Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-27482 September 10, 1981
GRACE PARK ENGINEERING CO., INC., plaintiff-appellee,
vs.
MOHAMAD ALI DIMAPORO, defendant-appellant.

DE CASTRO,* J.:
Appeal (prior to the effectivity of Republic Act No. 5440) by Mohamad Ali Dimaporo from
a decision of the Court of First Instance of Rizal, Branch VI (in its Civil Case No. 3828),
the dispositive portion of which reads:
WHEREFORE, all premises considered, judgment is hereby rendered
declaring the rescission of the Contract for the Sale of Cassava Flour and
Starch Processing Machinery and Equipment, Exh. A, dated April 1, 1954,
and ordering mutual restitution by the parties, defendant to return to
plaintiff the cassava flour and starch processing machinery and equipment
and bear the transportation expenses thereof to the port of Cotabato,
plaintiff corporation to bear the freight charges thereof for its shipment to
Manila, and, to pay plaintiff the total amount of P19,628.93 with interest
thereon at the rate of 6% per annum from the date of filing of this
complaint until full payment of the same, and plaintiff to return to
defendant the amount of P15,750.00 representing the partial payment
made to it by defendant for the purchase price of said machinery and
equipment. No pronouncement as to damages and costs. 1
Defendant-Appellant Dimaporo questions the validity of the questioned decision in so
far as said decision 1) orders him to return the cassava flour and starch processing
machinery and equipment and 2) orders him to pay plaintiff-appellee Grace Park
Engineering Co. P19,628.93 with interest.
The records disclose that on April 1, 1954, Grace Park Engineering, Inc., and Mohamad
Ali Dimaporo entered into a Contract for the Sale of Cassava Flour and Starch Processing
Machinery and Equipment (Exh. A) 2 whereby the corporation agreed to sell and install, for
the consideration of P52,000.00, a cassava flour and starch processing machinery and
equipment specifically described therein at Dimaporo's place in Karomatan Lanao Mill Site,
within a period of 70 working days from the date of signing of the contract. It was agreed
that P5,750.00 shall be paid upon signing of the contract; P10,000.00 shall be paid within 30
days from the date of the signing of the contract but before machinery and equipment is
loaded at Manila Harbor and P36,750.00 shall be payable in 12 monthly installments as
provided in the contract.

In view of the foregoing considerations, the Corporation guaranteed said machinery and
equipment to process at least 6 tons of cassava flour and starch per 24-hour day
operation, while Dimaporo undertook to supply at his own expenses the building
wherein shall be housed the machinery and equipment, laborers needed to complement
the operation of the mill, food, foundation materials, and effective water system (par. 6,
Exh. A).
In compliance with the agreement, defendant paid plaintiff the amounts of P5,750.00
and P10,000.00 as agreed upon, thus leaving a balance of P36,750.00.
It appears on record, however, that during the course of installation of said machinery
and equipment, Dimaporo failed to comply with his obligations specified in par. 6 of said
contract, so much so that the Corporation was forced to provide the necessary materials
and labor and advance whatever expenses had been made for that purpose with
previous knowledge and consent given by Dimaporo because the latter was short of
funds during that time.
It took the Corporation one (1) year and three (3) months to install the said machinery
and equipment, after which, it demanded from Dimaporo complete payment of the
balance due and for all expenses made in advance arising from the supply of materials
and labor which Dimaporo failed to provide on time. Dimaporo refused to pay on the
ground that the balance of P36,750.00 never became due and demandable because of
the Corporation's failure to complete the installation of the machinery and equipment
within the stipulated period and place the same in satisfactory running conditions as
guaranteed by it in the contract.
Hence, on October 1, 1955 the Corporation brought an action against Dimaporo for
rescission of the aforesaid contract after mutual restitution by the parties with provision
for damages in its favor. Dimaporo, in his answer, likewise seeks the rescission of the
contract, after mutual restitution by the parties, but with provision for the payment by
the Corporation of freight charges that may be incurred due to such restitution, and with
the award of damages in his favor.
After hearing on tile merit, the trial court found both parties having violated the terms
and conditions of the contract, defendant Dimaporo failing to comply with his
obligations under par. 6 of the contract and plaintiff corporation liable for installing
machinery and equipment that are basically defective and inadequate. As to who was
the first infractor in point of time, it was not determined by the trial court. Rescission of
the contract was granted but held that parties should bear his/its own damages,
applying article i 192 of the New Civil Code which provides:
In case both parties have committed a breach of the obligation, the
liability of the first infractor should be equitably tempered by the Courts. If
it cannot be determined which of the parties first violated the contract, the
same should be deemed extinguished, and each shall bear his own
damages.

