Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 97442 June 30, 1994
PILAR T. OCAMPO, petitioner,
vs.
COURT OF APPEALS and MAGDALENA S. VILLARUZ, respondents.
Esteban C. Manuel for petitioner.
Nery D. Duremdes for private respondent.

BELLOSILLO, J .:
Two (2) documents, an "Agreement to Sell Real Property" and a "Contract to Sell," covering the same
parcel of land were executed by a seller in favor of two (2) different buyers. Both buyers now assert
against each other a better title to the property.
In dispute is an 18,260-square meter lot in the Poblacion of Tigbauan, Iloilo, described in Plan Psu-
223696, L.R.C. Case No. N-675, L.R.C. Record No. N-38846, and registered under Original Certificate
of Title No. 0-7743 in the name of seller Severino Tolosa. On 20 August 1974, Tolosa mortgaged the land
to the Philippine Veterans Bank and had the encumbrance annotated on his certificate of title under Entry
No. 238353.
On 17 March 1975, Tolosa and Pilar T. Ocampo, the latter being then represented by Teresa T.
Borres,
1
entered into a contract whereby Tolosa undertook to sell the same parcel of land to Ocampo not
later than 15 May 1975 for P22,000.00, P1,000.00 of which was paid upon execution thereof.
2

On 21 April 1975, the parties entered into an "Agreement to Sell Real Property"
3
whereby Tolosa "sells,
cedes and transfers" the land to Ocampo in consideration of P25,000.00, P12,500.00 of which was paid
upon signing of the deed and the balance to be due within six (6) months thereafter. Paragraph 4 of the
contract provides that "immediately upon complete payment of the purchase price . . . by the VENDEE,
the VENDOR . . . agrees to execute and deliver unto the VENDEE whatever pertinent document or
documents necessary to implement this sale and to transfer title to the VENDEE."
Before the six-month period to complete the payment of the purchase price expired, Ocampo paid but
only the total of P16,700.00.
4
Nevertheless Tolosa accepted her subsequent late payments amounting to
P3,900.00.
5
Meanwhile, the subject property was involved in a boundary dispute.
6

On 6 June 1976, upon learning of the mortgage lien, Ocampo caused her adverse claim to be annotated on
Tolosas certificate of title as Entry No. 279936.
In his letter to Ocampo dated 15 March 1977, Tolosa sought the cancellation of Ocampos adverse claim
and presented her with two options, namely, a refund of payments made, or a share from the net proceeds
if sold to a third party.
7
On even date, Ocampo through counsel wrote Tolosa expressing her readiness to
pay the balance of the purchase price, which was P5,400.00, should Tolosa be ready to deliver to her the
deed of absolute sale and the owners duplicate of OCT No. 0-7743 for purposes of registration.
8

On 3 June 1977, Tolosa and Magdalena S. Villaruz executed a "Contract to Sell"
9
whereby Tolosa "sells,
cedes, transfers, and conveys" to Villaruz the same land in consideration of P94,300.00. The amount of
P15,000.00 was to be paid upon execution and the balance upon cancellation of all liens and
encumbrances from the certificate of title. The contract stipulated the immediate conveyance of the
physical possession of the land to Villaruz, although no deed of definite sale would be delivered to her
unless the price was fully paid. The contract noted the supposed judicial termination of the boundary
dispute over the land.
On 19 July 1977, Tolosa wrote Ocampo offering to reimburse her what she paid provided she would sign
a document canceling her adverse claim.
10
Failing to convince Ocampo, Tolosa filed a petition in the
Court of First Instance of Iloilo to cancel the adverse claim of Ocampo. On 30 July 1977, Judge Ricardo
M. Ilarde denied the petition.
11
On 4 August 1977, another adverse claim was caused to be annotated by
Ocampo on OCT No. 0-7743 under Entry No. 302257.
12

On 7 October 1977, Tolosa filed an action for "Breach of Contract, Damages and Quieting of Title"
against Teresa Borres.
13
Borres claimed in her answer that she was merely the agent of Ocampo who was
the real party in interest. Borres however died so that the trial court, on 2 July 1979, ordered her
substitution by defendant Ocampo. Magdalena S. Villaruz, then claiming to have already bought the land,
intervened in the case.
On 9 October 1979, during the pendency of Civil Case No. 12163, Tolosa succeeded in securing from
another branch of the court the cancellation of the adverse claims of Ocampo without notice to her.
14
This
paved the way for the registration on 23 November 1979 of the contract of sale of Villaruz dated 8 August
1979 and the subsequent issuance of Transfer Certificate of Title No. T-100021 in her name which
canceled the Original Certificate of Title No. 0-7743 of Tolosa.
On 13 October 1981, Ocampo filed a third-party complaint against Villaruz.
15

On 7 January 1988, Judge Julian Y. Ereo of the Regional Trial Court of Iloilo, Branch 27, rendered a
decision in Civil Case No. 12163 dismissing the complaint of Tolosa as well as the complaint in
intervention of Villaruz
1. Declaring the contract to sell executed between plaintiff Severino Tolosa and third-
party defendant Magdalena Villaruz as null and void as well as the Transfer of Certificate
of Title issued in connection therewith, if any;
2. Ordering plaintiff Tolosa to execute the corresponding deed of sale in favor of third-
party plaintiff Pilar T. Ocampo over the lot in litigation upon the latters payment of the
balance of P4,400.00;
3. Ordering plaintiff Tolosa to vacate and deliver possession of the lot in question to Pilar
T. Ocampo;
4. Ordering plaintiff to pay Pilar T. Ocampo P10,000.00 as attorneys fees, P30,000.00 as
moral damages, P2,000.00 as litigation expenses, and costs.
Her motion for reconsideration having been denied on 26 March 1988, Villaruz appealed to the Court of
Appeals. On 11 October 1990, the 16th Division of the Court of Appeals,
16
in CA-G.R. No. 18428,
reversed and set aside the trial courts decision
1. Declaring Magdalena S. Villaruz the absolute owner of the parcel of land covered by
TCT No. T-100021 of the Register of Deeds of Iloilo;
2. Ordering the Register of Deeds of Iloilo to annotate at the back of TCT No. T-100021
the adverse claims filed by Pilar Ocampo under Entry No. 279936 and 302257 found in
OCT No. 0-7743; and
3. Ordering the parties to pay proportionate costs.
The appellate court upheld the sale in favor of Villaruz on the theory that the 21 April 1975 agreement of
Tolosa and Ocampo was merely a contract to sell. It claimed that in the absence of a deed of absolute sale
in favor of Ocampo, in relation to par. 4 of the contract, Tolosa retained ownership over the land and
validly conveyed the same to Villaruz.
The agreement between Tolosa and Ocampo dated 21 April 1975 although titled "Agreement to Sell Real
Property" was a perfected contract of absolute sale wherein Tolosa forthwith sold, ceded and transferred
the land to Ocampo. It provided "[T]hat for and in consideration of the sum of TWENTY-FIVE
THOUSAND PESOS (P25,000.00), Philippine Currency, to be paid by the VENDEE unto the VENDOR,
the latter hereby SELLS, CEDES and TRANSFERS in favor of the former her heirs and assigns, the
above-described parcel of land, free from all liens and encumbrances."
In Dignos v. CA,
17
we laid down the criteria that:
. . . a deed of sale is absolute in nature although denominated as a "Deed of Conditional
Sale" where nowhere in the contract in question is a proviso or stipulation to the effect
that title to the property sold is reserved in the vendor until full payment of the purchase
price, nor is there a stipulation giving the vendor the right to unilaterally rescind the
contract the moment the vendee fails to pay within a fixed period (Taguba v. Vda. de
Leon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86
SCRA 305).
The conditions mentioned in Dignos, reiterating Taguba and Luzon Brokerage Co., Inc., were not found
in the subject contract to indicate that it was indeed a mere contract to sell or a deed of conditional sale.
Contrary to the interpretation of the appellate court, we find nothing significant about par. 4 of the
contract which provides that
. . . immediately upon complete payment of the purchase price herein by the VENDEE,
the VENDOR hereby agrees to execute and deliver unto the VENDEE whatever pertinent
document or documents necessary to implement this sale and to transfer title to the
VENDEE.
Paragraph 4 pertains to the undertaking of the seller to execute and deliver to the buyer any document
deemed necessary by law to implement the sale and transfer title since the parties were unsure of what
documents were pertinent. If the intent was for the seller to retain ownership and possession of the land
through non-delivery of certain documents unless the price be fully paid, par. 4 alone should be inutile; it
should have been complemented with a proviso that the sale would not be implemented nor the title
considered transferred unless another document specifically for said purpose be first executed and
delivered to the buyer. In this regard, no right to retain ownership and possession of the land pending full
payment of the price can be inferred from the fact that no delivery was made to Ocampo.
18

The failure of the buyer to pay the price in full within a fixed period does not, by itself, bar the transfer of
the ownership or possession,
19
much less dissolve the contract of sale. We held in De la Cruz v.
Legaspi:
20

. . . they err in the assertion that as plaintiff failed to pay the price after the execution of
the document of sale as agreed previously, the contract became null and void for lack of
consideration. It cannot be denied that when the document was signed the cause or
consideration existed: P450. The document specifically said so; and such was
undoubtedly the agreement. Subsequent non-payment of the price at the time agreed upon
did not convert the contract into one without cause or consideration: a nudum
pactum (Levy vs. Johnson, 4 Phil. 650; Puato vs. Mendoza, 64 Phil. 457). The situation
was rather one in which there is failure to pay the consideration, with its resultant
consequences. In other words, when after the notarization of the contract, plaintiff failed
to hand the money to defendants, as he previously promised, there was default on his part
at most, and defendants right was to demand interest legal interest for the delay,
pursuant to article 1501 (3) of the Civil Code
21
(Villaruel vs. Tan King, 43 Phil. 251), or
to demand rescission in court. (Escueta vs. Pardo, 42 Off. Gaz. 2759; Cortes vs. Bibao,
41 Phil. 298.) Such failure, however, did not ipso facto resolve the contract, no
stipulation to that effect having been alleged (Cf. Warner Barnes & Co. vs. Inza, 43 Phil.
505). Neither was there any agreement nor allegation that payment on time was essential
(Cf. Abella vs. Francisco, 55 Phil. 477; Berg vs. Magdalena Estate, 92 Phil. 110).
Under Art. 1592 of the Civil Code, the failure of Ocampo to complete her payment of the purchase price
within the stipulated period merely accorded Tolosa the option to rescind the contract of sale upon
judicial or notarial demand.
22

However, the letter of 2 August 1977 claimed to have been sent by Tolosa to Ocampo rescinding the
contract of sale
23
was defective because it was not notarized
24
and, more importantly, it was not proven
to have been received by Ocampo.
25

Likewise, Civil Case No. 12163 could not be considered a judicial demand under Art. 1592 of the Civil
Code because it did not pray for the rescission of the contract. Although the complaint sought the
cancellation of Ocampos adverse claim on Tolosas OCT and for the refund of the payments made, these
could not be equivalent to a rescission. In other words, seeking discharge from contractual obligations and
an offer for restitution is not the same as abrogation of the contract. To rescind is "[t]o declare a contract
void in its inception and to put an end to it as though it never were."
26
It is "[n]ot merely to terminate it
and release parties from further obligations to each other but to abrogate it from the beginning and restore
parties to relative positions which they would have occupied had no contract ever been made."
27

Even assuming arguendo that Civil Case No. 12163 was a valid judicial demand, rescission is not granted
as a matter of course. Before Civil Case No. 12163 was filed on 7 October 1977, Ocampo not only paid
Tolosa a total of P20,600.00 but also discharged Tolosas mortgage debt in the amount of P4,453.41. Had
not Tolosa ordered the Philippine Veterans Bank to return the mortgage debt payment by Ocampo,
28
the
purchase price would have been deemed fully paid.
If only to accentuate her intention to make good her contractual obligations, Ocampo offered to pay the
balance of the purchase price in her letter of 15 March 1977 or more than four months before Tolosa
allegedly wrote his letter of rescission on 2 August 1977, and more than six months before the filing of
Civil Case No. 12163 on 7 October 1977. This offer to pay prior to the demand for rescission is sufficient
to defeat Tolosas prerogative under Art. 1592 of the Civil Code.
Tolosa, on the other hand, is now precluded from raising the issue of late payments. His unqualified
acceptance of payments after the six-month period expired constitutes waiver of the period and, hence, of
the ground to rescind under Art. 1592.
In any case, however, the breach on the part of Ocampo was only slight if not outweighed by the bad faith
of Tolosa in reneging in his own prestations, hence, judicial rescission of the contract cannot be
justified. Angeles v. Calasanz
29
is apropos
The right to rescind the contract for non-performance of one of its stipulations . . . is not
absolute. InUniversal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated: 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 (Corpus v. Hon. Alikpala, et al., L-23707 & L-
23720, Jan. 17, 1968) . . .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the
contract to sell . . . because they failed to pay the August installment, despite demand, for
more than four (4) months.
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 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 P3920.00 excluding the 7
percent interest, 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 "[I]f the obligation has been
substantially performed in good faith, the obligator may recover as 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 canceling the contract.
. . . We agree with the plaintiffs-appellees that when the defendants-appellants, instead of
availing of their 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. In De Guzman v.
Guieb (48 SCRA 68), we held . . . But defendants do not deny that in spite of the long
arrearages, neither they nor their predecessor . . . even took steps to cancel the option or
to eject the appellees from the home-lot in question. On the contrary, it is admitted that
the delayed payments were received without protest or qualification. . . . Under these
circumstances, We cannot but agree with the lower court that at the time appellees
exercised their option, appellants had already forfeited their right to invoke the above-
quoted provision regarding the nullifying effect of the non-payment of six-months rentals
by appellees by their having accepted without qualification on July 21, 1964 the full
payment by appellees of all their arrearages.
While the contract dated 3 June 1977 in favor of Villaruz is also a contract of sale, that of Ocampo dated
21 April 1975 should prevail pursuant to Art. 1544 of the Civil code on double sales.
30
While Villaruz
may have registered his contract or came into possession ahead of Ocampo, Villaruz was never in good
faith.
Since Ocampo had her adverse claim annotated on Tolosas OCT on 6 June 1976, Villaruz could not
profess innocence thereof when she signed her contract on 3 June 1977; in fact, her full payment of the
purchase price was made dependent, among others, on the cancelation of this claim. Moreover, Villaruz
admitted having been informed by Tolosa of the first sale to Ocampo while still negotiating to buy the
land.
31
Knowledge of the foregoing should have impelled Villaruz to investigate the circumstances of the
annotation since this is equivalent to registration of Ocampos contract of sale as against Villaruz. In sum,
Ocampo having the older title in good faith and considering that personal knowledge thereof by Villaruz
constitutes registration as against the latter, Ocampo should be considered the preferred buyer.
Incidentally, the stipulation in the contract of Villaruz conveying the land in her favor bows to Tolosas
admission at the witness stand on 15 May 1980 that he never actually delivered the possession of the
property to anyone.
32

From the foregoing, although the decision of the trial court ordering Tolosa to execute another deed of
sale in favor of Ocampo already became final as against him for failing to appeal therefrom, there is no
more need for it. For practical purposes, it is enough that we order Villaruz to reconvey the property to
Ocampo.
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE and the decision
dated 7 January 1988 of the Regional Trial Court of Iloilo, Branch 27, in Civil Case No. 12163 is
REINSTATED, with the modification that respondent Magdalena S. Villaruz is directed to reconvey the
subject land now covered by TCT No. T-100021 in her name to petitioner Pilar T. Ocampo, without
prejudice to Severino Tolosa collecting from petitioner Pilar T. Ocampo the balance of the purchase price
of P4,400.00 which nevertheless may be deducted from the monetary awards made by the trial court in
favor of petitioner Ocampo.
SO ORDERED.

