VELARDE V CA (2001)
Assumption of Mortgage is a consideration of P120K plus the outstanding loan
Facts: The private respondent executed a Deed of Sale with Assumption of
Mortgage, with a balance of P1.8 million, in favor of the petitioners. Pursuant to
said agreements, plaintiffs paid the bank (BPI) for three (3) months until they were
advised that the Application for Assumption of Mortgage was denied. This
prompted the plaintiffs not to make any further payment. Private respondent
wrote the petitioners informing the non-fulfillment of the obligations. Petitioners,
thru counsel responded that they are willing to pay in cash the balance subject to
several conditions. Private respondents sent a notarial notice of
cancellation/rescission of the Deed of Sale. Petitioners filed a complaint which
was consequently dismissed by an outgoing judge but was reversed by the
assuming judge in their Motion for Reconsideration. The Court of Appeals
reinstated the decision to dismiss.
Issue: Whether or not there is a substantial breach of contract that would entitle
its rescission.
Ruling: YES. Article 1191 of the New Civil Code applies. The breach committed did
not merely consist of a slight delay in payment or an irregularity; such breach
would not normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they also imposed
upon private respondents’ new obligations as preconditions to the performance
of their own obligation. In effect, the qualified offer to pay was a repudiation of
an existing obligation, which was legally due and demandable under the contract
of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
CANNU v. GALANG (2005)
Facts: A complaint for Specific Performance and Damages was filed by spouses
Cannu against spouses Galang and the National Home Mortgage Finance
Corporation (NHMFC). Respondents obtained a loan from Fortune Savings & Loan
Association for P173,800.00 to purchase a house and lot located at Las Piñas, with
an area of 150 square meters.
To secure payment, a REM was constituted on the said house and lot in favor of
Fortune Savings and Loan and in 1990 the NHMFC purchased the mortgage loan
for a price of P173,800. Respondent Galang authorized her attorney-in-fact
Timbang to sell the house and lot.
Petitioner Leticia Cannu agreed to buy the property for P120,000 and to assume
the balance of the mortgage obligations with the NHMFC and CERF Realty. They
have a balance of P45,000. A Deed of Sale with Assumption of Mortgage
Obligation on August 20, 1990 was made and entered between spouses Galang
and spouses Cannu.
Despite requests from Adelina R. Timbang and Galang to have them pay the
balance of P45,000 or in alternative to vacate the property in question, the
petitioners refused to do so.
In 1993, Cannu informed the Vice President of the NHMFC that the property’s
ownership rights have been transferred to her per deed of sale with assumption
mortgage and that they were obliged to assume the mortgage and pay the
remaining unpaid loan balance, but the formal assumption was not approved.
Because Cannu failed to fully comply with their obligations, respondent Galang on
May 21, 1993 paid P233,957 as full payment of her remaining mortgage with the
NHMFC.
 Petitioners oppose such release because the subject property has
already been sold to them.
 They filed a Complaint for Specific Performance asking that Cannu be
declared the owners of the property involved subject to
reimbursements.
 NHMFC answered that they have no cause of action because they
failed to pay the consideration.
Discussion: What is clear is that the agreement of the Deed of Sale with
mortgage.
Under the Rules of Court, a party may present evidence to modify, explain or add
to the terms of the written agreement if he puts issue in his pleading, among
others, its failure to express the true intent and agreement of the parties thereto.
Article 1191 on Resolution is Predicated on Breach of Faith
Rescission will not be permitted for a slight or casual breach of contract.
Rescission may be had only for such breaches that are substantial and
fundamental as to defeat the object of the parties in making the agreement. The
question upon what is substantial depends on the attending circumstances and
not merely on the percentage of the amount not paid.
In the case: The Court finds the petitioners failure to pay the balance of P45,000
to be substantial the percentage of 18% is still substantial taken together the fact
that the last payment was made on eighteen months before Galang (owner)
herself paid the remaining balance thus the intention of the petitioners to renege
on their obligation is utterly clear.
On the Allegation of Tender of Payment
The fact that petitioners tendered a Manager’s Check to respondents-spouses
Galang in the amount of P278,957.00 seven months after the filing of this case is
of no moment. Tender of payment does not by itself produce legal payment,
unless it is completed by consignation.
Petitioners did Not Religiously Pay
As admitted by them, in the span of three years from 1990 to 1993, their
payments covered only thirty months. This, indeed, constitutes another breach or
violation. On top of this, there was no formal assumption of the mortgage
obligation with NHMFC because of the lack of approval by the NHMFC because
petitioners’ non-submission of requirements to be considered as
assignees/successors-in-interest over the property covered by the mortgage
obligation.
Demand was Made upon the Petitioners
There is sufficient evidence showing that demands were made from petitioners
to comply with their obligation. Adelina R. Timbang, attorney-in-fact of
respondents-spouses, per instruction of respondent Fernandina Galang, made
constant follow-ups after the last payment made on 28 November 1991, but
petitioners did not pay.
There is no waiver. The fact that respondents-spouses accepted, through their
attorney-in-fact, payments in installments does not constitute waiver on their
part to exercise their right to rescind. Adelina Timbang merely accepted the
installment payments as an accommodation to petitioners since they kept on
promising they would pay. It was only after petitioners stopped paying that
respondents-spouses moved to exercise their right of rescission.
On Demandability of the Obligation
Galang complied with their obligation when they gave the possession of the
property in question to petitioners. Thus, they have the right to ask for the
rescission of the Deed of Sale with Assumption of Mortgage.
As discussed by Justice Reyes in the case of Universal Food Corp v. Court of
Appeals Article 1191 is different from 1381:
Article 1191 Article 1381
It is predicated on the breach of faith by the defendant that violates the
reciprocity between the parties.
It is because of lesion or economic prejudice based on pecuniary injury.
It is a principal action based on breach that violates the reciprocity.
It is a subsidiary action.
Only on reciprocal obligations.
Applicable to unilateral obligations.
Only among the parties, especially injured party.
It can be invoked by a third person.
In the case: The reciprocity between parties was violated when the petitioners
failed to fully pay the P45,000 to the respondent spouses and failure to update
their amortizations.
Held: Having found that petitioners seriously breached the contract, therefore
the Court declares the same as rescinded in favor of the Galang spouses. Because
of the rescission, it is the duty of the court to require the parties to surrender
whatever they may have received from each other and that parties should be
restored to their original situation.
FOREST HILLS GOLF v. VERTEX SALES (2013)
Facts: Petitioner Forest Hills Golf & Country Club (Forest Hills) is a domestic non-
profit stock corporation that operates and maintains a golf and country club
facility in Antipolo City. Forest Hills was created as a result of a joint venture
agreement between Kings Properties Corporation (Kings) and Fil-Estate Golf and
Development, Inc. (FEGDI). Accordingly, Kings and FEGDI owned the shares of
stock of Forest Hills, holding 40% and 60% of the shares, respectively.
In August 1997, FEGDI sold to RS Asuncion Construction Corporation (RSACC) one
(1) Class "C" common share of Forest Hills for P1.1 million. Prior to the full
payment of the purchase price, RSACC transferred its interests over FEGDI's Class
"C" common share to respondent Vertex Sales and Trading, Inc. (Vertex).[4]
RSACC advised FEGDI of the transfer and FEGDI, in turn, requested Forest Hills to
recognize Vertex as a shareholder. Forest Hills acceded to the request, and Vertex
was able to enjoy membership privileges in the golf and country club.
Despite the sale of FEGDI's Class "C" common share to Vertex, the share remained
in the name of FEGDI, prompting Vertex to demand for the issuance of a stock
certificate in its name.[5] As its demand went unheeded, Vertex filed a
complaint[6] for rescission with damages against defendants Forest Hills, FEGDI,
and Fil-Estate Land, Inc. (FELI) the developer of the Forest Hills golf course. Vertex
averred that the defendants defaulted in their obligation as sellers when they
failed and refused to issue the stock certificate covering the Class "C" common
share. It prayed for the rescission of the sale and the return of the sums it paid; it
also claimed payment of actual damages for the defendants' unjustified refusal to
issue the stock certificate.
Forest Hills denied transacting business with Vertex and claimed that it was not a
party to the sale of the share; FELI claimed the same defense. While admitting
that no stock certificate was issued, FEGDI alleged that Vertex nonetheless was
recognized as a stockholder of Forest Hills and, as such, it exercised rights and
privileges of one. FEGDI added that during the pendency of Vertex's action for
rescission, a stock certificate was issued in Vertex's name,[7] but Vertex refused
to accept it.
RTC RULING: In its March 1, 2007 decision,[8] the Regional Trial Court (RTC)
dismissed Vertex's complaint after finding that the failure to issue a stock
certificate did not constitute a violation of the essential terms of the contract of
sale that would warrant its rescission. The RTC noted that the sale was already
consummated notwithstanding the non-issuance of the stock certificate. The
issuance of a stock certificate is a collateral matter in the consummated sale of
the share; the stock certificate is not essential to the creation of the relation of a
shareholder. Hence, the RTC ruled that the non- issuance of the stock certificate
is a mere casual breach that would not entitle Vertex to rescind the sale.[9]
CA RULING: Vertex appealed the RTC's dismissal of its complaint. In its February
22, 2012 decision,[10] the CA reversed the RTC. It declared that "in the sale of