From the judgment of the Court below, Dimaporo directly appealed to this Court
imputing seven (7) assignments of errors committed by the trial court, which may be
synthesized into four (4) main issues:
a) whether he was guilty of breach of contract.
b) whether he was liable to return the machinery and equipment subject matter of the
contract.
c) whether he was liable to pay appellee Corporation the amount of P19,628.93 with
interest.
d) whether he was entitled to the award of damages in his favor.
Appellant Dimaporo maintained that he has not committed any breach of contract, Exh.
A, particularly par. 6 thereof that it was appellee Corporation who was guilty thereof,
and points in his appellant's brief testimonial and documentary evidence in support of
the same. Upon the other hand, the trial court, in its decision, makes the following
findings:
From the entire evidence presented, it appears that defendant had failed
to comply with his obligations under the contract, Exh. A, more particularly
with the provisions of par. 6 thereof. He was unable to furnish sufficient
laborers needed to complete the operations of the mill, food, foundation
materials and effective water systems (Exhs. G, G-1, I, I-1, J-1, K, R, CC, KK
LL NN-1). Under Exh. MM, a daily work progress report duly certified
correct by defendant, the hammer mill and flash drier were already
commercially operated on December 11, 1954 (Exh. MM-3). This
necessarily gives the impression that the installation of the mill has been
completed in accordance with the contract and the subsequent failure of
the project is due to defendant's fault. ... Taking into consideration
defendant's failure to comply with this obligation, plaintiff's delay in the
complete installation of the machinery and equipment seems reasonable
and understandable. ... 3
The foregoing is a conclusion of fact of the trial court. The rule is well-settled that
factual findings of the trial court, supported by substantial evidence, are generally
binding on the Supreme Court. They are entitled to great respect, the lower court
having had the opportunity of weighing carefully what was testified to and did so
without oversight or neglect. 4 Hence the rule that when a party appeals directly to this
Court, he is deemed to have waived the right to dispute any finding of fact made by the
court below. 5
It is next argued for appellant Dimaporo, that the trial court erred in ordering the return
of the machinery and equipment subject matter of the contract to appellee corporation
and maintained that although a rescission of the contract is in order, he has no
obligation, however, to return the machinery and equipment, much less pay the
transportation expenses thereof to the port of Cotabato, since the machinery and
equipment shipped by appellee corporation were never delivered to appellant. He

contended that by reference to the contract, Exh. A, it is clear that the obligation of the
appellee did not end with the shipment of the machinery and equipment to the all site;
it must also install the machinery and equipment in such a manner that they would
produce at least 6 tons of cassava flour per 24 hours of operations so much so that until
such machinery and equipment were installed and shown to be capable of producing at
the warranted rate, there could be no delivery of such machinery and equipment to
appellant.
This contention is in Our opinion, not sustained by the terms of the contract or by the
facts appearing in evidence. It is true that under par. 8 of the contract, E Exh. A, the
"SELLER warrants that it will deliver all the machinery and equipment as agreed in par.
4, guaranteed to process at least 6 tons of cassava flour or starch per 24-hour day
operation." However in said paragraph it was also stipulated that "this warranty of
capacity shall be attained only when properly coordinated to the necessary manual
labor required for the purpose." And according to the trial court, "the delay of the
completion of the installation as well as the incapacity of the mill to produce the desired
amount of flour/starch as warranted by the plaintiff under the contract are attributable
to defendant's non-compliance with his obligation to furnish food, materials, and water
system."
Even assuming that there is some degree of plausibility in appellant's position, still the
lower court did not commit any error in ordering appellant to return the machinery and
equipment to appellee corporation, for when the former, as defendant in the lower
court, filed his Answer to the complaint of appellee corporation, he prayed for the
rescission of the contract between him and the plaintiff and for mutual restitution by the
parties. 6 To sustain appellant's contention that he is not liable for the return of machinery
and equipment would be fundamentally contradicting the very notion of rescission. The first
paragraph of article 1385 of the New Civil Code provides:
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.
Furthermore, when a contract is resolved or rescinded, it is the duty of the court to
require the parties to surrender that which they have severally received and to place
each as far as practicable in his original situation; and when a resolution is granted, it
has the effect of abrogating the contract in all parts. The party seeking resolution
cannot ask "performance as to part and resolution as to remainder. 7
The last two issues are both centered on the question of who is liable for the payment of
damages and interests as a result of the breach of contract. The trial court, in resolving
the issues, applied Article 1192 of the New Civil Code, which as aforestated, enunciated
the rule if both parties committed a breach of obligation. The trial court find the
following facts: "Both parties have failed to comply with what is respectively encumbent
upon them to do, and the object of the contract is consequently defeated; defendant
failed to comply with his obligations under the contract, Exh. A; that further scrutiny of
the evidence shows that the machinery and equipment sold and installed by plaintiff
were all along, by themselves, defective and inadequate. As to who was the first

