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1.) [G.R. No. 109966. May 31, 1999]


ELISCO TOOL MANUFACTURING CORPORATION, petitioner,
vs. COURT OF APPEALS, ROLANDO LANTAN, and RINA
LANTAN, respondents
DECISION
MENDOZA, J.:
This is a petition for review of the decision [1] of the Court of Appeals which
affirmed in toto the decision of the Regional Trial Court of Pasig, Branch 51,
declaring respondent spouses Rolando Lantan and Rina Lantan owners of a
1979 model 2-door Colt Lancer car which they had acquired under a car plan
for top employees of the Elizalde group of companies.
The facts are as follows:
Private respondent Rolando Lantan was employed at the Elisco Tool
Manufacturing Corporation as head of its cash department. On January 9,
1980, he entered into an agreement with the company which provided as
follows:[2]
That, EMPLOYER is the owner of a car Colt Lancer 2 door, Model 1979,
with Serial No. 3403 under LTC Registration Certificate No. 0526558;
That, for and in consideration of a monthly rental of ONE THOUSAND TEN
& 65/100 ONLY (P1,010.65) Philippine Currency, EMPLOYER desire to
lease and EMPLOYEE accept in lease the motor vehicle aforementioned for
a period of FIVE (5) years;
That, the EMPLOYEE agree as he hereby agreed to pay the lease rental thru
salary deduction from his monthly remuneration in the amount as above
specified for a period of FIVE (5) years;
That, for the duration of the lease contract, all expenses and costs of
registration, insurance, repair and maintenance, gasoline, oil, part
replacement inclusive of all expenses necessary to maintain the vehicle in top
condition shall be for the account of the EMPLOYEE;
That, at the end of FIVE (5) year period or upon payment of the 60 th monthly
rental, EMPLOYEE may exercise the option to purchase the motor vehicle
from the EMPLOYER and all monthly rentals shall be applied to the
payment of the full purchase price of the car and further, should

EMPLOYEE desire to exercise this option before the 5-year period lapse, he
may do so upon payment of the remaining balance on the five year rental
unto the EMPLOYER, it being understood however that the option is limited
to the EMPLOYEE;
That, upon failure of the EMPLOYEE to pay THREE (3) accumulated
monthly rentals will vest upon the EMPLOYER the full right to lease the
vehicle to another EMPLOYEE;
That, in the event of resignation and or dismissal from the service, the
EMPLOYEE shall return the subject motor vehicle to the EMPLOYER in its
compound at Kalawaan Sur, Pasig, Metro Manila in good working and body
condition.
On the same day, January 9, 1980, private respondent executed a promissory
note reading as follows:[3]
PROMISSORY NOTE
P60,639.00
FOR VALUE RECEIVED, we promise to pay [to] the order of ELISCO
TOOL MFG. CORP. SPECIAL PROJECT, at its office at Napindan, Taguig,
Metro Manila, Philippines, the sum of ONE THOUSAND TEN & 65/100
PESOS (P1,010.65), Philippine Currency, beginning January 9, 1980,
without the necessity of notice or demand in accordance with the schedule of
payment hereto attached as an integral part hereof.
In case of default in the payment of any installment on the stipulated due
date, we agree to pay as liquidated damages 2% of the amount due and
unpaid for every thirty (30) days of default or fraction thereof. Where the
default covers two successive installments, the entire unpaid balance shall
automatically become due and payable.
It is further agreed that if upon such default attorneys services are availed of,
an additional sum equal to TWENTY (20%) percent of the total amount due
thereon, but in no case be less than P1,000.00 shall be paid to holder(s)
hereof as attorneys fees in addition to the legal costs provided for by law. We
agree to submit to the jurisdiction of the proper courts of Makati, Metro
Manila or the Province of Rizal, at the option of the holder(s) waiving for
this purpose any other venue.

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In case extraordinary inflation or deflation of the currency stipulated should
occur before this obligation is paid in full, the value of the currency at the
time of the establishment of the obligation will be the basis of payment.
Holder(s) may accept partial payment reserving his right of recourse against
each and all endorsers who hereby waive DEMAND PRESENTMENT and
NOTICE.
Acceptance by the holder(s) of payment or any part thereof after due date
shall not be considered as extending the time for the payment of the aforesaid
obligation or as a modification of any of the condition hereof.
After taking possession of the car, private respondent installed accessories
therein worth P15,000.00.
In 1981, Elisco Tool ceased operations, as a result of which private
respondent Rolando Lantan was laid off. Nonetheless, as of December 4,
1984, private respondent was able to make payments for the car in the total
amount of P61,070.94.
On June 6, 1986, petitioner filed a complaint, entitled replevin plus sum of
money, against private respondent Rolando Lantan, his wife Rina, and two
other persons, identified only as John and Susan Doe, before the Regional
Trial Court of Pasig, Metro Manila. Petitioner alleged that private
respondents failed to pay the monthly rentals which, as of May 1986,
totalled P39,054.86; that despite demands, private respondents failed to settle
their obligation thereby entitling petitioner to the possession of the car; that
petitioner was ready to post a bond in an amount double the value of the car,
which was P60,000; and that in case private respondents could not return the
car, they should be held liable for the amount of P60,000 plus the accrued
monthly rentals thereof, with interest at the rate of 14% per annum, until
fully paid. Petitioners complaint contained the following prayer:
WHEREFORE, plaintiffs prays that judgment be rendered as follows:
ON THE FIRST CAUSE OF ACTION
Ordering defendant Rolando Lantan to pay the plaintiff the sum of
P39,054.86 plus legal interest from the date of demand until the whole
obligation is fully paid;
ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor


vehicle more particularly described in paragraph 3 of the Complaint, from
defendant Rolando Lantan and/or defendants Rina Lantan, John Doe, Susan
Doe and other person or persons in whose possession the said motor vehicle
may be found, complete with accessories and equipment, and direct deliver
thereof to plaintiff in accordance with law, and after due hearing to confirm
said seizure and plaintiffs possession over the same;
ON THE ALTERNATIVE CAUSE OF ACTION
In the event that manual delivery of the subject motor vehicle cannot be
effected for any reason, to render judgment in favor of plaintiff and against
defendant Rolando Lantan ordering the latter to pay the sum of SIXTY
THOUSAND PESOS (P60,000.00) which is the estimated actual value of the
above-described motor vehicle, plus the accrued monthly rentals thereof with
interests at the rate of fourteen percent (14%) per annum until fully paid;
PRAYER COMMON TO ALL CAUSES OF ACTION
1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount
equivalent to twenty-five percent (25%) of his outstanding obligation, for and
as attorneys fees;
2. Ordering defendants to pay the cost or expenses of collection,
repossession, bonding fees and other incidental expenses to be proved during
the trial; and
3. Ordering defendants to pay the costs of suit.
Plaintiff also prays for such further reliefs as this Honorable Court may deem
just and equitable under the premises.
Upon petitioners posting a bond in the amount of P120,000, the sheriff took
possession of the car in question and after five (5) days turned it over to
petitioner.[4]
In due time, private respondents filed their answer. They claimed that the
agreement on which the complaint was based had not been signed by
petitioners representative, Jose Ma. S. del Gallego, although it had been
signed by private respondent Rolando Lantan; that their true agreement was
to buy and sell and not lease with option to buy the car in question at a
monthly amortization of P1,000; and that petitioner accepted the installment
payments made by them and, in January 1986, agreed that the balance of the
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purchase price would be paid on or before December 31, 1986. Private
respondents cited the provision of the agreement making respondent Rolando
Lantan liable for the expenses for registration, insurance, repair and
maintenance, gasoline, oil and part replacements, inclusive of all necessary
expenses, as evidence that the transaction was one of sale. Private
respondents further alleged that, in any event, petitioner had waived its rights
under the agreement because of the following circumstances: (a) while the
parties agreed that payment was to be made through salary deduction,
petitioner accepted payments in cash or checks; (b) although they agreed that
upon the employees resignation, the car should be returned to the employer,
private respondent Rolando Lantan was not required to do so when he
resigned in September 1982; (c) petitioner did not lease the vehicle to
another employee after private respondent Rolando Lantan had allegedly
failed to pay three monthly rentals; and (d) petitioner failed to enforce the
manner of payment under the agreement by its acceptance of payments in
various amounts and on different dates.
In its reply, petitioner maintained that the contract between the parties was
one of lease with option to purchase and that the promissory note was merely
a nominal security for the agreement. It contended that the mere acceptance
of the amounts paid by private respondents and for indefinite periods of time
was not evidence that the parties agreement was one of purchase and
sale. Neither was it guilty of laches because, under the law, an action based
on a written contract can be brought within ten (10) years from the time the
action accrues. On August 31, 1987, the trial court[5] rendered its decision.
The trial court sustained private respondents claim that the agreement in
question was one of sale and held that the latter had fully paid the price of the
car having paid the total amount of P61,070.94 aside from installing
accessories in the car worth P15,000.00. Said the trial court:
Plaintiff now comes claiming ownership of the car in question and has
succeeded in repossessing the same by virtue of the writ of seizure issued in
this case on July 29, 1986. Not content with recovering possession of the said
car, plaintiff still asks that defendants should pay it the sum of P39,054.86,
allegedly representing the rentals due on the car from the time of the last
payment made by defendants to its repossession thereof. This is indeed a
classic case of one having his cake and eating it too! Under the Recto law
(Arts. 1484 & 1485, Civil Code), the vendor who repossesses the goods sold
on installments, has no right to sue the vendee for the unpaid balance thereof.

The Court can take judicial notice of the practice wherein executives enjoy
car plans in progressive companies. The agreement of January 9, 1980
between the parties is one such car plan. If defendant Rolando Lantan failed
to keep up with his amortizations on the car in question, it was not because of
his own liking but rather he was pushed to it by circumstances when his
employer folded up and sent him to the streets. That plaintiff was giving all
the chance to defendants to pay the value of the car and acquire full
ownership thereof is shown by the delay in instituting the instant case. . . .
The court likewise found that the amount of P61,070.94 included a 2%
penalty for late payments for which there was no stipulation in the
agreement:
. . . The agreement and defendant Rolando Lantans promissory note of
January 9, 1980 do not provide even for interest on the remaining balance of
the purchase price of the car. This privilege extended by corporations to their
top executives is considered additional emolument to them. And so the
reason for the lack of provision for interest, much less penalty
charges. Therefore, all payments made by defendant should be applied to the
principal account. Since the principal was only P60,639.00, the defendants
have made an overpayment of P431.94 which should be returned to
defendant by plaintiff.
For this reason, it ordered petitioner to pay private respondents the amount of
P431.94 as excess payment, as well as rentals at the rate of P1,000 a month
for depriving private respondents of the use of their car, and moral damages
for the worry, embarrassment, and mental torture suffered by them on
account of the repossession of the car.
The dispositive portion of the trial courts decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of defendants and
against plaintiff, dismissing plaintiffs complaint; declaring defendants the
lawful owners of that Colt Lancer 2-door, Model 1979 with Serial No. 3403
under Registration Certificate No. 0526558; ordering plaintiff to deliver to
defendants the aforesaid motor vehicle complete with all the accessories
installed therein by defendants; should for any reason plaintiff is unable to
deliver the said car to defendants, plaintiff is ordered to pay to defendants the
value of said car in the sum of P60,639.00 plus P15,000.00, the value of the
accessories, plus interest of 12% on the said sums from August 6, 1986; and
sentencing plaintiff to pay defendants the following sums:
a) P12,431.94 as actual damages broken down as follows:
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1) P431.94 overpayment made by defendants to plaintiff; and
2) P12,000.00 rental on the car in question from August 6, 1986 to August 5,
1987, plus the sum of P1,000.00 a month beginning August 6, 1987 until the
car is returned by plaintiff to, and is received by, defendant;
b) the sum of P20,000.00 as moral damages;
c) the sum of P5,000.00 as exemplary damages; and
d) the sum of P5,000.00 as attorneys fees.
Costs against the plaintiff.
SO ORDERED.
Petitioner appealed to the Court of Appeals. On the other hand, private
respondents filed a motion for execution pending appeal. In its resolution of
March 9, 1989, the Court of Appeals granted private respondents motion and,
upon the filing of a bond, in the amount of P70,000.00, it issued a writ of
execution, pursuant to which the car was delivered to private respondents on
April 16, 1989.[6]
On August 26, 1992, the Court of Appeals rendered its decision, affirming in
toto the decision of the trial court. Hence, the instant petition for review
on certiorari.
Petitioner contends that the Court of Appeals erred (a) in disregarding the admission in the pleadings as to what documents
contain the terms of the parties agreement.
(b) in holding that the interest stipulation in respondents Promissory Note
was not valid and binding.
(c) in holding that respondents had fully paid their obligations.
It further argues that On the assumption that the Lease Agreement with option to buy in this case
may be treated as a sale on installments, the respondent Court of Appeals
nonetheless erred in not finding that the parties have validly agreed that the
petitioner as seller may [i] cancel the contract upon the respondents default

on three or more installments, [ii] retake possession of the personalty, and


[iii] keep the rents already paid.
First. Petitioner does not deny that private respondent Rolando Lantan
acquired the vehicle in question under a car plan for executives of the
Elizalde group of companies. Under a typical car plan, the company
advances the purchase price of a car to be paid back by the employee through
monthly deductions from his salary. The company retains ownership of the
motor vehicle until it shall have been fully paid for.[7] However, retention of
registration of the car in the companys name is only a form of a lien on the
vehicle in the event that the employee would abscond before he has fully
paid for it. There are also stipulations in car plan agreements to the effect that
should the employment of the employee concerned be terminated before all
installments are fully paid, the vehicle will be taken by the employer and all
installments paid shall be considered rentals per agreement. [8]
This Court has long been aware of the practice of vendors of personal
property of denominating a contract of sale on installment as one of lease to
prevent the ownership of the object of the sale from passing to the vendee
until and unless the price is fully paid. As this Court noted in Vda. de Jose v.
Barrueco:[9]
Sellers desirous of making conditional sales of their goods, but who do not
wish openly to make a bargain in that form, for one reason or another, have
frequently resorted to the device of making contracts in the form of leases
either with options to the buyer to purchase for a small consideration at the
end of term, provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid, title shall thereupon
vest in the lessee.It is obvious that such transactions are leases only in
name. The so-called rent must necessarily be regarded as payment of the
price in installments since the due payment of the agreed amount results, by
the terms of the bargain, in the transfer of title to the lessee.
In an earlier case, Manila Gas Corporation v. Calupitan,[10] which involved a
lease agreement of a stove and a water heater, the Court said:
. . . [W]e are of the opinion, and so hold, that when in a so-called contract of
lease of personal property it is stipulated that the alleged lessee shall pay a
certain amount upon signing the contract, and on or before the 5 th of every
month, another specific amount, by way of rental, giving the alleged lessee
the right of option to buy the said personal property before the expiration of
the period of lease, which is the period necessary for the payment of the said
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amount at the rate of so much a month, deducting the payments made by way
of advance and alleged monthly rentals, and the said alleged lessee makes the
advance payment and other monthly installments, noting in his account and
in the receipts issued to him that said payments are on account of the price of
the personal property allegedly leased, said contract is one of sale on
installment and not of lease.[11]

to the payment of the full purchase price of the car. It is clear that the
transaction in this case is a lease in name only. The so-called monthly rentals
are in truth monthly amortizations on the price of the car.

In U.S. Commercial v. Halili,[12] a lease agreement was declared to be in fact


a sale of personal property by installment. Said the Court:[13]

ART. 1484. In a contract of sale of personal property the price of which is


payable in installments, the vendor may exercise any of the following
remedies:

. . . There can hardly be any question that the so-called contracts of lease on
which the present action is based were veritable leases of personal property
with option to purchase, and as such come within the purview of the above
article [Art. 1454-A of the old Civil Code on sale of personal property by
installment]. In fact the instruments (exhibits `A and `B) embodying the
contracts bear the heading or title `Lease-Sale (Lease-Sale of Transportation
and/or Mechanical Equipment). The contracts fix the value of the vehicles
conveyed to the lessee and expressly refer to the remainder of said value after
deduction of the down payment made by the lessee as `the unpaid balance of
thepurchase price of the leased equipment. The contracts also provide that
upon the full value (plus stipulated interest) being paid, the lease would
terminate and title to the leased property would be transferred to the
lessee. Indeed, as the defendant-appellant points out, the inclusion of a clause
waiving benefit of article 1454-A of the old Civil Code is conclusive proof of
the parties understanding that they were entering into a lease contract with
option to purchase which come within the purview of said article.

Second. The contract being one of sale on installment, the Court of Appeals
correctly applied to it the following provisions of the Civil Code:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.
ART. 1485. The preceding article shall be applied to contracts purporting to
be leases of personal property with option to buy, when the lessor has
deprived the lessee of the possession or enjoyment of the thing.

It was held that in choosing to deprive the defendant of possession of the


leased vehicles, the plaintiff waived its right to bring an action to recover
unpaid rentals on the said vehicles.

The remedies provided for in Art. 1484 are alternative, not cumulative. The
exercise of one bars the exercise of the others. [14] This limitation applies to
contracts purporting to be leases of personal property with option to buy by
virtue of Art. 1485.[15] The condition that the lessor has deprived the lessee of
possession or enjoyment of the thing for the purpose of applying Art. 1485
was fulfilled in this case by the filing by petitioner of the complaint for
replevin to recover possession of movable property. By virtue of the writ of
seizure issued by the trial court, the deputy sheriff seized the vehicle on
August 6, 1986 and thereby deprived private respondents of its use. [16] The
car was not returned to private respondent until April 16, 1989, after two (2)
years and eight (8) months, upon issuance by the Court of Appeals of a writ
of execution.[17]

In the case at bar, although the agreement provides for the payment by
private respondents of monthly rentals, the fifth paragraph thereof gives them
the option to purchase the motor vehicle at the end of the 5 th year or upon
payment of the 60th monthly rental when all monthly rentals shall be applied

Petitioner prayed that private respondents be made to pay the sum of


P39,054.86, the amount that they were supposed to pay as of May 1986, plus
interest at the legal rate.[18] At the same time, it prayed for the issuance of a
writ of replevin or the delivery to it of the motor vehicle complete with

Being leases of personal property with option to purchase as contemplated in


the above article, the contracts in question are subject to the provision that
when the lessor in such case has chosen to deprive the lessee of the
enjoyment of such personal property, he shall have no further action against
the lessee for the recovery of any unpaid balance owing by the latter,
agreement to the contrary being null and void.

