MAGDALENA ESTATE VS.

MYRICK
71 PHIL. 346

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 on account 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 on account
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.

UNIVERSAL FOOD CORPORATION VS. CA

33 SCRA 1
FACTS:
This is a petition for certiorari by the UFC against
the CA decision of February 13, 1968 declaring the BILL
OF ASSIGNMENT rescinded, ordering UFC to return to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 Chemist Ricardo Francisco, to recall all
daily employees who are connected in the production of
Mafran Sauce and also some additional daily employees
for the production of Porky Pops. 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 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.

UNIVERSITY OF THE PHILIPPINES VS. DE LOS

ANGELES
35 SCRA 102

FACTS:
On November 2, 1960, UP and ALUMCO entered
into a logging agreement whereby the latter was granted
exclusive authority to cut, collect and remove timber from
the Land Grant for a period starting from the date of
agreement to December 31, 1965, extendible for a period of
5 years by mutual agreement.

On December 8, 1964, ALUMCO incurred an

unpaid account of P219,362.94. Despite repeated
demands, ALUMCO still failed to pay, so UP sent a notice
to rescind the logging agreement. On the other hand,
ALUMCO executed an instrument entitled
“Acknowledgment of Debt and Proposed Manner of
Payments. It was approved by the president of UP, which
stipulated the following:
3. In the event that the payments called for are not
sufficient to liquidate the foregoing indebtedness,
the balance outstanding after the said payments
have been applied shall be paid by the debtor in
full no later than June 30, 1965.
5. In the event that the debtor fails to comply with
any of its promises, the Debtor agrees without
reservation that Creditor shall have the right to
consider the Logging Agreement rescinded,
without the necessity of any judicial suit…
ALUMCO continued its logging operations, but
again incurred an unpaid account. On July 19,1965, UP
informed ALUMCO that it had, as of that date, considered
rescinded and of no further legal effect the logging
agreement, and that UP had already taken steps to have
another concessionaire take over the logging operation.
ALUMCO filed a petition to enjoin UP from conducting the
bidding. The lower court ruled in favor of ALUMCO,
hence, this appeal.

ISSUE:
Can petitioner UP treat its contract with ALUMCO
rescinded, and may disregard the same before any judicial
pronouncement to that effect?

RULING:
Yes. In the first place, UP and ALUMCO had
expressly stipulated that upon default by the debtor, UP
has the right and the power to consider the Logging
Agreement of December 2, 1960 as rescinded without the necessity of any judicial suit. As to such special
stipulation
and in connection with Article 1191 of the Civil Code, the
Supreme Court, stated in Froilan vs. Pan Oriental Shipping
Co:
“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.”

ANGELES VS. CALASANZ

135 SCRA 323

FACTS:
On December 19, 1957, defendants-appellants
Ursula Torres 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 installment 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 December 7, 1966, the defendants-appellants

wrote the plantiffs-appellees a letter requesting the
remittance of past due accounts. On January 28, 1967, the
defendants-appellants cancelled the said contract because
the plaintiffs failed to meet subsequent payments. The
plaintiffs’ letter with their plea for reconsideration of the
said cancellation was denied by the defendants.

The plaintiffs-appellees filed a case before the

Court of First Instance to compel the defendant 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 including interests, realty taxes and
incidental expenses. The defendants alleged in their
answer that the plaintiffs violated par. 6 of the contract to
sell when they failed and refused to pay and/or offer to pay
monthly installments corresponding to the month of
August, 1966 for more than 5 months, thereby
constraining the defendants to cancel the said contract.

The Court of First Instance rendered judgment in

favor of the plaintiffs, hence this appeal.

ISSUE:
Has the Contract to Sell been automatically and
validly cancelled by the defendants-appellants?

RULING:
No. While it is true that par.2 of the contract
obligated the plaintiffs-appellees to pay the defendants the
sum of P3,920 plus 7% interest per annum, it is likewise
true that under par 12 the seller is obligated to transfer the
title to the buyer upon payment of the said price.

The contract to sell, being a contract of adhesion,

must be construed against the party causing it. The
Supreme Court agree with the observation of the plaintiffsappellees
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 its entirety is most unfair to the
buyers.

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 interest thereon, the defendant must immediately
execute the final deed of sale in favor of the plaintiffs and
execute the necessary transfer of documents, as provided
in par.12 of the contract.

