No. There was no valid rescission.

Under the third paragraph of Article 1191 of

the Civil Code, “The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.” The party entitled to rescind should
apply to the court for a decree of rescission. The right cannot be exercised solely
on a party’s own judgment that the other committed a breach of the obligation.
The operative act which produces the resolution of the contract is the decree of
the court and not the mere act of the vendor. Since a judicial or notarial act is
required by law for a valid rescission to take place, the letter written by
respondent declaring his intention to rescind did not operate to validly rescind
the contract. Moreover, it is evident that EMI had not rescinded the contract at
all. Despite EMI’s pronouncement, it failed to surrender the HMO cards of its
employees although this was required by the Agreement, and allowed them to
continue using them beyond the date of the rescission. The continued use by
them of their privileges under the contract, with the apparent consent of EMI,
belies any intention to cancel or rescind it, even as they felt that they ought to
have received more than what they got. Hence, although a ground exists to
validly rescind the contract between the parties, it appearsthat EMI failed to
judicially rescind the same.

EDS manufacturing vs. Healthcheck International

10/9/2013

Healthcheck is an organization which maintains a network of accredited

hospitals and medical clinics, one of which is DLSU-Medical Center. Eds
Manufacturing saw it fit to obtain insurance coverage from it. Hence, both parties
entered into a 1-year contract in which HCI was to provide the employees of Eds
as host of medical services and benefits.2 months into the program, HCI notified
Eds that its accreditation with DLSUMC was suspended on account of the Asian
regionalfinancial crisis and advised to avail of the services of nearby accredited
institutions. For failing to preserve its credit standing, HCI was suspended from
its accreditation for a second time. A third suspension was still to follow and
remained in force until the end of its contract with Eds. Because of complaints
from employees of Eds that their healthcards were not being honored, Eds
formally notified HCI that it was rescinding their agreement on account of HCI
serious and repeated breach of undertaking. It thus demanded a return of
premium for the unused period (P6 Million). HCI asked for the surrender of the
HMO cards so that it could process pre-termination of the contract and finalize
the reconciliation of accounts. It stated that until they have received the cards,
they will consider the account ongoing and existing thus subject for inclusion to
present billing and payment (at this tie, the employees of Eds failed to surrender
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their cards and continued to use them beyond the pre-termination period). In an
attempt to pre-empt Eds’ legal action, HCI instituted a case in the RTC on the
ground that there was unlawful pre-termination of the contract and failure of
Eds to submit a joint reconciliation of accounts and deliver such assets as
properly belonged to HCI (the cards). In its answer, Eds alleged that having
rescinded the contract, it was entitled to the unutilized portion of the premium.
After trial, the court ruled in favor of HCI and found that Eds’ rescission of the
agreement was not done through court action or bya notarial act and was based
on casual or slight breaches of the contract. Moreover, its employees continued
to use the cards, despite the announced rescission. It further held Eds liable for
the services it provided the employees beyond the period, deducting premiums
paid by Eds. On appeal, this was reversed.

Whether or not there was a valid rescission of the agreement between parties.

No. There was no valid rescission. Under the third paragraph of Article 1191 of
the Civil Code, “The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.” The party entitled to rescind should
apply to the court for a decree of rescission. The right cannot be exercised solely
on a party’s own judgment that the other committed a breach of the obligation.
The operative act which produces the resolution of the contract is the decree of
the court and not the mere act of the vendor. Since a judicial or notarial act is
required by law for a valid rescission to take place, the letter written by
respondent declaring his intention to rescind did not operate to validly rescind
the contract. Moreover, it is evident that EMI had not rescinded the contract at
all. Despite EMI’s pronouncement, it failed to surrender the HMO cards of its
employees although this was required by the Agreement, and allowed them to
continue using them beyond the date of the rescission. The continued use by
them of their privileges under the contract, with the apparent consent of EMI,
belies any intention to cancel or rescind it, even as they felt that they ought to
have received more than what they got. Hence, although a ground exists to
validly rescind the contract between the parties, it appearsthat EMI failed to
judicially rescind the same.

