UNIVERSAL FOOD CORPORATION, petitioner, permanent chief chemist of the corporation as he is expansion of the business, in

vs.
THE COURT OF APPEALS, MAGDALO V.
FRANCISCO, SR., and VICTORIANO N.
FRANCISCO, respondents.
Wigberto E. Tañada for petitioner.
Teofilo Mendoza for respondents.
CASTRO, J.:
Petition for certiorari by the Universal Food
Corporation against the decision of the Court of
Appeals of February 13, 1968 in CA-G.R. 31430-R
(Magdalo V. Francisco, Sr. and Victoriano V.
Francisco, plaintiffs-appellants vs. Universal Food
Corporation, defendant-appellee), the dispositive
portion of which reads as follows: "WHEREFORE the
appealed decision is hereby reversed; the BILL OF
ASSIGNMENT marked Exhibit A is hereby rescinded,
and defendant is hereby ordered to return to plaintiff
Magdalo V. Francisco, Sr., his Mafran sauce
trademark and formula subject-matter of Exhibit A,
and to pay him his monthly salary of P300.00 from
December 1, 1960, until the return to him of said
trademark and formula, plus attorney's fees in the
amount of P500.00, with costs against defendant."1
On February 14, 1961 Magdalo V. Francisco, Sr. and
Victoriano V. Francisco filed with the Court of First
Instance of Manila, against, the Universal Food
Corporation, an action for rescission of a contract
entitled "Bill of Assignment." The plaintiffs prayed the
court to adjudge the defendant as without any right to
the use of the Mafran trademark and formula, and
order the latter to restore to them the said right of
user; to order the defendant to pay Magdalo V.
Francisco, Sr. his unpaid salary from December 1,
1960, as well as damages in the sum of P40,000, and
to pay the costs of suit.1
On February 28, the defendant filed its answer
containing admissions and denials. Paragraph 3
thereof "admits the allegations contained in paragraph
3 of plaintiffs' complaint." The answer further alleged
that the defendant had complied with all the terms
and conditions of the Bill of Assignment and,
consequently, the plaintiffs are not entitled to
rescission thereof; that the plaintiff Magdalo V.
Francisco, Sr. was not dismissed from the service as
still its chief chemist; and, by way of special defenses,
that the aforesaid plaintiff is estopped from
questioning 1) the contents and due execution of the
Bill of Assignment, 2) the corporate acts of the
petitioner, particularly the resolution adopted by its
board of directors at the special meeting held on
October 14, 1960, to suspend operations to avoid
further losses due to increase in the prices of raw
materials, since the same plaintiff was present when
that resolution was adopted and even took part in the
consideration thereof, 3) the actuations of its
president and general manager in enforcing and
implementing the said resolution, 4) the fact that the
same plaintiff was negligent in the performance of his
duties as chief chemist of the corporation, and 5) the
further fact that the said plaintiff was delinquent in the
payment of his subscribed shares of stock with the
corporation. The defendant corporation prayed for the
dismissal of the complaint, and asked for P750 as
attorney's fees and P5,000 in exemplary or corrective
damages.
On June 25, 1962 the lower court dismissed the
plaintiffs' complaint as well as the defendant's claim
for damages and attorney's fees, with costs against
the former, who promptly appealed to the Court of
Appeals. On February 13, 1969 the appellate court
rendered the judgment now the subject of the present
recourse.
The Court of Appeals arrived at the following
"uncontroverted" findings of fact:
That as far back as 1938, plaintiff
Magdalo V. Francisco, Sr.
discovered or invented a formula
for the manufacture of a food
seasoning (sauce) derived from
banana fruits popularly known as
MAFRAN sauce; that the
manufacture of this product was
used in commercial scale in
1942, and in the same year
plaintiff registered his trademark
in his name as owner and
inventor with the Bureau of
Patents; that due to lack of
sufficient capital to finance the
1960, said plaintiff secured the
financial assistance of Tirso T.
Reyes who, after a series of
negotiations, formed with others
defendant Universal Food
Corporation eventually leading to
the execution on May 11, 1960 of
the aforequoted "Bill of
Assignment" (Exhibit A or 1).
Conformably with the terms and
conditions of Exh. A, plaintiff
Magdalo V. Francisco, Sr. was
appointed Chief Chemist with a
salary of P300.00 a month, and
plaintiff Victoriano V. Francisco
was appointed auditor and
superintendent with a salary of
P250.00 a month. Since the start
of the operation of defendant
corporation, plaintiff Magdalo V.
Francisco, Sr., when preparing
the secret materials inside the
laboratory, never allowed
anyone, not even his own son, or
the President and General
Manager Tirso T. Reyes, of
defendant, to enter the laboratory
in order to keep the formula
secret to himself. However, said
plaintiff expressed a willingness
to give the formula to defendant
provided that the same should be
placed or kept inside a safe to be
opened only when he is already
incapacitated to perform his
duties as Chief Chemist, but
defendant never acquired a safe
for that purpose. On July 26,
1960, President and General
Manager Tirso T. Reyes wrote
plaintiff requesting him to permit
one or two members of his family
to observe the preparation of the
'Mafran Sauce' (Exhibit C), but
said request was denied by
plaintiff. In spite of such denial,
Tirso T. Reyes did not compel or
force plaintiff to accede to said
request. Thereafter, however,
due to the alleged scarcity and
high prices of raw materials, on
November 28, 1960, Secretary-
Treasurer Ciriaco L. de Guzman
of defendant issued a
Memorandum (Exhibit B), duly
approved by the President and
General Manager Tirso T. Reyes
that only Supervisor Ricardo
Francisco should be retained in
the factory and that the salary of
plaintiff Magdalo V. Francisco,
Sr., should be stopped for the
time being until the corporation
should resume its operation.
Some five (5) days later, that is,
on December 3, 1960, President
and General Manager Tirso T.
Reyes, issued a memorandom to
Victoriano Francisco ordering him
to report to the factory and
produce "Mafran Sauce" at the
rate of not less than 100 cases a
day so as to cope with the orders
of the corporation's various
distributors and dealers, and with
instructions to take only the
necessary daily employees
without employing permanent
employees (Exhibit B). Again, on
December 6, 1961, another
memorandum was issued by the
same President and General
Manager instructing the Assistant
Chief Chemist Ricardo Francisco,
to recall all daily employees who
are connected in the production
of Mafran Sauce and also some
additional daily employees for the
production of Porky Pops (Exhibit
B-1). On December 29, 1960,
another memorandum was
issued by the President and
General Manager instructing
Ricardo Francisco, as Chief
Chemist, and Porfirio Zarraga, as
Acting Superintendent, to
produce Mafran Sauce and Porky
Pops in full swing starting
January 2, 1961 with further
instructions to hire daily laborers
in order to cope with the full blast
protection (Exhibit S-2). Plaintiff
Magdalo V. Francisco, Sr.
received his salary as Chief
Chemist in the amount of
P300.00 a month only until his
services were terminated on
November 30, 1960. On January
9 and 16, 1961, defendant, acting
thru its President and General
Manager, authorized Porfirio
Zarraga and Paula de Bacula to
look for a buyer of the corporation
including its trademarks, formula
and assets at a price of not less
than P300,000.00 (Exhibits D and
D-1). Due to these successive
memoranda, without plaintiff
Magdalo V. Francisco, Sr. being
recalled back to work, the latter
filed the present action on
February 14, 1961. About a
month afterwards, in a letter
dated March 20, 1961,
defendant, thru its President and
General Manager, requested said
plaintiff to report for duty (Exhibit
3), but the latter declined the
request because the present
action was already filed in court
(Exhibit J).
1. The petitioner's first contention is that the
respondents are not entitled to rescission. It is argued
that under article 1191 of the new Civil Code, the right
to rescind a reciprocal obligation is not absolute and
can be demanded only if one is ready, willing and
able to comply with his own obligation and the other is
not; that under article 1169 of the same Code, in
reciprocal obligations, neither party incurs in delay if
the other does not comply or is not ready to comply in
a proper manner with what is incumbent upon him;
that in this case the trial court found that the
respondents not only have failed to show that the
petitioner has been guilty of default in performing its
contractual obligations, "but the record sufficiently
reveals the fact that it was the plaintiff Magdalo V.
Francisco who had been remiss in the compliance of
his contractual obligation to cede and transfer to the
defendant the formula for Mafran sauce;" that even
the respondent Court of Appeals found that as
"observed by the lower court, 'the record is replete
with the various attempt made by the defendant
(herein petitioner) to secure the said formula from
Magdalo V. Francisco to no avail; and that upon the
foregoing findings, the respondent Court of Appeals
unjustly concluded that the private respondents are
entitled to rescind the Bill of Assignment.
The threshold question is whether by virtue of the
terms of the Bill of Assignment the respondent
Magdalo V. Francisco, Sr. ceded and transferred to
the petitioner corporation the formula for Mafran
sauce.2
The Bill of Assignment sets forth the following terms
and conditions:
THAT the Party of the First Part
[Magdalo V. Francisco, Sr.] is the
sole and exclusive owner of the
MAFRAN trade-mark and the
formula for MAFRAN SAUCE;
THAT for and in consideration of
the royalty of TWO (2%) PER
CENTUM of the net annual profit
which the PARTY OF THE
Second Part [Universal Food
Corporation] may realize by
and/or out of its production of
MAFRAN SAUCE and other food
products and from other business
which the Party of the Second
Part may engage in as defined in
its Articles of Incorporation, and
which its Board of Directors shall
determine and declare, said Party
of the First Part hereby assign,
transfer, and convey all its
property rights and interest over
said Mafran trademark and
formula for MAFRAN SAUCE
unto the Party of the Second
Part;
THAT the payment for the royalty
of TWO (2%) PER CENTUM of
the annual net profit which the
Party of the Second Part
obligates itself to pay unto the
Party of the First Part as founder
and as owner of the MAFRAN
trademark and formula for
MAFRAN SAUCE, shall be paid
at every end of the Fiscal Year
after the proper accounting and
inventories has been undertaken
by the Party of the Second Part
and after a competent auditor
designated by the Board of
Directors shall have duly
examined and audited its books
of accounts and shall have
certified as to the correctness of
its Financial Statement;
THAT it is hereby understood that
the Party of the First Part, to
improve the quality of the
products of the Party of the First
Part and to increase its
production, shall endeavor or
undertake such research, study,
experiments and testing, to invent
or cause to invent additional
formula or formulas, the property
rights and interest thereon shall
likewise be assigned, transferred,
and conveyed unto the Party of
the Second Part in consideration
of the foregoing premises,
covenants and stipulations:
THAT in the operation and
management of the Party of the
First Part, the Party of the First
Part shall be entitled to the
following Participation:
(a) THAT Dr. MAGDALO V.
FRANCISCO shall be appointed
Second Vice-President and Chief
Chemist of the Party of the
Second Part, which appointments
are permanent in character and
Mr. VICTORIANO V.
FRANCISCO shall be appointed
Auditor thereof and in the event
that the Treasurer or any officer
who may have the custody of the
funds, assets and other
properties of the Party of the
Second Part comes from the
Party of the First Part, then the
Auditor shall not be appointed
from the latter; furthermore
should the Auditor be appointed
from the Party representing the
majority shares of the Party of the
Second Part, then the Treasurer
shall be appointed from the Party
of the First Part;
(b) THAT in case of death or
other disabilities they should
become incapacitated to
discharge the duties of their
respective position, then, their
shares or assigns and who may
have necessary qualifications
shall be preferred to succeed
them;
(c) That the Party of the First Part
shall always be entitled to at least
two (2) membership in the Board
of Directors of the Party of the
Second Part;
(d) THAT in the manufacture of
MAFRAN SAUCE and other food
products by the Party of the
Second Part, the Chief Chemist
shall have and shall exercise
absolute control and supervision
over the laboratory assistants
and personnel and in the
purchase and safekeeping of the
Chemicals and other mixtures
used in the preparation of said
products;
THAT this assignment, transfer
and conveyance is absolute and
irrevocable in no case shall the
PARTY OF THE First Part ask,
demand or sue for the surrender
of its rights and interest over said
MAFRAN trademark and mafran
formula, except when a
dissolution of the Party of the
Second Part, voluntary or
otherwise, eventually arises, in
which case then the property
rights and interests over said
trademark and formula shall
automatically revert the Party of
the First Part.
Certain provisions of the Bill of Assignment would
seem to support the petitioner's position that the
respondent patentee, Magdalo V. Francisco, Sr.
ceded and transferred to the petitioner corporation the
formula for Mafran sauce. Thus, the last part of the
second paragraph recites that the respondent
patentee "assign, transfer and convey all its property
rights and interest over said Mafran trademark and
formula for MAFRAN SAUCE unto the Party of the
Second Part," and the last paragraph states that such
"assignment, transfer and conveyance is absolute and
irrevocable (and) in no case shall the PARTY OF THE
First Part ask, demand or sue for the surrender of its
rights and interest over said MAFRAN trademark and
mafran formula."
However, a perceptive analysis of the entire
instrument and the language employed therein3 would
lead one to the conclusion that what
was actually ceded and transferred was only
the use of the Mafran sauce formula. This was the
precise intention of the parties,4 as we shall presently
show.
Firstly, one of the principal considerations of the Bill of
Assignment is the payment of "royalty of TWO (2%)
PER CENTUM of the net annual profit" which the
petitioner corporation may realize by and/or out of its
production of Mafran sauce and other food products,
etc. The word "royalty," when employed in connection
with a license under a patent, means the
compensation paid for the use of a patented
invention.
'Royalty,' when used in
connection with a license under a
patent, means the compensation
paid by the licensee to the
licensor for the use of the
licensor's patented invention."
(Hazeltine Corporation vs. Zenith
Radio Corporation, 100 F. 2d 10,
16.)5
Secondly, in order to preserve the secrecy of the
Mafran formula and to prevent its unauthorized
proliferation, it is provided in paragraph 5-(a) of the
Bill that the respondent patentee was to be appointed
"chief chemist ... permanent in character," and that in
case of his "death or other disabilities," then his "heirs
or assigns who may have necessary qualifications
shall be preferred to succeed" him as such chief
chemist. It is further provided in paragraph 5-(d) that
the same respondent shall have and shall exercise
absolute control and supervision over the laboratory
assistants and personnel and over the purchase and
safekeeping of the chemicals and other mixtures used
in the preparation of the said product. All these
provisions of the Bill of Assignment clearly show that
the intention of the respondent patentee at the time of
its execution was to part, not with the formula for
Mafran sauce, but only its use, to preserve the
monopoly and to effectively prohibit anyone from
availing of the invention.6
Thirdly, pursuant to the last paragraph of the Bill,
should dissolution of the Petitioner corporation
eventually take place, "the property rights and
interests over said trademark and formula shall
automatically revert to the respondent patentee. This
must be so, because there could be no reversion of
the trademark and formula in this case, if, as
contended by the petitioner, the respondent patentee
assigned, ceded and transferred the trademark and
formula — and not merely the right to use it — for
then such assignment passes the property in such
patent right to the petitioner corporation to which it is
ceded, which, on the corporation becoming insolvent,
will become part of the property in the hands of the
receiver thereof.7
Fourthly, it is alleged in paragraph 3 of the
respondents' complaint that what was ceded and
transferred by virtue of the Bill of Assignment is the
"use of the formula" (and not the formula itself). This
incontrovertible fact is admitted without equivocation
in paragraph 3 of the petitioner's answer. Hence, it
does "not require proof and cannot be
contradicted."8 The last part of paragraph 3 of the
complaint and paragraph 3 of the answer are
reproduced below for ready reference:
3. — ... and due to these
privileges, the plaintiff in return
assigned to said corporation his
interest and rights over the said
trademark and formula so that
the defendant corporation could
use the formula in the preparation
and manufacture of the mafran
sauce, and the trade name for
the marketing of said project, as
appearing in said contract ....
3. — Defendant admits the
allegations contained in
paragraph 3 of plaintiff's
complaint.
Fifthly, the facts of the case compellingly demonstrate
continued possession of the Mafran sauce formula by
the respondent patentee.
Finally, our conclusion is fortified by the admonition of
the Civil Code that a conveyance should be
interpreted to effect "the least transmission of
right,"9 and is there a better example of least
transmission of rights than allowing or permitting only
the use, without transfer of ownership, of the formula
for Mafran sauce.
The foregoing reasons support the conclusion of the
Court of Appeals 10 that what was actually ceded and
transferred by the respondent patentee Magdalo V.
Francisco, Sr. in favor of the petitioner corporation
was only the use of the formula. Properly speaking,
the Bill of Assignment vested in the petitioner
corporation no title to the formula. Without basis,
therefore, is the observation of the lower court that the
respondent patentee "had been remiss in the
compliance of his contractual obligation to cede and
transfer to the defendant the formula for Mafran
sauce."
2. The next fundamental question for resolution is
whether the respondent Magdalo V. Francisco, Sr.
was dismissed from his position as chief chemist of
the corporation without justifiable cause, and in
violation of paragraph 5-(a) of the Bill of Assignment
which in part provides that his appointment is
"permanent in character."
The petitioner submits that there is nothing in the
successive memoranda issued by the corporate
officers of the petitioner, marked exhibits B, B-1 and
B-2, from which can be implied that the respondent
patentee was being dismissed from his position as
chief chemist of the corporation. The fact, continues
the petitioner, is that at a special meeting of the board
of directors of the corporation held on October 14,
1960, when the board decided to suspend operations
of the factory for two to four months and to retain only
a skeletal force to avoid further losses, the two private
respondents were present, and the respondent
patentee was even designated as the acting
superintendent, and assigned the mission of
explaining to the personnel of the factory why the
corporation was stopping operations temporarily and
laying off personnel. The petitioner further submits
that exhibit B indicates that the salary of the
respondent patentee would not be paid only during
the time that the petitioner corporation was idle, and
that he could draw his salary as soon as the
corporation resumed operations. The clear import of
this exhibit was allegedly entirely disregarded by the
respondent Court of Appeals, which concluded that
since the petitioner resumed partial production of
Mafran sauce without notifying the said respondent
formally, the latter had been dismissed as chief
chemist, without considering that the petitioner had to
resume partial operations only to fill its pending
orders, and that the respondents were duly notified of
that decision, that is, that exhibit B-1 was addressed
to Ricardo Francisco, and this was made known to
the respondent Victoriano V. Francisco. Besides, the
records will show that the respondent patentee had
knowledge of the resumption of production by the
corporation, but in spite of such knowledge he did not
report for work.
The petitioner further submits that if the respondent
patentee really had unqualified interest in propagating
the product he claimed he so dearly loved, certainly
he would not have waited for a formal notification but
would have immediately reported for work,
considering that he was then and still is a member of
the corporation's board of directors, and insofar as the
petitioner is concerned, he is still its chief chemist;
and because Ricardo Francisco is a son of the
respondent patentee to whom had been entrusted the
performance of the duties of chief chemist, while the
respondent Victoriano V. Francisco is his brother, the
respondent patentee could not feign ignorance of the
resumption of operations.
The petitioner finally submits that although exhibit B-2
is addressed to Ricardo Francisco, and is dated
December 29, 1960, the records will show that the
petitioner was set to resume full capacity production
only sometime in March or April, 1961, and the
respondent patentee cannot deny that in the very
same month when the petitioner was set to resume
full production, he received a copy of the resolution of
its board of directors, directing him to report
immediately for duty; that exhibit H, of a later vintage
as it is dated February 1, 1961, clearly shows that
Ricardo Francisco was merely the acting chemist, and
this was the situation on February 1, 1961, thirteen
days before the filing of the present action for
rescission. The designation of Ricardo Francisco as
the chief chemist carried no weight because the
president and general manager of the corporation had
no power to make the designation without the consent
of the corporation's board of directors. The fact of the
matter is that although the respondent Magdalo V.
Francisco, Sr. was not mentioned in exhibit H as chief
chemist, this same exhibit clearly indicates that
Ricardo Francisco was merely the acting chemist as
he was the one assisting his father.
In our view, the foregoing submissions cannot
outweigh the uncontroverted facts. On November 28,
1960 the secretary-treasurer of the corporation issued
a memorandum (exh. B), duly approved by its
president and general manager, directing that only
Ricardo Francisco be retained in the factory and that
the salary of respondent patentee, as chief chemist,
be stopped for the time being until the corporation
resumed operations. This measure was taken
allegedly because of the scarcity and high prices of
raw materials. Five days later, however, or on
December 3, the president and general manager
issued a memorandum (exh. B-1) ordering the
respondent Victoria V. Francisco to report to the
factory and to produce Mafran sauce at the rate of no
less than 100 cases a day to cope with the orders of
the various distributors and dealers of the corporation,
and instructing him to take only the necessary daily
employees without employing permanent ones. Then
on December 6, the same president and general
manager issued yet another memorandum (exh. B-2),
instructing Ricardo Francisco, as assistant chief
chemist, to recall all daily employees connected with
the production of Mafran sauce and to hire additional
daily employees for the production of Porky Pops.
Twenty-three days afterwards, or on December 29,
the same president and general manager issued still
another memorandum (exh. S-2), directing "Ricardo
Francisco, as Chief Chemist" and Porfirio Zarraga, as
acting superintendent, to produce Mafran sauce and,
Porky Pops in full swing, starting January 2, 1961,
with the further instruction to hire daily laborers in
order to cope with the full blast production. And finally,
at the hearing held on October 24, 1961, the same
president and general manager admitted that "I
consider that the two months we paid him (referring to
respondent Magdalo V. Francisco, Sr.) is
the separation pay."
