Pryce Corporation Vs.

PAGCOR

Case about Difference of Termination from Rescission; Ability of Courts to Reduce Unconscionable
Penalty

Oblicon Concept:

• Article 1159 of the Civil Code provides that ―obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good faith.

• Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly 

complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is 

iniquitous or unconscionable.

• Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be

equitably reduced if they are 

iniquitous or unconscionable.

Facts:

• Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC
for brevity) made 

representations with the Philippine Amusement and Gaming Corporation (PAGCOR) on the
possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro City. A series of
negotiations followed. PAGCOR representatives went to Cagayan de Oro City to determine
the pulse of the people whether the presence of a casino would be welcomed by the residents.
Some local government officials showed keen interest in the casino operation and expressed
the view that possible problems were surmountable. Their negotiations culminated with
PPC‘s counter-letter proposal dated October 14, 1992.

• On November 11, 1992, the parties executed a Contract of Lease involving the ballroom of
the Hotel for a period of three (3) years starting December 1, 1992 and until November 30,
1995.

• Various resolutions and ordinances were promulgated by Sangguniang Panlungsod ng

Cagayan De Oro to deter the casino in the city. Permit of the hotel to operate was threatened
together with imposition of penalties.

• In the afternoon of December 18, 1992 and just hours before the actual formal opening of
casino operations, a public rally in front of the hotel was staged by some local officials,
residents and religious leaders. Barricades were placed which prevented some casino
personnel and hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An agreement between PPC
and PAGCOR, on one hand, and representatives of the rallyists, on the other, eventually
ended the rally on the 20th of December, 1992.

• In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which,
however, another public rally was held. Casino operations continued for some time, but were
later on indefinitely suspended due to the incessant demonstrations. Per verbal advice from
the Office of the President of the Philippines, PAGCOR decided to stop its casino operations
in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior to
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 September, 1993. In two Statements of Account dated September 1, 1993, PPC apprised
PAGCOR of its outstanding account for the quarter September 1 to November 30, 1993. PPC
sent PAGCOR another Letter dated September 3, 1993 as a follow-up to the parties‘ earlier
conference. PPC sent PAGCOR another Letter dated September 15, 1993 stating its Board of
Directors‘ decision to collect the full rentals in case of pre-termination of the lease.

• PAGCOR sent PPC a letter dated September 20, 1993 stating that it was not amenable to the
payment of the full rentals citing as reasons unforeseen legal and other circumstances which
prevented it from complying with its obligations. PAGCOR further stated that it had no other
alternative but to pre-terminate the lease agreement due to the relentless and vehement
opposition to their casino operations. In a letter dated October 12, 1993, PAGCOR asked PPC
to refund the total of P1,437,582 representing the reimbursable rental deposits and expenses
for the permanent improvement of the Hotel‘s parking lot. In a letter dated November 5,
1993, PAGCOR formally demanded from PPC the payment of its claim for reimbursement.

• In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the
contract of lease due to PAGCOR‘s continuing breach of the contract and further stated that it
was exercising its rights under the contract of lease pursuant to Article 20 (a) and (c) thereof.

Issues:

• W/N Pryce‘s action is termination or rescission?

• W/N Pryce was entitled to future rentals or lease payments for the unexpired period of the
contract of lease?

• W/N the Court is entitled to reduce the penalty?

• W/N Pryce is entitled to damages even if there‘s a penalty clause already? 


Held:

• Termination. There is a distinction in law between cancellation of a contract and its

rescission. To rescind is to declare a 

contract void in its inception and to put an end to it as though it never were. It is not merely
to terminate it and release parties from further obligations to each other but to abrogate it
from the beginning and restore the parties to relative positions which they would have
occupied had no contract ever been made. The termination or cancellation of a contract
would necessarily entail enforcement of its terms prior to the declaration of its cancellation in
the same way that before a lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his ejectment. However, termination of a
contract need not undergo judicial intervention. 


o In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
Contract from the beginning. This fact was evident when it first sought to collect the accrued rentals
from September to November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination.

• Yes. The Court classified this as penalty clause which is legal in contracts. However, with the
circumstances that PAGCOR encountered, collecting the remaining rental payments by Pryce
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 will lead to unjust enrichment. Also worth mentioning is the CA‘s finding that PAGCOR‘s
casino operations had to be suspended for days on end since their start in December 1992;
and indefinitely from July 15, 1993, upon the advice of the Office of President, until the
formal cessation of operations in September 1993. Needless to say, these interruptions and
stoppages meant that PAGCOR suffered a tremendous loss of expected revenues, not to
mention the fact that it had fully operated under the Contract only for a limited time.

• Yes. The due to the circumstances, the Court find the penalty unconscionable.

• Yes. In obligations with a penal clause, the general rule is that the penalty serves as a
substitute for the indemnity for damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the contrary, in which case proof of actual
damages is not necessary for the penalty to be demanded. There are exceptions to the
aforementioned rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2) when the obligor is sued for refusal to
pay the agreed penalty, and 3) when the obligor is guilty of fraud. In these cases, the purpose
of the penalty is obviously to punish the obligor for the breach. Hence, the obligee can
recover from the former not only the penalty, but also other damages resulting from the
nonfulfillment of the principal obligation. The contract fell under 1).

3
8/3/2019 Digest Deiparine v CA

DEIPARINE v. CA Ernesto Deiparine, Jr., petitioner, vs. THE HON. COURT OF APPEALS,
CESARAIO CARUNGAY AND ENGR. NICANOR TRINIDAD, respondents.

Cruz, J.