infractor in point of time, under said circumstances, cannot be specifically delineated.

Hence, parties should bear his/its own damages.
Based on these findings, the trial court ruled, as aforestated in the dispositive portion,
that appellant Dimaporo must pay appellee corporation the total amount of P19,628.93
which the latter had spent by way of advances to the former with which to purchase the
necessary materials and supplies at the rate of 6% per annum; that appellee
corporation must return to appellant the amount of P15,750.00 representing the partial
payment made by it to appellant for the purchase price of said machinery and
equipment. The trial court, however, made no pronouncement as to damages and costs.
But appellant would contend that the amount of P19,628.93 should be offset by the
damages that are due to him by reason of the violations by the appellee corporation of
its obligation under the contract; that appellee must be required to pay interests on the
amount of P15,750.00 since this amount paid has already been used by it; and that
since the first infractor was the appellee's corporation, therefore, damages should be
paid by that party to the appellant.
The findings of fact of the trial court that both appellant Dimaporo and appellee
corporation have committed a breach of obligation are fully supported by the evidence
on record. As We have stated, We are not in a position to disturb the same. Therefore, it
correctly applied Article 1192 of the New Civil Code to the effect that in case both
parties have committed a breach of obligation and it cannot be determined who was the
first infractor, the contract shall be deemed extinguished and each shall bear his/its own
damages. Consequently, the trial court committed no reversible error when it ordered
appellee corporation to pay appellant the amount of P15,570.00 representing partial
payment of the purchase price of the machinery and equipment. This is but a
consequence of the decree of rescission granted by the trial court. Neither did it commit
any error when it refused to grant any interest on the aforesaid amount of P15,570.00.
This is also but a consequence of the enunciated rule that each party should bear his/its
own damages. For the same reasons, We hold that although appellant is liable to pay
the amount of P19,628.93 which appellee corporation had spent by way of advances
with which to purchase the necessary materials and supplies, however, he is not liable
to pay interest thereon at the rate of 6% per annum until full payment of the same, as
held by the lower court. Otherwise, to hold so would be in conflict with the abovementioned rule that each party must bear his/its own damages.
PREMISES CONSIDERED, with the only modification that the sum of P19,628.93 be paid
by appellant Dimaporo to appellee Grace Park Engineering, Inc., without interest, the
judgment appealed from is affirmed in all other respects. No pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.

Footnotes

* Mr. Justice de Castro was designated to sit with the First Division under
Special Order No. 225.
1 p. 54, Record on Appeal p. 34, Rollo.
2 p. 8, Record on Appeal, p. 34, Rollo.
3 pp 48-49, Record on Appeal, p. 34, Rollo.
4 Corliss vs. Manila Railroad Company 27 SCRA 674; Miguel vs. Court of
Appeals, 29 SCRA 760. Yturralde vs. Vagilidad 28 SCRA 393; Samson, Jr.
vs. Tarroza 28 SCRA 792; Perez vs. Araneta, 24 SCRA 43.
5 Cebu Portland Cement Co. vs. Mun. of Naga, Cebu, 24 SCRA 708; Pascua
vs. Capuyoc, 77 SCRA 78 citing Manacop vs. Cansino, I 1 1 Phil. 106.
6 p. 31, Record on Appeal, p. 34, Rollo.
7 Po Pauco vs. Siguenza and Aguilar, 49 Phil. 404; Magdalena Estate Inc.
vs. Louis J. Myrick 71 Phil. 344; Verceluz vs. Edano, 46 Phil. 801.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. Nos. 70310-11 June 1, 1993

MASSIVE CONSTRUCTION, INC., ENRIQUE P. SYQUIA, RAMON P. SYQUIA, JOSE
MA. MENDIETA, JAIME SANTAMARIA, and JESUS P. SYQUIA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT and JAIME C.
UY, respondents.
Syquia Law Offices for petitioners.
R.A. V. Saguisag for private respondent.

