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USURIOUS TRANSACTIONS

Solidbank Corp. v. Permanent Homes, Inc.


G. R. No. 171925, July 23, 2010

Permanent Homes, Inc. (PHI/Permament) entered into a loan agreement with Solidbank
Corp. (Solidbank) to finance the formers project, Buena Vida Townhomes. The loan
was for total amount of P60 million. Of the entire loan, P50 million is a time loan for a
term of up to three hundred sixty (360) days, with interest thereon at prevailing market
rates, and subject to monthly repricing. The remaining P1 million was available for
domestic bills purchase. The loan was secured through a Real Estate Mortgage, initially,
over three of the townhouse units from the project but the same was increased to 36
townhouses by the time the complaint was filed. Of the 60 million available to PHI, it
availed of a total of 41.5 million pesos, covered by three (3) promissory notes. The three
promissory notes between Solidbank and Permanent all contain the following
provisions:
5.We/I irrevocably authorize Solidbank to increase or decrease at any time
the interest rate agreed in this Note or Loan on the basis of, among
others, prevailing rates in the local or international capital markets. For
this purpose, We/I authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The adjustment of the
interest rate shall be effective from the date indicated in the written notice
sent to us by the bank, or if no date is indicated, from the time the notice
was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay
all amounts due under this Note or Loan within thirty (30) days from the
receipt by anyone of us of the written notice. Otherwise, We/I shall be
deemed to have given our consent to the interest rate adjustment.

There were several instances that the interest rates were increased. PHI,
contending that the increase was unilateral and arbitrary filed an action with the RTC to
1) annul the increases on the interest rate, 2) to fix the interest rate at the applicable
rate, and 3) for the court to order Solidbank to render an accounting in order for the

amount of refund by the latter to PHI to be determined. The RTC decided in favor of
Solidbank. The CA set aside the RTCs ruling. Hence, this petition.

ISSUE: Whether the Honorable Court of Appeals was correct in ruling that the
increases in the interest rates on PHIs loans are void for having been unilaterally
imposed without basis.

No. The virtual repeal of the Usury Law is within the range of judicial notice which
courts are bound to take into account. Although interest rates are no longer subject to a
ceiling, the lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such
imposed rate should be in writing. The stipulations on interest rate repricing are valid
because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect
only upon Solidbanks written notice to Permanent of the new interest rate; and (3)
Permanent has the option to prepay its loan if Permanent and Solidbank do not agree
on the new interest rate. The phrases irrevocably authorize, at any time
and adjustment of the interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated, from the time the notice
was sent, emphasize that Permanent should receive a written notice from Solidbank as
a condition for the adjustment of the interest rates.

In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on their
essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties is
void. There was no showing that either Solidbank or Permanent coerced each other to
enter into the loan agreements. The terms of the Omnibus Line Agreement and the
promissory notes were mutually and freely agreed upon by the parties.
Moreover, Solidbanks range of lending rates were consistent with prevailing
rates in the local or international capital markets as they were able to sufficiently prove.

USURIOUS TRANSACTIONS

Villanueva v. Court of Appeals


G. R. No. 163433, August 22, 2011

Petitioners applied for separate loans amounting to P100,000.00 and


P125,000.00, which were granted by herein respondent Provident Rural Bank of Sta.
Cruz, Laguna, Inc. (respondent Bank), secured by two promissory notes and two
separate Real Estate mortgages over some parcel of lands in Laguna. Respondent
Bank moved to foreclose the mortgages extrajudicially but it subsequently reapplied for
judicial foreclosure. Petitioners' mortgage debt rose to P713,465.35, plus interests,
charges and expenses. Petitioners then wrote a letter-request addressed to the Officerin-Charge of the Office of the Clerk of Court of the RTC, Santa Cruz, Laguna
questioning the amount of its outstanding obligations to respondent Bank and
requesting that the public auction scheduled on August 25, 2000 be suspended until
after its objection to the amount being sought by respondent Bank is resolved by the
court but the same was denied. Aggrieved, petitioners filed, on August 2, 2000, a
Petition for Declaratory Relief, Accounting and Damages praying that the stipulated
interests, charges and expenses on its loans be declared null and void for being
contrary to law, morals, good customs, public order or public policy as they are
exorbitant, usurious, iniquitous and unconscionable. The RTC dismissed the petition on
the ground of res judicata, giving credence to respondent Banks claim that the issues
raised by petitioners have already been decided in a prior case. The CA affirmed the
RTC. Hence, this petition.

ISSUES: 1)Whether the issue on the alleged existence of exorbitant charges made
by respondent bank has already been ruled in the previous case and is thus barred
by res judicata. 2) Whether 24% interest rate and 6% penalty charge per annum is
exorbitant

1) Yes. In the instant case, the cause of action in both Civil Case Nos. SC-3422 and 4032
is the act of respondent Bank in imposing what petitioners alleged as exorbitant,
unconscionable and usurious interest rates, penalties and other charges. There is, thus,
no doubt that the same evidence is required to establish the cause of action in both of
these cases. In fact, the issues (whether or not the interest rates, penalties and charges
imposed by respondent Bank are usurious and unconscionable) and the reliefs sought
(reduction of the said interest rates, penalties and surcharges to an amount not
exceeding 12% per annum) in both cases are essentially the same. Neither is the Court
persuaded by petitioners' contention that, in any case, the Court should not apply the
principle of res judicata because to do so would be tantamount to allowing respondent
Bank to unjustifiably and illegally enrich itself at the expense of petitioners by imposing
interests, penalties and other charges beyond what the law and equity allows.

It is true that res judicata is to be disregarded if its rigid application would involve
the sacrifice of justice to technicality. However, the present case does not fall under this
exception.
2) No. In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and
Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24% per
annum on a loan ofP244,000.00, agreed upon by the parties, may not be considered as
unconscionable and excessive. As such, the Court ruled that the borrowers cannot
renege on their obligation to comply with what is incumbent upon them under the
contract of loan as the said contract is the law between the parties and they are bound
by its stipulations. Also, in Garcia v. Court of Appeals, this Court sustained the
agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan finding
the same to be reasonable and clearly evidenced by the amended credit line agreement
entered into by the parties as well as two promissory notes executed by the borrower in
favor of the lender. Based on the above jurisprudence, the Court finds that the 24% per
annum interest rate, provided for in the subject mortgage contracts for a loan
of P225,000.00, may not be considered unconscionable. Moreover, considering that the
mortgage agreement was freely entered into by both parties, the same is the law
between them and they are bound to comply with the provisions contained therein.
As to the penalty charges, the Court also ruled that the same is valid. Petitioners
bound themselves to pay the stipulated penalty charge of 6% per annum of the
principal amount of loan as penalty for inexcusable neglect to pay any amount of t[he]
loan when due. Since petitioners failed to present evidence that their failure to perform
their obligation was due to either force majeure or the acts of respondent Bank or to any

justifiable or excusable cause, they are obliged to pay the penalty charge as agreed
upon.

USURIOUS TRANSACTIONS

RGM Industries, Inc. v. United Pacific Capital Corporation


G. R. No. 194781, June 27, 2012

Respondent, in the business of lending, granted a thirty million peso short-term


credit facility in favor of the petitioner. The loan amount was sourced from individual
funders on the basis of a direct-match facility for which a series of promissory notes
were issued by the petitioner for the payment of the loan. The petitioner failed to satisfy
the said promissory notes as they fell due and the loan had to be assumed in full by the
respondent which thereby stepped into the shoes of the individual funders.