FACTS: The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto
Deiparine, Jr. on August 13, 19B2, for the construction of a three-story dormitory in Cebu City. 1
The Carungays agreed to pay P970,000.00, inclusive of contractor's fee, and Deiparine bound
himself to erect the building "in strict accordance to (sic) plans and specifications." Nicanor Trinidad,
Jr., a civil engineer, was designated as the representative of the Carungay spouses, with powers of
inspection and coordination with the contractor.

Deiparine started the construction on September 1, 1982.

On November 6, 1982, Trinidad sent him a document entitled General Conditions and Specifications
which prescribed 3,000 pounds per square inch as the minimum acceptable compressive strength of
the building.

In the course of the construction, Trinidad reported to Cesario Carungay that Deiparine had been
deviating from the plans and specifications, thus impairing the strength and safety of the building.

Carungay ordered Deiparine to first secure approval from him before pouring cement. Order was
ignored. Carungay then sent another memorandum with complaints but this was also ignored.

After several conferences, the parties agreed to conduct cylinder tests to ascertain if the structure
thus far built complied with safety standards. Deiparine and Carungay agreed on core testing.
Deiparaine even promised that if the tests should show a total failure of if the failure exceed 10%, he
would shoulder all expenses.

The core testing was conducted by Geo-Testing International, a Manila-based firm, on twenty-four
core samples. On the basis of 3,000 psi, all the samples failed; on the basis of 2,500 psi, only three
samples passed; and on the basis of 2,000 psi, nineteen samples failed. 6 This meant that the building
was structurallydefective.

Spouses Carungay filed complaint with the RTC Cebu for the rescission of the construction contract
and for damages.

TC decision:

(1) Constructionagreement rescinded

(2) Condemning Deiparine to have forfeited his expenses in the construction (P244, 253.70)

(3) Ordering Deiparine to reimburse to the spouses Carungay the costs of core testing (P15, 104.33)

(4) Ordering Deiparine to demolish and remove all the existing structures and restore the premises to
their former condition before construction began

(5) Ordering Deiparine to pay attorney¶s fees and costs of suit (P10,000)

CA affirmed TC decision in toto

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ISSUE: Whether the contract may be validly rescinded under Article 1191 of the CC

***Short answer: YES

Ratio Decidendi: Rescission under Article 1191 is a remedy for breach in a reciprocal obligation.

Reasoning:

Petitioner challenges the application of Article 1191 of the CC in rescinding the construction
agreement. His position is that the applicable rules are Articles 1385 and 1725 of the CC.

Article 1385: Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obliged to restore.

Article 1725: In a contract for a piece of work, the owner may withdraw at will from the construction
of the work, although it may have been commenced, indemnifying the contractor for all the latter's
expenses, work, and the usefulness which the owner may obtain therefrom, and damages.

The right of rescission is used in two different contexts in the Civil Code.

(1) Under the law on contracts ± RESCISSIBLE CONTRACTS enumerated in Article 1381

y Those which are entered into by guardians whenever the wards who they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;

y Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
precedingnumber:

y Those undertaken in fraud of creditors when the later cannot in any other manner collect the claims
due them:

y Those which refer to things under litigation if they have been entered into by the defendants
without the knowledge and approval of the litigants or of competent judicial authority;

y All other contracts specially declared by law to be subject to rescission.

Article 1385 deals with the rescission of the contracts under Article 1381, which do not include the
construction agreementin question.

(2) Under the law on obligations ± RIGHT OF RESCISSION as granted in Article 1191

Art. 1191 - The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

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.

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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.

TC correctly applied Art 1191 which deals with reciprocal obligations.

The construction contract fails squarely under the coverage of Article 1191 because it imposes upon
Deiparine the obligation to build the structure and upon the Carungays, the obligation to pay for the
project upon its completion.

Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the, parties but
on breach of faith by one of them that violates the reciprocity between them. 19 The violation of
reciprocity between Deiparine and the Carungay spouses, to wit, the breach caused by Deiparine's
failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to
rescind or cancel the contract.

Article 1725 cannot support the petitioner's position either, for this contemplates a voluntary
withdrawal by the owner without fault on the part of the contractor, who is therefore entitled to
indemnity, and even damages, for the work he has already commenced. There is no such voluntary
withdrawal in the case at bar.

The other applicable provisions are:

Article 1714. If the contractor agrees to produce the work from material furnished by him, he shall
deliver the thing produced to the employer and transfer dominion over the thing. This contract shall
be governed by the following articles as well as by the pertinent provisions on warranty of title and
against hidden defects and the payment of price in a contract of sale.

Article 1715. The contractor shall execute the work in such a manner that it has the qualities agreed
upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use.
Should the work be not of such quality, the employer may require that the contractor remove the
defect or execute another work.If the contractor fails or refuses to comply with this obligation, the
employer may have the defect removed or another work executed, at the contractor's cost.

Article 1727. The contractor is responsible for the work done by persons employed by him.

Disposition

WHEREFORE, the challenged decision is hereby AFFIRMED and the instant petition for review is
DENIED, with costs against the petitioner.

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OLIVERIO LAPERAL& FILIPINAS GOLF & COUNTRY CLUB INC. vs. SOLID HOMES, INC.