shares of stock, physical delivery of a stock certificate is one of the essential
requisites for the transfer of ownership of the stocks purchased."[11]
It based its ruling on Section 63 of the Corporation Code,[12] which requires for a
valid transfer of stock
(1) the delivery of the stock certificate;
(2) the endorsement of the stock certificate by the owner or his attorney-
in-fact or other persons legally authorized to make the transfer; and
(3) to be valid against third parties, the transfer must be recorded in the
books of the corporation.
Without the issuance of the stock certificate and despite Vertex's full payment of
the purchase price, the share cannot be considered as having been validly
transferred. Hence, the CA rescinded the sale of the share and ordered the
defendants to return the amount paid by Vertex by reason of the sale. The
dispositive portion reads:
WHEREFORE, in view of the foregoing premises, the appeal is hereby GRANTED
and the March 1, 2007 Decision of the Regional Trial Court, Branch 161, Pasig City
in Civil Case No. 68791 is hereby REVERSED AND SET ASIDE. Accordingly, the sale
of x x x one (1) Class "C" Common Share of Forest Hills Golf and Country Club is
hereby rescinded and defendants-appellees are hereby ordered to return to
Vertex Sales and Trading, Inc. the amount it paid by reason of the said sale.[13]
(emphasis ours)
The CA denied Forest Hills' motion for reconsideration in its resolution of May 31,
2012.
THE PARTIES' ARGUMENTS: Forest Hills filed the present petition for review on
certiorari to assail the CA rulings. It argues that rescission should be allowed only
for substantial breaches that would defeat the very object of the parties making
the agreement.
The delay in the issuance of the stock certificate could not be considered as a
substantial breach, considering that Vertex was recognized as, and enjoyed the
privileges of, a stockholder.
Forest Hills also objects to the CA ruling that required it to return the amount paid
by Vertex for the share of stock. It claims that it was not a party to the contract of
sale; hence, it did not receive any amount from Vertex which it would be obliged
to return on account of the rescission of the contract.
In its comment to the petition, Vertex disagrees and claims that its compliance
with its obligation to pay the price and the other fees called into action the
defendants' compliance with their reciprocal obligation to deliver the stock
certificate, but the defendants failed to discharge this obligation. The defendants'
three (3)-year delay in issuing the stock certificate justified the rescission of the
sale of the share of stock. On account of the rescission, Vertex claims that mutual
restitution should take place. It argues that Forest Hills should be held solidarily
liable with FEGDI and FELI, since the delay was caused by Forest Hills' refusal to
issue the share of FEGDI, from whom Vertex acquired its share.
THE COURT'S RULING: The assailed CA rulings (a) declared the rescission of the
sale of one (1) Class "C" common share of Forest Hills to Vertex and (b) ordered
the return by Forest Hills, FEGDI, and FELI to Vertex of the amount the latter paid
by reason of the sale. While Forest Hills argues that the ruling rescinding the sale
of the share is erroneous, its ultimate prayer was for the reversal and setting aside
of the ruling holding it liable to return the amount paid by Vertex for the sale.[16]
The Court finds Forest Hills' prayer justified.
Ruling on rescission of sale is a settled matter
At the outset, we declare that the question of rescission of the sale of the share
is a settled matter that the Court can no longer review in this petition. While
Forest Hills questioned and presented its arguments against the CA ruling
rescinding the sale of the share in its petition, it is not the proper party to appeal
this ruling.
As correctly pointed out by Forest Hills, it was not a party to the sale even though
the subject of the sale was its share of stock. The corporation whose shares of
stock are the subject of a transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need not be a party to the
transaction, as may be inferred from the terms of Section 63 of the Corporation
Code. However, to bind the corporation as well as third parties, it is necessary
that the transfer is recorded in the books of the corporation. In the present case,
the parties to the sale of the share were FEGDI as the seller and Vertex as the
buyer (after it succeeded RSACC). As party to the sale, FEGDI is the one who may
appeal the ruling rescinding the sale. The remedy of appeal is available to a party
who has "a present interest in the subject matter of the litigation and [is]
aggrieved or prejudiced by the judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in the subject matter of the
lawsuit, is injuriously affected by the judgment, order or decree."[17] The
rescission of the sale does not in any way prejudice Forest Hills in such a manner
that its interest in the subject matter the share of stock is injuriously affected.
Thus, Forest Hills is in no position to appeal the ruling rescinding the sale of the
share. Since FEGDI, as party to the sale, filed no appeal against its rescission, we
consider as final the CA's ruling on this matter.
Ruling on return of amounts paid by reason of the sale modified
The CA's ruling ordering the "return to [Vertex] the amount it paid by reason of
the sale"[18] did not specify in detail what the amount to be returned consists of
and it did not also state the extent of Forest Hills, FEGDI, and FELI's liability with
regard to the amount to be returned. The records, however, show that the
following amounts were paid by Vertex to Forest Hills, FEGDI, and FELI by reason
of the sale:
Payee, Date of Payment, Purpose, Amount Paid
FEGDI, Feb 9 1999, Purchase price for one (1) Class "C" common share,
P780,000.00
FEGDI, Feb 9 1999, Transfer fee, P 60,000.00
Forest Hills, Feb 23 1999, Membership fee, P 150,000.00
FELI, Sep 25 2000, Documentary Stamps, P 6,300.00
FEGDI, Sep 25 2000, Notarial fees, P 200.00
A necessary consequence of rescission is restitution: the parties to a rescinded
contract must be brought back to their original situation prior to the inception of
the contract; hence, they must return what they received pursuant to the
contract.[24] Not being a party to the rescinded contract, however, Forest Hills is
under no obligation to return the amount paid by Vertex by reason of the sale.
Indeed, Vertex failed to present sufficient evidence showing that Forest Hills
received the purchase price for the share or any other fee paid on account of the
sale (other than the membership fee which we will deal with after) to make Forest
Hills jointly or solidarily liable with FEGDI for restitution.
Although Forest Hills received P150,000.00 from Vertex as membership fee, it
should be allowed to retain this amount. For three years prior to the rescission of
the sale, the nominees of Vertex enjoyed membership privileges and used the golf
course and the amenities of Forest Hills.[25] We consider the amount paid as
sufficient consideration for the privileges enjoyed by Vertex's nominees as
members of Forest Hills.
The Court PARTIALLY GRANTS the petition for review on certiorari. Petitioner
Forest Hills Golf & Country Club is ABSOLVED from liability for any amount paid
by Vertex Sales and Trading, Inc. by reason of the rescinded sale of one (1) Class
"C" common share of Forest Hills Golf & Country Club.
MAGLASANG v. NORTHWESTERN UNIVERSITY (2013)
Facts: On June 10, 2004 respondent Northwestern University engaged the
services of GL Enterprises to install a new IBS in Laoag City for it was required for
training laboratory so that the school could offer maritime transportation
programs.
• Since its Integrated Bridge System was obsolete it required the petitioner to
supply and install specific components to perform standards required.
They executed two contracts with the similar provisions:
(1) The IBS and its components must be compliant with IMO and CHED
standards.
(2) The contracts are to be terminated if one party commits a substantial
breach of its undertaking.
(3) Any dispute under the agreement shall first be settled mutually
between the parties before court action.
Subsequently respondent Northwestern paid P1M as down payment to the GL
Enterprises. Two months after the execution of the contracts, GL Enterprises
technicians delivered various materials to the project site.
• When they start installing the components respondent halted the operations.
Northwestern justified the work stoppage upon its finding that the delivered
equipment was substandard. It explained further that GL Enterprises violated the
terms and conditions of the contracts.
The reasons constituting the allegation because equipment:
(1) were old;
(2) did not have instruction manuals and warranty certificates;
(3) contained indications of being reconditioned machines; and
(4) did not meet the IMO and CHED standards.
Northwestern demanded compliance with the agreement and suggested that GL
Enterprises meet with the former’s representatives to iron out the situation.
Instead of heeding such suggestion, GL Enterprises filed a complaint for breach of
contract and prayed for P1.97M representing how much it could have earned.
• Petitioner alleged that Northwestern breached the contracts by ordering the
work stoppage and thus preventing the installation of the materials for the IBS.
Was there substantial breach of the contracts that would warrant the application
of Article 1191?
Substantial Breaches of the Contracts
The contracts require no less than substantial breach before they can be
rescinded. As held in Cannu v. Galang, the question of whether a breach of
contract is substantial depends upon the attending circumstances.
In the case: The parties explicitly agreed that the materials to be delivered must
be compliant with the CHED and IMO standards and must be complete with
manuals.
Evidently, the materials delivered were less likely to pass the CHED standards,
because the navigation system to be installed might not accurately point to the
true north; and the steering well was one from automobile rather than those from
the ships.
GL Enterprises did not dispute the allegation their equipment being substandard.
On the Allegation that CHED must check Standards
Allegation not sustained. Respondent could not just “sit still and wait for such day
that its accreditation may not be granted by CHED due to the apparent
substandard equipment installed in the bridge system.” The appellate court
correctly emphasized that, by that time, both parties would have incurred more
costs for nothing. The stoppage of the installation was justified.
SWIRE REALTY DEVELOPMENT v. YU (2015)
Facts: Respondent Jane Yu and Swire Realty entered into a Contract to Sell on July
