Villarroel vs.

Estrada,
71 Phil. 140, No. 47362 December 19, 1940GR No. L-47362 December 19, 1940JOHN F.
VILLARROEL, appellant-appellant,vs.. BERNARDINO ESTRADA, turned-appellee.D. Felipe
Agoncillo in representation of the appellant-appelante.D. Crispin Oben in
representation of the defendant-appellee.AVANCEA, Pres :
On May 9, 1912, Alejandro F. Callao, mother of defendant John F. Villarroel, obtained
from the spouses Mariano Estrada and Severina a loan of P1, 000 payable after seven
years (Exhibito A). Alejandra died, leaving as sole heir to the defendant. Spouses
Mariano Estrada and Severina also died, leaving as sole heir to the plaintiff Bernardino
Estrada. On August 9,1930, the defendant signed a document (Exhibito B) by which the
applicant must declare inthe amount of P1, 000, with an interest of 12 percent per year.
This action relates to the recovery of this amount. The Court of First Instance of Laguna,
which was filed in this action, condemn the defendant to pay the claimed amount of P1,
000 with legal interest of 12 percent per year since the August 9, 1930 until full pay. He
appealed the sentence. It will be noted that the parties in the present case are,
respectively, the only heirs and creditors of the original debtor. This action is brought
under the defendant's liability as the only son of the original debtor in favor of the
plaintiff contracted, sole heir of primitive loan creditors. It is recognized that the amount
of P1, 000 to which contracts this obligation is the same debt of the mother's parents
sued the plaintiff. Although the action to recover the original debt has prescribed and
when the lawsuit was filed in this case, the question raised in this appeal is primarily
whether, notwithstanding such requirement, the action taken is appropriate. However,
this action is based on the original obligation contracted by the mother of the
defendant, who has already prescribed, but in which the defendant contracted the
August 9, 1930 (Exhibito B) by assuming the fulfillment of that obligation, as prescribed.
Being the only defendant in the original herderodebtor eligible successor into his
inheritance, that debt brought by his mother in law, although it lost its effectiveness by
prescription, is now, however, for a moral obligation, that is consideration enough to
create and make effective and enforceable obligation voluntarily contracted its August
9, 1930 in Exhibito B. The rule that a new promise to pay a debt prrescrita must be
made by the same person obligated or otherwise legally authorized by it, is not
applicable to the present case is not required in compliance with the mandatory
obligation orignalmente but which would give it voluntarily assumed this obligation. It
confirms the judgment appealed from, with costs against the appellant. IT IS SO
ORDERED

.R. No. 46274

November 2, 1939

A.O. FISHER, plaintiff-appellee,

vs.
JOHN C. ROBB, defendant-appellant.
Marcial P. Lichauco and Manuel M. Mejia for appellant.
Wolfson, Barrion and Baradi and Ignacio Ycaza for appellee.

VILLA-REAL, J.:
The defendant John C. Robb appeals to this Court from the judgment of the Court of First Instance of
Manila, the dispositive part of which reads:
Judgment is hereby rendered in favor of the plaintiff and against the defendant, who is
ordered to pay to the former the sum of P2,000, with interest at the legal rate from March 11,
1938, until paid, plus costs.
The facts established at the trial without discussion are the following:
In September, 1935, the board of directors of the Philippine Greyhound Club, Inc., told the herein
defendant-appellant John C. Robb, to make a business trip to Shanghai to study the operation of a dog
racing course. In Shanghai, the defendant-appellant stayed at the American Club where be became
acquainted with the plaintiff-appellee, A. O. Fisher, through their mutual friends. In the course of a
conversation, the defendant-appellant came to know that the plaintiff-appellee was the manager of a
dog racing course. Upon knowing the purpose of the defendant-appellant's trip, the plaintiff-appellee
showed great interest and invited him to his establishment and for several days gave him information
about the business. It seems that the plaintiff became interested in the Philippine Greyhound Club,
Inc., and asked the defendant if he could have a part therein as a stockholder. As the defendantappellant answered in the affirmative, the plaintiff-appellee thereupon filled a subscription blank and,
through his bank in Shanghai, sent to the Philippine Greyhound Club, Inc., in Manila telegraphic
transfer for P3,000 in payment of the first installment of his subscription. Later on the defendantappellant returned to Manila from Shanghai.
Some months thereafter, when the board of directors of the Philippine Greyhound Club, Inc., issued a
call for the payment of the second installment of the subscriptions, the defendant-appellant sent a
radiogram to the plaintiff-appellee did so and sent P2,000 directly to the Philippine Greyhound Club,
Inc., in payment of the said installment. Due to the manipulations of those who controlled the
Philippine Greyhound Club, Inc., during the absence of the defendant-appellant undertook the
organization of a company called The Philippine Racing Club, which now manages the race track of
the Santa Ana park. The defendant immediately endeavored to save the investment of those who had
subscribed to the Philippine Greyhound Club, Inc., by having the Philippine Racing Club acquire the
remaining assets of the Philippine Greyhound Club, Inc. The defendant-appellant wrote a letter to the
plaintiff-appellee in Shanghai explaining in detail the critical condition of the Philippine Greyhound
Club, Inc., and outlining his plans to save the properties and assets of the plaintiff-appellee that he felt
morally responsible to the stockholders who had paid their second installment (Exh. C). In answer to
said letter, the plaintiff-appellee wrote the defendant-appellant requiring him to return the entire
amount paid by him to the Philippine Greyhound Club, Inc., (exhibit E). Upon receiving this letter,
the defendant-appellant answered the plaintiff-appellee for any loss which he might have suffered in
connection with the Philippine Greyhound Club, Inc., in the same way that he could not expect

