UNIVERSAL FOOD CORPORATION VS.
CA Chemist Ricardo Francisco, to recall all
33 SCRA 1
FACTS:
This is a petition for certiorari by the UFC against
the CA decision of February 13, 1968 declaring the
BILLOF ASSIGNMENT rescinded, ordering UFC to
return to Magdalo Francisco his Mafran sauce
trademark and to pay his monthly salary of P300.00
from Dec. 1, 1960 until the return to him of said
trademark and formula.
In 1938, plaintiff Magdalo V. Francisco, Sr.
discovered a formula for the manufacture of a food
seasoning (sauce) derived from banana fruits
popularly known as MAFRAN sauce. It was used
commercially since 1942, and in the same year
plaintiff registered his trademark in his name as
owner and inventor with the Bureau of Patents.
However, 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).
On May 31, 1960, Magdalo Francisco entered into
contract with UFC stipulating among other things
that he be the Chief Chemist and Second Vice-
President of UFC and shall have absolute control and
supervision over the laboratory assistants and
personnel and in the purchase and safekeeping of
the chemicals used in the preparation of said Mafran
sauce and that said positions are permanent
in nature.
In line with the terms and conditions of the Bill of
Assignment, Magdalo Francisco was appointed Chief
Chemist with a salary of P300.00 a month. Magdalo
Francisco kept the formula of the Mafran sauce
secret to himself. Thereafter, however, due to the
alleged scarcity and high prices of raw materials, on
November 28, 1960, Secretary-Treasurer Ciriaco L. de
Guzman of UFC issued a Memorandum 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. On
December 3, 1960, President and General Manager
Tirso T. Reyes, issued a memorandum 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. Again, on December 6, 1961, another
memorandum was issued by the same President and
General Manager instructing the Assistant Chief
daily employees who are connected in the
production of Mafran Sauce and also some
additional daily employees for the production of
Porky Pops. 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 operation. 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, UFC, 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.
Due to these successive memoranda, without
plaintiff Magdalo V. Francisco, Sr. being recalled
back to work, he filed the present action on February
14, 1961. Then in a letter dated March 20, 1961, UFC
requested said plaintiff to report for duty, but the
latter declined the request because the present
action was already filed in court.
ISSUES:
1. Was the Bill of Assignment really one that
involves transfer of the formula for Mafran sauce
itself?
2. Was petitioner’s contention that Magdalo
Francisco is not entitled to rescission valid?
RULING:
1. No. Certain provisions of the bill would lead
one to believe that the formula itself was
transferred. To
quote, “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
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.”
The SC had the following reasons to back up the
above conclusion. First, royalty was paid by UFC to
Magdalo Francisco. Second, the formula of said
Mafran sauce was never disclosed to anybody else.
Third, the Bill acknowledged the fact that upon
dissolution of said Corporation, the patentee rights
1
and interests of said trademark shall automatically
revert back to Magdalo Francisco. Fourth, paragraph
3 of the Bill declared only the transfer of the use of
the Mafran sauce and not the formula itself which
was admitted by UFC in its answer.
Fifth, the facts of the case undeniably show that
what was transferred was only the use. Finally, our
Civil Code allows only “the least transmission of
right, hence, what better way is there to show the
least transmission of right of the transfer of the use
of the transfer of the formula itself.”
2. No. Petitioner’s contention that Magdalo
Francisco’s petition for rescission 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, was of no merit because
“it 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.”
This was a case of reciprocal obligation. Article 1191
may be scanned without disclosing anywhere that
the action for rescission thereunder was
subordinated to anything other than the culpable
breach of his obligations by the defendant. Hence,
the reparation of damages for the breach was purely
secondary. Simply put, unlike Art. 1383, Art. 1191
allows both the rescission and the payment for
damages. Rescission is not given to the party as a last
resort, hence, it is not subsidiary in nature.
MAGDALENA ESTATE VS. MYRICK
71 PHIL. 344
FACTS:
Magdalena Estate, Inc. sold to Louis Myrick
lots No. 28 and 29 of Block 1, Parcel 9 of the San
Juan Subdivision, San Juan, Rizal. Their contract of
sale provides that the Price of P7,953 shall be
payable in 120 equal monthly installments of P96.39
each on the second day of every month beginning
the date of execution of the agreement.
In pursuance of said agreement, the vendee
made several payments amounting to P2,596.08, the
last being due and unpaid was that of May 2, 1930.
By reason of this, the vendor, through its president,
notified the vendee that, in view of his inability to
comply with the terms of their contract, said
agreement had been cancelled, relieving him of any
further obligation thereunder, and that all amounts
paid by him had been forfeited in favor of the
vendor. To this communication, the vendee did not
reply, and it appears likewise that the vendor
thereafter did not require him to make any further
disbursements because of the purchase price.
ISSUE: Was the petitioner authorized to forfeit the
purchase price paid?
RULING:
No. The contract of sale contains no
provision authorizing the vendor, in the event of
failure of the vendee to continue in the payment of
the stipulated monthly installments, to retain the
amounts paid to him because of the purchase price.
The claim therefore, of the petitioner that it has the
right to forfeit said sums in its favor is untenable.
Under Article 1124 of the Civil Code, however, he
may choose between demanding the fulfillment of
the contract or its resolution. These remedies are
alternative and not cumulative, and the petitioner in
this case, having elected to cancel the contract
cannot avail himself of the other remedy of exacting
performance. As a consequence of the resolution,
the parties should be restored, as far as practicable,
to their original situation which can be approximated
only be ordering the return of the things which were
the object of the contract, with their fruits and of the
price, with its interest, computed from the date of
institution of the action.
University of the Philippines v. De Los Angeles
G.R. No. L-28602 September 29, 1970
FACTS: On November 2, 1960, UP and
ALUMCO entered into a logging agreement under
which the latter was granted exclusive authority, for
a period starting from the date of the agreement to
31 December 1965, extendible for a further period of
five (5) years by mutual agreement, to cut, collect
and remove timber from the Land Grant, in
consideration of payment to UP of royalties, forest
fees, etc.;
That ALUMCO cut and removed timber
therefrom but, as of 8 December 1964, it had
incurred an unpaid account of P219,362.94, which,
despite repeated demands, it had failed to pay;
that after it had received notice that UP
would rescind or terminate the logging agreement,
ALUMCO executed an instrument, entitled
"Acknowledgment of Debt and Proposed Manner of
Payments," dated 9 December 1964, which was
approved by the president of UP, which expressly
states that, upon default by the debtor ALUMCO,
the creditor (UP) has “the right and the power to
consider the Logging Agreement as rescinded
without the necessity of any judicial suit.”
