[G.R. No. L-29900. June 28, 1974.
] wording of the promissory note being "upon demand," the obligation was immediately due. Since it was
IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA,
Deceased, GEORGE PAY, petitioner-appellant, vs. SEGUNDINA CHUA VDA. DE
PALANCA, oppositor-appellee.
Florentino B. del Rosario  for petitioner-appellant.
Manuel V. San Jose for oppositor-appellee.
DECISION
FERNANDO, J  p:
There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While
several points were raised, the decisive issue is whether a creditor is barred by prescription in his
attempt to collect on a promissory note executed more than fifteen years earlier with the debtor sued
promising to pay either upon receipt by him of his share from a certain estate or upon demand, the
basis for the action being the latter alternative. The lower court held that the ten-year period of limitation
of actions did apply, the note being immediately due and demandable, the creditor admitting expressly
that he was relying on the wording "upon demand." On the above facts as found, and with the law being
as it is, it cannot be said that its decision is infected with error. We affirm.
From the appealed decision, the following appears: "The parties in this case agreed to submit the
matter for resolution on the basis of their pleadings and annexes and their respective memoranda
submitted. Petitioner George Pay is a creditor of the Late Justo Palanca who died in Manila on July 3,
1963. The claim of the petitioner is based on a promissory note dated January 30, 1952, whereby the
late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to pay George Pay the
amount of P26,900.00, with interest thereon at the rate of 12% per annum. George Pay is now before
this Court, asking that Segundina Chua vda. de Palanca, surviving spouse of the late Justo Palanca, he
appointed as administratrix of a certain piece of property which is a residential dwelling located at 2656
Taft Avenue, Manila, covered by Tax Declaration No. 3114 in the name of Justo Palanca, assessed at
P41,800.00. The idea is that once said property is brought under administration, George Pay, as
creditor, can file his claim against the administratrix." 1 It then stated that the petition could not prosper
as there was a refusal on the part of Segundina Chua Vda, de Palanca to be appointed as
administratrix; that the property sought to be administered no longer belonged to the debtor, the late
Justo Palanca; and that the rights of petition creditor had already prescribed. The promissory note,
dated January 30, 1962, is worded thus: "'For value received from time to time since 1947, we [jointly
and severally promise to] pay to Mr. [George Pay] at his office at the China Banking Corporation the
sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at the rate of
12% per annum upon receipt by either of the undersigned of cash payment from the Estate of the late
Don Carlos Palanca or upon demand.' . . . As stated, this promissory note is signed by Rosa Gonzales
Vda. de Carlos Palanca and Justo Palanca.2 Then came this paragraph: "The Court has inquired
whether any cash payment has been received by either of the signers of this promissory note from the
Estate of the late Carlos Palanca. Petitioner informed that he does not insist on this provision but that
petitioner is only claiming on his right under the promissory note." 3 After which, came the ruling that the
dated January 30, 1952, it was clear that more "than ten (10) years has already transpired from that
time until to-date. The action, therefore, of the creditor has definitely prescribed." 4 The result, as above
noted, was the dismissal of the petition.
In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the
correctness of the rulings of the lower court as to the effect of the refusal of the surviving spouse of the
late Justo Palanca to be appointed as administratrix, as to the property sought to be administered no
longer belonging to the debtor, the late Justo Palanca, and as to the rights of petitioner-creditor having
already prescribed. As noted at the outset, only the question of prescription need detain us in the
disposition of this appeal. Likewise, as intimated, the decision must be affirmed, considering the clear
tenor of the promissory note.
From the manner in which the promissory note was executed, it would appear that petitioner was
hopeful that the satisfaction of his credit could he realized either through the debtor sued receiving cash
payment from the estate of the late Carlos Palanca presumptively as one of the heirs, or, as expressed
therein, "upon demand." There is nothing in the record that would indicate whether or not the first
alternative was fulfilled. What is undeniable is that on August 26, 1961, more than fifteen years after the
execution of the promissory note on January 30, 1952, this petition was filed. The defense interposed
was prescription Its merit is rather obvious. Article 1179 of the Civil Code provides: "Every obligation
whose performance does not depend upon a future or uncertain event, or upon a past event unknown
to the parties, is demandable at once." This used to be Article 1113 of the Spanish Civil Code of 1889.
As far back as Floriano v. Delgado, 5 a 1908 decision, it has been applied according to its express
language. The well-known Spanish commentator, Manresa, on this point, states: "Dejando, con acierto,
el caracter m s teorico y grafico del acto, o sea la perfeccion de este, se fija, para determinar el
concepto de la obligacion pura, en el distintivo de esta, y que es consecuencia de aqul: la exigibilidad
immediata." 6
The obligation being due and demandable, it would appear that the filing of the suit after fifteen years
was much too late. For again, according to the Civil Code, which is based on Section 43 of Act No. 190,
the prescriptive period for a written contract is that of ten years. 7 This is another instance where this
Court has consistently adhered to the express language of the applicable norm. 8 There is no necessity
therefore of passing upon the other two legal questions raised as to whether or not it did suffice for the
petition to fail just because the surviving spouse refuses to be made administratrix, or just because the
estate was left with no other property. The decision of the lower court cannot be overturned.
WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.
||| (Pay v. Vda. de Palanca, G.R. No. L-29900, [June 28, 1974], 156 PHIL 619-623)
 [G.R. No. 112127. July 17, 1995.]
CENTRAL PHILIPPINE UNIVERSITY,  petitioner, vs. COURT OF APPEALS,
REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ,
REDAN LOPEZ AND REMARENE LOPEZ,  respondents.
Juanito M. Acanto for petitioner.
Santos B. Aguadera for private respondents.
SYLLABUS
1. CIVIL LAW; PROPERTY; MODES OF ACQUIRING OWNERSHIP; DONATION; CONSIDERED
ONEROUS WHEN EXECUTED FOR A VALUABLE CONSIDERATION WHICH IS CONSIDERED THE
EQUIVALENT OF THE DONATION. — A clear perusal of the condition set forth in the deed of donation
executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his donation was
onerous, one executed for a valuable consideration which is considered the equivalent of the donation
itself, e.g., when a donation imposes a burden equivalent to the value of the donation. A gift of land to
the City of Manila requiring the latter to erect schools, construct a children's playground and open
streets on the land was considered an onerous donation. Similarly, where Don Ramon Lopez donated
the subject parcel of land to petitioner but imposed an obligation upon the latter to establish a medical
college thereon, the donation must be for an onerous consideration.
2. ID.; ID.; ID.; ID.; MAY BE REVOKED FOR NON-FULFILLMENT OR NON-COMPLIANCE OF THE
CONDITIONS SET FORTH THEREIN; CASE AT BAR. — Under Art. 1181 of the Civil Code, on
conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the condition. Thus, when a
person donates land to another on the condition that the latter would build upon the land a school, the
condition imposed was not a condition precedent or a suspensive condition but a resolutory one. It is
not correct to say that the schoolhouse had to be constructed before the donation became effective,
that is, before the donee could become the owner of the land, otherwise, it would be invading the
property rights of the donor. The donation had to be valid before the fulfillment of the condition. If there
was no fulfillment or compliance with the condition, such as what obtains in the instant case, the
donation may now be revoked and all rights which the donee may have acquired under it.
3. ID.; ID.; ID.; ID.; DONEE'S ACCEPTANCE AND ACKNOWLEDGMENT OF ITS OBLIGATION
PROVIDED IN THE DEED, SUFFICIENT TO PREVENT THE STATUTE OF LIMITATION FROM
BARRING THE ACTION OF DONOR UPON THE ORIGINAL CONTRACT. — The claim of petitioner
that prescription bars the instant action of private respondents is unavailing. The condition imposed by
the donor, i.e., the building of a medical school upon the land donated, depended upon the exclusive
will of the donee as to when this condition shall be fulfilled. When petitioner accepted the donation, it
bound itself to comply with the condition thereof. Since the time within which the condition should be
fulfilled depended upon the exclusive will of the petitioner, it has been held that its absolute acceptance
and the acknowledgment of its obligation provided in the deed of donation were sufficient to prevent the
statute of limitations from barring the action of private respondents upon the original contract which was
the deed of donation.
4. ID.; ID.; ID.; ID.; IN CASE OF REVOCATION, A CAUSE OF ACTION ARISES WHEN THAT WHICH
SHOULD HAVE BEEN DONE IS NOT DONE, OR THAT WHICH SHOULD NOT HAVE BEEN DONE IS
DONE. — The time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of
action arises when that which should have been done is not done, or that which should not have been
done is done. In cases where there is no special provision for such computation, recourse must be had
to the rule that the period must be counted from the day on which the corresponding action could have
been instituted. It is the legal possibility of bringing the action which determines the starting point for the
computation of the period. In this case, the starting point begins with the expiration of a reasonable
period and opportunity for petitioner to fulfill what has been charged upon it by the donor.
5. ID.; ID.; ID.; ID.; GENERALLY, WHEN THE OBLIGATION DOES NOT FIX A PERIOD BUT FROM
ITS NATURE AND CIRCUMSTANCES IT CAN BE INFERRED THAT A PERIOD WAS INTENDED,
COURT MAY FIX THE PERIOD FOR COMPLIANCE. — The period of time for the establishment of a
medical college and the necessary buildings and improvements on the property cannot be quantified in
a specific number of years because of the presence of several factors and circumstances involved in
the erection of an educational institution, such as government laws and regulations pertaining to
education, building requirements and property restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances it can be inferred
that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies, which
provides that the courts may fix the duration thereof because the fulfillment of the obligation itself cannot
be demanded until after the court has fixed the period for compliance therewith and such period has
arrived.
6. ID.; ID.; ID.; ID.; WHEN OBLIGOR CANNOT COMPLY WITH WHAT IS INCUMBENT UPON HIM,
THE OBLIGEE MAY SEEK RESCISSION; EXCEPTION. — This general rule however cannot be
applied considering the different set of circumstances existing in the instant case. More than a
reasonable period of fifty (50) years has already been allowed petitioner to avail of the opportunity to
comply with the condition even if it be burdensome, to make the donation in its favor forever valid. But,
unfortunately, it failed to do so. Hence, there is no more need to fix the duration of a term of the
obligation when such procedure would be a mere technicality and formality and would serve no purpose
than to delay or lead to an unnecessary and expensive multiplication of suits. Moreover, under Art. 1191
of the Civil Code, when one of the obligors cannot comply with what is incumbent upon him, the obligee
may seek rescission and the court shall decree the same unless there is just cause authorizing the
fixing of a period. In the absence of any just cause for the court to determine the period of the
compliance, there is no more obstacle for the court to decree the rescission claimed.
7. ID.; ID.; ID.; ID.; IN CASE OF GRATUITOUS DONATION DOUBTS SHOULD BE RESOLVED IN
FAVOR OF THE LEAST TRANSMISSION OF RIGHTS AND INTERESTS. — Finally, since the
questioned deed of donation herein is basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be resolved in favor of the least transmission of rights and
interests. Records are clear and facts are undisputed that since the execution of the deed of donation
up to the time of filing of the instant action, petitioner has failed to comply with its obligation as donee.
Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only just and
equitable now to declare the subject donation already ineffective and, for all purposes, revoked so that
petitioner as donee should now return the donated property to the heirs of the donor, private
respondents herein, by means of reconveyance.
DAVIDE, JR., J, dissenting opinion:
1. CIVIL LAW; PROPERTY, MODES OF ACQUIRING OWNERSHIP; DONATION; IN LAW OF
DONATION, "CONDITIONS" REFERS TO OBLIGATION OR CHARGES IMPOSED BY THE DONOR
ON THE DONEE. — There is no conditional obligation to speak of in this case. It seems that the
"conditions" imposed by the donor and as the word is used in the law of donations confused with
"conditions" as used in the law of obligations. In his annotation of Article 764 of the Civil Code on
Donations, Arturo M. Tolentino, citing the well-known civilists such as Castan, Perez Gonzalez and
Alguer, and Colin & Capitant, states clearly the context within which the term "conditions" is used in the
law of donations, to wit: The word "conditions" in this article does not refer to uncertain events on which
the birth or extinguishment of a juridical relation depends, but it is used in the vulgar sense
of obligations or charges imposed by the donor on the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense. (Italics supplied) Clearly then, when the law and the deed of donation
speaks of "conditions" of a donation, what are referred to are actually the obligations, charges or
burdens imposed by the donor upon the donee and which would characterize the donation as onerous.
In the present case, the donation is, quite obviously, onerous, but it is more properly called a "modal
donation." A modal donation is one in which the donor imposes a prestation upon the donee. The
establishment of the medical college as the condition of the donation in the present case is one such
prestation.
2. ID.; ID.; ID.; ID.; WHEN NO FIXED PERIOD IN WHICH THE CONDITION SHOULD BE FULFILLED,
IT IS THE DUTY OF THE COURT TO FIX A SUITABLE TIME FOR ITS FULFILLMENT. — J. Davide,
Jr., cannot subscribe to the view that the provisions of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are subject to a period. I draw this conclusion/based
on our previous ruling which, although made almost 90 years ago, still finds application in the present
case. In Barreto vs.  City of Manila, we said that when the contract of donation, as the one involved
therein, has no fixed period in which the condition should be fulfilled, the provisions of what is now
Article 1197 (then Article 1128) are applicable and it is the duty of the court to fix a suitable time for its
fulfillment. Indeed, from the nature and circumstances of the conditions/obligations of the present
donation, it can be inferred that a period was contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long period of time when in fact, he specifically burdened
the donee with the obligation to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions imposed are to be fulfilled.
 
3. ID.; ID.; ID.; ID.; MERE FACT THAT THERE IS NO TIME FIXED AS TO WHEN THE CONDITION
THEREOF ARE TO BE FULFILLED DOES NOT IPSO FACTO MEAN THAT THE STATUTE OF
LIMITATION WILL NOT APPLY. — There is misplaced reliance again on a previous decision of this
Court in Osmeña vs. Rama. That case does not speak of a deed of donation as erroneously quoted and
cited by the majority opinion. It speaks of a contract for a sum of money where the debtor herself
imposed a condition which will determine when she will fulfill her obligation to pay the creditor, thus,
making the fulfillment of her obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not imposed any conditions on the
fulfillment of its obligations. Although it is admitted that the fulfillment of the conditions/obligations of the
present donation may be dependent on the will of the donee as to when it will comply therewith, this did
not arise out of a condition which the donee itself imposed. It is believed that the donee was not meant
to and does not have absolute control over the time within which it will perform its obligations. It must
still do so within a reasonable time. What that reasonable time is, under the circumstances, for the
courts to determine. Thus, the mere fact that there is no time fixed as to when the conditions of the
donation are to be fulfilled does not ipso facto mean that the statute of limitations will not apply anymore
and the action to revoke the donation becomes imprescriptible.
4. ID.; ID.; ID.; ID.; ACTION TO REVOKE THEREOF PRESCRIBES IN FOUR (4) YEARS. — More
recently, in De Luna vs. Abrigo, this Court reiterated the ruling inParks and said that: It is true that under
Article 764 of the New Civil Code, actions for the revocation of a donation must be brought within four
(4) years from the non-compliance of the conditions of the donation. However, it is Our opinion that said
article does not apply to onerous donations in view of the specific provision of Article 733 providing that
onerous donations are governed by the rules on contracts. In the light of the above, the rules on
contracts and the general rules on prescription and not the rules on donations are applicable in the case
at bar. The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon a
written contract, which is what the deed of an onerous donation is. The prescriptive period is ten years
from the time the cause of action accrues, and that is, from the expiration of the time within which the
donee must comply with the conditions/obligations of the donation. As to when this exactly is remains to
be determined, and that is for the courts to do as reposed upon them by Article 1197.
DECISION
BELLOSILLO, J  p:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional trial Court of Iloilo City directing petitioner to
reconvey to private respondents the property donated to it by their predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of
the Central Philippine College (now Central Philippine University [CPU]), executed a deed of donation in
favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144,
then a portion of Lot No. 3174-B, for which Transfer Certificate of Title No. T-3910-A was issued in the
name of the donee CPU with the following annotations copied from the deed of donation.
1. The land described shall be utilized by the CPU exclusively for the establishment
and use of a medical college with all its buildings as part of the curriculum:
2. The said college shall not sell, transfer or convey to any third party nor in any
way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college
shall be under obligation to erect a cornerstones bearing that name. Any net
income from the land or any of its parks shall be put in a fund to be known as the
"RAMON LOPEZ CAMPUS FUND" to be used for improvements of said campus
and erection of a building thereon. " 1
On 31 May 1989, privates respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for
annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to the
time the action was filed the latter had not complied with the conditions of the donation. Private
respondents also argued that petitioner had in fact negotiated with the National Housing Authority
(NHA) to exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had prescribe; that
it did not violate any of the conditions in the deed of donation because it never used the donated
properly for any other purpose than that for which it was intended; and, that it did not sell, transfer or
convey it to any third party.
On 31 May 11991, the trial court held that petitioner failed to comply with the conditions of the donation
and declared it null and void. The court a quofurther directed petitioner to execute a deed of
reconveyance of the property in favor of the heirs of the donor, namely, private respondents herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the ruled
that the annotations at the back of petitioner's certificate of title were resolutory conditions breach of
which should terminate the rights of the donee thus making the donation revocable.
 The appellate court also found that while the first condition mandated petitioner to utilize
the donated property for the establishment of a medical school, the donor did not fix a period within
which the condition must be fulfilled, hence, until a period was fixed for the fulfillment of the
condition, petitioner could not be considered as having failed to comply with its part of the bargain.
Thus, the appellate court rendered its decision reversing the appealed decision and remanding the
case to the court of origin for the determination of the time within which petitioner should comply
with the first condition annotated in the certificate of title.
Petitioner now alleged that the court of Appeals erred: (a) in holding that the quoted
annotations in the certificate of title of petitioner are onerous obligations and resolutory conditions
of the donation which must be fulfilled non-compliance of which would render the donation
revocable; (b) in holding that the issue of prescription does not deserve "disquisition;" and, (c) in
remanding the case to the trial court for the fixing of the period within which petitioner would
establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the
deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that
this donation was onerous, one executed for a valuable consideration which is considered the
equivalent of the donation itself, e.g., when a donation imposes a burden equivalent to the value of
the donation. A gift of land to the City of Manila requiring the latter to erect schools, construct a
children's playground and open streets on the land was considered an onerous
donation. 3 Similarly, where Don Ramon Lopez donated the subject parcel of land to petitioner but
imposed an obligation upon the latter to establish a medical college thereon, the donation must be
for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend upon the happening of
the event which constitutes the condition. Thus, when a person donates land to another on the
condition that the latter would build upon the land a school, the condition imposed was not a
condition precedent or a suspensive condition but a resolutory one. 4It is not correct to say that the
schoolhouse had to be constructed before the donation became effective, that is, before the donee
could become the owner of the land, otherwise, it would be invading the property rights of the
donor. The donation had to be valid before the fulfillment of the condition. 5 If there was no
fulfillment or compliance with the condition, such as what obtains in the instant case, the donation
may now be revoked and all rights which the donee may have acquired under it shall be deemed
lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is
unavailing. The condition imposed by the donor, i.e., the building of a medical school upon the land
donated, depended upon the exclusive will of the donee as to when this condition shall fulfilled.
When petitioner accepted the donation, it bound itself to comply with the condition thereof. Since
the time within which the condition should be fulfilled depended upon the exclusive will of the
petitioner, it has been held that its absolute acceptance and the acknowledgement of its obligation
provided in the deed of donation were sufficient to prevent the statute of limitations from barring the
action of private respondents upon the original contract which was the deed of donation. 6
Moreover, the time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of
action arises when that which should have been done is not done, or that which should not have been
done is done. 7 In cases where there is no special provision for such computation, recourse must be
had to the rule that the period must be counted from the day on which the corresponding action could
have been instituted. It is the legal possibility of bringing the action which determines the starting point
for the computation of the period. In this case, the starting point begins with the expiration of a
reasonable period and opportunity for petitioner to fulfill what has been charged upon it by the donor.
 
