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SPOUSES LAM vs.KODAK PHILIPPINES, LTD. Noritsu representatives.

The Lam Spouses


G.R. No. 167615; January 11, 2016 issued postdated checks amounting to
LEONEN, J.: ₱35,000.00 each for 12 months as payment for
the first delivered unit, with the first check due on
March 31, 1992.
Facts:  The Lam Spouses requested that Kodak
Philippines, Ltd. not negotiate the check dated
March 31, 1992 allegedly due to insufficiency of
 On January 8, 1992, the Lam Spouses and
funds. The same request was made for the check
Kodak Philippines, Ltd. entered into an
due on April 30, 1992. However, both checks
agreement (Letter Agreement) for the sale of
were negotiated by Kodak Philippines, Ltd. and
three (3) units of the Kodak Minilab System
22XL6 (Minilab Equipment) in the amount of were honored by the depository bank. The 10
₱1,796,000.00 per unit, with the following terms: other checks were subsequently dishonored after
the Lam Spouses ordered the depository bank to
“This confirms our verbal agreement for Kodak stop payment.
Phils., Ltd. To provide Colorkwik Laboratories,  Kodak Philippines, Ltd. canceled the sale and
Inc. with three (3) units Kodak Minilab System demanded that the Lam Spouses return the unit.
22XL . . . for your proposed outlets in Rizal The Lam Spouses ignored the demand but also
Avenue (Manila), Tagum (Davao del Norte), and rescinded the contract through the letter dated
your existing Multicolor photo counter in Cotabato November 18, 1992 on account of Kodak
City under the following terms and conditions: Philippines, Ltd.’s failure to deliver the two (2)
remaining Minilab Equipment units.
1. Said Minilab Equipment packages will  Kodak Philippines, Ltd. filed a Complaint for
avail a total of 19% multiple order replevin and/or recovery of sum of money. The
discount based on prevailing equipment Lam Spouses failed to appear during the pre-trial
price provided said equipment packages conference. Thus, they were declared in default.
will be purchased not later than June 30,  Kodak Philippines, Ltd. presented evidence ex-
1992. parte. The trial court issued the Decision in favor
of Kodak Philippines, Ltd. ordering the seizure of
2. 19% Multiple Order Discount shall be the Minilab Equipment. Based on this Decision,
applied in the form of merchandise and Kodak Philippines, Ltd. was able to obtain a writ
delivered in advance immediately after of seizure for the Minilab Equipment installed at
signing of the contract. * Also includes the Lam Spouses’ outlet in Tagum, Davao
start-up packages worth P61,000.00. Province. The writ was enforced and Kodak
Philippines, Ltd. gained possession of the Minilab
3. NO DOWNPAYMENT. Equipment unit, accessories, and the generator
set.
4. Minilab Equipment Package shall be  The Lam Spouses then filed before the CA a
payable in 48 monthly installments at Petition to Set Aside the Orders issued by the trial
THIRTY FIVE THOUSAND PESOS court. These Orders were subsequently set aside
(P35,000.00) inclusive of 24% interest by the CA, and the case was remanded to the trial
rate for the first 12 months; the balance court for pre-trial.
shall be re-amortized for the remaining  In its Decision, the RTC dismissed the case and
36 months and the prevailing interest ordered the plaintiff to pay Lam Spouses
shall be applied.  Lam Spouses filed their Notice of Partial Appeal.
Kodak Philippines, Ltd. also filed an appeal.
5. Prevailing price of Kodak Minilab However, the CA dismissed it for Kodak
System 22XL as of January 8, 1992 is at Philippines, Ltd.’s failure to file its appellant’s
ONE MILLION SEVEN HUNDRED brief, without prejudice to the continuation of the
NINETY SIX THOUSAND PESOS. Lam Spouses’ appeal. The Resolution became
final and executory.
6. Price is subject to change without prior  CA modified the decision of the RTC.
notice. *Secured with PDCs; 1st monthly
amortization due 45 days after
installation.”

 Kodak Philippines, Ltd. delivered one (1) unit of


the Minilab Equipment in Tagum, Davao
Province. The delivered unit was installed by

