-
negotiation of the MOA with Jadewell as a solution to the problem.36
Meanwhile, on 13 March 2002, the DOTC–Cordillera Autonomous Region (DOTC-CAR) issued a cease and desist
order to Jadewell prohibiting it from clamping down and/or towing away vehicles in Baguio City for violation of traffic
rules and regulations.37
On 17 April 2002, the Sanggunian resolved through a Resolution of the same date, to override the veto of the City
Mayor, worded thus:
NOW THEREFORE, the Sangguniang Panlungsod (City Council) in Regular Session assembled, by twelve affirmative
votes constituting more that [sic] a two-thirds vote of all its Members, has resolved to override, as it hereby
overrides, the veto of His Honor, Mayor Bernardo M. Vergara, of City Resolution Numbered 037, Series of 2002,
entitled "Rescinding the Memorandum of Agreement (MOA) Executed Between the City of Baguio and Jadewell
Parking Systems Corporation Dated 26 June 2000."38
Also at this time, Braulio D. Yaranon, who was then a member of the Sanggunian, requested a special audit from
the Commission on Audit–Cordillera Autonomous Region (COA-CAR) on the operations of Jadewell as regards the
pay parking project embodied in the MOA.
On 27 May 2002, Jadewell filed with the RTC of Baguio City a Rule 65 Petition for Certiorari, Prohibition and
Mandamus with Prayer for the Issuance of a Writ of Preliminary Injunction, assailing the validity of Resolution No.
037-2002, which rescinded the MOA between the Sangguniang Panlungsod and Jadewell. 39 The case was docketed
as Civil Case No. 5285-R and was raffled off to RTC-Baguio (Branch 61).
On 8 October 2002, the RTC Br. 61 promulgated its Decision40 finding the Sanggunian’s rescission of the MOA
unlawful. The Sanggunian then filed an appeal assailing the RTC’s decision with the Court of Appeals; the case was
docketed as CA-G.R. SP No. 74756.
Meanwhile, pending resolution of CA-G.R. SP No. 74756 before the CA, the Sanggunian passed Resolution No. 089,
Series of 2003. The resolution sought the assistance of the DOTC-CAR specifically, for it to take immediate action
against the officers and personnel of Jadewell for defying the 13 March 2002 cease-and-desist Order it issued
prohibiting the latter from clamping down and/or towing away vehicles. 41 On 27 May 2003, City Mayor Vergara
approved and signed Resolution No. 089-2003. In response, Jadewell filed a Petition for Indirect Contempt with the
CA against Mayor Vergara, the Sanggunian and other local government officers. The case was docketed as CA-G.R.
SP No. 77341. The original petition was followed by three (3) supplemental petitions filed by Jadewell in the same
case.
On 7 July 2003, the CA rendered a Decision 42 in CA G.R. SP No. 74756, affirming the assailed Decision of the trial
court which declared as invalid the Sanggunian’s rescission of the MOA. The Sanggunian filed a Motion For
Reconsideration, but this was denied by the CA through a Resolution dated 4 September 2003. 43 Aggrieved by the
denial of their appeal, the Sanggunian filed a Rule 45 Petition for Review on Certiorari with this Court, seeking to
reverse and set aside the 7 July 2003 Decision and its Resolution dated 04 September 2003 of the CA. The petition
was docketed as G.R. No. 160025, the first of the consolidated petitions herein.44
In CA-G.R. SP No. 77341, the CA dismissed in a Decision 45 promulgated on 28 July 2004 the contempt petitions filed
by Jadewell for lack of merit. The latter’s Motion For Reconsideration was likewise denied by the CA. 46Jadewell
elevated the dismissal of its contempt petitions to this Court on 8 December 2004 by filing a Rule 45 Petition for
Review on Certiorari. The case was docketed as G.R. No. 166094. This is not among the consolidated petitions
herein.
On 13 July 2003, the COA-CAR promulgated the requested Report.47 The Report’s objective was to ascertain
compliance by the contracting parties – the City of Baguio and Jadewell – with Ordinance No. 003-2000 and the
MOA. The COA-CAR Report has 12 findings, essentially as follows:
1) The provisions of the MOA and its Supplement as regards the sharing of the fees are contradicting, hence the
share of the City Government cannot be determined;48
2) There was no proper segregation by area of the parking fees collected, hence the proper share of Baguio City
cannot be determined;49
3) The City Government did not strictly implement the collection of penalties arising from the late remittances of
Jadewell, hence additional revenues were not collected; 50
4) The City Treasurer did not conduct an audit of the books and accounts of Jadewell, thus the City Government’s
share from parking fees cannot be ascertained;51
5) The use of the P&D parking meters were [sic] not maximized due to Jadewell’s non-compliance with Ordinance
No. 003-2000 and the MOA, resulting in the collection of meager income from its use;52
6) The MOA does not specify the guidelines for determining the economic viability of installing the parking meters
and the period within which to install it [sic];53
7) The Supplemental MOA was not confirmed by the City Council of Baguio in violation of R.A. No. 7160 (the Local
Government Code);54
8) The coverage of the parking operations contained in Annex "A" of the MOA was not confirmed by the City
Council in violation of R.A. No. 7160;55
9) The City Government failed to ensure proper compliance by Jadewell with the MOA provisions;56
10) The pay parking project was awarded to a bidder who did not have all the qualifications as stated in the
"Invitation to Bid" in violation of R.A. No. 7160 and Audit Circular No. 92-386;57
11) The provisions on deputization in Ordinance No. 003-2000 and the MOA are contrary to R.A. No. 4136 (the
Land Transportation and Traffic Code), thus rendering it invalid;58
12) The monthly minimum amount to be remitted to the City Government is doubtful due to the discrepancy in
the amounts collected and expenses for the year 1999 provided by the City Government to Jadewell as against
the amount certified by the Office of the City Architect and Parks Superintendent-Burnham Parks Office for the
City Government overseeing the Ganza-Burnham parking spaces.59
On 11 February 2004, after G.R. No. 160025 was filed and pending resolution by this Court, the Sangguniang
Panlungsod adopted Resolution No. 056, Series of 2004. The said Resolution informs the general public that
Jadewell had neither the authority nor the police power to clamp, tow, or impound vehicles at any place in the City
of Baguio. 60 Also, on the same date, the Sangguniang Panlungsod passed Resolution No. 059, Series of 2004, in
which it made a formal demand upon Jadewell to restore to it possession of the Ganza Parking Area.61
With these developments, Jadewell filed directly with this Court its first indirect contempt case against Bernardo M.
Vergara (then City Mayor of Baguio), its Vice-Mayor, and the entire City Council for enacting Resolution Nos. 056 &
059, Series of 2004 pending resolution by this Court of G.R. 160025. The case was docketed as G.R. No. 163052.
On 23 June 2004, this Court through its First Division, ordered G.R. No. 163052 consolidated with G.R. No.
160025.62
On 1 July 2004, then Baguio City Mayor Braulio D. Yaranon issued Executive Order No. 001-04,63 the decretal
portion of which reads:
NOW, THEREFORE, the undersigned City Mayor, pursuant to his authority to enforce all laws and ordinances
relative to the governance of the City, and to issue executive orders for the faithful and appropriate enforcement
and execution of such laws and ordinances (Sec. 455 (b) (2) and (iii), R.A. 7160) hereby affirms and gives
protection to the right of the citizenry, particularly affected motor vehicle owners, operators, and drivers, to
refuse to submit to the enforcement of Ordinance 003-2000, by the Jadewell Parking Systems Corporation, and
further to refuse to pay public revenue in the form of fees, charges, impositions, fines, and penalties provided for
in the said ordinance, to the said entity, such acts being patently illegal and prohibited by law; this Executive
Order shall be in force and effect until the City Council, as the legislative arm of the City of Baguio, shall have
adopted appropriate remedial or corrective measures on the matters and concerns specified hereinabove.
On 8 July 2004, Mayor Yaranon issued a Memorandum64 to the City Director of the Baguio City Police Department,
directing the department to stop and prevent Jadewell from clamping, towing, and impounding vehicles; to arrest
and file criminal charges against Jadewell personnel who would execute the proscribed acts specified in the said
Memorandum; and to confiscate the equipment used by Jadewell to clamp, tow, or impound vehicles under the
authority of the rescinded MOA.
On 12 July 2004, Jadewell filed its second Petition for indirect contempt again with this Court, this time against
Mayor Yaranon for having issued the above-cited Order also for the same reasons given in its first contempt petition
with this Court. The Petition was docketed as G.R. No. 164107.
Furthermore, on 15 July 2004, Jadewell filed an administrative case against Mayor Yaranon before the Office of the
President (OP). Docketed as Case No. OP 04-G-294, it sought the mayor’s suspension and removal from office. The
case against Mayor Yaranon was for his issuance of the following: (1) Executive Order No. 001-04 dated 1 July
2004; (2) the Memorandum dated 7 July 2004 limiting the pay parking business of Jadewell to certain parts of
Baguio City;; and (3) Memorandum dated 8 July 2004 directing the Baguio City Police Department to prevent
Jadewell from apprehending, towing and impounding vehicles. A supplemental petition filed by Jadewell on 19
January 2005, complaining of Executive Order No. 005-2004, which was issued on 15 October 2004, was also
included in administrative case OP 04-G-294.
On the following day, 16 July 2004, Jadewell filed a Supplemental Petition with Motion for Leave of this Court 65 in
the second contempt petition before this Court, G.R. No. 164107, alleging as a supplemental fact, Mayor Yaranon’s
Memorandum of 08 July 2004.
On 15 October 2004, Mayor Yaranon issued Executive Order No. 005-2004. 66 This was a cease and desist order
against Jadewell to prevent it from performing the following acts: (1) charging and collecting from motorists,
parking fees without their consent;67 (2) seizing and detaining vehicles of motorists who refuse to pay parking fees
to Jadewell;68 and (3) using yellow-colored heavy wreckers or tow trucks bearing the name "City of Baguio".69
In addition to Executive Order No. 005-2004, Mayor Yaranon issued Executive Order No. 005-2004-A, which is
essentially a rehash of Executive Order No. 005-2004.70
On 25 October 2004, Jadewell filed a third Petition with this Court, praying that Mayor Yaranon be cited for
contempt and that Executive Order No. 005-2004 be nullified.71 This case was docketed as G.R. No. 165564. On 16
November 2004, Jadewell filed a Supplemental Petition to this Petition alleging as a supplemental ground the
issuance of Executive Order No. 005-2004-A.72
On 20 December 2004, Mayor Yaranon issued Administrative Order No. 622, Series of 2004, which declared that
Jadewell exceeded its area of operations for the administration of on-street parking and was thus required to show
lawful cause why its business permit should not be revoked. In response to this Order, Jadewell filed a Second
Supplemental Petition for contempt against Mayor Yaranon in G.R. No. 165564 on 25 January 2005.
On 10 January 2005, this Court through a Resolution 73 ordered the consolidation of G.R. No. 160025 with G.R. Nos.
163052, 164107, and 165564.
On 17 January 2005, this Court denied Jadewell’s petition in G.R. No. 166094 for failure to show any reversible error
on the part of the CA in dismissing its petition for contempt in CA-G.R. SP No. 77341. 74 Its Motion For
Reconsideration was likewise denied with finality.75
In the beginning of the year 2005, Jadewell attempted to renew its business permit from the City of Baguio and
tendered the fees required. However, the Office of the City Mayor refused to renew the business permit and
returned the amount tendered.76 Because of these actions of Mayor Yaranon, Jadewell filed on 15 April 2005 its
Third Supplemental Petition in G.R. No. 164107, which had been consolidated with G.R. Nos. 160025, 163052, and
165564. Aside from its main prayer to cite the mayor for contempt, Jadewell also prayed that Mayor Yaranon, a
lawyer, be disbarred.77 On 25 April 2005, this Court, through its Third Division, admitted the Third Supplemental
Petition of Jadewell.78  the enabling ordinance for the MOA.
On 9 February 2005, this Court, in G.R. No. 160025, issued a Writ of preliminary mandatory injunction ordering
Mayor Yaranon to immediately reopen the streets and premises occupied and/or operated by Jadewell. The Court
also required Jadewell to post a cash or surety bond in the amount of ₱100,000 within five days from receipt of the
order.79
The order, in part, reads:
Acting on the urgent motion dated January 26, 2005 of respondent Jadewell Parking Systems Corporation for the
issuance of a temporary mandatory/preventive order and/or for writ of preliminary mandatory/prohibitory
injunction pending appeal in G.R. No. 160025, alleging that the effects of the acts of City Mayor Yaranon, unless
stayed, would also make effective what the petitioner Sangguniang Panglungsod ng Baguio failed to obtain in the
instant case, the net effect of which would not only be grave damage and injury to the respondent but also to the
City of Baguio, the Court further Resolved:
(a) to ISSUE, the WRIT OF PRELIMINARY MANDATORY INJUNCTION prayed for, effective immediately,
commanding City Mayor Yaranon to immediately reopen the streets and/or premises operated and/or occupied
by the respondent and to let them remain open, until further orders of this Court; and
(b) to require petitioner to POST a CASH BOND or a SURETY BOND from a reputable bonding company of
indubitable solvency in the amount of ONE HUNDRED THOUSAND PESOS (₱100,000.00), with terms and
conditions to be approved by the Court, within five (5) days from notice, otherwise, the writ of preliminary
mandatory injunction herein issued shall AUTOMATICALLY be lifted.
NOW THEREFORE, You, [City Mayor Braulio D. Yaranon], your agents, representatives and/or any person or persons
acting upon your orders or in your place or stead, are hereby DIRECTED to IMMEDIATELY REOPEN the streets
and/or premises operated and/or occupied by the respondents and to let the said streets and premises remain
OPEN, until further orders from this Court.
On 8 April 2005, Mayor Yaranon issued a Memorandum  directing Col. Isagani Nerez, Director of the Baguio City
80
Police District, to create a special task force to stop Jadewell from clamping, towing, and impounding vehicles in
violation of parking rules in Baguio City; to impound the wrecker/tow trucks used by Jadewell.
On 20 April 2005, this Court promulgated a Resolution in G.R. No. 160025, finding Mayor Yaranon guilty of direct
and indirect contempt. He was cited for direct contempt when it was proven that he had submitted pleadings before
this Court containing falsehoods. Mayor Yaranon had stated in his Compliance that the streets were opened for
Jadewell to resume operations, but upon inspection these were found to be closed.81 He was also cited for indirect
contempt, for having continuously refused to carry out the writ issued by this Court to reopen the streets so
Jadewell could resume operations. 82 This Court likewise fined Mayor Yaranon the amount of ₱10,000, which he paid.
The Court further ordered the National Bureau of Investigation (NBI) to immediately arrest and detain Mayor
Yaranon pending his compliance with the 9 February 2005 writ of preliminary mandatory injunction issued by this
Court, which ordered the reopening of some streets so Jadewell could continue its operations.83
On 10 August 2005, Benedicto Balajadia, et al. filed Civil Case No. 6089-R against Jadewell before the RTC–Baguio
City. The case was subsequently raffled to Branch 3 of the RTC presided by Judge Fernando Vil
Pamintuan.84 Balajadia, et al. sought to nullify the MOA between Jadewell and the City Government of Baguio and its
enabling ordinance, Ordinance No. 003-2000. The complainants also prayed for the issuance of a Temporary
Restraining Order (TRO) and for a writ of preliminary injunction against Jadewell.
On 19 April 2006, Judge Pamintuan issued an Order in Civil Case No. 6089-R granting the prayer of complainants
Balajadia et al. for the issuance of a Writ of Preliminary Prohibitory Injunction. The injunction was meant to restrain
Jadewell from proceeding with the supervision and collection of parking, towing, and impounding fees on the streets
of Baguio City. Further, Judge Pamintuan ordered the holding in abeyance of the implementation of City Ordinance
No. 003-2000 and the MOA.85
On 27 April 2006, Jadewell filed with this Court a Rule 65 Petition for Certiorari, Prohibition, and Mandamus against
Judge Pamintuan86 for refusing to dismiss Civil Case No. 6089-R. The case was docketed as G.R. No. 172215. On the
same day, Jadewell filed a Petition asking this Court to cite Judge Pamintuan for contempt. This fourth contempt
case, albeit primarily against a member of the judiciary, was docketed as G.R. No. 172216.
On 19 June 2006, G.R. No. 172215 was ordered consolidated with G.R. Nos. 160025, 163052, 164107, and
165564.87
On 23 June 2006, Mayor Yaranon wrote Jadewell a letter demanding that it desist from operating the pay parking
system in Baguio City. Simultaneously, he wrote the Sanggunian, requesting it to cancel Ordinance No. 003-2000,
On 26 June 2006, Jadewell filed a Supplemental Petition 88 in G.R. No. 172215 complaining of Judge Pamintuan’s
issuance of the following Orders in Civil Case No. 6089-R: (a) Order dated 24 April 2006 89 directing the parties to file
a pre-trial brief and setting the pre-trial of the case; (b) Order dated 01 June 2006 90 informing Jadewell that public
respondent was not suspending the proceedings, because he believed he was not covered by the writ issued by this
Court; (c) Order dated 14 June 2006 91 upholding the writ he issued in the civil case despite his receipt of a copy of
the writ of preliminary injunction issued by this Court; and (d) Order dated 16 June 2006 92 directing Jadewell to
comply with the writ of preliminary prohibitory injunction under pain of direct contempt.
On the same day, 26 June 2006, the Office of the President (OP) rendered a Decision in OP 04-G-294, the
administrative case Jadewell had filed against Mayor Yaranon, finding him guilty of grave misconduct, abuse of
authority, and oppression. Mayor Yaranon was meted out a penalty totalling 12 months suspension from office. 93This
suspension was implemented by the Department of Interior and Local Government (DILG). Aggrieved by his
suspension, Mayor Yaranon filed his Motion For Reconsideration, which was denied on 22 August 2006 by the OP.
On 29 June 2006, in response to Mayor Yaranon’s letters of 23 June 2006, Jadewell filed before this Court yet
another case for contempt – its fifth contempt case, and the third one specifically against Mayor Yaranon. In
addition to its prayer to cite the mayor for contempt, Jadewell also prayed that Mayor Yaranon, a lawyer, be
disbarred.94 The case was docketed as G.R. No. 173043.
On 31 July 2006, G.R. No. 173043 was ordered consolidated with G.R. Nos. 160025, 163052, 164107, 165564, and
172215.95 On 27 September 2006, G.R. No. 172216 was consolidated with G.R. Nos. 160025, 163052, 164107,
165564.96
On 23 August 2006, while the consolidated cases were pending resolution before this Court, the Sangguniang
Panlungsod enacted Resolution No. 204, Series of 2006. The Resolution directed the City Legal Officer to notify
Jadewell of the Baguio City Government’s intention to rescind the MOA, and to inform Jadewell to stop its operations
under the MOA 60 days after receipt of the Notice.97
On 28 August 2006, the legal counsel for Jadewell wrote to Baguio City Vice-Mayor Bautista, Jr., informing him that
the OP had denied the Motion for Reconsideration of Mayor Yaranon assailing the OP resolution ordering the latter’s
suspension as City Mayor of Baguio City.98 The counsel for Jadewell likewise stated in his letter that they were aware
that the Sanggunian was planning to issue a resolution to repeal Ordinance No. 003-2000 and rescind the MOA. The
letter requested the Vice-Mayor to veto the measure in light of the pending petitions with the Supreme Court. 99 The
said counsel likewise sent a similar letter to the Sanggunian, urging it to desist from implementing the repeal of
Ordinance No. 003-2000 and the rescission of the MOA pending the resolution of the cases with the Supreme
Court.100
On 13 September 2006, Mayor Yaranon appealed to the CA, in a case docketed as CA G.R. CV SP No. 96116,
praying for the lifting of the penalty of suspension meted him in OP 04-G-294, but this appeal was denied. Mayor
Yaranon moved for reconsideration.101
On 22 September 2006, City Legal Officer Rabanes wrote a letter to Jadewell, through its President, Mr. Rogelio Tan,
informing Jadewell of Resolution No. 204, Series of 2006, which rescinded the MOA, and ordering it to stop
operations within 60 days from notice.102 This letter was received on the same day it was issued; 103 hence, the 60-
day period lapsed on 22 November 2006. This notice, together with the resolution, constitute the second act of
rescission of the MOA by the city officials of Baguio.