The facts narrated in the preceding paragraph were
the prevailing milieu on February 14, 1961 when the
complaint for rescission of the Bill of Assignment was
filed. They clearly prove that the petitioner, acting
through its corporate officers, 11 schemed and
maneuvered to ease out, separate and dismiss the
said respondent from the service as permanent chief
chemist, in flagrant violation of paragraph 5-(a) and
(b) of the Bill of Assignment. The fact that a month
after the institution of the action for rescission, the
petitioner corporation, thru its president and general
manager, requested the respondent patentee to
report for duty (exh. 3), is of no consequence. As the
Court of Appeals correctly observed, such request
was a "recall to placate said plaintiff."
3. We now come to the question of rescission of the
Bill of Assignment. In this connection, we quote for
ready reference the following articles of the new Civil
Code governing rescission of contracts:
ART. 1191. The power to rescind
obligations is implied in reciprocal
ones, in case one of the obligors
should not comply with what is
incumbent upon him.
The injured party may choose
between the fulfillment and the
rescission of the obligation, with
the payment of damages in either
case. He may also seek
rescission even after he has
chosen fulfillment, if the latter
should become impossible.
The court shall decree the
rescission claimed, unless there
be just cause authorizing the
fixing of a period.
This is understood to be without
prejudice to the rights of third
persons who have acquired the
thing, in accordance with articles
1385 and 1388 of the Mortgage
Law.
ART. 1383. The action for
rescission is subsidiary; it cannot
be instituted except when the
party suffering damage has no
other legal means to obtain
reparation for the same.
ART. 1384. Rescission shall be
only to the extent necessary to
cover the damages caused.
At the moment, we shall concern ourselves with the
first two paragraphs of article 1191. The power to
rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what
is incumbent upon him. The injured party may choose
between fulfillment and rescission of the obligation,
with payment of damages in either case.
In this case before us, there is no controversy that the
provisions of the Bill of Assignment are reciprocal in
nature. The petitioner corporation violated the Bill of
Assignment, specifically paragraph 5-(a) and (b), by
terminating the services of the respondent patentee
Magdalo V. Francisco, Sr., without lawful and
justifiable cause.
Upon the factual milieu, is rescission of the Bill of
Assignment proper?
The general rule is that rescission of a contract will
not be permitted for a slight or casual breach, but only
for such substantial and fundamental breach as would
defeat the very object of the parties in making the
agreement. 12 The question of whether a breach of a
contract is substantial depends upon the attendant
circumstances. 13 The petitioner contends that
rescission of the Bill of Assignment should be denied,
because under article 1383, rescission is a subsidiary
remedy which cannot be instituted except when the
party suffering damage has no other legal means to
obtain reparation for the same. However, in this case
the dismissal of the respondent patentee Magdalo V.
Francisco, Sr. as the permanent chief chemist of the
corporation is a fundamental and substantial breach
of the Bill of Assignment. He was dismissed without
any fault or negligence on his part. Thus, apart from
the legal principle that the option — to demand
performance or ask for rescission of a contract —
belongs to the injured party, 14 the fact remains that
the respondents-appellees had no alternative but to
file the present action for rescission and damages. It
is to be emphasized that the respondent patentee
would not have agreed to the other terms of the Bill of
Assignment were it not for the basic commitment of
the petitioner corporation to appoint him as its Second
Vice-President and Chief Chemist on a permanent
basis; that in the manufacture of Mafran sauce and
other food products he would have "absolute control
and supervision over the laboratory assistants and
personnel and in the purchase and safeguarding of
said products;" and that only by all these measures
could the respondent patentee preserve effectively
the secrecy of the formula, prevent its proliferation,
enjoy its monopoly, and, in the process afford and
secure for himself a lifetime job and steady income.
The salient provisions of the Bill of Assignment,
namely, the transfer to the corporation of only the use
of the formula; the appointment of the respondent
patentee as Second Vice-President and chief chemist
on a permanent status; the obligation of the said
respondent patentee to continue research on the
patent to improve the quality of the products of the
corporation; the need of absolute control and
supervision over the laboratory assistants and
personnel and in the purchase and safekeeping of the
chemicals and other mixtures used in the preparation
of said product — all these provisions of the Bill of
Assignment are so interdependent that violation of
one would result in virtual nullification of the rest.
4. The petitioner further contends that it was error for
the Court of Appeals to hold that the respondent
patentee is entitled to payment of his monthly salary
of P300 from December 1, 1960, until the return to
him of the Mafran trademark and formula, arguing that
under articles 1191, the right to specific performance
is not conjunctive with the right to rescind a reciprocal
contract; that a plaintiff cannot ask for both remedies;
that the appellate court awarded the respondents both
remedies as it held that the respondents are entitled
to rescind the Bill of Assignment and also that the
respondent patentee is entitled to his salary aforesaid;
that this is a gross error of law, when it is considered
that such holding would make the petitioner liable to
pay respondent patentee's salary from December 1,
1960 to "kingdom come," as the said holding requires
the petitioner to make payment until it returns the
formula which, the appellate court itself found, the
corporation never had; that, moreover, the fact is that
the said respondent patentee refused to go back to
work, notwithstanding the call for him to return —
which negates his right to be paid his back salaries for
services which he had not rendered; and that if the
said respondent is entitled to be paid any back salary,
the same should be computed only from December 1,
1960 to March 31, 1961, for on March 20, 1961 the
petitioner had already formally called him back to
work.
The above contention is without merit. Reading once
more the Bill of Assignment in its entirety and the
particular provisions in their proper setting, we hold
that the contract placed the use of the formula for
Mafran sauce with the petitioner, subject to defined
limitations. One of the considerations for the transfer
of the use thereof was the undertaking on the part of
the petitioner corporation to employ the respondent
patentee as the Second Vice-President and Chief
Chemist on a permanent status, at a monthly salary of
P300, unless "death or other disabilities supervened.
Under these circumstances, the petitioner corporation
could not escape liability to pay the private
respondent patentee his agreed monthly salary, as
long as the use, as well as the right to use, the
formula for Mafran sauce remained with the
corporation.
5. The petitioner finally contends that the Court of
Appeals erred in ordering the corporation to return to
the respondents the trademark and formula for
Mafran sauce, when both the decision of the appellate
court and that of the lower court state that the
corporation is not aware nor is in possession of the
formula for Mafran sauce, and the respondent
patentee admittedly never gave the same to the
corporation. According to the petitioner these findings
would render it impossible to carry out the order to
return the formula to the respondent patentee. The
petitioner's predicament is understandable. Article
1385 of the new Civil Code provides that rescission
creates the obligation to return the things which were
the object of the contract. But that as it may, it is a
logical inference from the appellate court's decision
that what was meant to be returned to the respondent
patentee is not the formula itself, but only its use and
the right to such use. Thus, the respondents in their
complaint for rescission specifically and particularly
pray, among others, that the petitioner corporation be
adjudged as "without any right to use said trademark
and formula."
ACCORDINGLY, conformably with the observations
we have above made, the judgment of the Court of
Appeals is modified to read as follows: "Wherefore the
appealed decision is reversed. The Bill of Assignment
(Exhibit A) is hereby rescinded, and the defendant
corporation is ordered to return and restore to the
plaintiff Magdalo V. Francisco, Sr. the right to the use
of his Mafran sauce trademark and formula, subject-
matter of the Bill of Assignment, and to this end the
defendant corporation and all its assigns and
successors are hereby permanently enjoined,
effective immediately, from using in any manner the
said Mafran sauce trademark and formula. The
defendant corporation shall also pay to Magdalo V.
Francisco, Sr. his monthly salary of P300 from
December 1, 1960, until the date of finality of this
judgment, inclusive, the total amount due to him to
earn legal interest from the date of the finality of this
judgment until it shall have been fully paid, plus
attorney's fees in the amount of P500, with costs
against the defendant corporation." As thus modified,
the said judgment is affirmed, with costs against the
petitioner corporation.
Concepcion, C.J., Dizon, Makalintal, Zaldivar,
Fernando, Barredo and Villamor, JJ., concur.
Teehankee J., took no part.
MAGDALENA ESTATE, INC., petitioner-appellant,
vs.
LOUIS J. MYRICK, respondent-appellee.
Felipe Ysmael and Eusebio C. Encarnacion for petitioner.
Andres C. Aguilar for respondent.
LAUREL, J.:
On January 2, 1928, the Magdalena Estate, Inc., sold to
Louis J. Myrick lots Nos. 28 and 29 of Block 1, Parcel 9 of
the San Juan Subdivision, San Juan Rizal, their contract
of sale No. SJ-639 (Exhibits B and 1) providing that the
price of P7,953 shall be payable in 120 equal monthly
installments of P96.39 each on the second day of every
month beginning the date of execution of the
agreement. Simultaneously, the vendee executed and
delivered to the vendor a promissory note (Exhibits C
and 2) for the whole purchase price, wherein it was
stipulated that "si cualquier pago o pagos de este pagare
quedasen en mora por mas de dos meses, entonces
todos el saldo no pagado del mismo con cualesquiera
intereses que hubiese devengado, vercera y sera
exigible inmediatamente y devengara intereses al
mismo tipo de 9 por ciento al año hasta su completo
pago, y en tal caso me comprometo, ademas, a pagar al
tenedor de este pagare el 10 por ciento de la cantidad
en concepto de honorarios de abogado."
In pursuance of said agreement, the vendee made
several monthly payments amounting to P2,596.08, the
last being on October 4, 1930, although the first
installment due and unpaid was that of May 2, 1930. By
reason of this default, the vendor, through its president,
K.H. Hemady, on December 14, 1932, notified the
vendee that, in view of his inability to comply with the
terms of their contract, said agreement had been
cancelled as of that date, thereby relieving him of any
further obligation thereunder, and that all amounts paid
by him had been forfeited in favor of the vendor, who
assumes the absolute right over the lots in question. To
this communication, the vendee did not reply, and it
appears likewise that the vendor thereafter did not
require him to make any further disbursements on
account of the purchase price.
On July 22, 1936, Louis J. Myrick, respondent herein,
commenced the present action in the Court of First
Instance of Albay, praying for an entry of judgment
against the Magdalena Estate, Inc. for the sum of
P2,596.08 with legal interest thereon from the filing of
the complaint until its payment, and for costs of the suit.
Said defendant, the herein petitioner, on September 7,
1936, filed his answer consisting in a general denial and
a cross-complaint and counterclaim, alleging that
contract SJ-639 was still in full force and effect and that,
therefore, the plaintiff should be condemned to pay the
balance plus interest and attorneys' fees. After due trial,
the Court of First Instance of Albay, on January 31,
1939, rendered its decision ordering the defendant to
pay the plaintiff the sum of P2,596.08 with legal interest
from December 14, 1932 until paid and costs, and
dismissing defendant's counterclaim. From this
judgment, the Magdalena Estate, Inc. appealed to the
Court of Appeals, where the cause was docketed as CA-
G.R. No. 5037, and which, on August 23, 1940,
confirmed the decision of the lower court, with the only
modification that the payment of interest was to be
computed from the date of the filing of the complaint
instead of from the date of the cancellation of the
contract. A motion for reconsideration was presented,
which was denied on September 6, 1940. Hence, the
present petition for a writ of certiorari.
Petitioner-appellant assigns several errors which we
proceed to discuss in the course of this opinion.
Petitioner holds that contract SJ-639 has not been
rendered inefficacious by its letter to the respondent,
dated December 14, 1932, and submits the following
propositions: (1) That the intention of the author of a
written instrument shall always prevail over the literal
sense of its wording; (2) that a bilateral contract may be
resolved or cancelled only by the prior mutual
agreement of the parties, which is approved by the
judgment of the proper court; and (3) that the letter of
December 14, 1932 was not assented to by the
respondent, and therefore, cannot be deemed to have
produced a cancellation, even if it ever was intended.
Petitioner contends that the letter in dispute is a mere
notification and, to this end, introduced in evidence the
disposition of Mr. K.H. Hemady, president of the
Magdalena Estate, Inc. wherein he stated that the word
"cancelled" in the letter of December 14, 1932, "es un
error de mi interpretacion sin ninguna intencion de
cancelar," and the testimony of Sebastian San Andres,
one of its employees, that the lots were never offered
for sale after the mailing of the letter aforementioned.
Upon the other hand, the Court of Appeals, in its
decision of August 23, 1940, makes the finding that
"notwithstanding the deposition of K.H. Hemady,
president of the defendant corporation, to the effect
that the contract was not cancelled nor was his
intention to do so when he wrote the letter of December
14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition
Exhibit 1-a), faith and credit cannot be given to such
testimony in view of the clear terms of the letter which
evince his unequivocal intent to resolve the contract.
His testimony is an afterthought. The intent to resolve
the contract is expressed unmistakably not only in the
letter of December 14, 1932, already referred to
(Exhibit 6 and D), but is reiterated in the letters which
the president of the defendant corporation states that
plaintiff lost his rights for the land for being behind
more than two years, and of April 10, 1035 (Exhibit G),
where defendant's president makes the following
statements: "Confirming the verbal arrangement had
between you and our Mr. K.H. Hemady regarding the
account of Mr. Louis J. Myrick under contract No. SJ-639,
already cancelled."
This conclusion of fact of the Court of Appeals is final
and should not be disturbed. (Guico vs. Mayuga and
Heirs of Mayuga, 63 Phil., 328; Mamuyac vs. Abena,
XXXVIII Off. Gaz. 84.) Where the terms of a writing are
clear, positive and unambiguous, the intention of the
parties should be gleaned from the language therein
employed, which is conclusive in the absence of mistake
(13 C.J. 524; City of Manila vs. Rizal Park Co., 52 Phil.
515). The proposition that the intention of the writer,
once ascertained, shall prevail over the literal sense of
the words employed is not absolute and should be
deemed secondary to and limited by the primary rule
that, when the text of the instrument is explicit and
leaves no doubt as to its intention, the court may not
read into it any other which would contradict its plain
import. Besides, we have met with some circumstances
of record which demonstrate the unequivocal
determination of the petitioner to cancel their contract.
They are: (1) the act of the petitioner in immediately
taking possession of the lots in question and offering to
resell them to Judge M.V. del Rosario, as demonstrated
by his letter marked Exhibit G, shortly after December
14, 1932; (2) his failure to demand from the respondent
the balance of the account after the mailing of the
disputed letter; and (3) the letters of January 10, 1933
(Exhibit F-2) and April 10, 1935 (Exhibit G) reiterate, in
clear terms, the intention to cancel first announced by
petitioner since December 14, 1932.
It is next argued that contract SJ-639, being a bilateral
agreement, in the absence of a stipulation permitting its
cancellation, may not be resolved by the mere act of the
petitioner. The fact that the contracting parties herein
did not provide for resolution is now of no moment, for
the reason that the obligations arising from the contract
of sale being reciprocal, such obligations are governed
by article 1124 of the Civil Code which declares that the
power to resolve, in the event that one of the obligors
should not perform his part, is implied. (Mateos vs.
Lopez, 6 Phil., 206; Cortez vs. Bibaño & Beramo, 41 Phil.
298; Cui. vs. Sun Chan, 41 Phil., 523; Po Pauco vs.
Siguenza, 49 Phil., 404.) Upon the other hand, where, as
in this case, the petitioner cancelled the contract,
advised the respondent that he has been relieved of his
obligations thereunder, and led said respondent to
believe it so and act upon such belief, the petitioner may
not be allowed, in the language of section 333 of the
Code of Civil Procedure (now section 68 (a) of Rule 123
of the New Rules of Court), in any litigation the course
of litigation or in dealings in nais, be permitted to
repudiate his representations, or occupy inconsistent
positions, or, in the letter of the Scotch law, to
"approbate and reprobate." (Bigelow on Estoppel, page
673; Toppan v. Cleveland, Co. & C.R. Co., Fed. Cas.
14,099.)
The contract of sale, contract SJ-639, contains no
provision authorizing the vendor, in the event of failure
of the vendee to continue in the payment of the
stipulated monthly installments, to retain the amounts
paid to him on account of the purchase price. The claim,
therefore, of the petitioner that it has the right to forfeit
said sums in its favor is untenable. Under article 1124 of
the Civil Code, however, he may choose between
demanding the fulfillment of the contract or its
resolution. These remedies are alternative and not
cumulative, and the petitioner in this case, having to
cancel the contract, cannot avail himself of the other
remedy of exacting performance. (Osorio & Tironavs.
Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap
Unki vs. Chua Jamco, 14 Phil., 602.) As a consequence of
the resolution, the parties should be restored, as far as
practicable, to their original situation (Po Pauco vs.
Siguenza, supra) which can be approximated only by
ordering, as we do now, the return of the things which
were the object of the contract, with their fruits and of
the price, with its interest (article 1295, Civil Code),
computed from the date of the institution of the action.
(Verceluz vs. Edaño, 46 Phil. 801.)
The writ prayed for is hereby denied, with costs against
the petitioner. So ordered.
G.R. No. L-28602 September 29, 1970
UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as
JUDGE of the COURT OF FIRST INSTANCE IN
QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo,
Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
REYES, J.B.L., J.:
Three (3) orders of the Court of First Instance of Rizal
(Quezon City), issued in its Civil Case No. 9435, are
sought to be annulled in this petition for certiorari and
prohibition, filed by herein petitioner University of the
Philippines (or UP) against the above-named
respondent judge and the Associated Lumber
Manufacturing Company, Inc. (or ALUMCO). The first
order, dated 25 February 1966, enjoined UP from
awarding logging rights over its timber concession (or
Land Grant), situated at the Lubayat areas in the
provinces of Laguna and Quezon; the second order,
dated 14 January 1967, adjudged UP in contempt of
court, and directed Sta. Clara Lumber Company, Inc.
to refrain from exercising logging rights or conducting
logging operations on the concession; and the third
order, dated 12 December 1967, denied
reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary
injunction against the enforcement or implementation
of the three (3) questioned orders was issued by this
Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was
segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to
be operated and developed for the purpose of raising
additional income for its support, pursuant to Act
3608;
That on or about 2 November 1960, UP and
ALUMCO entered into a logging agreement under
which the latter was granted exclusive authority, for a
period starting from the date of the agreement to 31
December 1965, extendible for a further period of five
(5) years by mutual agreement, to cut, collect and
remove timber from the Land Grant, in consideration
of payment to UP of royalties, forest fees, etc.; that
ALUMCO cut and removed timber therefrom but, as
of 8 December 1964, it had incurred an unpaid
account of P219,362.94, which, despite repeated
demands, it had failed to pay; that after it had
received notice that UP would rescind or terminate
the logging agreement, ALUMCO executed an
instrument, entitled "Acknowledgment of Debt and
Proposed Manner of Payments," dated 9 December
1964, which was approved by the president of UP,
and which stipulated the following:
3. In the event that the payments
called for in Nos. 1 and 2 of this
 paragraph are not sufficient to
liquidate the foregoing
indebtedness of the DEBTOR in
favor of the CREDITOR, the
balance outstanding after the
said payments have been applied
shall be paid by the DEBTOR in
full no later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR
fails to comply with any of its
promises or undertakings in this
document, the DEBTOR agrees
without reservation that the
CREDITOR shall have the right
and the power to consider the
Logging Agreement dated
December 2, 1960 as rescinded
without the necessity of any
judicial suit, and the CREDITOR
shall be entitled as a matter of
right to Fifty Thousand Pesos
(P50,000.00) by way of and for
liquidated damages;
ALUMCO continued its logging operations, but again
incurred an unpaid account, for the period from 9
December 1964 to 15 July 1965, in the amount of
P61,133.74, in addition to the indebtedness that it had
previously acknowledged.
That on 19 July 1965, petitioner UP informed
respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect
the logging agreement that they had entered in 1960;
and on 7 September 1965, UP filed a complaint
against ALUMCO, which was docketed as Civil Case
No. 9435 of the Court of First Instance of Rizal
(Quezon City), for the collection or payment of the
herein before stated sums of money and alleging the
facts hereinbefore specified, together with other
allegations; it prayed for and obtained an order, dated
30 September 1965, for preliminary attachment and
preliminary injunction restraining ALUMCO from
continuing its logging operations in the Land Grant.
That before the issuance of the aforesaid preliminary
injunction UP had taken steps to have another
concessionaire take over the logging operation, by
advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta.
Clara Lumber Company, Inc.; the logging contract
was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions
to discharge the writs of attachment and preliminary
injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition
to enjoin petitioner University from conducting the
bidding; on 27 November 1965, it filed a second
petition for preliminary injunction; and, on 25 February
1966, respondent judge issued the first of the
questioned orders, enjoining UP from awarding
logging rights over the concession to any other party.
That UP received the order of 25 February 1966 after
it had concluded its contract with Sta. Clara Lumber
Company, Inc., and said company had started logging
operations.
That, on motion dated 12 April 1966 by ALUMCO and
one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of
court and, in the same order, directed Sta. Clara
Lumber Company, Inc., to refrain from exercising
logging rights or conducting logging operations in the
concession.
The UP moved for reconsideration of the aforesaid
order, but the motion was denied on 12 December
1967.