Zulueta v. Mariano
Facts:
Petitioner Zulueta, owner of a house and lot, entered into a “Contract to Sell” for the said
property with private respondent, a movie director. The said property cost P75,000 payable in 20 years
with respondent buyer assuming to pay a down payment of P5,000  and a monthly installment of P630
payable in advance before the 5th day of the corresponding month, starting with December, 1964.
One of their stipulations was that upon failure of the buyer to fulfill any of the conditions being
stipulated, the buyer automatically and irrevocably authorizes owner to recover extra-judicially,
physical possession of the land, building and other improvements, which were the subject of the said
contract, and to take possession also extra-judicially whatever personal properties may be found within
the aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary
obligations buyer may have with owner.  Demand was also waived.
On the allegation that private respondent 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 Municipal Court of Pasig, praying that judgment be rendered ordering respondent to 1)
vacate the premises; 2) pay petitioner the sum of P11, 751.30 representing respondent’s balance owing
as of May, 1966; 3) pay petitioner the sum of P630 every month after May, 1966, and costs.  
Private respondent contended that the Municipal Court had no jurisdiction over the nature of the
action as it involved the interpretation and/or rescission of the contract.
Issue:
Was the action before the Municipal Court essentially one for rescission or annulment of a
contract?
Ruling:
Yes.  According to the Supreme Court, “...proof of violation is a condition precedent to
resolution or rescission. It is only when the violation has been established that the contract can be
declared resolved or rescinded.  Upon such rescission in turn, hinges a pronouncement that possession
of the realty has become unlawful.”
The Supreme Court, in Nera vs. Vacante (3 SCRA 505), also said, “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.”
 Also, according to the book of Tolentino, Civil Code of the Phil., Vol. IV, 1962 ed. P. 168,
citing Magdalena Estate vs. Myrick, 71 Phil. 344 (1941), extra-judicial rescission has legal effect when
the parties does not oppose it.  If it is objected to, judicial determination of the issue is still necessary.
With regards to the jurisdictions of inferior courts, the Supreme Court said that the CFI
correctly ruled that the Municipal Court had no jurisdiction over the case and correctly dismissed the
appeal.  However, the CFI erred in 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 of Rule 40:
                “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.”

alay, 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.
• 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 3 party.
rd

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.
• 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.
• 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 wherein it 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

Boysaw vs. Interphil Promotions

Boxer (P) vs. Promoter
(D)
 GR L-22590 [T]
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, 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.

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 v. IAC, GR 67881, June 30, 1987 [Per J. Paras, Second Division]
Issue: Wheher or not the Contract to sell was rescinded, under the automatic rescission clause of the Contract
between the parties
Digest:
Hacienda Benito, Inc. (Hacienda) as vendor and Jose W. Diokno and Carmen Diokno (Diokno) as vendees
executed a Contract to Sell over a parcel of land on monthly installments subject to an automatic rescission
clause, subjecting the contract to automatic rescission upon failure of the vendee to pay when due, three or more
consecutive installments as stipulated therein. During the contract, Hacienda sent a series of notices to Diokno
reminding their arrearages/balances to which they partially complied. As the Dioknos sent a letter expressing to
fully settle their obligation after two years from the last reminder, Hacienda informed them that the contract has
been rescinded subject to the automatic rescission clause of their contract, and Diokno is liable in default, citing
article 1189 of the Civil Code. However, Diokno argues that such clause has now been inapplicable due to the
waiver of such right after execution of several notices of the obligation.

I. What have we learned about the topic?

DOCTRINE: A contractual provision allowing “automatic rescission” (without prior need of judicial
rescission, resolution and cancellation) is VALID, the remedy of one who feels aggrieved being to go to
Court for the cancellation of the rescission itself, in case the rescission is found unjustified under the
circumstances.

II. What does the case teach us?

Wheher or not the Contract to sell was rescinded, under the automatic rescission clause of the Contract
between the parties
No, the contract has not been rescinded due to the automatic rescission clause. As iterated by the Supreme Court
in case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., “Automatic rescission (without prior need
of judicial rescission, resolution and cancellation) is VALID, the remedy of one who feels aggrieved being to go
to Court for the cancellation of the rescission itself, in case the rescission is found unjustified under the
circumstances. Here, it is clear that such rescission is unjustified since Hacienda has clearly waived of the
stipulated right of automatic rescission, as evidenced by the many notices and extensions given to Diokno. There
was 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".

Central Bank v. CA
G.R. No. L-45710, October 3, 1985, 139 SCRA 46

FACTS:

On April 28, 1965, 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, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved
loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual
interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into
a subdivision. 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 P17,000 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 P63,000 balance.

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued
Resolution No. 1049, which provides the prohibition of the bank from making new loans and investments [except investments in government
securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review
by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank’s deficiency as soon
as possible.

ISSUES:

Can the action of Sulpicio M. Tolentino for specific performance prosper?

RULING:

In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other and when one party has performed or
is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in
delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank
to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to
pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank’s
 delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it
legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.

UNLAD RESOURCES DEVELOPMENT CORPORATION vs. DRAGON,

G.R. NO. 149338, July 28, 2008
FACTS: The parties in this case entered in a Memorandum of Agreement (MoA) that UNLAD
will invest in additional stocks worth ₱4.8M and pay up immediately ₱1.2M for said
subscription while the respondents, Dragon and company, 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.

ISSUE: WON the rescission of the MoA between the parties is proper.

HELD: Yes, the MoA between the parties can be rescinded pursuant to Article 1191 of the
Civil Code which states that “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”. Since
UNLAD failed to comply with what is incumbent upon him, the other party-the
respondents can ask for rescission of the MoA on such ground. 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
original state, 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:

• 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 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
4  and 5 of the Contract of Lease which prohibit it from subleasing the premises or introducing improvements or
th th

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 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.