G.R. No. 130913. June 21, 2005

Facts: Filipinas Golf Sales and Development Corporation, predecessor-in-interest of Filipinas Golf
and Country Club, Inc., represented by its then President, Oliverio Laperal, entered into a
Development and Management Agreement with respondent Solid Homes, Inc., a registered
subdivision developer, involving several parcels of land owned by Laperal and FGSDC. Under the
terms and conditions of the aforementioned Agreement and the Supplement, respondent undertook to
convert at its own expense the land subject of the agreement into a first-class residential subdivision,
in consideration of which respondent will get 45% of the lot titles of the saleable area in the entire
project. The aforementioned Agreement was cancelled by the parties, and, in lieu thereof, two
contracts identically denominated Revised Development and Management Agreement were entered
into by respondent with the two successors-in-interest of FGSDC. Unlike the original agreement,
both Revised Agreements omitted the obligation of petitioners Laperal and FGCCI to make available
to respondent Solid Homes, Inc. the owner’s duplicate copies of the titles covering the subject
parcels of land. It appears, however, that even as the Revised Agreements already provided for the
non-surrender of the owner’s duplicate copies of the titles, respondent persisted in its request for the
delivery thereof .Then, petitioners served on respondent notices of rescission of the Revised
Agreements with a demand to vacate the subject properties and yield possession thereof to them.

Issue: Whether the termination of the Revised Agreement and Addendum, because of the contractual
breach committed by respondent solid homes, carried with it the effect provided under Article 1385
of the New Civil Code.

Held: Mutual restitution is required in cases involving rescission under Article 1191. Since 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.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. Applying the clear language of the law and the consistent jurisprudence on the matter, therefore,
the Court rules that rescission under Article 1191 in the present case, carries with it the
corresponding obligation of restitution.

7
PEZA v Philhino Sales Corp

FACTS:

On October 4, 1997, the PEZA published an invitation to bid for its acquisition of two brand new fire
truck units.

Three companies participated in the bidding: Starbilt Enterprise, Inc., Shurway Industries, Inc., and
Pilhino.

Pilhino secured the contract for the acquisition of the fire trucks.

The contract awarded to Pilhino stipulated that Pilhino was to deliver to the PEZA two FF3HP brand
fire trucks within 45 days of receipt of a purchase order from the PEZA.

A further stipulation stated that “in case of failure to deliver the . . . good on the date specified . . . ,
the Supplier agrees to pay penalty at the rate of 1/10 of 1% of the total contract price for each day
commencing on the first day after the date stipulated above.”

Pilhino failed to deliver the trucks as it had committed.

As Pilhino still failed to comply, despite repeated demands, the PEZA filed before the RTC a
Complaint for rescission of contract and damages.

The RTC ruled for the PEZA.

Subsequently, the CA partly granted Pilhino’s appeal by deleting the forfeiture of Pilhino’s
performance bond and pegging the liquidated damages due from it to the PEZA in the amount of
P1,400,000.00.

The PEZA moved for reconsideration, but it was denied by the CA.

Hence, this Petition for Review on Certiorari.

Petitioner asks for the reinstatement of the RTC’s award asserting that it already suffered damage
when respondent Pilhino Sales Corporation failed to deliver the trucks on time; that the contractually
stipulated penalty of 1/10 of 1% of the contract price for every day of delay was neither
unreasonable nor contrary to law, morals, or public order; that the stipulation on liquidated damages
was freely entered into by it and respondent; and that the CA’s computation had no basis in fact and
law.

On the other hand, respondent suggests that with the rescission of its contract with petitioner must
have come the negation of the contractual stipulation on liquidated damages and the obliteration of
its liability for such liquidated damages.

ISSUE:

Whether or not an award based on contractually stipulated liquidated damages is proper

notwithstanding the rescission of the same contract stipulating it.

RULING:

Although the provisions of a contract are legally null and void, the stipulated method of computing
liquidated damages may be accepted as evidence of the intent of the parties.

8
The provisions, therefore, can be basis for finding a factual anchor for liquidated damages. The liable
party may nevertheless present better evidence to establish a more accurate basis for awarding
damages. In this case, the respondent failed to do so.

Respondent’s intimation that with the rescission of a contract necessarily and inexorably follows the
obliteration of liability for what the same contracts stipulates as liquidated damages is entirely
misplaced.

A contract of sale, such as that entered into by petitioner and respondent, entails reciprocal
obligations.

As explained in Spouses Velarde v. CA,

“[i]n a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its equivalent.”

Rescission on account of breach of reciprocal obligations is provided for in Article 1191 of the Civil
Code:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with 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.

Jurisprudence has long settled that the restoration of the contracting parties to their original state is
the very essence of rescission.

In Spouses Velarde:

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract.

Accordingly, the initial payment of P800,000 and the corresponding mortgage payments . . . should
be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the
former.

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.
9
Contrary to respondent’s assertion, mutual restitution under Article 1191 is, however, no license for
the negation of contractually stipulated liquidated damages.

Article 1191 itself clearly states that the options of rescission and specific performance come with
“with the payment of damages in either case.” The very same breach or delay in performance that
triggers rescission is what makes damages due.

When the contracting parties, by their own free acts of will, agreed on what these damages ought to
be, they established the law between themselves. Their contemplation of the consequences proper in
the event of a breach has been articulated. When courts are, thereafter, confronted with the need to
award damages in tandem with rescission, courts must not lose sight of how the parties have
explicitly stated, in their own language, these consequences. To uphold both Article 1191 of the Civil
Code and the parties’ will, contractually stipulated liquidated damages must, as a rule, be maintained.

To sustain respondent’s claim would be to sustain an absurdity and an injustice. Respondent’s

position suggests that with rescission must necessarily come the obliteration of the punitive
consequence which, to begin with, was the product of its own (along with the other contracting
party’s) volition. Its position turns delinquency into a profitable enterprise, enabling contractual
breach to itself be the means for evading its own fallout. It is a position we cannot tolerate.

