THIRD DIVISION FedEx claimed that Luwalhati and Eliza "ha[d] no cause of action against it because [they] failed to

comply with a condition precedent, that of filing a written notice of claim within the 45 calendar days
from the acceptance of the shipment."13 It added that it was absolved of liability as Luwalhati and Eliza
G.R. No. 199455, June 27, 2018
shipped prohibited items and misdeclared these items as "documents."14 It pointed to conditions under
its Air Waybill prohibiting the "transportation of money (including but not limited to coins or negotiable
FEDERAL EXPRESS CORPORATION, Petitioner, v. LUWALHATI R. ANTONINO AND ELIZA BETTINA RICASA instruments equivalent to cash such as endorsed stocks and bonds)."15
ANTONINO, Respondents.
In its May 8, 2008 Decision,16 the Regional Trial Court ruled for Luwalhati and Eliza, awarding them moral
DECISION and exemplary damages, and attorney's fees.17

LEONEN, J.:
The duty of common carriers to observe extraordinary diligence in shipping goods does not terminate
until delivery to the consignee or to the specific person authorized to receive the shipped goods. Failure
to deliver to the person authorized to receive the goods is tantamount to loss of the goods, thereby
engendering the common carrier's liability for loss. Ambiguities in contracts of carriage, which are
contracts of adhesion, must be interpreted against the common carrier that prepared these contracts.
The Regional Trial Court found that Luwalhati failed to accurately declare the contents of the package as
"checks."18 However, it ruled that a check is not legal tender or a "negotiable instrument equivalent to
cash," as prohibited by the Air Waybill.19 It explained that common carriers are presumed to be at fault
whenever goods are lost.20 Luwalhati testified on the non-delivery of the package. FedEx, on the other
hand, claimed that the shipment was released without the signature of the actual recipient, as
authorized by the shipper or recipient. However, it failed to show that this authorization was made; thus,
it was still liable for the loss of the package.21

This resolves a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure
praying that the assailed Court of Appeals August 31, 2011 Decision2 and November 21, 2011
Resolution3 in CA-G.R. CV No. 91216 be reversed and set aside and that Luwalhati R. Antonino
(Luwalhati) and Eliza Bettina Ricasa Antonino (Eliza) be held liable on Federal Express Corporation's
(FedEx) counterclaim.
On non-compliance with a condition precedent, it ruled that under the Air Waybill, the prescriptive
period for filing an action was "within two (2) years from the date of delivery of the shipment or from the
date on which the shipment should have been delivered."22 Luwalhati and Eliza's demand letter made on
March 11, 2004 was within the two (2)-year period sanctioned by the Air Waybill.23 The trial court also
noted that they were given a "run-around" by FedEx employees, and thus, were deemed to have
24

1
complied with the filing of the formal claim.

The assailed Court of Appeals August 31, 2011 Decision denied the appeal filed by FedEx and affirmed
the May 8, 2008 Decision4 of Branch 217, Regional Trial Court, Quezon City, awarding moral and The dispositive portion of the Regional Trial Court May 8, 2008 Decision read:
exemplary damages, and attorney's fees to Luwalhati and Eliza.5 In its assailed November 21, 2011
Resolution, the Court of Appeals denied FedEx's Motion for Reconsideration.6 WHEREFORE, judgment is hereby rendered in favor of plaintiffs Luwalhati R. Antonino and Eliza Bettina
Ricasa Antonino ordering the following:
Eliza was the owner of Unit 22-A (the Unit) in Allegro Condominium, located at 62 West 62nd St., New
7
York, United States. In November 2003, monthly common charges on the Unit became due. These 1) The amount of P200,000.00 by way of moral damages;
charges were for the period of July 2003 to November 2003, and were for a total amount of 2) The amount of P100,000.00 by way of exemplary damages; and
US$9,742.81.8 [3]) The amount of P150,000.00 as and for attorney's fees. Costs against defendant.

On December 15, 2003, Luwalhati and Eliza were in the Philippines. As the monthly common charges on
the Unit had become due, they decided to send several Citibank checks to Veronica Z. Sison (Sison), who
was based in New York. Citibank checks allegedly amounting to US$17,726.18 for the payment of
monthly charges and US$11,619.35 for the payment of real estate taxes were sent by Luwalhati through
FedEx with Account No. x2546-4948-1 and Tracking No. 8442 4588 4268. The package was addressed to
Sison who was tasked to deliver the checks payable to Maxwell-Kates, Inc. and to the New York County
Department of Finance. Sison allegedly did not receive the package, resulting in the non-payment of
Luwalhati and Eliza's obligations and the foreclosure of the Unit.9
Upon learning that the checks were sent on December 15, 2003, Sison contacted FedEx on February 9,
2004 to inquire about the non-delivery. She was informed that the package was delivered to her
neighbor but there was no signed receipt.10
On March 14, 2004, Luwalhati and Eliza, through their counsel, sent a demand letter to FedEx for
payment of damages due to the non-delivery of the package, but FedEx refused to heed their
demand.11 Hence, on April 5, 2004, they filed their Complaint12 for damages.
The counterclaim is ordered dismissed.
SO ORDERED.25
In its assailed August 31, 2011 Decision,26 the Court of Appeals affirmed the ruling of the Regional Trial
Court.27 According to it, by accepting the package despite its supposed defect, FedEx was deemed to
have acquiesced to the transaction. Thus, it must deliver the package in good condition and could not
subsequently deny liability for loss.28 The Court of Appeals sustained the Regional Trial Court's conclusion
that checks are not legal tender, and thus, not covered by the Air Waybill's prohibition.29 It further noted
that an Air Waybill is a contract of adhesion and should be construed against the party that drafted it.30
The dispositive portion of the Court of Appeals August 31, 2011 Decision read:
WHEREFORE, premises considered, the present appeal is hereby DENIED. The assailed May 08, 2008
Decision of the Regional Trial Court, Branch 217, Quezon City in Civil case No. Q-04-52325 is AFFIRMED.
Costs against the herein appellant.
 31
SO ORDERED.
Following the Court of Appeals' denial32 of its Motion for Reconsideration, FedEx filed the present
Petition.
For resolution of this Court is the sole issue of whether or not petitioner Federal Express Corporation
may be held liable for damages on account of its failure to deliver the checks shipped by respondents
Luwalhati R. Antonino and Eliza Bettina Ricasa Antonino to the consignee Veronica Sison.
I
Petitioner disclaims liability because of respondents' failure to comply with a condition precedent, that
is, the filing of a written notice of a claim for non-delivery or misdelivery within 45 days from acceptance
of the shipment.33 The Regional Trial Court found the condition precedent to have been substantially
complied with and attributed respondents' noncompliance to FedEx for giving them a run-around.34 This
Court affirms this finding.
A provision in a contract of carriage requiring the filing of a formal claim within a specified period is a
valid stipulation. Jurisprudence maintains that compliance with this provision is a legitimate condition
precedent to an action for damages arising from loss of the shipment:
More particularly, where the contract of shipment contains a reasonable requirement of giving notice of
loss of or injury to the goods, the giving of such notice is a condition precedent to the action for loss or
injury or the right to enforce the carrier's liability. Such requirement is not an empty formalism. The
fundamental reason or purpose of such a stipulation is not to relieve the carrier from just liability, but
reasonably to inform it that the shipment has been damaged and that it is charged with liability therefor,
and to give it an opportunity to examine the nature and extent of the injury. This protects the carrier by
affording it an opportunity to make an investigation of a claim while the matter is fresh and easily
investigated so as to safeguard itself from false and fraudulent claims.35 (Citation omitted)
Petitioner's Air Waybill stipulates the following on filing of claims:
Claims for Loss, Damage, or Delay. All claims must be made in writing and within strict time limits. See
any applicable tariff, our service guide or our standard conditions for carriage for details.
The right to damages against us shall be extinguished unless an action is brought within two (2) years
from the date of delivery of the shipment or from the date on which the shipment should have been
delivered.
Within forty-five (45) days after notification of the claim, it must be documented by sending to us [all
the] relevant information about it.36
For their claim to prosper, respondents must, thus, surpass two (2) hurdles: first, the filing of their formal
claim within 45 days; and second, the subsequent filing of the action within two (2) years.
There is no dispute on respondents' compliance with the second period as their Complaint was filed on
April 5, 2004.37
In appraising respondents' compliance with the first condition, this Court is guided by settled standards
in jurisprudence.
In Philippine Airlines, Inc. v. Court of Appeals,38 Philippine Airlines alleged that shipper Gilda Mejia (Mejia)
failed to file a formal claim within the period stated in the Air Waybill.39 This Court ruled that there was
substantial compliance with the period because of the zealous efforts demonstrated by Mejia in
following up her claim.40 These efforts coupled with Philippine Airlines' "tossing around the claim and
leaving it unresolved for an indefinite period of time" led this Court to deem the requisite period
satisfied.41 This is pursuant to Article 1186 of the New Civil Code which provides that "[t]he condition
shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment":42
Considering the abovementioned incident and private respondent Mejia's own zealous efforts in
following up the claim, it was clearly not her fault that the letter of demand for damages could only be
filed, after months of exasperating follow-up of the claim, on August 13, 1990. If there was any failure at
all to file the formal claim within the prescriptive period contemplated in the air waybill, this was largely
because of PAL's own doing, the consequences of which cannot, in all fairness, be attributed to private
respondent.
Even if the claim for damages was conditioned on the timely filing of a formal claim, 'under Article 1186
of the Civil Code that condition was deemed fulfilled, considering that the collective action of PAL's
personnel in tossing around the claim and leaving it unresolved for an indefinite period of time was
tantamount to "voluntarily preventing its fulfillment." On grounds of equity, the filing of the baggage
freight claim, which sufficiently informed PAL of the damage sustained by private respondent's cargo,
2
constituted substantial compliance with the requirement in the contract for the filing of a formal
claim.43 (Citations omitted)
Here, the Court of Appeals detailed the efforts made by respondent Luwalhati and consignee Sison. It
also noted petitioner's ambiguous and evasive responses, nonchalant handling of respondents' concerns,
and how these bogged down respondents' actions and impaired their compliance with the required 45-
day period:
Anent the issues concerning lack of cause of action and their so-called "run-around" matter, We uphold
the lower court's finding that the herein appellees complied with the requirement for the immediate
filing of a formal claim for damages as required in the Air Waybill or, at least, We find that there was
substantial compliance therewith. Luwalhati testified that the addressee, Veronica Z. Sison promptly
traced the whereabouts of the said package, but to no avail. Her testimony narrated what happened
thereafter, thus:
". . .
"COURT: All right. She was informed that it was lost. What steps did you take to find out or to
recover back this package?
"ATTY. ALENTAJAN:
"Q What did you do to Fedex?
". . .
WITNESS: First, I asked the secretary here to call Fedex Manila and they said, the record show that it "Q On your part here in the Philippines after doing that, after instructing Veronica Sison, what
was sent to New York, Your Honor. else did you do because of this violation?

". . .
"A I think the next step was to issue a demand letter because any way I do not want to go to
ATTY. ALENTAJAN: Court, it is so hard, Sir."

"Q After calling Fedex, what did Fedex do?

"A None, sir. They washed their hands because according to them it is New York because they
have sent it. Their records show that New York received it, Sir.
The foregoing event show Luwalhati's own ardent campaign in following up the claim. To the Court's
mind, it is beyond her control why the demand letter for damages was only sent subsequent to her
infuriating follow-ups regarding the whereabouts of the said package. We can surmise that if there was
any omission at all to file the said claim within the prescriptive period provided for under the Air Waybill
it was mostly due to herein appellant's own behavior, the outcome thereof cannot, by any chance, be
imputed to the herein appellees.44 (Grammatical errors in the original)

Petitioner has been unable to persuasively refute Luwalhati's recollection of the efforts that she and
"Q New York Fedex? Sison exerted, and of the responses it gave them. It instead insists that the 45-day period stated in its Air
Waybill is sacrosanct. This Court is unable to bring itself to sustaining petitioner's appeal to a convenient
reprieve. It is one with the Regional Trial Court and the Court of Appeals in stressing that respondents'
inability to expediently file a formal claim can only be attributed to petitioner hampering its fulfillment.

3
Thus, respondents must be deemed to have substantially complied with the requisite 45-day period for
"A Yes, Sir.
filing a formal claim.

II
"Q Now what else did you do after that?
The Civil Code mandates common carriers to observe extraordinary diligence in caring for the goods they
are transporting:

"A And then I asked my friend Mrs. Veronica Sison to trace it, Sir. Article 1733. Common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances of each case.

". . . "Extraordinary diligence is that extreme measure of care and caution which persons of unusual prudence
and circumspection use for securing and preserving their own property or rights."45 Consistent with the
mandate of extraordinary diligence, the Civil Code stipulates that in case of loss or damage to goods,
common carriers are presumed to be negligent or at fault,46 except in the following instances:
"Q What did she report to you?

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

"A She reported to me that first, she checked with the Fedex and the first answer was they (2) Act of the public enemy in war, whether international or civil;
were going to trace it. The second answer was that, it was delivered to the lady, her
neighbor and the neighbor completely denied it and as they show a signature that is not my (3) Act or omission of the shipper or owner of the goods;
signature, so the next time she called again, another person answered. She called to say
that the neighbor did not receive and the person on the other line I think she got his name, (4) The character of the goods or defects in the packing or in the containers;
said that, it is because it is December and we usually do that just leave it and then they cut
the line and so I asked my friend to issue a sworn statement in the form of affidavit and
(5) Order or act or competent public authority.47
have it notarized in the Philippine Embassy or Consulate, Sir. That is what she did.

In all other cases, common carriers must prove that they exercised extraordinary diligence in the
performance of their duties, if they are to be absolved of liability.48
The responsibility of common carriers to exercise extraordinary diligence lasts from the time the goods
are unconditionally placed in their possession until they are delivered "to the consignee, or to the person
who has a right to receive them."49 Thus, part of the extraordinary responsibility of common carriers is
the duty to ensure that shipments are received by none but "the person who has a right to receive
them."50 Common carriers must ascertain the identity of the recipient. Failing to deliver shipment to the
designated recipient amounts to a failure to deliver. The shipment shall then be considered lost, and
liability for this loss ensues.
Petitioner is unable to prove that it exercised extraordinary diligence in ensuring delivery of the package
to its designated consignee. It claims to have made a delivery but it even admits that it was not to the
designated consignee. It asserts instead that it was authorized to release the package without the
signature of the designated recipient and that the neighbor of the consignee, one identified only as
"LGAA 385507," received it.51 This fails to impress.
The assertion that receipt was made by "LGAA 385507" amounts to little, if any, value in proving
petitioner's successful discharge of its duty. "LGAA 385507" is nothing but an alphanumeric code that
outside of petitioner's personnel and internal systems signifies nothing. This code does not represent a
definite, readily identifiable person, contrary to how commonly accepted identifiers, such as numbers
attached to official, public, or professional identifications like social security numbers and professional
license numbers, function. Reliance on this code is tantamount to reliance on nothing more than
petitioner's bare, self-serving allegations. Certainly, this cannot satisfy the requisite of extraordinary
diligence consummated through delivery to none but "the person who has a right to receive"52 the
package.
Given the circumstances in this case, the more reasonable conclusion is that the package was not
delivered. The package shipped by respondents should then be considered lost, thereby engendering the
liability of a common carrier for this loss.
Petitioner cannot but be liable for this loss. It failed to ensure that the package was delivered to the
named consignee. It admitted to delivering to a mere neighbor. Even as it claimed this, it failed to
identify that neighbor.
III
Petitioner further asserts that respondents violated the terms of the Air Waybill by shipping checks. It
53
adds that this violation exempts it from liability.
This is untenable.
Petitioner's International Air Waybill states:
Items Not Acceptable for Transportation. We do not accept transportation of money (including but not
limited to coins or negotiable instruments equivalent to cash such as endorsed stocks and bonds). We
exclude all liability for shipments of such items accepted by mistake. Other items may be accepted for
carriage only to limited destinations or under restricted conditions. We reserve the right to reject
packages based upon these limitations or for reasons of safety or security. You may consult our Service
54
Guide, Standard Conditions of Carriage, or any applicable tariff for specific details. (Emphasis in the
original)
The prohibition has a singular object: money. What follows the phrase "transportation of money" is a
phrase enclosed in parentheses, and commencing with the words "including but not limited to." The
additional phrase, enclosed as it is in parentheses, is not the object of the prohibition, but merely a
postscript to the word "money." Moreover, its introductory words "including but not limited to" signify
that the items that follow are illustrative examples; they are not qualifiers that are integral to or
inseverable from "money." Despite the utterance of the enclosed phrase, the singular prohibition
remains: money.
Money is "what is generally acceptable in exchange for goods."55 It can take many forms, most
commonly as coins and banknotes. Despite its myriad forms, its key element is its general
acceptability.56 Laws usually define what can be considered as a generally acceptable medium of
exchange.57 In the Philippines, Republic Act No. 7653, otherwise known as The New Central Bank Act,
defines "legal tender" as follows:
All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the
Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and
private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal
tender in amounts not exceeding Fifty pesos (P50.00) for denomination of Twenty-five centavos and
above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or
less.58
4
It is settled in jurisprudence that checks, being only negotiable instruments, are only substitutes for
money and are not legal tender; more so when the check has a named payee and is not payable to
bearer. In Philippine Airlines, Inc. v. Court of Appeals,59 this Court ruled that the payment of a check to
the sheriff did not satisfy the judgment debt as checks are not considered legal tender. This has been
maintained in other cases decided by this Court. In Cebu International Finance Corporation v. Court of
Appeals,60 this Court held that the debts paid in a money market transaction through the use of a check
is not a valid tender of payment as a check is not legal tender in the Philippines. Further, in Bank of the
61
Philippine Islands v. Court of Appeals, this Court held that "a check, whether a manager's check or
62
ordinary check, is not legal tender."
The Air Waybill's prohibition mentions "negotiable instruments" only in the course of making an
example. Thus, they are not prohibited items themselves. Moreover, the illustrative example does not
even pertain to negotiable instruments per se but to "negotiable instruments equivalent to cash."63
The checks involved here are payable to specific payees, Maxwell-Kates, Inc. and the New York County
Department of Finance.64 Thus, they are order instruments. They are not payable to their bearer,
i.e., bearer instruments. Order instruments differ from bearer instruments in their manner of
negotiation:
Under Section 30 of the [Negotiable Instruments Law], an order instrument requires an indorsement
from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand,
does not require an indorsement to be validly negotiated.65
There is no question that checks, whether payable to order or to bearer, so long as they comply with the
requirements under Section 1 of the Negotiable Instruments Law, are negotiable instruments. 66 The
more relevant consideration is whether checks with a specified payee are negotiable instruments
equivalent to cash, as contemplated in the example added to the Air Waybill's prohibition.
This Court thinks not. An order instrument, which has to be endorsed by the payee before it may be
negotiated,67 cannot be a negotiable instrument equivalent to cash. It is worth emphasizing that the
instruments given as further examples under the Air Waybill must be endorsed to be considered
equivalent to cash:68
Items Not Acceptable for Transportation. We do not accept transportation of money (including but not
limited to coins or negotiable instruments equivalent to cash such as endorsed stocks and bonds). ...
(Emphasis in the original)69
What this Court's protracted discussion reveals is that petitioner's Air Waybill lends itself to a great deal
of confusion. The clarity of its terms leaves much to be desired. This lack of clarity can only militate
against petitioner's cause.
The contract between petitioner and respondents is a contract of adhesion; it was prepared solely by
petitioner for respondents to conform to.70 Although not automatically void, any ambiguity in a contract
71
of adhesion is construed strictly against the party that prepared it. Accordingly, the prohibition against
transporting money must be restrictively construed against petitioner and liberally for respondents.
Viewed through this lens, with greater reason should respondents be exculpated from liability for
shipping documents or instruments, which are reasonably understood as not being money, and for being
unable to declare them as such.
Ultimately, in shipping checks, respondents were not violating petitioner's Air Waybill. From this, it
follows that they committed no breach of warranty that would absolve petitioner of liability.
WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed August 31, 2011 Decision and
November 21, 2011 Resolution of the Court of Appeals in CA-G.R. CV No. 91216 are AFFIRMED.
SO ORDERED.
THIRD DIVISION
G.R. No. 195999, June 20, 2018
LILY S. VILLAMIL, SUBSTITUTED BY HER HEIRS RUDY E. VILLAMIL, SOLOMON E. VILLAMIL, TEDDY E.
VILLAMIL, JR., DEBORAH E. VILLAMIL, FLORENCE E. VILLAMIL, GENEVIEVE E. VILLAMIL, AND MARC
ANTHONY E. VILLAMIL, Petitioner, v. SPOUSES JUANITO ERGUIZA AND MILA ERGUIZA, Respondents.
DECISION
MARTIRES, J.:
This is a petition for review on certiorari seeking to reverse and set aside the Decision,1 dated 29 June
2010, and Resolution,2 dated 2 February 2011, of the Court of Appeals (CA) in CA-G.R. SP No. 109813
3
which nullified the Decision, dated 2 October 2008, of the Regional Trial Court, Dagupan City, Branch 44
(RTC), in Civil Case No. 2007-0014-D, an action for recovery of possession.
THE FACTS
On 6 February 2003, petitioner Lily Villamil (petitioner) filed a Complaint4 for recovery of possession and
damages against respondent-spouses Juanito and Mila Erguiza (respondent-spouses) before the
Municipal Trial Court in Cities (MTCC) of Dagupan City. The complaint alleges, among others, the
following:
5
xxxx
2. Plaintiff is the absolute and exclusive owner of that certain parcel ofland more particularly described
as follows:
''A parcel of land (Lot 3371-C) of the subdivision plan (LRC) Psd-111002, being a portion of Lot 3371
Dagupan Cadastre, LRC Cad. Record No. 925, situated in the District of Pantal, City of Dagupan, Island of
Luzon, x x x containing an area or one hundred ninety-one (191) square meters, more or less. Covered by
Transfer Certificate Title No. 31225 with assessed value of P2,290.00 under Tax Declaration No. 221092."
A copy of Transfer Certificate of Title No. 31225 and Tax Declaration No. 221092 are hereto attached and
marked as Annexes "A" and "B," respectively;
3. Previously, said parcel of land was covered by Transfer Certificate of Title No. 23988 registered under
the names of plaintiff Corazon Villamil, Efren Villamil, Teddy Villamil, Florencio Villamil, Rodrigo Villamil,
Nicasio Villamil, John Villamil, Marcelina Villamil and Feliciano Villamil, all related. Copy of Transfer
Certificate of title No. 23988 is hereto attached as Annex "C";
4. On 20 September 1972, plaintiff together with her deceased sister, Corazon Villamil, and deceased
brother, Teddy Villamil, entered into an agreement with Juanito Erguiza for the purpose of selling the
above-described property to the latter subject to the condition that plaintiff and her siblings would file a
petition to secure authorization for minor children from the proper courts. Likewise, that in case of
failure of the plaintiff and her siblings to obtain said authority, the partial payment made by the
defendant Juanito Erguiza shall be applied as rent for twenty (20) years of the premises. A copy of the
agreement is hereto attached as Annex "D";
5. During the course of time, TCT No. 23988 was cancelled and TCT No. 30049 was issued by virtue of a
quitclaim executed by Corazon Villamil and her children in favor of the plaintiff. Likewise, TCT No. 30049
was cancelled and TCT No. 31125 (Annex "A") was issued by virtue of a Deed of Sale executed by Efren
Villamil and Teddy Villamil in favor of the plaintiff. Copies of TCT No. 30049 are hereto attached and
marked as Annex "E";
6. Plaintiff has been paying religiously the real estate taxes due on said property;
7. Sometime in 1992 or after the lapse of twenty (20) years and the expiration of the twenty (20) years
lease, plaintiff demanded from the defendants to return possession of the property but the latter failed
and refused, and still fails (sic) and refuses (sic) to return possession of the property to the damage and
prejudice of the plaintiff;
8. The continued occupation by the defendants of the property is by mere tolerance of the plaintiff and
has been staying thereon without paying any rent to the plaintiff;
9. On 7 January 2002, plaintiff again demanded from the defendant[s] to return the possession of the
property by way of a formal letter dated December 18, 2001 which was received by the defendant[s] on
January 11, 2002. Notwithstanding receipt of said letter, defendants just ignored the valid pleas of the
plaintiff; Annex "F";
10. A period of thirty (30) [days] had lapsed without the said agreement having been enforced, hence,
the defendants have lost whatever rights they have under said agreement;
11. The matter was brought to the Office of the Barangay of Pantal District but no conciliation or
settlement was reached between the parties hence, a certification to file action was issued by said office.
A copy of the certification is hereto attached as Annex "G";
x x x x5
The Agreement, which petitioner and respondent-spouses entered into in the sale and purchase of the
subject property, states:
KNOW ALL MEN BY THESE PRESENTS:
That we, CORAZON G. VILLAMIL, widow, LILY VILLAMIL, married and TEDDY S. VILLAMIL, married, all of
legal ages, Filipinos and residents of Dagupan City, Philippines, for and in consideration of the sum two
thousand six hundred fifty seven pesos (P2,657.00), Philippine currency, to us in hand paid and a receipt
of which is hereby acknowledged of JUANITO ERGUIZA, married, of legal age, Filipino and a resident of
Dagupan City, Philippines, BY THESE PRESENTS do hereby promise to sell absolutely unto the said Juanito
Erguiza, his heirs or assigns, a parcel of land covered [by] Transfer Certificate of Title No. 23988 of the
land records of Dagupan City, identified as Lot No. 2371, under the following terms and conditions:
1. That the total purchase price of the said land is FIVE THOUSAND ONE HUNDRED
FIFTY SEVEN PESOS P5,157.00. Because of us receiving today the sum of two
thousand six hundred and fifty seven pesos (P2,657.00), there is still a balance of
two thousand five hundred pesos (P2,500.00);
2. That because there is still lacking document or that court approval of the sale of
the shares of the minor-owners of parts of this land, the final deed of absolute sale
be made and executed upon issuance by the competent court; that the balance of
P2,500.00 will also be given in this stage of execution of this document;
3. In the event however that the petition for the sale of the shares of the minor-
owners of the parts of this land is [disapproved] by the court, the amount of
P2,657.00 be considered as lease of the land subject matwr of this contract for a
duration of twenty (20) years.
WITNESS OUR HANDS THIS 29th of September 1972 at Dagupan City, Philippines.6
On 26 May 2003, respondent-spouses filed their Answer,7 which effectively denied the material
allegations in petitioner's complaint and by way of special and affirmative defenses, aver that:
xxxx
5. That plaintiff has no cause of action.
6. The agreement between the co-heirs of plaintiff and defendants is for the sale on condition of the
subject property. A sale even if conditional transfers ownership to the vendees. And before plaintiff
could claim any right, there are certain proceedings which must first be complied [with]. Defendants did
not violate any of the terms and conditions contained in the agreement to which plaintiff is trying to
base her cause of action. It was plaintiff who made sure that the condition contained under the contract
6
to sell will not be complied with. She caused the execution of documents to violate such rights and it was
only now that defendants learned of the same;
7. That defendants never received a letter coming from the plaintiff regarding the subject property. As a
matter of fact, defendants are trying to enforce the agreement although the conditions contained
therein will be left to the sole will of the vendors:
8. That granting arguendo that the plaintiff has the right to damages, such could only be in the form of
accrued rentals. x x x8
On 14 October 2004, the MTCC dismissed the complaint on the ground that the cause of action thereof
was one for the interpretation of the agreement and the determination of the parties' respective rights.
It reasoned that such action was incapable of pecuniary estimation and, therefore, jurisdiction lies with
the RTC.9
On appeal, the RTC reversed the decision of the MTCC on the ground that the cause of action was one
for recovery of possession of real property. Considering that the assessed value of the subject property is
P2,290.00, the MTCC has original and exclusive jurisdiction over the case. Thus, the case was remanded
to the MTCC.10
The MTCC Ruling
11
In its decision, dated 15 November 2006, the MTCC ruled in favor of petitioner. It gave credence to
petitioner's claim that she communicated to respondent-spouses the fact of consolidation of ownership
in her name. The MTCC held that being an interested party in the collection of the remaining balance,
petitioner would naturally have made respondent-spouses aware of the consolidation of ownership over
the subject property. It declared that it was unbelievable that respondent-spouses did not exert any
effort to inquire from petitioner about the status of their agreement. The MTCC concluded that
respondent-spouses had no intention to pay the balance of the purchase price and that they had
become lessees of the subject property for twenty (20) years with their down payment being treated as
rentals. It ruled that after the lapse of the said period, respondent-spouses were bound to leave the
premises. The fallo reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff as follows:
1. Ordering the defendants, their assigns, agents or other persons acting for
themselves, to vacate the premises in question and to restore possession thereof
to the plaintiff;
2. Ordering the defendants to pay the plaintiff jointly and severally, the amount of
P500.00 a month from date of demand which was on December 18, 2001, until
they finally vacate the premises, as reasonable compensation for the use and
occupation of the same;
3. Ordering the defendants to pay the plaintiff, jointly and severally, the amount of
P5,000.00 as attorney's fees and to pay the costs of suit.
SO ORDERED.12
Aggrieved, respondent-spouses elevated an appeal to the RTC.
The RTC Ruling
In its decision, the RTC affirmed the ruling of the MTCC. It opined that the condition with respect to
judicial approval of the sale had become irrelevant when ownership over the subject property was
consolidated in favor of petitioner in 1973; thus, at that time, respondent-spouses were bound to
comply with their undertaking to pay the balance of the purchase price which they failed to do. The
dispositive portion states:
WHEREFORE, judgment is hereby rendered AFFIRMING the appealed decision with modification deleting
the award of attorney's fees.
SO ORDERED.13
Unconvinced, respondent-spouses moved for reconsideration. However, in a Resolution,14 dated 18 May
2009, the RTC denied the motion for lack of notice of hearing.
The CA Ruling
In its decision, the CA reversed and set aside the decision of the RTC. As to the procedural aspect, it
observed that despite omission of the name of petitioner's counsel in the notice of hearing, petitioner
appeared at the scheduled hearing and even filed her opposition to respondent-spouses' motion for
reconsideration. The CA declared that the right of respondent-spouses to appeal should not be curtailed
by the mere expediency of holding that there was lack of notice of hearing since the objective of Sections
4, 5, and 7 under Rule 15 of the Rules of Court to allow the adverse party the opportunity to oppose the
motion has been clearly met in this case.
With respect to the substantive issue, the appellate court declared that the agreement between the
parties was a contract to sell involving the subject property because the vendors reserved ownership and
it was subject to a suspensive condition, i.e., submission of the sellers of lacking documents or court
approval of the sale of the shares of the minor owners.
The CA did not acquiesce with the trial court's reasoning that respondent-spouses were already notified
of the transfer of title in petitioner's name because such alleged notice was not supported by any
evidence on record. It lends credence to respondent-spouses' evidence that they came to know of the
fact that petitioner "was already the registered owner of the subject property when a written demand
letter was sent to them by the former on 18 December 2001. The CA opined that respondent-spouses'
passive and complacent position in not asserting from the sellers what was incumbent under the subject
agreement should not be taken against the former. It stressed that the obligation to secure the
necessary documents or approval of the court for the minor children to be represented in the Deed of
Absolute Sale, was incumbent upon the sellers.
While the appellate court agreed with the lower courts' disquisition that the court's approval for the
minor children to be represented in the sale would no longer be necessary as the ownership and title in
the subject property were already consolidated to petitioner, it ruled that the same would not operate
like a magic wand to automatically make respondent-spouses perform what was required of them in the
subject agreement. On the contrary, the sellers had the positive duty to make known to the buyers that
they were ready to comply with what was mandated upon them, which act petitioner failed to prove by
any evidence. Thus, the CA concluded that respondent-spouses had more right to possess the subject
property pending consummation of the agreement or any outcome thereof. The CA disposed of the case
in this wise:
WHEREFORE, in consideration of the foregoing premises, the instant petition is perforce GRANTED. 7
Accordingly, the Decision dated October 02, 2008 and Resolution dated May 18, 2009 are
perforce reversed and set aside. Thus, petitioners Erguiza shall remain in actual and peaceful possession
of the subject property.
No pronouncement as to costs.
SO ORDERED.15
Petitioner moved for reconsideration but the CA denied the same in its 2 February 2011 resolution.
Hence, this petition.
ISSUES
Petitioner submits the following assignment of errors:
I.
WHETHER OR NOT THE 2 OCTOBER 2008 DECISION OF RTC, BRANCH 44, AFFIRMING THE DECISION OF
MTCC, BRANCH 3, DATED 15 NOVEMBER 2006 HAS BECOME FINAL AND EXECUTORY AFTER
RESPONDENTS FILED A DEFECTIVE MOTION FOR RECONSIDERATION WHICH DID NOT TOLL THE
RUNNING OF THE REGLEMENTARY PERIOD TO FILE A PETITION FOR REVIEW; AND WHETHER THE
COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR IN EXCESS
OF JURISDICTION WHEN IT GAVE DUE COURSE TO THE PETITION.
II.
WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR IN EXCESS OF JURISDICTION WHEN IT REVERSED THE DECISION OF RTC, BRANCH 44,
AFFIRMING THE DECISION OF MTCC, BRANCH 3, WHICH RULED THAT PETITIONER HAD A BETTER RIGHT
TO POSSESS THE PROPERTY AFTER PETITIONERS FAILED TO PAY THE BALANCE OF THE PURCHASE PRICE
AND THE SECOND CONDITION HAD SET IN, THAT IS, THE DOWN PAYMENT WAS APPLIED AS RENTALS
FOR TWENTY (20) YEARS FROM 1972 TO 1992.16
Petitioner argues: that the RTC decision has actually become final and executory after respondent-
spouses filed a defective motion for reconsideration which did not toll the running of the reglementary
period to appeal the decision before the CA; that the motion for reconsideration was a mere scrap of
paper as it did not contain notice of the time and place of hearing; that respondent-spouses knew that
petitioner was the owner of the subject property because they sought her permission to build their
house thereon; and that it is contrary to human experience that, being interested persons, respondent-
spouses would not inquire about the status of the subject property.17
In their Comment,18 respondent-spouses contend that they complied with the provision of the Rules of
Court as regards notice of hearing such that on the day the motion for reconsideration was to be heard,
petitioner was present and she even filed her opposition to the motion; that while the notice of hearing
was only addressed to the Branch Clerk of Court, petitioner was furnished with a copy of the motion for
reconsideration; that petitioner and her siblings did not take steps to fulfil the suspensive condition; that
they made an illegal act of transferring the share of the minors in the name of petitioner; that petitioner
only informed them of the consolidation of ownership when they received a demand letter on 18
December 2001 and when they were summoned to appear before the office of the Barangay Captain
sometime in April 2002; and that if petitioner had the slightest intention of informing them of her
ownership of the subject property and for them to pay the remaining balance, she should have done so
immediately upon the transfer of the title in her name.
In her Reply,19 petitioner avers that upon seeing the minor owners reach the age of majority, it would be
logical for respondent-spouses to follow up with her and her co-owners since court approval was no
longer necessary; that notwithstanding this information, respondent-spouses did not pay the balance of
the consideration; and that being an interested party in the collection of the remaining balance, it is
more in accord with human experience that she would have informed respondent-spouses about the
consolidation of ownership in her name.
THE COURT'S RULING
Petitioner had the opportunity to be heard despite the lack of notice of hearing.
Sections 4 and 5, Rule 15 of the Rules of Court provide that:
Sec. 4. Hearing of motion. - Except for motions which the court may act upon without prejudicing the
rights of the adverse party, every written motion shall be set for hearing by the applicant.
Every written motion required to be heard and the notice of the hearing thereof shall be served in such a
manner as to ensure its receipt by the other party at least three (3) days before the date of hearing,
unless the court for good cause sets the hearing on shorter notice.
Sec. 5. Notice of hearing. The notice of hearing shall be addressed to all parties concerned, and shall
specify the time and date of the hearing which must not be later than ten (10) days after the filing of the
motion.
The general rule is that the three-day notice requirement in motions under Sections 4 and 5 of the Rules
of Court is mandatory. It is an integral component of procedural due process. 20 "The purpose of the
three-day notice requirement, which was established not for the benefit of the movant but rather for the
adverse party, is to avoid surprises upon the latter and to grant it sufficient time to study the motion and
to enable it to meet the arguments interposed therein."21
"A motion that does not comply with the requirements of Sections 4 and 5 of Rule 15 of the Rules of
Court is a worthless piece of paper which the clerk of court has no right to receive and which the court
has no authority to act upon."22 "Being a fatal defect, in cases of motions to reconsider a decision, the
running of the period to appeal is not tolled by their filing or pendency."23
Nevertheless, the three-day notice requirement is not a hard and fast rule. When the adverse party had
been afforded the opportunity to be heard, and has been indeed heard through the pleadings filed in
opposition to the motion, the purpose behind the three-day notice requirement is deemed served. In
such case, the requirements of procedural due process are substantially complied with. Thus, in Preysler,
Jr. v. Manila Southcoast Development Corporation,24 the Court ruled that:
The three-day notice rule is not absolute. A liberal construction of the procedural rules is proper where
the lapse in the literal observance of a rule of procedure has not prejudiced the adverse party and has
8
not deprived the court of its authority. Indeed, Section 6, Rule I of the Rules of Court provides that the
Rules should be liberally construed in order to promote their objective of securing a just, speedy and
inexpensive disposition of every action and proceeding. Rules of procedure are tools designed to
facilitate the attainment of justice, and courts must avoid their strict and rigid application which would
result in technicalities that tend to frustrate rather than promote substantial justice.25
Likewise, in Jehan Shipping Corporation v. National Food Authority,26 the Court held that despite the lack
of notice of hearing in a motion for reconsideration, there was substantial compliance with the
requirements of due process where the adverse party actually had the opportunity to be heard and had
filed pleadings in opposition to the motion. The Court declared:
This Court has indeed held time and again, that under Sections 4 and 5 of Rule 15 of the Rules of Court,
mandatory is the notice requirement in a motion, which is rendered defective by failure to comply with
the requirement. As a rule, a motion without a notice of hearing is considered pro forma and does not
affect the reglementary period for the appeal or the filing of the requisite pleading.
As an integral component of procedural due process, the three-day notice required by the Rules is not
intended for the benefit of the movant. Rather, the requirement is for the purpose of avoiding surprises
that may be sprung upon the adverse party, who must be given time to study and meet the arguments in
the motion before a resolution by the court. Principles of natural justice demand that the right of a party
should not be affected without giving it an opportunity to be heard.
The test is the presence of opportunity to be heard, as well as to have time to study the motion and
meaningfully oppose or controvert the grounds upon which it is based. x x x27
A perusal of the records reveals that the trial court gave petitioner ten days within which to comment on
private respondents' motion for reconsideration.28 Petitioner filed its Opposition the Motion on 7
January 2009, and in fact, filed a Motion for Entry of Judgment.29 Thus, it cannot be gainsaid that
petitioner was not given her day in court as she in fact contested private respondents' motion for ownership is retained by the prospective seller without further remedies by the prospective buyer.
reconsideration. While it is true that the name of petitioner's counsel was not indicated in the notice of In Roque vs. Lapuz, this Court had occasion to rule:
hearing, nonetheless, she was furnished a copy thereof which she received before the date of the
scheduled hearing. The requirement of notice of time and hearing in the pleading filed by a party is
Hence, We hold that the contract between the petitioner and the respondent was a contract to sell
necessary only to apprise the other party of the actions of the former.30 Under the circumstances of the
where the ownership or title is retained by the seller and is not to pass until the full payment of the
present case, the purpose of a notice of hearing was served. Hence, the Court finds no reversible error
price, such payment being a positive suspensive condition and failure of which is not a breach, casual or
committed by the CA in ruling that the motion for reconsideration was not pro forma.
serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring
binding force.
Parties entered into a contract to sell
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the
A contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly purchase price, the prospective seller's obligation to sell the subject property by entering into a contract
reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds of sale with the prospective buyer becomes demandable as provided in Article 1479 of the Civil Code
himself to sell the said property exclusively to the latter upon his fulfillment of the conditions agreed which states:
upon, i.e., the full payment of the purchase price and/or compliance with the other obligations stated in
the contract to sell. Given its contingent nature, the failure of the prospective buyer to make full
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
payment and/or abide by his commitments stated in the contract to sell prevents the obligation of the
prospective seller to execute the corresponding deed of sale to effect the transfer of ownership to the
buyer from arising.31 A contract to sell is akin to a conditional sale where the efficacy or obligatory force An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon
of the vendor's obligation to transfer title is subordinated to the happening of a future and uncertain the promisor if the promise is supported by a consideration distinct from the price.36
event, so that if the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.32 In a contract to sell, the fulfillment of the suspensive In this case, the parties entered into an agreement with the following terms and conditions:
condition will not automatically transfer ownership to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale.33 On the other hand, in a conditional contract of sale, the KNOW ALL MEN BY THESE PRESENTS:
fulfillment of the suspensive condition renders the sale absolute and the previous delivery of the
property has the effect of automatically transferring the seller's ownership or title to the property to the
buyer.34
That we, CORAZON G. VILLAMIL, widow, LILY VILLAMIL, married and TEDDY S. VILLAMIL, married, all of
legal ages, Filipinos and residents of Dagupan City, Philippines, for and in consideration of the sum two
9
thousand six hundred fifty seven pesos (P2,657.00), Philippine currency, to us in hand paid and a receipt
In Coronel v. Court of Appeals,35 the Court declared: of which is hereby acknowledged of JUANITO ERGUIZA, married, of legal age, Filipino and a resident of
Dagupan City, Philippines, BY THESE PRESENTS do hereby promise to sell absolutely unto the said
Juanito Erguiza, his heirs or assigns, a parcel of land covered [by] Transfer Certificate of Title No. 23988
The Civil Code defines a contract of sale, thus: of the land records of Dagupan City, identified as Lot No. 2371, under the following terms and
conditions:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money
or its equivalent. 6. That the total purchase price of the said land is FIVE THOUSAND ONE HUNDRED FIFTY SEVEN PESOS
P5,157.00. Because of us receiving today the sum of two thousand six hundred and fifty seven
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential pesos (P2,657.00), there is still a balance of two thousand five hundred pesos (P2,500.00);
elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;
7. That because there is still lacking document or that court approval of the sale of the shares of the
b) Determinate subject matter; and
minor-owners of parts of this land, the final deed of absolute sale he made and executed upon
c) Price certain in money or its equivalent.
issuance by the competent court; that the balance of P2,500.00 will also be given in this stage of
execution of this document;
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first
essential element is lacking. In a contract to sell, the prospective seller explicity reserves the transfer of
title to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to
transfer ownership of the property subject of the contract to sell until the happening of an event, which 8. In the event however that the petition for the sale of the shares of the minor-owners of the parts of
for present purposes we shall take as the full payment of the purchase price. What the seller agrees or this land is [disapproved] by the court, the amount of P2,657.00 be considered as lease of the land
obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the subject matter of this contract for a duration of twenty (20) years.
purchase price is delivered to him. In other words the full payment of the purchase price partakes of a
suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus,
 37
WITNESS OUR HANDS THIS 29th of September 1972 at Dagupan City, Philippines. (emphases supplied)
An examination of the agreement would reveal that the parties entered into a contract to sell the subject
property. First, petitioner and her siblings who were then co-owners merely promised to sell the subject
property, thus, signifying their intention to reserve ownership. Second, the execution of a deed of
absolute sale was made dependent upon the proper court's approval of the sale of the shares of the
minor owners. Third, the agreement between the parties was not embodied in a deed of sale. The
absence of a formal deed of conveyance is a strong indication that the parties did not intend immediate
transfer of ownership.38Fourth, petitioner retained possession of the certificate of title of the lot. This is
an additional indication that the agreement did not transfer to private respondents, either by actual or
constructive delivery, ownership of the property.39Finally, respondent Juanito admitted during trial that
they have not finalized the sale in 1972 because there were minor owners 40 such that when they
constructed their house thereon, they sought the permission of petitioner.41
Now, the next question to be resolved is whether the suspensive condition, i.e., judicial approval of the
sale of the minor owners' shares, upon which the obligation of the sellers to execute a deed of sale
depends, is fulfilled.
Principle of constructive fulfillment applies
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
to sell when she and her then co-owners themselves are guilty of preventing the fulfillment of such
condition. When it has become evident that the condition would no longer be fulfilled, it was incumbent
upon petitioner to inform respondent-spouses of such circumstance because the choice whether to
waive the condition or continue with the agreement clearly belongs to the latter. Petitioner's claim that
respondent-spouses should have known that the condition would no longer be necessary because the
latter knew that the minor owners had already reached the age of majority and that they should have
been more proactive in following up the status of the contract to sell, deserves scant consideration.
While petitioner may have been right in the aforementioned instances, the same will not negate her
obligation to inform respondent-spouses of the non-fulfillment of the condition especially in view of the
fact that it was her fault that the condition became irrelevant and unnecessary.
Who has better right of possession?
Inasmuch as petitioner has not yet complied with her obligation to execute a deed of sale after the
condition has been deemed fulfilled, respondent-spouses are still entitled to possess the subject
property. Petitioner cannot anchor her claim on the supposed conversion of their agreement from a
contract to sell into a contract of lease as provided in the third paragraph of the agreement which
provides that should the court disapprove the sale of the shares of the minor owners, the down payment
would be treated as rentals for twenty (20) years. The agreement, however, could not have been
converted into a contract of lease for the simple reason that there was no petition filed before any court
seeking the approval of the sale as regards the shares of the minor owners. Hence, the court did not
have any occasion to approve much less disapprove the sale of such shares. As a result, there was no
reason for the contract to sell to be converted into a contract of lease.