The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of the
presence of several factors and circumstances involved in the erection of an educational institution,
such as government laws and regulations pertaining to government laws and regulations pertaining to
education, building requirements and property restrictions which are beyond the control of the
donee. LibLex
Thus, when the obligation does not fix a period but from its nature and circumstances it
can be inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code
applies, which provides that the courts may fix the duration thereof because the fulfillment of the
obligation itself cannot be demanded until after the court has fixed the period for compliance
therewith and such period has arrived. 8
This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of fifty (50) years has
already been allowed petitioner to avail of the opportunity to comply with the condition even if it be
burdensome, to make the donation in its favor forever valid. But, unfortunately, it failed to do so.
Hence, there is no more need to fix the duration of a term of the obligation when such procedure
would be a mere technicality and formality and would serve no purpose that to delay or lead to an
unnecessary and expensive multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code,
when one of the obligors cannot comply with what is incumbent upon him, the obligee may seek
rescission and the court shall decree the same unless there is just cause authorizing the fixing of a
period. In the absence of any just cause for the court to determine the period of the compliance,
there is no more obstacle for the court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts
referring to incidental circumstances of a gratuitous contract should be resolved in favor of the least
transmission of rights and interest. 10 Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to
comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length
of time. Hence, it is only just and equitable now to declare the subject donation already ineffective
and, for all purposes, revoked so that petitioner as donee should now return the donated property
to the heirs of the donor, private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is accordingly
MODIFIED. Consequently, petitioner is directed to reconvey to private respondents Lot No. 3174-B-1 of
the subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A within thirty (30)
days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.
||| (Central Philippine University v. Court of Appeals, G.R. No. 112127, [July 17, 1995], 316 PHIL 616-
634)
 [G.R. No. 87047. October 31, 1990.]
FRANCISCO LAO LIM,  petitioner, vs. COURT OF APPEALS and BENITO
VILLAVICENCIO DY,  respondents.
Gener E .  Asuncion for petitioner.
Natividad T .  Perez for private respondent.
DECISION
REGALADO, J  p:
Respondent Court of Appeals having affirmed in toto on June 30, 1988 in CA-G.R. SP No. 13925 1 the
decision of the Regional Trial Court of Manila, Branch XLVI, in Civil Case No. 8742719, entitled
"Francisco Lao Lim vs. Benito Villavicencio Dy," petitioner seeks the reversal of such affirmance in the
instant petition.
The records show that private respondent entered into a contract of lease with petitioner for a period of
three (3) years, that is, from 1976 to 1979. After the stipulated term expired, private respondent refused
to vacate the premises, hence, petitioner filed an ejectment suit against the former in the City Court of
Manila, docketed therein as Civil Case No. 051063-CV. The case was terminated by a judicially
approved compromise agreement of the parties providing in part:
"3. That the term of the lease shall be renewed every three years retroacting from
October 1979 to October 1982; after which the abovenamed rental shall be raised
automatically by 20% every three years for as long as defendant needed the
premises and can meet and pay the said increases, the defendant to give notice of
his intent to renew sixty (60) days before the expiration of the term;" 2
By reason of said compromise agreement the lease continued from 1979 to 1982, then from 1982 to
1985. On April 17, 1985, petitioner advised private respondent that he would no longer renew the
contract effective October, 1985. 3 However, on August 5, 1985, private respondent informed petitioner
in writing of his intention to renew the contract of lease for another term, commencing November, 1985
to October, 1988. 4 In reply to said letter, petitioner advised private respondent that he did not agree to
a renewal of the lease contract upon its expiration in October, 1985. 5
On January 15, 1986, because of private respondent's refusal to vacate the premises, petitioner filed
another ejectment suit, this time with the Metropolitan Trial Court of Manila in Civil Case No. 114659-
CV. In its decision of September 24, 1987, said court dismissed the complaint on the grounds that (1)
the lease contract has not expired, being a continuous one the period whereof depended upon the
lessee's need for the premises and his ability to pay the rents; and (2) the compromise agreement
entered into in the aforesaid Civil Case No. 051063-CV constitutes res judicata  to the case before it. 6
Petitioner appealed to the Regional Trial Court of Manila which, in its decision of January 28, 1988 in
Civil Case No. 8742719, affirmed the decision of the lower court. 7
As stated at the outset, respondent Court of Appeals affirmed in full said decision of the Regional Trial
Court and held that (1) the stipulation in the compromise agreement which, in its formulation, allows the
lessee to stay on the premises as long as he needs it and can pay rents is valid, being a resolutory
condition and, therefore, beyond the ambit of Article 1308 of the Civil Code; and (2) that a compromise
has the effect of res judicata. 8
Petitioner's motion for reconsideration having been denied by respondent Court of Appeals, this present
petition is now before us. We find the same to be meritorious.
Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant needed
the premises and can meet and pay said increases" is a purely potestative condition because it leaves
the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise
a suspensive condition because the renewal of the lease, which gives rise to a new lease, depends
upon said condition. It should be noted that a renewal constitutes a new contract of lease although with
the same terms and conditions as those in the expired lease. It should also not be overlooked that said
condition is not resolutory in nature because it is not a condition that terminates the lease contract. The
lease contract is for a definite period of three (3) years upon the expiration of which the lease
automatically terminates. prcd
The invalidity of a condition in a lease contract similar to the one at bar has been resolved
in Encarnacion vs. Baldomar, et al., 9 where we ruled that in an action for ejectment, the defense
interposed by the lessees that the contract of lease authorized them to continue occupying the premises
as long as they paid the rents is untenable, because it would leave to the lessees the sole power to
determine whether the lease should continue or not. As stated therein, "(i)f this defense were to be
allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals,
the owner would never be able to discontinue it; conversely, although the owner should desire the lease
to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the
contract by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the
aforesaid article of the Civil Code. (8 Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil.
100.)"
The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively
upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or
not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a
contract of lease and no equality exists between the lessor and the lessee since the life of the contract
is dictated solely by the lessee. Cdpr
The interpretation made by respondent court cannot, therefore, be upheld. Paragraph 3 of the
compromise agreement, read and interpreted in its entirety, is actually to the effect that the last portion
thereof, which gives the private respondent sixty (60) days before the expiration of the term the right to
give notice of his intent to renew, is subject to the first portion of said paragraph that "the term of the
lease shall be renewed every three (3) years," thereby requiring the mutual agreement of the parties.
The use of the word "renew" and the designation of the period of three (3) years clearly confirm that the
contract of lease is limited to a specific period and that it is not a continuing lease. The stipulation
provides for a renewal of the lease every three (3) years; there could not be a renewal if said lease did
not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby construed as providing for a definite period of
three (3) years and that the automatic increase of the rentals by twenty percent (20%) will take effect
only if the parties decide to renew the lease. A contrary interpretation will result in a situation where the
continuation and effectivity of the contract will depend only upon the will of the lessee, in violation
of Article 1308 of the Civil Code and the aforesaid doctrine in Encarnacion. The compromise agreement
should be understood as bearing that import which is most adequate to render it effectual. 10 Where the
instrument is susceptible of two interpretations, one which will make it invalid and illegal and another
which will make it valid and legal, the latter interpretation should be adopted. 11
Moreover, perpetual leases are not favored in law, nor are covenants for continued renewals tending to
create a perpetuity, and the rule of construction is well settled that a covenant for renewal or for an
additional term should not be held to create a right to repeated grants in perpetuity, unless by plain and
unambiguous terms the parties have expressed such intention. 12 A lease will not be construed to
create a right to perpetual renewals unless the language employed indicates clearly and unambiguously
that it was the intention and purpose of the parties to do so. 13 A portion in a lease giving the lessee
and his assignee the right to perpetual renewals is not favored by the courts, and a lease will be
construed as not making such a provision unless it does so clearly. 14
As we have further emphasized:
"It is also important to bear in mind that in a reciprocal contract like a lease, the
period of the lease must be deemed to have been agreed upon for the benefit
of both parties, absent language showing that the term was deliberately set for the
benefit of the lessee or lessor alone. We are not aware of any presumption in law
that the term of a lease is designed for the benefit of the lessee
alone. Koh and Cruz in effect rested upon such a presumption. But that
presumption cannot reasonably be indulged in casually in an era of rapid economic
change, marked by, among other things, volatile costs of living and fluctuations in
the value of the domestic currency. The longer the period the more clearly
unreasonable such a presumption would be. In an age like that we live in, very
specific language is necessary to show an intent to grant a unilateral faculty to
extend or renew a contract of lease to the lessee alone, or to the lessor alone for
that matter. We hold that the above-quoted rulings in Koh v.  Ongsiaco and Cruz
v.  Alberto should be and are overruled." 15
In addition, even assuming that the clause "for as long as the defendant needed the premises and can
meet and pay, said increases" gives private respondent an option to renew the lease, the same will be
construed as providing for but one renewal or extension and, therefore, was satisfied when the lease
was renewed in 1982 for another three (3) years. A general covenant to renew is satisfied by one
renewal and will not be construed to confer the right to more than one renewal unless provision is
clearly and expressly made for further renewals. 16 Leases which may have been intended to be
renewable in perpetuity will nevertheless be construed as importing but one renewal if there is any
uncertainty in that regard. 17
The case of Buccat vs. Dispo, et al., 18 relied upon by respondent court, to support its holding that
respondent lessee can legally stay on the premises for as long as he needs it and can pay the rents, is
not in point. In said case, the lease contract provides for an indefinite period since it merely stipulates
"(t)hat the lease contract shall remain in full force and effect as long as the land will serve the purpose
for which it is intended as a school site of the National Business Institute, but the rentals now stipulated
shall be subject to review every after ten (10) years by mutual agreement of the parties." This is in clear
contrast to the case at bar wherein, to repeat, the lease is fixed at a period of three (3) years although
subject to renewal upon agreement of the parties, and the clause "for as long as defendant needs the
premises and can meet and pay the rents" is not an independent stipulation but is controlled by said
fixed term and the option for renewal upon agreement of both parties.
On the second issue, we agree with petitioner that respondent court erred in holding that the action for
ejectment is barred by res judicata. While it is true that a compromise agreement has the effect of res
judicata, this doctrine does not apply in the present case. It is elementary that for a judgment to be a bar
to a subsequent case, (1) it must be a final judgment, (2) the court which rendered it had jurisdiction
over the subject matter and the parties, (3) it must be a judgment on the merits, and (4) there must be
identity between the two cases as to parties, subject matter and cause of action. 19
In the case at bar, the fourth requisite is lacking. Although there is identity of parties, there is no identity
of subject matter and cause of action. The subject matter in the first ejectment case is the original lease
contract while the subject matter in the case at bar is the lease created under the terms provided in the
subsequent compromise agreement. The lease executed in 1978 is one thing; the lease constituted in
1982 by the compromise agreement is another. LLjur
There is also no identity, in the causes of action. The test generally applied to determine the identity of
causes of action is to consider the identity of facts essential to their maintenance, or whether the same
evidence would sustain both causes of action. 20 In the case at bar, the delict or the wrong in the first
case is different from that in the second, and the evidence that will support and establish the cause of
action in the former will not suffice to support and establish that in the latter.
In the first ejectment case, the cause of action was private respondent's refusal to comply with the lease
contract which expired on December 31, 1978. In the present case, the cause of action is a similar
refusal but with respect to the lease which expired in October, 1985 under the compromise agreement.
While the compromise agreement may be res judicata as far as the cause of action and issues in the
first ejectment case is concerned, any cause of action that arises from the application or violation of the
compromise agreement cannot be said to have been settled in said first case. The compromise
agreement was meant to settle, as it did only settle, the first case. It did not, as it could not, cover any
cause of action that might arise thereafter, like the present case which was founded on the expiration of
the lease in 1985, which necessarily requires a different set of evidence. The fact that the compromise
agreement was judicially approved does not foreclose any cause of action arising from a violation of the
terms thereof. cdrep
WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET ASIDE. Private
respondent is hereby ordered to immediately vacate and return the possession of the leased premises
subject of the present action to petitioner and to pay the monthly rentals due thereon in accordance with
the compromise agreement until he shall have actually vacated the same. This judgment is immediately
executory.
SO ORDERED.
||| (Lim v. Court of Appeals, G.R. No. 87047, [October 31, 1990], 269 PHIL 155-165)
 [G.R. No. 4437. September 9, 1909.]
TOMAS OSMEÑA,  plaintiff-appellee, vs. CENONA RAMA, defendant-appellant.
Filemon Sotto for appellant.
J.H. Junquera for appellee.
SYLLABUS
1. CONTRACT; CONDITIONAL PROMISE TO PAY. — A condition imposed upon a
contract by the promisor, the performance of which depends upon his exclusive will, is void, in
accordance with the provisions of article 1115 of the Civil Code.
DECISION
JOHNSON,  J p:
It appears from the record that upon the 15th day of November, 1890, the defendant
herein executed and delivered to Victoriano Osmeña the following contract:
"EXHIBIT A.
P200.00.
"CEBU, November 15, 1890.
"I, Doña Cenona Rama, a resident of this city, and of legal age, have
received from Don Victoriano Osmeña the sum of two hundred pesos in cash which
I will pay in sugar in the month of January or February of the coming year, at the
price ruling on the day of delivering the sugar into his warehouses, and I will pay
him interest at the rate of half a cuartillo per month on each peso, beginning on this
date until the day of the settlement; and if I can not pay in full, a balance shall be
struck, showing the amount outstanding at the end of each June, including interest,
and such balance as may be outstanding against me shall be considered as capital
which I will always pay in sugar, together with the interest mentioned above. I
further promise that I will sell to the said Señor Osmeña all the sugar that I may
harvest, and as a guarantee, pledge as security all of my present and future
property, and as special security the house with tile roof and ground floor of stone
in which I live in Pagina; in proof whereof, I sign this document, and he shall be
entitled to make claim against me at the expiration of the term stated in this
document.
(Signed) "CENONA RAMA.
"Witnesses:
"FAUSTO PEÑALOSA.
"FRANCISCO MEDALLE."
On the 27th day of October, 1891, the defendant executed and delivered to the said
Victoriano Osmeña the following contract:
"EXHIBIT B.
"CEBU, October 27, 1891.
"On this date I have asked for a further loan and have received from Don
Victoriano Osmeña the sum of seventy pesos in cash, fifty pesos of which I have
loaned to Don Evaristo Peñares, which we will pay in sugar in the month of January
of the coming year according to the former conditions.
(Signed) "CENONA RAMA.
"FROM Don Evaristo Peñares P50
"Doña Cenona Rama 20
 ____
 P70
"Received — Evaristo Peñares."
Some time after the execution and delivery of the above contracts, the said Victoriano
Osmeña died. In the settlement and division of the property of his estate the above contracts
became the property of one of his heirs, Agustina Rafols. Later, the date does not appear, the said
Agustina Rafols ceded to the present plaintiff all of her right and interest in said contracts.
On the 15th day of March, 1902, the plaintiff presented the contracts to the defendant for
payment and she acknowledged her responsibility upon said contracts by an indorsement upon
them in the following language:
"EXHIBIT C.
"CEBU, March 15, 1902.
"On this date I hereby promise, in the presence of two witnesses, that, if
the house of strong materials in which I live in Pagina is sold, I will pay my
indebtedness to Don Tomas Osmeña as set forth in this document.
(Signed) "CENONA RAMA."
The defendant not having paid the amount due on said contracts; the plaintiff, upon the
26th day of June, 1906, commenced the present action in the Court of First Instance of the
Province of Cebu. The complaint filed in said cause alleged the execution and delivery of the above
contracts, the demand for payment, and the failure to pay on the part of the defendant, and the
prayer for a judgment for the amount due on the said contracts. The defendant answered by filing a
general denial and setting up the special defense of prescription.
The case was finally brought on to trial in the Court of First Instance, and the only witness
produced during the trial was the plaintiff himself. The defendant did not offer any proof whatever in
the lower court.
After hearing the evidence adduced during the trial, the lower court rendered a judgment
in favor of the plaintiff and against the defendant for the sum of P200 with interest at the rate of 18
3/4 per cent per annum, from the 15th day of November, 1890, and for the sum of P20, with
 interest at the rate of 18 3/4 per cent per annum, from the 27th day of October, 1891, until the said
sums were paid. From this judgment the defendant appealed.
The lower court found that P50 of the P70 mentioned in Exhibit B had not been borrowed
by the defendant, but by one Evaristo Peñares; therefore the defendant had no responsibility for
the payment of the said P50.
The only questions raised by the appellant were questions of fact. The appellant alleges
that the proof adduced during the trial of the cause was not sufficient to support the findings of the
lower court. It was suggested during the discussion of the case in this court that, in the
acknowledgment above quoted of the indebtedness made by the defendant, she imposed the
condition that she would pay the obligation if she sold her house. If that statement found in her
acknowledgment of the indebtedness should be regarded as a condition, it was a condition which
depended upon her exclusive will, and is, therefore, void. (Art. 1115, Civil Code.) The
acknowledgment, therefore, was an absolute acknowledgment of the obligation and was sufficient
to prevent the statute of limitation from barring the action upon the original contract.
We are satisfied, from all of the evidence adduced during the trial, that the judgment of the
lower court should be affirmed. So ordered.
||| (Osmeña v. Rama, G.R. No. 4437, [September 9, 1909], 14 PHIL 99-102)
 [G.R. No. 24190. July 13, 1926.]
GEORGE L. PARKS,  plaintiff-appellant, vs. TARLAC, MUNICIPALITY OF
TARLAC, CONCEPCION CIRER, and JAMES HILL, her husband,defendants-
appellees.
Jos. N. Wolfson for appellant.
Provincial Fiscal Lopez de Jesus  for the Province and Municipality of Tarlac.
SYLLABUS
1. IMMOVABLE PROPERTY; CONDITIONAL DONATION, CONDITION PRECEDENT. —
The characteristic of condition. precedent is that the acquisition of the right is not effected while
said condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired
and there is only an expectancy of right. Consequently, when a condition is imposed, the
compliance of which cannot be effected except when the right is deemed acquired, such condition
cannot be a condition precedent.
2. ID.; ID.; ACTION FOR REVOCATION; PRESCRIPTION. — The action for the
revocation of a donation is not excluded from the statute of limitations And not only this, — the law
itself recognizes the prescriptibility of the action for the revocation of a donation, providing a special
period of five years for the revocation by the subsequent birth of children (art. 646, Civil Code), and
one year for the revocation by reason of ingratitude. If no special period is provided for the
prescription of the action for revocation for noncompliance of the conditions of the donation (art.
647, Civil Code), it is because, in this respect, the donation is considered onerous and is governed
by the law or contracts and the general rules of prescription. Under the laws in force (sec. 43, Code
of Civ. Proc.) the period of prescription of this class; of action is ten years.
DECISION
AVANCEÑA,  C.J p:
On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2
referred to in the complaint, donated it perpetually to the municipality of Tarlac, Province of Tarlac,
under certain conditions specified in the public document in which they made this donation. The
donation was accepted by Mr. Santiago de Jesus in the same document on behalf of the municipal
council of Tarlac of which he was the municipal president. The parcel thus donated was later
registered in the name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion
Cirer and James Hill sold this parcel to the herein plaintiff George L. Parks. On August 24, 1923,
the municipality of Tarlac transferred the parcel to the Province of Tarlac which, by reason of this
transfer, applied for and obtained the registration thereof in its name, the corresponding certificate
of title having been issued to it.
The plaintiff, George L. Parks, alleging that the conditions of the donation had not been
complied with and invoking the sale of this parcel of land made by Concepcion Cirer and James Hill
in his favor, brought this action against the Province of Tarlac, the municipality of Tarlac,
Concepcion Cirer and James Hill and prayed that he be declared the absolute owner entitled to the
possession of this parcel, that the transfer of the same by the municipality of Tarlac to the Province
of Tarlac be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.
The lower court dismissed the complaint.
The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this
parcel made by Concepcion Cirer and James Hill in his favor on January 15, 1921, but that sale
cannot have any effect. This parcel having been donated by Concepcion Cirer and James Hill to
the municipality of Tarlac, which donation was accepted by the latter, the title to the property was
transferred to the municipality of Tarlac. It is true that the donation might have been revoked for the
causes, if any provided by the law, but the fact is that it was not revoked when Concepcion Cirer
and James Hill made the sale of this parcel to the plaintiff. Even supposing that causes existed for
the revocation of this donation, still, it was necessary, in order to consider it revoked, either that the
revocation had been consented to by the donee, the municipality of Tarlac, or that it had been
judicially decreed. None of these circumstances existed when Concepcion Cirer and James Hill
sold this parcel to the plaintiff. Consequently, when the sale was made Concepcion Cirer and
James Hill were no longer the owners of this parcel and could dot have sold it to the plaintiff, nor
could the latter have acquired it from them.
But the appellant contends that a condition precedent having been imposed in the
donation and the same not having been complied with, the donation never became effective. We
find no merit in this contention. The appellant refers to the condition imposed that one of the
parcels donated was to be used absolutely and exclusively for the erection of a central school and
the other for a public park, the work to commence in both cases within the period of six months
from the date of the ratification by the parties of the document evidencing the donation. It is true
that this condition has not been complied with. The allegation, however, that it is a condition
precedent is erroneous. The characteristic of a condition precedent is that the acquisition of the
right is not effected while said condition is not complied with or is not deemed complied with.
Meanwhile nothing is acquired and there is only an expectancy of right. Consequently, when a
condition is imposed, the compliance of which cannot be effected except then the right is deemed
acquired, such condition cannot a condition precedent. In the present case the condition that a
public school be erected and a public park made of the donated land, work on the same to
commence within six months from the date of the ratification of the donation by the parties, could
not be complied with except after giving effect to the donation. The donee could not do any work on
the donated land if the donation had not really been effected, because it would be an invasion of
another's title, for the land would have continued to belong to the donor so long as the condition
imposed was not complied with.
The appellant also contends that, in any event, the condition not having been complied
with, even supposing that it was not a condition precedent but subsequent, the non-compliance
thereof is sufficient cause for the revocation of the donation. This is correct. But the period for
bringing an action for the revocation of the donation has prescribed. That this action is prescriptible,
there is no doubt. There is no legal provision which excludes this class of action from the statute of
limitations. And not only this, — the law itself recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of five years for the revocation by the
subsequent birth of children (art. 646, Civil Code), and one year for their revocation by reason of
ingratitude. If no special period is provided for the prescription of the action for revocation for
noncompliance of the conditions of the donation (art. 647, Civil Code), it is because in this respect
the donation is considered onerous and is governed by the law of contracts and the general rules of
prescription. Under the laws in force (sec. 43, Code of Civ. Proc.), the period of prescription of this
class of action is ten years. The action for the revocation of the donation for this cause arose on
April 19, 1911, that is, six months after the ratification of the instrument of donation of October 18,
1910. The complaint in this action was presented July 5, 1924, more than ten years after this cause
accrued.
By virtue of the foregoing, the judgment appealed from is affirmed with the costs against
the appellant. So ordered.
 [G.R. No. L-21876. September 29, 1967.]
PHILIPPINE AMUSEMENT ENTERPRISES INC.,  plaintiff-
appellant, vs. SOLEDAD NATIVIDAD and MARIANO NATIVIDAD, defendants-
appellees.
Disini & Arnobit for plaintiff - appellant.
Isidoro Crisostomo for defendants - appellees.
SYLLABUS
1. CONTRACTS; RECIPROCAL OBLIGATIONS; RESCISSION; JUDICIAL ACTION. — Under Article
1191 of the New Civil Code, the right to resolve reciprocal obligations, in case one of the obligors fail to
comply with that which is incumbent upon him, is deemed to be implied but in the absence of a
stipulation to the contrary this right 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. Hence, where there is nothing in
the contract of lease empowering the defendants to rescind it without resort to the courts, the
defendants action is unilaterally terminating the contract is unjustified.
2. ID.; ID.; ID.; ID.; BREACH MUST BE SUBSTANTIAL. — Rescission by judicial action under Article
1191 of the New Civil Code will be ordered only where the breach complained of is substantial as to
defeat the object of the parties in entering into the agreement. It will not be granted where the breach is
slight or casual.
DECISION
CASTRO, J  p:
This is an appeal from the decision of the Court of First Instance of Davao dated May 31, 1962,
rescinding, in favor of the defendants, the lease agreement entered into by the plaintiff Philippine
Enterprises, Inc. and the defendant Soledad Natividad relative to an automatic phonograph, ordering
the latter to restore the phonograph to the former, denying the plaintiff's claim for liquidated and
exemplary damages, attorney's fees and costs of suit, and dismissing the defendants' counterclaim. The
plaintiff took the appeal to the Court of Appeals which, however, certified it to this Court because the
questions involved are of law.
On January 6, 1961 the plaintiff, a domestic corporation with main office in Quezon City and a branch
office in Davao City, entered into a contract with the defendant Soledad Natividad, owner of the Irene's
Refreshment Parlor in Davao City, whereby the former leased to the latter an automatic phonograph
(Seeburg Selectomatic 100-R), more popularly known as "jukebox." The pertinent provisions of the
contract are as follows:
"2. The OPERATOR 1 agrees to supply and replace parts that may have been
damaged as result of ordinary wear and tear without any cost to the
PROPRIETOR; 2
xxx xxx xxx
"5. The PROPRIETOR shall pay to the OPERATOR, by way of rental for the use of
the aforesaid automatic phonograph, an amount equal to 75% of the Gross
Receipts for the period of one week, but in no case shall the amount be less than
P50,00 a week;
xxx xxx xxx
"9. The PROPRIETOR agrees that during the term of this agreement, the
OPERATOR shall have the exclusive right to maintain an automatic phonograph in
the premises, and the PROPRIETOR shall not permit anyone to install or maintain
any phonograph or any other devices for the reproduction or the transmission of
music in any part of the premises;
xxx xxx xxx
"11. It is mutually agreed that the duration of this agreement shall be for the period
of three (3) years from the date hereof and shall renew itself automatically for a like
period under the same terms and conditions, unless either of the parties hereto
gives to the other written notice of his intention to cancel this agreement by
registered mail within thirty (30) days before the expiration of this agreement or any
renewal thereof.
"12. In the event that the PROPRIETOR shall fail to comply with any of the terms
and conditions of this contract, the OPERATOR, at any time during the existence of
the agreement, shall be entitled as a matter of right to immediately repossess, and
the PROPRIETOR binds himself to voluntarily surrender the said phonograph; and
hereby expressly grants permission to representatives of the OPERATOR any time
for such purposes thereby waiving any action for trespass or damages.
xxx xxx xxx
"15. In the event of a breach of this agreement by the PROPRIETOR, the parties
hereto agree that the OPERATOR shall be entitled to recover as liquidated
damages and not as a penalty or forfeiture, a sum equal to P50.00 per week for
each week remaining of the unexpired term of this agreement; AND IN THE EVENT
OF JUDICIAL PROCEEDINGS TO ENFORCE ANY OF THE PROVISIONS OF
THIS CONTRACT, the OPERATOR shall be entitled to attorney's fees of not less
than P200.00, costs of the action, premiums for bonds, and other expenses and
damages which OPERATOR may suffer or incur by reasons thereof, as well as to
the immediate issuance of preliminary writ of mandatory injunction."
On July 17, 1961 Mariano Natividad, husband of the defendant Soledad Natividad, wrote the following
letter to the plaintiff's branch office in Davao City:
"For two (2) weeks ago, I had advised your representative here in Davao to get
back your jukebox, but until today said representative did not mind us.
 "So upon receipt of this letter, you are hereby again advised to get the said
Jukebox and failure on your part to get it, we shall not be responsible anymore for
the said Jukebox."
On July 27, 1961 Mariano Natividad wrote another letter to the plaintiff, this time addressed to its main
office in Quezon City, informing it of his letter of July 17 and of the reasons for requesting the return of
the jukebox to the company. This letter reads as follows:
"Please may you hear our revelations or relations prior to the advise we had made
to your company regarding our slight difference from your agent, stationed here in
Davao City.
"1. We requested your agent that the said Jukebox should be inspected once in a
while there are times when the said Jukebox stock up and the coins which will be
dropped will just be confiscated due to the selected record which will not give our
selected music.
"2. About a year ago, we asked your agent here in Davao City if we could buy your
Jukebox. He replied, `yes' and he will inform the Manila office. From that time, we
made always an inquiry if said matter was already referred to. But we were
surprised why until last May we did not hear any word from your agent. So we
decided to order one from the United States.
"3. On July 3rd, we advised personally your agent that the said Jukebox should be
taken from our establishment. He answered us that he will report the matter to your
Central Office. From July 3rd until July 16th, we had not met your agent. On the
following day, July 17th, we met your agent because he accounted the income . of
the said Jukebox and we again told him that the Jukebox should be taken. He
replied that he could not act because there is no letter from us for the Manila office
advising the return of the said Jukebox. So we made a discussion why he did not
tell us if our letter was necessary; so we wrote a letter on July 17th. At that time
when he received our letter, he requested for an extension of one (1) week for he
would forward our letter to Manila. But according to my wife, your agent told her
that he forwarded our letter last July 22nd. On July 24th, we finally decided to return
the said Jukebox and even have ready laborers to help us load the Jukebox on
your pick-up. Your agent, Mr. Gonzales, remarked angrily that he would not accept
the said Jukebox but will just deposit it in our establishment until the Manila office
will act on it. According to him, your agent, Mr. Gonzales, we could not remove the
said Jukebox from the place because there was a contract. Later on, Mr. Gonzales
calmly requested us again to have an additional extension of one (1) more week. In
this situation we were very embarrassed because there were many customers and
other persons present during our discussions. Right on that day, we transferred
your Jukebox inside our air-conditioned room without any business because Mr.
Gonzales told us that the said Jukebox should be deposited only in our
establishment. Your agent Mr. Gonzales, is a good agent on the other world but not
in this world where we are having. Beginning July 24th until the time you will get the
Jukebox, we are going to collect a monthly rental of Fifty Pesos (P50.00) for the
space occupying the Jukebox."
In its reply of August 4, 1961 the plaintiff stated that —
"the stocking up of coins is quite normal in any coin-operated phonograph, as well
as failure to get the desired selection. It has been the policy of our company,
however, to give top priority to the complaints of our customers. It is not clear from
your letter whether our Branch Manager for Davao City has been remiss in his
duties. We are willing to give the benefit of the doubt by concluding that he might
have failed to respond to your calls in time and I assure you that immediate
instructions will be issued from this office directing him to give personal attention to
any service that you might wish in connection with the said Jukebox."
It as well denied knowledge of the defendants' desire to buy a jukebox and deplored the fact that
the defendants ordered one from the United States without first sending the request to buy directly
to it since the plaintiff was anyway willing to sell a jukebox to any interested person. Calling
attention to paragraph 9 of the lease contract which gave it the exclusive right to maintain an
automatic phonograph in the defendants' premises, the plaintiff asked the defendants to re-install
its jukebox and remove the other one which the defendants had installed in their premises.
On August 4 and October 16, 1961, the plaintiff, through counsel, wrote the defendant spouses,
demanding anew compliance with the lease contract and the payment of damages, and warning them
that it would file the corresponding action in court if they did not comply with its demand. As the
defendants refused the demand, the plaintiff brought action in the Court of First Instance of Davao on
November 21, 1961, praying for the return to it of the automatic phonograph, subject of the contract of
lease, and the payment of P5,850 as liquidated damages, P5,000 as exemplary damages, P500 as
attorney's fees and P400 as expenses of litigation.
 