BELLOSILLO, J.:

This is an appeal by certiorari under Rule 45, Revised Rules of Court, from the
consolidated decision of the Court of Appeals in AC-G. R. No. 64077-CV, entitled
"Massive Construction Inc. v. Jaime C. Uy," and AC-G. R. No. 65234-CV, entitled "Jaime
Uy v. Enrique P. Syquia, et al."
In AC-G. R. NO. 64077-CV, the Court of Appeals reversed the decision of the Court of
First Instance of Manila in Civil Code No. 87006, which ordered defendant Jaime C. Uy,
(UY for brevity) to pay plaintiff (MASSIVE for brevity) a sum of money for unrealized
profits resulting from UY's violation of the Agreement dated December 16, 1971
(AGREEMENT for brevity), attorney's fees and costs.
In AC-G. R. No. 65234-CV, the Court of Appeals reversed the decision of the Court of
First Instance of Manila in Civil Case No. 87511, which declared the AGREEMENT as
rescinded due to the breach thereof by both UY and defendants Enrique Syquia, et al.
(stockholders of MASSIVE).
The two cases arose from a common background.
MASSIVE was engaged in the construction business in the Greater Manila Area while UY
was connected with Super Highway Lumber and Construction Supply, Inc. (SUPER
HIGHWAY for brevity), a business run by his wife and engaged in the business of
supplying construction materials.
In the latter part of 1971, MASSIVE suffered financial reverses, resulting in its corporate
reorganization. Ramon P. Syquia, the general manager of MASSIVE, asked his relatives
to help bail out the company from its financial difficulties. Enrique P. Syquia, Jose Ma.
Mendieta, Jaime Sta. Maria, and Jesus P. Syquia were thus elected directors.
In the course of operation, MASSIVE became indebted to SUPER HIGHWAY for purchase
of construction materials in an amount exceeding P100,000.00. In order to settle this
obligation, negotiations were started between the stockholders of MASSIVE on one hand
and UY on the other. After several meetings, the parties signed on 16 December 1972
their AGREEMENT, particularly entered into by and among JAIME C. UY as First Party,
RAMON P. SYQUIA as Second Party, and JOSE MA. MENDIETA, JAIME STA. MARIA, ROMEO
ALMARIO, JESUS P. SYQUIA and ENRIQUE P. SYQUIA jointly as Third Party, with Jose Ma.
Mendieta signing his CONFORME in behalf of MASSIVE, the pertinent terms of which
follow:
1. That the SECOND PARTY and the THIRD PARTY are the complete
stockholders and directors of MASSIVE CONSTRUCTION, INC., a corporation
duly organized and existing under the laws of the Philippines.
2. That the FIRST PARTY is desirous of buying the entire shares of stock of
said corporation;
3. That the FIRST PARTY, SECOND PARTY and THIRD PARTY have agreed
that the FIRST PARTY will purchase the entire shares of stock of the

corporation belonging to the SECOND PARTY for P250,000.00, under the

following terms and conditions:
a) That the FIRST PARTY will pay to the SECOND PARTY and THIRD PARTY
as earnest money, P20,000.00 upon the signing of this Agreement, and
which will constitute as down payment after which the FIRST PARTY
complies with this Agreement, but which will be forfeited in favor of the
SECOND and THIRD PARTY in case of failure to comply with this
Agreement;
b) That aside from the P20,000.00 earnest money, the FIRST PARTY will
pay P30,000.00 on or before January 5, 1973 and the balance of
P200,000.00 shall be paid in monthly installments of P50,000.00 every 5th
day of the month thereafter until the entire amount of P250,000.00 is
paid;
c) That the corporation has monies due it from its receivable and
collections; and the corporation has also a pending obligation with the
FIRST PARTY; and all parties agree that from this date, 50% of the
receivable collected and 30% of the collections received by the
corporation shall be applied to the balance of P230,000.00 owing from the
FIRST PARTY to the SECOND PARTY and THIRD PARTY; and these amounts,
in turn, shall be paid by the FIRST PARTY to the corporation by the
reduction and partial payment of the obligation of the corporation to the
FIRST PARTY;
d) That upon payment of the FIRST PARTY of P20,000.00 to the SECOND
PARTY and THIRD PARTY, the SECOND PARTY and THIRD PARTY will give
P25,000.00 worth of shares to the FIRST PARTY, and said FIRST PARTY shall
also be elected as director of the Corporation; and upon succeeding
payments made by the FIRST PARTY, shares of stock will be transferred to
him until the total of P100,000.00 worth of shares have been transferred
to the name of the FIRST PARTY; and once the entire amount of
P250,000.00 is paid by the FIRST PARTY to the SECOND PARTY and THIRD
PARTY, then the remaining balance of the shares of stock shall be
transferred to him immediately;
e) That until the FIRST PARTY has fully paid said amount of P250,000.00,
the corporate structure and management at the present time shall be
maintained, and all the stockholders and directors shall continue with their
present rights, privileges, and prerogatives;
f) That upon payment by the FIRST PARTY to the SECOND PARTY and
THIRD PARTY of the said amount of P250,000.00, all the obligations of the
corporation to the SECOND and THIRD PARTY, which are purely personal in
nature, shall be considered fully liquidated; but this shall not exceed
P4,650.00 a month;