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UP vs. De Los Angeles

Case about Automatic Rescission Expressly Stipulated, Thus, No More Need for Judicial Decree 

Oblicon Concept:

• Art 1191. The parties may validly enter into an agreement that violation of the terms of the
contract would cause 

cancellation thereof even without judicial intervention or permission. Where a contract itself
contains such stipulation, the right to rescind is not ―impliedǁ but expressly recognized by the
parties. Hence, Art 1191 is not applicable.

Facts:

• Three orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No.
9435, are sought to be 

annulled in this petition for certiorari and prohibition, filed by herein petitioner University of
the Philippines (or UP) against the above-named respondent judge and the Associated Lumber
Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966,
enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated
at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January
1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to
refrain from exercising logging rights or conducting logging operations on the concession; and
the third order, dated 12 December 1967, denied reconsideration of the order of contempt.

• That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the
purpose of raising additional income for its support, pursuant to Act 3608;

• That on or about 2 November 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, 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, and which stipulated the following:

• In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient
to liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the
balance outstanding after the said payments have been applied shall be paid by the
DEBTOR in full no later than June 30, 1965;

• In the event that the DEBTOR fails to comply with any of its promises or undertakings in
this document, the DEBTOR agrees without reservation that the CREDITOR shall have the
right and the power to consider the Logging Agreement dated December 2, 1960 as
rescinded without the necessity of any judicial suit, and the CREDITOR shall be entitled as
a matter of right to Fifty Thousand Pesos (P50,000) by way of and for liquidated damages 


11
• ALUMCO continued its logging operations, but again incurred an unpaid account, for the
period from 9 December 1964 to 15 July 1965, in the amount of P61,133, in addition to the
indebtedness that it had previously acknowledged.

• That on 19 July 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; and on 7 September 1965, UP filed a complaint against ALUMCO, which was
docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the
collection or payment of the herein before stated sums of money and alleging the facts
hereinbefore specified, together with other allegations; it prayed for and obtained an order,
dated 30 September 1965, for preliminary attachment and preliminary injunction restraining
ALUMCO from continuing its logging operations in the Land Grant.

• That before the issuance of the aforesaid preliminary injunction UP had taken steps to have
another concessionaire take over the logging operation, by advertising an invitation to bid; that
bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.;
the logging contract was signed on 16 February 1966.

• That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from
conducting the bidding; on 27 November 1965, it filed a second petition for preliminary
injunction; and, on 25 February 1966, respondent judge issued the first of the questioned orders,
enjoining UP from awarding logging rights over the concession to any other party.

• That UP received the order of 25 February 1966 after it had concluded its contract with Sta.
Clara Lumber Company, Inc., and said company had started logging operations.

Issues:

• W/N U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before
any judicial pronouncement 

to that effect?

• W/N UP should be held in contempt of court?

Held:

• Yes. 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. In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without previous court action, but it
proceeds at its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law. But the
law definitely does not require that the contracting party who believes itself injured must first
file suit and wait for a judgment before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to passively sit and watch its
damages accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize its own
damages.

• The Court abstained because it is under a different case. 


12
ANGELES V CALASANZ

GUTIERREZ; March 18, 1985

NATURE

Appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X,
declaring the contract to sell as not having been validly cancelled and ordering the defendants-
appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00 attorneys
fees and costs.

FACTS

- On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of
land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum. The plaintiffs-
appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay
the balance in monthly installments of P41.20 until fully paid, the installments being due and payable
on the 19th day of each month. The plaintiffs appellees paid the monthly installments until July
1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the
defendants-appellants accepted and received delayed installment payments from the plaintiffs-
appellees.

- On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting

the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the
said contract because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs'
letter with their plea for reconsideration, of the said cancellation was denied by the defendants-
appellants. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of
Rizal, Seventh Judicial District Branch X to compel the defendants-appellants to execute in their
favor the final deed of sale alleging inter alia that after computing all subsequent payments for the
land in question, they found out that they have already paid the total amount of P4,533.38 including
interests, realty taxes and incidental expenses for the registration and transfer of the land. CFI
rendered a ruling favor of the plaintiffs-appellees prompting Calasanz spouses to appeal.

ISSUES

1. WON the contract to sell has been automatically and validly cancelled by the defendants-
appellants Calasanz spouses

2. WON the contract partakes of a contract of adhesion and therefore must be strictly construed
against the one who drafted it (defendants-appellants)

HELD

1. NO. "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. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The
question of whether a breach of a contract is substantial depends upon the attendant circumstances.

- The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid

13
the monthly installments for a period of almost nine (9) years. In other words, in only a short time,
the entire obligation would have been paid. Furthermore, although the principal obligation was only
P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees had already paid an aggregate
amount of P4,533.38. To sanction the rescission made by the defendants-appellants will work
injustice to the plaintiffs-appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would
unjustly enrich the defendants- appellants.

- Article 1234 of the Civil Code which provides that:

“If the obligation has been substantially performed in good faith, the obligor may recovers though
there had been a strict and complete fulfillment, less damages suffered by the obligee."

- Also militates against the unilateral act of the defendants-appellants in cancelling the contract. We
agree with the observation of the lower court to the effect that: "Although the primary object of
selling subdivided lots is business, yet, it cannot be denied that this subdivision is likewise purposely
done to afford those landless, low income group people of realizing their dream of a little parcel of
land which they can really call their own."