On 19 October 2006, Jadewell filed the sixth contempt case with this Court against the acting City Mayor of Baguio,
Reinaldo A. Bautista, Jr., and the members of the Sanggunian, including City Legal Officer Melchor Carlos R.
Rabanes, for the second act of rescission of the MOA.104 The case was docketed as G.R. No. 174879.
On 9 October 2007, the CA dismissed Mayor Yaranon’s Petition in CA G.R. CV SP No. 96116 on the ground that it
had become moot and academic due to Mayor Yaranon’s failure to be re-elected in the 17 May 2007 elections.
Mayor Yaranon filed a Motion for Reconsideration on 07 November 2007, but this was also denied by the CA on 24
January 2008. Thus, on 17 March 2008, Mayor Yaranon filed a Rule 45 Petition before this Court seeking to reverse
and set aside the CA Decision and Resolution. It was docketed as G.R. No. 181488.
On 12 November 2008, G.R. No. 181488 was ordered consolidated with the cases already mentioned.105
THE ISSUES
1. On G.R. No. 160025 and on the claim in G.R. No. 174879 that the second act of rescission was a valid
act of rescission.
Whilst the issues are spread out among the nine cases, we have grouped these according to what are common to
the specific cases.
In our effort to simplify the issues and provide forms of relief to the parties that are not purely academic, it is
necessary to examine the operative effects that may result from any resolution of this Court. Such examination may
also help guide the parties in their future actions, and perhaps the overly-litigated matters brought before us in the
consolidated petitions may finally be put to rest.
We note at the outset that on 22 November 2006, 60 days had lapsed from receipt of the letter dated 22 September
2006, informing Jadewell of the decision of the City of Baguio to rescind the MOA under Section 12 thereof. It may
be recalled that Section 12 requires that notice of the intention to rescind be given 60 days prior to the effectivity of
the rescission. Jadewell has not questioned the legal efficacy of this notice. It has brought this matter of a second
rescission to the Court’s attention only as a matter of contumacious behavior on the part of the respondents in G.R.
No. 174879, in the same way that it brought various actions of the public respondents before the Court in its other
contempt petitions. Since the legal efficacy of the rescission in 2006 has not been contested by Jadewell in any of
the petitions before us, we thus consider this notice of rescission to have taken legal effect and therefore, at the
latest, the MOA between the City of Baguio and Jadewell has ceased to legally exist as of 22 November 2006.
Parenthetically, we note that while the validity of the second act of rescission described in G.R. No. 174879 is not
principally determinative of the respondents’ liability for indirect contempt therein, a conclusion that the second act
of rescission was undertaken competently and appropriately will to a certain degree impact our appreciation of such
possible liability. We will discuss this issue in our subsequent discussion on the charges of contempt.
Inasmuch as there is no longer any existing MOA, no order of this Court can have the effect of directing the City of
Baguio to enforce any of the terms of the MOA, which brings us to the matter of G.R. No. 160025. In whatever
direction we rule on the question of the validity of the first act of rescission, such ruling will only have the effect of
either providing Jadewell a basis to seek damages from the City of Baguio for the wrongful termination of the MOA,
should we find wrongful termination to have taken place, or, deny Jadewell that right. The possible susceptibility of
the City of Baguio and its officials to an action for damages on a finding of wrongful termination is why we do not
consider G.R. No. 160025 as having been rendered moot by the lawful rescission of the MOA on 22 November 2006.
Thus, we will proceed to rule on the issues in G.R. No. 160025.
The fallo of the RTC Decision upheld by the CA, which affirmance is the lis mota in G.R. No. 160025, reads as
follows:
WHEREFORE, judgment is rendered declaring both Sangguniang Panlungsod Resolution No. 037, Series of 2002
and the April 17, 2002 Resolution overriding the Mayor’s veto as NULL and VOID. The Writ of Preliminary
Injunction earlier issued by this Court is made PERMANENT, with costs against respondents.106
The RTC did not order the respondents therein to comply with the MOA. An order to perform a contract is not
necessarily subsumed in an order not to terminate the same.
Contrast this legal point with the fact that the prayer of Jadewell in its original petition asked the RTC, in relevant
part:
...that the writ of preliminary injunction be made permanent and the writs applied for be issued against the
respondents nullifying and voiding Resolution No. 037, series of 2002 and the resolution over-riding the veto …
and instead, directing them to perform what the memorandum of agreement requires them to do. (Emphasis
supplied)107
This latter part, which is effectively a prayer for a permanent mandatory injunction against respondents therein to
perform the terms of the MOA, are not in the fallo of the RTC decision. We consider therefore that the RTC
deliberately withheld granting the specific prayer to order Baguio City to perform the MOA. No motion to correct or
clarify the said fallo having been filed by Jadewell, the prayer to order the city officials of Baguio to perform the MOA
is hereby deemed abandoned.
We further note three things:
1. Jadewell has not questioned - in its Petition, Reply to Comment, and Memorandum before this Court - the
implication of the RTC and CA Decisions to the effect that the Sanggunian had the authority to perform acts of
contractual rescission on behalf of the City of Baguio when both these courts ignored the issue raised by Jadewell
in its Petition before the RTC, and we therefore do not consider this to be a genuine issue in this Petition before
us;
2. While the Sangguniang Panlungsod has insinuated that there was fraud and excess of authority on the part of
the mayor in the execution 108 of the MOA - because the latter provided for a smaller sharing of "20 % from the
gross profit of the operation or 50% of the net profit whichever is higher" instead of the intended "20% of gross
receipts,"109- petitioners in G.R. No. 160025 conceded even at the RTC level that they are not assailing the MOA
for being defective but for having been breached in the performance. We thus disregard all arguments in G.R. No.
160025 regarding the validity of the execution of the MOA, for being a non-issue in this case;110
3. We also immediately set aside claims of Jadewell in its Petition before the RTC that an alternative relief should
be provided by the courts in the form of compensation for terminated Build-Operate-Transfer (BOT) contracts
under the BOT Law (Republic Act No. 6957) as there is not the slightest basis on record that the administration of
on-street parking can be classified as an infrastructure contract, a basic element that must be present for any
contract to come within the terms of the BOT Law.
Having preliminarily screened out the non-issues in this case, we proceed to examine the rulings of the courts a quo
in G.R. 160025.
The CA affirmed the RTC Decision in toto, along the following points:
1. On the sole procedural issue. - The RTC was correct in treating the Petition as one for permanent injunction
with a prayer for a preliminary injunction, instead of treating it by its formal title: "Petition for Certiorari,
Prohibition and Mandamus with a Prayer for a Writ of Preliminary Injunction." It was correct in holding that if the
Petition had been treated by its formal denomination, then it would have been dismissed for failing to satisfy the
requirement that the act sought to be nullified was rendered in a judicial or quasi-judicial capacity by the
respondents, but then this formal denomination could be disregarded and the nature of the Petition should be
determined by its allegations and prayers. Since there was a prayer to permanently enjoin respondents from
enforcing the questioned resolutions, the RTC was correct in treating it as one for permanent injunction.
2. On the substantive issues:
a. On the lack of due process afforded Jadewell. – The RTC was correct in ruling that Jadewell was denied the
right to be heard before the Sanggunian rescinded the MOA. There is no evidence on record that the
Sanggunian afforded Jadewell an opportunity to present its side or refute the charges of the latter’s violation
committed under the MOA.111
 b. On the authority of the RTC to consider the effect of Section 9 of the MOA 112 when Jadewell never raised the
matter of Section 9 in any of its pleadings. – The RTC correctly considered Jadewell’s letter dated 24 November
2001, addressed to the Sanggunian and offered during the trial, which introduced the subject matter of the five
(5) year guarantee against rescission provided in Section 9 of the MOA. The CA regarded the RTC’s
consideration of said letter as judicious and added that even without it, the MOA, and its provisions, form part
of the case records.113
c. On the failure to observe the 60-day notice requirement. – The RTC correctly found that the Sanggunian
cannot validly and unilaterally rescind the MOA without observing the provisions in Section 12 of the MOA
requiring that a 60-day notice be given before rescission can take place. To allow the Sanggunian to unilaterally
rescind the MOA without giving Jadewell an opportunity to present its side is to render the right to rescission
provided in the MOA legally vulnerable.114
d. On the lack of substantiveness of the alleged breach of performance of the MOA by Jadewell. – The CA
reviewed the records of the case and upheld the findings of the RTC that the violations of Jadewell were not
substantial to merit the consequence of rescission under the MOA.115
We elucidate on the arguments of the parties, the RTC, and the CA.
In its Petition before the RTC, Jadewell argues that the rescission of the MOA was not valid, on due process grounds,
and also because there was no substantial breach on its part to justify a rescission of the MOA.116 It also asserts that
the Sanggunian had no authority to rescind the MOA, because the latter was not a party thereto.117
Jadewell sought a writ of preliminary injunction to prevent the implementation of the questioned Resolution, and
prayed that after hearing, the preliminary injunction be made permanent. It further prayed for the issuance of a writ
of certiorari to nullify the assailed Resolution; and for a mandatory injunction to compel the City Government to
perform the latter’s obligations under the MOA. 118 Jadewell alternatively invoked the provisions of Section 18 of the
Implementing Rules and Regulations (IRR) of the BOT Law, 119 in the event the RTC would uphold the validity of the
questioned Resolution.
The trial court ruled that the rescission violated the due process clause of the Constitution and failed to meet the
requirements for rescission under the Civil Code and the MOA itself. In the Sanggunian’s Memorandum, on appeal
before the CA, the Sanggunian assigned three errors to the Decision of the trial court: (1) the RTC ignored the
evidence on record and the requirements of Rule 65 when it declared the subject Resolution void; (2) Jadewell was
not denied due process when the MOA was rescinded; and (3) by ruling that the Sangguniang Panlungsod had no
right of rescission for the first 5 years of the MOA – an issue not raised in the pleadings – the trial court improperly
took up the cudgels for Jadewell in the case.120
As earlier stated, the CA upheld the RTC’s Decision in toto.
The Sanggunian filed its Motion for Reconsideration arguing that the CA had erred as follows: (1) treating Jadewell’s
petition as an original action for injunction;121 (2) ruling that Jadewell was deprived of due process122 when it
rescinded the MOA; and (3) finding that the MOA stipulated for a five-year minimum guarantee against
rescission.123This was denied, and this denial and the CA Decision are the subjects of G. R. 160025.
2. G.R. No. 172215 – Certiorari, Prohibition and Mandamus, filed by Jadewell against Judge Pamintuan
for not dismissing Civil Case No. 6089-R
Jadewell directly filed the instant Rule 65 Petition for Certiorari before this Court to nullify the denial by the trial
court of its Motion to Dismiss and its Motion for Reconsideration of the same order,124 and for ordering Jadewell to
cease collecting parking fees, and from towing and impounding vehicles on the streets of Baguio City. It also seeks
to nullify the proceedings in Civil Case No. 6089-R, invoking both res judicata and litis pendentia. 125 It contends that,
since the issue on the validity of the questioned city ordinance and the MOA was favorably ruled upon previously by
RTC Branches 7 and 61 of Baguio City in separate cases, Branch 3 of the same RTC presided by Judge Pamintuan is
bound by the rulings of the other branches.126 Litis pendentia is being invoked in relation to the petitions already
before this Court.
Mayor Yaranon is impleaded in this case on the basis of the order of Judge Pamintuan to the city mayor to perform
his duty to supervise the roads, streets and park of Baguio City, in coordination with the police and the LTO during
the validity of the Writ of Injunction that Judge Pamintuan issued.127
The main issue to be resolved in Jadewell’s Petition for certiorari is whether Judge Pamintuan’s rulings in Civil Case
No. 6089-R violated the res judicata/litis pendentia doctrines.
3. G.R. No. 181488 – The Certiorari petition filed by Yaranon seeking to reverse Resolutions dated 9
October 2008 and 24 January 2008 in CA-G.R. SP No. 96116 which upheld the validity of his suspension
as City Mayor of Baguio.
Mayor Yaranon’s instant Petition before this Court raises the following issues: (1) that his failed re-election bid was
not a supervening event in the final determination by the CA of whether he was guilty of grave misconduct, abuse of
authority, and oppression; and (2) that the CA should rule on the substantive validity of his suspension.
4. The Petitions for Contempt
a. G.R. No. 163052 – This is the first contempt petition filed by Jadewell directly with this Court against City Mayor
Vergara, the Vice Mayor, and the entire Sanggunian, for enacting Resolution Nos. 056 & 059, Series of 2004. To
recall, Resolution No. 056, Series of 2004 informs the general public that Jadewell had neither the authority nor the
police power to clamp, tow or impound vehicles at any place in the City of Baguio. 128 In Resolution No. 059, Series of
2004, the City of Baguio made a formal demand upon Jadewell to surrender the Ganza and Burnham Park Parking
Areas within thirty days. In the same Resolution, the City of Baguio also directed the City Legal Officer to file the
appropriate legal actions necessary to recover the said parking areas and to ask for damages against Jadewell.129
The core issue to be resolved in this case is whether the Sanggunian Panlungsod is guilty of indirect contempt for
enacting the above resolutions, pending resolution of G.R. No. 160025.
b. G.R. No. 164107 – This contempt petition was filed directly with this Court against then Baguio City Mayor Braulio
D. Yaranon after he issued Executive Order No. 001-04 announcing that, as City Mayor, he would give protection to
motor vehicle owners, operators, and drivers who would refuse to submit to the enforcement of traffic rules by
Jadewell such as by refusing to pay the parking fees or fines the latter imposes.
Yaranon also issued a Memorandum dated 8 July 2004, ordering the arrest and filing of criminal charges against
Jadewell personnel who would clamp, tow, or impound motor vehicles in defiance of Executive Order No. 001-04.
This was followed by a Memorandum on 8 April 2005 directing the Baguio City Police District to create a special task
force to prevent Jadewell from clamping, towing, and impounding vehicles found to be in violation of the parking
rules in Baguio City.
The issue to be resolved in this petition is whether Mayor Yaranon could be cited for contempt for the above,
pending resolution of the issue of the validity of the rescission of the MOA in G.R. Nos. 160025 and 163052.
c. G.R. No. 165564 – Jadewell filed this third contempt petition against Mayor Yaranon for issuing Executive Order
No. 005-2004 dated 15 October 2004. The order directs Jadewell to cease and desist from: (a) charging and
collecting parking fees on the streets of Baguio City without the consent of the City Government; 130 (b) seizing and
detaining vehicles of motorists who refuse to pay the parking fees to Jadewell 131 and (c) using yellow-colored tow
trucks bearing the name "City of Baguio".132 Jadewell’s petition also seeks to nullify Executive Order No. 005-2004.
On 16 November 2004, Jadewell filed a Supplemental Petition. The act complained of this time was the issuance of
Executive Order No. 005-2004-A which is a mere rehash of Executive Order No. 005-2004.133 On 25 January 2005,
Jadewell filed a Second Supplemental Petition in connection with Mayor Yaranon’s issuance of Administrative Order
No. 622, Series of 2004. The said administrative order declared that Jadewell exceeded its area of operations for the
administration of on-street parking and it required to show lawful cause why its business permit should not be
revoked.
Like in the earlier contempt petitions, Jadewell alleges that these issuances by Mayor Yaranon are contumacious
because they were made while the main petition, G.R. No. 160025 questioning the rescission of the MOA by the
Sanggunian, is still pending resolution with this Court.
d. G.R. No. 172216 – On 27 April 2006, Jadewell filed a petition for contempt against Judge Fernando Vil Pamintuan,
Presiding Judge of RTC-Branch 3 of Baguio City, in relation to Civil Case No. 6089-R pending before his sala.134 In
the said civil case, Judge Pamintuan issued an Order directing Jadewell to desist from the collection of parking fees,
from towing and impounding vehicles on the streets of Baguio City and to hold in abeyance the implementation of
City Ordinance 003-2000 and the MOA. The validity of the Order of Judge Pamintuan is the subject of a Petition for
Certiorari, Prohibition, and Mandamus instituted by Jadewell in G.R. No. 172215.
The main issue to be resolved in this case is whether Judge Pamintuan should be cited for indirect contempt by this
Court for issuing the assailed Orders.
e. G.R. No. 173043 – On 29 June 2006, Jadewell filed yet another contempt case against Mayor Yaranon. In addition
to its prayer to cite him for contempt, Jadewell also prays that Mayor Yaranon, as a lawyer, be disbarred. 135Jadewell
instituted this fifth contempt case after it received a letter from Mayor Yaranon demanding that it stop its business
operations in Baguio City, at the same time directing the Sangguniang Panlungsod to cancel Ordinance 003-2000.
The issue to be resolved in this case is whether Mayor Yaranon was guilty of indirect contempt and professional
misconduct for the above acts pending resolution of G.R. Nos. 160025, 163052,164107, 165564 and 172215.136
f. G.R. No. 174879 - On 19 October 2006, Jadewell filed a contempt case against the acting City Mayor of Baguio,
Reinaldo A. Bautista, Jr., and the members of the Sangguniang Panlungsod, including City Legal Officer Melchor
Carlos R. Rabanes, in connection with the second act of rescission. 137 Jadewell also asks that the respondents who
are lawyers, namely: Rocky Thomas A. Balisong, Edilberto B. Tenefrancia, Faustino A. Olowan, Federico J.
Mandapat, Perlita L. Chan-Rondez, and Jose M. Molintas, be disbarred.
These acts, in Jadewell’s view, are contumacious in light of the pending G.R. No. 160025 before this Court.
OUR RULINGS
1. On G.R. No. 160025
a. On the Treatment of Jadewell’s Petition as one for Permanent Injunction.
The CA sustained the position of the Sanggunian that certiorari could not prosper because when the latter enacted
Resolution 37, the Sanggunian was exercising its legislative function and not its judicial or quasi-judicial function.
The writ of certiorari under Rule 65 requires: (a) that it is directed against a tribunal, a board or an officer exercising
judicial or quasi-judicial functions; (b) that such tribunal, board, or officer has acted without or in excess of
jurisdiction or with grave abuse of discretion; and (c) that there is no appeal nor any plain, speedy and adequate
remedy in the ordinary course of law.138
The CA nevertheless proceeded to treat the Petition as an original action for injunction, ruling in this wise:
Although in the trial court, Jadewell filed said petition for Certiorari, Prohibition and Mandamus under Rule 65, it is
essentially one for Injunction under Rule 58. Said petition’s form and substance satisfied all the requirements of a
civil action for Injunction, which is the proper remedy under the attendant circumstances.