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accessories and equipment.[19] In the event the car could not be delivered to
petitioner, it was prayed that private respondent Rolando Lantan be made to
pay petitioner the amount of P60,000.00, the estimated actual value of the
car, plus accrued monthly rentals thereof with interests at the rate of fourteen
percent (14%) per annum until fully paid.[20] This prayer of course cannot be
granted, even assuming that private respondents have defaulted in the
payment of their obligation. This led the trial court to say that petitioner
wanted to eat its cake and have it too.
Notwithstanding this impossibility in petitioners choice of remedy, this case
should be considered as one for specific performance, pursuant to Art.
1484(1), consistent with its prayer with respect to the unpaid installments as
of May 1986. In this view, the prayer for the issuance of a writ of replevin is
only for the purpose of insuring specific performance by private respondents.
Both the trial court and the Court of Appeals correctly ruled that private
respondents could no longer be held liable for the amounts of P39,054.86 or
P60,000.00 because private respondents had fulfilled their part of the
obligation. The agreement does not provide for the payment of interest on
unpaid monthly rentals or installments because it was entered into in
pursuance of a car plan adopted by the company for the benefit of its
deserving employees. As the trial court correctly noted, the car plan was
intended to give additional benefits to executives of the Elizalde group of
companies.
Petitioner contends that the promissory note provides for such interest
payment. However, as the Court of Appeals held:
The promissory note in which the 2% monthly interest on delayed payments
appears does not form part of the contract. There is no consideration for the
promissory note. There is nothing to show that plaintiff advanced the
purchase price of the vehicle for Lantan so as to make the latter indebted to
the former for the amount stated in the promissory note. Thus, as stated in the
complaint: That sometime in January, 1980, defendant Rolando Lantan
entered into an agreement with the plaintiff for the lease of a motor vehicle
supplied by the latter, with the option to purchase at the end of the period of
lease . . . . In other words, plaintiff did not buy the vehicle for Rolando
Lantan, advancing the purchase price for that purpose. There is nothing in the
complaint or in the evidence to show such arrangement. Therefore, there was
no indebtedness secured by a promissory note to speak of. There being no
consideration for the promissory note, the same, including the penalty clause
contained thereon, has no binding effect.[21]

There is no evidence that private respondents received the amount of


P60,639.00 indicated in the promissory note as its value. What was proven
below is the fact that private respondents received from petitioner the 2-door
Colt Lancer car which was valued at P60,000 and for which private
respondent Rolando Lantan paid monthly amortizations of P1,010.65 through
salary deductions.
Indeed, as already stated, private respondents default in paying installments
was due to the cessation of operations of Elizalde Steel Corporation,
petitioners sister company. Petitioners acceptance of payments made by
private respondents through cash and checks could have been impelled solely
by petitioners inability to deduct the amortizations from private respondent
Rolando Lantans salary which he stopped receiving when his employment
was terminated in September 1982. Apparently, to minimize the adverse
consequences of the termination of private respondents employment,
petitioner accepted even late payments. That petitioner accepted payments
from private respondent Rolando Lantan more than two (2) years after the
latters employment had been terminated constitutes a waiver of petitioners
right to collect interest upon the delayed payments. The 2% surcharge is not
provided for in the agreement. Its collection by the company would in fact
run counter to the purpose of providing added emoluments to its deserving
employees. Consequently, the total amount of P61,070.94 already paid to
petitioner should be considered payment of the full purchase price of the car
or the total installments paid.
Third. Private respondents presented evidence that they felt bad, were
worried, embarrassed and mentally tortured by the repossession of the car.
[22]
This has not been rebutted by petitioner. There is thus a factual basis for
the award of moral damages. In addition, petitioner acted in a wanton,
fraudulent, reckless and oppressive manner in filing the instant case, hence,
the award of exemplary damages is justified. [23] The award of attorneys fees
is likewise proper considering that private respondents were compelled to
incur expenses to protect their rights.[24]
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
costs against petitioner.
SO ORDERED.
2.) Republic of the Philippines
SUPREME COURT
Manila
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FIRST DIVISION
G.R. No. L-26578 January 28, 1974
LEGARDA HERMANOS and JOSE LEGARDA, petitioners,
vs.
FELIPE SALDAA and COURT OF APPEALS (FIFTH
DIVISION) * respondents.
TEEHANKEE, J.:1wph1.t
The Court, in affirming the decision under review of the Court of Appeals,
which holds that the respondent buyer of two small residential lots on
installment contracts on a ten-year basis who has faithfully paid for eight
continuous years on the principal alone already more than the value of one
lot, besides the larger stipulated interests on both lots, is entitled to the
conveyance of one fully paid lot of his choice, rules that the judgment is fair
and just and in accordance with law and equity.
The action originated as a complaint for delivery of two parcels of land in
Sampaloc, Manila and for execution of the corresponding deed of
conveyance after payment of the balance still due on their purchase price.
Private respondent as plaintiff had entered into two written contracts with
petitioner Legarda Hermanos as defendant subdivision owner, whereby the
latter agreed to sell to him Lots Nos. 7 and 8 of block No. 5N of the
subdivision with an area of 150 square meters each, for the sum of P1,500.00
per lot, payable over the span of ten years divided into 120 equal monthly
installments of P19.83 with 10% interest per annum, to commence on May
26, 1948, date of execution of the contracts. Subsequently, Legarda
Hermanos partitioned the subdivision among the brothers and sisters, and the
two lots were among those allotted to co-petitioner Jose Legarda who was
then included as co-defendant in the action.
It is undisputed that respondent faithfully paid for eight continuous years
about 95 (of the stipulated 120) monthly installments totalling P3,582.06 up
to the month of February, 1956, which as per petitioners' own statement of
account, Exhibit "1", was applied to respondent's account (without
distinguishing the two lots), as follows:
To interests P1,889.78
To principal 1,682.28
Total P3,582.06 1

It is equally undisputed that after February, 1956 up to the filing of


respondent's complaint in the Manila court of first instance in 1961,
respondent did not make further payments. The account thus shows that he
owed petitioners the sum of P1,317.72 on account of the balance of the
purchase price (principal) of the two lots (in the total sum of P3,000.00),
although he had paid more than the stipulated purchase price of P1,500.00 for
one lot.
Almost five years later, on February 2, 1961 just before the filing of the
action, respondent wrote petitioners stating that his desire to build a house on
the lots was prevented by their failure to introduce improvements on the
subdivision as "there is still no road to these lots," and requesting information
of the amount owing to update his account as "I intend to continue paying the
balance due on said lots."
Petitioners replied in their letter of February 11, 1961 that as respondent had
failed to complete total payment of the 120 installments by May, 1958 as
stipulated in the contracts to sell, "pursuant to the provisions of both
contracts all the amounts paid in accordance with the agreement together
with the improvements on the premises have been considered as rents paid
and as payment for damages suffered by your failure," 2 and "Said
cancellation being in order, is hereby confirmed."
From the adverse decision of July 17, 1963 of the trial court sustaining
petitioners' cancellation of the contracts and dismissing respondent's
complaint, respondent appellate court on appeal rendered its judgment of
July 27, 1966 reversing the lower court's judgment and ordering petitioners
"to deliver to the plaintiff possession of one of the two lots, at the choice of
defendants, and to execute the corresponding deed of conveyance to the
plaintiff for the said lot," 3 ruling as follows:
During the hearing, plaintiff testified that he suspended payments because the
lots were not actually delivered to him, or could not be, due to the fact that
they were completely under water; and also because the defendants-owners
failed to make improvements on the premises, such as roads, filling of the
submerged areas, etc., despite repeated promises of their representative, the
said Mr. Cenon. As regards the supposed cancellation of the contracts,
plaintiff averred that no demand has been made upon him regarding the
unpaid installments, and for this reason he could not be declared in default so
as to entitle the defendants to cancel the said contracts.

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The issue, therefore, is: Under the above facts, may defendants be compelled,
or not, to allow plaintiff to complete payment of the purchase price of the
two lots in dispute and thereafter to execute the final deeds of conveyance
thereof in his favor?
xxx xxx xxx
Whether or not plaintiffs explanation for his failure to pay the remaining
installments is true, considering the circumstances obtaining in this case, we
elect to apply the broad principles ofequity and justice. In the case at bar, we
find that the plaintiff has paid the total sum of P3,582.06 including interests,
which is even more than the value of the two lots. And even if the sum
applied to the principal alone were to be considered, which was of the total
of P1,682.28, the same was already more than the value of one lot, which
is P1,500.00. The only balance due on both lots was P1,317.72, which was
even less than the value of one lot. We will consider as fully paid by the
plaintiff at least one of the two lots, at the choice of the defendants. This is
more in line with good conscience than a total denial to the plaintiff of a little
token of what he has paid the defendant Legarda Hermanos. 4
Hence, the present petition for review, wherein petitioners insist on their right
of cancellation under the "plainly valid written agreements which constitute
the law between the parties" as against "the broad principles of equity and
justice" applied by the appellate court. Respondent on the other hand while
adhering to the validity of the doctrine of the Caridad Estates cases 5 which
recognizes the right of a vendor of land under a contract to sell to cancel the
contract upon default, with forfeiture of the installments paid as rentals,
disputes its applicability herein contending that here petitioners-sellers were
equally in default as the lots were "completely under water" and "there is
neither evidence nor a finding that the petitioners in fact cancelled the
contracts previous to receipt of respondent's letter." 6
The Court finds that the appellate court's judgment finding that of the total
sum of P3,582.06 (including interests of P1,889.78) already paid by
respondent (which was more than the value of two lots), the sum applied by
petitioners to the principal alone in the amount of P1,682.28 was already
more than the value ofone lot of P1,500.00 and hence one of the two lots as
chosen by respondent would be considered as fully paid, is fair and just and
in accordance with law and equity.
As already stated, the monthly payments for eight years made by respondent
were applied to his account without specifying or distinguishing between the

two lots subject of the two agreements under petitioners' own statement of
account, Exhibit "1". 7 Even considering respondent as having defaulted after
February 1956, when he suspended payments after the 95th installment, he
had as of the already paid by way of principal(P1,682.28) more than the full
value of one lot (P1,500.00). The judgment recognizing this fact and ordering
the conveyance to him of one lot of his choice while also recognizing
petitioners' right to retain the interests of P1,889.78 paid by him for eight
years on both lots, besides the cancellation of the contract for one lot which
thus reverts to petitioners, cannot be deemed to deny substantial justice to
petitioners nor to defeat their rights under the letter and spirit of the contracts
in question.
The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs.
Javier 8 is fully applicable to the present case, with the respondent at bar
being granted lesser benefits, since no rescission of contract was therein
permitted. There, where the therein buyer-appellee identically situated as
herein respondent buyer had likewise defaulted in completing the payments
after having religiously paid the stipulated monthly installments for almost
eight years and notwithstanding that the seller-appellant had duly notified the
buyer of the rescission of the contract to sell, the Court upheld the lower
court's judgment denying judicial confirmation of the rescission and instead
granting the buyer an additional grace period of sixty days from notice of
judgment to pay all the installment payments in arrears together with the
stipulated 10% interest per annum from the date of default, apart from
reasonable attorney's fees and costs, which payments, the Court observed,
would have the plaintiff-seller "recover everything due thereto, pursuant to
its contract with the defendant, including such damages as the former may
have suffered in consequence of the latter's default."
In affirming, the Court held that "Regardless, however, of the propriety of
applying said Art. 1592 thereto, We find that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234 of said Code: '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,'" and "that in the interest
of justice and equity, the decision appealed from may be upheld upon the
authority of Article 1234 of the Civil Code." 9
ACCORDINGLY, the appealed judgment of the appellate court is hereby
affirmed. Without pronouncement as to costs.

SALES
3.) Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-57552 October 10, 1986
LUISA F. MCLAUGHLIN, petitioner,
vs.
THE COURT OF APPEALS AND RAMON FLORES, respondents.
R.C. Domingo Jr. & Associates for private respondent.
FERIA, Actg. C.J.
This is an appeal by certiorari from the decision of the Court of Appeals, the
dispositive part of which reads as follows:
IN VIEW OF THE FOREGOING PREMISES, the petition for certiorari and
mandamus is hereby GRANTED and the Orders of respondent court dated
November 21 and 27 both 1980 are hereby nullified and set aside and
respondent Judge is ordered to order private respondent to accept petitioner's
Pacific Banking Corporation certified manager's Check No. MC-A-000311
dated November 17, 1980 in the amount of P76,059.71 in full settlement of
petitioner's obligation, or another check of equivalent kind and value, the
earlier check having become stale.
On February 28, 1977, petitioner Luisa F. McLaughlin and private
respondent Ramon Flores entered into a contract of conditional sale of real
property. Paragraph one of the deed of conditional sale fixed the total
purchase price of P140,000.00 payable as follows: a) P26,550.00 upon the
execution of the deed; and b) the balance of P113,450.00 to be paid not later
than May 31, 1977. The parties also agreed that the balance shall bear
interest at the rate of 1% per month to commence from December 1, 1976,
until the full purchase price was paid.
On June 19, 1979, petitioner filed a complaint in the then Court of First
Instance of Rizal (Civil Case No. 33573) for the rescission of the deed of
conditional sale due to the failure of private respondent to pay the balance
due on May 31, 1977.
On December 27, 1979, the parties submitted a Compromise Agreement on
the basis of which the court rendered a decision on January 22, 1980. In said
compromise agreement, private respondent acknowledged his indebtedness
to petitioner under the deed of conditional sale in the amount of P119,050.71,

and the parties agreed that said amount would be payable as follows: a)
P50,000.00 upon signing of the agreement; and b) the balance of P69,059.71
in two equal installments on June 30, 1980 and December 31, 1980.
As agreed upon, private respondent paid P50,000.00 upon the signing of the
agreement and in addition he also paid an "escalation cost" of P25,000.00.
Under paragraph 3 of the Compromise Agreement, private respondent agreed
to pay one thousand (P l,000.00) pesos monthly rental beginning December
5, 1979 until the obligation is duly paid, for the use of the property subject
matter of the deed of conditional sale.
Paragraphs 6 and 7 of the Compromise Agreement further state:
That the parties are agreed that in the event the defendant (private
respondent) fails to comply with his obligations herein provided, the plaintiff
(petitioner) will be entitled to the issuance of a writ of execution rescinding
the Deed of Conditional Sale of Real Property. In such eventuality, defendant
(private respondent) hereby waives his right to appeal to (from) the Order of
Rescission and the Writ of Execution which the Court shall render in
accordance with the stipulations herein provided for.
That in the event of execution all payments made by defendant (private
respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated
damages.
On October 15, 1980, petitioner wrote to private respondent demanding that
the latter pay the balance of P69,059.71 on or before October 31, 1980. This
demand included not only the installment due on June 30, 1980 but also the
installment due on December 31, 1980.
On October 30, 1980, private respondent sent a letter to petitioner signifying
his willingness and intention to pay the full balance of P69,059.71, and at the
same time demanding to see the certificate of title of the property and the tax
payment receipts.
Private respondent states on page 14 of his brief that on November 3, 1980,
the first working day of said month, he tendered payment to petitioner but
this was refused acceptance by petitioner. However, this does not appear in
the decision of the Court of Appeals.
On November 7, 1980, petitioner filed a Motion for Writ of Execution
alleging that private respondent failed to pay the installment due on June
9

SALES
1980 and that since June 1980 he had failed to pay the monthly rental of P
l,000.00. Petitioner prayed that a) the deed of conditional sale of real
property be declared rescinded with forfeiture of all payments as liquidated
damages; and b) the court order the payment of Pl,000.00 back rentals since
June 1980 and the eviction of private respondent.
On November 14, 1980, the trial court granted the motion for writ of
execution.
On November 17, 1980, private respondent filed a motion for reconsideration
tendering at the same time a Pacific Banking Corporation certified manager's
check in the amount of P76,059.71, payable to the order of petitioner and
covering the entire obligation including the installment due on December 31,
1980. However, the trial court denied the motion for reconsideration in an
order dated November 21, 1980 and issued the writ of execution on
November 25, 1980.
In an order dated November 27, 1980, the trial court granted petitioner's exparte motion for clarification of the order of execution rescinding the deed of
conditional sale of real property.
On November 28, 1980, private respondent filed with the Court of Appeals a
petition for certiorari and prohibition assailing the orders dated November 21
and 27, 1980.
As initially stated above, the appellate court nullified and set aside the
disputed orders of the lower court. In its decision, the appellate court ruled in
part as follows:
The issue here is whether respondent court committed a grave abuse of
discretion in issuing the orders dated November 21, 1980 and November
27,1980.
The general rule is that rescission will not be permitted for a 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.
(Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821)
In aforesaid case, it was held that a delay in payment for a small quantity of
molasses, for some twenty days is not such a violation of an essential
condition of the contract as warrants rescission for non-performance.

In Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, the Song Fo


ruling was reaffirmed.
In the case at bar, McLaughlin wrote Flores on October 15, 1980 demanding
that Flores pay the balance of P69,059.71 on or before October 31, 1980.
Thus it is undeniable that despite Flores' failure to make the payment which
was due on June 1980, McLaughlin waived whatever right she had under the
compromise agreement as incorporated in the decision of respondent court,
to demand rescission.
xxx xxx xxx
It is significant to note that on November 17, 1980, or just seventeen (17)
days after October 31, 1980, the deadline set by McLaughlin, Flores tendered
the certified manager's check. We hold that the Song Fo ruling is applicable
herein considering that in the latter case, there was a 20-day delay in the
payment of the obligation as compared to a 17-day delay in the instant case.
Furthermore, as held in the recent case of New Pacific Timber & Supply Co.,
Inc. vs. Hon. Alberto Seneris, L-41764, December 19, 1980, it is the accepted
practice in business to consider a cashier's or manager's check as cash and
that upon certification of a check, it is equivalent to its acceptance (Section
187, Negotiable Instrument Law) and the funds are thereby transferred to the
credit of the creditor (Araneta v. Tuason, 49 O.G. p. 59).
In the New Pacific Timber & Supply Co., Inc. case, the Supreme Court
further held that the object of certifying a check is to enable the holder
thereof to use it as money, citing the ruling in PNB vs. National City Bank of
New York, 63 Phil. 711.
In the New Pacific Timber case, it was also ruled that the exception in
Section 63 of the Central Bank Act that the clearing of a check and the
subsequent crediting of the amount thereof to the account of the creditor is
equivalent to delivery of cash, is applicable to a payment through a certified
check.
Considering that Flores had already paid P101,550.00 under the contract to
sell, excluding the monthly rentals paid, certainly it would be the height of
inequity to have this amount forfeited in favor McLaughlin. Under the
questioned orders, McLaughlin would get back the property and still keep
P101,550.00.

10

SALES
Petitioner contends that the appellate court erred in not observing the
provisions of Article No. 1306 of the Civil Code of the Philippines and in
having arbitrarily abused its judicial discretion by disregarding the penal
clause stipulated by the parties in the compromise agreement which was the
basis of the decision of the lower court.
We agree with the appellate court that it would be inequitable to cancel the
contract of conditional sale and to have the amount of P101,550.00 (P
l48,126.97 according to private respondent in his brief) already paid by him
under said contract, excluding the monthly rentals paid, forfeited in favor of
petitioner, particularly after private respondent had tendered the amount of
P76,059.71 in full payment of his obligation.
In the analogous case of De Guzman vs. Court of Appeals, this Court
sustained the order of the respondent judge denying the petitioners' motion
for execution on the ground that the private respondent had substantially
complied with the terms and conditions of the compromise agreement, and
directing the petitioners to immediately execute the necessary documents
transferring to the private respondent the title to the properties (July 23,
1985, 137 SCRA 730). In the case at bar, there was also substantial
compliance with the compromise agreement.
Petitioner invokes the ruling of the Court in its Resolution of November 16,
1978 in the case of Luzon Brokerage Co., Inc. vs. Maritime Building Co.,
Inc., to the effect that Republic Act 6552 (the Maceda Law) "recognizes and
reaffirms the vendor's right to cancel the contract to sell upon breach and
non-payment of the stipulated installments but requires a grace period after at
least two years of regular installment payments ... . " (86 SCRA 305, 329)
On the other hand, private respondent also invokes said law as an expression
of public policy to protect buyers of real estate on installments against
onerous and oppressive conditions (Section 2 of Republic Act No. 6552).
Section 4 of Republic Act No. 6552 which took effect on September 14, 1972
provides as follows:
In case where less than two years of installments were paid, the seller shall
give the buyer a grace period of not less than sixty days from the date the
installment became due. If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel the contract after thirty
days from receipt by the buyer of the notice of the cancellation or the
demand for rescission of the contract by a notarial act.