- The defendants-appellants argue that paragraph nine of the contract clearly allows the seller to
waive the observance of paragraph 6 not merely once, but for as many times as he wishes. The
defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when
the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and
received delayed payments of installments, though the plaintiffs-appellees have been in arrears
beyond the grace period mentioned in paragraph 6 of the contract, the defendants- appellants have
waived and are now estopped from exercising their alleged right of rescission.

2. YES. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has
some characteristics of a contract of adhesion. The defendants- appellants drafted and prepared the
contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed
their signatures and assented to the terms and conditions of the contract. They had no opportunity to
question nor change any of the terms of the agreement. It was offered to them on a "take it or leave
it" basis. "x x x (W)hile generally, stipulations in a contract come about after deliberate drafting by
the parties thereto, . . . there are certain contracts almost all the provisions of which have been
drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion,
because the only participation of the party is the signing of his signature or his 'adhesion' thereto.
Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this
category. '(Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.)" (Italics supplied)

- While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the
defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under
paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00
price sale. The contract to sell, being a contract of adhesion, must be construed against the party
causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a
contract must be interpreted against the party who drafted the same, especially where such
interpretation will help effect justice to buyers who, after having invested a big amount of money, are
now sought to be deprived of the same thru the prayed application of a contract clever in its
phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in its
entirety is most unfair to the buyers."

14
Disposition Thus, since the principal obligation under the contract is only P3,920.00 and the
plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only
order the payment of the few remaining installments but not uphold the cancellation of the contract.
Upon payment of the balance of P671.67 without any interests thereon, the defendants-appellants
must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the
necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are
justified.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY-ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any
interests.

15
IRINGAN V COURT OF APPEALS

QUISIMBING; September 26, 2001

Petition assailing decision of Court of Appeals.

FACTS

- On March 22, 1985 private respondent Antonio Palao sold to petitioner Alfonso Iringan an
undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located in Poblacion of Tuguegarao.
Parties executed a Deed of Sale on same date with the purchase price of P295K, payable as follows:

• a) P10K upon execution of this instrument, and vendor acknowledges having received the
amount;

• b) P140K on or before April 30, 1985;

• c) P145K on or before December 31, 1985.

- When second payment was due, Iringan paid only P40K. On July 18, 1985, Palao sent a letter to
Iringan stating that he would not accept any further payment considering that Iringan failed to
comply with his obligation to pay full amount of second installment.

- On August 20, 1985, Iringan replied that they were not opposing the revocation of the Deed of Sale,
but asked for the reimbursement of the ff:

• P50K –cash received;

• P3,200—geodetic engineer’s fee;

• P500—attorney’s fee;

• Interest on P53,700

- Palao declared he was not amenable to the reimbursements claimed by Iringan. Iringan then
proposed that the P50K which he had paid Palao be reimbursed, or Palao could sell to Iringin an
equivalent portion of the land.

- Palao replied that Iringan’s standing obligation had reached P61,600 representing payment of
arrears for rentals from October 1985 to March 1989. 

- Spouses Iringan alleged that the contract of sale was a consummated contract, hence the remedy for
Palao was for collection of the balance of the purchase price and not rescission. In addition they
declared that they had always been ready and willing to comply with their obligations to Palao. 

- RTC ruled in favor of Palao and affirmed the rescission of the contract. 

Petitioner’s Claim 

- That no rescission was effected simply by virtue of the letter sent by respondent stating that he
considered the contract of sale rescinded.

- That a judicial or notarial act is necessary before one party can unilaterally effect a rescission. 

Respondent’s Comment 

- The right to rescind is vested by law on the obligee and since petitioner did not oppose the intent to
rescind the contract, Iringan in effect agreed to it and had the legal effect of a mutually agreed
rescission. 


16
ISSUES 

1. WON the contract of sale was validly rescinded;

2. WON the award of moral and exemplary damages is proper.

HELD

1. Ratio The contract of sale between the parties as far as the prescriptive period applies, can still be,
validly rescinded.

Reasoning

- Art 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve the
contract.

ART. 1592. In the sale of immovable property, even though it may have been stipulated that upon
failure to pay the price at the time agreed upon the rescission of the contract shall of right take
place, the vendee may pay xxx as long as no demand for rescission of the contract has been made
upon him either judicially or by a notarial act.

Art 1592 “refers to a demand that the vendor makes upon the vendee for the latter to agree to the
resolution of the obligation and to create no obstacle to this contractual mode of extinguishing
obligations.” (Manresa)



- A judicial and notarial act is necessary before a valid rescission can take place, whether or not
automatic rescission has been stipulated. The phrase “even though” emphasizes that when no
stipulation is found on automatic rescission, the judicial or notarial requirement still applies.

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment,
if the latter should become impossible.

The court shall decree the rescission claimed xxx.

- The right to resolve reciprocal obligations is deemed implied in case one of the obligors shall fail to
comply with what is incumbent upon him. But the right must be invoked judicially. Even if the right
to rescind is made available to the injured party, the obligation is not ipso facto erased by the failure
of the other party to comply with what is incumbent upon him. The party entitled to rescind should
apply to the court for a decree of rescission. The operative act is the decree of the court.

- However, when private respondent filed an action for Judicial Confirmation of Rescission and
Damages before RTC, he complied with the requirement of the law for judicial decree of
rescission in stating that its purpose is:

1) To compel appellants to formalize in public document, their mutual agreement of

revocation and rescission;

2) To have judicial confirmation.

17


2. Ratio The award of moral and exemplary damages is proper.

Reasoning Petitioner claimed he was ready to pay but never actually paid respondent, even when he
knew that the reason for selling the lot was for Palao to needed to raise money to pay his SSS loan.