The rules of procedure ought not to be applied in a very rigid technical sense, rules of procedure are used only to
help secure, not override substantial justice. If a technical and rigid enforcement of the rules is made, their aim
would be defeated.
Considering the clear and patent denial of due process committed by the Sanggunian in precipitately rescinding the
MOA and in the interest of substantial justice, WE deem it more prudent to treat the petition filed below as an action
for Injunction under Rule 58, which is well within the jurisdiction of the trial court. Consequently, the present appeal
shall be considered as an appeal from the permanent injunction ordered by the trial court, which is properly
appealable to this Court, as held in Casilan vs. Ybaňez.139
We sustain the ruling of the appellate court treating Jadewell’s original action for certiorari as one for injunction
based on the allegations in the latter’s pleadings.
In Ramon Jimenez, Jr. v. Juan Jose Jordana, 140 the issue to be resolved was whether the nature of the action was
one for specific performance or for recovery of real property. In determining that the case was one for the recovery
of real property, the Court characterized the suit on the basis of the allegations in the Complaint. We restated the
rule that the nature of an action is determined by the material averments in the complaint and the character of the
relief sought. In the recent case of Reyes v. Alsons Development and Investment Corporation,141 we likewise ruled
that the nature of an action is determined by the allegations in the pleadings.
In Lee, Jr. v. Court of Appeals, 142 the controversy to be resolved was whether the appeal filed by the petitioner was
one under Rule 65 or Rule 42. The determination of the issue was crucial, because the appellate court had dismissed
the appeal of the petitioner, saying that the wrong mode of appeal had been used. The CA had ruled that petitioner
should have filed a certiorari petition under Rule 65 – instead of a petition under Rule 42 – to appeal the assailed
decision rendered by the RTC in the exercise of its appellate jurisdiction.
We held:
Our perusal of the petition filed before the Court of Appeals clearly shows that it is a petition for review under
Rule 42, and not a special civil action for certiorari under Rule 65. We note that in the Court of Appeals’ petition,
under the heading "Nature of the Petition," petitioner stated that it was a "petition for review on certiorari to set
aside, invalidate and reverse the Decision dated December 14, 2001 of public respondent Judge Victor T. Llamas,
Jr." Also, the reversal sought was premised on the ground that the decision was issued in gross error. The
statement under the heading "Nature of the Petition" that the trial courts’ decisions were issued with grave abuse
of discretion amounting to lack of jurisdiction, and even the caption impleading the lower courts, would not
automatically bring the petition within the coverage of Rule 65. It is hornbook doctrine that it is not the caption of
the pleading but the allegations therein that determine the nature of the action. (Emphasis supplied)
In the original action filed by Jadewell before the RTC of Baguio City, although the action was clearly denominated
as a Petition for Certiorari, Prohibition and Mandamus against the Sangguniang Panlungsod, the allegations actually
supported an action for injunction under Rule 58 of the Revised Rules on Civil Procedure. As can be gleaned from its
allegations and especially in its prayers, Jadewell filed the case with the trial court with the ultimate end of
restraining the implementation of Resolution No. 037, Series of 2002.
We agree with the CA when it ruled that Jadewell sought permanent injunction aside from the auxiliary remedy of
preliminary injunction, thus:
An action for injunction is a recognized remedy in this jurisdiction. It is a suit for the purpose of enjoining the
defendant, perpetually or for a particular time, from committing or continuing to commit a specific act, or
compelling the defendant to continue performing a particular act. It has an independent existence. The action for
injunction is distinct from the ancillary remedy of preliminary injunction, which cannot exist except only as part or
an incident of an independent action or proceeding. 143 xxxx...
In Garcia v. Adeva,144 this Court had the opportunity to clarify that while injunction can be a provisional remedy, it
can also be a main case. The Court had to make this preliminary distinction in order to find out whether the SEC had
the jurisdiction to prevent, on a permanent basis, the commission of certain acts by the respondents. Thus, the
necessity to make the distinction between injunction as a provisional remedy and injunction as a main case. It found
guidance from Garayblas v. Atienza, Jr.,145 and quoting from the latter:
Injunction is a judicial writ, process or proceeding whereby a party is ordered to do or refrain from doing a certain
act. It may be the main action or merely a provisional remedy for and as an incident in the main action. The Court
has distinguished the main action for injunction from the provisional or ancillary remedy of preliminary injunction,
thus:
The main action for injunction is distinct from the provisional or ancillary remedy of preliminary injunction which
cannot exist except only as part or an incident of an independent action or proceeding. As a matter of course, in
an action for injunction, the auxiliary remedy of preliminary injunction, whether prohibitory or mandatory, may
issue. Under the law, the main action for injunction seeks a judgment embodying a final injunction which is
distinct from, and should not be confused with, the provisional remedy of preliminary injunction, the sole object of
which is to preserve the status quo until the merits can be heard. A preliminary injunction is granted at any stage
of an action or proceeding prior to the judgment or final order. It persists until it is dissolved or until the
termination of the action without the court issuing a final injunction.
We, therefore, rule that the CA did not commit any error in treating Jadewell’s Petition for Certiorari as an original
action for injunction.
b. On the denial of due process.
The second issue in this Petition is the correctness of the CA’s ruling that Jadewell was deprived of due process
when the Sangguniang Panlungsod rescinded the MOA. The findings of the CA are as follows:
In the instant case, evidence on record does not show that before the Sanggunian passed the disputed Resolution it
gave Jadewell an opportunity to present its side. Neither did the Sanggunian convene an investigatory body to
inquire into Jadewell’s alleged violations nor at least invite Jadewell to a conference to discuss the alleged violations,
if only to give Jadewell the chance to refute any evidence gathered by it against the latter. As it is, the Sanggunian
arrogated upon itself the role of a prosecutor, judge and executioner in rescinding the MOA, all in clear violation of
Jadewell’s constitutionally embedded right to due process.146
Both courts held that Jadewell was denied due process. When the denial of due process argument is raised, it is
directed primarily against the exercise of governmental authority that "deprives life, liberty and property" without
observance what is, in the circumstances, the applicable standards of "due process." It is not an argument that is
relevant in situations of contractual breach between two purely private entities, nor is it available against the
government when the latter is not discharging a governmental function, but merely pursuing a purely commercial
activity in a proprietary capacity. In order to consider the due process argument, this Court must first determine
 whether the MOA was entered into by the City of Baguio in a governmental capacity, or in a purely proprietary
capacity.
The regulation of on-street and off-street parking is a governmental function that can be exercised by local
governments. It is important to understand the objective of the Baguio City Government in: (1) privatizing the
administration of on-street and off-street parking; and (2) its execution of a MOA with Jadewell. This can be gleaned
from the Explanatory Note and other provisions of the agreement, to wit:
The City of Baguio has earned the reputation of the CLEANEST AND GREENEST HIGHLY URBANIZED CITY for the
previous years. This has become possible due to the collective effort of both the Citizens of Baguio and the City
Government. However, the increase in population, volume of vehicles and the absence of a regulatory measure to
address this concern gradually tainted what used to be a reputation we were proud of.
The ever increasing problems, specifically those relevant to the Traffic situation is at this point the biggest
contributor to environmental degradation. Other Salient points we must consider relevant to this matter are the
problems on OBSTRUCTION AND DOUBLE PARKING which are very rampant. We further add to these the problems
on DISORGANIZED PARKING, LACK OF DEPUTIZED AGENTS to monitor, supervise and enforce traffic rules and
regulations.
At this point in time, we feel the immediate need of focusing on these problems. There is an urgent need to adopt
measures that would alleviate these matters. This we recommend that PARKING SPACES should be REGULATED in
such a manner that it would bring advantage both to the City Government and the Citizens of Baguio. We further
propose the collection of REGULATORY FEES that would be used in maintaining our roads and to hire people that
would de deputized to help ease the problems as stated above.
Finally, we believe that our roads are beyond the Commerce of Man. To convert our roads into PAY PARKING
SPACES, would be violative of this principle. However to REGULATE its use and its eventual effect would redound to
the GENERAL WELFARE will be an appreciated gesture to help preserve our image as the CLEANEST AND GREENEST
HIGHLY URBANIZED CITY.
SECTION 4. Parking spaces. A parking place may be divided into parking spaces and for the purposes of this
Ordinance, each space or for a number of spaces as determined by the private parking operator in consultation with
the concerned Official of the City of Baguio.
SECTION 5. Prohibitions against parking outside the parking spaces. No spaces shall park any motor vehicle on the
sidewalk or cause or permit any motor vehicle to wait to any road or length of road on which in any place in which
or adjacent to or in close proximity to which there is a parking place.
SECTION 7. Payment of Prescribed Charges. (1) No person shall park any motor vehicle in a parking place or
parking space during the times specified in this Ordinance without paying the prescribed charge for the required
parking period; (2) The prescribed charge payable in respect to the parking of a motor vehicle in a parking space
shall be paid by the insertion into the parking meter provided for that parking space a coin/coins of Philippine
Currency or by using cards in order to obtain the payment ticket to evidence the payment of the prescribed charge;
(3) The payment ticket shall be displayed at a conspicuous part of a motor vehicle in a parking place or parking
space; (4) The payment ticket shall be valid to be used on any parking space within the authorized period indicated
in the payment ticket.
SECTION 22. Rules. The Memorandum of Agreement (MOA) to be entered into by the City Mayor shall be governed
by this Ordinance.
From the above, the following are clear: (1) that the City of Baguio decided on the privatization of the
administration of parking for environmental and peace and safety reasons, both of which are within its powers under
Section 458(A)(5)(v) and (vi) of the Local Government Code; and (2) that the terms of agreement between the City
of Baguio and Jadewell involve the delegation of governmental functions in terms of regulating the designation and
use of parking spaces as well as the collection of fees for such use. These are indicators that any privatization
contract pursuant to the above Resolution takes the essential character of a franchise because what is being
privatized is a government-monopolized function.
It would thus be relevant to ask if there is a provision in the applicable laws or the franchise (MOA) that grants the
City of Baguio the right to revoke the latter either at will, or upon the satisfaction of certain conditions, such that
ordinary due process protection can be considered to have been waived by the franchisee. We must caution that
when we refer to revocation at will here, we are referring to the revocation of resolutory, not suspensive,
obligations.147
We have looked closely at Resolution No. 003-2000 and the MOA and have additionally reflected on the applicable
provision under the Civil Code. We have come to the conclusion that:
(a) There is only one provision that allows for unilateral revocation of the MOA, which can be found in Section 9
thereof:
9. Minimum Guaranty – The FIRST PARTY guaranties (sic) a minimum period of five (5) years against rescission;
provided that after such period, the parties may agree to increase to a reasonable rate the parking fees and the
share of the city from the parking fees collected as provided for in the guidelines, (Annex "B");
(b) This Section 9 requires that five years must have lapsed – presumably from the date of execution of the
MOA – before the unilateral right to revoke the MOA can be exercised;
(c) Therefore, before the five year period has lapsed, the right to revoke the MOA arises only under Article 1191
of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law.
From the above, it appears that in order to effect a valid revocation of the MOA prior to the lapse of the 5-year
period provided for in Section 9, the City of Baguio had to approach the problem from one or both of two
perspectives: one, negotiate the termination of the MOA with Jadewell, or two, exercise its option under Article 1191
of the Civil Code.
The first option, a negotiated pretermination of the contract, is an inherent right of every party in a contract. This
can be inferred from the freedom of the parties to contract and modify their previous covenants provided it would
not be contrary to law, morals, good customs, public order or public policy. 148 Despite the provision on the minimum
warranty against rescission stipulated in the MOA, the parties were not constrained to mutually modify such
restriction. The Sanggunian could have proposed to Jadewell the possibility of lifting the warranty against rescission
subject to the condition that the latter will comply with its obligations under the MOA.
This scenario could have impressed upon Jadewell that its contractual relations with the city government of Baguio
were less than ideal. The suggested approach for the Sanggunian could have been legally sound and practical.
Obviously, this was not done in this case; thus, Jadewell’s Complaint before the RTC of Baguio City.
The second option is the exercise of the unilateral right to rescind a bilateral contract on the part of a party who
believes that it has been injured by a breach substantial enough to warrant revocation. Where one party allegedly
failed to comply with his obligations under a contract, the injured party may rescind the obligation if the other does
not perform or is not ready and willing to perform.149 We will examine the acts of Baguio City in relation to what is
allowed under Article 1191.
Rescission under Article 1191 takes place through either of two modes: (1) through an extrajudicial declaration of
rescission; or (2) upon the grant of a judicial decree of rescission.
Extrajudicial declaration of rescission is recognized as a power which does not require judicial intervention. 150 If the
rescission is not opposed, extrajudicial declaration of rescission produces legal effect151 such that the injured party is
already relieved from performing the undertaking.152
However, the power of declaring extrajudicial rescission conferred upon the injured party is regulated by the Civil
Code. If the extrajudicial rescission is impugned by the other party, it shall be subject to a judicial
determination153where court action must be taken, and the function of the court is to declare the rescission as
having been properly or improperly made, or to give a period within which the debtor must perform the obligation
alleged to be breached. 154 A unilateral cancellation of a contract may be questioned in courts by the affected party to
determine whether or not cancellation is warranted.155 Thus, in an extrajudicial decree of rescission, revocation
cannot be completely exercised solely on a party’s own judgment that the other has committed a breach of the
obligation 156 but always subject to the right of the other party to judicially impugn such decision.
It is important to contextualize that the agreement entered into by the City of Baguio with Jadewell is the
embodiment of a grant of franchise imbued with public interest and is not merely an agreement between two private
parties.
It is our view that the first act of rescission by the City of Baguio may be valid even if there is a stipulation against it
within the first five years of the MOA’s existence. Article 1191 of the New Civil Code provides a party the right to
rescind the agreement and clearly overrides any stipulation to the contrary. However, the grounds that would serve
as basis to the application of the said article must be clearly established.
In the exercise of this option under Article 1191, was it necessary for the City of Baguio to provide Jadewell an
opportunity to air its side on the matter before the former implemented the rescission of the MOA? In the instant
case, was Jadewell deprived of procedural due process?
We answer in the negative. We disagree with the rulings of the RTC and the CA that Jadewell was deprived of due
process. In Taxicab Operators of Metro Manila v. The Board of Transportation, 157 we confronted the issue of whether
the petitioners were denied procedural due process when the respondent Board of Transportation issued a circular
ordering the phasing out of old vehicles to be used as taxicabs. In the said case, the phase-out was embodied in a
circular that was promulgated without holding a public hearing or at least requiring those affected to submit their
position papers on the policy to be implemented. We held for the respondent Board, and ruled in this wise:
Dispensing with a public hearing prior to the issuance of the Circulars is neither violative of procedural due process.
As held in Central Bank vs. Hon. Cloribel and Banco Filipino, 44 SCRA 307 (1972):
Previous notice and hearing as elements of due process, are constitutionally required for the protection of life or
vested property rights, as well as of liberty, when its limitation or loss takes place in consequence of a judicial or
quasi-judicial proceeding, generally dependent upon a past act or event which has to be established or ascertained.
It is not essential to the validity of general rules or regulations promulgated to govern future conduct of a class or
persons or enterprises, unless the law provides otherwise.
In the instant case, the assailed act by the Sanggunian Panlungsod in rescinding the MOA – be it first or second act
of rescission – was clearly in the exercise of its legislative or administrative functions and was not an exercise of a
judicial or quasi-judicial function. The Sanggunian Panlungsod does not possess any judicial or quasi-judicial
functions. The preamble of the MOA lends support to this view. Evidently, the foremost reason why the agreement
was entered into by the parties was to provide order, given Baguio City’s parking problems in identified areas, as
well as to generate income.
The objectives of the Sanggunian Panlungsod, as well as its intention to rescind the MOA; because it deems to no
longer serve the interest of the City of Baguio, are clearly an exercise of its legislative or administrative function.
However, it is another matter as to whether the City of Baguio was able to clearly establish the grounds as basis for
the exercise of its right to rescind.
c. On the allegation of Jadewell’s substantial breach of the MOA.
The Baguio City government has repeatedly mentioned that Jadewell had so far installed only 14 parking meters,
with only 12 functioning. The COA-CAR Report dated 13 July 2003 enumerated 12 findings, 158 a majority of which
indicates that Jadewell was remiss in the fulfilment of its obligations under the MOA. While Finding Nos. (1), (2),
(3), (4), (5), (8) and (12) of the COA-CAR Report state that Jadewell collected parking fees, Jadewell failed to
properly remit the same. Finding No. (11) of the COA-CAR Report states that Jadewell failed to have its parking
attendants deputized,159 a condition under the MOA that is also important to the overall objective of the endeavor.
The MOA does not specifically provide for the exact number of parking meters to be installed by Jadewell pursuant
to the parties’ objective in regulating parking in the city. Nevertheless, 100 parking spaces were allotted as
mentioned in Annex A of the MOA. 160 The agreement also obligates Jadewell to have its parking attendants
deputized by the DOTC-LTO so that they shall have the authority to enforce traffic rules and regulations in the
regulated areas.161 To the Court’s mind, these are two of the most important obligations that Jadewell had to comply
with, considering the nature and objective of the agreement it had entered into.
Despite the enumeration of the above-mentioned faults of Jadewell, we do not make a categorical finding that there
was substantial breach committed by Jadewell to justify a unilateral rescission of the MOA. We find, however, that
the RTC had not properly received evidence that would allow it to determine the extent of the claimed violations of
the MOA. Had these violations by Jadewell been proven in a proper hearing, the finding of a substantial breach of
the MOA would have been a distinct probability.
Unfortunately, neither the RTC nor the CA provided a clear basis for their rulings on the extent of the breach of the
MOA by Jadewell. Save from reiterating the Sanggunian’s litany of violations said to be committed by Jadewell,
there was no testimony on record to prove such facts and no indication as to whether the RTC or CA dismissed them
or took them at face value.
Whatever the extent of breach of contract that Jadewell may have committed – and the enumeration of Jadewell’s
alleged faults in Resolution 37 is quite extensive – the City of Baguio was still duty-bound to establish the alleged
breach.
Matters became complicated when the RTC and the CA lumped the issues on the due process violation of Baguio
City with Jadewell’s alleged substantial breaches under the MOA, instead of making a clear finding on the existence
and extent of such breach. The facts and legal issues were thus muddled.
We find fault in the lower and appellate court’s lapse in examining the issue on Jadewell’s alleged substantial
breach. Evidence-taking had to be undertaken by these courts before they could arrive at a judicial conclusion on
the presence of substantial breach.
We thus DENY the Petition of the Sanggunian Panlungsod in G.R. No. 160025 and AFFIRM the questioned CA
Decision. However, we reject the ruling made by the appellate court that the violations of Jadewell under the MOA
were not substantial. We hold that there is no sufficient evidence on record to make such determination.
While Jadewell prays for damages against the public respondent, and while ordinarily we could grant the same, the
context of this case prevents us from giving any form of recompense to Jadewell even if the rescission of the MOA
did not follow the required legal procedure. This is because it would be appalling to grant Jadewell any award of
damages, considering (1) it installed only 14 out of the apparently 100 contemplated parking meters; (2) its
employees, private citizens who did not possess any authority from the LTO, were manually collecting parking fees
from the public, and (3) it did not, apparently properly remit any significant amount of money to the City of Baguio.
These three facts are uncontested, these omissions are offensive to the concept of public service that the residents
of Baguio were promised through Jadewell. From its ambiguous responses extant in the records, it is clear that
Jadewell does not appear to be an investor who has lost in its investments in the Baguio City project. Thus, we do
not award any damages to Jadewell.