Consequently, on April 4, 1998, the petitioner issued in favor of the respondent a


consolidated promissory note in the principal amount of P27,852,075.98 for a term of
fourteen (14) days and maturing on April 28, 1998. The stipulated interest on the
consolidated promissory note was 32% per annum. In case of default, a penalty charge
was imposed in an amount equivalent to 8% per month of the outstanding amount due
and unpaid computed from the date of default. The petitioner failed to satisfy the
consolidated promissory note, the principal balance of which as of April 28, 1998
was P27,668,167.87. Having failed to meet its loan obligations, respondent filed a
collection suit against petitioner. The petitioner did not dispute the loan it owes but
claimed that the agreed interest rate was fixed at 15.5% per annum and not the varying
interest rates imposed by the respondent which reached as high as 40% per annum.
The petitioner asserted that the respondent unilaterally imposed the increased interest
rates in violation of the principle of mutuality of contracts.

The RTC ruled in favour of respondent. On appeal, the CA affirmed the RTC's
judgment but modified the interest rates and penalty charges imposed. The CA held that
the interest rates levied by the respondent were excessive and unconscionable hence,
must be reduced to 12% per annum. The CA likewise lowered the penalty charges to

2% per month considering that the P7,504,522.27 paid by the petitioner was already
applied thereto and the nature of the contract between the parties was a short-term
credit facility. The attorney's fees were reduced from 25% to 10% of the outstanding
obligation.

ISSUE: Whether the modified interest rates and penalty charges decreed by the CA are
still exorbitant and that the CA failed to appreciate the partial payments already made
when it upheld the amount of P27,668,167.87 as petitioner's outstanding balance.

No. The issue on partial payments and their application to the outstanding
balance involves a calibration of the evidence presented, hence, factual in nature and
not reviewable in the petition at bar. Oft-repeated is the rule that petitions for review
under Rule 45 of the Rules of Court may be brought only on questions of law, not on
questions of fact.
Nevertheless, we are convinced that the courts a quo, in concluding the
outstanding balance of the petitioner, have both carefully considered and appreciated
the evidence of partial payments adduced. As found by the CA, the payments made by
the petitioner before the complaint was filed were duly deducted from the outstanding
balance; while the payments made during the pendency of the case were applied to the
due and outstanding penalty charges.
We affirm the interest rate decreed by the CA. Stipulated interest rates are illegal
if they are unconscionable and courts are allowed to temper interest rates when
necessary. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. What may be
iniquitous and unconscionable in one case, may be just in another.
However, pursuant to Bank of the Philippine Islands, Inc. v. Yu, we deem it
proper to further reduce the penalty charge decreed by the CA from 2% per month to
1% per month or 12% per annum in view of the following factors: (1) respondent has
already received P7,504,522.27 in penalty charges, and (2) the loan extended to
respondent was a short-term credit facility.
On the basis of the same precedent, the attorney's fees must likewise be
equitably reduced considering that: (1) the petitioner has already made partial
payments; (2) the attorney's fees are not an integral part of the cost of borrowing but a
mere incident of collection; and (3) the attorney's fees were intended as penal clause to
answer for liquidated damages, hence, the rate of 10% of the unpaid obligation is too
onerous. Under the premises, attorneys fees equivalent to one percent (1%) of the
outstanding balance is reasonable.

USURIOUS TRANSACTIONS

David v. Misamis Occidental II Electric Cooperative, Inc.


G. R. No. 194785, July 11, 2012

Petitioner Virgilio S. David (David) was the owner or proprietor of VSD Electric
Sales, a company engaged in the business of supplying electrical hardware including
transformers for rural electric cooperatives like respondent Misamis Occidental II
Electric Cooperative, Inc. (MOELCI), with principal office located in Ozamis City.
MOELCI expressed its intention to purchase a 10 MVA power transformer from David.
For this reason, its General Manager, Engr. Reynaldo Rada (Engr. Rada), went to meet
David in the latters office in Quezon City. David agreed to supply the power transformer
provided that MOELCI would secure a board resolution because the item would still
have to be imported. David was later presented with the board resolution authorizing the
purchase of one MVA power transformer to which David likewise presented his proposal
for the acquisition. Engr. Rada and Director Jimenez (in charge of the procurement)
signed the proposal. As per Board Resolution, the transformer was to be paid through a
loan from the National Electrification Administration (NEA). However, since the loan was
not immediately acted upon, Engr. Rada requested that David to deliver the transformer
even without the downpayment agreed upon in the proposal. David agreed on the
condition that the interest would be pegged at 24% per annum to which Engr. Rada
agreed. On December 17, 1992, the goods were shipped to Ozamiz City via William
Lines. In the Bill of Lading, a sales invoice was included which stated the agreed
interest rate of 24% per annum. When MOELCI failed to communicate with David after
the shipment and when no payment was made despite several demands, David filed a
complaint with the RTC.

The RTC dismissed the complaint. On appeal, the CA affirmed the RTCs ruling.
Hence, this petition.

ISSUE: Was the 24% per annum interest rate unconscionable?

Yes. Although the Court agrees that MOELCI should pay interest, the stipulated
rate is, however, unconscionable and should be equitably reduced. While there is no
question that parties to a loan agreement have wide latitude to stipulate on any interest
rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury
Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest
rates whenever unconscionable may still be reduced to a reasonable and fair level.
There is nothing in the said circular which grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets. Accordingly, the excessive interest of 24% per annum
stipulated in the sales invoice should be reduced to 12% per annum.

PURE OBLIGATION

Hongkong and Shanghai Banking Corp. v. Broqueza


G. R. No. 178610, November 17, 2010

Petitioners Gerong and Editha Broqueza are employees of Hongkong and


Shanghai Banking Corp. (HSBC) and members of respondent Hongkong Shanghai
Banking Corporation, Ltd. Staff Retirement Plan (HSBCL-SRP), a retirement plan
established by HSBC through its Board of Trustees for the benefit of the employees.
Editha and Gerong obtained loans which were paid through automatic deduction.
Unfortunately, however, Editha and Gerong were terminated following a labor dispute
between HSBC and its employees. [Note: A labor dispute was filed and was pending
with the Labor Arbiter at the time this decision was penned.] As a result, Editha and
Gerong were not able to pay the monthly amortizations of their respective loans. Thus,
respondent HSBCL-SRP considered the accounts of petitioners delinquent. Demands to
pay the respective obligations were made upon petitioners, but they failed to pay.
HSBCL-SRP then filed a collection suit against Editha and Gerong. The MTC, in favour
of HSBCL-SRP, ruled that that the loans were in the nature of unsecured and pure
obligations. Hence, the loans are immediately demandable. The RTC affirmed the
MTCs ruling. The CA reversed the RTC. Hence, this petition.

ISSUE: Whether the loans were in the nature of pure obligations.