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Issues: work by metrical units, or analogous things which by their
nature are susceptible of partial performance, it shall be
(1) Whether the contract between petitioners divisible. However, even though the object or service may
Spouses Alexander and Julie Lam and be physically divisible, an obligation is indivisible if so
respondent Kodak Philippines, Ltd. pertained to provided by law or intended by the parties.
obligations that are severable, divisible, and
susceptible of partial performance under Article In Nazareno v. Court of Appeals, the indivisibility of an
1225 of the New Civil Code; and obligation is tested against whether it can be the subject
(2) Upon rescission of the contract, what the parties of partial performance: An obligation is indivisible when it
are entitled to under Article 1190 and Article 1522 cannot be validly performed in parts, whatever may be the
of the New Civil Code. nature of the thing which is the object thereof. The
indivisibility refers to the prestation and not to the object
Held: thereof. In the present case, the Deed of Sale of January
29, 1970 supposedly conveyed the six lots to Natividad.
(1) The Letter Agreement contained an The obligation is clearly indivisible because the
indivisible obligation. performance of the contract cannot be done in parts,
otherwise the value of what is transferred is diminished.
Petitioners are therefore mistaken in basing the
The intention of the parties is for there to be a single indivisibility of a contract on the number of obligors.
transaction covering all three (3) units of the Minilab
Equipment. Respondent’s obligation was to deliver all
There is no indication in the Letter Agreement that the
products purchased under a "package," and, in turn,
units petitioners ordered were covered by three (3)
petitioners’ obligation was to pay for the total purchase
separate transactions. The factors considered by the
price, payable in installments.
Court of Appeals are mere incidents of the execution of
the obligation, which is to deliver three units of the Minilab
The intention of the parties to bind themselves to an Equipment on the part of respondent and payment for all
indivisible obligation can be further discerned through three on the part of petitioners. The intention to create an
their direct acts in relation to the package deal. There was indivisible contract is apparent from the benefits that the
only one agreement covering all three (3) units of the Letter Agreement afforded to both parties. Petitioners
Minilab Equipment and their accessories. The Letter were given the 19% discount on account of a multiple
Agreement specified only one purpose for the buyer, order, with the discount being equally applicable to all
which was to obtain these units for three different outlets. units that they sought to acquire. The provision on "no
If the intention of the parties were to have a divisible down payment" was also applicable to all units.
contract, then separate agreements could have been Respondent, in turn, was entitled to payment of all three
made for each Minilab Equipment unit instead of covering Minilab Equipment units, payable by installments.
all three in one package deal. Furthermore, the 19%
multiple order discount as contained in the Letter
(2) The power to rescind obligations is implied in
Agreement was applied to all three acquired units. The
reciprocal ones, in case one of the obligors
"no downpayment" term contained in the Letter
should not comply with what is incumbent
Agreement was also applicable to all the Minilab
Equipment units. Lastly, the fourth clause of the Letter upon him.
Agreement clearly referred to the object of the contract as
"Minilab Equipment Package." 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,
In ruling that the contract between the parties intended to
cover divisible obligations, the Court of Appeals even after he has chosen fulfilment, if the latter should
become impossible.
highlighted: (a) the separate purchase price of each item;
(b) petitioners’ acceptance of separate deliveries of the
units; and (c) the separate payment arrangements for The court shall decree the rescission claimed, unless
each unit. However, through the specified terms and there be just cause authorizing the fixing of a period.
conditions, the tenor of the Letter Agreement indicated an
intention for a single transaction. This intent must prevail Rescission under Article 1191 has the effect of mutual
even though the articles involved are physically separable restitution. In Velarde v. Court of Appeals: Rescission
and capable of being paid for and delivered individually, abrogates the contract from its inception and requires a
consistent with the New Civil Code: Article 1225. For the mutual restitution of benefits received.
purposes of the preceding articles, obligations to give
definite things and those which are not susceptible of The Court of Appeals correctly ruled that both parties
partial performance shall be deemed to be indivisible. must be restored to their original situation as far as
When the obligation has for its object the execution of a practicable, as if the contract was never entered into.
certain number of days of work, the accomplishment of
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Petitioners must relinquish possession of the delivered policy. The company then confirmed that he paid the
Minilab Equipment unit and accessories, while premium and that they would extend the policy by one
respondent must return the amount tendered by year.
petitioners as partial payment for the unit received. Thereby, the company offered to reinstate same policy it
Further, respondent cannot claim that the two (2) monthly had previously cancelled and even proposed to extend its
installments should be offset against the amount awarded lifetime on finding that the cancellation was erroneous and
by the Court of Appeals to petitioners because the effect that the premiums were paid in full by petitioner-insured
of rescission under Article 1191 is to bring the parties but were not remitted by the company's branch manager,
back to their original positions before the contract was Mr. Malapit.
entered into. However, they were too late for Areola already filed an
action for breach of contract in the trial court.
When rescission is sought under Article 1191 of the Civil The company’s defense lay in rectifying its omission;
Code, it need not be judicially invoked because the power hence, there was no breach of contract.
to resolve is implied in reciprocal obligations. The right to The court ruled in favor of Areola and asked Prudential to
resolve allows an injured party to minimize the damages pay 250,000 pesos in moral and exemplary damages.
he or she may suffer on account of the other party’s failure The court held that the company was in bad faith in
to perform what is incumbent upon him or her. When a cancelling the policy. Had the insured met an accident at
party fails to comply with his or her obligation, the other that time, he wouldn’t be covered by the policy.
party’s right to resolve the contract is triggered. The This ruling was challenged on appeal by respondent
resolution immediately produces legal effects if the non- insurance company, denying bad faith in unilaterally
performing party does not question the resolution. Court cancelling the policy. The AC absolved Prudential on the
intervention only becomes necessary when the party who grounds that it was not motivated by negligence, malice
allegedly failed to comply with his or her obligation or bad faith in cancelling subject policy. Rather, the
disputes the resolution of the contract. Since both parties cancellation of the insurance policy was based on what
in this case have exercised their right to resolve under the existing records showed. The court even added that
Article 1191, there is no need for a judicial decree before the errant manager who didn’t remit the profits was forced
the resolution produces effects. to resign. Areola then filed for a petition in the Supreme
Court.
WHEREFORE, the Petition is DENIED.
Issue:
1. Did the erroneous act of cancelling subject insurance
policy entitle petitioner-insured to payment of damages?
2. Did the subsequent act of reinstating the wrongfully
Areola v CA cancelled insurance policy by respondent insurance
company, in an effort to rectify such error, obliterate
Facts: whatever liability for damages it may have to bear, thus
Prudential Guarantee cancelled Areola’s absolving it?
personal accident insurance on the grounds that the latter
failed to pay his premiums 7 months after issuing the Held: Yes. No. Petition granted.
policy. Areola was supposed to pay the total amount of
P1,609.65 which included the premium of P1,470.00, Ratio:
documentary stamp of P110.25 and 2% premium tax of 1. Petitioner alleged that the manager’s misappropriation
P29.40. The statement of account had a stipulation not of his premium payments is the proximate cause of the
considering it a receipt. It also reminded the customer to cancellation of the insurance policy. Subsequent
ask for a receipt after payment. There was also a reinstatement could not possibly absolve respondent
stipulation calling for a demand for a provisional receipt insurance company from liability, due to the breach of
after payment to an agent. A provisional receipt was sent contract. He contended that damage had already been
to petitioner telling him that the provisional receipt would done.
be confirmed by an official one. The company then Prudential averred that the equitable relief sought by
cancelled the policy for non-payment of premiums. After petitioner-insured was granted to the filing of the
being surprised, Areola confronted a company agent and complaint, petitioner-insured is left without a cause of
demanded an official receipt. The latter told him that it was action. Reinstatement effectively restored petitioner-
a mistake, but never gave him an official receipt. Areola insured to all his rights under the policy.
sent a letter demanding that he be reinstated or he The court held that Malapit's fraudulent act of
would file for damages if his demand was not met. The misappropriating the premiums paid by petitioner-insured
company then told him that his payments weren’t in full is directly imputable to respondent insurance company. A
yet. The company replied to Areola by telling him that corporation, such as respondent insurance
there was reason to believe that no payment has been company, acts solely thru its employees. The
made since no official receipt was issued. The company latters' acts are considered as its own. Malapit
then told him that they would still hold him under the represented its interest and acted in its behalf. His act of
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receiving the premiums collected is well within the
province of his authority. Thus, his receipt of said Velarde vs. Court of Appeals
premiums is receipt by private respondent insurance
company who, by provision of law is bound by the acts of
its agent.
Article 1910 thus reads:
FACTS:
Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within The private respondent executed a Deed of Sale with
the scope of his authority. Assumption of Mortgage, with a balance of P1.8 million,
As for any obligation wherein the agent has exceeded his
in favor of the petitioners. Pursuant to said agreements,
power, the principal is not bound except when he ratifies
it expressly or tacitly. plaintiffs paid the bank (BPI) for three (3) months until they
Malapit's failure to remit the premiums he received cannot were advised that the Application for Assumption of
constitute a defense for private respondent insurance Mortgage was denied. This prompted the plaintiffs not to
company; no exoneration from liability could result
therefrom. The fact that private respondent insurance make any further payment. Private respondent wrote the
company was itself defrauded due to the anomalies that petitioners informing the non-fulfillment of the obligations.
took place does not free the same from its obligation to Petitioners, thru counsel responded that they are willing
petitioner Areola. As held in Prudential Bank v. Court of
Appeals to pay in cash the balance subject to several conditions.
“A bank is liable for wrongful acts of its officers done in the Private respondents sent a notarial notice of
interests of the bank or in the course of dealings of the cancellation/rescission of the Deed of Sale. Petitioners
officers in their representative capacity but not
filed a complaint which was consequently dismissed by
for acts outside the scope of their authority. Accordingly,
a banking corporation is liable to innocent third persons an outgoing judge but was reversed by the assuming
where the representation is made in the course of its judge in their Motion for Reconsideration. The Court of
business by an agent acting within the general scope of Appeals reinstated the decision to dismiss.
his authority even though the agent is secretly abusing his
authority and attempting to perpetrate a fraud upon his
principal or some other person.” ISSUE:
Prudential is liable for damages for the Whether or not there is a substantial breach of contract
fraudulent acts committed by Malapit. Reinstating the
insurance policy can not obliterate the injury inflicted. A that would entitle its rescission.
contract of insurance creates reciprocal obligations for
both insurer and insured. Reciprocal obligations are those RULING:
which arise from the same cause and in which each party
YES. Article 1191 of the New Civil Code applies. The
is both a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the breach committed did not merely consist of a slight delay
other. in payment or an irregularity; such breach would not
2. Due to the agreement to enter into a contract of
normally defeat the intention of the parties to the contract.
insurance where Prudential promised to extend protection
to petitioner-insured against the risk insured, there was Here, petitioners not only failed to pay the P1.8 million
a debtor creditor relation ship between the two parties. balance, but they also imposed upon private respondents
Under Article 1191, the injured party is given a choice new obligations as preconditions to the performance of
between fulfillment or rescission of the obligation in case
one of the obligors fails to comply with what is incumbent their own obligation. In effect, the qualified offer to pay
upon him. However, said article entitles the injured party was a repudiation of an existing obligation, which was
to payment of damages, regardless of whether he legally due and demandable under the contract of sale.
demands fulfillment or rescission of the obligation.
The damages would be nominal because the insurance Hence, private respondents were left with the legal option
company took steps to rectify the contract . There was of seeking rescission to protect their own interest.
also no actual or substantial damage inflicted. Nominal
damages are "recoverable where a legal right is
technically violated and must be vindicated against an
invasion that has produced no actual present loss of any SPOUSES JAIME AND MATILDE POON, Petitioners, v.
kind, or where there has been a breach of contract and no PRIME SAVINGS BANK REPRESENTED BY THE
substantial injury or actual damages whatsoever have
PHILIPPINE DEPOSIT INSURANCE CORPORATION
been or can be shown.”
AS STATUTORY LIQUIDATOR, Respondent. G.R. No.
183794, June 13, 2016 NATURE OF ACTION:
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Rescission of Contract TOPIC: Fortuitous event/penal insolvency is not a fortuitous event, unless it is shown that
clause PONENTE: SERENO, C.J.: FACTS: Petitioners the government's action to place a bank under
owned a commercial building in Naga City, Matilde Poon receivership or liquidation proceedings is tainted with
and Prime Saving Bank(PSB) executed a 10-year arbitrariness, or that the regulatory body has acted
Contract of Lease (Contract) over the building for the without jurisdiction. Respondent posits that it should be
latter's use as its branch office in Naga City. In paragraph released from its contract with petitioners, because the
24 of the Contract, it provides: - Should the lease[d] closure of its business upon the BSP's order constituted
premises be closed, deserted or vacated by the LESSEE, a fortuitous event as the Court held in Provident Savings
the LESSOR shall have the right to terminate the lease Bank. The cited case, however, must always be read in
without the necessity of serving a court order and to the context of the earlier Decision in Central Bank v. Court
immediately repossess the leased premises. Thereafter of Appeals. The Court ruled in that case that the Monetary
the LESSOR shall open and enter the leased premises in Board had acted arbitrarily and in bad faith in ordering the
the presence of a representative of the LESSEE (or of the closure of Provident Savings Bank. Accordingly, in the
proper authorities) for the purpose of taking a complete subsequent case of Provident Savings Bank it was held
inventory of all furniture, fixtures, equipment and/or other that fuerza mayor had interrupted the prescriptive period
materials or property found within the leased premises. to file an action for the foreclosure of the subject
The LESSOR shall thereupon have the right to enter into mortgage. In contrast, there is no indication or allegation
a new contract with another party. All advanced rentals that the BSP's action in this case was tainted with
shall be forfeited in favor of the LESSOR. Barely three arbitrariness or bad faith. Instead, its decision to place
years later, however, the BSP placed PSB under the respondent under receivership and liquidation
receivership of the Philippine Deposit Insurance proceedings was pursuant to Section 30 of Republic Act
Corporation (PDIC) On 12 May 2000, PSB vacated the No. 7653. Moreover, respondent was partly accountable
leased premises and surrendered them to petitioners. for the closure of its banking business. It cannot be said,
Subsequently, the PDIC issued petitioners a demand then, that the closure of its business was independent of
letter11 asking for the return of the unused advance rental its will as in the case of Provident Savings Bank. The legal
amounting to P3,480,000 on the ground that paragraph effect is analogous to that created by contributory
24 of the lease agreement had become inoperative, negligence in quasi-delict actions. The difficulty of
because respondent's closure constituted force majeure. performance should be such that the party seeking to be
Petitioners, however, refused the PDIC's demand.12 released from a contractual obligation would be placed at
They maintained that they were entitled to retain the a disadvantage by the unforeseen event. Mere
remainder of the advance rentals following paragraph 24 inconvenience, unexpected impediments, increased
of their Contract. Consequently, PSB sued petitioners expenses, or even pecuniary inability to fulfill an
before the RTC for a partial rescission of contract and/or engagement, will not relieve the obligor from an
recovery of a sum of money. RTC ordered the partial undertaking that it has knowingly and freely contracted.
rescission of the lease agreement Parties' respective Clearly, the closure of respondent's business was not an
claims for damages and attorney's fees are dismissed. unforeseen event. As the lease was long-term, it was not
The CA affirmed the RTC Decision, but had a different lost on the parties that such an eventuality might occur,
rationale for applying Article 1229. The appellate court as it was in fact covered by the terms of their Contract.
ruled that the closure of respondent's business was not a Besides, as We have previously discussed, the event was
fortuitous event. Still, the CA sustained the trial court's not independent of respondent's will. 2 Yes. The forfeiture
interpretation of the proviso on the forfeiture of advance clause in the Contract is penal in nature. It is settled that
rentals as a penal clause and the consequent application a provision is a penal clause if it calls for the forfeiture of
of Article 1229. ISSUES: 1. Whether or not PSB may be any remaining deposit still in the possession of the lessor,
released from its contractual obligations on the ground of without prejudice to any other obligation still owing, in the
fortuitous event under Article 1174 of the Civil Code and event of the termination or cancellation of the agreement
unforeseen event under Article 1267 of the Civil Code; 2. by reason of the lessee's violation of any of the terms and
Whether or not the proviso in the parties' Contract conditions thereof. This kind of agreement may be validly
allowing the forfeiture of advance rentals was a penal entered into by the parties. The clause is an accessory
clause HELD: 21 1. No. The closure of respondent's obligation meant to ensure the performance of the
business was neither a fortuitous nor an unforeseen event principal obligation by imposing on the debtor a special
that rendered the lease agreement functus officio. The prestation in case of nonperformance or inadequate
period during which the bank cannot do business due to performance of the principal obligation. It is evident from