ALUMCO continued its logging operations,
but again incurred an unpaid account. On July 19,
1965, petitioner UP informed respondent ALUMCO
that it had, as of that date, considered as rescinded
and of no further legal effect the logging agreement
that they had entered in 1960. UP filed a complaint
against ALUMCO for the collection or payment of the
herein before stated sums of money and it prayed for
and obtained an order for preliminary attachment
and preliminary injunction restraining ALUMCO from
continuing its logging operations in the Land Grant.
Respondent ALUMCO contended that it is only after
a final court decree declaring the contract rescinded
for violation of its terms that U.P. could disregard
2
ALUMCO's rights under the contract and treat the
agreement as breached and of no force or effect.
ISSUE: Whether or not petitioner U.P. can
treat its contract with ALUMCO rescinded and may
disregard the same before any judicial
pronouncement to that effect.
HELD: UP and ALUMCO had expressly
stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default
by the debtor ALUMCO, the creditor (UP) has "the
right and the power to consider, the Logging
Agreement as rescinded without the necessity of any
judicial suit." In connection with Article 1191 of the
Civil Code, the Court stated in Froilan vs. Pan
Oriental Shipping Co that “there is nothing in the
law that prohibits the parties from entering into
agreement that violation of the terms of the contract
would cause cancellation thereof, even without court
intervention. In other words, it is not always
necessary for the injured party to resort to court for
rescission of the contract.”
It must be understood that the act of party
in treating a contract as cancelled or resolved on
account of infractions by the other contracting party
must be made known to the other and is always
provisional, being ever subject to scrutiny and review
by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to
court. Then, should the court, after due hearing,
decide that the resolution of the contract was not
warranted, the responsible party will be sentenced
to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded
to the party prejudiced.
ZULUETA VS. MARIANO
111 SCRA 206
FACTS:
Petitioner Jose C. Zulueta is the registered
owner of a residential house and lot situated within
the
Antonio Subdivision, Pasig, Rizal. On
November 6, 1964, petitioner Zulueta and private
respondent Lamberto Avellana, a movie director,
entered into a "Contract to Sell" the aforementioned
property for P75,000.00 payable in twenty years with
respondent buyer assuming to pay a down payment
of 5,000.00 and a monthly installment of P630.00
payable in advance before the 5th day of the
corresponding month, starting with December, 1964
– WITH FURTHER SPECIFIC STIPULATIONS IN CASE OF
BREACH OF SUCH contract.
Avellana occupied the property but title
remained with petitioner Zulueta. Upon the
allegation that respondent had failed to comply with
the monthly amortizations stipulated in the contract,
despite demands to pay and to vacate the premises,
and that thereby the contract was converted into
one of lease, petitioner commenced an ejectment
suit against respondent before the MTC-Pasig.
Respondent controverted by contending that the
Municipal Court had no jurisdiction over the nature
of the action as it involved the interpretation and/or
rescission of the contract; and made some
affirmative defenses and counterclaim. Lower court
found in favor of plaintiff, and asked defendant to
vacate and pay back rentals, etc. CA reversed and
ruled against the Justice of the Municipal Court
finding the case as one of interpretation and
rescission of contract because the contract to sell
was converted to contract of lease. MR denied.
ISSUE:
WON the original contract to sell was
rescinded due to the automatic rescission clause in
the contract, thus the case was unlawful detainer
cognizable by the MTC or one of judicial rescission of
contract cognizable by then CFI.
HELD:
Thus, the basic issue is not possession but
one of rescission or annulment of a contract, which
is beyond the jurisdiction of the Municipal Court to
hear and determine.
A violation by a party of any of the
stipulations of a contract on agreement to sell real
property would entitle the other party to resolved or
rescind it. An allegation of such violation in a
detainer suit may be proved by competent evidence.
And if proved a justice of the peace court might
make a finding to that effect, but it certainly cannot
declare and hold that the contract is resolved or
rescinded. It is beyond its power so to do. And as the
illegality of the possession of realty by a party to a
contract to sell is premised upon the resolution of
the contract, it follows that an allegation and proof
of such violation, a condition precedent to such
resolution or rescission, to render unlawful the
possession of the land or building erected thereon by
the party who has violated the contract, cannot be
taken cognizance of by a justice of the peace court
xxx .
True, the contract between the parties
provided for extrajudicial rescission. This has legal
effect, however, where the other party does not
oppose it. Where it is objected to, a judicial
determination of the issue is still necessary.
A stipulation entitling one party to take
possession of the land and building if the other party
violates the contract does not ex proprio vigore
confer upon the former the right to take possession
thereof if objected to without judicial intervention
and' determination.
But while respondent Judge correctly ruled
that the Municipal Court had no jurisdiction over the
case and correctly dismissed the appeal, he erred in
3
assuming original jurisdiction, in the face of the
objection interposed by petitioner. Section 11, Rule
40, leaves no room for doubt on this point:
Section 11. Lack of jurisdiction. A case tried
by an inferior court without jurisdiction over the
subject matter shall be dismissed on appeal by the
Court of First Instance. But instead of dismissing the
case, the Court of First Instance may try the case on
the merits, if the parties therein file their pleadings
and go to trial without any objection to such
jurisdiction.
There was no other recourse left for
respondent Judge, therefore, except to dismiss the
appeal.
If an inferior court tries a case without
jurisdiction over the subject-matter on appeal, the
only authority of the CFI is to declare the inferior
court to have acted without jurisdiction and dismiss
the case, unless the parties agree to the exercise by
the CFI of its original jurisdiction to try the case on
the merits.
The foregoing premises considered,
petitioner's prayer for a Writ of Execution of the
judgment of the Municipal Court of Pasig must
perforce to be denied.
PALAY VS. CLAVE
124 SCRA 638
Topic: Remedies for Breach of Obligations
FACTS:
On March 28, 1965, petitioner Palay, Inc.,
through its President, Albert Onstott executed in
favor of private respondent, Nazario Dumpit, a
Contract to Sell a parcel of Land (Lot No. 8, Block IV)
of the Crestview Heights Subdivision in Antipolo,
Rizal, with an area of 1,165 square meters, - covered
by TCT No. 90454, and owned by said corporation.
The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00
and monthly installments of P246.42 until fully paid.
Paragraph 6 of the contract provided for
automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse
of 90 days from the expiration of the grace period of
one month, without need of notice and with
forfeiture of all installments paid.
Respondent Dumpit paid the downpayment
and several installments amounting to P13,722.50.
The last payment was made on December 5, 1967
for installments up to September 1967.
On May 10, 1973, or almost six (6) years
later, private respondent wrote petitioner offering to
update all his overdue accounts with interest, and
seeking its written consent to the assignment of his
rights to a certain Lourdes Dizon. He followed this
up with another letter dated June 20, 1973
reiterating the same request. Replying petitioners
informed respondent that his Contract to Sell had
long been rescinded pursuant to paragraph 6 of the
contract, and that the lot had already been resold.