• 1) Iringan knew Palao’s reason for selling the property, and still he did not pay Palao.

• 2) Petitioner refused to formally execute an instrument showing their mutual agreement to

rescind the contract of sale, even when it was Iringan who breached the terms of their
contract, leaving Palao desperate to find other sources of funds to pay off the loan.

• 3) Petitioner did not substantiate by clear and convincing proof that he was ready and willing
to pay respondent. It was more of an afterthought to evade the consequence of the breach.

18
Spouses Lam v. Kodak Philippines, Ltd. GR No.
167615, 11 January 2016

FACTS:

On 8 January 1992, Spouses Lam and Kodak Philippines entered into an agreement for the sale of
three (3) units of the Kodak Minilab System 22XL in the amount of 1,796,000.00 php per unit.

Spouse Lam issued 12 post-dated checks as payment. They requested that Kodak Philippiines not
negotiate the first check dated 31 March 1992 allegedly due to insufficiency of funds. The same
request was made the following month. However, both checks were negotiated by Kodak Philippines
and were honoured by the bank. The 10 other checks were subsequently dishonoured after the
Spouses Lam ordered the bank to stop payment.

Kodak Philippines canceled the sale and demanded that the Spouses return the unit it delivered.
Spouses Lam ignored the demand but also rescinded the contract for failure to deliver the two (2)
remaining units.

Kodak Philippines filed a complaint for replevin and/or recovery of sum of money with the Makati
RTC, which then issued the decision in their favour ordering the seizure of the unit. Upon appeal to
the CA, the case was remanded to the trial court.

RTC found that Kodak Philippines defaulted in the performance of its obligation under its Letter
Agreement wit the Spouses. It held that the failure to deliver two (2) of out the three (3) units of the
equipment causes the Lam Spouses to stop paying for the rest of the instalments. Likewise, the RTC
ruled that when the Spouses accepted the delivery of the first unit, they became liable for the fair
value of the goods received. Thus, they were under the obligation to pay for the amount, and the
failure to deliver the remaining units did not give them the right to suspend payment for the unit
already delivered. RTC dismissed the case, ordering the petitioners to pay. Upon appeal to the CA,
raising the issue of the failure to order Kodak Philippines to pay. The CA affirmed the RTC’s
decision. They ruled that the Letter Agreement executed by the parties showed that their obligations
were susceptible of partial performance and the contract between the parties was validly rescinded.
Hence, this petition.

ISSUE:

1. Whether or not the contract between petitioners pertained to obligations that are
susceptible of partial performance.

2. Whether or not the CA correctly ordered mutual restitution

HELD:

1. NO

2. YES

RATIO:

1. Based on the foregoing, the intention of the parties is for there to be a single transaction
covering all three (3) units of the Minilab Equipment. Respondent’s obligation was to deliver
all products purchased under a “package” and, in turn, petitioners’ obligation was to pay for
the total purchase price, payable in installments.
19
 The intention of the parties to bind themselves to an indivisible obligation can be further
discerned through their direct acts in relation to the package deal. There was only one
agreement covering all three (3) units of the Minilab Equipment and their accessories.

There is no indication in the Letter Agreement that the units’ petitioners ordered were covered
by three (3) separate transactions. The factors considered by the Court of Appeals are mere
incidents of the execution of the obligation, which is to deliver three units of the Minilab
Equipment on the part of respondent and payment for all three on the part of petitioners. The
intention to create an indivisible contract is apparent from the benefits that the Letter
Agreement afforded to both parties. Petitioners were given the 19% discount on account of a
multiple order, with the discount being equally applicable to all units that they sought to
acquire. The provision on “no downpayment” was also applicable to all units. Respondent, in
turn, was entitled to payment of all three Minilab Equipment units, payable by installments.

2. Rescission under Article 1191 has the effect of mutual restitution.

When rescission is sought under Article 1191 of the Civil Code, it need not be judicially
invoked because the power to resolve is implied in reciprocal obligations. The right to resolve
allows an injured party to minimize the damages he or she may suffer on account of the other
party’s failure to perform what is incumbent upon him or her. When a party fails to comply
with his or her obligation, the other party’s right to resolve the contract is triggered. The
resolution immediately produces legal effects if the non-performing party does not question
the resolution. Court intervention only becomes necessary when the party who allegedly
failed to comply with his or her obligation disputes the resolution of the contract. Since both
parties in this case have exercised their right to resolve under Article 1191, there is no need
for a judicial decree before the resolution produces effects.

As discussed earlier, the breach committed by petitioners was the nonperformance of a

reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the
contract does not apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract.

20
NISSAN CAR LEASE PHILS., INC., vs. LICA MANAGEMENT, INC. ET AL G.R. No.
176986, January 13, 2016

NATURE OF ACTION: Extrajudicial foreclosure

TOPIC: Rescission of contract


PONENTE: JARDELEZA, J.:

FACTS;

Lica Management, Inc. (LMI) is the absolute owner of a property. On June 24, 1994, it entered into a
contract with Nissan Car Lease Phils. (Nissan) for the latter to lease the property for a term of ten
(10) years (or from July 1, 1994 to June 30, 2004) with a monthly rental of ₱308,000.00 and an
annual escalation rate of ten percent (10%). Sometime in September 1994, NCLPI, with LMI’s
consent, allowed its subsidiary Nissan Smartfix Corporation (NSC) to use the leased premises.
Nissan became delinquent in paying the monthly rent. In May 1996, 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 Nissan 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 Nissan that it was terminating their Contract of Lease due to arrears in the
payment of rentals. It also demanded that Nissan (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
Nissan 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 x x x. In consideration, Proton agreed to transmit to NCLPI a check representing three (3)
months of rental payments, to be deposited only upon the due execution of their Contract of
Sublease. Nissan through counsel, replied to LMI’s letter of October 16, 1996 acknowledging the
arrearages incurred by it under their Contract of Lease. Claiming, however, that it has no intention of
abandoning the lease and citing efforts to negotiate a possible sublease of the property. LMI filed a
Complaint for sum of money with damages against for its unpaid rentals, with interest and penalties,
as well as exemplary damages, attorney’s fees, and costs of litigation.