THIRD DIVISION
[G.R. No. 108346. July 11, 2001]
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF
APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO,respondents.
D E C I S I O N
PANGANIBAN, J .:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed
by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract from
its inception and requires a mutual restitution of benefits received.
The Case

Before us is a Petition for Review on Certiorari
[1]
questioning the Decision
[2]
of the Court of Appeals
(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution
[3]
dated December 29,
1992 denying petitioners motion for reconsideration.
[4]

The dispositive portion of the assailed Decision reads:
WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the
Decision dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds posted by
plaintiffs-appellees and defendants-appellants are hereby RELEASED.
[5]

The Facts

The factual antecedents of the case, as found by the CA, are as follows:
x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of
land, together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias
Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein private
respondent] is Davids father who negotiated with plaintiffs Avelina and Mariano Velarde [herein
petitioners] for the sale of said property, which was, however, under lease (Exh. 6, p. 232, Record of
Civil Case No. 15952).
On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. A; Exh. 1, pp. 11-12,
Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as
vendee, with the following terms and conditions:
x x x x x x x x x
That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from
the VENDEE, to his entire and complete satisfaction, by these presents the VENDOR hereby SELLS,
CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a
legal and valid title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel of
land mentioned and described above, together with the house and other improvements thereon.
That the aforesaid parcel of land, together with the house and other improvements thereon, were
mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to
secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and executed by the
VENDOR in favor of the said Bank of the Philippine Islands, on______ and which Real Estate Mortgage
was ratified before Notary Public for Makati, _______, as Doc. No. ____, Page No. ___, Book No. ___,
Series of 1986 of his Notarial Register.
That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage
obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the Philippine Islands, in
the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms and
conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI,
including interests and other charges for late payment levied by the Bank, as if the same were originally
signed and executed by the VENDEE.
It is further agreed and understood by the parties herein that the capital gains tax and documentary
stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer tax
thereon shall be for the account of the VENDEE. (Exh. A, pp. 11-12, Record).
On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her
husband, Mariano, executed an Undertaking (Exh. C, pp. 13-14, Record), the pertinent portions of
which read, as follows:
x x x x x x x x x
Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of
EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage
obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the
terms and conditions of the Deed of Real Estate Mortgage dated _________, signed and executed by Mr.
David A. Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc.
No. ___, Page No. ___, Book No. __, Series of 1986 of his Notarial Register.
WHEREAS, while my application for the assumption of the mortgage obligations on the property is not
yet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with
the Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said
Deed of Real Estate Mortgage, including all interests and other charges for late payment.
WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of
attesting and confirming our private understanding concerning the said mortgage obligations to be
assumed.
NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the
mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde, with the consent
of my husband, Mariano Z. Velarde, do hereby bind and obligate myself, my heirs, successors and
assigns, to strictly and faithfully comply with the following terms and conditions:
1. That until such time as my assumption of the mortgage obligations on the property purchased is
approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan
in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr.
David A. Raymundo, the original Mortgagor.
2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage,
I hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the
Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by
way of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr.
David A Raymundo shall resume total and complete ownership and possession of the property sold by
way of Deed of Sale with Assumption of Mortgage, and the same shall be deemed automatically
cancelled and be of no further force or effect, in the same manner as if (the) same had never been
executed or entered into.
3. That I am executing this Undertaking for purposes of binding myself, my heirs, successors and
assigns, to strictly and faithfully comply with the terms and conditions of the mortgage obligations with
the Bank of the Philippine Islands, and the covenants, stipulations and provisions of this Undertaking.
That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby
confirm and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage
obligations by the Vendee with the Bank of the Philippine Islands. (Exh. C, pp. 13-14, Record).
This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds
of a loan that plaintiffs were to secure from a bank with defendants help. Defendants had a standing
approved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPIs approval of an application for assumption of mortgage by plaintiffs. Pending BPIs
approval o[f] the application, plaintiffs were to continue paying the monthly interests of the loan secured
by a real estate mortgage.
Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20,
1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J, pp. 15, 17 and 18,
Record).
On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with
BPI was not approved (Exh. J, p. 133, Record). This prompted plaintiffs not to make any further
payment.
On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment
to the mortgage bank constitute[d] non-performance of their obligation (Exh. 3, p. 220, Record).
In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January
21, 1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987
for her immediate occupancy; (b) you cause the release of title and mortgage from the Bank of P.I. and
make the title available and free from any liens and encumbrances; and (c) you execute an absolute deed
of sale in her favor free from any liens or encumbrances not later than January 21, 1987. (Exhs. K, 4,
p. 223, Record).
On January 8, 1987, defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended
sale of the subject property allegedly due to the latters failure to comply with the terms and conditions of
the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. 5, pp. 225-226, Record).
[6]

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for
specific performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil
Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then
Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who dismissed the Complaint in
a Decision dated November 14, 1990.
[7]
Thereafter, petitioners filed a Motion for Reconsideration.
[8]

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador
S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991,
[9]
Judge Abad
Santos granted petitioners Motion for Reconsideration and directed the parties to proceed with the
sale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in turn, were
ordered to execute a deed of absolute sale and to surrender possession of the disputed property to
petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiagos
earlier Decision dismissing petitioners Complaint. Upholding the validity of the rescission made by
private respondents, the CA explained its ruling in this wise:
In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the consideration of
this sale, the VENDEE (Velarde) would assume to pay the mortgage obligation on the subject property
in the amount of P1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since the price to
be paid by the Vendee Velarde includes the downpayment of P800,000.00 and the balance ofP1.8 million,
and the balance of P1.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of the
sale, had to assume the mortgage obligation on the subject property. In other words, the assumption of
the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde
further agreed to strictly and faithfully comply with all the terms and conditions appearing in the Real
Estate Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were
originally signed and executed by the Vendee. (p.2, thereof, p.12, Record). This was reiterated by
Velarde in the document entitled Undertaking wherein the latter agreed to continue paying said loan in
accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of
Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and
conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all payments made
with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of
[M]ortgage would thereby be cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp.
13-14, Record).
From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption
by Velarde of the mortgage obligation of Raymundo in the amount of P1.8 million. This would mean that
Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage in the name of
Raymundo. The application with BPI for the approval of the assumption of mortgage would mean that, in
case of approval, payment of the mortgage obligation will now be in the name of Velarde. And in the
event said application is disapproved, Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on
September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This
being the case, the non-payment of the mortgage obligation would result in a violation of the
contract. And, upon Velardes failure to pay the agreed price, the[n] Raymundo may choose either of two
(2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, Civil
Code).
The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for
Velardes non-payment of the balance of the purchase price. As borne out by the evidence, Velarde had
to pay in full in case of BPIs disapproval of the application for assumption of mortgage. What Velarde
should have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated
January 7, 1987 (Exh. K, 4) which was strongly given weight by the lower court in reversing the
decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to
pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, would
constitute a new undertaking or new agreement which is subject to the consent or approval of
Raymundo. These 3 conditions were not among those previously agreed upon by Velarde and
Raymundo. These are mere offers or, at most, an attempt to novate. But then again, there can be no
novation because there was no agreement of all the parties to the new contract (Garcia, Jr. vs. Court of
Appeals, 191 SCRA 493).
It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with
Assumption of Mortgage would be deemed automatically cancelled and of no further force and effect, as
if the same had never been executed or entered into. While it is true that even if the contract expressly
provided for automatic rescission upon failure to pay the price, the vendee may still pay, he may do so
only for as long as no demand for rescission of the contract has been made upon him either judicially or
by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the latters failure to comply with
their obligation. The rescission was justified in view of Velardes failure to pay the price (balance) which
is substantial and fundamental as to defeat the object of the parties in making the agreement. As adverted
to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is a
resolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to
rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to
criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon
appellees failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost their right to its
enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635).
[10]

Hence, this appeal.
[11]

The Issues

Petitioners, in their Memorandum,
[12]
interpose the following assignment of errors:
I.
The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a
breach of the contract.
II.
The Court of Appeals erred in holding that the rescission (resolution) of the contract by private
respondents was justified.
III.
The Court of Appeals erred in holding that petitioners January 7, 1987 letter gave three new
conditions constituting mere offers or an attempt to novate necessitating a new agreement between
the parties.
The Courts Ruling

The Petition is partially meritorious.
First Issue:

Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage obligation did not constitute
a breach of contract, considering that their request to assume the obligation had been disapproved by the
mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and,
instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the
balance of the purchase price. As admitted by both parties, their agreement mandated that petitioners
should pay the purchase price balance of P1.8 million to private respondents in case the request to assume
the mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received notice of
the banks disapproval of their application to assume respondents mortgage, they should have paid the
balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment
only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such
conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a
buyer under a contract of sale.
In 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.
[13]
Private respondents had
already performed their obligation through the execution of the Deed of Sale, which effectively
transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery
or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to
delivery.
[14]

Petitioners, on the other hand, did not perform their correlative obligation of paying the contract
price in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond
those stipulated in the contract before fulfilling their own obligation to pay the full purchase price.
Second Issue

Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified,
inasmuch as the former had signified their willingness to pay the balance of the purchase price only a
little over a month from the time they were notified of the disapproval of their application for assumption
of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a
rescission. They cite several cases
[15]
in which this Court declared that rescission of a contract would not
be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their
obligation in good faith, considering that they have already made the initial payment of P800,000 and
three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the
mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:
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 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 right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated
on a breach of faith by the other party who violates the reciprocity between them.
[16]
The breach
contemplated in the said provision is the obligors failure to comply with an existing obligation.
[17]
When
the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of compliance, the court shall decree the
rescission.
[18]

In the present case, private respondents validly exercised their right to rescind the contract, because
of the failure of petitioners to comply with their obligation to pay the balance of the purchase
price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month after
it became due; however, this was not equivalent to actual payment as would constitute a faithful
compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance
by private respondents of additional burdens that had not been agreed upon in the original contract. Thus,
it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude
the exercise of the right to rescind.
Misplaced is petitioners reliance on the cases
[19]
they cited because the factual circumstances in
those cases are not analogous to those in the present one. In Song Fo there was, on the part of the buyer,
only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyers offer to pay was
unconditional and was accepted by the seller. In Zepeda, the breach involved a mere one-week delay in
paying the balance of P1,000, which was actually paid. In Tan, the alleged breach was private
respondents delay of only a few days, which was for the purpose of clearing the title to the property;
there was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an
irregularity; such breach would not normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private
respondents new obligations as preconditions to the performance of their own obligation. In effect, the
qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable
under the contract of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
Mutual Restitution

Required in Rescission

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. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the
amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners 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.
[20]
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.
[21]

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue
raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of
petitioners to private respondents were not part of the original contract. By that time, it was already
incumbent upon the former to pay the balance of the sale price. They had no right to demand
preconditions to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of
rescission. No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 126083 July 12, 2006
ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S.
Cortes), petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT
CORPORATION, respondents.
D E C I S I O N
YNARES-SANTIAGO, J .:
The instant petition for review seeks the reversal of the June 13, 1996 Decision
1
of the Court of Appeals
in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision
2
of the Regional Trial Court of
Makati, Branch 138, which rescinded the contract of sale entered into by petitioner Antonio Cortes
(Cortes) and private respondent Villa Esperanza Development Corporation (Corporation).
The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and Cortes
as seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title (TCT) No.
31113-A, TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque, Metro Manila. On
various dates in 1983, the Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in
September 1983, the parties executed a deed of absolute sale containing the following terms:
3

1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO
MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine Currency,
less all advances paid by the Vendee to the Vendor in connection with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]
PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of this
instrument, payment of which shall be secured by an irrevocable standby letter of credit to be
issued by any reputable local banking institution acceptable to the Vendor.
x x x x
4. All expense for the registration of this document with the Register of Deeds concerned,
including the transfer tax, shall be divided equally between the Vendor and the Vendee. Payment
of the capital gains shall be exclusively for the account of the Vendor; 5% commission of
Marcosa Sanchez to be deducted upon signing of sale.
4

Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant case
5
for specific performance seeking to compel
Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to the
Corporation, despite its readiness and ability to pay the purchase price, Cortes refused delivery of the
sought documents. It thus prayed for the award of damages, attorney's fees and litigation expenses arising
from Cortes' refusal to deliver the same documents.
In his Answer with counterclaim,
6
Cortes claimed that the owner's duplicate copy of the three TCTs were
surrendered to the Corporation and it is the latter which refused to pay in full the agreed down payment.
He added that portion of the subject property is occupied by his lessee who agreed to vacate the premises
upon payment of disturbance fee. However, due to the Corporation's failure to pay in full the sum of
P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee who now refused to pay
monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding balance plus
interest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial down payment, with
damages in either case.
On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return to
the Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of the
parties, the Corporation should have fully paid the amount of P2,200,000.00 upon the execution of the
contract. It stressed that such is the law between the parties because the Corporation failed to present
evidence that there was another agreement that modified the terms of payment as stated in the contract.
And, having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of the Deed of
Absolute Sale and the TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to consider their
agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The motion
was, however, denied by the trial court holding that the rescission should stand because the Corporation
did not act on the offer of Cortes' counsel to deliver the TCTs upon payment of the balance of the down
payment. Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in the
decision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed that if
[the Corporation] completes the down payment agreed upon and make arrangement for the
payment of the balances of the purchase price, [Cortes] would sign the Deed of Sale and turn over
the certificate of title to the [Corporation]. [The Corporation] did nothing to comply with its
undertaking under the agreement between the parties.
WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is hereby
DENIED.
SO ORDERED.
7

On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to execute a
Deed of Absolute Sale conveying the properties and to deliver the same to the Corporation together with
the TCTs, simultaneous with the Corporation's payment of the balance of the purchase price of
P2,487,000.00. It found that the parties agreed that the Corporation will fully pay the balance of the down
payment upon Cortes' delivery of the three TCTs to the Corporation. The records show that no such
delivery was made, hence, the Corporation was not remiss in the performance of its obligation and
therefore justified in not paying the balance. The decretal portion thereof, provides:
WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision
appealed from is hereby REVERSED and SET ASIDE and a new judgment rendered ordering
[Cortes] to execute a deed of absolute sale conveying to [the Corporation] the parcels of land
subject of and described in the deed of absolute sale, Exhibit D. Simultaneously with the
execution of the deed of absolute sale and the delivery of the corresponding owner's duplicate
copies of TCT Nos. 31113-A, 31931-A and 32013-A of the Registry of Deeds for the Province of
Rizal, Metro Manila, District IV, [the Corporation] shall pay [Cortes] the balance of the purchase
price of P2,487,000.00. As agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D,
under terms and conditions, "All expenses for the registration of this document (the deed of sale)
with the Register of Deeds concerned, including the transfer tax, shall be divided equally between
[Cortes and the Corporation]. Payment of the capital gains shall be exclusively for the account of
the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale." There is
no pronouncement as to costs.
SO ORDERED.
8

Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be reinstated.
There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the parties.
Reciprocal obligations are those which arise from the same cause, and 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.
9

Article 1191 of the Civil Code, states:
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.
x x x x
As to when said failure or delay in performance arise, Article 1169 of the same Code provides that
ART. 1169
x x x x
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins. (Emphasis supplied)
The issue therefore is whether there is delay in the performance of the parties' obligation that would
justify the rescission of the contract of sale. To resolve this issue, we must first determine the true
agreement of the parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as
shown not necessarily by the terminology used in the contract but by their conduct, words, actions and
deeds prior to, during and immediately after executing the agreement. As such, therefore, documentary
and parol evidence may be submitted and admitted to prove such intention.
10

In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in full
the P2,200,000.00 down payment upon execution of the contract. However, as correctly noted by the
Court of Appeals, the transcript of stenographic notes reveal Cortes' admission that he agreed that the
Corporation's full payment of the sum of P2,200,000.00 would depend upon his delivery of the TCTs of
the three lots. In fact, his main defense in the Answer is that, he performed what is incumbent upon him
by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale, but the
latter refused to pay in full the down payment.
11
Pertinent portion of the transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not been
paid in full the agreed down payment?
A Well, the broker told me that the down payment will be given if I surrender the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the down payment of P2,200,000.00
provided you surrender or entrust to the plaintiff the titles?
A Yes, sir.
12

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of the
lots will be transferred in the name of the Corporation upon full payment of the P2,200,000.00 down
payment. Thus
ATTY. ANTARAN
Q Of course, you have it transferred in the name of the plaintiff, the title?
A Upon full payment.
x x x x
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down payment of
P2,200,000.00?
A Yes, sir.
13

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver the
TCTs to the Corporation in order to effect said transfer. Hence, the phrase "execution of this
instrument"
14
as appearing in the Deed of Absolute Sale, and which event would give rise to the
Corporation's obligation to pay in full the amount of P2,200,000.00, can not be construed as referring
solely to the signing of the deed. The meaning of "execution" in the instant case is not limited to the
signing of a contract but includes as well the performance or implementation or accomplishment of the
parties' agreement.
15
With the transfer of titles as the corresponding reciprocal obligation of payment,
Cortes' obligation is not only to affix his signature in the Deed, but to set into motion the process that
would facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to surrender the
original copy thereof to the Corporation together with the TCTs.
Having established the true agreement of the parties, the Court must now determine whether Cortes
delivered the TCTs and the original Deed to the Corporation. The Court of Appeals found that Cortes
never surrendered said documents to the Corporation. Cortes testified that he delivered the same to
Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa Sanchez,
delivered the same to the Corporation.
Q Do you have any proof to show that you have indeed surrendered these titles to the plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with that
receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.
Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is that
Manny Sanchez?
A That is the son of the broker.
x x x x
Q May we know the full name of the real estate broker?
A Marcosa Sanchez
x x x x
Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.
x x x x.
16

ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?
x x x x
Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff?
A Yes, sir.
COURT
Q How do you know that it was delivered to the plaintiff by the son of the broker?
A The broker told me that she delivered the title to the plaintiff.
ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.] Dragon
17
the title without any
receipt?
A I have not seen any receipt.
Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not. It is
only upon the allegation of the broker?
A Yes, sir.
18

However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also denied
knowledge of delivery thereof to her son, Manny, thus:
Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he allegedly
gave you the title to the property in question, is it true?
A I did not receive the title.
Q He likewise said that the title was delivered to your son, do you know about that?
A I do not know anything about that.
19

What further strengthened the findings of the Court of Appeals that Cortes did not surrender the subject
documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of Absolute
Sale if the Corporation will pay the balance of the down payment. Indeed, if the said documents were
already in the hands of the Corporation, there was no need for Cortes' counsel to make such offer.
Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same together
with the TCTs, the trial court erred in concluding that he performed his part in the contract of sale and
that it is the Corporation alone that was remiss in the performance of its obligation. Actually, both parties
were in delay. Considering that their obligation was reciprocal, performance thereof must be
simultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise to a compensation
morae or default on the part of both parties because neither has completed their part in their reciprocal
obligation.
20
Cortes is yet to deliver the original copy of the notarized Deed and the TCTs, while the
Corporation is yet to pay in full the agreed down payment of P2,200,000.00. This mutual delay of the
parties cancels out the effects of default,
21
such that it is as if no one is guilty of delay.
22

We find no merit in Cortes' contention that the failure of the Corporation to act on the proposed
settlement at the pre-trial must be construed against the latter. Cortes argued that with his counsel's offer
to surrender the original Deed and the TCTs, the Corporation should have consigned the balance of the
down payment. This argument would have been correct if Cortes actually surrendered the Deed and the
TCTs to the Corporation. With such delivery, the Corporation would have been placed in default if it
chose not to pay in full the required down payment. Under Article 1169 of the Civil Code, from the
moment one of the parties fulfills his obligation, delay by the other begins. Since Cortes did not perform
his part, the provision of the contract requiring the Corporation to pay in full the down payment never
acquired obligatory force. Moreover, the Corporation could not be faulted for not automatically heeding
to the offer of Cortes. For one, its complaint has a prayer for damages which it may not want to waive by
agreeing to the offer of Cortes' counsel. For another, the previous representation of Cortes that the TCTs
were already delivered to the Corporation when no such delivery was in fact made, is enough reason for
the Corporation to be more cautious in dealing with him.
The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in the
contract of sale, i.e., for Cortes to, among others, deliver the necessary documents to the Corporation and
for the latter to pay in full, not only the down payment, but the entire purchase price. And since the
Corporation did not question the Court of Appeal's decision and even prayed for its affirmance, its
payment should rightfully consist not only of the amount of P987,000.00, representing the balance of the
P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining balance in the
P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of Appeals in CA-
G.R. CV No. 47856, is AFFIRMED.
SO ORDERED.

FIRST DIVISION


JOHANNES RIESENBECK,
P e t i t i o n e r,



- versus -




SPOUSES SILVINO G. MACEREN, JR.
and PATRICIA A. MACEREN,
R e s p o n d e n t s.
G.R. No. 158608

Present:

PANGANIBAN, C.J.
Chairperson,
YNARES-SANTIAGO,
AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

Promulgated:

January 27, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x


D E C I S I O N


CHICO-NAZARIO, J.:


Impugned in this petition for review is the Decision
[1]
dated 02 September 2002 of the Court of
Appeals, which dismissed the appeal filed by petitioner from the Order
[2]
of the Regional Trial Court
(RTC) of Lapu-Lapu City, Branch 54, in Civil Case No. 4307-L for annulment of Contract of Lease on
the ground that the case has been rendered moot. Assailed likewise is the Resolution
[3]
of the Court of
Appeals denying the motion for reconsideration still on mootness and forum shopping.

