G.R. No.

23769           September 16, 1925 (b) All handling charges and expenses at the central and at the dock at Mambaguid for our account.
SONG FO & COMPANY, plaintiff-appellee,
vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.
Hilado and Hilado, Ross, Lawrence and Selph and Antonio T. Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two causes of action for
breach of contract against the Hawaiian-Philippine Co., defendant, in which judgment was asked for P70,369.50, with legal
interest, and costs. In an amended answer and cross-complaint, the defendant set up the special defense that since the
plaintiff had defaulted in the payment for the molasses delivered to it by the defendant under the contract between the
parties, the latter was compelled to cancel and rescind the said contract. The case was submitted for decision on a
stipulation of facts and the exhibits therein mentioned. The judgment of the trial court condemned the defendant to pay to
the plaintiff a total of P35,317.93, with legal interest from the date of the presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant only has appealed. In this court it has made the following
assignment of errors: "I. The lower court erred in finding that appellant had agreed to sell to the appellee 400,000, and not
only 300,000, gallons of molasses. II. The lower court erred in finding that the appellant rescinded without sufficient cause
the contract for the sale of molasses executed by it and the appellee. III. The lower court erred in rendering judgment in
favor of the appellee and not in favor of the appellant in accordance with the prayer of its answer and cross-complaint. IV.
The lower court erred in denying appellant's motion for a new trial." The specified errors raise three questions which we
will consider in the order suggested by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000 gallons of molasses? The trial
court found the former amount to be correct. The appellant contends that the smaller amount was the basis of the
agreement.
The contract of the parties is in writing. It is found principally in the documents, Exhibits F and G. The First mentioned
exhibit is a letter addressed by the administrator of the Hawaiian-Philippine Co. to Song Fo & Company on December 13,
1922. It reads:
SILAY, OCC. NEGROS, P.I.
            December 13, 1922
(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48 for the round trip dock to
central and central to dock. This service to be restricted to one trip for the six tanks.
Yours very truly,
      SONG FO & COMPANY
By __________________________
                        Manager.
We agree with appellant that the above quoted correspondence is susceptible of but one interpretation. The Hawaiian-
Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses. The Hawaiian-Philippine Co. also
believed it possible to accommodate Song Fo & Company by supplying the latter company with an extra 100,000 gallons.
But the language used with reference to the additional 100,000 gallons was not a definite promise. Still less did it constitute
an obligation.
If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not consider itself obliged to
deliver to the plaintiff molasses in any amount. On the other hand, Exhibit A, a letter written by the manager of Song Fo &
Company on October 17, 1922, expressly mentions an understanding between the parties of a contract for P300,000
gallons of molasses.
We sustain appellant's point of view on the first question and rule that the contract between the parties provided for the
delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo & Company? The trial judge
answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo (Mr. Song Heng) gave us
to understand that you would pay us at the end of each month for molasses delivered to you." In Exhibit G, we find Song Fo
& Company stating that they understand the contents of Exhibit F, and that they confirm all the arrangements you have
stated, and in order to make the contract clear, we hereby quote below our old contract as amended, as per our new
arrangements. (a) Price, at 2 cents per gallon delivered at the central." In connection with the portion of the contract
having reference to the payment for the molasses, the parties have agree on a table showing the date of delivery of the
molasses, the amount and date thereof, the date of receipt of account by plaintiff, and date of payment. The table
mentioned is as follows:

Messrs. SONG FO AND CO. Date of receipt of

Date of delivery Account and date thereof Date of payment
Iloilo, Iloilo. account by plaintiff
DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited this Central, we wish to state as
follows: 1922 1923 1923
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, Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20
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 Dec. 29 206.16 Jan. 3/23 do Do
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
1923
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 Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31
month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain. Feb. 12 206.16 Mar. 12/23 do Do
Yours very truly,
HAWAIIAN-PHILIPPINE COMPANY Feb. 27 206.16 do do Do
      BY R. C. PITCAIRN
      Administrator. Mar. 5 206.16 do do Do

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on December 16, 1922. This
Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19