anyone to reimburse him for his own losses which were much more than those of the plaintiffappellee (Exh. B).
The principal question to be decided in this appeal is whether or not the trial court erred in holding
that there was sufficient consideration to justify the promise made by the defendant-appellant in his
letters Exhibits B and C.
In the fifth paragraph of the letter Exhibit B, dated March 16, 1936, addressed by the defendantappellant to the plaintiff-appellee, the former said: "I feel a moral responsibility for these second
payments, which were made in order to carry out my plan (not the first payments, as you have it in
your letter), and Mr. Hilscher and I will see to it that stockholders who made second payments receive
these amounts back as soon as possible, out of our own personal funds. "As it is, I have had to take
my loss along with everyone else here, and so far as I can see that is what all of us must do. The
corporation is finally flat, so it is out of the question to receive back any of your investment from that
source; the only salvage will be the second payment that you made, and that will come from Hilscher
and me personally, as I say, not because of any obligation, but simply because we have taken it on
ourselves to do that. (And I wish I could find someone who would undertake to repay a part of my
own losses in the enterprise!)" And in the seventh paragraph of the letter Exhibit C, dated February
21, 1936, addressed by the same defendant-appellant to the same plaintiff-appellee the former said the
following:
However, Mr. Fischer and I feel a personal responsibility to those few stockholders who made their
second payments, including yourself, and it is our intention to personally repay the amounts of the
second payments made by those few.
. . . And, finally, paragraph 8 of the same letter Exhibit C states: "We are to receive a certain
share of the new Philippine Racing Club for our services as promoters of that organization,
and as soon as this is received by us, we will be in a position to compensate you and the few
others who made the second payments. That, as T have said, will come from us personally, in
an effort to make things easier for those who were sportsmen enough to try to save the
Greyhound organization by making second payments.
Article 1254 of the Civil Code provides as follows:
A contract exists from the moment one or more persons consent to be bound with respect to
another or others to deliver something or to render some services.
And article 1261 of the same Civil Code provides the following:
ART. 1261. There is no contract unless the following requisites exists:
1. The consent of the contracting parties;
2. A definite object which is the subject-matter of the contract;
3. A consideration for the obligation established.
In the present case, while the defendant-appellant told the plaintiff-appellee that he felt morally
responsible for the second payments which had been made to carry out his plan, and that Mr. Hilscher
and he would do everything possible so that the stockholders who had made second payments may
receive the amount paid by them from their personal funds because they voluntarily assumed the
responsibility to make such payment as soon as they receive from the Philippine racing Club certain
shares for their services as promoters of said organization, it does not appear that the plaintiff-appellee

had consented to said form of reimbursement of the P2,000 which he had directly paid to the
Philippine Greyhound Club, Inc., in satisfaction of the second installment.
The first essential requisite, therefore, required by the cited article 1261 of the Civil Code for the
existence of a contract, does not exists.
As to the third essential requisite, namely, "A consideration for the obligation established," article
1274 of the same Code provides:lawphi1.net
In onerous contracts the consideration as to each of the parties is the delivery or performance
or the promise of delivery or performance of a thing or service by the other party; in
remuneratory contracts the consideration is the service or benefit for which the remuneration
is given, and in contracts of pure beneficence the consideration is the liberality of the
benefactors.
And article 1275 of the same Code provides:
ART. 1275. Contracts without consideration or with an illicit consideration produce no effect
whatsoever. A consideration is illicit when it is contrary to law or morality.
Manresa, in volume 8, 4rth edition, pages 618-619 of his Commentaries on the Civil Code, has this to
say:
Considering the concept of the consideration as the explanation and motive of the contract, it
is related to the latter's object and even more to its motives with which it is often confused. It
is differentiated from them, however, in that the former is the essential reason for the contract,
while the latter are the particular reasons of a contracting party which do not affect the other
party and which do not preclude the existence of a different consideration. To clarify by an
example: A thing purchased constitutes the consideration for the purchaser and not the
motives which have influenced his mind, like its usefulness, its perfection, its relation to
another, the use thereof which he may have in mind, etc., a very important distinction, which
precludes the annulment of the contract by the sole influence of the motives, unless the
efficacy of the former had been subordinated to compliance with the latter as conditions.
The jurisprudence shows some cases wherein this important distinction is established. The
consideration of contracts, states the decision of February 24, 1904, is distinct from the
motive which may prompt the parties in executing them. The inaccuracies committed in
expressing its accidental or secondary details do not imply lack of consideration or false
consideration, wherefore, they do not affect the essence and validity of the contract. In a loan
the consideration in its essence is, for the borrower the acquisition of the amount, and for the
lender the power to demand its return, whether the money be for the former or for another
person and whether it be invested as stated or otherwise.
The same distinction between the consideration and the motive is found in the decisions of
November 23, 1920 and March 5, 1924.
The contract sought to be judicially enforced by the plaintiff-appellee against the defendant-appellant
is onerous in character, because it supposes the deprivation of the latter of an amount of money which
impairs his property, which is a burden, and for it to be legally valid it is necessary that it should have
a consideration consisting in the lending or or promise of a thing or service by such party. The
defendant-appellant is required to give a thing, namely, the payment of the sum of P2,000, but the
plaintiff-appellee has not given or promised anything or service to the former which may compel him
to make such payment. The promise which said defendant-appellant has made to the plaintiff-appellee
to return to him P2,000 which he had paid to the Philippine Greyhound Club, Inc., as second