Except that it denied knowledge of the purpose of the
Land Grant, which purpose, anyway, is embodied in
Act 3608 and, therefore, conclusively known,
respondent ALUMCO did not deny the foregoing
allegations in the petition. In its answer, respondent
corrected itself by stating that the period of the
logging agreement is five (5) years - not seven (7)
years, as it had alleged in its second amended
answer to the complaint in Civil Case No. 9435. It
reiterated, however, its defenses in the court below,
which maybe boiled down to: blaming its former
general manager, Cesar Guy, in not turning over
management of ALUMCO, thereby rendering it unable
to pay the sum of P219,382.94; that it failed to pursue
the manner of payments, as stipulated in the
"Acknowledgment of Debt and Proposed Manner of
Payments" because the logs that it had cut turned out
to be rotten and could not be sold to Sta. Clara
Lumber Company, Inc., under its contract "to buy and
sell" with said firm, and which contract was referred
and annexed to the "Acknowledgment of Debt and
Proposed Manner of Payments"; that UP's unilateral
rescission of the logging contract, without a court
order, was invalid; that petitioner's supervisor refused
to allow respondent to cut new logs unless the logs
previously cut during the management of Cesar Guy
be first sold; that respondent was permitted to cut logs
in the middle of June 1965 but petitioner's supervisor
stopped all logging operations on 15 July 1965; that it
had made several offers to petitioner for respondent
to resume logging operations but respondent received
no reply.
The basic issue in this case is whether petitioner U.P.
can treat its contract with ALUMCO rescinded, and
may disregard the same before any judicial
pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the
injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific
findings in this regard), that it is only after a final court
decree declaring the contract rescinded for violation
of its terms that U.P. could disregard ALUMCO's
rights under the contract and treat the agreement as
breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly
stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by
the debtor ALUMCO, the creditor (UP) has "the right
and the power to consider, the Logging Agreement
dated 2 December 1960 as rescinded without the
necessity of any judicial suit." As to such special
stipulation, and in connection with Article 1191 of the
Civil Code, this Court stated in Froilan vs. Pan
Oriental Shipping Co., et al., L-11897, 31 October
1964, 12 SCRA 276:
there is nothing in the law that
prohibits the parties from entering
into agreement that violation of
the terms of the contract would
cause cancellation thereof, even
without court intervention. In
other words, it is not always
necessary for the injured party to
 resort to court for rescission of
the contract.
Of course, it must be understood that the act of party
in treating a contract as cancelled or resolved on
account of infractions by the other contracting party
must be made known to the other and is always
provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed, and
the consequent indemnity awarded to the party
prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will
conclusively and finally settle whether the action
taken was or was not correct in law. But the law
definitely does not require that the contracting party
who believes itself injured must first file suit and wait
for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its
damages accumulate during the pendency of the suit
until the final judgment of rescission is rendered when
the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code,
Article 2203).
We see no conflict between this ruling and the
previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary
for the resolution of a reciprocal obligation,1 since in
every case where the extrajudicial resolution is
contested only the final award of the court of
competent jurisdiction can conclusively settle whether
the resolution was proper or not. It is in this sense that
judicial action will be necessary, as without it, the
extrajudicial resolution will remain contestable and
subject to judicial invalidation, unless attack thereon
should become barred by acquiescence, estoppel or
prescription.
Fears have been expressed that a stipulation
providing for a unilateral rescission in case of breach
of contract may render nugatory the general rule
requiring judicial action (v. Footnote, Padilla, Civil
Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
but, as already observed, in case of abuse or error by
the rescinder the other party is not barred from
questioning in court such abuse or error, the practical
effect of the stipulation being merely to transfer to the
defaulter the initiative of instituting suit, instead of the
rescinder.
In fact, even without express provision conferring the
power of cancellation upon one contracting party, the
Supreme Court of Spain, in construing the effect of
Article 1124 of the Spanish Civil Code (of which
Article 1191 of our own Civil; Code is practically a
reproduction), has repeatedly held that, a resolution of
reciprocal or synallagmatic contracts may be made
extrajudicially unless successfully impugned in court.
El articulo 1124 del Codigo Civil
establece la facultad de resolver
las obligaciones reciprocas para
el caso de que uno de los
obligados no cumpliese lo que le
incumbe, facultad que, segun
jurisprudencia de este Tribunal,
surge
immediatamente despuesque la
otra parte incumplio su deber, sin
necesidad de una declaracion
previa de los Tribunales. (Sent. of
the Tr. Sup. of Spain, of 10 April
1929; 106 Jur. Civ. 897).
Segun reiterada doctrina de esta
Sala, el Art. 1124 regula la
resolucioncomo una "facultad"
atribuida a la parte perjudicada
por el incumplimiento del
contrato, la cual tiene derecho do
opcion entre exigir el
cumplimientoo la resolucion de lo
convenido, que puede
ejercitarse, ya en la via
judicial, ya fuera de ella, por
declaracion del acreedor, a
reserva, claro es, que si la
declaracion de resolucion hecha
por una de las partes se impugna
por la otra, queda aquella
sometida el examen y sancion de
los Tribunale, que habran de
declarar, en definitiva, bien hecha
la resolucion o por el contrario,
no ajustada a Derecho. (Sent. TS
of Spain, 16 November 1956;
Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos
sinalagmaticos, fundada en el
incumplimiento por una de las
partes de su respectiva
prestacion, puedetener lugar con
eficacia" 1. o Por la declaracion
de voluntad de la otra hecha
extraprocesalmente, si no es
impugnada en juicio luego con
exito. y 2. 0 Por la demanda de la
perjudicada, cuando no opta por
el cumplimientocon la
indemnizacion de danos y
perjuicios realmente causados,
siempre quese acredite, ademas,
una actitud o conducta
persistente y rebelde de
laadversa o la satisfaccion de lo
pactado, a un hecho obstativo
que de un modoabsoluto,
definitivo o irreformable lo impida,
segun el art. 1.124, interpretado
por la jurisprudencia de esta
Sala, contenida en las Ss. de 12
mayo 1955 y 16 Nov. 1956, entre
otras, inspiradas por el principio
del Derecho intermedio, recogido
del Canonico, por el cual fragenti
fidem, fides non est servanda.
(Ss. de 4 Nov. 1958 y 22 Jun.
1959.) (Emphasis supplied).
In the light of the foregoing principles, and considering
that the complaint of petitioner University made out
a prima facie case of breach of contract and defaults
in payment by respondent ALUMCO, to the extent
that the court below issued a writ of preliminary
injunction stopping ALUMCO's logging operations,
and repeatedly denied its motions to lift the injunction;
that it is not denied that the respondent company had
profited from its operations previous to the agreement
of 5 December 1964 ("Acknowledgment of Debt and
Proposed Manner of Payment"); that the excuses
offered in the second amended answer, such as the
misconduct of its former manager Cesar Guy, and the
rotten condition of the logs in private respondent's
pond, which said respondent was in a better position
to know when it executed the acknowledgment of
indebtedness, do not constitute on their face sufficient
excuse for non-payment; and considering that
whatever prejudice may be suffered by respondent
ALUMCO is susceptibility of compensation in
damages, it becomes plain that the acts of the court a
quo in enjoining petitioner's measures to protect its
interest without first receiving evidence on the issues
tendered by the parties, and in subsequently refusing
to dissolve the injunction, were in grave abuse of
discretion, correctible by certiorari, since appeal was
not available or adequate. Such injunction, therefore,
must be set aside.
For the reason that the order finding the petitioner UP
in contempt of court has open appealed to the Court
of Appeals, and the case is pending therein, this
Court abstains from making any pronouncement
thereon.
WHEREFORE, the writ of certiorari applied for is
granted, and the order of the respondent court of 25
February 1966, granting the Associated Lumber
Company's petition for injunction, is hereby set aside.
Let the records be remanded for further proceedings
conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando,
Teehankee, Barredo, Villamor and Makasiar, JJ.,
concur.
Reyes, J.B.L., Actg. C.J., is on leave . whatever unfulfilled monetary
G.R. No. L-29360 January 30, 1982
JOSE C. ZULUETA, petitioner,
vs.
HON. HERMINIO MARIANO, in his capacity as
Presiding Judge of Branch X of the Court of First
Instance of Rizal; and LAMBERTO
AVELLANA, respondents.
MELENCIO-HERRERA, J.:
In this action for mandamus and Prohibition, petitioner
seeks to compel respondent Judge to assume
appellate, not original jurisdiction over an Ejectment
case appealed from the Municipal Court of Pasig (CC
No. 1190 entitled Jose C. Zulueta vs. Lamberto
Avellana), and to issue a Writ of Execution in said
case.
The antecedental facts follow:
Petitioner Jose C. Zulueta is the registered owner of a
residential house and lot situated within the Antonio
Subdivision, Pasig, Rizal.
On November 6, 1964, petitioner Zulueta and private
respondent Lamberto Avellana, a movie director,
entered into a "Contract to Sell" the aforementioned
property for P75,000.00 payable in twenty years with
respondent buyer assuming to pay a down payment
of P5,000.00 and a monthly installment of P630.00
payable in advance before the 5th day of the
corresponding month, starting with December, 1964.
It was further stipulated:
12) That upon failure of the
BUYER to fulfill any of the
conditions herein stipulated,
BUYER automatically and
irrevocably authorizes OWNER to
recover extra-judicially, physical
possession of the land, building
and other improvements which
are the subject of this contract,
and to take possession also
extra-judicially whatever personal
properties may be found within
the aforesaid premises from the
date of said failure to answer for
obligations BUYER may have
with OWNER; and this contract
shall be considered as without
force and effect also from said
date; all payments made by the
BUYER to OWNER shall be
deemed as rental payments
without prejudice to OWNER's
right to collect from BUYER
whatever other monthly
installments and other money
obligations which may have been
paid until BUYER vacates the
aforesaid premises; upon his
failure to comply with any of the
herein conditions BUYER forfeits
all money claims against
OWNER and shall pay a monthly
rental equivalent to his monthly
installment under Condition 1 of
this Contract from the date of the
said failure to the date of
recovery of physical possession
by OWNER of the land, building
and other improvements which
are the subject of this Contract;
BUYER shall not remove his
personal properties without the
previous written consent of
OWNER, who, should he take
possession of such properties
following the aforesaid failure of
BUYER, shall return the same to
BUYER only after the latter shall
have fulfilled all money claims
against him by OWNER; in all
cases herein, demand is waived;
Respondent Avellana occupied the property from
December, 1964, but title remained with petitioner
Zulueta.
Upon the allegation that respondent Avellana had
failed to comply with the monthly amortizations
stipulated in the contract, despite demands to pay and
to vacate the premises, and that thereby the contract
was converted into one of lease, petitioner, on June
22, 1966, commenced an Ejectment suit against
respondent before the Municipal Court of Pasig (CC
No. 1190), praying that judgment be rendered
ordering respondent 1) to vacate the premises; 2) to
pay petitioner the sum of P11,751.30 representing
respondent's balance owing as of May, 1966; 3) to
pay petitioner the sum of P 630.00 every month after
May, 1966, and costs.
Respondent controverted by contending that the
Municipal Court had no jurisdiction over the nature of
the action as it involved the interpretation and/or
rescission of the contract; that prior to the execution
of the contract to sell, petitioner was already indebted
to him in the sum of P31,269.00 representing the cost
of two movies respondent made for petitioner and
used by the latter in his political campaign in 1964
when petitioner ran for Congressman, as well as the
cost of one 16 millimeter projector petitioner borrowed
from respondent and which had never been returned,
which amounts, according to their understanding,
would be applied as down payment for the property
and to whatever obligations respondent had with
petitioner. The latter strongly denied such an
understanding. Respondent's total counterclaim
against petitioner was in the amount of P42,629.99
representing petitioner's pleaded indebtedness to
private respondent, claim for moral damages, and
attorney's fees.
The counterclaim was dismissed by the Municipal
Court for being in an amount beyond its jurisdiction.
However, as a special defense, private respondent
sought to offset the sum of P31,269.00 against his
obligations to petitioner.
Deciding the case on May 10, 1967, the Municipal
Court found that respondent Avellana had failed to
comply with his financial obligations under the
contract and ordered him to vacate the premises and
deliver possession thereof to petitioner; to pay
petitioner the sum of P21,093.88 representing
arrearages as of April, 1967, and P630.00 as monthly
rental from and after May, 1967 until delivery of
possession of that premises to petitioner. That
conclusion was premised on title finding that breach
of any of the conditions by private respondent
converted the agreement into a lease contractual and
upon the following considerations:
The question involved herein is
that of possession, that who of
the contending parties has the
better right to possession of the
properly in question. The issue in
this case being that of
possession, the claim of
defendant against plaintiff or P
31,269.00 indebtedness, has no
place as a defense here. It
should be the subject- matter of a
separate action against, plaintiff
Jose C. Zulueta. As it is, said
indebtedness is only a claim still
debatable and controversial and
not a final judgment. 'It is our
considered opinion that to admit
and to allow such a defense
would be tantamount to prejuding
the claim on its merits
prematurely in favor of defendant.
This court can not do without
violating some rules of law. This
is not the proper court and this is
not the proper case in which to
ventilate the claim.
Respondent Avellana appealed to the Court of First
Instance of Rizal presided by respondent Judge.
Thereat, petitioner summoned for execution alleging
private respondent's failure to deposit in accordance
the monthly rentals, which the latter denied.
Respondent Judge held resolution thereof in
abeyance.
On February 19, 1968, respondent Avellana filed a
Motion to Dismiss Appeal alleging that, inasmuch as
the defense set up in his Answer was that he had not
breached his contract with petitioner, the case
necessarily involved the interpretation and/or
rescission of the contract and, therefore, beyond the
jurisdiction of the Municipal Court. Petitioner opposed
claiming that the Complaint had set out a clear case
of unlawful detainer considering that judicial action for
the rescission of the contract was unnecessary due to
the automatic rescission clause therein and the fact
that petitioner had cancelled said contract so that
respondent's right to remain in the premises had
ceased.
On March 21, 1968, respondent Judge dismissed the
case on the ground of lack of jurisdiction of the
Municipal Court, explaining:
The decision of the lower court
declared said Contract to Sell to
have been converted into a
contract of lease. It is the
contention of the defendant that
the lower court had no jurisdiction
to entertain the case as the same
involves the interpretation of
contract as to whether or not the
same has been converted to
lease contract. Although the
contract to sell object of this case
states that the same may be
converted into a lease contract
upon the failure of the defendant
to pay the amortization of the
property in question, there is no
showing that before filing this
case in the lower court, the
plaintiff has exercised or has
pursued his right pursuant to the
contract which should be the
basis of the action in the lower
court.
Petitioner's Motion for Reconsideration was denied by
respondent Judge as follows:
The plaintiff having filed a motion
for reconsideration of this Court's
Order dismissing the appeal, the
Court, while standing pat on its
Order dismissing this case for
lack of jurisdiction of the lower
court over the subject matter,
hereby takes cognizance of the
case and will try the case as if it
has been filed originally in this
Court.
WHEREFORE, let this case be
set for pre-trial on July 12, 1968
at 8:30 a.m. with notice to an
parties.
Petitioner then availed of the instant recourse.
Was the action before the Municipal Court of Pasig
essentially for detainer and, therefore, within its
exclusive original jurisdiction, or one for rescission or
annulment of a contract, which should be litigated
before a Court of First Instance?
Upon a review of the attendant circumstances, we
uphold the ruling of respondent Judge that the
Municipal Court of Pasig was bereft of jurisdiction to
take cognizance of the case filed before it. In his
Complaint, petitioner had alleged violation by
respondent Avellana of the stipulations of their
agreement to sell and thus unilaterally considered the
contract rescinded. Respondent Avellana denied any
breach on his part and argued that the principal issue
was one of interpretation and/or rescission of the
contract as well as of set-off. Under those
circumstances, proof of violation is a condition
precedent to resolution or rescission. It is only when
the violation has been established that the contract
can be declared resolved or rescinded. Upon such
rescission, in turn, hinges a pronouncement that
possession of the realty has become unlawful. Thus,
the basic issue is not possession but one of
rescission or annulment of a contract. which is
beyond the jurisdiction of the Municipal Court to hear
and determine.
A violation by a party of any of
the stipulations of a contract on
agreement to sell real property
would entitle the other party to
resolved or rescind it. An
allegation of such violation in a
detainer suit may be proved by
competent evidence. And if
proved a justice of the peace
court might make a finding to that
effect, but it certainly cannot
declare and hold that the contract
is resolved or rescinded. It is
beyond its power so to do. And
as the illegality of the possession
of realty by a party to a contract
to sell is premised upon the
resolution of the contract, it
follows that an allegation and
proof of such violation, a
condition precedent to such
resolution or rescission, to render
unlawful the possession of the
land or building erected thereon
by the party who has violated the
contract, cannot be taken
cognizance of by a justice of the
peace court. ... 1
True, the contract between the parties provided for
extrajudicial rescission. This has legal effect,
however, where the other party does not oppose
it. 2 Where it is objected to, a judicial determination of
the issue is still necessary.
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. 3
But while respondent Judge correctly ruled that the
Municipal Court had no jurisdiction over the case and
correctly dismissed the appeal, he erred in assuming
original jurisdiction, in the face of the objection
interposed by petitioner. Section 11, Rule 40, leaves
no room for doubt on this point:
Section 11. Lack of jurisdiction —
A case tried by an inferior court
without jurisdiction over the
subject matter shall be dismiss
on appeal by the Court of First
Instance. But instead of
dismissing the case, the Court of
First Instance may try the case
on the merits, if the parties
therein file their pleadings and go
to trial without any objection to
such jurisdiction.
There was no other recourse left for respondent
Judge, therefore, except to dismiss the appeal.
If an inferior court tries a case
without jurisdiction over the
subject-matter on appeal, the
only authority of the CFI is to
declare the inferior court to have
acted without jurisdiction and
dismiss the case, unless the
parties agree to the exercise by
the CFI of its original jurisdiction
to try the case on the merits. 4
The foregoing premises considered, petitioner's
prayer for a Writ of Execution of the judgment of the
Municipal Court of Pasig must perforce be denied.
WHEREFORE, the Writ of mandamus is denied, but
the Writ of Prohibition is granted and respondent
Court hereby permanently enjoined from taking
cognizance of Civil Case No. 10595 in the exercise of
its original jurisdiction. No costs.
SO ORDERED.
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.
MELENCIO-HERRERA, J.:
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.
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 altenative 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:
I payment of the t in arrears
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 Feb 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 falls
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
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
payment & 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 peacefully
to vacate the premises and
deliver the same to the SELLER.
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:
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
it proceeds at its own risk. For it
is only the final judgment of the
corresponding court that will
conclusively and finally settle
whether the action taken was or
was not correct in law. But the
law definitely does not require
that the contracting party who
believes itself injured must first
file suit and wait for a judgment
before taking extrajudicial steps
to protect its interest. Otherwise,
the party injured by the other's
breach will have to passively sit
and watch its damages
accumulate during the pendency
of the suit until the final judgment
of rescission is rendered when
the law itself requires that he
should exercise due diligence to
minimize its own damages (Civil
Code, Article 2203).
We see no conflict between this
ruling and the previous
jurisprudence of this Court
invoked by respondent declaring
that judicial action is necessary
for the resolution of a reciprocal
obligation (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
win be necessary, as without it,
the extrajudicial resolution will
remain contestable and subject to
judicial invalidation unless attack
thereon should become barred by
acquiescense, 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
supplied).
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 propio
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.
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 sham 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.
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 wen 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 a 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 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.
G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET AL., plaintiffs-
appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-
appellants.
GUTIERREZ, JR., J.:
This is an appeal from the decision of the Court of
First Instance of Rizal, Seventh Judicial District,
Branch X, declaring the contract to sell as not having
been validly cancelled and ordering the defendants-
appellants to execute a final deed of sale in favor of
the plaintiffs-appellees, to pay P500.00 attorney's fees
and costs.
The facts being undisputed, the Court of Appeals
certified the case to us since only pure questions of
law have been raised for appellate review.