25, 1995 covering one residential condominium unit at Makati City with an area
of 137.30 sq.m. for the contract price of P7,519,371 payable in equal monthly
installments until September 24, 1997. Respondent likewise purchased a parking
slot in the same building for P600K.
On September 24, 1997 (due date) she paid the full purchase price for the unit
while making a downpayment of P20K for the parking lot. Notwithstanding such,
petitioner failed to complete and deliver the subject unit on time.
This prompted Yu to file a Complain for Rescission of Contract with Damages
before the Housing and Land Use Regulatory Board (HLURB-NCR). In 2004, it
dismissed the complaint for it was of slight or casual breach and not substantial.
Upon elevation to the HLURB-BOC it was ordered to be rescinded. However, upon
elevation to the Office of the President (OP), it held that the breach was not
substantial.
Is the breach substantial to warrant the application of the Article 1191 on the
rescission of the obligation?
Right to Rescind Obligations under Article 1191
Basic is the rule that the right of rescission of a party to an obligation under Article
1191 is predicated on a breach of faith by the other party who violates the
reciprocity between them. The breach contemplate is the obligor’s failure to
comply with an existing obligation. When obligor cannot comply, the obligation
may seek rescission.
In the case: Even the extension granted, the unit was not yet finished as the
kitchen cabinets and fixtures were not yet installed and the agreed amenities
were not yet available upon inspection of the HLURB-NCR. It is evident that the
report on the ocular inspection conducted on the subject condominium project
and subject unit shows that the amenities under the approved plan has not been
provided as of May 3, 2002 and was not delivered to the respondent which is
beyond the extended period of 1999.
Held: Incontrovertibly, petitioner had incurred delay in the performance of its
obligation amounting to breach of contract as it failed to finish and deliver the
unit to respondent within the stipulated period. The delay in the completion of
the project as well as of the delay in the delivery of the unit are breaches of
statutory and contractual obligations which entitle respondent to rescind the
contract, demand a refund and payment of damages.
FONG v. DUEÑAS (2015)
Facts: Respondent is engaged in the bakery, food manufacturing and retailing
business which are all operated under his two companies D.C. DANTON Inc.
(Danton) and Bakcom Food Industries (Bakcom). He was an old acquaintance of
Fong as they were former schoolmates at DLSU.
Sometime in November 1996, they entered into a Verbal Joint Venture Contract
where they agreed to engage in the food business and to incorporate a holding
company under the name of Alliance Holdings, Inc. (proposed corporation). With
a capitalization of P65M to which contributes in equal.
• The parties agreed that Fong would contribute P32.5M while Duenas would
contribute both Danton and Bakcom shares which he valued also at P32.5M.
Fong required Duenas to submit the financial documents supporting the valuation
of such shares. On November 25, 1996 Fong started remitting the tranches of his
share in the capital while Duenas processed an international license.
On June 13, 1996, Fong sent a letter to Duenas informing him of his decision to
limit his total contribution from P32.5M to P5M. Pertinent parts of the letters are
as follows:
• Faced with personal factors which resulted to turning down of many business
opportunities.
• For us, it does not make sense anymore to go for a significant shareholding when
we cannot be hands on and participate actively as originally planned. For your
information, we will probably be giving up our subway franchise too.
• Together with our business advisers and legal counsel, we came to a decision to
hold our commitment (from advances to investment) at P5 million only for now
from the original plan of P32.5 million, if this is acceptable to you.
• We have put our money down in trust and good faith despite the much-delayed
financials.
Fong observed that despite his P5M contribution, Duenas still failed to give him
the financial documents on the valuation of the Danton and Bakcom shares.
• In addition, Duenas failed to have Alliance be registered and incorporate with
the SEC.
These circumstances convinced Fong that Dueñas would no longer honor his
obligations in their joint venture agreement. thus, on October 30, 1997, Fong
wrote Dueñas informing him of his decision to cancel the joint venture
agreement.
• He also asked for the refund of the P5 Million that he advanced.
• Dueñas admitted that he could not immediately return the money since he used
it to defray the business expenses of Danton and Bakcom.
On March 25, 1998, Fong wrote a final letter of demand informing Dueñas that
he would file a judicial action against him should he still fail to pay after receipt of
this written demand. Since Dueñas did not pay, Fong filed a complaint against him
for collection of a sum of money and damages on April 24, 1998.
RTC. Noted that failure to furnish the financial document and almost one-year
delay in the incorporation of Alliance which caused Fong to rescind the JVA.
CA. Reversed. Contrary to the trial court’s ruling, Dueñas correctly invested Fong’s
P5 Million contribution to Bakcom and Danton. This did not deviate from the
parties’ original agreement as eventually, the shares of these two companies
would form part of Alliance’s capital. Fong payment must be treated as share
subscription to Alliance.
Was the any breach of obligations on the verbal joint venture agreement that
would warrant rescission?
Discussion: On the validity of the joint venture agreement which was verbal; the
failure to reduce the agreement to writing does not affect its validity or
enforceability as there is no law or regulation which provides that an agreement
to incorporate must be in writing. Thus the agreement to incorporate the shares
of Bakcom, Danton and Boboli is valid under the eyes of the law.
The Body rather than Title of Complaint
Determines the Nature of the Action
A well-settled rule in procedural law is that the allegations in the body of the
pleading or the complaint, and not its title, determine the nature of an action.
IN THE CASE: An examination of Fong’s complaint shows that although it was
labeled as an action for a sum of money and damages, it was actually a complaint
for rescission.
• Fong’s allegations primarily pertained to his cancellation of their verbal
agreement because Dueñas failed to perform his obligations to provide verifiable
documents on the valuation of the Danton’s and Bakcom’s shares, and to
incorporate the proposed corporation.
Rescission under Article 1191 is Applicable
Reciprocal obligations are those which arise from the same cause, in which each
party is a debtor and a creditor of the other, such that the obligation of one is
dependent on the obligation of the other.
In the case: Fong and Dueñas’ execution of a joint venture agreement cr eated
between them reciprocal obligations that must be performed to fully
consummate the contract and achieve the purpose for which it was entered into.
On the Allegation that Payments are Treated as Subscription
The parties never agreed that Fong would invest his money in Danton and
Bakcom. Contrary to the submission, Fong’s understanding was that his money
would be applied to his shareholdings in Alliance.
• According to the Corporation Code, there must be the existence of 25% of the
capital stock, to prove compliance with this requirement, the SEC requires the
incorporators to submit a treasurer’s affidavit and a certificate of bank deposit,
showing the existence of an amount compliant with the prescribed capital
subscription.
This would lead to a conclusion that Fong’s cash contributions play an
indispensable part in Alliance’s incorporation. The process necessarily requires
the money not only to fund Alliance’s registration with the SEC but also its initial
capital subscription.
• Thus, Dueñas erred when he invested Fong’s contributions in his two
companies. This money should have been used in processing Alliance’s
registration. Its incorporation would not materialize if there would be no funds
for its initial capital.
On the Valuation of the Danton and Bakcom
Dueñas also failed to deliver the valuation documents of the Danton and Bakcom
shares to prove that the combined values of their capital contributions amounted
to P32.5 Million.
These acts led to Dueñas’ delay in incorporating the planned holding company,
thus resulting in his breach of the contract.
Fong is also in Breach of the Joint Venture Agreement
In his letters, although these reasons appear to be valid, they do not erase the
fact that Fong still reneged on his original promise to contribute P32.5 Million.
Hence, Fong’s diminution of his capital share to P5 Million also amounted to a
substantial breach of the joint venture agreement, which breach occurred before
Fong decided to rescind his agreement with Dueñas. Thus, Fong also contributed
to the non-incorporation of Alliance needed P65M as capital to operate.
Article 1192 Application on Mutual Breach of Obligation
The provision reads, 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.
In the case: The facts, however, show that both parties began performing their
obligations after executing the joint venture agreement. Fong started remitting
his share while Dueñas started processing the Boboli international license for the
proposed corporation’s food business. The absence of a written contract renders
the Court unsure as to whose obligation must be performed first.
• Despite these gray areas, the fact that both Fong and Dueñas substantially
contributed to the non-incorporation of Alliance and to the failure of their food
business plans remains certain.
Held: The Court holds that the joint venture agreement between Fong and Dueñas
is deemed extinguished through rescission under Article 1192 in relation with
Article 1191 of the Civil Code. Dueñas must therefore return the P5 Million that
Fong initially contributed since rescission requires mutual restitution. After
rescission, the parties must go back to their original status before they entered
into the agreement.
• No damages for each party shall bear own damages.
NOLASCO v. CUERPO (2015)
Facts: On July 22, 2008, petitioner and respondent entered into a Contract to Sell
over a 165,775 sq.m. parcel of land in Rizal. The pertinent provision of the
contracts are as follows:
a) Consideration of the sale is P33,155,000 payable through DP of
P11,604,250 inclusive of P2M reservation fee and the remaining
balance of P21,550,750 payable in 36-month installments each in the
amount of P598,632 through postdate checks.