We recount the facts paving the way to this petition:

Respondents Atty. Silvino G. Maceren, Jr., and his wife Patricia A. Maceren are the registered
owners of a beach resort, known as the Golden Views Resort, situated at Buot, Punta Engao, Lapu-
Lapu City.

On 25 March 1988, Juergen Maile, a German national, and respondents Atty. Silvino G. Maceren,
Jr., and his wife Patricia A. Maceren, entered into a Contract of Lease.
[4]
Petitioner Johannes Riesenbeck,
a Dutch national, was the substitute lessee. Linda Villariasa,
[5]
Filipino wife of Riesenbeck, also
appended her signature in the contract.
[6]
Excerpts of the lease contract provide:

That the ORIGINAL LESSEE rented and leased the above-mentioned premises
and facilities and in fact as part of the contract, he has introduced the restaurant of
indigenous materials along the beach;

That the ORIGINAL LESSEE has manifested his desire to relinquish
the CONTRACT OF LEASE covering the aforementioned beach resort and the facilities
therein in favor of the SUBSTITUTE LESSEE who is interested to go on with the lease
under the terms and conditions stipulated herein;

That the herein LESSOR is willing to grant in lease the aforementioned beach
resort and all its improvements in favor of the SUBSTITUTE LESSEE.

x x x x

5. IMPROVEMENTS The SUBSTITUTE LESSEE undertakes to introduce
within the leased premises within a period of SEVEN AND A HALF (7 & ) years from
the signing of this contract, permanent improvements worth not less than FIVE
HUNDRED THOUSAND PESOS (P500,000) provided that before any improvement
is introduced, the LESSOR shall be first advised as to its location. In no case will the
LESSEE destroy the tennis court and introduce improvements thereon, nor shall the
LESSEE destroy any existing improvements without first getting the written permission
of the LESSOR;

x x x x

8. OWNERSHIP AND POSSESSION That at the end of the term of the lease
or termination of the same for violations of its terms, all improvements introduced by the
SUBSTITUTE LESSEE in the leased premises shall belong to the LESSOR without need
of reimbursement of its costs; That upon termination of this contract the LESSEE shall
return the peaceful possession of the properties herein leased together with any and all
improvements they may have introduced to the LESSORS without need of demand;

9. RESERVATION OF PRIVILEGE The LESSOR TOGETHER WITH
THEIR GUESTS and lot buyers shall have free access to the beach and to enjoy bathing
in the area, but in no case shall they crowd the leased premises and hamper the business
of the SUBSTITUTE LESSEE. Neither can they make use of the hotel rooms and
restaurant without paying the proper fees and charges, subject however to any special
discount and privileges which the SUBSTITUTE LESSEE(s) may grant in their
discretion. The LESSOR and his guests retain the privilege to use the tennis court which
shall be maintained by the SUBSTITUTE LESSEE.

10. SUB-LEASE - THE SUBSTITUTE LESSEE cannot sublease the leased
premises to any party without first securing the written prior consent of the LESSOR,
otherwise the sublease shall not be respected by the latter;

11. FIRST PRIORITY OPTION TO BUY In case the LESSOR(s) decide to
sell the property herein leased, they shall give the SUBSTITUTE LESSEE the first
priority to equal the price offered by an interested buyer and should the LESSEE fail to
exercise this option within 15 days from notice, the LESSOR shall have the right to sell
the property herein leased to said buyer;

x x x x

13. VIOLATION AND DAMAGES In case of violation of any terms and
conditions contained herein will be a ground for the offended party to terminate the
contract even before the end of its term and in case the LESSEE violates the same the
LESSOR have the option to terminate the contract without prejudice to his rights to
collect whatever rentals due for the remaining years of the contract plus damages;

14. TERM OF LEASE AND PARTIES BOUND This CONTRACT OF
LEASE shall be commenced immediately upon the signing hereof and shall remain valid
and binding between the parties and their heirs for a period of FIFTEEN (15) YEARS
from January, 1988 and to end on December 2003, unless earlier terminated for violation
of terms hereof.

15. TAXES - The SUBSTITUTE LESSEE shall contribute for the payment of
the taxes and leased premises at no less than FIVE THOUSAND PESOS (P5,000.00)
each year, however, for their additional improvements, all taxes thereon during the term
of the lease shall be paid by the SUBSTITUTE LESSEE. (Emphases supplied)


On 23 July 1990, petitioner Johannes Riesenbeck filed Civil Case No. 2296-L for Declaratory
Relief.
[7]
The Complaint alleged, inter alia, that he had spent a sizeable sum of money for the
improvement and upkeep of the leased property. Sometime in April 1990, petitioner learned that the
actual amount of realty taxes due annually is onlyP2,495.00, which is less than the P5,000.00 that was
stipulated in the contract. Too, the Complaint averred that petitioner got wind of an impending sale of the
leased property in favor of a third party. He alleged that judicial declaration is necessary to delineate the
rights of the petitioner from those of the respondents vis--vis the stipulations pointed out in the contract
and prayed for a declaration of his rights under the lease contract, specifically with respect to Stipulations
No. 5, 8, 9, 11, 13, 14 and 15 as above-quoted concerning improvements, ownership and possession,
reservation of privilege, first priority option to buy, violation and damages, term of lease and parties
bound, and the taxes due, respectively.

Meanwhile, respondent Atty. Maceren sent a letter to petitioner Johannes Riesenbeck, as lessee of
the property, informing the latter of his intention to transfer the ownership of the property subject of the
Contract of Lease to the family corporation MAGICCORP. Thereafter, respondent Atty. Maceren was
able to effect the transfer of the leased property to MAGICCORP based on an instrument denominated as
Deed of Exchange of Shares of Stocks and Transfer of Property.

Stirred by the foregoing event, on 30 March 1993, petitioners wife, Linda Villariasa -
Riesenbeck filed a complaint for Redemption tagged as Civil Case No. 2819 against M. A Gen. Industrial
and Commercial Corp. or MAGICCORP pursuant to clause 11
[8]
of the Contract of Lease as cited above.
In an order dated 11 March 1994, the trial court dismissed the complaint for Redemption, with a ruling
that there was no actual transfer of ownership interests of the leased property when the same was
transferred by respondent Atty. Maceren to defendant corporation in exchange for the latters shares of
stock inasmuch as the transfer was merely one in form and not in substance, citing Delpher Trades
Corporation v. Intermediate Appellate Court.
[9]
The Court of Appeals affirmed the ruling of the trial
court on 08 February 2000.

Awaiting the conclusion of Civil Case No. 2819 for Redemption and Civil Case No. 2296-L for
Declaratory Relief, petitioner Johannes Riesenbeck filed on 13 September 1995 the case subject of the
present review docketed as Civil Case No. 4307-L
[10]
against respondents, this time, to annul the
aforementioned Contract of Lease. Petitioner replicated his allegations in his earlier Complaint for
Declaratory Relief that he had suffered damages from respondents act of defrauding him into entering
into the abovementioned Contract of Lease. Petitioner specifically asserted that respondents swayed
petitioner to enter into the Contract of Lease by stipulating, inter alia, that petitioner will have the first
option or priority to purchase the same from respondents. Likewise, petitioner echoed the contention that
he was conned as to the amount of taxes due inasmuch as he was assessed and had paid
respondents P5,000 per taxable year pursuant to the provision in the said contract, only to find out much
later that the taxes payable were only slightly over P2,000.

On 10 October 1995, respondents filed a Motion to Dismiss
[11]
citing the following grounds: (1)
two other actions between the same parties and for the same cause are pending, one before Branch 53 of
the RTC of Lapu-Lapu City, docketed as Civil Case No. 2296-L, and the other, before the Court of
Appeals in CA-G.R. CV No. 45655, docketed as Civil Case No. 2819-L in the trial court; (2) the
complaint violates the proscription against forum-shopping; and (3) the complaint does not state a cause
of action.Respondents averred in their Motion to Dismiss that the lease contract which petitioner wants to
be annulled was already terminated by respondents effective 30 November 1994, or almost a year before
this case was filed before the trial court on 13 September 1995 due to petitioners violation of clauses 10
and 11
[12]
of their contract.

On 20 May 1996, the trial court issued a verdict
[13]
favoring the respondents and granting the
Motion to Dismiss filed by respondents on the rationale that the present case is akin to forum-shopping.
In the trial courts elucidation, there is no dispute that the plaintiff herein is the same plaintiff in Civil
Case No. 2296-L for Declaratory Relief and at least, vicariously, in Civil Case No. 2819 for Redemption,
since his wife is the one named as party plaintiff. Said trial court noted that all these cases sprung out of
the same Contract of Lease executed by the same parties. In the trial courts words: While it may be
conceded that the present complaint, seeking as it does, the annulment of the said lease contract is literally
different from the other two, which by the very nature of the action, necessarily sought the enforcement or
at least, presupposes the recognition of the validity of the terms and conditions embodied therein,
nonetheless, this fact standing alone, does not militate against the proscription against multiplicity of suits
and forum-shopping, if the filing thereof would bring about the same evil sought to be avoided by the said
rule.
[14]


On 02 September 2002, the Court of Appeals rendered a Decision
[15]
affirming the trial courts
decision with the initial finding that there was no forum-shopping, but nonetheless, dismissing the case
for being moot. The Court of Appeals imparted the following rationale-

Nevertheless, even if there is no substantial finding of forum-shopping, we note
that events which transpired prior to the filing of the instant suit have rendered the same
moot and academic.

The lease contract which appellant wants to be annulled was already terminated
by appellees effective November 30, 1994, or almost a year before this case was filed
before the trial court on September 13, 1995. Appellees alleged in their Motion to
Dismiss that this was prompted by appellants violation of the terms and conditions of
their contract, particularly paragraph 13 thereof. Not once did appellant refute this. We
thus see no point in appellant pursuing the annulment of the lease contract when the same
is already of no force and effect between the parties.
[16]



Petitioner moved to reconsider the Court of Appeals Decision, still obdurate that the case has not
been rendered moot, but the Court of Appeals held in a Resolution
[17]
dated 12 May 2003, that since not
once did petitioner address the issue on violations of the terms of the contract head on, he cannot now
rightfully claim that the termination of their lease contract has not rendered the instant suit for annulment
of contract moot following Section 2, Rule 9 of the Rules of Court, the law in force at the time this case
was filed, which provided that defenses and objections not pleaded either in a motion to dismiss or in the
answer are deemed waived. Quite noteworthy is the fact that although the Court of Appeals, at first
glance, held in its Decision that there was no forum-shopping, a second look at the case under
reconsideration led to its change of heart - this time rulingthat petitioner already sought to recover
damages in the suit for Declaratory Relief arising from the same lease contract subject of the instant case
and to claim damages once more, this time via the present case would already be tantamount to forum-
shopping, if not harassment.

The Issue

His motion for reconsideration having been denied by the Court of Appeals, petitioner now lays
his cause before this Court through this petition for review where he assigns the following lone error to
the Court of Appeals. Thus:

THE LOWER COURT ERRED IN HOLDING THAT THE CASE HAS BECOME
MOOT AND ACADEMIC.
[18]



Critical to the resolution of this case is the issue of whether or not the act of respondents of
unilaterally terminating the lease contract, subject matter of this petition, on the basis of petitioners
alleged violation of the terms thereof has rendered the present case for annulment of said contract and for
damages fusty.

Petitioner submits that the potestative act of respondents in unilaterally and extrajudicially
terminating the lease contract could not have rendered the said contract functus oficio inasmuch as such
termination was without judicial approval.
[19]
Petitioner says that it is precisely this arbitrary termination
of the contract by respondent that petitioner now seeks redress for as he had suffered damages from
respondents act of defrauding him into entering into the said Contract of Lease. Petitioner specifically
claims that respondents convinced petitioner to enter into the Contract of Lease by stipulating, among
other things, that petitioner will have the first option or priority to purchase the same from
respondents. Repeating his argument, petitioner claims that as he is unfamiliar with the Philippine laws,
and trusting on the representation of respondent who is a lawyer, he entered into a contract and spent,
among other things, P1,153,890. Likewise, petitioner avers that he was duped into believing that
respondents will be shouldering part of the taxes on the property because petitioner will only be allegedly
contributing the sum of P5,000 per tax period, only to find out much later that the taxes due were only
slightly overP2,000. It is these fraudulent acts resulting in petitioners damage and prejudice that is the
heart of the complaint filed in the present case, according to petitioner.
[20]


Respondents, on the other hand, submit that the present petition ought to be dismissed not only
because it is moot, but also because its filing smacks of forum shopping.

The Courts Ruling

We find, as the Court of Appeals had found, that the petition was rendered moot or illusory by the
fact that respondents have already pre-terminated the lease contract effective 30 November 1994, or
almost a year before this case was filed with the trial court on 13 September 1995. The pre-termination
was prompted by petitioners violation of the terms and conditions of their contract following petitioners
act of sub-leasing the leased property sans the approval of private respondents in stark breach of Clause
10
[21]
in relation to Clause 13
[22]
of said contract. As the records bear out, petitioner had sub-leased the
seven units of the property in question to a Japanese national against whom he filed a rap for Grave
Threats with the Police Station of Lapu-lapu City per his Sworn Statement
[23]
taken dated 27

October
1994 in the presence of his wife, Linda Riesenbeck. Said affidavit is reproduced below for clarity of
exposition:

02. Q: Please state your name and other personal circumstances?

A: I am JOHANNES RIESENBECK, a Dutch National, 55 years old,
married, an owner of Golden Views Beach Resort and Hotel located at Boot,
Punta Engao, Lapu-lapu City and presently residing of same place.

x x x x

05. Q: Mr. Riesenbeck, why are you here in the office of the investigation Section,
Lapu-lapu Police Station?

A: I came here purposely to lodge a complaint against a Japanese National
SHINICHI MATSUMOTO, who harassed us in my residence bringing with him
a handgun presumably caliber 45 pistol barge into our house and threatened us to
kill but fortunately we were able to escape for our safety.

x x x x

07. Q: Why did SHINICHI MATSUMOTO harassed you and threatened you to kill?
(sic)

A: SHINICHI MATSUMOTO harassed us because he wants us to drive away
from the place for unknown reason.

08. Q: Is SHINICHI MATSUMOTO your neighbor?

A: No he is not our neighbor but the tenant of the seven (7) units
of our beach Resort Golden Views Beach Resort, which is located at Boot, Punta
Engao but he resides [at] Sea Breeze, Mactan, Lapu-Lapu City.

x x x x

11. Q: Since Mr. Romeo Abandan introduced to you to SHINICHI MATSUMOTO,
was their (sic) any proposal to rent a room or rooms in your Beach Resort in
favor of SHINICHI MATSUMOTO?

A: There was a proposal sir in fact we signed an agreement before a Notary
Public Elmergilio Ybalos on August 4, 1994.

12. Q: Since then what do you observed SHINICHI MATSUMOTO?

A: When he got drunk he is troublesome and he creates trouble in our place like
throwing bottles, shouting and anything he holds, he destroys it.

13. Q: What else did SHINICHI MATSUMOTO has done which affects your person?

A: His wife, Catalina Matsumoto told us that if SHINICHI MATSUMOTO got
angry he will kill us all of our family.

14. Q: How many times did SHINICHI MATSUMOTO harassed or threatened you?
(sic)

A: Many times but he did not told (sic) us personally but through his wife and his
wife told us that SHINICHI MATSUMOTO were going to kill us if we did not
follow what he wants but last night October 26, 1994 at about 7:15 in the
evening, SHINICHI MATSUMOTO personally harassed us bringing along with
him a handgun and threatened to kill both of us but fortunately we were able to
escape. (Emphases supplied)
[24]



Petitioner had the opportunity to refute the allegation of subleasing on various occasions: (1)
when it was raised in respondents Motion To Dismiss the Complaint, (2) when he filed a Motion for
Reconsideration to the Court of Appeals Decision dismissing his appeal on this very ground, and (3)
before this Court when this became the lis motaof the case on review. Despite the many windows of
opportunity, petitioner opted to be tight-lipped on this issue of sub-leasing. Petitioners silence on this
issue lends credibility to respondents claim that the present complaint was borne out of rancor for
respondents act of notifying him of the pre-termination of the lease contract and in anticipation of the
collection case for back rentals and damages that respondents were preparing to commence pursuant to
the contract which provides that in case the LESSEE violates the same (Contract of Lease) the LESSOR
have the option to terminate the contract without prejudice to his rights to collect whatever rentals due for
the remaining years of the contract plus damages. As found by the Court of Appeals, not once did
petitioner deny the fact that he sub-leased the premises. By his silence, he has admitted the truth of this
matter and he is now estopped from claiming otherwise. Qui tace consentire videtur. Silence means
consent.

The Contract of Lease was called off by respondents in virtue of Clauses No. 10 and No. 13
thereof to which the parties voluntarily bound themselves. In Manila Bay Club Corp. v. Court of
Appeals,
[25]
this Court interpreted as requiring mandatory compliance by the parties a provision in a lease
contract that failure or neglect to perform or comply with any of the covenants, conditions, agreements or
restrictions stipulated shall result in the automatic termination and cancellation of the lease.

In accord with this ruling is Peoples Industrial and Commercial Corp. v. Court of
Appeals
[26]
where the Court held that there is nothing wrong if the parties to a lease contract agreed on
certain mandatory provisions concerning their respective rights and obligations, such as the procurement
of insurance and the rescission clause. Thus -

[I]t is well to recall that contracts are respected as the law between the contracting parties,
and they may establish such stipulations, clauses, terms and conditions as they may want
to include. As long as such agreements are not contrary to law, morals, good customs,
public policy or public order they shall have the force of law between them.


The foregoing legal truism finds equal potency in the case at bar. No doubt, the pre-termination
was properly resorted to by respondents pursuant to Clause 10 of the Contract of Lease. Indeed, the law
on obligations and contracts does not prohibit parties from entering into agreement providing that a
violation of the terms of the contract would cause its cancellation even without judicial
intervention.
[27]
This is what petitioner and respondents entered into, a lease contract with stipulation that
the contract is rescinded upon violation of its substantial provisions, which petitioner, does not deny
having violated.