letter reads:
December 16th, 1922. Mar. 24 206.16 Mar. 31/23 do Do
Messrs. HAWAIIAN-PHILIPPINE CO.,
            Silay, Neg. Occ., P.I. Mar. 29 206.16 do do Do
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood all their contents. Some doubt has risen as to when Song Fo & Company was expected to make payments for the molasses delivered. Exhibit
In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the one who visited your F speaks of payments "at the end of each month." Exhibit G is silent on the point. Exhibit M, a letter of March 28, 1923,
Central, but it was not for he was Mr. Song Heng, the representative and the manager of Messrs. Song Fo & Co. from Warner, Barnes & Co., Ltd., the agent of the Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on
With reference to the contents of your letter dated the 13th inst. we confirm all the arrangements you have stated and in presentation of bills for each delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo & Company
order to make the contract clear, we hereby quote below our old contract as amended, as per our new arrangements. dated April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-Philippine Co. to Song Fo &
(a) Price, at 2 cents per gallon delivered at the central. Company on April 2, 1923, by which the Hawaiian-Philippine Co. gave notice of the termination of the contract, gave as the
reason for the rescission, the breach by Song Fo & Company of this condition: "You will recall that under the arrangements
made for taking our molasses, you were to meet our accounts upon presentation and at each delivery." Not far removed
from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay defendant, at the end of each
month upon presentation accounts."
Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable deduction is that Song Fo &
Company was to pay the Hawaiian-Philippine Co. upon presentation of accounts at the end of each month. Under this
hypothesis, Song Fo & Company should have paid for the molasses delivered in December, 1922, and for which accounts
were received by it on January 5, 1923, not later than January 31 of that year. Instead, payment was not made until
February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract should be
treated as of the essence of the contract. Theoretically, agreeable to certain conditions which could easily be imagined, the
Hawaiian-Philippine Co. would have had the right to rescind the contract because of the breach of Song Fo & Company. But
actually, there is here present no outstanding fact which would legally sanction the rescission of the contract by the
Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. A delay in
payment for a small quantity of molasses for some twenty days is not such a violation of an essential condition of the
contract was warrants rescission for non-performance. Not only this, but the Hawaiian-Philippine Co. waived this condition
when it arose by accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo &
Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse for writing its letter of
April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs. Inza [1922], 43 Phil., 505.)
We rule that the appellant had no legal right to rescind the contract of sale because of the failure of Song Fo & Company to
pay for the molasses within the time agreed upon by the parties. We sustain the finding of the trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently breached by the
Hawaiian-Philippine Co., what is the measure of damages? We again turn to the facts as agreed upon by the parties.
The first cause of action of the plaintiff is based on the greater expense to which it was put in being compelled to secure
molasses from other sources. Three hundred thousand gallons of molasses was the total of the agreement, as we have
seen. As conceded by the plaintiff, 55,006 gallons of molasses were delivered by the defendant to the plaintiff before the
breach. This leaves 244,994 gallons of molasses undelivered which the plaintiff had to purchase in the open market. As
expressly conceded by the plaintiff at page 25 of its brief, 100,000 gallons of molasses were secured from the Central North
Negros Sugar Co., Inc., at two centavos a gallon. As this is the same price specified in the contract between the plaintiff and
the defendant, the plaintiff accordingly suffered no material loss in having to make this purchase. So 244,994 gallons minus
the 100,000 gallons just mentioned leaves as a result 144,994 gallons. As to this amount, the plaintiff admits that it could
have secured it and more from the Central Victorias Milling Company, at three and one-half centavos per gallon. In other
words, the plaintiff had to pay the Central Victorias Milling company one and one-half centavos a gallon more for the
molasses than it would have had to pay the Hawaiian-Philippine Co. Translated into pesos and centavos, this meant a loss
to the plaintiff of approximately P2,174.91. As the conditions existing at the central of the Hawaiian-Philippine Co. may
have been different than those found at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling
Company, and as not alone through the delay but through expenses of transportation and incidental expenses, the plaintiff
may have been put to greater cost in making the purchase of the molasses in the open market, we would concede under
the first cause of action in round figures P3,000.