Questioning the validity of the rescission of
the contract, respondent filed a letter complaint with
the National Housing Authority (NHA) for
reconveyance with an alternative prayer for refund.
NHA ruled in favor of Dumpit (private respondent).
The petitioner appealed to the Office of the
President but the latter affirmed the decision of the
NHA.
ISSUE:
Whether or not there is a valid rescission.
RULING:
No. Well settled is the rule, as held in
previous jurisprudence, that judicial action for the
rescission of a contract is not necessary where the
contract provides that it may be revoked and
cancelled for violation of any of its terms and
conditions. However, even in the cited cases, there
was at least a written notice sent to the defaulter
informing him of the rescission. In other words,
resolution of reciprocal contracts may be made extra
judicially unless successfully impugned in Court. If
the debtor impugns the declaration, it shall be
subject to judicial determination.
In this case, private respondent has denied
that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether
resolution of the contract by petitioners was
warranted.
We hold that resolution by petitioners of
the contract was ineffective and inoperative against
private respondent for lack of notice of resolution, as
held in the U.P. vs. Angeles case, supra
The contention that private respondent had
waived his right to be notified under paragraph 6 of
the contract is neither meritorious because it was a
contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom
to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver
follows only where liberty of choice has been fully
accorded.
As a consequence of the resolution by
petitioners, rights to the lot should be restored to
private respondent or the same should be replaced
by another acceptable lot. However, considering that
the property had already been sold to a third person
and there is no evidence on record that other lots
are still available, private respondent is entitled to
the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the
institution of the action
4
Palay, Inc. v Clave (1983) – Melencio-Herrera, J.
Petitioner: Palay, Inc and Albert Onstott
Respondents: Jacobo Clave, National Housing
Authority, and Nazario Dumpit
Concept: The Corporate Entity
Brief Facts: Palay Inc and its President Onstott
executed a Contract to Sell a Parcel of Land in favour
of respondent Dumpit. Par 6 thereof provides for the
automatic extrajudicial rescission upon default of
payment of the monthly installments. Dumpit
defaulted. 6 years later, he wrote Palay that he is
planning to update all his overdue accounts, but the
latter informed him that the contract was rescinded
and that the land was already sold to a third party.
Dumpit filed a complaint, questioning the validity of
the rescission. The NHA and the Office of the
President ruled that such was void for lack of judicial
or notarial demand.
Doctrine: As a general rule, a corporation may not be
made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it
may be connected and vice versa.
Mere ownership by a single stockholder or by
another corporation is not of itself sufficient ground
for disregarding the separate corporate personality.
FACTS:
1. March 28, 1965 – Palay Inc through its President
Albert Onstott, executed a “Contract to Sell a
Parcel of Land” in favour of Nazario Dumpit.
o Sale price was P23,300 with 9%
interest per annum, payable with a
down payment of P4,660 and
monthly instalments of P246.42
until fully paid.
2. Par 6 of their contract provided for automatic
extrajudicial rescission upon default in payment
of any monthly instalment after the lapse of 90
days from the expiration of the grace period of
one month, without the need of notice and
with forfeiture of all instalments paid.
3. Dumpit paid the down payment and several
instalments amounting to P13, 722.50. The last
payment he made was on December 5, 1967 for
instalments up to September 1967.
4. May 10, 1973 or 6 years later, Dumpit wrote
Palay Inc, offering to update all its overdue
accounts with interest and seeking its written
consent to the assignment of his rights to
Lourdes Dizon.
5. June 20, 1973 – Dumpit wrote Palay again,
reiterating the same request.
6. Palay replied that their Contract to Sell had
already been rescinded pursuant to Par 6 of
their contract, and that the lot had already been
resold to a 3rd party.
7. Dumpit filed a letter complaint questioning the
validity of the rescission of the contract with the
National Housing Authority (NHA) for
reconveyance with an alternative prayer of
refund.
8. NHA: found the rescission void in the absence of
either judicial or notarial demand. Ordered Palay
and Onstott to refund to Dumpit P13,722.50
with 12% interest from the filing of the
complaint on November 8, 1974.
o Palay’s Motion for Reconsideration
was denied
9. On appeal to the Office of the President:
Presidential Executive Assistant affirmed the
NHA Resolution.
10. SC issued a TRO enjoining the enforcement of
the resolution. On Oct 28, 1981, the SC
dismissed the petition. However, upon Palay’s
motion, the SC reconsidered and gave due
course to the petition.
ISSUES:
1. WON Palay was justified in rescinding the contract
to sell without prior notice or demand (NO)
2. WON respondent had waived his right to be
notified under Par 6 of the contract (NO)
3. WON refund of the instalment payments is proper
(YES)
4. WON petitioner Onstott may be held jointly and
severally liable with Palay (NO)
RATIO:
1. Rescission of the contract was ineffective and
inoperative against Dumpit for lack of notice of
resolution.
- Well settled is the rule that judicial action for the
rescission of a contract is not necessary where
the contract provides that it may be revoked and
cancelled for violation of any of its terms and
conditions.
- However, as held in University of the Philippines
v de los Angeles, the act of a party in treating a
contract as cancelled should be made known to
the other.
o The party who deems the contract
violated may consider it rescinded
and act accordingly, without
previous court action, but it
proceeds at its own risk. For it is
only the final judgment of the
court that will conclusively settle
whether the action taken was or
was not correct in law
- This was reiterated in Zulueta v Mariano, where
the court held that extrajudicial rescission has
legal effect where the other party does not
oppose it. Where it is objected to, a judicial
determination of the issue is still necessary.
- In other words, resolution of reciprocal contracts
may be made extrajudicially unless successfully
impugned in Court.
- However, the rescission made by petitioners was
ineffective and inoperative for lack of notice of
resolution.
- The indispensability of notice of cancellation to
the buyer is underscored in RA 6551 1 wherein it
1
An Act to Provide Protection to Buyers of Real
Estate on Installment Payments
5
 provided that “the actual cancellation of the
contract shall take place after 30 days from
receipt by the buyer of the notice of cancellation
or the demand for rescission of the contract by a
notarial act and upon full payment of the cash
surrender value to the buyer…”
2. There was no waiver of the right to be notified
since the contract is a contract of adhesion.
- A waiver must be certain and unequivocal, and
intelligently made; such waiver follows only
where liberty of choice has been fully accorded.
- It is a matter of public policy to protect buyers of
real estate on instalment payments against
onerous and oppressive condition to buyers of
real estate on instalment.
3. As a consequence of the resolution by
petitioners, rights to the lot should be restored to
private respondent or the same should be replaced
by another acceptable lot. However, considering
that the property had already been sold to a third
person and there is no evidence on record that
other lots are still available, private respondent is
entitled to the refund of installments paid plus
interest at the legal rate of 12% computed from the
date of the institution of the action. 10 It would be
most inequitable if petitioners were to be allowed
to retain private respondent's payments and at the
same time appropriate the proceeds of the second
sale to another.