Upon the parties' stipulation of facts, their pleadings and the documentary evidence submitted by them
as annexes to the stipulation of facts and pleadings, the lower court rendered the decision hereinbefore
adverted to.
The plaintiff imputes four errors to the lower court, the vital one being the court's holding that the facts
fully warrant a rescission of the contract of lease in favor of the defendants by reason of the plaintiff's
failure to perform its obligation to render the automatic phonograph suitable for the purpose for which it
was intended.
It is our view that the decision of the lower court should be reversed on three grounds.
First. The power to rescind obligations is implied in reciprocal ones in case one of the obligors should
not comply with what is incumbent upon him. So the Civil Code provides. 3 But it is equally settled that,
in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be
exercised solely on a party's own judgment that the other has committed a breach of the
obligation. 4 Hence, as there is nothing in the contract of lease empowering the defendants to rescind it
without resort to the courts, the defendants' action in unilaterally terminating the contract is unjustified.
As this Court said in Escueta v. Pando: 5
"The defendant could not, by himself alone and without judicial intervention, resolve
or annul the agreement. Under Article 1124 [now art. 1191] of the Civil Code, the
right to resolve reciprocal obligations, in case one of the obligors shall fail to comply
with that which is incumbent upon him, is deemed to be implied. But that right must
be invoked judicially; for the same article also provides: `The court shall decree the
resolution demanded, unless there should be grounds which justify the allowance
of a term for the performance of the obligation.'"
Second. Rescission will be ordered only where the breach complained of is substantial as to defeat the
object of the parties in entering into the agreement. It will not be granted where the breach is slight or
casual. 6 The defendants asked the plaintiff to retrieve its phonograph, claiming that there were times
when the coins dropped into the slot would get stuck, resulting in its failure to play the desired music.
But apart from this bare statement, there is nothing in the evidence which shows the frequency with
which the jukebox failed to function properly. The expression "there are times" connotes occasional
failure of the phonograph to operate, not frequent enough to render it unsuitable and unserviceable. As
a matter of fact, there is not even a claim that, as a result of unsatisfactory performance thereof, the
income therefrom dropped to such a level that the defendants could not even pay the plaintiff its
guaranteed share of 50 a week. On the contrary, the evidence (Stipulation of Facts, Annexes J, K, L, M,
N, and O) shows that, during the period complained of, the operation of the jukebox was quite profitable
to both parties. 7
Third. We believe that the defendants actually bought a jukebox only in 1961 after they had signed the
lease contract in question, although they might have expressed a desire to buy one the year before, for
otherwise they would not have entered into a three-year lease. But certainly their decisions to buy a
jukebox and operate it themselves was made long before they ever complained in July, 1961 of any
defect in the rented jukebox. To be sure, it is not shown when the rented phonograph supposedly
developed trouble; presumably it was early in July, 1961, since the defendants' first letter of complaint
was written on July 17. But if, as defendants admit, they began operating their own jukebox "sometime
in July, 1961" (presumably on July 24, 1961 when they removed the rented jukebox from where it was
installed), then the defendants' pretense that they decided to buy their own jukebox only after the rented
one had failed to function properly becomes highly improbable. The jukebox which they ordered from
the United States could not have arrived in so short a time as to enable them to operate it on July 24.
We are rather inclined to believe that the decision to buy a jukebox was made because the defendants
found it more profitable to operate one themselves. Their letter of July 17, 1961, in which they
demanded the removal of the rented jukebox from their premises, with the warning that they would not
be "responsible anymore" for it, and their other letter of July 27 of like tenor, betray the haste with which
they wanted to get out of their contractual obligations to the plaintiff. We note that they did not even ask
the plaintiff to service the rented jukebox; they asked the plaintiff to remove the jukebox or they would
charge rental for the use of the space occupied by it. The conviction cannot be avoided that the jukebox
which the defendants had ordered from the United States had arrived and the latter thereafter conjured
up a reason for operating it without being charged with violation of the lease contract. The defendants'
pretenses cannot excuse their culpable violation of the lease contract; their conduct fully justifies the
award of liquidated damages to the plaintiff.
ACCORDINGLY, the judgment a quo is reversed, and the contract of lease between the plaintiff and the
defendant Soledad Natividad is hereby rescinded in favor of the plaintiff. The defendants are ordered to
return to the plaintiff the automatic phonograph subject of the contract, and to pay the plaintiff liquidated
damages in the total amount of P5,850, plus 6 per cent interest from the date of the filing of the
complaint until the amount shall have been fully paid, and attorney's fees in the amount of P200. Costs
against the defendants.
||| (Philippine Amusement Enterprises, Inc. v. Natividad, G.R. No. L-21876, [September 29, 1967], 128
PHIL 320-327)
 [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.
Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores  and  Special Counsel Perfecto V.
Fernandez for petitioner.
Norberto J. Quisumbing  for private respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT; RESCISSION UNDER ARTICLE 1191 OF
THE CIVIL CODE.— Where UP and ALUMCO had expressly stipulated in the "Acknowledgment of
Debt and Proposed Manner of Payments" that, upon default by the debtor LUMCO, the creditor (UP)
has "the right and the power to consider the Logging Agreement dated 2 December 1960 as rescinded
without the necessity of any judicial suit," respondent Alumco's contention that it is only after a final
court decree declaring the contract rescinded for violation of its terms that UP could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect is
untenable. In connection with Article 1191 of the Civil Code,it is not always necessary for the injured
party to resort to court for rescission of the contract. (Froilan vs. Pan Oriental Shipping Co., et al., L-
11897, 31 October 1964, 12 SCRA 276)
2.  ID..; ID.; ID.; ID.; EXPLANATION. — 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.
3. ID.; ID.; ID.; ID.; WHEN JUDICIAL ACTION NECESSARY. — There is no conflict between the ruling
that court action is not necessary to declare the contract rescinded where there is agreement to such
effect in case of violation of the terms thereof and the previous jurisprudence of this court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation, 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.
4. ID.; ID.; ID.; ID.; PRACTICAL EFFECT OF UNILATERAL RESCISSION. — 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 the 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.
5. ID.; ID.; ID.; ID.; ID.; CONSTRUCTION BY SUPREME COURT OF SPAIN. — 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
ownCivil 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.
6. ID.; ID.; ID.; ID.; COURT TO RECEIVE EVIDENCE ON ISSUES; FAILURE THEREOF
CONSTITUTES GRAVE ABUSE OF DISCRETION. — 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 subsequently in refusing to dissolve the injunction, were in grave abuse of discretion for
the following reasons: 1) Existence of a prima facie case of breach of contract and default in payment
by respondent ALUMCO; 2) The fact that respondent company had profited from its operations previous
to agreement of December 2, 1964; 3) That the excuses offered for non-payment were not sufficient,
and 4) That whatever prejudice which may be suffered by ALUMCO is susceptible of compensation in
damages.
DECISION
REYES, J.B.L., J  p:
Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435,
are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner University
of the Philippines (or UP) against the above-named respondent judge and the Associated Lumber
Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP from
awarding logging rights over its timber concession (or Land Grant), situated at the Lubayat areas in the
provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt
of court, and directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or
conducting logging operations on the concession; and the third order, dated 12 December 1967, denied
reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation
of the three (3) questioned orders was issued by this Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which
the latter was granted exclusive authority, for a period starting from the date of the agreement to 31
December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and
remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that
ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid
account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had
received notice that UP would rescind or terminate the logging agreement, ALUMCO executed an
instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December
1964, which was approved by the president of UP, and which stipulated the following:
 "3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are
not sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said payments have been applied
shall be paid by the DEBTOR in full no later than June 30, 1965;
"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 may be 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
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 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 itproceeds 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 extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation, 1 since operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
in every case where the extrajudicial resolution is contested only the final award of the court of respondent company had profited from its operations previous to the agreement of 5 December 1964
competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second
sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten condition of
contestable and subject to judicial invalidation, unless attack thereon should become barred by the logs in private respondent's pond, which said respondent was in a better position to know when it
acquiescence, estoppel or prescription. 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
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of susceptible of compensation in damages, it becomes plain that the acts of the court a quo in enjoining
contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil petitioner's measures to protect its interest without first receiving evidence on the issues tendered by
Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error the parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion,
by the rescinder, the other party is not barred from questioning in court such abuse or error, the correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be
practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, set aside.
instead of the rescinder.
For the reason that the order finding the petitioner UP in contempt of court has been appealed to the
In fact, even without express provision conferring the power of cancellation upon one contracting party, Court of Appeals, and the case is pending therein, this Court abstains from making any pronouncement
the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which thereon.
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.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25
"El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside.
reciprocas para el caso de que uno de los obligados no cumpliese lo que le Let the records be remanded for further proceedings conformably to this opinion.
incumbe, facultad que, segun jurisprudencia de este Tribunal, surge
immediatamente despues que la otra parte incumplio su deber, sin necesidad de ||| (University of the Philippines v. De los Angeles, G.R. No. L-28602, [September 29, 1970], 146 PHIL
una declaracion previa de los Tribunales." (Sent. of the Tr. Sup. of Spain, of 10 108-118)
April 1929; 106 Jur. Civ. 897).
"Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucion como una
`facultad' atribuida a la parte perjudicada por el incumplimiento del contrato, la cual
tiene derecho de opcion entre exigir el cumplimiento " 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 Tribunales, 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, puede tener lugar con eficacia:
1.° Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es
impugnada en juicio luego con exito; y 2.° Por la demanda de la perjudicada,
cuando no opta por el cumplimiento con la indemnizacion de daños y perjuicios
realmente causados, siempre que se acredite, adem s, una actitud o conducta
persistente y rebelde de la adversa o la satisfaccion de lo pactado, a un hecho
obstativo que de un modo absoluto, 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)
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
 [G.R. No. L-42283. March 18, 1985.]
BUENAVENTURA ANGELES, ET AL.,  plaintiffs-appellees, vs. URSULA TORRES
CALASANZ, ET AL.,  defendants-appellants.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RECIPROCAL OBLIGATIONS; RIGHT TO
RESCIND; MAY BE EXERCISED EXTRA-JUDICIALLY. — Article 1191 is explicit. In reciprocal
obligations, either party has 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, 334, and cases cited therein) . . . .
2. ID.; ID.; ID.; ID.; ID.; NOTICE, INDISPENSABLE. — 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. . . .
3. ID.; ID.; ID.; ID.; NOT ABSOLUTE. — The right to rescind the contract for non-performance of one of
its stipulations, therefore, is not absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the
Court stated that — "The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat the very object of
the parties in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The
question of whether a breach of a contract is substantial depends upon the attendant circumstances.
(Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968)." . . . .
4. ID.; ID.; ID.; RESCISSION NOT PROPER WHERE THERE IS SUBSTANTIAL PERFORMANCE OF
OBLIGATION. — 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 P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had already paid an
aggregate amount of P4,533.38. 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."
5. ID.; ID.; ID.; RIGHT OF RESCISSION; ACCEPTANCE OF DELAYED PAYMENTS OF
INSTALLMENTS CONSTITUTES WAIVER AND ESTOPPEL. — 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.
6. ID.; ID.; CONTRACT TO SELL FALLS INTO THE CATEGORY OF A CONTRACT OF ADHESION.
— The contract to sell entered into by the parties has some characteristics of a contract of adhesion.
The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire
a lot upon which they could build a home, affixed their signatures and assented to the terms and
conditions of the contract. They had no opportunity to question nor change any of the terms of the
agreement. It was offered to them on a "take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83
SCRA 361).
7. ID.; ID.; ID.; CONSTRUED AGAINST ONE WHO CAUSED IT. — The contract to sell, being a
contract of adhesion, must be construed against the party causing it. We agree with the observation of
the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party
who drafted the same, especially where such interpretation will help effect justice to buyers who, after
having invested a big amount of money, are now sought to be deprived of the same thru the prayed
application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its
effect which, in essence, and in its entirety is most unfair to the buyers."
DECISION
GUTIERREZ, JR., J  p:
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. cdrep
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 P41.20 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. LLphil
The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:
"WHEREFORE, based on the foregoing considerations, the Court hereby renders
judgment in favor of the plaintiffs and against the defendants declaring that the
contract subject matter of the instant case was NOT VALIDLY cancelled by the
defendants. Consequently, the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's
fees. Costs against the defendants."
A motion for reconsideration filed by the defendants-appellants was denied.
As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves
pure questions of law.
The defendants-appellants assigned the following alleged errors of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO
SELL (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND
VALIDLY CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL
HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER
COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL
DEED OF SALE IN FAVOR OF THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY
PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES.
The main issue to be resolved is whether or not the contract to sell has been automatically and validly
cancelled by the defendants-appellants.
The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of
the contract which provides:
 
xxx xxx xxx
"SIXTH. — In case the party of the SECOND PART fails to satisfy any monthly
installments, or any other payments herein agreed upon, he is granted a month of
grace within which to make the retarded payment, together with the one
corresponding to the said month of grace; it is understood, however, that should the
month of grace herein granted to the party of the SECOND PART expired; without
the payments corresponding to both months having been satisfied, an interest of
10% per annum will be charged on the amounts he should have paid; it is
understood further, that should a period of 90 days elapse, to begin from the
expiration of the month of grace herein mentioned, and the party of SECOND
PART has not paid all the amounts he should have paid with the corresponding
interest up to that date, the party of the FIRST PART has the right to declare this
contract cancelled and of no effect, and as consequence thereof, the party of the
FIRST PART may dispose of the parcel of land covered by this contract in favor of
other persons, as if this contract had never been entered into. In case of such
cancellation of the contract, all the amounts paid in accordance with this agreement
together with all the improvements made on the premises, shall be considered as
rents paid for the use and occupation of the above mentioned premises, and as
payment for the damages suffered by failure of the party of the SECOND PART to
fulfill his part of the agreement, and the party of the SECOND PART hereby
renounces all his right to demand or reclaim the return of the same and obliges
himself to peacefully vacate the premises and deliver the same to the party of the
FIRST PART." (Italics 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 later should become
impossible."
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either party has 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, 334, 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
itproceeds at its own risk. For it is only the final judgment of the corresponding court
that will conclusively and finally settle whether the action taken was or was not
correct in law . . .
"We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution
of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37
Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in
every case where the extrajudicial resolution is contested only the final award of the
court of competent jurisdiction can conclusively settle whether the resolution was
proper or not. It is in this sense that judicial action will be necessary, as without it,
the extrajudicial resolution will remain contestable and subject to judicial
invalidation, unless attack thereon should become barred by acquiescence,
estoppel or prescription."
The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute.
In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that —
"The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. (Song Fo & Co. v.
Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a
contract is substantial depends upon the attendant circumstances. (Corpus v. Hon.
Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968)." . . .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell
which provides:
"SECOND. — That in consideration of the agreement of sale of the above
described property, the party of the SECOND PART obligates himself to pay to the
party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED
TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7%
per annum, as follows:
"(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this
contract is signed; and
"(b) The sum of FORTY ONE AND 20/100 ONLY (P41.20) 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 P3,920.00
excluding the 7 percent interests, the plaintiffs-appellees had already paid an aggregate amount of
P4,533.38. 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: cdphil
"If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee."
also militates against the unilateral act of the defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
"Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless, low
income group people of realizing their dream of a little parcel of land which they can
really call their own."
The defendants-appellants cannot rely on paragraph 9 of the contract which provides:
"NINTH. — That whatever consideration of the party of the FIRST PART may
concede to the party of the SECOND PART, as not exacting a strict compliance
with the conditions of paragraph 6 of this contract, as well as any other condonation
that the party of the FIRST PART may give to the party of the SECOND PART with
regards to the obligations of the latter, should not be interpreted as a renunciation
on the part of the party of the FIRST PART of any right granted it by this contract, in
case of default or non-compliance by the party of the SECOND PART."
 