The second cause of action relates to lost profits on account of the breach of the contract. The only evidence in the record
on this question is the stipulation of counsel to the effect that had Mr. Song Heng, the manager of Song Fo & Company,
been called as a witness, he would have testified that the plaintiff would have realized a profit of P14,948.43, if the contract
of December 13, 1922, had been fulfilled by the defendant. Indisputably, this statement falls far short of presenting proof
on which to make a finding as to damages.
In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow the same line of thought
as found in the decision of the trial court, which we have found to be unsustainable. In the second place, had Mr. Song
Heng taken the witness-stand and made the statement attributed to him, it would have been insufficient proof of the
allegations of the complaint, and the fact that it is a part of the stipulation by counsel does not change this result. And
lastly, the testimony of the witness Song Heng, it we may dignify it as such, is a mere conclusion, not a proven fact. As to
what items up the more than P14,000 of alleged lost profits, whether loss of sales or loss of customers, or what not, we
have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on the first cause of
action in the amount of P3,000 and on the second cause of action in no amount. Appellant's assignments of error are
accordingly found to be well taken in part and not well taken in part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have and recover from the
defendant the sum of P3,000, with legal interest form October 2, 1923, until payment. Without special finding as to costs in
either instance, it is so ordered.
Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
G.R. No. 101762 July 6, 1993
VERMEN REALTY DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS and SENECA HARDWARE CO., INC., respondents.
Ramon P. Gutierrez for petitioner.
Adriano Velasco for private respondent.
BIDIN, J.:
Petitioner seeks a review of the decision of the Court of Appeals in CA-G.R. CV No. 15730, which set aside the decision of
the Regional Trial Court of Quezon City, Branch 92 in Civil Case No. Q-45232. The dispositive portion of the assailed decision
reads as follows:
WHEREFORE, the decision a quo  is set aside. As prayed for by plaintiff-appellant, the "Offsetting Agreement" (Exhibit "E" or
"2") is hereby rescinded. Room 601 of Phase I of the Vermen Pines Condominium should be returned by plaintiff-appellant
to defendant-appellee upon payment by the latter of the sum of P330,855.25 to the former, plus damages in the sum of
P5,000.00 and P50.00 for the furnishings of Phase I of Condo (sic) Units Nos. 601 and 602, and three (3) day rental of Room
402 during the Holy Week of 1982, respectively. In addition, defendant-appellee is hereby ordered to pay plaintiff-
appellant, who was compelled to litigate and hire the services of counsel to protect its interests against defendant-
appellee's violation of their Offsetting Agreement, the sum of P10,000.00 as an award for attorney's fee (sic) and other
expenses of litigation. The claim for unrealized profits in a sum equivalent to 10% to 20% percent or P522,000.00 not
having been duly proved, is therefore DENIED. No costs. (Rollo, p. 31)
On March 2, 1981, petitioner Vermen Realty and Development Corporation, as First Party, and private respondent Seneca
Hardware Co., Inc., as Second Party, entered into a contract denominated as "Offsetting Agreement". The said agreement
contained the following stipulations:
1. That the FIRST PARTY is the owner/developer of VERMEN PINES CONDOMINIUM located at Bakakeng Road, Baguio City;
2. That the SECOND PARTY is in business of construction materials and other hardware items;
3. That the SECOND PARTY desires to buy from the FIRST PARTY two (2) residential condominium units, studio type, with a
total floor area of 76.22 square meter (sic) more or less worth TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00)
PESOS only;
4. That the FIRST PARTY desires to but from the SECOND PARTY construction materials mostly steel bars, electrical
materials and other related items worth FIVE HUNDRED FIFTY TWO THOUSAND (P552,000.00) PESOS only;
5. That the FIRST PARTY shall pay the SECOND PARTY TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS in cash