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the above-quoted testimony of Jaime Poon that the December 1964, which was approved by the president of
stipulation on the forfeiture of advance rentals under UP, which expressly states that, upon default by the
paragraph 24 is a penal clause in the sense that it debtor ALUMCO, the creditor (UP) has “the right and the
provides for liquidated damages. In effect, the penalty for power to consider the Logging Agreement as rescinded
the premature termination of the Contract works both without the necessity of any judicial suit.”
ways. As the CA correctly found, the penalty was to
compel respondent to complete the 10-year term of the
lease. Petitioners, too, were similarly obliged to ensure
ALUMCO continued its logging operations, but
the peaceful use of their building by respondent for the
again incurred an unpaid account. On July 19, 1965,
entire duration of the lease under pain of losing the
petitioner UP informed respondent ALUMCO that it had,
remaining advance rentals paid by the latter. The
as of that date, considered as rescinded and of no further
forfeiture clauses of the Contract, therefore, served the
legal effect the logging agreement that they had entered
two functions of a penal 22 clause, i.e., (1) to provide for
in 1960. UP filed a complaint against ALUMCO for the
liquidated damages and (2) to strengthen the coercive
collection or payment of the herein before stated sums of
force of the obligation by the threat of greater
money and it prayed for and obtained an order for
responsibility in case of breach.47 As the CA correctly
preliminary attachment and preliminary injunction
found, the prestation secured by those clauses was the
restraining ALUMCO from continuing its logging
parties' mutual obligation to observe the fixed term of the
operations in the Land Grant. Respondent ALUMCO
lease. For this reason, We sustain the lower courts'
contended that it is only after a final court decree
finding that the forfeiture clause in paragraph 24 is a penal
declaring the contract rescinded for violation of its terms
clause, even if it is not expressly labelled as such.
that U.P. could disregard ALUMCO's rights under the
WHEREFORE, the Petition for Review on Certiorari is
contract and treat the agreement as breached and of no
DENIED.
force or effect.