On December 19, 1957, defendants-appellants Ursula
Torres Calasanz and Tomas Calasanz and plaintiffs-
appellees Buenaventura Angeles and Teofila Juani
entered into a contract to sell a piece of land located
in Cainta, Rizal for the amount of P3,920.00 plus 7% the defendants declaring that the The defendants-appellants submit that the contract
interest per annum. contract subject matter of the was validly cancelled pursuant to paragraph six of the
The plaintiffs-appellees made a downpayment of instant case was NOT VALIDLY contract which provides:
P392.00 upon the execution of the contract. They cancelled by the defendants. xxx xxx xxx
promised to pay the balance in monthly installments Consequently, the defendants SIXTH.—In case the party of the
of P 41.20 until fully paid, the installments being due are ordered to execute a final SECOND PART fails to satisfy
and payable on the 19th day of each month. The Deed of Sale in favor of the any monthly installments, or any
plaintiffs-appellees paid the monthly installments until plaintiffs and to pay the sum of other payments herein agreed
July 1966, when their aggregate payment already P500.00 by way of attorney's upon, he is granted a month of
amounted to P4,533.38. On numerous occasions, the fees. Costs against the grace within which to make the
defendants-appellants accepted and received delayed defendants. retarded payment, together with
installment payments from the plaintiffs-appellees. A motion for reconsideration filed by the defendants- the one corresponding to the said
On December 7, 1966, the defendants-appellants appellants was denied. month of grace; it is understood,
wrote the plaintiffs-appellees a letter requesting the As earlier stated, the then Court of Appeals certified however, that should the month
remittance of past due accounts. the case to us considering that the appeal involves of grace herein granted to the
On January 28, 1967, the defendants-appellants pure questions of law. party of the SECOND PART
cancelled the said contract because the plaintiffs- The defendants-appellants assigned the following expired; without the payments
appellees failed to meet subsequent payments. The alleged errors of the lower court: corresponding to both months
plaintiffs' letter with their plea for reconsideration of First Assignment of Error having been satisfied, an interest
the said cancellation was denied by the defendants- THE LOWER COURT ERRED IN of 10% per annum will be
appellants. NOT HOLDING THE charged on the amounts he
The plaintiffs-appellees filed Civil Case No. 8943 with CONTRACT TO SELL (ANNEX should have paid; it is understood
the Court of First Instance of Rizal, Seventh Judicial "A" OF COMPLIANCE) AS further, that should a period of 90
District, Branch X to compel the defendants- HAVING BEEN LEGALLY AND days elapse, to begin from the
appellants to execute in their favor the final deed of VALIDLY CANCELLED. expiration of the month of grace
sale alleging inter alia that after computing all Second Assignment of Error herein mentioned, and the party
subsequent payments for the land in question, they EVEN ASSUMING ARGUENDO of SECOND PART has not paid
found out that they have already paid the total amount THAT THE SAID CONTRACT TO all the amounts he should have
of P4,533.38 including interests, realty taxes and SELL HAS NOT BEEN LEGALLY paid with the corresponding
incidental expenses for the registration and transfer of AND VALIDLY CANCELLED, interest up to that date, the party
the land. THE LOWER COURT ERRED IN of the FIRST PART has the right
The defendants-appellants alleged in their answer ORDERING DEFENDANTS TO to declare this contract cancelled
that the complaint states no cause of action and that EXECUTE A FINAL DEED OF and of no effect, and as
the plaintiffs-appellees violated paragraph six (6) of SALE IN FAVOR OF THE consequence thereof, the party of
the contract to sell when they failed and refused to PLAINTIFF. the FIRST PART may dispose of
pay and/or offer to pay the monthly installments Third Assignment of Error the parcel of land covered by this
corresponding to the month of August, 1966 for more THE LOWER COURT ERRED IN contract in favor of other persons,
than five (5) months, thereby constraining the ORDERING DEFENDANTS TO as if this contract had never been
defendants-appellants to cancel the said contract. PAY PLAINTIFFS THE SUM OF entered into. In case of such
The lower court rendered judgment in favor of the P500.00 AS ATTORNEY'S cancellation of the contract, all
plaintiffs-appellees. The dispositive portion of the FEES. the amounts paid in accordance
decision reads: The main issue to be resolved is whether or not the with this agreement together with
WHEREFORE, based on the contract to sell has been automatically and validly all the improvements made on
foregoing considerations, the cancelled by the defendants-appellants. the premises, shall be considered
Court hereby renders judgment in as rents paid for the use and
favor of the plaintiffs and against occupation of the above
 mentioned premises, and as
payment for the damages
suffered by failure of the party of
the SECOND PART to fulfill his
part of the agreement; and the
party of the SECOND PART
hereby renounces all his right to
demand or reclaim the return of
the same and obliges himself to
peacefully vacate the premises
and deliver the same to the party
of the FIRST PART. (Emphasis
supplied by appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-
appellees failed to pay the August, 1966 installment
despite demands for more than four (4) months. The
defendants-appellants point to Jocson v. Capitol
Subdivision (G.R. No. L-6573, February 28, 1955)
where this Court upheld the right of the subdivision
owner to automatically cancel a contract to sell on the
strength of a provision or stipulation similar to
paragraph 6 of the contract in this case. The
defendants-appellants also argue that even in the
absence of the aforequoted provision, they had the
right to cancel the contract to sell under Article 1191
of the Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend
that the Jocson ruling does not apply. They state that
paragraph 6 of the contract to sell is contrary to law
insofar as it provides that in case of specified
breaches of its terms, the sellers have the right to
declare the contract cancelled and of no effect,
because it granted the sellers an absolute and
automatic right of rescission.
Article 1191 of the Civil Code on the rescission of
reciprocal obligations provides:
The power to rescind obligations
is implied in reciprocal ones, in
case one of the obligors should
not comply with what is
incumbent upon him.
The injured party may choose
between the fulfillment and the
rescission of the obligation, with
the payment of damages in either
case. He may also seek
rescission, even after he has
chosen fulfillment, if the latter
should become impossible.
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either
party the right to rescind the contract upon the failure
of the other to perform the obligation assumed
thereunder. Moreover, there is nothing in the law that
prohibits the parties from entering into an agreement
that violation of the terms of the contract would cause
its cancellation even without court intervention
(Froilan v. Pan Oriental Shipping, Co., et al., 12
SCRA 276)—
Well settled is, however, the rule
that a judicial action for the
rescission of a contract is not
necessary where the contract
provides that it may be revoked
and cancelled for violation of any
of its terms and conditions'
(Lopez v. Commissioner of
Customs, 37 SCRA 327, and
cases cited therein)
Resort to judicial action for
rescission is obviously not
contemplated . . . The validity of
the stipulation can not be
seriously disputed. It is in the
nature of a facultative resolutory
condition which in many cases
has been upheld by this Court.
(Ponce Enrile v. Court of
Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured
party to resort to court for rescission of the contract
when the contract itself provides that it may be
rescinded for violation of its terms and conditions, was
qualified by this Court inUniversity of the Philippines
v. De los Angeles, (35 SCRA 102) where we
explained that:
Of course, it must be understood
that the act of a party in treating a
contract as cancelled or resolved
on account of infractions by the
other contracting party must be
made known to the other and is
always provisional, being ever
subject to scrutiny and review by
the proper court. If the other party
denies that rescission is justified,
it is free to resort to judicial action
in its own behalf, and bring the
matter to court. Then, should the
court, after due hearing, decide
that the resolution of the contract
was not warranted, the
responsible party will be
sentenced to damages; in the
contrary case, the resolution will
be affirmed, and the consequent
indemnity awarded to the party
prejudiced.
In other words, the party who
deems the contract violated many
consider it resolved or rescinded,
and act accordingly, without
previous court action, but
it proceeds at its own risk. For it
is only the final judgment of the
corresponding court that will
conclusively and finally settle
whether the action taken was or
was not correct in law. ... .
We see no conflict between this
ruling and the previous
jurisprudence of this Court
invoked by respondent declaring
that judicial action is necessary
for the resolution of a reciprocal
obligation; (Ocejo, Perez & Co. v.
International Banking Corp., 37
Phil. 631; Republic v. Hospital de
San Juan de Dios, et al., 84 Phil.
820) since in every case where
the extrajudicial resolution is
contested only the final award of
the court of competent jurisdiction
can conclusively settle whether
the resolution was proper or not.
It is in this sense that judicial
action will be necessary, as
 without it, the extrajudicial
resolution will remain contestable
and subject to judicial
invalidation, unless attack
thereon should become barred by
acquiescence, estoppel or
prescription.
The right to rescind the contract for non-performance
of one of its stipulations, therefore, is not absolute.
InUniversal Food Corp. v. Court of Appeals (33 SCRA
1) the Court stated that—
The general rule is that rescission
of a contract will not be permitted
for a slight or casual breach, but
only for such substantial and
fundamental breach as would
defeat the very object of the
parties in making the agreement.
(Song Fo & Co. v. Hawaiian-
Philippine Co., 47 Phil. 821, 827)
The question of whether a breach
of a contract is substantial
depends upon the attendant
circumstances. (Corpus v. Hon.
Alikpala, et al., L-23707 & L-
23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-
appellees violated Section two of the contract to sell
which provides:
SECOND.—That in consideration
of the agreement of sale of the
above described property, the
party of the SECOND PART
obligates himself to pay to the
party of the FIRST PART the
Sum of THREE THOUSAND
NINE HUNDRED TWENTY
ONLY (P3,920.00), Philippine
Currency, plus interest at the rate
of 7% per annum, as follows:
(a) The amount of THREE
HUNDRED NINETY TWO only
(P392.00) when this contract is
signed; and
(b) The sum of FORTY ONE
AND 20/100 ONLY (P4l.20) on or
before the 19th day of each
month, from this date until the
total payment of the price above
stipulated, including interest.
because they failed to pay the August installment,
despite demand, for more than four (4) months.
The breach of the contract adverted to by the
defendants-appellants is so slight and casual when
we consider that apart from the initial downpayment of
P392.00 the plaintiffs-appellees had already paid the
monthly installments for a period of almost nine (9)
years. In other words, in only a short time, the entire
obligation would have been paid. Furthermore,
although the principal obligation was only P 3,920.00
excluding the 7 percent interests, the plaintiffs-
appellees had already paid an aggregate amount of P
4,533.38. To sanction the rescission made by the
defendants-appellants will work injustice to the
plaintiffs- appellees. (See J.M. Tuazon and Co., Inc.
v. Javier, 31 SCRA 829) It would unjustly enrich the
defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been
substantially performed in good
faith, the obligor may recover as
though there had been a strict
and complete fulfillment, less
damages suffered by the obligee.
also militates against the unilateral act of the
defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to
the effect that:
Although the primary object of
selling subdivided lots is
business, yet, it cannot be denied
that this subdivision is likewise
purposely done to afford those
landless, low income group
people of realizing their dream of
a little parcel of land which they
can really call their own.
The defendants-appellants cannot rely on paragraph
9 of the contract which provides:
NINTH.-That whatever
consideration of the party of the
FIRST PART may concede to the
party of the SECOND PART, as
not exacting a strict compliance
with the conditions of paragraph
6 of this contract, as well as any
other condonation that the party
of the FIRST PART may give to
the party of the SECOND PART
with regards to the obligations of
the latter, should not be
interpreted as a renunciation on
the part of the party of the FIRST
PART of any right granted it by
this contract, in case of default or
non-compliance by the party of
the SECOND PART.
The defendants-appellants argue that paragraph nine
clearly allows the seller to waive the observance of
paragraph 6 not merely once, but for as many times
as he wishes.
The defendants-appellants' contention is without
merit. We agree with the plaintiffs-appellees that
when the defendants-appellants, instead of availing of
their alleged right to rescind, have accepted and
received delayed payments of installments, though
the plaintiffs-appellees have been in arrears beyond
the grace period mentioned in paragraph 6 of the
contract, the defendants-appellants have waived and
are now estopped from exercising their alleged right
of rescission. In De Guzman v. Guieb (48 SCRA 68),
we held that:
xxx xxx xxx
But defendants do not deny that
in spite of the long arrearages,
neither they nor their
predecessor, Teodoro de
Guzman, even took steps to
cancel the option or to eject the
appellees from the home-lot in
question. On the contrary, it is
admitted that the delayed
payments were received without
protest or qualification. ... Under
these circumstances, We cannot
but agree with the lower court
that at the time appellees
exercised their option, appellants
 had already forfeited their right to
invoke the above-quoted
provision regarding the nullifying
effect of the non-payment of six
months rentals by appellees by
their having accepted without
qualification on July 21, 1964 the
full payment by appellees of all
their arrearages.
The defendants-appellants contend in the second
assignment of error that the ledger of payments show
a balance of P671,67 due from the plaintiffs-
appellees. They submit that while it is true that the
total monthly installments paid by the plaintiffs-
appellees may have exceeded P3,920.00, a
substantial portion of the said payments were applied
to the interests since the contract specifically provides
for a 7% interest per annum on the remaining
balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:
SECOND.—That in consideration
of the agreement of sale of the
above described property, the
party of the SECOND PART
obligates himself to pay to the
party of the FIRST PART the
Sum of THREE THOUSAND
NINE HUNDRED TWENTY
ONLY (P 3,920.00), Philippine
Currency, plus interest at the rate
of 7% per annum ... . (Emphasis
supplied)
The plaintiffs-appellees on the other hand are firm in
their submission that since they have already paid the
defendants-appellants a total sum of P4,533.38, the
defendants-appellants must now be compelled to
execute the final deed of sale pursuant to paragraph
12 of the contract which provides:
TWELFTH.—That once the
payment of the sum of
P3,920.00, the total price of the
sale is completed, the party to the
FIRST PART will execute in favor
of the party of the SECOND
PART, the necessary deed or
deeds to transfer to the latter the
title of the parcel of land sold,
free from all hens and
encumbrances other than those
expressly provided in this
contract; it is understood,
however, that au the expenses
which may be incurred in the said
transfer of title shall be paid by
the party of the SECOND PART,
as above stated.
Closely related to the second assignment of error is
the submission of the plaintiffs-appellees that the
contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to
sell entered into by the parties has some
characteristics of a contract of adhesion. The
defendants-appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a
lot upon which they could build a home, affixed their
signatures and assented to the terms and conditions
of the contract. They had no opportunity to question
nor change any of the terms of the agreement. It was
offered to them on a "take it or leave it" basis.
In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we
held that:
xxx xxx xxx
... (W)hile generally, stipulations
in a contract come about after
deliberate drafting by the parties
thereto. . . . there are certain
contracts almost all the
provisions of which have been
drafted only by one party, usually
a corporation. Such contracts are
called contracts of adhesion,
because the only participation of
the party is the signing of his
signature or his "adhesion"
thereto. Insurance contracts, bills
of lading, contracts of sale of lots
on the installment plan fall into
this category. (Paras, Civil Code
of the Philippines, Seventh ed.,
Vol. 1, p. 80.) (Emphasis
supplied)
While it is true that paragraph 2 of the contract
obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7%
interest per annum, it is likewise true that under
paragraph 12 the seller is obligated to transfer the title
to the buyer upon payment of the P3,920.00 price
sale.
The contract to sell, being a contract of adhesion,
must be construed against the party causing it. We
agree with the observation of the plaintiffs-appellees
to the effect that "the terms of a contract must be
interpreted against the party who drafted the same,
especially where such interpretation will help effect
justice to buyers who, after having invested a big
amount of money, are now sought to be deprived of
the same thru the prayed application of a contract
clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in
essence, and in its entirety is most unfair to the
buyers."
Thus, since the principal obligation under the contract
is only P3,920.00 and the plaintiffs-appellees have
already paid an aggregate amount of P4,533.38, the
courts should only order the payment of the few
remaining installments but not uphold the cancellation
of the contract. Upon payment of the balance of
P671.67 without any interest thereon, the defendants-
appellants must immediately execute the final deed of
sale in favor of the plaintiffs-appellees and execute
the necessary transfer documents as provided in
paragraph 12 of the contract. The attorney's fees are
justified.
WHEREFORE, the instant petition is DENIED for lack
of merit. The decision appealed from is AFFIRMED
with the modification that the plaintiffs-appellees
should pay the balance of SIX HUNDRED SEVENTY
ONE PESOS AND SIXTY-SEVEN CENTAVOS
(P671.67) without any interests. Costs against the
defendants-appellants.
SO ORDERED.

SOLOMON BOYSAW and ALFREDO M. YULO,
JR., plaintiffs-appellants,
vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL,
SR., and MANUEL NIETO, JR., defendants-
appellees.
Felipe Torres and Associates for plaintiffs-appellants.
V.E. Del Rosario & Associates for defendant-appellee
M. Nieto, Jr.
A.R. Naravasa & Pol Tiglao, Jr. for defendant-
appellee Interphil Promotions, Inc.
RESOLUTION
FERNAN, J.:
This is an appeal interposed by Solomon Boysaw and
Alfredo Yulo, Jr., from the decision dated July 25,
1963 and other rulings and orders of the then Court of
First Instance [CFI] of Rizal, Quezon City, Branch V in
Civil Case No. Q-5063, entitled "Solomon Boysaw
and Alfredo M. Yulo, Jr., Plaintiffs versus Interphil
Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto,
Jr., Defendants," which, among others, ordered them
to jointly and severally pay defendant-appellee
Manuel Nieto, Jr., the total sum of P25,000.00, broken
down into P20,000.00 as moral damages and
P5,000.00 as attorney's fees; the defendants-
appellees Interphil Promotions, Inc. and Lope Sarreal,
Sr., P250,000.00 as unrealized profits, P33,369.72 as
actual damages and P5,000.00 as attorney's fees;
and defendant-appellee Lope Sarreal, Sr., the
additional amount of P20,000.00 as moral damages
aside from costs.
The antecedent facts of the case are as follows:
On May 1, 1961, Solomon Boysaw and his then
Manager, Willie Ketchum, signed with Interphil
Promotions, Inc. represented by Lope Sarreal, Sr., a
contract to engage Gabriel "Flash" Elorde in a boxing
contest for the junior lightweight championship of the
world.
It was stipulated that the bout would be held at the
Rizal Memorial Stadium in Manila on September 30,
1961 or not later than thirty [30] days thereafter
should a postponement be mutually agreed upon, and
that Boysaw would not, prior to the date of the boxing
contest, engage in any other such contest without the
written consent of Interphil Promotions, Inc.
On May 3, 1961, a supplemental agreement on
certain details not covered by the principal contract
was entered into by Ketchum and Interphil.
Thereafter, Interphil signed Gabriel "Flash" Elorde to a
similar agreement, that is, to engage Boysaw in a title
fight at the Rizal Memorial Stadium on September 30,
1961.
On June 19, 1961, Boysaw fought and defeated Louis
Avila in a ten-round non-title bout held in Las Vegas,
Nevada, U.S.A. [pp. 26-27, t.s.n., session of March
14, 1963].
On July 2, 1961, Ketchum on his own behalf and on
behalf of his associate Frank Ruskay, assigned to J.
Amado Araneta the managerial rights over Solomon
Boysaw.
Presumably in preparation for his engagement with
Interphil, Solomon Boysaw arrived in the Philippines
on July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned
to Alfredo J. Yulo, Jr. the managerial rights over
Boysaw that he earlier acquired from Ketchum and
Ruskay. The next day, September 2, 1961, Boysaw
wrote Lope Sarreal, Sr. informing him of his arrival
and presence in the Philippines.
On September 5, 1961, Alfredo Yulo, Jr. wrote to
Sarreal informing him of his acquisition of the
managerial rights over Boysaw and indicating his and
Boysaw's readiness to comply with the boxing
contract of May 1, 1961. On the same date, on behalf
of Interphil Sarreal wrote a letter to the Games and
Amusement Board [GAB] expressing concern over
reports that there had been a switch of managers in
the case of Boysaw, of which he had not been
formally notified, and requesting that Boysaw be
called to an inquiry to clarify the situation.
The GAB called a series of conferences of the parties
concerned culminating in the issuance of its decision
to schedule the Elorde-Boysaw fight for November 4,
1961. The USA National Boxing Association which
has supervisory control of all world title fights
approved the date set by the GAB
Yulo, Jr. refused to accept the change in the fight
date, maintaining his refusal even after Sarreal on
September 26, 1961, offered to advance the fight date
to October 28, 1961 which was within the 30-day
period of allowable postponements provided in the
principal boxing contract of May 1, 1961.
Early in October 1961, Yulo, Jr. exchanged
communications with one Mamerto Besa, a local
boxing promoter, for a possible promotion of the
projected Elorde-Boysaw title bout. In one of such
communications dated October 6, 1961, Yulo
informed Besa that he was willing to approve the fight
date of November 4,1961 provided the same was
promoted by Besa.
While an Elorde-Boysaw fight was eventually staged,
the fight contemplated in the May 1, 1961 boxing
contract never materialized.
As a result of the foregoing occurrences, on October
12, 1961, Boysaw and Yulo, Jr. sued Interphil,
Sarreal, Sr. and Manuel Nieto, Jr. in the CFI of Rizal
[Quezon City Branch] for damages allegedly
occasioned by the refusal of Interphil and Sarreal,
aided and abetted by Nieto, Jr., then GAB Chairman,
to honor their commitments under the boxing contract
of May 1,1961.
On the first scheduled date of trial, plaintiff moved to
disqualify Solicitor Jorge Coquia of the Solicitor
General's Office and Atty. Romeo Edu of the GAB
Legal Department from appearing for defendant
Nieto, Jr. on the ground that the latter had been sued
in his personal capacity and, therefore, was not
entitled to be represented by government counsel.
The motion was denied insofar as Solicitor General
Coquia was concerned, but was granted as regards
the disqualification of Atty. Edu.
The case dragged into 1963 when sometime in the
early part of said year, plaintiff Boysaw left the country
without informing the court and, as alleged, his
counsel. He was still abroad when, on May 13, 1963,
he was scheduled to take the witness stand. Thus,
the lower court reset the trial for June 20, 1963. Since
Boysaw was still abroad on the later date, another
postponement was granted by the lower court for July
23, 1963 upon assurance of Boysaw's counsel that
should Boysaw fail to appear on said date, plaintiff's
case would be deemed submitted on the evidence
thus far presented.
On or about July 16, 1963, plaintiffs represented by a
new counsel, filed an urgent motion for postponement
of the July 23, 1963 trial, pleading anew Boysaw's
inability to return to the country on time. The motion
was denied; so was the motion for reconsideration
filed by plaintiffs on July 22, 1963.
The trial proceeded as scheduled on July 23, 1963
with plaintiff's case being deemed submitted after the
plaintiffs declined to submit documentary evidence
when they had no other witnesses to present. When
defendant's counsel was about to present their case,
plaintiff's counsel after asking the court's permission,
took no further part in the proceedings.
After the lower court rendered its judgment dismissing
the plaintiffs' complaint, the plaintiffs moved for a new
trial. The motion was denied, hence, this appeal taken
directly to this Court by reason of the amount
involved.
From the errors assigned by the plaintiffs, as having
been committed by the lower court, the following
principal issues can be deduced:
1. Whether or not there was a
violation of the fight contract of
May 1, 1961; and if there was,
who was guilty of such violation.