upon delivery of said construction materials and the other TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS
shall be paid in the form of two (2) residential condominium units, studio type, with a total floor area of 76.22 square
meter (sic) more or less also worth P276,000.00;
6. That, for every staggered delivery of construction materials, fifty percent (50%) shall be paid by the FIRST PARTY to the
SECOND PARTY C.O.D. and, fifty percent (50%) shall be credited to the said condominium unit in favor of the SECOND
PARTY;
7. That the SECOND PARTY shall deliver to the FIRST PARTY said construction materials under the agreed price and
conditions stated in the price quotation approved by both parties and made an integral part of this document;
8. That the SECOND PARTY is obliged to start delivering to the FIRST PARTY all items in the purchase order seven (7) days
from receipt of said purchase order until such time that the whole amount of P552,000.00 is settled;
9. That the place of delivery shall be Vermen Pines Condominium at Bakakeng Road, Baguio City;
10. That the freight cost of said materials shall be borne fifty percent (50%) by the FIRST PARTY and fifty percent (50%) by
the SECOND PARTY;
11. That the FIRST PARTY pending completion of the VERMEN PINES CONDOMINIUM PHASE II which is the subject of this
contract, shall deliver to the SECOND PARTY the possession of residential condominium, Phase I, Unit Nos. 601 and 602,
studio type with a total area of 76.22 square meters or less, worth P276,000.00;
12. That after the completion of Vermen Pines Condominium Phase II, the SECOND PARTY shall be given by the FIRST PARTY
the first option to transfer from Phase I to Phase II under the same price, terms and conditions. (Rollo, pp. 26-28).
As found by the appellate court and admitted by both parties, private respondent had paid petitioner the amount of
P110,151.75, and at the same time delivered construction materials worth P219,727.00. Pending completion of Phase II of
the Vermen Pines Condominiums, petitioner delivered to private respondent units 601 and 602 at Phase I of the Vermen
Pines Condominiums (Rollo, p. 28). In 1982, the petitioner repossessed unit 602. As a consequence of the repossession, the
officers of the private respondent corporation had to rent another unit for their use when they went to Baguio on April 8,
1982. On May 10, 1982, the officers of the private respondent corporation requested for a clarification of the petitioner's
action of preventing them and their families from occupying condominium unit 602.
In its reply dated May 24, 1982, the petitioner corporation averred that Room 602 was leased to another tenant because
private respondent corporation had not paid anything for purchase of the condominium unit. Petitioner corporation
demanded payment of P27,848.25 representing the balance of the purchase price of Room 601.
In 1983, the loan application for the construction of the Vermen Pines Condominium Phase II was denied. Consequently,
construction of the condominium project stopped and has not been resumed since then.
On June 21, 1985, private respondent filed a complaint with the Regional Trial Court of Quezon City (Branch 92) for
rescission of the Offsetting Agreement with damages. In said complaint, private respondent alleged that petitioner Vermen
Realty Corporation had stopped issuing purchase orders of construction materials after April, 1982, without valid reason,
thus resulting in the stoppage of deliveries of construction materials on its (Seneca Hardware) part, in violation of the
Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the fault lay with private respondent (plaintiff therein):
although petitioner issued purchase orders, it was private respondent who could not deliver the supplies ordered, alleging
that they were out of stock. (However, during a hearing on January 28, 1987, the Treasurer of petitioner corporation, when
asked where the purchase orders were, alleged that she was going to produce the same in court, but the same was never
produced (Rollo, p. 30). Moreover, private respondent quoted higher prices for the construction materials which were
available. Thus, petitioner had to resort to its other suppliers. Anent the query as to why Unit 602 was leased to another
tenant, petitioner averred that this was done because private respondent had not paid anything for it.