g) That said P250,000.00 shall be utilized in paying primarily to the

SECOND and THIRD PARTY the monies they have advanced and loaned to
the corporation;
h) That immediately upon the singing of this agreement, the FIRST PARTY
shall make available to the corporation such materials and capital as the
corporation may need for its projects as determined by the SECOND
PARTY, but this shall be considered as an obligation of the corporation to
the FIRST PARTY.
4.) That as soon as the FIRST PARTY has paid P250,000.00 to the SECOND
and THIRD PARTY, and the entire shares of the corporation are transferred
to him, it is agreed that the FIRST PARTY, in turn, will transfer half of these
shares to the SECOND PARTY; and the FIRST PARTY and SECOND PARTY
shall manage and control the corporation in equal shares, in equal
proportion and with equal participation in the
profits. 1
At the signing of the AGREEMENT, the stockholders of MASSIVE informed UY that the
company had several on-going construction projects, including those of Queen's Row
Subdivision, Republic Flour Mills, and B. F. Homes. On the same occasion, Uy issued to
Enrique P. Syquia a check postdated 22 December 1971 which bounced for lack of
funds. UY, however, made good the check by paying Syquia P20,000.00 in cash on 29
December 1971. 2
Out of the P20,000 paid by UY to Enrique P. Syquia, UY borrowed P2,000.00 payable on
or before 5 July 1972. UY failed to pay this amount, which compelled Syquia to file a
collection suit against him in the City Court of Manila (Civil Case No. 209298). The latter
Court rendered judgment against UY, who appealed the decision to the Court of First
Instance of Manila (Civil Case No. 87310).
Immediately after the signing of the AGREEMENT, UY was made a co-manager of
MASSIVE, pursuant to the AGREEMENT. Ramon P. Syquia also asked Uy for his promised
contribution of materials and funds. Out of P100,000.00 worth of materials needed for
the projects, UY was able to deliver only P6,085.69. He gave as an excuse the nonpayment by his relatives of the dividends which he intended to invest in MASSIVE.
MASSIVE made three demands for payment of the damages caused by UY's failure to
comply with his obligation under the AGREEMENT: the first, addressed to UY dated 14
January 1972, 3 the second, addressed to UY's counsel dated 18 January 1972, 4 and the
third, addressed to UY himself dated 18 January 1972. 5
In his answer to the letter dated 14 January 1972 of MASSIVE, 6 UY wrote that he had
been relieved from payment of the P30,000.00 required under paragraph 3(b) of the
AGREEMENT because of the failure of the stockholders of MASSIVE to deliver to him the
company's share of stock worth P25,000.00 upon his payment to them of the sum of
P20,000.00. 7
While Uy received the letters dated 17 and 18 January 1972, he did not reply to them.