Section 7 of said law provides as follows:


Any stipulation in any contract hereafter entered into contrary to the
provisions of Sections 3, 4, 5 and 6, shall be null and void.
The spirit of these provisions further supports the decision of the appellate
court. The record does not contain the complete text of the compromise
agreement dated December 20, 1979 and the decision approving it. However,
assuming that under the terms of said agreement the December 31, 1980
installment was due and payable when on October 15, 1980, petitioner
demanded payment of the balance of P69,059.71 on or before October 31,
1980, petitioner could cancel the contract after thirty days from receipt by
private respondent of the notice of cancellation. Considering petitioner's
motion for execution filed on November 7, 1980 as a notice of cancellation,
petitioner could cancel the contract of conditional sale after thirty days from
receipt by private respondent of said motion. Private respondent's tender of
payment of the amount of P76,059.71 together with his motion for
reconsideration on November 17, 1980 was, therefore, well within the thirtyday period grants by law..
The tender made by private respondent of a certified bank manager's check
payable to petitioner was a valid tender of payment. The certified check
covered not only the balance of the purchase price in the amount of
P69,059.71, but also the arrears in the rental payments from June to
December, 1980 in the amount of P7,000.00, or a total of P76,059.71. On this
point the appellate court correctly applied the ruling in the case of New
Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686, 692-694) to
the case at bar.
Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that:
An offer in writing to pay a particular sum of money or to deliver a written
instrument or specific property is, if rejected, equivalent to the actual
production and tender of the money, instrument, or property.
However, although private respondent had made a valid tender of payment
which preserved his rights as a vendee in the contract of conditional sale of
real property, he did not follow it with a consignation or deposit of the sum
due with the court. As this Court has held:
The rule regarding payment of redemption prices is invoked. True that
consignation of the redemption price is not necessary in order that the vendor
may compel the vendee to allow the repurchase within the time provided by
11

SALES
law or by contract. (Rosales vs. Reyes and Ordoveza, 25 Phil. 495.) We have
held that in such cases a mere tender of payment is enough, if made on time,
as a basis for action against the vendee to compel him to resell. But that
tender does not in itself relieve the vendor from his obligation to pay the
price when redemption is allowed by the court. In other words, tender of
payment is sufficient to compel redemption but is not in itself a payment that
relieves the vendor from his liability to pay the redemption price. " (Paez vs.
Magno, 83 Phil. 403, 405)
On September 1, 1986, the Court issued the following resolution
Considering the allegation in petitioner's reply brief that the Manager's Check
tendered by private respondent on November 17, 1980 was subsequently
cancelled and converted into cash, the Court RESOLVED to REQUIRE the
parties within ten (10) days from notice to inform the Court whether or not
the amount thereof was deposited in court and whether or not private
respondent continued paying the monthly rental of P1,000.00 stipulated in
the Compromise Agreement.
In compliance with this resolution, both parties submitted their respective
manifestations which confirm that the Manager's Check in question was
subsequently withdrawn and replaced by cash, but the cash was not deposited
with the court.
According to Article 1256 of the Civil Code of the Philippines, if the creditor
to whom tender of payment has been made refuses without just cause to
accept it, the debtor shall be released from responsibility by the consignation
of the thing or sum due, and that consignation alone shall produce the same
effect in the five cases enumerated therein; Article 1257 provides that in
order that the consignation of the thing (or sum) due may release the obligor,
it must first be announced to the persons interested in the fulfillment of the
obligation; and Article 1258 provides that consignation shall be made by
depositing the thing (or sum) due at the disposal of the judicial authority and
that the interested parties shall also be notified thereof.
As the Court held in the case of Soco vs. Militante, promulgated on June 28,
1983, after examining the above-cited provisions of the law and the
jurisprudence on the matter:
Tender of payment must be distinguished from consignation. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation,
which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment

may be extrajudicial, while consignation is necessarily judicial, and the


priority of the first is the attempt to make a private settlement before
proceeding to the solemnities of consignation. (8 Manresa 325). (123 SCRA
160,173)
In the above-cited case of De Guzman vs. Court of Appeals (137 SCRA 730),
the vendee was released from responsibility because he had deposited with
the court the balance of the purchase price. Similarly, in the above-cited case
of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686), the
judgment debtor was released from responsibility by depositing with the
court the amount of the judgment obligation.
In the case at bar, although as above stated private respondent had preserved
his rights as a vendee in the contract of conditional sale of real property by a
timely valid tender of payment of the balance of his obligation which was not
accepted by petitioner, he remains liable for the payment of his obligation
because of his failure to deposit the amount due with the court.
In his manifestation dated September 19, 1986, private respondent states that
on September 16, 1980, he purchased a Metrobank Cashier's Check No. CC
004233 in favor of petitioner Luisa F. McLaughlin in the amount of
P76,059.71, a photocopy of which was enclosed and marked as Annex "A1;" but that he did not continue paying the monthly rental of Pl,000.00
because, pursuant to the decision of the appellate court, petitioner herein was
ordered to accept the aforesaid amount in full payment of herein respondent's
obligation under the contract subject matter thereof.
However, inasmuch as petitioner did not accept the aforesaid amount, it was
incumbent on private respondent to deposit the same with the court in order
to be released from responsibility. Since private respondent did not deposit
said amount with the court, his obligation was not paid and he is liable in
addition for the payment of the monthly rental of Pl,000.00 from January 1,
1981 until said obligation is duly paid, in accordance with paragraph 3 of the
Compromise Agreement. Upon full payment of the amount of P76,059.71
and the rentals in arrears, private respondent shall be entitled to a deed of
absolute sale in his favor of the real property in question.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the
following modifications:
(a) Petitioner is ordered to accept from private respondent the Metrobank
Cashier's Check No. CC 004233 in her favor in the amount of P76,059.71 or
12

SALES
another certified check of a reputable bank drawn in her favor in the same
amount;
(b) Private respondent is ordered to pay petitioner, within sixty (60) days
from the finality of this decision, the rentals in arrears of P l,000.00 a month
from January 1, 1981 until full payment thereof; and
(c) Petitioner is ordered to execute a deed of absolute sale in favor of private
respondent over the real property in question upon full payment of the
amounts as provided in paragraphs (a) and (b) above. No costs.
SO ORDERED.

13

SALES
4.) Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-25885 January 31, 1972
LUZON BROKERAGE CO., INC., plaintiff-appellee,
vs.
MARITIME BUILDING CO., INC., and MYERS BUILDING CO.,
INC., defendants, MARITIME BUILDING CO., INC., defendantappellant.
Ross, Salcedo, Del Rosario, Bito and Misa for plaintiff-appellee.
C. R. Tiongson and L. V. Simbulan and Araneta, Mendoza and Papa for
defendant Myers Building Co., Inc.
Ambrosio Padilla Law Offices for defendant-appellant Maritima Building
Co., Inc.

REYES, J.B.L., J.:p


Direct appeal (prior to the effectivity of Republic Act 5440) by Maritime
Building Co., Inc. from a decision of the Court of First Instance of Manila (in
its Civil Case No. 47319), the dispositive part of which provides as follows:
FOR ALL THE FOREGOING CONSIDERATIONS, judgment is hereby
rendered declaring that the Myers Building Co., Inc. is entitled to receive the
rentals which the plaintiff has been paying, including those already deposited
in Court, thereby relieving the plaintiff of any obligation to pay the same to
any other party, and ordering the Maritime Building Co., Inc. to pay the
commission fees paid by the Myers Building Co., Inc. to the Clerk of this
Court, plus the sum of P3,000.00 as and for attorney's fees.
On the cross-claim by the Myers Building Co., Inc., the Maritima Building
Co., Inc. is hereby ordered to pay the Myers Building Co., Inc. the sum of
P10,000.00 damages, plus the sum of P30,000.00, representing rentals
wrongfully collected by it from the plaintiff corresponding to the months of
March, April and May, 1961 and the costs hereof.
The antecedents of the litigation are summarized in the appealed judgment
thus:

This is an action for interpleading.


It appears that on April 30, 1949, in the City of Manila, the defendant Myers
Building Co., Inc., owner of three parcels of land in the City of Manila,
together with the improvements thereon, entered into a contract entitled
"Deed of Conditional Sale" in favor of Bary Building Co., Inc., later known
as Maritime Building Co., Inc., whereby the former sold the same to the
latter for P1,000,000.00, Philippine currency. P50,000.00 of this price was
paid upon the execution of the said contract and the parties agreed that the
balance of P950,000.00 was to be paid in monthly installments at the rate of
P10,000.00 with interest of 5% per annum until the same was fully paid.
In Par. (O), they agreed that in case of failure on the part of the vendee to pay
any of the installments due and payable, the contract shall be annulled at the
option of the vendor and all payments already made by vendee shall be
forfeited and the vendor shall have right to re-enter the property and take
possession thereof.
Later, the monthly installment of P10,000.00 above-stipulated with 5%
interest per annum was amended or decreased to P5,000.00 per month and
the interest was raised to 5-1/2% per annum. The monthly installments under
the contract was regularly paid by the Bary Building Co., Inc. and/or the
Maritime Co., Inc. until the end of February, 1961. It failed to pay the
monthly installment corresponding to the month of March 1961, for which
the Vice-President, George Schedler, of the Maritime Building Co., Inc.,
wrote a letter to the President of Myers, Mr. C. Parsons, requesting for a
moratorium on the monthly payment of the installments until the end of the
year 1961, for the reason that the said company was encountering difficulties
in connection with the operation of the warehouse business. However, Mr. C.
Parsons, in behalf of the Myers Estate, answered that the monthly payments
due were not payable to the Myers Estate but to the Myers Building Co., Inc.,
and that the Board of Directors of the Myers Co., Inc. refused to grant the
request for moratorium for suspension of payments under any condition.
Notwithstanding the denial of this request for moratorium by the Myers
Board of Directors the Maritime Building Co., Inc. failed to pay the monthly
installments corresponding to the months of March, April and May, 1961.
Whereupon, on May 16, 1961, the Myers Building Co., Inc. made a demand
upon the Maritime Building Co., Inc., for the payment of the installments
that had become due and payable, which letter, however, was returned
unclaimed.
14

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Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime
Building Co., Inc. another letter advising it of the cancellation of the Deed of
Conditional Sale entered into between them and demanding the return of the
possession of the properties and holding the Maritime Building Co., Inc.
liable for use and occupation of the said properties at P10,000.00 monthly.
In the meantime, the Myers Building Co., Inc. demanded upon the Luzon
Brokerage Co., Inc. to whom the Maritime Building Co., Inc. leased the
properties, the payment of monthly rentals of P10,000.00 and the surrender
of the same to it. As a consequence, the Luzon Brokerage Co., Inc. found
itself in a payment to the wrong party, filed this action for interpleader
against the Maritime Building Co., Inc.
After the filing of this action, the Myers Building Co., Inc. in its answer filed
a cross-claim against the Maritime Building Co., Inc. praying for the
confirmation of its right to cancel the said contract. In the meantime, the
contract between the Maritime Building Co., Inc. and the Luzon Brokerage
Co., Inc. was extended by mutual agreement for a period of four (4) more
years, from April, 1964 to March 31, 1968.
The Maritime Building Co., Inc. now contends (1) that the Myers Building
Co., Inc. cannot cancel the contract entered into by them for the conditional
sale of the properties in question extrajudicially and (2) that it had not failed
to pay the monthly installments due under the contract and, therefore, is not
guilty of having violated the same.
It should be further elucidated that the suspension by the appellant Maritime
Building Co., Inc. (hereinafter called Maritime) of the payment of
installments due from it to appellee Myers Building Co., Inc. (hereinafter
designated as Myers Corporation) arose from an award of backwages made
by the Court of Industrial Relations in favor of members of Luzon Labor
Union who served the Fil-American forces in Bataan in early 1942 at the
instance of the employer Luzon Brokerage Co. and for which F. H. Myers,
former majority stockholder of the Luzon Brokerage Co., had allegedly
promised to indemnify E. M. Schedler (who controlled Maritime) when the
latter purchased Myers' stock in the Brokerage Company. Schedler contended
that he was being sued for the backpay award of some P325,000, when it was
a liability of Myers, or of the latter's estate upon his death. In his letter to
Myers Corporation (Exhibit "11", Maritime) dated 7 April 1961 (two months
and ten days before the initial complaint in the case at bar), Schedler claimed
the following:

At all times when the F. H. Myers Estate was open in the Philippine Islands
and open in San Francisco, the Myers Estate or heirs assumed the defense of
the Labor Union claims and led us to believe that they would indemnify us
therefrom.
Recently, however, for the first time, and after both the Philippine and San
Francisco F. H. Myers Estates were closed, we have been notified that the F.
H. Myers indemnity on the Labor Union case will not be honored, and in fact
Mrs. Schedler and I have been sued in the Philippines by my successor in
interest, Mr. Wentholt, and have been put to considerable expense.
You are advised that my wife and I, as the owners of the Maritime Building
Company, intend to withhold any further payments to Myers Building
Company or Estate, in order that we can preserve those funds and assets to
set off against the potential liability to which I am now exposed by the failure
of the Myers heirs to honor the indemnity agreement pertaining to the Labor
claims.
The trial court found the position of Schedler indefensible, and that
Maritime, by its failure to pay, committed a breach of the sale contract; that
Myers Company, from and after the breach, became entitled to terminate the
contract, to forfeit the installments paid, as well as to repossess, and collect
the rentals of, the building from its lessee, Luzon Brokerage Co., in view of
the terms of the conditional contract of sale stipulating that:
(d) It is hereby agreed, covenanted and stipulated by and between the parties
hereto that the Vendor will execute and deliver to the Vendee a definite or
absolute deed of sale upon the full payment by the vendee of the unpaid
balance of the purchase price hereinabove stipulated; that should the Vendee
fail to pay any of the monthly installments, when due, or otherwise fail to
comply with any of the terms and conditions herein stipulated, then this Deed
of Conditional Sale shall automatically and without any further formality,
become null and void, and all sums so paid by the Vendee by reason thereof,
shall be considered as rentals and the Vendor shall then and there be free to
enter into the premises, take possession thereof or sell the properties to any
other party.
xxx xxx xxx
(o) In case the Vendee fails to make payment or payments, or any part
thereof, as herein provided, or fails to perform any of the covenants or
agreements hereof, this contract shall, at the option of the Vendor, be
annulled and, in such event, all payments made by the Vendee to the Vendor
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by virtue of this contract shall be forfeited and retained by the Vendor in full
satisfaction of the liquidated damages by said Vendor sustained; and the said
Vendor shall have the right to forthwith re-enter, and take possession of, the
premises subject-matter of this contract.
"The remedy of forfeiture stated in the next-preceding paragraph shall not be
exclusive of any other remedy, but the Vendor shall have every other remedy
granted it by virtue of this contract, by law, and by equity."
From the judgment of the court below, the dispositive portion whereof has
been transcribed at the start of this opinion, Myers duly appealed to this
Court.
The main issue posed by appellant is that there has been no breach of
contract by Maritime; and assuming that there was one, that the appellee
Myers was not entitled to rescind or resolve the contract without recoursing
to judicial process.
It is difficult to understand how appellant Maritime can seriously contend
that its failure or refusal to pay the P5,000 monthly installments
corresponding to the months of March, April and May, 1961 did not
constitute a breach of contract with Myers, when said agreement (transcribed
in the Record on Appeal, pages 59-71) expressly stipulated that the balance
of the purchase price (P950,000)
shall be paid at the rate of Ten Thousand Pesos (P10,000) monthly on or
before the 10th day of each month with interest at 5% per annum, this
amount to be first applied on the interest, and the balance paid to the
principal thereof; and the failure to pay any installment or interest when due
shall ipso factocause the whole unpaid balance of the principal and interest to
be and become immediately due and payable. (Contract, paragraph b; Record
on Appeal, page 63)
Contrary to appellant Maritime's averments, the default was not made in
good faith. The text of the letter to Myers (Exhibit "11", Maritime),
heretofore quoted, leaves no doubt that the non-payment of the installments
was the result of a deliberate course of action on the part of appellant,
designed to coerce the appellee Myers Corporation into answering for an
alleged promise of the late F. H. MYERS to indemnify E. W. Schedler, the
controlling stock-holder of appellant, for any payments to be made to the
members of the Luzon Labor Union. This is apparent also from appellant's
letter to his counsel (Exhibit "12", Maritime):

... I do not wish to deposit pesos representing the months of March, April and
May, since the Myers refusal to honor the indemnity concerning the labor
claims has caused me to disburse (sic) roughly $10,000.00 to date in fees,
cost and travel expenses. However, if the Myers people will deposit in trust
with Mr. C. Parsons 25,000 pesos to cover my costs to date, I will then
deposit with Mr. Parsons, in trust, 15,000 pesos for March, April and May
and will also post a monthly deposit of 5,000 pesos until the dispute is
settled. The dispute won't be settled in my mind, unless and until:
a) The Myers people indemnify me fully the labor cases;
b) The labor cases are terminated favorably to Luzon Brokerage and no
liability exists;
c) The Myers people pay any judgment entered on the labor cases thereby
releasing me; or
d) It is finally determined either in San Francisco or in the Philippines by a
court that the Myers heirs must honor the indemnity which Mr. F. H. Myers
promised when I purchased Luzon Brokerage Company.
Yet appellant Maritime (assuming that it had validly acquired the claims of
its president and controlling stockholder, E. M. Schedler) could not ignore
the fact that whatever obligation F. H. Myers or his estate had assumed in
favor of Schedler with respect to the Luzon Brokerage labor case was not,
and could not have been, an obligation of appellee corporation (Myers
Building Company). No proof exists that the board of directors of the Myers
Corporation had agreed to assume responsibility for the debts (if any) that the
late Myers or his heirs had incurred in favor of Schedler. Not only this, but it
is apparent from the letters quoted heretofore that Schedler had allowed the
estate proceedings of the late F. M. Myers to close without providing for any
contingent liability in Schedler's favor; so that by offsetting the alleged debt
of Myers to him, against the balance of the price due under the "Deed of
Conditional Sale", appellant Maritime was in fact attempting to burden the
Myers Building Company with an uncollectible debt, since enforcement
thereof against the estate of F. H. Myers was already barred.
Under the circumstances, the action of Maritime in suspending payments to
Myers Corporation was a breach of contract tainted with fraud or malice
(dolo), as distinguished from mere negligence (culpa), "dolo" being
succinctly defined as a "conscious and intentional design to evade the normal
fulfillment of existing obligations" (Capistrano, Civil Code of the
Philippines, Vol. 3, page 38), and therefore incompatible with good faith
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SALES
(Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de
Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give
it further time to make payment and thereby erase the default or breach that it
had deliberately incurred. Thus the lower court committed no error in
refusing to extend the periods for payment. To do otherwise would be to
sanction a deliberate and reiterated infringement of the contractual
obligations incurred by Maritime, an attitude repugnant to the stability and
obligatory force of contracts.
From another point of view, it is irrelevant whether appellant Maritime's
infringement of its contract was casual or serious, for as pointed out by this
Court in Manuel vs. Rodriguez, 109 Phil. 1, at page 10
The contention of plaintiff-appellant that Payatas Subdivision Inc. had no
right to cancel the contract as there was only a "casual breach" is likewise
untenable. In contracts to sell, where ownership is retained by the seller and
is not to pass until the full payment of the price, such payment, as we said, is
a positive suspensive condition, the failure of which is not a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force, in accordance with Article 1117 of
the Old Civil Code. To argue that there was only a casual breach is to
proceed from the assumption that the contract is one of absolute sale, where
non-payment is a resolutory condition, which is not the case.
But it is argued for Maritime that even if it had really violated the Contract of
Conditional Sale with Myers, the latter could not extrajudicially rescind or
resolve the contract, but must first recourse to the courts. While recognizing
that paragraph (d) of the deed of conditional sale expressly provides inter
alia
that should the Vendee fail to pay any of the monthly installments when due,
or otherwise fail to comply with any of the terms and conditions herein
stipulated, then this Deed of Conditional Sale shallautomatically and without
any further formality, become null and void, and all sums so paid by the
Vendee by reason thereof shall be considered as rentals.. (Emphasis supplied)
herein appellant Maritime avers that paragraph (e) of the deed contemplates
that a suit should be brought in court for a judicial declaration of rescission.
The paragraph relied upon by Maritime is couched in the following, terms:

(e) It is also hereby agreed, covenanted and stipulated by and between the
parties hereto that should the Vendor rescind this Deed of Conditional Sale,
for any of the reasons stipulated in the preceding paragraph, the Vendee by
these presents obligates itself to peacefully deliver the properties subject of
this contract to the Vendor, and in the event that the Vendee refuses to
peacefully deliver the possession of the properties subject of this contract to
the Vendor in case of rescission, and a suit should be brought in court by the
Vendor to seek judicial declaration of rescission and take possession of the
properties subject of this contract, the Vendee hereby obligates itself to pay
all the expenses to be incurred by reason of such suit and in addition
obligates itself to pay the sum of P10,000.00, in concept of damages, penalty
and attorney's fees.
Correlation of this paragraph (e) with the preceding paragraph (d) of the
Deed of Conditional Sale (quoted in page 5 of this opinion) reveals no
incompatibility between the two; and the suit to "be brought in Court by the
Vendor to seek judicial declaration of rescission" is provided for by
paragraph(e) only in the eventuality that, notwithstanding the automatic
annulment of the deed under paragraph (d), the Vendee "refuses to peacefully
deliver the possession of the properties subject of this contract". The step
contemplated is logical since the Vendor can not, by himself, dispossess the
Vendee manu militari, if the latter should refuse to vacate despite the
violation of the contract, since no party can take the law in his own hands.
But the bringing of such an action in no way contradicts or restricts the
automatic termination of the contract in case the Vendee (i.e., appellant
Maritime) should not comply with the agreement.
Anyway, this Court has repeatedly held that
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 vs.
Commissioner of Customs, L-28235, 30 January 1971, 37 SCRA 327, 334,,
and cases cited therein). 1 (Emphasis supplied.)
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 vs. Court of Appeals, L-27549, 30 Sept. 1969; 29 SCRA
504).

17

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The obvious remedy of the party opposing the rescission for any reason
being to file the corresponding action to question the rescission and enforce
the agreement, as indicated in our decision in University of the Philippines
vs. Walfrido de los Angeles,
L-28602, 29 September 1970, 35 SCRA 107.
Of course, it must be understood that the act of a party in treating a contract
as cancelled or resolved on account of infractions by the other contracting
party must be made known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the other party denies
that rescission is justified, it is free to resort to judicial action in its own
behalf, and bring the matter to court. Then, should the court, after due
hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the
party prejudiced.
In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. 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).
Maritime likewise invokes Article 1592 of the Civil Code of the Philippines
as entitling it to pay despite its default:
ART. 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the
rescission of the contract shall of right take place, the vendee may pay, even
after the expiration of the period, as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act. After
the demand, the court may not grant him a new term.