4. In this case, petitioner Onstott was made liable
because he was then the President of the
corporation and he a to be the controlling
stockholder. No sufficient proof exists on record
that said petitioner used the corporation to defraud
private respondent.
- It is basic that a corporation is invested by law
with a personality separate and distinct from
those of the persons composing it as wen as
from that of any other legal entity to which it
may be related. As a general rule, a corporation
may not be made to answer for acts or liabilities
of its stockholders or those of the legal entities
to which it may be connected and vice versa.
- However, the veil of corporate fiction may be
pierced when it is used as a shield to further an
end subversive of justice; or for purposes that
could not have been intended by the law that
created it; or to defeat public convenience,
justify wrong, protect fraud, or defend crime; or
to perpetuate fraud or confuse legitimate issues;
or to circumvent the law or perpetuate
deception; or as an alter ego, adjunct or
business conduit for the sole benefit of the
stockholders.
- We find no badges of fraud on petitioners' part.
They had literally relied, albeit mistakenly, on
paragraph 6 of its contract with private
respondent when it rescinded the contract to
sell extrajudicially and had sold it to a third
person.
- In this case, petitioner Onstott was made liable
because he was then the President of the
corporation and he appeared to be the
controlling stockholder. No sufficient proof exists
on record that said petitioner used the
corporation to defraud private respondent.
- He cannot, therefore, be made personally liable
just because he "appears to be the controlling
stockholder".
- Mere ownership by a single stockholder or by
another corporation is not of itself sufficient
ground for disregarding the separate corporate
personality.
DISPOSITIVE: WHEREFORE, the questioned
Resolution of respondent public official, dated May
2, 1980, is hereby modified. Petitioner Palay, Inc. is
directed to refund to respondent Nazario M. Dumpit
the amount of P13,722.50, with interest at twelve
(12%) percent per annum from November 8, 1974,
the date of the filing of the Complaint. The
temporary Restraining Order heretofore issued is
hereby lifted.
Digest maker: Kat
Angeles v. Calasanz
G.R. No. L-42283, March 18, 1985, 135 SCRA 323
FACTS:
Ursula and Tomas Calasanz sold a piece of land to
Buenaventura Angeles and Teofila Juani covered by a
contract to sell. Angeles paid a down payment upon
the execution of the contract and started paying the
balance in monthly installments for nine years with
only a few remaining installments left to pay.
Although Calasanz accepted late payments before,
Angeles was now five months late. Calasanz
demanded payment of past due accounts, but did
not receive any. Eventually, Calansanz canceled the
said contract and Angeles asked for reconsideration,
but was denied.
A provision in the contract to sell gave Calasanz the
right to cancel the contract and consider the
amounts paid as rent for the property. However, the
lower court ruled that the contract was not validly
canceled and ordered Calasanz to execute a final
Deed of Sale in favor of Angeles.
ISSUE:
Was the contract to sell validly canceled?
RULING:
No. The act of a party in treating a contract as
canceled or resolved on account of infractions by the
other 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 bring the
matter to court. Then, should the court decide that
the resolution of the contract was not warranted, the
6
responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed and
indemnity awarded to the party prejudiced.
The right to rescind the contract for non-
performance of one of its stipulations is not
absolute. 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. The question
of whether a breach of a contract is substantial
depends upon the attendant circumstances.
The breach of the contract alleged by Calasanz is so
slight considering that Angeles had already paid
monthly installments for almost nine years. In only a
short time, the entire obligation would have been
paid.
To mitigate the unilateral act of Calasanz in
cancelling the contract, Article 1234 of the Civil Code
provides that: If the obligation has been substantially
performed in good faith, the obligor may recover as
though there had been a strict and complete
fulfillment, less damages suffered by the obligee.
Boysaw vs. Interphil Promotions
Boxer (P) vs. Promoter (D)
GR L-22590
Summary: A boxer signed an agreement with a
promotions agency to arrange and promote a boxing
match with Flash Elorde. The boxer violated the
terms of the contract, but in spite of these, the
agency proceeded except it negotiated for a new
date for the match. Eventually, the match as
originally stated in the contract did not materialize.
Boxer and manager is now suing the promotion
agency for breach of contract.
Rule of Law: Where one party did not perform the
undertaking which he was bound by the terms of the
agreement to perform, he is not entitled to insist
upon the performance of the contract by the other
party, or recover damages by reason of his own
breach.
Facts: Solomon Boysaw (P), signed with Interphil
Promotions, Inc. (D), a contract to engage Gabriel
"Flash" Elorde in a boxing contest for the junior
lightweight championship of the world. Thereafter,
Interphil (D) signed Gabriel "Flash" Elorde to a similar
agreement—that is, to engage Boysaw in a title fight.
The managerial rights over Boysaw (P) was assigned
and eventually reassigned to Alfredo Yulo, Jr. (P)
without the consent of Interphil (D) in violation of
their contract. When informed of the change,
Interphil (D) referred the matter to the Games and
Amusement Board culminating to a decision by the
board to approve a new date for the match. Yulo (P)
protested against the new date even when another
proposed date was within the 30-day allowable
postponements.
Boysaw (P) and Yulo (P) filed for breach of contract
when the fight contemplated in the original boxing
contract did not materialize.
Issues: May the offending party in a reciprocal
obligation compel the other party for specific
performance?
Ruling: No. Evidence established that the contract
was violated by Boysaw (P) when, without the
approval or consent of Interphil (D), he fought a
boxing match in Las Vegas. Another violation was the
assignment and transfer of the managerial rights
over Boysaw (P) without the knowledge or consent
of Interphil (D).
While the contract imposed no penalty for such
violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law
on contracts recognizes the principle that actionable
injury inheres in every contractual breach.
Those who in the performance of their obligations
are guilty of fraud, negligence or delay, and those
who in any manner contravene the terms thereof,
[T are liable for damages.
—Article 1170, Civil Code.
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.
—Article 1191, Civil Code.
The contract in question gave rise to reciprocal
obligations.
Reciprocal obligations are those which arise from the
same cause, and in which each party is a debtor and
a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other.
They are to be performed simultaneously, so that the
performance of one is conditioned upon the
simultaneous fulfillment of the other.
—Tolentino, Civil Code of the Philippines, Vol. IV, p.
175.
The power to rescind is given to the injured party.
Where the plaintiff is the party who did not perform
the undertaking which he was bound by the terms of
the agreement to perform, he is not entitled to insist
upon the performance of the contract by the
defendant, or recover damages by reason of his own
breach.
—Seva vs. Alfredo Berwin, 48 Phil. 581.