Because of the lack of fresh capital and construction materials, MASSIVE aborted all its
projects.
In Civil Case No. 87006, the trial court found that UY failed to make available to
MASSIVE the construction materials and funds needed for its projects; that the
construction materials delivered by UY to MASSIVE valued at P6,085.69 were
inadequate to carry out its various projects; that UY's claim that he did not understand
the import of the AGREEMENT was unbelievable; and, that it was UY who reneged on his
obligations under the AGREEMENT. 8
The trial court, after finding that it was UY who had violated the terms of the contract,
particularly paragraph 3(h) thereof, held him liable to pay MASSIVE P20,000.00 as
damages for the Republic Flour Mills project, P80,000.00 for the Queen's Row
Subdivision project, and P10,000.00 as attorneys' fees. The trial court denied MASSIVE's
claim for damages with respect to the B. F. Homes project.
The trial court did not resolve the issue on the right of UY to rescind the contract, saying
that this issue would have to be resolved in Civil Case No. 87511.
In Civil Case No. 87511, the trial court found that Uy entered into the contract freely and
even with the assistance and advice of counsel; that there was no undue influence or
fraud exerted on him by MASSIVE's stockholders as to justify the nullification of the
contract; and, that the said stockholders did not conceal from Uy the financial status of
MASSIVE. 9
The trial court however did not award any damages after finding that all the parties had
defaulted in the fulfillment of their obligations but it could not determine who of the
parties first violated the contract. 10
Uy appealed to the Court of Appeals from the decisions in both cases. The Court of
Appeals, viewing the evidence in a different light, found that the stockholders of
MASSIVE were the ones who first violated the terms of the AGREEMENT when they failed
to assign to UY the P25,000.00 worth of the company's shares of stock and to elect him
a director of the company upon his payment of P20,000.00. 11
In both AC-G.R. No. 64977-CV and AC-G.R. No. 65234-CV, the Court of Appeals reversed
the decisions of the Court of First Instance. In addition, in AC-G.R. No. 65234-CV, the
Court of Appeals ordered MASSIVE to refund to Uy the sum of P20,000.00 and to pay
P6,085.69, representing the cost of materials delivered by UY to MASSIVE, P5,000.00 as
attorney's fees and costs. In AC-G.R. No. 65234-CV, the Court of Appeals made the
stockholders of MASSIVE subsidiarily liable to pay UY the amounts adjudged in AC-G.R.
No. 64077-CV to be paid by MASSIVE.12 The Court of Appeals, however, did not sustain
UY's claim that his consent to the contract was obtained by fraud. 13
The Court of Appeals sustained the trial court in its finding that MASSIVE was a proper
party to ask for specific performance of the contract. The appellate court noted that the
contract was signed by all the directors-stockholders of MASSIVE and even had the
conformity of said company. 14

This Court can review the findings of facts of the Court of Appeals when the same are
contrary to the findings of the trial court 15 and to the stipulation of facts of the parties. 16
Inasmuch as the AGREEMENT imposed reciprocal obligations, the question to resolve is
who of the parties breached the contract first. The starting point of the inquiry is the
contract itself.
Under the AGREEMENT, UY, as First Party, agreed to buy all the outstanding shares of
stock of MASSIVE and the stockholders of MASSIVE, as Second and Third Parties, agreed
to sell to him the said shares for P250,000.00, under the following terms:
1) Upon the signing of the contract, Uy, would pay Ramon P. Syquia and
the other stockholders of Massive the sum of P20,000.00 as earnest
money;
2) Immediately upon the signing of the contract, Uy would "make available
to Massive such materials and capital as the company may need for its
projects as determined by Ramon P. Syquia. All the materials and capital
given by Uy would be considered an obligation of Massive;
3) On or before January 5, 1973, Uy would pay the stockholders of Massive
the sum of P30,000.00;
4) Every 5th day of the month beginning February 5, 1973, Uy would pay
the amount of P50,000.00 until the balance of P200,000.00 was paid;
5) Upon the payment of the P20,000.00 to the stockholders of Massive the
latter would give him P25,000.00 worth of shares and would elect him a
director of the company.
The party required to act first in compliance with the terms of the contract is no other
than UY.
While UY issued a postdated check for P20,000.00 on 16 December 1972 in payment of
the earnest money required under paragraph 3 (a) of the AGREEMENT, the check
bounced when it was deposited for collection. True, UY made good the check on 29
December 1971 but he had to borrow P2,000.00 out of his payment of P20,000.00.
Having failed to pay this amount by 5 July 1972 as promised, UY was sued in the City
Court of Manila for its collection. Effectively, UY was able to pay only P18,000.00 out of
the P20,000.00 he was supposed to pay as earnest money. This aspect of the case
showed the financial difficulties besetting UY and reflecting poorly on his ability to meet
his financial commitments.
In addition to his obligation to pay the earnest money of P20,000.00 Uy was required
under paragraph 3(h) of the AGREEMENT to make available to MASSIVE immediately
upon the signing of the contract, such "materials and capital as the corporation may
need for its projects as determined by" Ramon P. Syquia. Uy was able to deliver to