Assuming arguendo that Article 1592 is applicable, the cross-claim filed by


Myers against Maritime in the court below constituted a judicial demand for
rescission that satisfies the requirements of said article.
But even if it were not so, appellant overlooks that its contract with appellee
Myers is not the ordinary sale envisaged by Article 1592, transferring
ownership simultaneously with the delivery of the real property sold, but one
in which the vendor retained ownership of the immovable object of the sale,
merely undertaking to convey it provided the buyer strictly complied with the
terms of the contract (see paragraph [d], ante, page 5). In suing to recover
possession of the building from Maritime, appellee Myers is not after the
resolution or setting aside of the contract and the restoration of the parties to
the status quo ante, as contemplated by Article 1592, but precisely enforcing
the provisions of the agreement that it is no longer obligated to part with the
ownership or possession of the property because Maritime failed to comply
with the specified condition precedent, which is to pay the installments as
they fell due.
The distinction between contracts of sale and contract to sell with reserved
title has been recognized by this Court in repeated decisions 2 upholding the
power of promisors under contracts to sell in case of failure of the other party
to complete payment, to extrajudicially terminate the operation of the
contract, refuse conveyance and retain the sums or installments already
received, where such rights are expressly provided for, as in the case at bar.
Maritime's appeal that it would be iniquituous that it should be compelled to
forfeit the P973,000 already paid to Myers, as a result of its failure to make
good a balance of only P319,300.65, payable at P5,000 monthly, becomes
unimpressive when it is considered that while obligated to pay the price of
one million pesos at P5,000 monthly, plus interest, Maritime, on the other
hand, had leased the building to Luzon Brokerage, Inc. since 1949; and
Luzon paid P13,000 a month rent, from September, 1951 to August 1956,
and thereafter until 1961, at P10,000 a month, thus paying a total of around
one and a half million pesos in rentals to Maritime. Even adding to
Maritime's losses of P973,000 the P10,000 damages and P3,000 attorneys'
fees awarded by the trial court, it is undeniable that appellant Maritime has
come out of the entire transaction still at a profit to itself.
There remains the procedural objection raised by appellant Maritime to this
interpleader action filed by the Luzon Brokerage Co., the lessee of the
building conditionally sold by Myers to Maritime. It should be recalled that
when Maritime defaulted in its payments to Myers, and the latter notified the
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former that it was cancelling the contract of conditional sale, Myers also
notified Luzon Brokerage, Maritime's lessee of the building, of the
cancellation of the sale, and demanded that Luzon should pay to Myers the
rentals of the building beginning from June, 1961, under penalty of ejectment
(Record on Appeal, pages 14-15). In doubt as to who was entitled to the
rentals, Luzon filed this action for interpleader against Myers and Maritime,
and deposited the rentals in court as they fell due. The appellant Maritime
moved to dismiss on the ground that (a) Luzon could not entertain doubts as
to whom the rentals should be paid since Luzon had leased the building from
Maritime since 1949, renewing the contract from time to time, and Myers
had no right to cancel the lease; and (b) that Luzon was not a disinterested
party, since it tended to favor appellee Myers. The court below overruled
Maritime's objections and We see no plausible reason to overturn the order.
While Myers was not a party to the lease, its cancellation of the conditional
sale of the premises to Maritime, Luzon's lessor, could not but raise
reasonable doubts as to the continuation of the lease, for the termination of
the lessor's right of possession of the premises necessarily ended its right to
the rentals falling due thereafter. The preceding portion of our opinion is
conclusive that Luzon's doubts were grounded under the law and the
jurisprudence of this Court.
No adequate proof exists that Luzon was favoring any one of the contending
parties. It was interested in being protected against prejudice deriving from
the result of the controversy, regardless of who should win. For the purpose it
was simpler for Luzon to compel the disputants to litigate between
themselves, rather than chance being sued by Myers, and later being
compelled to proceed against Maritime to recoup its losses. In any event,
Maritime ultimately confirmed the act of Luzon in suing for interpleader, by
agreeing to renew Luzon's lease in 1963 during the pendency of the present
action, and authorizing Luzon to continue depositing the rentals in court
"until otherwise directed by a court of competent jurisdiction" (Exhibit "18Maritime"). The procedural objection has thus become moot.
PREMISES CONSIDERED, the appealed decision should be, and hereby is,
affirmed, and appellant Maritime Building Co., as well as appellee Luzon
Brokerage Co., are further ordered to surrender the premises to the appellee
Myers Building Co. Costs against appellant.

19

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5.) Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 111238 January 25, 1995
ADELFA PROPERTIES, INC., petitioner,
vs.
COURT OF APPEALS, ROSARIO JIMENEZ-CASTAEDA and
SALUD JIMENEZ, respondents.
REGALADO, J.:
The main issues presented for resolution in this petition for review
on certiorari of the judgment of respondent Court of appeals, dated April 6,
1993, in CA-G.R. CV No. 34767 1 are (1) whether of not the "Exclusive
Option to Purchase" executed between petitioner Adelfa Properties, Inc. and
private respondents Rosario Jimenez-Castaeda and Salud Jimenez is an
option contract; and (2) whether or not there was a valid suspension of
payment of the purchase price by said petitioner, and the legal effects thereof
on the contractual relations of the parties.
The records disclose the following antecedent facts which culminated in the
present appellate review, to wit:
1. Herein private respondents and their brothers, Jose and Dominador
Jimenez, were the registered co-owners of a parcel of land consisting of
17,710 square meters, covered by Transfer Certificate of Title (TCT) No.
309773, 2situated in Barrio Culasi, Las Pias, Metro Manila.
2. On July 28, 1988, Jose and Dominador Jimenez sold their share consisting
of one-half of said parcel of land, specifically the eastern portion thereof, to
herein petitioner pursuant to a "Kasulatan sa Bilihan ng
Lupa." 3Subsequently, a "Confirmatory Extrajudicial Partition
Agreement" 4 was executed by the Jimenezes, wherein the eastern portion of
the subject lot, with an area of 8,855 square meters was adjudicated to Jose
and Dominador Jimenez, while the western portion was allocated to herein
private respondents.
3. Thereafter, herein petitioner expressed interest in buying the western
portion of the property from private respondents. Accordingly, on November

25, 1989, an "Exclusive Option to Purchase" 5 was executed between


petitioner and private respondents, under the following terms and conditions:
1. The selling price of said 8,655 square meters of the subject property is
TWO MILLION EIGHT HUNDRED FIFTY SIX THOUSAND ONE
HUNDRED FIFTY PESOS ONLY (P2,856,150.00)
2. The sum of P50,000.00 which we received from ADELFA PROPERTIES,
INC. as an option money shall be credited as partial payment upon the
consummation of the sale and the balance in the sum of TWO MILLION
EIGHT HUNDRED SIX THOUSAND ONE HUNDRED FIFTY PESOS
(P2,806,150.00) to be paid on or before November 30, 1989;
3. In case of default on the part of ADELFA PROPERTIES, INC. to pay said
balance in accordance with paragraph 2 hereof, this option shall be cancelled
and 50% of the option money to be forfeited in our favor and we will refund
the remaining 50% of said money upon the sale of said property to a third
party;
4. All expenses including the corresponding capital gains tax, cost of
documentary stamps are for the account of the VENDORS, and expenses for
the registration of the deed of sale in the Registry of Deeds are for the
account of ADELFA PROPERTIES, INC.
Considering, however, that the owner's copy of the certificate of title issued
to respondent Salud Jimenez had been lost, a petition for the re-issuance of a
new owner's copy of said certificate of title was filed in court through Atty.
Bayani L. Bernardo, who acted as private respondents' counsel. Eventually, a
new owner's copy of the certificate of title was issued but it remained in the
possession of Atty. Bernardo until he turned it over to petitioner Adelfa
Properties, Inc.
4. Before petitioner could make payment, it received summons 6 on
November 29, 1989, together with a copy of a complaint filed by the
nephews and nieces of private respondents against the latter, Jose and
Dominador Jimenez, and herein petitioner in the Regional Trial Court of
Makati, docketed as Civil Case No. 89-5541, for annulment of the deed of
sale in favor of Household Corporation and recovery of ownership of the
property covered by TCT No. 309773. 7
5. As a consequence, in a letter dated November 29, 1989, petitioner
informed private respondents that it would hold payment of the full purchase
price and suggested that private respondents settle the case with their
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nephews and nieces, adding that ". . . if possible, although November 30,
1989 is a holiday, we will be waiting for you and said plaintiffs at our office
up to 7:00 p.m." 8 Another letter of the same tenor and of even date was sent
by petitioner to Jose and Dominador Jimenez. 9 Respondent Salud Jimenez
refused to heed the suggestion of petitioner and attributed the suspension of
payment of the purchase price to "lack of word of honor."
6. On December 7, 1989, petitioner caused to be annotated on the title of the
lot its option contract with private respondents, and its contract of sale with
Jose and Dominador Jimenez, as Entry No. 1437-4 and entry No. 1438-4,
respectively.
7. On December 14, 1989, private respondents sent Francisca Jimenez to see
Atty. Bernardo, in his capacity as petitioner's counsel, and to inform the latter
that they were cancelling the transaction. In turn, Atty. Bernardo offered to
pay the purchase price provided that P500,000.00 be deducted therefrom for
the settlement of the civil case. This was rejected by private respondents. On
December 22, 1989, Atty. Bernardo wrote private respondents on the same
matter but this time reducing the amount from P500,000.00 to P300,000.00,
and this was also rejected by the latter.
8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil
Case No. 89-5541. Thus, on February 28, 1990, petitioner caused to be
annotated anew on TCT No. 309773 the exclusive option to purchase as
Entry No. 4442-4.
9. On the same day, February 28, 1990, private respondents executed a Deed
of Conditional Sale 10 in favor of Emylene Chua over the same parcel of land
for P3,029,250, of which P1,500,000.00 was paid to private respondents on
said date, with the balance to be paid upon the transfer of title to the specified
one-half portion.
10. On April 16, 1990, Atty. Bernardo wrote private respondents informing
the latter that in view of the dismissal of the case against them, petitioner was
willing to pay the purchase price, and he requested that the corresponding
deed of absolute sale be executed. 11 This was ignored by private
respondents.
11. On July 27, 1990, private respondents' counsel sent a letter to petitioner
enclosing therein a check for P25,000.00 representing the refund of fifty
percent of the option money paid under the exclusive option to purchase.
Private respondents then requested petitioner to return the owner's duplicate
copy of the certificate of title of respondent Salud Jimenez. 12 Petitioner

failed to surrender the certificate of title, hence private respondents filed


Civil Case No. 7532 in the Regional Trial Court of Pasay City, Branch 113,
for annulment of contract with damages, praying, among others, that the
exclusive option to purchase be declared null and void; that defendant, herein
petitioner, be ordered to return the owner's duplicate certificate of title; and
that the annotation of the option contract on TCT No. 309773 be cancelled.
Emylene Chua, the subsequent purchaser of the lot, filed a complaint in
intervention.
12. The trial court rendered judgment 13 therein on September 5, 1991
holding that the agreement entered into by the parties was merely an option
contract, and declaring that the suspension of payment by herein petitioner
constituted a counter-offer which, therefore, was tantamount to a rejection of
the option. It likewise ruled that herein petitioner could not validly suspend
payment in favor of private respondents on the ground that the vindicatory
action filed by the latter's kin did not involve the western portion of the land
covered by the contract between petitioner and private respondents, but the
eastern portion thereof which was the subject of the sale between petitioner
and the brothers Jose and Dominador Jimenez. The trial court then directed
the cancellation of the exclusive option to purchase, declared the sale to
intervenor Emylene Chua as valid and binding, and ordered petitioner to pay
damages and attorney's fees to private respondents, with costs.
13. On appeal, respondent Court of appeals affirmed in toto the decision of
the court a quo and held that the failure of petitioner to pay the purchase
price within the period agreed upon was tantamount to an election by
petitioner not to buy the property; that the suspension of payment constituted
an imposition of a condition which was actually a counter-offer amounting to
a rejection of the option; and that Article 1590 of the Civil Code on
suspension of payments applies only to a contract of sale or a contract to sell,
but not to an option contract which it opined was the nature of the document
subject of the case at bar. Said appellate court similarly upheld the validity of
the deed of conditional sale executed by private respondents in favor of
intervenor Emylene Chua.
In the present petition, the following assignment of errors are raised:
1. Respondent court of appeals acted with grave abuse of discretion in
making its finding that the agreement entered into by petitioner and private
respondents was strictly an option contract;

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2. Granting arguendo that the agreement was an option contract, respondent
court of Appeals acted with grave abuse of discretion in grievously failing to
consider that while the option period had not lapsed, private respondents
could not unilaterally and prematurely terminate the option period;
3. Respondent Court of Appeals acted with grave abuse of discretion in
failing to appreciate fully the attendant facts and circumstances when it made
the conclusion of law that Article 1590 does not apply; and
4. Respondent Court of Appeals acted with grave abuse of discretion in
conforming with the sale in favor of appellee Ma. Emylene Chua and the
award of damages and attorney's fees which are not only excessive, but also
without in fact and in law. 14
An analysis of the facts obtaining in this case, as well as the evidence
presented by the parties, irresistibly leads to the conclusion that the
agreement between the parties is a contract to sell, and not an option contract
or a contract of sale.
I
1. In view of the extended disquisition thereon by respondent court, it would
be worthwhile at this juncture to briefly discourse on the rationale behind our
treatment of the alleged option contract as a contract to sell, rather than a
contract of sale. The distinction between the two is important for in contract
of sale, the title passes to the vendee upon the delivery of the thing sold;
whereas in a contract to sell, by agreement the ownership is reserved in the
vendor and is not to pass until the full payment of the price. In a contract of
sale, the vendor has lost and cannot recover ownership until and unless the
contract is resolved or rescinded; whereas in a contract to sell, title is retained
by the vendor until the full payment of the price, such payment being a
positive suspensive condition and failure of which is not a breach but an
event that prevents the obligation of the vendor to convey title from
becoming effective. Thus, a deed of sale is considered absolute in nature
where there is neither a stipulation in the deed that title to the property sold is
reserved in the seller until the full payment of the price, nor one giving the
vendor the right to unilaterally resolve the contract the moment the buyer
fails to pay within a fixed period. 15
There are two features which convince us that the parties never intended to
transfer ownership to petitioner except upon the full payment of the purchase
price. Firstly, the exclusive option to purchase, although it provided for
automatic rescission of the contract and partial forfeiture of the amount

already paid in case of default, does not mention that petitioner is obliged to
return possession or ownership of the property as a consequence of nonpayment. There is no stipulation anent reversion or reconveyance of the
property to herein private respondents in the event that petitioner does not
comply with its obligation. With the absence of such a stipulation, although
there is a provision on the remedies available to the parties in case of breach,
it may legally be inferred that the parties never intended to transfer
ownership to the petitioner to completion of payment of the purchase price.
In effect, there was an implied agreement that ownership shall not pass to the
purchaser until he had fully paid the price. Article 1478 of the civil code does
not require that such a stipulation be expressly made. Consequently, an
implied stipulation to that effect is considered valid and, therefore, binding
and enforceable between the parties. It should be noted that under the law
and jurisprudence, a contract which contains this kind of stipulation is
considered a contract to sell.
Moreover, that the parties really intended to execute a contract to sell, and
not a contract of sale, is bolstered by the fact that the deed of absolute sale
would have been issued only upon the payment of the balance of the
purchase price, as may be gleaned from petitioner's letter dated April 16,
1990 16 wherein it informed private respondents that it "is now ready and
willing to pay you simultaneously with the execution of the corresponding
deed of absolute sale."
Secondly, it has not been shown there was delivery of the property, actual or
constructive, made to herein petitioner. The exclusive option to purchase is
not contained in a public instrument the execution of which would have been
considered equivalent to delivery. 17 Neither did petitioner take actual,
physical possession of the property at any given time. It is true that after the
reconstitution of private respondents' certificate of title, it remained in the
possession of petitioner's counsel, Atty. Bayani L. Bernardo, who thereafter
delivered the same to herein petitioner. Normally, under the law, such
possession by the vendee is to be understood as a delivery. 18 However,
private respondents explained that there was really no intention on their part
to deliver the title to herein petitioner with the purpose of transferring
ownership to it. They claim that Atty. Bernardo had possession of the title
only because he was their counsel in the petition for reconstitution. We have
no reason not to believe this explanation of private respondents, aside from
the fact that such contention was never refuted or contradicted by petitioner.

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2. Irrefragably, the controverted document should legally be considered as a
perfected contract to sell. On this particular point, therefore, we reject the
position and ratiocination of respondent Court of Appeals which, while
awarding the correct relief to private respondents, categorized the instrument
as "strictly an option contract."
The important task in contract interpretation is always the ascertainment of
the intention of the contracting parties and that task is, of course, to be
discharged by looking to the words they used to project that intention in their
contract, all the words not just a particular word or two, and words in context
not words standing alone. 19 Moreover, judging from the subsequent acts of
the parties which will hereinafter be discussed, it is undeniable that the
intention of the parties was to enter into a contract to sell. 20 In addition, the
title of a contract does not necessarily determine its true nature. 21 Hence, the
fact that the document under discussion is entitled "Exclusive Option to
Purchase" is not controlling where the text thereof shows that it is a contract
to sell.
An option, as used in the law on sales, is a continuing offer or contract by
which the owner stipulates with another that the latter shall have the right to
buy the property at a fixed price within a certain time, or under, or in
compliance with, certain terms and conditions, or which gives to the owner
of the property the right to sell or demand a sale. It is also sometimes called
an "unaccepted offer." An option is not of itself a purchase, but merely
secures the privilege to buy. 22 It is not a sale of property but a sale of
property but a sale of the right to purchase. 23 It is simply a contract by which
the owner of property agrees with another person that he shall have the right
to buy his property at a fixed price within a certain time. He does not sell his
land; he does not then agree to sell it; but he does sell something, that it is,
the right or privilege to buy at the election or option of the other party. 24 Its
distinguishing characteristic is that it imposes no binding obligation on the
person holding the option, aside from the consideration for the offer. Until
acceptance, it is not, properly speaking, a contract, and does not vest,
transfer, or agree to transfer, any title to, or any interest or right in the subject
matter, but is merely a contract by which the owner of property gives the
optionee the right or privilege of accepting the offer and buying the property
on certain terms. 25
On the other hand, a contract, like a contract to sell, involves a meeting of
minds two persons whereby one binds himself, with respect to the other, to
give something or to render some service. 26 Contracts, in general, are
perfected by mere consent, 27 which is manifested by the meeting of the offer

and the acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. 28
The distinction between an "option" and a contract of sale is that an option is
an unaccepted offer. It states the terms and conditions on which the owner is
willing to sell the land, if the holder elects to accept them within the time
limited. If the holder does so elect, he must give notice to the other party, and
the accepted offer thereupon becomes a valid and binding contract. If an
acceptance is not made within the time fixed, the owner is no longer bound
by his offer, and the option is at an end. A contract of sale, on the other hand,
fixes definitely the relative rights and obligations of both parties at the time
of its execution. The offer and the acceptance are concurrent, since the minds
of the contracting parties meet in the terms of the agreement. 29
A perusal of the contract in this case, as well as the oral and documentary
evidence presented by the parties, readily shows that there is indeed a
concurrence of petitioner's offer to buy and private respondents' acceptance
thereof. The rule is that except where a formal acceptance is so required,
although the acceptance must be affirmatively and clearly made and must be
evidenced by some acts or conduct communicated to the offeror, it may be
made either in a formal or an informal manner, and may be shown by acts,
conduct, or words of the accepting party that clearly manifest a present
intention or determination to accept the offer to buy or sell. Thus, acceptance
may be shown by the acts, conduct, or words of a party recognizing the
existence of the contract of sale. 30
The records also show that private respondents accepted the offer of
petitioner to buy their property under the terms of their contract. At the time
petitioner made its offer, private respondents suggested that their transfer
certificate of title be first reconstituted, to which petitioner agreed. As a
matter of fact, it was petitioner's counsel, Atty. Bayani L. Bernardo, who
assisted private respondents in filing a petition for reconstitution. After the
title was reconstituted, the parties agreed that petitioner would pay either in
cash or manager's check the amount of P2,856,150.00 for the lot. Petitioner
was supposed to pay the same on November 25, 1989, but it later offered to
make a down payment of P50,000.00, with the balance of P2,806,150.00 to
be paid on or before November 30, 1989. Private respondents agreed to the
counter-offer made by petitioner. 31 As a result, the so-called exclusive option
to purchase was prepared by petitioner and was subsequently signed by
private respondents, thereby creating a perfected contract to sell between
them.
23

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It cannot be gainsaid that the offer to buy a specific piece of land was definite
and certain, while the acceptance thereof was absolute and without any
condition or qualification. The agreement as to the object, the price of the
property, and the terms of payment was clear and well-defined. No other
significance could be given to such acts that than they were meant to finalize
and perfect the transaction. The parties even went beyond the basic
requirements of the law by stipulating that "all expenses including the
corresponding capital gains tax, cost of documentary stamps are for the
account of the vendors, and expenses for the registration of the deed of sale
in the Registry of Deeds are for the account of Adelfa properties, Inc."
Hence, there was nothing left to be done except the performance of the
respective obligations of the parties.

comply with the obligation incumbent upon it to perform, not merely to


exercise an option or a right to buy the property.

We do not subscribe to private respondents' submission, which was upheld


by both the trial court and respondent court of appeals, that the offer of
petitioner to deduct P500,000.00, (later reduced to P300,000.00) from the
purchase price for the settlement of the civil case was tantamount to a
counter-offer. It must be stressed that there already existed a perfected
contract between the parties at the time the alleged counter-offer was made.
Thus, any new offer by a party becomes binding only when it is accepted by
the other. In the case of private respondents, they actually refused to concur
in said offer of petitioner, by reason of which the original terms of the
contract continued to be enforceable.