2. Whether or not there was legal
ground for the postponement of
the fight date from September 1,
1961, as stipulated in the May 1,
1961 boxing contract, to
November 4,1961,
3. Whether or not the lower court
erred in the refusing a
postponement of the July 23,
1963 trial.
4. Whether or not the lower court
erred in denying the appellant's
motion for a new trial.
5. Whether or not the lower court,
on the basis of the evidence
adduced, erred in awarding the
appellees damages of the
character and amount stated in
the decision.
On the issue pertaining to the violation of the May 1,
1961 fight contract, the evidence established that the
contract was violated by appellant Boysaw himself
when, without the approval or consent of Interphil, he
fought Louis Avila on June 19, 1961 in Las Vegas
Nevada. Appellant Yulo admitted this fact during the
trial. [pp. 26-27, t.s.n., March 14, 1963].
While the contract imposed no penalty for such
violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law on
contracts recognizes the principle that actionable
injury inheres in every contractual breach. Thus:
Those who in the performance of
their obligations are guilty of
fraud, negligence or delay, and
those who in any manner
contravene the terms thereof, are
liable for damages. [Art. 1170,
Civil Code].
Also:
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. [Part 1, Art.
1191, Civil Code].
There is no doubt that the contract in question gave
rise to reciprocal obligations. "Reciprocal obligations
are those which arise from the same cause, and in
which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent
upon the obligation of the other. They are to be
performed simultaneously, so that the performance of
one is conditioned upon the simultaneous fulfillment
of the other" [Tolentino, Civil Code of the
Philippines, Vol. IV, p. 175.1
The power to rescind is given to the injured party.
"Where the plaintiff is the party who did not perform
the undertaking which he was bound by the terms of
the agreement to perform 4 he is not entitled to insist
upon the performance of the contract by the
defendant, or recover damages by reason of his own
breach " [Seva vs. Alfredo Berwin 48 Phil. 581,
Emphasis supplied].
Another violation of the contract in question was the
assignment and transfer, first to J. Amado Araneta,
and subsequently, to appellant Yulo, Jr., of the
managerial rights over Boysaw without the knowledge
or consent of Interphil.
The assignments, from Ketchum to Araneta, and from
Araneta to Yulo, were in fact novations of the original
contract which, to be valid, should have been
consented to by Interphil.
Novation which consists in
substituting a new debtor in the
place of the original one, may be
made even without the
knowledge or against the will of
the latter, but not without the
consent of the creditor.[Art. 1293,
Civil Code, emphasis supplied].
That appellant Yulo, Jr., through a letter, advised
Interphil on September 5, 1961 of his acquisition of
the managerial rights over Boysaw cannot change the
fact that such acquisition, and the prior acquisition of
such rights by Araneta were done without the consent
of Interphil. There is no showing that Interphil, upon
receipt of Yulo's letter, acceded to the "substitution"
by Yulo of the original principal obligor, who is
Ketchum. The logical presumption can only be that,
with Interphil's letter to the GAB expressing concern
over reported managerial changes and requesting for
clarification on the matter, the appellees were not
reliably informed of the changes of managers. Not
being reliably informed, appellees cannot be deemed
to have consented to such changes.
Under the law when a contract is unlawfully novated
by an applicable and unilateral substitution of the
obligor by another, the aggrieved creditor is not bound
to deal with the substitute.
The consent of the creditor to the
change of debtors, whether
in expromision or delegacion is
an, indispensable requirement . .
. Substitution of one debtor for
another may delay or prevent the
fulfillment of the obligation by
reason of the inability or
insolvency of the new debtor,
hence, the creditor should agree
to accept the substitution in order
that it may be binding on him.
 Thus, in a contract where x is the
creditor and y is the debtor, if y
enters into a contract with z,
under which he transfers to z all
his rights under the first contract,
together with the obligations
thereunder, but such transfer is
not consented to or approved by
x, there is no novation. X can still
bring his action against y for
performance of their contract or
damages in case of breach.
[Tolentino, Civil Code of the
Philippines, Vol. IV, p. 3611.
From the evidence, it is clear that the appellees,
instead of availing themselves of the options given to
them by law of rescission or refusal to recognize the
substitute obligor Yulo, really wanted to postpone the
fight date owing to an injury that Elorde sustained in a
recent bout. That the appellees had the justification to
renegotiate the original contract, particularly the fight
date is undeniable from the facts aforestated. Under
the circumstances, the appellees' desire to postpone
the fight date could neither be unlawful nor
unreasonable.
We uphold the appellees' contention that since all the
rights on the matter rested with the appellees, and
appellants' claims, if any, to the enforcement of the
contract hung entirely upon the former's pleasure and
sufferance, the GAB did not act arbitrarily in acceding
to the appellee's request to reset the fight date to
November 4, 1961. It must be noted that appellant
Yulo had earlier agreed to abide by the GAB ruling.
In a show of accommodation, the appellees offered to
advance the November 4, 1961 fight to October 28,
1961 just to place it within the 30- day limit of
allowable postponements stipulated in the original
boxing contract.
The refusal of appellants to accept a postponement
without any other reason but the implementation of
the terms of the original boxing contract entirely
overlooks the fact that by virtue of the violations they
have committed of the terms thereof, they have
forfeited any right to its enforcement.
On the validity of the fight postponement, the
violations of the terms of the original contract by
appellants vested the appellees with the right to
rescind and repudiate such contract altogether. That
they sought to seek an adjustment of one particular
covenant of the contract, is under the circumstances,
within the appellee's rights.
While the appellants concede to the GAB's authority
to regulate boxing contests, including the setting of
dates thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is
their contention that only Manuel Nieto, Jr. made the
decision for postponement, thereby arrogating to
himself the prerogatives of the whole GAB Board.
The records do not support appellants' contention.
Appellant Yulo himself admitted that it was the GAB
Board that set the questioned fight date. [pp. 32-42,
t.s.n., Jan. 17, 1963]. Also, it must be stated that one
of the strongest presumptions of law is that official
duty has been regularly performed. In this case, the
absence of evidence to the contrary, warrants the full
application of said presumption that the decision to
set the Elorde-Boysaw fight on November 4, 1961
was a GAB Board decision and not of Manuel Nieto,
Jr. alone.
Anent the lower court's refusal to postpone the July
23, 1963 trial, suffice it to say that the same issue had
been raised before Us by appellants in a petition for
certiorari and prohibition docketed as G.R. No. L-
21506. The dismissal by the Court of said petition had
laid this issue to rest, and appellants cannot now
hope to resurrect the said issue in this appeal.
On the denial of appellant's motion for a new trial, we
find that the lower court did not commit any reversible
error.
The alleged newly discovered evidence, upon which
the motion for new trial was made to rest, consists
merely of clearances which Boysaw secured from the
clerk of court prior to his departure for abroad. Such
evidence cannot alter the result of the case even if
admitted for they can only prove that Boysaw did not
leave the country without notice to the court or his
counsel.
The argument of appellants is that if the clearances
were admitted to support the motion for a new trial,
the lower court would have allowed the postponement
of the trial, it being convinced that Boysaw did not
leave without notice to the court or to his counsel.
Boysaw's testimony upon his return would, then, have
altered the results of the case.
We find the argument without merit because it
confuses the evidence of the clearances and the
testimony of Boysaw. We uphold the lower court's
ruling that:
The said documents [clearances]
are not evidence to offset the
evidence adduced during the
hearing of the defendants. In fact,
the clearances are not even
material to the issues raised. It is
the opinion of the Court that the
'newly discovered evidence'
contemplated in Rule 37 of the
Rules of Court, is such kind of
evidence which has reference to
the merits of the case, of such a
nature and kind, that if it were
presented, it would alter the
result of the judgment. As
admitted by the counsel in their
pleadings, such clearances might
have impelled the Court to grant
the postponement prayed for by
them had they been presented on
time. The question of the denial
of the postponement sought for
by counsel for plaintiffs is a moot
issue . . . The denial of the
petition for certiorari and
prohibition filed by them, had he
effect of sustaining such ruling of
the court . . . [pp. 296-297,
Record on Appeal].
The testimony of Boysaw cannot be considered newly
discovered evidence for as appellees rightly contend,
such evidence has been in existence waiting only to
be elicited from him by questioning.
We cite with approval appellee's contention that "the
two qualities that ought to concur or dwell on each
and every of evidence that is invoked as a ground for
new trial in order to warrant the reopening . . . inhered
separately on two unrelated species of proof" which
"creates a legal monstrosity that deserves no
recognition."
On the issue pertaining to the award of excessive
damages, it must be noted that because the
appellants wilfully refused to participate in the final
hearing and refused to present documentary evidence
after they no longer had witnesses to present, they,
by their own acts prevented themselves from
objecting to or presenting proof contrary to those
adduced for the appellees.
On the actual damages awarded to appellees, the
appellants contend that a conclusion or finding based
upon the uncorroborated testimony of a lone witness
cannot be sufficient. We hold that in civil cases, there
is no rule requiring more than one witness or
declaring that the testimony of a single witness will
not suffice to establish facts, especially where such
testimony has not been contradicted or rebutted.
Thus, we find no reason to disturb the award of
P250,000.00 as and for unrealized profits to the
appellees.
On the award of actual damages to Interphil and
Sarreal, the records bear sufficient evidence
presented by appellees of actual damages which
were neither objected to nor rebutted by appellants,
again because they adamantly refused to participate
in the court proceedings.
The award of attorney's fees in the amount of
P5,000.00 in favor of defendant-appellee Manuel
Nieto, Jr. and another P5,000.00 in favor of
defendants-appellees Interphil Promotions, Inc. and
Lope Sarreal, Sr., jointly, cannot also be regarded as
excessive considering the extent and nature of
defensecounsels' services which involved legal work
for sixteen [16] months.
However, in the matter of moral damages, we are
inclined to uphold the appellant's contention that the
award is not sanctioned by law and well- settled
authorities. Art. 2219 of the Civil Code provides:
Art. 2219. Moral damages may
be recovered in the following
analogous cases:
1) A criminal offense resulting in
physical injuries;
2) Quasi-delict causing physical
injuries;
3) Seduction, abduction, rape or
other lascivious acts;
4) Adultery or concubinage;
5) Illegal or arbitrary detention or
arrest;
6) Illegal search;
7) Libel, slander or any other
form of defamation;
8) Malicious prosecution;
9) Acts mentioned in Art. 309.
10) Acts and actions referred to
in Arts., 21, 26, 27, 28, 29, 30,
32, 34 and 35.
The award of moral damages in the instant case is
not based on any of the cases enumerated in Art.
2219 of the Civil Code. The action herein brought by
plaintiffs-appellants is based on a perceived breach
committed by the defendants-appellees of the
contract of May 1, 1961, and cannot, as such, be
arbitrarily considered as a case of malicious
prosecution.
Moral damages cannot be imposed on a party litigant
although such litigant exercises it erroneously
because if the action has been erroneously filed, such
litigant may be penalized for costs.
The grant of moral damages is
not subject to the whims and
caprices of judges or courts. The
court's discretion in granting or
refusing it is governed by reason
and justice. In order that a person
may be made liable to the
payment of moral damages, the
law requires that his act be
wrongful. The adverse result of
an action does not per se make
the act wrongful and subject the
actor to the payment of moral
damages. The law could not have
meant to impose a penalty on the
right to litigate; such right is so
precious that moral damages
may not be charged on those
who may exercise it erroneously.
For these the law taxes costs.
[Barreto vs. Arevalo, et. al. No. L-
7748, Aug. 27, 1956, 52 O.G.,
No. 13, p. 5818.]
WHEREFORE, except for the award of moral
damages which is herein deleted, the decision of the
lower court is hereby affirmed.
SO ORDERED
PILIPINAS BANK as Successor-In-Interest Of
And/Or In substitution to, The MANUFACTURERS
BANK AND TRUST COMPANY, petitioner-appellant
vs.
INTERMEDIATE APPELLATE COURT (Fourth Civil
Cases Division), and JOSE W. DIOKNO and
CARMEN I. DIOKNO, respondents-appellees.
PARAS, J.:
This is an appeal by certiorari from the Decision 1 of
the respondent court dated May 31, 1984 in CA-G.R.
CV No. 67205 entitled "Jose W. Diokno and Carmen
I. Diokno, plaintiffs-appellees, vs. The Manufacturers
Bank and Trust Company, defendant-appellant" which
affirmed the decision 2 of the Court of First Instance of
Rizal (Pasig Branch XXI) in Civil Case No. 19660, the
dispositive portion of which reads:
WHEREFORE, judgment is rendered in
favor of the plaintiffs and against the
defendant, ordering the defendant
Manufacturers Bank & Trust Company:
1. To deliver to the plaintiffs the parcel of
land described in Contract to Sell No. VV-
18-(a) in the total area of 5,936 square
meters and to execute in their favor the
necessary deed of absolute sale therefor;
2. To pay the sum of P556,160.00 less the
amount due on the contract (i.e., the unpaid
installments from December, 1966 until the
contract would have been fully paid
together with interest thereon up to March
25, 1974) with legal interest on said
balance from April 22, 1974 until the same
is fully paid;
3. P50,000.00 by way of moral damages;
4. P50,000.00 by way of exemplary
damages;
5. Ten per cent (10%) of the judgment by
way of attorney's fees; and
6. Costs of suit.
 SO ORDERED. (Rollo, pp. 14-15)
The following are the undisputed facts of the case:
1. On April 18, 1961, Hacienda Benito, Inc.
(petitioner's predecessor-in-interest) as vendor, and
private respondents, as vendees executed Contract to
Sell No. VV-18 (a) (Exh. A) over a parcel of land with
an area of 5,936 square meters of the Victoria Valley
Subdivision in Antipolo, Rizal, subject to the following
terms and conditions, among others, relevant to this
petition:
(a) The total contract price for the entire
5,936 square-meter-lot was P47,488.00;
(b) Of the total sum, an amount of
Pl2,182.00 was applied thereto so as to
reduce the balance on the principal to
P35,306.00;
(c) The aforesaid balance, together with the
stipulated interest of 6% per annum, was to
be paid over a period of 8-1/2 years starting
on May 1, 1961 at a monthly installment of
P446.10 until fully paid-although this
monthly installment was later adjusted to
the higher amount of P797.86, starting on
April 1, 1965;
(d) Upon complete payment by the vendee
of the total price of the lot the vendor shall
execute a deed of sale in favor of the
vendee;
(e) The contract shall be considered
automatically rescinded and cancelled and
of no further force and effect upon failure of
the vendee to pay when due, three or more
consecutive installments as stipulated
therein or to comply with any of the terms
and conditions thereof, in which case the
vendor shall have right to resell the said
parcel of land to any person interested,
forfeiting payments made by the vendee as
liquidated damages.
2. On July 27, 1965, petitioner sent to private
respondents a Statement of Account (Exh. F-1)
requesting remittance of installment arrears showing
partial payments for the month of April 1965 and May
1965 and complete default for June, July and August,
1965;
3. Likewise, on August 31, 1965, petitioner sent to
private respondents another Statement of Account
with the additional entries of interests and the
incoming installment for September, 1965;
4. In partial compliance with the aforesaid Statements
of Account, private respondents paid on September 3,
1965 the sum of Pl,397.00 which answers for the
installments for the months of June 1965 to August
1965;
5. On March 17, 1967, petitioner sent private
respondents a simple demand letter showing a
delinquency in their monthly amortizations for 19
months (Exh. 9);
6. On April 17, 1967, petitioner again sent private
respondents a demand letter showing total arrearages
of 20 months as of April 1965, but this time advising
that unless they up-date their installment payments,
petitioner shall be constrained to avail of the
automatic rescission clause (Exh. 10);
7. On May 17, 1967, private respondents made a
partial payment of P2,000.00 with the request for an
extension of 60 days from May 17, 1967 within which
to up-date their account (Exh. 10-a);
8. On July 17, 1967, private respondents wrote a
letter to petitioner asking another extension of sixty
(60) days to pay all their arrearages and update their
payments under Contract No. VV-18 (a);
9. On September 18, 1967, private respondents paid
P5,000.00 as partial payment and requested an
extension of another 30 days from September 18,
1967 within which to update their account (Exh. 10-c);
10. On October 19, 1967, however, private
respondents failed to update their arrearages and did
not request for any further extension of time within
which to update their account;
11. After almost three (3) years, or on July 16, 1970,
private respondents wrote a letter to petitioner
requesting for a Statement of Account as of date in
arrears and interests(Exh. 10-d), to which petitioner
made a reply on July 22, 1970 (Exh. 11);
12. On May 19, 1971, petitioner wrote a letter to
private respondents, reminding them of their balance
which will be due on the 31st instant (Exh. J);
13. More than two (2) years from May 19, 1971 or on
July 5, 1973, private respondents wrote a letter to
petitioner expressing their desire to fully settle their
obligation, requesting for a complete statement of all
the balance due including interests;
14. On March 14, 1974, private respondents wrote a
letter reiterating their request in their letter dated July
5, 1973, which has not been complied with despite
several follow-ups (Exh. O);
15. On March 25, 1974, private respondent Carmen I.
Diokno went to see the Chairman of petitioner's Board
of Directors on the matter informing him that she had
a buyer who was ready to purchase the property,
16. On March 27, 1974, petitioner wrote a letter to
private respondents, informing them that the contract
to sell had been rescinded/cancelled by a notarial act,
to which letter was annexed a "Demand for
Rescission of Contract", notarized on March 25, 1974
(Exh. 12);
17. In view of the foregoing, private respondents filed
Complaint for Specific Performance with Damages to
compel petitioner to execute a deed of sale in their
favor, and to deliver to them the title of the lot in
question.
18. Petitioner filed an Answer with counterclaim for
damages in the form of attorney's fees, claiming that
Contract to Sell No. VV-18(a) has been automatically
rescinded or cancelled by virtue of private
respondents' failure to pay the installments due in the
contract under the automatic rescission clause.
19. After trial, the lower court rendered a decision in
private respondents' favor, holding that petitioner
could not rescind the contract to sell, because: (a)
petitioner waived the automatic rescission clause by
accepting payment on September 1967, and by
sending letters advising private respondents of the
balances due, thus, looking forward to receiving
payments thereon; (b) in any event, until May 18,
1977 (when petitioner made arrangements for the
acquisition of additional 870 square meters) petitioner
could not have delivered the entire area contracted
for, so, neither could private respondents be liable in
default, citing Art. 1 189 of the New Civil Code.
(Decision, pp. 141-148, Amended Record on Appeal).
Said decision was affirmed on appeal.
Hence, this Petition For Review on Certiorari, raising
the main issue of whether or not the Contract to Sell
No. VV-18(a) was rescinded or cancelled, under the
automatic rescission clause contained therein.
We find the petition meritless. While it is true that in
the leading case of Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc. and Myers Building Co., 43
SCRA 93 the Supreme Court reiterated among other
things that a contractual provision allowing "automatic
rescission" (without prior need of judicial rescission,
resolution or cancellation) is VALID, the remedy of
one who feels aggrieved being to go to Court for the
cancellation of the rescission itself, in case the
rescission is found unjustified under the
circumstances, still in the instant case there is a clear
WAIVER of the stipulated right of "automatic
rescission," as evidenced by the many
extensions granted private respondents by the
petitioner. In all these extensions, the petitioner never
called attention to the proviso on "automatic
rescission."
WHEREFORE the assailed decision is hereby
AFFIRMED but the actual damages are hereby
reduced to P250,000.00 (the profit private
respondents could have earned had the land been
delivered to them at the time they were ready to pay
all their arrearages) minus whatever private
respondents still owe the petitioner (with the
stipulated 6% annual interest up to March 25, 1974)
as a result of the contract.
SO ORDERED.
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and
ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND
SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and
SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E.
Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside
as null and void the decision of the Court of Appeals,
in C.A.-G.R. No. 52253-R dated February 11, 1977,
modifying the decision dated February 15, 1972 of the
Court of First Instance of Agusan, which dismissed
the petition of respondent Sulpicio M. Tolentino for
injunction, specific performance or rescission, and
damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon
favorable recommendation of its legal department,
approved the loan application for P80,000.00 of
Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage
over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and
which mortgage was annotated on the said title the
next day. The approved loan application called for a
lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual
interest. It was required that Sulpicio M. Tolentino
shall use the loan proceeds solely as an additional
capital to develop his other property into a
subdivision.
On May 22, 1965, a mere P17,000.00 partial release
of the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino
signed a promissory note for P17,000.00 at 12%
annual interest, payable within 3 years from the date
of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance
interest for the P80,000.00 loan covering a 6-month
period amounting to P4,800.00 was deducted from
the partial release of P17,000.00. But this pre-
deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by
the Bank that there was no fund yet available for the
release of the P63,000.00 balance (p. 47, rec.). The
Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p.
113, rec.).
On August 13, 1965, the Monetary Board of the
Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No.
1049, which provides:
In view of the chronic reserve
deficiencies of the Island Savings
Bank against its deposit liabilities,
the Board, by unanimous vote,
decided as follows:
1) To prohibit the bank from
making new loans and
investments [except investments
in government securities]
excluding extensions or renewals
of already approved loans,
provided that such extensions or
renewals shall be subject to
review by the Superintendent of
Banks, who may impose such
limitations as may be necessary
to insure correction of the bank's
deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding
thatIsland Savings Bank failed to put up the required
capital to restore its solvency, issued Resolution No.
967 which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting
Superintendent of Banks to take charge of the assets
of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of
non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-
judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M.