As weighed on the basis of the foregoing, the Court holds that the petition no longer presents a
live and justiciable controversy.

Petitioner further contends that the unilateral termination by respondents of the Contract of Lease
has not wiped out the damages sustained by petitioner on the premise that action for damages based on
respondents act of defrauding him in entering into the Contract of Lease can, nevertheless, prosper
dealing as it does with fraud committed prior to said termination such as respondents manner of
including the stipulation that petitioner has the first option to buy despite their knowledge that as a
foreigner he could not own properties in the Philippines.
[28]


We find no such sinister motive from the act of respondents of stipulating in the Contract of
Lease that the petitioner has the first option to buy the subject property. The Court is convinced as to the
veracity of respondents assertion that petitioner was well aware that he could not own a property. This is
precisely the reason why petitioners wife, Linda Villarasa who is a Filipina, was made a party to the
contract and has appended her signature thereon so that it is she who can exercise the option to buy the
subject property in his behalf as clearly stipulated in Clause 16 of the Contract of Lease which states:

16. That it is understood herein that mention of the word LESSEE refers to
the SUBSTITUTE LESSEE and his wife and in case of death of the SUBSTITUTE
LESSEE, the wife is subrogated to all his rights herein.
[29]
(Emphasis supplied)


The Court takes judicial notice of the fact that Civil Case No. 2819-L for Redemption filed by
Linda Riesenbeck, wife of herein petitioner, was dismissed by the RTC, Branch 54, and which dismissal
was affirmed by the Court of Appeals and has become final and executory per Comment
[30]
of
respondents, which finality the petitioner does not deny anywhere in his pleadings. Although the
principal party in said case is petitioners wife, it was clearly stated in the above-quoted Clause 16 of the
contract that: the word LESSEE refers to the SUBSTITUTE LESSEE and his wife. Quite telling is the
fact that in Civil Case No. 2819-L for Redemption of the property in question subject matter of the
contract, petitioners wife is the principal plaintiff where she sought to enforce her right of first refusal
over the property. Thus, the Court cannot feign a blind eye to the fact that petitioner and his wife
represent the same interests over the disputed Contract of Lease. In this light, petitioner cannot, on one
hand, claim in the present case that he was defrauded by respondents into thinking that he has the right of
first refusal over the property, and, on the other hand, seek to enforce the same right in another action. In
a word, he cannot, without flouting the basic tenets of fair play, deny that such right exists in one case
while insisting on it in another. Never again should the practice of trifling with judicial processes be
countenanced.
[31]


In brief, independently from this civil case for Annulment of Contract filed by petitioner
Johannes Riesenbeck against the respondents, petitioner had earlier filed a case for Declaratory Relief
which was, at that time, still pending in another branch of the Regional Trial Court while his wife, in his
behalf, filed a case for Redemption, where in both cases petitioner, in his own behalf or vicariously
through his wife, sought the enforcement of the provisions of the Contract of Lease.

During the pendency of the suit for Declaratory Relief and the other case for Redemption, does
the filing of a third suit for Annulment of Contract to prevent the enforcement of the contract violate the
ban against forum shopping?

The litmus test to determine if forum-shopping exists is where the elements of litis pendentia are
present or where a final judgment in one case will amount to res judicatain the other. Consequently,
where a litigant (or one representing the same interest or person) sues the same party against whom
another action or actions for the alleged violation of the same right and the enforcement of the same relief
is/are still pending, the defense of litis pendencia in one case is a bar to the others; and, a final judgment
in one would constitute res judicata and this would cause the dismissal of the rest.
[32]
What is truly
important to consider in determining whether forum-shopping exists or not is the vexation caused the
courts and parties-litigant by a party who asks different courts and/or administrative agencies to rule on
the same or related causes and/or to grant the same or substantially the same reliefs, in the process
creating the possibility of conflicting decisions being rendered by the different fora upon the same
issue.
[33]


Applying the foregoing principles in the present case as compared with the first two cases, it is
obvious that there exists identity of parties or interests represented, identity of rights or causes, and
identity of reliefs sought. In fact, there are common allegations in the complaints in these three cases,
particularly on the matters of taxes, the alleged fraud committed in making petitioner believe that he
could own properties in the Philippines, as well as alleged ploys adopted by respondents which tainted the
Contract of Lease at its inception. We further note that the original complaint in the court a quo which
gave rise to the instant petition was filed by the lessee to annul or bar the enforcement of the Contract
of Lease. On the other hand, the complaints in the two other cases seek to enforce the contract or at least
to declare the rights of petitioner or his wife, accruing from said covenant. The objective or the relief
being sought, though worded differently, is the same, namely, to enable the petitioner to profit from the
Contract of Lease, either from the enforcement thereof or from its annulment. In other words, in the
present case, petitioner is seeking to accomplish what he and his wife failed to do in the other two
cases. Citing Danville Maritime, Inc. v. Commission on Audit,
[34]
this Court, in First Philippine
International Bank v. Court of Appeals
[35]
ruled that the filing by a party of two apparently different
actions, but with the same objective, constituted forum shopping.

In this case, a possible decision annulling the contract and barring the parties from enforcing or
implementing the said contract will directly conflict with a decision recognizing the perfection and
directing the enforcement of the Contract of Lease. Indeed, a final decision in the one would
constitute res judicata in the other.
[36]


Altogether, as both the lower court and the Court of Appeals have ruled, petitioner or his wife
already sought to recover damages in the suit for Declaratory Relief and Redemption based on separate
provisions of the same lease contract subject of the instant case and his posture of claiming damages once
more, this time via the present case under a varied denomination of action, but anchored on the same
Contract of Lease, is an utter disdain of the imperative forbidding forum shopping.

By and large, the Court must hold, as we now hold, that the present action cannot pass muster on
sheer dictates of law and fair play.

WHEREFORE, the instant petition is hereby DENIED and the Decision
[37]
dated 02 September
2002 and the Resolution
[38]
dated 12 May 2003 of the Court of Appeals are hereby AFFIRMED. With
costs.



Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 129760 December 29, 1998
RICARDO CHENG, petitioner,
vs.
RAMON B. GENATO and ERNESTO R. DA JOSE & SOCORRO DA JOSE, respondents.

MARTINEZ, J .:
This petition for review on certiorari seeks to annul and set aside the Decision of the Court of Appeals
(CA)
1
dated July 7, 1997 in CA-G.R. No. CV No. 44706 entitled "Ricardo Cheng, plaintiff-appellee vs.
Ramon B. Genato, defendant-appellant, Ernesto R. Da Jose & Socorro B. Da Jose, Intervenors-
Appellants" which reversed the ruling of the Regional Trial Court, Branch 96 of Quezon City dated
January 18, 1994. The dispositive portion of the CA Decision reads:
WHEREFORE, based on the foregoing, appealed decision is hereby REVERSED and
SET ASIDE and judgment is rendered ordering;
1. The dismissal of the complaint;
2. The cancellation of the annotations of the defendant-appellant's Affidavit to Annul
Contract to Sell and plaintiff-appellee's Notice of Adverse Claim in the subject TCT's,
namely, TCT No. T-76.196 (M) and TCT No. T-76.197 (M);
3. Payment by the intervenors-appellants of the remaining balance of the purchase price
pursuant to their agreement with the defendant-appellant to suspend encashment of the
three post-dated checks issued since 1989.
4. Ordering the execution by the defendant-appellant Genato of the Deed of Absolute
Sale over the subject two lots covered by TCT No. T-76.196 (M) and TCT No. T-76.197
(M) in favor of intervenors-appellants Spouses Da Jose;
5. The return by defendant-appellant Genato of the P50,000.00 paid to him by the
plaintiff-appellee Cheng, and
6. Payment by plaintiff-appellee Cheng of moral damages to herein intervenors-
appellants Da Jose of P100,000.00, exemplary damages of P50,000.00, attorney's fees of
P50,000.00, and costs of suit; and to defendant-appellant, of P100,000.00 in exemplary
damages, P50,000.00 in attorney's fees. The amounts payable to the defendant-appellant
may be compensated by plaintiff appellee with the amount ordered under the immediately
foregoing paragraph which defendant-appellant has to pay the plaintiff-appellee.
SO ORDERED.
2

The antecedents of the case are as follows:
Respondent Ramon B. Genato (Genato) is the owner of two parcels of land located at Paradise Farms,
San Jose del Monte, Bulacan covered by TCT No. T-76.196 (M)
3
and TCT No. T-76.197 (M)
4
with an
aggregate area of 35,821square meters, more or less.
On September 6, 1989, respondent Genato entered into an agreement with respondent-spouses Ernesto R.
Da Jose and Socorro B. Da Jose (Da Jose spouses) over the above-mentioned two parcels of land. The
agreement culminated in the execution of a contract to sell for which the purchase price was P80.00 per
square meter. The contract was in a public instrument and was duly annotated at the back of the two
certificates of title on the same day. Clauses 1and 3 thereof provide:
1. That the purchase price shall be EIGHTY (P80.00) PESOS, Philippine Currency per
square meter, of which the amount of FIFTY THOUSAND (P50,000.00) PESOS shall be
paid by the VENDEE to the VENDOR as partial down payment at the time of execution
of this Contract to Sell.
xxx xxx xxx
3. That the VENDEE, Thirty (30) DAYS after the execution of this contract, and only
after having satisfactorily verified and confirmed the truth and authenticity of documents,
and that no restrictions, limitations, and developments imposed on and/or affecting the
property subject of this contract shall be detrimental to his interest, the VENDEE shall
pay to the VENDOR, NINE HUNDRED FIFTY THOUSAND (P950,00.00) PESOS.
Philippine Currency, representing the full payment of the agreed Down Payment, after
which complete possession of the property shall be given to the VENDEE to enable him
to prepare the premises and any development therein.
On October 4, 1989, the Da Jose spouses, not having finished verifying the titles mentioned in clause 3 as
aforequoted, asked for and was granted by respondent Genato an extension of another 30 days or until
November 5, 1989. However, according to Genato, the extension was granted on condition that a new set
of documents is made seven (7) days from October 4, 1989.
6
This was denied by the Da Jose spouses.
Pending the effectivity of the aforesaid extension period, and without due notice to the Da Jose spouses,
Genato executed an Affidavit to Annul the Contract to Sell,
7
on October 13, 1989. Moreover, no
annotation of the said affidavit at the back of his titles was made right away. The affidavit contained, inter
alia, the following paragraphs;
xxx xxx xxx
That it was agreed between the parties that the agreed downpayment of P950,000.00 shall
be paid thirty (30) days after the execution of the Contract, that is on or before October 6,
1989;
The supposed VENDEES failed to pay the said full downpayment even up to this writing,
a breach of contract;
That this affidavit is being executed to Annul the aforesaid Contract to Sell for the
vendee having committed a breach of contract for not having complied with the
obligation as provided in the Contract to Sell;
8

On October 24, 1989, herein petitioner Ricardo Cheng (Cheng) went to Genato's residence and expressed
interest in buying the subject properties. On that occasion, Genato showed to Ricardo Cheng copies of his
transfer certificates of title and the annotations at the back thereof of his contract to sell with the Da Jose
spouses. Genato also showed him the aforementioned Affidavit to Annul the Contract to Sell which has
not been annotated at the back of the titles.
Despite these, Cheng went ahead and issued a check for P50,000.00 upon the assurance by Genato that
the previous contract with the Da Jose spouses will be annulled for which Genato issued a handwritten
receipt (Exh. "D"), written in this wise:
10/24/89
Received from Ricardo Cheng
the Sum of Fifty Thousand Only (P50.000-)
as partial for T-76196 (M)
T-76197 (M) area 35.821 Sq.m.
Paradise Farm, Gaya-Gaya, San Jose Del Monte
P70/m2 Bulacan
plus C. G. T. etc.
Check # 470393 (SGD.) Ramon B. Genato
10/24/89
9

On October 25, 1989, Genato deposited Cheng's check. On the same day, Cheng called up Genato
reminding him to register the affidavit to annul the contract to sell.
10

The following day, or on October 26, 1989, acting on Cheng's request, Genato caused the registration of
the Affidavit to Annul the Contract to Sell in the Registry of Deeds, Meycauayan, Bulacan as primary
entry No. 262702.
11

While the Da Jose spouses were at the Office of the Registry of Deeds of Meycauayan, Bulacan on
October 27, 1989, they met Genato by coincidence. It was only then that the Da Jose spouses discovered
about the affidavit to annul their contract. The latter were shocked at the disclosure and protested against
the rescission of their contract. After being reminded that he (Genato) had given them (Da Jose spouses)
an additional 30-day period to finish their verification of his titles, that the period was still in effect, and
that they were willing and able to pay the balance of the agreed down payment, later on in the day,
Genato decided to continue the Contract he had with them. The agreement to continue with their contract
was formalized in a conforme letter dated October 27, 1989.
Thereafter, Ramon Genato advised Ricardo Cheng of his decision to continue his contract with the Da
Jose spouses and the return of Cheng's P50,000.00 check. Consequently, on October 30, 1989, Cheng's
lawyer sent a letter
12
to Genato demanding compliance with their agreement to sell the property to him
stating that the contract to sell between him and Genato was already perfected and threatening legal
action.
On November 2, 1989, Genato sent a letter
13
to Cheng (Exh. "6") enclosing a BPI Cashier's Check for
P50,000.00 and expressed regret for his inability to "consummate his transaction" with him. After having
received the letter of Genato on November 4, 1989, Cheng, however, returned the said check to the
former via RCPI telegram
14
dated November 6, 1989, reiterating that "our contract to sell your property
had already been perfected."
Meanwhile, also on November 2, 1989, Cheng executed an affidavit of adverse claim
15
and had it
annotated on the subject TCT's.
On the same day, consistent with the decision of Genato and the Da Jose spouses to continue with their
Contract to Sell of September 6, 1989, the Da Jose spouses paid Genato the complete down payment of
P950,000.00 and delivered to him three (3) postdated checks (all dated May 6, 1990, the stipulated due
date) in the total amount of P1,865,680.00 to cover full payment of the balance of the agreed purchase
price. However, due to the filing of the pendency of this case, the three (3) postdated checks have not
been encashed.
On December 8, 1989, Cheng instituted a complaint
16
for specific performance to compel Genato to
execute a deed of sale to him of the subject properties plus damages and prayer for preliminary
attachment. In his complaint, Cheng averred that the P50,000.00 check he gave was a partial payment to
the total agreed purchase price of the subject properties and considered as an earnest money for which
Genato acceded. Thus, their contract was already perfected.
In Answer
17
thereto, Genato alleged that the agreement was only a simple receipt of an option-bid
deposit, and never stated that it was a partial payment, nor is it an earnest money and that it was subject to
condition that the prior contract with the Da Jose spouses be first cancelled.
The Da Jose spouses, in their Answer in Intervention,
18
asserted that they have a superior right to the
property as first buyers. They alleged that the unilateral cancellation of the Contract to Sell was without
effect and void. They also cited Cheng's bad faith as a buyer being duly informed by Genato of the
existing annotated Contract to Sell on the titles.
After trial on the merits, the lower court ruled that the receipt issued by Genato to Cheng unerringly
meant a sale and not just a priority or an option to buy. It cannot be true that the transaction was subjected
to some condition or reservation, like the priority in favor of the Da Jose spouses as first buyer because, if
it were otherwise, the receipt would have provided such material condition or reservation, especially as it
was Genato himself who had made the receipt in his own hand. It also opined that there was a valid
rescission of the Contract to Sell by virtue of the Affidavit to Annul the Contract to Sell. Time was of the
essence in the execution of the agreement between Genato and Cheng, under this circumstance demand,
extrajudicial or judicial, is not necessary. It falls under the exception to the rule provided in Article
1169
19
of the Civil Code. The right of Genato to unilaterally rescind the contract is said to be under
Article 1191
20
of the Civil Code. Additionally, after reference was made to the substance of the
agreement between Genato and the Da Jose spouses, the lower court also concluded that Cheng should be
preferred over the intervenors-Da Jose spouses in the purchase of the subject properties. Thus, on January
18, 1994 the trial court rendered its decision the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered:
1. Declaring the contract to sell dated September 6, 1989 executed between defendant
Ramon Genato, as vendor, and intervenors Spouses Ernesto and Socorro Da Jose, as
vendees, resolved and rescinded in accordance with Art. 1191, Civil Code, by virtue of
defendant's affidavit to annul contract to sell dated October 13, 1989 and as the
consequence of intervenors' failure to execute within seven (7) days from October 4,
1989 another contract to sell pursuant to their mutual agreement with defendant;
2. Ordering defendant to return to the intervenors the sum of P1,000,000.00, plus interest
at the legal rate from November 2, 1989 until full payment;
3. Directing defendant to return to the intervenors the three (3) postdated checks
immediately upon finality of this judgment;
4. Commanding defendant to execute with and in favor of the plaintiff Ricardo Cheng, as
vendee, a deed of conveyance and sale of the real properties described and covered in
Transfer Certificates of Title No. T-76-196 (M) and T-76.197 (M) of the Registry of
Deeds of Bulacan, Meycauayan Branch, at the rate of P70.000/square meter, less the
amount of P50,000.00 alreaddy paid to defendant, which is considered as part of the
purchase price, with the plaintiff being liable for payment of the capital gains taxes and
other expenses of the transfer pursuant to the agreement to sell dated October 24, 1989;
and
5 Ordering defendant to pay the plaintiff and the intervenors as follows:
a/ P50,000.00, as nominal damages, to plaintiff;
b/ P50,000.00, as nominal damages, to intervenors;
c/ P20,000.00, as and for attorney's fees, to plaintiff;
d/ P20,000.00, as and for attorney's fees, to intervenors;
and
e/ Cost of the suit.
xxx xxx xxx
Not satisfied with the aforesaid decision, herein respondents Ramon Genato and Da Jose spouses
appealed to the court a quo which reversed such judgment and ruled that the prior contract to sell in favor
of the Da Jose spouses was not validly rescinded; that the subsequent contract to sell between Genato and
Cheng, embodied in the handwritten receipt, was without force and effect due to the failure to rescind the
prior contract; and that Cheng should pay damages to the respondents herein being found to be in bad
faith.
Hence this petition.
21