Yes. The loans were covered by Promissory Notes. We affirm the findings of the
MeTC and the RTC that there is no date of payment indicated in the Promissory Notes.
The RTC is correct in ruling that since the Promissory Notes do not contain a period,
HSBCL-SRP has the right to demand immediate payment. Article 1179 of the Civil Code
applies. The spouses Broquezas obligation to pay HSBCL-SRP is a pure obligation.
The fact that HSBCL-SRP was content with the prior monthly check-off from Editha

Broquezas salary is of no moment. Once Editha Broqueza defaulted in her monthly


payment, HSBCL-SRP made a demand to enforce a pure obligation.
The payroll deduction is merely a convenient mode of payment and not the sole
source of payment for the loans. HSBCL-SRP never agreed that the loans will be paid
only through salary deductions. Neither did HSBCL-SRP agree that if Editha Broqueza
ceases to be an employee of HSBC, her obligation to pay the loans will be suspended.
HSBCL-SRP can immediately demand payment of the loans at anytime because the
obligation to pay has no period. Moreover, the spouses Broqueza have already incurred
in default in paying the monthly installments.
Finally, the enforcement of a loan agreement involves "debtor-creditor relations
founded on contract and does not in any way concern employee relations. As such it
should be enforced through a separate civil action in the regular courts and not before
the Labor Arbiter."

CONDITIONAL OBLIGATION

Bonrostro v. Sps. Juan and Constacia Luna


G. R. No. 172346, July 24, 2013

In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a


Contract to Sell with Bliss Development Corporation (Bliss) involving a house and lot
located at New Capitol Estates in Diliman, Quezon City. Barely a year after, Constancia,
this time as the seller, entered into another Contract to Sell with petitioner Lourdes
Bonrostro (Lourdes) concerning the same property. A condition in the contract states:
2. x x x In the event the VENDEE fails to pay the second installment on time, the
VENDEE will pay starting May 1, 1993 a 2% interest on the P300,000.00
monthly. Likewise, in the event the VENDEE fails to pay the amount
of P630,000.00 on the stipulated time, this CONTRACT TO SELL shall likewise
be deemed cancelled and rescinded and x x x 5% of the total contract price
of P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid
monthly amortization shall likewise be deducted from the initial down payment in
favor of the VENDOR.7
Immediately after the execution of the said second contract, the spouses Bonrostro took
possession of the property. However, except for the P200,000.00 down payment,
Lourdes failed to pay any of the stipulated subsequent amortization payments. On
January 11, 1994, Constancia and her husband, respondent Juan Luna (spouses Luna),
filed before the RTC a Complaint for Rescission of Contract and Damages against the
spouses Bonrostro. The RTC ruled in favor of the spouses Bonrostro. The CA, among
other pronouncements, affirmed the RTCs finding that Lourdes was ready to pay her
obligation on November 24, 1993. Hence, this petition.

ISSUE: Whether there is correct reliance by on Lourdes willingness to pay.

No. The RTC in resolving the Complaint focused on the sole issue of whether the
failure of spouses Bonrostro to pay the installments of P300,000.00 on April 30, 1993
and P330,000.00 on July 31, 1993 is a substantial breach of their obligation under the
contract as to warrant the rescission of the same. Clearly, the RTC arrived at its
conclusion based on its mistaken premise that rescission is applicable to the case.
Hence, its determination of whether there was substantial breach. As may be recalled,
however, the CA, in its assailed Decision, found the contract between the parties as a
contract to sell, specifically of a real property on installment basis, and as such
categorically declared rescission to be not the proper remedy. This is considering that in
a contract to sell, payment of the price is a positive suspensive condition, failure of
which is not a breach of contract warranting rescission under Article 1191 of the Civil
Code but rather just an event that prevents the supposed seller from being bound to
convey title to the supposed buyer. Also, and as correctly ruled by the CA, Article 1191
cannot be applied to sales of real property on installment since they are governed by
the Maceda Law.

There being no breach to speak of in case of non-payment of the purchase price


in a contract to sell, as in this case, the RTCs factual finding that Lourdes was willing
and able to pay her obligation a conclusion arrived at in connection with the said
courts determination of whether the non-payment of the purchase price in accordance
with the terms of the contract was a substantial breach warranting rescission therefore
loses significance. The spouses Bonrostros reliance on the said factual finding is thus
misplaced. They cannot invoke their readiness and willingness to pay their obligation on
November 24, 1993 as an excuse from being made liable for interest beyond the said
date.

CONDITIONAL OBLIGATION

Lim v. Development Bank of the Philippines


G. R. No. 177050, July 1, 2013

Petitioners (the Lims) obtained a loan from Development Bank of the Philippines
(DBP) to finance their cattle raising business. The loans were covered by Promissory
Notes. A second loan was obtained by the Lims along with several other individuals
under another account (Diamond L Ranch account) with the same bank, also covered
by Promissory Notes. A mortgage over several real properties was also executed in
favor DBP. Due to violent confrontations between government troops and Muslim rebels
in Mindanao from 1972 to 1977, petitioners were forced to abandon their cattle ranch.
As a result, their business collapsed and they failed to pay the loan amortizations. Upon
failure to pay despite demand, DBP subsequently moved to foreclose the mortgage but,
at one time, was prevented from doing so because of a TRO secured by the petitioners.
There were also several discussion on loan restructuring but none were successful. In
the end, DBP was able to foreclose the properties and sold the same on auction sale
with itself as the sole bidder. At one time, DBP agreed to restructure the loan rather than
foreclosing the mortgage but petitioners still failed to pay their obligations, prompting
DBP to cancel the Loan Restructuring Agreement. After much ado, the petitioners filed a
complaint for the nullification of the foreclosure sale with the RTC. The RTC ruled in
favor of the petitioners. The CA reversed the RTC. Hence, this petition.

ISSUE: Whether the obligation was extinguished due to fulfilment of the condition.

No. The Promissory Notes subject of the instant case became due and
demandable as early as 1972 and 1976. The only reason the mortgaged properties
were not foreclosed in 1977 was because of the restraining order from the court. In
1978, petitioners made a partial payment of P902,800.00. No subsequent payments
were made. It was only in 1989 that petitioners tried to negotiate the settlement of their

loan obligations. And although DBP could have foreclosed the mortgaged properties, it
instead agreed to restructure the loan. In fact, from 1989 to 1994, DBP gave several
extensions for petitioners to settle their loans, but they never did, thus, prompting DBP
to cancel the Restructuring Agreement.

Petitioners insist that DBPs cancellation of the Restructuring Agreement justifies


the extinguishment of their loan obligation under the Principle of Constructive Fulfillment
found in Article 1186 of the Civil Code but the Court does not agree. As aptly pointed out
by the CA, Article 1186 of the Civil Code, which states that the condition shall be
deemed fulfilled when the obligor voluntarily prevents its fulfillment, does not apply in
this case:

Article 1186 enunciates the doctrine of constructive fulfillment of suspensive


conditions, which applies when the following three (3) requisites concur, viz: (1)
The condition is suspensive; (2) The obligor actually prevents the fulfillment of
the condition; and (3) He acts voluntarily. Suspensive condition is one the
happening of which gives rise to the obligation. It will be irrational for any Bank to
provide a suspensive condition in the Promissory Note or the Restructuring
Agreement that will allow the debtor-promissor to be freed from the duty to pay
the loan without paying it.

Besides, petitioners have no one to blame but themselves for the cancellation of
the Restructuring Agreement. It is significant to point out that when the Regional Credit
Committee reconsidered petitioners proposal to restructure the loan, it imposed
additional conditions. In fact, when DBPs General Santos Branch forwarded the
Restructuring Agreement to the Legal Services Department of DBP in Makati,
petitioners were required to pay the amount of P1,300,672.75, plus a daily interest of
P632.15 starting November 16, 1993 up to the date of actual payment of the said
amount. This, petitioners failed to do. DBP therefore had reason to cancel the
Restructuring Agreement. Moreover, since the Restructuring Agreement was cancelled,
it could not have novated or extinguished petitioners loan obligation. And in the
absence of a perfected Restructuring Agreement, there was no impediment for DBP to
exercise its right to foreclose the mortgaged properties.