The test in determining whether a contract is a "contract of sale or purchase"


or a mere "option" is whether or not the agreement could be specifically
enforced. 33 There is no doubt that the obligation of petitioner to pay the
purchase price is specific, definite and certain, and consequently binding and
enforceable. Had private respondents chosen to enforce the contract, they
could have specifically compelled petitioner to pay the balance of
P2,806,150.00. This is distinctly made manifest in the contract itself as an
integral stipulation, compliance with which could legally and definitely be
demanded from petitioner as a consequence.

At any rate, the same cannot be considered a counter-offer for the simple
reason that petitioner's sole purpose was to settle the civil case in order that it
could already comply with its obligation. In fact, it was even indicative of a
desire by petitioner to immediately comply therewith, except that it was
being prevented from doing so because of the filing of the civil case which, it
believed in good faith, rendered compliance improbable at that time. In
addition, no inference can be drawn from that suggestion given by petitioner
that it was totally abandoning the original contract.
More importantly, it will be noted that the failure of petitioner to pay the
balance of the purchase price within the agreed period was attributed by
private respondents to "lack of word of honor" on the part of the former. The
reason of "lack of word of honor" is to us a clear indication that private
respondents considered petitioner already bound by its obligation to pay the
balance of the consideration. In effect, private respondents were demanding
or exacting fulfillment of the obligation from herein petitioner. with the
arrival of the period agreed upon by the parties, petitioner was supposed to

The obligation of petitioner on November 30, 1993 consisted of an obligation


to give something, that is, the payment of the purchase price. The contract
did not simply give petitioner the discretion to pay for the property. 32 It will
be noted that there is nothing in the said contract to show that petitioner was
merely given a certain period within which to exercise its privilege to buy.
The agreed period was intended to give time to herein petitioner within
which to fulfill and comply with its obligation, that is, to pay the balance of
the purchase price. No evidence was presented by private respondents to
prove otherwise.

This is not a case where no right is as yet created nor an obligation declared,
as where something further remains to be done before the buyer and seller
obligate themselves. 34 An agreement is only an "option" when no obligation
rests on the party to make any payment except such as may be agreed on
between the parties as consideration to support the option until he has made
up his mind within the time specified. 35 An option, and not a contract to
purchase, is effected by an agreement to sell real estate for payments to be
made within specified time and providing forfeiture of money paid upon
failure to make payment, where the purchaser does not agree to purchase, to
make payment, or to bind himself in any way other than the forfeiture of the
payments made. 36 As hereinbefore discussed, this is not the situation
obtaining in the case at bar.
While there is jurisprudence to the effect that a contract which provides that
the initial payment shall be totally forfeited in case of default in payment is
to be considered as an option contract, 37 still we are not inclined to conform
with the findings of respondent court and the court a quo that the contract
executed between the parties is an option contract, for the reason that the
parties were already contemplating the payment of the balance of the
24

SALES
purchase price, and were not merely quoting an agreed value for the
property. The term "balance," connotes a remainder or something remaining
from the original total sum already agreed upon.

in a proper case, or it has been stipulated that, notwithstanding any such


contingency, the vendee shall be bound to make the payment. A mere act of
trespass shall not authorize the suspension of the payment of the price.

In other words, the alleged option money of P50,000.00 was actually earnest
money which was intended to form part of the purchase price. The amount of
P50,000.00 was not distinct from the cause or consideration for the sale of
the property, but was itself a part thereof. It is a statutory rule that whenever
earnest money is given in a contract of sale, it shall be considered as part of
the price and as proof of the perfection of the contract. 38 It constitutes an
advance payment and must, therefore, be deducted from the total price. Also,
earnest money is given by the buyer to the seller to bind the bargain.

Respondent court refused to apply the aforequoted provision of law on the


erroneous assumption that the true agreement between the parties was a
contract of option. As we have hereinbefore discussed, it was not an option
contract but a perfected contract to sell. Verily, therefore, Article 1590 would
properly apply.

There are clear distinctions between earnest money and option money, viz.:
(a) earnest money is part of the purchase price, while option money ids the
money given as a distinct consideration for an option contract; (b) earnest
money is given only where there is already a sale, while option money
applies to a sale not yet perfected; and (c) when earnest money is given, the
buyer is bound to pay the balance, while when the would-be buyer gives
option money, he is not required to buy. 39
The aforequoted characteristics of earnest money are apparent in the socalled option contract under review, even though it was called "option
money" by the parties. In addition, private respondents failed to show that the
payment of the balance of the purchase price was only a condition precedent
to the acceptance of the offer or to the exercise of the right to buy. On the
contrary, it has been sufficiently established that such payment was but an
element of the performance of petitioner's obligation under the contract to
sell. 40
II
1. This brings us to the second issue as to whether or not there was valid
suspension of payment of the purchase price by petitioner and the legal
consequences thereof. To justify its failure to pay the purchase price within
the agreed period, petitioner invokes Article 1590 of the civil Code which
provides:
Art. 1590. Should the vendee be disturbed in the possession or ownership of
the thing acquired, or should he have reasonable grounds to fear such
disturbance, by a vindicatory action or a foreclosure of mortgage, he may
suspend the payment of the price until the vendor has caused the disturbance
or danger to cease, unless the latter gives security for the return of the price

Both lower courts, however, are in accord that since Civil Case No. 89-5541
filed against the parties herein involved only the eastern half of the land
subject of the deed of sale between petitioner and the Jimenez brothers, it did
not, therefore, have any adverse effect on private respondents' title and
ownership over the western half of the land which is covered by the contract
subject of the present case. We have gone over the complaint for recovery of
ownership filed in said case 41 and we are not persuaded by the factual
findings made by said courts. At a glance, it is easily discernible that,
although the complaint prayed for the annulment only of the contract of sale
executed between petitioner and the Jimenez brothers, the same likewise
prayed for the recovery of therein plaintiffs' share in that parcel of land
specifically covered by TCT No. 309773. In other words, the plaintiffs
therein were claiming to be co-owners of the entire parcel of land described
in TCT No. 309773, and not only of a portion thereof nor, as incorrectly
interpreted by the lower courts, did their claim pertain exclusively to the
eastern half adjudicated to the Jimenez brothers.
Such being the case, petitioner was justified in suspending payment of the
balance of the purchase price by reason of the aforesaid vindicatory action
filed against it. The assurance made by private respondents that petitioner did
not have to worry about the case because it was pure and simple
harassment 42 is not the kind of guaranty contemplated under the exceptive
clause in Article 1590 wherein the vendor is bound to make payment even
with the existence of a vindicatory action if the vendee should give a security
for the return of the price.
2. Be that as it may, and the validity of the suspension of payment
notwithstanding, we find and hold that private respondents may no longer be
compelled to sell and deliver the subject property to petitioner for two
reasons, that is, petitioner's failure to duly effect the consignation of the
purchase price after the disturbance had ceased; and, secondarily, the fact that
the contract to sell had been validly rescinded by private respondents.
25

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The records of this case reveal that as early as February 28, 1990 when
petitioner caused its exclusive option to be annotated anew on the certificate
of title, it already knew of the dismissal of civil Case No. 89-5541. However,
it was only on April 16, 1990 that petitioner, through its counsel, wrote
private respondents expressing its willingness to pay the balance of the
purchase price upon the execution of the corresponding deed of absolute sale.
At most, that was merely a notice to pay. There was no proper tender of
payment nor consignation in this case as required by law.
The mere sending of a letter by the vendee expressing the intention to
pay, without the accompanying payment, is not considered a valid tender of
payment. 43 Besides, a mere tender of payment is not sufficient to compel
private respondents to deliver the property and execute the deed of absolute
sale. It is consignation which is essential in order to extinguish petitioner's
obligation to pay the balance of the purchase price. 44 The rule is different in
case of an option contract 45 or in legal redemption or in a sale with right to
repurchase, 46 wherein consignation is not necessary because these cases
involve an exercise of a right or privilege (to buy, redeem or repurchase)
rather than the discharge of an obligation, hence tender of payment would be
sufficient to preserve the right or privilege. This is because the provisions on
consignation are not applicable when there is no obligation to pay. 47 A
contract to sell, as in the case before us, involves the performance of an
obligation, not merely the exercise of a privilege of a right. consequently,
performance or payment may be effected not by tender of payment alone but
by both tender and consignation.
Furthermore, petitioner no longer had the right to suspend payment after the
disturbance ceased with the dismissal of the civil case filed against it.
Necessarily, therefore, its obligation to pay the balance again arose and
resumed after it received notice of such dismissal. Unfortunately, petitioner
failed to seasonably make payment, as in fact it has deposit the money with
the trial court when this case was originally filed therein.
By reason of petitioner's failure to comply with its obligation, private
respondents elected to resort to and did announce the rescission of the
contract through its letter to petitioner dated July 27, 1990. That written
notice of rescission is deemed sufficient under the circumstances. Article
1592 of the Civil Code which requires rescission either by judicial action or
notarial act is not applicable to a contract to sell. 48 Furthermore, judicial
action for rescission of a contract is not necessary where the contract
provides for automatic rescission in case of breach, 49 as in the contract
involved in the present controversy.

We are not unaware of the ruling in University of the Philippines vs. De los
Angeles, etc. 50 that the right to rescind is not absolute, being ever subject to
scrutiny and review by the proper court. It is our considered view, however,
that this rule applies to a situation where the extrajudicial rescission is
contested by the defaulting party. 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 51 otherwise, if said party does not oppose it, the extrajudicial
rescission shall have legal effect. 52
In the case at bar, it has been shown that although petitioner was duly
furnished and did receive a written notice of rescission which specified the
grounds therefore, it failed to reply thereto or protest against it. Its silence
thereon suggests an admission of the veracity and validity of private
respondents' claim. 53 Furthermore, the initiative of instituting suit was
transferred from the rescinder to the defaulter by virtue of the automatic
rescission clause in the contract.54 But then, the records bear out the fact that
aside from the lackadaisical manner with which petitioner treated private
respondents' latter of cancellation, it utterly failed to seriously seek redress
from the court for the enforcement of its alleged rights under the contract. If
private respondents had not taken the initiative of filing Civil Case No. 7532,
evidently petitioner had no intention to take any legal action to compel
specific performance from the former. By such cavalier disregard, it has been
effectively estopped from seeking the affirmative relief it now desires but
which it had theretofore disdained.
WHEREFORE, on the foregoing modificatory premises, and considering that
the same result has been reached by respondent Court of Appeals with
respect to the relief awarded to private respondents by the court a quo which
we find to be correct, its assailed judgment in CA-G.R. CV No. 34767 is
hereby AFFIRMED.
SO ORDERED.

6.) Republic of the Philippines


SUPREME COURT
Manila
26

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EN BANC
G.R. No. L-29155 May 13, 1970
UNIVERSAL FOOD CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and
VICTORIANO N. FRANCISCO, respondents.
Wigberto E. Taada 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
permanent chief chemist of the corporation as he is 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 expansion of the business, in 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,
27

SALES
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, SecretaryTreasurer 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
28

SALES
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 VicePresident 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 therein 3 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
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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,
30

SALES
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.
31

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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 VicePresident 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 VicePresident 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
32

SALES
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.

Separate Opinions

REYES, J.B.L., J., concurring:


I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I
would like to add that the argument of petitioner, that the rescission
demanded by the respondent-appellee, Magdalo Francisco, should be denied
because under Article 1383 of the Civil Code of the Philippines rescission
can not be demanded except when the party suffering damage has no other
legal means to obtain reparation, is predicated on a failure to distinguish
between a rescission for breach of contract under Article 1191 of the Civil
Code and a rescission by reason of lesion or economic prejudice, under
Article 1381, et seq. The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is subordinated
to anything other than the culpable breach of his obligations by the
defendant. This rescission is in principal action retaliatory in character, it
being unjust that a party be held bound to fulfill his promises when the other
violates his. As expressed in the old Latin aphorism: "Non servanti fidem,
33

SALES
non est fides servanda." Hence, the reparation of damages for the breach is
purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice,
the cause of action is subordinated to the existence of that prejudice, because
it is the raison d'etre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384.
But the operation of these two articles is limited to the cases of rescission
forlesion enumerated in Article 1381 of the Civil Code of the Philippines,
and does not, apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective
technique of the new Code that terms both instances as rescission without
distinctions between them; unlike the previous Spanish Civil Code of 1889,
that differentiated "resolution" for breach of stipulations from "rescission" by
reason of lesion or damage. 1 But the terminological vagueness does not
justify confusing one case with the other, considering the patent difference in
causes and results of either action.

being unjust that a party be held bound to fulfill his promises when the other
violates his. As expressed in the old Latin aphorism: "Non servanti fidem,
non est fides servanda." Hence, the reparation of damages for the breach is
purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice,
the cause of action is subordinated to the existence of that prejudice, because
it is the raison d'etre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384.
But the operation of these two articles is limited to the cases of rescission
forlesion enumerated in Article 1381 of the Civil Code of the Philippines,
and does not, apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective
technique of the new Code that terms both instances as rescission without
distinctions between them; unlike the previous Spanish Civil Code of 1889,
that differentiated "resolution" for breach of stipulations from "rescission" by
reason of lesion or damage. 1 But the terminological vagueness does not
justify confusing one case with the other, considering the patent difference in
causes and results of either action.

Separate Opinions
REYES, J.B.L., J., concurring:
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I
would like to add that the argument of petitioner, that the rescission
demanded by the respondent-appellee, Magdalo Francisco, should be denied
because under Article 1383 of the Civil Code of the Philippines rescission
can not be demanded except when the party suffering damage has no other
legal means to obtain reparation, is predicated on a failure to distinguish
between a rescission for breach of contract under Article 1191 of the Civil
Code and a rescission by reason of lesion or economic prejudice, under
Article 1381, et seq. The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is subordinated
to anything other than the culpable breach of his obligations by the
defendant. This rescission is in principal action retaliatory in character, it

7.) G.R. No. 73893


June 30, 1987

34

SALES
MARGARITA SURIA AND GRACIA R. JOVEN, petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT, HON. JOSE MAR
GARCIA (Presiding Judge of the RTC of Laguna, Branch XXIV, Bian,
Laguna), and SPOUSES HERMINIO A. CRISPIN and NATIVIDAD C.
CRISPIN,respondents.
De Castro & Cagampang Law Offices for petitioners.
Nelson A. Loyola for private respondents.
RESOLUTION

GUTIERREZ, JR., J.:

having been made on September 24, 1981, February 7, 1982, February 24,
1983, March 13, 1983, and April 12, 1983, but defendants for no justifiable
reason failed to comply with the demands of plaintiffs;
6. x x x
On November 14, 1983, petitioners filed their answer with counterclaim.
On July 16, 1984, petitioners filed a motion to disniiss complaint, alleging
that:
1. That plaintiffs are not entitled to the subsidiary remedy of rescission
because of the presence of remedy of foreclosure in the Deed of Sale with
Mortgage (Annex "A", Complaint);

As factual background, we quote from the Court of Appeals' decision:

2. That, assuming arguendo that rescission were a proper remedy, it is


apparent in the face of the Complaint that the plaintiffs failed to comply with
the requirements of law, hence the rescission was ineffective, illegal, null and
void, and invalid.

The factual and procedural antecedents of this case may be briefly stated as
follows:

On July 26, 1984, private-respondents filed their opposition to the above


motion.

On June 20, 1983, private-respondents filed a complaint before the Regional


Trial Court of Laguna, Branch XXIV, for rescission of contract and damages,
alleging among others:

In the meantime, on August 6, 1984, petitioners formerly offered to pay


private-respondents all the outstanding balance under the Deed of Sale with
Mortgage, which offer was rejected by private respondents on August 7,
1984.

This is a petition for review on certiorari of the decision of the Court of


Appeals dismissing for lack of merit the petition for certiorari filed therein.

1. x x x
2. That on March 31, 1975, plaintiffs being the owners of a parcel of land
situated at Barrio San Antonio, San Pedro, Laguna, entered into a contract
denominated as DEED OF SALE WITH MORTGAGE, with herein
defendants, a true copy of said contract (which is made an integral part
hereof) is hereto attached as ANNEX ."A":
3. x x x
4. That the defendants violated the terms and conditions of the contract by
failing to pay the stipulated installments and in fact only one installment due
in July 1975 (paid very late in the month of September, 1975) was made all
the others remaining unsettled to the present time;
5. That repeated verbal and written demands were made by plaintiff upon the
defendants for the payment of the installments, some of said written demands

On November 26, 1984, the respondent-Court denied the motion to dismiss.


The order reads:
Defendants through counsel filed a Second Motion to Dismiss dated July 24,
1984 based on an affirmative defense raised in their answer, that is, that the
complaint fails to state a cause of action for rescission against defendants
because (1) plaintiffs are not entitled to the subsidiary remedy of
rescission because of the presence of the remedy of foreclosure in the Deed
of Sale with Mortgage (Annex "A", Complaint) and (2) assuming
arguendo that rescission were a proper remedy, it is apparent from the face of
the Complaint that the plaintiffs failed to comply with the requirements of
law, hence the rescission was ineffective, illegal, null and void, and invalid.
After a careful perusal of the allegations of the complaint considered in the
light of existing applicable law and jurisprudence touching on the matters in
35

SALES
issue, and mindful of the settled rule that in a motion to dismiss grounded on
lack of cause of action the allegations of the complaint must be assumed to
be true, the Court finds and holds that the motion to dismiss dated July 24,
1984 filed by defendants lacks merit and therefore denied the same.
SO ORDERED.
On January 31, 1985, petitioners filed a motion for reconsideration to which
private-respondents filed their opposition on February 11, 1985. On February
19, 1985, petitioners filed their reply.
On March 13, 1985, the respondent-Court denied the motion for
reconsideration. The order reads in part:
xxx

xxx

xxx

Perusing the grounds invoked by the defendants in their Motion for


Reconsideration and Reply as well as the objections raised by plaintiffs in
their opposition, and it appearing that in its Order dated November 26, 1984,
the Court has sufficiently, althou (sic) succinctly stated its reason for denying
the motion to dismiss dated July 16, 1984, that is, for lack of merit, the Court
finds no overriding reason or justification from the grounds invoked in the
said Motion for Reconsideration for it to reconsider, change, modify, or set
aside its Order dated November 26, 1984. The Court still believes that the
two (2) grounds invoked by defendants in their Motion to Dismiss dated July
16, 1984 are not meritorious when considered in the light of prevailing law
and jurisprudence and the hypothetically admitted allegations of the
complaint, and for that reason it denied the motion to dismiss in its said order
of November 26, 1984.
The instant Motion for Reconsideration is therefore denied for lack of merit.
(Pp, 29-32, Rollo)
The questions raised by petitioner are as follows:
I
IN A DEED OF SALE, WHICH IS COUPLED WITH A MORTGAGE TO
SECURE PAYMENT OF THE BALANCE OF THE PURCHASE PRICE,
MAY THE SELLER RESORT TO THE REMEDY OF RESCISSION
UNDER ARTICLE 1191 OF THE CIVIL CODE WHICH PROVIDES FOR
THE SUBSIDIARY AND EQUITABLE REMEDY OF RESCISSION IN
CASE OF BREACH OF RECIPROCAL OBLIGATIONS?