This petition for review, assails the Court of Appeals' Decision on the following grounds: (1) that the Da
Jose spouses' Contract to Sell has been validly rescinded or resolved; (2) that Ricardo Cheng's own
contract with Genato was not just a contract to sell but one of conditional contract of sale which gave him
better rights, thus precluding the application of the rule on double sales under Article 1544, Civil Code;
and (3) that, in any case, it was error to hold him liable for damages.
The petition must be denied for failure to show that the Court of Appeals committed a reversible error
which would warrant a contrary ruling.
No reversible error can be ascribed to the ruling of the Court of Appeals that there was no valid and
effective rescission or resolution of the Da Jose spouses Contract to Sell, contrary to petitioner's
contentions and the trial court's erroneous ruling.
In a Contract to Sell, the payment of the purchase price is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force.
22
It is one where the happening of the event gives rise to
an obligation. Thus, for its non-fulfillment there will be no contract to speak of, the obligor having failed
to perform the suspensive condition which enforces a juridical relation. In fact with this circumstance,
there can be no rescission of an obligation that is still non-existent, the suspensive condition not having
occurred as yet.
23
Emphasis should be made that the breach contemplated in Article 1191 of the New
Civil Code is the obligor's failure to comply with an obligation already extant, not a failure of a condition
to render binding that obligation.
24

Obviously, the foregoing jurisprudence cannot be made to apply to the situation in the instant case
because no default can be ascribed to the Da Jose spouses since the 30-day extension period has not yet
expired. The Da Jose spouses' contention that no further condition was agreed when they were granted the
30-days extension period from October 7, 1989 in connection with clause 3 of their contract to sell dated
September 6, 1989 should be upheld for the following reason, to wit; firstly, If this were not true, Genato
could not have been persuaded to continue his contract with them and later on agree to accept the full
settlement of the purchase price knowing fully well that he himself imposed such sine qua non condition
in order for the extension to be valid; secondly, Genato could have immediately annotated his affidavit to
annul the contract to sell on his title when it was executed on October 13, 1989 and not only on October
26, 1989 after Cheng reminded him of the annotation; thirdly, Genato could have sent at least a notice of
such fact, there being no stipulation authorizing him for automatic rescission, so as to finally clear the
encumbrance on his titles and make it available to other would be buyers. It likewise settles the holding of
the trial court that Genato "needed money urgently."
Even assuming in gratia argumenti that the Da Jose spouses defaulted, as claimed by Genato, in their
Contract to Sell, the execution by Genato of the affidavit to annul the contract is not even called for. For
with or without the aforesaid affidavit their non-payment to complete the full downpayment of the
purchase price ipso facto avoids their contract to sell, it being subjected to a suspensive condition. When a
contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the
event which constitutes the condition happens or is fulfilled.
25
If the suspensive condition does not take
place, the parties would stand as if the conditional obligation had never
existed.
26

Nevertheless, this being so Genato is not relieved from the giving of a notice, verbal or written, to the Da
Jose spouses for his decision to rescind their contract. In many cases,
27
even though we upheld the
validity of a stipulation in a contract to sell authorizing automatic rescission for a violation of its terms
and conditions, at least a written notice must be sent to the defaulter informing him of the same. The act
of a party in treating a contract as cancelled should be made known to the other.
28
For such act is always
provisional. It is always subject to scrutiny and review by the courts in case the alleged defaulter brings
the matter to the proper courts. In University of the Philippines vs. De Los Angeles,
29
this Court stressed
and we quote:
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 (Civil Code, Article 2203).
This rule validates, both in equity and justice, contracts such as the one at bat, in order to avoid and
prevent the defaulting party from assuming the offer as still in effect due to the obligee's tolerance for
such non-fulfillment. Resultantly, litigations of this sort shall be prevented and the relations among
would-be parties may be preserved. Thus, Ricardo Cheng's contention that the Contract to Sell between
Genato and the Da Jose spouses was rescinded or resolved due to Genato's unilateral rescission finds no
support in this case.
Anent the issue on the nature of the agreement between Cheng and Genato, the records of this case are
replete with admissions
30
that Cheng believed it to be one of a Contract to Sell and not one of Conditional
Contract of Sale which he, in a transparent turn-around, now pleads in this Petition. This ambivalent
stance of Cheng is even noted by the appellate court, thus:
At the outset, this Court notes that plaintiff-appellee was inconsistent in characterizing
the contract he allegedly entered into. In his complaint.
31
Cheng alleged that the
P50,000.00 down payment was earnest money. And next, his testimony
32
was offered to
prove that the transaction between him and Genato on October 24, 1989 was actually a
perfected contract to sell.
33

Settled is the rule that an issue which was not raised during the trial in the court below cannot be raised
for the first time on appeal.
34
Issues of fact and arguments not adequately brought to the attention of the
trial court need not be and ordinarily will not be considered by a reviewing court as they cannot be raised
for the first time on appeal.
35
In fact, both courts below correctly held that the receipt which was the
result of their agreement, is a contract to sell. This was, in fact Cheng's contention in his pleadings before
said courts. This patent twist only operates against Cheng's posture which is indicative of the weakness of
his claim.
But even if we are to assume that the receipt, Exh. "D," is to be treated as a conditional contract of sale, it
did not acquire any obligatory force since it was subject to suspensive condition that the earlier contract to
sell between Genato and the Da Jose spouses should first be cancelled or rescinded a condition never
met, as Genato, to his credit, upon realizing his error, redeemed himself by respecting and maintaining his
earlier contract with the Da Jose spouses. In fact, a careful reading of the receipt, Exh. "D," alone would
not even show that a conditional contract of sale has been entered by Genato and Cheng. When the
requisites of a valid contract of sale are lacking in said receipt, therefore the "sale" is neither valid or
enfoceable.
36

To support his now new theory that the transaction was a conditional contract of sale, petitioner invokes
the case ofCoronel vs. Court of Appeals
37
as the law that should govern their Petition. We do not agree.
Apparently, the factual milieu in Coronel is not on all fours with those in the case at bar.
In Coronel, this Court found that the petitioners therein clearly intended to transfer title to the buyer
which petitioner themselves admitted in their pleading. The agreement of the parties therein was
definitively outlined in the "Receipt of Down Payment" both as to property, the purchase price, the
delivery of the seller of the property and the manner of the transfer of title subject to the specific
condition that upon the transfer in their names of the subject property the Coronels will execute the deed
of absolute sale.
Whereas, in the instant case, even by a careful perusal of the receipt, Exh. "D," alone such kind of
circumstances cannot be ascertained without however resorting to the exceptions of the Rule on Parol
Evidence.
To our mind, the trial court and the appellate court correctly held that the agreement between Genato and
Cheng is a contract to sell, which was, in fact, petitioner connection in his pleadings before the said
courts. Consequently, both to mind, which read:
Art. 1544. If the same thing should have been sold to different vendees, the ownership
shall be transferred to the person who may have first taken possession thereof in good
faith, if it should be movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it
who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good
faith was first in possession; and in the absence thereof, to the person who presents he
oldest title, provided there is good faith.
However, a meticulous reading of the aforequoted provision shows that said law is not apropos to the
instant case. This provision connotes that the following circumstances must concur:
(a) The two (or more) sales transactions in issue must pertain to exactly the same subject
matter, and must be valid sales transactions.
(b) The two (or more) buyers at odds over the rightful ownership of the subject matter
must each represent conflicting interests; and
(c) The two (or more) buyers at odds over the rightful ownership of the subject matter
must each have bought from the very same seller.
These situations obviously are lacking in a contract to sell for neither a transfer of ownership nor a sales
transaction has been consummated. The contract to be binding upon the obligee or the vendor depends
upon the fulfillment or non-fulfillment of an event.
Notwithstanding this contrary finding with the appellate court, we are of the view that the governing
principle of Article 1544, Civil Code, should apply in this situation. Jurisprudence
38
teaches us that the
governing principle is PRIMUS TEMPORE, PORTIOR JURE (first in time, stronger in right). For not
only was the contract between herein respondents first in time; it was also registered long before
petitioner's intrusion as a second buyer. This principle only applies when the special rules provided in the
aforcited article of the Civil Code do not apply or fit the specific circumstances mandated under said law
or by jurisprudence interpreting the article.
The rule exacted by Article 1544 of the Civil Code for the second buyer to be able to displace the first
buyer are:
(1) that the second buyer must show that he acted in good faith (i.e. in ignorance of the first sale and of
the first buyer's rights) from the time of acquisition until title is transferred to him by registration or
failing registration, by delivery of possession;
39

(2) the second buyer must show continuing good faith and innocence or lack of knowledge of the first sale
until his contract ripens into full ownership through prior registration as provided by law.
40

Thus, in the case at bar, the knowledge gained by the Da Jose spouses, as first buyers, of the new
agreement between Cheng and Genato will not defeat their rights as first buyers except where Cheng, as
second buyer, registers or annotates his transaction or agreement on the title of the subject properties in
good faith ahead of the Da Jose spouses. Moreover, although the Da Jose spouses, as first buyers, knew of
the second transaction it will not bar them from availing of their rights granted by law, among them, to
register first their agreement as against the second buyer.
In contrast, knowledge gained by Cheng of the first transaction between the Da Jose spouses and Genato
defeats his rights even if he is first to register the second transaction, since such knowledge taints his prior
registration with bad faith.
"Registration", as defined by Soler and Castillo, means any entry made in the books of the registry,
including both registration in its ordinary and strict sense, and cancellation, annotation, and even marginal
notes.
41
In its strict acceptation, it is the entry made in the registry which records solemnly and
permanently the right of ownership and other real rights.
42
We have ruled
43
before that when a Deed of
Sale is inscribed in the registry of property on the original document itself, what was done with respect to
said entries or annotations and marginal notes amounted to a registration of the sale. In this light, we see
no reason why we should not give priority in right the annotation made by the Da Jose spouses with
respect to their Contract to Sell dated September 6, 1989.
Moreover, registration alone in such cases without good faith is not sufficient. Good faith must concur
with registration for such prior right to be enforceable. In the instant case, the annotation made by the Da
Jose spouses on the titles of Genato of their "Contract To Sell" more than satisfies this requirement.
Whereas in the case of Genato's agreement with Cheng such is unavailing. For even before the receipt,
Exh. "D," was issued to Cheng information of such pre-existing agreement has been brought to his
knowledge which did not deter him from pursuing his agreement with Genato. We give credence to the
factual finding of the appellate court that "Cheng himself admitted that it was he who sought Genato in
order to inquire about the property and offered to buy the same.
44
And since Cheng was fully aware, or
could have been if he had chosen to inquire, of the rights of the Da Jose spouses under the Contract to Sell
duly annotated on the transfer certificates of titles of Genato, it now becomes unnecessary to further
elaborate in detail the fact that he is indeed in bad faith in entering into such agreement. As we have held
in Leung Yee vs. F.L. Strong Machinery Co.:
45

One who purchases real estate with knowledge of a defect . . . of title in his vendor
cannot claim that he has acquired title thereto in good faith as against . . . . an interest
therein; and the same rule must be applied to one who has knowledge of facts which
should have put him upon such inquiry and investigation as might be necessary to
acquaint him with the defects in the title of his vendor. A purchaser cannot close his eyes
to facts which should put a reasonable man upon his guard, and then claim that he acted
in good faith under the belief that there was no defect in the title of the vendor. His mere
refusal to believe that such defect exists, or his willful closing of his eyes to the
possibility of the existence of a defect in his vendor's title, will not make him an innocent
purchaser for value, if it afterwards develops that the title was in fact defective, and it
appears that he had such notice of the defect as would have led to its discovery had he
acted with that measure of precaution which may reasonably be required of a prudent
man in a like situation. Good faith, or lack of it, is in its last analysis a question of
intention; but in ascertaining the intention by which one is actuated on a given occasion,
we are necessarily controlled by the evidence as to the conduct and outward acts by
which alone the inward motive may with safety, be determined. So it is that "the honesty
of intention," "the honest lawful intent," which constitutes good faith implies a "freedom
from knowledge and circumstances which ought to put a person on inquiry," and so it is
that proof of such knowledge overcomes the presumption of good faith in which the
courts always indulge in the absence of the proof to the contrary. "Good faith, or the want
of it, is not a visible, tangible fact that can be seen or touched, but rather a state or
condition of mind which can only be judge of by actual or fancied tokens or signs."
(Wilder vs. Gilman, 55 Vt. 504, 505; Cf. Cardenas vs. Miller, 108 Cal., 250; Breaux-
Renoudet, Cypress Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098; Pinkerton Bros. Co.
vs. Bromely, 119 Mich., 8, 10, 17.) (Emphasis ours)
Damages were awarded by the appellate court on the basis of its finding that petitioner "was in bad faith
when he filed the suit for specific performance knowing fully well that his agreement with Genato did not
push through.
46
Such bad faith, coupled with his wrongful interference with the contractual relations
between Genato and the Da Jose spouses, which culminated in his filing of the present suit and thereby
creating what the counsel for the respondents describes as "a prolonged and economically unhealthy
gridlock
47
on both the land itself and the respondents' rights provides ample basis for the damages
awarded. Based on these overwhelming evidence of bad faith on the part of herein petitioner Ricardo
Cheng, we find that the award of damages made by the appellate court is in order.
WHEREFORE, premises considered, the instant petition for review is DENIED and the assailed decision
is hereby AFFIRMED EN TOTO.
SO ORDERED.