b) In case any of the checks are dishonored, the amounts already paid
shall be forfeited in petitioner’s favor and the latter shall be entitled
to cancel the subject contract without judicial recourse.
c) Respondents are not entitled to possess the subject land until full
payment of the purchase price.
d) Petitioners shall transfer the title over the subject land from a certain
Santos to petitioners’ names, should they fail to do so, respondents
may cause the said transfer and costs against monthly amortizations.
e) Upon full payment, petitioners shall transfer title.
However, in November 7, 2008 respondent sent petitioners a letter seeking to
rescind the subject contract on the ground of financial difficulties in complying
the same. They sought the return the amount of P12,202,882 they had paid to the
petitioners. The letter was unheeded, respondents filed for rescission before the
RTC.
Petitioners countered that the act is unilateral cancellation of the subject contract
as the former did not consent to it. Financial difficulties are not among the ground
for a valid rescission.
RTC. Contract is rescinded and that the petitioners failed to cause the completion
of the transfer of registration of title of the property. CA. It affirmed the RTC for
the petitioners failed to transfer the subject land from Santos to Nolasco within
90 days from the execution of the said contract.
Was the rescission proper?
Article 1191 and Reciprocal Obligations
In reciprocal obligations, either party may rescind or resolve the contract upon
the other party’s substantial breach. The retaliatory remedy is given to the injured
party.
In the case: The RTC and CA bases the rescission of the contract on the violation
of paragraph 7 of the agreement. The lower courts have misinterpreted such
paragraph. It provides:
[Petitioners] shall, within ninety (90) days from the signing of [the subject
contract], cause the completion of the transfer of registration of title of the
property subject of [the subject contract], from Edilberta N. Santos to their
names, at [petitioners’] own expense. Failure on the part of [petitioners] to
undertake the foregoing within the prescribed period shall automatically
authorize [respondents] to undertake the same in behalf of [petitioners] and
charge the costs incidental to the monthly amortizations upon due date.
A plain reading provides that petitioners failed to perform the transfer within the
said period, but this does not constitute a substantial breach. The paragraph
provides a contractual recourse in the event of nonperformance and that is to
cause such transfer in behalf and at the expense of petitioners.
Theory of the Case, Principle
When a party deliberately adopts a certain theory and the case is decided upon
that theory in the court, he will not be permitted to change the same on appeal,
because to permit him to do so would be unfair to the adverse party.
In the case: The court cannot grant the petitioners’ prayer in the petition to order
the cancellation of the contract and the forfeiture of the payments because they
neither prayer for this specific relief nor argued that they were entitled to such
and did not provide such for defense.
ASB REALTY v. ORTIGAS (2015)
Facts: On June 29, 1994, respondent Ortigas entered a Deed of Sale with Amethyst
Pearl Corporation involving a parcel of land with an area of 1,012 sq.m. in Oranbo,
Pasig City for the consideration of P2,024,000. Pertinent parts provide:
• Building constructed be reinforced concrete, cement hollow blocks and shall be
of the following height of not more than 14 storeys plus one penthouse.
• Final plans and specifications of said building be submitted to Ortigas for
approval not later than six months from the date thereof. Should object, it shall
notify and specify in writing the amendments required to perform with its
buildings and submit the amended plans within 60 days from receipt of notice.
• The vendee shall finish the construction of its building within four years from
December 31, 1991.
On December 28, 1996, Amethyst assigned the subject property to its sole
stockholder, the ASB Realty Corporation under a Deed of Assignment in
Liquidation in consideration of 100,000 shares of the outstanding capital stock,
such was transferred free from any liens or encumbrances.
On July 7, 2000, Ortigas filed its Complaint for Specific Performance against the
petitioner, alleging violation of:
• While the lot may be used only for office and residential purposes, defendant
introduced construction on the property which are commercial in nature like
restaurants and retails stores.
• Commercial structures extend up to the boundary lines of the lot in question.
• Failed to submit the final plans and specifications of its proposed building not
later than 6 months from June 29, 1994 and to complete construction of the same
within four years from December 31, 1991.
• It allowed putting up of commercial signs and advertisements over the area,
which was prohibited.
Ortigas prayed for the reconveyance of the subject property, or alternatively, for
the demolition of the structures and improvements thereon plus penalties and
costs.
RTC. Dismissed the complaint. Amethyst was supposed to finish construction on
December 31, 1995 but up to the time the property was transferred to ASB on
December 28, 1996, Ortigas never initiated any action against Amethyst to
enforce said provision. Making him guilty of laches or negligence on such action.
CA. Affirmed RTC. Ortigas can no longer enforce the said restrictions against ASB
for the vendee was Amethyst.
CA MR. It reversed its decision stating that it is not disputed that Amethyst failed
to finish construction within the period stated the prescriptive period under a
Deed of Sale is ten years and they had until 31 December 2005 and that Ortigas
filed the present complaint on 07 July 2000 within such period.
Whether or not Ortigas validly rescinded the Deed of Sale due to the failure of
Amethyst and its assignee, the petitioner ASB, to fulfill the covenants of the Deed
of Sale.
Ortigas’ Action for Rescission Could Not Prosper
Ortigas never took to task such other buyers and Amethyst for failing to construct
the buildings within the periods contractually imposed. It maintains, therefore,
that Ortigas slept on its rights because it did not take any action against Amethyst
during the period prescribed in the Deed of Sale.
Allegation on ASB as Amethyst’s Assignee
Petitioner Ortigas argues in its right to rescind that the petitioner was bound by
the covenants of the Deed of Sale annotated in the name of the petitioner; and
that the petitioner’s privity to the Deed of Sale was by virtue of its being the
successor-in-interest or assignee of Amethyst.
Examination of Agreement: The Deed of Assignment in Liquidation executed
between Amethyst and ASB expressly stated that “the assignor hereby assigns,
transfers and conveys unto the assignee one parcel of property”.
• This indicates that the transfer was only the tangible asset consisting the piece
of land and by no means did Amethyst assign the right or duties it has assumed
under the Deed of Sale.
• ASB Realty became vested with rights of ownership free from any lien or
encumbrance.
Doctrine of Estoppel, Recognition of Transfer
On the Allegation the “No Transfer Stipulation”. Ortigas apparently recognized
without any reservation the issuance of the new certificate of title and the
subsequent transfer by assignment from Amethyst to ASB leading to a new
certificate of title. As such, Ortigas was estopped from assailing the petitioner’s
acquisition and ownership of the property.
The application of estoppel was appropriate. The doctrine of estoppel was based
on public policy, fair dealing, good faith and justice, and its purpose is to forbid a
party to speak against his own act or omission, representation, or commitment to
the injury of another who relied thereon.
On the Performance Required from the Assignee
TCT No. PT-10597 bound the petitioner but not to the extent that rendered the
petitioner liable for the nonperformance of the covenants stipulated in the Deed
of Sale.
• Section 39 of The Land Registration Act requires that every person receiving a
certificate of title in pursuance of a decree of registration, and every subsequent
purchaser of registered land who takes a certificate of title for value in good faith
shall hold the same free of all encumbrances except as those noted on said
certificate. Annotation are to charge the purchaser or title holder with notice of
such burdens.
In the case: By acquiring the parcel of land with notice of the covenants in the
Deed of Sale, ASB bound itself to acknowledge and respect the encumbrance. But
it did not step into the shoes of Amethyst as a party in the Deed of Sale. Thus, the
annotation of the covenants contained in the Deed of Sale did not give rise to a
liability on the part of ASB as the purchaser or successor-in-interest without its
express assumption of such duties or obligation.
Burden to Perform Covenants of
Deed of Sale Remained with Amethyst
Contractual obligations, unlike rights or benefits are generally not assignable. But
there are recognized means by which obligations may be transferred, like sub-
contract or novation.
In the case: The following shows that the assignment is not a novation to transfer
such: (1) The substitution of the petitioner did not result in the novation for
novation requires consent of the vendor. (2) Petitioner did not expressly assume
obligations of Amethyst. (3) The consent of the new obligor (ASB) which was
essential to novation was not obtained.
There is still no express or implied indication that the petitioner had assumed
Amethyst’s obligations. In short, the burden to perform the covenants under the
Deed of Sale, or the liability for the nonperformance thereof, remained with
Amethyst.
Propriety of Rescission under Article 1191
Based on the foregoing, Ortigas’ complaint predicated on Article 1191 of the Civil
Code. It is proper if one of the parties commits a substantial breach of its
provisions. It abrogates the contract from its inception and requires mutual
restitution of the benefits received.
In the case: Ortigas did not have a cause of action against the petitioner for the
rescission of the Deed of Sale. Under Section 2, Rule 2 of the Rules of Court
elements of cause of action:
1. Right in favor of the plaintiff
2. Obligation of defendant not to violate such right
3. An act or omission constituting a breach of such
The second and third elements were absent in this case. Simply because ASB
Realty is not privy to the Deed of Sale because it was not the party obliged
thereon.
• Not having come under the duty not to violate any covenant in the Deed of Sale
when it purchased the subject property despite the annotation, its failure to
comply with the covenants did not constitute a breach of contract.