Otherwise stated,
IS THE SUBSIDIARY AND EQUITABLE REMEDY OF RESCISSION
AVAILABLE IN THE PRESENCE OF A REMEDY OF FORECLOSURE
IN THE LIGHT OF THE EXPRESS PROVISION OF ARTICLE 1383 OF
THE CIVIL CODE THAT: '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?
xxx

xxx

xxx

II
MAY THE SELLER LEGALLY DEMAND RESCISSION OF THE DEED
OF SALE WITH MORTGAGE WITHOUT OFFERING TO RESTORE TO
THE BUYER WHAT HE HAS PAID, AS REQUIRED BY ARTICLE 1385,
OR COMPLYING WITH THE REQUIREMENTS OF THE MACEDA
LAW (REPUBLIC ACT 6552) GRANTING THE BUYER A GRACE
PERIOD TO PAY WITHOUT INTEREST, AND, IN CASE OF
CANCELLATION IN CASE THE BUYER STILL COULD NOT PAY
WITHIN THE GRACE PERIOD, REQUIRING THE SELLER TO ORDER
PAYMENT OF THE CASH SURRENDER VALUE BEFORE THE
CANCELLATION MAY LEGALLY TAKE EFFECT (SEC. 3[b], LAST
PAR., REP. ACT 6552)?
The petition was denied in a minute resolution on June 13, 1986 but was
given due course on September 29, 1986 on a motion for reconsideration.
The petition is impressed with merit.
The respondent court rejected the petitioners' reliance on paragraph (H) of
the contract which grants to the vendors mortgagees the right to foreclose "in
the event of the failure of the vendees-mortgagors to comply with any
provisions of this mortgage." According to the appellate court, this
stipulation merely recognizes the right of the vendors to foreclose and realize
on the mortgage but does not preclude them from availing of other remedies
under the law, such as rescission of contract and damages under Articles 1191
and 1170 of the Civil Code in relation to Republic Act No. 6552.
The appellate court committed reversible error. As will be explained later,
Art. 1191 on reciprocal obligations is not applicable under the facts of this
case. Moreover, Art. 1383 of the Civil Code provides:
36

SALES
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.
The concurring opinion of Justice J.B.L. Reyes in Universal Food Corp. v.
Court of Appeals (33 SCRA 22) was cited by the appellate court.
In that case, Justice J.B.L. Reyes explained:
xxx

xxx

xxx

... The rescission on account of breach of stipulations is not predicated on


injury to economic interests of the party plaintiff but on the breach of faith by
the defendant, that violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character, it being unjust that a
party be held bound to fulfill his promises when the other violates his. As
expressed in the old Latin aphorism: "Non servanti fidem, non est fides
servanda," Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice,
the cause of action is subordinated to the existence of that prejudice, because
it is the raison d 'etre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384.
But the operation of these two articles is limited to the cases of rescission for
lesion enumerated in Article 1381 of the Civil Code of the Philippines, and
does not apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective
technique of the new Code that terms both instances as "rescission" without
distinctions between them; unlike the previous Spanish Civil Code of 1889,
that differentiated "resolution" for breach of stipulations from "rescission" by
reason of lesion or damage. But the terminological vagueness does not justify
confusing one case with the other, considering the patent difference in causes
and results of either action.
According to the private respondents, the applicable law is Article 1191 of
the Civil Code which provides:

The power to rescind obligations is implied in reciprocal ones, in case one of


the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of
the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfiument, 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.
There is no dispute that the parties entered into a contract of sale as
distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the ownership
of and to deliver a determinate thing to the buyer, who in turn, is obligated to
pay a price certain in money or its equivalent (Art. 1458, Civil Code). From
the respondents' own arguments, we note that they have fully complied with
their part of the reciprocal obligation. As a matter of fact, they have already
parted with the title as evidenced by the transfer certificate of title in the
petitioners' name as of June 27, 1975.
The buyer, in tum, fulfilled his end of the bargain when he executed the deed
of mortgage. The payments on an installment basis secured by the execution
of a mortgage took the place of a cash payment. In other words, the
relationship between the parties is no longer one of buyer and seller because
the contract of sale has been perfected and consummated. It is already one of
a mortgagor and a mortgagee. In consideration of the petitioners'promise to
pay on installment basis the sum they owe the respondents, the latter have
accepted the mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the
cited opinion of Justice J.B.L. Reyes. The petitioners' breach of obligations is
not with respect to the perfected contract of sale but in the obligations created
by the mortgage contract. The remedy of rescission is not a principal action
retaliatory in character but becomes a subsidiary one which by law is
available only in the absence of any other legal remedy. (Art. 1384, Civil
Code).
37

SALES
Foreclosure here is not only a remedy accorded by law but, as earlier stated,
is a specific provision found in the contract between the parties.
The petitioners are correct in citing this Court's ruling in Villaruel v. Tan
King (43 Phil. 251) where we Stated:
At the outset it must be said that since the subject-matter of the sale in
question is real property, it does not come strictly within the provisions of
article 1124 of the Civil Code, but is rather subjected to the stipulations
agreed upon by the contracting parties and to the provisions of Article 1504
of the Civil Code.
The "pacto comisorio" of "ley comisoria" is nothing more than a condition
subsequent of the contract of purchase and sale. Considered carefully, it is
the very condition subsequent that is always attached to all bilateral
obligations according to article 1124; except that when applied to real
property it is not within the scope of said article 1124, and it is subordinate to
the stipulations made by the contracting parties and to the provisions of the
article on which we are now commenting" (article 1504). (Manresa, Civil
Code, volume 10, page 286, second edition.)

The petitioners have offered to pay au past due accounts. Considering the
lower purchasing value of the peso in terms of prices of real estate today, the
respondents are correct in stating they have suffered losses. However, they
are also to blame for trusting persons who could not or would not comply
with their obligations in time. They could have foreclosed on the mortgage
immediately when it fell due instead of waiting all these years while trying to
enforce the wrong remedy.
WHEREFORE, the petition is hereby GRANTED. The Intermediate
Appellate Court's decision dated November 8, 1985 and the resolution dated
December 6, 1985 and February 28, 1986 are REVERSED and SET ASIDE.
The petitioners are ordered to pay the balance of their indebtedness under the
Deed of Absolute Sale with Mortgage with legal interests from the second
installment due on October 24, 1975 until fully paid, failing which the
respondents may resort to foreclosure.
SO ORDERED.

Now, in the contract of purchase and sale before us, the parties stipulated that
the payment of the balance of one thousand pesos (P1,000) was guaranteed
by the mortgage of the house that was sold. This agreement has the two-fold
effect of acknowledging indisputably that the sale had been consummated, so
much so that the vendee was disposing of it by mortgaging it to the vendor,
and of waiving the pacto comisorio, that is, the resolution of the sale in the
event of failure to pay the one thousand pesos (P1,000) such waiver being
proved by the execution of the mortgage to guarantee the payment, and in
accord therewith the vendor's adequate remedy, in case of nonpayment, is the
foreclosure of such mortgage. (at pp. 255-256).
xxx

xxx

xxx

There is, therefore, no cause for the resolution of the sale as prayed for by the
plaintiff. His action, at all events, should have been one for the foreclosure of
the mortgage, which is not the action brought in this case.

8.) Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

Article 1124 of the Civil Code, as we have seen, is not applicable to this case.
Neither is the doctrine enunciated in the case of Ocejo, Perez & Co. v.
International Banking Corporation (37 Phil. 631), which plaintiff alleges to
be applicable, because that principle has reference to the sale of personal
property. (at p. 257)

G.R. No. 107207 November 23, 1995


VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE
ONGSIONG, respondents.
38

SALES
VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a
contract for the sale of a parcel of land for a cause traceable to his own
failure to have the squatters on the subject property evicted within the
contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business
of production, manufacture and exportation of perlite filter aids, permalite
insulation and processed perlite ore. In 1988, petitioner and his foreign
partners decided to put up a central warehouse in Metro Manila on a land
area of approximately 2,000 square meters. The project was made known to
several freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife,
accompanied by a broker, offered a parcel of land measuring 1,952 square
meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the lot
was covered by TCT No. 361402 in the name of private respondent
Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except
for the presence of squatters in the area, he found the place suitable for a
central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he
advance the amount of P50,000.00 which could be used in taking up an
ejectment case against the squatters, private respondent would agree to sell
the property for only P800.00 per square meter. Petitioner expressed his
concurrence. On 09 June 1988, a contract, denominated "Deed of
Conditional Sale," was executed between petitioner and private respondent.
The simply-drawn contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines
this 9th day of June, 1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino
and residing at 105 Simoun St., Quezon City, Metro Manila, hereinafter
referred to as the VENDOR;

VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino,


and residing at 110 San Miguel St., Plainview Subd., Mandaluyong Metro
Manila, hereinafter referred to as the VENDEE:
W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total
area of ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952)
SQUARE METERS, more or less, located in Barrio San Dionisio,
Municipality of Paraaque, Province of Rizal, covered by TCT No. 361402
issued by the Registry of Deeds of Pasig and more particularly described as
follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and
the VENDOR has accepted the offer, subject to the terms and conditions
hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION
FIVE HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS
(P1,561,600.00) ONLY, Philippine Currency, payable by VENDEE to in to
(sic) manner set forth, the VENDOR agrees to sell to the VENDEE, their
heirs, successors, administrators, executors, assign, all her rights, titles and
interest in and to the property mentioned in the FIRST WHEREAS
CLAUSE, subject to the following terms and conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY
Philippine Currency, is to be paid upon signing and execution of this
instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS
(P1,511,600.00) ONLY shall be paid 45 days after the removal of all
squatters from the above described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR
without necessity of demand shall immediately sign, execute, acknowledged
(sic) and deliver the corresponding deed of absolute sale in favor of the
VENDEE free from all liens and encumbrances and all Real Estate taxes are
all paid and updated.

-and39

SALES
It is hereby agreed, covenanted and stipulated by and between the parties
hereto that if after 60 days from the date of the signing of this contract the
VENDOR shall not be able to remove the squatters from the property being
purchased, the downpayment made by the buyer shall be returned/reimbursed
by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the
balance of the purchase price of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY
after 45 days from written notification to the VENDEE of the removal of the
squatters from the property being purchased, the FIFTY THOUSAND
PESOS (P50,000.00) previously paid as downpayment shall be forfeited in
favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp,
transfer fee, assurances and such other fees and expenses as may be
necessary to transfer the title to the name of the VENDEE shall be for the
account of the VENDEE while capital gains tax shall be paid by the
VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in
the City of Makati MM, Philippines on this 9th day of June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.
DE ONGSIONG

In a letter, dated 07 April 1989, private respondent sought to return the


P50,000.00 she received from petitioner since, she said, she could not "get
rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for
petitioner, in his reply of 17 April 1989, refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering
the favorable decision rendered by the Court and the writ of execution issued
pursuant thereto, it is now possible to eject the squatters from the premises of
the subject property, for which reason, he proposes that he shall take it upon
himself to eject the squatters, provided, that expenses which shall be incurred
by reason thereof shall be chargeable to the purchase price of the land. 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"),
through its Regional Director for Luzon, Farley O. Viloria, asked the
Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21
April 1989 within which to relocate and transfer the squatter families. Acting
favorably on the request, the court suspended the enforcement of the writ of
execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of
the 45-day grace period and his client's willingness to "underwrite the
expenses for the execution of the judgment and ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private
respondent, advised Atty. Apostol that the Deed of Conditional Sale had been
rendered null and void by virtue of his client's failure to evict the squatters
from the premises within the agreed 60-day period. He added that private
respondent had "decided to retain the property." 6

Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz

premises. The decision was handed down beyond the 60-day period (expiring
09 August 1988) stipulated in the contract. The writ of execution of the
judgment was issued, still later, on 30 March 1989.

On 23 June 1989, Atty. Apostol wrote back to explain:


1

Alfonso Flores, in behalf of private respondent, forthwith received and


acknowledged a check for P50,000.002 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for ejectment
(Civil Case No. 7579) against Melchor Musa and 29 other squatter families
with the Metropolitan Trial Court of Paraaque. A few months later, or on 21
February 1989, judgment was rendered ordering the defendants to vacate the

The contract of sale between the parties was perfected from the very moment
that there was a meeting of the minds of the parties upon the subject lot and
the price in the amount of P1,561,600.00. Moreover, the contract had already
been partially fulfilled and executed upon receipt of the downpayment of
your client. Ms. Ongsiong is precluded from rejecting its binding effects
relying upon her inability to eject the squatters from the premises of subject
property during the agreed period. Suffice it to state that, the provision of the
Deed of Conditional Sale do not grant her the option or prerogative to rescind
40

SALES
the contract and to retain the property should she fail to comply with the
obligation she has assumed under the contract. In fact, a perusal of the terms
and conditions of the contract clearly shows that the right to rescind the
contract and to demand the return/reimbursement of the downpayment is
granted to our client for his protection.
Instead, however, of availing himself of the power to rescind the contract and
demand the return, reimbursement of the downpayment, our client had opted
to take it upon himself to eject the squatters from the premises. Precisely, we
refer you to our letters addressed to your client dated April 17, 1989 and June
8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is
given to the injured party. Undoubtedly, under the circumstances, our client
is the injured party.
Furthermore, your client has not complied with her obligation under their
contract in good faith. It is undeniable that Ms. Ongsiong deliberately refused
to exert efforts to eject the squatters from the premises of the subject property
and her decision to retain the property was brought about by the sudden
increase in the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand
to execute the absolute Deed of Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted by
petitioner's continued refusal to accept the return of the P50,000.00 advance
payment, filed with the Regional Trial Court of Makati, Branch 133, Civil
Case No. 89-4394 for rescission of the deed of "conditional" sale, plus
damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued
an alias writ of execution in Civil Case No. 7579 on motion of private
respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court
of Makati 8 rendered decision holding that private respondent had no right to
rescind the contract since it was she who "violated her obligation to eject the
squatters from the subject property" and that petitioner, being the injured
party, was the party who could, under Article 1191 of the Civil Code, rescind
the agreement. The court ruled that the provisions in the contract relating to
(a) the return/reimbursement of the P50,000.00 if the vendor were to fail in
her obligation to free the property from squatters within the stipulated period

or (b), upon the other hand, the sum's forfeiture by the vendor if the vendee
were to fail in paying the agreed purchase price, amounted to "penalty
clauses". The court added:
This Court is not convinced of the ground relied upon by the plaintiff in
seeking the rescission, namely: (1) he (sic) is afraid of the squatters; and (2)
she has spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3,
1990). Militating against her profession of good faith is plaintiffs conduct
which is not in accord with the rules of fair play and justice. Notably, she
caused the issuance of an alias writ of execution on August 25, 1989 (Exh. 6)
in the ejectment suit which was almost two months after she filed the
complaint before this Court on June 27, 1989. If she were really afraid of the
squatters, then she should not have pursued the issuance of an alias writ of
execution. Besides, she did not even report to the police the alleged phone
threats from the squatters. To the mind of the Court, the so-called squatter
factor is simply factuitous (sic). 9
The lower court, accordingly, dismissed the complaint and ordered, instead,
private respondent to eject or cause the ejectment of the squatters from the
property and to execute the absolute deed of conveyance upon payment of
the full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the
appellate court rendered its decision. 10It opined that the contract entered into
by the parties was subject to a resolutory condition, i.e., the ejectment of the
squatters from the land, the non-occurrence of which resulted in the failure of
the object of the contract; that private respondent substantially complied with
her obligation to evict the squatters; that it was petitioner who was not ready
to pay the purchase price and fulfill his part of the contract, and that the
provision requiring a mandatory return/reimbursement of the P50,000.00 in
case private respondent would fail to eject the squatters within the 60-day
period was not a penal clause. Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE,
and a new one entered declaring the contract of conditional sale dated June 9,
1988 cancelled and ordering the defendant-appellee to accept the return of
the downpayment in the amount of P50,000.00 which was deposited in the
court below. No pronouncement as to costs. 11
Failing to obtain a reconsideration, petitioner filed this petition for review
on certiorari raising issues that, in fine, center on the nature of the contract
adverted to and the P50,000.00 remittance made by petitioner.
41

SALES
A perfected contract of sale may either be absolute or
conditional 12 depending on whether the agreement is devoid of, or subject to,
any condition imposed on the passing of title of the thing to be conveyed or
on the obligation of a party thereto. When ownership is retained until the
fulfillment of a positive condition the breach of the condition will simply
prevent the duty to convey title from acquiring an obligatory force. If the
condition is imposed on an obligation of a party which is not complied with,
the other party may either refuse to proceed or waive said condition (Art.
1545, Civil Code). Where, of course, the condition is imposed upon
the perfection of the contract itself, the failure of such condition would
prevent the juridical relation itself from coming into existence. 13
In determining the real character of the contract, the title given to it by the
parties is not as much significant as its substance. For example, a deed of
sale, although denominated as a deed of conditional sale, may be treated as
absolute in nature, if title to the property sold is not reserved in the vendor or
if the vendor is not granted the right to unilaterally rescind the contract
predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed
condition. 14
The term "condition" in the context of a perfected contract of sale pertains, in
reality, to the compliance by one party of an undertaking the fulfillment of
which would beckon, in turn, the demandability of the reciprocal prestation
of the other party. The reciprocal obligations referred to would normally be,
in the case of vendee, the payment of the agreed purchase price and, in the
case of the vendor, the fulfillment of certain express warranties (which, in the
case at bench is the timely eviction of the squatters on the property).
It would be futile to challenge the agreement here in question as not being a
duly perfected contract. A sale is at once perfected when a person (the seller)
obligates himself, for a price certain, to deliver and to transfer ownership of a
specified thing or right to another (the buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified to be
a 1,952-square meter lot in San Dionisio, Paraaque, Rizal, covered by
Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig
and therein technically described. The purchase price was fixed at
P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the
document of sale and the balance of P1,511,600.00 payable "45 days after the
removal of all squatters from the above described property."

From the moment the contract is perfected, the parties are bound not only to
the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good
faith, usage and law. Under the agreement, private respondent is obligated to
evict the squatters on the property. The ejectment of the squatters is
a condition the operative act of which sets into motion the period of
compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the
property" within the stipulated period gives petitioner the right to either
refuse to proceed with the agreement or waive that condition in consonance
with Article 1545 of the Civil Code. 16 This option clearly belongs to
petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of
private respondent does not constitute a "potestative condition dependent
solely on his will" that might, otherwise, be void in accordance with Article
1182 of the Civil Code 17 but a "mixed" condition "dependent not on the will
of the vendor alone but also of third persons like the squatters and
government agencies and personnel concerned." 18 We must hasten to add,
however, that where the so-called "potestative condition" is imposed not on
the birth of the obligation but on its fulfillment, only the obligation is
avoided, leaving unaffected the obligation itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code,
aforementioned, allows the obligee to choose between proceeding with the
agreement or waiving the performance of the condition. It is this provision
which is the pertinent rule in the case at bench. Here, evidently, petitioner has
waived the performance of the condition imposed on private respondent to
free the property from squatters. 20
In any case, private respondent's action for rescission is not warranted. She is
not the injured party. 21 The right of resolution of a party to an obligation
under Article 1191 of the Civil Code is predicated on a breach of faith by the
other party that violates the reciprocity between them. 22 It is private
respondent who has failed in her obligation under the contract. Petitioner did
not breach the agreement. He has agreed, in fact, to shoulder the expenses of
the execution of the judgment in the ejectment case and to make
arrangements with the sheriff to effect such execution. In his letter of 23 June
1989, counsel for petitioner has tendered payment and demanded forthwith
the execution of the deed of absolute sale. Parenthetically, this offer to pay,
having been made prior to the demand for rescission, assuming for the sake
of argument that such a demand is proper under Article 1592 23 of the Civil
42

SALES
Code, would likewise suffice to defeat private respondent's prerogative to
rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00
advance payment is reimbursable to petitioner or forfeitable by private
respondent, since, on the basis of our foregoing conclusions, the matter has
ceased to be an issue. Suffice it to say that petitioner having opted to proceed
with the sale, neither may petitioner demand its reimbursement from private
respondent nor may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby
REVERSED AND SET ASIDE, and another is entered ordering petitioner to
pay private respondent the balance of the purchase price and the latter to
execute the deed of absolute sale in favor of petitioner. No costs.
SO ORDERED.

