Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-29155 May 13, 1970 UNIVERSAL FOOD CORPORATION, petitioner, vs. THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents. Wigberto E. Taada for petitioner. Teofilo Mendoza for respondents.

CASTRO, J.: Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1 On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1 On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The defendant

corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or corrective damages. On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the present recourse. The Court of Appeals arrived at the following "uncontroverted" findings of fact: That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and in the same year plaintiff registered his trademark in his name as owner and inventor with the Bureau of Patents; that due to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1). Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor and superintendent with a salary of P250.00 a month. Since the start of the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret to himself. However, said plaintiff expressed a willingness to give the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly approved by the President and General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960, President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him to report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with the orders of the corporation's various distributors and dealers, and with instructions to take only the necessary daily employees without employing permanent employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees who are connected in the production of Mafran Sauce and also some additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation including its trademarks, formula and assets at a price of not less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action on February 14, 1961. About a month afterwards, in a letter

dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present action was already filed in court (Exhibit J). 1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169 of the same Code, in reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been guilty of default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of Assignment. The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2 The Bill of Assignment sets forth the following terms and conditions: THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE; THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production of MAFRAN SAUCE and other food products and from other business which the Party of the Second Part may engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine and declare, said Party of the First Part hereby assign, transfer, and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part; THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of the Second Part and after a competent auditor designated by the Board of Directors shall have duly examined and audited its books of accounts and shall have certified as to the correctness of its Financial Statement; THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the Party of the First Part and to increase its production, shall endeavor or undertake such research, study, experiments and testing, to invent or cause to invent additional formula or formulas, the property rights and interest thereon shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in consideration of the foregoing premises, covenants and stipulations: THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be entitled to the following Participation: (a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief Chemist of the Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V. FRANCISCO shall be appointed

Auditor thereof and in the event that the Treasurer or any officer who may have the custody of the funds, assets and other properties of the Party of the Second Part comes from the Party of the First Part, then the Auditor shall not be appointed from the latter; furthermore should the Auditor be appointed from the Party representing the majority shares of the Party of the Second Part, then the Treasurer shall be appointed from the Party of the First Part; (b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of their respective position, then, their shares or assigns and who may have necessary qualifications shall be preferred to succeed them; (c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of Directors of the Party of the Second Part; (d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the preparation of said products; THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in which case then the property rights and interests over said trademark and formula shall automatically revert the Party of the First Part. Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula." However, a perceptive analysis of the entire instrument and the language employed therein 3 would lead one to the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the parties, 4 as we shall presently show. Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for the use of a patented invention. 'Royalty,' when used in connection with a license under a patent, means the compensation paid by the licensee to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5 Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping of the chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the intention of the respondent patentee at

the time of its execution was to part, not with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6 Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark and formula and not merely the right to use it for then such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become part of the property in the hands of the receiver thereof. 7 Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below for ready reference: 3. ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights over the said trademark and formula so that the defendant corporation could use the formula in the preparation and manufacture of the mafran sauce, and the trade name for the marketing of said project, as appearing in said contract .... 3. Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.

Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent patentee. Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the least transmission of right," 9 and is there a better example of least transmission of rights than allowing or permitting only the use, without transfer of ownership, of the formula for Mafran sauce. The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce." 2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character." The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position as chief chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to retain only a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was even designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he could

draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the petitioner had to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides, the records will show that the respondent patentee had knowledge of the resumption of production by the corporation, but in spite of such knowledge he did not report for work. The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work, considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist, while the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of the resumption of operations. The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received a copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no weight because the president and general manager of the corporation had no power to make the designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father. In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretarytreasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time being until the corporation resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twentythree days afterwards, or on December 29, the same president and general manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full blast production. And finally, at the hearing held on October 24, 1961, the same president and general manager admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation pay." The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers,

11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission, the petitioner corporation, thru its president and general manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff." 3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the following articles of the new Civil Code governing rescission of contracts: ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 of the Mortgage Law. ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused. At the moment, we shall concern ourselves with the first two paragraphs of article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between fulfillment and rescission of the obligation, with payment of damages in either case. In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause. Upon the factual milieu, is rescission of the Bill of Assignment proper? The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. 12The question of whether a breach of a contract is substantial depends upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the legal principle that the option to demand performance or ask for rescission of a contract belongs to the injured party, 14 the fact remains that the respondentsappellees had no alternative but to file the present action for rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the purchase and safeguarding of said products;"

and that only by all these measures could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second Vice-President and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said product all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of the rest. 4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is that the said respondent patentee refused to go back to work, notwithstanding the call for him to return which negates his right to be paid his back salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already formally called him back to work. The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation. 5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and formula." ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the

defendant corporation and all its assigns and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur. Teehankee J., took no part.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-42283 March 18, 1985 BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees, vs. URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.: This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00 attorney's fees and costs. The facts being undisputed, the Court of Appeals certified the case to us since only pure questions of law have been raised for appellate review. On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffs-appellees. On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendants-appellants. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land. The defendants-appellants alleged in their answer that the complaint states no cause of action and that the plaintiffsappellees violated paragraph six (6) of the contract to sell when they failed and refused to pay and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the said contract.

The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the decision reads: WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor of the plaintiffs and against the defendants declaring that the contract subject matter of the instant case was NOT VALIDLY cancelled by the defendants. Consequently, the defendants are ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the defendants. A motion for reconsideration filed by the defendants-appellants was denied. As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law. The defendants-appellants assigned the following alleged errors of the lower court: First Assignment of Error THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED. Second Assignment of Error EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF. Third Assignment of Error THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES. The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the defendants-appellants. The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of the contract which provides: xxx xxx xxx SIXTH. In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one corresponding to the said month of grace; it is understood, however, that should the month of grace herein granted to the party of the SECOND PART expired; without the payments corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of the contract, all the amounts paid in accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of the agreement; and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART. (Emphasis supplied by appellant)

xxx xxx xxx The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment despite demands for more than four (4) months. The defendants-appellants point to Jocson v. Capitol Subdivision (G.R. No. L6573, 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 defendantsappellants also argue that even in the absence of the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines. The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no effect, because it granted the sellers an absolute and automatic right of rescission. Article 1191 of the Civil Code on the rescission of reciprocal obligations provides: The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. xxx xxx xxx Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an agreement that violation of the terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276) Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs, 37 SCRA 327, and cases cited therein) Resort to judicial action for rescission is obviously not contemplated . . . The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA 504). The rule that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA 102) where we explained that: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated many consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. ... . We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... . The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides: SECOND. That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as follows: (a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed; and (b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each month, from this date until the total payment of the price above stipulated, including interest. because they failed to pay the August installment, despite demand, for more than four (4) months. The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P 3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants. Article 1234 of the Civil Code which provides that: If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. also militates against the unilateral act of the defendants-appellants in cancelling the contract. We agree with the observation of the lower court to the effect that:

Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this subdivision is likewise purposely done to afford those landless, low income group people of realizing their dream of a little parcel of land which they can really call their own. The defendants-appellants cannot rely on paragraph 9 of the contract which provides: NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of the SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this contract, as well as any other condonation that the party of the FIRST PART may give to the party of the SECOND PART with regards to the obligations of the latter, should not be interpreted as a renunciation on the part of the party of the FIRST PART of any right granted it by this contract, in case of default or non-compliance by the party of the SECOND PART. The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely once, but for as many times as he wishes. The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68), we held that: xxx xxx xxx But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the appellees from the home-lot in question. On the contrary, it is admitted that the delayed payments were received without protest or qualification. ... Under these circumstances, We cannot but agree with the lower court that at the time appellees exercised their option, appellants had already forfeited their right to invoke the above-quoted provision regarding the nullifying effect of the non-payment of six months rentals by appellees by their having accepted without qualification on July 21, 1964 the full payment by appellees of all their arrearages. The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a substantial portion of the said payments were applied to the interests since the contract specifically provides for a 7% interest per annum on the remaining balance. The defendantsappellants 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 defendantsappellants a total sum of P4,533.38, the defendants-appellants must now be compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides: TWELFTH. That once the payment of the sum of P3,920.00, the total price of the sale is completed, the party to the FIRST PART will execute in favor of the party of the SECOND PART, the necessary deed or deeds to transfer to the latter the title of the parcel of land sold, free from all hens and encumbrances other than those expressly provided in this contract; it is understood, however, that au the expenses which may be incurred in the said transfer of title shall be paid by the party of the SECOND PART, as above stated.

Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract of adhesion. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that: xxx xxx xxx ... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto. . . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. (Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied) While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale. The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers." Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendants-appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are justified. WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTYSEVEN CENTAVOS (P671.67) without any interests. Costs against the defendants-appellants. SO ORDERED. Melencio-Herrera, Plana, Relova, De la Fuente and Alampay, JJ., concur. Teehankee (Chairman), J., took no part.

G.R. No. 129107

September 26, 2001

ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P. DELOS SANTOS, respondents. QUISUMBING, J.: This petition assails the Decision1 dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949, affirming the decision of the Regional Trial Court and deleting the award of attorney's fee. The facts of the case are based on the records. On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of Tuguegarao and covered by Transfer Certificate of Title No. T-5790. The parties executed a Deed of Sale2 on the same date with the purchase price of P295,000.00, payable as follows: (a) P10,000.00 - upon the execution of this instrument, and for this purpose, the vendor acknowledges having received the said amount from the vendee as of this date; (b) P140,000.00 - on or before April 30, 1985; (c) P145,000.00 - on or before December 31, 1985.3 When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent a letter4 to Iringan stating that he considered the contract as rescinded and that he would not accept any further payment considering that Iringan failed to comply with his obligation to pay the full amount of the second installment. On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino,5 replied that they were not opposing the revocation of the Deed of Sale but asked for the reimbursement of the following amounts: (a) P50,000.00 - cash received by you; (b) P3,200.00 - geodetic engineer's fee; (c) P500.00 - attorney's fee; (d) the current interest on P53,700.00.6 In response, Palao sent a letter dated January 10, 1986,7 to Atty. Aquino, stating that he was not amenable to the reimbursements claimed by Iringan. On February 21, 1989, Iringan, now represented by anew counsel - Atty. Carmelo Z. Lasam, proposed that the P50,000 which he had already paid Palao be reimbursed8 or Palao could sell to Iringan, an equivalent portion of the land. Palao instead wrote Iringan that the latter's standing obligation had reached P61,600, representing payment of arrears for rentals from October 1985 up to March 1989.9 The parties failed to arrive at an agreement. On July 1, 1991, Palao filed a Complaint10 for Judicial Confirmation of Rescission of Contract and Damages against Iringan and his wife.

In their Answer,11 the spouses alleged that the contract of sale was a consummated contract, hence, the remedy of Palao was for collection of the balance of the purchase price and not rescission. Besides, they said that they had always been ready and willing to comply with their obligations in accordance with said contract. In a Decision12 dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I, ruled in favor of Palao and affirmed the rescission of the contract. It disposed, WHEREFORE, the Court finds that the evidence preponderates in favor of the plaintiff and against the defendants and judgment is hereby rendered as follows: (a) Affirming the rescission of the contract of sale; (b) Cancelling the adverse claim of the defendants annotated at the back of TCT No. T-5790; (c) Ordering the defendants to vacate the premises; (d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as reasonable compensation for use of the property minus 50% of the amount paid by them; and to pay P50,000.00 as moral damages; P10,000.00 as exemplary damages; and P50,000.00 as attorney's fee; and to pay the costs of suit. SO ORDERED.13 As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review. Iringan avers in this petition that the Court of Appeals erred: 1. In holding that the lower court did not err in affirming the rescission of the contract of sale; and 2. In holding that defendant was in bad faith for "resisting" rescission and was made liable to pay moral and exemplary damages.14 We find two issues for resolution: (1) whether or not the contract of sale was validly rescinded, and (2) whether or not the award of moral and exemplary damages is proper. On the first issue, petitioner contends that no rescission was effected simply by virtue of the letter15 sent by respondent stating that he considered the contract of sale rescinded. Petitioner asserts that a judicial or notarial act is necessary before one party can unilaterally effect a rescission. Respondent Palao, on the other hand, contends that the right to rescind is vested by law on the obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect agreed to it and had the legal effect of a mutually agreed rescission. Article 1592 of the Civil Code is the applicable provision regarding the sale of an immovable property. Article 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. (Italics supplied) Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve the contract.16 In the case of Villaruel v. Tan King,17 we ruled in this wise,

...since the subject-matter of the sale in question is real property, it does not come strictly within the provisions of article 1124 (now Article 1191) of the Civil Code, but is rather subjected to the stipulations agreed upon by the contracting parties and to the provisions of article 1504 (now Article 1592) of the Civil Code."18 Citing Manresa, the Court said that the requirement of then Article 1504, "refers to a demand that the vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create no obstacles to this contractual mode of extinguishing obligations."19 Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even though"20 emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial requirement still applies. On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2 thereof. Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. [Emphasis ours.] The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law. But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission. InEscueta v. Pando,21 we ruled that under Article 1124 (now Article 1191) of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to comply with what is incumbent upon him. But that right must be invoked judicially. The same article also provides: "The Court shall decree the resolution demanded, unless there should be grounds which justify the allowance of a term for the performance of the obligation." This requirement has been retained in the third paragraph of Article 1191, which states that "the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period." Consequently, even if the right to rescind is made available to the injured party,22 the obligation is not ipso factoerased by the failure of the other party to comply with what is incumbent upon him. The party entitled to rescind should apply to the court for a decree of rescission.23 The right cannot be exercised solely on a party's own judgment that the other committed a breach of the obligation.24 The operative act which produces the resolution of the contract is the decree of the court and not the mere act of the vendor.25 Since a judicial or notarial act is required by law for a valid rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly rescind the contract. Notwithstanding the above, however, in our view when private respondent filed an action for Judicial Confirmation of Rescission and Damages26 before the RTC, he complied with the requirement of the law for judicial decree of rescission. The complaint27 categorically stated that the purpose was 1) to compel appellants to formalize in a public document, their mutual agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said revocation/rescission under terms and conditions fair, proper and just for both parties.28 In Luzon Brokerage Co.,

Inc. v. Maritime Building Co., Inc.,29 we held that even a crossclaim found in the Answer could constitute a judicial demand for rescission that satisfies the requirement of the law.30 Petitioner contends that even if the filing of the case were considered the judicial act required, the action should be deemed prescribed based on the provisions of Article 1389 of the Civil Code.31 This provision of law applies to rescissible contracts,32 as enumerated and defined in Articles 138033 and 1381.34We must stress however, that the "rescission" in Article 1381 is not akin to the term "rescission" in Article 1191 and Article 1592.35 In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article.36 The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144,37 which provides that the action upon a written contract should be brought within ten years from the time the right of action accrues. The suit was brought on July 1, 1991, or six years after the default. It was filed within the period for rescission. Thus, the contract of sale between the parties as far as the prescriptive period applies, can still be validly rescinded. On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals erred in finding bad faith on his part when he resisted the rescission38 and claimed he was ready to pay but never actually paid respondent, notwithstanding that he knew that appellee's principal motivation for selling the lot was to raise money to pay his SSS loan.39 Petitioner would have us reverse the said CA findings based on the exception40 that these findings were made on a misapprehension of facts. The records do not support petitioner's claims. First, per the records, petitioner knew respondent's reason for selling his property. As testified to by petitioner41 and in the deposition42 of respondent, such fact was made known to petitioner during their negotiations as well as in the letters sent to petitioner by Palao.43 Second,petitioner adamantly refused to formally execute an instrument showing their mutual agreement to rescind the contract of sale, notwithstanding that it was petitioner who plainly breached the terms of their contract when he did not pay the stipulated price on time, leaving private respondent desperate to find other sources of funds to payoff his loan. Lastly, petitioner did not substantiate by clear and convincing proof, his allegation that he was ready and willing to pay respondent. We are more inclined to believe his claim of readiness to pay was an afterthought intended to evade the consequence of his breach. There is no record to show the existence of such amount, which could have been reflected, at the very least, in a bank account in his name, if indeed one existed; or, alternatively, the proper deposit made in court which could serve as a formal tender of payment.44 Thus, we find the award of moral and exemplary damages proper.1wphi1.nt WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting the award of attorney's fees, is hereby AFFIRMED. Costs against the petitioner. SO ORDERED. Bellosillo, Mendoza, Buena, De Leon, Jr., JJ., concur.