Tolentino; and the sheriff scheduled the auction for
January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a
petition with the Court of First Instance of Agusan for
injunction, specific performance or rescission and
damages with preliminary injunction, alleging that
since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island
Savings Bank to deliver the P63,000.00 with interest
of 12% per annum from April 28, 1965, and if said
balance cannot be delivered, to rescind the real
estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of
a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank
from continuing with the foreclosure of the mortgage
(pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the
answer in intervention praying for the dismissal of the
petition of Sulpicio M. Tolentino and the setting aside
of the restraining order, filed by the Central Bank and
by the Acting Superintendent of Banks (pp. 65-76,
rec.).
On February 15, 1972, the trial court, after trial on the
merits rendered its decision, finding unmeritorious the
petition of Sulpicio M. Tolentino, ordering him to pay
Island Savings Bank the amount of PI 7 000.00 plus
legal interest and legal charges due thereon, and
lifting the restraining order so that the sheriff may
proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on
appeal by Sulpicio M. Tolentino, modified the Court of
First Instance decision by affirming the dismissal of
Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank
can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M.
Tolentino for specific
performance prosper?
2. Is Sulpicio M. Tolentino liable
to pay the P17,000.00 debt
covered by the promissory note?
3. If Sulpicio M. Tolentino's
liability to pay the P17,000.00
subsists, can his real estate
mortgage be foreclosed to satisfy
said amount?
When Island Savings Bank and Sulpicio M. Tolentino
entered into an P80,000.00 loan agreement on April
28, 1965, they undertook reciprocal obligations. In
reciprocal obligations, the obligation or promise of
each party is the consideration for that of the other
(Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de
Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one
party has performed or is ready and willing to perform
his part of the contract, the other party who has not
performed or is not ready and willing to perform incurs
in delay (Art. 1169 of the Civil Code). The promise of
Sulpicio M. Tolentino to pay was the consideration for
the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino
executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank
to furnish the P80,000.00 loan accrued. Thus, the
Bank's delay in furnishing the entire loan started on
April 28, 1965, and lasted for a period of 3 years or
when the Monetary Board of the Central Bank issued
Resolution No. 967 on June 14, 1968, which
prohibited Island Savings Bank from doing further
business. Such prohibition made it legally impossible
for Island Savings Bank to furnish the P63,000.00
balance of the P80,000.00 loan. The power of the
Monetary Board to take over insolvent banks for the
protection of the public is recognized by Section 29 of
R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Board Resolution No. 1049 issued on August
13,1965 cannot interrupt the default of Island Savings
Bank in complying with its obligation of releasing the
P63,000.00 balance because said resolution merely
prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island
Savings Bank from releasing the balance of loan
agreements previously contracted. Besides, the mere
pecuniary inability to fulfill an engagement does not
discharge the obligation of the contract, nor does it
constitute any defense to a decree of specific
performance (Gutierrez Repide vs. Afzelius and
Afzelius, 39 Phil. 190 [1918]). And, the mere fact of
insolvency of a debtor is never an excuse for the non-
fulfillment of an obligation but 'instead it is taken as a
breach of the contract by him (vol. 17A, 1974 ed.,
CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and
accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00
loan covering a 6-month period cannot be taken as a
waiver of his right to collect the P63,000.00 balance.
The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed
P80,000.00 loan, was improper considering that only
P17,000.00 out of the P80,000.00 loan was released.
A person cannot be legally charged interest for a non-
existing debt. Thus, the receipt by Sulpicio M.
'Tolentino of the pre-deducted interest was an
exercise of his right to it, which right exist
independently of his right to demand the completion
of the P80,000.00 loan. The exercise of one right
does not affect, much less neutralize, the exercise of
the other.
The alleged discovery by Island Savings Bank of the
over-valuation of the loan collateral cannot exempt it
from complying with its reciprocal obligation to furnish
the entire P80,000.00 loan. 'This Court previously
ruled that bank officials and employees are expected
to exercise caution and prudence in the discharge of
their functions (Rural Bank of Caloocan, Inc. vs. C.A.,
104 SCRA 151 [1981]). It is the obligation of the
bank's officials and employees that before they
approve the loan application of their customers, they
must investigate the existence and evaluation of the
properties being offered as a loan security. The recent
rush of events where collaterals for bank loans turn
out to be non-existent or grossly over-valued
underscore the importance of this responsibility. The
mere reliance by bank officials and employees on
their customer's representation regarding the loan
collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank
officials and employees totally reIy on the
representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in
case the collateral turn out to be over-valued. The
representation made by the customer is immaterial to
the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on
objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-
valuation because of their failure to raise the same in
their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971).
The lower court's action is sanctioned by the Rules of
Court, Section 2, Rule 9, which states that "defenses
and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived."
Petitioners, thus, cannot raise the same issue before
the Supreme Court.
Since Island Savings Bank was in default in fulfilling
its reciprocal obligation under their loan agreement,
Sulpicio M. Tolentino, under Article 1191 of the Civil
Code, may choose between specific performance or
rescission with damages in either case. But since
Island Savings Bank is now prohibited from doing
further business by Monetary Board Resolution No.
967, WE cannot grant specific performance in favor of
Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE
rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because
the bank is in default only insofar as such amount is
concerned, as there is no doubt that the bank failed to
give the P63,000.00. As far as the partial release of
P17,000.00, which Sulpicio M. Tolentino accepted
and executed a promissory note to cover it, the bank
was deemed to have complied with its reciprocal
obligation to furnish a P17,000.00 loan. The
promissory note gave rise to Sulpicio M. Tolentino's
reciprocal obligation to pay the P17,000.00 loan when
it falls due. His failure to pay the overdue
amortizations under the promissory note made him a
party in default, hence not entitled to rescission
(Article 1191 of the Civil Code). If there is a right to
rescind the promissory note, it shall belong to the
aggrieved party, that is, Island Savings Bank. If
Tolentino had not signed a promissory note setting
the date for payment of P17,000.00 within 3 years, he
would be entitled to ask for rescission of the entire
loan because he cannot possibly be in default as
there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance
of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay
his P17,000.00 debt within 3 years as stipulated, they
are both liable for damages.
Article 1192 of the Civil Code provides that in case
both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor
shall be equitably tempered by the courts. WE rule
that the liability of Island Savings Bank for damages in
not furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino
for interest on his PI 7,000.00 debt shall not be
included in offsetting the liabilities of both parties.
Since Sulpicio M. Tolentino derived some benefit for
his use of the P17,000.00, it is just that he should
account for the interest thereon.
WE hold, however, that the real estate mortgage of
Sulpicio M. Tolentino cannot be entirely foreclosed to
satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real
estate mortgage is the same as that of the principal
contract (Banco de Oro vs. Bayuga, 93 SCRA 443
[1979]). For the debtor, the consideration of his
obligation to pay is the existence of a debt. Thus, in
the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage
is the existence of a valid, voidable, or unenforceable
debt (Art. 2086, in relation to Art, 2052, of the Civil
Code).
The fact that when Sulpicio M. 'Tolentino executed his
real estate mortgage, no consideration was then in
existence, as there was no debt yet because Island
Savings Bank had not made any release on the loan,
does not make the real estate mortgage void for lack
of consideration. It is not necessary that any
consideration should pass at the time of the execution
of the contract of real mortgage (Bonnevie vs. C.A.,
125 SCRA 122 [1983]). lt may either be a prior or
subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take
effect only when the debt secured by it is created as a
binding contract to pay (Parks vs, Sherman, Vol. 176
N.W. p. 583, cited in the 8th ed., Jones on Mortgage,
Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable
to the extent of such failure (Dow. et al. vs. Poore,
Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p.
138). Where the indebtedness actually owing to the
holder of the mortgage is less than the sum named in
the mortgage, the mortgage cannot be enforced for
more than the actual sum due (Metropolitan Life Ins.
Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed.,
Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the
P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage
covering 100 hectares is unenforceable to the extent
of 78.75 hectares. The mortgage covering the
remainder of 21.25 hectares subsists as a security for
the P17,000.00 debt. 21.25 hectares is more than
sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage
provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is
indivisible even though the debt
may be divided among the
successors in interest of the
debtor or creditor.
Therefore, the debtor's heirs who
has paid a part of the debt can
not ask for the proportionate
extinguishment of the pledge or
mortgage as long as the debt is
not completely satisfied.
Neither can the creditor's heir
who have received his share of
the debt return the pledge or
cancel the mortgage, to the
prejudice of other heirs who have
not been paid.
The rule of indivisibility of the mortgage as outlined by
Article 2089 above-quoted presupposes several heirs
of the debtor or creditor which does not obtain in this
case. Hence, the rule of indivisibility of a mortgage
cannot apply
WHEREFORE, THE DECISION OF THE COURT OF
APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY
ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS
P41,210.00 REPRESENTING 12% INTEREST PER
ANNUM COVERING THE PERIOD FROM MAY 22,
1965 TO AUGUST 22, 1985, AND 12% INTEREST
ON THE TOTAL AMOUNT COUNTED FROM
AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO
PAY, HIS REAL ESTATE MORTGAGE COVERING
21.25 HECTARES SHALL BE FORECLOSED TO
SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING
78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED
RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.
G.R. No. 149338 July 28, 2008
UNLAD RESOURCES DEVELOPMENT
CORPORATION, UNLAD RURAL BANK OF
NOVELETA, INC., UNLAD COMMODITIES, INC.,
HELENA Z. BENITEZ, and CONRADO L. BENITEZ
II, Petitioners,
vs.
RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ,
VICENTE D. CASAS, ROMULO M. VIRATA,
FLAVIANO PERDITO, TEOTIMO BENITEZ, ELENA
BENITEZ, and ROLANDO SUAREZ, Respondents.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari
under Rule 45 of the Rules of Civil Procedure seeking
the reversal of the November 29, 2000 Decision1 and
August 2, 2001 Resolution2 of the Court of Appeals
(CA) in CA-G.R. CV No. 54226.
The facts, as found by the CA, are as follows:
On December 29, 1981, the Plaintiffs (herein
respondents) and defendant (herein petitioner) Unlad
Resources, through its Chairman[,] Helena Z.
Benitez[,] entered into a Memorandum of Agreement
wherein it is provided that [respondents], as
controlling stockholders of the Rural Bank [of
Noveleta] shall allow Unlad Resources to invest four
million eight hundred thousand pesos
(₱4,800,000.00) in the Rural Bank in the form of
additional equity. On the other hand, [petitioner] Unlad
Resources bound itself to invest the said amount of
4.8 million pesos in the Rural Bank; upon signing, it
was, likewise, agreed that [petitioner] Unlad
Resources shall subscribe to a minimum of four
hundred eighty thousand pesos (₱480,000.00) (sic)
common or preferred non-voting shares of stock with
a total par value of four million eight hundred
thousand pesos (₱4,800,000.00) and pay up
immediately one million two hundred thousand pesos
(₱1,200,000.00) for said subscription; that the
[respondents], upon the signing of the said agreement
shall transfer control and management over the Rural
Bank to Unlad Resources. According to the
[respondents], immediately after the signing of the
agreement, they complied with their obligation and
transferred control of the Rural Bank to Unlad
Resources and its nominees and the Bank was
renamed the Unlad Rural Bank of Noveleta, Inc.
However, [respondents] claim that despite repeated
demands, Unlad Resources has failed and refused to
comply with their obligation under the said
Memorandum of Agreement when it did not invest
four million eight hundred thousand pesos
(₱4,800,000.00) in the Rural Bank in the form of
additional equity and, likewise, it failed to immediately
infuse one million two hundred thousand pesos
(₱1,200,000.00) as paid in capital upon signing of the
Memorandum of Agreement.
On August 10, 1984, the Board of Directors of
[petitioner] Unlad Resources passed Resolution No.
84-041 authorizing the President and the General
Manager to lease a mango plantation situated in Naic,
Cavite. Pursuant to this Resolution, the Bank as
[lessee] entered into a Contract of Lease with the
[petitioner] Helena Z. Benitez as [lessor]. The
management of the mango plantation was undertaken
by Unlad Commodities, Inc., a subsidiary of Unlad
Resources[,] under a Management Contract
Agreement. The Management Contract provides that
Unlad Commodities, Inc. would receive eighty percent
(80%) of the net profits generated by the operation of
the mango plantation while the Bank’s share is twenty
percent (20%). It was further agreed that at the end of
the lease period, the Rural Bank shall turn over to the
lessor all permanent improvements introduced by it
on the plantation.
xxxx
On May 20, 1987, [petitioner] Unlad Rural Bank wrote
[respondents] regarding [the] Central Bank’s approval
to retire its [Development Bank of the Philippines]
preferred shares in the amount of ₱219,000.00 and
giving notice for subscription to proportionate shares.
The [respondents] objected on the grounds that there
is already a sinking fund for the retirement of the said
DBP-held preferred shares provided for annually and
that it could deprive the Rural Bank of a cheap source
of fund. (sic)
[Respondents] alleged compliance with all of their
obligations under the Memorandum of Agreement in
that they have transferred control and management
over the Rural bank to the [petitioners] and are ready,
willing and able to allow [petitioners] to subscribe to a
minimum of four hundred eighty thousand
(₱480,000.00) (sic) common or preferred non-voting
shares of stocks with a total par value of four million
eight hundred thousand pesos (₱4,800,000.00) in the
Rural Bank. However, [petitioners] have failed and
refused to subscribe to the said shares of stock and to
pay the initial amount of one million two hundred
thousand pesos (₱1,200,000.00) for said
subscription.3
On July 3, 1987, herein respondents filed before the
Regional Trial Court (RTC) of Makati City, Branch 61
a Complaint4 for rescission of the agreement and the
return of control and management of the Rural Bank
from petitioners to respondents, plus damages. After
trial, the RTC rendered a Decision,5 the dispositive
portion of which provides:
WHEREFORE, Premises Considered, judgment is
hereby rendered, as follows:
1. The Memorandum of Agreement dated
29 December 1991 (sic) is hereby declared
rescinded and:
(a) Defendant Unlad Resources
Development Corporation is
hereby ordered to immediately
return control and management
over the Rural Bank of Noveleta,
Inc. to Plaintiffs; and
(b) Unlad Rural Bank of Noveleta,
Inc. is hereby ordered to return to
Defendants the sum of One
Million Three Thousand Seventy
Pesos (₱1,003,070.00)
2. The Director for Rural Banks of the
Bangko Sentral ng Pilipinas is hereby
appointed as Receiver of the Rural Bank;
3. Unlad Rural Bank of Noveleta, Inc. is
hereby enjoined from placing the retired
DBP-held preferred shares available for
 subscription and the same is hereby
ordered to be placed under a sinking fund;
4. Defendant Unlad Resources
Development Corporation is hereby ordered
to pay plaintiffs the following:
(a) actual compensatory
damages amounting to Four
Million Six Hundred One
Thousand Seven Hundred Sixty-
Five and 38/100 Pesos
(₱4,601,765.38);
(b) moral damages in the amount
of Five Hundred Thousand Pesos
(₱500,000.00);
(c) exemplary and corrective
damages in the amount of One
Hundred Thousand Pesos
(₱100,000.00); and
(d) attorney’s fees in the sum of
(₱100,000.00), plus cost of suit.
SO ORDERED.6
Herein petitioners appealed the ruling to the CA.
Respondents filed a Motion to Dismiss and,
subsequently, a Supplemental Motion to Dismiss,
which were both denied. Later, however, the CA, in a
Decision dated November 29, 2000, dismissed the
appeal for lack of merit and affirmed the RTC
Decision in all respects. Petitioners’ motion for
reconsideration was denied in CA Resolution dated
August 2, 2001.
Petitioners are now before this Court alleging that the
CA committed a grave and serious reversible error in
issuing the assailed Decision. Petitioners question the
jurisdiction of the trial court, something they have
done from the beginning of the controversy,
contending that the issues that respondents raised
before the trial court are intra-corporate in nature and
are, therefore, beyond the jurisdiction of the trial court.
They point out that respondents’ complaint charged
them with mismanagement and alleged dissipation of
the assets of the Rural Bank. Since the complaint
challenges corporate actions and decisions of the
Board of Directors and prays for the recovery of the
control and management of the Rural Bank, these
matters fall outside the jurisdiction of the trial court.
Thus, they posit that the judgment of the trial court, as
affirmed by the CA, is null and void and may be
impugned at any time.
Petitioners further argue that the action instituted by
respondents had already prescribed, because Article
1389 of the Civil Code provides that an action for
rescission must be commenced within four years.
They claim that the trial court and the CA mistakenly
applied Article 1144 of the Civil Code which treats of
prescription of actions in general. They submit that
Article 1389, which deals specifically with actions for
rescission, is the applicable law.
Moreover, petitioners assert that they have fully
complied with their undertaking under the subject
Memorandum of Agreement, but that the undertaking
has become a "legal and factual impossibility"
because the authorized capital stock of the Rural
Bank was increased from ₱1.7 million to only ₱5
million, and could not accommodate the subscription
by petitioners of ₱4.8 million worth of shares. Such
deficiency, petitioners contend, is with the knowledge
and approval of respondent Renato P. Dragon and his
nominees to the Board of Directors.
Petitioners, without conceding the propriety of the
judgment of rescission, also argue that the subject
Memorandum of Agreement could not just be ordered
rescinded without the corresponding order for the
restitution of the parties’ total contributions and/or
investments in the Rural Bank. Finally, they assail the
award for moral and exemplary damages, as well as
the award for attorney’s fees, as bereft of factual and
legal bases given that, in the body of the Decision, it
was merely stated that respondents suffered moral
damages without any discussion or explanation of,
nor any justification for such award. Likewise, the
matter of attorney’s fees was not at all discussed in
the body of the Decision. Petitioners claim that
pursuant to the prevailing rule, attorney’s fees cannot
be recovered in the absence of stipulation.
On the other hand, respondents declare that
immediately after the signing of the Memorandum of
Agreement, they complied with their obligation and
transferred control of the Rural Bank to petitioner
Unlad Resources and its nominees, but that, despite
repeated demands, petitioners have failed and
refused to comply with their concomitant obligations
under the Agreement.
Respondents narrate that shortly after taking over the
Rural Bank, petitioners Conrado L. Benitez II and
Jorge C. Cerbo, as President and General Manager,
respectively, entered into a Contract of Lease over
the Naic, Cavite mango plantation, and that, as a
consequence of this venture, the bank incurred
expenses amounting to ₱475,371.57, equivalent to
25.76% of its capital and surplus. The respondents
further assert that the Central Bank found this
undertaking not inherently connected with bona fide
rural banking operations, nor does it fall within the
allied undertakings permitted under Section 26 of
Central Bank Circular No. 741 and Section 3379 of
the Manual of Regulations of the Central Bank. Thus,
respondents contend that this circumstance, coupled
with the fact that petitioners Helena Z. Benitez and
Conrado L. Benitez II were also stockholders and
members of the Board of Directors of Unlad
Resources, Unlad Rural Bank, and Unlad
Commodities at that time, is adequate proof that the
Rural Bank’s management had every intention of
diverting, dissipating, and/or wasting the bank’s
assets for petitioners’ own gain.
They likewise allege that because of the failure of
petitioners to comply with their obligations under the
Memorandum of Agreement, respondents, with the
exception of Tarcisius Rodriguez, lodged a complaint
with the Securities and Exchange Commission (SEC),
seeking rescission of the Agreement, damages, and
the appointment of a management committee, but the
SEC dismissed the complaint for lack of jurisdiction.
Furthermore, when the Rural Bank informed
respondents of the Central Bank’s approval of its plan
to retire its DBP-held preferred shares, giving notices
for subscription to proportionate shares, respondents
objected on the ground that there was already a
sinking fund for the retirement of said shares provided
for annually, and that the retirement would deprive the
petitioner Rural Bank of a cheap source of fund. It
was at that point, respondents claim, that they
instituted the aforementioned Complaint against
petitioners before the RTC of Makati.
The respondents also seek the outright dismissal of
this Petition for lack of verification as to petitioners
Helena Z. Benitez and Conrado L. Benitez II; lack of
proper verification as to petitioners Unlad Resources
Development Corporation, Unlad Rural Bank of
Noveleta, Inc., and Unlad Commodities, Inc.; lack of
proper verified statement of material dates; and lack
of proper sworn certification of non-forum shopping.
They support the proposition that Tijam v.
Sibonghanoy7 applies, and that petitioners are indeed
estopped from questioning the jurisdiction of the trial
court. They also share the lower court’s view that it is
Article 1144 of the Civil Code, and not Article 1389,
that is applicable to this case. Finally, respondents
allege that the failure of petitioner Unlad Resources to
comply with its undertaking under the Agreement, as
uniformly found by the trial court and the CA, may no
longer be assailed in the instant Petition, and that the
award of moral and exemplary damages and
attorney’s fees is justified.
The Petition is bereft of merit. We uphold the Decision
of the CA affirming that of the RTC.
First, the subject of jurisdiction. The main issue in this
case is the rescission of the Memorandum of
Agreement. This is to be distinguished from
respondents’ allegation of the alleged
mismanagement and dissipation of corporate assets
by the petitioners which is based on the prayer for
receivership over the bank. The two issues, albeit
related, are obviously separate, as they pertain to
different acts of the parties involved. The issue of
receivership does not arise from the parties’
obligations under the Memorandum of Agreement, but
rather from specific acts attributed to petitioners as
members of the Board of Directors of the Bank.
Clearly, the rescission of the Memorandum of
Agreement is a cause of action within the jurisdiction
of the trial courts, notwithstanding the fact that the
parties involved are all directors of the same
corporation.