7

Under the law, when a contract is unlawfully novated
by an applicable and unilateral substitution of the
obligor by another, the aggrieved creditor is not
bound to deal with the substitute. However, from
the evidence, it is clear that the Interphil (D), instead
of availing themselves of the options given to them
by law of rescission or refusal to recognize the
substitute obligor, really wanted to postpone the
fight date owing to an injury that Elorde sustained in
a recent bout. That Interphil (D) had justification to
renegotiate the original contract, particularly the
fight date is undeniable from the facts. Under the
circumstances, Interphil's (D) desire to postpone the
fight date could neither be unlawful nor
unreasonable.
Pilipinas Bank vs IAC June 30, 1987
FACTS: Hacienda Benito, Inc. as vendor, and private
respondents, as vendees executed Contract to Sell
No. over a parcel of land on monthly installments
subject to the condition: “The contract shall be
considered automatically rescinded and cancelled
and of no further force and effect upon failure of the
vendee to pay when due, three or more consecutive
installments as stipulated therein or to comply with
any of the terms and conditions thereof…”
During the contract, petitioner sent series of notices
to private respondents (PR) for thei latter’s
balances/arrearages. From time to time, PR partially
complied with this and requested for extensions. On
May 19, 1970, the petitioner, for the last time,
reminded the PR to pay their balance. After more
than two years, PR sent a letter expressing their
desire to settle their desire to fully settle their
obligation. On March 27, 1974, petitioner wrote a
letter to PR , informing them that the contract to sell
had been rescinded. PR filed Complaint for Specific
Performance with Damages to compel petitioner to
execute a deed of sale.
After trial, the lower court rendered a decision in
PR’s favor, holding that petitioner could not rescind
the contract to sell, because: (a) petitioner waived
the automatic rescission clause by accepting
payment and by sending letters advising private
respondents of the balances due, thus, looking
forward to receiving payments thereon. Said decision
was affirmed on appeal. Hence, this Petition For
Review on Certiorari,
ISSUE: whether or not the Contract to Sell was
rescinded, under the automatic rescission clause
contained therein.
HELD: In case the rescission is found unjustified
under the circumstances, still in the instant case
there is a clear waiver of the stipulated right of
"automatic rescission," as evidenced by the many
extensions granted private respondents by the
petitioner. In all these extensions, the petitioner
never called attention to the proviso on "automatic
rescission." The assailed decision is affirmed.
Central Bank v Court of Appeals G.R. No. L-45710
October 3, 1985
MARCH 16, 2014LEAVE A COMMENT
The bank’s asking for advance interest for the loan
is improper considering that the total loan hasn’t
been released. A person can’t be charged interest
for nonexisting debt. The alleged discovery by the
bank of overvaluation of the loan collateral is not
an issue. Since Island Savings Bank failed to furnish
the P63,000.00 balance of the P80,000.00 loan, the
real estate mortgage of Sulpicio M. Tolentino
became unenforceable to such extent.
Facts: Island Savings Bank, upon favorable
recommendation of its legal department, approved
the loan application for P80,000.00 of Sulpicio M.
Tolentino, who, as a security for the loan, executed
on the same day a real estate mortgage over his 100-
hectare land located in Cubo, Las Nieves, Agusan.
The loan called for a lump sum of P80,000, repayable
in semi-annual installments for 3 yrs, with 12%
annual interest. After the agreement, a mere P17K
partial release of the loan was made by the bank and
Tolentino and his wife signed a promissory note for
the P17,000 at 12% annual interest payable w/in 3
yrs. An advance interest was deducted fr the partial
release but this prededucted interest was refunded
to Tolentino after being informed that there was no
fund yet for the release of the P63K balance.
Monetary Board of Central Bank, after finding that
bank was suffering liquidity problems, prohibited the
bank fr making new loans and investments. And after
the bank failed to restore its solvency, the Central
Bank prohibited Island Savings Bank from doing
business in the Philippines. Island Savings Bank in
view of the non-payment of the P17K filed an
application for foreclosure of the real estate
mortgage. Tolentino filed petition for specific
performance or rescission and damages with
preliminary injunction, alleging that since the bank
failed to deliver P63K, he is entitled to specific
performance and if not, to rescind the real estate
mortgage.
Issues: 1) Whether or not Tolentino’s can collect
from the bank for damages
2) Whether or not the mortgagor is liable to
pay the amount covered by the promissory note
3) Whether or not the real estate mortgage
can be foreclosed
Held:
1) Whether or not Tolentino’s can collect from the
bank for damages
The loan agreement implied reciprocal obligations.
When one party is willing and ready to perform, the
other party not ready nor willing incurs in delay.
When Tolentino executed real estate mortgage, he
signified willingness to pay. That time, the bank’s
8
obligation to furnish the P80K loan accrued. Now, the
Central Bank resolution made it impossible for the
bank to furnish the P63K balance. The prohibition on
the bank to make new loans is irrelevant bec it did
not prohibit the bank fr releasing the balance of
loans previously contracted. Insolvency of debtor is
not an excuse for non-fulfillment of obligation but is
a breach of contract.
The bank’s asking for advance interest for the loan is
improper considering that the total loan hasn’t been
released. A person can’t be charged interest for
nonexisting debt. The alleged discovery by the bank
of overvaluation of the loan collateral is not an issue.
The bank officials should have been more
responsible and the bank bears risk in case the
collateral turned out to be overvalued. Furthermore,
this was not raised in the pleadings so this issue can’t
be raised. The bank was in default and Tolentino may
choose bet specific performance or rescission w/
damages in either case. But considering that the
bank is now prohibited fr doing business, specific
performance cannot be granted. Rescission is the
only remedy left, but the rescission shld only be for
the P63K balance.
2) Whether or not the mortgagor is liable to pay the
amount covered by the promissory note
The promissory note gave rise to Sulpicio M.
Tolentino’s reciprocal obligation to pay the
P17,000.00 loan when it falls due. His failure to pay
the overdue amortizations under the promissory
note made him a party in default, hence not entitled
to rescission (Article 1191 of the Civil Code). If there
is a right to rescind the promissory note, it shall
belong to the aggrieved party, that is, Island Savings
Bank. If Tolentino had not signed a promissory note
setting the date for payment of P17,000.00 within 3
years, he would be entitled to ask for rescission of
the entire loan because he cannot possibly be in
default as there was no date for him to perform his
reciprocal obligation to pay. Since both parties were
in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank
failed to comply with its obligation to furnish the
entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his P17,000.00 debt within
3 years as stipulated, they are both liable for
damages.
3) Whether or not the real estate mortgage can be
foreclosed
Since Island Savings Bank failed to furnish the
P63,000.00 balance of the P80,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage
covering 100 hectares is unenforceable to the extent
of 78.75 hectares. The mortgage covering the
remainder of 21.25 hectares subsists as a security for
the P17,000.00 debt. 21.25 hectares is more than
sufficient to secure a P17,000.00 debt.