This provision refers to the constructive fulfillment of a suspensive condition, whose application calls for
two requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b)
the actual prevention of the fulfillment. Mere intention of the debtor to prevent the happening of the
condition, or to place ineffective obstacles to its compliance, without actually preventing the fulfillment,
is insufficient.42
Petitioner and her then co-owners undertook, upon receipt of the down payment from respondent-
spouses, the filing of a petition in court, after which they promised the latter to execute the deed of
absolute sale whereupon the latter shall, in turn, pay the entire balance of the purchase price. The
balance of the consideration shall be paid only upon grant of the court's approval and upon execution of
the deed of absolute sale.
Respondent-spouses did not become lessees. They remained to be prospective buyers of the subject
property who, up to now, are awaiting fulfillment of the obligation of the prospective sellers to execute a 10
deed of sale. Hence, inasmuch as the sellers allowed them to have the subject property in their
possession pending the execution of a deed of sale, respondent-spouses are entitled to possession
pending the outcome of the contract to sell.
WHEREFORE, the petition is DENIED. The Decision, dated 29 June 2010, and Resolution, dated 2
February 2011, of the Court of Appeals in CA-G.R. SP No. 109813 are AFFIRMED. The Entry of Judgment
in Civil Case No. 2007-0014-D is hereby LIFTED.
SO ORDERED.

Here, there is no doubt that petitioner prevented the fulfillment of the suspensive condition. She herself
admitted that they did not file any petition to seek approval of the court as regards the sale of the shares
of the minor owners.43 In addition, the other co-owners sold their shares to petitioner such that she was
able to consolidate the title in her name.44 Thus, the condition is deemed constructively fulfilled, as the
intent to prevent fulfillment of the condition and actual prevention thereof were definitely present.
Consequently, it was incumbent upon the sellers to enter into a contract with respondent-spouses for
the purchase of the subject property.

Respondent-spouses' obligation to pay the balance of the purchase price arises only when the court's
approval of the sale of the minor owners' shares shall have been successfully secured, in accordance
with Article 1181 of the New Civil Code.45 Judicial approval is a condition the operative act of which sets
into motion the period of compliance by respondent-spouses of their own obligation, i.e., to pay the
balance of the purchase price. Accordingly, an obligation dependent upon a suspensive condition cannot
be demanded until after the condition takes place because it is only after the fulfillment of the condition
that the obligation arises.46 Petitioner cannot invoke the non-fulfillment of the condition in the contract

G.R. No. 101762 July 6, 1993
VERMEN REALTY DEVELOPMENT CORPORATION, petitioner,
vs.
THE COURT OF APPEALS and SENECA HARDWARE CO., INC., respondents.
BIDIN, J.:
Petitioner seeks a review of the decision of the Court of Appeals in CA-G.R. CV No. 15730, which set
aside the decision of the Regional Trial Court of Quezon City, Branch 92 in Civil Case No. Q-45232. The
dispositive portion of the assailed decision reads as follows:
WHEREFORE, the decision a quo is set aside. As prayed for by plaintiff-appellant,
the "Offsetting Agreement" (Exhibit "E" or "2") is hereby rescinded. Room 601 of
Phase I of the Vermen Pines Condominium should be returned by plaintiff-
appellant to defendant-appellee upon payment by the latter of the sum of
P330,855.25 to the former, plus damages in the sum of P5,000.00 and P50.00 for
the furnishings of Phase I of Condo (sic) Units Nos. 601 and 602, and three (3) day
rental of Room 402 during the Holy Week of 1982, respectively. In addition,
defendant-appellee is hereby ordered to pay plaintiff-appellant, who was
compelled to litigate and hire the services of counsel to protect its interests
against defendant-appellee's violation of their Offsetting Agreement, the sum of
P10,000.00 as an award for attorney's fee (sic) and other expenses of litigation.
The claim for unrealized profits in a sum equivalent to 10% to 20% percent or
P522,000.00 not having been duly proved, is therefore DENIED. No costs. (Rollo, p.
31)
On March 2, 1981, petitioner Vermen Realty and Development Corporation, as First Party, and private
respondent Seneca Hardware Co., Inc., as Second Party, entered into a contract denominated as
"Offsetting Agreement". The said agreement contained the following stipulations:
1. That the FIRST PARTY is the owner/developer of VERMEN PINES CONDOMINIUM
located at Bakakeng Road, Baguio City;
2. That the SECOND PARTY is in business of construction materials and other
hardware items;
3. That the SECOND PARTY desires to buy from the FIRST PARTY two (2) residential
condominium units, studio type, with a total floor area of 76.22 square meter (sic)
more or less worth TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS
only;
4. That the FIRST PARTY desires to but from the SECOND PARTY construction
materials mostly steel bars, electrical materials and other related items worth FIVE
HUNDRED FIFTY TWO THOUSAND (P552,000.00) PESOS only;
5. That the FIRST PARTY shall pay the SECOND PARTY TWO HUNDRED SEVENTY SIX
THOUSAND (P276,000.00) PESOS in cash upon delivery of said construction
materials and the other TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00)
PESOS shall be paid in the form of two (2) residential condominium units, studio
type, with a total floor area of 76.22 square meter (sic) more or less also worth
P276,000.00;
6. That, for every staggered delivery of construction materials, fifty percent (50%)
shall be paid by the FIRST PARTY to the SECOND PARTY C.O.D. and, fifty percent
(50%) shall be credited to the said condominium unit in favor of the SECOND
PARTY;
7. That the SECOND PARTY shall deliver to the FIRST PARTY said construction
materials under the agreed price and conditions stated in the price quotation
approved by both parties and made an integral part of this document;
8. That the SECOND PARTY is obliged to start delivering to the FIRST PARTY all
items in the purchase order seven (7) days from receipt of said purchase order
until such time that the whole amount of P552,000.00 is settled;
9. That the place of delivery shall be Vermen Pines Condominium at Bakakeng
Road, Baguio City;
10. That the freight cost of said materials shall be borne fifty percent (50%) by the
FIRST PARTY and fifty percent (50%) by the SECOND PARTY;
11. That the FIRST PARTY pending completion of the VERMEN PINES
CONDOMINIUM PHASE II which is the subject of this contract, shall deliver to the
11
SECOND PARTY the possession of residential condominium, Phase I, Unit Nos. 601
and 602, studio type with a total area of 76.22 square meters or less, worth
P276,000.00;
12. That after the completion of Vermen Pines Condominium Phase II, the SECOND
PARTY shall be given by the FIRST PARTY the first option to transfer from Phase I to
Phase II under the same price, terms and conditions. (Rollo, pp. 26-28).
As found by the appellate court and admitted by both parties, private respondent had paid petitioner
the amount of P110,151.75, and at the same time delivered construction materials worth P219,727.00.
Pending completion of Phase II of the Vermen Pines Condominiums, petitioner delivered to private
respondent units 601 and 602 at Phase I of the Vermen Pines Condominiums (Rollo, p. 28). In 1982, the
petitioner repossessed unit 602. As a consequence of the repossession, the officers of the private
respondent corporation had to rent another unit for their use when they went to Baguio on April 8,
1982. On May 10, 1982, the officers of the private respondent corporation requested for a clarification of
the petitioner's action of preventing them and their families from occupying condominium unit 602.
In its reply dated May 24, 1982, the petitioner corporation averred that Room 602 was leased to another
tenant because private respondent corporation had not paid anything for purchase of the condominium
unit. Petitioner corporation demanded payment of P27,848.25 representing the balance of the purchase
price of Room 601.
In 1983, the loan application for the construction of the Vermen Pines Condominium Phase II was
denied. Consequently, construction of the condominium project stopped and has not been resumed
since then.
On June 21, 1985, private respondent filed a complaint with the Regional Trial Court of Quezon City
(Branch 92) for rescission of the Offsetting Agreement with damages. In said complaint, private
respondent alleged that petitioner Vermen Realty Corporation had stopped issuing purchase orders of
construction materials after April, 1982, without valid reason, thus resulting in the stoppage of deliveries
of construction materials on its (Seneca Hardware) part, in violation of the Offsetting Agreement.
In its Answer filed on August 15, 1985, petitioner alleged that the fault lay with private respondent
(plaintiff therein): although petitioner issued purchase orders, it was private respondent who could not
deliver the supplies ordered, alleging that they were out of stock. (However, during a hearing on January
28, 1987, the Treasurer of petitioner corporation, when asked where the purchase orders were, alleged
that she was going to produce the same in court, but the same was never produced (Rollo, p. 30).
Moreover, private respondent quoted higher prices for the construction materials which were available.
Thus, petitioner had to resort to its other suppliers. Anent the query as to why Unit 602 was leased to
another tenant, petitioner averred that this was done because private respondent had not paid anything
for it.
As of December 16, 1986, private respondent had paid petitioner P110,151.75 in cash, made deliveries
of construction materials worth P219,727.00, leaving a balance of P27,848.25 representing the purchase
price of unit 601 (Rollo, p. 28). The price of one condominium unit was P138,000.00.
After conducting hearings, the trial court rendered a decision dismissing the complaint and ordering the
plaintiff (private respondent in this petition) to pay defendant (petitioner in this petition) on its
counterclaim in the amount of P27,848.25 representing the balance due on the purchase price of
condominium unit 601.
On appeal, respondent court reversed the trial court's decision as adverted to above.
Petitioner now comes before us with the following assignment of errors:
I
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY
THIS HONORABLE COURT, WHEN IT SUPPLANTED CONTRARY TO THE EVIDENCE ON
RECORD, THE TRIAL COURT'S CONCLUSIONS THAT PETITIONER DID NOT VIOLATE
THE "OFFSETTING AGREEMENT" IT ENTERED INTO WITH THE SENECA HARDWARE
CO., INC. WITH ITS TOTALLY BASELESS "PERCEPTION" THAT IT WAS PETITIONER
WHICH DISCONTINUED TO ISSUE PURCHASE ORDERS DUE TO THE STOPPAGE OF
THE CONSTRUCTION OF PHASE II OF THE CONDOMINIUM PROJECT WHEN THE
LOAN ON THE SAID PROJECT WAS STOPPED.
II
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY
THIS HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE "OFFSETTING AGREEMENT" BECAUSE IT DID NOT SEND PURCHASE
ORDERS TO PRIVATE RESPONDENT AND DISCONTINUED THE CONSTRUCTION OF
THE CONDOMINIUM PROJECT DESPITE THE FACT THAT THE EXHIBITS ATTESTING
TO THIS FACT WAS FORMALLY OFFERED IN EVIDENCE IN COURT AND MENTIONED
BY IT IN ITS DECISION.
III
THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE BY
THIS HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE "OFFSETTING AGREEMENT" DESPITE THE ADMISSION MADE BY
PRIVATE RESPONDENT'S OWN WITNESS THAT PETITIONER HAD THE DISCRETION
TO ORDER OR NOT TO ORDER THE CONSTRUCTION MATERIAL (SIC) FROM THE
FORMER. (Rollo, p. )
The issue presented before the Court is whether or not the circumstances of the case warrant rescission
of the Offsetting Agreement as prayed for by Private Respondent when he instituted the case before the
trial court.
We rule in favor of private respondent. There is no controversy that the provisions of the Offsetting
Agreement are reciprocal in nature. Reciprocal obligations are those created or established at the same
time, out of the same cause, and which results in a mutual relationship of creditor and debtor between
parties. In reciprocal obligations, the performance of one is conditioned on the simultaneous fulfillment
of the other obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the
agreement, private respondent shall deliver to petitioner construction materials worth P552,000.00
under the conditions set forth in the Offsetting Agreement. Petitioner's obligation under the agreement
is three-fold: he shall pay private respondent P276,000.00 in cash; he shall deliver possession of units
601 and 602, Phase I, Vermen Pines Condominiums (with total value of P276,000.00) to private
respondent; upon completion of Vermen Pines Condominiums Phase II, private respondent shall be
12
given option to transfer to similar units therein.
Article 1191 of the Civil Code provides the remedy of rescission in (more appropriately, the term is
"resolution") in case of reciprocal obligations, where one of the obligors fails to comply with that is
incumbent upon him.
The general rule is that rescission of a contract will not be permitted for a slight or causal breach, but
only for such substantial and fundamental breach as would defeat the very object of the parties in
executing the agreement. The question of whether a breach of contract is substantial depends upon the
attendant circumstances (Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, [1970]).
In the case at bar, petitioner argues that it was private respondent who failed to perform its obligation in
the Offsetting Agreement. It averred that contrary to the appellate court's ruling, the mere stoppage of
the loan for the construction of Phase II of the Vermen Pines Condominiums should not have had any
effect on the fulfillment of the obligations set forth in the Offsetting Agreement. Petitioner moreover
stresses that contrary to private respondent's averments, purchase orders were sent, but there was
failure to deliver the materials ordered because they were allegedly out of stock. Petitioner points out
that, as admitted by private respondent's witness, petitioner had the discretion to order or not to order
constructions materials, and that it was only after petitioner approved the price, after making a canvass
from other suppliers, that the latter would issue a purchase order. Petitioner argues that this was the
agreement, and therefore the law between the parties, hence, when no purchase orders were issued, no
provision of the agreement was violated.
Private respondent, on the other hand, points out that the subject of the Offsetting Agreement is Phase
II of the Vermen Pines Condominiums. It alleges that since construction of Phase II of the Vermen Pines
Condominiums has failed to begin (Rollo, p. 104), it has reason to move for rescission of the Offsetting
Agreement, as it cannot forever wait for the delivery of the condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its obligation in the G.R. No. 115117 June 8, 2000
Offsetting Agreement. The discontinuance of delivery of construction materials to petitioner stemmed
from the failure of petitioner to send purchase orders to private respondent. The allegation that INTEGRATED PACKAGING CORP., petitioner,
petitioner had been sending purchase orders to private respondent, which the latter could not fill, vs.
cannot be given credence. Perhaps in the beginning, it would send purchase orders to private
COURT OF APPEALS and FIL-ANCHOR PAPER CO., INC., respondents.
respondent (as evidenced by the purchase orders presented in court), and the latter would deliver the
construction materials ordered. However, according to private respondent, after April, 1982, petitioner
stopped sending purchase orders. Petitioner failed to refute this allegation. When petitioner's witness, QUISUMBING, J.:
Treasurer of the petitioner corporation, was asked to produce the purchase orders in court, the latter
promised to do so, but this was never complied with.
This is a petition to review the decision of the Court of Appeals rendered on April 20, 1994 reversing the
judgment of the Regional Trial Court of Caloocan City in an action for recovery of sum of money filed by
On the other hand, petitioner would never able to fulfill its obligation in allowing private respondent to private respondent against petitioner. In said decision, the appellate court decreed:
exercise the option to transfer from Phase I to Phase II, as the construction of Phase II has ceased and
the subject condominium units will never be available.
WHEREFORE, in view of all the foregoing, the appealed judgment is hereby REVERSED and SET
ASIDE. Appellee [petitioner herein] is hereby ordered to pay appellant [private respondent
The impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the herein] the sum of P763,101.70, with legal interest thereon, from the date of the filing of the
contract for indeed, the non-fulfillment of the obligation aforementioned constitutes substantial breach Complaint, until fully paid.
of the Offsetting Agreement. The possibility of exercising the option of whether or not to transfer to
condominium units in Phase II was one of the factors which were considered by private respondent
SO ORDERED.1
when it entered into the agreement. Since the construction of the Vermen Pines Condominium Phase II
has stopped, petitioner would be in no position to perform its obligation to give private respondent the
option to transfer to Phase II. It would be the height of injustice to make private respondent wait for The RTC judgment reversed by the Court of Appeals had disposed of the complain as follows:
something that may never come.
WHEREFORE, judgment is hereby rendered:
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.
Ordering plaintiff [herein private respondent] to pay defendant [herein petitioner] the sum of
13
SO ORDERED. P27,222.60 as compensatory and actual damages after deducting P763,101.70 (value of
materials received by defendant) from P790,324.30 representing compensatory damages as
defendant's unrealized profits;

Ordering plaintiff to pay defendant the sum of P100,000.00 as moral damages;

Ordering plaintiff to pay the sum of P30,000.00 for attorney's fees; and to pay the costs of
suit.

SO ORDERED.2

The facts, as culled from the records, are as follows:

Petitioner and private respondent executed on May 5, 1978, an order agreement whereby private
respondent bound itself to deliver to petitioner 3,450 reams of printing paper, coated, 2 sides basis, 80
lbs., 38" x 23", short grain, worth P1,040,060.00 under the following schedule: May and June 1978 —
450 reams at P290.00/ream; August and September 1978 — 700 reams at P290/ream; January 1979 —
575 reams at P307.20/ream; March 1979 — 575 reams at P307.20/ream; July 1979 — 575 reams at
307.20/ream; and October 1979 — 575 reams at P307.20/ream. In accordance with the standard
operating practice of the parties, the materials were to be paid within a minimum of thirty days and
maximum of ninety days from delivery.

Later, on June 7, 1978, petitioner entered into a contract with Philippine Appliance Corporation
(Philacor) to print three volumes of "Philacor Cultural Books" for delivery on the following dates: Book VI,
SECOND DIVISION on or before November 1978; Book VII, on or before November 1979 and; Book VIII, on or before
November 1980, with a minimum of 300,000 copies at a price of P10.00 per copy or a total cost of Expectedly, petitioner filed this instant petition contending that the appellate court's judgment is based
P3,000,000.00. on erroneous conclusions of facts and law. In this recourse, petitioner assigns the following errors:

As of July 30, 1979, private respondent had delivered to petitioner 1,097 reams of printing paper out of [I]
the total 3,450 reams stated in the agreement. Petitioner alleged it wrote private respondent to
immediately deliver the balance because further delay would greatly prejudice petitioner. From June 5,
THE COURT OF APPEALS ERRED IN CONCLUDING THAT PRIVATE RESPONDENT DID NOT
1980 and until July 23, 1981, private respondent delivered again to petitioner various quantities of
VIOLATE THE ORDER AGREEMENT.
printing paper amounting to P766,101.70. However, petitioner encountered difficulties paying private
respondent said amount. Accordingly, private respondent made a formal demand upon petitioner to
settle the outstanding account. On July 23 and 31, 1981 and August 27, 1981, petitioner made partial [II]
payments totalling P97,200.00 which was applied to its back accounts covered by delivery invoices dated
September 29-30, 1980 and October 1-2, 1980.3 THE COURT OF APPEALS ERRED IN CONCLUDING THAT RESPONDENT IS NOT LIABLE FOR
PETITIONER'S BREACH OF CONTRACT WITH PHILACOR.
Meanwhile, petitioner entered into an additional printing contract with Philacor. Unfortunately,
petitioner failed to fully comply with its contract with Philacor for the printing of books VIII, IX, X and XI. [III]
Thus, Philacor demanded compensation from petitioner for the delay and damage it suffered on account
of petitioner's failure.
THE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER IS NOT ENTITLED TO
DAMAGES AGAINST PRIVATE RESPONDENT. 5
On August 14, 1981, private respondent filed with the Regional Trial Court of Caloocan City a collection
suit against petitioner for the sum of P766,101.70, representing the unpaid purchase price of printing
paper bought by petitioner on credit. In our view, the crucial issues for resolution in this case are as follows:

In its answer, petitioner denied the material allegations of the complaint. By way of counterclaim, (1) Whether or not private respondent violated the order agreement, and;

petitioner alleged that private respondent was able to deliver only 1,097 reams of printing paper which
was short of 2,875 reams, in total disregard of their agreement; that private respondent failed to deliver
the balance of the printing paper despite demand therefor, hence, petitioner suffered actual damages
and failed to realize expected profits; and that petitioner's complaint was prematurely filed.
After filing its reply and answer to the counterclaim, private respondent moved for admission of its
supplemental complaint, which was granted. In said supplemental complaint, private respondent alleged
that subsequent to the enumerated purchase invoices in the original complaint, petitioner made
additional purchases of printing paper on credit amounting to P94,200.00. Private respondent also
averred that petitioner failed and refused to pay its outstanding obligation although it made partial
payments in the amount of P97,200.00 which was applied to back accounts, thus, reducing petitioner's
indebtedness to P763,101.70.
On July 5, 1990, the trial court rendered judgment declaring that petitioner should pay private
respondent the sum of P763,101.70 representing the value of printing paper delivered by private
respondent from June 5, 1980 to July 23, 1981. However, the lower court also found petitioner's
counterclaim meritorious. It ruled that were it not for the failure or delay of private respondent to
deliver printing paper, petitioner could have sold books to Philacor and realized profit of P790,324.30
from the sale. It further ruled that petitioner suffered a dislocation of business on account of loss of
contracts and goodwill as a result of private respondent's violation of its obligation, for which the award
of moral damages was justified.
14
(2) Whether or not private respondent is liable for petitioner's breach of contract with
Philacor.
Petitioner's contention lacks factual and legal basis, hence, bereft of merit.
Petitioner contends, firstly, that private respondent violated the order agreement when the latter failed
to deliver the balance of the printing paper on the dates agreed upon.
The transaction between the parties is a contract of sale whereby private respondent (seller) obligates
itself to deliver printing paper to petitioner (buyer) which, in turn, binds itself to pay therefor a sum of
money or its equivalent (price).6 Both parties concede that the order agreement gives rise to a reciprocal
obligations7 such that the obligation of one is dependent upon the obligation of the other. Reciprocal
obligations are to be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.8 Thus, private respondent undertakes to deliver printing paper of
various quantities subject to petitioner's corresponding obligation to pay, on a maximum 90-day credit,
for these materials. Note that in the contract, petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of private respondent to deliver the materials is
conditional upon payment by petitioner within the prescribed period. Clearly, petitioner did not fulfill its
side of the contract as its last payment in August 1981 could cover only materials covered by delivery
invoices dated September and October 1980.

On appeal, the respondent Court of Appeals reversed and set aside the judgment of the trial court. The
appellate court ordered petitioner to pay private respondent the sum of P763,101.70 representing the
amount of unpaid printing paper delivered by private respondent to petitioner, with legal interest
thereon from the date of the filing of the complaint until fully paid.4 However, the appellate court
deleted the award of P790,324.30 as compensatory damages as well as the award of moral damages and
attorney's fees, for lack of factual and legal basis.
There is no dispute that the agreement provides for the delivery of printing paper on different dates and
a separate price has been agreed upon for each delivery. It is also admitted that it is the standard
practice of the parties that the materials be paid within a minimum period of thirty (30) days and a
maximum of ninety (90) days from each delivery.9 Accordingly, the private respondent's suspension of its
deliveries to petitioner whenever the latter failed to pay on time, as in this case, is legally justified under
the second paragraph of Article 1583 of the Civil Code which provides that:
 When there is a contract of sale of goods to be delivered by stated installments, which are to the award of P790,324.30 as compensatory damages representing petitioner's self-serving claim of
be separately paid for, and the seller makes defective deliveries in respect of one or more unrealized profit.
installments, or the buyer neglects or refuses without just cause to take delivery of or pay for
one or more installments, it depends in each case on the terms of the contract and the
Further, the deletion of the award of moral damages is proper, since private respondent could not be
circumstances of the case, whether the breach of contract is so material as to justify the
held liable for breach of contract. Moral damages may be awarded when in a breach of contract the
injured party in refusing to proceed further and suing for damages for breach of the entire
defendant acted in bad faith, or was guilty of gross negligence amounting to bad faith, or in wanton
contract, or whether the breach is severable, giving rise to a claim for compensation but not
disregard of his contractual obligation. 15 Finally, since the award of moral damages is eliminated, so
to a right to treat the whole contract as broken. (Emphasis supplied)
must the award for attorney's fees be also deleted. 16

In this case, as found a quo petitioner's evidence failed to establish that it had paid for the printing paper
WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals is AFFIRMED. Costs
covered by the delivery invoices on time. Consequently, private respondent has the right to cease
against petitioner.
making further delivery, hence the private respondent did not violate the order agreement. On the
contrary, it was petitioner which breached the agreement as it failed to pay on time the materials
delivered by private respondent. Respondent appellate court correctly ruled that private respondent did SO ORDERED.
not violate the order agreement.

On the second assigned error, petitioner contends that private respondent should be held liable for
petitioner's breach of contract with Philacor. This claim is manifestly devoid of merit.

As correctly held by the appellate court, private respondent cannot be held liable under the contracts
entered into by petitioner with Philacor. Private respondent is not a party to said agreements. It is also
not a contract pour autrui. Aforesaid contracts could not affect third persons like private respondent
because of the basic civil law principle of relativity of contracts which provides that contracts can only
10

15
bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware
of such contract and has acted with knowledge thereof. 11

Indeed, the order agreement entered into by petitioner and private respondent has not been shown as
having a direct bearing on the contracts of petitioner with Philacor. As pointed out by private respondent
and not refuted by petitioner, the paper specified in the order agreement between petitioner and
private respondent are markedly different from the paper involved in the contracts of petitioner with
Philacor. 12 Furthermore, the demand made by Philacor upon petitioner for the latter to comply with its
printing contract is dated February 15, 1984, which is clearly made long after private respondent had
filed its complaint on August 14, 1981. This demand relates to contracts with Philacor dated April 12,
1983 and May 13, 1983, which were entered into by petitioner after private respondent filed the instant
case.lawphi1

To recapitulate, private respondent did not violate the order agreement it had with petitioner. Likewise,
private respondent could not be held liable for petitioner's breach of contract with Philacor. It follows
that there is no basis to hold private respondent liable for damages. Accordingly, the appellate court did
not err in deleting the damages awarded by the trial court to petitioner.