• It was Amethyst that defaulted on the covenants, hence the action to enforce
such provisions of the contract or to rescind the contract should be against
Amethyst.
Rescission could not anymore take place against the petitioner once the subject
property legally came into the juridical possession of the petitioner who was a
third party to the Deed of Sale.
Right not absolute. Rescission will not be permitted for a slight or causal breach,
it shall be only for substantial or fundamental ones as to defeat the object of the
parties in agreement.
Limitations or Restrictions of Power to Rescind
1. Due process must be observed.
2. It is subordinated to the rights of third persons who acquired the thing in good
faith.
3. Injured party must respect the power of the court to fix period in lieu of
rescission.
4. Evidence is needed to justify rescission.
5. Slight breach will not justify it should be substantial as to defeat the object of
parties in agreement.
Effects of Rescission
• Extinguishes Obligatory Relation
The exercise of the power to rescind under Article 1191 has the effect as if the
obligatory relation has never existed having a retroactive effect. It has the effect
of abrogating the contract in all parts and the parties will be brought back to
status quo before they entered the contract. Hence the need for parties for
restitution.
• Obligation for Mutual Restitution
Hence the need for parties for restitution for it has been contemplated that the
relations shall be as if there was no obligatory relation at all. However, it can be
stipulated that damages may be recovered in case of breach or if the parties
entered the agreement in bad faith.
Inapplicability of Article 1191
1. Obligations of sales of real property by installments since RA 6552 of
Maceda Law governs.
2. Sales of personal property by installment (RA 1484)
3. Contract of partnerships
4. Contract of Lease
When Judicial Approval is Not Required for Rescission
1. Express stipulation of automatic rescission.
2. When the debtor voluntarily returned the thing even before judicial
approval.
Waiver of the Right to Rescind under Article 1191
Contracting parties may waive the same. For example, when the parties in a
contract of sale subsequently execute a document stipulating herein that the land
sold to the vendee shall stand as security for the payment of the balance of the
purchase price, this stipulation is incompatible with the idea of rescission of the
sale and therefore amount to a waiver of right.
• The vendor has already chosen the remedy of specific performance or simple
collection of a debt.
• Acceptance by the creditor of the delayed payment amount to a waiver of the
right of rescission.
ARTICLE 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
extinguished, and each shall bear his own damages.
NOTE: Where both parties are in default, their respective liability for damages
shall offset equitably.
PACIFIC BANKING v. IAC (1991)
Facts: On October 24, 1975, defendant Regala applied for and obtained from the
bank the issuance and use of Pacificard credit card which was under the Terms
and Conditions governing the Issuance and Use of Pacificard a copy of which was
issued to and received by the said defendant on the date of the application and
agreed on such.
On the same date, Robert Regala executed a Guarantor’s Undertaking in favor of
the bank, whereby the latter agreed to be jointly and severally of Celia Regala to
pay the bank upon demand any and all indebtedness incurred by Celia with the
use of the Pacificard or renewals thereof.
The defendant Celia Regala, had purchased goods and/or services on credit under
her Pacificard for which the bank advanced the cost of P92,803 at the time of the
filing of the complaint. Celia failed to settle her account for the purchases,
received a demand, and was sent to Robert the Guarantor.
A complaint was filed against Celia for failure to settle her obligation. Robert
Regala on the other hand admitted his understanding as guarantor but limited to
P2,000 per month.
RTC. They are condemned jointly and severally to pay the amount with interest
plus 15% of principal obligation for costs. IAC. Regala was made to be liable to
only P2000 a month and only to the effectivity of the card.
What should be the liability of Robert Regala as guarantor?
Guarantor’s Undertaking was a Contract of Surety
As distinguished from a contract of guaranty where the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor only in case the latter
should fail to do so, in a contract of suretyship, the surety binds himself solidarily
with the principal debtor.
In the case: As a surety he bound himself jointly and severally with the debtor
Celia Regala “to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia
Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation.
Roberto, in fact, made his commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia Regala have been fully paid. All these were
clear under the “Guarantor’s Undertaking” Roberto signed.
• He was made aware of the terms and conditions and voluntarily agreed to be
bound as surety.
INDUSTRIAL MANAGEMENT v. NLRC (2000)
Facts: On September 1984, private respondents filed a complaint wit the
DOLERAB in Cebu against Filipinas Carbon Mining Corporation and petitioner
Industrial Management Development Corporation (INIMACO) for payment of
separation pay and unpaid wages.
The Labor Arbiter ruled in favor of the private respondents, absent appeal it
became final and executory. Upon issuance of Writ of Execution, it was returned
unsatisfied. On 1987, the labor arbiter issued an Alias Writ of Execution which
ordered to produce the award for the private respondents.
On September 3, 1987, petitioner filed a Motion to Quash Alias Writ of Execution
and Set Aside Decision alleging among others was that the alias writ of execution
altered and changed the tenor of the decision by changing the liability of
respondents from joint to solidary by the insertion of and/or between
respondents.
Whether or not the petitioners’ liability pursuant to the decision of the Labor
Arbiter is solidary or not.
Discussion: Upon examination of the pleadings, the Court finds that the liability
of the petitioner is not solidary but merely joint and NLRC acted in GADALEJ in
upholding such solidarity.
Joint and Solidary Obligations, Joint Presumption
Well-entrenched is the rule that solidary obligation cannot lightly be inferred.
There is a solidary liability only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so requires.
In the case: In the dispositive portion of the Labor Arbiter, the word “solidary”
does not appear. The said fallo expressly states the following respondents therein
as liable. Nor can it be inferred therefrom that the liability of the six (6)
respondents in the case below is solidary, thus their liability should merely be
joint. When it is not provided in a judgment that the defendants are liable to pay
jointly and severally a certain sum of money, none of them may be compelled to
satisfy in full said judgment.
When Decision is Final It Cannot be Amended or Altered
It thereby becomes immutable and unalterable and any amendment or alteration
which substantially affects a final and executory judgment is null and void for lack
of jurisdiction, including the entire proceedings held for that purpose. An order of
execution which varies the tenor of the judgment or exceeds the terms thereof is
a nullity.
In the case: None of the parties in the case before the Labor Arbiter appealed the
Decision dated March 10, 1987, hence the same became final and executory.
Thus, the proceedings held for the purpose of amending or altering the dispositive
portion of the said decision are null and void for lack of jurisdiction. Alias Writ of
Execution is void because it varied the tenor of the final judgment against the
petitioners making the liability solidary.
MARIVELES SHIPYARD v. CA (2003)
Facts: October 1993, petitioner Mariveles engaged the service of the Longest
Force Security Agency to render security services at its premises. Pursuant to their
agreement, Longest Force deployed its security guards, the private respondents
at its shipyard in Mariveles, Bataan.
According to petitioner, it religiously complied with the terms of the security
contract with Longest Force, promptly paying its bills and the contract rates of the
latter. However, it found the services being rendered by the assigned guards
unsatisfactory and inadequate, causing it to terminate its contract with Longest
Force on April 1995.
• In turn, Longest Force terminated employment of the security guards it
deployed at petitioner’s shipyard.
September 2, 1996, private respondents filed a case for illegal dismissal,
underpayment of wages against both petitioner and Longest Force praying for full
back wages and without loss.
Longest Force filed a cross-claim against the petitioner. Longest Force admitted
that it employed private respondents and assigned them to such rendering 12
hours duty per shift and likewise admitted liability as to non-payment of the
alleged wage differential amounting to P2,618,025 but passed on the liability to
petitioner for the latter paid so lower than the prescribed rate contrary to law.
Mariveles Shipyard denied any liability, stressing that no employer-employee
relationship existed between it and the security guards. It further pointed out that
it would be the height of injustice to make it liable again for monetary claims
which it had already paid.
Labor Arbiter (NCR). It declared respondents Longest Force and Mariveles
Shipyard jointly and severally liable to pay the money claims of complainants
representing underpayment of wages and overtime pay in the total amount of
P2,700,623.40 based on the PADPAO rates. NLRC affirmed in toto.
Should Mariveles Shipyard be a solidary judgment debtor together with Longest
Force in this case?
Discussion: Petitioner argues that it should not be held jointly and severally liable
with Longest Force for underpayment of wages and overtime pay because it had
been paying religiously the bills for the security services sent by Longest Force.
Petitioner’s Liability is Solidary Pursuant to
Articles 106, 107 and 109 of the Labor Code
Article 106. In the event that the contractor or subcontractor fails to pay the
wages of his employees, the employer shall be jointly and severally liable with his
contractor or subcontractor.
Article 107. The provisions of Article 106 apply to any person or corporation,
indirect employer, contracts with an independent contractor for the performance
of any work.
Article 108. Solidary Liability. The provisions of existing laws to the contrary
notwithstanding, every employer or indirect employer shall be held responsible
with his contractor or subcontractor for any violation of any provision of this
Code.