As of December 16, 1986, private respondent had paid petitioner P110,151.75 in cash, made deliveries of construction
materials worth P219,727.00, leaving a balance of P27,848.25 representing the purchase price of unit 601 (Rollo, p. 28).
The price of one condominium unit was P138,000.00.
After conducting hearings, the trial court rendered a decision dismissing the complaint and ordering the plaintiff (private
respondent in this petition) to pay defendant (petitioner in this petition) on its counterclaim in the amount of P27,848.25
representing the balance due on the purchase price of condominium unit 601.
On appeal, respondent court reversed the trial court's decision as adverted to above.
Petitioner now comes before us with the following assignment of errors:
I which were considered by private respondent when it entered into the agreement. Since the construction of the Vermen
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS HONORABLE COURT, WHEN IT
SUPPLANTED CONTRARY TO THE EVIDENCE ON RECORD, THE TRIAL COURT'S CONCLUSIONS THAT PETITIONER DID NOT
VIOLATE THE "OFFSETTING AGREEMENT" IT ENTERED INTO WITH THE SENECA HARDWARE CO., INC. WITH ITS TOTALLY
BASELESS "PERCEPTION" THAT IT WAS PETITIONER WHICH DISCONTINUED TO ISSUE PURCHASE ORDERS DUE TO THE
STOPPAGE OF THE CONSTRUCTION OF PHASE II OF THE CONDOMINIUM PROJECT WHEN THE LOAN ON THE SAID PROJECT
WAS STOPPED.
II
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS HONORABLE COURT, WHEN IT
CONCLUDED THAT IT WAS PETITIONER WHICH BREACHED THE "OFFSETTING AGREEMENT" BECAUSE IT DID NOT SEND
PURCHASE ORDERS TO PRIVATE RESPONDENT AND DISCONTINUED THE CONSTRUCTION OF THE CONDOMINIUM PROJECT
DESPITE THE FACT THAT THE EXHIBITS ATTESTING TO THIS FACT WAS FORMALLY OFFERED IN EVIDENCE IN COURT AND
MENTIONED BY IT IN ITS DECISION.
III
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY THIS HONORABLE COURT, WHEN IT
CONCLUDED THAT IT WAS PETITIONER WHICH BREACHED THE "OFFSETTING AGREEMENT" DESPITE THE ADMISSION MADE
BY PRIVATE RESPONDENT'S OWN WITNESS THAT PETITIONER HAD THE DISCRETION TO ORDER OR NOT TO ORDER THE
CONSTRUCTION MATERIAL (SIC) FROM THE FORMER. (Rollo, p. )
The issue presented before the Court is whether or not the circumstances of the case warrant rescission of the Offsetting
Agreement as prayed for by Private Respondent when he instituted the case before the trial court.
We rule in favor of private respondent. There is no controversy that the provisions of the Offsetting Agreement are
reciprocal in nature. Reciprocal obligations are those created or established at the same time, out of the same cause, and
which results in a mutual relationship of creditor and debtor between parties. In reciprocal obligations, the performance of
one is conditioned on the simultaneous fulfillment of the other obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil.
1262 [1957]). Under the agreement, private respondent shall deliver to petitioner construction materials worth
P552,000.00 under the conditions set forth in the Offsetting Agreement. Petitioner's obligation under the agreement is
three-fold: he shall pay private respondent P276,000.00 in cash; he shall deliver possession of units 601 and 602, Phase I,
Vermen Pines Condominiums (with total value of P276,000.00) to private respondent; upon completion of Vermen Pines
Condominiums Phase II, private respondent shall be given option to transfer to similar units therein.
Article 1191 of the Civil Code provides the remedy of rescission in (more appropriately, the term is "resolution") in case of
reciprocal obligations, where one of the obligors fails to comply with that is incumbent upon him.