The defendants-appellants argue that paragraph nine clearly allows the seller to waive the
observance of paragraph 6 not merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when
the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and
received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond
the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and
are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA
68), we held that:
xxx xxx xxx
"But defendants do not deny that in spite of the long arrearages, neither they nor
their predecessor, Teodoro de Guzman, even took steps to cancel the option or to
eject the appellees from the home-lot in question. On the contrary, it is admitted
that the delayed payments were received without protest or qualification. . . . Under
these circumstances, We cannot but agree with the lower court that at the time
appellees exercised their option, appellants had already forfeited their right to
invoke the above-quoted provision regarding the nullifying effect of the non-
payment of six months rentals by appellees by their having accepted without
qualification on July 21, 1964 the full payment by appellees of all their arrearages."
The defendants-appellants contend in the second assignment of error that the ledger of payments show
a balance of P671.67 due from the plaintiffs-appellees. They submit that while it is true that the total
monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a substantial
portion of the said payments were applied to the interests since the contract specifically provides for a
7% interest per annum on the remaining balance. The 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 (P3,920.00), 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 liens and encumbrances other than those
expressly provided in this contract; it is understood, however, that all the expenses
which may be incurred in the said transfer of title shall be paid by the party of the
SECOND PART, as above stated."
Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the
contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract.
The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their
signatures and assented to the terms and conditions of the contract. They had no opportunity to
question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it"
basis. In Sweet Lines, Inc. v. Teves (83 SCRA 361), we held that:
xxx xxx xxx
". . .' (W)hile generally, stipulations in a contract come about after deliberate
drafting by the parties thereto, .. there are certain contracts almost all the provisions
of which have been drafted only by one party, usually a corporation. Such contracts
are called contracts of adhesion, because the only participation of the party is the
signing of his signature or his `adhesion' thereto. Insurance contracts, bills of
lading, contracts of sale of lots on the installment plan fall into this
category.' (Paras, Civil Code of the Philippines, Seventh ed., Vol. I, p. 80.)"
(Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-
appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12
the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be construed against the party causing it. We
agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be
interpreted against the party who drafted the same, especially where such interpretation will help effect
justice to buyers who, after having invested a big amount of money, are now sought to be deprived of
the same thru the prayed application of a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the
buyers."
Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the
few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance
of P671.67 without any interest thereon, the defendants-appellants must immediately execute the final
deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as
provided in paragraph 12 of the contract. The attorney's fees are justified. cdrep
WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED
SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (671.67) without any interests. Costs against
the defendants-appellants.
SO ORDERED.
||| (Angeles v. Calasanz, G.R. No. L-42283, [March 18, 1985], 220 PHIL 10-23)
 [G.R. No. L-45349. August 15, 1988.]
NEWTON JISON and SALVACION I. JISON,  petitioners, vs. COURT OF
APPEALS and ROBERT O. PHILLIPS & SONS, INC.,  respondents.
Ledesma, Saludo & Associates for petitioners.
Domicador L. Reyes and Magtanggol C. Gunigundo for respondents.
SYLLABUS
1. CIVIL LAW; RESCISSION OF CONTRACT TO SELL. — In the instant case the resolution or
rescission of the Contract to Sell was valid. Neither can it be said that the cancellation of the contract
was ineffective for failure of private respondents to give petitioners notice thereof as petitioners were
informed by private respondent that the contract was cancelled in the letter dated April 6, 1967 (Exh.
"D"). As R.A. No. 6552 was not yet effective, the notice of cancellation need not be by notarial act,
private respondent's letter being sufficient compliance with the legal requirement.
2. ID.; ID.; FORFEITURE OF FIFTY PERCENT OF AMOUNT ALREADY PAID UPON RESOLUTION
OF CONTRACT CONSIDERED FAIR SETTLEMENT; REASON. — Since the contract price is only
P55,000.00, the forfeiture of amounts already paid totalling P47,312 is iniquitous. A forfeiture if fifty
percent of the amount already paid is a fair settlement. Although petitioners were delinquent in paying
several amortizations to the prejudice of private respondent, upon resolution of the contract, possession
of the lot reverts to private respondent who may resell it to another. Also, had R.A. No. 6552 been
applicable to this case, the same percentage would have been forfeited [Sec. 3 (b).]
3. ID.; ID.; ID.; REDUCTION OF FORFEITED AMOUNT FINDS SUPPORT IN THE CIVIL CODE. —
The reduction of the forfeited amount is supported by Civil Code provisions. Art. 2227 states that
liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconsciounable. Further, Art. 1229 provides that in obligations with a penal clause,
the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with.
DECISION
CORTES, J  p:
The instant petition for review of the decision of the Court of Appeals poses the issue of the validity of
the rescission of a contract to sell a subdivision lot due to the failure of the lot buyer to pay monthly
installments on their due dates and the forfeiture of the amounts already paid. llcd
The case is not one of first impression, and neither is it exceptional. On the contrary, it typifies the
common plight of countless subdivision lot buyers. Petitioners, the spouses Newton and Salvacion
Jison, entered into a Contract to Sell with private respondent, Robert O. Phillips & Sons, Inc., whereby
the latter agreed to sell to the former a lot at the Victoria Valley Subdivision in Antipolo, Rizal for the
agreed price of P55,000.00, with interest at 8% per annum, payable on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of P11,000.00 on
October 20, 1961 and from October 27, 1961 to May 8, 1965 a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided in the contract, the stipulated
penalty of P5.00 per square meter was imposed to the effect that the monthly amortization was
increased to P707.24.
On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly
installments due on said dates although petitioners subsequently paid the amounts due and these were
accepted by private respondent.
Again on October 1, 1966, November 1, 1966, December 1, 1966 and January 1, 1967, petitioners
failed to pay. On January 11, 1967, private respondent sent a letter (Exh. "2") to petitioners calling their
attention to the fact that their account was four months overdue. This letter was followed up by another
letter dated February 27, 1967 (Exh. "3") where private respondent reminded petitioner of the automatic
rescission clause of the contract. Petitioners eventually paid on March 1, 1967. LLjur
Petitioners again failed to pay the monthly installments due on February 1, 1967, March 1, 1967 and
April 1, 1967. Thus, in a letter dated April 6, 1967 (Exh. "D"), private respondent returned petitioners'
check and informed them that the contract was cancelled when on April 1, 1987 petitioners failed to pay
the monthly installment due, thereby making their account delinquent for three months.
On April 19, 1967, petitioners tendered payment for all the installments already due but the tender was
refused. Thus, petitioners countered by filing a complaint for specific performance with the Court of First
Instance of Rizal on May 4, 1967 and consigning the monthly installments due with the court.
Following the hearing of the case, wherein the parties entered into a stipulation of facts, the trial court
on January 9, 1969 rendered judgment in favor of private respondent, dismissing the complaint and
declaring the contract cancelled and all payments already made by petitioner forfeited; ordering
petitioners to pay P1,000.00 as and for attorney's fees; and declaring the consignation and tender of
payment made by petitioners as not amounting to payment of the corresponding monthly installments.
Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals. Agreeing
with the findings and conclusions of the trial court, the Court of Appeals on November 4, 1976 affirmed
the former's decision.
Thus, the instant petition for review.
In assailing the decision of the Court of Appeals, petitioners attributed the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PETITIONERS HAVE SUBSTANTIALLY COMPLIED WITH THE TERMS OF
THEIR AGREEMENT WITH PRIVATE RESPONDENTS.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE
CONTRACT TO SELL MAY BE AUTOMATICALLY RESCINDED AND PRIVATE
RESPONDENT MAY UNILATERALLY RESCIND SAID CONTRACT AND REJECT
THE CONSIGNATION OF PAYMENTS MADE BY PETITIONERS, WHICH
 ACTIONS OF PRIVATE RESPONDENT ARE HIGHLY INIQUITOUS AND
UNCONSCIONABLE.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT
PRIVATE RESPONDENT'S ACT OF FORFEITING ALL PREVIOUS PAYMENTS
MADE BY PETITIONERS IS CONTRARY TO LAW, HIGHLY INIQUITOUS AND
UNCONSCIONABLE. [Petitioners' Brief, pp. 13-27.]
As stated at the outset, the principal issue in this case is the legality of the rescission of the contract and
the forfeiture of the payments already made by petitioners.
To support the rescission and forfeiture private respondent falls back on paragraph 3 of the contract
which reads:
This contract shall be considered automatically rescinded and cancelled and of no
further force and effect, upon the failure of the Vendee to pay when due Three (3)
or more consecutive monthly installments mentioned in Paragraph 2 of this
Contract, or to comply with any of the terms and conditions hereof, in which case
the Vendor shall have the right to resell the said parcel of land to any Vendee and
any amount derived from the sale on account hereof shall be forfeited in favor of
the Vendor as liquidated damages for the breach of the Contract by the Vendee,
the latter hereby renouncing and reconveying absolutely and forever in favor of the
Vendor all rights and claims to and for all the amount paid by the Vendee on
account of the Contract, as well as to and for all compensation of any kind, hereby
also agreeing in this connection, to forthwith vacate the said property or properties
peacefully without further advise of any kind.
Since the contract was executed and cancelled prior to the effectivity of Republic Act No. 6552 (the
Realty Installment Buyers' Protection Act) and Presidential Decree No. 957 (the Subdivision and
Condominium Buyers' Protective Decree), it becomes necessary to resort to jurisprudence and the
general provisions of law to resolve the controversy.
The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076, September 21, 1983, 124
SCRA 692] facilitates the resolution of the controversy. In deciding whether the rescission of the
contract to sell a subdivision lot after the lot buyer has failed to pay several installments was valid, the
Court said:
Well settled is the rule, as held in previous jurisprudence [Torralba v. De los
Angeles, 96 SCRA 69, Luzon Brokerage Co., Inc. v. Maritime Building Co., 43
SCRA 93 and 86 SCRA 305; Lopez v. Commissioner of Customs, 37 SCRA 327;
U.P. v. De los Angeles, 35 SCRA 102; Ponce Enrile v. CA, 29 SCRA 504; Froilan v.
Pan Oriental Shipping Co., 12 SCRA 276; Taylor v. Uy Tieng Piao, 43 Phil. 873],
that judicial action for the rescission of a contract is not necessary where the
contract provides that it may be cancelled for violation of any of its terms and
conditions. However, even in the cited cases, there was at least a written notice
sent to the defaulter informing him of the rescission. As stressed in University of the
Philippines v. Walfrido de los Angeles [35 SCRA 102] the act of a party in treating a
contract as cancelled should be made known to the other . . .
xxx xxx xxx
In other words, resolution of reciprocal contracts may be made extrajudicially
unless successfully impugned in Court. If the debtor impugns the declaration it shall
be subject to judicial determination. prLL
In this case, private respondent has denied that rescission is justified and has
resorted to judicial action. It is now for the Court to determine whether resolution of
the contract by petitioner was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative
against private respondent for lack of notice of resolution, as held in the U.P. v.
Angeles case, supra.
xxx xxx xxx
The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 6552 entitled "An Act to Provide Protection to
Buyers of Real Estate on Installment Payments." which took effect on September
14, 1972, when it specifically provided:
 
Sec. 3 (b) . . . the actual cancellation of the contract shall take
place thirty days from receipt by the buyer of the notice of cancellation or
the demand for rescission of the contract by a notarial act and upon full
payment of the cash surrender value to the buyer.
There is no denying that in the instant case the resolution or rescission of the Contract to Sell was valid.
Neither can it be said that the cancellation of the contract was ineffective for failure of private
respondents to give petitioners notice thereof as petitioners were informed by private respondent that
the contract was cancelled in the letter dated April 6, 1967 (Exh. "D"). As R.A. No. 6552 was not yet
effective, the notice of cancellation need not be by notarial act, private respondent's letter being
sufficient compliance with the legal requirement. LLjur
The facts of the instant case should be distinguished from those in the Palay, Inc. case, as such
distinction will explain why the Court in said case invalidated the resolution of the contract. In said case,
the subdivision developer, without informing the buyer of the cancellation of the contract, resold the lot
to another person. The lot buyer in said case was only informed of the resolution of the contract some
six years later after the developer rejected his request for authority to assign his rights under the
contract. Such a situation does not obtain in the instant case. In fact, petitioners were informed of the
cancellation of their contract in April 1967, when private respondent wrote them the letter dated April 6,
1967 (Exh. "D"), and within a month they were able to file a complaint against private respondent.
While the resolution of the contract and the forfeiture of the amounts already paid are valid and binding
upon petitioners, the Court is convinced that the forfeiture of the amount of P47,312.64, although it
includes the accumulated fines for petitioners' failure to construct a house as required by the contract, is
clearly iniquitous considering that the contract price is only P55,000.00. The forfeiture of fifty percent
(50%) of the amount already paid, or P23,656.32, appears to be a fair settlement. In arriving at this
amount the Court gives weight to the fact that although petitioners have been delinquent in paying their
amortizations several times to the prejudice of private respondent, with the cancellation of the contract
the possession of the lot reverts to private respondent who is free to resell it to another party. Also,
had R.A. No. 6552 been applicable to the instant case, the same percentage of the amount already paid
would have been forfeited [Sec. 3(b).]
The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in
paragraph 3 of the contract, in case the contract is cancelled, the amounts already paid shall be
forfeited in favor of the vendor as liquidated damages. The Code provides that liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable [Art. 2227.]
Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor [Art. 1229; Hodges v.
Javellana, G.R. No. L-17247, April 28, 1962, 4 SCRA 1228]. In this connection, the Court said:
It follows that, in any case wherein there has been a partial or irregular compliance
with the provisions in a contract for special indemnification in the event of failure to
comply with its terms, courts will rigidly apply the doctrine of strict construction and
against the enforcement in its entirety of the indemnification, where it is clear from
the terms of the contract that the amount or character of the indemnity is fixed
without regard to the probable damages which might be anticipated as a result of a
breach of the terms of the contract; or, in other words, where the indemnity
provided for is essentially a mere penalty having for its principal object the
enforcement of compliance with the contract.. (Laureano v. Kilayco, 32 Phil.
194(1915).]
This principle was reiterated in Makati Development Corp. v. Empire Insurance Co. [G.R. No. L-21780,
June 30, 1967, 20 SCRA 557] where the Court affirmed the judgment of the Court of First Instance
reducing the subdivision lot buyer's liability from the stipulated P12,000.00 to P1,500.00 after finding
that he had partially performed his obligation to complete at least fifty percent (50%) of his house within
two (2) years from March 31, 1961, fifty percent (50%) of the house having been completed by the end
of April 1961. LexLib
WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED as to the amount forfeited
which is reduced to fifty percent (50%) of the amount already paid or P23,656.32 and AFFIRMED as to
all other respects.
Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty (30) days
from the date of finality of this judgment.
SO ORDERED.
||| (Jison v. Court of Appeals, G.R. No. L-45349, [August 15, 1988], 247 PHIL 304-311)
 [G.R. No. 80479. July 28, 1989.]
AGUSTINA LIQUETTE TAN, petitioner, vs. COURT OF APPEALS AND SPS.
MARIANO SINGSON and VISITACION SINGSON, respondents.
Noe Villanueva for petitioner.
Jose Beltran for private respondents.
SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION; POWER TO RESCIND; IMPLIED IN
RECIPROCAL OBLIGATIONS. — 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 is clear from a reading of
the Civil Code provisions.
2.ID.; ID.; ID.; HOW EFFECTED. — 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.
3.ID.; ID.; ID.; ALLOWED ONLY IN CASE OF SUBSTANTIAL BREACH. — Rescission will not be
permitted for a slight or casual breach of the contract but only for such breaches as are so substantial
and fundamental as to defeat the object of the parties in making the agreement.
4.ID.; ID.; ID.; ID.; DETERMINATION OF SUBSTANTIAL BREACH ADDRESSED TO THE SOUND
DISCRETION OF THE COURT. — A court, in determining whether rescission is warranted, must
exercise its discretion judiciously considering that the question of whether a breach of a contract is
substantial depends upon the attendant circumstances.
5.ID.; ID.; ID.; SLIGHT DELAY IN THE PERFORMANCE OF OBLIGATION WHERE TIME IS NOT OF
THE ESSENCE, NOT A GROUND. — Where time not the essence in the agreement, a slight delay on
the part of the party in the performance of their obligation, is not sufficient ground for the resolution of
the agreement more so when the delay was not totally attributable to them.
6.ID.; ID.; FAILURE OF A THIRD PERSON TO FULFILL THE CONDITION OF A CONTRACT WILL
NOT PREJUDICE THE RIGHTS OF THE OBLIGOR WHO HAVE SUBSTANTIALLY COMPLIED WITH
HIS OBLIGATION. — Where the fulfillment of the condition (in a conditional obligation) does not depend
on the will of the obligor, but on that of a third person, the obligor's part of the contract is complied with,
if he does all that is in his power and it then becomes incumbent upon the other contracting party to
comply with the terms of the contract.
7.ID.; ID.; DELAY IS INCURRED BY A PARTY BY A DEMAND MADE BY THE OTHER TO FULFILL
OBLIGATION. — Where the sellers are ready, willing and able to comply with their obligation to deliver
title to the property subject of the sale and had already demanded that petitioner pay the full amount of
the purchase price, the petitioner must be considered as having incurred in delay.
8.ID.; ID.; BREACH OF CONTRACT; REMEDY AVAILABLE TO AGGRIEVED PARTY. — The breach
of a contract gives the aggrieved party under the law and even under general principles of fairness, the
right to rescind the contract or to ask for specific performance.
9.ID.; ID.; VOIDABLE CONTRACT; CONSENT MUST BE OBTAINED THROUGH INSIDIOUS WORDS
OR MACHINATIONS. — The contract of sale is not voidable where no evidence was shown that
through insidious words or machinations under Article 1338 of the Civil Code, the seller had induced the
buyer to enter into the contract.
10.ID.; ID.; COURT, WITH DISCRETIONARY POWER TO ALLOW A PERIOD WITHIN WHICH AN
OBLIGATION MAY BE PERFORMED. — The Court is given a discretionary power to allow a period
within which a person in default may be permitted to perform his obligation.
DECISION
CORTES, J  p:
The instant petition for review raises the main issue of whether the private respondents committed a
substantial breach of their obligation so as to warrant petitioner's exercise of her right to rescind the
contract of sale under Article 1191 of the Civil Code.
The antecedents of the instant controversy had been summarized in the respondent court's
decision ** as follows:
xxx xxx xxx
The evidence shows that defendants-appellants spouses (private respondents
herein) are the owners of a house and lot located at No. 34 Easter Road, Baguio
City, and covered by T.C.T. No. T-13826, which were then for sale. On June 14,
1984, plaintiff-appellee together with her agent went to see said spouses at their
residence regarding the property. After appellants had shown appellee around the
house and had conversation about the encumbrances and/or liens on the property,
the parties finally agreed on the price of P1,800,000.00, with appellee to advance
earnest money of P200,000.00 to enable appellants to secure the cancellation of
the mortgage and lien annotated on the title of the property and the balance of the
price to be paid by appellee on June 21, 1984. Forthwith, appellee handed to
appellants a check for P200,000.00 and thereupon the parties signed a receipt
(Exh. A) in the following tenor:
xxx xxx xxx
In turn, appellants handed to appellee a xerox copy of the title and other papers
pertaining to the property as well as an inventory of the furnishings of the house
that are included in the sale. There (3) days thereafter, i.e., on June 17, 1984,
appellee returned to appellants' house together with her daughter Corazon and one
Ines, to ask for a reduction of the price to P1,750,000.00 and appellants spouses
agreed, and so another receipt entitled "Agreement" (Exh. B) was signed by the
parties as follows:
xxx xxx xxx
The very same day that appellants received the earnest money of P200,000.00,
they started paying their mortgage loan with the Development Bank of the
Philippines (DBP) to clear up the title of the subject property. On June 14, 1984,
appellants paid the bank P30,000.00 per receipt, Exhibit B; on June 18, 1984
another P50,000.00 (Exh. 4-c); on June 29, 1984, P20,000.00 (Exh. 4-D); and on
July 5, 1984, P70,909.59 and another P19,886.60 (Exhs. 4-F and 4-G) in full
payment of the mortgage loan. On July 9, 1984, the DBP executed a cancellation of
mortgage, which was registered with the Registry of Property of Baguio City in July
12, 1984. Appellants also paid all the taxes due and in appears on the property. It
likewise appears that appellants paid in full on July 17, 1984 the cost price of the
338 square meter lot which was awarded to appellant Visitacion Singson per her
townsite sale application for said property. And the request of the City Sheriff of
Baguio City to lift the notice of levy in execution dated February 2, 1978 in Civil
Case No. Q-10202, Pio S. Acampado, et al. v. Mariano D. Singson, et al., was duly
annotated on the back of TCT No. T-13826 on August 2, 1979.
On June 25, 1984, appellee accompanied by her daughter Corazon and her lawyer,
Atty. Vicente Quitoriano, went to Baguio City to inquire about the status of the
property and appellants told her that the Development Bank of the Philippines was
taking some time processing their payments and preparing the deed of cancellation
of the mortgage. On that occasion, the parties agreed on an extension of two (2)
weeks for the execution of the deed of sale. Here, the parties' respective versions
on the matter parted ways. According to appellants, it was appellee who asked for
the extension because she was not yet ready to pay the balance of P1,550,000.00.
On the other hand, appellee said that it was appellants who asked for it because
the title of the property was not yet cleared. The court below believed appellee
because on said date the Development Bank had not yet executed the deed of
cancellation of mortgage, and no title has yet been issued for the driveway although
already fully paid for.
Immediately, upon execution by the DBP of the deed of cancellation of mortgage of
July 9, 1984, appellants tried to contact appellee and/or her daughter Corazon to
come to Baguio City for the formal execution of the deed of sale, but to no avail.
Instead, appellants received a telegram from Atty. Quitoriano cancelling the sale
and demanding the return of the P200,000.00 earnest money. Appellants
countered with a letter of their lawyer, Atty. Teofisto Rodes, calling on appellee to
perform her part of the contract because "the title to the house and lot right now
suffers no imperfection or doubt. The levy on execution has long been lifted, the
mortgage indebtedness released, the portion of the public land used as driveway
has long been awarded and fully paid for the City of Baguio. In short, the title can
now be transferred in your name upon execution of the contract of sale. . . Your
refusal will compel Us to sue for specific performance . . ."
Before appellants could make good their threat, appellee "jumped the gun", so to
speak, upon them by filing in court on August 27, 1984 the case for recovery of sum
of money with damages which is now this case on appeal before us.
In her complaint, appellee alleged that she gave appellants spouses P200,000.00
upon their assurances that they could transfer to her the house and lot she was
buying from them free from any liens and encumbrances, including the furnishings
thereof and the adjacent lot being used as driveway, on June 25, 1984, but that day
had come and passed without appellants being able to make good their promise,
because she "discovered to her shock and dismay that she had been dealt with in
bad faith by defendants" as the mortgage on the property was not released or
cancelled and the driveway was still public land and could not be validly transferred
to her as any disposition thereof would yet require approval by the Secretary of
Agriculture and Natural Resources. Hence, the suit against appellants spouses for
recovery of the P200,000.00 earnest money which is, in essence and concept, one
for rescission with damages.
xxx xxx xxx
[CA Decision, pp. 1-6; Rollo, pp. 53-57.]
The Regional Trial Court which took cognizance of Civil Case No. 3709-V filed by petitioner Agustina
Liquette Tan rendered a decision disposing of the case as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants:
 