G.R. No. 149338 July 28, 2008
UNLAD RESOURCES DEVELOPMENT CORPORATION,
UNLAD RURAL BANK OF NOVELETA, INC., UNLAD
COMMODITIES, INC., HELENA Z. BENITEZ, and
CONRADO L. BENITEZ II, Petitioners,
vs.
RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ,
VICENTE D. CASAS, ROMULO M. VIRATA, FLAVIANO
PERDITO, TEOTIMO BENITEZ, ELENA BENITEZ, and
ROLANDO SUAREZ, Respondents.
Topic: F. Remedies for Breach of Obligations –
Judicial Remedies
Facts:
The parties entered in a Memorandum of
Agreement: respondents as controlling stockholders
of the Rural Bank shall allow Unlad Resources to
subscribe to a minimum of P480, 000 common or
preferred non-voting shares of stock with a total par
value of P4.8M and pay up immediately P1.2M for
said subscription; that the respondents, upon the
signing of the said agreement shall transfer control
and management over the Rural Bank to Unlad
Resources. The respondents complied with their
obligation but the petitioners did not, thus
respondents filed a Complaint for rescission of the
agreement and the return of control and
management of the Rural Bank from petitioners to
respondents, plus damages. RTC declared the MOA
rescinded &ordered to immediately return control
and management over the Rural to respondents.
Petitioners appealed to the CA which dismissed the
appeal for lack of merit.
Petitioners contend that the issues court are
intra-corporate in nature and are, therefore, beyond
the jurisdiction of the trial court. They point out that
respondents' complaint charged them with
mismanagement and alleged dissipation of the
assets of the Rural Bank.
Issue #1: Does RTC have jurisdiction over the case?
Decision: Yes
Ratio:
The main issue in this case is the rescission
of the Memorandum of Agreement. This is to be
distinguished from respondents' allegation of the
alleged mismanagement and dissipation of corporate
assets by the petitioners, which is based on the
prayer for receivership over the bank. The two
issues, albeit related, are obviously separate, as they
pertain to different acts of the parties involved. The
issue of receivership does not arise from the parties'
obligations under the Memorandum of Agreement,
but rather from specific acts attributed to petitioners
as members of the Board of Directors of the Bank.
Clearly, the rescission of the Memorandum of
Agreement is a cause of action within the jurisdiction
of the trial courts, notwithstanding the fact that the
parties involved are all directors of the same
corporation.
The petitioners insist that the trial court had
no jurisdiction over the complaint because the issues
involved are intra-corporate in nature. This point has
9
been rendered moot by RA 8799, also known as the
Securities Regulation Code, which took effect in
2000, transferred jurisdiction over such disputes to
the RTC.
Issue #2: Has the action prescribed?
Decision: No
Ratio:
Petitioners contend that the action for
rescission has prescribed under Article 1398 of the
Civil Code, which provides: The action to claim
rescission must be commenced within 4 years. This is
an erroneous proposition. Article 1389 specifically
refers to rescissible contracts as, clearly, this
provision is under the chapter entitled "Rescissible
Contracts."
Article 1389 applies to rescissible contracts,
as enumerated and defined in Articles 1380 and
1381. The "rescission" in Article 1381 is not akin to
the term "rescission" in Article 1191 and Article
1592. In Articles 1191 and 1592, the rescission is a
principal action which seeks the resolution or
cancellation of the contract while in Article 1381, the
action is a subsidiary one limited to cases of
rescission for lesion as enumerated in said article.
The prescriptive period applicable to
rescission under Articles 1191 and 1592, is found in
Article 1144, which provides that the action upon a
written contract should be brought within ten years
from the time the right of action accrues.
Article 1381 sets out what are rescissible contracts,
to wit:
Article 1381. The following
contracts are rescissible:
(1) Those which are entered into by
guardians whenever the wards whom
they represent suffer lesion by more than
one-fourth of the value of the things
which are the object thereof;
(2) Those agreed upon in
representation of absentees, if the latter suffer
the lesion stated in the preceding
number;
(3) Those undertaken in fraud of
creditors when the latter cannot in any
other manner collect the claims due them;
(4) Those which refer to things
under litigation if they have been entered
into by the defendant without the
knowledge and approval of the
litigants or of competent judicial authority;
(5) All other contracts specially
declared by law to be subject to
rescission.
The Memorandum of Agreement subject of
this controversy does not fall under the above
enumeration. Accordingly, the prescriptive period
that should apply to this case is that provided for in
Article 1144, to wit: The following actions must be
brought within ten years from the time the right of
action accrues: (1) Upon a written contract;
Based on the records of this case, the action
was commenced on July 3, 1987, while the
Memorandum of Agreement was entered into on
December 29, 1981. Article 1144 specifically
provides that the 10-year period is counted from
"the time the right of action accrues." The right of
action accrues from the moment the breach of right
or duty occurs. Thus, the original Complaint was filed
well within the prescriptive period.
Issue #3: Did the RTC correctly rule for the rescission
of the MOA?
Decision: Yes
Ratio:
Petitioners failed to fulfill their obligation
under the MOA. Even they admit the same, albeit
laying the blame on respondents.
It is true that respondents increased the
Rural Bank's authorized capital stock to only P5
million, which was not enough to accommodate the
P4.8 million worth of stocks that petitioners were to
subscribe to and pay for. However, respondents'
failure to fulfill their undertaking in the agreement
would have given rise to the scenario contemplated
by Article 1191 of the Civil Code, which reads:
Article 1191. The power to rescind
reciprocal obligations is implied in
reciprocal ones, in case one of the obligors
should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment,
if the latter should become impossible.
The court shall decree the rescission
claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice
to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and
the Mortgage Law.
Thus, petitioners should have exacted
fulfillment from the respondents or asked for the
rescission of the contract instead of simply not
performing their part of the Agreement. But in the
course of things, it was the respondents who availed
of the remedy under Article 1191, opting for the
rescission of the Agreement in order to regain
control of the Rural Bank.
Having determined that the rescission of
the subject Memorandum of Agreement was in
order, the trial court ordered petitioner Unlad
Resources to return to respondents the management
and control of the Rural Bank and for the latter to
return the sum of P1,003,070.00 to petitioners.
Mutual restitution is required in cases
involving rescission under Article 1191. This means
bringing the parties back to their original status prior
to the inception of the contract. [14] Article 1385 of
the Civil Code provides, thus:
ART. 1385. Rescission creates the
obligation to return the things which
were the object of the contract, together
with their fruits, and the price with its
interest; consequently, it can be carried out only
10
when he who demands rescission can
return whatever he may be obligated to restore.
Neither shall rescission take place when the
things which are the object of the contract are legally
in the possession of third persons who did not act in
bad faith.
In this case, indemnity for damages may be
demanded from the person causing the loss.