The general rule is that rescission of a contract will not be permitted for a slight or causal breach, but only for such
substantial and fundamental breach as would defeat the very object of the parties in executing the agreement. The
question of whether a breach of contract is substantial depends upon the attendant circumstances (Universal Food Corp.
vs. Court of Appeals, 33 SCRA 1, [1970]).
In the case at bar, petitioner argues that it was private respondent who failed to perform its obligation in the Offsetting
Agreement. It averred that contrary to the appellate court's ruling, the mere stoppage of the loan for the construction of
Phase II of the Vermen Pines Condominiums should not have had any effect on the fulfillment of the obligations set forth in
the Offsetting Agreement. Petitioner moreover stresses that contrary to private respondent's averments, purchase orders
were sent, but there was failure to deliver the materials ordered because they were allegedly out of stock. Petitioner points
out that, as admitted by private respondent's witness, petitioner had the discretion to order or not to order constructions
materials, and that it was only after petitioner approved the price, after making a canvass from other suppliers, that the
latter would issue a purchase order. Petitioner argues that this was the agreement, and therefore the law between the
parties, hence, when no purchase orders were issued, no provision of the agreement was violated.
Private respondent, on the other hand, points out that the subject of the Offsetting Agreement is Phase II of the Vermen
Pines Condominiums. It alleges that since construction of Phase II of the Vermen Pines Condominiums has failed to begin
(Rollo, p. 104), it has reason to move for rescission of the Offsetting Agreement, as it cannot forever wait for the delivery of
the condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its obligation in the Offsetting
Agreement. The discontinuance of delivery of construction materials to petitioner stemmed from the failure of petitioner
to send purchase orders to private respondent. The allegation that petitioner had been sending purchase orders to private
respondent, which the latter could not fill, cannot be given credence. Perhaps in the beginning, it would send purchase
orders to private respondent (as evidenced by the purchase orders presented in court), and the latter would deliver the
construction materials ordered. However, according to private respondent, after April, 1982, petitioner stopped sending
purchase orders. Petitioner failed to refute this allegation. When petitioner's witness, Treasurer of the petitioner
corporation, was asked to produce the purchase orders in court, the latter promised to do so, but this was never complied
with.
On the other hand, petitioner would never able to fulfill its obligation in allowing private respondent to exercise the option
to transfer from Phase I to Phase II, as the construction of Phase II has ceased and the subject condominium units will never
be available.
The impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the contract for indeed,
the non-fulfillment of the obligation aforementioned constitutes substantial breach of the Offsetting Agreement. The
possibility of exercising the option of whether or not to transfer to condominium units in Phase II was one of the factors
Pines Condominium Phase II has stopped, petitioner would be in no position to perform its obligation to give private
respondent the option to transfer to Phase II. It would be the height of injustice to make private respondent wait for
something that may never come.
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.
Feliciano, Davide, Jr., Romero and Melo, JJ., concur.
G.R. No. 108346       July 11, 2001
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,
vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract,
entitled the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari 1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV No.
32991 dated October 9, 1992, as well as its Resolution 3 dated December 29, 1992 denying petitioner's motion for
reconsideration.4
The dispositive portion of the assailed Decision reads:
"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated November 14,
1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants are
hereby RELEASED."5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land, together with
the house and other improvements thereon, located at 1918 Kamias St., Dasmariñas Village, Makati and covered by TCT
No. 142177. Defendant George Raymundo [herein private petitioners] is David's father who negotiated with plaintiffs
Avelina and Mariano Velarde [herein petitioners] for the sale of said property, which was, however, under lease (Exh. '6', p.
232, Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by
defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms and
conditions:
'x x x      x x x      x x x
'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency,
receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to his entire and complete satisfaction,
by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full
warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel of land
mentioned and described above, together with the house and other improvements thereon.