[Note: Although the Court ruled that the obligation is not extinguished, it however
nullified the foreclosure sale, viz: But while DBP had a right to foreclose the mortgage,
we are constrained to nullify the foreclosure sale due to the banks failure to send a
notice of foreclosure to petitioners.]

RECIPROCAL OBLIGATIONS

G.G. Sportsewar Mfg. Corp. v. World Class Properties, Inc.


G. R. No. 182720, March 2, 2010

GG Sportswear, a domestic corporation, offered to purchase the 38 th floor


penthouse unit and 16 parking slots for 32 cars in World Class's condominium project
for the discounted, pre-selling price of P89,624,272.82. After GG Sportswear paid
the P500,000.00 reservation fee, the parties, on May 15, 1996, signed a Reservation
Agreement (Agreement) that provides for the schedule of payments, including the
stipulated monthly installments on the down payment and the balance on the purchase
price. Based on the Agreement, the contract to sell pertaining to the entire 38 th floor
Penthouse unit and the parking slots would be executed upon the payment of thirty
percent (30%) of the total purchase price. It also stipulated that all its provisions
would be deemed incorporated in the contract to sell and other documents to be
executed by the parties thereafter. The Agreement also specified that the failure of the
buyer to pay any of the installments on the stipulated date would give the developer the
right either to: (1) charge 3% interest per month on all unpaid receivables, or (2) rescind
and cancel the Agreement without the need of any court action and, upon cancellation,
automatically forfeit the reservation fee and other payments made by the buyer.
Somewhere along the fulfilment of the obligation, GG Sportswear requested to replace
some of the outstanding checks with World Class to which the latter agreed with the
suggestion that a new Reservation Agreement will be executed. When GG Sportswear
indeed delivered the replacement checks and paid its overdue balance, World Class
handed GG Sportswear a new Reservation Agreement, which the latter refused to sign.

Instead, it sent a letterto World Class, requesting that its check dated April 24,
1997 be deposited on May 15, 1997 because it was experiencing financial difficulties.
When World Class rejected GG Sportswears request, GG Sportswear sent another
letter informing World Class that the second Reservation Agreement was incomplete
because it did not expressly provide the time of completion of the condominium
unit. World Class countered that the provisional Contract to Sell it previously submitted

to GG Sportswear expressly provided for the completion date (December 15, 1998) and
insisted that GG Sportswear pay its overdue account.
On June 10, 1997, GG Sportswear filed a Complaint with the Housing and Land
Use Regulatory Board (HLURB) claiming a refund of the installment payments made to
World Class because it was dissatisfied with the completion date found in the
Contract to Sell. The HLURB rescinded the Agreement. On appeal to the HLURB

Board of Commissioners (Board), the Board modified the Arbiters


decision by ruling that the Agreement could no longer be
rescinded for lack of a CR/LS because World Class had already
been issued a License to Sell on August 1, 1996, or before the
complaint was filed. Notwithstanding this pronouncement, the
Board still awarded a refund in GG Sportswears favor.
The Office of the President (OP) denied World Classs appeal
by quoting extensively from the Arbiters decision. The OP
subsequently denied World Classs motion for reconsideration. The
CA, however, reversed the OPs decision. Hence, this petition.

ISSUE: .Whether the obligation is a reciprocal one where (under Art. 1191) the
power to rescind is implied.

No. The Agreement expressly provides that GG Sportswear shall be entitled to a


Contract to Sell only upon its payment of at least 30% of the total contract price.
Since GG Sportswear had only paid 21% of the total contract price, World Classs
obligation to execute a Contract to Sell had not yet arisen. Accordingly, GG Sportswear
had no basis to claim that World Class breached this obligation.
Even if we apply Article 1191 of the Civil Code, which provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon
him. x x x x.
no reason still exists to rescind the contract. Under the Agreement, World Classs
obligation was to finish the project and turn over the purchased units to GG Sportswear

on or before the completion date. Notably, at the time GG Sportswear filed its complaint
on June 10, 1997, the agreed completion date of December 15, 1998, or even August
1998, the date appearing on World Classs first License to Sell, was still a long way
out. In other words, when GG Sportswear filed its complaint, World Class had not
yet breached its obligation, and rescission under this provision of the Civil Code
was premature.

RECIPROCAL OBLIGATIONS

Solar Harvest Incorporated v. Davao Corrugated Carton, Corp.


G. R. No. 176686, July 26, 2010

A verbal agreement between Solar Harvest, Inc. (Solar Harvest) and Davao
Corrugated Carton Corp. (DCCC) was entered into for the latter to supply the former
with corrugated carton boxes at $1.10 each. Solar Harvest deposited on March 31,
1998 $40,150.00 to respondents US Dollar Savings Account with Westmont Bank as
full payment for the boxes it ordered.

Despite such payment, petitioner did not receive any boxes from respondent.
On January 3, 2001, petitioner wrote a demand letter for reimbursement of the
amount paid. On February 19, 2001, respondent replied that the boxes had been
completed as early as April 3, 1998 and that petitioner failed to pick them up from
the formers warehouse 30 days from completion, as agreed upon. Respondent
mentioned that petitioner even placed an additional order of 24,000 boxes, out of
which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes
and P132,000.00 as storage fee.

Solar Harvest filed a complaint for sum of money with damages against
DCCC. The RTC ruled that respondent did not commit any breach of faith that
would justify rescission of the contract and the consequent reimbursement of the
amount paid by petitioner. The CA dismissed Solar Harvests appeal. Hence, this
petition.

ISSUE: Whether DCCC failed to perform its obligation, justifying recission.

No. In reciprocal obligations, as in a contract of sale, the general rule is that the
fulfillment of the parties respective obligations should be simultaneous. Hence, no
demand is generally necessary because, once a party fulfills his obligation and the other
party does not fulfill his, the latter automatically incurs in delay. But when different dates
for performance of the obligations are fixed, the default for each obligation must be
determined by the rules given in the first paragraph of the present article, that is, the
other party would incur in delay only from the moment the other party demands
fulfillment of the formers obligation. Thus, even in reciprocal obligations, if the period for
the fulfillment of the obligation is fixed, demand upon the obligee is still necessary
before the obligor can be considered in default and before a cause of action for
rescission will accrue.

Evident from the records and even from the allegations in the complaint was the
lack of demand by petitioner upon respondent to fulfill its obligation to manufacture and
deliver the boxes. The Complaint only alleged that petitioner made a follow-up upon
respondent, which, however, would not qualify as a demand for the fulfillment of the
obligation. Petitioners witness also testified that they made a follow-up of the boxes, but
not a demand. Note is taken of the fact that, with respect to their claim for
reimbursement, the Complaint alleged and the witness testified that a demand letter
was sent to respondent. Without a previous demand for the fulfillment of the obligation,
petitioner would not have a cause of action for rescission against respondent as the
latter would not yet be considered in breach of its contractual obligation.

Even assuming that a demand had been previously made before filing the
present case, petitioners claim for reimbursement would still fail, as the circumstances
would show that respondent was not guilty of breach of contract.