The rule on compensatory damages is well established. True, indemnification for damages comprehends
not only the loss suffered, that is to say actual damages (damnum emergens), but also profits which the
obligee failed to obtain, referred to as compensatory damages (lucrum cessans). However, to justify a
grant of actual or compensatory damages, it is necessary to prove with a reasonable degree of certainty,
premised upon competent proof and on the best evidence obtainable by the injured party, the actual
amount of loss. 13 In the case at bar, the trial court erroneously concluded that petitioner could have sold
books to Philacor at the quoted selling price of P1,850,750.55 and by deducting the production cost of
P1,060,426.20, petitioner could have earned profit of P790,324.30. Admittedly, the evidence relied upon
by the trial court in arriving at the amount are mere estimates prepared by petitioner. 14 Said evidence is
highly speculative and manifestly hypothetical. It could not provide sufficient legal and factual basis for

G.R. No. 97347 July 6, 1999
JAIME G. ONG, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SPOUSES MIGUEL K. ROBLES and ALEJANDRO M.
ROBLES, respondents.
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari from the judgment rendered by the Court of Appeals
which, except as to the award of exemplary damages, affirmed the decision of the Regional Trial Court of
Lucena City, Branch 60, setting aside the "Agreement of Purchase and Sale" entered into by herein
petitioner and private respondent spouses in Civil Case No. 85-85.1âwphi1.nêt
On May 10, 1983, petitioner Jaime Ong, on the one hand, and respondent spouses Miguel K. Robles and
Alejandra Robles, on the other hand, executed an "Agreement of Purchase and Sale" respecting two
parcels of land situated at Barrio Puri, San Antonio, Quezon. The terms and conditions of the contract
read:"
1. That for and in consideration of the agreed purchase price of TWO MILLION
PESOS (P2,000,000.00), Philippine currency, the mode and manner of payment is
as follows:
A. The initial payment of SIX HUNDRED THOUSAND PESOS
(P600,000.00) as verbally agreed by the parties, shall be
broken down as follows:
1. P103,499.91 shall be paid, and as
already paid by the BUYER to
the SELLERS on March 22, 1983, as
stipulated under the Certification of
undertaking dated March 22, 1983
and covered by a check of even date.
2. That the sum of P496,500.09 shall
be paid directly by the BUYER to the
Bank of Philippine Islands to answer
for the loan of the SELLERS which as of
March 15, 1983 amounted to
P537,310.10, and for the interest that
may accrued (sic) from March 15,
1983, up to the time said obligation of
the SELLERS with the said bank has
been settled, provided however that
the amount in excess of P496,500.09,
shall be chargeable from the time
deposit of the SELLERS with the
aforesaid bank.
B. That the balance of ONE MILLION FOUR HUNDRED
THOUSAND (P1,400,000.00) PESOS shall be paid by
the BUYER to the SELLERS in four (4) equal quarterly
installments of THREE HUNDRED FIFTY THOUSAND PESOS
(P350,000.00), the first to be due and payable on June 15,
1983, and every quarter thereafter, until the whole amount
is fully paid, by these presents promise to sell to said BUYER
the two (2) parcels of agricultural land including the rice mill
and the piggery which are the most notable improvements
thereon, situated at Barangay Puri, San Antonio Quezon, . . .
2. That upon the payment of the total purchase price by
the BUYER the SELLERS bind themselves to deliver to the former a good and
sufficient deed of sale and conveyance for the described two (2) parcels of land,
free and clear from all liens and encumbrances.
3. That immediately upon the execution of this document, the SELLERS shall
deliver, surrender and transfer possession of the said parcels of land including all
the improvements that may be found thereon, to the BUYER, and the latter shall
take over from the SELLER the possession, operation, control and management of
16
the RICEMILL and PIGGERY found on the aforesaid parcels of land.
4. That all payments due and payable under this contract shall be effected in the
residence of the SELLERS located at Barangay Puri, San Antonio, Quezon unless
another place shall have been subsequently designated by both parties in writing.
xxx xxx xxx 1
On May 15, 1983, petitioner Ong took possession of the subject parcels of land together with the
piggery, building, ricemill, residential house and other improvements thereon.
Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103,499.91 2 by
depositing it with the United Coconut Planters Bank. Subsequently, petitioner deposited sums of money
with the Bank of Philippine Islands (BPI), 3 in accordance with their stipulation that petitioner pay the
loan of respondents with BPI.
To answer for his balance of P1,400,000.00 petitioner issued four (4) post-dated Metro Bank checks
payable to respondent spouses in the amount of P350,0000.00 each, namely: Check No. 157708 dated
June 15, 1983, 4 Check No. 157709 dated September 15, 1983, 5 Check No. 157710 dated December 15,
6 7
1983 and Check No. 157711 dated March 15, 1984. When presented for payment, however, the
checks were dishonored due to insufficient funds. Petitioner promised to replace the checks but failed to
do so. To make matters worse, out of the P496,500.00 loan of respondent spouses with the Bank of the
Philippine Islands, which petitioner, as per agreement, should have paid, petitioner only managed to
dole out no more than P393,679.60. When the bank threatened to foreclose the respondent spouses'
mortgage, they sold three transformers of the rice mill worth P51,411.00 to pay off their outstanding
obligation with said bank, with the knowledge and conformity of petitioner. 8 Petitioner, in return,
voluntarily gave the spouses authority to operate the rice mill. 9 He, however, continued to be in
possession of the two parcels of land while private respondents were forced to use the rice mill for
residential purposes.
On August 2, 1985, respondent spouses, through counsel, sent petitioner a demand letter asking for the
return of the properties. Their demand was left unheeded, so, on September 2, 1985, they filed with the
Regional Trial Court of Lucena City, Branch 60, a complaint for rescission of contract and recovery of
properties with damages. Later, while the case was still pending with the trial court, petitioner
introduced major improvements on the subject properties by constructing a complete fence made of
hollow blocks and expanding the piggery. These prompted the respondent spouses to ask for a writ of
preliminary injunction. 10 The trial court granted the application and enjoined petitioner from introducing
improvements on the properties except for repairs. 11
On June 1, 1989 the trial court rendered a decision, the dispositive portion of which reads as follows:
IN VIEW OF THE FOREGOING, judgment is hereby rendered:
a) Ordering that the contract entered into by plaintiff spouses Miguel K. Robles
and Alejandra M. Robles and the defendant, Jaime Ong captioned "Agreement of
Purchase and Sale," marked as Exhibit "A" set aside;
b) Ordering defendant, Jaime Ong to deliver the two (2) parcels of land which are
the subject matter of Exhibit "A" together with the improvements thereon to the
spouses Miguel K. Robles and Alejandro M. Robles;
c) Ordering plaintiff spouses, Miguel Robles and Alejandra Robles to return to
Jaime Ong the sum of P497,179.51;
d) Ordering defendant Jaime Ong to pay the plaintiffs the sum of P100,000.00 as
exemplary damages; and
e) Ordering defendant Jaime Ong to pay the plaintiffs spouses Miguel K. Robles
and Alejandra Robles the sum of P20,000.00 as attorney's fees and litigation
expenses.
The motion of the plaintiff spouses Miguel K. Roles and Alejandra Robles for the
appointment of receivership is rendered moot and academic.
SO ORDERED. 12
From this decision, petitioner appealed to the Court of Appeals, which affirmed the decision of the
Regional Trial Court but deleted the award of exemplary damages. In affirming the decision of the trial
court, the Court of Appeals noted that the failure of petitioner to completely pay the purchase price is a
substantial breach of his obligation which entitles the private respondents to rescind their contract
under Article 1191 of the New Civil Code. Hence, the instant petition.
At the outset, it must be stated that the issues raised by the petitioner are generally factual in nature
and were already passed upon by the Court of Appeals and the trial court. Time and again, we have
stated that it is not the function of the Supreme Court to assess and evaluate all over again the evidence,
testimonial and documentary, adduced by the parties to an appeal, particularly where, such as in the
case at bench, the findings of both the trial court and the appellate court on the matter coincide. There is
no cogent reason shown that would justify the court to discard the factual findings of the two courts
below and to superimpose its own. 13
The only pertinent legal issues raised which are worthy of discussion are (1) whether the contract
entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and (2)
whether the parties had novated their original contract as to the time and manner of payment.
Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid
respondent spouses a considerable sum and has therefore substantially complied with his obligation. He
cites Article 1383 instead, to the effect that where specific performance is available as a remedy,
rescission may not be resorted to.
A discussion of the aforesaid articles is in order.
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them
by a contract, even if this should be valid, by restoration of things to their condition at the moment prior
to the celebration of the contract. 14 It implies a contract, which even if initially valid, produces a lesion
or a pecuniary damage to someone. 15
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is
a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. 16 They are to be performed simultaneously such that the performance of one is conditioned
upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of
the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although
17
both presuppose contracts validly entered into and subsisting and both require mutual restitution when
proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code,
17
from which the article was based, was "resolution. " Resolution is a principal action which is based on
breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission
for lesion under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible
contracts:
1. Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than one
fourth of the value of the things which are the object
thereof;
2. Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter
cannot in any manner collect the claims due them;
4. Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial
authority;
 5. All other contracts specially declared by law to be subject
to rescission.
Obviously, the contract entered into by the parties in the case at bar does not fall
under any of those mentioned by Article 1381. Consequently, Article 1383 is
inapplicable.
May the contract entered into between the parties, however, be rescinded based
on Article 1191?
A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is
in the nature of a contract to sell, as distinguished from a contract of sale. In a
contract of sale, the title to the property passes to the vendee upon the delivery of
the thing sold; while in a contract to sell, ownership is, by agreement, reserved in
the vendor and is not to pass to the vendee until full payment of the purchase
18
price. In a contract to sell, the payment of the purchase price is a positive
suspensive condition, the failure of which is not a breach, casual or serious, but a
situation that prevents the obligation of the vendor to convey title from acquiring
an obligatory force. 19
Respondents in the case at bar bound themselves to deliver a deed of absolute
sale and clean title covering the two parcels of land upon full payment by the
buyer of the purchase price of P2,000,000.00. This promise to sell was subject to
the fulfillment of the suspensive condition of full payment of the purchase price by
the petitioner. Petitioner, however, failed to complete payment of the purchase
price. The non-fulfillment of the condition of full payment rendered the contract
to sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to
comply with an obligation. 20 Failure to pay, in this instance, is not even a breach
but merely an event which prevents the vendor's obligation to convey title from
acquiring binding force. 21 Hence, the agreement of the parties in the case at
bench may be set aside, but not because of a breach on the part of petitioner for
failure to complete payment of the purchase price. Rather, his failure to do so
brought about a situation which prevented the obligation of respondent spouses
to convey title from acquiring an obligatory force.
Petitioner insists, however, that the contract was novated as to the manner and
time of payment.
We are not persuaded. Article 1292 of the New Civil Code states that, "In order
that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other."
Novation is never presumed, it must be proven as a fact either by express
stipulation of the parties or by implication derived from an irreconcilable
22
incompatibility between the old and the new obligation. Petitioner cites the
following instances as proof that the contract was novated: the retrieval of the
transformers from petitioner's custody and their sale by the respondents to
MERALCO on the condition that the proceeds thereof be accounted for by the
respondents and deducted from the price of the contract; the take-over by the
respondents of the custody and operation of the rice mill; and the continuous and
regular withdrawals by respondent Miguel Robles of installment sums per
vouchers (Exhs. "8" to "47") on the condition that these installments be credited to
petitioner's account and deducted from the balance of the purchase price.
Contrary to petitioner's claim, records show that the parties never even intended
to novate their previous agreement. It is true that petitioner paid respondents
small sums of money amounting to P48,680.00, in contravention of the manner of
payment stipulated in their contract. These installments were, however, objected
to by respondent spouses, and petitioner replied that these represented the
interest of the principal amount which he owed them. 23 Records further show that
petitioner agreed to the sale of MERALCO transformers by private respondents to
pay for the balance of their subsisting loan with the Bank of Philippine Islands.
Petitioner's letter of authorization reads:
xxx xxx xxx
Under this authority, it is mutually understood that whatever payment received
from MERALCO as payment to the transfromers will be considered as partial
payment of the undersigned's obligation to Mr. and Mrs. Miguel K. Robles.
The same will be utilized as partial payment to existing loan with the Bank of
Philippine Islands.
18
It is also mutually understood that this payment to the Bank of Philippine Islands
will be reimbursed to Mr. and Mrs. Miguel K. Robles by the undersigned.
[Emphasis supplied] 24
It should be noted that while it was. agreed that part of the purchase price in the
sum of P496,500.00 would be directly deposited by petitioner to the Bank of
Philippine Islands to answer for the loan of respondent spouses, petitioner only
managed to deposit P393,679.60. When the bank threatened to foreclose the
properties, petitioner apparently could not even raise the sum needed to forestall
any action on the part of the bank. Consequently, he authorized respondent
spouses to sell the three (3) transformers. However, although the parties agreed
to credit the proceeds from the sale of the transformers to petitioner's obligation,
he was supposed to reimburse the same later to respondent spouses. This can
only mean that there was never an intention on the part of either of the parties to
novate petitioner's manner of payment.
Petitioner contends that the parties verbally agreed to novate the manner of
payment when respondent spouses proposed to operate the rice mill on the
condition that they will account for its earnings. We find that this is
unsubstantiated by the evidenced on the record. The tenor of his letter dated
August 12, 1984 to respondent spouses, in fact, shows that petitioner had a "little
misunderstanding" with respondent spouses whom he was evidently trying to
appease by authorizing them to continue temporarily with the operation of the
rice mill. Clearly, while petitioner might have wanted to novate the original
agreement as to his manner of payment, the records are bereft of evidence that
respondent spouses willingly agreed to modify their previous arrangement.
In order for novation to take place, the concurrence of the following requisites is
indispensable: (1) there must be a previous valid obligation; (2) there must be an
agreement of the parties concerned to a new contract; (3) there must be the
extinguishment of the old contract; and (4) there must be the validity of the new
contract. 25 The aforesaid requisites are not found in the case at bench. The
subsequent acts of the parties hardly demonstrate their intent to dissolve the old
obligation as a consideration for the emergence of the new one. We repeat to the
point of triteness, novation is never presumed, there must be an express intention
to novate.
As regards the improvements introduced by petitioner to the premises and for
which he claims reimbursement, we see no reason to depart from the ruling of the
trial court and the appellate court that petitioner is a builder in bad faith. He
introduced the improvements on the premises knowing fully well that he has not
paid the consideration of the contract in full and over the vigorous objections of
respondent spouses. Moreover, petitioner introduced major improvements on the
premises even while the case against him was pending before the trial court.
The award of exemplary damages was correctly deleted by the Court of Appeals in
as much as no moral, temperate, liquidated or compensatory damages in addition
to exemplary damages were awarded.
WHEREFORE, the decision rendered by the Court of Appeals is hereby AFFIRMED
with the MODIFICATION that respondent spouses are ordered to return to
petitioner the sum of P48,680.00 in addition to the amounts already awarded.
Costs against petitioner.1âwphi1.nêt
SO ORDERED.
FIRST DIVISION
G.R. No. 137909 December 11, 2003
FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner,
vs.
Spouses BERNARDINO NAGUIAT and MARIA PAULINA GERONA-NAGUIAT, respondents.
DECISION
PANGANIBAN, J.:
The failure to pay in full the purchase price stipulated in a deed of sale does not ipso facto grant the
seller the right to rescind the agreement. Unless otherwise stipulated by the parties, rescission is allowed
only when the breach of the contract is substantial and fundamental to the fulfillment of the obligation.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the October 31,
1997 Decision2 and the February 23, 1999 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
51067. The assailed Decision disposed as follows:
19
"WHEREFORE, modified as indicated above, the decision of the Regional Trial Court is hereby
AFFIRMED."4
The assailed Resolution denied petitioner’s Motion for Reconsideration.
The Facts
The facts of the case are summarized by the CA as follows:
"Eulalio Mistica, predecessor-in-interest of herein [petitioner], is the owner of a parcel of land located at
Malhacan, Meycauayan, Bulacan. A portion thereof was leased to [Respondent Bernardino Naguiat]
sometime in 1970.
"On 5 April 1979, Eulalio Mistica entered into a contract to sell with [Respondent Bernardino Naguiat]
over a portion of the aforementioned lot containing an area of 200 square meters. This agreement was
reduced to writing in a document entitled ‘Kasulatan sa Pagbibilihan’ which reads as follows:
‘NAGSASALAYSAY:
‘Na ang NAGBIBILI ay nagmamay-aring tunay at naghahawak ng isang lagay na lupa na nasa Nayon ng
Malhacan, Bayan ng Meycauayan, Lalawigan ng Bulacan, na ang kabuuan sukat at mga kahangga nito
gaya ng sumusunod:
xxx xxx xxx
 ‘Na alang-alang sa halagang DALAWANG PUNG LIBONG PISO (₱20,000.00) Kualtang Pilipino, ang
NAGBIBILI ay nakipagkasundo ng kanyang ipagbibili ang isang bahagi o sukat na DALAWANG DAAN (200)
METROS PARISUKAT, sa lupang nabanggit sa itaas, na ang mga kahangga nito ay gaya ng sumusunod:
xxx xxx xxx
‘Na magbibigay ng paunang bayad ang BUMIBILI SA NAGBIBILI na halagang DALAWANG LIBONG PISO
(₱2,000.00) Kualtang Pilipino, sa sandaling lagdaan ang kasulatang ito.
‘Na ang natitirang halagang LABING WALONG LIBONG PISO (₱18,000.00) Kualtang Pilipino, ay babayaran
ng BUM[I]BILI sa loob ng Sampung (10) taon, na magsisimula sa araw din ng lagdaan ang kasulatang ito.
‘Sakaling hindi makakabayad ang Bumibili sa loob ng panahon pinagkasunduan, an[g] BUMIBILI ay
magbabayad ng pakinabang o interes ng 12% isang taon, sa taon nilakaran hanggang sa ito’y mabayaran
tuluyan ng Bumibili:
‘Sa katunayan ng lahat ay nilagdaan ng Magkabilang Panig ang kasulatang ito, ngayon ika 5 ng Abril,
1979, sa Bayan ng Meycauayan. Lalawigan ng Bulacan, Pilipinas.
(signed) (signed)
BERNARDINO NAGUIAT EULALIO MISTICA
Bumibili Nagbibili'
"Pursuant to said agreement, [Respondent Bernardino Naguiat] gave a downpayment of ₱2,000.00. He
made another partial payment of ₱1,000.00 on 7 February 1980. He failed to make any payments
thereafter. Eulalio Mistica died sometime in October 1986.
"On 4 December 1991, [petitioner] filed a complaint for rescission alleging inter alia: that the failure and
refusal of [respondents] to pay the balance of the purchase price constitutes a violation of the contract
which entitles her to rescind the same; that [respondents] have been in possession of the subject portion
and they should be ordered to vacate and surrender possession of the same to [petitioner] ; that the
reasonable amount of rental for the subject land is ₱200.00 a month; that on account of the unjustified
actuations of [respondents], [petitioner] has been constrained to litigate where she incurred expenses
for attorney’s fees and litigation expenses in the sum of ₱20,000.00.
"In their answer and amended answer, [respondents] contended that the contract cannot be rescinded
on the ground that it clearly stipulates that in case of failure to pay the balance as stipulated, a yearly
interest of 12% is to be paid. [Respondent Bernardino Naguiat] likewise alleged that sometime in
October 1986, during the wake of the late Eulalio Mistica, he offered to pay the remaining balance to
[petitioner] but the latter refused and hence, there is no breach or violation committed by them and no
damages could yet be incurred by the late Eulalio Mistica, his heirs or assigns pursuant to the said
document; that he is presently the owner in fee simple of the subject lot having acquired the same by
virtue of a Free Patent Title duly awarded to him by the Bureau of Lands; and that his title and ownership
had already become indefeasible and incontrovertible. As counterclaim, [respondents] pray for moral
damages in the amount of ₱50,000.00; exemplary damages in the amount of ₱30,000.00; attorney’s fees
in the amount of ₱10,000.00 and other litigation expenses.
"On 8 July 1992, [respondents] also filed a motion to dismiss which was denied by the court on 29 July
1992. The motion for reconsideration was likewise denied per its Order of 17 March 1993.
"After the presentation of evidence, the court on 27 January 1995 rendered the now assailed judgment,
the dispositive portion of which reads:
‘WHEREFORE, premises considered, judgment is hereby rendered:
‘1. Dismissing the complaint and ordering the [petitioner] to pay the [respondents] attorney’s
fee in the amount of ₱10,000.00 and costs of the suit;
‘2. Ordering the [respondents]:
‘a. To pay [petitioner] and the heirs of Eulalio Mistica the balance of the purchase
price in the amount of ₱17,000.00, with interest thereon at the rate of 12% per
annum computed from April 5, 1989 until full payment is made, subject to the
application of the consigned amount to such payment;
‘b. To return to [petitioner] and the heirs of Eulalio Mistica the extra area of 58
square meters from the land covered by OCT No. 4917 (M), the corresponding
price therefor based on the prevailing market price thereof.’"5 (Citations omitted)
CA’s Decision
Disallowing rescission, the CA held that respondents did not breach the Contract of Sale. It explained
that the conclusion of the ten-year period was not a resolutory term, because the Contract had
stipulated that payment -- with interest of 12 percent -- could still be made if respondents failed to pay
within the period. According to the appellate court, petitioner did not disprove the allegation of
20
respondents that they had tendered payment of the balance of the purchase price during her husband’s
funeral, which was well within the ten-year period.
Moreover, rescission would be unjust to respondents, because they had already transferred the land title
to their names. The proper recourse, the CA held, was to order them to pay the balance of the purchase
price, with 12 percent interest.
As to the matter of the extra 58 square meters, the CA held that its reconveyance was no longer feasible,
because it had been included in the title issued to them. The appellate court ruled that the only remedy
available was to order them to pay petitioner the fair market value of the usurped portion.
Hence, this Petition.6
Issues
In her Memorandum,7 petitioner raises the following issues:
"1. Whether or not the Honorable Court of Appeals erred in the application of Art. 1191 of
the New Civil Code, as it ruled that there is no breach of obligation inspite of the lapse of the
stipulated period and the failure of the private respondents to pay.
"2. Whether or not the Honorable Court of Appeals [e]rred in ruling that rescission of the
contract is no longer feasible considering that a certificate of title had been issued in favor of
the private respondents.
 "3. Whether or not the Honorable Court of Appeals erred in ruling that since the 58 sq. m. stated in the Deed that payment of the purchase price is dependent upon whether respondents want to
portion in question is covered by a certificate of title in the names of private respondents pay it or not. Second, the fact that they already made partial payment thereof only shows that the
reconveyance is no longer feasible and proper."8 parties intended to be bound by the Kasulatan.

The Court’s Ruling Both the trial and the appellate courts arrived at this finding.1âwphi1 Well-settled is the rule that
findings of fact by the CA are generally binding upon this Court and will not be disturbed on appeal,
especially when they are the same as those of the trial court.16 Petitioner has not given us sufficient
The Petition is without merit.
reasons to depart from this rule.

First Issue:
Second Issue:

Rescission in Article 1191

Rescission Unrelated to Registration

Petitioner claims that she is entitled to rescind the Contract under Article 1191 of the Civil Code, because
The CA further ruled that rescission in this case would be unjust to respondents, because a certificate of
respondents committed a substantial breach when they did not pay the balance of the purchase price
title had already been issued in their names. Petitioner nonetheless argues that the Court is still
within the ten-year period. She further avers that the proviso on the payment of interest did not extend
empowered to order rescission.
the period to pay. To interpret it in that way would make the obligation purely potestative and, thus,
void under Article 1182 of the Civil Code.
We clarify. The issuance of a certificate of title in favor of respondents does not determine whether
petitioner is entitled to rescission. It is a fundamental principle in land registration that such title serves
We disagree. The transaction between Eulalio Mistica and respondents, as evidenced by the Kasulatan,
merely as an evidence of an indefeasible and incontrovertible title to the property in favor of the person
was clearly a Contract of Sale. A deed of sale is considered absolute in nature when there is neither a
whose name appears therein.17
stipulation in the deed that title to the property sold is reserved to the seller until the full payment of the
price; nor a stipulation giving the vendor the right to unilaterally resolve the contract the moment the

21
9
buyer fails to pay within a fixed period. While a review of the decree of registration is no longer possible after the expiration of the one-year
period from entry, an equitable remedy is still available to those wrongfully deprived of their
property.18 A certificate of title cannot be subject to collateral attack and can only be altered, modified or
In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. 10 Under
canceled in direct proceedings in accordance with law.19 Hence, the CA correctly held that the propriety
Article 1191 of the Civil Code, the right to rescind an obligation is predicated on the violation of the
of the issuance of title in the name of respondents was an issue that was not determinable in these
reciprocity between parties, brought about by a breach of faith by one of them.11 Rescission, however, is
proceedings.
allowed only where the breach is substantial and fundamental to the fulfillment of the obligation.12

Third Issue:
In the present case, the failure of respondents to pay the balance of the purchase price within ten years
from the execution of the Deed did not amount to a substantial breach. In the Kasulatan, it was
stipulated that payment could be made even after ten years from the execution of the Contract, Reconveyance of the Portion Importunately Included
provided the vendee paid 12 percent interest. The stipulations of the contract constitute the law
between the parties; thus, courts have no alternative but to enforce them as agreed upon and written.13
Petitioner argues that it would be reasonable for respondents to pay her the value of the lot, because
the CA erred in ruling that the reconveyance of the extra 58-square meter lot, which had been included
Moreover, it is undisputed that during the ten-year period, petitioner and her deceased husband never in the certificate of title issued to them, was no longer feasible.
made any demand for the balance of the purchase price. Petitioner even refused the payment tendered
by respondents during her husband’s funeral, thus showing that she was not exactly blameless for the
In principle, we agree with petitioner. Registration has never been a mode of acquiring ownership over
lapse of the ten-year period. Had she accepted the tender, payment would have been made well within
immovable property, because it does not create or vest title, but merely confirms one already created or
the agreed period.
vested.20 Registration does not give holders any better title than what they actually have.21 Land
erroneously included in the certificate of title of another must be reconveyed in favor of its true and
If petitioner would like to impress upon this Court that the parties intended otherwise, she has to show actual owner.22
competent proof to support her contention. Instead, she argues that the period cannot be extended
beyond ten years, because to do so would convert the buyer’s obligation to a purely potestative
Section 48 of Presidential Decree 1529, however, provides that the certificate of title shall not be subject
obligation that would annul the contract under Article 1182 of the Civil Code.
to collateral attack, alteration, modification, or cancellation except in a direct proceeding.23 The
cancellation or removal of the extra portion from the title of respondents is not permissible in an action
This contention is likewise untenable. The Code prohibits purely potestative, suspensive, conditional for rescission of the contract of sale between them and petitioner’s late husband, because such action is
obligations that depend on the whims of the debtor, because such obligations are usually not meant to tantamount to allowing a collateral attack on the title.
be fulfilled.14 Indeed, to allow the fulfillment of conditions to depend exclusively on the debtor’s will
would be to sanction illusory obligations.15 The Kasulatan does not allow such thing. First, nowhere is it
It appears that an action for cancellation/annulment of patent and title and for reversion was already Date Amount Paid
filed by the State in favor of petitioner and the heirs of her husband.24 Hence, there is no need in this July 19, 1990 P40,000.006
case to pass upon the right of respondents to the registration of the subject land under their names. For
the same reason, there is no necessity to order them to pay petitioner the fair market value of the extra March 13, 1991 15,000.007
58-square meter lot importunately included in the title. April 6, 1991 15,000.008
November 28, 1991 5,000.009
WHEREFORE, the assailed Decision and Resolution are AFFIRMED with the MODIFICATION that the Total P75,000.00
payment for the extra 58-square meter lot included in respondents’ title is DELETED.
Thus, leaving a balance of P45,000.00.
SECOND DIVISION
A Deed of Sale with Assumption of Mortgage Obligation10 dated 20 August 1990 was made and entered
G.R. No. 139523 May 26, 2005 into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe Cannu
(vendees) over the house and lot in question which contains, inter alia, the following:
SPS. FELIPE AND LETICIA CANNU, petitioners,
vs. NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED FIFTY THOUSAND
SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE FINANCE PESOS (P250,000.00), Philippine Currency, receipt of which is hereby acknowledged by the
CORPORATION, respondents. Vendors and the assumption of the mortgage obligation, the Vendors hereby sell, cede and
transfer unto the Vendees, their heirs, assigns and successor in interest the above-described
property together with the existing improvement thereon.
DECISION

It is a special condition of this contract that the Vendees shall assume and continue with the
CHICO-NAZARIO, J.:
payment of the amortization with the National Home Mortgage Finance Corporation Inc. in
the outstanding balance of P_______________, as of __________ and shall comply with and
Before Us is a Petition for Review on Certiorari which seeks to set aside the decision1 of the Court of
Appeals dated 30 September 1998 which affirmed with modification the decision of Branch 135 of the
Regional Trial Court (RTC) of Makati City, dismissing the complaint for Specific Performance and
abide by the terms and conditions of the mortgage document dated Feb. 27, 1989 and
identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for Quezon City
Marites Sto. Tomas Alonzo, as if the Vendees are the original signatories.
22
Damages filed by petitioners, and its Resolution2 dated 22 July 1999 denying petitioners’ motion for
reconsideration.
Petitioners immediately took possession and occupied the house and lot.
3
A complaint for Specific Performance and Damages was filed by petitioners-spouses Felipe and Leticia
Petitioners made the following payments to the NHMFC:
Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage
Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was
docketed as Civil Case No. 93-2069. Date Amount Receipt No.
July 9, 1990 P 14,312.47 D-50398611
The facts that gave rise to the aforesaid complaint are as follows: March 12, 1991 8,000.00 D-72947812
February 4, 1992 10,000.00 D-99912713
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan March 31, 1993 6,000.00 E-56374914
Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Piñas, with an area April 19, 1993 10,000.00 E-582432
15

of 150 square meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of
April 27, 1993 7,000.00 E-61832616
respondents-spouses. To secure payment, a real estate mortgage was constituted on the said house and
lot in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage loan of P 55,312.47
respondents-spouses from Fortune Savings & Loan Association for P173,800.00.
Petitioners paid the "equity" or second mortgage to CERF Realty.17
4
Respondent Fernandina Galang authorized her attorney-in-fact, Adelina R. Timbang, to sell the subject
house and lot. Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00 or in
the alternative to vacate the property in question, petitioners refused to do so.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the
mortgage obligations with the NHMFC and with CERF Realty5 (the Developer of the property). In a letter18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice
President, Fund Management Group of the NHMFC, that the ownership rights over the land covered by
Of the P120,000.00, the following payments were made by petitioners: TCT No. T-8505 in the names of respondents-spouses had been ceded and transferred to her and her
husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to assume the spouses Galang to return the partial payments made by plaintiffs; and the plaintiffs are
mortgage and pay the remaining unpaid loan balance. Petitioners’ formal assumption of mortgage was ordered, on the other hand, to return the physical and legal possession of the subject
not approved by the NHMFC.19 property to spouses Galang by way of mutual restitution;

Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang, on 21 2. To pay defendants spouses Galang and NHMFC, each the amount of P10,000.00 as
May 1993, paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC.20 litigation expenses, jointly and severally;

Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the 3. To pay attorney’s fees to defendants in the amount of P20,000.00, jointly and severally;
subject property had already been sold to them. Consequently, the NHMFC held in abeyance the release and
of said TCT.
4. The costs of suit.
Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things,
that petitioners (plaintiffs therein) be declared the owners of the property involved subject to
5. No moral and exemplary damages awarded.24
reimbursements of the amount made by respondents-spouses (defendants therein) in preterminating
the mortgage loan with NHMFC.
25
A Motion for Reconsideration was filed, but same was denied. Petitioners appealed the decision of the
RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals disposed of the appeal as
Respondent NHMFC filed its Answer.21 It claimed that petitioners have no cause of action against it
follows:
because they have not submitted the formal requirements to be considered assignees and successors-in-
interest of the property under litigation.
Obligations arising from contract have the force of law between the contracting parties and
should be complied in good faith. The terms of a written contract are binding on the parties
In their Answer,22 respondents-spouses alleged that because of petitioners-spouses’ failure to fully pay
thereto.
the consideration and to update the monthly amortizations with the NHMFC, they paid in full the
existing obligations with NHMFC as an initial step in the rescission and annulment of the Deed of Sale
with Assumption of Mortgage. In their counterclaim, they maintain that the acts of petitioners in not
fully complying with their obligations give rise to rescission of the Deed of Sale with Assumption of
Mortgage with the corresponding damages.
Plaintiffs-appellants therefore are under obligation to pay defendants-appellees spouses
Galang the sum of P250,000.00, and to assume the mortgage. 23
Records show that upon the execution of the Contract of Sale or on July 19, 1990 plaintiffs-
After trial, the lower court rendered its decision ratiocinating: appellants paid defendants-appellees spouses Galang the amount of only P40,000.00.

On the basis of the evidence on record, testimonial and documentary, this Court is of the view
that plaintiffs have no cause of action either against the spouses Galang or the NHMFC.
Plaintiffs have admitted on record they failed to pay the amount of P45,000.00 the balance
due to the Galangs in consideration of the Deed of Sale With Assumption of Mortgage
Obligation (Exhs. "C" and "3"). Consequently, this is a breach of contract and evidently a
failure to comply with obligation arising from contracts. . . In this case, NHMFC has not been
duly informed due to lack of formal requirements to acknowledge plaintiffs as legal assignees,
or legitimate tranferees and, therefore, successors-in-interest to the property, plaintiffs
should have no legal personality to claim any right to the same property.23
The next payment was made by plaintiffs-appellants on March 13, 1991 or eight (8) months
after the execution of the contract. Plaintiffs-appellants paid the amount of P5,000.00.
The next payment was made on April 6, 1991 for P15,000.00 and on November 28, 1991, for
another P15,000.00.
From 1991 until the present, no other payments were made by plaintiffs-appellants to
defendants-appellees spouses Galang.

The decretal portion of the decision reads:
Premises considered, the foregoing complaint has not been proven even by preponderance of
evidence, and, as such, plaintiffs have no cause of action against the defendants herein. The
above-entitled case is ordered dismissed for lack of merit.
Out of the P250,000.00 purchase price which was supposed to be paid on the day of the
execution of contract in July, 1990 plaintiffs-appellants have paid, in the span of eight (8)
years, from 1990 to present, the amount of only P75,000.00. Plaintiffs-appellants should have
paid the P250,000.00 at the time of the execution of contract in 1990. Eight (8) years have
already lapsed and plaintiffs-appellants have not yet complied with their obligation.

We consider this breach to be substantial.