'That the aforesaid parcel of land, together with the house and other improvements thereon, were mortgaged by the
VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to secure the payment of a loan of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed
and executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ and which Real Estate Mortgage
was ratified before Notary Public for Makati, _____, as Doc. No. ______, Page No. _____, Book No. ___, Series of 1986 of
his Notarial Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage obligations on the property
herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in
favor of Bank of Philippine Islands, in the name of the VENDOR, and further agrees to strictly and faithfully comply with all
the terms and conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI,
including interests and other charges for late payment levied by the Bank, as if the same were originally signed and
executed by the VENDEE.
'It is further agreed and understood by the parties herein that the capital gains tax and documentary stamps on the sale
shall be for the account of the VENDOR; whereas, the registration fees and transfer tax thereon shall be the account of the
VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband,
Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x      x x x      x x x
'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of EIGHT HUNDRED
THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage obligations on the property with the Bank
of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, in accordance with the terms and conditions of the Deed of Real Estate Mortgage dated _____, signed and
executed by Mr. David A. Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc. No.
_____, Page No. _____, Book No. _____, Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet approved by the
mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the Bank in the name of Mr. David A.
Raymundo, in accordance with the terms and conditions of the said Deed of Real Estate Mortgage, including all interests
and other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting and confirming
our private understanding concerning the said mortgage obligations to be assumed.
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the mortgage obligations of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, with the bank of the Philippine
Islands, I, Mrs, Avelina D, Velarde with the consent of my husband, Mariano Z. Velardo, do hereby bind and obligate myself,
my heirs, successors and assigns, to strictly and faithfully comply with the following terms and conditions:
'1. That until such time as my assumption of the mortgage obligations on the property purchased is approved by the
mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accordance with the terms and
conditions of the Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I hereby agree that
my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine Islands on the mortgage loan,
shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated damages, without necessity of notice or
any judicial declaration to that effect, and Mr. David A. Raymundo shall resume total and complete ownership and
possession of the property sold by way of Deed of Sale with Assumption of Mortgage, and the same shall be deemed
automatically cancelled and be of no further force or effect, in the same manner as it (the) same had never been executed
or entered into.
'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and assigns, to strictly and
faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the Philippine Islands, and the
covenants, stipulations and provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby confirm and agree to
the undertakings of the Vendee pertinent to the assumption of the mortgage obligations by the Vendee with the Bank of
the Philippine Islands. (Exh. 'C', pp. 13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of a loan that
plaintiffs were to secure from a bank with defendant's help. Defendants had a standing approved credit line with the Bank
of the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of an application for assumption
of mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue paying the monthly
interests of the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the aforementioned mortgage
for three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19,
1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI, was not
approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to the
mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January 21, 1987
provided: (a) you deliver actual possession of the property to her not later than January 15, 1987 for her immediate
occupancy; (b) you cause the re- lease of title and mortgage from the Bank of P.I. and make the title available and free from
any liens and encumbrances; and (c) you execute an absolute deed of sale in her favor free from any liens or encumbrances
not later than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended sale of the
subject property allegedly due to the latter's failure to comply with the terms and conditions of the Deed of Sale with
Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance,
nullity of cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at the Regional Trial
Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate
justice of this Court), who dismissed the Complaint in a Decision dated November 14, 1990. 7 Thereafter, petitioners filed a
Motion for Reconsideration.8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was
assigned to the sala she vacated. In an Order dated May 15, 1991, 9 Judge Abad Santos granted petitioner's Motion for
Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8
million to private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender possession
of the disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier Decision dismissing
petitioners' Complaint. Upholding the validity of the rescission made by private respondents, the CA explained its ruling in
this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this sale, the
VENDEE (Velarde)' would assume to pay the mortgage obligation on the subject property in the amount of P 1.8 million in
favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the
downpayment of P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be paid in cash,
Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage obligation on the subject property. In
other words, the assumption of the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract.