2. On G.R. Nos. 163052, 164107, 165564, 172216, 173043 and 174879 (The Contempt Petitions)
Section 3 of Rule 71 of the Revised Rules of Civil Procedure enumerates the acts constituting indirect contempt,
thus:
(a) Misbehavior of an officer of a court in the performance of his official duties or in his official transactions;
(b) Disobedience of or resistance to a lawful writ, process, order, or judgment of a court, including the act of a
person who, after being dispossessed or ejected from any real property by the judgment or process of any court
of competent jurisdiction, enters or attempts or induces another to enter into or upon such real property, for the
purpose of executing acts of ownership or possession, or in any manner disturbs the possession given to the
person adjudged to be entitled thereto;
(c) Any abuse of or any unlawful interference with the processes or proceedings of a court not constituting direct
contempt under Section 1 of this Rule;
(d) Any improper conduct tending, directly or indirectly, to impede, obstruct, or degrade the administration of
justice;
(e) Assuming to be an attorney or an officer of a court, and acting as such without authority;
(f) Failure to obey a subpoena duly served;
(g) The rescue, or attempted rescue, of a person or property in the custody of an officer by virtue of an order or
process of a court held by him.
But nothing in this section shall be so construed as to prevent the court from issuing process to bring the
respondent into court, or from holding him in custody pending such proceedings.
The rule alerts us to three possible situations, wherein, in the context of the facts of these petitions, contumacious
behaviour could have been committed by public respondents. First, disobedience or resistance to a lawful order of
this Court under paragraph (b). Second, unlawful interference with the proceedings of this Court under paragraph
(c). Third, improper conduct tending, directly or indirectly, to impeded, obstruct, or degrade the administration of
justice by this Court under paragraph (d).
Jadewell, in G.R. Nos. 163052, 164107, 165564, 172216, 173043, and 174879, bases its charges of indirect
contempt against public respondents on a claim that any action that tends to stop the implementation of the MOA is
contumacious. Such actions include desistance orders to desist against Jadewell itself, the second act of unilateral
rescission of the MOA; orders to other public officers to prevent Jadewell from exercising its authority under the
MOA; and the official encouragement for motorists to resist attempts of Jadewell to collect parking fees or
clamp/tow vehicles that do not observe the parking regulations.
We find scant jurisprudence to guide us on this matter. The closest situation is that presented in Southern
Broadcasting Network v. Davao Light and Power,162 penned by Justice Felix Makasiar. In that case, petitioner’s
representative, Carmen Pacquing, wrote a letter to President Marcos asking for his intervention so that her Motion
for Reconsideration (MR) of the resolution of this Court denying her Petition could be favorably granted. Respondent
Davao Light asked that petitioner Pacquing be cited for contempt, arguing that her act in writing to the President
asking him to intervene in the case showed disrespect to and disregard for the authority of this Court as the final
arbiter of all cases. We found petitioner Pacquing guilty of contempt, thus:
x x x. WE hold that such actuation of herein petitioner’s representative only bespeaks more of her contumacious
attempt to trifle with the orderly administration of justice because if she know that this Court will ultimately decide
the case "regardless of the President’s intervention," then she should have desisted from writing to the President.
In the light of the foregoing, there is no doubt that Mrs. Pacquing committed an "improper conduct tending, directly
or indirectly, to impede, obstruct, or degrade the administration of justice" (Section 3, par. [d] Rule 71, Rules of
Court) and impair the respect due to the courts of justice in general, and the Supreme Court, in particular.
In the above case, respondent Carmen Pacquing was clearly asking the President to commit an improper act – to
influence the Supreme Court – that obstructs the orderly administration of justice, as the Court is constitutionally
required to act independently free from the promptings of the President. Pacquing clearly violated both Sections (c)
and (d) of Section 3, Rule 71.
No such similar situation occurred here. Public respondents never asked anyone to employ pressure or influence on
this Court for the former’s benefit.
Instead, the acts that have been allegedly committed by public respondents are acts done pursuant to their belief
that: (a) the MOA has been validly voided, and more importantly, (b) that Jadewell’s personnel do not have the
legal authority to perform the governmental function of administering the regulation of on-street and off-street
parking, of towing or clamping vehicles that violate such regulation, and of collecting parking fees from motorists.
It is important to note that the Court never gave a mandatory injunction that is couched in a way that requires
public respondents to fully comply with the terms of the MOA. The writ of preliminary mandatory injunction (WPMI)
issued on 9 February 2005 is directed to Mayor Yaranon only, and it directs him to perform only one specific act: to
reopen, and maintain open, the street and premises then being occupied and operated by Jadewell.
Mayor Yaranon did not immediately comply with this WPMI. Thus, this Court fined him ₱10,000 on 20 April 2005,
and ordered the NBI to arrest him if he further failed to comply with the WPMI. Subsequently, Mayor Yaranon paid
the fine, and there is nothing on record to show that he has, since April of 2005, further defied this Court on that
score.
The Court did not issue a WPMI specifically ordering the parties to observe the terms of the MOA. Thus, public
respondents were not expressly prohibited to act on their beliefs regarding the validity or invalidity of the MOA, or,
the authority or lack of authority of Jadewell personnel to perform governmental functions in the streets of Baguio.
This is an important result, because to hold otherwise is to effectively grant one of the parties a mandatory
injunction even without an express resolution to this effect from the Court. Without an express order, the pendency
of a suit before the Supreme Court is not a prima facie entitlement of provisional relief to either party.
Public respondents therefore were, at liberty to question and inform the public of their belief regarding the lack of
authority of Jadewell and its personnel to regulate public parking in Baguio. They were certainly free to formally
write Jadewell on their beliefs and pass the corresponding resolutions to this effect. The mayor was also not under
legal compulsion to renew Jadewell’s business permit in view of his opinion that Jadewell was exceeding its
allowable area of operation, which Jadewell was not able to fully disprove. This is especially true for two important
reasons: (1) there is an uncontested cease and desist order that was issued by the DOTC-CAR on 13 March 2002
which Jadewell defied well into 2005, and (2) public respondents are city officials of Baguio who have the legal duty
to ensure the laws are being followed, including laws that define who may enforce regulations on public parking.
That Jadewell personnel do not have the legal authority to enforce regulations on public parking is categorical from
the Letter dated 1 February 2001 by the Regional Director of the DOTC-CAR denying the request of Jadewell for the
deputation of its personnel.163
We therefore do not find any of the public respondents who were then officials of the City of Baguio, liable for
indirect contempt, and thereby dismiss G.R. Nos. 163052, 164107, 165564, 173043 and 174879. In G.R. 174879,
we have already pronounced that the Sanggunian was within its full right to perform the second act of rescission,
and thus, it is even with more reason, that its members and the City Legal Officer cannot be held in contempt
therefor. We deny the prayer in the petitions to disbar the respondents therein who are lawyers.
We also do not find Judge Fernando Vil Pamintuan liable for contempt in G.R. No. 172216.
Jadewell wants this Court to cite Judge Pamintuan for contempt for issuing a writ of preliminary prohibitory
injunction ordering Jadewell to stop collecting parking fees; to refrain from supervising the parking in Baguio City;
as well as to hold in abeyance the implementation of the MOA and its enabling ordinance.164
It was only on 5 June 2006 that this Court, in G.R. No. 172215, issued a Temporary Restraining Order
(TRO)165directing the trial court to discontinue the proceedings in Civil Case No. 6089-R. Upon receipt by Judge
Pamintuan of the TRO, he immediately ordered the cancellation of the 29 June 2006 hearing.166
We do not consider the promulgation of the assailed writ of preliminary prohibitory injunction against Jadewell as a
defiance of our writ issued on 9 February 2005, considering, it was directed against Mayor Yaranon only. We have
held in Leonidas v. Supnet that "a party cannot be held in indirect contempt for disobeying a court order which is
not addressed to him."167 We note that Judge Pamintuan observed deference to the Orders of this Court when he
immediately suspended the proceedings in Civil Case No. 6089-R upon receipt of the TRO.
G.R. No. 172215
In this Petition for certiorari, prohibition, and mandamus under Rule 65 of the Rules of Civil Procedure, Jadewell
assails the Orders of RTC-Branch 3 (Baguio City) denying its motion to dismiss and motion for reconsideration in
Civil Case No. 6089-R.
We deny the petition of Jadewell in this case.
In Manuel Camacho v. Atty. Jovito Coresis, Jr.,168 we described the nature of special civil action for certiorari under
Rule 65, as follows:
A special civil action for certiorari under Rule 65 of the Rules of Court is an extraordinary remedy for the
correction of errors of jurisdiction. To invoke the Court’s power of judicial review under this Rule, it must first be
shown that respondent tribunal, board or officer exercising judicial or quasi- judicial functions has indeed acted
without or in excess of its or his jurisdiction, and that there is no appeal, or any plain, speedy and adequate
remedy in the ordinary course of law. Conversely, absent a showing of lack or excess of jurisdiction or grave
abuse of discretion amounting to lack or excess of jurisdiction, the acts of the respondents may not be subjected
to our review under Rule 65.
In Indiana Aerospace University v. Commission on Higher Education,169 this Court ruled thus:
An order denying a motion to dismiss is interlocutory, and so the proper remedy in such a case is to appeal after
a decision has been rendered. A writ of certiorari is not intended to correct every controversial interlocutory
ruling; it is resorted to only to correct a grave abuse of discretion or a whimsical exercise of judgment equivalent
to lack of jurisdiction. Its function is limited to keeping an inferior court within its jurisdiction and to relieve
persons from arbitrary acts -- acts which courts or judges have no power or authority in law to perform. It is not
designed to correct erroneous findings and conclusions made by the court.
In East Asia Traders, Inc. v. Republic of the Philippines, et al.,170 we decreed:
The petition for certiorari and prohibition filed by petitioner with the Court of Appeals is not the proper remedy to
assail the denial by the RTC of the motion to dismiss. The Order of the RTC denying the motion to dismiss is
merely interlocutory. An interlocutory order does not terminate nor finally dispose of the case, but leaves
something to be done by the court before the case is finally decided on the merits. It is always under the control
of the court and may be modified or rescinded upon sufficient grounds shown at any time before final judgment.
This proceeds from the court’s inherent power to control its process and orders so as to make them conformable
to law and justice. The only limitation is that the judge cannot act with grave abuse of discretion, or that no
injustice results thereby.
East Asia Trader also reiterated our ruling in Indiana Aerospace. Further, in Bonifacio Construction Management
Corporation v. Hon. Perlas Bernabe,171 we reiterated our rulings in East Asia Traders and Indiana Aerospace. We had
ruled in these earlier cases that an order of the trial court denying a motion to dismiss is an interlocutory order, and
to use a writ of certiorari to assail it is improper.
The procedural policy in the cited cases was again referred to in Bernas v. Sovereign Ventures, Inc., 172 highlighting a.) In G.R. No. 160025, the Petition of the Sangguniang Panlungsod of Baguio City is DENIED. The CA Decision
the following: dated 7 July 2003 in CA G.R. SP No. 74756 is hereby AFFIRMED with modification. There is not enough evidence
Let it be stressed at this point the basic rule that when a motion to dismiss is denied by the trial court, the on record to conclude that Jadewell’s violations were sufficient to justify the unilateral cancellation of the MOA by
remedy is not to file a petition for certiorari, but to appeal after a decision has been rendered. (Emphasis the Sangguniang Panlungsod of Baguio City; at the same time, neither the RTC nor the CA provided a clear
supplied) finding whether the breach of the MOA by Jadewell was substantial. We affirm the CA as to the rest of its
dispositions in its assailed Decision. Nevertheless, no award of damages is hereby made in favour of Jadewell and
G.R. No. 181488 neither is there any pronouncement as to costs.

The question of law raised by petitioner Yaranon in this Petition for Review on Certiorari is whether the CA correctly
dismissed his appeal questioning the validity of his suspension from office as City Mayor, on the ground that his suit
had become moot and academic due to his non-re-election to office. The CA cited Crespo v. Provincial Board of
Nueva Ecija173 as basis for the dismissal.
For his part, Mayor Yaranon contends that the appellate court should have ruled on the validity of his suspension
from office despite his failure to get re-elected as City Mayor. He argues that he has the right to know whether his
suspension was valid or not and, in the event his suspension is declared invalid, Mayor Yaranon believes he is
entitled to the salaries and benefits accruing during the period he was suspended.
b.) G.R. Nos. 163052, 164107, 165564, 172216, 173043 and 174879, the Petitions of Jadewell to cite Mayor
Braulio D. Yaranon, Mayor Bernardo M. Vergara, Acting City Mayor Reinaldo A. Bautista, Vice Mayor Betty Lourdes
F. Tabanda, the members of the Sangguniang Panlungsod of Baguio City namely: Elmer O. Datuin, Antonio R.
Tabora, Edilberto B. Tenefrancia, Federico J. Mandapat, Jr., Richard A. Carino, Faustino A. Olowan, Rufino M.
Panagan, Leonardo B. Yangot, Jr., Rocky Thomas A. Balisong, Galo P. Weygan, Perlita L. Chan-Rondez, Jose M.
Molintas, and Judge Fernando Vil Pamintuan for indirect contempt and to disbar Sangguniang Panlungsod
members Rocky Thomas A. Balisong, Edilberto B. Tenefrancia, Faustino A. Olowan, Federico J. Mandapat, Perlita
L. Chan-Rondez, Jose M. Molintas, Melchor Carlos B. Rabanes and Mayor Braulio D. Yaranon are all hereby
DISMISSED for lack of merit. No pronouncement as to costs.

We deny the Petition of Mayor Yaranon.
The appeal of Mayor Yaranon has been rendered moot and academic. We hold that the resolution of the issue raised
herein would serve no practical purpose.
In Miriam College v. Court of Appeals, 174 we ruled that a case becomes moot and academic when there is no more
actual controversy between the parties, or when no useful purpose can be served in passing upon the merits.
Further, courts will not determine a moot question in which no practical relief can be granted.175
c.) We DENY the Petition of Jadewell for lack of merit in G.R. No. 172215. We likewise DENY its prayer for the
issuance of a temporary restraining order and/or writ of preliminary injunction for being moot and academic. No
pronouncement as to costs.
d.) We DENY the Petition of Mayor Braulio D. Yaranon in G.R. No. 181488, for lack of merit and AFFIRM the CA
Decision CA-G.R. SP No. 96116. No pronouncement as to costs.

Mayor Yaranon has already served his suspension. We find no practical value in remanding his case to the appellate
court for the determination of the factual basis and legal issues of his appeal pertaining to the validity of his
suspension as then City Mayor of Baguio City.

We have held in Nicart, Jr. v. Sandiganbayan (Third Division), 176 that an issue becomes moot when a petitioner is
not entitled to substantial relief:
x x x [T]he propriety of the preventive suspension of petitioner effected through the assailed Resolution of
February 15, 2001 has become a moot issue, it appearing that he has already served his suspension. An issue
becomes moot and academic when it ceases to present a justifiable controversy so that a determination thereof
would be of no practical use and value. In such cases, there is no actual substantial relief to which petitioner
would be entitled to and which would be negated by the dismissal of the petition.

We cannot sustain Mayor Yaranon’s argument that his appeal should not have been dismissed because, in the event
that the finding of the Office of the President to suspend him is reversed, he is still entitled to the salaries accruing
during the period he was suspended. We take note of the cases cited by Mayor Yaranon such as Crespo v. Provincial
Board of Nueva Ecija,177 Baquerfo v. Sanchez178 and Reyes v. Cristi, 179 among others. These cases involve substantial
issues – such as denial of due process and procedural irregularities – other than a mere claim for entitlement to
salaries. The factual background and the legal issues for resolution in the cases mentioned are not similar to the
case at bar.

In Triste v. Leyte State College Board of Trustees180 the Court elucidated on the nature of the salary of a public
official:
Mechem states that "(l)ike the requirement of an oath, the fact of the payment of a salary and/or fees may aid in
determining the nature of a position, but it is not conclusive, for while a salary or fees are usually annexed to the
office, it is not necessarily so. As in the case of the oath, the salary or fees are mere incidents and form no part of
the office. Where a salary or fees are annexed, the office is often said to be ‘coupled with an interest’; where
neither is provided for it is a naked or honorary office, and is supposed to be accepted merely for the public G.R. No. 167615
good." (Emphasis supplied)
SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the Name and Style
Given the circumstances of this case, we find that Mayor Yaranon’s claim for unpaid salaries, in case of exoneration,
does not constitute such substantial relief that would justify the revival of his appeal. Even if we did sustain his
"COLORKWIK LABORATORIES" AND "COLORKWIK PHOTO SUPPLY", Petitioners, 
Petition, we nevertheless find that it has been mooted by our resolution in the main petition. vs.
KODAK PHILIPPINES, LTD., Respondent.
WHEREFORE, we hereby rule as follows:
LEONEN, J.:
This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30, 2005 Decision 1 and September 9, 2005 Amended
Decision2 of the Court of Appeals, which modified the February 26, 1999 Decision 3 of the Regional Trial Court by reducing the amount of
damages awarded to petitioners Spouses Alexander and Julie Lam (Lam Spouses).4 The Lam Spouses argue that respondent Kodak
Philippines, Ltd.’s breach of their contract of sale entitles them to damages more than the amount awarded by the Court of Appeals.5
I unit, its standard accessories, and a separate generator set. 22 Based on this Decision, Kodak
On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an agreement
(Letter Agreement) for the sale of three (3) units of the Kodak Minilab System 22XL 6 (Minilab
Equipment) in the amount of ₱1,796,000.00 per unit,7 with the following terms:
This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik Laboratories, Inc.
with three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal Avenue
(Manila), Tagum (Davao del Norte), and your existing Multicolor photo counter in Cotabato City
under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later than
June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE
THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION SEVEN
HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab Equipment in
Tagum, Davao Province.9 The delivered unit was installed by Noritsu representatives on March 9,
1992.10 The Lam Spouses issued postdated checks amounting to ₱35,000.00 each for 12 months as
payment for the first delivered unit, with the first check due on March 31, 1992.11
The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated March 31,
1992 allegedly due to insufficiency of funds.12 The same request was made for the check due on
April 30, 1992. However, both checks were negotiated by Kodak Philippines, Ltd. and were honored
by the depository bank.13 The 10 other checks were subsequently dishonored after the Lam
Spouses ordered the depository bank to stop payment.14
Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the unit it
delivered together with its accessories. 15 The Lam Spouses ignored the demand but also rescinded
the contract through the letter dated November 18, 1992 on account of Kodak Philippines, Ltd.’s
failure to deliver the two (2) remaining Minilab Equipment units.16
On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or recovery of
sum of money. The case was raffled to Branch 61 of the Regional Trial Court, Makati City. 17 The
Summons and a copy of Kodak Philippines, Ltd.’s Complaint was personally served on the Lam
Spouses.18
The Lam Spouses failed to appear during the pre-trial conference and submit their pre-trial brief
despite being given extensions.19 Thus, on July 30, 1993, they were declared in default.20 Kodak
Philippines, Ltd. presented evidence ex-parte.21 The trial court issued the Decision in favor of Kodak
Philippines, Ltd. ordering the seizure of the Minilab Equipment, which included the lone delivered
Philippines, Ltd. was able to obtain a writ of seizure on December 16, 1992 for the Minilab
Equipment installed at the Lam Spouses’ outlet in Tagum, Davao Province.23 The writ was enforced
on December 21, 1992, and Kodak Philippines, Ltd. gained possession of the Minilab Equipment
unit, accessories, and the generator set.24
The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the Orders issued by
the trial court dated July 30, 1993 and August 13, 1993. These Orders were subsequently set aside
by the Court of Appeals Ninth Division, and the case was remanded to the trial court for pre-trial.25
On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge Fernando V.