THIRD DIVISION
[G.R. No. 130913. June 21, 2005]
OLIVERIO LAPERAL and FILIPINAS GOLF & COUNTRY CLUB INC., petitioners, vs. SOLID
HOMES, INC., respondent.
SOUTHRIDGE VILLAGE HOMEOWNERS ASSOCIATION, intervenor.
D E C I S I O N
GARCIA, J .:
Before us is this petition for review on certriorari under Rule 45 of the Rules of Court to nullify and
set aside the following issuances of the Court of Appeals in CA-G.R. CV No. 37853, to wit:
1. Decision dated September 18, 1996,
[1]
affirming with modification an earlier decision of
the Regional Trial Court at Laguna, Br. XXV, in an action for reformation of document
thereat commenced by herein respondent Solid Homes, Inc. against the petitioners; and
2. Resolution dated September 23, 1997,
[2]
denying the parties respective motions for
reconsideration.
As found by the Court of Appeals in the decision under review, the material facts may be briefly
stated, as follows:
On June 6, 1981, Filipinas Golf Sales and Development Corporation (FGSDC), predecessor-in-
interest of petitioner Filipinas Golf and Country Club, Inc. (FGCCI), represented by its then President,
the other petitioner herein, Oliverio Laperal, entered into a Development and Management
Agreement
[3]
(Agreement, for short) with herein respondent Solid Homes, Inc., a registered subdivision
developer, involving several parcels of land owned by Laperal and FGSDC with an aggregate area of
approximately 42 hectares and located at Bo. San Antonio, San Pedro, Laguna.
Under the terms and conditions of the aforementioned Agreement and the Supplement
[4]
thereto dated
January 19, 1982, respondent Solid Homes, Inc., 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.
On different dates, or more specifically on June 8, 1983, June 22, 1983 and July 29, 1983, Victorio
V. Soliven, President and General Manager of respondent Solid Homes, Inc., wrote Oliverio Laperal,
President of FGSDC, requesting Laperal to furnish Solid Homes, Inc., with the owners duplicate copies
of the Torrens titles covering the subject land in order to facilitate the processing of respondents
application with the Human Settlements Regulatory Commission (HSRC) for a license to sell subdivision
lots, as required under Presidential Decree No. 957.
Despite repeated requests, however, Laperal did not comply.
On October 7, 1983, the aforementioned Agreement was cancelled by the parties, and, in lieu thereof,
two (2) contracts identically denominated Revised Development and Management Agreement
[5]
(Revised
Agreements, for short) were entered into by respondent with the two (2) successors-in-interest of
FGSDC, to wit: (1) one, with petitioner Oliverio Laperal as owner of the 181,075-square meter area of
the subject land; and (2) another, with petitioner FGCCI as owner of the 399,075-square meter area
thereof.
Unlike the original agreement, both Revised Agreements omitted the obligation of herein petitioners
Laperal and FGCCI to make available to respondent Solid Homes, Inc. the owners duplicate copies of
the titles covering the subject parcels of land.
And, because there were still other matters which were inadvertently omitted in the said Revised
Agreements, the parties executed an Addendum
[6]
thereto dated November 11, 1983.
In addition to the provision on the automatic rescission of the Revised Agreements in case of breach
of the terms and conditions thereof under paragraph 10 of the same, the parties further agreed in
the Addendum that upon a showing that respondent deliberately abandoned or discontinued work in the
subject project, all improvements of whatever nature and kind it may have introduced in the property and
existing as of the date of the violation shall be forfeited in favor of the petitioners without any obligation
on their part to pay respondent therefor. Likewise, the parties agreed in the same Addendum to a
forfeiture of all advances made and remittances of proceeds from reservations and sales upon occurrence
of the aforesaid default or violation of any of the terms and conditions of the Revised Agreements and
the Addendum. Under the Addendum, abandonment is deemed to have occurred upon failure or absence of
any work for development for any ten (10) days.
It appears, however, that even as the Revised Agreements already provided for the non-surrender of
the owners duplicate copies of the titles, respondent persisted in its request for the delivery thereof,
explaining that said owners duplicate copies were necessary for: (1) the issuance by the HSRC of the
license to sell; (2) the segregation of the golf course portion from the rest of the subdivision area; (3) the
segregation of the individual titles for portions which are supposed to be made available for PAG-
IBIG take-outs; and (4) the preparation of the technical description of nine (9) blocks already approved
by the Bureau of Lands.
Then, in a letter dated December 7, 1983 addressed to herein petitioners, respondent, through its
Executive Vice-President and Treasurer, Purita R. Soliven, explained that it was unable to meet the
November 30, 1983 deadline for the payment of P1 Million as provided for in the Revised
Agreements because there was delay in the processing of its license to sell, which, in turn, is due to
petitioners continued refusal to deliver the owners duplicate copies of the titles, contrary to what was
allegedly agreed upon by the parties. Respondent reiterated in the same letter that in the absence of such
license from HSRC, it would not be able to comply with the rest of its undertakings within the allotted
periods since the projected collection of amounts from sales and reservations of the subdivision lots did
not materialize. Nonetheless, in order to demonstrate that it was not reneging on its commitments under
the Revised Agreements despite its difficulties to generate more funds, respondent proposed that it be
allowed to assign to petitioners P1Million out of its receivables worth P1,209,000.00 from loan proceeds
due in its favor under the PAG-IBIG housing program, which it expected to receive for some of the
completed housing units.
In separate letters both dated December 9, 1983, however, petitioners rejected respondents proposal
and instead insisted on the payment of P1Million to each of them.
It was only at this point, as alleged in respondents reply letter dated December 13, 1983, that
respondent supposedly realized that instead of providing for the payment of onlyP500,000.00 in each
contract, or a total of P1Million for both Revised Agreements, the total amount of P1Million was
erroneously carried over in each of the Revised Agreements, with the consequence that under said two
(2) Revised Agreements, it was bound to pay a total of P2Million to the petitioners.
Meanwhile, in subsequent letters dated January 6, 1984, January 17, 1984 and February 6, 1984,
respondent continued to press petitioners for the delivery of the owners duplicate copies of their titles
covering the subject parcel of land.
Then, on March 9, 1984, 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. In the
same letter, petitioners made it clear that they are enforcing the rescission clause of the Revised
Agreements on account of respondents failure to: (1) pay them P1Million each on November 30,
1983; (2) complete the development of Phase I-A of the project not later than February 15, 1984;
and (3) obtain from the HSRC the license to sell subdivision lots.
In its response-letter dated March 14, 1984, respondent, through counsel, objected to the announced
rescission, arguing that the proximate cause of its inability to meet its contractual obligations was
petitioners own failure and refusal to deliver their owners duplicate copies of the titles for processing by
the HSRC, PAG-IBIG, accredited banks, and other government agencies, adding that on account of
petitioners failure to do so, it was not issued the necessary license to sell, thus resulting in the slowdown
in the development works in the project due to its inability to generate additional funds and to the
slackening of its sales campaign.
Such was the state of things when, on April 2, 1984, in the Regional Trial Court (RTC) at Bian,
Laguna respondent Solid Homes, Inc. instituted the complaint in this case praying for the reformation of
the Revised Agreements and the Addendum on the ground that these contracts failed to express the true
intent of the parties. In the same complaint, respondent prayed for the issuance of a temporary restraining
order (TRO) and a writ of preliminary injunction to prevent petitioners from exercising their rights as
owners of the subject properties. Docketed with the same court as Civil Case No. B-2069, the complaint
was raffled to Branch XXV thereof.
On the very day that the complaint was filed, the trial court issued a TRO to prevent petitioners from
implementing the unilateral rescission of the Revised Agreements and theAddendum.
Later, in an order dated May 23, 1984,
[7]
the same court granted respondents application for a writ
of preliminary injunction upon its posting of a bond in the amount of P1Million.
On April 18, 1985,
[8]
the Southridge Village Homeowners Association filed a complaint-in-
intervention praying that the rights and preferential status of its members who have been occupying some
of the completed units in the subdivision project be respected by whoever between the principal litigants
may later be adjudged as the prevailing party.
Both the petitioners and respondent filed their respective answers to the aforesaid complaint-in-
intervention, commonly alleging intervenors lack of capacity to sue. Petitioners added in their answer
that it should be respondent which must be made solely liable to the intervenor for whatever claims its
members may be entitled to. For its part, respondent prayed for the cancellation, in whole or in part, of its
contracts with the members of the intervenor Association to the extent compatible with prevailing
economic conditions.
Upon petitioners motion, the trial court issued an order on May 20, 1985 lifting the writ of
preliminary injunction over the entire property except as to Phase I-A thereof, and reducing respondents
injunction bond from P1Million to only P200,000.00.
Petitioners then filed a motion for reconsideration. Finding merit in the motion, the trial court, in its
order of August 15, 1985,
[9]
as clarified in its order of September 27, 1985,
[10]
completely lifted the writ of
preliminary injunction so as to include the area covered by Phase I-A, and cancelled the bond
of P200,000.00 earlier posted by respondent.
To these orders, both parties filed their respective motions for reconsideration. In its subsequent
order dated November 8, 1985,
[11]
the trial court modified its August 15, 1985 order by maintaining the
complete lifting of the writ of preliminary injunction but ordering the restoration of
respondents P1Million bond or its substitution with another if the same had already been cancelled, to
answer for whatever damages that may be proven by the petitioners during the trial of the case.
The above-mentioned orders, namely, orders dated May 20, 1985, August 15, 1985, September 27,
1985 and November 8, 1985 involving the dissolution of the writ of preliminary injunction over the entire
property and the maintenance of the P1Million bond against respondent, became the subject of a petition
for certiorari filed by respondent before the Court of Appeals docketed therein as CA-G.R. SP No.
47885.
In a decision dated October 9, 1987, the Court of Appeals dismissed the petition.
Therefrom, respondent went to this Court in G.R, No. 80290 but later abandoned the same,
prompting this Court, in its Resolution dated February 22, 1988, to consider the Court of Appeals
dismissal of respondents petition final and executory.
Meanwhile, upon respondents application, a notice of lis pendens was annotated on the Torrens
titles covering the properties in litigation. Said notice, however, was lifted by the trial court in its orders
of April 12, 1988 and May 21, 1991.
Eventually, after due proceedings in the main case, the trial court, in a decision dated December 19,
1991,
[12]
rendered judgment dismissing respondents complaint for reformation. We quote the dispositive
portion of the same decision:
IN THE LIGHT OF THE FOREGOING, judgment is hereby rendered in favor of the defendants and
against the plaintiff dismissing the complaint with costs:
On defendants recovery upon the bond posted by the plaintiff to answer to whatever damages that the
party enjoined may suffer by reason of the injunction, resolution as to the propriety of its award is hereby
held in abeyance until after proper application by the defendants and hearing thereon, as reserved by the
defendants in their memorandum.
As regards the Intervenors, the defendants are directed to respect and acknowledge their preferential
rights over said Intervenors occupied houses and lots.
SO ORDERED.
Therefrom, respondent went to the Court of Appeals via ordinary appeal in CA-G.R. CV No. 37853.
As stated at the threshold hereof, the Court of Appeals, in a decision dated September 18,
1996,
[13]
affirmed with modification the appealed decision of the trial court, thus:
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision appealed from
is AFFIRMED with the modification that [petitioners] are ordered to reimburse [respondent], jointly and
severally, the amount of Five Million Two Hundred Thousand Eight Hundred Thirty Three Pesos and
Twenty Seven Centavos (P5,200,833.27) representing the actual cost of the development and the
completed improvements on the project. In all other respects, the judgment of the trial court
is AFFIRMED.
SO ORDERED.
Both parties separately moved for reconsideration, but their respective motions were denied by the
appellate court in its resolution of September 23, 1997.
[14]

And, as they did not agree with the judgment, petitioners are now appealing to this Court for
relief via the present recourse, it being their submission that the Court of Appeals erred-
I.
xxx IN HOLDING THAT PETITIONERS 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.
II.
xxx IN VOIDING THE FORFEITURE CLAUSES OF THE ADDENDUM, AND IN ORDERING THE
REFUND OF THE SUM OF P5,200,833.27 TO RESPONDENT SOLID HOMES.
III.
xxx IN HOLDING, IN EFFECT, THAT PETITIONERS ARE NOT ENTITLED TO DAMAGES.
The Court finds merit in the petition.
While this Court does not agree with petitioners that the right to rescind under Article 1191 of the
Civil Code does not carry with it the corresponding obligation for restitution, we do not subscribe to the
Court of Appeals conclusion that: (1) the forfeiture/penalty clause under paragraphs Nos. 2 and 3 of the
Addendum to the Revised Development and Management Agreements is, under the factual milieu of this
case, unreasonable and unconscionable and, therefore, void for being contrary to morals and good
customs
[15]
; and (2) petitioners must reimburse respondent the actual cost of development and completed
improvements on the project in the total amount of P5,200,833.27.
[16]

It is petitioners thesis that inasmuch as the rescission of the Revised Agreements and
its Addendum was made pursuant to Article 1191 of the Civil Code, the provision of Article 1385
[17]
of
the same Code, which requires mutual restitution should not apply because Article 1385 applies only if
the rescission is made under the instances enumerated in Article 1381
[18]
of the Code.
We do not agree.
Mutual restitution is required in cases involving rescission under Article 1191. In Velarde vs. Court
of Appeals,
[19]
this Court, in no uncertain terms, squarely ruled on this matter:
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 in the
amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners 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 (citing Co v. Court of
Appeals, 312 SCRA 528, August 17, 1999; and Vitug, Compendium of Civil Law and Jurisprudence,
1993 revised ed., p. 556). 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 (citing Ocampo v. Court of Appeals, 233 SCRA 551, June 30, 1994).
Article 1191 of the Civil Code provides:
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 the
period.
This is understood without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law. (1124)
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used
the term resolution, the amendment thereto (presently, Article 1191) explicitly and clearly used the term
rescission. Unless Article 1191 is subsequently amended to revert back to the term resolution, this
Court has no alternative but to apply the law, as it is written.
Again, 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.
In Palay, Inc. vs. Clave,
[20]
this Court applied Article 1385 in a case involving resolution under
Article 1191, thus:
Regarding the second issue on refund of the installment payments made by private respondent. Article
1385 of the Civil Code provides:
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
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. 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.
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.
This notwithstanding, the Court does not agree with the Court of Appeals that, as a consequence of
the obligation of mutual restitution in this case, petitioners should return the amount of P5,200,833.27 to
respondent.
Article 1191 states that the injured party may choose between fulfillment and rescission of the
obligation, with the payment of damages in either case. In other words, while petitioners are indeed
obliged to return the said amount to respondent under Article 1385, assuming said figure is correct,
respondent is at the same time liable to petitioners in the same amount as liquidated damages by virtue of
the forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum, paragraphs 1 and
2
[21]
of which respectively read:
WHEREAS, included as part of said agreement are the following:
1. Further to the stipulations on paragraph 10, upon default of performances, violations and/or non-
compliance with the terms and conditions herein agreed upon by the DEVELOPER wherein it appears
that the DEVELOPER deliberately abandoned or discontinued the work on the project, said party shall
lose any entitlement, if any, to any refund and/or advances it may have incurred in connection with or
relative to previous development works in the subdivision; likewise, all improvements of whatever nature
and kind introduced by the DEVELOPER on the property, existing as of the date of default or violation,
shall automatically belong to the OWNER without obligation on his part to pay for the costs thereof.
2. Similarly with the same condition of default or violation obtaining, as stated in paragraph 10 of said
agreement, all advances made and remittances of proceeds from reservations and sales given by the
DEVELOPER to the OWNER as provided for in this agreement shall be deemed absolutely forfeited in
favor of the OWNER, resulting to waiver of DEVELOPERs rights, if any, with respect to said
amount(s).
If this Court recognized the right of the parties to stipulate on an extrajudicial rescission
[22]
under
Article 1191, there is no reason why this Court will not allow the parties to stipulate on the matter of
damages in case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code
governing liquidated damages.
[23]

For sure, we find no factual and legal justification to sustain the appellate courts conclusion that the
agreed forfeiture/penalty clause is unreasonable and unconscionable unless respondent had sufficiently
shown that it had completely accounted for the proceeds of the sale of subdivision lots it made during the
effectivity of the agreement. It must be stressed that the lots sold by respondent were owned by
petitioners Laperal and FGCCI. How then could there be unjust enrichment in favor of petitioners in such
a case?
Furthermore, a substantial part of the funds spent by respondent in the construction works which by
the Court of Appeals required to be reimbursed by petitioners admittedly came from the proceeds of the
sale of the real property still owned by petitioners. This may be gleaned from the fact that one of the
main reasons respondent raised in its complaint for reformation before the trial court was that it was
unable to proceed with the construction works due to lack of funds on account of the slackening of its
sales campaign resulting from the alleged refusal, which is after all justified, of the petitioners to
surrender their titles to respondent.
Finally, even assuming that the foregoing forfeiture/penalty clause in the Addendum would result
in considerable losses on the part of respondent, it is not for this Court to release said party from its
obligation. Our pronouncement in Esguerra vs. Court of Appeals
[24]
is apt and pertinent:
xxx. It is a long established doctrine that the law does not relieve a party from the effects of an unwise,
foolish, or disastrous contract, entered into with all the required formalities and with full awareness of
what he was doing. Courts have no power to relieve parties from obligations voluntarily assumed, simply
because their contracts turned out to be disastrous deals or unwise investments. xxx.
WHEREFORE, the petition is hereby GRANTED. Accordingly, the assailed decision and
resolution of the Court of appeals are REVERSED and SET ASIDE and the decision dated December 19,
1991 of the Regional Trial Court in Civil Case No. B-2069 REINSTATED.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 96053 March 3, 1993
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN GALICIA, JUAN
GALICIA, JR. and RODRIGO GALICIA, petitioners,
vs.
COURT OF APPEALS and ALBRIGIDO LEYVA, respondents.
Facundo T. Bautista for petitioners.
Jesus T. Garcia for private respondent.

MELO, J .:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to his demise in 1979, and
Celerina Labuguin, in favor of Albrigido Leyva involving the undivided one-half portion of a piece of
land situated at Poblacion, Guimba, Nueva Ecija for the sum of P50,000.00 under the following terms:
1. The sum of PESOS: THREE THOUSAND (P3,000.00) is HEREBY acknowledged to
have been paid upon the execution of this agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be paid within ten (10)
days from and after the execution of this agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00) represents the VENDORS'
indebtedness with the Philippine Veterans Bank which is hereby assumed by the
VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND (P27,000.00.) shall be paid
within one (1) year from and after the execution of this instrument. (p. 53, Rollo)
is the subject matter of the present litigation between the heirs of Juan Galicia, Sr. who assert breach of
the conditions as against private respondent's claim anchored on full payment and compliance with the
stipulations thereof.
The court of origin which tried the suit for specific performance filed by private respondent on account of
the herein petitioners' reluctance to abide by the covenant, ruled in favor of the vendee (p. 64, Rollo)
while respondent court practically agreed with the trial court except as to the amount to be paid to
petitioners and the refund to private respondent are concerned (p. 46, Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was received by Juan Galicia, Sr.
According to petitioners, of the P10,000.00 to be paid within ten days from execution of the instrument,
only P9,707.00 was tendered to, and received by, them on numerous occasions from May 29, 1975, up to
November 3, 1979. Concerning private respondent's assumption of the vendors' obligation to the
Philippine Veterans Bank, the vendee paid only the sum of P6,926.41 while the difference the
indebtedness came from Celerina Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single
centavo of the P27,000.00 representing the remaining balance was paid to them. Because of the
apprehension that the heirs of Juan Galicia, Sr. are disavowing the contract inked by their predecessor,
private respondent filed the complaint for specific performance.
In addressing the issue of whether the conditions of the instrument were performed by herein private
respondent as vendee, the Honorable Godofredo Rilloraza, Presiding Judge of Branch 31 of the Regional
Trial Court, Third Judicial Region stationed at Guimba, Nueva Ecija, decided to uphold private
respondent's theory on the basis of constructive fulfillment under Article 1186 and estoppel through
acceptance of piecemeal payments in line with Article 1235 of the Civil Code.
Anent the P10,000.00 specified as second installment, the lower court counted against the vendors the
candid statement of Josefina Tayag who sat on the witness stand and made the admission that the check
issued as payment thereof was nonetheless paid on a staggered basis when the check was dishonored
(TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66, Rollo). Regarding the third condition, the trial
court noted that plaintiff below paid more than P6,000.00 to the Philippine Veterans Bank but Celerina
Labuguin, the sister and co-vendor of Juan Galicia, Sr. paid P3,778.77 which circumstance was construed
to be a ploy under Article 1186 of the Civil Code that "prematurely prevented plaintiff from paying the
installment fully" and "for the purpose of withdrawing the title to the lot". The acceptance by petitioners
of the various payments even beyond the periods agreed upon, was perceived by the lower court as
tantamount to faithful performance of the obligation pursuant to Article 1235 of the Civil Code.
Furthermore, the trial court noted that private respondent consigned P18,520.00, an amount sufficient to
offset the remaining balance, leaving the sum of P1,315.00 to be credited to private respondent.
On September 12, 1984, judgment was rendered:
1. Ordering the defendants heirs of Juan Galicia, to execute the Deed of Sale of their
undivided ONE HALF (1/2) portion of Lot No. 1130, Guimba Cadastre, covered by TCT
No. NT-120563, in favor of plaintiff Albrigido Leyva, with an equal frontage facing the
national road upon finality of judgment; that, in their default, the Clerk of Court II, is
hereby ordered to execute the deed of conveyance in line with the provisions of Section
10, Rule 39 of the Rules of Court;
2. Ordering the defendants, heirs of Juan Galicia, jointly and severally to pay attorney's
fees of P6,000.00 and the further sum of P3,000.00 for actual and compensatory
damages;
3. Ordering Celerina Labuguin and the other defendants herein to surrender to the Court
the owner's duplicate of TCT No. NT-120563, province of Nueva Ecija, for the use of
plaintiff in registering the portion, subject matter of the instant suit;
4. Ordering the withdrawal of the amount of P18,520.00 now consigned with the Court,
and the amount of P17,204.75 be delivered to the heirs of Juan Galicia as payment of the
balance of the sale of the lot in question, the defendants herein after deducting the amount
of attorney's fees and damages awarded to the plaintiff hereof and the delivery to the
plaintiff of the further sum of P1,315.25 excess or over payment and, defendants to pay
the cost of the suit. (p. 69, Rollo)
and following the appeal interposed with respondent court, Justice Dayrit with whom Justices Purisima
and Aldecoa, Jr. concurred, modified the fourth paragraph of the decretal portion to read:
4. Ordering the withdrawal of the amount of P18,500.00 now consigned with the Court,
and that the amount of P16,870.52 be delivered to the heirs of Juan Galicia, Sr. as
payment to the unpaid balance of the sale, including the reimbursement of the amount
paid to Philippine Veterans Bank, minus the amount of attorney's fees and damages
awarded in favor of plaintiff. The excess of P1,649.48 will be returned to plaintiff. The
costs against defendants. (p. 51, Rollo)
As to how the foregoing directive was arrived at, the appellate court declared:
With respect to the fourth condition stipulated in the contract, the period indicated therein
is deemed modified by the parties when the heirs of Juan Galicia, Sr. accepted payments
without objection up to November 3, 1979. On the basis of receipts presented by appellee
commencing from August 8, 1975 up to November 3, 1979, a total amount of P13,908.25
has been paid, thereby leaving a balance of P13,091.75. Said unpaid balance plus the
amount reimbursable to appellant in the amount of P3,778.77 will leave an unpaid total of
P16,870.52. Since appellee consigned in court the sum of P18,500.00, he is entitled to get
the excess of P1,629.48. Thus, when the heirs of Juan Galicia, Sr. (obligees) accepted the
performance, knowing its incompleteness or irregularity and without expressing any
protest or objection, the obligation is deemed fully complied with (Article 1235, Civil
Code). (p. 50,Rollo)
Petitioners are of the impression that the decision appealed from, which agreed with the conclusions of
the trial court, is vulnerable to attack via the recourse before Us on the principal supposition that the full
consideration of the agreement to sell was not paid by private respondent and, therefore, the contract must
be rescinded.
The suggestion of petitioners that the covenant must be cancelled in the light of private respondent's so-
called breach seems to overlook petitioners' demeanor who, instead of immediately filing the case
precisely to rescind the instrument because of non-compliance, allowed private respondent to effect
numerous payments posterior to the grace periods provided in the contract. This apathy of petitioners who
even permitted private respondent to take the initiative in filing the suit for specific performance against
them, is akin to waiver or abandonment of the right to rescind normally conferred by Article 1191 of the
Civil Code. As aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985];
4 Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p. 203:
. . . 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 . . .
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818; cited in 4 Padilla, Civil
Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion was expressed to the effect that:
In a perfected contract of sale of land under an agreed schedule of payments, while the
parties may mutually oblige each other to compel the specific performance of the
monthly amortization plan, and upon failure of the buyer to make the payment, the seller
has the right to ask for a rescission of the contract under Art. 1191 of the Civil Code, this
shall be deemed waived by acceptance of posterior payments.
Both the trial and appellate courts were, therefore, correct in sustaining the claim of private respondent
anchored on estoppel or waiver by acceptance of delayed payments under Article 1235 of the Civil Code
in that:
When the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied
with.
considering that the heirs of Juan Galicia, Sr. accommodated private respondent by accepting the latter's
delayed payments not only beyond the grace periods but also during the pendency of the case for specific
performance (p. 27, Memorandum for petitioners; p. 166, Rollo). Indeed, the right to rescind is not
absolute and will not be granted where there has been substantial compliance by partial payments
(4 Caguioa, Comments and Cases on Civil Law, First Ed. [1968] p. 132). By and large, petitioners'
actuation is susceptible of but one construction that they are now estopped from reneging from their
commitment on account of acceptance of benefits arising from overdue accounts of private respondent.
Now, as to the issue of whether payments had in fact been made, there is no doubt that the second
installment was actually paid to the heirs of Juan Galicia, Sr. due to Josefina Tayag's admission in
judicio that the sum of P10,000.00 was fully liquidated. It is thus erroneous for petitioners to suppose that
"the evidence in the records do not support this conclusion" (p. 18, Memorandum for Petitioners; p.
157, Rollo). A contrario, when the court of origin, as well as the appellate court, emphasized the frank
representation along this line of Josefina Tayag before the trial court (TSN, September l, 1983, pp. 3-4; p.
5, Decision in CA-G.R. CV No. 13339, p. 50, Rollo; p. 3, Decision in Civil Case No. 681-G, p.
66, Rollo), petitioners chose to remain completely mute even at this stage despite the opportunity
accorded to them, for clarification. Consequently, the prejudicial aftermath of Josefina Tayag's
spontaneous reaction may no longer be obliterated on the basis of estoppel (Article 1431, Civil
Code; Section 4, Rule 129; Section 2(a), Rule 131, Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be recalled that respondent court applied
Article 1186 of the Civil Code on constructive fulfillment which petitioners claim should not have been
appreciated because they are the obligees while the proviso in point speaks of the obligor. But, petitioners
must concede that in a reciprocal obligation like a contract of purchase, (Ang vs. Court of Appeals, 170
SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are mutually obligors and also obligees
(4 Padilla, supra, at p. 197), and any of the contracting parties may, upon non-fulfillment by the other
privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). In
short, it is puerile for petitioners to say that they are the only obligees under the contract since they are
also bound as obligors to respect the stipulation in permitting private respondent to assume the loan with
the Philippine Veterans Bank which petitioners impeded when they paid the balance of said loan. As
vendors, they are supposed to execute the final deed of sale upon full payment of the balance as
determined hereafter.
Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum of
P18,520.00 which they acknowledge to have been deposited in court on January 22, 1981 five years after
the amount of P27,000.00 had to be paid (p. 23, Memorandum for Petitioners; p. 162, Rollo). Again this
suggestion ignores the fact that consignation alone produced the effect of payment in the case at bar
because it was established below that two or more heirs of Juan Galicia, Sr. claimed the same right to
collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. 67-68, Rollo).
Moreover, petitioners did not bother to refute the evidence on hand that, aside from the P18,520.00 (not
P18,500.00 as computed by respondent court) which was consigned, private respondent also paid the sum
of P13,908.25 (Exhibits "F" to "CC"; p. 50, Rollo). These two figures representing private respondent's
payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners to the bank,
will lead us to the sum of P28,649.48 or a refund of P1,649.48 to private respondent as overpayment of
the P27,000.00 balance.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed from is hereby AFFIRMED
with the slight modification of Paragraph 4 of the dispositive thereof which is thus amended to read:
4. ordering the withdrawal of the sum of P18,520.00 consigned with the Regional Trial
Court, and that the amount of P16,870.52 be delivered by private respondent with legal
rate of interest until fully paid to the heirs of Juan Galicia, Sr. as balance of the sale
including reimbursement of the sum paid to the Philippine Veterans Bank, minus the
attorney's fees and damages awarded in favor of private respondent. The excess of
P1,649.48 shall be returned to private respondent also with legal interest until fully paid
by petitioners. With costs against petitioners.
SO ORDERED.