In sum, the Court finds that petitioner failed to establish a cause of action for
rescission, the evidence having shown that respondent did not commit any breach of its
contractual obligation. As previously stated, the subject boxes are still within
respondents premises. To put a rest to this dispute, we therefore relieve respondent
from the burden of having to keep the boxes within its premises and, consequently, give

it the right to dispose of them, after petitioner is given a period of time within which to
remove them from the premises.

RECIPROCAL OBLIGATIONS

Maceda v. Development Bank of the Philippines


G. R. No. 174979, August 11, 2010

Bonifacio Maceda, Jr. (Maceda) obtained a loan from the defendant DBP in the
amount of P7.3 million to finance the expansion of the Old Gran Hotel in Leyte. Upon
approval of said loan, plaintiff Maceda executed a promissory note and a real estate
mortgage. The DBP Governor at that time, Recio Garcia, in-charge of loans for hotels,
allegedly imposed the condition that DBP would choose the building contractor,
namely, Moreman Builders Co. (Moreman). The contractor would directly receive the
loan releases from DBP, after verification by DBP of the construction progress. The
period of loan availment was 360 days from date of initial release of the loan. Similarly,
suppliers of equipment and furnishings for the hotel were also to be paid directly by
DBP. The construction deadline was set for December 22, 1977.

Maceda filed a complaint for Rescission of the building contract with Damages
against the contractor Moreman with the CFI. The CFI rescinded the building contract,
suspended the period of availment, allowed Maceda to himself take over construction,
and directed DBP to release to Maceda the sum of P1.003M, which had previously
been approved for release in January 1978. The DBP was further ordered to give
plaintiff Maceda such other amounts still pending release. Moreman filed an appeal
which was subsequently dismissed in 1990 by the Supreme Court. Entry of judgment on
this case was issued on April 23, 1990.

In the meantime, Maceda also instituted the case a quo for Specific Performance
with Damages against defendant DBP before the Makati RTC in 1984. The Manila CFIs
November 28, 1978 Decision and the factual findings therein contained became part of
the evidence submitted before the Makati RTC as Exh. D. The RTC ruled in favor of
Maceda and required DBP to pay Maceda P17,547,510.90 to finish the construction of

the hotel but later modified its decision regarding the awarded damages. Said modified
decision was affirmed by the CA. Hence, this petition.

ISSUE: Whether the RTC and CA were correct in requiring


pay Maceda P17,547,510.90 to finish the construction of the hotel..

DBP

to

No. Maceda filed the present complaint for specific performance so he could

finish the construction of the hotel. In an action for specific performance, the party at
fault will be required to perform its undertaking under the contract. In this case, the trial
court and the appellate court should have required DBP, as creditor under the loan
agreement, to lend (and not to pay)Maceda the amount needed to finish the
construction of the hotel. The trial court and the appellate court thus erred in requiring
DBP to pay Maceda P17,547,510.90 to finish the construction of the hotel.
Maceda put in cash equity worth P6,153,398.05 as of 31 July 1980. Under Article
1191 of the Civil Code, the aggrieved party has a choice between specific performance
and rescission with damages in either case. However, we have ruled that if specific
performance becomes impractical or impossible, the court may order rescission with
damages to the injured party. After the lapse of more than 30 years, it is now
impossible to implement the loan agreement as it was written, considering the absence
of evidence as to the rising costs of construction, as well as the obvious changes in
market conditions on the viability of the operations of the hotel. We deem it equitable
and practicable to rescind the obligation of DBP to deliver the balance of the loan
proceeds to Maceda. In exchange, we order DBP to pay Maceda the
value of Macedas cash equity of P6,153,398.05 by way of actual damages, plus the
applicable interest rate. The present ruling comes within the purview of Macedas and
DBPs prayers for other reliefs, just or equitable under the premises.

RECIPROCAL OBLIGATIONS

Heirs of Gaite v. The Plaza, Inc.


G. R. No. 177685, January 26, 2011

The Plaza, Inc. (The Plaza), a corporation engaged in the restaurant business,
through its President, Jose C. Reyes, entered into a contract with Rhogen Builders
(Rhogen), represented by Ramon C. Gaite, for the construction of a restaurant building
in Greenbelt, Makati, Metro Manila for the price of P7,600,000.00. On July 18, 1980, to
secure Rhogens compliance with its obligation under the contract, Gaite and FGU
Insurance Corporation (FGU) executed a surety bond in the amount of P1,155,000.00 in
favor of The Plaza. OnJuly 28, 1980, The Plaza paid P1,155,000.00 less withholding
taxes as down payment to Gaite. Thereafter, Rhogen commenced construction of the
restaurant building. Several instances concerning the construction occurred which led to
Gaite terminating the contract based on the Contractors Right to Stop Work or
Terminate Contracts as provided for in the General Conditions of the Contract. In a
letter, Gaite accused Reyes of not cooperating with Rhogen in solving the problem
concerning the revocation of the building permits, which he described as a minor
problem. Additionally, Gaite demanded the payment of P63,058.50 from The Plaza
representing the work that has already been completed by Rhogen. This ultimately led to
a lawsuit for breach of contract, sum of money and damages against Gaite and FGU in
the Court of First Instance (CFI) of Rizal. The RTC ruled in favor of The Plaza. The CA
affirmed the Decision of the trial court but modified the award of damages. Hence, this
petition.

ISSUE: Whether there were valid and legal grounds for Rhogen to terminate the
contract pursuant to Article 1191 of the Civil Code and Article 123 of the General
Conditions of the Construction Contract.

No. Petitioners claim that Rhogen sent Progress Billing No. 1 dated September
10, 1980 and demanded payment from The Plaza in the net amount of P473,554.06 for
the work it had accomplished from July 28, 1980 until September 7, 1980. The Plaza,
however, failed to pay the said amount. According to petitioners, Article 123 of the
General Conditions of the Construction Contract gives The Plaza seven days from
notice within which to pay the Progress Billing; otherwise, Rhogen may terminate the
contract. Petitioners also invoke Article 1191 of the Civil Code, which states that the
power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

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
such that the performance of one is conditioned upon the simultaneous fulfillment of the
other. Respondent The Plaza predicated its action on Article 1191of the Civil Code,
which provides for the remedy of rescission or more properly resolution, a principal
action based on breach of faith by the other party who violates the reciprocity between
them. The breach contemplated in the provision is the obligors failure to comply with
an existing obligation. Thus, the power to rescind is given only to the injured party. The
injured party is the party who has faithfully fulfilled his obligation or is ready and willing
to perform his obligation.

The construction contract between Rhogen and The Plaza provides for reciprocal
obligations whereby the latters obligation to pay the contract price or progress billing is
conditioned on the formers performance of its undertaking to complete the works within
the stipulated period and in accordance with approved plans and other specifications by
the owner. Pursuant to its contractual obligation, The Plaza furnished materials and
paid the agreed down payment. It also exercised the option of furnishing and delivering
construction materials at the jobsite pursuant to Article III of the Construction
Contract. However, just two months after commencement of the project, construction
works were ordered stopped by the local building official and the building permit
subsequently revoked on account of several violations of the National Building
Code and other regulations of the municipal authorities.