Still, the petitioners insist that the trial court had no
jurisdiction over the complaint because the issues
involved are intra-corporate in nature.
This argument miserably fails to persuade. The law in
force at the time of the filing of the case was
Presidential Decree (P.D.) 902-A, Section 5(b) of
which vested the Securities and Exchange
Commission with original and exclusive jurisdiction to
hear and decide cases involving controversies arising
out of intra-corporate relations.8Interpreting this
statutorily conferred jurisdiction on the SEC, this
Court had occasion to state:
Nowhere in said decree do we find even so much as
an [intimation] that absolute jurisdiction and control is
vested in the Securities and Exchange Commission in
all matters affecting corporations. To uphold the
respondent’s arguments would remove without legal
imprimatur from the regular courts all conflicts over
matters involving or affecting corporations, regardless
of the nature of the transactions which give rise to
such disputes. The courts would then be divested of
jurisdiction not by reason of the nature of the dispute
submitted to them for adjudication, but solely for the
reason that the dispute involves a corporation. This
cannot be done.9
It is well to remember that the respondents had
actually filed with the SEC a case against the
petitioners which, however, was dismissed for lack of
jurisdiction due to the pendency of the case before
the RTC.10 The SEC’s Order dismissing the
respondents’ complaint is instructive:
From the foregoing allegations, it is apparent that the
present action involves two separate causes of action
which are interrelated, and the resolution of which
hinges on the very document sought to be rescinded.
The assertion that the defendants failed to comply
with their contractual undertaking and the claim for
rescission of the contract by the plaintiffs has, in
effect, put in issue the very status of the herein
defendants as stockholders of the Rural Bank. The
issue as to whether or not the defendants are
stockholders of the Rural Bank is a pivotal issue to be
determined on the basis of the Memorandum of
Agreement. It is a prejudicial question and a logical
antecedent to confer jurisdiction to this Commission.
It is to be noted, however, that determination of the
contractual undertaking of the parties under a contract
lies with the Regional Trial Courts and not with this
Commission. x x x11
Be that as it may, this point has been rendered moot
by Republic Act (R.A.) No. 8799, also known as the
Securities Regulation Code. This law, which took
effect in 2000, has transferred jurisdiction over such
disputes to the RTC. Specifically, R.A. 8799 provides:
Sec. 5. Powers and Functions of the Commission
xxxx
5.2. The Commission’s jurisdiction over all cases
enumerated under Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial
Court: Provided, That the Supreme Court in the
exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which
should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.
Section 5 of P.D. No. 902-A reads, thus:
Sec. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of
associations registered with it as expressly granted
under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases
involving:
a) Devices and schemes employed by or
any acts of the board of directors, business
associates, its officers or partnership,
amounting to fraud and misrepresentation
which may be detrimental to the interest of
the public and/or of the stockholder,
partners, members of associations or
organizations registered with the
Commission;
b) Controversies arising out of intra-
corporate or partnership relations, between
and among stockholders, members, or
associates; between any or all of them and
the corporation, partnership or association
of which they are stockholders, members or
associates, respectively; and between such
corporation, partnership or association and
the state insofar as it concerns their
individual franchise or right to exist as such
entity;
c) Controversies in the election or
appointment of directors, trustees, officers
 or managers of such corporations,
partnerships or associations.
Consequently, whether the cause of action stems
from a contractual dispute or one that involves intra-
corporate matters, the RTC already has jurisdiction
over this case. In this light, the question of whether
the doctrine of estoppel by laches applies, as
enunciated by this Court in Tijam v. Sibonghanoy, no
longer finds relevance.
Second, the issue of prescription. Petitioners further
contend that the action for rescission has prescribed
under Article 1398 of the Civil Code, which provides:
Article 1389. The action to claim rescission must be
commenced within four years x x x.
This is an erroneous proposition. Article 1389
specifically refers to rescissible contracts as, clearly,
this provision is under the chapter entitled
"Rescissible Contracts."
In a previous case,12 this Court has held that Article
1389:
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.
Article 1381 sets out what are rescissible contracts, to
wit:
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by
guardians whenever the wards whom they
represent suffer lesion by more than one-
fourth of the value of the things which are
the object thereof;
(2) Those agreed upon in representation of
absentees, if the latter suffer the lesion
stated in the preceding number;
(3) Those undertaken in fraud of creditors
when the latter cannot in any other manner
collect the claims due them;
(4) Those which refer to things under
litigation if they have been entered into by
the defendant without the knowledge and
approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by
law to be subject to rescission.
The Memorandum of Agreement subject of this
controversy does not fall under the above
enumeration. Accordingly, the prescriptive period that
should apply to this case is that provided for in Article
1144, to wit:
Article 1144. The following actions must be brought
within ten years from the time the right of action
accrues:
(1) Upon a written contract;
xxxx
Based on the records of this case, the action was
commenced on July 3, 1987, while the Memorandum
of Agreement was entered into on December 29,
1981. Article 1144 specifically provides that the 10-
year period is counted from "the time the right of
action accrues." The right of action accrues from the
moment the breach of right or duty occurs.13 Thus, the
original Complaint was filed well within the
prescriptive period.
We now proceed to determine if the trial court, as
affirmed by the CA, correctly ruled for the rescission
of the subject Agreement.
Petitioners contend that they have fully complied with
their obligation under the Memorandum of
Agreement. They allege that due to respondents’
failure to increase the capital stock of the corporation
to an amount that will accommodate their
undertaking, it had become impossible for them to
perform their end of the Agreement.
Again, petitioners’ contention is untenable. There is
no question that petitioners herein failed to fulfill their
obligation under the Memorandum of Agreement.
Even they admit the same, albeit laying the blame on
respondents.
It is true that respondents increased the Rural Bank’s
authorized capital stock to only ₱5 million, which was
not enough to accommodate the ₱4.8 million worth of
stocks that petitioners were to subscribe to and pay
for. However, respondents’ failure to fulfill their
undertaking in the agreement would have given rise
to the scenario contemplated by Article 1191 of the
Civil Code, which reads:
Article 1191. The power to rescind reciprocal
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.
Thus, petitioners should have exacted fulfillment from
the respondents or asked for the rescission of the
contract instead of simply not performing their part of
the Agreement. But in the course of things, it was the
respondents who availed of the remedy under Article
1191, opting for the rescission of the Agreement in
order to regain control of the Rural Bank.
Having determined that the rescission of the subject
Memorandum of Agreement was in order, the trial
court ordered petitioner Unlad Resources to return to
respondents the management and control of the Rural
Bank and for the latter to return the sum of
₱1,003,070.00 to petitioners.
Mutual restitution is required in cases involving
rescission under Article 1191. This means bringing
the parties back to their original status prior to the
inception of the contract.14 Article 1385 of the Civil
Code provides, thus:
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
obligated 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.
This Court has consistently ruled that this provision
applies to rescission under Article 1191:
[S]ince Article 1385 of the Civil Code expressly and
clearly states that "rescission creates the obligation to
return the things which were the object of the
contract, together with their fruits, and the price with
its interest," the Court finds no justification to sustain
petitioners’ position that said Article 1385 does not
apply to rescission under Article 1191.15
Rescission has the effect of "unmaking a contract, or
its undoing from the beginning, and not merely its
termination."16 Hence, 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.17
Accordingly, when a decree for rescission is handed
down, it is the duty of the court to require both parties
to surrender that which they have respectively
received and to place each other as far as practicable
in his original situation. The rescission has the effect
of abrogating the contract in all parts.18
Clearly, the petitioners failed to fulfill their end of the
agreement, and thus, there was just cause for
rescission. With the contract thus rescinded, the
parties must be restored to the status quo ante, that
is, before they entered into the Memorandum of
Agreement.
Finally, we must resolve the question of the propriety
of the award for damages and attorney’s fees.
The trial court’s Decision mentioned that the
"evidence is clear and convincing that Plaintiffs
(herein respondents) suffered actual compensatory
damages amounting to Four Million Six Hundred One
Thousand Seven Hundred Sixty-Five and 38/100
Pesos (₱4,601,765.38) moral damages and attorney’s
fees."
Though not discussed in the body of the Decision, the
records show that the amount of ₱4,601,765.38
pertains to actual losses incurred by respondents as a
result of petitioners’ non-compliance with their
undertaking under the Memorandum of Agreement.
On this point, respondent Dragon presented
testimonial and documentary evidence to prove the
actual amount of damages, thus:
Atty. Cruz
Q: Was there any consequence to you Mr. Dragon
due to any breach of the agreement marked as
Exhibit A?
A: Yes sir I could have earned thru the shares of
stock that I have, or we have or we had by this time
amounting to several millions pesos (sic). They have
only put in the whole amount that we have agreed
upon (sic).
Q: In this connection did you cause computation of
these losses that you incured (sic)?
A: Yes sir.
xxxx
Q: Will you please kindly go through this computation
and explain the same to the Honorable Court?
A: Number 1 is an Organ (sic) income from the sale of
60% (sic) at only Three Hundred Ninety Nine
Thousand Two hundred for Nineteen Thousand Nine
Hundred Sixty shares which should have been sold if
it were sold to others for ₱50.00 each for a total of
Nine Hundred Ninety Eight Thousand but sold to them
for Three Hundred Ninety nine (sic) Thousand two
(sic) Hundred only and of which only Three Hundred
Twenty Four Thousand Six Hundred was paid to me.
Therefore, there was a difference of Six Hundred
Seven Three (sic) Thousand Four Hundred
(₱673,400.00). On the basis of the commulative (sic)
lost income every year from March 1982 from the
amount of Seven Six Hundred (sic) Seventy Three
Thousand four (sic) Hundred (₱673,400.) (sic) there
would be a discommulative (sic) lost (sic) of One
Million Ninety Three Thousand Nine Hundred Fifty
Two Pesos and forty two (sic) centavos
(₱1,093,952.42). Please note that the interest
imputed is only at 12% per annum but it should had
(sic) been much higher. In 1984 to 1986 (sic) alone
rates went as higher (sic) as 40% per annum from the
so called (sic) Jobo Bills and yet we only computed
the imputed income or lost income at 12% per annum
and then there is a 40% participation on the
unrealized earnings due to their failure to put in an
stabilized (sic) earnings. You will note that if they put
in 4.8 million Pesos and it would be earning money,
40% of that will go to us because 40% of the bank
would be ours and 60% would be there (sic). But
because they did put in the 4.8 million our 40% did
not earn up to that extent and computed again on the
basis of 12% the amount (sic) on the commulative
(sic) basis up to September 1990 is 2 million three
hundred fifty two thousand sixty five pesos and four
centavos (sic). (₱2,352,065.04). You will note again
that the average return of investment of any Cavite
based (sic) Rural Bank has been no less than 20% or
about 30% per annum. And we computed only the
earnings at 12%.
xxxx
There were loans granted fraudulently to members of
the board and some borrowers which were not all
charged interest for several years and on this basis
we computed a 40% shares (sic) on the foregone
income interest income (sic) on all these fraudulently
granted loans, without interest being collected and
none a project (sic) among a plantation project (sic),
which was funded by the bank but nothing was given
back to the bank for several hundred thousand of
pesos (sic). And we arrived an (sic) estimate of the
foregone interest income a total of One Million Two
Hundred Five Thousand Eight Hundred Sixty None
Pesos and eighty one (sic) centavos and 40 percent
share of this (sic) would be Four Hundred Eighty Two
Thousand Three Hundred Forty Seven Pesos and
Ninety Two Centavos. All in all our estimate of the
damages we have suffered is Four Million Six
Hundred one (sic) Thousand Seven Hundred Sixty
Five Pesos and thirty eight (sic) centavos
(₱4,601,765.38).19
More importantly, petitioners never raised in issue
before the CA this award of actual compensatory
damages. They did not raise the matter of damages in
their Appellants’ Brief, while in their Motion for
Reconsideration, they questioned only the award of
moral and exemplary damages, not the award of
actual damages. Even in the present Petition for
Review, what petitioners raised was the propriety of
the award of moral and exemplary damages and
attorney’s fees.
On the grant of moral and exemplary damages and
attorney’s fees, we note that the trial court’s Decision
did not discuss the basis for the award. No mention of
these damages awarded – or their factual basis – is
made in the body of the Decision, only in the
dispositive portion. Be that as it may, we have
examined the records of the case and found that the
award must be sustained.
It should be remembered that there are two separate
causes of action in this case: one for rescission of the
Memorandum of Agreement and the other for
receivership based on alleged mismanagement of the
company by the plaintiffs. While the award of actual
compensatory damages was based on the breach of
duty under the Memorandum of Agreement, the
award of moral damages appears to be based on
petitioners’ mismanagement of the company when
they became members of the Board of Directors of
the Rural Bank.
Thus, the trial court said:
Under the Rural Bank’s management, a systematic
diversion of the bank’s assets was conceived
whereby: (a) The Rural Bank’s funds would be
funneled in the development and improvements of the
Benitez Mango Plantation in the guise of an
investment in said plantation; (b) Of the net profits
earned from the plantation’s operations, the Rural
Bank’s share therein, although it shoulders all of the
financial risks, would be a measly twenty percent
(20%) thereof while UCI, without investing a single
centavo, would earn eighty percent (80%) of the said
profits. Thus, the bulk of the profits of the mango
plantation was also sought to be diverted to an entity
wherein Helena Z. Benitez and Conrado L. Benitez II
are not only principal stockholders but also the
Chairman of the Board of Directors and President,
respectively. Moreover, Defendant Helena Z. Benitez
would be entitled to receive, under the lease contract,
rentals in the total amount of Three Hundred
Thousand Pesos (₱300,000.00) or ten percent (10%)
of gross profits, whichever is higher. (c) Finally, at the
end of the lease period, the Rural Bank was obliged
to turn over to the lessor (Helena Z. Benitez) all
permanent improvements introduced by it on the
plantation at no cost to Ms. Benitez.
Further, in its report dated March 13, 1985, the
[Central Bank] after conducting its general
examination upon the Rural Bank ordered the latter to
"explain satisfactorily why the bank engage (sic) in an
undertaking not inherently connected with [bona fide]
rural banking operations nor within the allowed allied
undertakings," contrary to the provisions of Section
3379 of the CB Manual of Regulations and Section 26
of CB Circular No. 741, otherwise known as the
"Circular on Rural Banks[.]"
The aforestated CB report states that "total exposure
to this project now amounts to ₱475,371.57 or
25.76% of its capital and surplus[.]" Notwithstanding a
finding by the CB of the undertaking’s illegality, the
defendants nevertheless persisted in pursuing the
Mango Plantation Project and never acceded to the
call of [the] CB for it to desist from further
implementing the said project. It was only after
another letter from the CB was received when
defendant finally shelved the mango plantation
project.
The result of the aforestated report, as well as the
actuations of the Defendants in not yielding to the
order of the CB, adequately establishes not only a
violation of CB Rules (specifically Section 26, Circular
741 and Section 3379 of the CB Manual of
Regulations, but also, that it has caused undue
damage both to the Rural bank as well as its
stockholders.
The initial CB report should have sufficiently apprised
Defendants of the illegality of the undertaking.
Defendants, therefore have the duty to terminate the
Mango Plantation Project. They, however, [chose] to
continue it, apparently to further their [own] interest in
the scheme for their own personal benefit and gain,
an act which is clearly contrary to the fiduciary nature
of their relationship with the corporation in which they
are officers. Such persistence proves evident bad
faith, or a breach of a known duty through some
motive or ill-will, which resulted in the further
dissipation and wastage of the Rural Bank’s assets,
unjustly depriving Plaintiffs of their fair share in the
assets of the bank.
All the foregoing satisfactorily affirms the allegations
of Plaintiffs to the effect that these contracts were but
part of a device employed by Defendants to siphon
[off] the Rural bank for their personal gain.20
Moral damages include physical suffering, mental
anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Though incapable of
precise pecuniary computation, moral damages may
be recovered if they are the proximate result of the
defendant’s wrongful act or omission.21Article 2220 of
the Civil Code further provides that moral damages
may be recovered in case of a breach of contract
where the defendant acted in bad faith.22
To award moral damages, a court must be satisfied
with proof of the following requisites: (1) an injury –
whether physical, mental, or psychological – clearly
sustained by the claimant; (2) a culpable act or
omission factually established; (3) a wrongful act or
omission of the defendant as the proximate cause of
the injury sustained by the claimant; and (4) the
award of damages predicated on any of the cases
stated in Article 2219.231avvphi1
Accordingly, based upon the findings of the trial court,
it is clear that respondents are entitled to moral
damages. The acts attributed to the petitioners as
directors of the Rural Bank manifestly prejudiced the
respondents causing detriment to their standing as
directors and stockholders of the Rural Bank.
Exemplary damages cannot be recovered as a matter
of right.24 While these need not be proved,
respondents must show that they are entitled to
moral, temperate or compensatory damages before
the court may consider the question of awarding
exemplary damages.25 We find that respondents are
indeed entitled to moral damages; thus, the award for
exemplary damages is in order.
Anent the award for attorney’s fees, Article 2208 of
the Civil Code states:
In the absence of stipulation, attorney’s fees and
expenses of litigation, other than judicial costs, cannot
be recovered, except:
(1) When exemplary damages are awarded.
Hence, the award of exemplary damages is in itself
sufficient justification for the award of attorney’s
fees.26
WHEREFORE, the foregoing premises considered,
the petition is hereby DENIED. The assailed Decision
and Resolution of the Court of Appeals in CA-G.R. CV
No. 54226 are AFFIRMED.
SO ORDERED.
SWIRE REALTY DEVELOPMENT
CORPORATION, Petitioner,
vs.
JAYNE YU, Respondent.
DECISION
PERALTA, J.:
This is a Petition for Review on Certiorari under Rule
45 of the 1997 Rules of Civil Procedure which seeks
to reverse and set aside the Decision1 dated January
24, 2013 and Resolution2 dated April 30, 2013 of the
Court of Appeals (CA) in CA-G.R. SP No. 121175.
The facts follow.
Respondent Jayne Yu and petitioner Swire Realty
Development Corporation entered into a Contract to
Sell on July 25, 1995 covering one residential
condominium unit, specifically Unit 3007 of the Palace
of Makati, located at P. Burgos comer Caceres Sts.,
Makati City, with an area of 137.30 square meters for
the total contract price of P7,519,371.80, payable in
equal monthly installments until September 24, 1997.
Respondent likewise purchased a parking slot in the
same condominium building for P600,000.00.
On September 24, 1997, respondent paid the full
purchase price of P7,519,371.80 for the unit while
making a down payment of P20,000.00 for the
parking lot. However, notwithstanding full payment of
the contract price, petitioner failed to complete and
deliver the subject unit on time. This prompted
respondent to file a Complaint for Rescission of
Contract with Damages before the Housing and Land
Use Regulatory Board (HLURB) Expanded National
Capital Region Field Office (ENCRFO).
On October 19, 2004, the HLURB ENCRFO rendered
a Decision3 dismissing respondent’s complaint. It
ruled that rescission is not permitted for slight or
casual breach of the contract but only for such
breaches as are substantial and fundamental as to
defeat the object of the parties in making the
agreement. It disposed of the case as follows:
WHEREFORE, PREMISES CONSIDERED, judgment
is hereby rendered ordering [petitioner] the following:
1.To finish the subject unit as pointed out in
the inspection Report
2.To pay [respondent] the following:
a.the amount of P100,000 as
compensatory damages for the
minor irreversible defects in her
unit [respondent], or, in the
alternative, conduct the
necessary repairs on the subject
unit to conform to the intended
specifications;
b.moral damages of P20,000.00
c.Attorney’s fees of P20,000.00
On the other hand, [respondent] is hereby directed to
immediately update her account insofar as the
parking slot is concerned, without interest, surcharges
or penalties charged therein.
All other claims and counterclaims are hereby
dismissed for lack of merit.
IT IS SO ORDERED.4
Respondent then elevated the matter to the HLURB
Board of Commissioners.
In a Decision5 dated March 30, 2006, the HLURB
Board of Commissioners reversed and set aside the
ruling of the HLURB ENCRFO and ordered the
rescission of the Contract to Sell, ratiocinating:
We find merit in the appeal. The report on the ocular
inspection conducted on the subject condominium
project and subject unit shows that the amenities
under the approved plan have not yet been provided
as of May 3, 2002, and that the subject unit has not
been delivered to [respondent] as of August 28, 2002,
which is beyond the period of development of
December 1999 under the license to sell. The delay in
the completion of the project as well as of the delay in
the delivery of the unit are breaches of statutory and
contractual obligations which entitles [respondent] to
rescind the contract, demand a refund and payment
of damages.
The delay in the completion of the project in
accordance with the license to sell also renders
[petitioner] liable for the payment of administrative
fine.
Wherefore, the decision of the Office below is set
aside and a new decision is rendered as follows:
1.Declaring the contract to sell as rescinded
and directing [petitioner] to refund to
[respondent] the amount of P7,519,371.80
at 6% per annum from the time of
extrajudicial demand on January 05, 2001:
subject to computation and payment of the
correct filing fee;
2.Directing [petitioner] to pay respondent
attorney’s fees in the amount of
P20,000.00;
3.Directing [petitioner] to pay an
administrative fine of P10,000.00 for
violation of Section 20, in relation to Section
38 of P.D. 957:
SO ORDERED.6
Petitioner moved for reconsideration, but the same
was denied by the HLURB Board of Commissioners
in a Resolution7 dated June 14, 2007.