THIRD DIVISION
[G.R. No. 157480. May 6, 2005]
PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioner,
vs. PHILIPPINE AMUSEMENT AND GAMING CORPORATION,respondent.
D E C I S I O N
PANGANIBAN, J .:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of
benefits received. The consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law, morals, good customs, public order
or public policy, they shall be respected by courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however, are
empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties agreed
upon by the parties.
The Case
Before us is a Petition for Review
[1]
under Rule 45 of the Rules of Court, assailing the May 22, 2002
Decision
[2]
of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution
[3]
denying petitioners Motion for Reconsideration. The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil Case No.
93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering [Respondent]
Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the total
amount of P687,289.50 as actual damages representing the accrued rentals for the quarter September to
November 1993 with interest and penalty at the rate of two percent (2%) per month from date of filing of
the complaint until the amount shall have been fully paid, and the sum of P50,000.00 as attorneys fees;
(2) In Civil Case No. 93-68337, the appealed decision is REVERSED and SET ASIDE and a new
judgment is rendered ordering [Petitioner] Pryce Properties Corporation to reimburse
[Respondent] Philippine Amusement and Gaming Corporation the amount of P687,289.50 representing
the advanced rental deposits, which amount may be compensated by [Petitioner] Pryce Properties
Corporation with its award in Civil Case No. 93-68266 in the equal amount of P687,289.50.
[4]

The Facts
According to the CA, the facts are as follows:
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 PPCs counter-letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom of the
Hotel for a period of three (3) years starting December 1, 1992 and until November 30, 1995. On
November 13, 1992, they executed an addendum to the contract x x x which included a lease of an
additional 1000 square meters of the hotel grounds as living quarters and playground of the casino
personnel. PAGCOR advertised the start of their casino operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No. 2295 x
x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or not to allow the
establishment of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated October
19, 1992 (or a month before the contract of lease was executed) was subsequently passed reiterating with
vigor and vehemence the policy of the City under Resolution No. 2295, series of 1990, banning casinos in
Cagayan de Oro City. On December 7, 1992, the Sangguniang Panlungsod of Cagayan de Oro City
enacted Ordinance No. 3353 x x x prohibiting the issuance of business permits and canceling existing
business permits to any establishment for using, or allowing to be used, its premises or any portion
thereof for the operation of a casino.
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 20
th
of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod of
Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty for violation
thereof. On January 7, 1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x
against then public respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before the
Court of Appeals, docketed as CA G.R. SP No. 29851 praying inter alia, for the declaration of
unconstitutionality of Ordinance No. 3353. PAGCOR intervened in said petition and further assailed
Ordinance No. 4475-93 as being violative of the non-impairment of contracts and equal protection
clauses. On March 31, 1993, the Court of Appeals promulgated its decision x x x, the dispositive portion
of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are hereby
DECLARED UNCONSTITUTIONAL and VOID and the respondents and all other persons acting under
their authority and in their behalf are PERMANENTLY ENJOINED from enforcing those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the case to the
Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20, 1994 x x x, the
Supreme Court denied the petition and affirmed the decision of the Court of Appeals.
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 x x x 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 September, 1993. In two Statements of Account dated
September 1, 1993 x x x, 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 x x x as a follow-up
to the parties earlier conference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x
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 x x x [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 x x x, PAGCOR asked PPC to refund the total of P1,437,582.25
representing the reimbursable rental deposits and expenses for the permanent improvement of the Hotels
parking lot. In a letter dated November 5, 1993 x x x, PAGCOR formally demanded from PPC the
payment of its claim for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of Manila
docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case for sum of
money in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the contract of
lease due to PAGCORs 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.
On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266, which the
trial court admitted in an Order dated February 11, 1994. In an Order dated April 27, 1994, Civil Case
No. 93-68377 was ordered consolidated with Civil Case No. 93-68266. These cases were jointly tried by
the court a quo. On August 17, 1995, the court a quo promulgated its decision. Both parties appealed.
[5]

In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award
actual and moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the
courts ruling that the 2 percent penalty was to be imposed from the date of the promulgation of the
Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the Contract
of Lease had already been terminated as early as September 21, 1993, or at the latest, on October 14,
1993, when PPC received PAGCORs letter dated October 12, 1993. The gaming corporation added that
the trial court erred in 1) failing to consider that PPC was entitled to avail itself of the provisions of
Article XX only when PPC was the party terminating the Contract; 2) not finding that there were valid,
justifiable and good reasons for terminating the Contract; and 3) dismissing the Complaint of PAGCOR
in Civil Case No. 93-68337 for lack of merit, and not finding PPC liable for the reimbursement of
PAGCORS cash deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract
of Lease was unjustified. The appellate court explained that public demonstrations and rallies could not
be considered as fortuitous events that would exempt the gaming corporation from complying with the
latters contractual obligations. Therefore, the Contract continued to be effective until PPC elected to
terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had
the right to ask for (1) rescission of the Contract and indemnification for damages; or(2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the Contract remained
effective, and PPC could collect the accrued rentals. However, from the time it terminated the Contract
on November 25, 1993, PPC could no longer demand payment of the remaining rentals as part of actual
damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR
had acted in gross or evident bad faith in failing to pay the rentals from September to November
1993. Such failure was shown especially by the fact that PPC still had in hand three (3) months advance
rental deposits of PAGCOR. The former could have simply applied this deposit to the unpaid rentals, as
provided in the Contract. Neither did PPC adequately show that its reputation had been besmirched or the
hotels goodwill eroded by the establishment of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR
had not presented official receipts to prove the latters alleged expenses. The appellate court, however,
upheld the trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.
[6]

Issues
In their Memorandum, petitioner raised the following issues:
MAIN ISSUE:
Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that Pryce was
not entitled to future rentals or lease payments for the unexpired period of the Contract of Lease between
Pryce and PAGCOR?
Sub-Issues:
1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the right of
PRYCE to terminate the Contract for cause and to moreover collect rentals from PAGCOR corresponding
to the remaining term of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract, PRYCE
having rescinded the Contract of Lease?
3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited by
PAGCOR support its position that PRYCE was not entitled to future rentals?
4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?
5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the Contract of
Lease?
6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts, particularly in
the PRYCE-PAGCOR Contract of Lease?
[7]

The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it
argues that termination, as defined under the Contract, is different from the remedy
ofrescission prescribed under Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as
the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly no longer entitled to
future rentals, because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
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.
[8]
In deference to the rights of
the parties, the law
[9]
allows them to enter into stipulations, clauses, terms and conditions they may deem
convenient; that is, as long as these are not contrary to law, morals, good customs, public order or public
policy. Likewise, it is settled that if the terms of the contract clearly express the intention of the
contracting parties, the literal meaning of the stipulations would be controlling.
[10]

In this case, Article XX of the parties Contract of Lease provides in part as follows:
XX. BREACH OR DEFAULT
a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall be
deemed essential conditions of this contract, and in the event of default or breach of any of such terms,
conditions and/or covenants, or should the LESSEE become bankrupt, or insolvent, or compounds with
his creditors, the LESSOR shall have the right to terminate and cancel this contract by giving them
fifteen (15 days) prior notice delivered at the leased premises or posted on the main door thereof. Upon
such termination or cancellation, the LESSOR may forthwith lock the premises and exclude the LESSEE
therefrom, forcefully or otherwise, without incurring any civil or criminal liability. During the fifteen
(15) days notice, the LESSEE may prevent the termination of lease by curing the events or causes of
termination or cancellation of the lease.
b) x x x x x x x x x
c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to the
remaining term of the lease as well as for any and all damages, actual or consequential resulting from
such default and termination of this contract.
d) x x x x x x x x x. (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right to
terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with the
provisions of the Contract by stipulating that a default or breach, among others, shall give the lessee the
termination option, coupled with the lessors liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order
or public policy. Neither is there anything objectionable about the inclusion in the Contract of mandatory
provisions concerning the rights and obligations of the parties.
[11]
Being the primary law between the
parties, it governs the adjudication of their rights and obligations. A court has no alternative but to
enforce the contractual stipulations in the manner they have been agreed upon and written.
[12]
It is well to
recall that courts, be they trial or appellate, have no power to make or modify contracts.
[13]
Neither can
they save parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for termination plus the full payment
of future rentals under the provisions of the Contract, rather than just rescissionunder Article 1659 of the
Civil Code. This Court is not unmindful of the fact that termination and rescission are terms that have
been used loosely and interchangeably in the past. But distinctions ought to be made, especially in this
controversy, in which the terms mean differently and lead to equally different consequences.
The term rescission is found in 1) Article 1191
[14]
of the Civil Code, the general provision on
rescission of reciprocal obligations; 2) Article 1659,
[15]
which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 1380
[16]
with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,
[17]
Justice J. B. L. Reyes
differentiated rescission under Article 1191 from that under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the culpable
breach of his obligations to the defendant. This rescission is a principal action retaliatory in character, it
being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in
the old Latin aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damages
for the breach is purely secondary.
On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure of the
right to rescind. x x x.
[18]

Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old
Civil Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also
Article 1659).
[19]

Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA
[20]
held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus, the
remedy was not rescission, but termination or cancellation, of the contract. The Court explained:
x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the contract
because they sought its partial enforcement in praying for rental arrearages. 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.
x x x. 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. x x x.
[21]
(Italics supplied)
Rescission has likewise been defined as the unmaking of a contract, or its undoing from the
beginning, and not merely its termination. Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of the
other, if a legally sufficient ground exists or if a decree of rescission is applied for before the courts.
[22]
On
the other hand, termination refers to an end in time or existence; a close, cessation or conclusion. With
respect to a lease or contract, it means an ending, usually before the end of the anticipated term of such
lease or contract, that may be effected by mutual agreement or by one party exercising one of its remedies
as a consequence of the default of the other.
[23]

Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to
their original situation prior to the inception of the contract.
[24]
Applying this principle to this case, it
means that PPC would re-acquire possession of the leased premises, and PAGCOR would get back the
rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is
the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with
their contractual obligations. Only after the contract has been cancelled will they be released from their
obligations.
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. Any intent to rescind was not shown, even when it abrogated the
Contract on November 25, 1993, because such abrogation was not the rescission provided for under
Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto
[25]
is inapplicable, because the remedy
resorted to by the lessors in that case was rescission, not termination. The rights and obligations of the
parties in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the damages
to which the lessor was entitled could not have extended to the lessees liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of
anothers property after the termination of a contract. We stress that by abrogating the Contract in the
present case, PPC released PAGCOR from the latters future obligations, which included the payment of
rentals. To grant that right to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest
from a reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph (c)
of the Contract. A penal clause is an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the debtor a special
prestation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled
or is irregularly or inadequately fulfilled.
[26]

Quite common in lease contracts, this clause functions to strengthen the coercive force of the
obligation and to provide, in effect, for what could be the liquidated damages resulting from a
breach.
[27]
There is nothing immoral or illegal in such indemnity/penalty clause, absent any showing that
it was forced upon or fraudulently foisted on the obligor.
[28]

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,
[29]
in which case proof of actual damages is not necessary for the penalty to be
demanded.
[30]
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.
[31]

In the present case, the first exception applies because Article XX (c) provides that, aside from the
payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be liable for
any and all damages, actual or consequential, resulting from such default and termination of this
contract. Having entered into the Contract voluntarily and with full knowledge of its provisions,
PAGCOR must be held bound to its obligations. It cannot evade further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts.
[32]
This
power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
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.
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of
the courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to -- the
type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and relationship of the parties; and the like.
[33]

In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were
in fact real and pressing. From the CAs factual findings, which are not contested by either party, we find
that PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It
did so not only with the PPC, but also with local government officials, who assured it that the problems
were surmountable. Likewise, PAGCOR took pains to contest the ordinances
[34]
before the courts, which
consequently declared them unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the former to
cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs 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.
While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals to
the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the
circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for
respondents breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay
petitioner the additional amount of P687,289.50 as penalty, which may be set off or applied against the
formers advanced rental deposits. Meanwhile, the CAs award to petitioner of actual damages
representing the accrued rentals for September to November 1993 -- with interest and penalty at the rate
of two percent (2%) per month, from the date of filing of the Complaint until the amount shall have been
fully paid -- as well as the P50,000 award for attorneys fees, is AFFIRMED. No costs.
SO ORDERED.

FIRST DIVISION

[G.R. No. 94828. September 18, 1992.]

SPOUSES ROMULO DE LA CRUZ and DELIA DE LA CRUZ, and DANIEL
FAJARDO, Petitioners, v. ASIAN CONSUMER AND INDUSTRIAL FINANCE CORPORATION
and the HONORABLE COURT OF APPEALS, Respondents.
D E C I S I O N


BELLOSILLO, J .:


The pivotal point before Us is whether a chattel mortgagee, after opting to foreclose the mortgage but
failing afterwards to sell the property at public auction, may still sue to recover the unpaid balance of the
purchase price.