Judgment is hereby rendered by way of counterclaim, in favor of defendants and against
plaintiffs, to wit:
The tender made by plaintiffs-appellants after the filing of this case, of the Managerial Check
in the amount of P278,957.00 dated January 24, 1994 cannot be considered as an effective
1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs. "C" and "3") mode of payment.
rescinded and hereby declared the same as nullified without prejudice for defendants-
 Performance or payment may be effected not by tender of payment alone but by both tender
and consignation. It is consignation which is essential in order to extinguish plaintiffs-
appellants obligation to pay the balance of the purchase price.
In addition, plaintiffs-appellants failed to comply with their obligation to pay the monthly
amortizations due on the mortgage.
In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only six
payments. The payments made by plaintiffs-appellants are not even sufficient to answer for
the arrearages, interests and penalty charges.
On account of these circumstances, the rescission of the Contract of Sale is warranted and
justified.
...
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with
modification. Defendants-appellees spouses Galang are hereby ordered to return the partial
payments made by plaintiff-appellants in the amount of P135,000.00.
No pronouncement as to cost. 26
The motion for reconsideration27 filed by petitioners was denied by the Court of Appeals in a
Resolution28 dated 22 July 1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT PETITIONERS’ BREACH
OF THE OBLIGATION WAS SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD THAT THERE WAS
NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY
AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THE OTHER
FACTS AND CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE
ACTION FOR RESCISSION IS SUBSIDIARY.29
Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a priori that
the latter made a misappreciation of evidence regarding the consideration of the property in litigation
when it relied solely on the Deed of Sale with Assumption of Mortgage executed by the respondents-
spouses Galang and petitioners-spouses Cannu.
As above-quoted, the consideration for the house and lot stated in the Deed of Sale with Assumption of
Mortgage is P250,000.00, plus the assumption of the balance of the mortgage loan with NHMFC.
However, after going over the record of the case, more particularly the Answer of respondents-spouses,
the evidence shows the consideration therefor is P120,000.00, plus the payment of the outstanding loan
mortgage with NHMFC, and of the "equity" or second mortgage with CERF Realty (Developer of the
property).30
Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-spouses
Galang shows that the consideration is "P250,000.00." In fact, what is clear is that of the P120,000.00 to
be paid to the latter, only P75,000.00 was paid to Adelina Timbang, the spouses Galang’s attorney-in-
fact. This debunks the provision in the Deed of Sale with Assumption of Mortgage that the amount
of P250,000.00 has been received by petitioners.
Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent and
agreement of the parties regarding its consideration, the same should not be fully relied upon. The
foregoing facts lead us to hold that the case on hand falls within one of the recognized exceptions to the
parole evidence rule. 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 in issue in his pleading, among others, its failure to
express the true intent and agreement of the parties thereto.31
In the case at bar, when respondents-spouses enumerated in their Answer the terms and conditions for
the sale of the property under litigation, which is different from that stated in the Deed of Sale with
Assumption with Mortgage, they already put in issue the matter of consideration. Since there is a
24
difference as to what the true consideration is, this Court has admitted evidence aliunde to explain such
inconsistency. Thus, the Court has looked into the pleadings and testimonies of the parties to thresh out
the discrepancy and to clarify the intent of the parties.
As regards the computation32 of petitioners as to the breakdown of the P250,000.00 consideration, we
find the same to be self-serving and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred when it ruled that their breach of the
obligation was substantial.
Settled is the rule that rescission or, more accurately, resolution,33 of a party to an obligation under
Article 119134 is predicated on a breach of faith by the other party that violates the reciprocity between
them.35 Article 1191 reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only
for such breaches that are substantial and fundamental as to defeat the object of the parties in making
 36
the agreement. The question of whether a breach of contract is substantial depends upon the
attending circumstances37 and not merely on the percentage of the amount not paid.
In the case at bar, we find petitioners’ failure to pay the remaining balance of P45,000.00 to be
substantial. Even assuming arguendo that only said amount was left out of the supposed consideration
of P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial. Taken together
with the fact that the last payment made was on 28 November 1991, eighteen months before the
respondent Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the
intention of petitioners to renege on their obligation is utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate Court,38 petitioners ask that they be granted
additional time to complete their obligation. Under the facts of the case, to give petitioners additional
time to comply with their obligation will be putting premium on their blatant non-compliance of their
obligation. They had all the time to do what was required of them (i.e., pay the P45,000.00 balance and
to properly assume the mortgage loan with the NHMFC), but still they failed to comply. Despite demands
for them to pay the balance, no payments were made.39
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.40 Their failure to fulfill their
obligation gave the respondents-spouses Galang the right to rescission.
Anent the second assigned error, we find that petitioners were not religious in paying the amortization
to rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely accepted the
installment payments as an accommodation to petitioners since they kept on promising they would pay.
However, after the lapse of considerable time (18 months from last payment) and the purchase price
was not yet fully paid, respondents-spouses exercised their right of rescission when they paid the
outstanding balance of the mortgage loan with NHMFC. It was only after petitioners stopped paying that
respondents-spouses moved to exercise their right of rescission.
Petitioners cite the case of Angeles v. Calasanz46 to support their claim that respondents-spouses waived
their right to rescind. We cannot apply this case since it is not on all fours with the case before us. First,
in Angeles, the breach was only slight and casual which is not true in the case before us. Second,
in Angeles, the buyer had already paid more than the principal obligation, while in the instant case, the
buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they were obligated to pay.
We find petitioners’ statement that there is no evidence of prejudice or damage to justify rescission in
favor of respondents-spouses to be unfounded. The damage suffered by respondents-spouses is the
effect of petitioners’ failure to fully comply with their obligation, that is, their failure to pay the
remaining P45,000.00 and to update the amortizations on the mortgage loan with the NHMFC.
Petitioners have in their possession the property under litigation. Having parted with their house and lot,
respondents-spouses should be fully compensated for it, not only monetarily, but also as to the terms
and conditions agreed upon by the parties. This did not happen in the case before us.
Citing Seva v. Berwin & Co., Inc.,47 petitioners argue that no rescission should be decreed because there
is no evidence on record that respondent Fernandina Galang is ready, willing and able to comply with her

25
own obligation to restore to them the total payments they made. They added that no allegation to that
with the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments
effect is contained in respondents-spouses’ Answer.
covered only thirty months.41 This, indeed, constitutes another breach or violation of the Deed of Sale
with Assumption of Mortgage. On top of this, there was no formal assumption of the mortgage
obligation with NHMFC because of the lack of approval by the NHMFC42 on account of petitioners’ non- We find this argument to be misleading.
submission of requirements in order to be considered as assignees/successors-in-interest over the
property covered by the mortgage obligation.43
First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the former, the failure
of one party to perform his obligation was the fault of the other party, while in the case on hand, failure
On the third assigned error, petitioners claim there was no clear evidence to show that respondents- on the part of petitioners to perform their obligation was due to their own fault.
spouses Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with
Assumption of Mortgage.
Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t (referring to the right to rescind or
resolve) can be demanded only if the plaintiff is ready, willing and able to comply with his own
We do not agree. obligation, and the other is not." In other words, if one party has complied or fulfilled his obligation, and
the other has not, then the former can exercise his right to rescind. In this case, respondents-spouses
complied with their obligation when they gave the possession of the property in question to petitioners.
There is sufficient evidence showing that demands were made from petitioners to comply with their
Thus, they have the right to ask for the rescission of the Deed of Sale with Assumption of Mortgage.
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.44 Respondent Fernandina Galang stated in her Answer45 that upon her arrival On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the
from America in October 1992, she demanded from petitioners the complete compliance of their Court of Appeals erred when it failed to consider that the action for rescission is subsidiary.
obligation by paying the full amount of the consideration (P120,000.00) or in the alternative to vacate
the property in question, but still, petitioners refused to fulfill their obligations under the Deed of Sale
Their reliance on Article 1383 is misplaced.
with Assumption of Mortgage. Sometime in March 1993, due to the fact that full payment has not been
paid and that the monthly amortizations with the NHMFC have not been fully updated, she made her
intentions clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with The subsidiary character of the action for rescission applies to contracts enumerated in Articles 138148 of
Assumption of Mortgage. the Civil Code. The contract involved in the case before us is not one of those mentioned therein. The
provision that applies in the case at bar is Article 1191.
We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the
Deed of Sale with Assumption of Mortgage. 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
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of
Appeals,49 rescission under Article 1191 was distinguished from rescission under Article 1381. Justice
J.B.L. Reyes said:
. . . 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 lesion or economic prejudice, the cause of
action is subordinated to the existence of that prejudice, because it is the raison d être 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 lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply
to cases under Article 1191.
From the foregoing, it is clear that rescission ("resolution" in the Old Civil Code) under Article 1191 is a
Mortgage, it behooves the court to settle the matter once and for all than to have the case re-litigated
again on an issue already heard on the merits and which this court has already taken cognizance of.
Having found that petitioners seriously breached the contract, we, therefore, declare the same is
rescinded in favor of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with Assumption
of Mortgage, it is the duty of the court to require the parties to surrender whatever they may have
received from the other. The parties should be restored to their original situation.51
The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the
P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As to the
petitioners’ alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia Cannu’s bare
allegation, we find the same not to be supported by competent evidence. As a general rule, one who
pleads payment has the burden of proving it.52 However, since it has been admitted in respondents-
spouses’ Answer that petitioners shall assume the second mortgage with CERF Realty in the amount of
P35,000.00, and that Adelina Timbang, respondents-spouses’ very own witness, testified53 that same has
been paid, it is but proper to return this amount to petitioners. The three amounts total P165,312.47 --
the sum to be returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments
made by petitioners in the amount of P165,312.47. With costs.

26
principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach
SO ORDERED.
by the other party that violates the reciprocity between the parties, while the latter is not.

In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay
the balance of P45,000.00 to respondents-spouses and their failure to update their amortizations with
the NHMFC.

Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the right to
unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage, they should have first
asked the court for the rescission thereof before they fully paid the outstanding balance of the mortgage
loan with the NHMFC. They claim that such payment is a unilateral act of rescission which violates
existing jurisprudence.

In Tan v. Court of Appeals,50 this court said:

. . . [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 is clear from a reading of the Civil Code
provisions. 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 the petitioner to rescind it without resort to the courts, the petitioner’s
action in unilaterally terminating the contract in this case is unjustified.

It is evident that the contract under consideration does not contain a provision authorizing its
extrajudicial rescission in case one of the parties fails to comply with what is incumbent upon him. This
being the case, respondents-spouses should have asked for judicial intervention to obtain a judicial
declaration of rescission. Be that as it may, and considering that respondents-spouses’ Answer (with
affirmative defenses) with Counterclaim seeks for the rescission of the Deed of Sale with Assumption of
 FIRST DIVISION
In a Decision15 dated March 1, 2010, the RTC ruled in favor of respondents and, accordingly, ordered: (a)
the rescission of the subject contract; and (b) the return of the amounts already paid by respondents to
G.R. No. 210215, December 09, 2015
petitioners, as well as the remaining post-dated checks issued by respondent Celerino S. Cuerpo
representing the remaining monthly amortizations.16
ROGELIO S. NOLASCO, NICANORA N. GUEVARA, LEONARDA N. ELPEDES, HEIRS OF ARNULFO S.
NOLASCO, AND REMEDIOS M. NOLASCO, REPRESENTED BY ELENITA M. NOLASCO Petitioners, It found petitioners to have substantially breached paragraph 7 of the subject contract which states that
v. CELERINO S. CUERPO, JOSELITO ENCABO, JOSEPH ASCUTIA, AND DOMILO LUCENARIO, Respondents. "[t]he [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 said contract], from
DECISION Edilberta N. Santos to their names, at [petitioners'] own expense."17 As such, respondents were entitled
to rescission under Article 1191 of the Civil Code.18

PERLAS-BERNABE, J.: Dissatisfied, petitioners appealed19 to the CA.

Assailed in this petition for review on certiorari1 are the Decision2 dated June 17, 2013 and the The CA Ruling
Resolution3 dated November 19, 2013 of the Court of Appeals (CA) in CA-G.R. CV No. 95353, which
4 20
affirmed in toto the Decision dated March 1, 2010 of the Regional Trial Court of Quezon City, Branch 81 In a Decision dated June 17, 2013, the CA affirmed the RTC ruling. It agreed with the RTC that
(RTC) in Civil Case No. Q-08-63860 ordering the rescission of the Contract to Sell executed by herein petitioners substantially breached paragraph 7 of the subject contract when they did not effect the
parties and the return of the amounts already paid by respondents Celerino S. Cuerpo, Joselito Encabo, transfer of the subject land from Edilberta N. Santos to petitioners' names within ninety (90) days from
Joseph Ascutia, and Domilo Lucenario (respondents) to petitioners Rogelio S. Nolasco, Nicanora N. the execution of said contract, thus, entitling respondents to rescind the same. In this relation, the CA
Guevara, Leonarda N. Elpedes, Heirs of Arnulfo S. Nolasco, and Remedios M. Nolasco, represented by held that under the present circumstances, the forfeiture of the payments already made by respondents
Elenita M. Nolasco (petitioners), as well as the remaining post-dated checks issued by respondent to petitioners is clearly improper and unwarranted.21
Celerino S. Cuerpo representing the remaining monthly amortizations, all in connection with the said
contract. Aggrieved, petitioners moved for reconsideration,22 which was denied in a Resolution23 dated November
19, 2013; hence, this petition.
The Facts
The Issue Before the Court
27
On July 22, 2008, petitioners and respondents entered into a Contract to Sell5 (subject contract) over a
165,775-square meter parcel of land located in Barangay San Isidro, Rodriguez, Rizal covered by Original The core issue for the Court's resolution is whether or not the CA correctly affirmed the rescission of the
Certificate of Title No. 152 (subject land).6 The subject contract provides, inter alia, that: (a) the subject contract and the return of the amounts already paid by respondents to petitioners, as well as the
consideration for the sale is P33,155,000.00 payable as follows: down payment in the amount of remaining post-dated checks issued by respondent Celerino S. Cuerpo representing the remaining
P11,604,250.00 inclusive of the amount of P2,000,000.00 previously paid by respondents as earnest monthly amortizations.
money/reservation fee, and the remaining balance of P21,550,750.00 payable in 36 monthly
installments, each in the amount of P598,632.00 through post-dated checks; (b) in case any of the checks The Court's Ruling
is dishonored, the amounts already paid shall be forfeited in petitioners' favor, and the latter shall be
entitled to cancel the subject contract without judicial recourse in addition to other appropriate legal
The petition is partially meritorious.
action; (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 Edilberta N. Santos to
petitioners' names, and, should they fail to do so, respondents may cause the said transfer and charge In reciprocal obligations, either party may rescind - or more appropriately, resolve - the contract upon
the costs incurred against the monthly amortizations; and (e) upon full payment of the purchase price, the other party's substantial breach of the obligation/s he had assumed thereunder.24 This is expressly
petitioners shall transfer title over the subject land to respondents.7 However, respondents sent provided for in Article 1191 of the Civil Code which states:
petitioners a letter8 dated November 7, 2008 seeking to rescind the subject contract on the ground of
financial difficulties in complying with the same. They also sought the return of the amount of Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
P12,202,882.00 they had paid to petitioners.9 As their letter went unheeded, respondents filed the should not comply with what is incumbent upon him.
instant complaint10 for rescission before the RTC.11

In their defense,12 petitioners countered that respondents' act is a unilateral cancellation of the subject The injured party may choose between the fulfillment and the rescission of the obligation, with the
contract as the former did not consent to it. Moreover, the ground of financial difficulties is not among payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the grounds provided by law to effect a valid rescission.13 the latter should become impossible.

In view of petitioners' failure to file the required pre-trial brief, they were declared "as in default" and, The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
consequently, respondents were allowed to present their evidence ex-parte.14
period.

The RTC Ruling


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.
"More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a
breach of faith that violates the reciprocity between the parties to the contract. This retaliatory remedy
is given to the contracting party who suffers the injurious breach on the premise that it is 'unjust that a
party be held bound to fulfill his promises when the other violates his.'"25 Note that the rescission (or
resolution) of a contract will not be permitted for a slight or casual breach, but only for such substantial
and fundamental violations as would defeat the very object of the parties in making the
agreement.26 Ultimately, the question of whether a breach of contract is substantial depends upon the
attending circumstances.27
In the instant case, both the RTC and the CA held that petitioners were in substantial breach of
paragraph 7 of the subject contract as they did not cause the transfer of the property to their names
from one Edilberta N. Santos within 90 days from the execution of said contract.28
The courts a quo are mistaken.
Paragraph 7 of the subject contract state in full:
31
Compulsory Counterclaim and Motion for Summary Judgment filed before the RTC, petitioners neither
prayed for this specific relief nor argued that they were entitled to the same. Worse, petitioners were
declared "as in default" for failure to file the required pre-trial brief and, thus, failed to present any
evidence in support of their defense.32 It is settled that "[w]hen a party deliberately adopts a certain
theory and the case is decided upon that theory in the court below, 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."33 The Court's
pronouncement in Peña v. Spouses Tolentino34 is instructive on this matter, to wit:
Indeed, the settled rule in this jurisdiction, according to Mon v. Court of Appeals, is that a party cannot
change his theory of the case or his cause of action on appeal. This rule affirms that "courts of justice
have no jurisdiction or power to decide a question not in issue." Thus, a judgment that goes beyond the
issues and purports to adjudicate something on which the court did not hear the parties is not only
irregular but also extrajudicial and invalid. The legal theory under which the controversy
was heard and decided in the trial court should be the same theory under which the review on
appeal is conducted. Otherwise, prejudice will result to the adverse party. We stress that points of
law, theories, issues, and arguments not adequately brought to the attention of the lower court will
not be ordinarily considered by a reviewing court, inasmuch as they cannot be raised for the first time
on appeal. This would be offensive to the basic rules of fair play, justice, and due process. 35 (Emphasis
and underscoring supplied)

7. [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. (Emphasis and underscoring supplied)
WHEREFORE, the petition is PARTIALLY GRANTED. Accordingly, the Decision dated June 17, 2013 and
the Resolution dated November 19, 2013 of the Court of Appeals in CA-G.R. CV No. 95353 are
hereby REVERSED and SET ASIDE. The Contract to Sell executed by the parties on July 22, 2008
remains VALID and SUBSISTING. 28
SO ORDERED.

A plain reading of paragraph 7 of the subject contract reveals that while the RTC and the CA were indeed
correct in finding that petitioners failed to perform their obligation to effect the transfer of the title to
the subject land from one Edilberta N. Santos to their names within the prescribed period, said courts
erred in concluding that such failure constituted a substantial breach that would entitle respondents to
rescind (or resolve) the subject contract. To reiterate, for a contracting party to be entitled to rescission
(or resolution) in accordance with Article 1191 of the Civil Code, the other contracting party must be in
substantial breach of the terms and conditions of their contract. A substantial breach of a contract,
unlike slight and casual breaches thereof, is a fundamental breach that defeats the object of the parties
in entering into an agreement.29 Here, it cannot be said that petitioners' failure to undertake their
obligation under paragraph 7 defeats the object of the parties in entering into the subject contract,
considering that the same paragraph provides respondents contractual recourse in the event of
petitioners' non-performance of the aforesaid obligation, that is, to cause such transfer themselves in
behalf and at the expense of petitioners.

Indubitably, there is no substantial breach of paragraph 7 on the part of petitioners that would
necessitate a rescission (or resolution) of the subject contract. As such, a reversal of the rulings of the
RTC and the CA is in order.

The foregoing notwithstanding, the Court cannot grant petitioners' prayer in the instant petition to order
the cancellation of the subject contract and the forfeiture of the amounts already paid by respondents
on account of the latter's failure to pay its monthly amortizations,30 simply because in their Answer with
 G.R. No. 157480 May 6, 2005
PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioners,
vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of
benefits received. The consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law, morals, good customs, public order
or public policy, they shall be respected by courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however, are
empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties
agreed upon by the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 22, 2002
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003 Resolution3 denying
petitioner’s Motion for Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil
Case No. 93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce
Properties Corporation the total amount of P687,289.50 as actual damages representing the
accrued rentals for the quarter September to November 1993 with interest and penalty at the
rate of two percent (2%) per month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorney’s fees; (2) In Civil Case No. 93-
68337, the appealed decision is REVERSED and SET ASIDE and a new judgment is rendered
ordering [Petitioner] Pryce Properties Corporation to reimburse [Respondent] Philippine
Amusement and Gaming Corporation the amount of P687,289.50 representing the advanced
rental deposits, which amount may be compensated by [Petitioner] Pryce Properties
Corporation with its award in Civil Case No. 93-68266 in the equal amount of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC
for brevity) made representations with the Philippine Amusement and Gaming Corporation
(PAGCOR) on the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro City.
[A] series of negotiations followed. PAGCOR representatives went to Cagayan de Oro City to
determine the pulse of the people whether the presence of a casino would be welcomed by
the residents. Some local government officials showed keen interest in the casino operation
and expressed the view that possible problems were surmountable. Their negotiations
culminated with PPC’s counter-letter proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom
of the Hotel for a period of three (3) years starting December 1, 1992 and until November 30,
1995. On November 13, 1992, they executed an addendum to the contract x x x which
included a lease of an additional 1000 square meters of the hotel grounds as living quarters
and playground of the casino personnel. PAGCOR advertised the start of their casino
operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution
No. 2295 x x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or not
to allow the establishment of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x
x x dated October 19, 1992 (or a month before the contract of lease was executed) was
subsequently passed reiterating with vigor and vehemence the policy of the City under
Resolution No. 2295, series of 1990, banning casinos in Cagayan de Oro City. On December 7,
1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted Ordinance No. 3353 x x x
prohibiting the issuance of business permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or any portion thereof for the
operation of a casino.
"In the afternoon of December 18, 1992 and just hours before the actual formal opening of
casino operations, a public rally in front of the hotel was staged by some local officials,
29
residents and religious leaders. Barricades were placed [which] prevented some casino
personnel and hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An agreement between PPC
and PAGCOR, on one hand, and representatives of the rallyists, on the other, eventually
ended the rally on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod
of Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty for
violation thereof. On January 7, 1993, PPC filed a Petition for Prohibition with Preliminary
Injunction x x x against then public respondent Cagayan de Oro City and/or Mayor Pablo P.
Magtajas x x x before the Court of Appeals, docketed as CA G.R. SP No. 29851 praying inter
alia, for the declaration of unconstitutionality of Ordinance No. 3353. PAGCOR intervened in
said petition and further assailed Ordinance No. 4475-93 as being violative of the non-
impairment of contracts and equal protection clauses. On March 31, 1993, the Court of
Appeals promulgated its decision x x x, the dispositive portion of which reads:
‘IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93
are hereby DECLARED UNCONSTITUTIONAL and VOID and the respondents and all
other persons acting under their authority and in their behalf are PERMANENTLY
ENJOINED from enforcing those ordinances.
‘SO ORDERED.’
"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the
case to the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20,
1994 x x x, the Supreme Court denied the petition and affirmed the decision of the Court of
Appeals.
 "In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which,
however, another public rally was held. Casino operations continued for some time, but were
later on indefinitely suspended due to the incessant demonstrations. Per verbal advice x x x
from the Office of the President of the Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior to
September, 1993. In two Statements of Account dated September 1, 1993 x x x, PPC apprised
PAGCOR of its outstanding account for the quarter September 1 to November 30, 1993. PPC
sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up to the parties’
earlier conference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x stating
its Board of Directors’ decision to collect the full rentals in case of pre-termination of the
lease.
First, on the appeal of PAGCOR, the CA ruled that the PAGCOR’S pretermination of the Contract of Lease
was unjustified. The appellate court explained that public demonstrations and rallies could not be
considered as fortuitous events that would exempt the gaming corporation from complying with the
latter’s contractual obligations. Therefore, the Contract continued to be effective until PPC elected to
terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had the
right to ask for (1) rescission of the Contract and indemnification for damages; or (2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.

As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC correctly
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable
exercised the option to terminate the lease agreement. Previously, the Contract remained effective, and
to the payment of the full rentals citing as reasons unforeseen legal and other circumstances
PPC could collect the accrued rentals. However, from the time it terminated the Contract on November
which prevented it from complying with its obligations. PAGCOR further stated that it had no
25, 1993, PPC could no longer demand payment of the remaining rentals as part of actual damages, the
other alternative but to pre-terminate the lease agreement due to the relentless and
CA added.
vehement opposition to their casino operations. In a letter dated October 12, 1993 x x x,
PAGCOR asked PPC to refund the total of P1,437,582.25 representing the reimbursable rental
deposits and expenses for the permanent improvement of the Hotel’s parking lot. In a letter Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR had
dated November 5, 1993 x x x, PAGCOR formally demanded from PPC the payment of its acted in gross or evident bad faith in failing to pay the rentals from September to November 1993. Such
claim for reimbursement. failure was shown especially by the fact that PPC still had in hand three (3) months advance rental
deposits of PAGCOR. The former could have simply applied this deposit to the unpaid rentals, as
provided in the Contract. Neither did PPC adequately show that its reputation had been besmirched or
"On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of
the hotel’s goodwill eroded by the establishment of the casino and the public protests.
Manila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case
for sum of money in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR had not
presented official receipts to prove the latter’s alleged expenses. The appellate court, however, upheld
30
"In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the
the trial court’s award to PPC of P50,000 attorney’s fees.
contract of lease due to PAGCOR’s continuing breach of the contract and further stated that it
was exercising its rights under the contract of lease pursuant to Article 20 (a) and (c) thereof.
Hence this Petition.6
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266,
which the trial court admitted in an Order dated February 11, 1994. In an Order dated April Issues
27, 1994, Civil Case No. 93-68377 was ordered consolidated with Civil Case No. 93-68266.
These cases were jointly tried by the court a quo. On August 17, 1995, the court a quo In their Memorandum, petitioner raised the following issues:
promulgated its decision. Both parties appealed."5

In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award actual
and moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the court’s
ruling that the 2 percent penalty was to be imposed from the date of the promulgation of the Decision,
not from the date stipulated in the Contract.
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that
Pryce was not entitled to future rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR?

On the other hand, PAGCOR criticized the trial court for the latter’s failure to rule that the Contract of
Lease had already been terminated as early as September 21, 1993, or at the latest, on October 14, "Sub-Issues:
1993, when PPC received PAGCOR’s letter dated October 12, 1993. The gaming corporation added that
the trial court erred in 1) failing to consider that PPC was entitled to avail itself of the provisions of "1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the
Article XX only when PPC was the party terminating the Contract; 2) not finding that there were valid, right of PRYCE to terminate the Contract for cause and to moreover collect rentals from
justifiable and good reasons for terminating the Contract; and 3) dismissing the Complaint of PAGCOR in PAGCOR corresponding to the remaining term of the lease valid and binding?
Civil Case No. 93-68337 for lack of merit, and not finding PPC liable for the reimbursement of PAGCOR’S
cash deposits and of the value of improvements.
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract,
PRYCE having ‘rescinded’ the Contract of Lease?
Ruling of the Court of Appeals
 "3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited by
PAGCOR support its position that PRYCE was not entitled to future rentals?
"4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?
"5. Could we not have ‘harmonized’ Article 1659 of the Civil Code and Article 20 of the
Contract of Lease?
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts,
particularly in the PRYCE-PAGCOR Contract of Lease?"7
The Court’s Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is different from the remedy of rescission prescribed
under Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that Article
1659 of the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals, because it
chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith."8 In deference to the rights
of the parties, the law9 allows them to enter into stipulations, clauses, terms and conditions they may
deem convenient; that is, as long as these are not contrary to law, morals, good customs, public order or
public policy. Likewise, it is settled that if the terms of the contract clearly express the intention of the
contracting parties, the literal meaning of the stipulations would be controlling.10
In this case, Article XX of the parties’ Contract of Lease provides in part as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall
be deemed essential conditions of this contract, and in the event of default or breach of any
of such terms, conditions and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors, the LESSOR shall have the right to terminate and
cancel this contract by giving them fifteen (15 days) prior notice delivered at the leased
premises or posted on the main door thereof. Upon such termination or cancellation, the
LESSOR may forthwith lock the premises and exclude the LESSEE therefrom, forcefully or
otherwise, without incurring any civil or criminal liability. During the fifteen (15) days notice,
the LESSEE may prevent the termination of lease by curing the events or causes of
termination or cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to
the remaining term of the lease as well as for any and all damages, actual or consequential
resulting from such default and termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right to
terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with the
provisions of the Contract by stipulating that a default or breach, among others, shall give the lessee the
termination option, coupled with the lessor’s liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order or
public policy. Neither is there anything objectionable about the inclusion in the Contract of mandatory
provisions concerning the rights and obligations of the parties.11 Being the primary law between the
parties, it governs the adjudication of their rights and obligations. A court has no alternative but to
enforce the contractual stipulations in the manner they have been agreed upon and written. 12 It is well
to recall that courts, be they trial or appellate, have no power to make or modify contracts.13 Neither can
they save parties from disadvantageous provisions.
31
Termination or Rescission?
Well-taken is petitioner’s insistence that it had the right to ask for "termination plus the full payment of
future rentals" under the provisions of the Contract, rather than just rescission under Article 1659 of the
Civil Code. This Court is not unmindful of the fact that termination and rescission are terms that have
been used loosely and interchangeably in the past. But distinctions ought to be made, especially in this
controversy, in which the terms mean differently and lead to equally different consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the general provision on rescission of
reciprocal obligations; 2) Article 1659,15 which authorizes rescission as an alternative remedy, insofar as
the rights and obligations of the lessor and the lessee in contracts of lease are concerned; and 3) Article
138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J. B. L. Reyes differentiated
rescission under Article 1191 from that under Article 1381 et seq. as follows:
"x x x. 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 to 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 rescission by reason of lesion or economic prejudice, the cause of action when it abrogated the Contract on November 25, 1993, because such abrogation was not
is subordinated to the existence of that prejudice, because it is the raison d’etre as well as the the rescission provided for under Article 1659.
measure of the right to rescind. x x x."18
Future Rentals
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil
Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable, because the remedy
Article 1659).19
resorted to by the lessors in that case was rescission, not termination. The rights and obligations of the
parties in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the damages
Now, as to the distinction between termination (or cancellation) and rescission (more to which the lessor was entitled could not have extended to the lessee’s liability for future rentals.
properly, resolution), Huibonhoa v. CA20 held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus, the
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of
remedy was not rescission, but termination or cancellation, of the contract. The Court explained:
another’s property after the termination of a contract. We stress that by abrogating the Contract in the
present case, PPC released PAGCOR from the latter’s future obligations, which included the payment of
"x x x. By the allegations of the complaint, the Gojoccos’ aim was to cancel or terminate the rentals. To grant that right to the former is to unjustly enrich it at the latter’s expense.
contract because they sought its partial enforcement in praying for rental arrearages. There is
a distinction in law between cancellation of a contract and its rescission. To rescind is to
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest from a
declare a contract void in its inception and to put an end to it as though it never were. It is not
reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph (c) of the
merely to terminate it and release parties from further obligations to each other but to
Contract. A penal clause is "an accessory obligation which the parties attach to a principal obligation for
abrogate it from the beginning and restore the parties to relative positions which they would
the purpose of insuring the performance thereof by imposing on the debtor a special prestation
have occupied had no contract ever been made.
(generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled."26
"x x x. The termination or cancellation of a contract would necessarily entail enforcement of its
terms prior to the declaration of its cancellation in the same way that before a lessee is
Quite common in lease contracts, this clause functions to strengthen the coercive force of the obligation

32
ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued
and to provide, in effect, for what could be the liquidated damages resulting from a breach.27 There is
prior to his ejectment. However, termination of a contract need not undergo judicial
nothing immoral or illegal in such indemnity/penalty clause, absent any showing that it was forced upon
intervention. x x x."21 (Italics supplied)
or fraudulently foisted on the obligor.28

Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the beginning,
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the
and not merely its termination." Rescission may be effected by both parties by mutual agreement; or
indemnity for damages and the payment of interests in case of noncompliance; that is, if there is no
unilaterally by one of them declaring a rescission of contract without the consent of the other, if a legally
stipulation to the contrary,29 in which case proof of actual damages is not necessary for the penalty to be
sufficient ground exists or if a decree of rescission is applied for before the courts.22 On the other 30
demanded. There are exceptions to the aforementioned rule, however, as enumerated in paragraph 1
hand, termination refers to an "end in time or existence; a close, cessation or conclusion." With respect
of Article 1226 of the Civil Code: 1) when there is a stipulation to the contrary, 2) when the obligor is
to a lease or contract, it means an ending, usually before the end of the anticipated term of such lease or
sued for refusal to pay the agreed penalty, and 3) when the obligor is guilty of fraud. In these cases, the
contract, that may be effected by mutual agreement or by one party exercising one of its remedies as a
purpose of the penalty is obviously to punish the obligor for the breach. Hence, the obligee can recover
consequence of the default of the other.23
from the former not only the penalty, but also other damages resulting from the nonfulfillment of the
principal obligation. 31
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to
their original situation prior to the inception of the contract.24 Applying this principle to this case, it
In the present case, the first exception applies because Article XX (c) provides that, aside from the
means that PPC would re-acquire possession of the leased premises, and PAGCOR would get back the
payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be liable
rentals it paid the former for the use of the hotel space.
"for any and all damages, actual or consequential, resulting from such default and termination of this
contract." Having entered into the Contract voluntarily and with full knowledge of its provisions,
In contrast, the parties in a case of termination are not restored to their original situation; neither is the PAGCOR must be held bound to its obligations. It cannot evade further liability for liquidated damages.
contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with
their contractual obligations. Only after the contract has been cancelled will they be released from their
Reduction of Penalty
obligations.
32
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts. This power
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
Contract from the beginning. This fact was evident when it first sought to collect the accrued rentals
from September to November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination. Any intent to rescind was not shown, even "Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
 performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the
courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to -- the
type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and relationship of the parties; and the like.33
In this case, PAGCOR’s breach was occasioned by events that, although not fortuitous in law, were in fact
real and pressing. From the CA’s factual findings, which are not contested by either party, we find that
PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It did so
not only with the PPC, but also with local government officials, who assured it that the problems were
34
surmountable. Likewise, PAGCOR took pains to contest the ordinances before the courts, which
consequently declared them unconstitutional. On top of these developments, the gaming corporation
was advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the
former to cease operations prior to September 1993.
Also worth mentioning is the CA’s finding that PAGCOR’s casino operations had to be suspended for days
on end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice of the
Office of President, until the formal cessation of operations in September 1993. Needless to say, these
interruptions and stoppages meant that PAGCOR suffered a tremendous loss of expected revenues, not
to mention the fact that it had fully operated under the Contract only for a limited time.
While petitioner’s right to a stipulated penalty is affirmed, we consider the claim for future rentals to the
tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the
circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for
respondent’s breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay
petitioner the additional amount of P687,289.50 as penalty, which may be set off or applied against the
former’s advanced rental deposits. Meanwhile, the CA’s award to petitioner of actual damages
representing the accrued rentals for September to November 1993 -- with interest and penalty at the
rate of two percent (2%) per month, from the date of filing of the Complaint until the amount shall have
been fully paid -- as well as the P50,000 award for attorney’s fees, is AFFIRMED. No costs.
SO ORDERED.
G.R. No. 96643. April 23, 1993.
ERNESTO DEIPARINE, JR., petitioner,
vs.
THE HON. COURT OF APPEALS, CESARIO CARUNGAY and ENGR. NICANOR TRINIDAD, respondents.
Gregorio B. Escasinas for petitioner.
Florido and Associates for respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; RESCISSION IS USED IN TWO DIFFERENT CONTEXTS IN THE CIVIL CODE. —
Deiparine seems to be confused over the right of rescission, which is used in two different contexts in
the Civil Code. Under the law on contracts, there are what are called "rescissible contracts" which are
enumerated in Article 1381 . . . There is also a right of rescission under the law on obligations as granted
in Article 1191.
2. ID.; ID.; ARTICLES 19, 1159, 1191, 1714, 1715 AND 1727, CIVIL CODE ARE APPLICABLE, WHILE ARTICLES
1381, 1385 AND 1725, SAME CODE ARE NOT, IN CASE OF BREACH OF CONSTRUCTION CONTRACT. — The
petitioner challenges the application by the lower court of Article 1191 of the Civil Code in rescinding the
construction agreement. His position is that the applicable rules are Articles 1385 and 1725 of the Civil
33
Code . . . Article 1385, upon which Deiparine relies, deals with the rescission of the contracts
enumerated above, which do not include the construction agreement in question . . . The construction
contract falls squarely under the coverage of Article 1191 because it imposes upon Deiparine the
obligation to build the structure and upon the Carungays the obligation to pay for the project upon its
completion. Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the
parties but on breach of faith by one of them that violates the reciprocity between them. The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's
failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to
rescind or cancel the contract. Article 1725 cannot support the petitioner's position either, for this
contemplates a voluntary withdrawal by the owner without fault on the part of the contractor, who is
therefore entitled to indemnity, and even damages, for the work he has already commenced. There is no
such voluntary withdrawal in the case at bar. On the contrary, the Carungays have been constrained to
ask for judicial rescission because of the petitioner's failure to comply with the terms and conditions of
their contract. The other applicable provisions are: Article 1714 . . . Article 1715 . . . Article 1727 . . . It is a
basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every person must,
in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith." This admonition is reiterated in Article 1159, which states that "obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith." The
petitioner has ignored these exhortations and is therefore not entitled to the relief he seeks.
3. ADMINISTRATIVE LAW; THE PHILIPPINE DOMESTIC CONSTRUCTION BOARD HAS NO POWER TO
ADJUDICATE A CASE FOR RESCISSION OF CONSTRUCTION CONTRACT. — The wording of P.D. 1746 is
clear. The adjudicatory powers of the Philippine Domestic Construction Board are meant to apply only to
public construction contracts. Its power over private construction contracts is limited to the formulation
and recommendation of rules and procedures for the adjudication and settlement of disputes involving
such (private) contracts. It therefore has no jurisdiction over cases like the one at bar which remain
cognizable by the regular courts of justice.
4. LEGAL AND JUDICIAL ETHICS; COUNSEL WHO TRIES TO MISLEAD THE COURT BY DELIBERATELY
MISQUOTING THE LAW IS SUBJECT TO DISCIPLINE. — Counsel is obviously trying to mislead the Court.
First, he purposely misquotes Section 6(b), paragraph 3, substituting the word "the" for "public," . . .
Second, he makes the wrong emphasis in paragraph 5, . . . For deliberately changing the language of the
above-quoted paragraph 3, Atty. Gregorio B. Escasinas has committed contempt of this Court and shall
be disciplined. As for paragraph 5, the correct stress should be on the words "formulate and
recommend," which is all the body can do, rather than on adjudication and settlement."
DECISION
CRUZ, J p:
This case involves not only the factual issue of breach of contract and the legal questions of jurisdiction
and rescission. The basic inquiry is whether the building subject of this litigation is safe enough for its
future occupants. The petitioner says it is, but the private respondents demur. They have been sustained
by the trial court and the appellate court. The petitioner says they have all erred.
The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto Deiparine, Jr. on
August 13, 19B2, for the construction of a three-story dormitory in Cebu City. 1 The Carungays agreed to
pay P970,000.00, inclusive of contractor's fee, and Deiparine bound himself to erect the building "in
strict accordance to (sic) plans and specifications." Nicanor Trinidad, Jr., a civil engineer, was designated
as the representative of the Carungay spouses, with powers of inspection and coordination with the
contractor.
Construction Development Board pursuant to Presidential Decree No. 1746. The motion was denied in
an order dated April 12, 1984.
After trial on the merits, Judge Juanito A. Bernad rendered judgment: a) declaring the construction
agreement rescinded; b) condemning Deiparine to have forfeited his expenses in the construction in the
same of P244,253.70; c) ordering Deiparine to reimburse to the spouses Carungay the sum of P15,104.33
for the core testing; d) ordering Deiparine to demolish and remove all the existing structures and restore
the premises to their former condition before the construction began, being allowed at the same time to
take back with him all the construction materials belonging to him; and e) ordering Deiparine to pay the
Carungay spouses attorney's fees in the amount of P10,000.00 as well as the costs of the suit. 7
On appeal, the decision was affirmed in toto by the respondent court on August 14, 1990. 8 His motion
for reconsideration having been denied, petitioner Ernesto Deiparine, Jr. has come to this Court to
question once more the jurisdiction of the regular courts over the case and the power of the trial court
to grant rescission. He will lose again.
The challenge to the jurisdiction of the trial court is untenable.
P.D. 1746 created the Construction Industry Authority of the Philippines (CIAP) as the umbrella
organization which shall exercise jurisdiction and supervision over certain administrative bodies acting as
its implementing branches. The implementing body in this case is the Philippine Domestic Construction
Board (PDCB) and not the inexistent Philippine Construction Development Board as maintained by
Deiparine.