9.) [G.R. No. 102784. February 28, 1996]


ROSA LIM, petitioner, vs. COURT OF APPEALS and PEOPLE OF
THE PHILIPPINES, respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS
ARE OBLIGATORY IN WHATEVER FORM ENTERED; PLACE OF
SIGNATURE IMMATERIAL; PARTY BOUND THEREON THE
MOMENT SHE AFFIXED HER SIGNATURE. - Rosa Lims signature
43

SALES
indeed appears on the upper portion of the receipt immediately below the
description of the items taken. We find that this fact does not have the effect
of altering the terms of the transaction from a contract of agency to sell on
commission basis to a contract of sale. Neither does it indicate absence or
vitiation of consent thereto on the part of Rosa Lim which would make the
contract void or voidable. The moment she affixed her signature thereon,
petitioner became bound by all the terms stipulated in the receipt. She, thus,
opened herself to all the legal obligations that may arise from their
breach. This is clear from Article 1356 of the New Civil Code which
provides: Contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
In the case before us, the parties did not execute a notarial will but a simple
contract of agency to sell on commission basis, thus making the position of
petitioners signature thereto immaterial.
2. ID.; ID.; CONTRACT OF AGENCY; NO FORMALITIES
REQUIRED. - There are some provisions of the law which require certain
formalities for particular contracts. The first is when the form is required for
the validity of the contract; the second is when it is required to make the
contract effective as against the third parties such as those mentioned in
Articles 1357 and 1358; and the third is when the form is required for the
purppose of proving the existence of the contract, such as those provided in
the Statute of Frauds in Article 1403. A contract of agency to sell on
commission basis does not belong to any of these three categories, hence, it
is valid and enforceable in whatever form it may be entered into.
3. REMEDIAL LAW; EVIDENCE; WEIGHT THEREOF NOT
DETERMINED BY SUPERIORITY IN NUMBERS OF WITNESSES.
- Weight of evidence is not determined mathematically by the numerical
superiority of the witnesses testifying to a given fact. It depends upon its
practical effect in inducing belief on the part of the judge trying the case.
4. ID.; ID.; CREDIBILITY; FINDINGS OF THE TRIAL AND
APPELLATE COURTS GENERALLY NOT INTERFERED WITH ON
APPEAL. - In the case at bench, both the trial court and the Court of
Appeals gave weight to the testimony of Vicky Suarez that she did not
authorize Rosa Lim to return the pieces of jewelry to Nadera. We shall not
disturb this finding of the respondent court. It is well settled that we should
not interfere with the judgment of the trial court in determining the
credibility of witnesses, unless there appears in the record some fact or
circumstances of weight and influence which has been overlooked or the
significance of which has been misinterpreted. The reason is that the trial

court is in a better position to determine questions involving credibility


having heard the witnesses and having observed their deportment and
manner of testifying during the trial.
5. CRIMINAL LAW; ESTAFA WITH ABUSE OF CONFIDENCE;
ELEMENTS. - The elements of estafa with abuse of confidence under this
subdivision are as follows: (1) That money, goods, or other personal property
be received by the offender in trust, or on commission, or for administration,
or under any other obligation involving the duty to make delivery of, or to
return, the same; (2) That there be misappropriation or conversion of such
money or property by the offender or denial on his part of such receipt; (3)
That such misappropriation or conversion or denial is to the prejudice of
another; and (4) That there is a demand made by the offended party to the
offender (Note: The 4th element is not necessary when there is evidence of
misappropriation of the goods by the defendant).
6. ID.; ID.; ID.; PRESENT IN CASE AT BAR. All the elements of estafa
under Article 315, Paragraph 1(b) of the Revised Penal Code, are present in
the case at bench. First, the receipt marked as Exhibit A proves that petitioner
Rosa Lim received the pieces of jewelry in trust from Vicky Suarez to be sold
on commission basis. Second, petitioner misappropriated or converted the
jewelry to her own use; and, third, such misappropriation obviously caused
damaged and prejudice to the private respondent.
APPEARANCES OF COUNSEL
Zosa & Quijano Law Offices for petitioner.
The Solicitor General for respondents.
DECISION
HERMOSISIMA, JR., J.:
This is a petition to review the Decision of the Court of Appeals in CA-G.R.
CR No. 10290, entitled People v. Rosa Lim, promulgated on August 30,
1991.
On January 26, 1989, an Information for Estafa was filed against petitioner
Rosa Lim before Branch 92 of the Regional Trial Court of Quezon City.
[1]
The Information reads:

44

SALES
That on or about the 8th day of October 1987, in Quezon City, Philippines
and within the jurisdiction of this Honorable Court, the said accused with
intent to gain, with unfaithfulness and/or abuse of confidence, did, then and
there, wilfully, unlawfully and feloniously defraud one VICTORIA
SUAREZ, in the following manner, to wit: on the date and place
aforementioned said accused got and received in trust from said complainant
one (1) ring 3.35 solo worth P169,000.00, Philippine Currency, with the
obligation to sell the same on commission basis and to turn over the proceeds
of the sale to said complainant or to return said jewelry if unsold, but the said
accused once in possession thereof and far from complying with her
obligation despite repeated demands therefor, misapplied, misappropriated
and converted the same to her own personal use and benefit, to the damage
and prejudice of the said offended party in the amount aforementioned and in
such other amount as may be awarded under the provisions of the Civil
Code.
CONTRARY TO LAW.[2]
After arraignment and trial on the merits, the trial court rendered judgment,
the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. Finding accused Rosa Lim GUILTY beyond reasonable doubt of the
offense of estafa as defined and penalized under Article 315, paragraph 1(b)
of the Revised Penal Code;
2. Sentencing her to suffer the Indeterminate penalty of FOUR (4) YEARS
and TWO (2) MONTHS of prision correccional as minimum, to TEN (10)
YEARS of prision mayor as maximum;
3. Ordering her to return to the offended party Mrs. Victoria Suarez the ring
or its value in the amount of P169,000 without subsidiary imprisonment in
case of insolvency; and
4. To pay costs.[3]
On appeal, the Court of Appeals affirmed the Judgment of conviction with
the modification that the penalty imposed shall be six (6) years, eight (8)
months and twenty- one (21) days to twenty (20) years in accordance with
Article 315, paragraph 1 of the Revised Penal Code. [4]

Petitioner filed a motion for reconsideration before the appellate court on


September 20, 1991, but the motion was denied in a Resolution dated
November 11, 1991.
In her final bid to exonerate herself, petitioner filed the instant petition for
review alleging the following grounds:
I
THE RESPONDENT COURT VIOLATED THE CONSTITUTION, THE
RULES OF COURT AND THE DECISION OF THIS HONORABLE
COURT IN NOT PASSING UPON THE FIRST AND THIRD ASSIGNED
ERRORS IN PETITIONERS BRIEF;
II
THE RESPONDENT COURT FAILED TO APPLY THE PRINCIPLE THAT
THE PAROL EVIDENCE RULE WAS WAIVED WHEN THE PRIVATE
PROSECUTOR CROSS-EXAMINED THE PETITIONER AND AURELIA
NADERA AND WHEN COMPLAINANT WAS CROSS-EXAMINED BY
THE COUNSEL FOR THE PETITIONER AS TO THE TRUE NATURE OF
THE AGREEMENT BETWEEN THE PARTIES WHEREIN IT WAS
DISCLOSED THAT THE TRUE AGREEMENT OF THE PARTIES WAS A
SALE OF JEWELRIES AND NOT WHAT WAS EMBODIED IN THE
RECEIPT MARKED AS EXHIBIT A WHICH WAS RELIED UPON BY
THE RESPONDENT COURT IN AFFIRMING THE JUDGMENT OF
CONVICTION AGAINST HEREIN PETITIONER; and
III
THE RESPONDENT COURT FAILED TO APPLY IN THIS CASE THE
PRINCIPLE ENUNCIATED BY THIS HONORABLE COURT TO THE
EFFECT THAT ACCUSATION IS NOT, ACCORDING TO THE
FUNDAMENTAL LAW, SYNONYMOUS WITH GUILT: THE
PROSECUTION MUST OVERTHROW THE PRESUMPTION OF
INNOCENCE WITH PROOF OF GUILT BEYOND REASONABLE
DOUBT. TO MEET THIS STANDARD, THERE IS NEED FOR THE
MOST CAREFUL SCRUTINY OF THE TESTIMONY OF THE STATE,
BOTH ORAL AND DOCUMENTARY, INDEPENDENTLY OF
WHATEVER DEFENSE IS OFFERED BY THE ACCUSED. ONLY IF THE
JUDGE BELOW AND THE APPELLATE TRIBUNAL COULD ARRIVE
AT A CONCLUSION THAT THE CRIME HAD BEEN COMMITTED
PRECISELY BY THE PERSON ON TRIAL UNDER SUCH AN
45

SALES
EXACTING TEST SHOULD SENTENCE THUS REQUIRED THAT
EVERY INNOCENCE BE DULY TAKEN INTO ACCOUNT. THE PROOF
AGAINST HIM MUST SURVIVE THE TEST OF REASON, THE
STRONGEST SUSPICION MUST NOT BE PERMITTED TO SWAY
JUDGMENT. (People v. Austria, 195 SCRA 700)[5]
Herein the pertinent facts as alleged by the prosecution.
On or about October 8, 1987, petitioner Rosa Lim who had come from Cebu
received from private respondent Victoria Suarez the following two pieces of
jewelry: one (1) 3.35 carat diamond ring worth P169,000.00 and one (1)
bracelet worth P170,000.00, to be sold on commission basis. The agreement
was reflected in a receipt marked as Exhibit A[6] for the prosecution. The
transaction took place at the Sir Williams Apartelle in Timog Avenue,
Quezon City, where Rosa Lim was temporarily billeted.
On December 15, 1987, petitioner returned the bracelet to Vicky Suarez, but
failed to return the diamond ring or to turn over the proceeds thereof if
sold. As a result, private complainant, aside from making verbal demands,
wrote a demand letter[7] to petitioner asking for the return of said ring or the
proceeds of the sale thereof. In response, petitioner, thru counsel, wrote a
letter[8] to private respondents counsel alleging that Rosa Lim had returned
both ring and bracelet to Vicky Suarez sometime in September, 1987, for
which reason, petitioner had no longer any liability to Mrs. Suarez insofar as
the pieces of jewelry were concerned. Irked, Vicky Suarez filed a complaint
for estafa under Article 315, par. 1(b) of the Revised Penal Code for which
the petitioner herein stands convicted.
Petitioner has a different version.
Rosa Lim admitted in court that she arrived in Manila from Cebu sometime
in October 1987, together with one Aurelia Nadera, who introduced
petitioner to private respondent, and that they were lodged at the Williams
Apartelle in Timog, Quezon City. Petitioner denied that the transaction was
for her to sell the two pieces of jewelry on commission basis. She told Mrs.
Suarez that she would consider buying the pieces of jewelry for her own use
and that she would inform the private complainant of such decision before
she goes back to Cebu. Thereafter, the petitioner took the pieces of jewelry
and told Mrs. Suarez to prepare the necessary paper for me to sign because I
was not yet prepare(d) to buy it.[9] After the document was prepared,
petitioner signed it. To prove that she did not agree to the terms of the receipt
regarding the sale on commission basis, petitioner insists that she signed the

aforesaid document on the upper portion thereof and not at the bottom where
a space is provided for the signature of the person(s) receiving the jewelry.[10]
On October 12, 1987 before departing for Cebu, petitioner called up Mrs.
Suarez by telephone in order to inform her that she was no longer interested
in the ring and bracelet. Mrs. Suarez replied that she was busy at the time and
so, she instructed the petitioner to give the pieces of jewelry to Aurelia
Nadera who would in turn give them back to the private complainant. The
petitioner did as she was told and gave the two pieces of jewelry to Nadera as
evidenced by a handwritten receipt, dated October 12, 1987. [11]
Two issues need to be resolved: First, what was the real transaction between
Rosa Lim and Vicky Suarez - a contract of agency to sell on commission
basis as set out in the receipt or a sale on credit; and, second, was the subject
diamond ring returned to Mrs. Suarez through Aurelia Nadera?
Petitioner maintains that she cannot be liable for estafa since she never
received the jewelries in trust or on commission basis from Vicky
Suarez. The real agreement between her and the private respondent was a
sale on credit with Mrs. Suarez as the owner-seller and petitioner as the
buyer, as indicated by the fact that petitioner did not sign on the blank space
provided for the signature of the person receiving the jewelry but at the upper
portion thereof immediately below the description of the items taken. [12]
The contention is far from meritorious.
The receipt marked as Exhibit A which establishes a contract of agency to
sell on commission basis between Vicky Suarez and Rosa Lim is herein
reproduced in order to come to a proper perspective:
THIS IS TO CERTIFY, that I received from Vicky
Suarez PINATUTUNAYAN KO na aking tinanggap kay _______________
the following jewelries:
ang mga alahas na sumusunod:
Description Price
Mga Uri Halaga
1 ring 3.35 dolo P 169,000.00
1 bracelet 170.000.00
46

SALES
total Kabuuan P 339.000.00
in good condition, to be sold in CASH ONLY within . . .days from date of
signing this receipt na nasa mabuting kalagayan upang ipagbili ng
KALIWAAN (ALCONTADO) lamang sa loob ng. . . araw mula ng ating
pagkalagdaan:
if I could not sell, I shall return all the jewelry within the period mentioned
above; if I would be able to sell, I shall immediately deliver and account the
whole proceeds of sale thereof to the owner of the jewelries at his/her
residence; my compensation or commission shall be the over-price on the
value of each jewelry quoted above. I am prohibited to sell any jewelry on
credit or by installment; deposit, give for safekeeping; lend, pledge or give as
security or guaranty under any circumstance or manner, any jewelry to other
person or persons.
kung hindi ko maipagbili ay isasauli ko ang lahat ng alahas sa loob ng taning
na panahong nakatala sa itaas; kung maipagbili ko naman ay dagli kong
isusulit at ibibigay ang buong pinagbilhan sa may-ari ng mga alahas sa
kanyang bahay tahanan; ang aking gantimpala ay ang mapapahigit na halaga
sa nakatakdang halaga sa itaas ng bawat alahas HIND I ko ipinahihintulutang
ipa-u-u-tang o ibibigay na hulugan ang alin mang alahas, ilalagak,
ipagkakatiwala; ipahihiram; isasangla o ipananagot kahit sa anong paraan
ang alin mang alahas sa ibang mga tao o tao.
I sign my name this . . . day of. . . 19 . . . at Manila, NILALAGDAAN ko ang
kasunduang ito ngayong ika____ ng dito sa Maynila.
Signature of Persons who
received jewelries (Lagda
ng Tumanggap ng mga
Alahas)
Address: . . . . . . . . . . .
Rosa Lims signature indeed appears on the upper portion of the receipt
immediately below the description of the items taken. We find that this fact
does not have the effect of altering the terms of the transaction from a
contract of agency to sell on commission basis to a contract of sale. Neither
does it indicate absence or vitiation of consent thereto on the part of Rosa

Lim which would make the contract void or voidable. The moment she
affixed her signature thereon, petitioner became bound by all the terms
stipulated in the receipt. She, thus, opened herself to all the legal obligations
that may arise from their breach. This is clear from Article 1356 of the New
Civil Code which provides:
Contracts shall be obligatory in whatever form they may have been entered
into, provided all the essential requisites for their validity are present. x x x.
However, there are some provisions of the law which require certain
formalities for particular contracts. The first is when the form is required for
the validity of the contract; the second is when it is required to make the
contract effective as against third parties such as those mentioned in Articles
1357 and 1358; and the third is when the form is required for the purpose of
proving the existence of the contract, such as those provided in the Statute of
Frauds in Article 1403.[13] A contract of agency to sell on commission basis
does not belong to any of these three categories, hence it is valid and
enforceable in whatever form it may be entered into.
Furthermore, there is only one type of legal instrument where the law strictly
prescribes the location of the signature of the parties thereto. This is in the
case of notarial wills found in Article 805 of the Civil Code, to wit:
Every will, other than a holographic will, must be subscribed at
the end thereof by the testator himself x x x.
The testator or the person requested by him to write his name and the
instrumental witnesses of the will, shall also sign, as aforesaid, each and
every page thereof, except the last, on the left margin x x x.
In the case before us, the parties did not execute a notarial will but a simple
contract of agency to sell on commission basis, thus making the position of
petitioners signature thereto immaterial.
Petitioner insists, however, that the diamond ring had been returned to Vicky
Suarez through Aurelia Nadera, thus relieving her of any liability. Rosa Lim
testified to this effect on direct examination by her counsel:
Q: And when she left the jewelries with you, what did you do thereafter?
A: On October 12, I was bound for Cebu. So I called up Vicky through
telephone and informed her that I am no longer interested in the bracelet and
ring and that 1 will just return it.
47

SALES
Q: And what was the reply of Vicky Suarez?
A: She told me that she could not come to the apartelle since she was very
busy. So, she asked me if Aurelia was there and when I informed her that
Aurelia was there, she instructed me to give the pieces of jewelry to Aurelia
who in turn will give it back to Vicky.
Q: And you gave the two (2) pieces of jewelry to Aurelia Nadera?
A: Yes, Your Honor.[14]
This was supported by Aurelia Nadera in her direct examination by
petitioners counsel:
Q: Do you know if Rosa Lim in fact returned the jewelries ?

testimony of Vicky Suarez that she did not authorize Rosa Lim to return the
pieces of jewelry to Nadera. The respondent court, in affirming the trial
court, said:
x x x This claim (that the ring had been returned to Suarez thru Nadera) is
disconcerting. It contravenes the very terms of Exhibit A. The instruction by
the complaining witness to appellant to deliver the ring to Aurelia Nadera is
vehemently denied by the complaining witness, who declared that she did not
authorize and/or instruct appellant to do so. And thus, by delivering the ring
to Aurelia without the express authority and consent of the complaining
witness, appellant assumed the right to dispose of the jewelry as if it were
hers, thereby committing conversion, a clear breach of trust, punishable
under Article 315, par. 1(b), Revised Penal Code.

A: Rosa Lim called up Vicky Suarez the following morning and told Vicky
Suarez that she was going home to Cebu and asked if she could give the
jewelries to me.

We shall not disturb this finding of the respondent court. It is well settled that
we should not interfere with the judgment of the trial court in determining the
credibility of witnesses, unless there appears in the record some fact or
circumstance of weight and influence which has been overlooked or the
significance of which has been misinterpreted. The reason is that the trial
court is in a better position to determine questions involving credibility
having heard the witnesses and having observed their deportment and
manner of testifying during the trial.[18]

Q: And when did Rosa Lim give to you the jewelries?

Article 315, par. 1(b) of the Revised Penal Code provides:

A: She gave the jewelries to me.


Q: Why did Rosa Lim give the jewelries to you?

A: Before she left for Cebu.

[15]

On rebuttal, these testimonies were belied by Vicky Suarez herself:


Q: It has been testified to here also by both Aurelia Nadera and Rosa Lim
that you gave authorization to Rosa Lim to turn over the two (2) pieces of
jewelries mentioned in Exhibit A to Aurelia Nadera, what can you say about
that?
A:. That is not true sir, because at that time Aurelia Nadera is highly indebted
to me in the amount of P 140,000.00, so if I gave it to Nadera, I will be
exposing myself to a high risk.[16]
The issue as to the return of the ring boils down to one of credibility. Weight
of evidence is not determined mathematically by the numerical superiority of
the witnesses testifying to a given fact. It depends upon its practical effect in
inducing belief on the part of the judge trying the case. [17] In the case at
bench, both the trial court and the Court of Appeals gave weight to the

ART. 315. Swindling (estafa). - Any person who shall defraud another by any
of the means mentioned hereinbelow shall be punished by:
xxx xxx xxx
(b) By misappropriating or converting, to the prejudice of another, money,
goods, or any other personal property received by the offender in trust or on
commission, or for administration, or under any other obligation involving
the duty to make delivery of or to return the same, even though such
obligation be totally or partially guaranteed by a bond; or by denying having
received such money, goods, or other property.
xxx xxx xxx
The elements of estafa with abuse of confidence under this subdivision are as
follows: (1) That money, goods, or other personal property be received by the
offender in trust, or on commission, or for administration, or under any other
obligation involving the duty to make delivery of, or to return, the same; (2)
48

SALES
That there be misappropriation or conversion of such money or property by
the offender or denial on his part of such receipt; (3) That such
misappropriation or conversion or denial is to the prejudice of another; and
(4) That there is a demand made by the offended party to the offender (Note:
The 4th element is not necessary when there is evidence of misappropriation
of the goods by the defendant).[19]
All the elements of estafa under Article 315, Paragraph 1(b) of the Revised
Penal Code, are present in the case at bench. First, the receipt marked as
Exhibit A proves that petitioner Rosa Lim received the pieces of jewelry in
trust from Vicky Suarez to be sold on commission basis. Second, petitioner
misappropriated or converted the jewelry to her own use; and, third, such
misappropriation obviously caused damage and prejudice to the private
respondent.
WHEREFORE, the petition is DENIED and the Decision of the Court of
Appeals is hereby AFFIRMED.
Costs against petitioner.
SO ORDERED.