installment of the payment of the amount of the shares for which he has subscribed, was prompted by
a feeling of pity which said defendant-appellant had for the plaintiff-appellee as a result of the loss
which the latter had suffered because of the failure of the enterprise. The obligation which the said
defendant-appellant had contracted with the plaintiff-appellee is, therefore, purely moral and, as such,
is not demandable in law but only in conscience, over which human judges have no
jurisdiction.1awphi1.net
As to whether a moral obligation is a sufficient consideration, read in volume 12 of the American
Jurisprudence, pages 589-590, paragraphs 96, 67, the following:
SEC. 96. Moral obligation. Although there is authority in support of the board proposition
that a moral obligation is sufficient consideration, such proposition is usually denied. . . . .
The case presenting the question whether a moral obligation will sustain an express executory
promise may be divided into five classes: (1) Cases in which the moral obligation arose
wholly from ethical considerations, unconnected with any legal obligations, perfect or
imperfect, and without the receipt of actual pecuniary or material benefit by the promisor
prior to the subsequent promise; (2) cases in which the moral obligation arose from a legal
liability already performed or still enforceable; (3) cases in which the moral obligation arose
out of, or was connected with, a previous request or promise creating originally an
enforceable legal liability, which, however, at the time of the subsequent express promise had
become discharged or barred by operation of a positive rule of law, so that at that time there
was no enforceable legal liability; (4) cases in which the moral obligation arose from, or was
connected with, a previous request or promise which, however, never created any enforceable
legal liability, because of a rule of law which rendered the original agreement void, or at least
unenforceable; and (5) cases in which the moral obligation arose out of, or was connected
with, the receipt of actual material or pecuniary benefit by the promisor, without, however,
any previous request or promise on his part, express or implied, and therefore, of course,
without any original legal liability, perfect or imperfect.
SEC. 97. Moral obligation unconnected with legal liability or legal benefit. Although, as
subsequently shown was formerly some doubt as to the point, it is now well established that a
mere moral obligation or conscience duty arising wholly from ethical motives or a mere
conscientious duty unconnected with any legal obligation, perfect or imperfect, or with the
receipt of benefit by the promisor of a material or pecuniary nature will not furnish a
consideration for an executory promise. . . . .
In view of the foregoing considerations, we are of the opinion and so hold, that the promise made by
an organizer of a dog racing course to a stockholder to return to him certain amounts paid by the latter
in satisfaction of his subscription upon the belief of said organizer that he was morally responsible
because of the failure of the enterprise, is not the consideration rquired by article 1261 of the Civil
Code as an essential element for the legal existence of an onerous contract which would bind the
promisor to comply with his promise.
Wherefore, the appealed judgment is reversed and the costs to the plaintiff.
Avancea, C.J., Imperial, Diaz, Laurel, Concepcion, and Moran, JJ., concur.
The Lawphil Project - Arellano Law Foundation

G.R. No. L-48930

February 23, 1944

ANTONIO VAZQUEZ, petitioner,

vs.
FRANCISCO DE BORJA, respondent.
x---------------------------------------------------------x
G.R. No. L-48931

February 23, 1944

FRANCISCO DE BORJA, petitioner,

vs.
ANTONIO VAZQUEZ, respondent.
OZAETA, J.:
This action was commenced in the Court of First Instance of Manila by Francisco de Borja against
Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the total sum of
P4,702.70 upon three alleged causes of action, to wit: First, that in or about the month of January,
1932, the defendants jointly and severally obligated themselves to sell to the plaintiff 4,000 cavans of
palay at P2.10 per cavan, to be delivered during the month of February, 1932, the said defendants
having subsequently received from the plaintiff in virtue of said agreement the sum of P8,400; that the
defendants delivered to the plaintiff during the months of February, March, and April, 1932, only
2,488 cavans of palay of the value of P5,224.80 and refused to deliver the balance of 1,512 cavans of
the value of P3,175.20 notwithstanding repeated demands. Second, that because of defendants' refusal
to deliver to the plaintiff the said 1,512 cavans of palay within the period above mentioned, the
plaintiff suffered damages in the sum of P1,000. And, third, that on account of the agreement above
mentioned the plaintiff delivered to the defendants 4,000 empty sacks, of which they returned to the
plaintiff only 2,490 and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay their
value amounting to P377.50; and that on account of such refusal the plaintiff suffered damages in the
sum of P150.
The defendant Antonio Vazquez answered the complaint, denying having entered into the contract
mentioned in the first cause of action in his own individual and personal capacity, either solely or