Deiparine started the construction on September 1, 1982. 2 On November 6, 1982, Trinidad sent him a
document entitled General Conditions and Specifications which inter alia prescribed 3,000 psi (pounds
Among the functions of the PDCB under Section 6 of the decree are to: 34
per square inch) as the minimum acceptable compressive strength of the building. 3
xxx xxx xxx

In the course of the construction, Trinidad reported to Cesario Carungay that Deiparine had been
3. Adjudicate and settle claims and implementation of public construction contracts and for this purpose,
deviating from the plans and specifications, thus impairing the strength and safety of the building. On
formulate and adopt the necessary rules and regulations subject to the approval of the President:
September 25, 1982, Carungay ordered Deiparine to first secure approval from him before pouring
cement. 4 This order was not heeded, prompting Carungay to send Deiparine another memorandum
complaining that the "construction works are faulty and done haphazardly . . . mainly due to lax xxx xxx xxx
supervision coupled with . . . inexperienced and unqualified staff." 5 This memorandum was also
ignored. 5. Formulate and recommend rules and procedures for the adjudication and settlement of claims and
disputes in the implementation of contracts in private construction; (Emphasis supplied)
After several conferences, the parties agreed to conduct cylinder tests to ascertain if the structure thus
far built complied with safety standards. Carungay suggested core testing. Deiparine was reluctant at Deiparine argues that the Philippine Construction Development Board (that is, the Philippine Domestic
first but in the end agreed. He even promised that if the tests should show total failure, or if the failure Construction Board) has exclusive jurisdiction to hear and try disputes arising from domestic
should exceed 10%, he would shoulder all expenses; otherwise, the tests should be for the account of constructions. He invokes the above-mentioned functions to prove his point.
Carungay.

The core testing was conducted by Geo-Testing International, a Manila-based firm, on twenty-four core
samples. On the basis of 3,000 psi, all the samples failed; on the basis of 2,500 psi, only three samples
passed; and on the basis of 2,000 psi, nineteen samples failed. 6 This meant that the building was
structurally defective.
In view of this finding, the spouses Carungay filed complaint with the Regional Trial Court of Cebu for the
rescission of the construction contract and for damages. Deiparine moved to dismiss, alleging that the
court had no jurisdiction over construction contracts, which were now cognizable by the Philippine
His counsel is obviously trying to mislead the Court. First, he purposely misquotes Section 6(b),
paragraph 3, substituting the word "the" for "public," thus:
3. Adjudicate and settle claims and disputes in the implementation of the construction contracts and for
this purpose, formulate and adopt the necessary rules and regulations subject to the approval of the
President; (Emphasis ours).
Second, he makes the wrong emphasis in paragraph 5, thus:
5. Formulate and recommend rules and procedures for the ADJUDICATION and SETTLEMENT of CLAIMS
and DISPUTES in the implementation of CONTRACTS in PRIVATE CONSTRUCTIONS.
For deliberately changing the language of the abovequoted paragraph 3, Atty. Gregorio P. Escasinas has
committed contempt of this Court and shall be disciplined. As for paragraph 5, the correct stress should
be on the words "formulate and recommend," which is all the body can do, rather than on "adjudication
and settlement."
The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic Construction
Board are meant to apply only to public construction contracts. Its power over private construction
contracts is limited to the formulation and recommendation of rules and procedures for the adjudication
and settlement of disputes involving such (private) contracts. It therefore has no jurisdiction over cases
like the one at bar which remain cognizable by the regular courts of justice.
On the issue of rescission, Deiparine insists that the construction agreement does not specify any
compressive strength for the structure nor does it require that the same be subjected to any kind of
stress test. Therefore, since he did not breach any of his covenants under the agreement, the court erred
in rescinding the contract.
The record shows that Deiparine commenced the construction soon after the signing of the contract,
even before Trinidad had submitted the contract documents, including the General Conditions and
Specifications.
According to Eduardo Logarta, the petitioner's own project engineer, Deiparine actually instructed him
and some of the other workers to ignore the specific orders or instructions of Carungay or Trinidad
relative to the construction. 9 Most of these orders involved safety measures such as: (1) the use of two
concrete vibrators in the pouring of all columns, beams and slabs; (2) making PVC pipes well-capped to
prevent concrete from setting inside them; (3) the use of 12-mm reinforcement bars instead of 10-mm
bars; (4) the use of mixed concrete reinforcements instead of hollow block reinforcements; and (5)
securing the approval of the owner or his representative before any concrete-pouring so that it could be
determined whether the cement mixture complied with safety standards. Deiparine obviously wanted to
avoid additional expenses which would reduce his profit.
Parenthetically, it is not disputed that Deiparine is not a civil engineer or an architect but a master
mariner and former ship captain; 10 that Pio Bonilla, a retainer of Deiparine Construction, was not the
supervising architect of the protect; 11 that the real supervisor of the construction was Eduardo-Logarta,
who was only a third year civil engineering student at the time; 12 that his understudy was Eduardo
Martinez, who had then not yet passed the board examinations; 13 and that the supposed project
engineer, Nilo Paglinawan, was teaching full-time at the University of San Jose-Recoletos, and had in fact
entered the construction site only after November 4, 1982, although the construction had already begun
two months earlier. 14
It was after discovering that the specifications and the field memorandums were not being followed by
Deiparine that Carungay insisted on the stress tests.
There were actually two sets of specifications. The first "Specifications" are labeled as such and are but a
general summary of the materials to be used in the construction. These were prepared by Trinidad prior
to the execution of the contract for the purpose only of complying with the document requirements of
the loan application of Cesario Carungay with the Development Bank of the Philippines. The other
specifications, which were also prepared by Trinidad, are entitled "General Conditions and
Specifications" and laid down in detail the requirements of the private respondent in the construction of
his building.
In his testimony, Deiparine declared that when the contract was signed on August 13, 1982, it was
understood that the plans and specifications would be given to him by Trinidad later. 15 Deiparine thus
admitted that the plans and specifications referred to in the construction agreement were not the first
Specifications but the General Conditions and Specifications submitted by Trinidad in November 1982.
This second set of specifications required a structural compressive strength of 3,000 psi. 16 It completely
belies Deiparine's contention that no compressive strength of the dormitory was required.
Deiparine further argues that by following the concrete mixture indicated in the first specifications, that
is, 1:2:4, the structure would still attain a compressive strength of 2,500 psi, which was acceptable for
dormitories. According to him, the 3,000 psi prescribed in the General Conditions and Specifications was
recommended for roads, not for buildings. In so arguing, he is interpreting the two specifications
together but applying only the first and rejecting the second.
Deiparine also avers that the contract does not also require any kind of test to be done on the structure
and that, test or no test, he has not violated the agreement. Nevertheless, he subjected the building to a
cylinder test just to convince Carungay that the unfinished dormitory was structurally sound.
A cylinder test is done by taking samples from fresh concrete, placing them in a cylinder mold and
allowing them to harden for a maximum of 28 days, following which they are subjected to compression
to determine if the cement mixture to be poured conforms to accepted standards in construction. 17
35
Carungay was not satisfied with the results of the cylinder test because they were inconsistent and could
easily be falsified by the simple expedient of replacing the samples with a good mixture although a
different mixture had been used in the actual pouring. Consequently, Carungay requested core testing, a
more reliable procedure because the specimens obtained by extracting concrete from the hardened
existing structure would determine its actual strength. The core test is less prone to manipulation than
the cylinder test because the samples in the former are taken from the building which is already
standing. 18
Deiparine vehemently refused to go along with the core test, insisting that the results of the cylinder test
earlier made were conclusive enough to prove that the building was structurally sound. What was the
real reason for this refusal? After all, Carungay would shoulder the expenses if the specimens passed the
core test, unlike the cylinder test, which was for the petitioner's account. The only logical explanation
would be that Deiparine was not sure that the core test would prove favorable to him.
We see no reason to disturb the factual finding of the courts below that Deiparine did not deal with the
Carungays in good faith. His breach of this duty constituted a substantial violation of the contract
correctible by judicial rescission.
The petitioner challenges the application by the lower court of Article 1191 of the Civil Code in rescinding
the construction agreement. His position is that the applicable rules are Articles 1385 and 1725 of the
Civil Code.
Article 1385 states:
Rescission creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Article 1725 provides that in a contract for a piece of work:
The owner may withdraw at will from the construction of the work, although it may have been
commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness which
the owner may obtain therefrom, and damages.
Deiparine seems to be confused over the right of rescission, which is used in two different contexts in
the Civil Code.
Under the law on contracts, there are what are called "rescissible contracts" which are enumerated in
Article 1381 thus:
(1) Those which are entered into by guardians whenever the wards who they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number:
(3) Those undertaken in fraud of creditors when the later cannot in any other manner collect the claims
due them:
(4) Those which refer to things under litigation if they have been entered into by the defendants without
the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1385, upon which Deiparine relies, deals with the rescission of the contracts enumerated above,
which do not include the construction agreement in question.
There is also a right of rescission under the law on obligations as granted in Article 1191, providing as
follows:
"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between 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.
This was the provision the trial court and the respondent court correctly applied because it relates to
contracts involving reciprocal obligations like the subject construction contract. The construction
contract fails squarely under the coverage of Article 1191 because it imposes upon Deiparine the
obligation to build the structure and upon the Carungays the obligation to pay for the project upon its
completion.
Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the, parties but on
breach of faith by one of them that violates the reciprocity between them. 19 The violation of reciprocity
between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's failure to follow
the stipulated plans and specifications, has given the Carungay spouses the right to rescind or cancel the
contract.
Article 1725 cannot support the petitioner's position either, for this contemplates a voluntary
withdrawal by the owner without fault on the part of the contractor, who is therefore entitled to
indemnity, and even damages, for the work he has already commenced. there is no such voluntary
withdrawal in the case at bar. On the contrary, the Carungays have been constrained to ask for judicial
rescission because of the petitioner's failure to comply with the terms and conditions of their contract.
The other applicable provisions are:
Article 1714. If the contractor agrees to produce the work from material furnished by him, he shall
deliver the thing produced to the employer and transfer dominion over the thing. This contract shall be
governed by the following articles as well as by the pertinent provisions on warranty of title and against
hidden defects and the payment of price in a contract of sale.
Article 1715. The contractor shall execute the work in such a manner that it has the qualities agreed
upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use.
Should the work be not of such quality, the employer may require that the contractor remove the defect
or execute another work. If the contractor fails or refuses to comply with this obligation, the employer
36
may have the defect removed or another work executed, at the contractor's cost.
Article 1727. The contractor is responsible for the work done by persons employed by him.
While it is true that the stress test was not required in any of the contract documents, conducting the
test was the only manner by which the owner could determine if the contractor had been faithfully
complying with his presentations under their agreement. Furthermore, both parties later agreed in
writing that the core test should be conducted. When the structure failed under this test the Carungay
spouses were left with no other recourse than to rescind their contract.
It is a basic principle in human relations, acknowledged in Article 19 of the Civil Code, that "every person
must, in the performance of his duties, act with justice, give everyone his due, and observe honesty and
good faith." This admonition is reiterated in Article 1159, which states that "obligations arising from
contracts have the force of law between the contracting parties and should be complied with in good
faith." The petitioner has ignored these exhortations and is therefore not entitled to the relief he seeks.
WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition for review is DENIED,
with costs against the petitioner. For deliberately changing the language of Section 6(b), paragraph 3, of
P.D. No. 1746, Atty. Gregorio B. Escasinas is hereby fined P1,000.00, with the warning that repetition of a
similar offense will be dealt with more severely. It is so ordered. Concur.
Griño-Aquino, Bellosillo and Quiason, JJ ., concur.
 THIRD DIVISION
G.R. No. 130913 June 21, 2005
OLIVERIO LAPERAL and FILIPINAS GOLF & COUNTRY CLUB INC., petitioners,
vs.
SOLID HOMES, INC., respondent.
SOUTHRIDGE VILLAGE HOMEOWNERS ASSOCIATION, intervenor.
DECISION
GARCIA, J.:
Before us is this petition for review on certriorari under Rule 45 of the Rules of Court to nullify and set
aside the following issuances of the Court of Appeals in CA-G.R. CV No. 37853, to wit:
1. Decision dated September 18, 1996,1 affirming with modification an earlier decision of the
Regional Trial Court at Laguna, Br. XXV, in an action for reformation of document thereat
commenced by herein respondent Solid Homes, Inc. against the petitioners; and
2. Resolution dated September 23, 1997,2 denying the parties’ respective motions for
reconsideration.
As found by the Court of Appeals in the decision under review, the material facts may be briefly stated,
as follows:
On June 6, 1981, Filipinas Golf Sales and Development Corporation (FGSDC), predecessor-in-interest of
petitioner Filipinas Golf and Country Club, Inc. (FGCCI), represented by its then President, the other
petitioner herein, Oliverio Laperal, entered into a Development and Management
Agreement3 (Agreement, for short) with herein respondent Solid Homes, Inc., a registered subdivision
developer, involving several parcels of land owned by Laperal and FGSDC with an aggregate area of
approximately 42 hectares and located at Bo. San Antonio, San Pedro, Laguna.
Under the terms and conditions of the aforementioned Agreement and the Supplement4 thereto dated
January 19, 1982, respondent Solid Homes, Inc., undertook to convert at its own expense the land
subject of the agreement into a first-class residential subdivision, in consideration of which respondent
will get 45% of the lot titles of the saleable area in the entire project.
On different dates, or more specifically on June 8, 1983, June 22, 1983 and July 29, 1983, Victorio V.
Soliven, President and General Manager of respondent Solid Homes, Inc., wrote Oliverio Laperal,
President of FGSDC, requesting Laperal to furnish Solid Homes, Inc., with the owner’s duplicate copies of
the Torrens titles covering the subject land in order to facilitate the processing of respondent’s
application with the Human Settlements Regulatory Commission (HSRC) for a license to sell subdivision
lots, as required under Presidential Decree No. 957.
Despite repeated requests, however, Laperal did not comply.
On October 7, 1983, the aforementioned Agreement was cancelled by the parties, and, in lieu thereof,
two (2) contracts identically denominated Revised Development and Management Agreement5 (Revised
Agreements, for short) were entered into by respondent with the two (2) successors-in-interest of
FGSDC, to wit: (1) one, with petitioner Oliverio Laperal as owner of the 181,075-square meter area of the
subject land; and (2) another, with petitioner FGCCI as owner of the 399,075-square meter area thereof.
Unlike the original agreement, both Revised Agreements omitted the obligation of herein petitioners
Laperal and FGCCI to make available to respondent Solid Homes, Inc. the owner’s duplicate copies of the
titles covering the subject parcels of land.
And, because there were still other matters which were inadvertently omitted in the said Revised
Agreements, the parties executed an Addendum6 thereto dated November 11, 1983.
In addition to the provision on the automatic rescission of the Revised Agreements in case of breach of
the terms and conditions thereof under paragraph 10 of the same, the parties further agreed in
the Addendum that upon a showing that respondent deliberately abandoned or discontinued work in the
subject project, all improvements of whatever nature and kind it may have introduced in the property
and existing as of the date of the violation shall be forfeited in favor of the petitioners without any
obligation on their part to pay respondent therefor. Likewise, the parties agreed in the
same Addendum to a forfeiture of all advances made and remittances of proceeds from reservations and
sales upon occurrence of the aforesaid default or violation of any of the terms and conditions of
the Revised Agreements and the Addendum. Under the Addendum, abandonment is deemed to have
occurred upon failure or absence of any work for development for any ten (10) days.
It appears, however, that even as the Revised Agreements already provided for the non-surrender of the
37
owner’s duplicate copies of the titles, respondent persisted in its request for the delivery thereof,
explaining that said owner’s duplicate copies were necessary for: (1) the issuance by the HSRC of the
license to sell; (2) the segregation of the golf course portion from the rest of the subdivision area; (3) the
segregation of the individual titles for portions which are supposed to be made available for PAG-IBIG
take-outs; and (4) the preparation of the technical description of nine (9) blocks already approved by the
Bureau of Lands.
Then, in a letter dated December 7, 1983 addressed to herein petitioners, respondent, through its
Executive Vice-President and Treasurer, Purita R. Soliven, explained that it was unable to meet the
November 30, 1983 deadline for the payment of ₱1 Million as provided for in the Revised
Agreements because there was delay in the processing of its license to sell, which, in turn, is due to
petitioners’ continued refusal to deliver the owner’s duplicate copies of the titles, contrary to what was
allegedly agreed upon by the parties. Respondent reiterated in the same letter that in the absence of
such license from HSRC, it would not be able to comply with the rest of its undertakings within the
allotted periods since the projected collection of amounts from sales and reservations of the subdivision
lots did not materialize. Nonetheless, in order to demonstrate that it was not reneging on its
commitments under the Revised Agreements despite its difficulties to generate more funds, respondent
proposed that it be allowed to assign to petitioners ₱1Million out of its receivables worth ₱1,209,000.00
from loan proceeds due in its favor under the PAG-IBIG housing program, which it expected to receive
for some of the completed housing units.
In separate letters both dated December 9, 1983, however, petitioners rejected respondent’s proposal
and instead insisted on the payment of ₱1Million to each of them.
It was only at this point, as alleged in respondent’s reply letter dated December 13, 1983, that
respondent supposedly realized that instead of providing for the payment of only ₱500,000.00 in each
contract, or a total of ₱1Million for both Revised Agreements, the total amount of ₱1Million was
erroneously carried over in each of the Revised Agreements, with the consequence that under said two
(2) Revised Agreements, it was bound to pay a total of ₱2Million to the petitioners.
Meanwhile, in subsequent letters dated January 6, 1984, January 17, 1984 and February 6, 1984,
respondent continued to press petitioners for the delivery of the owner’s duplicate copies of their titles
covering the subject parcel of land.
Then, on March 9, 1984, petitioners served on respondent notices of rescission of the Revised
Agreements with a demand to vacate the subject properties and yield possession thereof to them. In the
same letter, petitioners made it clear that they are enforcing the rescission clause of the Revised
Agreements on account of respondents’ failure to: (1) pay them ₱1Million each on November 30,
1983; (2) complete the development of Phase I-A of the project not later than February 15, 1984;
and (3) obtain from the HSRC the license to sell subdivision lots.
In its response-letter dated March 14, 1984, respondent, through counsel, objected to the announced
rescission, arguing that the proximate cause of its inability to meet its contractual obligations was
petitioners’ own failure and refusal to deliver their owner’s duplicate copies of the titles for processing
by the HSRC, PAG-IBIG, accredited banks, and other government agencies, adding that on account of
petitioners’ failure to do so, it was not issued the necessary license to sell, thus resulting in the
slowdown in the development works in the project due to its inability to generate additional funds and
to the slackening of its sales campaign.
Such was the state of things when, on April 2, 1984, in the Regional Trial Court (RTC) at Biñan, Laguna
respondent Solid Homes, Inc. instituted the complaint in this case praying for the reformation of
the Revised Agreements and the Addendum on the ground that these contracts failed to express the true
intent of the parties. In the same complaint, respondent prayed for the issuance of a temporary
restraining order (TRO) and a writ of preliminary injunction to prevent petitioners from exercising their
rights as owners of the subject properties. Docketed with the same court as Civil Case No. B-2069, the
complaint was raffled to Branch XXV thereof.
On the very day that the complaint was filed, the trial court issued a TRO to prevent petitioners from
implementing the unilateral rescission of the Revised Agreements and the Addendum.
Later, in an order dated May 23, 1984,7 the same court granted respondent’s application for a writ of
preliminary injunction upon its posting of a bond in the amount of ₱1Million.
On April 18, 1985,8 the Southridge Village Homeowner’s Association filed a complaint-in-intervention
praying that the rights and preferential status of its members who have been occupying some of the
completed units in the subdivision project be respected by whoever between the principal litigants may
later be adjudged as the prevailing party.
Both the petitioners and respondent filed their respective answers to the aforesaid complaint-in-
intervention, commonly alleging intervenor’s lack of capacity to sue. Petitioners added in their answer
that it should be respondent which must be made solely liable to the intervenor for whatever claims its
members may be entitled to. For its part, respondent prayed for the cancellation, in whole or in part, of
its contracts with the members of the intervenor Association to the extent compatible with prevailing
economic conditions.
Upon petitioners’ motion, the trial court issued an order on May 20, 1985 lifting the writ of preliminary
injunction over the entire property except as to Phase I-A thereof, and reducing respondent’s injunction
bond from ₱1Million to only ₱200,000.00.
Petitioners then filed a motion for reconsideration. Finding merit in the motion, the trial court, in its
order of August 15, 1985,9 as clarified in its order of September 27, 1985,10 completely lifted the writ of
preliminary injunction so as to include the area covered by Phase I-A, and cancelled the bond of
₱200,000.00 earlier posted by respondent.
To these orders, both parties filed their respective motions for reconsideration. In its subsequent order
dated November 8, 1985,11 the trial court modified its August 15, 1985 order by maintaining the
complete lifting of the writ of preliminary injunction but ordering the restoration of respondent’s
₱1Million bond or its substitution with another if the same had already been cancelled, to answer for
whatever damages that may be proven by the petitioners during the trial of the case.
The above-mentioned orders, namely, orders dated May 20, 1985, August 15, 1985, September 27, 1985
and November 8, 1985 involving the dissolution of the writ of preliminary injunction over the entire
property and the maintenance of the ₱1Million bond against respondent, became the subject of a
petition for certiorari filed by respondent before the Court of Appeals docketed therein as CA-G.R. SP No.
47885.
In a decision dated October 9, 1987, the Court of Appeals dismissed the petition.
Therefrom, respondent went to this Court in G.R, No. 80290 but later abandoned the same, prompting
this Court, in its Resolution dated February 22, 1988, to consider the Court of Appeals’ dismissal of
respondent’s petition final and executory.
Meanwhile, upon respondent’s application, a notice of lis pendens was annotated on the Torrens titles
covering the properties in litigation. Said notice, however, was lifted by the trial court in its orders of
38
April 12, 1988 and May 21, 1991.
Eventually, after due proceedings in the main case, the trial court, in a decision dated December 19,
1991,12 rendered judgment dismissing respondent’s complaint for reformation. We quote the dispositive
portion of the same decision:
IN THE LIGHT OF THE FOREGOING, judgment is hereby rendered in favor of the defendants and against
the plaintiff dismissing the complaint with costs:
On defendants’ recovery upon the bond posted by the plaintiff to answer to whatever damages that the
party enjoined may suffer by reason of the injunction, resolution as to the propriety of its award is
hereby held in abeyance until after proper application by the defendants and hearing thereon, as
reserved by the defendants in their memorandum.
As regards the Intervenors, the defendants are directed to respect and acknowledge their preferential
rights over said Intervenors’ occupied houses and lots.
SO ORDERED.
Therefrom, respondent went to the Court of Appeals via ordinary appeal in CA-G.R. CV No. 37853.
As stated at the threshold hereof, the Court of Appeals, in a decision dated September 18,
1996,13 affirmed with modification the appealed decision of the trial court, thus:
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision appealed from is AFFIRMED with the
modification that [petitioners] are ordered to reimburse [respondent], jointly and severally, the amount
of Five Million Two Hundred Thousand Eight Hundred Thirty Three Pesos and Twenty Seven Centavos
(₱5,200,833.27) representing the actual cost of the development and the completed improvements on
the project. In all other respects, the judgment of the trial court is AFFIRMED.
SO ORDERED.
Both parties separately moved for reconsideration, but their respective motions were denied by the
14
appellate court in its resolution of September 23, 1997.
And, as they did not agree with the judgment, petitioners are now appealing to this Court for
relief via the present recourse, it being their submission that the Court of Appeals erred-
I.
xxx IN HOLDING THAT PETITIONERS’ TERMINATION OF THE REVISED AGREEMENT AND ADDENDUM,
BECAUSE OF THE CONTRACTUAL BREACH COMMITTED BY RESPONDENT SOLID HOMES, CARRIED WITH IT
THE EFFECT PROVIDED UNDER ARTICLE 1385 OF THE NEW CIVIL CODE.
II.
xxx IN VOIDING THE FORFEITURE CLAUSES OF THE ADDENDUM, AND IN ORDERING THE REFUND OF THE
SUM OF ₱5,200,833.27 TO RESPONDENT SOLID HOMES.
III.
xxx IN HOLDING, IN EFFECT, THAT PETITIONERS ARE NOT ENTITLED TO DAMAGES.
The Court finds merit in the petition.
While this Court does not agree with petitioners that the right to rescind under Article 1191 of the Civil
Code does not carry with it the corresponding obligation for restitution, we do not subscribe to the Court
of Appeals’ conclusion that: (1) "the forfeiture/penalty clause under paragraphs Nos. 2 and 3 of the
‘Addendum to the Revised Development and Management Agreements’ is, under the factual milieu of
this case, unreasonable and unconscionable and, therefore, void for being contrary to morals and good
customs"15; and (2) petitioners must reimburse respondent the actual cost of development and
completed improvements on the project in the total amount of ₱5,200,833.27.16
It is petitioners’ thesis that inasmuch as the rescission of the Revised Agreements and its Addendum was
made pursuant to Article 1191 of the Civil Code, the provision of Article 138517 of the same Code, which
requires mutual restitution – should not apply because Article 1385 applies only if the rescission is made
under the instances enumerated in Article 138118 of the Code.
We do not agree.
Mutual restitution is required in cases involving rescission under Article 1191. In Velarde vs. Court of
Appeals,19 this Court, in no uncertain terms, squarely ruled on this matter:
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the
amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore (citing Co v. Court of
Appeals, 312 SCRA 528, August 17, 1999; and Vitug, Compendium of Civil Law and Jurisprudence, 1993
revised ed., p. 556). 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 (citing Ocampo v. Court of Appeals, 233 SCRA 551, June 30, 1994).
Article 1191 of the Civil Code provides:
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 the
period. 39
This is understood without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law. (1124)
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the
term "resolution", the amendment thereto (presently, Article 1191) explicitly and clearly used the term
"rescission". Unless Article 1191 is subsequently amended to revert back to the term "resolution", this
Court has no alternative but to apply the law, as it is written.
Again, since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain petitioners’ position that said Article
1385 does not apply to rescission under Article 1191.
In Palay, Inc. vs. Clave,20 this Court applied Article 1385 in a case involving "resolution" under Article
1191, thus:
Regarding the second issue on refund of the installment payments made by private respondent. Article
1385 of the Civil Code provides:
"ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when
he who demands rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the contract are legally in the For sure, we find no factual and legal justification to sustain the appellate court’s conclusion that the
possession of third persons who did not act in bad faith. agreed forfeiture/penalty clause is unreasonable and unconscionable unless respondent had sufficiently
shown that it had completely accounted for the proceeds of the sale of subdivision lots it made during
the effectivity of the agreement. It must be stressed that the lots sold by respondent were owned by
"In this case, indemnity for damages may be demanded from the person causing the loss."
petitioners Laperal and FGCCI. How then could there be unjust enrichment in favor of petitioners in such
a case?
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
Furthermore, a substantial part of the funds spent by respondent in the construction works which by the
property had already been sold to a third person and there is no evidence on record that other lots are
Court of Appeals required to be reimbursed by petitioners admittedly came from the proceeds of the
still available, private respondent is entitled to the refund of installments paid plus interest at the legal
sale of the real property still owned by petitioners. This may be gleaned from the fact that one of the
rate of 12% computed from the date of the institution of the action. It would be most inequitable if
main reasons respondent raised in its complaint for reformation before the trial court was that it was
petitioners were to be allowed to retain private respondent's payments and at the same time
unable to proceed with the construction works due to lack of funds on account of the slackening of its
appropriate the proceeds of the second sale to another.
sales campaign resulting from the alleged refusal, which is after all justified, of the petitioners to
surrender their titles to respondent.
Applying the clear language of the law and the consistent jurisprudence on the matter, therefore, the
Court rules that rescission under Article 1191 in the present case, carries with it the corresponding
Finally, even assuming that the foregoing forfeiture/penalty clause in the "Addendum" would result in
obligation of restitution.
considerable losses on the part of respondent, it is not for this Court to release said party from its
obligation. Our pronouncement in Esguerra vs. Court of Appeals24 is apt and pertinent:
This notwithstanding, the Court does not agree with the Court of Appeals that, as a consequence of the
obligation of mutual restitution in this case, petitioners should return the amount of ₱5,200,833.27 to
xxx. It is a long established doctrine that the law does not relieve a party from the effects of an unwise,
respondent.
foolish, or disastrous contract, entered into with all the required formalities and with full awareness of
what he was doing. Courts have no power to relieve parties from obligations voluntarily assumed, simply
Article 1191 states that "the injured party may choose between fulfillment and rescission of the because their contracts turned out to be disastrous deals or unwise investments." xxx.
obligation, with the payment of damages in either case." In other words, while petitioners are indeed
obliged to return the said amount to respondent under Article 1385, assuming said figure is correct,
respondent is at the same time liable to petitioners in the same amount as liquidated damages by virtue
of the forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum, paragraphs 1
WHEREFORE, the petition is hereby GRANTED. Accordingly, the assailed decision and resolution of the
Court of appeals are REVERSED and SET ASIDE and the decision dated December 19, 1991 of the Regional
40
Trial Court in Civil Case No. B-2069 REINSTATED.
and 221 of which respectively read:

No pronouncement as to costs.
WHEREAS, included as part of said agreement are the following:

SO ORDERED.
1. Further to the stipulations on paragraph 10, upon default of performances, violations and/or non-
compliance with the terms and conditions herein agreed upon by the DEVELOPER wherein it appears
that the DEVELOPER deliberately abandoned or discontinued the work on the project, said party shall
lose any entitlement, if any, to any refund and/or advances it may have incurred in connection with or
relative to previous development works in the subdivision; likewise, all improvements of whatever
nature and kind introduced by the DEVELOPER on the property, existing as of the date of default or
violation, shall automatically belong to the OWNER without obligation on his part to pay for the costs
thereof.

2. Similarly with the same condition of default or violation obtaining, as stated in paragraph 10 of said
agreement, all advances made and remittances of proceeds from reservations and sales given by the
DEVELOPER to the OWNER as provided for in this agreement shall be deemed absolutely forfeited in
favor of the OWNER, resulting to waiver of DEVELOPER’s rights, if any, with respect to said amount(s).

If this Court recognized the right of the parties to stipulate on an extrajudicial rescission 22 under Article
1191, there is no reason why this Court will not allow the parties to stipulate on the matter of damages
in case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code governing
liquidated damages.23
 G.R. No. 185765, September 28, 2016
In its defense, Pilhino claimed that there was no starting date from which its obligation to deliver could
be reckoned, considering that the Complaint supposedly failed to allege acceptance by Pilhino of the
PHILIPPINE ECONOMIC ZONE AUTHORITY, Petitioner, v. PILHINO SALES CORPORATION, Respondent.
purchase order.20 Pilhino suggested that there was not even a meeting of minds between it and the
Philippine Economic Zone Authority.21
DECISION
In its November 2, 2005 Decision,22 the Regional Trial Court ruled for the Philippine Economic Zone
LEONEN, J.: Authority. The dispositive portion of the Decision reads:

Although the provisions of a contract are legally null and void, the stipulated method of computing WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering
liquidated damages may be accepted as evidence of the intent of the parties. The provisions, therefore, the latter to:
can be basis for finding a factual anchor for liquidated damages. The liable party may nevertheless
present better evidence to establish a more accurate basis for awarding damages. In this case, the
1. Pay the plaintiff in liquidated damages a[t] the rate of 1/10 of 1% of the total
respondent failed to do so.
contract price of Php 5,800,000.00 for each day of delay commencing from June
19, 1998.
1 2
This resolves a Petition for Review on Certiorari praying that the assailed May 2, 2008 Decision and
November 25, 2008 Resolution3 of the Court of Appeals in CA G.R. CV No. 86406 be reversed and set 2. Pay the plaintiff exemplary damages in the amount of Php 100,00[0].00.
aside and that the Decision4 dated November 2, 2005 of Branch 108 of the Regional Trial Court of Pasay
City in Civil Case No. 00-0343 be reinstated.
3. That the contract be declared rescinded and the performance bond posted by the
defendant be forfeited in favor of the plaintiff.
The Regional Trial Court's November 2, 2005 Decision ruled in favor of petitioner Philippine Economic
Zone Authority, which, as plaintiff, brought an action for rescission of contract and damages against the
defendant, now respondent Pilhino Sales Corporation (Pilhino).5chanrobleslaw 4. For defendant to pay the cost of the suit.