In its Answer and Third-Party Complaint against Proton, Nissan alleged that LMI and Proton
"schemed" and "colluded" to unlawfully force Nissan from the premises.

Ruling of the Trial Court

The trial court ruled in favor of LMI. The trial court found that Nissan purposely violated the terms
of its contract with LMI when it failed to pay the required rentals and contracted to sublease the
premises without the latter’s consent.The CA denied Nissan appeal and affirmed the trial court’s
decision with modification.

Nissan maintains that LMI cannot unilaterally and extrajudicially rescind their Contract of Lease in
the absence of an express provision in their Contract to that effect because - the power to rescind is
judicial in nature and the Supreme Court has allowed extrajudicial rescission if such remedy is
specifically provided for in the contract.

21
ISSUE:

Whether or not a contract may be rescinded extrajudicially despite the absence of a special
contractual stipulation therefor?

HELD:

Yes.

It is true that Nissan 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 extrajudicially 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:

[T]he 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). (Emphasis and underscoring supplied)

We are aware of this Court’s previous rulings in Tan v. Court of Appeals, Iringan v. Court of Appeals,
and EDS Manufacturing, Inc. v. Healthcheck International, Inc., for example, wherein we held that
extrajudicial rescission of a contract is not possible without an express stipulation to that effect.

The seeming "conflict" between this and our previous rulings, however, is more apparent than real.

Whether a contract provides for it or not, the remedy of rescission is always available as a
remedy against a defaulting party. When done without prior judicial imprimatur, however, it may
still be subject to a possible court review. In Golden Valley Exploration, Inc. v. Pinkian Mining
Company, we explained:

This notwithstanding, jurisprudence still indicates that 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.
This was made clear in the case of U.P. v. De los Angeles, wherein the Court held as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review by the proper court.
If the other party denies that rescission is justified, it is free to resort to judicial action in its
own behalf, and bring the matter to court.Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.

22
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. x x x (Emphasis and underscoring in the original)

The only practical effect of a contractual stipulation allowing extrajudicial rescission is "merely to
transfer to the defaulter the initiative of instituting suit, instead of the rescinder."In fact, the rule is
the same even if the parties’ contract expressly allows extrajudicial rescission. The other party
denying the rescission may still seek judicial intervention to determine whether or not the rescission
was proper.

Having established that LMI can extrajudicially rescind its contract with Nissan even absent an
express contractual stipulation to that effect, the question now to be resolved is whether this
extrajudicial rescission was proper under the circumstances.

As earlier discussed, Nissan’s non-payment of rentals and unauthorized sublease of the leased
premises were both clearly proven by the records. We thus confirm LMI’s rescission of its contract
with Nissan on account of the latter’s breach of its obligations.

WHEREFORE, in view of the foregoing, the petition is DENIED

23
Spouses William & Jeanette Yao vs Carlomagno Matela

Chester Cabalza recommends his visitors to please read the original & full text of the case cited. Xie
xie!

Spouses William & Jeanette Yao vs Carlomagno Matela

G.R. No. 167767

August 29, 2006

Facts:

These consolidated petitions for review assail the Decision of the Court of Appeals dated September
30, 2004, which modified the Decision of the Regional Trial Court of Las Piñas City, as well as the
Resolution dated April 15, 2005, denying the motions for reconsideration of both parties. Spouses
William and Jeanette Yao pray that the assailed decision and resolution of the Court of Appeals be
reversed and set aside and that the original complaint filed by Carlomagno B. Matela in the lower
court be dismissed for lack of merit. On the other hand, Matela prays that the judgment of the Court
of Appeals be modified by ordering the spouses Yao to pay the amount of P741,482.00 as actual
damages instead of P391,582.00, plus interest and attorney’s fees.

On March 30, 1997, the spouses Yao contracted the services of Matela, a licensed architect, to
manage and supervise the construction of a two-unit townhouse at a total cost of P5,090,560.00.

On the other hand, Matela prays that the judgment of the Court of Appeals be modified by ordering
the spouses Yao to pay the amount of P741,482.00 as actual damages instead of P391,582.00, plus
interest and attorney’s fees.

On April 1, 2002, the Regional Trial Court of Las Piñas City, Branch 275 rendered judgment in favor
of Matela, ordering the spouses to pay the architect the sum of P741,428.00 plus legal rate of interest
from the filing of the Complaint until fully paid and P50,000.00 as and by way of attorney’s fees and
to pay the costs.

The trial court anchored its decision on the following findings of facts: Defendant spouses engaged
the professional services of the plaintiff on March 30, 1997 to manage and supervise the construction
of their two unit townhouses in Makati City at the agreed construction cost of P5,090,560.00. The
construction started in the first week of April, 1997 and was completed by the plaintiff in April,
1998.

On the other hand, the Court of Appeals declared that as to the second assigned error, defendants-
appellants claimed that plaintiff-appellee failed to finish the project within the agreed one hundred
eighty (180) days. They pointed out that one hundred eighty (180) days from April 1997 ended on
October 1997, however, the units were turned over only in April 1998. The Court does not find any
merit in this argument either. Any delay in the delivery is cured by acceptance of the thing after delay
incurred.