together with his codefendant Fernando Busuego, and alleging that the agreement for the purchase of
4,000 cavans of palay and the payment of the price of P8,400 were made by the plaintiff with and to
the Natividad-Vasquez Sabani Development Co., Inc., a corporation organized and existing under the
laws of the Philippines, of which the defendant Antonio Vazquez was the acting manager at the time
the transaction took place. By way of counterclaim, the said defendant alleged that he suffered
damages in the sum of P1,000 on account of the filing of this action against him by the plaintiff with
full knowledge that the said defendant had nothing to do whatever with any and all of the transactions
mentioned in the complaint in his own individual and personal capacity.
The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff the
sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving the
defendant Fernando Busuego (treasurer of the corporation) from the complaint and the plaintiff from
the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of Appeals, the latter
modified that judgment by reducing it to the total sum of P3,314.78, with legal interest thereon and
the costs. But by a subsequent resolution upon the defendant's motion for reconsideration, the Court
of Appeals set aside its judgment and ordered that the case be remanded to the court of origin for
further proceedings. The defendant Vazquez, not being agreeable to that result, filed the present
petition for certiorari (G.R. No. 48930) to review and reverse the judgment of the Court of Appeals;
and the plaintiff Francisco de Borja, excepting to the resolution of the Court of Appeals whereby its
original judgment was set aside and the case was ordered remanded to the court of origin for further
proceedings, filed a cross-petition for certiorari (G.R. No. 48931) to maintain the original judgment of
the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration read
as follows:
Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al
demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho
demandante solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000
sacos vacios. Esta provbado que de dichos 4,000 sacos vacios solamente se entregaron, 2,583
quedando en poder del demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada
la demanda contra los demandados Antonio Vazquez y Fernando Busuego para el pago de la
cantidad de P4,702.70, con sus intereses legales desde el 1.o de marzo de 1932 hasta su
completo pago y las costas, el Juzgado de Primera Instancia de Manila el asunto condenando
a Antonio Vazquez a pagar al demandante la cantidad de P3,175.20, mas la cantidad de
P377.50, con sus intereses legales, absolviendo al demandado Fernando Busuego de la
demanda y al demandante de la reconvencion de los demandados, sin especial
pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado Antonio
Vazquez, apuntado como principal error el de que el habia sido condenado personalmente, y
no la corporacion por el representada.
Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de
Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente interino y
Manager de la corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi resulta del
Exh. 1, que es la copia al carbon del recibo otorgado por el demandado Vazquez, y cuyo
original lo habia perdido el demandante, segun el. Asi tambien consta en los libros de la
corporacion arriba mencionada, puesto que en los mismos se ha asentado tanto la entrada de
los P8,400, precio del palay, como su envio al gobierno en pago de los alquileres de la
Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al abogado Sr. Jacinto Tomacruz,
posterior presidente de la corporacion sucesora en el arrendamiento de la Sabani Estate,
cuando el solicito sus buenos oficios para el cobro del precio del palay no entregado. Asi
igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion, cuyo
testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en
ella a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development Co., Inc.
Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani Development
Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro, sin embargo, al
demandado Vazquez responsable del pago de la cantidad reclamada por su negligencia al
vender los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha cantidad existia
en las bodegas de la corporacion.
Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de
Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el
cavan, y decimos 'despues' porque esta ultima venta aparece asentada despues de la primera.
Segun esto, el apelante no solamente obro con negligencia, sino interviniendo culpa de su
parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser
responsable subsidiariamente del pago de la cantidad objecto de la demanda.
En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que el
apelante debe pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes de
palay que dejo de entregar al demandante, mas la suma de P339.08 como importe de los 1,417
sacos vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con sus
intereses legales desde la interposicion de la demanda y las costas de ambas instancias.
Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y
alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah Phoy,
la corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho extremo