Gorospe, Jr.,26 who had issued the writ of seizure. 27 The ground for the motion for inhibition was not
provided. Nevertheless, Judge Fernando V. Gorospe Jr. inhibited himself, and the case was
reassigned to Branch 65 of the Regional Trial Court, Makati City on October 3, 1995.28
In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak Philippines, Ltd.
defaulted in the performance of its obligation under its Letter Agreement with the Lam Spouses. 29 It
held that Kodak Philippines, Ltd.’s failure to deliver two (2) out of the three (3) units of the Minilab
Equipment caused the Lam Spouses to stop paying for the rest of the installments. 30 The trial court
noted that while the Letter Agreement did not specify a period within which the delivery of all units
was to be made, the Civil Code provides "reasonable time" as the standard period for compliance:
The second paragraph of Article 1521 of the Civil Code provides:
Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for
sending them is fixed, the seller is bound to send them within a reasonable time.
What constitutes reasonable time is dependent on the circumstances availing both on the part of
the seller and the buyer. In this case, delivery of the first unit was made five (5) days after the date
of the agreement. Delivery of the other two (2) units, however, was never made despite the lapse
of at least three (3) months.31
Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all three (3)
purchased units within a reasonable time.32
The trial court found:
Kodak would have the court believe that it did not deliver the other two (2) units due to the
failure of defendants to make good the installments subsequent to the second. The court is not
convinced. First of all, there should have been simultaneous delivery on account of the
circumstances surrounding the transaction. . . . Even after the first delivery . . . no delivery was
made despite repeated demands from the defendants and despite the fact no installments were
due. Then in March and in April (three and four months respectively from the date of the
agreement and the first delivery) when the installments due were both honored, still no delivery
was made.
Second, although it might be said that Kodak was testing the waters with just one delivery -
determining first defendants’ capacity to pay - it was not at liberty to do so. It is implicit in the
letter agreement that delivery within a reasonable time was of the essence and failure to so
deliver within a reasonable time and despite demand would render the vendor in default.
 Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account of
defendants’ inability to pay, non-delivery during the two (2) months that payments were honored
is unjustified.33
Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of the first
unit, they became liable for the fair value of the goods received:
On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of the Civil
Code, in the event the buyer accepts incomplete delivery and uses the goods so delivered, not then
knowing that there would not be any further delivery by the seller, the buyer shall be liable only for
the fair value to him of the goods received. In other words, the buyer is still liable for the value of
the property received. Defendants were under obligation to pay the amount of the unit. Failure of
delivery of the other units did not thereby give unto them the right to suspend payment on the unit
delivered. Indeed, in incomplete deliveries, the buyer has the remedy of refusing payment unless
delivery is first made. In this case though, payment for the two undelivered units have not even
commenced; the installments made were for only one (1) unit.
Hence, Kodak is right to retrieve the unit delivered.34
The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to deliver
the remaining units did not give them the right to suspend payment for the unit already
delivered.35 However, the trial court held that since Kodak Philippines, Ltd. had elected to cancel the
sale and retrieve the delivered unit, it could no longer seek payment for any deterioration that the
unit may have suffered while under the custody of the Lam Spouses.36
As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to mislead the
court by claiming that it had delivered the generator set with its accessories to the Lam Spouses,
when the evidence showed that the Lam Spouses had purchased it from Davao Ken Trading, not
from Kodak Philippines, Ltd.37 Thus, the generator set that Kodak Philippines, Ltd. wrongfully took
from the Lam Spouses should be replaced.38
The dispositive portion of the Regional Trial Court Decision reads:
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the following:
1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid; and
2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal Ave.,
Manila outlets.
On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an issue the
Regional Trial Court’s failure to order Kodak Philippines, Ltd. to pay: (1) ₱2,040,000 in actual
damages; (2) ₱50,000,000 in moral damages; (3) ₱20,000,000 in exemplary damages; (4)
₱353,000 in attorney’s fees; and (5) ₱300,000 as litigation expenses. 40 The Lam Spouses did not
appeal the Regional Trial Court’s award for the generator set and the renovation expenses.41
Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals 42 dismissed it on
December 16, 2002 for Kodak Philippines, Ltd.’s failure to file its appellant’s brief, without prejudice
to the continuation of the Lam Spouses’ appeal.43 The Court of Appeals’ December 16, 2002
Resolution denying Kodak Philippines, Ltd.’s appeal became final and executory on January 4,
2003.44
In the Decision45 dated March 30, 2005, the Court of Appeals Special Fourteenth Division modified
the February 26, 1999 Decision of the Regional Trial Court:
WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the
Regional Trial Court, Branch 65 in Civil Case No. 92-3442 is hereby MODIFIED. Plaintiff-appellant
is ordered to pay the following:
1. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid; and
2. P440,000.00 as actual damages;
3. P25,000.00 as moral damages; and
4. P50,000.00 as exemplary damages.
The Court of Appeals agreed with the trial court’s Decision, but extensively discussed the basis for
the modification of the dispositive portion.
The Court of Appeals ruled that the Letter Agreement executed by the parties showed that their
obligations were susceptible of partial performance. Under Article 1225 of the New Civil Code, their
obligations are divisible:
In determining the divisibility of an obligation, the following factors may be considered, to wit: (1)
the will or intention of the parties, which may be expressed or presumed; (2) the objective or
purpose of the stipulated prestation; (3) the nature of the thing; and (4) provisions of law
affecting the prestation.
Applying the foregoing factors to this case, We found that the intention of the parties is to be bound
separately for each Minilab Equipment to be delivered as shown by the separate purchase price for
each of the item, by the acceptance of Sps. Lam of separate deliveries for the first Minilab
Equipment and for those of the remaining two and the separate payment arrangements for each of
the equipment. Under this premise, Sps. Lam shall be liable for the entire amount of the purchase
price of the Minilab
Equipment delivered considering that Kodak had already completely fulfilled its obligation to deliver
the same. . . .
Third, it is also evident that the contract is one that is severable in character as demonstrated by
the separate purchase price for each of the minilab equipment.  "If the part to be performed by one
party consists in several distinct and separate items and the price is apportioned to each of them,
the contract will generally be held to be severable. In such case, each distinct stipulation relating to
a separate subject matter will be treated as a separate contract." Considering this, Kodak's breach
of its obligation to deliver the other two (2) equipment cannot bar its recovery for the full payment
of the equipment already delivered. As far as Kodak is concerned, it had already fully complied with
its separable obligation to deliver the first unit of Minilab Equipment.47 (Emphasis supplied)
The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the delivered
Minilab Equipment unit and its standard accessories are concerned, since Kodak Philippines, Ltd.
had the right to possess it:48
The purchase price of said equipment is P1,796,000.00 which, under the agreement is payable with
forty eight (48) monthly amortization. It is undisputed that Sps. Lam made payments which
amounted to Two Hundred Seventy Thousand Pesos (P270,000.00) through the following checks:
Metrobank Check Nos. 00892620 and 00892621 dated 31 March 1992 and 30 April 1992
respectively in the amount of Thirty Five Thousand Pesos (P35,000.00) each, and BPI Family Check
dated 31 July 1992 amounting to Two Hundred Thousand Pesos (P200,000.00). This being the
case, Sps. Lam are still liable to Kodak in the amount of One Million Five Hundred Twenty Six
Thousand Pesos (P1,526,000.00), which is payable in several monthly amortization, pursuant to the
Letter Agreement. However, Sps. Lam admitted that sometime in May 1992, they had already
ordered their drawee bank to stop the payment on all the other checks they had issued to Kodak as
payment for the Minilab Equipment delivered to them. Clearly then, Kodak ha[d] the right to
repossess the said equipment, through this replevin suit. Sps. Lam cannot excuse themselves from
paying in full the purchase price of the equipment delivered to them on account of Kodak’s breach
of the contract to deliver the other two (2) Minilab Equipment, as contemplated in the Letter
Agreement.49(Emphasis supplied)
Echoing the ruling of the trial court, the Court of Appeals held that the liability of the Lam Spouses
to pay the remaining balance for the first delivered unit is based on the second sentence of Article
1592 of the New Civil Code.50 The Lam Spouses’ receipt and use of the Minilab Equipment before
they knew that Kodak Philippines, Ltd. would not deliver the two (2) remaining units has made
them liable for the unpaid portion of the purchase price.51
The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its contract with
the Lam Spouses in the letter dated October 14, 1992.52 The rescission was based on Article 1191
of the New Civil Code, which provides: "The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent upon him." 53 In its
letter, Kodak Philippines, Ltd. demanded that the Lam Spouses surrender the lone delivered unit of
Minilab Equipment along with its standard accessories.54
The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through its letter
dated November 18, 1992 on account of Kodak Philippines, Inc.’s breach of the parties’ agreement
to deliver the two (2) remaining units.55
As a result of this rescission under Article 1191, the Court of Appeals ruled that "both parties must
be restored to their original situation, as far as practicable, as if the contract was never entered
into."56 The Court of Appeals ratiocinated that Article 1191 had the effect of extinguishing the
obligatory relation as if one was never created:57
To rescind is to declare a contract void in its inception and to put an end to it as though it never
were. It is not merely to terminate it and to release parties from further obligations to each other
but abrogate it from the beginning and restore parties to relative positions which they would have
occupied had no contract been made.58
The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit and its
standard accessories, while Kodak Philippines, Ltd. was ordered to return the amount of
₱270,000.00, tendered by the Lam Spouses as partial payment.59
As to the actual damages sought by the parties, the Court of Appeals found that the Lam Spouses
were able to substantiate the following:
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of lease
which made the Sps. Lam liable, by way of advance payment, in the amount of P40,000.00, the
same being intended for the repair of the flooring of the leased premises; and lastly, the payment
of P300,000.00, as compromise agreement for the pre-termination of the contract of lease with
Ruales.60
The total amount is ₱440,000.00. The Court of Appeals found that all other claims made by the Lam
Spouses were not supported by evidence, either through official receipts or check payments.61
As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis of the writ
of replevin, the Court of Appeals found that there was no basis for the Lam Spouses’ claim for
reasonable rental of ₱5,000.00. It held that the trial court’s award of 12% interest, in addition to
the cost of the generator set in the amount of ₱130,000.00, is sufficient compensation for whatever
damage the Lam Spouses suffered on account of its improper seizure.62
The Court of Appeals also ruled on the Lam Spouses’ entitlement to moral and exemplary damages,
as well as attorney’s fees and litigation expenses:
In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have manifested
bad faith and malevolence because as earlier ruled upon, it was well within its right to do the
same. However, with respect to the seizure of the generator set, where Kodak misrepresented to
the court a quo  its alleged right over the said item, Kodak’s bad faith and abuse of judicial
processes become self-evident. Considering the off-setting circumstances attendant, the amount
of P25,000.00 by way of moral damages is considered sufficient.
In addition, so as to serve as an example to the public that an application for replevin should not be
accompanied by any false claims and misrepresentation, the amount of P50,000.00 by way of
exemplary damages should be pegged against Kodak.
With respect to the attorney’s fees and litigation expenses, We find that there is no basis to award
Sps. Lam the amount sought for.63
Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but it was
denied for lack of merit.64 However, the Court of Appeals noted that the Lam Spouses’ Opposition
correctly pointed out that the additional award of ₱270,000.00 made by the trial court was not
mentioned in the decretal portion of the March 30, 2005 Decision:
Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to the
amount of Two Hundred Seventy Thousand (P270,000.00) which plaintiff-appellant should return
to the defendantsappellants, the Court also ruled that defendants-appellants should, in turn,
relinquish possession of the Minilab Equipment and the standard accessories to plaintiff-appellant.
Inadvertently, these material items were not mentioned in the decretal portion of the Decision.
Hence, the proper correction should herein be made.65
The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand, Kodak
Philippines, Ltd. filed its Motion for Reconsideration 66 before the Court of Appeals on April 22, 2005.
While the Petition for Review on Certiorari filed by the Lam Spouses was pending before this court,
the Court of Appeals Special Fourteenth Division, acting on Kodak Philippines, Ltd.’s Motion for
Reconsideration, issued the Amended Decision 67 dated September 9, 2005. The dispositive portion
of the Decision reads:
WHEREFORE, premises considered, this Court resolved that:
A. Plaintiff-appellant’s Motion for Reconsideration is hereby DENIED for lack of merit.
B. The decretal portion of the 30 March 2005 Decision should now read as follows:
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the
Regional Trial Court, Branch 65 in Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-appellant
is ordered to pay the following:
a. P270,000.00 representing the partial payment made on the Minilab equipment.
b. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid;
c. P440,000.00 as actual damages;
d. P25,000.00 as moral damages; and
 e. P50,000.00 as exemplary damages.
Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-appellant the
Minilab equipment and the standard accessories delivered by plaintiff-appellant.
Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd. filed a Motion
for Extension of Time to File an Appeal by Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure before this court.69
This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November 2, 2005,
the Lam Spouses moved that G.R. No. 167615 and G.R. No. 169639 be consolidated since both
involved the same parties, issues, transactions, and essential facts and circumstances.70
In the Resolution dated November 16, 2005, this court noted the Lam Spouses’ September 23 and
September 30, 2005 Manifestations praying that the Court of Appeals’ September 9, 2005 Amended
Decision be considered in the resolution of the Petition for Review on Certiorari. 71 It also granted
the Lam Spouses’ Motion for Consolidation.72
In the Resolution73 dated September 20, 2006, this court deconsolidated G.R No. 167615 from G.R.
No. 169639 and declared G.R. No. 169639 closed and terminated since Kodak Philippines, Ltd.
failed to file its Petition for Review.
II
We resolve the following issues:
First, whether the contract between petitioners Spouses Alexander and Julie Lam and respondent
Kodak Philippines, Ltd. pertained to obligations that are severable, divisible, and susceptible of
partial performance under Article 1225 of the New Civil Code; and
Second, upon rescission of the contract, what the parties are entitled to under Article 1190 and
Article 1522 of the New Civil Code.
Petitioners argue that the Letter Agreement it executed with respondent for three (3) Minilab
Equipment units was not severable, divisible, and susceptible of partial performance. Respondent’s
recovery of the delivered unit was unjustified.74
Petitioners assert that the obligations of the parties were not susceptible of partial performance
since the Letter Agreement was for a package deal consisting of three (3) units. 75 For the delivery
of these units, petitioners were obliged to pay 48 monthly payments, the total of which constituted
one debt.76 Having relied on respondent’s assurance that the three units would be delivered at the
same time, petitioners simultaneously rented and renovated three stores in anticipation of
simultaneous operations.77 Petitioners argue that the divisibility of the object does not necessarily
determine the divisibility of the obligation since the latter is tested against its susceptibility to a
partial performance.78 They argue that even if the object is susceptible of separate deliveries, the
transaction is indivisible if the parties intended the realization of all parts of the agreed obligation.79
Petitioners support the claim that it was the parties’ intention to have an indivisible agreement by
asserting that the payments they made to respondent were intended to be applied to the whole
package of three units.80 The postdated checks were also intended as initial payment for the whole
package.81 The separate purchase price for each item was merely intended to particularize the unit
prices, not to negate the indivisible nature of their transaction.82 As to the issue of delivery,
petitioners claim that their acceptance of separate deliveries of the units was solely due to the
constraints faced by respondent, who had sole control over delivery matters.83
With the obligation being indivisible, petitioners argue that respondent’s failure to comply with its
obligation to deliver the two (2) remaining Minilab Equipment units amounted to a breach.
Petitioners claim that the breach entitled them to the remedy of rescission and damages under
Article 1191 of the New Civil Code.84
Petitioners also argue that they are entitled to moral damages more than the ₱50,000.00 awarded
by the Court of Appeals since respondent’s wrongful act of accusing them of non-payment of their
obligations caused them sleepless nights, mental anguish, and wounded feelings. 85 They further
claim that, to serve as an example for the public good, they are entitled to exemplary damages as
respondent, in making false allegations, acted in evident bad faith and in a wanton, oppressive,
capricious, and malevolent manner.86
Petitioners also assert that they are entitled to attorney’s fees and litigation expenses under Article
2208 of the New Civil Code since respondent’s act of bringing a suit against them was baseless and
malicious. This prompted them to engage the services of a lawyer.87
Respondent argues that the parties’ Letter Agreement contained divisible obligations susceptible of
partial performance as defined by Article 1225 of the New Civil Code. 88 In respondent’s view, it was
the intention of the parties to be bound separately for each individually priced Minilab Equipment
unit to be delivered to different outlets:89
The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at their Tagum,
Davao del Norte, Sta. Cruz, Manila and Cotabato City outlets. Each of these units [is] independent
from one another, as many of them may perform its own job without the other. Clearly the
objective or purpose of the prestation, the obligation is divisible.
The nature of each unit of the three (3) Minilab Equipment is such that one can perform its own
functions, without awaiting for the other units to perform and complete its job. So much so, the
nature of the object of the Letter Agreement is susceptible of partial performance, thus the
obligation is divisible.90
With the contract being severable in character, respondent argues that it performed its obligation
when it delivered one unit of the Minilab Equipment.91 Since each unit could perform on its own,
there was no need to await the delivery of the other units to complete its job.92 Respondent then is
of the view that when petitioners ordered the depository bank to stop payment of the issued checks
covering the first delivered unit, they violated their obligations under the Letter Agreement since
respondent was already entitled to full payment.93
Respondent also argues that petitioners benefited from the use of the Minilab Equipment for 10
months—from March to December 1992— despite having paid only two (2) monthly installments.
Respondent avers that the two monthly installments amounting to ₱70,000.00 should be the
subject of an offset against the amount the Court of Appeals awarded to petitioners.95
Respondent further avers that petitioners have no basis for claiming damages since the seizure and
recovery of the Minilab Equipment was not in bad faith and respondent was well within its right.96
III
The Letter Agreement contained an indivisible obligation.
Both parties rely on the Letter Agreement97 as basis of their respective obligations. Written by
respondent’s Jeffrey T. Go and Antonio V. Mines and addressed to petitioner Alexander Lam, the
Letter Agreement contemplated a "package deal" involving three (3) units of the Kodak Minilab
System 22XL, with the following terms and conditions:
This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik Laboratories, Inc.
with three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal Avenue
(Manila), Tagum (Davao del Norte), and your existing Multicolor photo counter in Cotabato City
under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later than
June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE
THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION SEVEN
HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]98
Based on the foregoing, the intention of the parties is for there to be a single transaction covering
all three (3) units of the Minilab Equipment. Respondent’s obligation was to deliver all products
purchased under a "package," and, in turn, petitioners’ obligation was to pay for the total purchase
price, payable in installments.
The intention of the parties to bind themselves to an indivisible obligation can be further discerned
through their direct acts in relation to the package deal. There was only one agreement covering all
three (3) units of the Minilab Equipment and their accessories. The Letter Agreement specified only
one purpose for the buyer, which was to obtain these units for three different outlets. If the
intention of the parties were to have a divisible contract, then separate agreements could have
been made for each Minilab Equipment unit instead of covering all three in one package deal.
Furthermore, the 19% multiple order discount as contained in the Letter Agreement was applied to
all three acquired units.99 The "no downpayment" term contained in the Letter Agreement was also
applicable to all the Minilab Equipment units. Lastly, the fourth clause of the Letter Agreement
clearly referred to the object of the contract as "Minilab Equipment Package."