Unfazed, petitioner appealed to the Office of the
President (OP) on August 7, 2007.
In a Decision8 dated November 21, 2007, the OP,
through then Deputy Executive Secretary Manuel
Gaite, dismissed petitioner’s appeal on the ground
that it failed to promptly file its appeal before the OP.
It held:
Records show that [petitioner] received its copy of the
30 March 2006 HLURB Decision on 17 April 2006 and
instead of filing an appeal, it opted first to file a Motion
for Reconsideration on 28 April 2006 or eleven (11)
days thereafter. The said motion interrupted the 15-
day period to appeal.
On 23 July 2007, [petitioner] received the HLURB
Resolution dated 14 June 2007 denying the Motion
for Reconsideration.
Based on the ruling in United Overseas Bank
Philippines, Inc. v. Ching (486 SCRA 655), the period
to appeal decisions of the HLURB Board of
Commissioners to the Office of the President is 15
days from receipt thereof pursuant to Section 15 of
P.D. No. 957 and Section 2 of P.D. No. 1344 which
are special laws that provide an exception to Section
1 of Administrative Order No. 18.
Corollary thereto, par. 2, Section 1 of Administrative
Order No. 18, Series of 1987 provides that:
The time during which a motion for reconsideration
has been pending with the Ministry/Agency concerned
shall be deducted from the period of appeal. But
where such a motion for reconsideration has been
filed during office hours of the last day of the period
herein provided, the appeal must be made within the
day following receipt of the denial of said motion by
the appealing party (Underscoring supplied)
xxxx
Accordingly, the [petitioner] had only four (4) days
from receipt on 23 July 2007 of HLURB Resolution
dated 14 June 2007, or until 27 July 2007 to file the
Notice of Appeal before this Office. However,
[petitioner] filed its appeal only on 7 August 2007 or
eleven (11) days late.
Thus, this Office need not delve on the merits of the
appeal filed as the records clearly show that the said
appeal was filed out of time.
WHEREFORE, premises considered, [petitioner]’s
appeal is hereby DISMISSED, and the HLURB
Decision dated 30 March 2006 and HLURB
Resolution dated 14 June 2007 are hereby
AFFIRMED.
SO ORDERED.9
Immediately thereafter, petitioner filed a motion for
reconsideration against said decision.
In a Resolution10 dated February 17, 2009, the OP,
through then Executive Secretary Eduardo Ermita,
granted petitioner’s motion and set aside Deputy
Executive Secretary Gaite’s decision. It held that after
a careful and thorough evaluation and study of the
records of the case, the OP was more inclined to
agree with the earlier decision of the HLURB
ENCRFO as it was more in accord with facts, law and
jurisprudence relevant to the case. Thus:
WHEREFORE, premises considered, the instant
Motion for Reconsideration is hereby GRANTED. The
Decision and Resolution of the HLURB Third Division
Board of Commissioners, dated March 30, 2006 and
June 14, 2007, respectively, are hereby SET ASIDE,
and the HLURB ENCRFO Decision dated October 19,
2004 is hereby REINSTATED.
SO ORDERED.11
Respondent sought reconsideration of said resolution,
however, the same was denied by the OP in a
Resolution12dated August 18, 2011.
Consequently, respondent filed an appeal to the CA.
In a Decision dated January 24, 2013, the CA granted
respondent’s appeal and reversed and set aside the
Order of the OP. The fallo of its decision reads:
WHEREFORE, the Petition is hereby GRANTED. The
assailed Resolution dated 17 February 2009 and
Order dated 18 August 2011 of the Office of the
President, in O.P. Case No. 07-H-283, are hereby
REVERSED and SET ASIDE. Accordingly, the
Decision dated 30 March 2006 and Resolution dated
14 June 2007 of the HLURB Board of Commissioners
in HLURB Case No. REM-A-050127-0014, are
REINSTATED.
SO ORDERED.13
Petitioner moved for reconsideration, however, the
CA denied the same in a Resolution dated April 30,
2013.
Hence, the present petition wherein petitioner raises
the following grounds to support its petition:
THE COURT OF APPEALS GRAVELY ERRED IN
IGNORING THE LEGAL PRECEPTS THAT:
A.TECHNICAL RULES ARE NOT
BINDING UPON
ADMINISTRATIVE AGENCIES;
and
B.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.14
In essence, the issues are: (1) whether petitioner’s
appeal was timely filed before the OP; and (2)
whether rescission of the contract is proper in the
instant case.
We shall resolve the issues in seriatim.
First, the period to appeal the decision of the HLURB
Board of Commissioners to the Office of the President
has long been settled in the case of SGMC Realty
Corporation v. Office of the President,15 as reiterated
in the cases of Maxima Realty Management and
Development Corporation v. Parkway Real Estate
Development Corporation16 and United Overseas
Bank Philippines, Inc. v. Ching.17
In the aforementioned cases, we ruled that the period
to appeal decisions of the HLURB Board of
Commissioners is fifteen (15) days from receipt
thereof pursuant to Section 1518 of PD No. 95719 and
Section 220 of PD No. 134421which are special laws
that provide an exception to Section 1 of
Administrative Order No. 18. Thus, in the SGMC
Realty Corporation v. Office of the President case, the
Court explained:
As pointed out by public respondent, the aforecited
administrative order allows aggrieved party to file its
appeal with the Office of the President within thirty
(30) days from receipt of the decision complained of.
Nonetheless, such thirty-day period is subject to the
qualification that there are no other statutory periods
of appeal applicable. If there are special laws
governing particular cases which provide for a shorter
or longer reglementary period, the same shall prevail
over the thirty-day period provided for in the
administrative order. This is in line with the rule in
statutory construction that an administrative rule or
regulation, in order to be valid, must not contradict but
conform to the provisions of the enabling law.
We note that indeed there are special laws that
mandate a shorter period of fifteen (15) days within
which to appeal a case to public respondent. First,
Section 15 of Presidential Decree No. 957 provides
that the decisions of the National Housing Authority
(NHA) shall become final and executory after the
lapse of fifteen (15) days from the date of receipt of
the decision. Second, Section 2 of Presidential
Decree No. 1344 states that decisions of the National
Housing Authority shall become final and executory
after the lapse of fifteen (15) days from the date of its
receipt. The latter decree provides that the decisions
of the NHA is appealable only to the Office of the
President. Further, we note that the regulatory
functions of NHA relating to housing and land
development has been transferred to Human
Settlements Regulatory Commission, now known as
HLURB. x x x22
Records show that petitioner received a copy of the
HLURB Board of Commissioners’ decision on April
17, 2006. Correspondingly, it had fifteen days from
April 17, 2006 within which to file its appeal or until
May 2, 2006. However, on April 28, 2006, or eleven
days after receipt of the HLURB Board of
Commissioner’s decision, it filed a Motion for
Reconsideration, instead of an appeal.
Concomitantly, Section 1 of Administrative Order No.
1823 provides that the time during which a motion for
reconsideration has been pending with the ministry or
agency concerned shall be deducted from the period
for appeal. Petitioner received the HLURB Board
Resolution denying its Motion for Reconsideration on
July 23, 2007 and filed its appeal only on August 7,
2007. Consequently therefore, petitioner had only four
days from July 23, 2007, or until July 27, 2007, within
which to file its appeal to the OP as the filing of the
motion for reconsideration merely suspended the
running of the 15-day period. However, records reveal
that petitioner only appealed to the OP on August 7,
2007, or eleven days late. Ergo, the HLURB Board of
Commissioners’ decision had become final and
executory on account of the fact that petitioner did not
promptly appeal with the OP.
In like manner, we find no cogent reason to exempt
petitioner from the effects of its failure to comply with
the rules.
In an avuncular case, we have held that while the
dismissal of an appeal on purely technical grounds is
concededly frowned upon, it bears emphasizing that
the procedural requirements of the rules on appeal
are not
harmless and trivial technicalities that litigants can just
discard and disregard at will. Neither being a natural
right nor a part of due process, the rule is settled that
the right to appeal is merely a statutory privilege
which may be exercised only in the manner and in
accordance with the provisions of the law.24
Time and again, we have held that rules of procedure
exist for a noble purpose, and to disregard such rules,
in the guise of liberal construction, would be to defeat
such purpose. Procedural rules are not to be
disdained as mere technicalities. They may not be
ignored to suit the convenience of a party.25 The
reason for the liberal application of the rules before
quasi- judicial agencies cannot be used to perpetuate
injustice and hamper the just resolution of the case.
Neither is the rule on liberal construction a license to May 3, 2002:
disregard the rules of procedure.26 1.The unit of the [respondent] is Unit 3007,
Thus, while there may be exceptions for the relaxation which was labeled as P2-07, at the Palace
of technical rules principally geared to attain the ends of Makati, located at the corner of P.
of justice, petitioner’s fatuous belief that it had a fresh Burgos Street and Caceres Street,
15-day period to elevate an appeal with the OP is not Poblacion, Makati City. Based on the
the kind of exceptional circumstance that merits approved plans, the said unit is at the 26th
relaxation. Floor.
Second, Article 1191 of the Civil Code sanctions the 2.During the time of inspection, the said unit
right to rescind the obligation in the event that specific appears to be completed except for the
performance becomes impossible, to wit: installation of kitchen cabinets and fixtures.
Article 1191. The power to rescind obligations is 3.Complainant pinpointed to the
implied in reciprocal ones, in case one of the obligors undersigned the deficiencies as follows:
should not comply with what is incumbent upon him. a.The delivered unit has high
The injured party may choose between the fulfillment density fiber (HDF) floorings
and the rescission of the obligation, with the payment instead of narra wood parquet.
of damages in either case. He may also seek b.The [petitioners] have also
rescission, even after he has chosen fulfillment, if the installed baseboards as borders
latter should become impossible. instead of pink porrino granite
The court shall decree the rescission claimed, unless boarders.
there be just cause authorizing the fixing of a period. c.Walls are newly painted by the
This is understood to be without prejudice to the rights respondent and the alleged
of third persons who have acquired the thing, in obvious signs of cladding could
accordance with Articles 1385 and 1388 and the not be determined.
Mortgage Law. d.Window opening at the master
Basic is the rule that the right of rescission of a party bedroom conforms to the
to an obligation under Article 1191 of the Civil Code is approved plans. As a result it
predicated on a breach of faith by the other party who leaves a 3 inches (sic) gap
violates the reciprocity between them. The breach between the glass window and
contemplated in the said provision is the obligor’s partitioning of the master’s
failure to comply with an existing obligation. When the bedroom.
obligor cannot comply with what is incumbent upon it, e.It was verified and confirmed
the obligee may seek rescission and, in the absence that a square column replaced
of any just cause for the court to determine the period the round column, based on the
of compliance, the court shall decree the rescission.27 approved plans.
In the instant case, the CA aptly found that the f.At the time of inspection,
completion date of the condominium unit was amenities such as swimming pool
November 1998 pursuant to License No. 97-12-3202 and change room are seen at the
dated November 2, 1997 but was extended to 31st floor only. These amenities
December 1999 as per License to Sell No. 99-05- are reflected on the 27th floor
3401 dated May 8, 1999. However, at the time of the plan of the approved
ocular inspection conducted by the HLURB ENCRFO, condominium plans. Health spa
the unit was not yet completely finished as the kitchen for men and women, Shiatsu
cabinets and fixtures were not yet installed and the Massage Room, Two-Level Sky
agreed amenities were not yet available. Said Palace Restaurant and Hall for
inspection report states: games and entertainments,
 replete with billiard tables, a bar,
indoor golf with spectacular deck
and karaoke rooms were not yet
provided by the [petitioner].
g.The [master’s] bedroom door
bore sign of poor quality of
workmanship as seen below.
h.The stairs have been installed
in such manner acceptable to the
undersigned.
i.Bathrooms and powder room
have been installed in such
manner acceptable to the
undersigned.28
From the foregoing, it is evident that the report on the
ocular inspection conducted on the subject
condominium project and subject unit shows that the
amenities under the approved plan have not yet been
provided as of May 3, 2002, and that the subject unit
has not been delivered to respondent as of August
28, 2002, which is beyond the period of development
of December 1999 under the license to sell.
Incontrovertibly, petitioner had incurred delay in the
performance of its obligation amounting to breach of
contract as it failed to finish and deliver the unit to
respondent within the stipulated period. The delay in
the completion of the project as well as of the delay in
the delivery of the unit are breaches of statutory and
contractual obligations which entitle respondent to
rescind the contract, demand a refund and payment
of damages.
WHEREFORE, premises considered, the instant
petition is DENIED. The Decision dated January 24,
2013 and Resolution dated April 30, 2013 of the Court
of Appeals in CA-G.R. SP No. 121175 are hereby
AFFIRMED, with MODIFICATION that moral
damages be awarded in the amount of P20,000.00.
SO ORDERED.
OLIVAREZ REALTY CORPORATION and DR. PABLO
R. OLIVAREZ, Petitioner,
vs.
BENJAMIN CASTILLO, Respondent.
Facts:
Castillo was the owner of a parcel of land covered by
TCT 19972. The Philippine Tourism Authority allegedly
claimed ownership of the same parcel of land based on
TCT 18493.
Castillo and Olivarez Realty Corporation, represented
by Dr. Pablo Olivarez, entered into a contract of
conditional sale over the property. The details were as
follows:
1. Under the deed of conditional sale, Castillo agreed to
sell his property to Olivarez Realty; with Olivarez Realty
delivering the downpayment and the rest to be paid in
30 equal monthly installments every 8th of the month
beginning in the month that the parties would receive a
decision voiding the PTA’s title to the property.
2. Under the same deed, Olivarez Realty will file the
action against PTA with full assistance of Castillo; and
that should the petition be denied, Castillo shall
reimburse all the amounts paid by Olivarez Realty.
3. Under the same contract, Olivarez Realty undertook
to pay the legitimate tenants of the land disturbance
compensation, while Castillo undertook to clear the
land of the tenants within 6 months from the signing of
the deed; that should Castillo fail to clear the land
within 6 months, Olivarez Realty may suspend its
monthly downpayment until the tenants vacate the
property.
4. The parties agreed that Olivarez Realty Corporation
may immediately occupy the property upon signing of
the deed. Should the contract be cancelled, Olivarez
Realty Corporation agreed to return the property’s
possession to Castillo and forfeit all the improvements it
may have introduced on the property.
Olivarez Realty failed to comply with the conditions, to
wit: a) pay the full purchase price; b) failed to file any
action against PTA; c) failed to clear the land of the
tenants nor paying them disturbance compensation. For
breaching the contract, Castillo prayed for rescission of
contract under Art. 1191 of Civil Code, plus damages.
In their defense, Olivarez Realty alleged that Castillo
failed to fully assist in filing the action against PTA; that
Castillo failed to clear the property of the tenants within
6 months from the signing of the deed. Thus, they had
all the legal right to withhold the subsequent payments
to fully pay the purchase price.
Both RTC and CA ruled that Olivarez Realty breached
the contract and ordered the rescission of the sale plus
damages.
Issue #1:
What is the nature of obligations undertaken by both
parties?
Held #1:
Olivarez Realty’s obligation to pay the disturbance
compensation is a pure obligation, and hence,
demandable at once. With respect to Castillo’s
obligation to clear the land of the tenants within six
months from the signing of the contract, his obligation
was an obligation with a resolutory period. The
obligation to clear the land of the tenants took effect at
once, specifically, upon the parties’ signing of the deed
of conditional sale. Castillo had until October 2, 2000,
six months from April 5, 2000 when the parties signed
the deed of conditional sale, to clear the land of the
tenants. Olivarez Realty Corporation, therefore, had no
right to withhold payments of the purchase price. As the
trial court ruled, Olivarez Realty Corporation “can only
claim non-compliance of the obligation to clear the land
of the tenants in October 2000.
Issue #2:
Whether or not rescission of the contract is proper.
Held #2: NO.
SC characterized the contract as a contract to sell, not a
contract of conditional sale. In a contract of conditional
sale, the buyer automatically acquires title to the
property upon full payment of the purchase price. This
transfer of title is “by operation of law without any
further act having to be performed by the seller.” In a
contract to sell, transfer of title to the prospective buyer
is not automatic. “The prospective seller must convey
title to the property through a deed of conditional sale.”
The distinction is important to determine the applicable
laws and remedies in case a party does not fulfill his or
her obligations under the contract. In contracts of
conditional sale, our laws on sales under the Civil Code
of the Philippines apply. On the other hand, contracts to
sell are not governed by our law on sales but by the Civil
Code provisions on conditional obligations.
Specifically, Article 1191 of the Civil Code on the right to
rescind reciprocal obligations does not apply to
contracts to sell. Failure to fully pay the purchase price
in contracts to sell is not the breach of contract under
Art. 1191. Failure to fully pay the purchase price is
merely an event which prevents the seller’s obligation
to convey title from acquiring binding force. This is
because there can be no rescission of an obligation that
is still nonexistent, the suspensive condition (the
condition of having the buyer pay the full purchase
price) having not happened.
In this case, Castillo reserved his title to the property
and undertook to execute a deed of absolute sale upon
Olivarez Realty Corporation’s full payment of the
purchase price. Since Castillo still has to execute a deed
of absolute sale to Olivarez Realty Corporation upon full
payment of the purchase price, the transfer of title is not
automatic. As this case involves a contract to sell, Article
1191 of the Civil Code of the Philippines does not apply.
The contract to sell is instead cancelled, and the parties
shall stand as if the obligation to sell never existed.
SC cancelled the deed of conditional sale. Olivarez Realty
was ordered to return to Castillo the possession of
property, together with all improvements that it
introduced. Olivarez Realty was also ordered to pay
moral damages, exemplary damages, and attorney’s fees
to Castillo.
GR No. 176986, January 13, 2016
Nissan Car Lease Phils Inc (Petitioner) v LICA
Management and Proton (Respondents)
Third Division
Ponente: Jardeleza, J.
Nature of Action: Petition for Review on Certiorari
assailing the decision of the Court of Appeals in ruling
for the validity of extra-judicial rescission.
FACTS:
LMI is the absolute owner of a property located at
Pasong Tamo Extension, Makati City. It entered into a
contract with NCLPI for the latter to lease the property
for a term of ten (10) years with a monthly rental of
₱308,000.00. Subsequently, NCLPI became delinquent
in paying the monthly rent. Nissan and Lica verbally
agreed to convert the arrearages into a debt to be
covered by a promissory note and twelve (12)
postdated checks each amounting to ₱162,541.95 as
monthly payments starting June 1996 until May 1997.
While NCLPI was able to deliver the postdated checks
per its verbal agreement with LMI, it failed to sign the
promissory note and pay the checks for June to October
1996. Thus, in a letter dated October 16, 1996, LMI
informed NCLPI that it was terminating their Contract
of Lease due to arrears in the payment of rentals. It also
demanded that NCLPI (1) pay the amount of
₱2,651,570.39 for unpaid rentals and (2) vacate the
premises within five (5) days from receipt of the notice.
In the meantime, Proton sent NCLPI an undated request
to use the premises as a temporary display center for
"Audi" brand cars for a period of ten (10) days. NCLPI
entered into a Memorandum of Agreement with Proton
whereby the former agreed to allow Proton "to
immediately commence renovation work even prior to
the execution of the Contract of Sublease. LMI entered
into a Contract of Lease with Proton over the subject
premises. NCLPI demanded Proton to vacate the leased
premises. However, Proton replied that it was
occupying the property based on a lease contract with
LMI. In a letter of even date addressed to LMI, NCLPI
asserted that its failure to pay rent does not
automatically result in the termination of the Contract
of Lease nor does it give LMI the right to terminate the
same.
ISSUE:
Whether the contract can be rescinded extra-judicially
despite the absence of a special contractual stipulation
therefor.
RULING:
Yes. Art. 1191 provides that the power to rescind is
implied in reciprocal obligations, in cases where one of
the obligors should fail to comply with what is
incumbent upon him.
It is clear from the records that NCLPI committed
substantial breaches of its Contract of Lease with LMI.
Aside from non-payment of rentals, it appears that
NCLPI also breached its obligations under Paragraphs
4th and 5th of the Contract of Lease which prohibit it
from subleasing the premises or introducing
improvements or alterations thereon without LMI’s
prior written consent. As revealed from the evidence
presented by PROTON however, even before NCLPI
represented that it would try to negotiate a possible
sub-lease of the premises, it had, without any semblance
of authority from LMI, already effectively subleased the
subject premises to PROTON and allowed the latter not
only to enter the premises but to renovate the same. It
is true that NCLPI and LMI’s Contract of Lease does not
contain a provision expressly authorizing extrajudicial
rescission. LMI can nevertheless rescind the contract,
without prior court approval, pursuant to Art. 1191 of
the Civil Code.
Art. 1191 provides that the power to rescind is implied
in reciprocal obligations, in cases where one of the
obligors should fail to comply with what is incumbent
upon him. Otherwise stated, an aggrieved party is not
prevented from extra-judicially rescinding a contract to
protect its interests, even in the absence of any
provision expressly providing for such right. The
rationale for this rule was explained in the case
of University of the Philippines v. De los Angeles wherein
this Court held:
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).
An extrajudicial rescission based on grounds not
specified in the contract would not preclude a party to
treat the same as rescinded. The rescinding party,
however, by such course of action, subjects himself to
the risk of being held liable for damages when the
extrajudicial rescission is questioned by the opposing
party in court. In other words, the party who deems the
contract violated may consider it resolved or rescinded,
and act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will
conclusively and finally settle whether the action taken
was or was not correct in law.