Petitioners may not justify Rhogens termination of the contract upon grounds of
non-payment of progress billing and uncooperative attitude of respondent The Plaza
and its employees in rectifying the violations which were the basis for issuance of the
stoppage order. Having breached the contractual obligation it had expressly
assumed, i.e., to comply with all laws, rules and regulations of the local authorities,
Rhogen was already at fault. Respondent The Plaza, on the other hand, was justified
in withholding payment on Rhogens first progress billing, on account of the stoppage
order and additionally due to disappearance of owner-furnished materials at the jobsite.
In failing to have the stoppage and revocation orders lifted or recalled, Rhogen should
take full responsibility in accordance with its contractual undertaking

Such non-observance of laws and regulations of the local authorities affecting the
construction project constitutes a substantial violation of the Construction Contract
which entitles The Plaza to terminate the same, without obligation to make further
payment to Rhogen until the work is finished or subject to refund of payment exceeding
the expenses of completing the works.

RECIPROCAL OBLIGATIONS

Reyes v. Tuparan
G. R. No. 188064, June 1, 2011

Reyes owned a building where she leased a space to Tuparan. A close friendship
developed between the two which led to the respondent investing thousands of pesos in
petitioners financing/lending business from February 7, 1990 to May 27, 1990, with
interest at the rate of 6% a month. On June 20, 1988, petitioner mortgaged the subject
real properties to the Farmers Savings Bank and Loan Bank, Inc. (FSL Bank) to secure
a loan of 2,000,000.00 payable in installments. On November 15, 1990, petitioners
outstanding account on the mortgage reached 2,278,078.13. Petitioner then decided
to sell her real properties for at least 6,500,000.00 so she could liquidate her bank loan
and finance her businesses. As a gesture of friendship, respondent verbally offered to
conditionally buy petitioners real properties for 4,200,000.00 payable on installment
basis without interest and to assume the bank loan.

The parties then proceeded to obtain a Deed of Conditional Sale of Real


Properties with Assumption of Mortgage from FSL Bank. Any other agreements between
the Reyes and Tuparan were merely done verbally.

Under the Deed of Conditional Sale of Real Properties with Assumption of


Mortgage, respondent was bound to pay the petitioner a lump sum of 1.2 million pesos
without interest as part of the purchase price in three (3) fixed installments. Respondent,
however, defaulted in the payment of her obligations on their due dates. Instead of
paying the amounts due in lump sum on their respective maturity dates, respondent
paid petitioner in small amounts from time to time. To compensate for her delayed
payments, respondent agreed to pay petitioner an interest of 6% a month. As of August
31, 1992, respondent had only paid 395,000.00, leaving a balance of 805,000.00 as
principal on the unpaid installments and 466,893.25 as unpaid accumulated interest.

The building was subsequently gutted by fire and the respondent failed to renew
the fire insurance policy covering the properties. On September 2, 1992, respondent
offered the amount of 751,000.00 only payable on September 7, 1992, as full payment
of the purchase price of the subject real properties and demanded the simultaneous
execution of the corresponding deed of absolute sale.

On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for


Rescission of Contract with Damages against Victoria T. Tuparan (respondent) before
the RTC. The RTC also considered the Deed of Conditional Sale of Real Property with
Assumption of Mortgage executed by and among the two parties and FSL Bank a
contract to sell, and not a contract of sale. The CA rendered its decision affirming with
modification the RTC Decision. The CA agreed with the RTC that the contract entered
into by the parties is a contract to sell but ruled that the remedy of rescission could not
apply because the respondents failure to pay the petitioner the balance of the purchase
price in the total amount of 805,000.00 was not a breach of contract, but merely an
event that prevented the seller (petitioner) from conveying title to the purchaser
(respondent). Hence, this petition.

ISSUE: Whether or not the CA was correct in ruling that there was no legal basis for the
rescission of the Deed of Conditional Sale with Assumption of Mortgage.

Yes. The Court agrees with the ruling of the courts below that the subject Deed of
Conditional Sale with Assumption of Mortgage entered into by and among the two
parties and FSL Bank on November 26, 1990 is a contract to sell and not a contract of
sale. The subject contract was correctly classified as a contract to sell based on the
following pertinent stipulations:
8. That the title and ownership of the subject real properties shall remain with
the First Party until the full payment of the Second Party of the balance of the
purchase price and liquidation of the mortgage obligation of 2,000,000.00.
Pending payment of the balance of the purchase price and liquidation of the
mortgage obligation that was assumed by the Second Party, the Second
Party shall not sell, transfer and convey and otherwise encumber the subject
real properties without the written consent of the First and Third Party.

9. That upon full payment by the Second Party of the full balance of the
purchase price and the assumed mortgage obligation herein mentioned the
Third Party shall issue the corresponding Deed of Cancellation of Mortgage
and the First Party shall execute the corresponding Deed of Absolute Sale in
favor of the Second Party.
Based on the above provisions, the title and ownership of the subject properties
remains with the petitioner until the respondent fully pays the balance of the purchase
price and the assumed mortgage obligation. Thereafter, FSL Bank shall then issue the
corresponding deed of cancellation of mortgage and the petitioner shall execute the
corresponding deed of absolute sale in favor of the respondent.
Accordingly, the petitioners obligation to sell the subject properties becomes
demandable only upon the happening of the positive suspensive condition, which is the
respondents full payment of the purchase price. Without respondents full payment,
there can be no breach of contract to speak of because petitioner has no obligation yet
to turn over the title. Respondents failure to pay in full the purchase price is not the
breach of contract contemplated under Article 1191 of the New Civil Code but rather just
an event that prevents the petitioner from being bound to convey title to the respondent.
[Note: the fulfillment of the suspensive condition which is the full payment of the
purchase price, the prospective sellers obligation to sell the subject property by
entering into a contract of sale with the prospective buyer becomes demandable as
provided in Article 1479 of the Civil Code which states: Art. 1479. A promise to buy and
sell a determinate thing for a price certain is reciprocally demandable.]

RECIPROCAL OBLIGATIONS

Lalicon v. National Housing Authority


G. R. No. 185440, July 13, 2011

On November 25, 1980 the National Housing Authority (NHA) executed a Deed
of Sale with Mortgage over a Quezon City lot in favor of the spouses Isidro and Flaviana
Alfaro (the Alfaros). In due time, the Quezon City Registry of Deeds issued Transfer
Certificate of Title (TCT) 277321 in the name of the Alfaros. The deed of sale provided,
among others, that the Alfaros could sell the land within five years from the date of its
release from mortgage without NHAs prior written consent, which was annotated on the
Alfaros title April 14, 1981. About nine years later while the mortgage still subsisted, the
Alfaros sold the property to their son Victor who had a common-law wife, Cecilia, and
two daughters with her, Vicelet and Vicelen Lalicon (the Lalicons). After the mortgage
obligation has been fully settled by Cecilia and six days after NHA has released the
mortgage, Victor transferred the title to his daughters Vicelet and Vicelen. Four years
later, Victor registered the sale, resulting in the cancellation of his parents title. The
property was subsequently sold to Marcela Lao Chua, the title being transferred to the
latter.

The NHA instituted an action with the RTC. for the annulment of the NHAs 1980
sale of the land to the Alfaros, the latters 1990 sale of the land to their son Victor, and
the subsequent sale of the same to Chua, made in violation of NHA rules and
regulations. The RTC ruled that although the Alfaros clearly violated the five-year
prohibition, the NHA could no longer rescind its sale to them since its right to do so had
already prescribed, applying Article 1389 of the New Civil Code. The CA reversed the
RTC. Hence, this petition.