10.) EN BANC
G.R. No. L-11897
October 31, 1964
FERNANDO A. FROILAN, Plaintiff-Appellee, vs. PAN ORIENTAL
SHIPPING COMPANY,defendant-appellant,
REPUBLIC OF THE PHILIPPINES, and COMPANIA
MARITIMA, intervenors-appellees.
Sycip, Salazar & Associates and Enrique Fernando & Emma QuisumbingFernando for defendant-appellant.
49

SALES
The Government Corporate Counsel for intervenors-appellees.
Rafael Dinglasan for plaintiff-appellee.
BARRERA, J.:
On March 7, 1947, Fernando A. Froilan purchased from the Shipping
Administration a boat described as MV/FS 197 for the sum of P200,000.00,
with a down payment of P50,000,00. To secure payment of the unpaid
balance of the purchase price, a mortgage was constituted on the vessel in
favor of the Shipping Administration in a contract which provides, among
others, the following:
In the event that the FIRST PARTY should elect to exercise its rights to
rescind under the terms of this contract, it shall have the right to take
possession of the vessel herein sold in the condition that it is at the time of
rescission but in no case in a worse condition than when originally delivered
to the second party, ordinary wear and tear excepted and in case at the time
of rescission the condition of the vessel is not satisfactory to the FIRST
PARTY, it shall have the right to have the vessel reconditioned, repaired, drydocked at the expense of the SECOND PARTY. The same right is hereby
granted to the FIRST PARTY in case the SECOND PARTY should for any
reason refuse or fail to comply with this condition of sale and return the
vessel herein sold in a condition not satisfactory to the FIRST
PARTY.chanroblesvirtualawlibrarychanrobles virtual law library
The right of rescission shall be considered as a cumulative remedy granted to
the FIRST PARTY and shall not in any way prejudice his right to demand
immediate and complete payment of the purchase price of the vessel under
the terms herein provided, and to demand and collect from the SECOND
PARTY such damages caused by the non-compliance with this contract.
This contract was duly approved by the President of the
Philippines.chanroblesvirtualawlibrarychanrobles virtual law library
Froilan appeared to have defaulted in spite of demands, not only in the
payment of the first installment on the unpaid balance of the purchase price
and the interest thereon when they fell due, but also failed in his express
undertaking to pay the premiums on the insurance coverage of the vessel,
obliging the Shipping Administration to advance such payment to the
insurance company. Consequently, the Shipping Administration requested the
Commissioner of Customs on June 1, 1948 to refuse clearance on the vessel

and the voyage thereof was ordered


suspended.chanroblesvirtualawlibrarychanrobles virtual law library
Thereafter, Froilan asked for a reconsideration of the action taken by the
Shipping Administration, claiming that his failure to pay the required
installments was due to the fact that he was awaiting the decision of the
President on the petition of the shipowners for an extension of the period of
payment of the purchased vessels, which petition was favorably acted
upon.chanroblesvirtualawlibrarychanrobles virtual law library
On July 3, 1948, the Shipping Administration and Froilan entered into an
agreement whereby the latter undertook to liquidate immediately all of his
outstanding accounts, including the insurance premiums, within 30 days, and
have the vessel overhauled, and promised that in case of his default, he shall
"waive, any formal notice of demand and to redeliver the said vessel
peaceably and amicably without any other proceedings" (Exh.
39).chanroblesvirtualawlibrarychanrobles virtual law library
Again, Froilan failed to settle his accounts within the prescribed period, thus,
the Shipping Administration threatened to rescind the contract unless
payment be immediately made. On August 28, 1948, upon Froilan's request,
the Shipping Administration agreed to release the vessel on condition that the
same would be overhauled and repaired and the accrued interest on the first
installment would be paid. The Administration also allowed the mortgagor to
pay his overdue accounts, amounting now to P48,500.00 in monthly
installments, with warming that in case of further default, it would
immediately repossess the vessel and rescind the contract. Froilan failed to
pay. On January 17, 1949, the Shipping Administration required him to
return the vessel or else file a bond for P25,000.00 in five days. In a letter
dated January 28, 1949, Froilan requested that the period for filing the bond
be extended to February 15, 1949, upon the express condition and
understanding that:
... . If I fail to file the required bond on the said date, February 15, 1949, to
the satisfaction of the Shipping Administration, I am willing to relinquish and
I do hereby relinquish any and all rights I have or may have on the said
vessel including any payments made thereon to the Shipping Administration,
without prejudice to other rights the Shipping Administration may have
against me under the contract of sale executed in my
favor.chanroblesvirtualawlibrarychanrobles virtual law library

50

SALES
I wish to reiterate that if I fail to file the bond within the period I have
requested, any and all rights I have on the vessel and any payments made to
the Shipping Administration shall be considered automatically forfeited in
favor of the Shipping Administration and the ownership of the said vessel
will be as it is hereby automatically transferred to the Shipping
Administration which is then hereby authorized to take immediate possession
of said vessel. (Exh. 66)
This letter of Froilan was submitted by the General Manager of the Shipping
Administration to the board of directors for proper consideration. By
resolution of January 31, 1949, the petition was granted subject specifically
to the conditions set forth therein. Froilan again failed to make good his
promises. Hence, on February 18, 1949, the General Manager of the
Shipping Ad-ministration wrote the Collector of Customs of Manila, advising
the latter that the Shipping Administration, by action of its board, terminated
the contract with Froilan, and requesting the suspension of the clearance of
the boat effective that date (Exh. 70).chanroblesvirtualawlibrarychanrobles
virtual law library
On February 21, 1949, the General Manager directed its officers, Capt.
Laconico and others, to take immediate possession of the vessel and to
suspend the unloading of all cargoes on the same until the owners thereof
made the corresponding arrangement with the Shipping Administration.
Pursuant to these instructions, the boat was, not only actually repossessed,
but the title thereto was registered again in the name of the Shipping
Administration, thereby re-transferring the ownership thereof to the
government.chanroblesvirtualawlibrarychanrobles virtual law library
On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as
Pan Oriental, offered to charter said vessel FS-197 for a monthly rent of
P3,000.00. Because the government was then spending for the guarding of
the boat and subsistence of the crew-members since repossession, the
Shipping Administration on April 1, 1949, accepted Pan Oriental's offer "in
principle" subject to the condition that the latter shall cause the repair of the
vessel, advancing the cost of labor and drydocking thereof, and the Shipping
Administration to furnish the necessary spare parts. In accordance with this
charter contract, the vessel was delivered to the possession of Pan
Oriental.chanroblesvirtualawlibrarychanrobles virtual law library
In the meantime, or on February 22, 1949, Froilan tried to explain his failure
to comply with the obligations he assumed and asked that he be given
another extension up to March 15, 1949 to file the necessary bond. Then on

March 8, Froilan offered to pay all his overdue accounts. However, as he


failed to fulfill even these offers made by him in these two communications,
the Shipping Administration denied his petition for reconsideration (of the
rescission of the contract) on March 22, 1949. It should be noted that while
his petition for reconsideration was denied on March 22, it does not appear
when he formally formulated his appeal. In the meantime, as already stated,
the boat has being repossessed by the Shipping Administration and the title
thereto re-registered in the name of the government, and delivered to the Pan
Oriental in virtue of the charter agreement. On June 2, 1949, Froilan
protested to the President against the charter of the
vessel.chanroblesvirtualawlibrarychanrobles virtual law library
On the same date, the Executive Office advised the Administration and the
Commissioner of Customs not to dispose of the vessel in favor of another
party pending final decision by the President on the appeal of Froilan (Exhs.
93-A and 93-D). But since the vessel was already cleared in favor of Pan
Oriental prior to the receipt of the foregoing communication, and allegedly in
order to prevent its being made answerable for damages, the General
Manager of the Shipping Administration advised the Collector of Customs
not to suspend the voyage of the vessel pending final decision on the appeal
of Froilan. Similar manifestation, to allow the Pan Oriental's operation of the
vessel without prejudice to whatever action the President may take in the
case, was also made by the Administration to the Executive
Secretary.chanroblesvirtualawlibrarychanrobles virtual law library
On June 4, 1949, the Shipping Administration and the Pan Oriental
formalized the charter agreement and signed a bareboat contract with option
to purchase, containing the following pertinent provisions:
III. CHARTER HIRE, TIME OF PAYMENT. - The CHARTERER shall pay to
the owner a monthly charter hire of THREE THOUSAND (P3,000.00)
PESOS from date of delivery of the vessel, payable in advance on or before
the 5th of every current month until the return of the vessel to OWNER or
purchase of the vessel by
CHARTERER.chanroblesvirtualawlibrarychanrobles virtual law library
XII. RIGHT OF OPTION TO PURCHASE. - The right of option to purchase
the vessel at the price of P150,000.00 plus the amount expended for its
present repairs is hereby granted to the CHARTERER within 120 days from
the execution of this Contract, unless otherwise extended by the OWNER.
This right shall be deemed exercised only if, before the expiration of the said
period, or its extension by the OWNER the CHARTERER completes the
51

SALES
payment, including any amount paid as Charter hire, of a total sum of not
less than twenty-five percentum (25%) of said price of the
vessel.chanroblesvirtualawlibrarychanrobles virtual law library
The period of option may be extended by the OWNER without in any way
affecting the other provisions, stipulations, and terms of this
contract.chanroblesvirtualawlibrarychanrobles virtual law library
If, for any reason whatsoever, the CHARTERER fails to exercise its option to
purchase within the period stipulated, or within the extension thereof by the
OWNER, its right of option to purchase shall be deemed terminated, without
prejudice to the continuance of the Charter Party provisions of this contract.
The right to dispose of the vessel or terminate the Charter Party at its
discretion is reserved to the OWNER.chanroblesvirtualawlibrarychanrobles
virtual law library
XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. - After the
CHARTERER has exercised his right of option as provided in the preceding
paragraph (XII), the vessel shall be deemed conditionally sold to the
purchaser, but the ownership thereof shall not be deemed transferred unless
and until all the price of the vessel, together with the interests thereon, and
any other obligation due and payable to the OWNER under this contract,
have been fully paid by the CHARTERER.
xxx

xxx

xxxchanrobles virtual law library

XXI. APPROVAL OF THE PRESIDENT. - This contract shall take effect


only upon approval of His Excellency, the President.
On September 6, 1949, the Cabinet revoked the cancellation of Froilan's
contract of sale and restored to him all his rights thereunder, on condition that
he would give not less than P10,000.00 to settle partially his overdue
accounts and that reimbursement of the expenses incurred for the repair and
drydocking of the vessel performed by Pan Oriental was to be made in
accordance with future adjustment between him and the Shipping
Administration (Exh. I). Later, pursuant to this reservation, Froilan's request
to the Executive Secretary that the Administration advance the payment of
the expenses incurred by Pan Oriental in the drydocking and repair of the
vessel, was granted on condition that Froilan assume to pay the same and file
a bond to cover said undertaking (Exh.
111).chanroblesvirtualawlibrarychanrobles virtual law library

On September 7, 1949, the formal bareboat charter with option to purchase


filed on June 4, 1949, in favor of the Pan Oriental was returned to the
General Manager of the Shipping Administration without action (not
disapproval), only because of the Cabinet resolution of September 6, 1949
restoring Froilan to his rights under the conditions set forth therein, namely,
the payment of P10,000.00 to settle partially his overdue accounts and the
filing of a bond to guarantee the reimbursement of the expenses incurred by
the Pan Oriental in the drydocking and repair of the vessel. But Froilan again
failed to comply with these conditions. And so the Cabinet, considering
Froilan's consistent failure to comply with his obligations, including those
imposed in the resolution of September 6, 1949, resolved to reconsider said
previous resolution restoring him to his previous rights. And, in a letter dated
December 3, 1949, the Executive Secretary authorized the Administration to
continue its charter contract with Pan Oriental in respect to FS-197 and
enforce whatever rights it may still have under the original contract with
Froilan (Exh. 188).chanroblesvirtualawlibrarychanrobles virtual law library
Froilan, for his part, petitioned anew for a reconsideration of this action of
the Cabinet, claiming that other ship purchasers, including the PresidentTreasurer of the Pan Oriental himself, had also defaulted in payment and yet
no action to rescind their contracts had been taken against them. He also
offered to make a cash partial payment of P10,000.00 on his overdue
accounts and reimburse Pan Oriental of all its necessary expense on the
vessel. Pan Oriental, however, not only expressed its unwillingness to
relinquish possession of the vessel, but also tendered the sum of P15,000.00
which, together with its alleged expenses already made on the vessel, cover
25% of the cost of the vessel, as provided in the option granted in the
bareboat contract (Exh. 122). This amount was accepted by the
Administration as deposit, subject to the final determination of Froilan's
appeal by the President. The Executive Secretary was also informed of the
exercise by Pan Oriental of said option to
purchase.chanroblesvirtualawlibrarychanrobles virtual law library
On August 25, 1950, the Cabinet resolved once more to restore Froilan to his
rights under the original contract of sale, on condition that he shall pay the
sum of P10,000.00 upon delivery of the vessel to him, said amount to be
credited to his outstanding accounts; that he shall continue paying the
remaining installments due, and that he shall assume the expenses incurred
for the repair and drydocking of the vessel (Exh. 134). Pan Oriental protested
to this restoration of Froilan's rights under the contract of sale, for the reason
that when the vessel was delivered to it, the Shipping Administration had
authority to dispose of the said property, Froilan having already relinquished
52

SALES
whatever rights he may have thereon. Froilan paid the required cash of
P10,000.00, and as Pan Oriental refused to surrender possession of the
vessel, he filed an action for replevin in the Court of First Instance of Manila
(Civil Case No. 13196) to recover possession thereof and to have him
declared the rightful owner of said
property.chanroblesvirtualawlibrarychanrobles virtual law library

In view of the dismissal of its complaint, intervenor Republic of the


Philippines also moved for the dismissal of defendant's counterclaims against
it, which was granted by the court. On appeal by Pan Oriental to this Court
(G.R. No. L-6060), said order was reversed and the case remanded to the
lower court for further proceedings.chanroblesvirtualawlibrarychanrobles
virtual law library

Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of
the vessel from Pan Oriental and its delivery to the plaintiff. Pan Oriental
tried to question the validity of this order in a petition for certiorari filed in
this Court (G.R. No. L-4577), but the same was dismissed for lack of merit
by resolution of February 22, 1951. Defendant accordingly filed an answer,
denying the averments of the
complaint.chanroblesvirtualawlibrarychanrobles virtual law library

Subsequently, Compaia Maritima, as purchaser of the vessel from Froilan,


was allowed to intervene in the proceedings (in the lower court), said
intervenor taking common cause with the plaintiff Froilan. In its answer to
the complaint in intervention, defendant set up a counterclaim for damages in
the sum of P50,000.00, alleging that plaintiff secured the Cabinet resolutions
and the writ of replevin, resulting in its deprivation of possession of the,
vessel, at the instigation and inducement of Compaia Maritima. This
counterclaim was denied by both plaintiff and intervenor
Maritima.chanroblesvirtualawlibrarychanrobles virtual law library

The Republic of the Philippines, having been allowed to intervene in the


proceeding, also prayed for the possession of the vessel in order that the
chattel mortgage constituted thereon may be foreclosed. Defendant Pan
Oriental resisted said intervention, claiming to have a better right to the
possession of the vessel by reason of a valid and subsisting contract in its
favor, and of its right of retention, in view of the expenses it had incurred for
the repair of the said vessel. As counterclaim, defendant demanded of the
intervenor to comply with the latter's obligation to deliver the vessel pursuant
to the provisions of the charter contract.chanroblesvirtualawlibrarychanrobles
virtual law library
Thereafter, and upon plaintiff's presenting proof that he had made payment to
the intervenor Republic of the Philippines, of the sum of P162,576.96,
covering the insurance premiums, unpaid balance of the purchase price of the
vessel and interest thereon, the lower court by order of February 8, 1952,
dismissed the complaint in intervention on the ground that the claim or
demand therein had already been released. Said dismissal, however, was
made without prejudice to the determination of defendant's right, and that the
release and cancellation of the chattel mortgage did not "prejudge the
question involved between the plaintiff and the defendant which is still the
subject of determination in this case."chanrobles virtual law library

On September 28, 1956, the lower court rendered a decision upholding


Froilan's (and Compaia Maritima's) right to the ownership and possession of
the FS-197. It was ruled that Froilan's violations of the conditions of the
contract of sale in his favor did not automatically deprive him of his right of
ownership of the vessel, which passed to him upon execution of the contract,
but merely gave rise to the Shipping Administration's right either to foreclose
the mortgage or rescind the contract by court action. As the Shipping
Administration failed to avail itself of any of these remedies, Froilan's right
of ownership remained unaffected. And the subsequent resolutions of the
Cabinet, restoring him to his rights under the said contract, reaffirmed the
same. The charter contract between the Shipping Administration and
defendant was declared null and void, not only because the former could not
have legally bound the vessel, but also due to the fact that said agreement has
not been perfected for lack of approval by the President of the Philippines.
And, even assuming that the said charter contract was valid, the lower court
held that, as the owner (Republic of the Philippines) under the same
agreement was given the right to terminate the charter or dispose of the
vessel anytime, the action of the Cabinet in cancelling or withdrawing the
rescission of Froilan's contract, had the effect of terminating the charter
agreement with the defendant. The court also dismissed (1) defendant's
counterclaims against plaintiff Froilan and intervenor Compaia Maritima,
on the ground that it (defendant) was a possessor in bad faith, and
consequently, not entitled to damages; (2) plaintiff's counterclaims against
defendant, for the reason that the same should have been directed against
intervenor Republic of the Philippines; and (3) defendant's counterclaims
53

SALES
said intervenor Republic, on the ground that the order dismissing the
complaint in intervention had already become final and it was materially
impossible for the latter to secure possession of the vessel. From this
decision, Pan Oriental brought the instant
appeal.chanroblesvirtualawlibrarychanrobles virtual law library
Contrary to appellant's contention, the ruling of the lower court that under the
contract of sale with mortgage, ownership of the vessel passed to Froilan,
upon delivery of the property to the latter, must be sustained. It is to be noted
that unlike in the charter contract where it was specifically prescribed that
ownership of the vessel shall be transferred to the vendee only upon full
payment of the purchase price, no similar provision appears in the contract of
sale in favor of Froilan. In the absence of stipulation to the contrary, the
ownership of the thing sold passes to the vendee upon the actual or
constructive delivery thereof (Art. 1477, new Civil Code). It is for this reason
that Froilan was able to constitute a mortgage on the vessel in favor of the
Administration, to secure payment of the unpaid balance of the purchase
price.chanroblesvirtualawlibrarychanrobles virtual law library
There is no gainsaying the fact that there was continuous violation by Froilan
of the terms of said contract of sale. The records conclusively show that
notwithstanding the numerous opportunities given him, Froilan had been
remiss in the fulfillment of his obligations thereunder. Nevertheless, the
lower court upheld his allegation that the Administration may not legally
rescind the contract without filing the corresponding complaint in
court.chanroblesvirtualawlibrarychanrobles virtual law library
Under Article 11911 of the Civil Code, in case of reciprocal obligations, the
power to rescind the contract where a party incurs in default, is impliedly
given to the injured party. Appellee maintains however, that the law
contemplates of rescission of contract by judicial action and not a unilateral
act by the injured party; consequently, the action of the Shipping
Administration contravenes said provision of the law. This is not entirely
correct, because there is also 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. As already held2judicial action is needed where there, is
absence of special provision in the contract granting to a party the right of
rescission.chanroblesvirtualawlibrarychanrobles virtual law library

In the instant case, while it may be true that the contract of sale did not
expressly give to the mortgagee the right to cancel the agreement it was,
nevertheless, provided therein that said party may rescind the contract as it
may see fit in case of breach of the terms thereof by the mortgagor. Taking
into account the promises, waivers and representations made by Froilan, to
the extent that he agreed to the automatic transfer of ownership of the vessel
to the Administration, should he fall to fulfill what was incumbent upon him,
which did happen, the rescission of the contract without judicial action is
proper.chanroblesvirtualawlibrarychanrobles virtual law library
The next question to be determined is whether there had been a valid and
enforceable charter contract in favor of appellant Pan Oriental, and what was
the effect thereon of the subsequent restoration to Froilan by the Cabinet, of
his rights under the original contract of sale with
mortgage.chanroblesvirtualawlibrarychanrobles virtual law library
It is not disputed that appellant Pan Oriental took possession of the vessel in
question after it had been repossessed by the Shipping Administration and
title thereto reacquired by the government, and operated the same from June
2, 1949 after it had repaired the vessel until it was dispossessed of the
property on February 3, 1951, in virtue of a bareboat charter contract entered
into between said company and the Shipping Administration. In the same
agreement, appellant as charterer, was given the option to purchase the
vessel, which may be exercised upon payment of a certain amount within a
specified period. The President and Treasurer of the appellant company,
tendered the stipulated initial payment on January 16, 1950. Appellant now
contends that having exercised the option, the subsequent Cabinet resolutions
restoring Froilan's rights on the vessel violated its existing rights over the
same property. To the contention of plaintiff Froilan that the charter contract
never became effective because it never received presidential approval, as
required therein, Pan Oriental answers that the letter of the Executive
Secretary dated December 3, 1949 (Exh. 118), authorizing the Shipping
Administration to continue its charter contract with appellant, satisfies such
requirement (of presidential approval). It is to be noted, however, that said
letter was signed by the Executive Secretary only and not under authority of
the President. The same, therefore, cannot be considered to have attached
unto the charter contract the required consent of the Chief Executive for its
validity.chanroblesvirtualawlibrarychanrobles virtual law library
Upon the other hand, the Cabinet resolutions purporting to restore Froilan to
his former rights under the deed of sale, cannot also be considered as an act
of the President which is specifically required in all contracts relating to
54

SALES
these vessels (Executive Order No. 31, series of 1946). Actions of the
Cabinet are merely recommendatory or advisory in character. Unless
afterwards specifically adopted by the President as his own executive act,
they cannot be considered as equivalent to the act of approval of the
President expressly required in cases involving disposition of these
vessels.chanroblesvirtualawlibrarychanrobles virtual law library
In the circumstances of this case, therefore, the resulting situation is that
neither Froilan nor the Pan Oriental holds a valid contract over the vessel.
However, since the intervenor Shipping Administration, representing the
government practically ratified its proposed contract with Froilan by
receiving the full consideration of the sale to the latter, for which reason the
complaint in intervention was dismissed as to Froilan, and since Pan Oriental
has no capacity to question this actuation of the Shipping Administration
because it had no valid contract in its favor, the decision of the lower court
adjudicating the vessel to FroiIan and its successor Compaia Maritima, must
be sustained. Nevertheless, under the circumstances already adverted to, Pan
Oriental cannot be considered a possessor in bad faith until after the
institution of the instant case. However, since it is not disputed that said
appellant made useful and necessary expenses on the vessel, appellant is
entitled to the refund of such expenses with the right to retain the vessel until

he has been reimbursed therefor (Art. 546, Civil Code). As it is by the


concerted acts of defendants and intervenor Republic of the Philippines that
appellant was deprived of the possession of the vessel over which appellant
had a lien for his expenses, appellees Froilan, Compaia Maritima, and the
Republic of the Philippines3are declared liable for the reimbursement to
appellant of its legitimate expenses, as allowed by law, with legal interest
from the time of disbursement.chanroblesvirtualawlibrarychanrobles virtual
law library
Modified in this manner, the decision appealed from is affirmed, without
costs. Case is remanded to the lower court for further proceedings in the
matter of expenses. So ordered.chanroblesvirtualawlibrarychanrobles virtual
law library

55