CONGREGATION OF THE RELIGIOUS OF THE VIRGIN MARY and/or THE SUPERIOR GENERAL OF THE RELIGIOUS OF THE VIRGIN MARY, represented by The REVEREND MOTHER MA. CLARITA BALLEQUE, Petitioner,

G.R. No. 169790

Present:

- versus YNARES-SANTIAGO, J., EMILIO Q. OROLA, JOSEPHINE FATIMA LASERNA OROLA, MYRNA ANGELINE LASERNA OROLA, MANUEL LASERNA OROLA, MARJORIE MELBA LASERNA OROLA & ANTONIO LASERNA OROLA, Respondents. Chairperson, AUSTRIA-MARTINEZ, CHICO-NAZARIO, NACHURA, and REYES, JJ.

Promulgated:

April 30, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Challenged in this petition for review on certiorari is the Court of Appeals (CA) Decision[1] in CA-G.R. CV. No. 71406 which modified the Regional Trial Court (RTC) Decision[2] in Civil Case No. V-7382 ordering the rescission of the contract of sale between the parties in an action for Specific Performance or Rescission with Damages filed by respondents Emilio, Josephine Fatima Laserna, Myrna Angeline Laserna, Manuel Laserna, Marjorie Melba Laserna, & Antonio Laserna, all surnamed Orola, (respondents) against petitioner Congregation of the Religious of the Virgin Mary (RVM).[3]

The undisputed facts, as found by the CA and adopted by RVM in its petition, follow.

Sometime in April 1999, [petitioner] Religious of the Virgin Mary (RVM for brevity), acting through its local unit and specifically through Sr. Fe Enhenco, local Superior of the St. Mary s Academy of Capiz and [respondents] met to discuss the sale of the latter s property adjacent to St. Mary s Academy. Said property is denominated as Lot 159-B-2 and was still registered in the name of [respondents ] predecessor-in-interest, Manuel Laserna.

In May of 1999, [respondent] Josephine Orola went to Manila to see the Mother Superior General of the RVM, in the person of Very Reverend Mother Ma. Clarita Balleque [VRM Balleque] regarding the sale of the property subject of this instant case.

A contract to sell dated June 2, 1999 made out in the names of herein [petitioner] and [respondents] as parties to the agreement was presented in evidence pegging the total consideration of the property at P5,555,000.00 with 10% of the total consideration payable upon the execution of the contract, and which was already signed by all the [respondents] and Sr. Ma. Fe Enhenco, R.V.M. [Sr. Enhenco] as witness.

On June 7, 1999, [respondents] Josephine Orola and Antonio Orola acknowledged receipt of RCBC Check No. 0005188 dated June 7, 1999 bearing the amount of P555,500.00 as 10% down payment for Lot 159-B-2 from the RVM Congregation (St. Mary s Academy of Cadiz [SMAC]) with the conforme signed by Sister Fe Enginco (sic), Mother Superior, SMAC.

[Respondents] executed an extrajudicial settlement of the estate of Trinidad Andrada Laserna dated June 21, 1999 adjudicating unto themselves, in pro indiviso shares, Lot 159-B-2, and which paved the transfer of said lot into their names under Transfer Certificate of Title No. T-39194 with an entry date of August 13, 1999.[4]

Thereafter, respondents, armed with an undated Deed of Absolute Sale which they had signed, forthwith scheduled a meeting with VRM Balleque at the RVM Headquarters in Quezon City to finalize the sale, specifically, to obtain payment of the remaining balance of the purchase price in the amount of P4,999,500.00. However, VRM Balleque did not meet with respondents. Succeeding attempts by respondents to schedule an appointment with VRM Balleque in order to conclude the sale were likewise rebuffed.

In an exchange of correspondence between the parties respective counsels, RVM denied respondents demand for payment because: (1) the purported Contract to Sell was merely signed by Sr. Enhenco as witness, and not by VRM Balleque, head of the corporation sole; and (2) as discussed by counsels in their phone conversations, RVM will only be in a financial position to pay the balance of the purchase price in two years time. Thus, respondents filed with the RTC a complaint with alternative causes of action of specific performance or rescission.

After trial, the RTC ruled that there was indeed a perfected contract of sale between the parties, and granted respondents prayer for rescission thereof. It disposed of the case, to wit:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondents] and against the [petitioner].

1. 2. 3.

Dismissing the counterclaim; Ordering the rescission of the Contract to Sell, Exh. E . Ordering the forfeiture of the downpayment of P555,500 in favor of the [respondents];

4. Ordering [petitioner] corporation sole, the Superior General of the Religious of the Virgin Mary, to pay [respondents]:

a. b.

P50,000.00 as exemplary damages; P50,000.00 as attorney s fees.

5.

Costs against the [petitioner].

Dissatisfied, both parties filed their respective Notices of Appeal. The CA dismissed the respondents appeal because of their failure to file an Appeal Brief. However, RVM s appeal, where respondents accordingly filed an Appellee s Brief, continued. Subsequently, the CA rendered judgment setting aside the RTC Decision, to wit:

WHEREFORE, with all the foregoing, the decision of the Regional Trial Court, Branch 15, Roxas City dated March 1, 2001 in [C]ivil [C]ase [N]o. V-7382 for Specific Performance or Rescission with Damages is hereby SET ASIDE and a new one entered GRANTING [respondents ] action for specific performance. [Petitioner RVM] [is] hereby ordered to pay [respondents] immediately the balance of the total consideration for the subject property in the amount of P4,999,500.00 with interest of 6% per annum computed from June 7, 2000 or one year from the downpayment of the 10% of the total consideration until such time when the whole obligation has been fully satisfied. In the same way, [respondents] herein are ordered to immediately deliver the title of the property and to execute the necessary documents required for the sale as soon as all requirements aforecited have been complied by [RVM]. Parties are further ordered to abide by their reciprocal obligations in good faith.

All other claims and counterclaims are hereby dismissed for lack of factual and legal basis.

No pronouncement as to cost.

In modifying the RTC Decision, the CA, albeit sustaining the trial court s finding on the existence of a perfected contract of sale between the parties, noted that the records and evidence adduced did not preponderate for either party on the manner of effecting payment for the subject property. In short, the CA was unable to determine from the records if the balance of the purchase price was due in two (2) years, as claimed by RVM, or, upon transfer of title to the property in the names of respondents, as they averred. Thus, the CA applied Articles 1383[5] and 1384[6] of the Civil Code which pronounce rescission as a subsidiary remedy covering only the damages caused.

The appellate court then resolved the matter in favor of the greatest reciprocity of interest pursuant to Article 1378[7] of the Civil Code. It found that the 2-year period to purchase the property, which RVM insisted on, had been mooted considering the time elapsed from the commencement of this case. Thus, the CA ordered payment of the

balance of the purchase price with 6% interest per annum computed from June 7, 2000 until complete satisfaction thereof.