(1)Ordering the rescission of the contracts entered into by and between plaintiff and
the defendants, which are embodied in Exhs. "A" or "1 and "B" or "2";
(2)Ordering the defendants, spouses Mariano Singson and Visitacion Singson to
return to plaintiff the P200,000.00 earnest money given by her to defendants;
(3)Ordering the defendants to pay plaintiff interest at the rate of 12% per annum on
the P200,000.00 from the filing of the complaint until fully paid;
(4)Ordering the defendant (sic) to pay plaintiff moral damages in the sum of
P50,000.00;
(5)Ordering the defendants to pay plaintiff the amount of P20,000.00 as attorney's
fees; and
(6)Ordering the defendants to pay the costs of this suit.
SO ORDERED. [Rollo. pp. 49-50.]
Private respondents interposed an appeal from said decision alleging that the trial court erred.
I.. . . in considering the consent of appellee to the agreement was vitiated by fraud.
II.. . . in resolving in favor of the appellee the sole right of rescission.
III.. . . in considering the adjacent lot as part of the sale agreed upon by the parties.
IV.. . . in deciding the case in favor of the appellee and awarding damages.
On August 24, 1987, the respondent Court of Appeals promulgated a decision reversing that of the trial
court, the decretal portion of which reads as follows:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE and a new
one is hereby entered ordering immediately upon the finality of this judgment
appellants spouses to execute and sign an absolute deed of sale conveying to
appellee free from any lien or encumbrance the house and lot covered by T.C.T.
No. 13826 of the Registry of Deeds of Baguio City together with the furnishings and
appliances listed in Exhibit C and the adjacent lot used as driveway covered by the
Order of Award, Exhibit E-3 and appellee to pay appellants spouses the sum of
P1,550,000.00 plus interest at the legal rate from the finality of this judgment until
fully paid.
 SO ORDERED. [Rollo, p. 61.]
Petitioners filed the instant petition for review on certiorari assailing the conclusion of the respondent
Court of Appeals that the private respondents had not committed a substantial breach of their obligation
and therefore, there was no legal basis for the judgment ordering rescission of the contract. Petitioners
maintain that since private respondents were not prepared to convey the title to the subject property on
the date agreed upon in view of the various liens and encumbrances thereon, the former are entitled to
rescind the contract pursuant to Article 1191 of the Civil Code which states:
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.
After a thorough examination of the allegations contained in the parties' pleadings, the Court finds the
instant petition to be devoid of any merit.
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 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 [Philippine Amusement Enterprises, Inc. v. Natividad, G.R. No. L-12876. September 29,
1967, 21 SCRA 284].
In this case, petitioner received on July 17, 1984 through her daughter Cora Tan Singson, a telegram
from private respondent Visitacion Singson advising the former that the papers for the sale of the
property are ready for final execution. The parties likewise met on June 25, 1984, the day agreed upon
for the full payment of the purchase price, and they agreed on a further extension of two weeks for the
execution of the deed of sale. Despite this agreement, private respondents suddenly received a
telegram from Atty. Quitoriano, counsel for the petitioner, unilaterally stopping the sale and demanding
the return of the earnest money paid by petitioner [Exhibit "9", Original Records, p. 99].
Petitioner, in rescinding the sale, claims that a substantial breach of the obligation has been committed
by the private respondents as indicated by the following facts proved to be existing as of the date
agreed upon for the consummation of the sale:
1.That no title has yet been issued by the Registry of Deeds of the City of Baguio in
the name of either of the respondents in connection with the 338-square meter lot
where the driveway is located;
2.That the private respondents have not paid in full the total consideration for the
said lot to the City of Baguio because they were able to complete the payment of
the purchase price only on July 17, 1984 as found out by the respondent court in its
decision (Please see page 8 of the Court of Appeals' decision, Annex "B");
3.That private respondents have not acquired the "previous consent of the
Secretary of Natural Resources" for the said transfer to the petitioner as required by
the award;
4.That the restrictions indicated in the AWARD makes whatever conveyance to be
made by the awardee of the lot within the prohibited period as null and void and
could cause the forfeiture of all the payments already made as well as the
improvements introduced therein;
5.That there are still liens and encumbrances insofar as TCT No. T-13826
consisting of a mortgage with the DBP and a notice of levy and Writ of Execution.
[Rollo, pp. 14-15.]
Alternatively, petitioner seeks annulment of the contract on the ground of fraud since private
respondents had misrepresented to her that they could validly convey title to the property subject of the
contract which however is encumbered with various existing liens.
1.The alleged breach of the obligation by the private respondents, which consists in a mere delay for a
few days in clearing the title to the property, cannot be considered substantial enough to warrant
rescission of the contract.
A thorough review of the records clearly indicates that private respondents had substantially complied
with their undertaking of clearing the title to the property which has a total land area of 886 square
meters. It must be pointed out that the subject lot consists of private land, with an area of 548 square
meters, covered by TCT No. T-13826 and of a portion of the public land which has been awarded to the
private respondents under Townsite Sales Application No. 7-676-A. While TCT No. T-13826 was
subject to a mortgage in favor of DBP, private respondents, upon receipt of the earnest money paid by
petitioner, utilized the same to settle its obligations with DBP thus enabling them to secure a
cancellation of the existing mortgage, which was duly noted in the title to the property [See Original
Records, p. 94].
It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the
contract but only for such breaches as are so substantial and fundamental as to defeat the object of the
parties in making the agreement [Universal Food Corporation v. Court of Appeals, G.R. No. L-29155,
May 13, 1970, 33 SCRA 1; Philippine Amusement Enterprises, Inc. v. Natividad, supra; Roque v.
Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741] . A court, in determining whether rescission is
warranted, must exercise its discretion judiciously considering that the question of whether a breach of
a contract is substantial depends upon the attendant circumstances [Corpus v. Alikpala, et al., G.R.
Nos. L-23720 and L-23707, January 17, 1968, 22 SCRA 104].
In this case, as to the lot covered by TCT No. T-13826, it is true that as of June 25, 1984, the date set
for the execution of the final deed of sale, the mortgage lien in favor of DBP annotated in the title has
not yet been cancelled as it took DBP some time in processing the papers relative thereto. However,
just a few days after, or on July 12, 1984, the cancellation of the DBP mortgage was entered by the
Register of Deeds and duly noted on the title. Time not being of the essence in the agreement, a slight
delay on the part of the private respondents in the performance of their obligation, is not sufficient
ground for the resolution of the agreement [Biando and Espanto v. Embestro and Bardaje, 105 Phil.
1164 (1959)], more so when the delay was not totally attributable to them.
As to the notice of levy and execution annotated on TCT No. T-13826, a request to lift the same had
already been filed with the Register of Deeds and duly noted on the title [Original Records, p. 95]. The
fact that said notice had not yet been cancelled by the Register of Deeds as of June 25, 1984 cannot
prejudice the sellers who must be deemed to have substantially complied with their obligation. The rule
in this jurisdiction is that where the fulfillment of the condition (in a conditional obligation) does not
depend on the will of the obligor, but on that of a third person, the obligor's part of the contract is
complied with, if he does all that is in his power and it then becomes incumbent upon the other
contracting party to comply with the terms of the contract [Article 1182, Civil Code; Smith Bell and Co. v.
Sotelo Matti, 44 Phil. 874 (1922)].
 
On the other hand, private respondents' interest in the public land used as a driveway can likewise be
conveyed to petitioner although no title has yet been issued in the name of Visitacion Singson. Such
portion of the public land has long been awarded to Singson in 1972 and payment of the purchase price
thereof has already been completed as of July 17, 1984. The fact that the consent of the Secretary of
Agriculture and Natural Resources to the sale of the property to petitioner has not yet been secured
cannot be considered a substantial breach of private respondents' obligation under the contract of sale.
In Juanico and Barredo v. American Land Commercial Co., Inc., et al. [97 Phil. 221 1955)], this Court
had ruled that the prior approval of the Secretary of Agriculture and Natural Resources is required only
in cases of sale and encumbrance of the public land during the pendency of the application by the
purchaser and before his compliance with the requirements of the law. Thus:
. . . But such approval becomes unnecessary after the purchaser had complied with
all the requirements of the law, even if the patent has not been actually issued, for
in that case the rights of the purchaser are already deemed vested, the issuance of
the patent being a mere ceremony. Thus, "the execution and delivery of the patent
after the right to it has become complete, are the mere ministerial acts of the
officers charged with that duty" . . . And, as it has been held, "One who has done
everything which is necessary in order to entitle him to receive a patent for public
land has, even before the patent is actually issued by the land department, a
complete acquitable estate in the land which he can sell and convey, mortgage or
lease. A fortiori a contract to convey land made before the issuance of a patent but
after final proof has been made and the land paid for is not illegal". . .
[At 227: Emphasis supplied.]
Here, since the land in question had already been awarded to private respondents since 1972 and all
the requirements of the law for the purchase of public land were subsequently complied with, private
respondents, as owners of said property, can properly convey title thereto to petitioner.
Inasmuch as the private respondents are ready, willing and able to comply with their obligation to
deliver title to the property subject of the sale and had already demanded that petitioner pay the full
amount of the purchase price, the petitioner must be considered as having incurred in delay. This
conclusion is warranted by the clear provision of Article 1169 of the Civil Code which states:
Art. 1169.Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extra-judicially demands from them the fulfillment of their
obligation.
xxx xxx xxx
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
It is basic that the breach of a contract gives the aggrieved party under the law and even under general
principles of fairness, the right to rescind the contract or to ask for specific performance [Nagarmull v.
Binalbagan-Isabela Sugar Co., Inc., G.R. No. L-22470, May 28, 1970, 33 SCRA 46.] Petitioner having
failed to comply with her obligation of paying the balance of the purchase price despite demands by
private respondents, private respondents were clearly entitled to their counterclaim for specific
performance, as correctly adjudged by the respondent court.
2.The claim that petitioner's consent to the contract was vitiated by fraud and, therefore, the contract in
question is voidable is patently unmeritorious. The contract of sale is not voidable where no evidence
was shown that through insidious words or machinations under Article 1338 of the Civil Code, the seller
had induced the buyer to enter into the contract (Caram v. Laureta, Jr., G.R. No. L-28740, February 24,
1981, 103 SCRA 7].
In this case, the evidence on record fully supports the finding of the appellate court that private
respondents did not represent to petitioner that the house and lot they were selling were free from liens
and encumbrances. Rather, they told her that the property was mortgaged to the DBP which was why
they asked her to advance P200,000.00 as earnest money so that they could settle the mortgage
indebtedness and clear up the title [Rollo, p. 60]. The testimony of petitioner herself shows that she was
furnished with xerox copies of the title, at the back of which was a memorandum of the encumbrances
of the property [TSN, September 30, 1985, p. 4]. Further, it is undisputed that at the time petitioner
entered into the agreement in question, she was accompanied by her daughter Corazon and one Maria
Lorenzo whom she could have asked to explain the particulars of the transaction that she could not
understand [Rollo, p. 61].
One final point, the decision of the respondent Court of Appeals ordered execution by private
respondents of the absolute deed of sale conveying the subject property to petitioner and payment by
petitioner of the balance of the purchase price immediately upon finality of such judgment. However,
under the third paragraph of Article 1191 of the Civil Code, the Court is given a discretionary power to
allow a period within which a person in default may be permitted to perform his obligation [Kapisanan
Banahaw v. Dejarme and Alvero, 55 Phil. 339 (1930)]. Considering the huge amount of money involved
in this sale, the Court, in the exercise of its sound discretion, hereby fixes a period of ninety (90) days
within which petitioner shall pay the balance of the purchase price amounting to one million and five
hundred fifty thousand pesos (P1,550,000.00) plus interest thereon at the legal rate from finality of this
judgment until fully paid. After such payment has been made, the private respondents are ordered to
sign and execute the necessary absolute deed of sale in favor of petitioner.
WHEREFORE, the assailed decision of the respondent Court of Appeals granting the counterclaim for
specific performance of herein private respondents is hereby AFFIRMED with the MODIFICATION that
the petitioner is given a period of ninety (90) days within which to pay the sum of one million and five
hundred fifty thousand pesos (P1,550,000.00) representing the balance of the purchase price, with
interest thereon at the legal rate from the finality of this judgment until fully paid. The private
respondents are ordered to sign and execute the absolute deed of sale after the petitioner has
completed payment of the purchase price and the interest thereon.
SO ORDERED.
||| (Tan v. Court of Appeals, G.R. No. 80479, [July 28, 1989], 256 PHIL 1048-1060)
 [G.R. No. 101762. July 6, 1993.]
VERMEN REALTY DEVELOPMENT CORPORATION,  petitioner, vs. THE
COURT OF APPEALS and SENECA HARDWARE CO., INC.,  respondents.
Ramon P. Gutierrez for petitioner.
Adriano Velasco for private respondent.
SYLLABUS
1. CIVIL LAW; OBLIGATION AND CONTRACTS; RECIPROCAL OBLIGATION; ITS NATURE. —
Reciprocal obligations are those created or established at the same time, out of the same cause, and
which results in a mutual relationship of creditor and debtor between parties. In reciprocal obligations,
the performance of one is conditioned on the simultaneous fulfillment of the other obligation (Abaya vs.
Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the agreement, private respondent shall
deliver to petitioner construction materials worth P552,000.00 under the conditions set forth in the
Offsetting Agreement. Petitioner's obligation under the agreement is three-fold: he shall pay private
respondent P276,000.00 in cash; he shall deliver possession of units 601 and 602, Phase I, Vermen
Pines Condominiums (with total value of P276,000.00) to private respondent; upon completion of
Vermen Pines Condominiums Phase II, private respondent shall be given option to transfer to similar
units therein.
2. ID.; RESCISSION (BETTER TERM IS "RESOLUTION") OF RECIPROCAL OBLIGATION UNDER
ARTICLE 1191 OF THE CIVIL CODE; GENERAL RULE; PETITIONER'S NON-FULFILLMENT OF ITS
OBLIGATION UNDER THE OFFSETTING AGREEMENT CONSTITUTES SUBSTANTIAL BREACH,
NECESSITATING RESOLUTION OF THE CONTRACT. — 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 what 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]). The impossibility of fulfillment of the
obligation on the part of petitioner necessitates resolution of the contract for indeed, the non-fulfillment
of the obligation aforementioned constitutes substantial breach of the Offsetting Agreement. The
possibility of exercising the option of whether or not to transfer to condominium units in Phase II was
one of the factors which were considered by private respondent 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 something that may never come.
DECISION
BIDIN, J  p:
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 buy from the SECOND PARTY construction
materials mostly steel bars, electrical materials and other related items worth FIVE
HUNDRED FIFTY TWO THOUSAND (P552,000.00) PESOS only;
"5. That the FIRST PARTY shall pay the SECOND PARTY TWO HUNDRED
SEVENTY SIX THOUSAND (P276,000.00) PESOS in cash upon delivery of said
construction materials and the other TWO HUNDRED SEVENTY SIX THOUSAND
(P276,000.00) PESOS shall be paid in the form of two (2) residential condominium
units, studio type, with a total floor area of 76.22 square meter (sic) more or less
also worth P276,000.00;
"6. That, for every staggered delivery of construction materials, fifty percent (50%)
shall be paid by the FIRST PARTY to the SECOND PARTY C.O.D. and, fifty
percent (50%) shall be credited to the said condominium unit in favor of the
SECOND PARTY;
"7. That the SECOND PARTY shall deliver to the FIRST PARTY said construction
materials under the agreed price and conditions stated in the price quotation
approved by both parties and made an integral part of this document;
 "8. That the SECOND PARTY is obliged to start delivering to the FIRST PARTY all
items in the purchase order seven (7) days from receipt of said purchase order until
such time that the whole amount of P552,000.00 is settled;
"9. That the place of delivery shall be Vermen Pines Condominium at Bakakeng
Road, Baguio City;
"10. That the freight cost of said materials shall be borne fifty percent (50%) by the
FIRST PARTY and fifty percent (50%) by the SECOND PARTY;
"11. That the FIRST PARTY pending completion of the VERMEN PINES
CONDOMINIUM PHASE II which is the subject of this contract, shall deliver to the
SECOND PARTY the possession of residential condominium, Phase I, Unit Nos.
601 and 602, studio type with a total area of 76.2 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. cdphil
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 when it entered into the agreement. Since the construction of the Vermen Pines Condominium Phase II
of the other obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the has stopped, petitioner would be in no position to perform its obligation to give private respondent the
agreement, private respondent shall deliver to petitioner construction materials worth P552,000.00 option to transfer to Phase II. It would be the height of injustice to make private respondent wait for
under the conditions set forth in the Offsetting Agreement. Petitioner's obligation under the agreement is something that may never come.
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 WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner. LexLib
respondent; upon completion of Vermen Pines Condominiums Phase II, private respondent shall be
SO ORDERED.
given option to transfer to similar units therein.
||| (Vermen Realty Development Corp. v. Court of Appeals, G.R. No. 101762, [July 6, 1993])
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 what 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. llcd
Private respondent, on the other hand, points out that the subject of the Offsetting Agreement is Phase
II of the Vermen Pines Condominiums. It alleges that since construction of Phase II of the Vermen
Pines Condominiums has failed to begin (Rollo, p. 104), it has reason to move for rescission of the
Offsetting Agreement, as it cannot forever wait for the delivery of the condominium units to it.
It is evident from the facts of the case that private respondent did not fail to fulfill its obligation in the
Offsetting Agreement. The discontinuance of delivery of construction materials to petitioner stemmed
from the failure of petitioner to send purchase orders to private respondent. The allegation that
petitioner had been sending purchase orders to private respondent, which the latter could not fill, cannot
be given credence. Perhaps in the beginning, it would send purchase orders to private respondent (as
evidenced by the purchase orders presented in court), and the latter would deliver the construction
materials ordered. However, according to private respondent, after April, 1982, petitioner stopped
sending purchase orders. Petitioner failed to refute this allegation. When petitioner's witness, Treasurer
of the petitioner corporation, was asked to produce the purchase orders in court, the latter promised to
do so, but this was never complied with.
On the other hand, petitioner would never be able to fulfill its obligation in allowing private respondent to
exercise the option to transfer from Phase I to Phase II, as the construction of Phase II has ceased and
the subject condominium units will never be available.
The impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the
contract for indeed, the non-fulfillment of the obligation aforementioned constitutes substantial breach of
the Offsetting Agreement. The possibility of exercising the option of whether or not to transfer to
condominium units in Phase II was one of the factors which were considered by private respondent
 [G.R. No. 129107. September 26, 2001.]
ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and
ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P. DELOS
SANTOS,  respondents.
Espejo & Volante Law Office  for petitioner.
Padilla Jimenez Kintanar & Asuncion Law Offices for private respondent.
SYNOPSIS
Private respondent and petitioner executed a Deed of Sale whereby the former sold to the
latter an undivided portion of Lot No. 992 covered by Transfer Certificate of Title No. T-5790, the
purchase price of which shall be paid in three installments. When petitioner failed to pay the full
amount of the second installment, private respondent wrote a letter informing petitioner that he
considered the contract as rescinded. Petitioner did not oppose the revocation of the contract but
proposed for reimbursement of the amount, which he had already paid, or private respondent could
sell to him an equivalent portion of the land. Private respondent, however, did not agree.
On July 1, 1991, private respondent filed a complaint for Judicial Confirmation of
Rescission and Damages against petitioner to compel the latter to formalize in a public document
their mutual agreement of revocation and rescission and to have a judicial confirmation of the said
revocation under the terms and conditions fair, proper and just for both parties. Petitioner opposed
the rescission of the contract contending that the proper remedy of private respondent is for
collection of the balance of the purchase price. The trial court ruled in favor of private respondent. It
affirmed the rescission of the contract of sale and ordered petitioner to pay moral and exemplary
damages and attorney's fees. On appeal, the decision of the trial court was affirmed by the Court of
Appeals but deleted the award of attorney's fees. Hence, petitioner filed this petition for review
asserting that a judicial or notarial act is necessary before one party can unilaterally effect a
rescission. Petitioner also claimed that the appellate court erred in finding bad faith on his part
when he resisted the rescission and claimed that he was ready to pay private respondent.
The Supreme Court ruled that the letter written by private respondent declaring his
intention to rescind did not operate to validly rescind the contract since a judicial of notarial act is
required by law for a valid rescission to take place. The operative act, which produces the
resolution of the contract, is the decree of the court and not the mere act of the vendor.
Notwithstanding this, however, the Court found that private respondent had complied with the
requirement of the law for judicial decree of rescission when he filed an action for Judicial
Confirmation of Rescission and Damages.
Moreover, the Court found the award of moral and exemplary damages to private
respondent proper. Petitioner did not substantiate by clear and convincing proof his allegation that
he was ready and willing to pay private respondent. The Court was more inclined to believe that
petitioner's claim of readiness to pay was an afterthought intended to evade the consequence of his
breach.
Petition denied and the Decision of the Court of Appeals was affirmed.
SYLLABUS
1. CIVIL LAW; SALES; SALE OF IMMOVABLE PROPERTY; RESCISSION OF CONTRACT;
REQUIRES A NOTARIAL OR JUDICIAL ACT. — Article 1592 of the Civil Code is the applicable
provision regarding the sale of an immovable property. Article 1592 requires the rescinding party to
serve judicial or notarial notice of his intent to resolve the contract. In the case of Villaruel v. Tan King,
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." 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." 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" emphasizing that when no stipulation is found on automatic rescission, the judicial or
notarial requirement still applies.
2. ID.; OBLIGATIONS; RESCISSION; JUDICIAL DECREE OF RESCISSION IS A REQUISITE; RIGHT
TO RESCIND CANNOT BE EXERCISED SOLELY ON A PARTY'S JUDGMENT THAT THE OTHER
COMMITTED A BREACH OF THE OBLIGATION. — 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. But in our view, even if Article 1191 were applicable, petitioner would still
not be entitled to automatic rescission. In Escueta v. Pando, we ruled that under Article 1124 (now
Article 1191) of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one
of the obligors shall fail to comply with what is incumbent upon him. But that right must be invoked
judicially. The same article also provides: "The Court shall decree the resolution demanded, unless
there should be grounds which justify the allowance of a term for the performance of the obligation."
This requirement has been retained in the third paragraph of Article 1191, which states that "the court
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period."
Consequently, even if the right to rescind is made available to the injured party, the obligation is
not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The
party entitled to rescind should apply to the court for a decree of rescission. The right cannot be
exercised solely on a party's own judgment that the other committed a breach of the obligation. The
operative act which produces the resolution of the contract is the decree of the court and not the mere
act of the vendor. Since a judicial or notarial act is required by law for a valid rescission to take place,
the letter written by respondent declaring his intention to rescind did not operate to validly rescind the
contract.
3. ID.; ID.; ID.; CROSSCLAIM FOUND IN THE ANSWER CONSTITUTES JUDICIAL DEMAND FOR
RESCISSION. — However, in our view when private respondent filed an action for Judicial Confirmation
of Rescission and Damages before the RTC, he complied with the requirement of the law for judicial
decree of rescission. The complaint 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. In Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., we held that even a crossclaim
found in the Answer could constitute a judicial demand for rescission that satisfies the requirement of
the law.
4. ID.; ID.; ID.; PRESCRIPTIVE PERIOD; CASE AT BAR. — 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. This provision of law applies to rescissible contracts, as
enumerated and defined in Articles 1380 and 1381. We must stress however, that the "rescission" in
Article 1381 is not akin to the term "rescission" in Article 1191 and Article 1592. 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. The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in
Article 1144, 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.
5. ID.; DAMAGES; AWARD OF MORAL AND EXEMPLARY DAMAGES, PROPER IN CASE AT BAR.
— On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals erred in
finding bad faith on his part when he resisted the rescission 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. Petitioner would have us reverse the said CA findings
based on the exception that these findings were made on a misapprehension of facts. The records do
not support petitioner's claims. First, per the records, petitioner knew respondent's reason for selling his
property. As testified to by petitioner and in the deposition of respondent, such fact was made known to
petitioner during their negotiations as well as in the letters sent to petitioner by Palao. Second, petitioner
adamantly refused to formally execute an instrument showing their mutual agreement to rescind the
contract of sale, notwithstanding that it was petitioner who plainly breached the terms of their contract
when he did not pay the stipulated price on time, leaving private respondent desperate to find other
sources to pay off his loan. Lastly, petitioner did not substantiate by clear and convincing proof, his
allegation that he was ready and willing to pay respondent. We are more inclined to believe his claim of
readiness to pay was an afterthought intended to evade the consequence of his breach. There is no
record to show the existence of such amount, which could have been reflected, at the very least, in a
bank account in his name, if indeed one existed; or, alternatively, the proper deposit made in court
which could serve as a formal tender of payment. Thus, we find the award of moral and exemplary
damages proper.
DECISION
QUISUMBING,  J p:
This petition assails the Decision 1 dated April 30, 1997 of the Court of Appeals in CA G.R. CV No.
39949, affirming the decision of the Regional Trial Court and deleting the award of attorney's fee.
The facts of the case are based on the records.
On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an undivided
portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of Tuguegarao and
covered by Transfer Certificate of Title No. T-5790. The parties executed a Deed of Sale 2 on the same
date with the purchase price of P295,000.00, payable as follows:
(a) P10,000.00 — upon the execution of this instrument, and for this purpose, the
vendor acknowledges having received the said amount from the vendee as of this
date;
(b) P140,000.00 — on or before April 30, 1985;
(c) P145,000.00 — on or before December 31, 1985. 3
When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent a
letter 4 to Iringan stating that he considered the contract as rescinded and that he would not accept any
further payment considering that Iringan failed to comply with his obligation to pay the full amount of the
second installment.
On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino, 5 replied that they were not
opposing the revocation of the Deed of Sale but asked for the reimbursement of the following amounts:
(a) P50,000.00 — cash received by you;
(b) P3,200.00 — geodetic engineer's fee;
(c) P500.00 — attorney's fee;
(d) the current interest on P53,700.00. 6
In response, Palao sent a letter dated January 10, 1986, 7 to Atty. Aquino, stating that he was not
amenable to the reimbursements claimed by Iringan.
On February 21, 1989, Iringan, now represented by a new counsel — Atty. Carmelo Z. Lasam,
proposed that the P50,000 which he had already paid Palao be reimbursed 8 or Palao could sell to
Iringan, an equivalent portion of the land.
Palao instead wrote Iringan that the latter's standing obligation had reached P61,600, representing
payment of arrears for rentals from October 1985 up to March 1989. 9 The parties failed to arrive at an
agreement.
On July 1, 1991, Palao filed a Complaint 10 for Judicial Confirmation of Rescission of Contract and
Damages against Iringan and his wife.
In their Answer, 11 the spouses alleged that the contract of sale was a consummated contract, hence,
the remedy of Palao was for collection of the balance of the purchase price and not rescission. Besides,
they said that they had always been ready and willing to comply with their obligations in accordance
with said contract.
In a Decision 12 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
letter 15 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. (Emphasis supplied)
Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve the
contract. 16
In the case of Villaruel v.  Tan King, 17 we ruled in this wise,
. . .since the subject-matter of the sale in question is real property, it does not come
strictly within the provisions of article 1124 (now Article 1191) of the Civil Code, but
is rather subjected to the stipulations agreed upon by the contracting parties and to
the provisions of article 1504 (now Article 1592) of the Civil Code. 18
Citing Manresa, the Court said that the requirement of then Article 1504, "refers to a demand that the
vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create no
obstacles to this contractual mode of extinguishing obligations." 19
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not
automatic rescission has been stipulated. It is to be noted that the law uses the phrase "even
though" 20 emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial
requirement still applies.
On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual
agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2 thereof.
ARTICLE 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
[Emphasis ours.]
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic
rescission. In Escueta v. Pando, 21 we ruled that under Article 1124 (now Article 1191) of the Civil
Code, the right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail
to comply with what is incumbent upon him. But that right must be invoked judicially. The same article
also provides: "The Court shall decree the resolution demanded, unless there should be grounds which
justify the allowance of a term for the performance of the obligation." acHITE
This requirement has been retained in the third paragraph of Article 1191, which states that "the court
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period."
Consequently, even if the right to rescind is made available to the injured part, 22 the obligation is
not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The
party entitled to rescind should apply to the court for a decree of rescission. 23 The right cannot be
exercised solely on a party's own judgment that the other committed a breach of the obligation. 24 The
operative act which produces the resolution of the contract is the decree of the court and not the mere
act of the vendor. 25 Since a judicial or notarial act is required by law for a valid rescission to take
place, the letter written by respondent declaring his intention to rescind did not operate to validly rescind
the contract.
Notwithstanding the above, however, in our view when private respondent filed an action for Judicial
Confirmation of Rescission and Damages 26 before the RTC, he complied with the requirement of the
law for judicial decree of rescission. The complaint 27 categorically stated that the purpose was 1) to
compel appellants to formalize in a public document, their mutual agreement of revocation and
rescission; and/or 2) to have a judicial confirmation of the said revocation/rescission under terms and
conditions fair, proper and just for both parties. 28 In Luzon Brokerage Co., Inc. v. Maritime Building
Co., Inc., 29 we held that even a crossclaim found in the Answer could constitute a judicial demand for
rescission that satisfies the requirement of the law. 30
Petitioner contends that even if the filing of the case were considered the judicial act required, the action
should be deemed prescribed based on the provisions of Article 1389 of the Civil Code. 31
 