suficientemente discutido y probado, y pudiendo variar el resultado del asunto, dejamos sin
efecto nuestra citada decision, y ordenamos la devolucion de la causa al Juzgado de origen
para que reciba pruebas al efecto y dicte despues la decision correspondiente.
Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R.
No. 8676, Francisco de Borja vs. Antonio Vasquez et al., praying, for the reasons therein
given, that the resolution of December 22, 1942, be reconsidered: Considering that said
resolution remanding the case to the lower court is for the benefit of the plaintiff-appellee to
afford him opportunity to refute the contention of the defendant-appellant Antonio Vazquez,
motion denied.
The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered into
the contract with the defendant Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that according to the
preponderance of the evidence "the sale made by Antonio Vazquez in favor of Francisco de Borja of
4,000 cavans of palay was in his capacity as acting president and manager of the corporation
Natividad-Vazquez Sabani Development Co., Inc." That finding of fact is final and, it resolving the
only issue involved, should be determinative of the result.
The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin for
further trial to determine whether the corporation had sufficient stock of palay at the time appellant
sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the issue, it should
have been proven during the trial; and the statement of the court that it had not been sufficiently
discussed and proven was no justification for ordering a new trial, which, by the way, neither party
had solicited but against which, on the contrary, both parties now vehemently protest. Second, the
point is, in any event, beside the issue, and this we shall now discuss in connection with the original
judgment of the Court of Appeals which the plaintiff cross-petitioner seeks to maintain.
The action being on a contract, and it appearing from the preponderance of the evidence that the party
liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is not a party
herein, the complaint should have been dismissed. Counsel for the plaintiff, in his brief as respondent,
argues that altho by the preponderance of the evidence the trial court and the Court of Appeals found
that Vazquez celebrated the contract in his capacity as acting president of the corporation and altho it
was the latter, thru Vazquez, with which the plaintiff had contracted and which, thru Vazquez, had
received the sum of P8,400 from Borja, and altho that was true from the point of view of a legal
fiction, "ello no impede que tambien sea verdad lo alegado en la demanda de que la misma persona de
Vasquez fue la que contrato con Borja y que la misma persona de Vasquez fue quien recibio la suma
de P8,400." But such argument is invalid and insufficient to show that the president of the corporation
is personally liable on the contract duly and lawfully entered into by him in its behalf.
It is well known that a corporation is an artificial being invested by law with a personality of its own,
separate and distinct from that of its stockholders and from that of its officers who manage and run its
affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to act
thru its agents, does not make the latter personally liable on a contract duly entered into, or for an act
lawfully performed, by them for an in its behalf. The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without it no corporate entities may exists
and no corporate business may be transacted. Such legal fiction may be disregarded only when an
attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has been
alleged or proven in this case. It has not been alleged nor even intimated that Vazquez personally
benefited by the contract of sale in question and that he is merely invoking the legal fiction to avoid
personal liability. Neither is it contended that he entered into said contract for the corporation in bad
faith and with intent to defraud the plaintiff. We find no legal and factual basis upon which to hold
him liable on the contract either principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no solamente
obro con negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo con los arts. 1102,
1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la cantidad objeto
de la demanda." We think both the trial court and the Court of Appeals erred in law in so holding.
They have manifestly failed to distinguish a contractual from an extracontractual obligation, or an
obligation arising from contract from an obligation arising from culpa aquiliana. The fault and
negligence referred to in articles 1101-1104 of the Civil Code are those incidental to the fulfillment or
nonfullfillment of a contractual obligation; while the fault or negligence referred to in article 1902 is
the culpa aquiliana of the civil law, homologous but not identical to tort of the common law, which
gives rise to an obligation independently of any contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica,
38 Phil., 875, 887-890; Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact that the corporation,
acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the contract, did not
make Vazquez principally or even subsidiarily liable for such negligence. Since it was the
corporation's contract, its nonfulfillment, whether due to negligence or fault or to any other cause,
made the corporation and not its agent liable.
On the other hand if independently of the contract Vazquez by his fault or negligence cause damaged
to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then the
plaintiff's cause of action should be based on culpa aquiliana and not on the contract alleged in his
complaint herein; and Vazquez' liability would be principal and not merely subsidiary, as the Court of
Appeals has erroneously held. No such cause of action was alleged in the complaint or tried by
express or implied consent of the parties by virtue of section 4 of Rule 17. Hence the trial court had
no jurisdiction over the issue and could not adjudicate upon it (Reyes vs. Diaz, G.R. No. 48754.)
Consequently it was error for the Court of Appeals to remand the case to the trial court to try and
decide such issue.
It only remains for us to consider petitioner's second assignment of error referring to the lower courts'
refusal to entertain his counterclaim for damages against the respondent Borja arising from the
bringing of this action. The lower courts having sustained plaintiff's action. The finding of the Court
of Appeals that according to the preponderance of the evidence the defendant Vazquez celebrated the
contract not in his personal capacity but as acting president and manager of the corporation, does not
warrant his contention that the suit against him is malicious and tortious; and since we have to decide
defendant's counterclaim upon the facts found by the Court of Appeals, we find no sufficient basis
upon which to sustain said counterclaim. Indeed, we feel that a a matter of moral justice we ought to
state here that the indignant attitude adopted by the defendant towards the plaintiff for having brought
this action against him is in our estimation not wholly right. Altho from the legal point of view he was
not personally liable for the fulfillment of the contract entered into by him on behalf of the
corporation of which he was the acting president and manager, we think it was his moral duty towards
the party with whom he contracted in said capacity to see to it that the corporation represented by him
fulfilled the contract by delivering the palay it had sold, the price of which it had already received.
Recreant to such duty as a moral person, he has no legitimate cause for indignation. We feel that under
the circumstances he not only has no cause of action against the plaintiff for damages but is not even
entitled to costs.
The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed, without any
finding as to costs.
Yulo, C.J., Moran, Horrilleno and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Upon the facts of this case as expressly or impliedly admitted in the majority opinion, the plaintiff is
entitled to a judgment against the defendant. The latter, as acting president and manager of NatividadVazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent status of his
company, agreed to sell to the plaintiff 4,000 cavans of palay. Notwithstanding the receipt from the
plaintiff of the full purchase price, the defendant delivered only 2,488 cavans and failed and refused to
deliver the remaining 1,512 cavans and failed and refused to deliver the remaining 1,512 cavans and a
quantity of empty sacks, or their value. Such failure resulted, according to the Court of First Instance
of Manila and the Court of Appeals, from his fault or negligence.
It is true that the cause of action made out by the complaint is technically based on a contract between
the plaintiff and Natividad-Vazquez Sabani Development Co., Inc. which is not a party to this case.
Nevertheless, inasmuch as it was proven at the trial that the defendant was guilty of fault in that he
prevented the performance of the plaintiff's contract and also of negligence bordering on fraud which
cause damage to the plaintiff, the error of procedure should not be a hindrance to the rendition of a
decision in accordance with the evidence actually introduced by the parties, especially when in such a
situation we may order the necessary amendment of the pleadings, or even consider them
correspondingly amended.
As already stated, the corporation of which the defendant was acting president and manager was, at
the time he made the sale of the plaintiff, known to him to be insolvent. As a matter of fact, said
corporation was soon thereafter dissolved. There is admitted damage on the part of the plaintiff,
proven to have been inflicted by reason of the fault or negligence of the defendant. In the interest of
simple justice and to avoid multiplicity of suits I am therefore impelled to consider the present action
as one based on fault or negligence and to sentence the defendant accordingly. Otherwise, he would
be allowed to profit by his own wrong under the protective cover of the corporate existence of the
company he represented. It cannot be pretended that any advantage under the sale inured to the benefit
of Natividad-Vazquez Sabani Development Co., Inc. and not of the defendant personally, since the
latter undoubtedly owned a considerable part of its capital.
The Lawphil Project - Arellano Law Foundation