Hence, this recourse.

RVM postulates that the order to pay interest is inconsistent with the professed adherence by the CA to the greatest reciprocity of interest between the parties. Since mutual restitution cannot be had when the CA set aside the rescission of the contract of sale and granted the prayer for specific performance, RVM argues that the respondents should pay rentals for the years they continued to occupy, possess, and failed to turn over to RVM the subject property.

Effectively, the only issue for our resolution is whether RVM is liable for interest on the balance of the purchase price. At the outset, we must distinguish between an action for rescission as mapped out in Article 1191 of the Civil Code and that provided by Article 1381 of the same Code. The articles read:

Art. 1191. The power to rescind obligations is impled 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.

Art. 1381.

The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one fourth of the value of the things which are the object thereof;

(2) number;

Those agreed upon in representation of absentees, if the latter suffer the lesion state in the preceding

(3) them;

Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

(5)

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

Article 1191, as presently worded, speaks of the remedy of rescission in reciprocal obligations within the context of Article 1124 of the Old Civil Code which uses the term resolution. The remedy of resolution applies only to reciprocal obligations[8] such that a party s breach thereof partakes of a tacit resolutory condition which entitles the injured party to rescission. The present article, as in the Old Civil Code, contemplates alternative remedies for the injured party who is granted the option to pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of damages in each case. On the other hand, rescission under Article 1381 of the Civil Code, taken from Article 1291 of the Old Civil Code, is a subsidiary action, and is not based on a party s breach of obligation.

The esteemed Mr. Justice J.B.L. Reyes, ingeniously cuts through the distinction in his concurring opinion in Universal Food Corporation v. CA:[9]

I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be denied because under Article 1383 of the Civil Code of the Philippines[,] rescission can not be demanded except when the party suffering damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesin or economic prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesin or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d etre as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly

provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesin enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191.

It is probable that the petitioner s confusion arose from the defective technique of the new Code that terms both instances as rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that differentiated resolution for breach of stipulations from rescission by reason of lesin or damage. But the terminological vagueness does not justify confusing one case with the other, considering the patent difference in causes and results of either action.

In the case at bench, although the CA upheld the RTC s finding of a perfected contract of sale between the parties, the former disagreed with the latter that fraud and bad faith were attendant in the sale transaction. The appellate court, after failing to ascertain the parties actual intention on the terms of payment for the sale, proceeded to apply Articles 1383 and 1384 of the Civil Code declaring rescission as a subsidiary remedy that may be availed of only when the injured party has no other legal means to obtain reparation for the damage caused. In addition, considering the absence of fraud and bad faith, the CA felt compelled to arrive at a resolution most equitable for the parties. The CA s most equitable resolution granted respondents prayer for specific performance of the sale and ordered RVM to pay the remaining balance of the purchase price, plus interest. It set aside and deleted the RTC s order forfeiting the downpayment of P555,500.00 in favor of, and payment of exemplary damages, attorney s fees and costs of suit to, respondents.

Nonetheless, RVM is displeased. It strenuously objects to the CA s imposition of interest. RVM latches on to the CA s characterization of its resolution as most equitable which, allegedly, is not embodied in the dispositive portion of the decision ordering the payment of interest. RVM is of the view that since the CA decreed specific performance of the contract without a finding of bad faith by either party, and respondents retained possession of the subject property for the duration of the litigation, the imposition of interest is not keeping with equity without simultaneously requiring respondents to pay rentals for their continued and uninterrupted stay thereon. In all, RVM phrases the issue in metaphysical terms, i.e., the most equitable solution.

We completely disagree. The law, as applied to this factual milieu, leaves no room for equivocation. Thus, we are not wont to apply equity in this instance.

As uniformly found by the lower courts, we likewise find that there was a perfected contract of sale between the parties. A contract of sale carries the correlative duty of the seller to deliver the property and the obligation of the buyer to pay the agreed price.[10] As there was already a binding contract of sale between the parties, RVM had the corresponding obligation to pay the remaining balance of the purchase price upon the issuance of the title in the name of respondents. The supposed 2-year period within which to pay the balance did not affect the nature of the agreement as a perfected contract of sale.[11] In fact, we note that this 2-year period is neither reflected in any of the drafts to the contract,[12] nor in the acknowledgment receipt of the downpayment executed by respondents Josephine and Antonio

with the conformity of Sr. Enhenco.[13] In any event, we agree with the CA s observation that the 2-year period to effect payment has been mooted by the lapse of time.

However, the CA mistakenly applied Articles 1383 and 1384 of the Civil Code to this case because respondents cause of action against RVM is predicated on Article 1191 of the same code for breach of the reciprocal obligation. It is evident from the allegations in respondents Complaint[14] that the instant case does not fall within the enumerated instances in Article 1381 of the Civil Code. Certainly, the Complaint did not pray for rescission of the contract based on economic prejudice.

Moreover, contrary to the CA s finding that the evidence did not preponderate for either party, the records reveal, as embodied in the trial court s exhaustive disquisition, that RVM committed a breach of the obligation when it suddenly refused to execute and sign the agreement and pay the balance of the purchase price.[15]Thus, when RVM refused to pay the balance and thereby breached the contract, respondents rightfully availed of the alternative remedies provided in Article 1191. Accordingly, respondents are entitled to damages regardless of whichever relief, rescission or specific performance, would be granted by the lower courts.[16]

Yet, RVM stubbornly argues that given the CA s factual finding on the absence of fraud or bad faith by either party, its order to pay interest is inequitable.

The argument is untenable. The absence of fraud and bad faith by RVM notwithstanding, it is liable to respondents for interest. In ruling out fraud and bad faith, the CA correspondingly ordered the fulfillment of the obligation and deleted the RTC s order of forfeiture of the downpayment along with payment of exemplary damages, attorney s fees and costs of suit. But RVM s contention disregards the common finding by the lower courts of a perfected contract of sale. As previously adverted to, RVM breached this contract of sale by refusing to pay the balance of the purchase price despite the transfer to respondents names of the title to the property. The 2-year period RVM relies on had long passed and expired, yet, it still failed to pay. It did not even attempt to pay respondents the balance of the purchase price after the case was filed, to amicably end this litigation. In fine, despite a clear cut equitable decision by the CA, RVM refused to lay the matter to rest by complying with its obligation and paying the balance of the agreed price for the property.

Lastly, to obviate confusion, the clear language of Article 1191 mandates that damages shall be awarded in either case of fulfillment or rescission of the obligation.[17] In this regard, Article 2210 of the Civil Code is explicit that interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract. The ineluctable conclusion is that the CA correctly imposed interest on the remaining balance of the purchase price to cover the damages caused the respondents by RVM s breach.