In ruling that the contract between the parties intended to cover divisible obligations, the Court of
Appeals highlighted: (a) the separate purchase price of each item; (b) petitioners’ acceptance of
separate deliveries of the units; and (c) the separate payment arrangements for each
unit.100 However, through the specified terms and conditions, the tenor of the Letter Agreement
indicated an intention for a single transaction. This intent must prevail even though the articles
involved are physically separable and capable of being paid for and delivered individually,
consistent with the New Civil Code:
Article 1225. For the purposes of the preceding articles, obligations to give definite things and
those which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is indivisible
if so provided by law or intended by the parties.  (Emphasis supplied)
In Nazareno v. Court of Appeals, 101 the indivisibility of an obligation is tested against whether it can
be the subject of partial performance:
An obligation is indivisible when it cannot be validly performed in parts, whatever may be the
nature of the thing which is the object thereof. The indivisibility refers to the prestation and not
to the object thereof. In the present case, the Deed of Sale of January 29, 1970 supposedly
conveyed the six lots to Natividad. The obligation is clearly indivisible because the performance of
the contract cannot be done in parts, otherwise the value of what is transferred is diminished.
Petitioners are therefore mistaken in basing the indivisibility of a contract on the number of
obligors.102 (Emphasis supplied, citation omitted)
There is no indication in the Letter Agreement that the units petitioners ordered were covered by
three (3) separate transactions. The factors considered by the Court of Appeals are mere incidents
of the execution of the obligation, which is to deliver three units of the Minilab Equipment on the
part of respondent and payment for all three on the part of petitioners. The intention to create an
indivisible contract is apparent from the benefits that the Letter Agreement afforded to both parties.
Petitioners were given the 19% discount on account of a multiple order, with the discount being
equally applicable to all units that they sought to acquire. The provision on "no downpayment" was
also applicable to all units. Respondent, in turn, was entitled to payment of all three Minilab
Equipment units, payable by installments.
IV
With both parties opting for rescission of the contract under Article 1191, the Court of Appeals
correctly ordered for restitution.
The contract between the parties is one of sale, where one party obligates himself or herself to
transfer the ownership and deliver a determinate thing, while the other pays a certain price in
money or its equivalent.103 A contract of sale is perfected upon the meeting of minds as to the
object and the price, and the parties may reciprocally demand the performance of their respective
obligations from that point on.104
The Court of Appeals correctly noted that respondent had rescinded the parties’ Letter Agreement
through the letter dated October 14, 1992.105 It likewise noted petitioners’ rescission through the
letter dated November 18, 1992.106This rescission from both parties is founded on Article 1191 of
the New Civil Code:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen
fulfilment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
Rescission under Article 1191 has the effect of mutual restitution. 107 In Velarde v. Court of
Appeals:108
Rescission abrogates the contract from its inception and requires a mutual restitution of benefits
received.
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.109 (Emphasis supplied, citations omitted)
The Court of Appeals correctly ruled that both parties must be restored to their original situation as
far as practicable, as if the contract was never entered into. Petitioners must relinquish possession
of the delivered Minilab Equipment unit and accessories, while respondent must return the amount
tendered by petitioners as partial payment for the unit received. Further, respondent cannot claim
that the two (2) monthly installments should be offset against the amount awarded by the Court of
Appeals to petitioners because the effect of rescission under Article 1191 is to bring the parties
back to their original positions before the contract was entered into. Also in Velarde:
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 ₱800,000 and the corresponding mortgage
payments in the amounts of ₱27,225, ₱23,000 and ₱23,925 (totaling ₱874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at
the expense of the former.110 (Emphasis supplied)
When rescission is sought under Article 1191 of the Civil Code, it need not be judicially invoked
because the power to resolve is implied in reciprocal obligations.111 The right to resolve allows an
injured party to minimize the damages he or she may suffer on account of the other party’s failure
to perform what is incumbent upon him or her.112 When a party fails to comply with his or her
obligation, the other party’s right to resolve the contract is triggered. 113 The resolution immediately
produces legal effects if the non-performing party does not question the resolution. 114 Court
intervention only becomes necessary when the party who allegedly failed to comply with his or her
obligation disputes the resolution of the contract.115 Since both parties in this case have exercised
their right to resolve under Article 1191, there is no need for a judicial decree before the resolution
produces effects.
V
The issue of damages is a factual one. A petition for review on certiorari under Rule 45 shall only
pertain to questions of law.116 It is not the duty of this court to re-evaluate the evidence adduced
before the lower courts.117Furthermore, unless the petition clearly shows that there is grave abuse
of discretion, the findings of fact of the trial court as affirmed by the Court of Appeals are conclusive
upon this court.118 In Lorzano v. Tabayag, Jr.:119
For a question to be one of law, the same must not involve an examination of the probative value
of the evidence presented by the litigants or any of them. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances. Once it is clear that the issue
invites a review of the evidence presented, the question posed is one of fact.
For the same reason, we would ordinarily disregard the petitioner’s allegation as to the propriety
of the award of moral damages and attorney’s fees in favor of the respondent as it is a question
of fact. Thus, questions on whether or not there was a preponderance of evidence to justify the
award of damages or whether or not there was a causal connection between the given set of
facts and the damage suffered by the private complainant or whether or not the act from which
civil liability might arise exists are questions of fact.
Essentially, the petitioner is questioning the award of moral damages and attorney’s fees in favor
of the respondent as the same is supposedly not fully supported by evidence. However, in the
final analysis, the question of whether the said award is fully supported by evidence is a factual
question as it would necessitate whether the evidence adduced in support of the same has any
probative value. For a question to be one of law, it must involve no examination of the probative
value of the evidence presented by the litigants or any of them.120 (Emphasis supplied, citations
omitted)
The damages awarded by the Court of Appeals were supported by documentary
evidence.121 Petitioners failed to show any reason why the factual determination of the Court of
Appeals must be reviewed, especially in light of their failure to produce receipts or check payments
to support their other claim for actual damages.122
Furthermore, the actual damages amounting to ₱2,040,000.00 being sought by petitioners 123 must
be tempered on account of their own failure to pay the rest of the installments for the delivered
unit. This failure on their part is a breach of their obligation, for which the liability of respondent, for
its failure to deliver the remaining units, shall be equitably tempered on account of Article 1192 of
the New Civil Code.124 In Central Bank of the Philippines v. Court of Appeals:125
Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his ₱17,000.00 debt within 3 years as
stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts.
WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is
offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges,
for not paying his overdue ₱17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his
₱17,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the ₱17,000.00, it is just that he should account for
the interest thereon.126 (Emphasis supplied)
The award for moral and exemplary damages also appears to be sufficient. Moral damages are
granted to alleviate the moral suffering suffered by a party due to an act of another, but it is not
intended to enrich the victim at the defendant’s expense.127 It is not meant to punish the culpable
party and, therefore, must always be reasonable vis-a-vis the injury caused.128 Exemplary
damages, on the other hand, are awarded when the injurious act is attended by bad faith. 129 In this
case, respondent was found to have misrepresented its right over the generator set that was
seized. As such, it is properly liable for exemplary damages as an example to the public.130
However, the dispositive portion of the Court of Appeals Amended Decision dated September 9,
2005 must be modified to include the recovery of attorney’s fees and costs of suit in favor of
petitioners. In Sunbanun v. Go:131
Furthermore, we affirm the award of exemplary damages and attorney’s fees. Exemplary
damages may be awarded when a wrongful act is accompanied by bad faith or when the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner which would
justify an award of exemplary damages under Article 2232 of the Civil Code. Since the award of
exemplary damages is proper in this case, attorney’s fees and cost of the suit may also be
recovered as provided under Article 2208 of the Civil Code.132 (Emphasis supplied, citation
omitted)
Based on the amount awarded for moral and exemplary damages, it is reasonable to award
petitioners ₱20,000.00 as attorney’s fees.
WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9, 2005
is AFFIRMED with MODIFICATION. Respondent Kodak Philippines, Ltd. is ordered to pay
petitioners Alexander and Julie Lam:
(a) P270,000.00, representing the partial payment made on the Minilab Equipment;
(b) P130,000.00, representing the amount of the generator set, plus legal interest at 12% .per
annum from December 1992 until fully paid;
(c) P440,000.00 as actual damages;
(d) P25,000.00 as moral damages;
(e) P50,000.00 as exemplary damages; and
(f) P20,000.00 as attorney's fees.
Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard accessories
to respondent.
G.R. No. 176986
NISSAN CAR LEASE PHILS., INC., Petitioner, 
vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.
JARDELEZA, J.:
This is a Petition for Review on Certiorari1 filed by Nissan Car Lease Philippines, Inc. (NCLPI) to assail the Decision 2and Resolution3 dated
September 27, 2006 and March 8, 2007, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 75985. The CA affirmed with
modification the Decision4 of the Regional Trial Court dated June 7, 2002 and ruled that there was a valid extrajudicial rescission of the
lease contract between NCLPI and Lica Management, Inc. (LMI). It also ordered NCLPI to pay its unpaid rentals and awarded damages in
favor of LMI and third-party respondent Proton Pilipinas, Inc. (Proton).
The Facts
LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati City with a
total area of approximately 2,860 square meters. 5 On June 24, 1994, it entered into a contract with
NCLPI for the latter to lease the property for a term of ten (10) years (or from July 1, 1994 to June
30, 2004) with a monthly rental of ₱308,000.00 and an annual escalation rate of ten percent
(10%).6 Sometime in September 1994, NCLPI, with LMI’s consent, allowed its subsidiary Nissan
Smartfix Corporation (NSC) to use the leased premises.7
Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total rental
arrearages8 amounted to ₱1,741,520.85.9 In May 1996, Nissan and Lica verbally agreed to convert
the arrearages into a debt to be covered by a promissory note and twelve (12) postdated checks,
each amounting to ₱162,541.95 as monthly payments starting June 1996 until May 1997.10
While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it failed to
sign the promissory note and pay the checks for June to October 1996. Thus, in a letter dated
October 16, 1996, which was sent on October 18, 1996 by registered mail, LMI informed NCLPI that
it was terminating their Contract of Lease due to arrears in the payment of rentals. It also
demanded that NCLPI (1) pay the amount of ₱2,651,570.39 for unpaid rentals 11 and (2) vacate the
premises within five (5) days from receipt of the notice.12
In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary
display center for "Audi" brand cars for a period of ten (10) days. In the same letter, Proton
undertook "not to disturb [NCLPI and LMI’s] lease agreement and ensure that [NCLPI] will not
breach the same [by] lending the premises x x x without any consideration." 13 NCLPI acceded to
this request.14
On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton whereby the
former agreed to allow Proton "to immediately commence renovation work even prior to the
execution of the Contract of Sublease x x x." 15 In consideration, Proton agreed to transmit to NCLPI
a check representing three (3) months of rental payments, to be deposited only upon the due
execution of their Contract of Sublease.16
In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMI’s letter of October 16,
1996 acknowledging the arrearages incurred by it under their Contract of Lease. Claiming, however,
that it has no intention of abandoning the lease and citing efforts to negotiate a possible sublease of
the property, NCLPI requested LMI to defer taking court action on the matter.17
LMI, on November 8, 1996, entered into a Contract of Lease with Proton over the subject
premises.18
On November 12, 1996, LMI filed a Complaint 19 for sum of money with damages seeking to recover
from NCLPI the amount of ₱2,696,639.97, equivalent to the balance of its unpaid rentals, with
interest and penalties, as well as exemplary damages, attorney’s fees, and costs of litigation.20
On November 20, 1996, NCLPI demanded Proton to vacate the leased premises. 21 However, Proton
replied that it was occupying the property based on a lease contract with LMI.22 In a letter of even
date addressed to LMI, NCLPI asserted that its failure to pay rent does not automatically result in
the termination of the Contract of Lease nor does it give LMI the right to terminate the
same.23 NCLPI also informed LMI that since it was unlawfully ousted from the leased premises and
was not deriving any benefit therefrom, it decided to stop payment of the checks issued to pay the
rent.24
In its Answer25 and Third-Party Complaint26 against Proton, NCLPI alleged that LMI and Proton
"schemed" and "colluded" to unlawfully force NCLPI (and its subsidiary NSC) from the premises.
Since it has not abandoned its leasehold right, NCLPI asserts that the lease contract between LMI
and Proton is void for lack of a valid cause or consideration. 27 It likewise prayed for the award of:
(1) ₱3,000,000.00, an amount it anticipates to lose on account of LMI and Proton’s deprivation of
its right to use and occupy the premises; (2) ₱1,000,000.00 as exemplary damages; and (3)
₱500,000.00 as attorney’s fees, plus ₱2,000.00 for every court appearance.28
The trial court admitted29 the third-party complaint over LMI’s opposition.30
Subsequently, or on April 17, 1998, Proton filed its Answer with Compulsory Counterclaim against
NCLPI.31According to Proton, the undated letter-request supposedly sent by Proton to NCLPI was
actually prepared by the latter so as to keep from LMI its intention to sublease the premises to
Proton until NCLPI is able to secure LMI’s consent. 32 Denying NCLPI’s allegation that its use of the
lease premises was made without any consideration, Proton claims that it "actually paid [NCLPI]
rental of ₱200,000.00 for the use of subject property for 10 days x x x."33
Proton further asserted that NCLPI had vacated the premises as early as during the negotiations for
the sublease and, in fact, authorized the former to enter the property and commence
renovations.34 When NCLPI ultimately failed to obtain LMI’s consent to the proposed sublease and
its lease contract was terminated, Proton, having already incurred substantial expenses renovating
the premises, was constrained to enter into a Contract of Lease with LMI. Thus, Proton prayed for
the dismissal of the Third-Party Complaint, and asked, by way of counterclaim, that NCLPI be
ordered to pay exemplary damages, attorney’s fees, and costs of litigation.35
Ruling of the Trial Court
On June 7, 2002, the trial court promulgated its Decision,36 the decretal portion of which reads:
WHEREFORE, in view of the foregoing, judgment is rendered in plaintiff LICA MANAGEMENT
INCORPORATED’s favor. As a consequence of this, defendant NISSAN CAR LEASE PHILIPPINES,
INC. is directed to pay plaintiff the following:
1.) [₱]2,696,639.97 representing defendant’s unpaid rentals inclusive of interest and penalties up
to 12 November 1996, plus interest to be charged against said amount at the rate of twelve
percent (12%) beginning said date until the amount is fully paid.
2.) Exemplary damages and attorney’s fees amounting to Two Hundred Thousand Pesos
([₱]200,000.00) and litigation expenses amounting to Fifty Thousand Pesos ([₱]50,000.00).
The third party complaint filed by defendant is DENIED for lack of merit and in addition to the
foregoing and as prayed for, defendant NISSAN is ordered to pay third party defendant PROTON
PILIPINAS INC. the sum of Two Hundred Thousand Pesos ([₱]200,000.00) representing exemplary
damages and attorney’s fees due.
The trial court found that NCLPI purposely violated the terms of its contract with LMI when it failed
to pay the required rentals and contracted to sublease the premises without the latter’s
consent.38 Under Article 1191 of the Civil Code, LMI was therefore entitled to rescind the contract
between the parties and seek payment of the unpaid rentals and damages. 39 In addition, the trial
court ruled that LMI’s act of notifying NCLPI of the termination of their lease contract due to non-
payment of rentals is expressly sanctioned under paragraphs 1640 and 1841 of their contract.42
Contrary to NCLPI’s claim that it was "fooled" into allowing Proton to occupy the premises for a
limited period after which the latter unilaterally usurped the premises for itself, the trial court found
that it was NCLPI "which misrepresented itself to [Proton] as being a lessee of good standing, so
that it could induce the latter to occupy and renovate the premises when at that time the
negotiations were underway the lease between [LMI] and [NCLPI] had already been terminated."43
Aggrieved, NCLPI filed a Petition for Review with the CA. In its Appellant’s Brief, 44 it argued that the
trial court erred in: (1) holding that there was a valid extrajudicial rescission of its lease contract
with LMI; and (2) dismissing NCLPI’s claim for damages against LMI and Proton while at the same
time holding NCLPI liable to them for exemplary damages and attorney’s fees.45
Ruling of the Court of Appeals
The CA denied NCLPI’s appeal and affirmed the trial court’s decision with modification. The decretal
portion of the CA’s Decision46 reads:
WHEREFORE, the appealed Decision dated June 7, 2002 of the trial court is affirmed, subject to
modification that:
(1) The award of exemplary damages of ₱100,000.00 each in favor of plaintiff-appellee and third-
party defendant-appellee is reduced to ₱50,000.00 each;
(2) The award of attorney’s fees of ₱100,000.00 each in favor of plaintiff-appellee and third-party
defendantappellee is reduced to ₱50,000.00 each;
(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, exclusive of
interest; and,
(4) Plaintiff-appellee is ordered to return the balance of the security deposit amounting to
₱883,253.72 to defendant-appellant.
The Decision dated June 7, 2002 is affirmed in all other respects.
NCLPI sought for a reconsideration 48 of this decision. LMI, on the other hand, filed a motion to
clarify whether the amount of ₱2,365,569.61 representing unpaid rentals was inclusive of
interest.49 The CA resolved both motions, thus:
WHEREFORE, the motion for reconsideration filed by defendant-appellant Nissan Car Lease is
denied for lack of merit.
With respect to the motion for clarification filed by plaintiff-appellee Lica Management, Inc.,
paragraph (3) of the dispositive portion of the Decision is hereby clarified to read as follows:
(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, inclusive of
interest and penalties up to November 12, 1996, plus interest to be charged against said amount
at the rate of twelve per cent (12%) beginning said date until the amount is fully paid.
Hence, this petition.
The Petition
NCLPI, in its Petition, raises the following questions:
1. May a contract be rescinded extrajudicially despite the absence of a special contractual
stipulation therefor?
2. Do the prevailing facts warrant the dismissal of [LMI]’s claims and the award of NCLPI’s
claims?
3. How much interest should be paid in the delay of the release of a security deposit in a lease
contract?51
The Court’s Ruling
We deny the Petition for lack of merit.
Before going into the substantive merits of the case, however, we shall first resolve the technical
issue raised by LMI in its Comment52 dated August 22, 2007.
According to LMI, NCLPI’s petition must be denied outright on the ground that Luis Manuel T.
Banson (Banson), who caused the preparation of the petition and signed the Verification and
Certification against Forum Shopping, was not duly authorized to do so. His apparent authority was
based, not by virtue of any NCLPI Board Resolution, but on a Special Power of Attorney (SPA)
signed only by NCLPI’s Corporate Secretary Robel C. Lomibao.53
As a rule, a corporation has a separate and distinct personality from its directors and officers and
can only exercise its corporate powers through its board of directors. Following this rule, a
verification and certification signed by an individual corporate officer is defective if done without
authority from the corporation’s board of directors.54
The requirement of verification being a condition affecting only the form of the pleading,55 this
Court has, in a number of cases, held that:
[T]he following officials or employees of the company can sign the verification and
certification without need of a board resolution: (1) the Chairperson of the Board of
Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case.
x x x [T]he determination of the sufficiency of the authority was done on a case to case
basis. The rationale applied in the foregoing cases is to justify the authority of corporate
officers or representatives of the corporation to sign x x x, being "in a position to verify
the truthfulness and correctness of the allegations in the petition." 56 (Emphasis and
underscoring supplied)
In this case, Banson was President of NCLPI at the time of the filing of the petition. 57 Thus, and
applying the foregoing ruling, he can sign the verification and certification against forum shopping
in the petition without the need of a board resolution.58
Having settled the technical issue, we shall now proceed to discuss the substantial issues.