The assailed Court of Appeals Decision partly granted Pilhino's appeal by reducing the amount of
liquidated damages due from it to the Philippine Economic Zone Authority, and by deleting the forfeiture
of its performance bond.6 The assailed Court of Appeals Resolution denied the Philippine Economic Zone
SO ORDERED.23
Pilhino then appealed before the Court of Appeals.
41
Authority's Motion for Reconsideration.7chanrobleslaw
In its assailed May 2, 2008 Decision,24 the Court of Appeals partly granted Pilhino's appeal by deleting the
The facts are not disputed, and all that is in issue is the consequence of Pilhino's contractual breach. forfeiture of Pilhino's performance bond and pegging the liquidated damages due from it to the
Philippine Economic Zone Authority in the amount of P1,400,000.00.
On October 4, 1997, the Philippine Economic Zone Authority published an invitation to bid in the
Business Daily for its acquisition of two (2) brand new fire truck units "with a capacity of 4,000-5,000 The Court of Appeals debunked Pilhino's claim that there was no meeting of minds. It emphasized that
liters [of] water and 500-1,000 liters [of chemical foam,] with complete accessories."8chanrobleslaw Pilhino "manifested its acquiescence . . . [to] the Purchase Order . . . when it submitted to [the Philippine
Economic Zone Authority] a Performance Bond dated 02 June 1999 and Indemnity Agreement dated 09
Three (3) companies participated in the bidding: Starbilt Enterprise, Inc., Shurway Industries, Inc., and June 1998 duly signed by its Vice President."25cralawred It added that in a subsequent letter dated
Pilhino.9 Pilhino secured the contract for the acquisition of the fire trucks.10 The contract price was March 29, 199926 "signed by [Pilhino's] Hino Division Manager Edgar R. Santiago and noted by VP-
initially at P3,000,000.00 per truck, but this was reduced after negotiation to P2,900,000.00 per Operations Roberto R. Garcia, [Pilhino] admitted that it can no longer meet the requirements regarding
truck.11chanrobleslaw the specification on the two (2) units of fire truck[s]."27

The contract awarded to Pilhino stipulated that Pilhino was to deliver to the Philippine Economic Zone
Authority two (2) FF3HP brand fire trucks within 45 days of receipt of a purchase order from the
Philippine Economic Zone Authority.12 A further stipulation stated that "[i]n case of fail[u]re to deliver
the . . . good on the date specified . . . , the Supplier agree[s] to pay penalty at the rate of 1/10 of 1% of
the total contract price for each days [sic] commencing on the first day after the date stipulated
above."13
The Philippine Economic Zone Authority furnished Pilhino with a purchase order dated November 6,
1997.14 Pilhino failed to deliver the trucks as it had committed.15 This prompted the Philippine Economic
Zone Authority to make formal demands on Pilhino on July 27, 199816 and on February 23, 1999.17 As
Pilhino still failed to comply, the Philippine Economic Zone Authority filed before the Regional Trial Court
of Pasay City a Complaint18 for rescission of contract and damages. This was docketed as Civil Case No.
00-0343 and raffled to Branch 108.19
In this March 29, 1999 letter, Pilhino not only acknowledged its inability to meet its obligations but also
proposed a modified arrangement with the Philippine Economic Zone Authority:
[P]lease allow us to submit our new proposal for your consideration (please see attached specifications).
Our price for this new specification if P3,600,000.00/unit. However, we are willing to shoulder the
difference between the original price of P2,900,000.00/unit and P3,600,000.00 in lieu of the penalty.
May we also request your good office to stop the accumulation of the penalty [.]28
In calibrating the amount of liquidated damages, the Court of Appeals cited Articles 122929 and 222730 of
the Civil Code. It reasoned that through its March 29, 1999 letter, Pilhino made an attempt at
rectification or mitigation:
In the instant case, we consider the supervening reality that after appellant's failure to deliver to
appellee the two (2) brand new units of fire trucks in accordance with the specifications previously
agreed upon, appellant nevertheless tried to remedy the situation by offering to appellee new
specifications at P3,600,000.00 per unit; and expressed willingness to shoulder the difference between
the original price (based on the contract) of P2,900,000.00 per unit and the price corresponding to the
new specifications. Further, it is undisputed that appellee has not paid any amount to appellant in
connection with said undelivered two (2) brand new units of fire trucks. We thus equitably reduce said
liquidated damages to P1,400,000.00, which is the difference between the contract price of
P5,800,000.00 and P7,200,000.00 based on the new specifications for two (2) new units of fire
trucks.31chanroblesvirtuallawlibrary
The Philippine Economic Zone Authority moved for reconsideration of the modifications to the Regional
Trial Court's award. As this Motion was denied in the Court of Appeals' assailed November 25, 2008
Resolution,32 the Philippine Economic Zone Authority filed the present Petition.
Petitioner asks for the reinstatement of the Regional Trial Court's award asserting that it already suffered
damage when respondent Pilhino Sales Corporation failed to deliver the trucks on time;33 that the
contractually stipulated penalty of 1/10 of 1% of the contract price for every day of delay was neither
unreasonable34 nor contrary to law, morals, or public order;35 that the stipulation on liquidated damages
was freely entered into by it and respondent;36 and that the Court of Appeals' computation had no basis
in fact and law.37 Regarding respondent's supposed attempt at mitigation, petitioner notes that by the
time the offer was made, the Complaint for rescission and damages had already been filed38 and was,
therefore, inconsequential and hardly a remedy.
Commenting on petitioner's Petition,39 respondent raises the question of:
Whether or not a contract can be rescinded and declared void ab initio, and then thus rescinded, can a
stipulation for liquidated damages or penalty contained in that very same contract be given separate life,
force and effect, that is, separate and distinct from the rescinded and voided contract itself?40
Therefore, respondent suggests that with the rescission of its contract with petitioner must have come
the negation of the contractual stipulation on liquidated damages and the obliteration of its liability for
such liquidated damages.41
We resolve the twin issues of:
First, the propriety of an award based on contractually stipulated liquidated damages notwithstanding
the rescission of the same contract stipulating it; and
Second, on the assumption that such award is proper, the propriety of the Court of Appeals' reduction of
the liquidated damages due to petitioner.
I Regarding the second issue on refund of the installment payments made by private respondent. Article
Respondent's intimation that with the rescission of a contract necessarily and inexorably follows the
obliteration of liability for what the same contracts stipulates as liquidated damages 42 is entirely
misplaced.
A contract of. sale, such as that entered into by petitioner and respondent, entails reciprocal obligations.
As explained in Spouses Velarde v. Court of Appeals,43 "[i]n a contract of sale, the seller obligates itself to
transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain
44
in money or its equivalent." chanrobleslaw
Rescission on account of breach of reciprocal obligations is provided for in Article 1191 of the Civil Code:
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 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. (Emphasis supplied)
Respondent correctly notes that rescission under Article 1911 results in mutual restitution.
Jurisprudence has long settled that the restoration of the contracting parties to their original state is the
very essence of rescission. In Spouses Velarde:
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments . . .
should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of
the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. 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.45 (Citations omitted)
Laperal v. Solid Homes, Inc.46 has explained how the restitution spoken of in rescission under Article 1385
42
of the Civil Code equally holds true for rescission under Article 1191 of the Civil Code:
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the
term "resolution", the amendment thereto (presently, Article 1191) explicitly and clearly used the term
"rescission". Unless Article 1191 is subsequently amended to revert back to the term "resolution", this
Court has no alternative but to apply the law, as it is written.
Again, since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain petitioners' position that said Article
1385 does not apply to rescission under Article 1191.
In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case involving "resolution" under Article 1191,
thus:
1385 of the Civil Code provides:
"ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when
he who demands rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the person causing the loss."
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots are
still available, private respondent is entitled to the refund of installments paid plus interest at the legal
rate of 12% computed from the date of the institution of the action. It would be most inequitable if We see no reason for departing from this. It is true that Laperal involved extrajudicial rescission, while
petitioners were to be allowed to retain private respondent's payments and at the same time this case involves rescission through judicial action. The distinction between judicial and extrajudicial
appropriate the proceeds of the second sale to another. rescission is in how extrajudicial rescission is possible only when the contract has an express stipulation
to that effect.50 This distinction does not diminish the rights of a contracting party under Article 1191 of
Applying the clear language of the law and the consistent jurisprudence on the matter, therefore, the
the Civil Code and is immaterial for purposes of the availability of liquidated damages.
Court rules that rescission under Article 1191 in the present case, carries with it the corresponding
obligation of restitution.47 (Citations omitted)
To sustain respondent's claim would be to sustain an absurdity and an injustice. Respondent's position
Contrary to respondent's assertion, mutual restitution under Article 1191 is, however, no license for the suggests that with rescission must necessarily come the obliteration of the punitive consequence which,
negation of contractually stipulated liquidated damages. to begin with, was the product of its own (along with the other contracting party's) volition. Its position
turns delinquency into a profitable enterprise, enabling contractual breach to itself be the means for
Article 1191 itself clearly states that the options of rescission and specific performance come with "with evading its own fallout. It is a position we cannot tolerate.
the payment of damages in either case." The very same breach or delay in performance that triggers
rescission is what makes damages due.
II
When the contracting parties, by their own free acts of will, agreed on what these damages ought to be,
In calibrating the amount of liquidated damages, the Court of Appeals relied on how respondent
they established the law between themselves. Their contemplation of the consequences proper in the
supposedly attempted to rectify things "by offering to [petitioner] new specifications at P3,600,000.00
event of a breach has been articulated. When courts are, thereafter, confronted with the need to award
per unit; and expressed willingness to shoulder the difference between the original price (based on the
damages in tandem with rescission, courts must not lose sight of how the parties have explicitly stated,
contract) of P2,900,000.00 per unit and the price corresponding to the new
in their own language, these consequences. To uphold both Article 1191 of the Civil Code and the
specifications."51chanrobleslaw
parties' will, contractually stipulated liquidated damages must, as a rule, 48 be maintained.
As underscored by petitioner, however, this offer was inconsequential and hardly a remedy to the
What respondent purports to be the ensuing nullification of liquidated damages is not a novel question
predicament it found itself in.
in jurisprudence. This matter has been settled, and respondent's position has been rebuked. In Laperal:
Petitioner already suffered damage by respondent's mere delay. Philippine Economic Zone Authority
This notwithstanding, the Court does not agree with the Court of Appeals that, as a consequence of the

43
Director General Lilia B. De Lima's internal memorandum to its Board of Directors emphasized what was,
obligation of mutual restitution in this case, petitioners should return the amount of P5,200,833.27 to
at the time, the specific urgency of obtaining fire trucks:
respondent.
1. With the increase in the number of locator-enterprises at the regular zones, there is a need for
Article 1191 states that "the injured party may choose between fulfillment and rescission of the
additional units of fire trucks to address any eventuality. The onset of the El Niño phenomena further
obligation, with the payment of damages in either case." In other words, while petitioners are indeed
makes it imperative that PEZA be more prepared.
obliged to return the said amount to respondent under Article 1385, assuming said figure is correct,
respondent is at the same time liable to petitioners in the same amount as liquidated damages by virtue
2. At present, there are only six (6) units of serviceable fire trucks distributed as follows:
of the forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum, paragraphs 1
and 2 of which respectively read:
Bataan EZ 2
Baguio City EZ 1
WHEREAS, included as part of said agreement are the following:
Cavite EZ 1
Further to the stipulations on paragraph 10, upon default of performances, violations and/or non- Mactan EZ 252 (Emphasis supplied)
compliance with the terms and conditions herein agreed upon by the DEVELOPER wherein it appears
that the DEVELOPER deliberately abandoned or discontinued the work on the project, said party shall
The Court of Appeals itself recognized that "time was of the essence when the contract . . . was awarded
lose any entitlement, if any, to any refund and/or advances it may have incurred in connection with or
to [respondent] and the non-compliance therewith exposed [petitioner's] operations [at] risk."53
relative to previous development works in the subdivision; likewise, all improvements of whatever
nature and kind introduced by the DEVELOPER on the property, existing as of the date of default or
Respondent's attempt at rectification came too late and under such circumstances that petitioner was
violation, shall automatically belong to the OWNER without obligation on his part to pay for the costs
no longer even in a position to accept respondent's offer. As petitioner notes, by the time respondent
thereof.
made its offer, the Complaint for rescission and damages had already been filed before the Regional-Trial
Court of Pasay City.54 If at all, the offer was nothing more than a belated reaction to undercut litigation.
2. Similarly with the same condition of default or violation obtaining, as stated in paragraph 10 of said
agreement, all advances made and remittances of proceeds from reservations and sales given by the
By the time respondent made its attempt at rectification, petitioner was no longer capable of
DEVELOPER to the OWNER as provided for in this agreement shall be deemed absolutely forfeited in
accommodating contractual modifications. Jurisprudence has established the impropriety of modifying
favor of the OWNER, resulting to waiver of DEVELOPER'S rights, if any, with respect to said amount(s).
awarded contracts that were previously subjected to public bidding, such as that between petitioner and
If this Court recognized the right of the parties to stipulate on an extrajudicial rescission under Article respondent:
1191, there is no reason why this Court will not allow the parties to stipulate on the matter of damages
in case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code governing An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not
liquidated damages.49 (Citations omitted) simply in terms of application of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract bidded upon. Each bidder must be able to
bid on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify
certain provisions in the contract awarded such that the contract is altered in any material respect, then
the essence of fair competition in the public bidding is destroyed. A public bidding would indeed be a
farce if after the contract is awarded, the winning bidder may modify the contract and include provisions
which are favorable to it that were not previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The specifications
should, accordingly, operate equally or indiscriminately upon all bidders.
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a contract for public
work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as
to permit free and full competition. Nor can they enter into a contract with the best bidder containing
substantial provisions beneficial to him, not included or contemplated in the terms and specifications
upon which the bids were invited.55 (Emphasis supplied)
By definition, liquidated damages are a penalty, meant to impress upon defaulting obligors
the graver consequences of their own culpability. Liquidated damages must necessarily make non-
compliance more cumbersome than compliance. Otherwise, contracts might as well make no threat of a
penalty at all:
Liquidated damages are those that the parties agree to be paid in case of a breach. As worded, the
amount agreed upon answers for damages suffered by the owner due to delays in the completion of the
project. Under Philippine laws, these damages take the nature of penalties. A penal clause is an
accessory undertaking to assume greater liability in case of a breach. It is attached to an obligation in
order to ensure performance.56 (Citations omitted)
Respondent cannot now balk at the natural result of its own breach. As for the Court of Appeals, we find
it to be in error in frustrating the express terms of the contract that respondent actively endeavored to
be awarded to it. The exigencies that impelled petitioner to obtain fire trucks made it imperative for
respondent to act with dispatch. Instead, it dragged its feet, left petitioner with inadequate means for
addressing the very emergencies that engendered the need for fire trucks, and forced it into litigation to
enforce its rights.
WHEREFORE, the Petition is GRANTED. The assailed May 2, 2008 Decision and November 25, 2008
Resolution of the Court of Appeals in CA G.R. CV No. 86406 are REVERSED and SET ASIDE. The Decision
dated November 2, 2005 of Branch 108 of the Regional Trial Court of Pasay City in Civil Case No. 00-0343
is REINSTATED.
SO ORDERED.
EN BANC
G.R. No. L-28602 September 29, 1970
UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON
CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
REYES, J.B.L., J.:
Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are
sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner University
of the Philippines (or UP) against the above-named respondent judge and the Associated Lumber
Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP from
44
awarding logging rights over its timber concession (or Land Grant), situated at the Lubayat areas in the
provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of
court, and directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or
conducting logging operations on the concession; and the third order, dated 12 December 1967, denied
reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation
of the three (3) questioned orders was issued by this Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the
latter was granted exclusive authority, for a period starting from the date of the agreement to 31
December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and
remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that
ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid
account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had received
notice that UP would rescind or terminate the logging agreement, ALUMCO executed an instrument,
entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which
was approved by the president of UP, and which stipulated the following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are
not sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of
 the CREDITOR, the balance outstanding after the said payments have been applied
shall be paid by the DEBTOR in full no later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply with any of its promises or
undertakings in this document, the DEBTOR agrees without reservation that the
CREDITOR shall have the right and the power to consider the Logging Agreement
dated December 2, 1960 as rescinded without the necessity of any judicial suit,
and the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos
(P50,000.00) by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9
December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had
previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had entered in
1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case
No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or payment of the herein
before stated sums of money and alleging the facts hereinbefore specified, together with other
allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment
and preliminary injunction restraining ALUMCO from continuing its logging operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract
was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the
bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February
1966, respondent judge issued the first of the questioned orders, enjoining UP from awarding logging
rights over the concession to any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara
Lumber Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara
Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in the
concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December
1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied
in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing
allegations in the petition. In its answer, respondent corrected itself by stating that the period of the
logging agreement is five (5) years - not seven (7) years, as it had alleged in its second amended answer
to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court below, which
maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over management
of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to pursue the
manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments"
because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber
Company, Inc., under its contract "to buy and sell" with said firm, and which contract was referred and
annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral
rescission of the logging contract, without a court order, was invalid; that petitioner's supervisor refused
to allow respondent to cut new logs unless the logs previously cut during the management of Cesar Guy
be first sold; that respondent was permitted to cut logs in the middle of June 1965 but petitioner's
supervisor stopped all logging operations on 15 July 1965; that it had made several offers to petitioner
for respondent to resume logging operations but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and
may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings in this regard), that it is only after a final
court decree declaring the contract rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the 45
right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without
the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of
the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964,
12 SCRA 276:
there is nothing in the law that prohibits the parties from entering into agreement
that violation of the terms of the contract would cause cancellation thereof, even
without court intervention. In other words, it is not always necessary for the
injured party to resort to court for rescission of the contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on
account of infractions by the other contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract was not warranted,
the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed,
and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and finally settle whether the action taken was or was
not correct in law. But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment of rescission is rendered when the
law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article
2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation,1 since
in every case where the extrajudicial resolution is contested only the final award of the court of
competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this
sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of
contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law,
Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the
rescinder the other party is not barred from questioning in court such abuse or error, the practical effect
of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the
rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting party,
the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which
Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a resolution of
reciprocal or synallagmatic contracts may be made extrajudicially unless successfully impugned in court.
In the light of the foregoing principles, and considering that the complaint of petitioner University made
out a prima facie case of breach of contract and defaults in payment by respondent ALUMCO, to the
extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
respondent company had profited from its operations previous to the agreement of 5 December 1964
("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second
amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten condition of
the logs in private respondent's pond, which said respondent was in a better position to know when it
executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-
payment; and considering that whatever prejudice may be suffered by respondent ALUMCO is
susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining
petitioner's measures to protect its interest without first receiving evidence on the issues tendered by
the parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion,
correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be
set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to the
Court of Appeals, and the case is pending therein, this Court abstains from making any pronouncement
thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25
February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside.
Let the records be remanded for further proceedings conformably to this opinion.

46
El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones
reciprocas para el caso de que uno de los obligados no cumpliese lo que le
incumbe, facultad que, segun jurisprudencia de este Tribunal, surge
immediatamente despuesque la otra parte incumplio su deber, sin necesidad de
una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April
1929; 106 Jur. Civ. 897).

Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una
"facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la
cual tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo
convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por
declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion
hecha por una de las partes se impugna por la otra, queda aquella sometida el
examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien
hecha la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16
November 1956; Jurisp. Aranzadi, 3, 447).

La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por

una de las partes de su respectiva prestacion, puedetener lugar con eficacia"
1. o Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es
impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada,
cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios
realmente causados, siempre quese acredite, ademas, una actitud o conducta
persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho
obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el
art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de
12 mayo 1955 y 16 Nov. 1956, entre otras, inspiradas por el principio del Derecho
intermedio, recogido del Canonico, por el cual fragenti fidem, fides non est
servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).
 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 plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and refused to
pay and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more
than five (5) months, thereby constraining the defendants-appellants to cancel the said contract.
The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:
WHEREFORE, based on the foregoing considerations, the Court hereby renders
judgment in favor of the plaintiffs and against the defendants declaring that the
contract subject matter of the instant case was NOT VALIDLY cancelled by the
defendants. Consequently, the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's
fees. Costs against the defendants.
A motion for reconsideration filed by the defendants-appellants was denied.
As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves
pure questions of law.
The defendants-appellants assigned the following alleged errors of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (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. 47
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. L-6573, February 28, 1955) where this Court upheld the right of the subdivision
owner to automatically cancel a contract to sell on the strength of a provision or stipulation similar to
paragraph 6 of the contract in this case. The defendants-appellants also argue that even in the absence
of the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the
Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that
paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified
breaches of its terms, the sellers have the right to declare the contract cancelled and of no effect,
because it granted the sellers an absolute and automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
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
48
court that will conclusively and finally settle whether the action taken was or was
not correct in law. ... .
We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution
of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37
Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in
every case where the extrajudicial resolution is contested only the final award of
the court of competent jurisdiction can conclusively settle whether the resolution
was proper or not. It is in this sense that judicial action will be necessary, as
without it, the extrajudicial resolution will remain contestable and subject to
judicial invalidation, unless attack thereon should become barred by acquiescence,
estoppel or prescription.
The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that—
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. (Song Fo & Co. v.
Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a
contract is substantial depends upon the attendant circumstances. (Corpus v. Hon.
Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell
which provides:
 SECOND.—That in consideration of the agreement of sale of the above described
property, the party of the SECOND PART obligates himself to pay to the party of
the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY
(P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as
follows:
(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this
contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of
each month, from this date until the total payment of the price above stipulated,
including interest.
because they failed to pay the August installment, despite demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid
the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the
entire obligation would have been paid. Furthermore, although the principal obligation was only P
3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate
amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice
to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich
the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.
also militates against the unilateral act of the defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless,
low income group people of realizing their dream of a little parcel of land which
they can really call their own.
The defendants-appellants cannot rely on paragraph 9 of the contract which provides:
NINTH.-That whatever consideration of the party of the FIRST PART may concede
to the party of the SECOND PART, as not exacting a strict compliance with the
conditions of paragraph 6 of this contract, as well as any other condonation that
the party of the FIRST PART may give to the party of the SECOND PART with
regards to the obligations of the latter, should not be interpreted as a renunciation
on the part of the party of the FIRST PART of any right granted it by this contract,
in case of default or non-compliance by the party of the SECOND PART.
The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of
paragraph 6 not merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and
received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond
the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and
are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68),
we held that:
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
49
a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total
monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a substantial portion
of the said payments were applied to the interests since the contract specifically provides for a 7%
interest per annum on the remaining balance. The defendants-appellants rely on paragraph 2 of the
contract which provides:
SECOND.—That in consideration of the agreement of sale of the above described
property, the party of the SECOND PART obligates himself to pay to the party of
the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P
3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... .
(Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid
the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be compelled
to execute the final deed of sale pursuant to paragraph 12 of the contract which provides:
TWELFTH.—That once the payment of the sum of P3,920.00, the total price of the
sale is completed, the party to the FIRST PART will execute in favor of the party of
the SECOND PART, the necessary deed or deeds to transfer to the latter the title of
the parcel of land sold, free from all hens and encumbrances other than those
expressly provided in this contract; it is understood, however, that au the
expenses which may be incurred in the said transfer of title shall be paid by the
party of the SECOND PART, as above stated.
Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the
contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some G.R. No. 129107 September 26, 2001
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 ALFONSO L. IRINGAN, petitioner,
signatures and assented to the terms and conditions of the contract. They had no opportunity to vs.
question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it"
HON. COURT OF APPEALS and ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P. DELOS
basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:
SANTOS, respondents.

xxx xxx xxx

QUISUMBING, J.:

... (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 This petition assails the Decision1 dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949,
which have been drafted only by one party, usually a corporation. Such contracts affirming the decision of the Regional Trial Court and deleting the award of attorney's fee.
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 The facts of the case are based on the records.
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)
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
While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants- by Transfer Certificate of Title No. T-5790. The parties executed a Deed of Sale2 on the same date with
appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the purchase price of P295,000.00, payable as follows:
the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale.

(a) P10,000.00 - upon the execution of this instrument, and for this purpose, the vendor
The contract to sell, being a contract of adhesion, must be construed against the party causing it. We acknowledges having received the said amount from the vendee as of this date;
agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be

50
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 (b) P140,000.00 - on or before April 30, 1985;
the same thru the prayed application of a contract clever in its phraseology, condemnable in its
3
lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers." (c) P145,000.00 - on or before December 31, 1985.

Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent a
already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few letter4 to Iringan stating that he considered the contract as rescinded and that he would not accept any
remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of further payment considering that Iringan failed to comply with his obligation to pay the full amount of
P671.67 without any interest thereon, the defendants-appellants must immediately execute the final the second installment.
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.
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:
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
(a) P50,000.00 - cash received by you;
PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any interests. Costs against the defendants-
appellants.
(b) P3,200.00 - geodetic engineer's fee;

(c) P500.00 - attorney's fee;

(d) the current interest on P53,700.00.6

7
In response, Palao sent a letter dated January 10, 1986, to Atty. Aquino, stating that he was not
amenable to the reimbursements claimed by Iringan.

On February 21, 1989, Iringan, now represented by anew counsel - Atty. Carmelo Z. Lasam, proposed
that the P50,000 which he had already paid Palao be reimbursed 8 or Palao could sell to Iringan, an
equivalent portion of the land.
Palao instead wrote Iringan that the latter's standing obligation had reached P61,600, representing
payment of arrears for rentals from October 1985 up to March 1989.9 The parties failed to arrive at an
agreement.
On July 1, 1991, Palao filed a Complaint10 for Judicial Confirmation of Rescission of Contract and
Damages against Iringan and his wife.
11
In their Answer, 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
51
Citing Manresa, the Court said that the requirement of then Article 1504, "refers to a demand that the
vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create
no obstacles to this contractual mode of extinguishing obligations."19
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not
automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even
though"20 emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial
requirement still applies.
On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual
agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2 thereof.
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible. [Emphasis ours.]
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the rights of third persons who have acquired
the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic
rescission. In Escueta v. Pando,21 we ruled that under Article 1124 (now Article 1191) of the Civil Code,
the right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to agreement to rescind the contract of sale, notwithstanding that it was petitioner who plainly breached
comply with what is incumbent upon him. But that right must be invoked judicially. The same article also the terms of their contract when he did not pay the stipulated price on time, leaving private respondent
provides: "The Court shall decree the resolution demanded, unless there should be grounds which justify desperate to find other sources of funds to payoff his loan. Lastly, petitioner did not substantiate by
the allowance of a term for the performance of the obligation." 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,
This requirement has been retained in the third paragraph of Article 1191, which states that "the court
at the very least, in a bank account in his name, if indeed one existed; or, alternatively, the proper
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period."
deposit made in court which could serve as a formal tender of payment.44 Thus, we find the award of
moral and exemplary damages proper.1âwphi1.nêt
Consequently, even if the right to rescind is made available to the injured party, 22 the obligation is
not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The
WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court of Appeals
party entitled to rescind should apply to the court for a decree of rescission.23 The right cannot be
in CA G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting the award of attorney's
exercised solely on a party's own judgment that the other committed a breach of the obligation. 24 The
fees, is hereby AFFIRMED. Costs against the petitioner.
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 SO ORDERED.
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

52
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
1381.34 We 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
 January 11, 2016
G.R. No. 167615
SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the Name and Style "COLORKWIK
LABORATORIES" AND "COLORKWIK PHOTO SUPPLY", Petitioners,
vs.
KODAK PHILIPPINES, LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30, 2005
1 2
Decision and September 9, 2005 Amended Decision of the Court of Appeals, which modified the
February 26, 1999 Decision3 of the Regional Trial Court by reducing the amount of damages awarded to
petitioners Spouses Alexander and Julie Lam (Lam Spouses).4 The Lam Spouses argue that respondent
Kodak Philippines, Ltd.’s breach of their contract of sale entitles them to damages more than the amount
awarded by the Court of Appeals.5
I
On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an agreement (Letter
Agreement) for the sale of three (3) units of the Kodak Minilab System 22XL 6 (Minilab Equipment) in the
amount of ₱1,796,000.00 per unit,7 with the following terms:
This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik Laboratories, Inc. with
three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal Avenue (Manila), Tagum
(Davao del Norte), and your existing Multicolor photo counter in Cotabato City under the following terms
and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later
than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE
THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab Equipment in Tagum,
Davao Province.9 The delivered unit was installed by Noritsu representatives on March 9, 1992.10 The
Lam Spouses issued postdated checks amounting to ₱35,000.00 each for 12 months as payment for the
11
first delivered unit, with the first check due on March 31, 1992.
The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated March 31, 1992
allegedly due to insufficiency of funds.12 The same request was made for the check due on April 30, 1992.
However, both checks were negotiated by Kodak Philippines, Ltd. and were honored by the depository
bank.13 The 10 other checks were subsequently dishonored after the Lam Spouses ordered the
depository bank to stop payment.14
Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the unit it
delivered together with its accessories.15 The Lam Spouses ignored the demand but also rescinded the
contract through the letter dated November 18, 1992 on account of Kodak Philippines, Ltd.’s failure to
deliver the two (2) remaining Minilab Equipment units.16
On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or recovery of sum of
money. The case was raffled to Branch 61 of the Regional Trial Court, Makati City.17 The Summons and a
copy of Kodak Philippines, Ltd.’s Complaint was personally served on the Lam Spouses.18
The Lam Spouses failed to appear during the pre-trial conference and submit their pre-trial brief despite
53
being given extensions.19 Thus, on July 30, 1993, they were declared in default.20 Kodak Philippines, Ltd.
presented evidence ex-parte.21 The trial court issued the Decision in favor of Kodak Philippines, Ltd.
ordering the seizure of the Minilab Equipment, which included the lone delivered unit, its standard
accessories, and a separate generator set.22 Based on this Decision, Kodak Philippines, Ltd. was able to
obtain a writ of seizure on December 16, 1992 for the Minilab Equipment installed at the Lam Spouses’
23
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.24
The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the Orders issued by the
trial court dated July 30, 1993 and August 13, 1993. These Orders were subsequently set aside by the
Court of Appeals Ninth Division, and the case was remanded to the trial court for pre-trial.25
On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge Fernando V. Gorospe,
Jr.,26 who had issued the writ of seizure.27 The ground for the motion for inhibition was not provided.
Nevertheless, Judge Fernando V. Gorospe Jr. inhibited himself, and the case was reassigned to Branch 65
of the Regional Trial Court, Makati City on October 3, 1995.28
In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak Philippines, Ltd.
defaulted in the performance of its obligation under its Letter Agreement with the Lam Spouses.29 It held
that Kodak Philippines, Ltd.’s failure to deliver two (2) out of the three (3) units of the Minilab Equipment
30
caused the Lam Spouses to stop paying for the rest of the installments. The trial court noted that while
the Letter Agreement did not specify a period within which the delivery of all units was to be made, the
Civil Code provides "reasonable time" as the standard period for compliance:
The second paragraph of Article 1521 of the Civil Code provides:
Where by a contract of sale the seller is bound to send the goods to the buyer, but no time for sending
them is fixed, the seller is bound to send them within a reasonable time.
What constitutes reasonable time is dependent on the circumstances availing both on the part of the
seller and the buyer. In this case, delivery of the first unit was made five (5) days after the date of the
agreement. Delivery of the other two (2) units, however, was never made despite the lapse of at least
three (3) months.31
Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all three (3)
purchased units within a reasonable time.32
The trial court found:
Kodak would have the court believe that it did not deliver the other two (2) units due to the failure of
defendants to make good the installments subsequent to the second. The court is not convinced. First of
all, there should have been simultaneous delivery on account of the circumstances surrounding the
transaction. . . . Even after the first delivery . . . no delivery was made despite repeated demands from
the defendants and despite the fact no installments were due. Then in March and in April (three and four
months respectively from the date of the agreement and the first delivery) when the installments due
were both honored, still no delivery was made.
Second, although it might be said that Kodak was testing the waters with just one delivery - determining
first defendants’ capacity to pay - it was not at liberty to do so. It is implicit in the letter agreement that
delivery within a reasonable time was of the essence and failure to so deliver within a reasonable time
and despite demand would render the vendor in default.
....
Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account of defendants’
inability to pay, non-delivery during the two (2) months that payments were honored is unjustified.33
Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of the first unit,
they became liable for the fair value of the goods received:
On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of the Civil Code, in
the event the buyer accepts incomplete delivery and uses the goods so delivered, not then knowing that
there would not be any further delivery by the seller, the buyer shall be liable only for the fair value to
him of the goods received. In other words, the buyer is still liable for the value of the property received.
Defendants were under obligation to pay the amount of the unit. Failure of delivery of the other units
did not thereby give unto them the right to suspend payment on the unit delivered. Indeed, in
incomplete deliveries, the buyer has the remedy of refusing payment unless delivery is first made. In this
case though, payment for the two undelivered units have not even commenced; the installments made
were for only one (1) unit.
Hence, Kodak is right to retrieve the unit delivered.34
The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to deliver the
remaining units did not give them the right to suspend payment for the unit already
delivered.35 However, the trial court held that since Kodak Philippines, Ltd. had elected to cancel the sale
and retrieve the delivered unit, it could no longer seek payment for any deterioration that the unit may
have suffered while under the custody of the Lam Spouses.36
As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to mislead the court
by claiming that it had delivered the generator set with its accessories to the Lam Spouses, when the
evidence showed that the Lam Spouses had purchased it from Davao Ken Trading, not from Kodak
Philippines, Ltd.37 Thus, the generator set that Kodak Philippines, Ltd. wrongfully took from the Lam
Spouses should be replaced.38
The dispositive portion of the Regional Trial Court Decision reads:
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the following:
1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at 12%
per annum from December 1992 until fully paid; and
2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal Ave.,
Manila outlets.
SO ORDERED.39
On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an issue the Regional
Trial Court’s failure to order Kodak Philippines, Ltd. to pay: (1) ₱2,040,000 in actual damages; (2)
₱50,000,000 in moral damages; (3) ₱20,000,000 in exemplary damages; (4) ₱353,000 in attorney’s fees;
and (5) ₱300,000 as litigation expenses.40 The Lam Spouses did not appeal the Regional Trial Court’s
54
award for the generator set and the renovation expenses.41
Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals 42 dismissed it on December
16, 2002 for Kodak Philippines, Ltd.’s failure to file its appellant’s brief, without prejudice to the
43
continuation of the Lam Spouses’ appeal. The Court of Appeals’ December 16, 2002 Resolution denying
Kodak Philippines, Ltd.’s appeal became final and executory on January 4, 2003.44
In the Decision45 dated March 30, 2005, the Court of Appeals Special Fourteenth Division modified the
February 26, 1999 Decision of the Regional Trial Court:
WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the Regional
Trial Court, Branch 65 in Civil Case No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is ordered to pay
the following:
1. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid; and
2. P440,000.00 as actual damages;
3. P25,000.00 as moral damages; and
4. P50,000.00 as exemplary damages.
 46
SO ORDERED. (Emphasis supplied) Echoing the ruling of the trial court, the Court of Appeals held that the liability of the Lam Spouses to pay
the remaining balance for the first delivered unit is based on the second sentence of Article 1592 of the
New Civil Code.50 The Lam Spouses’ receipt and use of the Minilab Equipment before they knew that
The Court of Appeals agreed with the trial court’s Decision, but extensively discussed the basis for the
Kodak Philippines, Ltd. would not deliver the two (2) remaining units has made them liable for the
modification of the dispositive portion.
unpaid portion of the purchase price.51

The Court of Appeals ruled that the Letter Agreement executed by the parties showed that their
obligations were susceptible of partial performance. Under Article 1225 of the New Civil Code, their
obligations are divisible:
In determining the divisibility of an obligation, the following factors may be considered, to wit: (1) the
will or intention of the parties, which may be expressed or presumed; (2) the objective or purpose of the
stipulated prestation; (3) the nature of the thing; and (4) provisions of law affecting the prestation.
Applying the foregoing factors to this case, We found that the intention of the parties is to be bound
separately for each Minilab Equipment to be delivered as shown by the separate purchase price for each
of the item, by the acceptance of Sps. Lam of separate deliveries for the first Minilab Equipment and for
those of the remaining two and the separate payment arrangements for each of the equipment. Under
this premise, Sps. Lam shall be liable for the entire amount of the purchase price of the Minilab
Equipment delivered considering that Kodak had already completely fulfilled its obligation to deliver the
same. . . .
The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its contract with the Lam
Spouses in the letter dated October 14, 1992.52 The rescission was based on Article 1191 of the New Civil
Code, which provides: "The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him."53 In its letter, Kodak Philippines, Ltd.
demanded that the Lam Spouses surrender the lone delivered unit of Minilab Equipment along with its
standard accessories.54
The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through its letter dated
November 18, 1992 on account of Kodak Philippines, Inc.’s breach of the parties’ agreement to deliver
the two (2) remaining units.55
As a result of this rescission under Article 1191, the Court of Appeals ruled that "both parties must be
restored to their original situation, as far as practicable, as if the contract was never entered into."56 The
Court of Appeals ratiocinated that Article 1191 had the effect of extinguishing the obligatory relation as
if one was never created:57
To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It