In the case: Mariveles Shipyard is an Indirect Employer, by virtue of Article 107
pursuant to Article 106 of the Labor Code, when the agency as contractor failed
to pay the guards, the corporation (Mariveles) becomes jointly and severally liable
for the guards’ wages. This is mandated by the Labor Code.
Petitioner cannot evade liability by alleging that it paid religiously the
compensation of guards under the contract with the security agency. Labor laws
are considered written in every contract, stipulations thereof are considered null.
• Employers cannot hide behind their contracts to evade liability for
noncompliance with such laws.
Reimbursement, Application
The solidary liability of petitioner with Longest Force does not preclude the
application of the Civil Code provision on the right of reimbursement from his co-
debtor by the one who paid.
The security agency may not seek exculpation by claiming that the principal’s
payments to it were inadequate for the guards’
lawful compensation. As an employer, the security agency is charged with
knowledge of labor laws; and the adequacy of the compensation that it demands
for contractual services is its principal concern and not any others.
On Overtime Pay. Despite the alleged lack of proof thereof, suffice it to state that
such involves a determination and evaluation of facts which cannot be done in a
petition for review. Well established is the rule that in an appeal via certiorari,
only questions of law may be reviewed.
Held: Petitioner and Longest Force are held liable jointly and severally for
underpayment of wages and overtime pay of the security guards, without
prejudice to petitioner’s right of reimbursement from Longest Force.
CONSTRUCTION DEVELOPMENT v. ESTRELLA (2006)
Facts: On December 29, 1978, respondents Rebecca G. Estrella and her
granddaughter Rachel boarded in San Pablo City, a BLTB bus bound for Pasay City.
However, they never reached their destination because their bus was rammed
behind by a tractor-truck of CDCP in the South Expressway.
The strong impact pushed forward their seats and pinned their knees to the seats
in front of them. They regained consciousness only when rescuers created a hole
in the bus and extricated their legs from under the seats. They were brought to
Makati Medical Center where the doctors diagnose their injuries as shown in the
Medical Certificate.
Thereafter, respondents filed a Complaint for damages against, CDCP, BLTB,
Payunan, Jr. and Datinguinoo before RTC Manila alleging negligence, failure to
exercise diligence.
RTC. CDCP and BLTB and their employees are found to be liable for damages, BLTB
as a common carrier was bound to observe extraordinary diligence in the vigilance
of passenger safety. CA affirmed but modified amount of damages.
Whether BTLB and its driver Datinguinoo are solely liable for the damages of
respondents.
Discussion: Petitioner contends that since it was made solidarily liable with BTLB
for actual damages and attorney’s fees in the decision, then it should no longer
be held liable to pay the amount under paragraph 2.
Culpa Aquiliana, Employer’s Liability and Defenses
The case filed by respondents is an action for culpa aquiliana or quasi-delict. In
this regard Article 2180 provides that the obligation imposed by Article 2176 is
demandable for the act or omission of those persons for whom one is responsible.
• An action based on quasi-delict may be instituted against the employer for an
employee’s act or omission.
• The liability for the negligent conduct of the subordinate is direct and primary
but is subject to defense of due diligence and supervision of employee.
In the case: The trial court found that petitioner failed to prove that it exercised
the diligence of a good father of a family in the selection and supervision of
Payunan, Jr.
The RTC and CA found petitioner solidarily liable with BTLB for the actual damages
suffered by respondents because of the injuries they sustained. Payunan, Jr.
(driver of CDCP) was discovered to be driving recklessly because of the skid marks
as shown in the sketch.
As well settled in Fabre, Jr. v. Court of Appeals that the owner of the other vehicle
which collided with a common carrier is solidarily liable to the injured passenger
of the same.
• Carrier and the driver were jointly and severally liable because their separate
and distinct acts concurred to produce the same injury.
Joint Tort Feasors are Not Liable Pro Rata
They are jointly and severally liable for the tort which they commit. The persons
injured may sue all of them and each is liable for the whole damages caused. The
damages cannot be apportioned among them, except among themselves.
Regarding Insurance Claim
The action has already prescribed. The law is clear and leaves no room for
interpretation. A written notice of claim must be filed within six months from the
date of the accident. Since petitioner never made any claim within six months
from the date of the accident, its claim has already prescribed.
Held: The Decision of Court of Appeals is Affirmed with modification and
clarification that all of the parties shall be held jointly and severally liable to pay
the actual damages, moral damages, exemplary damages, and attorney’s fees.
YULIM v. INTERNATIONAL EXCHANGE BANK (2015)
Facts: On June 2, 2000, iBank granted Yulim a credit facility in the form of an
Omnibus Loan Line for P5M as evidenced by a Credit Agreement which was
secured by a Chattel Mortgage over Yulim’s inventories in its merchandise
warehouse. As further guarantee, the partners namely James, Jonathan and
Almerick executed Continuing Surety Agreement.
There was a consolidated promissory note to mature on February 28, 2002 but
Yulim defaulted on the said note. On April 5, 2002, iBank sent demand letters but
without success. iBank filed for Complaint for Sum of Money with Replevin against
Yulim and its sureties. The items seized from the warehouse were worth only
P140,000.
On October 2, 2002, the petitioners moved to dismiss the complaint insisting that
their loan had been fully paid after they assigned to iBank their condominium unit
in Quezon City. Claiming that its market value has since risen to P5.5 Million.
RTC. The sureties are not liable and only Yulim alone to pay iBank and dismissed
against the individual sureties for there was no evidence that the loan benefited
their families.
CA. Petitioners failed to prove that they have already paid the loan. The records
are bereft of such evidence showing payment. The assignment was a mere
temporary arrangement to provide security for its loan but there was no showing
to such which was considered as a mortgage.
Concerning the solidary liability of the sureties, is it proper that is should be first
shown that the proceeds of the loan redounded to the benefit of the family to
make them liable?
Discussion: The individual petitioners do not deny that they executed the
Continuing Surety Agreement wherein they jointly and severally with the principal
hereby guarantee full and complete payment when due including fees and
interest.
Contract of Suretyship, Concept
In a contract of suretyship, one lends his credit by joining in the principal debtor’s
obligation to render himself directly and primarily responsible with him without
reference to the solvency of the principal. As provided in Article 2047, the
provisions on Article 1207 shall apply.
In the case: They bound themselves to be jointly and severally with Yulim to
unconditionally and irrevocably guarantee full and complete payment of all credit
accommodations and warrant that their liability shall be direct, immediate and
not contingent upon the pursuit by the bank.
Condominium Assignment, Security not Satisfaction
What the letter accepted was only the collaterals for the loans as well as
consolidation of promissory notes. Nowhere is such that the Deed of Assignment
will extinguish the loan and expressed as interim security for the repayment.
The condominium unit then is a mere temporary security, not a payment to settle
their promissory notes. There was an express stipulation that it is a plain and
direct acknowledgment that the parties really intended to merely constitute a real
estate mortgage over the property.
• iBank did not have the same appreciation it was construed as to be a collateral
for the loan and that there was no REM.
The assignment being in its essence a mortgage, it was but a security not a
satisfaction. Nowhere in the Deed of Assignment can it be remotely said that a
sale of the condominium unit was contemplated by the parties, the consideration
for which would consist of the amount of outstanding loan due to iBank from the
petitioners.
SINAMBAN v. CHINA BANKING CORPORATION (2015)
Facts: February 19, 1990, the spouses Danilo and Magdalena Manalastas
executed a Real Estate Mortgage in favor China Bank over two real estate
properties in Pampanga to secure a loan of P700K intended as working capital in
their rice milling business. During the next few years they had amendment
increasing their credit to P2,450,000 on March 23, 1994.
The spouses Manalastas executed several promissory notes in favor of China
Bank. In the two PNs petitioner spouses Sinamban signed as comakers. In 1995,
Chinabank filed a Complaint for Sum of Money against the parties. The complaint
alleged was that they reneged on their loan obligation under the PNs executed on
different dates.
All the three promissory notes carried an acceleration clause stating that if the
borrowers failed to pay any stipulated interest, installment or loan amortization
as they accrued, the notes shall, without notice be immediately due and
demandable.
On the basis on the SOA, Chinabank instituted extrajudicial foreclosure against
the mortgage security. The foreclosure sale was held on May 18, 1998 with
Chinabank as the highest bid but still with the auction there was still a loan
deficiency of P1,758,427 and prayed to direct defendants to jointly and severally
settle the said deficiency.
The Spouses Sinamban do not recall having executed promissory notes and had
no participation in execution. They however admitted that they signed some PN
forms as comakers upon requests from relatives; although they insisted that they
derived no money or other benefits from the loans.
• They denied knowing about the mortgage security provided the spouses
Manalastas and default and that they did not receive notice of foreclosure.
• The Spouses Manalastas were declared in default.
RTC. The defendants Manalastas and Sinamban are jointly and severally liable for
the deficiency. MR. They are liable for the PNs that they had signed and it would
be unfair to make them liable for the remaining amount of the deficiency.
RTC Reinstatement. This time the RTC held that the spouses Sinamban must,
solidarily with the spouses Manalastas, proportionately answer for the loan