This provision of law applies to rescissible contracts, 32 as enumerated and defined in Articles
1380 33 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 rescission 38 and claimed he was ready to pay but
never actually paid respondent, notwithstanding that he knew that appellee's principal motivation for
selling the lot was to raise money to pay his SSS loan. 39 Petitioner have us reverse the said CA
findings based on the exception 40 that these findings were made on a misapprehension of facts.
The records do not support petitioner's claims. First, per the records, petitioner knew respondent's
reason for selling his property. As testified to by petitioner41 and in the deposition 42 of respondent,
such fact was made known to petitioner during their negotiations as well as in the letters sent to
petitioner by Palao. 43 Second, petitioner adamantly refused to formally execute an instrument showing
their mutual agreement to rescind the contract of sale, notwithstanding that it was petitioner who plainly
breached the terms of their contract when he did not pay the stipulated price on time, leaving private
respondent desperate to find other sources of funds to pay off his loan. Lastly, petitioner did not
substantiate by clear and convincing proof, his allegation that he was ready and willing to pay
respondent. We are more inclined to believe his claim of readiness to pay was an afterthought intended
to evade the consequence of his breach. There is no record to show the existence of such amount,
which could have been reflected, at the very least, in a bank account in his name, if indeed one existed;
or, alternatively, the proper deposit made in court which could serve as a formal tender of
payment. 44 Thus, we find the award of moral and exemplary damages proper.
WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court of
Appeals in CA-G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting the award of
attorney's fees, is hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
||| (Iringan v. Court of Appeals, G.R. No. 129107, [September 26, 2001], 418 PHIL 286-298)
 [G.R. No. 108346. July 11, 2001.]
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO,  respondents.
Marciano J. Cagatan and Mariano R. Logarta  for petitioners.
M.B. Tomacruz for private respondents.
SYNOPSIS
Petitioners entered into a deed of sale with assumption of mortgage with private respondents paying a
downpayment of P800,000 and assuming the mortgage amount of P1.8M in favor of BPI. Petitioners
further agreed "to strictly and faithfully comply with all the terms and conditions appearing in the real
estate mortgage signed and executed by the vendor in favor of BPI . . . as if the same were originally
signed and executed by the vendee." As part of the deed, petitioner Avelina with her husband's consent
executed an undertaking that during the pendency of the application for the assumption of mortgage
she agreed to continue paying said loan in accordance with the mortgage deed and that in the event of
violation of any of the terms and conditions of the deed of real estate mortgage, she agreed that the
P800,000 downpayment shall be forfeited as liquidated damages and the deed of sale with assumption
of mortgage shall be deemed automatically cancelled. When the bank denied the application for
assumption of mortgage, petitioners stopped making payments. Thus, notice of cancellation/rescission
was sent to petitioners for non-performance of their obligation. Aggrieved, petitioners filed a complaint
against private respondent for specific performance, nullity of cancellation, writ of possession and
damages. Both parties admitted that their agreement mandated that petitioners should pay the
purchase price balance of P1.8M to private respondents in case the request to assume the mortgage
would be disapproved. The trial court dismissed the complaint, but on reconsideration, directed the
parties to proceed with the sale. On appeal, the Court of Appeals upheld the validity of the rescission.
Hence, this recourse. ADCIca
The failure of the vendee to pay the balance of the purchase price constitutes a breach on the
performance of a reciprocal obligation, and not a violation of the terms and conditions of the mortgage
contract. This gave rise to the vendor's right to rescind the contract. However, the automatic rescission
and forfeiture of payment clauses in the mortgage contract does not apply. Considering that the
rescission of the contract was based on Article 1191 of the Civil Code, mutual restitution by the parties
is required.
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. — In 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 in money or its equivalent. Private respondents had already performed their
obligation through the execution of the Deed of Sale, which effectively transferred ownership of the
property to petitioner through constructive delivery. Prior physical delivery or possession is not legally
required, and the execution of the Deed of Sale is deemed equivalent to delivery.
2. ID.; ID.; RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING OBLIGATION. — The
right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party who violates the reciprocity between them. The breach contemplated
in the said provision is the obligor's failure to comply with an existing obligation. When the obligor
cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of
any just cause for the court to determine the period of compliance, the court shall decree the
rescission. IEHScT
3. ID.; ID.; ID.; ID.; CASE AT BAR. — In the present case, private respondents validly exercised their
right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay
the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the
contract of sale, a violation that consequently gave rise to private respondents' right to rescind the same
in accordance with law.
4. ID.; ID.; ID.; FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH WAS NON-
PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. — As discussed earlier, the breach
committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms
and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment
clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and
regulate the resolution of this controversy. Considering that the rescission of the contract is based on
Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling
P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former.
5. ID.; ID.; ID.; OBLIGATION CREATED. — 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. IDAEHT
DECISION
PANGANIBAN,  J p:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by
the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from
its inception and requires a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari 1 questioning the Decision 2 of the Court of Appeals
(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution 3 dated December 29,
1992 denying petitioner's motion for reconsideration. 4
The dispositive portion of the assailed Decision reads:
 "WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET
ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is
REINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants
are hereby RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
" . . .. David Raymundo [herein private respondent] is the absolute and registered
owner of a parcel of land, together with the house and other improvements thereon,
located at 1918 Kamias St., Dasmariñas Village, Makati and covered by TCT No.
142177. Defendant George Raymundo [herein private respondent] is David's father
who negotiated with plaintiffs Avelina and Mariano Velarde [herein petitioners] for
the sale of said property, which was, however, under lease (Exh. '6', p. 232, Record
of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh.
'1', pp. 11-12, Record) was executed by defendant David Raymundo, as vendor, in
favor of plaintiff Avelina Velarde, as vendee, with the following terms and
conditions:
'xxx xxx xxx
'That for and in consideration of the amount of EIGHT HUNDRED
THOUSAND PESOS (P800,000.00), Philippine currency, receipt of which
in full is hereby acknowledged by the VENDOR from the VENDEE, to his
entire and complete satisfaction, by these presents the VENDOR hereby
SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided by law,
unto the VENDEE, her heirs, successors and assigns, the parcel of land
mentioned and described above, together with the house and other
improvements thereon.
'That the aforesaid parcel of land, together with the house and other
improvements thereon, were mortgaged by the VENDOR to the BANK OF
THE PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the payment
of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as evidenced by a Real Estate
Mortgage signed and executed by the VENDOR in favor of the said Bank
of the Philippine Islands, on _________ and which Real Estate Mortgage
was ratified before Notary Public for Makati, _________, as Doc. No.
_____, Page No. ____, Book No. ____, Series of 1986 of his Notarial
Register.
'That as part of the consideration of this sale, the VENDEE hereby
assumes to pay the mortgage obligations on the property herein sold in
the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in favor of Bank of the Philippine
Islands, in the name of the VENDOR, and further agrees to strictly and
faithfully comply with all the terms and conditions appearing in the Real
Estate Mortgage signed and executed by the VENDOR in favor of BPI,
including interests and other charges for late payment levied by the Bank,
as if the same were originally signed and executed by the VENDEE.
'It is further agreed and understood by the parties herein that the capital
gains tax and documentary stamps on the sale shall be for the account of
the VENDOR; whereas, the registration fees and transfer tax thereon shall
be for the account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde,
with the consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp.
13-14, Record). the pertinent Portions of which read, as follows:
'xxx xxx xxx
'Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr.
David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, and assume the mortgage obligations
on the property with the Bank of the Philippine Islands in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the terms and conditions of the
Deed of Real Estate Mortgage dated _________, signed and executed by
Mr. David A. Raymundo with the said Bank, acknowledged before Notary
Public for Makati, ______, as Doc. No. ___, Page No. ____, Book No.
_____, Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage
obligations on the property is not yet approved by the mortgagee Bank, I
have agreed to pay the mortgage obligations on the property with the
Bank in the name of Mr. David A. Raymundo, in accordance with the
terms and conditions of the said Deed of Real Estate Mortgage, including
all interests and other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A.
Raymundo, for purposes of attesting and confirming our private
understanding concerning the said mortgage obligations to be
assumed. cCEAHT
'NOW, THEREFORE, for and in consideration of the foregoing premises,
and the assumption of the mortgage obligations of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency,
with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde, with the
consent of my husband, Mariano Z. Velarde, do hereby bind and obligate
myself, my heirs, successors and assigns, to strictly and faithfully comply
with the following terms and conditions:
'1. That until such time as my assumption of the mortgage obligations on
the property purchased is approved by the mortgagee bank, the Bank of
the Philippine Islands, I shall continue to pay the said loan in accordance
with the terms and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and conditions of the said
Deed of Real Estate Mortgage, I hereby agree that my downpayment of
P800,000.00, plus all payments made with the Bank of the Philippine
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
 Raymundo, as and by way of liquidated damages, without necessity of
notice or any judicial declaration to that effect, and Mr. David A.
Raymundo shall resume total and complete ownership and possession of
the property sold by way of Deed of Sale with Assumption of Mortgage,
and the same shall be deemed automatically cancelled and be of no
further force or effect, in the same manner as if (the) same had never
been executed or entered into.
'3. That I am executing this Undertaking for purposes of binding myself,
my heirs, successors and assigns, to strictly and faithfully comply with the
terms and conditions of the mortgage obligations with the Bank of the
Philippine Islands, and the covenants, stipulations and provisions of this
Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and
identified above, [does] hereby confirm and agree to the undertakings of
the Vendee pertinent to the assumption of the mortgage obligations by the
Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David
Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million
was from the proceeds of a loan that plaintiffs were to secure from a bank with
defendant's help. Defendants had a standing approved credit line with the Bank of
the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's
approval of an application for assumption of mortgage by plaintiffs. Pending BPI's
approval o[f] the application, plaintiffs were to continue paying the monthly interests
of the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan
secured by the aforementioned mortgage for three (3) months as follows:
September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and
November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17 and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption
of Mortgage with BPI was not approved (Exh. 'J', p. 133, Record). This prompted
plaintiffs not to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter
that their non-payment to the mortgage bank constitute[d] non-performance of their
obligation (Exh. '3', p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the balance
in cash not later than January 21, 1987 provided: (a) you deliver actual
possession of the property to her not later than January 15, 1987 for her
immediate occupancy; (b) you cause the release of title and mortgage
from the Bank of P.I. and make the title available and free from any liens
and encumbrances; and (c) you execute an absolute deed of sale in her
favor free from any liens or encumbrances not later than January 21,
1987.' (Exhs. 'K', '4', p. 223, Record).
"On January 8, 1987, defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended sale of the subject property allegedly due to
the latter's failure to comply with the terms and conditions of the Deed of Sale with
Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)." ' 6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific
performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil Case
No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then
Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who dismissed the Complaint
in a Decision dated November 14, 1990. 7 Thereafter, petitioners filed a Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S.
A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991, 9 Judge Abad
Santos granted petitioners' Motion for Reconsideration and directed the parties to proceed with the sale.
He instructed petitioners to pay the balance of P1.8 million to private respondents who, in turn, were
ordered to execute a deed of absolute sale and to surrender possession of the disputed property to
petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier
Decision dismissing petitioners' Complaint. Upholding the validity of the rescission made by private
respondents, the CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of
the consideration of this sale, the VENDEE (Velarde)' would assume to pay the
mortgage obligation on the subject property in the amount of P1.8 million in favor of
BPI in the name of the Vendor (Raymundo). Since the price to be paid by the
Vendee Velarde includes the downpayment of P800,000.00 and the balance of
P1.8 million, and the balance of P1.8 million cannot be paid in cash, Vendee
Velarde, as part of the consideration of the sale, had to assume the mortgage
obligation on the subject property. In other words, the assumption of the mortgage
obligation is part of the obligation of Velarde, as vendee, under the contract.
Velarde further agreed 'to strictly and faithfully comply with all the terms and
conditions appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI . . . as if the same were originally signed and executed by
the Vendee.' (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the
document entitled 'Undertaking' wherein the latter agreed to continue paying said
loan in accordance with the terms and conditions of the Deed of Real Estate
Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event of
violation by Velarde of any terms and conditions of said deed of real estate
mortgage, the downpayment of P800,000.00 plus all payments made with BPI or
the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of
[M]ortgage would thereby be cancelled automatically and of no force and effect
(pars. 2 & 3, thereof, pp. 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the
sale was the assumption by Velarde of the mortgage obligation of Raymundo in the
amount of P1.8 million. This would mean that Velarde had to make payments to
BPI under the [D]eed of [R]eal [E]state [M]ortgage in the name of Raymundo. The
application with BPI for the approval of the assumption of mortgage would mean
that, in case of approval, payment of the mortgage obligation will now be in the
 name of Velarde. And in the event said application is disapproved, Velarde had to
pay in full. This is alleged and admitted in Paragraph 5 of the Complaint. Mariano
Velarde likewise admitted this fact during the hearing on September 15, 1997 (p.
47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This
being the case, the non-payment of the mortgage obligation would result in a
violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n]
Raymundo may choose either of two (2) actions — (1) demand fulfillment of the
contract, or (2) demand its rescission (Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of mortgage cannot be
used as an excuse for Velarde's non-payment of the balance of the purchase price.
As borne out by the evidence, Velarde had to pay in full in case of BPI's
disapproval of the application for assumption of mortgage. What Velarde should
have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo
a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given weight by the
lower court in reversing the decision rendered by then Judge Ynares-Santiago. In
said letter, Velarde registered their willingness to pay the balance in cash but
enumerated 3 new conditions which, to the mind of this Court, would constitute a
new undertaking or new agreement which is subject to the consent or approval of
Raymundo. These 3 conditions were not among those previously agreed upon by
Velarde and Raymundo. These are mere offers or, at most, an attempt to novate.
But then again, there can be no novation because there was no agreement of all
the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
 
"It was likewise agreed that in case of violation of the mortgage obligation, the
Deed of Sale with Assumption of Mortgage would be deemed 'automatically
cancelled and of no further force and effect, as if the same had never been
executed or entered into.' While it is true that even if the contract expressly
provided for automatic rescission upon failure to pay the price, the vendee may still
pay, he may do so only for as long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial act (Article 1592, Civil Code).
In the case at bar, Raymundo sent Velarde a notarial notice dated January 8, 1987
of cancellation/rescission of the contract due to the latter's failure to comply with
their obligation. The rescission was justified in view of Velarde's failure to pay the
price (balance) which is substantial and fundamental as to defeat the object of the
parties in making the agreement. As adverted to above, the agreement of the
parties involved a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which entitles the other
party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-
payment of the mortgage obligation by appellees Velarde would create a right to
demand payment or to rescind the contract, or to criminal prosecution (Edca
Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellees'
failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs.
IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the
contract, they have lost their right to its enforcement and hence, cannot avail of the
action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA
635)." 10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum, 12 interpose the following assignment of errors:
"I
The Court of Appeals erred in holding that the non-payment of the mortgage
obligation resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract
by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave
three 'new conditions' constituting mere offers or an attempt to novate necessitating
a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents' mortgage obligation did not constitute a
breach of contract, considering that their request to assume the obligation had been disapproved by the
mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and,
instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the
balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners
should pay the purchase price balance of P1.8 million to private respondents in case the request to
assume the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received
notice of the bank's disapproval of their application to assume respondents' mortgage, they should have
paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only
upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such
conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a
buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate
thing, and the buyer to pay therefor a price certain in money or its equivalent. 13
Private respondents had already performed their obligation through the execution of the Deed of Sale,
which effectively transferred ownership of the property to petitioner through constructive delivery. Prior
physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed
equivalent to delivery. 14
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in
the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond those
stipulated in the contract before fulfilling their own obligation to pay the full purchase price. IHcTDA
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was not justified,
inasmuch as the former had signified their willingness to pay the balance of the purchase price only a
little over a month from the time they were notified of the disapproval of their application for assumption
of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a
rescission. They cite several cases 15 in which this Court declared that rescission of a contract would
not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed
their obligation in good faith, considering that they have already made the initial payment of P800,000
and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the
mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:
"ARTICLE 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party who violates the reciprocity between them. 16 The breach
contemplated in the said provision is the obligor's failure to comply with an existing obligation. 17 When
the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of compliance, the court shall decree the
rescission. 18
In the present case, private respondents validly exercised their right to rescind the contract, because of
the failure of petitioners to comply with their obligation to pay the balance of the purchase price.
Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents' right to rescind the same in accordance with law.
under the contract of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal
obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic
rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil
Code provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the
amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. 20 To rescind is to
declare a contract void at its inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to abrogate it. from the
beginning and restore the parties to their relative positions as if no contract has been made. 21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue
raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter
of petitioners to private respondents were not part of the original contract. By that time, it was already
incumbent upon the former to pay the balance of the sale price. They had no right to demand
preconditions to the fulfillment of their obligation, which had become due.