ISSUE: Whether or not the NHAs right to rescind has prescribed.

No. An action for rescission can proceed from either Article 1191 or Article 1381. It has
been held that Article 1191 speaks of rescission in reciprocal obligations within the context of
Article 1124 of the Old Civil Code which uses the term resolution. Resolution applies only to
reciprocal obligations such that a breach on the part of one party constitutes an implied
resolutory condition which entitles the other party to rescission. Resolution grants the injured
party the option to pursue, as principal actions, either a rescission or specific performance of the
obligation, with payment of damages in either case. Rescission under Article 1381, on the other
hand, was taken from Article 1291 of the Old Civil Code, which is a subsidiary action, not based
on a partys breach of obligation. The four-year prescriptive period provided in Article 1389
applies to rescissions under Article 1381.

Here, the NHA sought annulment of the Alfaros sale to Victor because they violated the
five-year restriction against such sale provided in their contract. Thus, the CA correctly ruled
that such violation comes under Article 1191 where the applicable prescriptive period is that
provided in Article 1144 which is 10 years from the time the right of action accrues. The NHAs
right of action accrued on February 18, 1992 when it learned of the Alfaros forbidden sale of the
property to Victor. Since the NHA filed its action for annulment of sale on April 10, 1998, it did
so well within the 10-year prescriptive period.

RECIPROCAL OBLIGATIONS

F.F. Cruz & co., Inc. v. HR Consruction Corp.


G. R. No. 187521, March 14, 2012

FFCCI entered into a contract with the Department of Public Works and
Highways (DPWH) for the construction of the Magsaysay Viaduct, known as the Lower
Agusan Development Project. FFCCI, in turn, entered into a Subcontract Agreement
with HR Construction Corporation (HRCC) for the supply of materials, labor, equipment,
tools and supervision for the construction of a portion of the said project called the East
Bank Levee and Cut-Off Channel in accordance with the specifications of the main
contract. The subcontract price agreed upon by the parties amounted
to P31,293,532.72. Pursuant to the Subcontract Agreement, HRCC would submit to
FFCCI a monthly progress billing which the latter would then pay, subject to stipulated
deductions, within 30 days from receipt thereof. Problems arose, however, when HRCC
submitted its first billing to FFCCI and the latter refused to pay in full because DPWH
has not inspected the some of the work completed on the period billed. A joint
inspection by FFCCI and DPWH was subsequently conducted and some of the billed
amounts were paid. The HRCC subsequently demanded payments for its subcontracted
works to FCCI which the latter refused to pay in full, the latter arguing that some of the
amounts have already been settled. HRCC completely halted all works. HRCC to file
with the Construction Industry Arbitration Commission (CIAC) a Complaint against
FFCCI.

The CIAC ruled in favor of HRCC. The CIAC held that FFCCIs non-payment of
the progress billings submitted by HRCC gave the latter the right to rescind the
Subcontract Agreement and, accordingly, HRCCs work stoppage was justified. The CA
agreed with the CIAC that FFCCI had waived its right under the Subcontract Agreement
to require a joint quantification of HRCCs completed works. Hence, this petition.

ISSUE: Whether there was a valid rescission of the Subcontract Agreement by


HRCC.

No. The right of rescission is statutorily recognized in reciprocal obligations.


Article 1191 of the Civil Code. The rescission referred to in this article, more
appropriately referred to as resolution is on the breach of faith by the defendant which is
violative of the reciprocity between the parties. The right to rescind, however, may be
waived, expressly or impliedly. While the right to rescind reciprocal obligations is
implied, that is, that such right need not be expressly provided in the contract,
nevertheless the contracting parties may waive the same. Contrary to the respective
dispositions of the CIAC and the CA, we find that HRCC had no right to rescind the
Subcontract Agreement in the guise of a work stoppage, the latter having waived such
right. Apropos is Article 11.2 of the Subcontract Agreement, which reads:

11.2

Effects of Disputes and Continuing Obligations


Notwithstanding any dispute, controversy, differences or
arbitration proceedings relating directly or indirectly to this
SUBCONTRACT Agreement and without prejudice to the eventual
outcome thereof, [HRCC] shall at all times proceed with the
prompt performance of the Works in accordance with the
directives of FFCCI and this SUBCONTRACT Agreement.

Hence, in spite of the existence of dispute or controversy between the parties


during the course of the Subcontract Agreement, HRCC had agreed to continue the
performance of its obligations pursuant to the Subcontract Agreement. In view of the
provision of the Subcontract Agreement quoted above, HRCC is deemed to have
effectively waived its right to effect extrajudicial rescission of its contract with FFCCI.
Accordingly, HRCC, in the guise of rescinding the Subcontract Agreement, was not
justified in implementing a work stoppage.

RECIPROCAL OBLIGATIONS

Subic Bay Metropolitan Authority v. CA


G. R. No. 192885, July 4, 2012

Subic Bay Metropolitan Authority (SBMA) and Subic International Hotel, Corp.
(SIHC) entered into two separate lease agreements whereby SIHC undertook to help
SBMA in the development and rehabilitation of the Subic Naval Base by taking over
abandoned barracks and constructing hotel and restaurant facilities that will
accommodate the needs of the growing number of businessmen and tourists in the
Freeport Zone, which was reduced into a Lease and Development Agreement. Section
6.1 of the said Agreement stipulated for the payment of service fees, which pertain to
the proportionate share of the private respondent in the costs that the petitioner may
incur in the provision of services, maintenance and operation of common facilities
computed at $0.10 per square meter of the gross land area of the leased property. The
controversy arose when SBMA charged SIHC service fees on the ground that it has the
right to do so under R.A. 7227 for other services such as fire protection, maintenance of
common areas, police protection, and other services of similar nature. Eventually, SIHC
filed for a Petition for Declaratory Relief with the RTC. The RTC ruled in SIHCs favor.
The CA affirmed the RTC. According to the CA, the records show that petitioner did not
actually provide most of the services enumerated in the Lease and Development
Agreement and that the obligation involved in the agreement was reciprocal in nature;
therefore, private respondent's obligation to pay was dependent upon petitioner's
performance of its reciprocal duty to provide the agreed service, and since petitioner
failed to perform its part of the deal, it cannot exact compliance from private respondent
of its duty to pay. Hence, this petition.

ISSUE: Whether SBMA is entitled to the service fees.

No. The CA was correct in ruling that service fees pertain to the proportionate
share of the tenant in the costs of the enumerated services which include the
maintenance and operation of facilities which directly or indirectly benefit or serve the
leased property or the tenant, or any of its subsidiaries, assignees, transferees or
operators. Clearly, if the intention is the contrary, there would have been no need to
enumerate what would constitute services covered by the service fees. Even logic
dictates that before anyone is entitled to collect service fees, one must have actually
rendered a service. The questioned provisions of the contract are reciprocal in nature.
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 such that the
performance of one is conditioned upon the simultaneous fulfillment of the other. For
one party to demand the performance of the obligation of the other party, the former
must also perform its own obligation. Accordingly, petitioner, not having provided the
services that would require the payment of service fees as stipulated in the Lease
Development Agreement, is not entitled to collect the same.

RECIPROCAL OBLIGATIONS

Tongson v. Emergency Pawnshop Bula, Inc.