WHEREFORE, premises considered, the petition is DENIED. The order granting specific performance and payment of the balance of the purchase price plus six percent (6%) interest per annum from June 7, 2000 until complete satisfaction is hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA Associate Justice

G.R. No. 149140

September 12, 2006

VICTORIA ONG, petitioner, vs. ERNESTO BOGALBAL1 and HON. COURT OF APPEALS, respondents. DECISION CHICO-NAZARIO, J.: In this Special Civil Action for Certiorari under Rule 65 of the Rules of Court, petitioner seeks the nullification of a 22 May 2001 Court of Appeals Resolution denying her Motion for Reconsideration of a 31 March 2000 Decision.2 The Court of Appeals found the facts to be as follows: On January 2, 1995, [herein respondent] Ernesto Bogalbal, an architect-contractor doing business under the name and style of E.B. Bogalbal Construction, entered into an "Owner-Contractor Agreement" with [herein petitioner] Victoria Ong, a businesswoman, for the construction of a proposed boutique owned by the latter to be known as Les Galeries de Paris located at the 3rd Floor of the Shangri-La Plaza, Epifanio Delos Santos Avenue corner Shaw Boulevard, Mandaluyong City (Exhibits "A" and "1", pp. 100-102, ibid). The agreement provides that in consideration of the sum of two hundred thousand pesos (P200,000.00), the contractor agrees to furnish labor, tools and equipment to complete the work on the boutique as per specification within forty-five (45) days excluding Sundays from the date of delivery of the construction materials. Payment by the owner shall be made by progress billing to be collected every two (2) weeks based on the accomplishment of work value submitted by the contractor to the owner as certified for payment by the architect assigned on site. The agreement likewise provides for a change order as a result of fluctuation in the cost of labor. Moreover, should the owner require the contractor to perform work over and above that required, the additional cost shall be added to the contract amount and if ordered to omit work as required by their agreement, the cost of work omitted shall be deducted from the contract amount. Actual work on the project commenced on January 19, 1995. For work accomplished during the period January 19 to 28, 1995, [respondent Bogalbal] submitted and was paid his progress billing no. 1 in the sum of P35,950.00 equivalent to 17.975% of the total job to be performed (Exh. "E", p. 106, ibid). Partial billing nos. 2 and 3 for the period from January 29 to February 15, 1995 and February 16 to March 3, 1995 in the sum of P69,000.00 and P41,500.00, equivalent to 34.65% and 20.63% of the total job, respectively, were likewise made to respondent and paid for by the latter (Exhs. "F" and "G", pp. 107-108, ibid.). It is with respect to progress billing no. 4 that the present controversy arose. When [respondent Bogalbal] submitted the fourth progress billing on March 31, 1995 for the period covering March 4 to 18, 1995, in the sum of P30,950.00 equivalent to 15.47% of the total job (Exh. "B", p. 103, ibid.), [petitioner Ong] refused to pay the same. As in the previous three billings, the fourth billing was first evaluated and recommended for payment by Supervising Architect John Noel R. Cano, an employee of Balce-Sindac and Associates, the principal designer of the [petitioner Ong's] boutique (Exh. "H-1", p. 110, ibid.). The reason for [petitioner Ong's] refusal to pay the fourth (4th) progress billing is not clear on the record. It is [respondent Bogalbal's] contention that [petitioner Ong] refused to pay since she was insisting that the flooring, which she asked to be changed from vinyl tiles to kenzo flooring where polyurethane is to be used as coating, be first completed within three (3) days from April 22, 1995. [Respondent Bogalbal], however, insisted that the same is not possible because the floor needed to be cured first to avoid adverse chemical reaction of the polyurethane on the color of the flooring. Due to the insistence of [petitioner Ong] that the flooring be finished in time for the arrival of the

furniture from abroad, [respondent Bogalbal] proceeded with the work but the rushed work resulted in the reddish reaction of the polyurethane on the floor, which was not acceptable to respondent (TSN, March 28, 1996, pp. 30-32; June 21, 1996, pp. 15-18). On the other hand, [petitioner Ong] contends that her refusal to pay was because the fourth billing was allegedly in excess and over the value of the work accomplished during the period. To settle the matter, the parties purportedly met whereby [respondent Bogalbal] supposedly agreed to finish the kenzo flooring on or before April 24, 1995 before [petitioner Ong] would pay the fourth (4th) progress billing. However, instead of complying with his commitment, [respondent Bogalbal] abandoned the project on April 24, 1995 when it became apparent that he could not complete the kenzo flooring on the date agreed upon. Due to [petitioner Ong's] continued refusal to pay [respondent Bogalbal's] fourth (4th) progress billing despite written demands from his counsel (Exhs. "C" and "D", pp. 104-105, ibid), the latter was constrained to file an action for sum of money with damages with the Metropolitan Trial Court (MeTC) of Caloocan City. The complaint, which was docketed as Civil Case No. 22143 and raffled to Branch 49 of the court, prayed for actual damages in the total sum of P50,450.00 representing P30,950.00 (4th progress billing), P16,000.00 on the change order from vinyl tiles to kenzo flooring and an unidentified amount. It likewise prayed for moral and exemplary damages, as well as attorney's fees. In her answer with counterclaim, [petitioner Ong] refused payment of the fourth (4th) progress billing since [respondent Bogalbal] failed to perform what was incumbent upon him under their agreement, but instead abandoned the job to her great damage and prejudice. As to the P16,000.00 value of the change order, she alleged that the same was premature since she had never received any billing for said change order duly certified for payment and approved by the Architect assigned on site. Besides, [petitioner Ong] averred that the P16,000.00 being charged by [respondent Bogalbal] was grossly disproportionate with the quantity of the work actually accomplished by the former. By way of counterclaim, [petitioner Ong] prayed for actual damages by reason of [respondent Bogalbal's] refusal to finish the job agreed upon which forced her to hire a new contractor to complete the same for which she paid the sum of P78,000.00 and for loss of business opportunity in the amount of P50,000.00. She likewise prayed for moral, exemplary and liquidated damages, as well as attorney's fees. After trial on the merits, the [MeTC], in a Decision dated June 18, 1998, ruled in favor of [respondent Bogalbal,] awarding to him the sum of P30,950.00 representing the fourth progress billing, P13,000.00 representing the value of the accomplished work on the kenzo flooring, P15,000.00 as attorney's fees, P20,000.00 and P25,000.00 as moral and exemplary damages, respectively (p. 175, ibid.). Aggrieved by the decision of the court, [petitioner Ong] elevated the case on appeal to the Regional Trial Court (RTC) of Caloocan City. The appeal was docketed as Civil Case No. C-18466 and raffled to Branch 126 thereof. The court a quo, after requiring the parties to submit their respective memoranda, reversed and set aside the ruling of the MTC and rendered judgment in favor of [petitioner Ong] in a Decision dated February 18, 1999 (p. 407, ibid.). It is worthy to note that although the RTC ruled in favor of [petitioner Ong], it did not specify the relief granted to her in the dispositive portion of its decision.3 Respondent Bogalbal then filed a Petition for Review with the Court of Appeals. On 31 March 2000, the Court of Appeals granted the Petition, disposing of the case as follows:

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The Decision of the Regional Trial Court dated February 18, 1999 is REVERSED and SET ASIDE, and the Decision of the Metropolitan Trial Court dated June 18, 1998 is REINSTATED. No pronouncement as to costs.4 The dispositive portion of the reinstated 18 June 1998 Metropolitan Trial Court (MeTC) Decision is as follows: WHEREFORE, after a careful consideration of the foregoing evidence, the Court finds the same to strongly preponderates (sic) in favor of the plaintiff and hereby orders defendant Victoria Ong to pay plaintiff Ernesto Bognalbal the amount of THIRTY THOUSAND NINE HUNDRED FIFTY PESOS (P30,950.00) representing the value of his accomplished work for the period from March 4 to March 18, 1995, the amount of (P13,000.00) THIRTEEN THOUSAND PESOS representing the value of his accomplished work on the kenzo flooring equivalent to 60% of the agreed fee of P25,000.00 minus the amount of P2,000.00 paid under the third progress billing, the amount of FIFTEEN THOUSAND (P15,000.00) PESOS as and for attorney's fees, the amount of TWENTY THOUSAND (P20,000.00) PESOS AS MORAL damages and the amount of TWENTY-FIVE THOUSAND (P25,000.00) PESOS as exemplary damages. Defendant is further ordered to pay the costs of this suit. For lack of sufficient basis, the counterclaim of the defendant is hereby dismissed.5 On 22 May 2001, the Court of Appeals denied petitioner Ong's Motion for Reconsideration in the assailed Resolution, a copy of which was received by petitioner, through counsel, on 11 June 2001. In the instant Petition for Certiorari, filed on 10 August 2001, petitioner Ong alleges that: THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DENYING THE MOTION FOR RECONSIDERATION AND IN RESOLVING THE ABOVE-ENTITLED CASE IN FAVOR OF THE PRIVATE RESPONDENT.6 Propriety/Impropriety of Special Civil Action for Certiorari under Rule 65 Petitioner claims that a special civil action for certiorari is proper since appeal by certiorari under Rule 45 is limited only to questions of law. This is wrong. The writ of certiorari is proper to correct errors of jurisdiction committed by the lower court, or grave abuse of discretion which is tantamount to lack of jurisdiction. Where the error is not one of jurisdiction but an error of law or fact which is a mistake of judgment, appeal is the remedy.7 It is true that, as a general rule, in the exercise of the Supreme Court's power of review, the Court is not a trier of facts and does not normally undertake the re-examination of the evidence presented by the contending parties during the trial of the case considering that the findings of facts of the Court of Appeals are conclusive and binding on the Court. However, the Court had recognized several exceptions to this rule, to wit: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.8