Validity of Extrajudicial Rescission of Lease Contract
It is clear from the records that NCLPI committed substantial breaches of its Contract of Lease with
LMI.
Under Paragraph 2, NCLPI bound itself to pay a monthly rental of ₱308,000.00 not later than the
first day of every month to which the rent corresponds. NCLPI, however, defaulted on its
contractual obligation to timely and properly pay its rent, the arrearages of which, as of October 16,
1996, amounted to ₱2,651,570.39.59 This fact was acknowledged and admitted by NCLPI.60
Aside from non-payment of rentals, it appears that NCLPI also breached its obligations under
Paragraphs 461 and 562 of the Contract of Lease which prohibit it from subleasing the premises or
introducing improvements or alterations thereon without LMI’s prior written consent. The trial court
found:
As revealed from the evidence presented by PROTON however, even before [NCLPI] represented
that it would try to negotiate a possible sub-lease of the premises, it had, without any
semblance of authority from [LMI,]already effectively subleased the subject premises
to PROTON and allowed the latter not only to enter the premises but to renovate the
same.
[NCLPI]’s assertion that they only allowed PROTON to utilize the premises for ten days as a
display center for Audi cars on the occasion of the historic visit of Chancellor Helmut Kohl of
Germany to the Philippines is belied by the evidence offered by PROTON that by virtue of a
Memorandum of Agreement [NCLPI] had already permitted PROTON "to immediately
commence renovation work even prior to the execution of the Contract of
Sublease" and had accepted a check from PROTON representing the rental deposit under the
yet to be executed Contract of Sublease. x x x
Besides, the court is not inclined to show [NCLPI] any sympathy x x x because it came to court
with unclean hands when it accused [LMI] and PROTON of being guilty parties when they
supposedly connived with each other to oust [NCLPI] from the leased premises when in
truth and in fact, [NCLPI]’s lease was already terminated when it pursued negotiations to
sub-lease the premises to PROTON then giving the latter the assurance they would be able to
obtain [LMI]’s consent to the sublease when this was very remote, in light of [NCLPI]’s failure to
update its rental payments.63 (Emphasis and underscoring supplied)
This factual finding was affirmed by the CA:
There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to maintain
it in peaceful possession of the leased premises. It was [NCLPI] who breached the lease
contract by defaulting in the payment of lease rentals, entering into a sublease contract
with [Proton] and allowing [Proton] to introduce renovations on the leased premises
without the consent of [LMI].64 x x x (Emphasis supplied)
Factual findings of the CA are binding and conclusive on the parties and upon this Court and will not
be reviewed or disturbed on appeal. While the rule admits of certain exceptions, 65 NCLPI failed to
prove that any of the exceptions applies in this case.
The crux of the controversy rather revolves around the validity of LMI’s act of extrajudicially
rescinding its Contract of Lease with NCLPI.
NCLPI maintains that while a lessor has a right to eject a delinquent lessee from its property, such
right must be exercised in accordance with law:
6.15. In this case, [LMI] did not comply with the requirement laid down in Section 2 of Rule 70 of
the Rules of Court, in unceremoniously ejecting [NCLPI] from the property. The said Rule explicitly
provides that the lessor shall serve a written notice of the demand to pay or comply with the
conditions of the lease and to vacate or post such notice on the premises if no person is found
thereon, giving the lessee 15 days to comply with the demand. [LMI]’s demand letter dated 16
October 1996 provides only a period of five days for [NCLPI] to comply with such demand and,
thus, defective.66 (Emphasis and underscoring supplied)
NCLPI’s reliance on Section 2, Rule 7067 in this case is misplaced.
Rule 70 of the Rules of Court sets forth the procedure in relation to the filing of suits for forcible
entry and unlawful detainer. The action filed by LMI against NCLPI, however, is one for the
recovery of a sum of money. Clearly, Section 2 of Rule 70 is not applicable.
In fact, it does not appear that it was even necessary for LMI to eject NCLPI from the leased
premises. NCLPI had already vacated the same as early as October 11, 1996 when it surrendered
possession of the premises to Proton, by virtue of their Memorandum of Agreement, so that the
latter can commence renovations.68
NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind their Contract of
Lease in the absence of an express provision in their Contract to that effect.69 According to NCLPI:
6.1. The power to rescind is judicial in nature x x x
6.2. Nevertheless, the Supreme Court has allowed extrajudicial rescission if such remedy is
specifically provided for in the contract. A provision granting the nondefaulting party merely a
right to rescind would be superfluous because by law, it is inherent in such contract [see by
analogy  Villanueva, PHILIPPINE LAW ON SALES, P. 238 (1998)].
6.4. [Paragraph 16],70 however, cannot be construed as an authority for either party to
unilaterally and extrajudicially rescind the Lease Contract in case of breach by the other party. All
that [Paragraph] 16 affords the aggrieved party is merely the right to rescind the lease contract,
which is the very same right already granted under Article 1191 of the Civil Code.71 (Emphasis
and underscoring in the original)
It is true that NCLPI and LMI’s Contract of Lease does not contain a provision expressly authorizing
extrajudicial rescission. LMI can nevertheless rescind the contract, without prior court approval,
pursuant to Art. 1191 of the Civil Code.
Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases where one
of the obligors should fail to comply with what is incumbent upon him. Otherwise stated, an
aggrieved party is not prevented from extrajudicially rescinding a contract to protect its interests,
even in the absence of any provision expressly providing for such right.72 The rationale for this rule
was explained in the case of University of the Philippines v. De los Angeles 73 wherein this Court
held:
[T]he law definitely does not require that the contracting party who believes itself injured must
first file suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment
of rescission is rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article 2203). (Emphasis and
underscoring supplied)
We are aware of this Court’s previous rulings in Tan v. Court of Appeals,74 Iringan v. Court of
Appeals,75 and EDS Manufacturing, Inc. v. Healthcheck International, Inc.,76 for example, wherein
we held that extrajudicial rescission of a contract is not possible without an express stipulation to
that effect.77
The seeming "conflict" between this and our previous rulings, however, is more apparent than real.
Whether a contract provides for it or not, the remedy of rescission is always available as a remedy
against a defaulting party. When done without prior judicial imprimatur, however, it may still be
subject to a possible court review. In Golden Valley Exploration, Inc. v. Pinkian Mining
Company,78 we explained:
This notwithstanding, jurisprudence still indicates that an extrajudicial rescission based on
grounds not specified in the contract would not preclude a party to treat the same as
rescinded. The rescinding party, however, by such course of action, subjects himself to the risk of
being held liable for damages when the extrajudicial rescission is questioned by the opposing party
in court. This was made clear in the case of U.P. v. De los Angeles, wherein the Court held as
follows:
Of course, it must be understood that the act of a party in treating a contract as cancelled
or resolved on account of infractions by the other contracting party must be made
known to the other and is always provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the matter to court. Then, should the
court, after due hearing, decide that the resolution of the contract was not warranted,
the responsible party will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it  proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct in law. x x x
(Emphasis and underscoring in the original)
The only practical effect of a contractual stipulation allowing extrajudicial rescission is "merely to
transfer to the defaulter the initiative of instituting suit, instead of the rescinder." 79
In fact, the rule is the same even if the parties’ contract expressly allows extrajudicial rescission.
The other party denying the rescission may still seek judicial intervention to determine whether or
not the rescission was proper.80
Having established that LMI can extrajudicially rescind its contract with NCLPI even absent an
express contractual stipulation to that effect, the question now to be resolved is whether this
extrajudicial rescission was proper under the circumstances.
As earlier discussed, NCLPI’s non-payment of rentals and unauthorized sublease of the leased
premises were both clearly proven by the records.1avvphi1 We thus confirm LMI’s rescission of its
contract with NCLPI on account of the latter’s breach of its obligations.
Rental Arrearages and Interest
Having upheld LMI’s extrajudicial rescission of its Contract of Lease, we hold that NCLPI is required
to pay all rental arrearages owing to LMI, computed by the CA as follows:
 In its appellant’s brief, [NCLPI] admitted that it had rental arrears of ₱1,300,335.60 as of May
1996.1âwphi1 Additionally, the statement of account submitted by [LMI] showed that from June
1996 to October 1996  the rental arrears of [NCLPI] amounted to ₱1,065,234.01. Hence, the
total of said rental arrears not disputed by the parties is ₱2,365,569.61 x x
x.81 (Emphasis and underscoring supplied)
The Contract of Lease shows that the parties did not stipulate an applicable interest rate in case of
default in the payment of rentals. Thus, and following this Court’s ruling in Nacar v. Gallery
Frames,82 the foregoing amount of rental arrearages shall earn interest at the rate of six percent
(6%) per annum computed from October 18, 1996, the date of LMI’s extrajudicial demand,83 until
the date of finality of this judgment. The total amount shall thereafter earn interest at the rate of
six percent (6%) per annum from such finality of judgment until its satisfaction.
Security Deposit
NCLPI also argues that, assuming LMI could validly rescind their Contract of Lease, the security
deposit must be returned, with interest at the rate of twelve percent (12%) per annum, the
obligation to return being in the nature of a forbearance of money.84
NCLPI is partly correct.
Paragraph 385 of the Contract of Lease provides that, in case of termination of the lease, the
balance of the security deposit must be returned to NCLPI within seven (7) days. Since "there is no
question that [LMI] is retaining the security deposit" in the amount of ₱883,253.72 (after deduction
of the expenses for water and telephone services), 86LMI must return the same to NCLPI, with
interest.
Considering, however, that the Contract of Lease does not stipulate an applicable interest rate,
again following our ruling in Nacar, the rate shall be six percent (6%) from the time of judicial or
extrajudicial demand. The records of this case show that the first time NCLPI raised the issue on
the security deposit was in its Brief dated March 25, 2003 filed with the CA.87 Thus, the interest
should be computed starting only on said date until the finality of this Decision, after which the total
amount shall earn interest at the rate of six percent (6%) from the finality of this Decision until
satisfaction by LMI.88
Improvements
In its Petition, NCLPI also prayed for the return of "all the equipment installed and the other
improvements on the property, or their value, pursuant to the mandate of mutual restitution." 89
NCLPI errs.
Under Paragraph 5 of the Contract of Lease, NCLPI is entitled only to the return of those
improvements introduced by it which can be removed without causing damage to the leased
premises.90 Considering, however, that the issue of ownership of the improvements within the
premises appears to be subject of another case initiated by NCLPI’s subsidiary, NSC,91 this Court
will not rule on the same.
Denial of NCLPI’s claim and award of damages in favor of LMI and Proton proper
Both the trial court and CA found that NCLPI breached the Contract of Lease. In sustaining the
denial of NCLPI’s claim for damages, the CA held:
There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to maintain
it in peaceful possession of the leased premises. It was [NCLPI] who breached the lease contract
x x x Moreover, the lease contract between [LMI] and [Proton] was entered into only on
November 8, 1996 x x x after the lease contract between [LMI] and [NCLPI] had been
terminated. As aptly noted by the trial court:
In other words, while in its responsive pleading [NCLPI] claims [that] it was fooled into allowing
[Proton] to occupy the subject premises for a limited period, after which the latter, in alleged
collusion with [LMI] unilaterally usurped the premises for itself, the evidence shows that it was
[NCLPI] which misrepresented itself to PROTON as being a lessee of good standing, so
that it could induce the latter to occupy and renovate the premises when at that time the
negotiations were underway, the lease between [LMI] and [NCLPI] had already been
terminated. (Emphasis and underscoring supplied)
Contrary to NCLPl's claims of an unlawful "scheme" devised by LMJ and Proton to force it out of the
leased premises, we find that it was NCLPI who was in bad faith and itself provided the bases for
the cancellation of its Contract of Lease with LMI and its eventual ejectment from the leased
premises. Accordingly, we affirm (1) the award of exemplary damages and attorney's fees in favor
of LMI and Proton and (2) the denial of NCLPI's claim for damages.93
WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated September 27,
2006 and the Resolution dated March 8, 2007 rendered by the CA in CA-G.R. CV No. 75985 are,
however, MODIFIED as follows:
(1) NCLP I is ordered to pay LMI and Proton exemplary damages of P50,000.00 and attorney's
fees of P50,000.00, each;
(2) NCLPI is ordered to pay the amount of P2,365,569.61 unpaid rentals, with interest at the rate
of six percent ( 6%) per annum computed from October 18, 1996 until the date of finality of this
judgment. The total amount shall thereafter earn interest at the rate of six percent (6%) per
annum from the finality of judgment until its satisfaction;
(3) LMI is ordered to return to NCLPI the balance of the security deposit amounting to
P883,253.72, with interest at the rate of six percent ( 6o/o) starting March 25, 2003 until the
finality of this Decision, after which the total amount shall earn interest at the rate of six percent
(6%) from the finality of this Decision until satisfaction by LMI.94

G.R. No. 226213, September 27, 2017
G. HOLDINGS, INC., Petitioner, v. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC.
(CEPALCO) AND FERROCHROME PHILIPPINES, INC., Respondents.
CAGUIOA, J.:
This is a petition for review on certiorari1 (Petition) under Rule 45 of the Rules of Court assailing the Decision2 dated April 14, 2016 of the
Court of Appeals3 (CA) in CA-G.R. CV No. 03366-MIN and the Resolution4 dated July 25, 2016 denying the motion for reconsideration filed
by petitioner, G. Holdings, Inc. (GHI). The CA Decision denied the appeal and affirmed the Decision 5 dated July 22, 2013 of the Regional
Trial Court of Misamis Oriental, 10th Judicial Region, Branch 38, Cagayan de Oro City (RTC-CDO) in Civil Case No. 2004-111.
Facts and Antecedent Proceedings
From March 1990, Cagayan Electric Power and Light Company, Inc. (CEPALCO), which operates a
light and power distribution system in Cagayan de Oro City, supplied power to the ferro-alloy
smelting plant of Ferrochrome Philippines, Inc. 6 (FPI) at the PfflVIDEC Industrial Estate in Tagoloan,
Misamis Oriental.7When FPI defaulted in the payment of its electric power bills amounting to
P16,301,588.06 as of March 1996, CEPALCO demanded payment thereof.8 FPI paid CEPALCO on
three separate dates the total amount of P13,161,916.44, leaving a balance of P2,899,859.15. 9 FPI
failed again to pay its subsequent electricity bills, thereby increasing its unpaid electric bills to
P29,509,240.89 as of May 1996.10 For failure to pay FPI's outstanding bills, CEPALCO disconnected
the electric power supply to FPI in May 1996.11 After sending a statement of account with
P30,147,835.65 unpaid bills plus 2% monthly surcharge, CEPALCO filed a collection suit (Civil Case
No. 65789) against FPI in July 1996 before the Regional Trial Court of Pasig City, Branch 264 (RTC-
Pasig).12
RTC-Pasig rendered a Decision (Partial Summary Judgment) dated April 22, 1999 in favor of
CEPALCO, ordering FPI to pay CEPALCO P25,608,579.98.13 On January 19, 2004, RTC-Pasig
rendered its Decision14in favor of CEPALCO, affirming the P25,608,579.98 award for basic cost of
energy consumed (given in the Partial Summary Judgment), and ordering the payment of
P2,364,703.80 for contracted energy or energy differential and surcharges, PHIVIDEC royalty and
franchise tax.15
On February 27, 2004, FPI appealed the Decision of the RTC-Pasig to the CA (CA G.R. CV No.
86228 [CEPALCO collection case]).16
CEPALCO moved for execution pending appeal, which was granted by RTC-Pasig.  The writ of
execution was issued on March 30, 2004.18 FPI filed before the CA a certiorari petition with prayer
for temporary restraining order (TRO) and preliminary injunction (CA G.R. SP No. 83224 [CEPALCO
execution case]).19
In the meantime, Sheriff Renato B. Baron (Baron) of RTC-Pasig issued notices of levy upon personal
and real properties dated April 1 and 2, 2004 and notices of sale on execution of personal and real
properties dated April 1, 2004.20
In CA G.R. SP No. 83224 (CEPALCO execution case), the CA issued an initial TRO in its Resolution
dated April 6, 2004 and then a writ of preliminary injunction in its Resolution dated June 11, 2004,
enjoining the implementation of the Order granting execution pending appeal.21
On April 5, 2004, GHI filed a case (Civil Case No. 2004-111) against Sheriff Baron, CEPALCO and
FPI for Nullification of Sheriffs Levy on Execution and Auction Sale, Recovery of Possession of
Properties and Damages before the RTC-CDO.22 GHI claimed that the levied ferro-alloy smelting
facility, properties and equipment are owned by it as evidenced by a Deed of Assignment23 dated
March 11, 2003 (the Deed of Assignment) executed by FPI in consideration of P50,366,926.71.24
In the unilateral Deed of Assignment, FPI, as the assignor, through its stockholders and Board of
Directors' duly authorized representative and Acting President, Juanito E. Figueroa, in consideration
of obligations amounting to P50,366,926.71 as of December 31, 2002, inclusive of the interest
charges, assigned, transferred, ceded and conveyed absolutely in favor of GHI, as the assignee,
"all of the [assignor's! properties, equipment and facilities, located in Phividec Industrial
Estate, Tagoloan, Misamis Oriental and more particularly described in the attached
schedules as Annexes 'I', 'II', 'III', 'IV['] and 'V'."25
Prior to the Deed of Assignment, FPI sent to GFII a letter 26 dated February 28, 2003 wherein the
manner by which the obligation of FPI amounting to P50,366,926.71 (as of December 31, 2002)
would be addressed per their earlier discussions was confirmed, to wit:
1. The obligation of FPI to G. Holdings amounting to P50,366,926.71 (as of December
31, 2002) shall be covered by assignment of certain FPI assets sufficient to cover the
obligations even at today's depressed metal prices.
2. The right to the work process owned by FPI shall be made available to G. Holdings under
the following options[:]
Option A
As soon as metal prices and major costs justify, FPI shall at its capital and expense operate
the plant including the assets transferred to G. Holdings. Revenue shall be shared with G.
Holdings at the rate of 20% of EBITDA (Earnings Before Interest[,] Taxes,
Depreciation and Amortization.)
A minimum of P10.0 million annually shall be shared by G. Holdings. The [c]ost of
maintenance and upkeep of assets shall be covered by FPI.
Option B
[G.] Holdings shall be the entity to operate the plant and business with its capital and
expense.
As owner of the rights to the work process, FPI shall be entitled to a share of 10%in
the EBITDA with a minimum of P7.5 million per year.
17
This arrangement shall be for a minimum of 8 years after which G. Holdings can acquire
the rights for an amount equal to P36.0 M.
All financial requirements shall be shouldered by G. Holdings x x x.