University of the Philippines v. De Los Angeles


ISSUE: Whether or not petitioner U.P. can treat
G.R. No. L-28602 September 29, 1970 its contract with ALUMCO rescinded and may disregard
the same before any judicial pronouncement to that effect.

HELD: UP and ALUMCO had expressly


FACTS: On November 2, 1960, UP and stipulated in the "Acknowledgment of Debt and Proposed
ALUMCO entered into a logging agreement under which Manner of Payments" that, upon default by the debtor
the latter was granted exclusive authority, for a period ALUMCO, the creditor (UP) has "the right and the power
starting from the date of the agreement to 31 December to consider, the Logging Agreement as rescinded without
1965, extendible for a further period of five (5) years by the necessity of any judicial suit." In connection with
Article 1191 of the Civil Code, the Court stated in
mutual agreement, to cut, collect and remove timber from Froilan vs. Pan Oriental Shipping Co that “there is
the Land Grant, in consideration of payment to UP of nothing in the law that prohibits the parties from entering
royalties, forest fees, etc.; 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
That ALUMCO cut and removed timber therefrom contract.”
but, as of 8 December 1964, it had incurred an unpaid
account of P219,362.94, which, despite repeated It must be understood that the act of party in
demands, it had failed to pay; 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
that after it had received notice that UP would other party denies that rescission is justified, it is free to
rescind or terminate the logging agreement, ALUMCO resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing,
executed an instrument, entitled "Acknowledgment of
decide that the resolution of the contract was not
Debt and Proposed Manner of Payments," dated 9 warranted, the responsible party will be sentenced to
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damages; in the contrary case, the resolution will be shares to APIC. Defendant obviously did not enter into the
affirmed, and the consequent indemnity awarded to the stipulated SPA because it did not have the shares of APC
party prejudiced. transferred to APIC despite its representations. Under the
circumstances, it is clear that defendant fraudulently
violated the provisions of the MOA.”
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner, On appeal, the Court of Appeals affirmed the
vs. ruling of the Regional Trial Court. Hence this petition.
U-LAND AIRLINES, CO., LTD., Respondent.
Ponenete: Leonen, J. Petitioners invokes Suria v. Intermediate
Appellate Court, which held that an "action for rescission
Facts: is not a principal action that is retaliatory in character
Wellex and U-Land agreed to develop a long- under Article 1191 of the Civil Code, but a subsidiary one
term business relationship through the creation of joint which is available only in the absence of any other legal
interest in airline operations and property development remedy under Article 1384 of the Civil Code Respondent
projects in the Philippines. The agreement includes: I. U-land avers that this case was inapplicable because the
Acquisition of APIC and PEC shares; II. Operation and pertinent provision in Suria was not Article 1191 but
management of APIC/PEC/APC; III. Entering into and rescission under Article 1383 of the Civil Code. The
funding a joint development agreement; and IV. The "rescission" referred to in Article 1191 referred to
option to acquire from WELLEX shares of stock of "resolution" of a contract due to a breach of a mutual
EXPRESS SAVINGS BANK ("ESB") up to 40% of the obligation, while Article 1384 spoke of "rescission"
outstanding capital stock of ESB of U-Land. The because of lesion and damage. Thus, the rescission that
provisions of the memorandum were agreed to be is relevant to the present case is that of Article 1191,
executed within 40 days from its execution date. which involves breach in a reciprocal obligation. It is, in
fact, resolution, and not rescission as a result of fraud or
The 40-day period lapsed but Wellex and U-Land lesion, as found in Articles 1381, 1383, and 1384 of the
were not able to enter into any share purchase agreement Civil Code.
although drafts were exchanged between the two.
However, Despite the absence of a share purchase Issue: Whether or not respondent U-Land correctly
agreement, U-Land remitted to Wellex a total of sought the principal relief of rescission or resolution under
US$7,499,945.00. Wellex acknowledged the receipt of Article 1191.
these remittances in a confirmation letter addressed to U-
Land and allegedly delivered stock certificates and TCTs Held: Yes.
of subject properties. Despite these transactions, Wellex Respondent U-Land is praying for rescission or
and U-Land still failed to enter into the share purchase resolution under Article 1191, and not rescission under
agreement and the joint development agreement. Thus, Article 1381. The failure of one of the parties to comply
U-Land filed a Complaint72 praying for rescission of the with its reciprocal prestation allows the wronged party to
First Memorandum of Agreement and damages against seek the remedy of Article 1191. The wronged party is
Wellex and for the issuance of a Writ of Preliminary entitled to rescission or resolution under Article 1191, and
Attachment. Note: After verification with the Securities even the payment of damages. It is a principal action
and Exchange Commission, U-Land discovered that precisely because it is a violation of the original reciprocal
"APIC did not own a single share of stock in APC. prestation. Article 1381 and Article 1383, on the other
hand, pertain to rescission where creditors or even third
RTC: Ruled In favor of Uland and ordered rescission of persons not privy to the contract can file an action due to
contract under Art. 1911 of the civil code. Basis of lesion or damage as a result of the contract. Rescission
rescission: Wellex’s misrepresentation that APIC was a or resolution under Article 1191, therefore, is a principal
majority shareholder of APC that compelled it to enter into action that is immediately available to the party at the time
the agreement.. that the reciprocal prestation was breached. Article 1383
“Notwithstanding the said remittances, APIC does not mandating that rescission be deemed a subsidiary action
own a single share of APC. On the other hand, defendant cannot be applicable to rescission or resolution under
could not even satisfactorily substantiate its claim that at Article 1191. Thus, respondent U-Land correctly sought
least it had the intention to cause the transfer of APC