If the allegedly erroneous findings of fact by the Court of Appeals amounts to grave abuse of discretion amounting to lack of or excess of jurisdiction, the proper remedy would indeed be a petition for certiorari under Rule 65. However, if the allegedly erroneous findings of fact constitute only a mistake of judgment, the proper remedy is a petition for review on certiorari under Rule 45. Since the petition filed in the case at bar is one under Rule 65, we would be constrained to dismiss the same if we find a mere error of judgment. Credibility of Architect Noel Cano The contract between petitioner and respondent provides: 4.01 Progress Billing will commence 15 days after the Contractor receive[s] the notice to proceed from the Owner. 4.02 Balance will be collected every 2-weeks, based on the accomplishment of work value submitted by the contractor to the Owner and to be certified for payment by the architect assigned on site. 4.03 Final and full payment of the consideration herein above-mentioned shall be made by the owner to the contractor upon fulfilling the condition set forth and approved by the architect assigned on site.9 Pursuant thereto, the architect on site, Architect John Noel Cano, certified for payment four progress billings, which petitioner Ong paid on the following dates10: Partial Date Sent Progress Billing Covered Period Amount Part of Project Date of Accomplished Partial (contract Payment price: P200,000.00) 17.975 % --Date of Full Payment

1st

28 January 1995 15 February 1995

19-28 January 29 January to 15 February

P 35,950.00

6 February 1995

2nd

P 69,300.00

34.650 %

22 February 4 March 1995 1995

3rd

8 March 1995 16 February P 41,500.00 to 3 March 31 March 1995 4-18 March P 30,950.00

20.750 %

24 March 1995 ---

6 April 1995

4th

15.475 %

---

Total

P 181,700.00 88.850 %

As earlier stated, this controversy arose with respect to the fourth partial billing. Petitioner Ong claims that the fourth partial billing is not yet due and demandable, since only 60% of the work has been accomplished. Petitioner Ong claims that Architect Cano's certification as to the accomplishment of the work cannot be trusted, since Architect Cano was allegedly biased in favor of respondent Bogalbal.11 Petitioner Ong claims that "Arch. Cano was an associate of [respondent Bogalbal] in his construction business, and because of this, he was partial, biased and unprofessional about his work."12 Petitioner Ong adds that work was conducted on the job site seven days a week, but Architect Cano was present only twice or thrice a week, and therefore "[h]e was in no position to determine whether or not [respondent Bogalbal] performed as claimed."13

The afore-quoted Article 4.02 of the Owner-Contractor Agreement between petitioner Ong and respondent Bogalbal, which provides that the "[b]alance shall be collected every 2-weeks, based on the accomplishment of work value submitted by the contractor to the Owner and to be certified for payment by the architect on site,"14makes the second paragraph of the following provision of the Civil Code applicable: Art. 1730. If it is agreed that the work shall be accomplished to the satisfaction of the proprietor, it is understood that in case of disagreement the question shall be subject to expert judgment. If the work is subject to the approval of a third person, his decision shall be final, except in case of fraud or manifest error. The existence of fraud or manifest error, being an exception to the finality of the decision of a third person under Article 1730, should be adequately proven by petitioner Ong. Petitioner Ong, however, miserably failed to prove the same. Petitioner Ong's allegation that "the certifications may have been purposely doctored or engineered in such a fashion as to unduly favor [respondent Bogalbal], in the desire of Architect Cano to return a favor or repay a debt of gratitude"15 is a bare speculation that cannot be given any credence. It is utterly inappropriate for petitioner Ong to paint Architect Cano as "biased, partial, and unprofessional" just because Architect Cano's architectural firm, Balce-Sindac & Associates, was allegedly recommended to her by respondent Bogalbal. The fact remains that it was petitioner Ong and Balce-Sindac & Associates which had privity of contract with each other, petitioner Ong having contracted with the latter firm for its project architectural design and plan. Balce-Sindac & Associates, in turn, assigned Architect Cano as supervising architect on site. The alleged recommendation by respondent Bogalbal is enormously inadequate to prove bad faith on the part of Architect Cano. Good faith is always presumed.16 It is the one who alleges bad faith who has the burden to prove the same.17 Neither was petitioner able to prove manifest error on the part of Architect Cano. The presence of Architect Cano only twice or thrice a week was not adequately proven to have made him incompetent to determine the completion of the project. Determination of project completion requires inspection of a product rather than a process. Besides, whereas Architect Cano provided a detailed progress report that substantiate respondent Bogalbal's allegation that 88.45% of the project had been accomplished,18 petitioner Ong was not able to demonstrate her repeated claim that only 60% of the project has been completed.19 Petitioner Ong alleged that the same was admitted by respondent Bogalbal in the pleadings filed with this Court,20 but we were unable to find any such admission. It seems that petitioner Ong was referring to the Kenzo flooring, 60% of which respondent claims to have finished.21 Time and again, this Court has ruled that the findings of the lower court respecting the credibility of witnesses are accorded great weight and respect since it had the opportunity to observe the demeanor of the witnesses as they testified before the court. Unless substantial facts and circumstances have been overlooked or misunderstood by the latter which, if considered, would materially affect the result of the case, this Court will undauntedly sustain the findings of the lower court.22 In the case at bar, the credibility of Architect Cano was upheld by the MeTC, which had the opportunity to observe Architect Cano's demeanor as he testified. Neither the Court of Appeals, nor the RTC, questioned such credibility, the RTC having ruled in favor of petitioner Ong pursuant to an interpretation of law.23 Alleged novation of the Owner-Contractor Agreement Petitioner Ong also claims, as a defense against payment of the fourth progress billing, that "the only reason why the fourth billing was not paid was because [respondent Bogalbal] himself agreed and committed to collect the fourth progress billing after he completed the Kenzo flooring."24 Petitioner Ong claims that, because of this promise, her obligation to pay respondent Bogalbal has not yet become due and demandable.25