Velarde further agreed 'to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were originally signed and executed by
the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the document entitled 'Undertaking' wherein
the latter agreed to continue paying said loan in accordance with the terms and conditions of the Deed of Real Estate
Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and
conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the
mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled
automatically and of no force and effect (pars. 2 & 3, thereof, pp 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde of
the mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that Velarde had to make payments
to BPI under the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the approval of
the assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in the
name of Velarde. And in the event said application is disapproved, Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p.
47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the
mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n]
Raymundo may choose either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission
(Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for Velarde's non-
payment of the balance of the purchase price. As borne out by the evidence, Velarde had to pay in full in case of BPI's
disapproval of the application for assumption of mortgage. What Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given weight by the
lower court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their
willingness to pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, would constitute
a new undertaking or new agreement which is subject to the consent or approval of Raymundo. These 3 conditions were
not among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to
novate. But then again, there can be no novation because there was no agreement of all the parties to the new contract
(Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption of Mortgage
would be deemed 'automatically cancelled and of no further force and effect, as if the same had never been executed or
entered into.' While it is true that even if the contract expressly provided for automatic rescission upon failure to pay the
price, the vendee may still pay, he may do so only for as long as no demand for rescission of the contract has been made
upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde notarial
notice dated January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to comply with their
obligation. The rescission was justified in view of Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the agreement. As adverted to above, the agreement of the
parties involved a reciprocal obligation wherein the obligation of one is a resolutory condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus,
the non-payment of the mortgage obligation by appellees Velarde would create a right to demand payment or to
rescind  the contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614).
Upon appellee's failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720).
Consequently, appellees Velarde having violated the contract, they have lost their right to its enforcement and hence,
cannot avail of the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)."10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of errors:
"I.
The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach of the
contract.
"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new conditions' constituting mere
offers or an attempt to novate necessitating a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract,
considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly,
payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents
again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the
purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price
balance of P1.8 million to private respondents in case the request to assume the mortgage would be disapproved. Thus, on
December 15, 1986, when petitioners received notice of the bank's disapproval of their application to assume respondents'
mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the
fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take
the place of actual payment as would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the buyer
to pay therefor a price certain in money or its equivalent.13
Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively
transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is
not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.14
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner
agreed upon. Worse, they wanted private respondents  to perform obligations beyond those stipulated in the contract
before fulfilling their own obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the
former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they
were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of
the contract was not substantial as would warrant a rescission. They cite several cases15  in which this Court declared that
rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have already made the initial payment of P800,000 and
three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage
obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale.
Private respondents' right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly provides as
follows:
"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the obligation, with the payment of damages in
either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by
the other party who violates the reciprocity between them. 16 The breach contemplated in the said provision is the obligor's
failure to comply with an existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee
may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court
shall decree the rescission.18
In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very
essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's right to rescind
the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due;
however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation.
Moreover, the offer to pay was conditioned on the performance by private respondents of additional burdens that had not
been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was merely
slight or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in those cases are not
analogous to those in the present one. In Song Fo  there was, on the part of the buyer, only a delay of twenty (20) days to
pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the seller.
In Zepeda,  the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid.
In Tan,  the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title
to the property; there was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach
would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8
million balance, but they also imposed upon private respondents new obligations as preconditions to the performance of
their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due
and demandable under the contract of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of
payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to
bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of
P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling
P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore. 20 To rescind is to declare a contract void at its inception and to
put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to
each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has
been made.21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners.
Suffice it to say that the three conditions appearing on the January 7, 1987 letter of petitioners to private respondents were
not part of the original contract. By that time, it was already incumbent upon the former to pay the balance of the sale
price. They had no right to demand preconditions to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED  with the MODIFICATION  that private respondents are ordered to
return to petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded contract, with legal
interest thereon from January 8, 1987, the date of rescission. No pronouncement as to costs.
SO ORDERED.1âwphi1.nêt
Melo, Vitug,  and Sandoval-Gutierrez, JJ., concur.