7
the principal relief of rescission or resolution under Article rescind. Hence, where the defendant makes good the
1191. damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and
The order is valid. Enforcement of Section 9 of 1384. But the operation of these two articles is limited to
the First Memorandum of Agreement has the same effect the cases of rescission for lesión enumerated in Article
as rescission or resolution under Article 1191 of the Civil 1381 of the Civil Code of the Philippines, and does not
Code. The parties are obligated to return to each other all apply to cases under Article 1191.
that they may have received as a result of the breach by
petitioner Wellex of the reciprocal obligation. Therefore, Rescission or resolution under Article 1191,
the Court of Appeals did not err in affirming the rescission therefore, is a principal action that is immediately
granted by the trial court. available to the party at the time that the reciprocal
prestation was breached. Article 1383 mandating that
Contrary to petitioner Wellex’s argument, this is rescission be deemed a subsidiary action cannot be
not rescission under Article 1381 of the Civil Code. This applicable to rescission or resolution under Article 1191.
case does not involve prejudicial transactions affecting Thus, respondent U-Land correctly sought the principal
guardians, absentees, or fraud of creditors. Article relief of rescission or resolution under Article 1191.
1381(3) pertains in particular to a series of fraudulent
actions on the part of the debtor who is in the process of The obligations of the parties gave rise to
transferring or alienating property that can be used to reciprocal prestations, which arose from the same cause:
satisfy the obligation of the debtor to the creditor. There is the desire of both parties to enter into a share purchase
no allegation of fraud for purposes of evading obligations agreement that would allow both parties to expand their
to other creditors. The actions of the parties involving the respective airline operations in the Philippines and other
terms of the First Memorandum of Agreement do not fall neighboring countries.
under any of the enumerated contracts that may be
subject of rescission. Other Matters:
1. The MOA is ambiguous. The parties were never
Further, respondent U-Land is pursuing able to arrive at a specific period within which they would
rescission or resolution under Article 1191, which is a bind themselves to enter into an agreement.
principal action. Justice J.B.L. Reyes’ concurring opinion 2. There was no express or implied novation of the
in the landmark case of Universal Food Corporation v. First Memorandum of Agreement. There was no
Court of Appeals184 gave a definitive explanation on the incompatibility between the original terms of the First
principal character of resolution under Article 1191 and Memorandum of Agreement and the remittances made by
the subsidiary nature of actions under Article 1381: respondent U-Land for the shares of stock. These
The rescission on account of breach of stipulations is not remittances were actually made with the view that both
predicated on injury to economic interests of the party parties would subsequently enter into a share purchase
plaintiff but on the breach of faith by the defendant, that agreement. It is clear that there was no subsequent
violates the reciprocity between the parties. It is not a agreement inconsistent with the provisions of the First
subsidiary action, and Article 1191 may be scanned Memorandum of Agreement. There being no novation of
without disclosing anywhere that the action for rescission the First Memorandum of Agreement, respondent U-Land
thereunder is subordinated to anything other than the is entitled to the return of the amount it remitted to
culpable breach of his obligations by the defendant. This petitioner Wellex. Petitioner Wellex is likewise entitled to
rescission is a principal action retaliatory in character, it the return of the certificates of shares of stock and titles
being unjust that a party be held bound to fulfill his of land it delivered to respondent U-Land.
promises when the other violates his. As expressed in the 3. Applying Article 1185 of the Civil Code, the
old Latin aphorism: "Non servanti fidem, non est fides parties are obligated to return to each other all they have
servanda." Hence, the reparation of damages for the received. petitioner Wellex is obligated to return the
breach is purely secondary. remittances made by respondent U-Land, in the same
way that respondent U-Land is obligated to return the
On the contrary, in the rescission by reason of certificates of shares of stock and the land titles to
lesion or economic prejudice, the cause of action is petitioner Wellex.
subordinated to the existence of that prejudice, because 4. The jurisprudence relied upon by petitioner
it is the raison detre as well as the measure of the right to Wellex is not applicable.

8
5. Petitioner Wellex was not guilty of fraud but of ART. 1383. The action for rescission is subsidiary; it
violating Article 1159 of the Civil Code. The absence of cannot be instituted except when the party suffering
fraud in a transaction does not mean that rescission under damage has no other legal means to obtain reparation for
Article 1191 is not proper. This case is not an action to the same.
declare the First Memorandum of Agreement null and
void due to fraud at the inception of the contract or dolo Rescission itself, however, is defined by Article
causante. This case is not an action for fraud based on 1385:
Article 1381 of the Civil Code. Rescission or resolution ART. 1385. Rescission creates the obligation to return the
under Article 1191 is predicated on the failure of one of things which were the object of the contract, together with
the parties in a reciprocal obligation to fulfill the prestation their fruits, and the price with its interest; consequently, it
as required by that obligation. It is not based on vitiation can be carried out only when he who demands rescission
of consent through fraudulent misrepresentations. can return whatever he may be obliged to restore. Neither
6. Respondent U-Land was not bound to pay the shall rescission take place when the things which are the
US$3 million under the joint development agreement. object of the contract are legally in the possession of third
7. Respondent U-Land was not obligated to exhaust persons who did not act in bad faith.
the "securities" given by petitioner Wellex
Provisions: For Article 1191 to be applicable, however, there
ART. 1191. The power to rescind obligations is implied in must be reciprocal prestations as distinguished from
reciprocal ones, in case one of the obligors should not mutual obligations between or among the parties. A
comply with what is incumbent upon him. prestation is the object of an obligation, and it is the
The injured party may choose between the fulfillment and conduct required by the parties to do or not to do, or to
the rescission of the obligation, with the payment of give.177 Parties may be mutually obligated to each other,
damages in either case. He may also seek rescission, but the prestations of these obligations are not
even after he has chosen fulfillment, if the latter should necessarily reciprocal. The reciprocal prestations must
become impossible. necessarily emanate from the same cause that gave rise
The court shall decree the rescission claimed, unless to the existence of the contract. This distinction is best
there be just cause authorizing the fixing of a period. illustrated by an established authority in civil law, the late
This is understood to be without prejudice to the rights of Arturo Tolentino:
third persons who have acquired the thing, in accordance This article applies only to reciprocal obligations. It has no
with articles 1385 and 1388 and the Mortgage Law. application to every case where two persons are mutually
Articles 1380 and 1381, on the other hand, provide an debtor and creditor of each other. There must be
enumeration of rescissible contracts: ART. 1380. reciprocity between them. Both relations must arise from
Contracts validly agreed upon may be rescinded in the the same cause, such that one obligation is correlative to
cases established by law. ART. 1381. The following the other. Thus, a person may be the debtor of another by
contracts are rescissible: reason of an agency, and his creditor by reason of a loan.
(1) Those which are entered into by guardians whenever They are mutually obligated, but the obligations are not
the wards whom they represent suffer lesion by more than reciprocal. Reciprocity arises from identity of cause, and
one-fourth of the value of the things which are the object necessarily the two obligations are created at the same
thereof; time.
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding number; Note: Wellex is a corporation established under Philippine
(3) Those undertaken in fraud of creditors when the latter law and it maintains airline operations in the Philippines.
cannot in any other manner collect the claims due them; It owns shares of stock in several corporations including
(4) Those which refer to things under litigation if they have Air Philippines International Corporation (APIC),
been entered into by the defendant without the knowledge Philippine Estates Corporation (PEC), and Express
and approval of the litigants or of competent judicial Savings Bank (ESB). Wellex alleges that it owns all
authority; shares of stock of Air Philippines Corporation (APC).
(5) All other contracts specially declared by law to be
subject to rescission. U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly
organized and existing under the laws of Taiwan,
Article 1383 expressly provides for the subsidiary registered to do business . . . in the Philippines." It is
nature of rescission:

9
engaged in the business of air transportation in Taiwan
and in other Asian countries. The following month, however, petitioners failed to submit
the necessary documents despite several demands from
Pacific to do so. Instead, they informed Pacific that they
Note: This case distinguished rescission under Art. 1191-
wanted to rescind the contract and refused to accept
“resolution” and rescission under Art. 1381, 1383 and Pacific's tender of additional payments amounting to
1384. P1,005,180.

When a party seeks the relief of rescission as provided in Pacific, through Melecio P. Fortuno, Jr. (Fortuno), opened
Article 1381, there is no need for reciprocal prestations to a savings account with the Capitol Bank of General Trias,
exist between or among the parties. All that is required is Cavite, in the names of petitioners, depositing in said
account the amount of P1,005,180.11 Pacific then
that the contract should be among those enumerated in
informed petitioners of the deposit and that "they were
Article 1381 for the contract to be considered rescissible. authorized to withdraw the same at [their] convenience."
Unlike Article 1191, rescission under Article 1381 must be
a subsidiary action because of Article 1383. Thereafter, Pacific learned that petitioners were
negotiating the sale of the property with other buyers
Rescission or resolution under Article 1191 is a principal allegedly for a higher consideration. In September 1995,
action that is immediately available to the party at the time Pacific effected an annotation of an adverse claim on the
property's title.13redarclaw
that the reciprocal prestation was breached. Mutual
restitution is required in cases involving rescission under Pacific made several demands on petitioners to fulfill their
Article 1191. This means bringing the parties back to their obligations under the Deed of Conditional Sale. Instead of
original status prior to the inception of the contract. heeding the demands, petitioners, through a certain Atty.
Determining the existence of fraud is not necessary in an Fojas, began negotiating with Pacific for the rescission of
action for rescission or resolution under Article 1191. The the Deed of Conditional Sale. Pacific made another
demand on petitioners to fulfill all their obligations,
existence of fraud must be established if the rescission
Petitioners continued to ignore the demand.
prayed for is the rescission under Article 1381.
Pacific then filed a Complaint for Cancellation of Contract,
Sum of Money and Damages before the RTC of Trece
Ascano-Cupino v Pacific Rehouse Martires City. However, before pre-trial, Pacific
discovered that petitioners had withdrawn the PI,005,180
Facts: On 1 October 1994. Honorlita Ascano-Cupino4 and it had deposited with Capitol Bank of General Trias. In
Flaviana Ascano-Colocado (petitioners), and their sister, view of petitioners' action, Pacific filed an Amended
Noeminia Ascano, (collectively, the Ascanos) 5 entered Complaint changing its cause of action from cancellation
into a Deed of Conditional Sale with Pacific Rehouse to specific performance.
Corporation (Pacific). The latter obliged itself to purchase
from the Ascanos a parcel of land with an area of 59,753 Petitioners alleged that it was Pacific that defaulted in its
square meters located in General Trias, Cavite for payment. They maintained that the real purchase price
P5,975,300. they agreed upon was P200 per square meter, or a total
of P11,950,600, and that allegedly the much lower
Following the terms of the Deed of Conditional Sale, amount stated in the Deed of Conditional Sale was put
Pacific paid a down payment of P1,792,590 leaving a there at Pacific's request in order to lower the taxes they
balance of P4,182,710, to be paid upon the fulfillment of would need to pay.
certain conditions, namely: (1) the completion of all
documents necessary for the transfer of the certificate of The RTC ruled for the cancellation of the contract and
title of the land; (2) the vendors (the Ascanos) shall ordering defendants (Ascanos) to return the amount of
guarantee removal of the tenants, squatters and other Two Million Six Hundred Two Thousand (P2,602,000.00)
occupants on the land, with the disturbance Pesos to the plaintiff; while Plaintiff is hereby ordered to
compensation to said tenants to be paid by vendors; and pay defendants who incurred the following in defending
(3) submission by vendors to Pacific of the Affidavit of their rights:LawlibraryofCRAlaw
Non-Tenancy and the land operation transfer documents.
1. The amount of One Hundred Fifty Thousand
On 13 February 1995, petitioners submitted to Pacific a (P150,000.00) Pesos as damages;
Barangay Agrarian Reform Council Certification stating
that the property was untenanted. They also informed 2. The amount of One Hundred Thousand (P100,000.00)
Pacific that the other necessary documents were being Pesos as attorney's fees; and
processed and more expected to be completed the
following month. 3. The litigation expenses.
10
The CA granted the appeal by Pacific. The CA held that The obligation of petitioners under the Deed of
"the trial court erred in deciding the case on the basis of Conditional Sale is to "guarantee removal of tenants" and
the original complaint." The CA noted that Pacific not merely to pay disturbance compensation. It is an
amended its complaint from cancellation of contract to undertaking specifically given to petitioners under the
specific performance, which was done with leave of and Deed of Conditional Sale, considering that Pacific is not
allowed by the RTC. yet the owner of the property and will have no personality
to evict the property's present occupants. Petitioners
The CA also held that rescission was not warranted in this failed to fulfill this obligation, as well as the obligation to
case. It ruled that petitioners "were clearly the ones who deliver the necessary documents to complete the sale.
failed in their obligation under the contract."28 Pacific then
is the injured party entitled to choose between rescission As previously held by the Court, "the injured party is the
of the contract and fulfillment of the obligation. Pacific party who has faithfully fulfilled his obligation or is ready
chose the latter, as stated in their Amended Complaint for and willing to perform his obligation."64 From the
specific performance.darclaw foregoing, it is clear that Pacific is the injured party,
entitled to elect between rescinding of the contract and
Lastly, the CA found that it was proven and undisputed exacting fulfillment of the obligation. It has opted for the
that a total of P4,497,770 had already been paid by remedy of specific performance, as embodied in its
Pacific leaving only a balance of P4,577,530. Amended Complaint.