On 22 September 1982, the spouses Romulo de la Cruz and Delia de la Cruz, and one Daniel Fajardo,
petitioners herein, purchased on installment basis one (1) unit Hino truck from Benter Motor Sales
Corporation (BENTER for brevity). To secure payment, they executed in favor of BENTER a chattel
mortgage over the vehicle 1 and a promissory note for P282,360.00 payable in thirty (30) monthly
installments of P9,412.00. 2 On the same date, BENTER assigned its rights and interest over the vehicle
in favor of private respondent Asian Consumer and Industrial Finance Corporation (ASIAN for brevity).
3 Although petitioners initially paid some installments they subsequently defaulted on more than two (2)
installments. Thereafter, notwithstanding the demand letter of ASIAN, 4 petitioners failed to settle their
obligation.

On 26 September 1984, by virtue of a petition for extrajudicial foreclosure of chattel mortgage, the sheriff
attempted to repossess the vehicle but was unsuccessful because of the refusal of the son of petitioner,
Rolando de la Cruz to surrender the same. Hence, the return of the sheriff that the service was not
satisfied.
On 10 October 1984, petitioner Romulo de la Cruz brought the vehicle to the office of ASIAN and left it
there where it was inventoried and inspected. 5

On 27 November 1984, ASIAN filed an ordinary action with the court a quo for collection of the balance
of P196,152.99 of the purchase price, plus liquidated damages and attorneys fees. 6

After trial, the court below rendered judgment in favor of ASIAN.

On appeal, the Court of Appeals affirmed the judgment and held that

". . . no extrajudicial foreclosure of chattel mortgage ever transpired in the case at bar. Undoubtedly,
plaintiff had first chosen to extrajudically foreclose the mortgage, but this did not materialize through no
fault of plaintiff, as defendant refused to surrender the Hino truck. The mere fact that the writ in now in
possession of plaintiff and a Technical and Inspection Report was made in connection therewith is not
conclusive of the extrajudicial foreclosure, for in this kind of foreclosure, possession of the chattel by the
sheriff is necessary, aside from the sale at public auction."

"Though the remedy of foreclosure was first chosen, this remedy however proved ineffectual due to no
fault of plaintiff. Therefore, plaintiff may exercise other remedies such as exact fulfillment of the
obligation and thereafter recover the deficiency. This is the essence of the rule of alternative remedies
under Article 1484."

Petitioners take exception. While they do not dispute that where the mortgagee elects the remedy of
foreclosure which, according to them, includes the option to sell in a public or private sale, commences
and pursues it, and in consideration of which he also performs everything that is incumbent upon him to
do to implement the foreclosure they nevertheless insist that he should not later be allowed to change
course midway in the process, abandon the foreclosure and shift to other remedies such as collection of
the balance, especially after having recovered the mortgaged chattel from them and while retaining
possession thereof.

We do not agree with petitioners.

It is not disputed that the instant case is covered by the so-called "Recto Law", now Art. 1484 of the New
Civil Code, which provides:

"In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to
pay; (2) Cancel the sale, should the vendees failure to pay cover two or more installments; (3) Foreclose
the chattel mortgage on the thing sold, if one has been constituted, should the vendees failure to pay
cover two or more installments. In this case, he shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the contrary shall be void."

In this jurisdiction, the three (3) remedies provided for in the "Recto Law" are alternative and not
cumulative; the exercise of one would preclude the other remedies. Consequently, should the vendee-
mortgagor default in the payment of two or more of the agreed installments, the vendor-mortgagee has the
option to avail of any of these three (3) remedies: either to exact fulfillment of the obligation, to cancel
the sale, or to foreclose the mortgage on the purchased chattel, if one was constituted. 7

The records show that on 14 September 1984 ASIAN initiated a petition for extrajudicial foreclosure of
the chattel mortgage. But the sheriff failed to recover the motor vehicle from petitioners due to the refusal
of the son of petitioners Romulo and Delia de la Cruz to surrender it. It was not until 10 October 1984, or
almost a month later that petitioners delivered the unit to ASIAN. The action to recover the balance of the
purchase price was instituted on 27 November 1984.
It is thus clear that while ASIAN eventually succeeded in taking possession of the mortgaged vehicle, it
did not pursue the foreclosure of the mortgage as shown by the fact that no auction sale of the vehicle was
ever conducted. As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. 8

"Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein
appellee, can only operate to extinguish appellants liability if the appellee had actually caused the
foreclosure sale of the mortgaged property when it recovered possession thereof (Northern Motors, Inc. v.
Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila
Motors Co., Inc. v. Fernandez, 99 Phil. 782 [1956]). It is worth noting that it is the fact of foreclosure and
actual sale of the mortgaged chattel that bar recovery by the vendor of any balance of the purchasers
outstanding obligation not satisfied by the sale (New Civil Code, par. 3, Article 1484). As held by this
Court, if the vendor desisted, on his own initiative, from consummating the auction sale, such desistance
was a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific
performance" (Industrial Finance Corp. v. Tobias, 78 SCRA 28 [1977]; Radiowealth, Inc. v. Lavin, L-
18563, April 27, 1963, 7 SCRA 804; Pacific Commercial Co. v. dela Rama, 72 Phil. 380 [1941]).

Consequently, in the case before Us, there being no actual foreclosure of the mortgaged property, ASIAN
is correct in resorting to an ordinary action for collection of the unpaid balance of the purchase price.

We note however that the trial court, as well as the Court of Appeals failed to consider that the vehicle
was already in the possession of ASIAN when it directed petitioners herein to pay P184,466.67
representing the balance of the purchase price of the mortgaged property. Law and equity will not permit
ASIAN to have its cake and eat it too, so to speak. By allowing ASIAN to retain possession of the vehicle
and then directing petitioners to pay the unpaid balance would certainly result in unjust enrichment of the
former. Accordingly, the ownership and possession of the vehicle should be returned to petitioners by
ASIAN in the condition that it was when delivered to it, and if this be no longer feasible, to deduct from
the adjudged liability of petitioners the amount of P60,000.00, its corresponding appraised value. 9

WHEREFORE, the assailed decision is AFFIRMED, with the MODIFICATION that the subject vehicle
be returned to petitioners or, at their option, they be allowed to deduct P60,000.00 from their adjudged
liability. No costs.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. 109125 December 2, 1994
ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT
CORPORATION, respondents.
VITUG, J .:
Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in
CA-G.R. SP No. 26345 setting aside and declaring without force and effect the orders of execution of the
trial court, dated 30 August 1991 and 27 September 1991, in Civil Case No. 87-41058.
The antecedents are recited in good detail by the appellate court thusly:
On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu
Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before
the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058, alleging, among others,
that plaintiffs are tenants or lessees of residential and commercial spaces owned by defendants
described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have occupied said spaces
since 1935 and have been religiously paying the rental and complying with all the conditions of the
lease contract; that on several occasions before October 9, 1986, defendants informed plaintiffs that
they are offering to sell the premises and are giving them priority to acquire the same; that during
the negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a counter
offer of P5-million; that plaintiffs thereafter asked the defendants to put their offer in writing to
which request defendants acceded; that in reply to defendant's letter, plaintiffs wrote them on
October 24, 1986 asking that they specify the terms and conditions of the offer to sell; that when
plaintiffs did not receive any reply, they sent another letter dated January 28, 1987 with the same
request; that since defendants failed to specify the terms and conditions of the offer to sell and
because of information received that defendants were about to sell the property, plaintiffs were
compelled to file the complaint to compel defendants to sell the property to them.
Defendants filed their answer denying the material allegations of the complaint and interposing a
special defense of lack of cause of action.
After the issues were joined, defendants filed a motion for summary judgment which was
granted by the lower court. The trial court found that defendants' offer to sell was never accepted by
the plaintiffs for the reason that the parties did not agree upon the terms and conditions of the
proposed sale, hence, there was no contract of sale at all. Nonetheless, the lower court ruled that
should the defendants subsequently offer their property for sale at a price of P11-million or below,
plaintiffs will have the right of first refusal. Thus the dispositive portion of the decision states:
WHEREFORE, judgment is hereby rendered in favor of the defendants and
against the plaintiffs summarily dismissing the complaint subject to the
aforementioned condition that if the defendants subsequently decide to offer their
property for sale for a purchase price of Eleven Million Pesos or lower, then the
plaintiffs has the option to purchase the property or of first refusal, otherwise,
defendants need not offer the property to the plaintiffs if the purchase price is higher
than Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice
Segundino G. Chua and concurred in by Justices Vicente V. Mendoza and Fernando A. Santiago),
this Court affirmed with modification the lower court's judgment, holding:
In resume, there was no meeting of the minds between the parties concerning the sale
of the property. Absent such requirement, the claim for specific performance will not
lie. Appellants' demand for actual, moral and exemplary damages will likewise fail as
there exists no justifiable ground for its award. Summary judgment for defendants
was properly granted. Courts may render summary judgment when there is no
genuine issue as to any material fact and the moving party is entitled to a judgment as
a matter of law (Garcia vs. Court of Appeals, 176 SCRA 815). All requisites
obtaining, the decision of the court a quois legally justifiable.
WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is
hereby AFFIRMED, but subject to the following modification: The court a quo in the
aforestated decision gave the plaintiffs-appellants the right of first refusal only if the
property is sold for a purchase price of Eleven Million pesos or lower; however,
considering the mercurial and uncertain forces in our market economy today. We find
no reason not to grant the same right of first refusal to herein appellants in the event
that the subject property is sold for a price in excess of Eleven Million pesos. No
pronouncement as to costs.
SO ORDERED.
The decision of this Court was brought to the Supreme Court by petition for review on certiorari.
The Supreme Court denied the appeal on May 6, 1991 "for insufficiency in form and substances"
(Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court,
the Cu Unjieng spouses executed a Deed of Sale (Annex D, Petition) transferring the property in
question to herein petitioner Buen Realty and Development Corporation, subject to the following
terms and conditions:
1. That for and in consideration of the sum of FIFTEEN MILLION PESOS
(P15,000,000.00), receipt of which in full is hereby acknowledged, the VENDORS
hereby sells, transfers and conveys for and in favor of the VENDEE, his heirs,
executors, administrators or assigns, the above-described property with all the
improvements found therein including all the rights and interest in the said property
free from all liens and encumbrances of whatever nature, except the pending
ejectment proceeding;
2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for
the transfer of title in his favor and other expenses incidental to the sale of above-
described property including capital gains tax and accrued real estate taxes.
As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses
was cancelled and, in lieu thereof, TCT No. 195816 was issued in the name of petitioner on
December 3, 1990.
On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees
demanding that the latter vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the
property subject to the notice of lis pendens regarding Civil Case No. 87-41058 annotated on
TCT No. 105254/T-881 in the name of the Cu Unjiengs.
The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case
No. 87-41058 as modified by the Court of Appeals in CA-G.R. CV No. 21123.
On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows:
Presented before the Court is a Motion for Execution filed by plaintiff
represented by Atty. Antonio Albano. Both defendants Bobby Cu Unjieng and
Rose Cu Unjieng represented by Atty. Vicente Sison and Atty. Anacleto Magno
respectively were duly notified in today's consideration of the motion as
evidenced by the rubber stamp and signatures upon the copy of the Motion for
Execution.
The gist of the motion is that the Decision of the Court dated September 21, 1990
as modified by the Court of Appeals in its decision in CA G.R. CV-21123, and
elevated to the Supreme Court upon the petition for review and that the same was
denied by the highest tribunal in its resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a consequence, there was an
Entry of Judgment by the Supreme Court as of June 6, 1991, stating that the
aforesaid modified decision had already become final and executory.
It is the observation of the Court that this property in dispute was the subject of
the Notice of Lis Pendens and that the modified decision of this Court
promulgated by the Court of Appeals which had become final to the effect that
should the defendants decide to offer the property for sale for a price of P11
Million or lower, and considering the mercurial and uncertain forces in our
market economy today, the same right of first refusal to herein
plaintiffs/appellants in the event that the subject property is sold for a price in
excess of Eleven Million pesos or more.
WHEREFORE, defendants are hereby ordered to execute the necessary Deed of
Sale of the property in litigation in favor of plaintiffs Ang Yu Asuncion, Keh
Tiong and Arthur Go for the consideration of P15 Million pesos in recognition of
plaintiffs' right of first refusal and that a new Transfer Certificate of Title be
issued in favor of the buyer.
All previous transactions involving the same property notwithstanding the
issuance of another title to Buen Realty Corporation, is hereby set aside as having
been executed in bad faith.
SO ORDERED.
On September 22, 1991 respondent Judge issued another order, the dispositive portion of which
reads:
WHEREFORE, let there be Writ of Execution issue in the above-entitled case
directing the Deputy Sheriff Ramon Enriquez of this Court to implement said
Writ of Execution ordering the defendants among others to comply with the
aforesaid Order of this Court within a period of one (1) week from receipt of this
Order and for defendants to execute the necessary Deed of Sale of the property in
litigation in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go
for the consideration of P15,000,000.00 and ordering the Register of Deeds of the
City of Manila, to cancel and set aside the title already issued in favor of Buen
Realty Corporation which was previously executed between the latter and
defendants and to register the new title in favor of the aforesaid plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go.
SO ORDERED.
On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition)
was issued.
1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared
without force and effect the above questioned orders of the court a quo.
In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the
writ of execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the
name of Buen Realty, at the time of the latter's purchase of the property on 15 November 1991 from the
Cu Unjiengs.
We affirm the decision of the appellate court.
A not too recent development in real estate transactions is the adoption of such arrangements as the right
of first refusal, a purchase option and a contract to sell. For ready reference, we might point out some
fundamental precepts that may find some relevance to this discussion.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is
constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical
tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-
contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct; required to be
observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of
the obligation, are the active (obligee) and the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds
between two persons whereby one binds himself, with respect to the other, to give something or to render
some service (Art. 1305, Civil Code). A contract undergoes various stages that include its negotiation or
preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the
prospective contracting parties indicate interest in the contract to the time the contract is concluded
(perfected). The perfection of the contract takes place upon the concurrence of the essential elements
thereof. A contract which is consensual as to perfection is so established upon a mere meeting of minds,
i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A contract which
requires, in addition to the above, the delivery of the object of the agreement, as in a pledge
or commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain
formalities prescribed by law, such as in a donation of real property, is essential in order to make the act
valid, the prescribed form being thereby an essential element thereof. The stage of consummation begins
when the parties perform their respective undertakings under the contract culminating in the
extinguishment thereof.
Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding
juridical relation. In sales, particularly, to which the topic for discussion about the case at bench belongs,
the contract is perfected when a person, called the seller, obligates himself, for a price certain, to deliver
and to transfer ownership of a thing or right to another, called the buyer, over which the latter agrees.
Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor
a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the
ownership of the thing sold is retained until the fulfillment of a positive suspensive condition (normally,
the full payment of the purchase price), the breach of the condition will prevent the obligation to convey
title from acquiring an obligatory force.
2
In Dignos vs. Court of Appeals (158 SCRA 375), we have said
that, although denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is
devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated, e.g., until or
unless the price is paid. Ownership will then be transferred to the buyer upon actual or constructive
delivery (e.g., by the execution of a public document) of the property sold. Where the condition is
imposed upon the perfection of the contract itself, the failure of the condition would prevent such
perfection.
3
If the condition is imposed on the obligation of a party which is not fulfilled, the other party
may either waive the condition or refuse to proceed with the sale (Art. 1545, Civil Code).
4

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price
is fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted.
5

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when
coupled with a valuable consideration distinct and separate from the price, is what may properly be
termed a perfected contract ofoption. This contract is legally binding, and in sales, it conforms with the
second paragraph of Article 1479 of the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from
the price. (1451a)
6

Observe, however, that the option is not the contract of sale itself.
7
The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the
option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to
comply with their respective undertakings.
8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily
construed as mere invitations to make offers or only as proposals. These relations, until a contract is
perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the
contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the
withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily
when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to
the offeree within which to accept the offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has
the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the
offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324,
Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a
unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs.
Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Paraaque, Inc., vs. Remolado,
135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised
whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil
Code which ordains that "every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be
a breach of that contract to withdraw the offer during the agreed period. The option, however, is an
independent contract by itself, and it is to be distinguished from the projected main agreement (subject
matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws
the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue
for specific performance on the proposed contract ("object" of the option) since it has failed to reach its
own stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of
the option. In these cases, care should be taken of the real nature of theconsideration given, for if, in fact,
it has been intended to be part of the consideration for the main contract with a right of withdrawal on the
part of the optionee, the main contract could be deemed perfected; a similar instance would be an "earnest
money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).
In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to
point out, it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither
can the right of first refusal, understood in its normal concept, per se be brought within the purview of an
option under the second paragraph of Article 1479, aforequoted, or possibly of an offer under Article
1319
9
of the same Code. An option or an offer would require, among other things,
10
a clear certainty on
both the object and the cause or consideration of the envisioned contract. In a right of first refusal, while
the object might be made determinate, the exercise of the right, however, would be dependent not only on
the grantor's eventual intention to enter into a binding juridical relation with another but also on terms,
including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so described
as merely belonging to a class of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by,
among other laws of general application, the pertinent scattered provisions of the Civil Code on human
conduct.
Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its
breach cannot justify correspondingly an issuance of a writ of execution under a judgment that merely
recognizes its existence, nor would it sanction an action for specific performance without thereby
negating the indispensable element of consensuality in the perfection of contracts.
11
It is not to say,
however, that the right of first refusal would be inconsequential for, such as already intimated above, an
unjustified disregard thereof, given, for instance, the circumstances expressed in Article 19
12
of the Civil
Code, can warrant a recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first
refusal" in favor of petitioners. The consequence of such a declaration entails no more than what has
heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of
private respondents to honor the right of first refusal, the remedy is not a writ of execution on the
judgment, since there is none to execute, but an action for damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of
the property, has acted in good faith or bad faith and whether or not it should, in any case, be considered
bound to respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be
independently addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil
Case No. 87-41058, cannot be held subject to the writ of execution issued by respondent Judge, let alone
ousted from the ownership and possession of the property, without first being duly afforded its day in
court.
We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of
execution varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV-
21123. The Court of Appeals, in this regard, has observed:
Finally, the questioned writ of execution is in variance with the decision of the trial court
as modified by this Court. As already stated, there was nothing in said decision
13
that
decreed the execution of a deed of sale between the Cu Unjiengs and respondent lessees,
or the fixing of the price of the sale, or the cancellation of title in the name of petitioner
(Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143
SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885).
It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at
the time the execution of any deed of sale between the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders,
dated 30 August 1991 and 27 September 1991, of the court a quo. Costs against petitioners.
SO ORDERED.