This Court has consistently ruled that this
provision applies to rescission under Article 1191:
[S]ince Article 1385 of the Civil
Code expressly and clearly states that
"rescission creates the obligation
to return the things which were the
object of the contract, together
with their fruits, and the price with its
interest,"the Court finds no
justification to sustain petitioners' position
that said Article 1385 does not apply to
rescission under Article 1191.[15]
Rescission has the effect of "unmaking a
contract, or its undoing from the beginning, and not
merely its termination."[16] Hence, rescission creates
the obligation to return the object of the contract. It
can be carried out only when the one who demands
rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its
inception and to put an end to it as though it never
was. It is not merely to terminate it and release the
parties from further obligations to each other, but to
abrogate it from the beginning and restore the
parties to their relative positions as if no contract has
been made.[17]
Accordingly, when a decree for rescission is
handed down, it is the duty of the court to require
both parties to surrender that which they have
respectively received and to place each other as far
as practicable in his original situation. The rescission
has the effect of abrogating the contract in all parts.
[18]
Clearly, the petitioners failed to fulfill their
end of the agreement, and thus, there was just cause
for rescission. With the contract thus rescinded, the
parties must be restored to the status quo ante, that
is, before they entered into the Memorandum of
Agreement.
___________________________________________
Case Title: SWIRE REALTY DEVELOPMENT
CORPORATION, PETITIONER, VS. JAYNE YU,
RESPONDENT
G.R. No. 207133, March 09, 2015 Date: 27 of Sept
2017
Ponente: PERALTA, J
Topic: Rescission of obligations in case of failure on
the part of the obligor to deliver/perform his
prestation.
FACTS
 Respondent Jayne Yu and petitioner Swire
Realty Development Corporation entered
into a Contract to Sell on July 25, 1995
covering Condo Unit 3007 of the Palace of
Makati, with an area of 137.30 square
meters for the total contract price of
P7,519,371.80, payable in equal monthly
instalments until September 24, 1997.
Respondent likewise purchased a parking
slot in the same condominium building for
P600,000.00.
 On September 24, 1997, respondent paid
the full purchase price of P7,519,371.80 for
the unit while making a down payment of
P20,000.00 for the parking lot. However,
notwithstanding full payment, petitioner
failed to complete and deliver the subject
unit on time prompting respondent to file a
Complaint for Rescission of Contract with
Damages before HLURB
 On October 19, 2004, the HLURB rendered a
Decision dismissing respondent’s complaint.
It ruled that rescission is not permitted for
slight or casual breach of the contract but
only for such breaches as are substantial
and fundamental as to defeat the object of
the parties in making the agreement.
 Respondent then elevated the matter to the
HLURB Board of Commissioners.
 The HLURB Board of Commissioners
reversed and set aside the ruling stating
that he delay in the completion of the
project as well as of the delay in the
delivery of the unit are breaches of
statutory and contractual obligations which
entitles respondent to rescind the contract,
demand a refund and payment of damages.
 Petitioner moved for reconsideration, but
the same was denied by the HLURB Board
of Commissioners.
 Petitioner then appealed to the Office of
the President on August 7, 2007 which
dismissed petitioner’s appeal on the ground
that it failed to promptly file its appeal.
Immediately, petitioner filed a motion for
reconsideration against said decision.
 In a Resolution 10 dated February 17, 2009,
the OP, through then Executive Secretary
Eduardo Ermita, granted petitioner’s motion
and set aside Deputy Executive Secretary
Gaite’s decision.
ISSUE 1: Whether or not rescission of the contract is
proper in the instant case.
HELD 1:
 Yes, Article 1191 of the Civil Code sanctions
the right to rescind the obligation in the
event that specific performance becomes
impossible, to wit:
11

 Article 1191. The power to rescind
obligations is implied in reciprocal ones, in
case one of the obligors should not comply
with what is incumbent upon him.
 The injured party may choose between the
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 fulfilment, if the
latter should become impossible.
 In this case, it is evident that, petitioner had
incurred delay in the performance of its
obligation amounting to breach of contract
for failing to finish and deliver the unit to
respondent within the stipulated period.
The delay in the completion of the project
as well as the delay in the delivery of the
unit are breaches of statutory and
contractual obligations which entitle
respondent to rescind the contract, demand
a refund and payment of damages.
G.R. No. 196251 July 9, 2014
OLIVAREZ REALTY CORPORATION and DR. PABLO R.
OLIVAREZ, Petitioner,
vs.
BENJAMIN CASTILLO, Respondent.
Facts:
Castillo was the owner of a parcel of land covered by
TCT 19972. The Philippine Tourism Authority
allegedly claimed ownership of the same parcel of
land based on TCT 18493.
Castillo and Olivarez Realty Corporation, represented
by Dr. Pablo Olivarez, entered into a contract of
conditional sale over the property. The details were
as follows:
1. Under the deed of conditional sale, Castillo agreed
to sell his property to Olivarez Realty; with Olivarez
Realty delivering the downpayment and the rest to
be paid in 30 equal monthly installments every 8th of
the month beginning in the month that the parties
would receive a decision voiding the PTA’s title to the
property.
2. Under the same deed, Olivarez Realty will file the
action against PTA with full assistance of Castillo; and
that should the petition be denied, Castillo shall
reimburse all the amounts paid by Olivarez Realty.
3. Under the same contract, Olivarez Realty
undertook to pay the legitimate tenants of the land
disturbance compensation, while Castillo undertook
to clear the land of the tenants within 6 months from
the signing of the deed; that should Castillo fail to
clear the land within 6 months, Olivarez Realty may
suspend its monthly downpayment until the tenants
vacate the property.
4. The parties agreed that Olivarez Realty
Corporation may immediately occupy the property
upon signing of the deed. Should the contract be
cancelled, Olivarez Realty Corporation agreed to
return the property’s possession to Castillo and
forfeit all the improvements it may have introduced
on the property.
Olivarez Realty failed to comply with the conditions,
to wit: a) pay the full purchase price; b) failed to file
any action against PTA; c) failed to clear the land of
the tenants nor paying them disturbance
compensation. For breaching the contract, Castillo
prayed for rescission of contract under Art. 1191 of
Civil Code, plus damages.
In their defense, Olivarez Realty alleged that Castillo
failed to fully assist in filing the action against PTA;
that Castillo failed to clear the property of the
tenants within 6 months from the signing of the
deed. Thus, they had all the legal right to withhold
the subsequent payments to fully pay the purchase
price.
Both RTC and CA ruled that Olivarez Realty breached
the contract and ordered the rescission of the sale
plus damages.
Issue #1:
What is the nature of obligations undertaken by both
parties?
Held #1:
Olivarez Realty’s obligation to pay the disturbance
compensation is a pure obligation, and hence,
demandable at once. With respect to Castillo’s
obligation to clear the land of the tenants within six
months from the signing of the contract, his
obligation was an obligation with a resolutory period.