G. R. No. 167874, January 15 2010

Danilo Napala offered to buy a property owned by Spouses Jose and Carmen
Tongson (the Tongsons) for P3 million. A Memorandum of Agreement was executed to
this effect. Subsequently, a Deed of Absolute sale was prepared by Napalas lawyer.
When Carmen noticed that the consideration in the Deed was only P400, 000, Napala
said that he (Napala) will be paying for the taxes and that the Tongsons will receive the
P3 million as promised. Another Memorandum of Agreement was prepared to conform
to the consideration in the Deed. Upon signing the Deed of Absolute Sale, Napala
paid P200,000 in cash to the Spouses Tongson and issued a postdated Philippine
National Bank (PNB) check in the amount ofP2,800,000, representing the remaining
balance of the purchase price of the subject property. Thereafter, the Tongsons title was
cancelled and a new was issued in the name of Emergency Pawnshop Bula, Inc.
(EPBI). When presented for payment, the PNB check was dishonored for the reason
Drawn Against Insufficient Funds. Despite the Spouses Tongson's repeated demands
to either pay the full value of the check or to return the subject parcel of land, Napala
failed to do either. The Tongsons were left with no recourse but to file a complaint with
the RTC. The RTC ruled in favor of the Tongsons. The CA affirmed the RTC. Hence, this
petition.

ISSUE: Whether rescission is proper in this case.

Indisputably, the Spouses Tongson as the sellers had already performed their
obligation of executing the Deed of Sale, which led to the cancellation of their title in
favor of EPBI. Respondents as the buyers, on the other hand, failed to perform their
correlative obligation of paying the full amount of the contract price. While Napala
paid P200,000 cash to the Spouses Tongson as partial payment, Napala issued an

insufficiently funded PNB check to pay the remaining balance of P2.8 million. Despite
repeated demands and the filing of the complaint, Napala failed to pay the P2.8 million
until the present. Clearly, respondents committed a substantial breach of their reciprocal
obligation, entitling the Spouses Tongson to the rescission of the sales contract. The law
grants this relief to the aggrieved party thus:
Article 1191 of the Civil Code provides:
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible.
Article 1385 of the Civil Code provides the effects of rescission, viz:
ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and the
price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
While they did not file an action for the rescission of the sales contract, the
Spouses Tongson specifically prayed in their complaint for the annulment of the
sales contract, for the immediate execution of a deed of reconveyance, and for
the return of the subject property to them. The Spouses Tongson likewise prayed
for such other reliefs which may be deemed just and equitable in the premises. In view
of such prayer, and considering respondents substantial breach of their obligation under
the sales contract, the rescission of the sales contract is but proper and justified.
Accordingly, respondents must reconvey the subject property to the Spouses Tongson,
who in turn shall refund the initial payment of P200,000 less the costs of suit.
Napalas claims that rescission is not proper and that he should be given more
time to pay for the unpaid remaining balance of P2,800,000 cannot be countenanced.
Having acted fraudulently in performing his obligation, Napala is not entitled to more
time to pay the remaining balance of P2,800,000, and thereby erase the default or
breach that he had deliberately incurred. To do otherwise would be to sanction a
deliberate and reiterated infringement of the contractual obligations incurred by Napala,
an attitude repugnant to the stability and obligatory force of contracts.

RECIPROCAL OBLIGATIONS

Fil-Estate Properties, Inc. v. Ronquillo


G. R. No. 185798, January 13, 2014

Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place
Tower while co-petitioner Fil-Estate Network, Inc. is its authorized marketing agent.
Respondent Spouses Conrado and Maria Victoria Ronquillo (Sps. Ronquillo) purchased
from petitioners an 82-square meter condominium unit at Central Park Place Tower in
Mandaluyong City. Respondents executed and signed a Reservation Application
Agreement wherein they deposited P200,000.00 as reservation fee. As agreed upon,
respondents paid the full downpayment of P1,552,200.00 and had been paying
the P63,363.33 monthly amortizations until September 1998. Subsequently, however,
upon learning that construction works had stopped, respondents likewise stopped
paying their monthly amortization. Claiming to have paid a total of P2,198,949.96 to
petitioners, respondents through two (2) successive letters, demanded a full refund of
their payment with interest. When their demands went unheeded, respondents were
constrained to file a Complaint for Refund and Damages before the Housing and Land
Use Regulatory Board (HLURB). The HLURB issued an Order of Default against
petitioners for failing to file their Answer within the reglementary period despite service
of summons. Petitioners filed a motion to lift order of default and attached their position
paper attributing the delay in construction to the 1997 Asian financial crisis. Petitioners
denied committing fraud or misrepresentation which could entitle respondents to an
award of moral damages.
The HLURB fuled in favor of the Sps. Ronquillo. On petition for review, the Board
of Commissioners of the HLURB denied the petition and affirmed the Arbiters Decision.
The Office of the President likewise dismissed petitioners appeal. On a Rule 43 petition
for review, the CA likewise denied the same. Hence, this petition.

ISSUE: Whether the non-performance of petitioners obligation entitles respondents


to rescission under Article 1191 of the New Civil Code.

Yes. Indeed, the non-performance of petitioners obligation entitles respondents to


rescission under Article 1191 of the New Civil Code which states:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible. More in point is
Section 23 of Presidential Decree No. 957, the rule governing the sale of
condominiums, which provides:
Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in
a subdivision or condominium project for the lot or unit he contracted to buy shall be
forfeited in favor of the owner or developer when the buyer, after due notice to the
owner or developer, desists from further payment due to the failure of the owner or
developer to develop the subdivision or condominium project according to the approved
plans and within the time limit for complying with the same. Such buyer may, at his
option, be reimbursed the total amount paid including amortization interests but
excluding delinquency interests, with interest thereon at the legal rate.
Conformably with these provisions of law, respondents are entitled to rescind the
contract and demand reimbursement for the payments they had made to petitioners.
Notably, the issues had already been settled by the Court in the case of Fil-Estate
Properties, Inc. v. Spouses Go promulgated on 17 August 2007, where the Court stated
that the Asian financial crisis is not an instance of caso fortuito. Bearing the same
factual milieu as the instant case, G.R. No. 165164 involves the same company, FilEstate, albeit about a different condominium property. The company likewise reneged
on its obligation to respondents therein by failing to develop the condominium project
despite substantial payment of the contract price. Fil-Estate advanced the same
argument that the 1997 Asian financial crisis is a fortuitous event which justifies the
delay of the construction project. First off, the Court classified the issue as a question of
fact which may not be raised in a petition for review considering that there was no
variance in the factual findings of the HLURB, the Office of the President and the Court
of Appeals. Second, the Court cited the previous rulings of Asian Construction and
Development Corporation v. Philippine Commercial International Bank 14 and Mondragon
Leisure and Resorts Corporation v. Court of Appeals holding that the 1997 Asian
financial crisis did not constitute a valid justification to renege on obligations. The Court
expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and
beyond the control of a business corporation. It is unfortunate that petitioner apparently

met with considerable difficulty e.g. increase cost of materials and labor, even before
the scheduled commencement of its real estate project as early as 1995. However, a
real estate enterprise engaged in the pre-selling of condominium units is concededly a
master in projections on commodities and currency movements and business risks. The
fluctuating movement of the Philippine peso in the foreign exchange market is an
everyday occurrence, and fluctuations in currency exchange rates happen everyday,
thus, not an instance of caso fortuito.