True, petitioners expressed their willingness to pay the balance of the purchase price one month after it WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
became due; however, this was not equivalent to actual payment as would constitute a faithful respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a
compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of
by private respondents of additional burdens that had not been agreed upon in the original contract. rescission. No pronouncement as to costs.
Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would SO ORDERED. SDHCac
preclude the exercise of the right to rescind.
||| (Sps. Velarde v. Court of Appeals, G.R. No. 108346, [July 11, 2001], 413 PHIL 360-376)
Misplaced is petitioners' reliance on the cases 19 they cited, because the factual circumstances in those
cases are not analogous to those in the present one. In Song Fo  there was, on the part of the buyer,
only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's offer to pay was
unconditional and was accepted by the seller. In Zepeda, the breach involved a mere one-week delay in
paying the balance of P1,000, which was actually paid. In Tan, the alleged breach was private
respondent's delay of only a few days, which was for the purpose of clearing the title to the property;
there was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an
irregularity; such breach would not normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private
respondents new obligations as preconditions to the performance of their own obligation. In effect, the
qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable
 [G.R. No. L-56076. September 21, 1983.]
PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C. CLAVE, Presidential
Executive Assistant, NATIONAL HOUSING AUTHORITY and NAZARIO
DUMPIT,  respondents.
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.
SYLLABUS
1. CIVIL LAW; CONTRACTS; WRITTEN NOTICE STILL REQUIRED THOUGH JUDICIAL ACTION
NOT NECESSARY FOR RESCISSION. — Well settled is the rule, as held in previous jurisprudence
Torralba vs. de Los Angeles, 96 SCRA 69) that judicial action for the rescission of a contract is not
necessary where the contract provides that it may be revoked and canceled for violation of any of its
terms and conditions. However, even in the cited case, there was at least a written notice sent to the
defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los
Angeles, 33 SCRA 102 (1970) the act of a party in treating a contract as cancelled should be made
known to the other.
2. ID.; ID.; EXTRAJUDICIAL RESCISSION; EFFECTIVE IF NOT OPPOSED. — A stipulation entitling
one party to take possession of the land and building if the other party violates the contract does not ex
proprio vigore confer upon the former the right to take possession thereof if objected to without judicial
intervention and determination (Nera vs. Vacante, 3 SCRA 505 (1961]). This was reiterated in Zulueta
vs. Mariano (111 SCRA 206 [1982]) where we held that extrajudicial rescission has legal effect where
the other party does not oppose it (Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., p. 168,
citing Magdalena Estate vs. Myrick, 71 Phil. 344). In other words, resolution of reciprocal contracts may
be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it
shall be subject to judicial determination (UP vs. de los Angeles, supra).
3. ID.; ID.; ID.; WAIVER OF RIGHT TO BE NOTIFIED; VALID ONLY WHERE LIBERTY OF CHOICE
FULLY ACCORDED. — The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on
Installment Payments" which took effect on September 14, 1972. The contention that private
respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious
because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent
had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such
waiver follows only where liberty of choice has been fully accorded (Chavez vs. Court of Appeals, 24
SCRA 663, 682-683(1968]). Moreover, it is a matter of public policy to protect buyers of real estate on
installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous
and oppressive condition to buyers of real estate on installment payments.
4. ID.; ID.; ID.; RIGHT ACCORDED DEFAULTER. — As a consequence of the resolution by petitioners,
tights 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. (Vercelus vs. Edano, 46 Phil. 801 [1924]). It would be most inequitable if
petitioners were to be allowed to retain private respondent's payments and at the same time appropriate
the proceeds of the second sale to another.
5. CORPORATION LAW; CORPORATION; SEPARATE AND DISTINCT PERSONALITY; PIERCING
OF CORPORATE FICTION. — It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of any other legal
entity to which it may be related (Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160
[1961]). As a general rule, a corporation may not be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it may be connected and vice versa. However, the
veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice
(Emilio Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 [1965]); or for purposes that could not have been
intended by the law that created it (McConnel vs. CA, 1 SCRA 722, 726 [1961]); or to defeat public
convenience, justify wrong, protect fraud, or defend crime (Yutivo Sons Hardware Co. vs. CTA, supra;
McConnel vs. CA, supra); or to perpetuate fraud or confuse legitimate issues (R.F. Sugay & Co., Inc. vs.
Reyes, 12 SCRA 700 [1964]) or to circumvent the law or perpetuate deception; (Gregorio Araneta, Inc.
vs. De Paterno & Vidal, 91 Phil. 786 [1952]) or as an alter ego, adjunct or business conduit for the sole
benefit of the stockholders (McConnel vs. CA, supra; Commissioner of Internal Revenue vs. Norton
Harrison Co., 120 Phil. 684 [1964]).
6. ID.; ID.; ID.; MERE OWNERSHIP OF ALL CAPITAL STOCK; NOT GROUND FOR DISREGARDING
CORPORATE PERSONALITY. — In this case, petitioner Onstott was made liable because he was then
the President of the corporation and he appeared to be the controlling stockholder. No sufficient proof
exists on record that said petitioner used the corporation to defraud private respondent. He cannot,
therefore, be made personally liable just because he "appears to be the controlling stockholder." Mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate personality (Liddel &
Co. vs. Collector of Internal Revenue, 2 SCRA 632, 640 [1961]).
DECISION
MELENCIO-HERRERA, J  p:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P.
Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott, jointly and severally, to refund to
private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as
resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well
as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said
Resolution of May 2, 1980, are being assailed in this petition. LLphil
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott, executed in favor of
private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the
Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, covered by TCT
No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per annum,
payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid.
Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of
any monthly installment after the lapse of 90 days from the expiration of the grace period of one month,
without need of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last
payment was made on December 5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all
his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a
certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same
request. Replying, petitioners informed respondent that his Contract to Sell had long been rescinded
pursuant to paragraph 6 of the contract, and that the lot had already been resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the
National Housing Authority (NHA) for reconveyance with an alternative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of
either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott, in his capacity as President
of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of
P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion
for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to
law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the
Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the
present petition wherein the following issues are raised: LibLex
I the same to the SELLER."
"Whether notice or demand is not mandatory under the circumstances and,
therefore, may be dispensed with by stipulation in a contract to sell.
II
Whether petitioners may be held liable for the refund of the installment payments
made by respondent Nazario M. Dumpit.
III
Whether the doctrine of piercing the veil of corporate fiction has application to the
case at bar.
IV
"Whether respondent Presidential Executive Assistant committed grave abuse of
discretion in upholding the decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by respondent Nazario M.
Dumpit thereby denying substantial justice to the petitioners, particularly petitioner
Onstott."
We issued a Temporary Restraining Order on February 11, 1981 enjoining the enforcement of the
questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On
October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal
and gave due course to the petition on March 15, 1982.
 
On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior
notice or demand upon respondent in view of paragraph 6 thereof which provides:
"6. That in case the BUYER fails to satisfy any monthly installment, or any other
payments herein agreed upon, the BUYER shall be granted a month of grace within
which to make the payment of the account in arrears together with the one
corresponding to the said month of grace. It shall be understood, however, that
should the month of grace herein granted to the BUYER expire, without the
payments corresponding to both months having been satisfied, an interest of ten
(10%) per cent per annum shall be charged on the amounts the BUYER should
have paid; it is understood further, that should a period of NINETY (90) DAYS
elapse to begin from the expiration of the month of grace hereinbefore mentioned,
and the BUYER shall not have paid all the amounts that the BUYER should have
paid with the corresponding interest up to the date, the SELLER shall have the right
to declare this contract cancelled and of no effect without notice, and as a
consequence thereof, the SELLER may dispose of the lot/lots covered by this
Contract in favor of other persons, as if this contract had never been entered into.
In case of such cancellation of this Contract, all the amounts which may have been
paid by the BUYER in accordance with the agreement, together with all the
improvements made on the premises, shall be considered as rents paid for the use
and occupation of the above mentioned premises and for liquidated damages
suffered by virtue of the failure of the BUYER to fulfill his part of this agreement:
and the BUYER hereby renounces his right to demand or reclaim the return of the
same and further obligates himself peacefully to vacate the premises and deliver
Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and cancelled for violation
of any of its terms and conditions. However, even in the cited cases, there was at least a written notice
sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs.
Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should be made known to
the other. We quote the pertinent excerpt: LLpr
"Of course, it must be understood that the act of a party in treating a contract as
cancelled or resolved in account of infractions by the other contracting party must
be made known to the other and is always provisional being ever subject to
scrutiny and review by the proper court. If the other party denies that rescission is
justified it is free to resort to judicial action in its own behalf, and bring the matter to
court. Then, should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but itproceeds at
its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting party who believes
itself injured must first file suit and wait for a judgment before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203).
 We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution
of a reciprocal obligation (Ocejo, Perez & Co., vs. International Banking Corp., 37
Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in
every case where the extrajudicial resolution is contested only the final award of
the court of competent jurisdiction can conclusively settle whether the resolution
was proper or not. It is in this sense that judicial action 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." (Emphasis ours).
Of similar import is the ruling in Nera vs. Vacante 4 , reading:
"A stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex proprio vigore confer upon the former
the right to take possession thereof if objected to without judicial intervention and
determination."
This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect
where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue
is still necessary. LLjur
In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7
In this case, private respondent has denied that rescission is justified and has resorted to judicial action.
It is now for the Court to determine whether resolution of the contract by petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra.
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to
rescind in court because from the moment the petitioner defaulted in the timely payment of the
installments, the contract between the parties was deemed ipso facto rescinded." However, it should be
noted that even in that case notice in writing was made to the vendee of the cancellation and annulment
of the contract although the contract entitled the seller to immediate repossessing of the land upon
default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act
No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments."
which took effect on September 14, 1972, when it specifically provided:
"Sec. 3(b) . . . the actual cancellation of the contract shall take place after thirty
days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer." (Emphasis supplied).
The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment payments.
Regarding the second issue on refund of the installment payments made by private respondent. Article
1385 of the Civil Code provides:
"ART. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
"Neither 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. 10 It would be most inequitable if
petitioners were to be allowed to retain private respondent's payments and at the same time appropriate
the proceeds of the second sale to another. cdphil
We come now to the third and fourth issues regarding the personal liability of petitioner Onstott, who
was made jointly and severally liable with petitioner corporation for refund to private respondent of the
total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law
with a personality separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected
and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to
further an end subversive of justice 12 ; or for purposes that could not have been intended by the law
that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime 14 ; or
to perpetuate fraud or confuse legitimate issues; 15 or to circumvent the law or perpetuate
deception; 16 or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17
 
We find no badges of fraud on petitioners part. They had literally relied, albeit mistakenly, on paragraph
6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and
had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the corporation
and he appeared to be the controlling stockholder. No sufficient proof exists on record that said
petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally
liable just because he "appears to be the controlling stockholder". Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality. 18 In this respect then, a
modification of the Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the
filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.
No costs.
SO ORDERED.
||| (Palay, Inc. v. Clave, G.R. No. L-56076, [September 21, 1983], 209 PHIL 523-533)
 [G.R. No. L-37976. July 16, 1985.]
PABLO R. ROMAN,  petitioner, vs. COURT OF APPEALS and PABLO M.
SARANGAYA,  respondents.
Filoteo T. Banzon for petitioner.
Salonga, Ordoñez, Yap, Africano & Associates for respondent.
DECISION
MELENCIO-HERRERA, J  p:
For review is the Decision of the then Court of Appeals in the case entitled Pablo M. Sarangaya vs.
Porfirio Belgica, et als. (CA-G.R. No. 37395) for Breach of Contract and Damages. LexLib
From the evidence adduced, it appears that, on December 12, 1957, a Contract to Sell, covering five (5)
parcels of land situated in Barrio Dolores, Municipality of Taytay, Rizal, with an aggregate area of
116,243 sq. ms., more or less, was executed between Pablo M. SARANGAYA, as Vendor, and Pablo
R. ROMAN, Porfirio Belgica and Emilio Yangco, as Vendees. The contract provided, among others, that
SARANGAYA must, within one year from the date thereof, be able to secure titles to the lands in his
name, otherwise, the Vendees would be relieved from buying the same; that within 60 days from the
issuance of the titles, the Vendees would pay SARANGAYA the total purchase price of P116,243.00;
and that in the event of failure to comply with this condition, the Vendees would be jointly liable to
SARANGAYA for liquidated damages in the sum of P50,000.00 (or P16,666.00 for each).
SARANGAYA obtained titles to the land in his name on August 5, 1958 (Exhibits "B" and "B-1"), and
notice thereof was received by vendee Porfirio Belgica on August 12, 1958 (Exhibit "C-2"). As the
contract between the parties stipulated that notice served on any of the three Vendees shall be notice to
all of them, the Vendees became obligated, on October 11, 1958, either to pay the agreed purchase
price of P116,243.00, or the liquidated damages of P50,000.00. The Vendees having defaulted,
SARANGAYA, on January 12, 1959, filed suit against them for the recovery of the liquidated damages,
plus costs of suit, and P5,000.00 as attorney's fees.
SARANGAYA's complaint was predicated on the implicit or tacit rescission of the reciprocal obligations
to sell and to buy. As Manresa has commented:
". . . La sentencia de 19 de junio de 1917, manifiesta que con arreglo al parrafo 1.
del presente articulo, supuesto el incumplimiento de una obligacion reciproca,
puede darse por resuelto el contrato de una manera implicita o tacita sin necesidad
de la declaracion previa de los Tribunales, y tanto mas si la excepcion se alego en
la contestacion y fue objeto de debate; doctrina que repite el fallo de 19 de junio de
1913. cdphil
En la Sentencia de 24 de Octubre de 1941, el Tribunal Supremo precisa aun mas
este extremo, con la siguiente doctrina: El Codigo español, separandose de los
precedentes que le marcaban algunos Codigos extranjeros, como el frances y el
italiano, en los cuales se dice que la resolucion debe ser pedida judicialmente (1)
regula dicha resolucion, como una facultad atribuida a la parte perjudicada por el
incumplimiento del contrato, la cual tiene un derecho de opcion entre exigir el
cumplimiento o la resolucion de los convenido, que puede ejercitarse (segun el
sentido en que se ha orientado la jurisprudencia de esta Sala en repetidas
sentencias, entre ellas, las de 17 de febrero de 1912, 19 de junio de 1913 y 10 de
abril de 1929), ya en la via judicial, ya fuera de ella por declaracion del acreedor; a
reserva, claro es, de que si la declaracion de resolucion, hecha por una de las
partes se impugna por la otra, queda aquella sometida al examen y sancion de los
Tribunales, que habran de declarar en definitiva bien hecha la resolucion o por el
contrario no ajustada a Derecho. (En parecidos terminos se expresa la de 28 de
enero de 1943, que cita la anterior.)" 1
SARANGAYA's complaint can be deemed a "declaracion" of rescission, similar to a complaint being
deemed a demand for payment.
The vendee, Porfirio Belgica, was served with summons and having failed to interpose an Answer to the
complaint, was declared in default. The vendee, Emilio Yangco, was served with summons through
publication and afterwards improperly declared in default, the suit against him being in personam. 2 The
vendee ROMAN had answered the Complaint, but failing to appear at the trial scheduled for March 1,
1960, where SARANGAYA proved his case, the trial Court, on March 30, 1960, promulgated a Decision
ordering the three Vendees to pay plaintiff P50,000.00 as liquidated damages, and P1,000.00 as
attorney's fees.
It appears that on March 29, 1960, ROMAN had filed a Motion 3 explaining his failure to appear at the
hearing of March 1, 1960 and praying that the case be re-set for trial. On April 11, 1960, 4 ROMAN filed
a Motion for Reconsideration of the Decision of March 30, 1960, based substantially on his allegations
previously made in his Motion of March 29, 1960.
In his Answer, 5 ROMAN had defended on the allegation that he had not received notice that
SARANGAYA had already secured title to the land except through the summons served on him; but he
did not then ask for time to comply with his obligation. In his Motion for Reconsideration, to which an
Affidavit of Merits was attached, 6 he asked the Court to grant him an extension of time, under Article
1191 of the Civil Code, within which to pay.
After the filing of the Motion for Reconsideration, SARANGAYA and ROMAN began to talk of settling
their differences. 7 When ROMAN's Motion for Reconsideration of April 11, 1960 was heard on August
20, 1960, ROMAN, in chambers, suggested, as one of two propositions, to purchase the entire property
(116, 243 sq. m.) in cash in the original price of P1.00 per square meter (P116.243.00). 8 That offer was
accepted on September 20, 1960 by SARANGAYA provided ROMAN would pay: Cdpr
(1) Legal costs and attorney's fees.
(2) Interest at the legal rate starting October 12, 1968 which is the last day set to
purchase and pay the property in question.
(3) Documentary stamps and registration fees of the Deed of Sale. 9
The counter-proposal was never accepted by ROMAN. He could have objected to the 2-year legal
interest on P116,243.00, to undetermined attorney's fees, and to the stamp tax, all of which could be
substantial amounts. Later, it appeared he was no longer agreeable to settle. 10 It is a matter of fact
that the trial Court, when it decided the controversy between the parties, said "the full settlement of this
case has not been arrived at by the parties". 11
On September 15, 1961, the trial Court granted the reconsideration petitioned by ROMAN, and allowed
him to present his evidence before the Clerk of Court, which was done on October 26, 1961. After the
lapse of more than three years, or on January 9, 1965, and invoking the provisions of Article 1191 of the
Civil Code, the trial Court issued an Order, actually a decision in respect of ROMAN, the dispositive
portion of which reads as follows:
"WHEREFORE, defendant Pablo R. Roman is hereby ordered, upon execution and
registration by the plaintiff of the deed of absolute sale over the lands subject of
Exhs. 'A' or '1' at the original price of P1.00 per square meter together with the legal
cost and attorney's fees in the amount of P1,000.00, the interest at the legal rate
from October 12, 1958, and the documentary stamps and registration fees of the
deed of sale." 12
It will be noted that the Order, or Decision, was in effect an approval of the previous offer to settle made
by ROMAN, and of the counter-proposal submitted by SARANGAYA with attorney's fees being
determined at P1,000.00 but which, as already pointed out, were never subsequently accepted by the
parties as a final settlement. The trial Court justified its Order/Decision as follows:
". . . Considering the said offer and counter-offer by the parties, which constitute a
just cause for fixing the period within which the defendant can comply, in pursuance
of the provision of Art. 1191, New Civil Code, the Court hereby grants him an
opportunity to comply with his obligations." 13
ROMAN accepted the trial Court's judgment. The substance of SARANGAYA's counter-offer may have
lost relevance in reference to the then value of the land.LexLib
The Order/Decision of the trial Court of January 9, 1965 was erroneous on two substantial points. In the
first place, considering that the settlement offer and counter-offer of the parties were subsequently
abandoned by them, the adjudication of the controversy between SARANGAYA and ROMAN on the
basis of those offer and counter-offer was improper. The judgment was not a resolution of the issues
joined by the pleadings. In the second place, even conceding that the Complaint was for rescission and
damages under Article 1191 of the Civil Code, 14 the trial Court did not fix a period (plazo) within which
ROMAN could comply with his obligation under the contract to sell. Moreover, there would have been
no "just cause", a requirement in Article 1191, for fixing a period. After institution of the action against
him, what ROMAN should have done, which he did not do, was to pay SARANGAYA within 60 days
after service of summons. It would not have been just to grant him an extention of more than six (6)
years, from October 11, 1958 to January 9, 1965, to comply with his 60-day obligation.
SARANGAYA appealed from the Order/Decision of the trial Court to the Court of Appeals which, on
October 26, 1973, reversed it and ordered ROMAN to pay SARANGAYA P16,666,00 (one-third of the
liquidated damages), with interest at the legal rate from the filing of the complaint until fully paid. On the
basis of what has been related in regards to the proceedings before the trial Court, and what has been
expounded in regards to its Order/Decision of January 9, 1965, we see no valid reason to set aside the
judgment of respondent Appellate Court.
WHEREFORE, the Petition for Review on Certiorari filed in this case is hereby denied, with costs
against petitioner.
 