Moreover, rescission must not be allowed in favor of


Issue: Whether Rescission is a valid action in the case at petitioners, since they themselves failed to perform their
bar. obligations under the Deed of Conditional
Sale.65redarclaw
Held: The Court affirmed the decision of CA. It is clear that
the RTC erred in deciding the case based on the original As to the purchase price, both the RTC and the CA held
complaint and not on the Amended Complaint, that, given no other evidence to conclude otherwise, the
thus:LawlibraryofCRAlaw true purchase price agreed upon by the parties is
P5,975,300, the amount stipulated in the Deed of
[Pacific] in [its] complaint prays for the rescission or Conditional Sale.
cancellation of contract and to this allegation, the Court
has no recourse but to grant this prayer x x x. The Court agrees.

Pacific is entitled to ask


for specific performance. Swire Realty v Yu

Article 1191 of the Civil Code states:LawlibraryofCRAlaw Facts: Respondent Jayne Yu and petitioner Swire Realty
Development Corporation entered into a Contract to Sell
Art. 1191. The power to rescind obligations is implied in covering one residential condominium unit in Makati City
reciprocal ones, in case one of the obligors should not for the total contract price of P7,519,371.80, payable in
comply with what is incumbent upon him. equal monthly installments until September 24, 1997.
Respondent likewise purchased a parking slot in the
The injured party may choose between fulfillment and the same condominium building for P600,000.00.
rescission of the obligation, with payment of damages in
either case. He may also seek rescission, even after he Respondent paid the full purchase price of P7,519,371.80
has chosen fulfillment, if the latter should become for the unit while making a down payment of P20,000.00
impossible. for the parking lot. However, notwithstanding full payment
of the contract price, petitioner failed to complete and
The court shall decree the rescission claimed, unless deliver the subject unit on time. This prompted respondent
there be just cause authorizing the fixing of a period. to file a Complaint for Rescission of Contract with
Damages before the Housing and Land Use Regulatory
This is understood to be without prejudice to the rights of Board (HLURB) Expanded National Capital Region Field
third persons who have acquired the thing, in accordance Office (ENCRFO).
with Articles 1385 and 1388 and the Mortgage Law.
On October 19, 2004, the HLURB ENCRFO rendered a
As previously discussed, the Deed of Conditional Sale Decision3 dismissing respondent’s complaint. It ruled that
clearly spells out the obligations of each party. Based on rescission is not permitted for slight or casual breach of
the allegations of the parties and the findings of the lower the contract but only for such breaches as are substantial
courts, Pacific has already partially fulfilled its obligation and fundamental as to defeat the object of the parties in
while petitioners have not. making the agreement.
11
may seek rescission and, in the absence of any just cause
Respondent then elevated the matter to the HLURB for the court to determine the period of compliance, the
Board of Commissioners. In a Decision5 dated March 30, court shall decree the rescission.
2006, the HLURB Board of Commissioners reversed and
set aside the ruling of the HLURB ENCRFO and ordered In the instant case, the CA aptly found that the completion
the rescission of the Contract to Sell, ratiocinating: date of the condominium unit was November 1998
pursuant to License No. 97-12-3202 dated November 2,
We find merit in the appeal. The report on the ocular 1997 but was extended to December 1999 as per License
inspection conducted on the subject condominium project to Sell No. 99-05-3401 dated May 8, 1999. However, at
and subject unit shows that the amenities under the the time of the ocular inspection conducted by the HLURB
approved plan have not yet been provided as of May 3, ENCRFO, the unit was not yet completely finished as the
2002, and that the subject unit has not been delivered to kitchen cabinets and fixtures were not yet installed and
[respondent] as of August 28, 2002, which is beyond the the agreed amenities were not yet available.
period of development of December 1999 under the [From the foregoing,] it is evident that the report on the
license to sell. The delay in the completion of the project ocular inspection conducted on the subject condominium
as well as of the delay in the delivery of the unit are project and subject unit shows that the amenities under
breaches of statutory and contractual obligations which the approved plan have not yet been provided as of May
entitles [respondent] to rescind the contract, demand a 3, 2002, and that the subject unit has not been delivered
refund and payment of damages. to respondent as of August 28, 2002, which is beyond the
period of development of December 1999 under the
The delay in the completion of the project in accordance license to sell. Incontrovertibly, petitioner had incurred
with the license to sell also renders [petitioner] liable for delay in the performance of its obligation amounting to
the payment of administrative fine. breach of contract as it failed to finish and deliver the unit
to respondent within the stipulated period. The delay in
Petitioner moved for reconsideration, but the same was the completion of the project as well as of the delay in the
denied by the HLURB Board of Commissioners. Petitioner delivery of the unit are breaches of statutory and
appealed to the Office of the President (OP) but was contractual obligations which entitle respondent to
denied. But when petitioner filed for motion for rescind the contract, demand a refund and payment of
reconsideration, it was granted by the OP. The damages.
Respondent now sought for reconsideration but was
denied by the CA. Thus, the present petition.
Fong v Duenas
Issue: Whether rescission of the contract is proper in the
instant case. George Fong
Held: [Second issue,] Article 1191 of the Civil Code Jose Duenas
sanctions the right to rescind the obligation in the event
that specific performance becomes impossible, to wit: Facts: Dueñas is engaged in the bakery, food
Article 1191. The power to rescind obligations is implied manufacturing, and retailing business, which are all
in reciprocal ones, in case one of the obligors should not operated under his two companies, D.C. DANTON, Inc.
comply with what is incumbent upon him. (Danton) and Bakcom Food Industries, Inc. (Bakcom). He
was an old acquaintance of Fong as they were former
The injured party may choose between the fulfillment and schoolmates at the De La Salle University.
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, Sometime in November 1996, Dueñas and Fong entered
even after he has chosen fulfillment, if the latter should into a verbal joint venture contract where they agreed to
become impossible. engage in the food business and to incorporate a holding
company under the name Alliance Holdings, Inc. (Alliance
The court shall decree the rescission claimed, unless or the proposed corporation). Its capitalization would be
there be just cause authorizing the fixing of a period. Sixty Five Million Pesos (P65 Million), to which they would
This is understood to be without prejudice to the rights of contribute in equal parts.
third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law. The parties agreed that Fong would contribute Thirty Two
Million and Five Hundred Thousand Pesos (P32.5 Million)
Basic is the rule that the right of rescission of a party to an in cash while Dueñas would contribute all his Danton and
obligation under Article 1191 of the Civil Code is Bakcom shares which he valued at P32.5 Million.8 Fong
predicated on a breach of faith by the other party who required Dueñas to submit the financial documents
violates the reciprocity between them. The breach supporting the valuation of these shares.
contemplated in the said provision is the obligor’s failure
to comply with an existing obligation. When the obligor Fong started remitting in tranches his share in the
cannot comply with what is incumbent upon it, the obligee proposed corporation’s capital. He made the remittances
12
under the impression that his contribution would be contrary to the trial court’s ruling, Dueñas correctly
applied as his subscription to fifty percent (50%) of invested Fong’s P5 Million contribution to Bakcom and
Alliance’s total shareholdings. On the other hand, Dueñas Danton. This did not deviate from the parties’ original
started processing the Boboli9international license that agreement as eventually, the shares of these two
they would use in their food business. companies would form part of Alliance’s capital.