55
Third, it is also evident that the contract is one that is severable in character as demonstrated by the is not merely to terminate it and to release parties from further obligations to each other but abrogate it
separate purchase price for each of the minilab equipment. "If the part to be performed by one party from the beginning and restore parties to relative positions which they would have occupied had no
consists in several distinct and separate items and the price is apportioned to each of them, the contract contract been made.58
will generally be held to be severable. In such case, each distinct stipulation relating to a separate subject
matter will be treated as a separate contract." Considering this, Kodak's breach of its obligation to deliver
The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit and its standard
the other two (2) equipment cannot bar its recovery for the full payment of the equipment already
accessories, while Kodak Philippines, Ltd. was ordered to return the amount of ₱270,000.00, tendered by
delivered. As far as Kodak is concerned, it had already fully complied with its separable obligation to
the Lam Spouses as partial payment.59
deliver the first unit of Minilab Equipment.47 (Emphasis supplied)

As to the actual damages sought by the parties, the Court of Appeals found that the Lam Spouses were
The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the delivered
able to substantiate the following:
Minilab Equipment unit and its standard accessories are concerned, since Kodak Philippines, Ltd. had the
right to possess it:48
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of lease which
made the Sps. Lam liable, by way of advance payment, in the amount of P40,000.00, the same being
The purchase price of said equipment is P1,796,000.00 which, under the agreement is payable with forty
intended for the repair of the flooring of the leased premises; and lastly, the payment of P300,000.00, as
eight (48) monthly amortization. It is undisputed that Sps. Lam made payments which amounted to Two
compromise agreement for the pre-termination of the contract of lease with Ruales.60
Hundred Seventy Thousand Pesos (P270,000.00) through the following checks: Metrobank Check Nos.
00892620 and 00892621 dated 31 March 1992 and 30 April 1992 respectively in the amount of Thirty
Five Thousand Pesos (P35,000.00) each, and BPI Family Check dated 31 July 1992 amounting to Two The total amount is ₱440,000.00. The Court of Appeals found that all other claims made by the Lam
Hundred Thousand Pesos (P200,000.00). This being the case, Sps. Lam are still liable to Kodak in the Spouses were not supported by evidence, either through official receipts or check payments.61
amount of One Million Five Hundred Twenty Six Thousand Pesos (P1,526,000.00), which is payable in
several monthly amortization, pursuant to the Letter Agreement. However, Sps. Lam admitted that
As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis of the writ of
sometime in May 1992, they had already ordered their drawee bank to stop the payment on all the other
replevin, the Court of Appeals found that there was no basis for the Lam Spouses’ claim for reasonable
checks they had issued to Kodak as payment for the Minilab Equipment delivered to them. Clearly then,
rental of ₱5,000.00. It held that the trial court’s award of 12% interest, in addition to the cost of the
Kodak ha[d] the right to repossess the said equipment, through this replevin suit. Sps. Lam cannot excuse
generator set in the amount of ₱130,000.00, is sufficient compensation for whatever damage the Lam
themselves from paying in full the purchase price of the equipment delivered to them on account of
Spouses suffered on account of its improper seizure.62
Kodak’s breach of the contract to deliver the other two (2) Minilab Equipment, as contemplated in the
Letter Agreement.49 (Emphasis supplied)
The Court of Appeals also ruled on the Lam Spouses’ entitlement to moral and exemplary damages, as
well as attorney’s fees and litigation expenses:
In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have manifested bad faith
and malevolence because as earlier ruled upon, it was well within its right to do the same. However, with
respect to the seizure of the generator set, where Kodak misrepresented to the court a quo its alleged
right over the said item, Kodak’s bad faith and abuse of judicial processes become self-evident.
Considering the off-setting circumstances attendant, the amount of P25,000.00 by way of moral
damages is considered sufficient.
In addition, so as to serve as an example to the public that an application for replevin should not be
accompanied by any false claims and misrepresentation, the amount of P50,000.00 by way of exemplary
damages should be pegged against Kodak.
With respect to the attorney’s fees and litigation expenses, We find that there is no basis to award Sps.
Lam the amount sought for.63
Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but it was denied for
64
lack of merit. However, the Court of Appeals noted that the Lam Spouses’ Opposition correctly pointed
out that the additional award of ₱270,000.00 made by the trial court was not mentioned in the decretal
portion of the March 30, 2005 Decision:
Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to the amount of
Two Hundred Seventy Thousand (P270,000.00) which plaintiff-appellant should return to the
defendantsappellants, the Court also ruled that defendants-appellants should, in turn, relinquish
possession of the Minilab Equipment and the standard accessories to plaintiff-appellant. Inadvertently,
these material items were not mentioned in the decretal portion of the Decision. Hence, the proper
correction should herein be made.65
The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand, Kodak Philippines,
Ltd. filed its Motion for Reconsideration66 before the Court of Appeals on April 22, 2005.
While the Petition for Review on Certiorari filed by the Lam Spouses was pending before this court, the
Court of Appeals Special Fourteenth Division, acting on Kodak Philippines, Ltd.’s Motion for
Reconsideration, issued the Amended Decision67 dated September 9, 2005. The dispositive portion of the
Decision reads:
WHEREFORE, premises considered, this Court resolved that:
A. Plaintiff-appellant’s Motion for Reconsideration is hereby DENIED for lack of merit.
B. The decretal portion of the 30 March 2005 Decision should now read as follows:
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of the Regional
Trial Court, Branch 65 in Civil Cases No. 92-3442 is hereby MODIFIED. Plaintiff-appellant is ordered to
pay the following:
a. P270,000.00 representing the partial payment made on the Minilab equipment.
b. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid;
c. P440,000.00 as actual damages;
d. P25,000.00 as moral damages; and
e. P50,000.00 as exemplary damages.
Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-appellant the
Minilab equipment and the standard accessories delivered by plaintiff-appellant.
SO ORDERED."
SO ORDERED.68 (Emphasis in the original)
Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd. filed a Motion for
Extension of Time to File an Appeal by Certiorari under Rule 45 of the 1997 Rules of Civil Procedure
before this court.69
This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November 2, 2005, the
Lam Spouses moved that G.R. No. 167615 and G.R. No. 169639 be consolidated since both involved the
same parties, issues, transactions, and essential facts and circumstances.70
56
In the Resolution dated November 16, 2005, this court noted the Lam Spouses’ September 23 and
September 30, 2005 Manifestations praying that the Court of Appeals’ September 9, 2005 Amended
Decision be considered in the resolution of the Petition for Review on Certiorari.71 It also granted the
Lam Spouses’ Motion for Consolidation.72
In the Resolution73 dated September 20, 2006, this court deconsolidated G.R No. 167615 from G.R. No.
169639 and declared G.R. No. 169639 closed and terminated since Kodak Philippines, Ltd. failed to file its
Petition for Review.
II
We resolve the following issues:
First, whether the contract between petitioners Spouses Alexander and Julie Lam and respondent Kodak
Philippines, Ltd. pertained to obligations that are severable, divisible, and susceptible of partial
performance under Article 1225 of the New Civil Code; and
Second, upon rescission of the contract, what the parties are entitled to under Article 1190 and Article
1522 of the New Civil Code.
Petitioners argue that the Letter Agreement it executed with respondent for three (3) Minilab
Equipment units was not severable, divisible, and susceptible of partial performance. Respondent’s
recovery of the delivered unit was unjustified.
74
Petitioners assert that the obligations of the parties were not susceptible of partial performance since
the Letter Agreement was for a package deal consisting of three (3) units.75 For the delivery of these
units, petitioners were obliged to pay 48 monthly payments, the total of which constituted one
 76
debt. Having relied on respondent’s assurance that the three units would be delivered at the same
time, petitioners simultaneously rented and renovated three stores in anticipation of simultaneous
operations.77 Petitioners argue that the divisibility of the object does not necessarily determine the
divisibility of the obligation since the latter is tested against its susceptibility to a partial
performance.78 They argue that even if the object is susceptible of separate deliveries, the transaction is
indivisible if the parties intended the realization of all parts of the agreed obligation.79
Petitioners support the claim that it was the parties’ intention to have an indivisible agreement by
asserting that the payments they made to respondent were intended to be applied to the whole package
of three units.80 The postdated checks were also intended as initial payment for the whole
package.81 The separate purchase price for each item was merely intended to particularize the unit
prices, not to negate the indivisible nature of their transaction.82 As to the issue of delivery, petitioners
claim that their acceptance of separate deliveries of the units was solely due to the constraints faced by
respondent, who had sole control over delivery matters.83
With the obligation being indivisible, petitioners argue that respondent’s failure to comply with its
obligation to deliver the two (2) remaining Minilab Equipment units amounted to a breach. Petitioners
claim that the breach entitled them to the remedy of rescission and damages under Article 1191 of the
New Civil Code.84
Petitioners also argue that they are entitled to moral damages more than the ₱50,000.00 awarded by
the Court of Appeals since respondent’s wrongful act of accusing them of non-payment of their
obligations caused them sleepless nights, mental anguish, and wounded feelings.85 They further claim
that, to serve as an example for the public good, they are entitled to exemplary damages as respondent,
in making false allegations, acted in evident bad faith and in a wanton, oppressive, capricious, and
malevolent manner.86
Petitioners also assert that they are entitled to attorney’s fees and litigation expenses under Article 2208
of the New Civil Code since respondent’s act of bringing a suit against them was baseless and malicious.
This prompted them to engage the services of a lawyer.87
Respondent argues that the parties’ Letter Agreement contained divisible obligations susceptible of
partial performance as defined by Article 1225 of the New Civil Code.88 In respondent’s view, it was the
intention of the parties to be bound separately for each individually priced Minilab Equipment unit to be
delivered to different outlets:89
The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at their Tagum, Davao
del Norte, Sta. Cruz, Manila and Cotabato City outlets. Each of these units [is] independent from one
another, as many of them may perform its own job without the other. Clearly the objective or purpose of
the prestation, the obligation is divisible.
The nature of each unit of the three (3) Minilab Equipment is such that one can perform its own
functions, without awaiting for the other units to perform and complete its job. So much so, the nature
of the object of the Letter Agreement is susceptible of partial performance, thus the obligation is
divisible.90
With the contract being severable in character, respondent argues that it performed its obligation when
it delivered one unit of the Minilab Equipment.91 Since each unit could perform on its own, there was no
need to await the delivery of the other units to complete its job.92 Respondent then is of the view that
when petitioners ordered the depository bank to stop payment of the issued checks covering the first
delivered unit, they violated their obligations under the Letter Agreement since respondent was already
entitled to full payment.93
Respondent also argues that petitioners benefited from the use of the Minilab Equipment for 10
months—from March to December 1992— despite having paid only two (2) monthly
installments.94 Respondent avers that the two monthly installments amounting to ₱70,000.00 should be
the subject of an offset against the amount the Court of Appeals awarded to petitioners.95
Respondent further avers that petitioners have no basis for claiming damages since the seizure and
recovery of the Minilab Equipment was not in bad faith and respondent was well within its right.96
III
The Letter Agreement contained an indivisible obligation.
Both parties rely on the Letter Agreement97 as basis of their respective obligations. Written by
respondent’s Jeffrey T. Go and Antonio V. Mines and addressed to petitioner Alexander Lam, the Letter
Agreement contemplated a "package deal" involving three (3) units of the Kodak Minilab System 22XL,
with the following terms and conditions:
This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik Laboratories, Inc. with
three (3) units Kodak Minilab System 22XL . . . for your proposed outlets in Rizal Avenue (Manila), Tagum
57
(Davao del Norte), and your existing Multicolor photo counter in Cotabato City under the following terms
and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based on
prevailing equipment price provided said equipment packages will be purchased not later
than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered in
advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE
THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall be
applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]98
Based on the foregoing, the intention of the parties is for there to be a single transaction covering all
three (3) units of the Minilab Equipment. Respondent’s obligation was to deliver all products purchased
under a "package," and, in turn, petitioners’ obligation was to pay for the total purchase price, payable in
installments.
The intention of the parties to bind themselves to an indivisible obligation can be further discerned
through their direct acts in relation to the package deal. There was only one agreement covering all
three (3) units of the Minilab Equipment and their accessories. The Letter Agreement specified only one
purpose for the buyer, which was to obtain these units for three different outlets. If the intention of the
parties were to have a divisible contract, then separate agreements could have been made for each
Minilab Equipment unit instead of covering all three in one package deal. Furthermore, the 19% multiple
order discount as contained in the Letter Agreement was applied to all three acquired units.99 The "no
downpayment" term contained in the Letter Agreement was also applicable to all the Minilab Equipment
units. Lastly, the fourth clause of the Letter Agreement clearly referred to the object of the contract as
"Minilab Equipment Package."
In ruling that the contract between the parties intended to cover divisible obligations, the Court of
Appeals highlighted: (a) the separate purchase price of each item; (b) petitioners’ acceptance of separate
deliveries of the units; and (c) the separate payment arrangements for each unit.100 However, through
the specified terms and conditions, the tenor of the Letter Agreement indicated an intention for a single
transaction. This intent must prevail even though the articles involved are physically separable and
capable of being paid for and delivered individually, consistent with the New Civil Code:
Article 1225. For the purposes of the preceding articles, obligations to give definite things and those
which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are susceptible of
partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties. (Emphasis supplied)
In Nazareno v. Court of Appeals,101 the indivisibility of an obligation is tested against whether it can be
the subject of partial performance:
An obligation is indivisible when it cannot be validly performed in parts, whatever may be the nature of
the thing which is the object thereof. The indivisibility refers to the prestation and not to the object
thereof. In the present case, the Deed of Sale of January 29, 1970 supposedly conveyed the six lots to
Natividad. The obligation is clearly indivisible because the performance of the contract cannot be done in
parts, otherwise the value of what is transferred is diminished. Petitioners are therefore mistaken in
basing the indivisibility of a contract on the number of obligors.102 (Emphasis supplied, citation omitted)
There is no indication in the Letter Agreement that the units petitioners ordered were covered by three
(3) separate transactions. The factors considered by the Court of Appeals are mere incidents of the
execution of the obligation, which is to deliver three units of the Minilab Equipment on the part of
respondent and payment for all three on the part of petitioners. The intention to create an indivisible
contract is apparent from the benefits that the Letter Agreement afforded to both parties. Petitioners
were given the 19% discount on account of a multiple order, with the discount being equally applicable
to all units that they sought to acquire. The provision on "no downpayment" was also applicable to all
units. Respondent, in turn, was entitled to payment of all three Minilab Equipment units, payable by
installments.
IV
With both parties opting for rescission of the contract under Article 1191, the Court of Appeals correctly
ordered for restitution.
The contract between the parties is one of sale, where one party obligates himself or herself to transfer
the ownership and deliver a determinate thing, while the other pays a certain price in money or its
equivalent.103 A contract of sale is perfected upon the meeting of minds as to the object and the price,
and the parties may reciprocally demand the performance of their respective obligations from that point
on.104
The Court of Appeals correctly noted that respondent had rescinded the parties’ Letter Agreement
through the letter dated October 14, 1992.105 It likewise noted petitioners’ rescission through the letter
dated November 18, 1992.106 This rescission from both parties is founded on Article 1191 of the New
Civil Code:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
58
The injured party may choose between the fulfilment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfilment, if
the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
Rescission under Article 1191 has the effect of mutual restitution.
107 108
In Velarde v. Court of Appeals:
Rescission abrogates the contract from its inception and requires a mutual restitution of benefits
received.
....
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never was. It is not merely to terminate
it and release the parties from further obligations to each other, but to abrogate it from the beginning
and restore the parties to their relative positions as if no contract has been made.109 (Emphasis supplied,
citations omitted)
The Court of Appeals correctly ruled that both parties must be restored to their original situation as far
as practicable, as if the contract was never entered into. Petitioners must relinquish possession of the
delivered Minilab Equipment unit and accessories, while respondent must return the amount tendered
by petitioners as partial payment for the unit received. Further, respondent cannot claim that the two (2)
monthly installments should be offset against the amount awarded by the Court of Appeals to
petitioners because the effect of rescission under Article 1191 is to bring the parties back to their original
positions before the contract was entered into. Also in Velarde:

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal
obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the
automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of ₱800,000 and the corresponding mortgage payments in the
amounts of ₱27,225, ₱23,000 and ₱23,925 (totaling ₱874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the expense of the
former.110 (Emphasis supplied)
When rescission is sought under Article 1191 of the Civil Code, it need not be judicially invoked because
the power to resolve is implied in reciprocal obligations.111 The right to resolve allows an injured party to
minimize the damages he or she may suffer on account of the other party’s failure to perform what is
incumbent upon him or her.112 When a party fails to comply with his or her obligation, the other party’s
right to resolve the contract is triggered.113 The resolution immediately produces legal effects if the non-
performing party does not question the resolution.114 Court intervention only becomes necessary when
the party who allegedly failed to comply with his or her obligation disputes the resolution of the
contract.115 Since both parties in this case have exercised their right to resolve under Article 1191, there
is no need for a judicial decree before the resolution produces effects.
V benefit for his use of the ₱17,000.00, it is just that he should account for the interest
The issue of damages is a factual one. A petition for review on certiorari under Rule 45 shall only pertain
to questions of law.116 It is not the duty of this court to re-evaluate the evidence adduced before the
lower courts.117 Furthermore, unless the petition clearly shows that there is grave abuse of discretion,
the findings of fact of the trial court as affirmed by the Court of Appeals are conclusive upon this
court.118 In Lorzano v. Tabayag, Jr.:119
For a question to be one of law, the same must not involve an examination of the probative value of the
evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what
the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the
evidence presented, the question posed is one of fact.
....
For the same reason, we would ordinarily disregard the petitioner’s allegation as to the propriety of the
award of moral damages and attorney’s fees in favor of the respondent as it is a question of fact. Thus,
questions on whether or not there was a preponderance of evidence to justify the award of damages or
whether or not there was a causal connection between the given set of facts and the damage suffered by
the private complainant or whether or not the act from which civil liability might arise exists are
questions of fact.
Essentially, the petitioner is questioning the award of moral damages and attorney’s fees in favor of the
respondent as the same is supposedly not fully supported by evidence. However, in the final analysis, the
question of whether the said award is fully supported by evidence is a factual question as it would
necessitate whether the evidence adduced in support of the same has any probative value. For a question
to be one of law, it must involve no examination of the probative value of the evidence presented by the
litigants or any of them.120 (Emphasis supplied, citations omitted)
121
The damages awarded by the Court of Appeals were supported by documentary evidence. Petitioners
failed to show any reason why the factual determination of the Court of Appeals must be reviewed,
especially in light of their failure to produce receipts or check payments to support their other claim for
actual damages.122
Furthermore, the actual damages amounting to ₱2,040,000.00 being sought by petitioners 123 must be
tempered on account of their own failure to pay the rest of the installments for the delivered unit. This
failure on their part is a breach of their obligation, for which the liability of respondent, for its failure to
deliver the remaining units, shall be equitably tempered on account of Article 1192 of the New Civil
Code.124 In Central Bank of the Philippines v. Court of Appeals:125
Since both parties were in default in the performance of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his ₱17,000.00 debt within 3 years as
stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule
that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his
overdue ₱17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his ₱17,000.00 debt shall
not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some
126
59
thereon. (Emphasis supplied)
The award for moral and exemplary damages also appears to be sufficient. Moral damages are granted
to alleviate the moral suffering suffered by a party due to an act of another, but it is not intended to
enrich the victim at the defendant’s expense.127 It is not meant to punish the culpable party and,
therefore, must always be reasonable vis-a-vis the injury caused.128 Exemplary damages, on the other
hand, are awarded when the injurious act is attended by bad faith.129 In this case, respondent was found
to have misrepresented its right over the generator set that was seized. As such, it is properly liable for
130
exemplary damages as an example to the public.
However, the dispositive portion of the Court of Appeals Amended Decision dated September 9, 2005
must be modified to include the recovery of attorney’s fees and costs of suit in favor of petitioners.
In Sunbanun v. Go:131
Furthermore, we affirm the award of exemplary damages and attorney’s fees. Exemplary damages may
be awarded when a wrongful act is accompanied by bad faith or when the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner which would justify an award of exemplary
damages under Article 2232 of the Civil Code. Since the award of exemplary damages is proper in this
case, attorney’s fees and cost of the suit may also be recovered as provided under Article 2208 of the Civil
Code.132 (Emphasis supplied, citation omitted)
Based on the amount awarded for moral and exemplary damages, it is reasonable to award petitioners
₱20,000.00 as attorney’s fees.
WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9, 2005 is AFFIRMED with
MODIFICATION. Respondent Kodak Philippines, Ltd. is ordered to pay petitioners Alexander and Julie
Lam:
 (a) P270,000.00, representing the partial payment made on the Minilab Equipment; January 13, 2016

(b) P130,000.00, representing the amount of the generator set, plus legal interest at 12% .per G.R. No. 176986
annum from December 1992 until fully paid;
NISSAN CAR LEASE PHILS., INC., Petitioner,
(c) P440,000.00 as actual damages; vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.
(d) P25,000.00 as moral damages;
DECISION
(e) P50,000.00 as exemplary damages; and
JARDELEZA, J.:
(f) P20,000.00 as attorney's fees.
This is a Petition for Review on Certiorari1 filed by Nissan Car Lease Philippines, Inc. (NCLPI) to assail the
Decision2 and Resolution3 dated September 27, 2006 and March 8, 2007, respectively, of the Court of
Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard accessories to 4
Appeals (CA) in CA-G.R. CV No. 75985. The CA affirmed with modification the Decision of the Regional
respondent.
Trial Court dated June 7, 2002 and ruled that there was a valid extrajudicial rescission of the lease
contract between NCLPI and Lica Management, Inc. (LMI). It also ordered NCLPI to pay its unpaid rentals
SO ORDERED. and awarded damages in favor of LMI and third-party respondent Proton Pilipinas, Inc. (Proton).

The Facts

LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati City with a total
area of approximately 2,860 square meters.5 On June 24, 1994, it entered into a contract with NCLPI for
the latter to lease the property for a term of ten (10) years (or from July 1, 1994 to June 30, 2004) with a
monthly rental of ₱308,000.00 and an annual escalation rate of ten percent (10%).6 Sometime in
60
September 1994, NCLPI, with LMI’s consent, allowed its subsidiary Nissan Smartfix Corporation (NSC) to
use the leased premises.7

Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total rental
8 9
arrearages amounted to ₱1,741,520.85. In May 1996, Nissan and Lica verbally agreed to convert the
arrearages into a debt to be covered by a promissory note and twelve (12) postdated checks, each
amounting to ₱162,541.95 as monthly payments starting June 1996 until May 1997.10

While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it failed to sign
the promissory note and pay the checks for June to October 1996. Thus, in a letter dated October 16,
1996, which was sent on October 18, 1996 by registered mail, LMI informed NCLPI that it was
terminating their Contract of Lease due to arrears in the payment of rentals. It also demanded that NCLPI
11
(1) pay the amount of ₱2,651,570.39 for unpaid rentals and (2) vacate the premises within five (5) days
12
from receipt of the notice.

In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary display
center for "Audi" brand cars for a period of ten (10) days. In the same letter, Proton undertook "not to
disturb [NCLPI and LMI’s] lease agreement and ensure that [NCLPI] will not breach the same [by] lending
the premises x x x without any consideration."13 NCLPI acceded to this request.14

On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton whereby the former
agreed to allow Proton "to immediately commence renovation work even prior to the execution of the
Contract of Sublease x x x."15 In consideration, Proton agreed to transmit to NCLPI a check representing
three (3) months of rental payments, to be deposited only upon the due execution of their Contract of
Sublease.16
In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMI’s letter of October 16, 1996
acknowledging the arrearages incurred by it under their Contract of Lease. Claiming, however, that it has
no intention of abandoning the lease and citing efforts to negotiate a possible sublease of the property,
NCLPI requested LMI to defer taking court action on the matter.17
LMI, on November 8, 1996, entered into a Contract of Lease with Proton over the subject premises.18
19
On November 12, 1996, LMI filed a Complaint for sum of money with damages seeking to recover from
NCLPI the amount of ₱2,696,639.97, equivalent to the balance of its unpaid rentals, with interest and
penalties, as well as exemplary damages, attorney’s fees, and costs of litigation.20
On November 20, 1996, NCLPI demanded Proton to vacate the leased premises.21 However, Proton
replied that it was occupying the property based on a lease contract with LMI.22 In a letter of even date
addressed to LMI, NCLPI asserted that its failure to pay rent does not automatically result in the
termination of the Contract of Lease nor does it give LMI the right to terminate the same.23 NCLPI also
informed LMI that since it was unlawfully ousted from the leased premises and was not deriving any
benefit therefrom, it decided to stop payment of the checks issued to pay the rent.24
In its Answer25 and Third-Party Complaint26 against Proton, NCLPI alleged that LMI and Proton "schemed"
and "colluded" to unlawfully force NCLPI (and its subsidiary NSC) from the premises. Since it has not
abandoned its leasehold right, NCLPI asserts that the lease contract between LMI and Proton is void for
lack of a valid cause or consideration.27 It likewise prayed for the award of: (1) ₱3,000,000.00, an amount
it anticipates to lose on account of LMI and Proton’s deprivation of its right to use and occupy the
premises; (2) ₱1,000,000.00 as exemplary damages; and (3) ₱500,000.00 as attorney’s fees, plus
₱2,000.00 for every court appearance.28
The trial court admitted29 the third-party complaint over LMI’s opposition.30
Subsequently, or on April 17, 1998, Proton filed its Answer with Compulsory Counterclaim against
NCLPI.31 According to Proton, the undated letter-request supposedly sent by Proton to NCLPI was
actually prepared by the latter so as to keep from LMI its intention to sublease the premises to Proton
until NCLPI is able to secure LMI’s consent.32 Denying NCLPI’s allegation that its use of the lease premises
was made without any consideration, Proton claims that it "actually paid [NCLPI] rental of ₱200,000.00
for the use of subject property for 10 days x x x."33
Proton further asserted that NCLPI had vacated the premises as early as during the negotiations for the
sublease and, in fact, authorized the former to enter the property and commence renovations. 34 When
NCLPI ultimately failed to obtain LMI’s consent to the proposed sublease and its lease contract was
terminated, Proton, having already incurred substantial expenses renovating the premises, was
constrained to enter into a Contract of Lease with LMI. Thus, Proton prayed for the dismissal of the
Third-Party Complaint, and asked, by way of counterclaim, that NCLPI be ordered to pay exemplary
damages, attorney’s fees, and costs of litigation.35
Ruling of the Trial Court
36
On June 7, 2002, the trial court promulgated its Decision, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, judgment is rendered in plaintiff LICA MANAGEMENT
INCORPORATED’s favor. As a consequence of this, defendant NISSAN CAR LEASE PHILIPPINES, INC. is
directed to pay plaintiff the following:
1.) [₱]2,696,639.97 representing defendant’s unpaid rentals inclusive of interest and penalties
up to 12 November 1996, plus interest to be charged against said amount at the rate of
twelve percent (12%) beginning said date until the amount is fully paid.
2.) Exemplary damages and attorney’s fees amounting to Two Hundred Thousand Pesos
([₱]200,000.00) and litigation expenses amounting to Fifty Thousand Pesos ([₱]50,000.00).
The third party complaint filed by defendant is DENIED for lack of merit and in addition to the foregoing
and as prayed for, defendant NISSAN is ordered to pay third party defendant PROTON PILIPINAS INC. the
sum of Two Hundred Thousand Pesos ([₱]200,000.00) representing exemplary damages and attorney’s
fees due.
SO ORDERED.37
The trial court found that NCLPI purposely violated the terms of its contract with LMI when it failed to
pay the required rentals and contracted to sublease the premises without the latter’s consent. 38 Under
Article 1191 of the Civil Code, LMI was therefore entitled to rescind the contract between the parties and
seek payment of the unpaid rentals and damages.39 In addition, the trial court ruled that LMI’s act of
notifying NCLPI of the termination of their lease contract due to non-payment of rentals is expressly
sanctioned under paragraphs 1640 and 1841 of their contract.42
Contrary to NCLPI’s claim that it was "fooled" into allowing Proton to occupy the premises for a limited
period after which the latter unilaterally usurped the premises for itself, the trial court found that it was
61
NCLPI "which misrepresented itself to [Proton] as being a lessee of good standing, so that it could induce
the latter to occupy and renovate the premises when at that time the negotiations were underway the
lease between [LMI] and [NCLPI] had already been terminated."43
Aggrieved, NCLPI filed a Petition for Review with the CA. In its Appellant’s Brief,44 it argued that the trial
court erred in: (1) holding that there was a valid extrajudicial rescission of its lease contract with LMI;
and (2) dismissing NCLPI’s claim for damages against LMI and Proton while at the same time holding
45
NCLPI liable to them for exemplary damages and attorney’s fees.
Ruling of the Court of Appeals
The CA denied NCLPI’s appeal and affirmed the trial court’s decision with modification. The decretal
portion of the CA’s Decision46 reads:
WHEREFORE, the appealed Decision dated June 7, 2002 of the trial court is affirmed, subject to
modification that:
(1) The award of exemplary damages of ₱100,000.00 each in favor of plaintiff-appellee and
third-party defendant-appellee is reduced to ₱50,000.00 each;
(2) The award of attorney’s fees of ₱100,000.00 each in favor of plaintiff-appellee and third-
party defendantappellee is reduced to ₱50,000.00 each;
(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, exclusive
of interest; and,
 (4) Plaintiff-appellee is ordered to return the balance of the security deposit amounting to
₱883,253.72 to defendant-appellant.
The Decision dated June 7, 2002 is affirmed in all other respects.
47
SO ORDERED.
NCLPI sought for a reconsideration48 of this decision. LMI, on the other hand, filed a motion to clarify
whether the amount of ₱2,365,569.61 representing unpaid rentals was inclusive of interest.49 The CA
resolved both motions, thus:
WHEREFORE, the motion for reconsideration filed by defendant-appellant Nissan Car Lease is denied for
lack of merit.
With respect to the motion for clarification filed by plaintiff-appellee Lica Management, Inc., paragraph
(3) of the dispositive portion of the Decision is hereby clarified to read as follows:
(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, inclusive of interest
and penalties up to November 12, 1996, plus interest to be charged against said amount at the rate of
twelve per cent (12%) beginning said date until the amount is fully paid.
SO ORDERED.50
Hence, this petition.
The Petition
NCLPI, in its Petition, raises the following questions:
1. May a contract be rescinded extrajudicially despite the absence of a special contractual
stipulation therefor?
2. Do the prevailing facts warrant the dismissal of [LMI]’s claims and the award of NCLPI’s
claims?
3. How much interest should be paid in the delay of the release of a security deposit in a lease
contract?51
The Court’s Ruling
We deny the Petition for lack of merit.
Before going into the substantive merits of the case, however, we shall first resolve the technical issue
raised by LMI in its Comment52 dated August 22, 2007.
According to LMI, NCLPI’s petition must be denied outright on the ground that Luis Manuel T. Banson
(Banson), who caused the preparation of the petition and signed the Verification and Certification
against Forum Shopping, was not duly authorized to do so. His apparent authority was based, not by
virtue of any NCLPI Board Resolution, but on a Special Power of Attorney (SPA) signed only by NCLPI’s
Corporate Secretary Robel C. Lomibao.53
As a rule, a corporation has a separate and distinct personality from its directors and officers and can
only exercise its corporate powers through its board of directors. Following this rule, a verification and
certification signed by an individual corporate officer is defective if done without authority from the
corporation’s board of directors.54
The requirement of verification being a condition affecting only the form of the pleading,55 this Court
has, in a number of cases, held that:
[T]he following officials or employees of the company can sign the verification and certification
without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an
Employment Specialist in a labor case.
x x x [T]he determination of the sufficiency of the authority was done on a case to case basis. The
rationale applied in the foregoing cases is to justify the authority of corporate officers or
representatives of the corporation to sign x x x, being "in a position to verify the truthfulness and
correctness of the allegations in the
petition."56 (Emphasis and underscoring supplied)
In this case, Banson was President of NCLPI at the time of the filing of the petition. 57 Thus, and applying
62
the foregoing ruling, he can sign the verification and certification against forum shopping in the petition
without the need of a board resolution.58
Having settled the technical issue, we shall now proceed to discuss the substantial issues.
Validity of Extrajudicial Rescission of Lease Contract
It is clear from the records that NCLPI committed substantial breaches of its Contract of Lease with LMI.
Under Paragraph 2, NCLPI bound itself to pay a monthly rental of ₱308,000.00 not later than the first day
of every month to which the rent corresponds. NCLPI, however, defaulted on its contractual obligation to
timely and properly pay its rent, the arrearages of which, as of October 16, 1996, amounted to
₱2,651,570.39.59 This fact was acknowledged and admitted by NCLPI.60
Aside from non-payment of rentals, it appears that NCLPI also breached its obligations under Paragraphs
461 and 562 of the Contract of Lease which prohibit it from subleasing the premises or introducing
improvements or alterations thereon without LMI’s prior written consent. The trial court found:
As revealed from the evidence presented by PROTON however, even before [NCLPI] represented that it
would try to negotiate a possible sub-lease of the premises, it had, without any semblance of authority
from [LMI,] already effectively subleased the subject premises to PROTON and allowed the latter not
only to enter the premises but to renovate the same.
[NCLPI]’s assertion that they only allowed PROTON to utilize the premises for ten days as a display center In fact, it does not appear that it was even necessary for LMI to eject NCLPI from the leased premises.
for Audi cars on the occasion of the historic visit of Chancellor Helmut Kohl of Germany to the Philippines NCLPI had already vacated the same as early as October 11, 1996 when it surrendered possession of the
is belied by the evidence offered by PROTON that by virtue of a Memorandum of Agreement [NCLPI] premises to Proton, by virtue of their Memorandum of Agreement, so that the latter can commence
had already permitted PROTON "to immediately commence renovation work even prior to the renovations.68
execution of the Contract of Sublease" and had accepted a check from PROTON representing the rental
deposit under the yet to be executed Contract of Sublease. x x x
NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind their Contract of Lease in the
absence of an express provision in their Contract to that effect.69 According to NCLPI:
xxxx
6.1. The power to rescind is judicial in nature x x x
Besides, the court is not inclined to show [NCLPI] any sympathy x x x because it came to court with
unclean hands when it accused [LMI] and PROTON of being guilty parties when they supposedly
6.2. Nevertheless, the Supreme Court has allowed extrajudicial rescission if such remedy is specifically
connived with each other to oust [NCLPI] from the leased premises when in truth and in fact, [NCLPI]’s
provided for in the contract. A provision granting the nondefaulting party merely a right to rescind would
lease was already terminated when it pursued negotiations to sub-lease the premises to PROTON then
be superfluous because by law, it is inherent in such contract [see by analogy Villanueva, PHILIPPINE
giving the latter the assurance they would be able to obtain [LMI]’s consent to the sublease when this
LAW ON SALES, P. 238 (1998)].
was very remote, in light of [NCLPI]’s failure to update its rental payments.63 (Emphasis and underscoring
supplied)
xxxx
This factual finding was affirmed by the CA:
6.4. [Paragraph 16],70 however, cannot be construed as an authority for either party to unilaterally and
extrajudicially rescind the Lease Contract in case of breach by the other party. All that [Paragraph] 16
There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to maintain it in
affords the aggrieved party is merely the right to rescind the lease contract, which is the very same right
peaceful possession of the leased premises. It was [NCLPI] who breached the lease contract
already granted under Article 1191 of the Civil Code.71 (Emphasis and underscoring in the original)
by defaulting in the payment of lease rentals, entering into a sublease contract with [Proton] and
allowing [Proton] to introduce renovations on the leased premises without the consent of [LMI].64 x x x

(Emphasis supplied)
Factual findings of the CA are binding and conclusive on the parties and upon this Court and will not be
reviewed or disturbed on appeal. While the rule admits of certain exceptions,65 NCLPI failed to prove that
any of the exceptions applies in this case.
The crux of the controversy rather revolves around the validity of LMI’s act of extrajudicially rescinding
its Contract of Lease with NCLPI.
63
It is true that NCLPI and LMI’s Contract of Lease does not contain a provision expressly authorizing
extrajudicial rescission. LMI can nevertheless rescind the contract, without prior court approval,
pursuant to Art. 1191 of the Civil Code.
Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases where one of
the obligors should fail to comply with what is incumbent upon him. Otherwise stated, an aggrieved
party is not prevented from extrajudicially rescinding a contract to protect its interests, even in the
absence of any provision expressly providing for such right.72 The rationale for this rule was explained in
the case of University of the Philippines v. De los Angeles 73 wherein this Court held:

NCLPI maintains that while a lessor has a right to eject a delinquent lessee from its property, such right
must be exercised in accordance with law:
6.15. In this case, [LMI] did not comply with the requirement laid down in Section 2 of Rule 70 of the
Rules of Court, in unceremoniously ejecting [NCLPI] from the property. The said Rule explicitly provides
that the lessor shall serve a written notice of the demand to pay or comply with the conditions of the
lease and to vacate or post such notice on the premises if no person is found thereon, giving the
lessee 15 days to comply with the demand. [LMI]’s demand letter dated 16 October 1996 provides only
a period of five days for [NCLPI] to comply with such demand and, thus, defective.66 (Emphasis and
underscoring supplied)
[T]he law definitely does not require that the contracting party who believes itself injured must first file
suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party
injured by the other's breach will have to passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). (Emphasis and
underscoring supplied)
We are aware of this Court’s previous rulings in Tan v. Court of Appeals,74 Iringan v. Court of
Appeals,75 and EDS Manufacturing, Inc. v. Healthcheck International, Inc.,76 for example, wherein we held
that extrajudicial rescission of a contract is not possible without an express stipulation to that effect.77

NCLPI’s reliance on Section 2, Rule 7067 in this case is misplaced.