G.R. No. L-4811

July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.
FORTUNATO F. HALILI, defendant-appellant.
Taada, Pelaez & Teehankee for defendant and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the defendant,
the most important provisions of which are (1) that they shall organize a partnership for the bottling
and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the
defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to decide
matters of general policy regarding the business, while the plaintiff was to attend to the operation and
development of the bottling plant; (3) that the plaintiff was to secure the Mission Soft Drinks
franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was to receive 30 per

cent of the net profits of the business. The above agreement was arrived at after various conferences
and consultations by and between them, with the assistance of their respective attorneys. Prior to
entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los Angeles,
California, U.S.A., manufacturers of the bases and ingridients of the beverages bearing its name, that
he had interested a prominent financier (defendant herein) in the business, who was willing to invest
half a million dollars in the bottling and distribution of the said beverages, and requested, in order that
he may close the deal with him, that the right to bottle and distribute be granted him for a limited time
under the condition that it will finally be transferred to the corporation (Exhibit H). Pursuant for this
request, plaintiff was given "a thirty-days" option on exclusive bottling and distribution rights for the
Philippines" (Exhibit J). Formal negotiations between plaintiff and defendant began at a meeting on
November 27, 1947, at the Manila Hotel, with their lawyers attending. Before this meeting plaintiff's
lawyer had prepared the draft of the agreement, Exhibit II or OO, but this was not satisfactory because
a partnership, instead of a corporation, was desired. Defendant's lawyer prepared after the meeting his
own draft, Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.
The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the
United States without the agreement being not first signed. On that day plaintiff and defendant went to
the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into the
Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granted defendant the
exclusive right, license, and authority to produce, bottle, distribute, and sell Mision beverages in the
Philippines. The plaintiff and the defendant thereafter returned to the Philippines. Plaintiff reported
for duty in January, 1948, but operations were not begun until the first week of February, 1948. In
January plaintiff was given as advance, on account of profits, the sum of P2,000, besides the use of a
car; in February, 1948, also P2,000, and in March only P1,000. The car was withdrawn from plaintiff
on March 9, 1948.
When the bottling plant was already on operation, plaintiff demanded of defendant that the
partnership papers be executed. At first defendant executed himself, saying there was no hurry. Then
he promised to do so after the sales of the product had been increased to P50,000. As nothing definite
was forthcoming, after this condition was attained, and as defendant refused to give further
allowances to plaintiff, the latter caused his attorneys to take up the matter with the defendant with a
view to a possible settlement. as none could be arrived at, the present action was instituted.
In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the
profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his
answer defendant alleges by way of defense (1) that defendant's consent to the agreement, Exhibit A,
was secured by the representation of plaintiff that he was the owner, or was about to become owner of
an exclusive bottling franchise, which representation was false, and plaintiff did not secure the
franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his
undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so. He also presented a counter-claim for
P200,000 as damages. On these issues the parties went to trial, and thereafter the Court of First
Instance rendered judgment ordering defendant to render an accounting of the profits of the bottling
and distribution business, subject of the action, and to pay plaintiff 15 percent thereof. it held that the
execution of the contract of partnership could not be enforced upon the parties, but it also held that the
defense of fraud was not proved. Against this judgment both parties have appealed.
The most important question of fact to be determined is whether defendant had falsely represented
that he had an exclusive franchise to bottle Mission beverages, and whether this false representation
or fraud, if it existed, annuls the agreement to form the partnership. The trial court found that it is
improbable that defendant was never shown the letter, Exhibit J, granting plaintiff had; that the drafts
of the contract prior to the final one can not be considered for the purpose of determining the issue, as
they are presumed to have been already integrated into the final agreement; that fraud is never
presumed and must be proved; that the parties were represented by attorneys, and that if any party

thereto got the worse part of the bargain, this fact alone would not invalidate the agreement. On this
appeal the defendant, as appellant, insists that plaintiff did represent to the defendant that he had an
exclusive franchise, when as a matter of fact, at the time of its execution, he no longer had it as the
same had expired, and that, therefore, the consent of the defendant to the contract was vitiated by
fraud and it is, consequently, null and void.
Our study of the record and a consideration of all the surrounding circumstances lead us to believe
that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive grantee of a franchise, thus:
A. I don't recall any discussion about that matter. I took along with me the file of the office
with regards to this matter. I notice from the first draft of the document which I prepared
which calls for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is
represented as being the exclusive grantee of a franchise from the Mission Dry
Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila Hotel
conference on November 27th, expressly states that plaintiff had the exclusive franchise. Thus, the
first paragraph states:
Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry
Corporation San Francisco, California, for the bottling of Mission products and their sale to
the public throughout the Philippines; . . . .
3. The manager, upon the organization of the said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the principle of integration of jural acts. We find that the
principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter,
or modify the agreement, but to discover the intent of the parties thereto and the circumstances
surrounding the execution of the contract. The issue of fact is: Did plaintiff represent to defendant that
he had an exclusive franchise? Certainly, his acts or statements prior to the agreement are essential
and relevant to the determination of said issue. The act or statement of the plaintiff was not sought to
be introduced to change or alter the terms of the agreement, but to prove how he induced the
defendant to enter into it to prove the representations or inducements, or fraud, with which or by
which he secured the other party's consent thereto. These are expressly excluded from the parol
evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co.
vs. Export & Import Lumber Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false
representation are an incident to the creation of a jural act, not to its integration, and are not governed
by the rules on integration. Were parties prohibited from proving said representations or inducements,
on the ground that the agreement had already been entered into, it would be impossible to prove
misrepresentation or fraud. Furthermore, the parol evidence rule expressly allows the evidence to be
introduced when the validity of an instrument is put in issue by the pleadings (section 22, par. (a),
Rule 123, Rules of Court),as in this case.
That plaintiff did make the representation can also be easily gleaned from his own letters and his own
testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.
. . . He told me to come back to him when I was able to speak with authority so that we could
come to terms as far as he and I were concerned. That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited
period of time, during which I may consummate my plants. . . .
By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947.
(See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an instrument
with which to bargain with defendant and close the deal with him, he must have used his said option
for the above-indicated purpose, especially as it appears that he was able to secure, through its use,
what he wanted.
Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that
when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the
authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.) When
after the elections of 1949 plaintiff went to see the defendant (and at that time he had already the
option), he must have exultantly told defendant that he had the authority already. It is improbable and
incredible for him to have disclosed the fact that he had only an option to the exclusive franchise,
which was to last thirty days only, and still more improbable for him to have disclosed that, at the time
of the signing of the formal agreement, his option had already expired. Had he done so, he would
have destroyed all his bargaining power and authority, and in all probability lost the deal itself.
The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the
agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The
existence of this provision in the final agreement does not militate against plaintiff having represented
that he had the exclusive franchise; it rather strengthens belief that he did actually make the
representation. How could plaintiff assure defendant that he would get the franchise for the latter if he
had not actually obtained it for himself? Defendant would not have gone into the business unless the
franchise was raised in his name, or at least in the name of the partnership. Plaintiff assured defendant
he could get the franchise. Thus, in the draft prepared by defendant's attorney, Exhibit HH, the above
provision is inserted, with the difference that instead of securing the franchise for the defendant,
plaintiff was to secure it for the partnership. To show that the insertion of the above provision does not
eliminate the probability of plaintiff representing himself as the exclusive grantee of the franchise, the
final agreement contains in its third paragraph the following:
. . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise
...
and in paragraph 11 it also expressly states:
1. In the event of the dissolution or termination of the partnership, . . . the franchise from
Mission Dry Corporation shall be reassigned to the manager.
These statements confirm the conclusion that defendant believed, or was made to believe, that
plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the
franchise was to be transferred to the name of the partnership, and that, upon its dissolution or
termination, the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have
the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits
to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made
him believe that he (plaintiff) was the exclusive grantee of the franchise.
The learned trial judge reasons in his decision that the assistance of counsel in the making of the
contract made fraud improbable. Not necessarily, because the alleged representation took place before
the conferences were had, in other words, plaintiff had already represented to defendant, and the latter
had already believed in, the existence of plaintiff's exclusive franchise before the formal negotiations,