deficiency pertaining to the two PNs they cosigned, since the mortgage security
provided by the spouses Manalastas secured all three PNs and thus also benefited
them as comakers.
But since they did not cosign PN No. OACL 634-95, the deficiency judgment
pertaining thereto will be the sole liability of the spouses Manalastas. CA affirmed
such decision of the RTC.
Are the Spouses Sinamban liable for the deficiency even though they only signed
two PNs as comakers?
Comaker of PN Binding Solidarily is Primarily Liable
A comaker of a PN who binds himself with the maker “jointly and severally”
renders himself directly and primarily liable with the maker on the debt, without
reference to his solvency.
Promissory Note is a solemn acknowledgement of a debt and a formal
commitment to repay it on the date under the conditions agreed upon by the
borrower and the lender.
A person who signs such an instrument is bound to honor it as a legitimate
obligation duly assumed by him through the signature he affixes thereto as a
token of good faith. If he reneges on his promise without cause, the forfeits the
sympathy and assistance of this Court and deserves sharp repudiation.
In the case: The three subject PNs uniformly describe the solidary nature and
extent of the obligation assumed by each of the defendants “I/We jointly and
severally”.
In this case, the spouses Sinamban expressly bound themselves to be jointly and
severally, or solidarily, liable with the principal makers of the PNs, the spouses
Manalastas
Article 1216, Chinabank Opted to Proceed Against
Co-Debtors Simultaneously on the Entire Amount
Article 1216 provides that the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected.
In the case: Each PN is simultaneously covered by the same mortgage security,
the foreclosure of which will also benefit them proportionately. No PN enjoys any
priority or preference in payment over the others, with the only difference being
that the spouses Sinamban are solidarily liable for the deficiency on two of them.
Pursuant, then, to the order or manner of application of the auction proceeds
chosen by Chinabank, the solidary liability of the defendants pertaining to each
PN on the proportion of the two signed PNs.
LIGHT RAIL TRANSIT AUTHORITY v. MENDOZA (2015)
Facts: The LRTA is a GOCC under EO 603 was mandated to entered into a ten-year
operation and management agreement with the Meralco Transit Organization
Inc. (MTOI) from June 8, 1984 to June 8, 1994 for an annual fee of P5M. Operating
expenses included all salaries and fringe benefits and top management
compensation.
On June 9, 1989 the Manila Electric Company who owned 499,990 of MTOI shares
of stocks sold such to LRTA which made it a wholly owned subsidiary of LRTA
changing its corporate name as Metro Transit Organization, Inc. (MTERO).
Renewed the O&M agreement and extended on a month to month basis.
On July 25, 2000 the Pinag-isang Lakas ng Manggagawa sa METRO, INC., the rank-
and-file union at METRO, staged an illegal strike over a bargaining deadlock,
paralyzing the operations of the light rail transport system. In July 28, 2000 the
LRTA agree to shoulder METRO’s operating expenses for two moths and updated
the Employee Retirement Fund.
Due to the strike, the LRTA no longer renewed the O&M agreement when it
expired on July 31, 2000 resulting to the cessation of METRO’s operation and the
termination of the employment of its workers which are the respondents.
• On April 2001, the METRO-BOD authorized payment of 50% of the dismissed
employee’s separation pay to be sourced from the retirement fund.
• On May 2001, the received such 50%, but demanded for the 50% balance but
rejected, prompting them to file a formal complaint to the labor arbiter.
Labor Arbiter. Labor Arbiter (LA) Arthur L. Amansec pierced the veil of METRO’s
corporate fiction, invoked the law against labor-only contracting, and declared
LRTA solidarity liable with METRO for the payment of the remaining 50% of
respondents’ separation pay. On appeal, NLRC affirmed thereby dismissing the
appeal. It also held that the case had not prescribed. LRTA moved for
reconsideration, but the NLRC denied the motion in its resolution of March 30,
2009.
CA. The CA affirmed the NLRC ruling that LRTA is solidarily liable for the remaining
50% of respondents’ separation pay, but not squarely on the same grounds.
Unlike the NLRC, it considered inapplicable the doctrine of piercing the veil of
corporate fiction to justify LRTA’s solidary liability due to the absence of fraud or
wrongdoing on LRTA’s part in relation to the nonpayment of the balance.
• It agreed with the NLRC finding that LRTA provided METRO’s “operating
expenses” which included the employees’ wages and fringe benefits, and all other
general and administrative expenses relative to the operation of the light rail
transit system.
Is the LRTA liable for the fifty percent unpaid balance of the separation pay of the
dismissed workers?
LRTA Obligated Itself to Fund Operating Expenses
Trinidad stressed that as a consequence of the nonrenewal of the O & M
agreement by LRTA, METRO was compelled to close its business operations
effective September 30, 2000. This created, Trinidad added, a legal obligation to
pay the qualified employees separation benefits under existing company policy
and collective bargaining agreements. The METRO Board of Directors approved
the payment of 50% of the employees’ separation pay because that was only what
the Employees’ Retirement Fund could accommodate.
Evidence: LRTA anticipated and prepared for the non-renewal, eventual
cessation, involuntary loss of jobs. The clear language of Resolution No. 00-44, to
our mind, established the LRTA’s obligation for the 50% unpaid balance of the
respondents’ separation pay.
LRTA is Solidarily Liable as an Indirect Employer
This liability arises from the O & M agreement it had with METRO, which created
a principal-job contractor relationship between them. Article 107 and 109 of the
Labor Code provides that an indirect employer is solidarily liable for the violations
of any provision of the Labor Code.
• The agreement was terminated not on the fault of the METRO for they had no
choice on the matter considering it was a mere subsidiary.
• There was involuntary loss of their employment.
Article 1223. Joint Indivisible Obligations
LAM v. KODAK PHILIPPINES (2016)
Facts: Lam Spouses and Kodak Philippines entered into an agreement for the sale
of three units of the Kodak Minilab System in the amount of P1,796,000 per unit.
1. Total of 19% multiple order discount
2. Order discount be applied in the form of merchandise and delivered in advance
immediately after signing.
3. No downpayment.
4. Payable in 48 monthly installments at P35K.
5. Prevailing price of P1,796,000
6. Price is subject to change without prior notice.
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab
Equipment in Tagum. stalled by Noritsu representatives on March 9, 1992.10 The
Lam Spouses issued postdated checks amounting to P35,000.00 each for 12
months as payment for the first delivered unit.
The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check
dated March 31, 1992 allegedly due to insufficiency of funds. owever, both checks
were negotiated by Kodak Philippines, Ltd. and were honored by the depository
bank.
The 10 other checks were subsequently dishonored after the Lam Spouses
ordered the depository bank to stop payment.
Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses
return the unit it delivered together with its accessories. The Lam Spouses ignored
the demand but also rescinded the contract due to failure to deliver.
• Kodak filed a complaint for replevin and or recovery of sum of money.
• Lam Spouses failed to appear during pretrial despite extensions and declared in
default, Kodak ex parte.
RTC. Kodak Philippines, Ltd. was able to obtain a writ of seizure on December 16,
1992 for the Minilab Equipment installed at the Lam Spouses’ outlet in Tagum,
Davao Province. The writ was enforced on December 21, 1992, and Kodak
Philippines, Ltd. gained possession of the Minilab Equipment unit, accessories,
and the generator set.
• CA set aside orders and ordered remanded to RTC.
RTC Remand. It found that Kodak Philippines, Ltd. defaulted in the performance
of its obligation under its Letter Agreement with the Lam Spouses. It held that
Kodak Philippines, Ltd.’s failure to deliver two (2) out of the three (3) units of the
Minilab Equipment caused the Lam Spouses to stop paying for the rest of the
installments.
• Also ruled when the Lam Spouses accepted delivery of the first unit, they
became liable for the fair value of the goods received.
• They were under obligation to pay for the amount of one unit, and the failure
to deliver the remaining units did not give them the right to suspend payment for
the unit already delivered.
Generator set was purchased it from Davao Ken Trading, not from Kodak
Philippines, Ltd. Thus, the generator set that Kodak Philippines, Ltd. wrongfully
took from the Lam Spouses should be replaced.
CA. Court of Appeals ruled that the Letter-Agreement executed by the parties
showed that their obligations were susceptible of partial performance stating
that:
• We found that the intention of the parties is to be bound separately for each
Minilab Equipment to be delivered as shown by the separate purchase price for
each of the item, by the acceptance of Sps. Lam of separate deliveries for the first
Minilab Equipment and for those of the remaining two and the separate payment
arrangements for each of the equipment.
• the contract is one that is severable in character as demonstrated by the
separate purchase price for each of the minilab equipment.
• Rescission led to mutual restitution.
Is the Agreement between the Spouses Lam and Kodak Philippine severable,
divisible and susceptible of partial performance under Article 1225?
Discussion: Spouses Lam Petitioners assert that the obligations of the parties were
not susceptible of partial performance since the Letter Agreement was for a
package deal consisting of three (3) units for the delivery were obliged to pay 48
monthly payments, the total of which constituted one debt.
Joint Indivisible Obligation, Not Only on Subject Matter
The Letter Agreement contemplated a “package deal” involving three (3) units of
the Kodak Minilab System 22XL. The intention of the parties is for there to be a
single transaction covering all three (3) units of the Minilab Equipment. remaining units, shall be equitably tempered on account of Article 1192 of the
Respondent’s obligation was to deliver all products purchased under a “package,” New Civil Code.
and, in turn, petitioners’ obligation was to pay for the total purchase price,
payable in installments. • Since there was a first infractor, the other party’s damage is equitably tempered.