3. The option shall be decided by G. Holdings within a three[-]year period beyond which
the choice shall be made by FPI within a 3[-] year period. The cycle will be repeated if the
plant has not operated for six years from assignment.27
The letter bears the conformity of GHI.28
CEPALCO filed its answer with compulsory counterclaim and cross-claim. 29 In its counterclaim,
CEPALCO assailed the validity of the Deed of Assignment executed by FPI in favor of GHI in
payment of alleged advances from GHI (sister company of FPI) from 1998 to 2002 amounting to
£50,366,926.71, inclusive of interest, as of December 2002. CEPALCO contended that the Deed of
Assignment was null and void for being absolutely simulated and, as a dacion en pago, it did not
bear the conformity of the creditor. GHI and FPI have substantially the same directors. The Deed of
Assignment was in fraud of FPFs creditors as it was made after the RTC-Pasig had already rendered
a partial judgment in favor of CEPALCO and was, therefore, rescissible.30
In the meantime, the CA rendered its Decision dated August 14, 2008 in CA G.R. CV No. 86228
(CEPALCO collection case) granting FPFs appeal in part and the RTC-Pasig Decision was affirmed
but modified by deleting the award of the PHIVIDEC royalty of 1%. 31 FPI elevated the CA Decision
to the Court and was docketed as G.R. No. 185892.32 In April 2010, the Court denied FPI's petition
in its Resolution dated April 21, 2010 for failure of FPI to sufficiently show that the CA committed
any reversible error in the challenged decision and resolution to warrant the Court's discretionary
appellate jurisdiction.33
In CA G.R. SP No. 83224 (CEPALCO execution case), the CA dismissed FPI's petition for lack of
merit and affirmed the assailed orders of the RTC-Pasig, and FPI's motion for reconsideration was
likewise denied.34
The RTC-CDO Ruling
Going back to the RTC-CDO case (Civil Case No. 2004-111), the origin of the present case, a
Decision35dated July 22, 2013 was rendered in favor of CEPALCO and against GHI: (1) rescinding
the Deed of Assignment; (2) ordering GHI to pay CEPALCO actual and exemplary damages as well
as attorney's fees; and (3) lifting the writ of preliminary injunction.36
The rescission of the Deed of Assignment by the RTC-CDO was anchored on the presence of several
badges of fraud, to wit: (a) the consideration of the assignment was P50 million while the value of
the assets of FPI amounted to P280 million; (b) the existence of the "Outokumpo" work process of
smelting (which was allegedly more valuable than the smelting facility subject of the assignment
and without which the smelting facility could not be operated), as well as its value, were not
sufficiently established; (c) the assignment of all or substantially all of FPI's assets was made when
FPI was suffering financially and after the rendition of the partial judgment in favor of CEPALCO;
and (d) GHI did not take exclusive possession of the assets assigned to it.37
The dispositive portion of the RTC-CDO Decision states:
WHEREFORE, judgment is hereby rendered in favor of defendant CEPALCO against G Holdings
Inc. as follows:
1. Rescinding the Deed of Assignment dated March 11, 2003 between G Holdings Inc. in
favor of Ferrochrome Philippines Inc.;
2. Ordering G [HJoldings Inc. to pay defendant CEPALCO the following:
2.a Actual damages in the amount of Php256,587.48;
2.b Exemplary damages in the amount of Php1,000,000.00; and
2.c Attorney's Fees in the amount of Php500,000.00
3. Lifting the Writ of Preliminary Injunction and finding G. [H]oldings Inc. and Oriental
Assurance Corporation liable on the Phpl Million Preliminary Injunction Bond to partially
satisfy the foregoing sums.
4. Costs against G Holdings, Inc.
GHI appealed the RTC-CDO Decision to the CA.39 The appeal was docketed as CA-G.R. CV No.
03366-MIN.40
The CA Ruling
In its Decision41 dated April 14, 2016, the CA denied the appeal and affirmed the RTC-CDO
Decision. The CA ruled that the RTC-CDO correctly found the existence of fraud or deliberate intent
on the part of FPI and GHI to defraud CEPALCO. The agreement between GHI and FPI where GHI
was given the option to operate the smelting facility using the alleged "Outokumpo" work process
which FPI retained, subject to payment of an agreed amount to FPI as owner of the rights of the
work process, was designed to keep the smelting facility intact and insulated against execution in
satisfaction of CEPALCO's judgment credit. The CA also ruled that the Deed of Assignment was
absolutely simulated and having been executed after the Partial Summary Judgment rendered by
the RTC-Pasig, it was done in anticipation of the adverse final outcome of the RTC-Pasig case.
Regarding GHI's contention that CEPALCO failed to pay the filing fees, the CA noted that CEPALCO
filed its Answer with Compulsory Counterclaim and Cross-claim on April 26, 2004. At that time, the
CA reasoned that CEPALCO was not yet liable to pay filing fees. Under Rule 141, Section 7, as
amended by A.M. No. 04-2-04-SC, docket fees were required to be paid for compulsory
counterclaims and cross-claims effective only on August 16, 2004.42
The dispositive portion of the CA Decision states:
WHEREFORE, the instant appeal is DENIED. The Decision dated 22 July 2013 of the Regional
Trial Court, 10th Judicial Region, Branch 38, Cagayan de Oro City, in Civil Case No. 2004-111 is
hereby AFFIRMED.
GHI filed a motion for reconsideration, which was denied in a Resolution44 dated July 25, 2016.
Hence, this Petition. CEPALCO filed its Comment45 dated May 12, 2017.
Issues
Whether the CA erred in not dismissing CEPALCO's permissive counterclaim for non-payment of
docket fees.
Whether the CA erred in holding that the Deed of Assignment was absolutely simulated.
Whether the CA erred in rescinding the Deed of Assignment absent an independent action for
rescission.
Whether the CA erred in holding that the Deed of Assignment was done in fraud of creditors and
badges of fraud accompanied its execution.
Whether GHI is entitled to its claims for damages.46
The Court's Ruling
Filing Fees of CEPALCO's Counterclaim
In justifying the non-payment of filing fees on the counterclaim of CEPALCO, the CA ruled:
As for the absence of filing fees, it is noteworthy that CEPALCO filed its Answer with Compulsory
Counterclaim and Cross-Claim on 26 April 2004. At that time, CEPALCO was not yet liable to pay
filing fees. The Supreme Court stressed, however, that effective 16 August 2004 under Rule 141,
Section 7, as amended by A.M. No. 04-2-04-SC, docket fees are required to be paid for
compulsory counterclaims and cross-claims.47
As to the cause of action of GHI in its Complaint in Civil Case No. 2004-111 (RTC-CDO case), the
caption states that it is for: "FOR INJUNCTION AND NULLIFICATION OF SHERIFF'S LEVY ON
EXECUTION AND AUCTION SALE; RECOVERY OF POSSESSION OF PROPERTIES; AND DAMAGES,
WITH PRAYER FOR ISSUANCE OF TEMPORARY RESTRAINING ORDER AND WRIT OF PRELIMINARY
INJUNCTION."48 In its second cause of action, GHI alleges that it is "entitled to the immediate
return and restitution of said [transportation and] mobile equipment." 49 In the Complaint's prayer,
GHI seeks the return of the possession of such properties to GHI, "the rightful owner thereof." 50 As
basis of its claim of ownership, GHI alleges in the Complaint that:
x x x The smelter facility/properties subject of sheriffs Notice of Levy Upon Personal Property and
Notice of Levy Upon Real Property are owned by GHI, having acquired the same through a Deed
of Assignment of March 11, 2003 executed by FPI in favor of GHI, in consideration of x x x
[P]50,366,926.71 x x x paid by GHI. x x x51
In light of the foregoing, CEPALCO's counterclaim and prayer for rescission of the Deed of
Assignment can only be viewed, as it is indeed, a compulsory counterclaim because it "arises out of
or is connected with the transaction or occurrence constituting the subject matter of the opposing
party's claim and does not require for its adjudication the presence of third parties of whom the
court cannot acquire jurisdiction." 52 Being a compulsory counterclaim, the CA was correct when it
ruled that as of the filing of CEPALCO's Answer with Compulsory Counterclaim and Cross-Claim on
April 26, 2004, it was not liable to pay filing fees on its compulsory counterclaim. Thus, on the first
issue, the CA committed no reversible error when it did not order the dismissal of CEPALCO's
counterclaim, which is compulsory, for non-payment of docket fees.
Efficacy of the Deed of Assignment
Since the second, third and fourth issues concern the legal effect or efficacy, if any, of the Deed of
Assignment between GHI and FPI, they will be discussed together. It is noted, however, that the
legality or efficacy of the Deed of Assignment is attacked in the second issue as being absolutely
simulated, while, in the third and fourth issues, it is claimed to be rescissible for having been
undertaken in fraud of creditors, given the presence of badges of fraud in its execution.
Under the Civil Code, there are four defective contracts, namely: (1) rescissible contracts; (2)
voidable contracts; (3) unenforceable contracts; and (4) void or inexistent contracts. However, it
has been opined that, strictly speaking, only the voidable and unenforceable contracts are defective
contracts and are the only ones susceptible of ratification unlike the rescissible ones which suffer
from no defect and the void or inexistent contracts which do not exist and are absolute
nullity.53 Thus, the four may be more appropriately categorized as species or forms of the inefficacy
of contracts.54
Since the Deed of Assignment is being questioned for being both rescissible and, at the same time,
an absolute simulation, it may be apropos to compare rescissible contracts with void or inexistent
contracts.
Rescission has been defined as a remedy to make ineffective a contract validly entered into and
which is obligatory under normal conditions by reason of external causes resulting in a pecuniary
prejudice to one of the contracting parties or their creditors. 55 Rescission, which is a specie or form
of the inefficacy of contracts and operates by law and not through the will of the parties, requires
the following: (1) a contract initially valid and (2) a lesion or pecuniary prejudice to someone.56
Under Article 1381 of the Civil Code, the following contracts are rescissible: (1) those which are
entered into by guardians whenever the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object thereof; (2) those agreed upon in
representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) those
undertaken in fraud of creditors when the latter cannot in any manner collect the claims due them;
(4) those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority; and (5) all
other contracts specially declared by law to be subject to rescission.
It is further provided under Article 1383 that the action for rescission is a subsidiary one, and
cannot thus be instituted except when the party suffering damage has no other legal means to
obtain reparation for the same.
On the other hand, void or inexistent contracts are those which are ipso jure prevented from
producing their effects and are considered as inexistent from the very beginning because of certain
imperfections.57
Under Article 1409 of the Civil Code, the following contracts are inexistent and void from the
beginning: (1) those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy; (2) those which are absolutely simulated or fictitious; (3) those whose
cause or object did not exist at the time of the transaction; (4) those whose object is outside the
commerce of men; (5) those which contemplate an impossible service; (6) those where the
intention of the parties relative to the principal object of the contract cannot be ascertained; and
(7) those expressly prohibited or declared void by law.
These contracts cannot be ratified and the right to set up the defense of illegality cannot be
waived.58Further, the action or defense for the declaration of the inexistence of a contract does not
prescribe.
Rescission and nullity can be distinguished in the following manner: (a) by reason of the basis —
rescission is based on prejudice, while nullity is based on a vice or defect of one of the essential
elements of a contract; (2) by reason of purpose — rescission is a reparation of damages, while
nullity is a sanction; (3) by reason of effects — rescission affects private interest while nullity
affects public interest; (4) by reason of nature of action — rescission is subsidiary while nullity is a
principal action; (5) by reason of the party who can bring action — rescission can be brought by a
third person while nullity can only be brought by a party; and (6) by reason of susceptibility to
ratification — rescissible contracts need not be ratified while void contracts cannot be ratified.59
They can likewise be distinguished as follows: (1) as to defect: In rescissible contracts, there is
damage or injury either to one of the contracting parties or to third persons; while in void or
inexistent contracts, one or some of the essential requisites of a valid contract are lacking in fact or
in law; (2) As to effect: The first are considered valid and enforceable until they are rescinded by a
competent court; while the latter do not, as a general rule, produce any legal effect; (3) As to
prescriptibility of action or defense: In the first, the action for rescission may prescribe; while in the
latter, the action for declaration of nullity or inexistence or the defense of nullity or inexistence does
not prescribe; (4) As to susceptibility of ratification: The first are not susceptible of ratification, but
are susceptible of convalidation; while the latter are not susceptible of ratification; (5) As to who
may assail contracts: The first may be assailed not only by a contracting party but even by a third
person who is prejudiced or damaged by the contract; while the latter may be assailed not only by
a contracting party but even by a third party whose interest is directly affected; (6) As to how
contracts may be assailed: the first may be assailed directly, and not collaterally; while the latter
may be assailed directly or collaterally.60
The enumerations and distinctions above indicate that rescissible contracts and void or inexistent
contracts belong to two mutually exclusive groups. A void or inexistent contract cannot at the same
time be a rescissible contract, and vice versa. The latter, being valid and until rescinded, is
efficacious while the former is invalid. There is, however, a distinction between inexistent contracts
and void ones as to their effects. Inexistent contracts produce no legal effect whatsoever in
accordance with the principle "quod nullum est nullum producit effectum"61 In case of void contracts
where the nullity proceeds from the illegality of the cause of object, when executed (and not merely
executory) they have the effect of barring any action by the guilty to recover what he has already
given under the contract.62
The RTC-CDO ruled the Deed of Assignment as a rescissible contract and ordered its rescission.
However, the CA, while affirming the RTC-CDO Decision, stated that it "agree[d] with the RTC[-
CDO] that the Deed of Assignment was absolutely simulated" 63 and, at the same time, noted that
"the RTC-CDO correctly found the existence of fraud or deliberate intent on the part of FPI and GHI
to defraud CEPALCO."64Unfortunately, however, and contrary to what the CA declared, nowhere is it
ruled in the RTC-CDO Decision that the Deed of Assignment was absolutely simulated.
Given a seemingly conflicting finding or ruling by the RTC-CDO and the CA as to the classification of
the Deed of Assignment — whether rescissible or inexistent, it behooves the Court to resolve the
conflict.
Under Article 1345 of the Civil Code, simulation of a contract may be absolute, when the parties do
not intend to be bound at all, or relative, when the parties conceal their true agreement. The
former is known as contracto simulado while the latter is known as contracto disimulado.65 An
absolutely simulated or fictitious contract is void while a relatively simulated contract when it does
not prejudice a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their real agreement.66
In Vda. de Rodriguez v. Rodriguez,67 the Court, speaking through the renowned civilist, Justice
J.B.L. Reyes, stated that:
x x x the characteristic of simulation is the fact that the apparent contract is not really desired or
intended to produce legal effects or in any way alter the juridical situation of the parties. Thus,
where a person, in order to place his property beyond the reach of his creditors, simulates a
transfer of it to another, he does not really intend to divest himself of his title and control of the
property; hence, the deed of transfer is but a sham. x x x68
The Court, in Heirs of Spouses Intac v. CA,69 reiterated that:
In absolute simulation, there is a colorable contract but it has no substance as the parties have
no intention to be bound by it. "The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce legal effect or in any way alter the
juridical situation of the parties." "As a result, an absolutely simulated or fictitious contract is
void, and the parties may recover from each other what they may have given under the
contract." 70
In the Deed of Assignment, did FPI intend to divest itself of its title and control of the properties
assigned therein?
The lack of intention on the part of FPI to divest its ownership and control of "all of [its] properties,
equipment and facilities, located in Phividec Industrial Estate, Tagoloan, Misamis Oriental" 71 — in
spite of the wordings in the Deed of Assignment that FPI "assigned, transferred, ceded and
conveyed [them] x x x absolutely in favor of [GHI]" 72 — is evident from the letter dated
February 28, 2003 which reveals the true intention of FPI and GHI.
In the letter dated February 28, 2003, it is there provided that the right to the work process,
otherwise known as "Outokumpo," was to be retained by FPI and would only be made available to
GHI under two options. One option even gave FPI the option to operate the assigned assets with
the obligation to pay GHI a guaranteed revenue. While GHI was given the first crack to choose
which of the two options to take, such chosen option would only last for three years, and
subsequently, FPI would make the choice and the option chosen by FPI would last for the next three
years. The cycle would then be repeated if the ferro-alloy plant would not be operated for six years
from assignment.73 What is evident, therefore, in the delineation of the different options available to
FPI and GHI in the settlement of FPI's obligations to the latter is that FPI did not intend to really
assign its assets "absolutely" to GHI. Stated differently, this letter belies the wordings of the Deed
of Assignment that, it should be emphasized, was executed a mere 11 days after the letter, that is,
on March 11, 2003.
That there was no intention to absolutely assign to GHI all of FPI's assets was confirmed by the
finding of the RTC-CDO that, according to FPI's Acting President, Juanito E. Figueroa, "GHI cannot
operate the [equipment, machinery and smelting facilities] without the patented 'Outokumpo'
process and GHI has not been operating the same."74 Moreover, the equipment and machinery
remain physically in the plant premises, slowly depreciating with the passage of time, and, worse,
there also appears to be no effective delivery as the premises on which these are located remain
under the control of FPI which continues to employ the security and skeletal personnel in the plant
premises.75
Thus, in executing the Deed of Assignment, FPI's intention was not to transfer absolutely the
assigned assets (admittedly valued at about P280 Million 76) to GHI in payment of FPI's obligations
to GHI amounting to P50,366,926.71.77 FPI, as shown above, did not really intend to divest itself of
its title and control of the assigned properties. FPI's real intention was, borrowing the words of
Justice J.B.L Reyes in Rodriguez, to place them beyond the reach of its creditor CEPALCO. This was
astutely observed by the CA Decision, viz.:
x x x The Deed of Assignment was executed while Civil Case No. 65789 was already pending with
the RTC-Pasig and after the Partial Summary Judgment was rendered on 22 April 1999. In
anticipation of the adverse final outcome of Civil Case No. 65789 as promulgated in the 19
January 2004 Decision of the RTC-Pasig, GHI and FPI executed the Deed of Assignment. Hence,
the presumption of fraud set in by operation of the law against the sister companies, FPI, then
already the judgment debtor, and GHI.78
As to the presence of badges of fraud, which the RTC-CDO found to have existed and affirmed by
the CA, they do, in fact, confirm the intention of FPI to defraud CEPALCO. But these findings do not
thereby render as rescissible the Deed of Assignment under Article 1381(3). Rather, they fortify the
finding that the Deed of Assignment was "not really desired or intended to produce legal effects or
in any way alter the juridical situation of the parties" or, put differently, that the Deed of
Assignment was a sham, or a contracto simulado.
Thus, given the foregoing, the Deed of Assignment is declared inexistent for being absolutely
simulated or fictitious. Accordingly, the CA correctly ruled that the Deed of Assignment was
absolutely simulated, although it was in error in affirming the rescission ordered by the RTC-CDO
because, as explained above, rescissible contracts and void or inexistent contracts belong to two
mutually exclusive groups. This error, however, does not justify the granting of the Petition.
Entitlement to Damages
The Court's declaration of the inexistence of the Deed of Assignment renders the resolution of the
fifth issue — on GHI's entitlement to damages — superfluous. Instead, the dismissal of its
complaint for lack of cause of action is warranted.
WHEREFORE, the Petition is hereby DENIED for lack of merit. The Court of Appeals' Decision
dated April 14, 2016 and Resolution dated July 25, 2016 in CA-G.R. CV No. 03366-MIN as well as
the Decision dated July 22, 2013 of the Regional Trial Court of Cagayan de Oro City, Branch 38 in
Civil Case No. 2004-111 are hereby AFFIRMED with MODIFICATIONS. The Deed of Assignment
dated March 11, 2003 executed by respondent Ferrochrome Philippines, Inc. in favor of petitioner
G. Holdings, Inc. is declared inexistent for being absolutely simulated; the complaint of petitioner
G. Holdings, Inc. is dismissed for lack of cause of action; and pursuant to Nacar v. Gallery
Frames,79 the total amount awarded in the RTC-CDO Decision shall earn 6% interest per year from
the date of finality of this Decision until fully paid.