The Court of Appeals rejected this argument, ruling that respondent Bogalbal's stoppage of work on the project prior to its completion cannot justify petitioner Ong's refusal to pay the fourth progress billing and the value of respondent Bogalbal's accomplished work on the Kenzo flooring. On the contrary, according to the Court of Appeals, respondent Bogalbal was justified to refuse to continue the project due to petitioner Ong's failure to pay the fourth progress billing.26 According to the Court of Appeals: Records reveal that [herein respondent Bogalbal] submitted his fourth (4th) progress billing for work accomplished on [herein petitioner Ong's] boutique for the period covering March 4 to 18, 1995 (Exh. "B", ibid.). Said billing was in accordance with the parties' agreement that it will be collected every two (2) weeks, based on the accomplishment of work value submitted by the contractor to the owner and certified for payment by the architect assigned on site (Article 4.02, Owner-contractor Agreement; Exh. "A-1", p. 101, ibid.). However, [petitioner Ong], immediately upon her receipt of said billing, refused to pay the same since it was allegedly "in excess and over the value of the work accomplished during the period." This was, in fact, part of the statement/findings of the facts of the lower court's decision (p. 2, RTC Decision; p. 400, ibid.). [Petitioner Ong], at the very outset, refused to pay the fourth (4th) billing despite actual work accomplished on her botique which was certified by the architect on site, John Noel Cano, all in accordance with the agreement of the parties. [Respondent Bogalbal's] eventual decision not to proceed anymore with the contract cannot be used as a reason to justify [petitioner Ong's] refusal to pay her obligation. This notwithstanding the parties' supposed verbal agreement that collection of said billing will be held on abeyance until after [respondent Bogalbal] finished the work on the kenzo flooring which [petitioner Ong] requested to be changed from its original plan of vinyl tile flooring. The proven fact is that there was work accomplished on [petitioner Ong's] boutique equivalent to the bill being charged her in the fourth (4th) progress billing in accordance with their contract. While the fourth (4th) billing covered the accomplished work therefor as certified by the architect assigned on site, the agreement as to the kenzo flooring is subject to another bill covered by the change order. (Emphasis supplied.)27 The Court of Appeals is in error. If the parties indeed had a verbal agreement that collection of said billing will be held on abeyance until after respondent Bogalbal finished the work on the Kenzo flooring, there would have been a novation of petitioner Ong's obligation to pay the price covered by the fourth billing by changing the principal conditions therefor. This falls under the first type of novation under Article 1291 of the Civil Code which provides: Article 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. While the subject of novation is, in the Civil Code, included in Book IV, Title I, Chapter 4, which refers to extinguishment of obligations, the effect of novation may be partial or total. There is partial novation when there is only a modification or change in some principal conditions of the obligation. It is total, when the obligation is completely extinguished.28 Also, the term principal conditions in Article 1291 should be construed to include a change in the period to comply with the obligation. Such a change in the period would only be a partial novation, since the period merely affects the performance, not the creation of the obligation.29 If petitioner Ong's allegation was true, then the fourth partial billing's principal condition -- that the "(b)alance shall be collected every 2-weeks, based on the accomplishment of work value submitted by the contractor to the Owner and to

be certified for payment by the architect assigned on site"30 would have been modified to include another condition, that of the finishing of the Kenzo flooring by respondent Bogalbal. As previously discussed, the Court of Appeals did not bother to review the evidence on petitioner Ong's allegation of respondent Bogalbal's promise to finish the Kenzo flooring before the fourth progress billing shall be paid. The Court of Appeals instead brushed off the contention with its explanation that "[respondent Bogalbal's] eventual decision not to proceed anymore with the contract cannot be used as a reason to justify [petitioner Ong's] refusal to pay her obligation, x x x notwithstanding the parties' supposed verbal agreement that collection of said billing will be held on abeyance until after [respondent Bogalbal] finished the work on the kenzo flooring which [petitioner Ong] requested to be changed from its original plan of vinyl tile flooring." Novation is never presumed. Unless it is clearly shown either by express agreement of the parties or by acts of equivalent import, this defense will never be allowed.31 The evidence preponderates in favor of respondent Bogalbal that there had been no novation of the contract. At best, what was proven was a grudging accommodation on the part of respondent Bogalbal to continue working on the project despite petitioner Ong's failure to pay the fourth progress billing. Respondent Bogalbal's fourth partial billing demand letters dated 21 April 1995 and 15 May 1995, both of which were served upon petitioner Ong after the alleged 20 April 1995 meeting,32 is inconsistent with the theory that the meeting had produced a novation of the petitioner Ong's obligation to pay the subject billing. More importantly, assuming that there was indeed a novation of the obligation of petitioner Ong to pay the fourth billing so as to include as additional condition the completion of the Kenzo flooring, such new condition would, nevertheless, be deemed fulfilled. This is pursuant to Article 1186 of the Civil Code, which provides: Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. According to petitioner Ong herself: Petitioner sent [respondent Bogalbal] letters demanding that he should return to the jobsite with his people and comply with his commitment. When the demand letters were ignored, petitioner was constrained to hire the services of another contractor, for which she had to unnecessarily incur expenses in the amount ofP78,000.00. But just the same, the completion of the project was delayed for eighty two (82) days, which also caused petitioner additional damages.33 The Civil Code indeed provides that, "(i)f a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone."34 There is no question, however, that such allegation constitutes an admission that Petitioner Ong had voluntarily prevented the fulfillment of the condition which should have given rise to her obligation to pay the amount of the fourth billing. Respondent Bogalbal would no longer have the opportunity to finish the Kenzo flooring if another contractor had already finished the same. Such condition would, hence, be deemed fulfilled under Article 1186 of the Civil Code, and, therefore, petitioner Ong's obligation to pay the amount of the fourth billing has been converted to a pure obligation. Authority of respondent Bogalbal to abandon work This Court has held that, even if respondent Bogalbal unjustifiably withdrew from the project, petitioner Ong's obligation is nevertheless due and demandable because of the third-party certification by Architect Cano on the completion of the fourth project billing as required by their contract. This Court has also held that petitioner Ong has not sufficiently proven the alleged contract novation adding a new condition for her payment of the fourth progress billing.

The following arguments of petitioner Ong are already inconsequential as to whether she should be held liable for the fourth billing: (1) that the power to resolve contracts under Article 119135 of the Civil Code cannot be invoked extrajudicially in the absence of stipulation to the contrary;36 (2) that petitioner never rushed respondent Bogalbal to complete the Kenzo flooring in three days;37 (3) and that respondent Bogalbal failed to complete the Kenzo flooring on time because of his incompetence.38 All these arguments merely amplify petitioner Ong's primary contention that respondent Bogalbal was not justified in abandoning the project.39 The issue of whether or not respondent Bogalbal is justified in abandoning the project is relevant to the resolution of petitioner Ong's counterclaim against respondent Bogalbal. The Court rules in favor of petitioner Ong on this score. There is nothing in the record which would justify respondent Bogalbal's act of abandoning the project. However, contrary to the finding of the RTC, Article 1724 is inapplicable to this case. Article 1724 provides: Art. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the landowner, can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided: (1) Such change has been authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor has been determined in writing by both parties. According to the RTC, the exception in Article 1724 (change in plans and specifications authorized by the proprietor in writing, and the additional price therefor being determined by the proprietor in writing) applies only with respect to the prohibition to "demand an increase in the price on account of the higher cost of labor or materials" and not with respect to the prohibition to "withdraw from the contract." There is therefore no exception allowed by law insofar as withdrawal from the contract is concerned, and, hence, respondent Bogalbal cannot claim the change order as a justification for his abandonment of the project. 40 This is incorrect. According to this Court in Arenas v. Court of Appeals,41 Article 1724 contemplates disputes arising from increased costs of labor and materials. Article 1724 should, therefore, be read as to prohibit a contractor from perpetrating two acts: (1) withdrawing from the contract on account of the higher cost of the labor or materials; and (2) demanding an increase in the price on account of the higher cost of the labor or materials.42This focus on disputes arising from increased cost of labor and materials is even more evident when the origin of Article 1754 is reviewed. Article 1754 of the 1950 Civil Code is based on Article 159343 of the Spanish Civil Code, which states: Art. 1593. An architect or contractor who, for a lump sum, undertakes the construction of a building, or any other work to be done in accordance with a plan agreed upon with the owner of the ground, may not demand an increase of the price, even if the cost of the materials or labor has increased; but he may do so when any change increasing the work is made in the plans, provided the owner has given his consent thereto. Article 1593 of the Spanish Civil Code did not contain a similar prohibition against abandonment, and was entirely focused on its apparent objective to providing an exception to the rule that a contracting party cannot unilaterally amend (by increasing the contract price) the contract despite supervening circumstances. Neither party is claiming that the abandonment arose from increased costs of labor and materials. Petitioner Ong claims that respondent Bogalbal failed to complete the Kenzo flooring on time because of his incompetence.44Respondent Bogalbal claims, on the other hand, that he abandoned the work because of petitioner Ong's continuing refusal to pay