MASSIVE materials valued at only P6,085.69 out of the P100,000.00 worth as required
by the on-going projects.
The infusion of fresh capital was the lifeblood of the projects and the essence of his
being brought in as an investor. Without his capital contribution, the company could not
possibly operate.
Lastly, UY failed to pay on or before 5 January 1972 the P30,000.00 required under
paragraph 3(b) of the AGREEMENT. UY cannot claim that he was relieved from the
payment of the monthly installment of P50,000.00 beginning 5 January 1973. When the
parties agreed that the monthly installments should be paid out of the receivables and
collections of MASSIVE (paragraph 3[c], AGREEMENT), it was implied that there was
actual cash received or collected.
The Court of Appeals held that UY was relieved of his obligation to pay the P30,000.00
after the stockholders of MASSIVE failed to deliver the P20,000.00 worth of shares of
stock of the company. The thinking of the Court of Appeals was that after UY had paid
the P20,000.00 earnest money, it became the seller's turn to assign the shares of stock
to UY.
The Court of Appeals erred in concluding that the stockholders of MASSIVE were the first
to default on their obligations because it overlooked the fact that under paragraph 3(h)
of the AGREEMENT, UY was also obligated "immediately upon the signing of the
contract" to contribute materials and funds needed for the on-going projects.
Uy was aware of these twin-obligations of his, so much so that his complaint in Civil
Case No. 87511 against the stockholders of MASSIVE was anchored on his alleged
compliance with the provisions of paragraph 3(a) and (h) of the AGREEMENT. 17
The failure of the stockholders to deliver to UY the P25,000.00 worth of shares is not as
substantial a breach as that accorded it by the appellate court. As a matter of fact, Uy
did not set up such default as a defense in his answer in Civil Case No. 87006, leading
one to conclude that such contention was a mere after-thought.
Under Art. 1191 of the Civil Code, the power to rescind or the right to resolve is not
absolute and must be based on a serious breach of an obligation as to defeat the object
of the parties in making the agreement. 18 The non-delivery of the certificates of stock to
Uy and his non-election to the board of director were not serious breaches, particularly
considering that he has not shown the necessity or urgency for the transfer of the shares in
his name or his election as director. Besides, the trial court is given the discretion to allow a
period within which a party in default may be permitted to perform the stipulation upon
which the claim for rescission of the contract is based, especially when the breach is not
substantial. 19
WHEREFORE, the decision of the Court of Appeals is reversed and, in lieu thereof, the
decision of the trial court in Civil Case No. 87006 is AFFIRMED in toto, and the decision
in Civil Case No. 87511 is likewise AFFIRMED but only insofar as it dismissed the
monetary reliefs including attorney's fees sought by both parties.

SO ORDERED.
Cruz, J. and Grio-Aquino, JJ., concur.
Quiason, J., took no part.

# Footnotes
1 Exhs. "B" and "5", Civil Case No. 87006; Exhs. "E" and "2", Civil Case No.
87511.
2 Exhs. "C" and "6", Civil Case 87006.
3 Exh. "4", Civil Case No. 87511.
4 Exh. "5", Ibid.
5 Exh. "E", Ibid.
6 Exh. "4", Ibid.
7 Exh. "5-A", Ibid.
8 Amended Record on Appeal, AC-G.R. No. 640777-CV; Rollo, pp. 106-108.
9 Record on Appeal, AC-G.R. No. 65234-CV; Rollo, pp. 108-109.
10 Ibid.
11 Decision, p. 11; Rollo, p. 75.
12 Decision, p. 18; Rollo, p. 82.
13 Decision, p. 15-16; Rollo, pp. 79-81.
14 Decision, p. 10; Rollo, p. 74.
15 Philippine National Bank v. Court of Appeals, 112 SCRA (1982);
Gonzales v. Court of Appeals, 90 SCRA 183 (1979); Jereos v. Court of
Appeals, 117 SCRA 395 (1982).
16 Evangelista v. Alto Surety and Insurance Co., Inc., 103 Phil. 401 (1958).
17 Record on Appeals, p. 3; Rollo, p. 108.