SO ORDERED.
||| (Roman v. Court of Appeals, G.R. No. L-37976, [July 16, 1985], 222 PHIL 87-93)
 [G.R. No. L-22558. May 31, 1967.]
GREGORIO ARANETA, INC.,  petitioner, vs. THE PHILIPPINE SUGAR ESTATES
DEVELOPMENT CO., LTD.,  respondent.
Araneta, & Araneta for petitioner.
Rosauro Alvarez and Ernani Cruz Paño for respondent.
SYLLABUS
1. ACTION TO COMPEL PERFORMANCE UNDER CONTRACT; COURT HAS NO AUTHORITY TO
FIX PERIOD WHERE CONTRACT ESTABLISHES "REASONABLE TIME". — If the contract provided a
"reasonable time", then there was a period fixed, and all that the court should have done was to
determine if that reasonable time had already elapsed when suit was filed. If it had passed, then the
court should declare that petitioner had breached the contract, as averred in the complaint, and fix the
resulting damages. On the other hand, if reasonable time had not yet elapsed, the court perforce was
bound to dismiss the action for being premature. But in no case can it be logically held that under the
facts above quoted the intervention of the court to fix the period for performance was warranted, for
Article 1197 is precisely predicated on the absence of any period fixed by the parties.
2. PLEADING AND PRACTICE; ABSENCE OF PRAYER IN COMPLAINT FOR COURT TO FIX
PERIOD; EFFECT. — The complaint not having sought that the Court should set a period the court
could not proceed to do so unless the complaint was first amended; for the original decision is clear that
the complaint proceeded on the theory that the period for performance had already elapsed, that the
contract had been breached and defendant was already answerable in damages.
3. ACTION TO COMPEL PERFORMANCE; POWER OF COURT TO FIX DATE ART. 1197,
CONSTRUED. — Granting, however, that it lay within the Court's power to fix the period of
performance, still the amended decision is defective in that no basis is stated to support the conclusion
that the period should be set at two years after finality of the judgment. The last paragraph of Article
1197 is clear that the period cannot be set arbitrarily. All the trial court's amended decision (Rec. on
Appeal, p. 124) says in this respect is that "the proven facts precisely warrant the fixing of such a
period", a statement manifestly insufficient to explain how the two-year period given herein was derived
at.
DECISION
REYES, J.B.L., J  p:
Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G. R. No. 28249-R,
affirming with modification, an amendatory decision of the Court of First Instance of Manila, in its Civil
Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M.
Tuason & Co., Inc. and Gregorio Araneta, Inc. defendants".
As found by the Court of Appeals, the facts of this case are:
J. M. Tuason & Co., Inc. is the owner of a big tract of land situated in Quezon City, otherwise known as
the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950,
through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4 square
meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates Development Co., Ltd.
The parties stipulated, among others, in the contract of purchase and sale with mortgage, that the buyer
will —
"Build on the parcel of land the Sto. Domingo church and convent;" while the seller
for its part will —
"Construct streets on the NE and NW and SW sides of the land herein sold so that
the latter will be a block surrounded by streets on all four sides; and the street on
the NE side shall be named 'Sto. Domingo Avenue';"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo
Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing the streets, is
unable to finish the construction of the street in the Northeast side (named Sto. Domingo Avenue)
because a certain third party, by the name of Manuel Abundo, who has been physically occupying a
middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates
Development Co., Ltd., filed its complaint against J. M. Tuason & Co., Inc., and Gregorio Araneta, Inc.
in the above Court of First Instance, seeking to compel the latter to comply with their obligation, as
stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or
refused to perform said obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter
particularly setting up the principal defense that the action was premature since its obligation to
construct the streets in question was without a definite period which needs to be fixed first by the court
in a proper suit for that purpose before a complaint for specific performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its termination, it
dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses interposed by
defendant Gregorio Araneta, Inc.
Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within
which defendants will comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not
expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that the
evidence presented at the trial was insufficient to warrant the fixing of such a period.
On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of
such a period", issued an order granting plaintiff's motion for reconsideration and amending the
dispositive portion of the decision of May 31, 1960, to read as follows:
"WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta,
Inc., a period of Two (2) Years from notice hereof, within which to comply with its
obligation under the contract, Annex A"
Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which
motion, plaintiff opposed.
On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc.'s motion; and the latter
perfected its appeal to the Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief
granted, i.e. fixing of a period, under the amendatory decision of July 16, 1960, was not justified by the
pleadings and not supported by the facts submitted at the trial of the case in the court below and that
the relief granted in effect allowed a change of theory after the submission of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was within the
pleadings and that there was no true change of theory after the submission of the case for decision
since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in
paragraph 7 of the affirmative defenses contained in its answer which reads —
"7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and
complete the streets on the NE, NW and SW sides of the lot in question; that under
the circumstances, said reasonable time has not elapsed;
Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not
decisive in the resolution of the legal issues posed in the instant appeal before us, said appellate court
rendered its decision dated December 27, 1963, the dispositive part of which reads —
"IN VIEW WHEREOF, judgment affirmed and modified; as a consequence,
defendant is given Two (2) years from the date of finality of this decision to comply
with the obligation to construct streets on the NE, NW and SW sides of the land
sold to plaintiff so that the same would be a block surrounded by streets on all four
sides."
Unsuccessful in having the above decision reconsidered defendant- appellant Gregorio Araneta, Inc.
resorted to a petition for review by certiorari to this Court. We gave it due course.
We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First
Instance is legally untenable. The fixing of a period by the courts under Article 1197 of the Civil Code of
the Philippines is sought to be justified on the basis that petitioner (defendant below) placed the
absence of a period in issue by pleading in its answer that the contract with respondent Philippine
Sugar Estates Development Co., Ltd., gave petitioner Gregorio Araneta, Inc. "reasonable time within
which to comply with its obligation to construct and complete the streets." Neither of the courts below
seems to have noticed that, on the hypothesis stated, what the answer put in issue was not whether the
court should fix the time of performance, but whether or not the parties agreed that the petitioner should
have reasonable time to perform its part of the bargain. If the contract so provided, then there was a
period fixed, a "reasonable time"; and all that the court should have done was to determine if that
reasonable time had already elapsed when suit was filed. If it had passed, then the court should declare
that petitioner had breached the contract, as averred in the complaint, and fix the resulting damages.
On the other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss
the action for being premature. But in no case can it be logically held that under the plea above quoted,
the intervention of the court to fix the period for performance was warranted, for Article 1197 is precisely
predicated on the absence of any period fixed by the parties.
Even on the assumption that the court should have found that no reasonable time or no period at all had
been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint
not having sought that the Court should set a period, the court could not proceed to do so unless the
complaint was first amended; for the original decision is clear that the complaint proceeded on the
theory that the period for performance had elapsed already, that the contract had been breached and
defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of performance, still the amended
decision is defective in that no basis is stated to support the conclusion that the period should be set at
two years after finality of the judgment. The last paragraph of Article 1197 is clear that the period can
not be set arbitrarily. The law expressly prescribes that —
"the courts shall determine such period as may under the circumstance have
been probably contemplated by the parties."
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the
proven facts precisely warrant the fixing of such a period", a statement manifestly insufficient to explain
how the two-year period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first
determine that "the obligation does not fix a period" (or that the period is made to depend upon the will
of the debtor), "but from the nature and the circumstances it can be inferred that a period was intended"
(Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to the second
step, and decide what period was "probably contemplated by the parties" (Do., par. 3). So that,
ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but
must set the time that the parties are shown to have intended. As the record stands, the trial Court
appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are
mentioned to support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that
the land described therein was occupied by squatters, because the fact is expressly mentioned therein
(Rec. on Appeal, Petitioner's Appendix B, pp. 12- 13). As the parties must have known that they could
not take the law into their own hands, but must resort to legal processes in evicting the squatters, they
must have realized that the duration of the suits to be brought would not be under their control nor could
the same be determined in advance. The conclusion is thus forced that the parties must have intended
to defer the performance of the obligations under the contract until the squatters were duly evicted, as
contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance indefinite.
Yet, the circumstances admit no other reasonable view; and this very indefiniteness is what explains
why the agreement did not specify any exact periods or dates of performance.
It follows that there is no justification in law for the setting of the date of performance at any other time
than that of the eviction of the squatters occupying the land in question; and in not so holding, both the
trial Court and the Court of Appeals committed reversible error. It is not denied that the case against
one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in this case
was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the
obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on
affected areas are finally evicted therefrom.
Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.
||| (Gregorio Araneta, Inc. v. Philippine Sugar Estates Development Co., Ltd., G.R. No. L-22558, [May
31, 1967], 126 PHIL 678-685)
 [G.R. No. 119729. January 21, 1997.]
ACE-AGRO DEVELOPMENT CORPORATION,  petitioner, vs. COURT OF
APPEALS and COSMOS BOTTLING CORPORATION,  respondents.
Jimeno, Jalandoni, Cope, and Associates Law Offices  for petitioners.
Mariano V .  Ampil, Jr.  for private respondent.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF OBLIGATION; FORCE
MAJEURE IN CASE AT BAR, NOT VALID CAUSE FOR TERMINATION OF CONTRACT, BUT ONLY
FOR ITS SUSPENSION. — Article 1231 of the New Civil Code on extinguishment of obligations does
not specifically mention unilateral termination as a mode of extinguishment of obligation but, according
to Tolentino, "there are other causes of extinguishment of obligations which are not expressly provided
for in this chapter" (Tolentino, Civil Code of the Phils., Vol. IV, 1986 ed., p. 273). He further said: But in
some contracts either because of its indeterminate duration or because of the nature of the prestation
which is its object, one of the parties may free himself from the contractual tie by his own will. (Unilateral
extinguishment) . . . Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen
event and that the same even burned practically all the soft drink bottles and wooden shells — which
are the objects of the agreement. But the story did not end there. It is true that defendant-appellant still
had other bottles that needed cleaning and wooden shells that needed repairing (pp. 110-111,
orig. rec.);therefore the suspension of the work of the plaintiff-appellee brought about by the fire is, at
best, temporary as found by the trial court. The court thus rejects private respondent's claim that, as a
result of the fire, the obligation of contract must be deemed to have been extinguished. Cdpr
2. ID.; ID.; SUSPENSION OF CONTRACT BROUGHT BY FORCE MAJEURE, DOES NOT JUSTIFY
AN EXTENSION OF THE TERM THEREOF. — As the appellate court correctly ruled, the suspension of
work under the contract was brought about by force majeure. Therefore, the period during which work
was suspended did not justify an extension of the term of the contract. For the fact is that the contract
was subject to a resolutory period which relieved the parties of their respective obligations but did not
stop the running of the period of their contract.
DECISION
MENDOZA,  J p:
This case originated in a complaint for damages for breach of contract which petitioner filed against
private respondent. From the decision of the Regional Trial Court, Branch 72, Malabon, Metro Manila,
finding private respondent guilty of breach of contract and ordering it to pay damages, private
respondent appealed to the Court of Appeals which reversed the trial court's decision and dismissed the
complaint for lack of merit. Petitioner in turn moved for a reconsideration, but its motion was denied.
Hence, this petition for review on certiorari.
The facts are as follows:
Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling Corporation are
corporations duly organized and existing under Philippine laws. Private respondent Cosmos Bottling
Corp. is engaged in the manufacture of soft drinks. Since 1979 petitioner Ace-Agro Development Corp.
(Ace-Agro) had been cleaning soft drink bottles and repairing wooden shells for Cosmos, rendering its
services within the company premises in San Fernando, Pampanga. The parties entered into service
contracts which they renewed every year. On January 18, 1990, they signed a contract covering the
period January 1, 1990 to December 31, 1990. Private respondent had earlier contracted the services
of Aren Enterprises in view of the fact that petitioner could handle only from 2,000 to 2,500 cases a day
and could not cope with private respondent's daily production of 8,000 cases. Unlike petitioner, Aren
Enterprises rendered service outside private respondent's plant. cdtai
On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places, the area
where petitioner did its work. As a result, petitioner's work was stopped.
On May 15, 1990, petitioner asked private respondent to allow it to resume its service, but petitioner
was advised that on account of the fire, which had "practically burned all . . . old soft drink bottles and
wooden shells," private respondent was terminating their contract.
Petitioner expressed surprise at the termination of the contract and requested private respondent, on
June 13, 1990, to reconsider its decision and allow petitioner to resume its work in order to "cushion the
sudden impact of the unemployment of many of [its] workers." As it received no reply from private
respondent, petitioner, on June 20, 1990, informed its employees of the termination of their
employment. Petitioner's memorandum 1 read:
MEMORANDUM TO: All Workers/Union Members
THRU : Mr. Angelito B. Catalan
 Local Chapter President
 Bisig Manggagawa sa Ace Agro-NAFLU
This is to inform you that the Cosmos Bottling Corp. has sent a letter to Ace Agro-
Development Corp. terminating our contract with them.
However, we are still doing, what we can to save our contract and resume our
operations, though this might take some time.
We will notify you whatever would be the outcome of our negotiation with them in
due time.
Truly yours,
ACE AGRO-DEVELOPMENT CORP.
(Sgd.) ANTONIO L. ARQUIZA
Manager
This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against petitioner
and private respondent.
On July 17, 1990, petitioner sent another letter to private respondent, reiterating its request for
reconsideration. Its letter 2 read:
 COSMOS BOTTLING CORPORATION Here is looking forward to doing business with you at the earliest possible time.
San Isidro, MacArthur Highway (Sgd.) DANILO M. DE CASTRO
San Fernando, Pampanga Plant General Manager
  Petitioner refused the offer, claiming that to do its work outside the company's premises would make it
(petitioner) incur additional costs for transportation which "will eat up the meager profits that [it] realizes
Attention: Mr. Norman P.  Uy from its original contract with Cosmos." In subsequent meetings with Danilo M. de Castro, Butch Ceña
and Norman Uy of Cosmos, petitioner's manager, Antonio I. Arquiza, asked for an extension of the term
General Services Manager of the contract in view of the suspension of work. But its request was apparently turned down.
Gentlemen: On November 7, 1990, private respondent advised petitioner that the latter could then resume its work
In our letter to you dated June 13, 1990 seeking your kind reconsideration of your inside the plant in accordance with its original contract with Cosmos. Private respondent's
sudden drastic decision to terminate our mutually beneficial contract of long letter 4 stated:
standing, it is more than a month now but our office has not received a reply from MR. ANTONIO I. ARQUIZA
you.
General Manager
Our workers, who have been anxiously waiting for the resumption of the operations
and who are the ones most affected by your sudden decision, are now becoming Ace-Agro Development Corporation
restless due to the financial difficulties they are now suffering.
165 J. P. Bautista St., Malabon
We are, therefore, again seeking for the reconsideration of your decision to help
alleviate the sufferings of the displaced workers, which we also have to consider for Metro Manila
humanitarian reason. Dear Mr. Arquiza:
Yours very truly, This is to officially inform you that you can now resume the repair of wooden shells
inside the plant according to your existing contract with the Company.
ACE AGRO-DEVELOPMENT CORP.
Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in the Plant.
(Sgd.) ANTONIO I. ARQUIZA
Very truly yours,
Manager
In response, private respondent advised petitioner on August 28, 1990 that the latter could resume the COSMOS BOTTLING CORPORATION
repair of wooden shells under terms similar to those contained in its contract but work had to be done
(Sgd.) MICHAEL M. ALBINO
outside the company premises. Private respondent's letter 3 read:
VP-Luzon/Plant General Manager
MR. ANTONIO I. ARQUIZA
On November 17, 1990, petitioner rejected private respondent's offer, this time, citing the fact that there
Manager was a pending labor case. Its letter 5 to private respondent stated:
ACE-AGRO DEVELOPMENT CORPORATION Mr. Michael M. Albino
165 J.P. Bautista Street VP-Luzon/Plant General Manager
Malabon, Metro Manila Cosmos Bottling Corporation
Dear Mr. Arquiza:
San Fernando, Pampanga
We are pleased to inform you that COSMOS BOTTLING CORPORATION, San Dear Mr. Albino,
Fernando Plant is again accepting job-out contract for the repair of our wooden
shells. This is in connection with your letter dated November 7, 1990 regarding the
resumption of the repair of your wooden shells inside San Fernando, Pampanga
Work shall be done outside the premises of the plant and under similar terms you Plant according to the existing contract with your company.
previously had with the company. We intend to give you priority so please see or
contact me at my office soonest for the particulars regarding the job.
 At present, there is a pending case before the Department of Labor and
Employment in San Fernando, Pampanga which was a result of the premature
termination of the said existing contract with your company. In view of that, we find
it proper for us to work for the resolution of the said pending case and include in the
Compromise Agreement the matter of the resumption of the repair of wooden shells
in your San Fernando, Pampanga Plant.
Thank you very much.
Very truly yours,
ACE AGRO-DEVELOPMENT CORP.
(Sgd.) ANTONIO I. ARQUIZA
Manager
On January 3, 1991, petitioner brought this case against private respondent for breach of contract and
damages in the Regional Trial Court of Malabon. It complained that the termination of its service
contract was illegal and arbitrary and that, as a result, it stood to lose profits and to be held liable to its
employees for backwages, damages and/or separation pay.
 
On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable for the claims
of its employees. Petitioner was ordered to reinstate the employees and pay them backwages.
However, private respondent Cosmos was absolved from the employees' claims on the ground that
there was no privity of contract between them and private respondent.
On the other hand, in its decision rendered on November 21, 1991, the RTC found private respondent
guilty of breach of contract and ordered it to pay damages to petitioner. Petitioner's claim for
reimbursement for what it had paid to its employees in the labor case was denied. The dispositive
portion of the trial court's decision read:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
plaintiff Ace-Agro Development Corporation and against defendant Cosmos
Bottling Corporation, ordering, the latter to pay to the former the following:
a) The amount of P1,008,418.01 as actual damages;
b) P100,000.00 as corrective or exemplary damages;
c) The amount of P50,000.00 as and for attorney's fees; and
d) Costs and expenses of litigation.
Defendant's counterclaims are dismissed.
SO ORDERED.
Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed the trial
court's decision and dismissed petitioner's complaint. The appellate court found that it was petitioner
which had refused to resume work, after failing to secure an extension of its contract. Petitioner now
seeks a review of the Court of Appeals' decision.
First. Petitioner claims that the appellate court erred "in ruling that respondent was justified in
unilaterally terminating the contract on account of a force majeure." Quite possibly it did not understand
the appellate court's decision. or it would not be contending that there was no valid cause for the
termination of the contract but only for its suspension. The following is what the appellate court said: 6
Article 1231 of the New Civil Code on extinguishment of obligations does not
specifically mention unilateral termination as a mode of extinguishment of obligation
but, according to Tolentino, "there are other causes of extinguishment of obligations
which are not expressly provided for in this chapter" (Tolentino, Civil Code of the
Phils., Vol. IV, 1986 ed., p. 273). He further said:
But in some contracts, either because of its indeterminate duration or
because of the nature of the prestation which is its object, one of the
parties may free himself from the contractual tie by his own will (unilateral
extinguishment); . . . (p. 274-275, Ibid)
And that was just what defendant-appellant did when it unilaterally terminated the
agreement it had with plaintiff-appellee by sending, the May 23, 1990 letter. As per
its letter, the reason given by defendant-appellant for unilaterally terminating, the
agreement was because the April 25, 1990 fire practically burned all of the softdrink
bottles and wooden shells which plaintiff-appellee was working on under the
agreement. What defendant-appellant was trying to say was that the prestation or
the object of their agreement had been lost and destroyed in the above-described
fire.  Apparently, the defendant-appellant would like this situation to fall within what
— according to Tolentino — would be:
. . . (O)bligations may be extinguished by the happening of unforeseen
events, under whose influence the obligation would never have been
contracted, because in such cases, the very basis upon which the
existence of the obligation is founded would be wanting.
Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen
event and that the same even burned practically all the softdrink bottles and
wooden shells — which are the objects of the agreement. But the story did not end
there.
It is true that defendant-appellant still had other bottles that needed cleaning and
wooden shells that needed repairing (pp.  110-111, orig.  rec.); therefore the
suspension of the work of the plaintiff-appellee brought about by the fire is at best
temporary as found by the trial court. Hence, plaintiff-appellee's letters of
reconsideration of the termination of the agreement addressed to defendant-
appellant dated June 13, 1990 and July 17, 1990.
It is obvious that what petitioner thought was the appellate court's ruling is merely its summary of private
respondent's allegations. Precisely the appellate court does not agree with private respondent, that is
why, in the last paragraph of the above excerpt, the court says that there was no cause for terminating
the contract but at most a "temporary suspension of work." The court thus rejects private respondent's
claim that, as a result of the fire, the obligation of contract must be deemed to have been extinguished.
Nonetheless, the Court of Appeals found that private respondent had reconsidered its decision to
terminate the contract and tried to accommodate the request of petitioner, first, by notifying petitioner on
August 28, 1990 that it could resume work provided that this was done outside the premises and, later,
on November 7, 1990, by notifying petitioner that it could then work in its premises, under the terms of
their contract. However, petitioner unjustifiably refused the offer because it wanted an extension of the
contract to make up for the period of inactivity. As the Court of Appeals said in its decision: 7
It took defendant-appellant time to make a reply to plaintiff-appellee's letters. But
when it did on August 28, 1990, it granted plaintiff-appellee priority to resume its
work under the terms of their agreement (but outside its premises), and the plaintiff-
appellee refused the same on the ground that working outside the defendant-
appellant's San Fernando Plant would mean added transportation costs that would
offset any profit it would earn.
The appellee was without legal ground to refuse resumption of work as offered by
the appellant, under the terms of their above agreement It could not legally insist on
staying inside property it did not own, nor was under lease to it. . . . In its refusal to
resume its work because of the additional transportation costs to be brought about
by working outside the appellant's San Fernando plant, the appellee could be held
liable for damages for breach of contract.
Thereafter, appellant sent its November 7, 1990 letter to appellee, this time
specifically stating that plaintiff-appellee can now resume work in accordance with
their existing agreement. This time, it could not be denied that by the tenor of the
letter, appellant was willing to honor its agreement with appellee, that it had finally
made a reconsideration of appellee's plea to resume work under the contract. But
again, plaintiff-appellee refused this offer to resume work.
Why did the appellee refuse to resume work? Its November 17, 1990 letter stated
that it had something to do with the settlement of the NLRC case filed against it by
its employees. But that was not the real reason. In his cross-examination, the
witness for appellee stated that its real reason for refusing to resume work with the
appellant was — as in its previous refusal — because it wanted an extension of the
period or duration of the contract beyond December 31, 1991, to cover the period
within which it was unable to work.
The agreement between the appellee and the appellant is with a resolutory period,
beginning from January 1, 1990 and ending on December 31, 1990. When the fire
broke out on April 25, 1990, there resulted a suspension of the appellee's work as
per agreement. But this suspension of work due to  force majeure did not merit an
automatic extension of the period of the agreement between them According, to
Tolentino:
The stipulation that in the event of a fortuitous event or force majeure the
contract shall be deemed suspended during the said period does not
mean that the happening of any of those went stops the running of the
period the contract has been agreed upon to run. It only relieves the
parties from the fulfillment of their respective obligations during that time. If
during six of the thirty years fixed as the duration of a contract, one of the
parties is prevented by force majeure to perform his obligation during
those years, he cannot after the expiration of the thirty-year period, be
compelled to perform his obligation for six more years to make up for at he
failed to perform during the said six years, because it would in effect be all
extension of the term of the contract. The contract is stipulated to run for
thirty years. and the period expires on the thirtieth year; the period of six
years during which performance by one of the parties is prevented by
force majeure cannot be deducted from the period stipulated.
In fine, the appellant withdrew its unilateral termination of its agreement with
appellee in its letter dated November 7, 1990. But the appellee's refusal to resume
work was, in effect, a unilateral termination of the parties' agreement — an act that
was without basis. When the appellee asked for an extension of the period of the
contract beyond December 31, 1990 it was, in effect, asking for a new contract
which needed the consent of defendant-appellant. The appellee might be forgiven
for its first refusal (pertaining to defendant-appellant's August 28, 1990 letter), but
the second refusal must be construed as a breach of contract by plaintiff-appellee. .
..
The Court of Appeals was right that petitioner had no basis for refusing private respondent's offer unless
petitioner was allowed to carry out its work in the company premises. That petitioner would incur
additional cost for transportation was not a good reason for its refusal. Petitioner has not shown that on
August 28, 1990, when it was notified of the private respondent's offer, the latter's premises had so far
been restored so as to permit petitioner to resume work there. In fact, even when petitioner was finally
allowed to resume work within the plant, it was not in the former work place but in a new one, which
shows that private respondent's reason for not granting petitioner's request was not just a pretext.
 
Nor was petitioner justified in refusing to resume work on November 7 when it was again notified by
petitioner to work. Although it cited the pending labor case as reason for turning down private
respondent's offer, it would appear that the real reason for petitioner's refusal was the fact that the term
of the contract was expiring in two months and its request for an extension was not granted. But, as the
appellate court correctly ruled, the suspension of work under the contract was brought about by force
majeure. Therefore, the period during which work was suspended did not justify an extension of the
term of the contract. 8 For the fact is that the contract was subject to a resolutory period which relieved
the parties of their respective obligations but did not stop the running of the period of their contract.
The truth of the matter is that while private respondent had made efforts towards accommodation,
petitioner was unwilling to make adjustments as it insisted that it "cannot profitably resume operation
under the same terms and conditions [of] the terminated contract but with an outside work venue [as]
transportation costs alone will eat up the meager profit that Ace-Agro realizes from its original
contract." 9 While this so-called "job-out offer of private respondent had the effect of varying the terms
of the contract in the sense that it could increase its cost, what petitioner did not seem to realize was
that the change was brought about by circumstances not of private respondent's making.
Again when private respondent finally advised petitioner on November 7, 1990 to work under the strict
terms of its contract and inside the plant, petitioner thought only of its interest by insisting that the
contract be extended. Petitioner's manager, Antonio I. Arquiza, testified that he tried to secure a term
extension for his company but his request was turned down because the management of private
respondent wanted a new contract after the expiration of the contract on December 31, 1990. Arquiza
testified: 10
A [Butch Ceña] told me that Cosmos is agreeable to allow us to resume our
operation and when I inquired about the extension of the contract he told
me that I better refer the matter to Mr. Norman Uy.
Q Did you see Mr. Norman Uy?
A Yes, sir, when I went to see Mr. Norman Uy he asked me why I was there and he
told me why I did not start operation I told him that what we are expecting
that Mr. Ceña would give me the formal letter regarding the resumption of
the operation and honoring of contract and he said that our price was so
high and if we are willing to use said contract and when I said yes he told
me that we will just send you a letter considering that another contractor
 repairing our damaged shells and cleaning of dirty bottles. When I asked ||| 
him that does that mean that the meeting I had with Mr. Ceña, he told me
that was null and void and he told me that Mr. Ceña want a new contract.
As already stated, because the suspension of work was due to force majeure, there was no justification
for petitioner's demand for an extension of the terms of the contract. Private respondent was justified in
insisting that after the expiration of the contract, the parties must negotiate a new one as they had done
every year since the start of their business relations in 1979.
Second. Petitioner slams the Court of Appeals for ruling that "it was [petitioner's] unjustified refusal
which finally terminated the contract between the parties." This contention is likewise without merit.
Petitioner may not be responsible for the termination of the contract, but neither is private respondent,
since the question in this case is whether private respondent is guilty of breach of contract. The trial
court held that private respondent committed a breach of contract because, even as its August 28, 1990
letter allowed petitioner to resume work, private respondent's offer was limited to the repairs of wooden
shells and this had to be done outside the company's premises. On the other hand, the final offer made
on November 7, 1990, while allowing the "repair of wooden shells [to be done] inside the plant
according to your contract with the company," was still limited to the repair of the wooden shells, when
the fact was that the parties' contract was both for the repair of wooden crates and for the cleaning of
soft drink bottles.
But this was not the petitioner's complaint. There was never an issue whether the company's offer
included the cleaning of bottles. Both parties understood private respondent's offer as including the
cleaning of empty soft drink bottles and the repair of the wooden crates. Rather, the discussions
between petitioner and private respondent's representatives focused first, on the insistence of petitioner
that it be allowed to work inside the company plant and, later, on its request for the extension of the life
of the contract.
Petitioner claims that private respondent had a reason to want to terminate the contract and that was to
give the business to Aren Enterprises, as the latter offered its services at a much lower rate than
petitioner. Aren Enterprises' rate was P2.50 per shell while petitioner's rates were P4.00 and P6.00 per
shell for ordinary and super sized bottles, respectively. 11
The contention has no basis in fact. The contract between private respondent and Aren Enterprises had
been made on March 29, 1990 — before the fire broke out. The contract between petitioner and private
respondent did not prohibit the hiring by private respondent of another service contractor. With private
respondent hitting production at 8,000 bottles of soft drinks per day, petitioner could clearly not handle
the business, since it could clean only 2,500 bottles a day. 12 These facts show that although Aren
Enterprises' rate was lower than petitioner's, they did not affect private respondent's business relation
with petitioner. Despite private respondent's contract with Aren Enterprises, private respondent
continued doing business with petitioner and would probably have done so were it not for the fire. On
the other hand, Aren Enterprises could not be begrudged for being allowed to continue rendering
service even after the fire because it was doing its work outside private respondent's plant. For that
matter, after the fire, private respondent on August 28, 1990 offered to let petitioner resume its service
provided this was done outside the plant. cda
Petitioner may not be to blame for the failure to resume work after the fire, but neither is private
respondent. Since the question is whether private respondent is guilty of breach of contract, the fact that
private respondent is blameless can only lead to the conclusion that the appealed decision is correct.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.