The intention of the parties to bind themselves to an indivisible obligation can be

further discerned through their direct acts in relation to the package deal.

• There was only one agreement covering all three units of the Minilab Equipment
and heir accessory.

• The Letter Agreement specified only one purpose for the buyer, which was to
obtain these units for three different outlets.

• The 19% Multiple Order Discount was applied to all three acquire units.

Tenor of the Letter Agreement Must Prevail, Article 1225

Article 1225 of the Civil Code provides that even though the object or service may
be physically divisible, an obligation is indivisible if so provided by law or intended
by the parties.

In the case: There is no indication in the Letter Agreement that the units
petitioners ordered were covered by three (3) separate transactions. The factors
considered by the Court of Appeals are mere incidents of the execution of the
obligation, which is to deliver three units of the Minilab Equipment on the part of
respondent and payment for all three on the part of petitioners.

The intention to create an indivisible contract is apparent from the benefits that
the Letter Agreement afforded to both parties. Petitioners were given the 19%
discount on account of a multiple order, with the discount being equally
applicable to all units that they sought to acquire. The provision on “no
downpayment” was also applicable to all units. Respondent, in turn, was entitled
to payment of all three Minilab Equipment units, payable by installments.

Propriety and Application of Rescission

The contract between the parties is one of sale, where one party obligates himself
or herself to transfer the ownership and deliver a determinate thing, while the
other pays a certain price in money or its equivalent.

Effect of Rescission. Rescission creates the obligation to return the object of the
contract. It can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore.

To rescind is to declare a contract void at its inception and to put an end to it as

though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.

In the case: Petitioners must relinquish possession of the delivered Minilab

Equipment unit and accessories, while respondent must return the amount
tendered by petitioners as partial payment for the unit received.

On offsetting. Further, respondent cannot claim that the two (2) monthly
installments should be offset against the amount awarded by the Court of Appeals
to petitioners because the effect of rescission under Article 1191 is to bring the
parties back to their original positions before the contract was entered into.

On court intervention. Court intervention only becomes necessary when the party
who allegedly failed to comply with his or her obligation disputes the resolution
of the contract. Since both parties in this case have exercised their right to resolve
under Article 1191, there is no need for a judicial decree before the resolution
produces effects.

Damages in Case of Mutual Breach

Furthermore, the actual damages amounting to P2,040,000.00 being sought by

petitioners must be tempered on account of their own failure to pay the rest of
the installments for the delivered unit. This failure on their part is a breach of their
obligation, for which the liability of respondent, for its failure to deliver the