24
Issues:

a)W/N respondent Matela is entitled to the additional construction cost?

b)W/N the decision of the CA is not dismissing the complaint of the respondent and not awarding the
counterclaim of the spouses Yao is in accordance with law and jurisprudence?

Held:

Matela claims that although the spouses Yao did not expressly admit their obligation as regards the
additional construction cost of P300,000.00, they impliedly admitted the same as evidenced by the
testimony of Jeanette Yao before the court a quo.

On the other hand, the spouses Yao contend that the complaint for the collection of a sum of money
filed by Matela should be dismissed because it was the latter who breached his undertaking by using
sub-standard materials and not completing the project. They also allege that the payments they made
amounting to P4,699,610.93 should be considered as sufficient payment for the construction of the
project.

In the instant case, we find that the factual findings of the trial court and Court of Appeals are
contradicted by the evidence on record. Thus, a review of the facts is in order.

As agreed by the parties, Matela will construct the townhouses in accordance with the Specification
while spouses Yao will pay Matela the agreed construction cost based on progress billings. The
spouses Yao will not pay Matela the agreed price in full unless the latter has fully complied with and
has discharged his obligations as specified in the contract.

In his book on Obligations and Contracts, the late Court of Appeals Justice Desiderio Jurado made
the following discussion on reciprocal obligations.

The rule then is that in reciprocal obligations, one party incurs in delay from the moment the other
party fulfills his obligation, while he himself does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. If neither party complies or is ready to comply with what
is incumbent upon him, the default of one compensates for the default of the other. In such case,
there can be no legal delay.

Evidently, both parties in this case breached their respective obligations. The well entrenched
doctrine is that the law does not relieve a party from the effects of an unwise, foolish or disastrous
contract, entered into with full awareness of what he was doing and entered into and carried out in
good faith. Such a contract will not be discarded even if there was a mistake of law or fact.

WHEREFORE, the Decision dated September 30, 2004 of the Court of Appeals in CA-G.R. CV No.
75264 which affirmed with modification the Decision of the Regional Trial Court of Las Piñas City,
Branch 275, and its Resolution dated April 15, 2005 denying reconsideration thereof, are
REVERSED and SET ASIDE. The contract between spouses William and Jeanette Yao and
Carlomagno B. Matela is DEEMED EXTINGUISHED and each of the parties shall bear their own
losses. SO ORDERED.

25
Ong vs Bognalbal G.R. No 149140

On January 2, 1995, Architect Ernesto Bognalbal (E.B. Bognalbal Construction) was hired by
petitioner, Victoria Ong, for the construction of her boutique on a contract price of P200,000 but
subject to change in respect to economic factors and change of order. The agreement was to complete
the work within 45 days and payment shall be made every two weeks based on the accomplishment
of work value. The project started on Jan. 19, 1995.

Work Accomplished Billing

Jan 19-28, 1995 17.975%
Jan 19 to Feb 15, 1995 34.65%
Feb 16 to March 3, 1995 20.63%
March 4-18 Work 15.47%
Total 88.85%
petitioner paid P 35,950
petitioner paid P 69,300
petitioner paid P 41,500
No payment P 30,950
P 181,700

Petitioner wanted a change of order within 3 days from vinyl tiles to kenzo flooring on April 22,
1995. Kenzo flooring took time to construct because of the curing process and additional costs shall
be incurred. The rushed work of kenzo flooring was not acceptable to petitioner Victoria Ong. She
refused to pay the 4th billing. Demand of respondent Bognalbal for petitioner Ong to pay for the
kenzo flooring was made on or before April 24, 1995. Petitioner Victoria Ong didn’t pay, respondent
Bognalbal abandoned the kenzo flooring job on April 25, 1995.

(Petitioner Ong hired another contractor, she incurred P 78,000 and additional damages, and the
completion of the kenzo flooring was delayed for 82 days.)

Issue: Is Bognalbal liable to pay?

Ruling:
MeTC ruled in favor of respondent Bognalbal. Petitioner Victoria Ong was made to pay.

RTC ruled in favor petitioner Victoria Ong. MeTC’s decision was reversed and set aside.

CA (Petition for Review) ruled in favor of respondent Bognalbal. MeTC’s decision was reinstated.

SC (Petition for Certiorari is dismissed) ruled in favor of respondent Bognalbal. MeTC’s decision
was affirmed. (Respondent Victoria Ong is liable pay.)

“Novation is never presumed. Unless it is clearly shown either by express agreement of the parties or
by acts of equivalent import, defense will never be allowed.”

“…assuming that there was indeed a novation of the obligation of Petitioner Ong to pay the fourth
billing so as to include as additional condition the completion of the Kenzo flooring, such new
condition would, nevertheless, be deemed fulfilled. This is pursuant to Article 1186 of the Civil Code
which provides:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.”

(This could mean that the prevention of petitioner Ong of the fulfillment of the vinyl tiles, made the
condition of the contract fulfilled, without due course to any of her change order.)

26
“…(petitioner) Ong has not sufficiently proven the alleged contract novation…”

Breach of contract was her [petitioner Ong] failure to pay what she was legally bound to pay under
her contract with respondent Bognalbal. “Payment, being the very consideration of the contract, is
certainly not a mere casual or slight breach but a very substantial and fundamental breach as to
defeat the object of the parties making the agreement, due to which rescission of the contract may be
had (Ang vs. CA, 170 SCRA 286, 296).”

27