The obligation to clear the land of the tenants took
effect at once, specifically, upon the parties’ signing
of the deed of conditional sale. Castillo had until
October 2, 2000, six months from April 5, 2000 when
the parties signed the deed of conditional sale, to
clear the land of the tenants. Olivarez Realty
Corporation, therefore, had no right to withhold
payments of the purchase price. As the trial court
ruled, Olivarez Realty Corporation “can only claim
non-compliance of the obligation to clear the land of
the tenants in October 2000.
Issue #2:
Whether or not rescission of the contract is proper.
Held #2: NO.
SC characterized the contract as a contract to sell,
not a contract of conditional sale. In a contract of
conditional sale, the buyer automatically acquires
title to the property upon full payment of the
purchase price. This transfer of title is “by operation
of law without any further act having to be
performed by the seller.” In a contract to sell,
transfer of title to the prospective buyer is not
automatic. “The prospective seller must convey title
to the property through a deed of conditional sale.”
The distinction is important to determine the
applicable laws and remedies in case a party does
not fulfill his or her obligations under the contract. In
contracts of conditional sale, our laws on sales under
the Civil Code of the Philippines apply. On the other
hand, contracts to sell are not governed by our law
on sales but by the Civil Code provisions on
conditional obligations.
Specifically, Article 1191 of the Civil Code on the right
to rescind reciprocal obligations does not apply to
contracts to sell. Failure to fully pay the purchase
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price in contracts to sell is not the breach of contract
under Art. 1191. Failure to fully pay the purchase
price is merely an event which prevents the seller’s
obligation to convey title from acquiring binding
force. This is because there can be no rescission of
an obligation that is still nonexistent, the suspensive
condition (the condition of having the buyer pay the
full purchase price) having not happened.
In this case, Castillo reserved his title to the property
and undertook to execute a deed of absolute sale
upon Olivarez Realty Corporation’s full payment of
the purchase price. Since Castillo still has to execute
a deed of absolute sale to Olivarez Realty
Corporation upon full payment of the purchase price,
the transfer of title is not automatic. As this case
involves a contract to sell, Article 1191 of the Civil
Code of the Philippines does not apply. The contract
to sell is instead cancelled, and the parties shall
stand as if the obligation to sell never existed.
SC cancelled the deed of conditional sale. Olivarez
Realty was ordered to return to Castillo the
possession of property, together with all
improvements that it introduced. Olivarez Realty was
also ordered to pay moral damages, exemplary
damages, and attorney’s fees to Castillo.
GR No. 176986, January 13, 2016
Nissan Car Lease Phils Inc (Petitioner) v LICA
Management and Proton (Respondents)
Third Division
Ponente: Jardeleza, J.
Nature of Action: Petition for Review on Certiorari
assailing the decision of the Court of Appeals in
ruling for the validity of extra-judicial rescission.
FACTS:
LMI is the absolute owner of a property
located at Pasong Tamo Extension, Makati City. It
entered into a contract with NCLPI for the latter to
lease the property for a term of ten (10) years with a
monthly rental of ₱308,000.00. Subsequently, NCLPI
became delinquent in paying the monthly rent.
Nissan and Lica verbally agreed to convert the
arrearages into a debt to be covered by a promissory
note and twelve (12) postdated checks each
amounting to ₱162,541.95 as monthly payments
starting June 1996 until May 1997. While NCLPI was
able to deliver the postdated checks per its verbal
agreement with LMI, it failed to sign the promissory
note and pay the checks for June to October 1996.
Thus, in a letter dated October 16, 1996, LMI
informed NCLPI that it was terminating their
Contract of Lease due to arrears in the payment of
rentals. It also demanded that NCLPI (1) pay the
amount of ₱2,651,570.39 for unpaid rentals and (2)
vacate the premises within five (5) days from receipt
of the notice. In the meantime, Proton sent NCLPI an
undated request to use the premises as a temporary
display center for "Audi" brand cars for a period of
ten (10) days. NCLPI entered into a Memorandum of
Agreement with Proton whereby the former agreed
to allow Proton "to immediately commence
renovation work even prior to the execution of the
Contract of Sublease. LMI entered into a Contract of
Lease with Proton over the subject premises. NCLPI
demanded Proton to vacate the leased
premises. However, Proton replied that it was
occupying the property based on a lease contract
with LMI. In a letter of even date addressed to LMI,
NCLPI asserted that its failure to pay rent does not
automatically result in the termination of the
Contract of Lease nor does it give LMI the right to
terminate the same.
ISSUE:
Whether the contract can be rescinded
extra-judicially despite the absence of a special
contractual stipulation therefor.
RULING:
Yes. Art. 1191 provides that the power to
rescind is implied in reciprocal obligations, in cases
where one of the obligors should fail to comply with
what is incumbent upon him.
It is clear from the records that NCLPI
committed substantial breaches of its Contract of
Lease with LMI. Aside from non-payment of rentals,
it appears that NCLPI also breached its obligations
under Paragraphs 4th and 5th of the Contract of Lease
which prohibit it from subleasing the premises or
introducing improvements or alterations thereon
without LMI’s prior written consent. As revealed
from the evidence presented by PROTON however,
even before NCLPI represented that it would try to
negotiate a possible sub-lease of the premises, it
had, without any semblance of authority from LMI,
already effectively subleased the subject premises to
PROTON and allowed the latter not only to enter the
premises but to renovate the same. It is true that
NCLPI and LMI’s Contract of Lease does not contain a
provision expressly authorizing extrajudicial
rescission. LMI can nevertheless rescind the contract,
without prior court approval, pursuant to Art. 1191
of the Civil Code.
Art. 1191 provides that the power to rescind
is implied in reciprocal obligations, in cases where
one of the obligors should fail to comply with what is
incumbent upon him. Otherwise stated, an aggrieved
party is not prevented from extra-judicially
rescinding a contract to protect its interests, even in
the absence of any provision expressly providing for
such right. The rationale for this rule was explained
in the case of University of the Philippines v. De los
Angeles wherein this Court held:
The law definitely does not require that the
contracting party who believes itself injured
must first file suit and wait for a judgment
before taking extrajudicial steps to protect
its interest. Otherwise, the party injured by
the other's breach will have to passively sit
and watch its damages accumulate during
the pendency of the suit until the final
judgment of rescission is rendered when
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 the law itself requires that he should
exercise due diligence to minimize its own
damages (Civil Code, Article 2203).

An extrajudicial rescission based on grounds

not specified in the contract would not preclude a
party to treat the same as rescinded. The rescinding
party, however, by such course of action, subjects
himself to the risk of being held liable for damages
when the extrajudicial rescission is questioned by the
opposing party in court. In other words, the party
who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk.
For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether
the action taken was or was not correct in law.

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