The seeming "conflict" between this and our previous rulings, however, is more apparent than real.

Rule 70 of the Rules of Court sets forth the procedure in relation to the filing of suits for forcible entry
Whether a contract provides for it or not, the remedy of rescission is always available as a remedy
and unlawful detainer. The action filed by LMI against NCLPI, however, is one for the recovery of a sum of
against a defaulting party. When done without prior judicial imprimatur, however, it may still be subject
money. Clearly, Section 2 of Rule 70 is not applicable.
to a possible court review. In Golden Valley Exploration, Inc. v. Pinkian Mining Company, 78 we explained:
This notwithstanding, jurisprudence still indicates that an extrajudicial rescission based on grounds not
specified in the contract would not preclude a party to treat the same as rescinded. The rescinding
party, however, by such course of action, subjects himself to the risk of being held liable for damages
when the extrajudicial rescission is questioned by the opposing party in court. This was made clear in the
case of U.P. v. De los Angeles, wherein the Court held as follows:
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved
on account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other party
denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. x x x (Emphasis and underscoring in the original)
The only practical effect of a contractual stipulation allowing extrajudicial rescission is "merely to
transfer to the defaulter the initiative of instituting suit, instead of the rescinder."79
In fact, the rule is the same even if the parties’ contract expressly allows extrajudicial rescission. The
other party denying the rescission may still seek judicial intervention to determine whether or not the
rescission was proper.80
Having established that LMI can extrajudicially rescind its contract with NCLPI even absent an express
contractual stipulation to that effect, the question now to be resolved is whether this extrajudicial
rescission was proper under the circumstances.
As earlier discussed, NCLPI’s non-payment of rentals and unauthorized sublease of the leased premises
were both clearly proven by the records.1avvphi1 We thus confirm LMI’s rescission of its contract with
NCLPI on account of the latter’s breach of its obligations.
Rental Arrearages and Interest
Having upheld LMI’s extrajudicial rescission of its Contract of Lease, we hold that NCLPI is required to pay
all rental arrearages owing to LMI, computed by the CA as follows:
In its appellant’s brief, [NCLPI] admitted that it had rental arrears of ₱1,300,335.60 as of May
1996.1âwphi1 Additionally, the statement of account submitted by [LMI] showed that from June 1996 to
October 1996 the rental arrears of [NCLPI] amounted to ₱1,065,234.01. Hence, the total of said rental
arrears not disputed by the parties is ₱2,365,569.61 x x x.81 (Emphasis and underscoring supplied)
The Contract of Lease shows that the parties did not stipulate an applicable interest rate in case of
default in the payment of rentals. Thus, and following this Court’s ruling in Nacar v. Gallery Frames,82 the
foregoing amount of rental arrearages shall earn interest at the rate of six percent (6%) per annum
computed from October 18, 1996, the date of LMI’s extrajudicial demand,83 until the date of finality of
this judgment. The total amount shall thereafter earn interest at the rate of six percent (6%) per annum
from such finality of judgment until its satisfaction.
Security Deposit
NCLPI also argues that, assuming LMI could validly rescind their Contract of Lease, the security deposit
must be returned, with interest at the rate of twelve percent (12%) per annum, the obligation to return
being in the nature of a forbearance of money.84
NCLPI is partly correct.
Paragraph 385 of the Contract of Lease provides that, in case of termination of the lease, the balance of
the security deposit must be returned to NCLPI within seven (7) days. Since "there is no question that
[LMI] is retaining the security deposit" in the amount of ₱883,253.72 (after deduction of the expenses
for water and telephone services),86 LMI must return the same to NCLPI, with interest.
Considering, however, that the Contract of Lease does not stipulate an applicable interest rate, again
following our ruling in Nacar, the rate shall be six percent (6%) from the time of judicial or extrajudicial
demand. The records of this case show that the first time NCLPI raised the issue on the security deposit
was in its Brief dated March 25, 2003 filed with the CA.87 Thus, the interest should be computed starting
only on said date until the finality of this Decision, after which the total amount shall earn interest at the
rate of six percent (6%) from the finality of this Decision until satisfaction by LMI.88
Improvements
64
In its Petition, NCLPI also prayed for the return of "all the equipment installed and the other
improvements on the property, or their value, pursuant to the mandate of mutual restitution."89
NCLPI errs.
Under Paragraph 5 of the Contract of Lease, NCLPI is entitled only to the return of those improvements
introduced by it which can be removed without causing damage to the leased premises. 90 Considering,
however, that the issue of ownership of the improvements within the premises appears to be subject of
another case initiated by NCLPI’s subsidiary, NSC,91 this Court will not rule on the same.
Denial of NCLPI’s claim and award of damages in favor of LMI and Proton proper
Both the trial court and CA found that NCLPI breached the Contract of Lease. In sustaining the denial of
NCLPI’s claim for damages, the CA held:
There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to maintain it in
peaceful possession of the leased premises. It was [NCLPI] who breached the lease contract x x x
Moreover, the lease contract between [LMI] and [Proton] was entered into only on November 8, 1996 x
x x after the lease contract between [LMI] and [NCLPI] had been terminated. As aptly noted by the trial
court:
xxxx
In other words, while in its responsive pleading [NCLPI] claims [that] it was fooled into allowing [Proton]
to occupy the subject premises for a limited period, after which the latter, in alleged collusion with [LMI]
unilaterally usurped the premises for itself, the evidence shows that it was [NCLPI] which
misrepresented itself to PROTON as being a lessee of good standing, so that it could induce the latter
to occupy and renovate the premises when at that time the negotiations were underway, the lease FIRST DIVISION
between [LMI] and [NCLPI] had already been terminated.92 (Emphasis and underscoring supplied)
G.R. No. 167767 August 29, 2006
Contrary to NCLPl's claims of an unlawful "scheme" devised by LMJ and Proton to force it out of the
leased premises, we find that it was NCLPI who was in bad faith and itself provided the bases for the
SPOUSES WILLIAM AND JEANETTE YAO, Petitioners,
cancellation of its Contract of Lease with LMI and its eventual ejectment from the leased premises.
vs.
Accordingly, we affirm (1) the award of exemplary damages and attorney's fees in favor of LMI and
CARLOMAGNO B. MATELA, Respondent.
Proton and (2) the denial of NCLPI's claim for damages.93

x ---------------------------------------------------- x
WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated September 27, 2006
and the Resolution dated March 8, 2007 rendered by the CA in CA-G.R. CV No. 75985 are,
however, MODIFIED as follows: G.R. No. 167799 August 29, 2006

(1) NCLP I is ordered to pay LMI and Proton exemplary damages of P50,000.00 and attorney's CARLOMAGNO B. MATELA, Petitioner,
fees of P50,000.00, each; vs.
SPOUSES WILLIAM AND JEANETTE YAO, Respondents
(2) NCLPI is ordered to pay the amount of P2,365,569.61 unpaid rentals, with interest at the
rate of six percent ( 6%) per annum computed from October 18, 1996 until the date of finality .
of this judgment. The total amount shall thereafter earn interest at the rate of six percent
(6%) per annum from the finality of judgment until its satisfaction; DECISION

(3) LMI is ordered to return to NCLPI the balance of the security deposit amounting to
P883,253.72, with interest at the rate of six percent ( 6o/o) starting March 25, 2003 until the
finality of this Decision, after which the total amount shall earn interest at the rate of six
percent (6%) from the finality of this Decision until satisfaction by LMI.94
SO ORDERED.
YNARES-SANTIAGO, J.:
These consolidated petitions for review assail the Decision1 of the Court of Appeals dated September 30,
2004, in CA-G.R. CV No. 75264, which modified the Decision2 of the Regional Trial Court of Las Piñas City,
65
Branch 275 in Civil Case No. 98-0263, as well as the Resolution3 dated April 15, 2005, denying the
motions for reconsideration of both parties.

In G.R. No. 167767, spouses William and Jeanette Yao pray that the assailed decision and resolution of
the Court of Appeals be reversed and set aside and that the original complaint filed by Carlomagno B.
Matela in the lower court be dismissed for lack of merit.

In G.R. No. 167799, Matela prays that the judgment of the Court of Appeals be modified by ordering the
spouses Yao to pay the amount of P741,482.00 as actual damages instead of P391,582.00, plus interest
and attorney’s fees.

The antecedent facts are as follows:

On March 30, 1997, the spouses Yao contracted the services of Matela, a licensed architect, to manage
and supervise the construction of a two-unit townhouse at a total cost of P5,090,560.00.4

The construction started in the first week of April 1997 and was completed in April 1998, with additional
works costing P300,000.00. Matela alleged that the spouses Yao paid him the amount of P4,649,078.00,
5
thereby leaving a balance of P741,482.00. When his demand for payment of P741,482.00 went
6
unheeded, Matela filed a complaint for sum of money with the Regional Trial Court of Las Piñas City
which was docketed as LP-98-0263 and raffled to Branch 275.

In their answer, the spouses Yao denied that the project was completed in April 1998. Instead, they
alleged that Matela abandoned the project without notice. They claimed that they paid Matela the sum
of P4,699,610.93 which should be considered as sufficient payment considering that Matela used sub-
standard materials causing damage to the project which needed a substantial amount of money to
repair.
On April 1, 2002, the Regional Trial Court of Las Piñas City, Branch 275 rendered judgment in favor of
Matela, the dispositive portion of which reads:
WHEREFORE, judgment is rendered in favor of [Matela] and against the [spouses Yao] ordering the latter
to pay the former the sum of P741,428.00 plus legal rate of interest from the filing of the Complaint until
fully paid and P50,000.00 as and by way of attorney’s fees and to pay the costs.
SO ORDERED.7
The trial court anchored its decision on the following findings of facts:
Defendant spouses engaged the professional services of the plaintiff on March 30, 1997 to manage and
supervise the construction of their two unit townhouses in Makati City at the agreed construction cost of
P5,090,560.00. The construction started in the first week of April, 1997 and was completed by the
plaintiff in April, 1998.
Close scrutiny of the evidence reveals that contrary to the allegation of the defendant spouses the
construction of the two unit townhouses x x x were completed by the plaintiff. This is shown by the fact
that the Building Official of Makati City, after inspection of the construction thereof, issued, the
Evaluation Sheet Occupancy Permit (Exhs. "E" and "E-1"), Certificate of Completion (Exh. "F"), Certificate
of Occupancy (Exh. "G") and Progress Flow Sheet of Occupancy Permit (Exh. "G-1").
It appears from these documents that the construction was completed on April 5, 1998 (Exh. "F") and
that after inspection the same was found to have been done in accordance with its plans and
specifications (Exh. "G").
If there (sic) defects were found all over the two unit townhouses, the Building Official of Makati City
would not have issued the said documents, which are presumed to have been executed in due course
and good faith.8
The Court of Appeals affirmed the decision of the lower court but modified the amount of actual
damages to P391,582.00. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the decision of the Regional Trial Court of Las Piñas City, Branch 275,
in Civil Case No. 98-0263 is hereby MODIFIED in that the [spouses Yao] are hereby ordered to pay actual
damages of Three Hundred Ninety One Thousand Five Hundred Eighty Two Pesos (P 391,582.00). The
decision of the Regional Trial Court of Las Piñas City, Branch 275, dated 1 April 2002 in Civil Case No. 98-
0263 is hereby AFFIRMED in all other aspect.
SO ORDERED.9
In affirming the findings of the court a quo, the Court of Appeals declared that:
As to the second assigned error, defendants-appellants claimed that plaintiff-appellee failed to finish the
project within the agreed one hundred eighty (180) days. They pointed out that one hundred eighty
(180) days from April 1997 ended on October 1997, however, the units were turned over only in April
1998.
The Court does not find any merit in this argument either. Any delay in the delivery is cured by
acceptance of the thing after delay incurred. (See: Tayong v. CA, 219 SCRA 480, [1993]). In the present
case, defendants-appellants do not deny they took over the townhouse units and have even sold the
same. (See: Records, p. 363)10
Hence these consolidated petitions.
In G.R. No. 167799, Matela raised the lone issue of:
WHETHER OR NOT [MATELA] IS ENTITLED TO THE ADDITIONAL CONSTRUCTION COST. 11
In G.R. No. 167767, the issue raised by the spouses Yao is:
WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS IN NOT DISMISSING THE COMPLAINT [OF
MATELA] AND NOT AWARDING THE COUNTER CLAIM [OF THE SPOUSES YAO] IS IN ACCORDANCE WITH
LAW AND JURISPRUDENCE.12
Matela claims that although the spouses Yao did not expressly admit their obligation as regards the
additional construction cost of P300,000.00, they impliedly admitted the same as evidenced by the
66
testimony of Jeanette Yao before the court a quo.13
On the other hand, the spouses Yao contend that the complaint for the collection of a sum of money
filed by Matela should be dismissed because it was the latter who breached his undertaking by using
sub-standard materials and not completing the project. They also allege that the payments they made
amounting to P4,699,610.93 should be considered as sufficient payment for the construction of the
project.
The resolution of the issues raised by the parties require a re-examination of the pieces of evidence
presented during the trial of the case. This is an exception to the established rule that in the exercise of
our power of review, we only resolve questions of law and not questions of facts.
The rule that the Supreme Court does not resolve questions of facts, however, is not absolute.
Jurisprudence has recognized several exceptions in which factual issues may be resolved by the Supreme
Court, such as: (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; or (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.14
In the instant case, we find that the factual findings of the trial court and Court of Appeals are
contradicted by the evidence on record. Thus, a review of the facts is in order.
 18
As agreed by the parties, Matela will construct the townhouses in accordance with the Door jambs shall be of standard type from 2/5 K.D. tanguile or equivalent.
Specification15 while spouses Yao will pay Matela the agreed construction cost based on progress billings.
The spouses Yao will not pay Matela the agreed price in full unless the latter has fully complied with and
Contrary to the foregoing, the photographs offered by the spouses Yao as exhibits showed unfinished
has discharged his obligations as specified in the contract.
and uneven ceilings, rotten door jambs and door posts, unfinished wooden partitions and unhinged and
unfinished doors.19
In his book on Obligations and Contracts, the late Court of Appeals Justice Desiderio Jurado made the
following discussion on reciprocal obligations:
Paragraph I, Electrical Works of the Specification contained the following undertaking:

Reciprocal obligations are those which are created or established at the same time, out of the same
The Contractor shall furnish all materials, (or otherwise specified) labor and other services and perform
cause, and which result in mutual relationships of creditor and debtor between the parties. These
all operations necessary for the complete installation of the Electrical System for the Project in
obligations are conditional in the sense that the fulfillment of an obligation by one party depends upon
accordance with the drawings and specifications. All electrical work shall be done under the direct
the fulfillment of the obligation by the other. Thus, in a contract of sale of an automobile for P54,000.
supervision of a licensed Electrical Engineer. The Electrical Contractor shall secure the required Electrical
The vendor is obliged to deliver the automobile to the vendee, while the vendee is obliged to pay the
Wiring Permit and Certificate of Electrical Inspection and pay the corresponding permit fees. All wiring in
price of P54,000 to the vendor. It is clear that the vendor will not deliver the automobile to the vendee
ceiling and double walls shall be Neltex Schedule 40 uPVC conduits or equivalent. All installation on
unless the latter pay the price, while the vendee will not pay the price to the vendor unless the latter will
concrete shall be in rigid conduit pipes.20
deliver the automobile. Hence, in reciprocal obligations, the general rule is that fulfillment by both
parties should be simultaneous or at the same time.
Furnishing and installation of conduits, boxes, wire gutters, fittings, cabinets, wireways, manholes and
covers, supports and accessories for:
The rule then is that in reciprocal obligations, one party incurs in delay from the moment the other party
fulfills his obligation, while he himself does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. If neither party complies or is ready to comply with what is incumbent a. Lighting system
upon him, the default of one compensates for the default of the other. In such case, there can be no
legal delay. These rules may be illustrated by the following example: A sold his automobile to B for b. Convenience Outlets and other Special Purpose Outlets

67
P30,000. They agreed that delivery and payment shall be made on the 15th of November 1980. On that
date, A was not ready to deliver the automobile, neither was B ready to pay. In such case, neither party
has incurred in delay. If A, however, delivered or was ready to deliver the automobile, but B did not pay c. Sub-Feeders/Homeruns from Lighting Panels to Lighting Circuits as indicated on the plans
or was not ready to pay, then B is said to have incurred in delay.16
d. Feeders to all Lighting Panels as indicated on plans.
Both the trial court and the Court of Appeals found that Matela’s "delivery" of the project constitutes a
faithful discharge of his duties. We find otherwise. Our evaluation of the records reveal that Matela e. Main Distribution Panel (MDP)
failed to comply with his obligation to construct the townhouses based on the agreed specifications. As
such, he cannot be discharged from his obligations by mere delivery of the same to the spouses Yao.
f. Service Entrance from source of Power to MDP

The Specification contained the following provisions:

g. Necessary Concrete Pedestals

D. CARPENTRY WORKS
h. Telephone System

Lumber – This shall be of approved quality, well-seasoned, thoroughly dry, free from large, loose and
i. Intercom System
unsound knots, saps, shakes and other imperfections impairing its durability, strength and appearance.

Again, based on the photographs presented as evidence, we find that there were unfinished electrical
All roof trusses shall be of Apitong, conventional fabrication using wooden plates and machine bolts.
conduits, electrical outlets with loose wirings and outlets with exposed wires.21

Purlins shall be 2x3 (commercial size) apitong or equivalent spaced at 0.60 m. o.c.17
xxxx
All wooden partitions indicated in the drawing shall be double faced ¼" thk. ordinary plywood nailed to
2x3 (commercial size) tanguile spaced at 0.60 m. o.c. bothways (wherever available).
The ceiling shall be of 3/16" thk plywood (class C) with 2x2 ceiling joist spaced at 0.60 m. o.c.
The Specification also provided for several kinds of tiles to be installed on the floors22 and on the
walls.23 However, the exhibits showed decaying and unfinished cabinet floors,24 stairways and bathroom
floors with missing tiles,25 uninstalled bathroom fixtures and exposed plumbing fixtures.26 The bath tub
was uninstalled that it can be easily pulled out of its concrete receptacle.27 The exhibits also showed
unfinished windows,28 unpainted walls,29 rusted metalworks and balusters.30
During the trial of the case before the court a quo on October 26, 2000, Jeanette Yao testified as follows:
Atty. De Asa, Sr.: A: I found out in the Unit B, Master Bed Room, that there were no showers. There were no faucet. And in
the kitchen, there were no wire basket or accessory. In the, all the cabinet, there were no chrome plate
or aluminum tube for the hanger of the clothes. All of these were not there.
Now, you have read Exhibit "H" and Exhibit "3", I supposed and you understood its contents, isn’t it?

Atty. De Asa, Sr.:

Jeanette Yao:

Now, again on the next page, fourth page, there is here encircled the words nelpex scheduled 40 UPDC
Yes sir.
conduits or equivalent, which again for purposes of record, Your Honor, please this was marked as
Exhibit "3-F" for the defendant.
Q: Now, on page 2 of Exhibit "3" also Exhibit "H" refers to a paragraph which states to carpentry works,
which was bracketed and marked by this representation as Exhibit "3-B". And this refers to the carpentry
Would you kindly explain whether or not this particular encircled words followed us specified.
works. What happened to this condition as contained in the second page of said Exhibit "H" and Exhibit
"3" marked as Exhibit "3-B"?
A: They did not followed this, they used the another like the hose orange color not the pipe.
A: Sir, this was not followed.
Q: Not the pipe, and the, finally, on the last page of this Exhibit, we refer to the modular kitchen by
Danielle (door panel only) this was encircled also Your Honor please and marked as Exhibit "3" was this
Q: What do you mean it was not followed?
followed by the plaintiff Matela in the construction of the townhouse?

A: I found out during the construction that the wood has termites and some are not properly installed.
A: No sir they used ordinary wood, plywood, not the panel door by Danielle.

Q: Going further to this Exhibit "H" and Exhibit "3". Found page 3 thereon again bracketed as Exhibit "3-
Q: Now, summing up this Exhibit "3-B" on carpentry, on carpentry works which were not followed "3-C",
C" by this representation and I will quote all wooden partition indicated in the drawing shall be double
"3-D", "3-F", and "3-E", if you will translate them into figure or in money, how much would they cost?

68
face ¼ inches thick ordindary plywood, made two by three (commercial size) tangile space at 0.60 m.o.c
both ways (where ever available). Similarly the ceilings shall be of three by sixteen inches thick plywood
(-c) with two by two ceilings joys space 0.60 m.o.c. Likewise, door jams shall be of standard size from two A: Around Five Hundred Thousand.
feet K.D. tangile. Again was, Mrs. Witness, was this conditions as contained in the specification followed?
Q: Five Hundred Thousand, now, you mentioned all of these defects and matters which were not
A: Not followed sir. followed thru it specification was contained in Exhibit "H" and Exhibit "E". What other documents if any
do you have to prove that indeed these defects existed?
Q: Why do you say that it was not followed?
A: I took photos, sir.
A: Because I found out that all the bathrooms were no cabinet. That was supposed to have. And when I
opened the ceilings, I found out that there are corrugated, GI corrugated inside still attached in the Q: Photographs, if those photographs will be shown to you, will you be able to recognize them?
ceiling and a lot of termite also on the door jams.
A: Yes, sir.
Atty. De Asa, Sr.:
Q: Now, during the pre-trial conference, Mrs. Witness, Atty. Margaret Chua marked in evidence several
So, further going to Exhibit "3" and Exhibit "H" is specification under paragraph G denominated photographs from Exhibit "5", "5-A", up to "5-QQQ". Would you go over the same and tell this Honorable
specialties, finished hard wares and I will quote unless otherwise specified all hard wares shall be of Court, what relation has those with the photograph according to you, you took to prove that you indeed
chromium plated finished. The contractor shall also provide and fit in place other hard wares nor herein the specifications as contained in Exhibit "H" and Exhibit "3" as well as the defects in the constructed
executed and mentioned but nevertheless necessary to complete the work. For the record, Your Honor, townhouses were not followed or appears?
this was bracketed and marked as defendant Exhibit "3-B".
A: I will show you one by one, this one.
Was this followed?
Q: These are the pictures.
A: This was not followed sir.
A: Yes.
Q: Again why do you say that it was not followed?
Court: A: "5-L", there are wires, live wires found in the circuit breaker and leave it open.

Already marked? Atty. De Asa, Sr.:

Atty. De Asa, Sr.: Next.

Yes, Your Honor, as exhibit. A: "5-M", we installed the cover since it is very dangerous because there are live wires. And letter M,
there was.
Q: Now, aside from these pictures Mrs. Witness I have here other pictures referring to Unit A and Unit B
of. Atty. De Asa, Sr.:

Atty. De Asa, Sr.: "5-N".

I’m sorry, I will withdraw that, Your Honor. A: Yeah, "5-N", the water flows in the circuit breaker so, it cause like a fire crackers during the rainy days.

Q: Go over now, each and every picture and explain before this Honorable Court, what specifications Q: How about Exhibit "5-O"?
were not followed and for what were the defects you found in the constructed townhouses.
A: "5-O", as you can see there are also no outlet. "5-P", no electrical wire, outlet or switch but there is a
A: The concrete moldings that they installed the electrical were not repaired. junction box.

Court Interpreter: Q: "5-Q"?

Witness is referring to Exhibit "5-A". A: There are also junction box, but no wire and no switch covered. 69
A: And then, the next there is no doorbell for Unit B. Q: "5-R"?

Court Interpreter: A: "5-R", as you can see the ceiling there are GI corrugated, they used this in the flooring and the water
flows in here from second floor because there are water leaks. The same with this.
Witness is referring to Exhibit "5-B".
Court Interpreter:
A: And then, 5-C, and D, there is no electrical switch or outlet, no lights.
"5-S".
Atty. De Asa, Sr.:
Atty. De Asa, Sr.:
No lights referring to:
"5-S".
Court Interpreter:
A: The same.
"5-E".
Atty. De Asa, Sr.:
A: The ceilings there is no electrical, and the ceilings were open and "5-F", this is the Attic there is no air-
con outlet. "5-G", the wall no electrical switch. Also "5-H", no switched, no outlet. The same "5-T"?

Court Interpreter: A: They used two inches PVC pipe for the down-spout. It should be three inches as I have seen in the
blue print. "5-U", as you can see this is also number two inches pipe.
Same as Exhibit "5-I", "5-K" and "5-J".
 37
Court Interpreter: investments. However, in situations such as the one discussed above, where it cannot be conclusively
determined which of the parties first violated the contract, equity calls and justice demands that we
apply the solution provided in Article 1192 of the Civil Code:
Witness is referring to the two inches pipe.

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first
A: "5-V", the same with "5-U" and "5-W", the pipe is so small.
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.
Atty. De Asa, Sr.:
In Camus v. Price, Inc.,38 we held that:
Anyway, these pictures from Exhibit "5", "5-A" up to "5-QQQ" were all the pictures, which you have
taken to establish that the specifications were not followed and that there were defects in the
Even assuming, therefore, that the Lessee’s obligation to insure the building arose after the completion
townhouses constructed by Matela?
of the construction of the buildings in September, 1951, as the Lessor also defaulted in the performance
of his corresponding duty, it can not really be determined with definiteness who of the parties
A: Yes, sir. committed the first infraction of the terms of the contract. Under the circumstances, the conclusion
reached by the Court of Appeals, that the parties are actually in pari delicto, must be sustained, and the
Q: Now, was these townhouses completed by plaintiff? contract deemed extinguished, with the parties suffering their respective losses.

A: No. In the instant case, the losses to be incurred by the parties will come, as far as Matela is concerned, in
the form of the alleged unpaid balance of the construction cost that he is seeking to collect from the
spouses Yao. For the latter, the losses that they will bear is the cost of repairing the defects in the
Q: Why do you say no? project. We consider the amount of P4,699,610.93 which Matela has already received from the spouses
Yao, as sufficient payment for his services and the materials used in the project.
A: Since I took photo, he did not follow what we have agreed in the specification.31

We cannot rely on the Building Permit,32 Certificate of Completion33 and Certificate of Occupancy34 to
prove the project’s completion. While it is true that under the Rules of Court, the issuance of the
foregoing documents enjoy the presumption of regularity, however, it is only a disputable presumption,
which may be overcome by other evidence.
WHEREFORE, the Decision dated September 30, 2004 of the Court of Appeals in CA-G.R. CV No. 75264
which affirmed with modification the Decision of the Regional Trial Court of Las Piñas City, Branch 275,
and its Resolution dated April 15, 2005 denying reconsideration thereof, are REVERSED and SET ASIDE.
70
The contract between spouses William and Jeanette Yao and Carlomagno B. Matela is DEEMED
EXTINGUISHED and each of the parties shall bear their own losses.

The agreed construction cost of the project was P5,090,560.00, however, the amounts reflected in the SO ORDERED.
Building Permit, the Certificate of Completion and the Certificate of Occupancy are far less. In the
Building Permit, the total cost was pegged at P2,191,700.00; in the Certificate of Completion, the actual
cost of construction was P2,347,706.81; while in the Certificate of Occupancy the cost of the project as
built was declared at P2,341,706.00. Considering the discrepancies, the conclusiveness of the said
documents fall when arrayed against the pieces of evidence introduced by the spouses Yao.

However, we find that the spouses Yao likewise failed to comply with their undertakings.

As alleged by Matela, the spouses Yao made periodic payments to him based on progress billings. This
was contained in the Summary of Cash Payments35 and the Summary of WLY Invoices36 that he
submitted as part of his formal offer of evidence. However, the spouses Yao refused to pay the balance
of the agreed construction cost despite demands. The spouses Yao justified their non-payment by
arguing that Matela abandoned the project and that there were defects in its construction.

Evidently, both parties in this case breached their respective obligations. The well entrenched doctrine is
that the law does not relieve a party from the effects of an unwise, foolish or disastrous contract,
entered into with full awareness of what he was doing and entered into and carried out in good faith.
Such a contract will not be discarded even if there was a mistake of law or fact. Courts have no
jurisdiction to look into the wisdom of the contract entered into by and between the parties or to render
a decision different therefrom. They have no power to relieve parties from obligation voluntarily
assumed, simply because their contracts turned out to be disastrous deals or unwise
 FIRST DIVISION
G.R. No. 149140 September 12, 2006
VICTORIA ONG, petitioner,
vs.
ERNESTO BOGÑALBAL1 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
2
31 March 2000 Decision.
The Court of Appeals found the facts to be as follows:
On January 2, 1995, [herein respondent] Ernesto Bogñalbal, an architect-contractor doing
business under the name and style of E.B. Bogñalbal 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 Bogñalbal] 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 Bogñalbal] 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 Bogñalbal'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 Bogñalbal], 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
Bogñalbal] 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 Bogñalbal]
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 Bogñalbal] 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 Bogñalbal'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 71
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 Bogñalbal] 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 Bogñalbal] 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 Bogñalbal'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 Bogñalbal,] 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 Bogñalbal 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
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

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.
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.
72
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.

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:
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

THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

Pursuant thereto, the architect on site, Architect John Noel Cano, certified for payment four progress
OF JURISDICTION IN DENYING THE MOTION FOR RECONSIDERATION AND IN RESOLVING THE 10
billings, which petitioner Ong paid on the following dates :
ABOVE-ENTITLED CASE IN FAVOR OF THE PRIVATE RESPONDENT.6

Propriety/Impropriety of Special Civil Action Partial Date Sent Covered Period Amount Part of Project Date
for Certiorari under Rule 65 Progress Accomplished Payme
Billing (contract
price: P 200,000.00)
Petitioner claims that a special civil action for certiorari is proper since appeal by certiorari under Rule 45
1st 28 January 1995 19-28 January P 35,950.00 17.975 % ---
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 2nd 15 February 1995 29 January to 15 P 69,300.00 34.650 % 22 Feb
 February
3rd 8 March 1995 16 February to 3 P 41,500.00 20.750 %
March
4th 31 March 1995 4-18 March P 30,950.00 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 Bogñalbal.11
Petitioner Ong claims that "Arch. Cano was an associate of [respondent Bogñalbal] 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 Bogñalbal] performed as claimed."13
The afore-quoted Article 4.02 of the Owner-Contractor Agreement between petitioner Ong and
respondent Bogñalbal, 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,"14 makes 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 Bogñalbal], 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 Bogñalbal. 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 Bogñalbal 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 Bogñalbal's allegation that 88.45% of the project had been
18
accomplished,
24 March 1995 petitioner
6 April 1995 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
Bogñalbal 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 Bogñalbal] 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 Bogñalbal has not yet become due
and demandable.25
The Court of Appeals rejected this argument, ruling that respondent Bogñalbal's stoppage of work on the
project prior to its completion cannot justify petitioner Ong's refusal to pay the fourth progress billing
73
and the value of respondent Bogñalbal's accomplished work on the Kenzo flooring. On the contrary,
according to the Court of Appeals, respondent Bogñalbal 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 Bogñalbal] 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 Bogñalbal'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
Bogñalbal] 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 Bogñalbal 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 Bogñalbal.
As previously discussed, the Court of Appeals did not bother to review the evidence on petitioner Ong's
allegation of respondent Bogñalbal'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 Bogñalbal'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 Bogñalbal] 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 Bogñalbal that there had been no novation of the
contract. At best, what was proven was a grudging accommodation on the part of respondent Bogñalbal
to continue working on the project despite petitioner Ong's failure to pay the fourth progress billing.
Respondent Bogñalbal'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 Bogñalbal] 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 of P78,000.00. But just the same, the completion
of the project was delayed for eighty two (82) days, which also caused petitioner additional
33
damages.
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 Bogñalbal would no longer have the opportunity to finish the
74
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 Bogñalbal to abandon work
This Court has held that, even if respondent Bogñalbal 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
37
rushed respondent Bogñalbal to complete the Kenzo flooring in three days; (3) and that respondent
Bogñalbal 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 Bogñalbal was not
justified in abandoning the project.39
The issue of whether or not respondent Bogñalbal is justified in abandoning the project is relevant to the
resolution of petitioner Ong's counterclaim against respondent Bogñalbal.
The Court rules in favor of petitioner Ong on this score. There is nothing in the record which would
justify respondent Bogñalbal'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 Bogñalbal 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.42 This 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 Bogñalbal failed to complete the Kenzo flooring on time because
of his incompetence.44 Respondent Bogñalbal 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 Bogñalbal, 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 Bogñalbal]. 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 Bogñalbal] 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.
75
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 Bogñalbal's unilateral termination the contract
without a court action is unjustified.
Petitioner Ong's Counterclaim
Since respondent Bogñalbal 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 Bogñalbal 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 Bogñalbal 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 Bogñalbal 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
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 a certiorari 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, which originally provides:

76
SEC. 4. Where petition filed. – The petition may be filed not later than sixty (60) days from
from liability for damages, presupposes that the contracting parties are on equal footing with respect to
notice of the judgment, order or resolution sought to be assailed in the Supreme Court or, if it
their reciprocal principal obligations. Actual damages representing deficiencies in the performance of the
relates to the acts or omissions of a lower court or of a corporation, board, officer or person,
principal obligation should be taken out of the equation.54
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
In the case at bar, the partial performance of respondent Bogñalbal (88.85% 55 of the original contract of its appellate jurisdiction, x x x.
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).
Section 4, Rule 65 was, however, amended on 1 September 2000, several months before the filing of this
Petition, to insert the following provision:
For reference, the MeTC Decision, which was reinstated by the Court of Appeals, awarded the following
to respondent Bogñalbal:
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
Value of accomplished work on the original contract P 30,950.00 motion.
for the period 4 to 18 March 1995:
Value of accomplished work on the Kenzo flooring P 13,000.00 This insertion gives petitioner Ong a fresh 60-day period to assail the Decision via a Petition
(60% of the agreed fee of P 25,000, minus P2,000 for Certiorari, which is what this Petition really seeks and which is how this Court has treated the same.
paid under the third progress billing)
Moral damages P 20,000.00 WHEREFORE, the Decision of the Court of Appeals reinstating the Decision of the Metropolitan Trial
Exemplary damages P 25,000.00 Court holding petitioner Victoria Ong liable for damages is affirmed. The instant Petition for Certiorari is
TOTAL P 88,950.00 hereby DISMISSED for lack of merit. Costs against petitioner.

Petitioner Ong should first be obliged to pay the value of the accomplished work (P30,950.00 SO ORDERED.
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
Bogñalbal, as provided under Article 1192.