On June 13, 1997, Fong sent a letter to Dueñas informing Lastly, the CA held that the June 13, 1997 letter showed
him of his decision to limit his total contribution from P32.5 that Fong knew all along that he could not immediately
Million to P5 Million. This is because of the delays in ask for the return of his P5 Million investment. Thus,
implementing their joint venture, that had also turn down whether the action filed was a complaint for collection of
a number of business opportunities for Fong, thus, a sum of money, or rescission, it must still fail.
caused them to rethink their position in the joint venture.
Fong observed that despite his P5 Million contribution, Issue: Whether petitioner herein has the right for its
Dueñas still failed to give him the financial documents on rescission.
the valuation of the Danton and Bakcom shares. Thus,
except for Dueñas’ representations, Fong had nothing to Held: The court Granted the Petition. An examination of
rely on to ensure that these shares were really valued Fong’s complaint shows that although it was labeled as
at P32.5 Million. Moreover, Dueñas failed to incorporate an action for a sum of money and damages, it was
and register Alliance with the Securities and Exchange actually a complaint for rescission. The following
Commission (SEC). allegations in the complaint support this finding:

These circumstances convinced Fong that Dueñas would 9. Notwithstanding the aforesaid remittances, defendant
no longer honor his obligations in their joint venture failed for an unreasonable length of time to submit a
agreement.13 Thus, on October 30, 1997, Fong wrote valuation of the equipment of D.C. Danton and Bakcom x
Dueñas informing him of his decision to cancel the joint x x.
venture agreement. He also asked for the refund of the P5 10. Worse, despite repeated reminders from plaintiff,
Million that he advanced.14 In response, Dueñas admitted defendant failed to accomplish the organization and
that he could not immediately return the money since he incorporation of the proposed holding company, contrary
used it to defray the business expenses of Danton and to his representation to promptly do so.
Bakcom. xxxx
17. Considering that the incorporation of the proposed
To meet Fong’s demand, Dueñas proposed several holding company failed to materialize, despite the lapse
schemes for payment of the P5 Million.16 However, Fong of one year and four months from the time of subscription,
did not accept any of these proposed schemes. On March plaintiff has the right to revoke his pre-incorporation
25, 1998, Fong wrote a final letter of demand17 informing subscription. Such revocation entitles plaintiff to a refund
Dueñas that he would file a judicial action against him of the amount of P5,000,000.00 he remitted to defendant,
should he still fail to pay after receipt of this written representing advances made in favor of defendant to be
demand. considered as payment on plaintiff’s subscription to the
Since Dueñas did not pay, Fong filed a complaint against proposed holding company upon its incorporation, plus
him for collection of a sum of money and damages. interest from receipt by defendant of said amount until
RTC ruled in favor of Fong and held that a careful fully paid. [Emphasis supplied.]
examination of the complaint shows that although it was
labeled as an action for collection of a sum of money, it Fong’s allegations primarily pertained to his cancellation
was actually an action for rescission. of their verbal agreement because Dueñas failed to
The trial court noted that Dueñas’ failure to furnish Fong perform his obligations to provide verifiable documents on
with the financial documents on the valuation of the the valuation of the Danton’s and Bakcom’s shares, and
Danton and Bakcom shares, as well as the almost one to incorporate the proposed corporation. These
year delay in the incorporation of Alliance, caused Fong allegations clearly show that what Fong sought was the
to rescind the joint venture agreement. According to the joint venture agreement’s rescission.
trial court, these are adequate and acceptable reasons for
rescission. Since Dueñas was unjustly enriched by Fong’s As a contractual remedy, rescission is available when one
advance capital contributions, the trial court ordered him of the parties substantially fails to do what he has
to return the money amounting to P5 Million and to pay obligated himself to perform.32 It aims to address the
ten percent (10%) of this amount in attorney’s fees, as breach of faith and the violation of reciprocity between two
well as the cost of the suit. parties in a contract.33 Under Article 1191 of the Civil
Code, the right of rescission is inherent in reciprocal
CA reversed the RTC’s ruling. The CA ruled that Fong’s obligations, viz:
June 13, 1997 letter evidenced his intention to convert his
cash contributions from "advances" to the proposed
corporation’s shares, to mere "investments." Thus,
13
The power to rescind obligations is implied in reciprocal sale, a violation that consequently gave rise to private
ones, in case one of the obligors should not comply with respondents’ right to rescind the same in accordance with
what is incumbent upon him. [Emphasis supplied.] law.

Dueñas submits that Fong’s prayer for the return of his


cash contribution supports his claim that Fong’s complaint
is an action for collection of a sum of money. However,
Dueñas failed to appreciate that the ultimate effect of
rescission is to restore the parties to their original status
before they entered in a contract. As the Court ruled in
Unlad Resources v. Dragon:34 Rescission has the effect
of "unmaking a contract, or its undoing from the
beginning, and not merely its termination." Hence,
rescission creates the obligation to return the object of the
contract. It can be carried out only when the one who
demands rescission can return whatever he may be
obliged to restore. To rescind is to declare a contract void
at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties
from further obligations to each other, but to abrogate it
from the beginning and restore the parties to their relative
positions as if no contract has been made.

Accordingly, when a decree for rescission is handed


down, it is the duty of the court to require both parties to
surrender that which they have respectively received and
to place each other as far as practicable in his original
situation.
The Court agrees with the trial court that Dueñas violated
his agreement with Fong (that instead, the money should
have been used in processing Alliance’s registration. Its
incorporation would not materialize if there would be no
funds for its initial capital). Aside from unilaterally applying
Fong’s contributions to his two companies, Dueñas also
failed to deliver the valuation documents of the Danton
and Bakcom shares to prove that the combined values of
their capital contributions actually amounted to P32.5
Million. These acts led to Dueñas’ delay in incorporating
the planned holding company, thus resulting in his breach
of the contract.

On this basis, Dueñas’ breach justified Fong’s rescission


of the joint venture agreement under Article 1191.

The right of rescission of a party to an obligation under


Article 1191 of the Civil Code is predicated on a breach of
faith by the other party who violates the reciprocity
between them. The breach contemplated in the said
provision is the obligor’s failure to comply with an existing
obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and
in the absence of any just cause for the court to determine
the period of compliance, the court shall decree the
rescission.

In the present case, private respondents validly exercised


their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the
balance of the purchase price. Indubitably, the latter
violated the very essence of reciprocity in the contract of
14