Nissan Car vs. Lica Management

January 13 2016

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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.

Whether or not a contract may be rescinded extrajudicially despite the absence

of a special contractual stipulation therefor.

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

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LMI’s Contract of Lease does not contain a provision expressly authorizing
extrajudicial rescission. LMI can nevertheless rescind the contract, without prior
court approval, pursuant to Art. 1191 of the Civil Code. Art. 1191 provides that
the power to rescind is implied in reciprocal obligations, in cases where one of
the obligors should fail to comply with what is incumbent upon him. Otherwise
stated, an aggrieved party is not prevented from extra-judicially rescinding a
contract to protect its interests, even in the absence of any provision expressly
providing for such right. The rationale for this rule was explained in the case of
University of the Philippines v. De los Angeles wherein this Court held: The law
definitely does not require that the contracting party who believes itself injured
must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have
to passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). An extrajudicial rescission based on grounds not specified in the
contract would not preclude a party to treat the same as rescinded. The
rescinding party, however, by such course of action, subjects himself to the risk
of being held liable for damages when the extrajudicial rescission is questioned
by the opposing party in court. In other words, the party who deems the contract
violated may consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle
whether the action taken was or was not correct in law.

Spouses Galang
5/26/2005
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune
Savings & Loan Association forP173,800.00 to purchase a house and lot located
at Pulang Lupa, Las Piñas, with an area of 150 square meters covered by
Transfer Certificate of Title (TCT) No. T-8505 in the names of respondents-
spouses. To secure payment, a real estate mortgage was constituted on the said
house and lot in favor of Fortune Savings & Loan Association. In early 1990,
NHMFC purchased the mortgage loan of respondents-spouses from Fortune
Savings & Loan Association for P173,800.00. Respondent Fernandina Galang
authorized her attorney-in-fact, Adelina R. Timbang, to sell the subject house
and lot. Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and
to assume the balance of the mortgage obligations with the NHMFC and with
CERF Realty (the Developer of the property). A Deed of Sale with Assumption of
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Mortgage Obligation dated 20 August 1990 was made and entered into by and
between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and
Felipe Cannu (vendees) over the house and lot in question. Petitioners paid the
“equity” or second mortgage to CERF Realty. Despite requests from Adelina R.
Timbang and Fernandina Galang to pay the balance of P45,000.00 or in the
alternative to vacate the property in question, petitioners refused to do so. In a
letter dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T.
Arzaga, Vice President, Fund Management Group of the NHMFC, that the
ownership rights over the land covered by TCT No. T-8505 in the names of
respondents-spouses had been ceded and transferred to her and her husband
per Deed of Sale with Assumption of Mortgage, and that they were obligated to
assume the mortgage and pay the remaining unpaid loan balance. Petitioners’
formal assumption of mortgage was not approved by the NHMFC. Because the
Cannus failed to fully comply with their obligations, respondent Fernandina
Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining
mortgage loan with NHMFC. Petitioners opposed the release of TCT No. T-8505
in favor of respondents-spouses insisting that the subject property had already
been sold to them. Consequently, the NHMFC held in abeyance the release of
said TCT.

Whether or not the breach of the obligation is substantial.

Yes. Rescission may be had only for such breaches that are substantial and
fundamental as to defeat the object of the parties in making the agreement. The
question of whether a breach of contract is substantial depends upon the
attending circumstances and not merely on the percentage of the amount not
paid. In the case at bar, we find petitioners’ failure to pay the remaining balance
of P45,000.00 to be substantial. Taken together with the fact that the last
payment made was on 28 November 1991, eighteen months before the
respondent Fernandina Galang paid the outstanding balance of the mortgage
loan with NHMFC, the intention of petitioners to renege on their obligation is
utterly clear.

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