the fourth progress billing in violation of their contract.45 Since the dispute has nothing to do with increased costs of labor and materials, Article 1724 is not applicable.46 Thus, it is the general rules on contracts which are applicable. Expounding on the argument by respondent Bogalbal, the Court of Appeals held: It should be noted 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 (par. 1, Art. 1191, Civil Code). [Herein petitioner Ong's] breach of contract was her failure to pay what she was legally bound to pay under her contract with [respondent Bogalbal]. Payment, being the very consideration of the contract, is certainly not a mere casual or slight breach but a very substantial and fundamental breach as to defeat the object of the parties making the agreement, due to which rescission of the contract may be had (Ang vs. Court of Appeals, 170 SCRA 286, 296). [Petitioner Ong's] contention that [respondent Bogalbal] should have had more capital to absorb a little delay in her payment is not quite tenable (TSN, June 21 1996; p. 7).47 This Court, however, has held in Tan v. Court of Appeals,48 that: [T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him x x x. However, 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. Where there is nothing in the contract empowering [a party] to rescind it without resort to the courts, [such party's] action in unilaterally terminating the contract x x x is unjustified. In the case at bar, there is nothing in the Owner-Contractor Agreement empowering either party to rescind it without resort to the courts. Hence, respondent Bogalbal's unilateral termination the contract without a court action is unjustified. Petitioner Ong's Counterclaim Since respondent Bogalbal is unjustified in abandoning the project, should this Court award damages to petitioner Ong? Considering that both parties committed a breach of their respective obligations, Article 1192 of the Civil Code is on all fours: Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. Under this provision, the second infractor is not liable for damages at all;49 the damages for the second breach, which would have been payable by the second infractor to the first infractor, being compensated instead by the mitigation of the first infractor's liability for damages arising from his earlier breach. The first infractor, on the other hand, is liable for damages, but the same shall be equitably tempered by the courts, since the second infractor also derived or thought he would derive some advantage by his own act or neglect.50 Article 2215, however, seems contradictory, as it gives the court the option whether or not to equitably mitigate the damages, and does not take into account which infractor first committed breach: Art. 2215. In contracts, quasi-contracts, and quasi-delicts, the court may equitably mitigate the damages under circumstances other than the case referred to in the preceding article,51 as in the following instances: (1) That the plaintiff himself has contravened the terms of the contract; x x x

It is a cardinal principle that a statute must be so construed as to harmonize all apparent conflicts, and give effect to all its provisions whenever possible.52 Articles 1192 and 2215 of the Civil Code are not irreconcilably conflicting. The plaintiff referred to in Article 2215(1) should be deemed to be the second infractor, while the one whose liability for damages may be mitigated is the first infractor. Furthermore, the directions to equitably temper the liability of the first infractor in Articles 1192 and 2215 are both subject to the discretion of the court, despite the word "shall" in Article 1192, in the sense that it is for the courts to decide what is equitable under the circumstances. In the case at bar, both respondent Bogalbal and petitioner Ong claim that it was the other party who first committed a breach of contractual obligations.53 Considering this Court's finding that there had been no contract novation requiring respondent Bogalbal to finish the Kenzo flooring before the fourth progress billing shall be paid, it is crystal clear that it was petitioner Ong who first violated the contract. As such, it is petitioner Ong who is liable to pay damages, which may, however, be reduced, depending on what is equitable under the circumstances. On the other hand, since respondent Bogalbal is the second infractor, he is not liable for damages in petitioner Ong's counterclaim. Care must, however, be judiciously taken when applying Article 1192 of the Civil Code to contracts such as this where there has been partial performance on the part of either or both reciprocal obligors. Article 1192, in making the first infractor liable for mitigated damages and in exempting the second infractor from liability for damages, presupposes that the contracting parties are on equal footing with respect to their reciprocal principal obligations. Actual damages representing deficiencies in the performance of the principal obligation should be taken out of the equation.54 In the case at bar, the partial performance of respondent Bogalbal (88.85%55 of the original contract and 60% of the Kenzo flooring) is more than the partial payment of petitioner Ong (73.375%56 of the original contract and 0% of the Kenzo flooring). For reference, the MeTC Decision, which was reinstated by the Court of Appeals, awarded the following to respondent Bogalbal: Value of accomplished work on the original contract for the period 4 to 18 March 1995: Value of accomplished work on the Kenzo flooring (60% of the agreed fee of P 25,000, minus P2,000 paid under the third progress billing) Moral damages Exemplary damages TOTAL P 30,950.00

P 13,000.00

P 20,000.00 P 25,000.00 P 88,950.00

Petitioner Ong should first be obliged to pay the value of the accomplished work (P30,950.00 and P13,000.00), before the damage scheme under Article 1192 of the Civil Code is applied. Therefore, this Court would have been limited to determining how much of the moral and exemplary damages, for which petitioner Ong is liable, may be mitigated by the amount of damages caused by respondent Bogalbal, as provided under Article 1192. As earlier discussed, however, this mitigation is subject to the discretion of the court, depending on what is equitable under the circumstances. It would have been within this Court's power to mitigate the moral and exemplary damages for which petitioner Ong is liable if she had only filed an ordinary appeal under Rule 45 of the Rules of Court. It would be

an exaggeration to consider such non-mitigation by the Court of Appeals as grave abuse of discretion leading to lack of or excess of jurisdiction, which would have been reviewable by this Court in acertiorari proceeding under Rule 65.57 Grave abuse of discretion implies a capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or, when the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty enjoined or to act at all in contemplation of law.58 Mere abuse of discretion is not enough -- it must be grave.59 All of the foregoing shows that while there had been some errors of law on the part of the Court of Appeals, the Petition would still fail even if it were a Petition for Review under Rule 45. With more reason is this Court constrained to dismiss a Petition for Certiorari under Rule 65, which requires not a mere error in judgment, but a grave abuse of discretion amounting to lack of or excess of jurisdiction. Finally, this Court notices that the prayer in the instant Petition for Certiorari only seeks to nullify the Resolution of the Court of Appeals on petitioner Ong's Motion for Reconsideration, without praying for the nullification of the Decision itself sought to be reconsidered. The reason seems to be the fact that petitioner Ong, through counsel, received the Decision more than sixty days prior to the filing of the Petition. A Petition seeking to nullify such Decision was, thus, perceived to be violative of Section 4, Rule 65 of the 1997 Rules of Civil Procedure, whichoriginally provides: SEC. 4. Where petition filed. The petition may be filed not later than sixty (60) days from notice of the judgment, order or resolution sought to be assailed in the Supreme Court or, if it relates to the acts or omissions of a lower court or of a corporation, board, officer or person, in the Regional Trial Court exercising jurisdiction over the territorial area as defined by the Supreme Court. It may also be filed in the Court of Appeals whether or not the same is in aid of its appellate jurisdiction, x x x. Section 4, Rule 65 was, however, amended on 1 September 2000, several months before the filing of this Petition, to insert the following provision: In case a motion for reconsideration or new trial is timely filed, whether such motion is required or not, the sixty (60) day period shall be counted from notice of the denial of said motion. This insertion gives petitioner Ong a fresh 60-day period to assail the Decision via a Petition for Certiorari, which is what this Petition really seeks and which is how this Court has treated the same. WHEREFORE, the Decision of the Court of Appeals reinstating the Decision of the Metropolitan Trial Court holding petitioner Victoria Ong liable for damages is affirmed. The instant Petition for Certiorari is herebyDISMISSED for lack of merit. Costs against petitioner. SO ORDERED. Panganiban, C.J., Chairperson, Ynares-Santiago, Austria-Martinez, Callejo, Sr., J.J., concur.