18 Philippine Amusement Enterprise, Inc. v. Natividad, 21 SCRA (1976);

Tan v. Court of Appeals, 175 SCRA 655 (1989).
19 Angeles v. Calasanz, 135 SCRA 323 (1985); IV Tolentino, Commentaries
on the Civil Code of the Philippines, p. 179, 1991 Ed.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T.
CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his
capacity as statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the
Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the
decision dated February 15, 1972 of the Court of First Instance of Agusan, which
dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific
performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who,
as a security for the loan, executed on the same day a real estate mortgage over his
100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305,
and which mortgage was annotated on the said title the next day. The approved loan
application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made
by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory
note for P17,000.00 at 12% annual interest, payable within 3 years from the date of
execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An

advance interest for the P80,000.00 loan covering a 6-month period amounting to
P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by
the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the
release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island
Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which
provides:
In view of the chronic reserve deficiencies of the Island Savings Bank
against its deposit liabilities, the Board, by unanimous vote, decided as
follows:
1) To prohibit the bank from making new loans and investments [except
investments in government securities] excluding extensions or renewals of
already approved loans, provided that such extensions or renewals shall
be subject to review by the Superintendent of Banks, who may impose
such limitations as may be necessary to insure correction of the bank's
deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to
put up the required capital to restore its solvency, issued Resolution No. 967 which
prohibited Island Savings Bank from doing business in the Philippines and instructed the
Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp.
48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00
covered by the promissory note, filed an application for the extra-judicial foreclosure of
the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the
sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance
of Agusan for injunction, specific performance or rescission and damages with
preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by
ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum
from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate
mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a
temporary restraining order enjoining the Island Savings Bank from continuing with the
foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the
dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining
order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76,
rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision,
finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island
Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due
thereon, and lifting the restraining order so that the sheriff may proceed with the
foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified
the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's
petition for specific performance, but it ruled that Island Savings Bank can neither
foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the
promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his
real estate mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the consideration for that of the
other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1
[1969]); and when one party has performed or is ready and willing to perform his part of
the contract, the other party who has not performed or is not ready and willing to
perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from
doing further business. Such prohibition made it legally impossible for Island Savings
Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the
Monetary Board to take over insolvent banks for the protection of the public is
recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of
Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance
because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance
of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill
an engagement does not discharge the obligation of the contract, nor does it constitute
any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and
Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the prededucted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a
6-month period cannot be taken as a waiver of his right to collect the P63,000.00
balance. The act of Island Savings Bank, in asking the advance interest for 6 months on
the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of
the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted
interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not
affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral
cannot exempt it from complying with its reciprocal obligation to furnish the entire
P80,000.00 loan. 'This Court previously ruled that bank officials and employees are
expected to exercise caution and prudence in the discharge of their functions (Rural
Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's
officials and employees that before they approve the loan application of their
customers, they must investigate the existence and evaluation of the properties being
offered as a loan security. The recent rush of events where collaterals for bank loans
turn out to be non-existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on their customer's
representation regarding the loan collateral being offered as loan security is a patent
non-performance of this responsibility. If ever bank officials and employees totally reIy
on the representation of their customers as to the valuation of the loan collateral, the
bank shall bear the risk in case the collateral turn out to be over-valued. The
representation made by the customer is immaterial to the bank's responsibility to
conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M.
Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation
because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15.
1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9,
which states that "defenses and objections not pleaded either in a motion to dismiss or
in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before
the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their
loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose
between specific performance or rescission with damages in either case. But since
Island Savings Bank is now prohibited from doing further business by Monetary Board

Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M,

Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only
for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only
insofar as such amount is concerned, as there is no doubt that the bank failed to give
the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino
accepted and executed a promissory note to cover it, the bank was deemed to have
complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note
gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan
when it falls due. His failure to pay the overdue amortizations under the promissory
note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the
aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory
note setting the date for payment of P17,000.00 within 3 years, he would be entitled to
ask for rescission of the entire loan because he cannot possibly be in default as there
was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish
the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a
breach of their reciprocal obligations, the liability of the first infractor shall be equitably
tempered by the courts. WE rule that the liability of Island Savings Bank for damages in
not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt
shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should
account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be
entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that
of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the
debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in furnishing
the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in
relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island Savings
Bank had not made any release on the loan, does not make the real estate mortgage
void for lack of consideration. It is not necessary that any consideration should pass at
the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA
122 [1983]). lt may either be a prior or subsequent matter. But when the consideration

is subsequent to the mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W.
p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is
partial failure of consideration, the mortgage becomes unenforceable to the extent of
such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p.
138). Where the indebtedness actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be enforced for more than the
actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th
ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00
loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such
extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering
100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering
the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25
hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the
Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided
among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask
for the proportionate extinguishment of the pledge or mortgage as long as
the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of other heirs
who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND
12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE
COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED

UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.
NO COSTS. SO ORDERED.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.