and they were assisted by their lawyers only when said formal negotiations actually took place.
Furthermore, plaintiff's attorney testified that plaintiff had said that he had the exclusive franchise;
and defendant's lawyer testified that plaintiff explained to him, upon being asked for the franchise,
that he had left the papers evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the
holder of the exclusive franchise. The defendant was made to believe, and he actually believed, that
plaintiff had the exclusive franchise. Defendant would not perhaps have gone to California and
incurred expenses for the trip, unless he believed that plaintiff did have that exclusive privilege, and
that the latter would be able to get the same from the Mission Dry Corporation itself. Plaintiff knew
what defendant believed about his (plaintiff's) exclusive franchise, as he induced him to that belief,
and he may not be allowed to deny that defendant was induced by that belief. (IX Wigmore, sec.
2423; Sec. 65, Rule 123, Rules of Court.)
We now come to the legal aspect of the false representation. Does it amount to a fraud that would
vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or
gradations, from the innocent praises of a salesman about the excellence of his wares to those
malicious machinations and representations that the law punishes as a crime. In consequence, article
1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may
be a ground for the annulment of a contract, and the incidental deceit, which only renders the party
who employs it liable for damages. This Court had held that in order that fraud may vitiate consent, it
must be the causal (dolo causante), not merely the incidental (dolo causante), inducement to the
making of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record
abounds with circumstances indicative that the fact that the principal consideration, the main cause
that induced defendant to enter into the partnership agreement with plaintiff, was the ability of
plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership.
The original draft prepared by defendant's counsel was to the effect that plaintiff obligated himself to
secure a franchise for the defendant. Correction appears in this same original draft, but the change is
made not as to the said obligation but as to the grantee. In the corrected draft the word
"capitalist"(grantee) is changed to "partnership." The contract in its final form retains the substituted
term "partnership." The defendant was, therefore, led to the belief that plaintiff had the exclusive
franchise, but that the same was to be secured for or transferred to the partnership. The plaintiff no
longer had the exclusive franchise, or the option thereto, at the time the contract was perfected. But
while he had already lost his option thereto (when the contract was entered into), the principal
obligation that he assumed or undertook was to secure said franchise for the partnership, as the bottler
and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false
representation, this was not the causal consideration, or the principal inducement, that led plaintiff to
enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft
prepared by plaintiff's lawyer, Exhibit II, the following provision exists:
3. That the MANAGER, upon the organization of the said corporation, shall forthwith
transfer to the said corporation his exclusive right to bottle Mission products and to sell them
throughout the Philippines. As a consideration for such transfer, the CAPITALIST shall
transfer to the Manager fully paid non assessable shares of the said corporation . . . twentyfive per centum of the capital stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he never had experience in the production or
distribution of beverages. As a matter of fact, when the bottling plant being built, all that he suggested
was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise did
not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of
30 per cent of the net profits; in other words, by pretending that he had the exclusive franchise and
promising to transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big
slice in the net profits. This is the dolo incidente defined in article 1270 of the Spanish Civil Code,
because it was used to get the other party's consent to a big share in the profits, an incidental matter in
the agreement.
El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para
arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun extremo
o accidente de esta, dando lugar tan solo a una accion para reclamar indemnizacion de
perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the agreement may not be declared null and void, the question
that next comes before us is, May the agreement be carried out or executed? We find no merit in the
claim of plaintiff that the partnership was already a fait accompli from the time of the operation of the
plant, as it is evident from the very language of the agreement that the parties intended that the
execution of the agreement to form a partnership was to be carried out at a later date. They expressly
agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from the time
that the franchise from the Mission Dry Corporation was obtained in California, plaintiff himself had
been demanding that defendant comply with the agreement. And plaintiff's present action seeks the
enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with their intention and
incompatible with his own conduct and suit.
As the trial court correctly concluded, the defendant may not be compelled against his will to carry
out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant
has an obligation to do, not to give. The law recognizes the individual's freedom or liberty to do an act
he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a
very personal act (acto personalismo), of which courts may not compel compliance, as it is considered
an act of violence to do so.
Efectos de las obligaciones consistentes en hechos personalismo.Tratamos de la ejecucion
de las obligaciones de hacer en el solocaso de su incumplimiento por parte del deudor, ya
sean los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el
complimiento espontaneo de las mismas esta regido por los preceptos relativos al pago, y en
nada les afectan las disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.
Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el
principio romano nemo potest precise cogi ad factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que perciben la posibilidad de la destruccion deeste
principio, aaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque
esto constituiria una violencia, y noes la violenciamodo propio de cumplir las obligaciones
(Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar
por la violencia seria infrigir la libertad eimponer una especie de esclavitud.
xxx

xxx

xxx

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza

fisica, no ya precisamente porque seconstituya de este modo una especie de esclavitud, segun
el dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el caracter

personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna razon no se
realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza publica, mediante
coaccion sobre las personas, en las relaciones puramente particulares; porque la evolucion de
las ideas ha ido poniendo masde relieve cada dia el respeto a la personalidad humana, y nose
admite bien la violencia sobre el individuo la cual tiene caracter visiblemente penal, sino por
motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia
cuando setrata de las obligaciones que hemos llamado ex lege, que afectanal orden social y a
la entidad de Estado, y aparecen impuestas sinconsideracion a las conveniencias particulares,
y sin que por estemotivo puedan tampoco ser modificadas; pero no debe serlo cuandola
obligacion reviste un interes puramente particular, como sucedeen las contractuales, y cuando,
por consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo
dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431432.)
The last question for us to decide is that of damages,damages that plaintiff is entitled to receive
because of defendant's refusal to form the partnership, and damages that defendant is also entitled to
collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under
article 1106 of the Spanish Civil Code the measure of damages is the actual loss suffered and the
profits reasonably expected to be received, embraced in the terms dao emergente and lucro cesante.
Plaintiff is entitled under the terms of the agreement to 30 per cent of the net profits of the business.
Against this amount of damages, we must set off the damage defendant suffered by plaintiff's
misrepresentation that he had obtained a very high percentage of share in the profits. We can do no
better than follow the appraisal that the parties themselves had adopted.
When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he
pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction was
to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction defendant appears
to have readily given his assent. It was under this understanding, which amounts to a virtual
modification of the contract, that the bottling plant was established and plaintiff worked as Manager
for the first three months. If the contract may not be considered modified as to plaintiff's share in the
profits, by the decision of defendant to reduce the same to one-half and the assent thereto of plaintiff,
then we may consider the said amount as a fair estimate of the damages plaintiff is entitled to under
the principle enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176.
Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto amount to an admission
on the part of each of the reasonableness of this amount as plaintiff's share. This same amount was
fixed by the trial court. The agreement contains the stipulation that upon the termination of the
partnership, defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment
of the trial court does not fix the period within which these damages shall be paid to plaintiff. In view
of paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall
continue to be paid while defendant uses the franchise from the Mission Dry Corporation.
With the modification above indicated, the judgment appealed from is hereby affirmed. Without costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.
The Lawphil Project - Arellano Law Foundation

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.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed
by the contract, entitled 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 Decision2 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 petitioner's motion for reconsideration.4
The dispositive portion of the assailed Decision reads:
"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and
the Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. 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 petitioners] is David's 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. 1112, 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

xxx

xxx

'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 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 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).'
'x x x

xxx

xxx

'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. Velardo, 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 it (the) same had never been executed or entered into.
'3. That I am executing the 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 defendant's 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 BPI's approval of an application for assumption
of mortgage by plaintiffs. Pending BPI's 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, 17and 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 re- lease 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 latter's 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 petitioner's 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 Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's 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 P 1.8 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 of Pl.8 million, and the balance of Pl.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 Pl.8
million. This would mean that Velarde had to make payments to BPI under the [D]eed of
[R]eal [E]state [M]ortgage 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 Velarde's 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 Velarde's non-payment of the balance of the purchase price. As borne out by the
evidence, Velarde had to pay in full in case of BPI's 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 notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latter's failure to comply with their
obligation. The rescission was justified in view of Velarde's 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 nonfulfillment 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 appellee's 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 Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner 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 bank's 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
things, 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 obligor's 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 respondent's 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 buyer's 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 1,000 which was
actually paid.
In Tan, the alleged breach was private respondent's 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.1wphi1.nt
Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.

G.R. No. 23769

September 16, 1925

SONG FO & COMPANY, plaintiff-appellee,

vs.
HAWAIIAN PHILIPPINE CO., defendant-appellant.

Hilado and Hilado, Ross, Lawrence and Selph and Antonio T. Carrascoso, Jr., for appellant.
Arroyo, Gurrea and Muller for appellee.
MALCOLM, J.:
In the court of First Instance of Iloilo, Song Fo & Company, plaintiff, presented a complaint with two
causes of action for breach of contract against the Hawaiian-Philippine Co., defendant, in which
judgment was asked for P70,369.50, with legal interest, and costs. In an amended answer and crosscomplaint, the defendant set up the special defense that since the plaintiff had defaulted in the
payment for the molasses delivered to it by the defendant under the contract between the parties, the
latter was compelled to cancel and rescind the said contract. The case was submitted for decision on a
stipulation of facts and the exhibits therein mentioned. The judgment of the trial court condemned the
defendant to pay to the plaintiff a total of P35,317.93, with legal interest from the date of the
presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the defendant only has appealed. In this court it has
made the following assignment of errors: "I. The lower court erred in finding that appellant had
agreed to sell to the appellee 400,000, and not only 300,000, gallons of molasses. II. The lower court
erred in finding that the appellant rescinded without sufficient cause the contract for the sale of
molasses executed by it and the appellee. III. The lower court erred in rendering judgment in favor of
the appellee and not in favor of the appellant in accordance with the prayer of its answer and crosscomplaint. IV. The lower court erred in denying appellant's motion for a new trial." The specified
errors raise three questions which we will consider in the order suggested by the appellant.
1. Did the defendant agree to sell to the plaintiff 400,000 gallons of molasses or 300,000
gallons of molasses? The trial court found the former amount to be correct. The appellant
contends that the smaller amount was the basis of the agreement.
The contract of the parties is in writing. It is found principally in the documents, Exhibits F
and G. The First mentioned exhibit is a letter addressed by the administrator of the HawaiianPhilippine Co. to Song Fo & Company on December 13, 1922. It reads:

SILAY, OCC. NEGROS, P.I.

December 13, 1922

Messrs. SONG FO AND CO.

Iloilo, Iloilo.
DEAR SIRS: Confirming our conversation we had today with your Mr. Song Fo, who visited
this Central, we wish to state as follows:
He agreed to the delivery of 300,000 gallons of molasses at the same price as last year under
the same condition, and the same to start after the completion of our grinding season. He
requested if possible to let you have molasses during January, February and March or in other
words, while we are grinding, and we agreed with him that we would to the best of our ability,
altho we are somewhat handicapped. But we believe we can let you have 25,000 gallons
during each of the milling months, altho it interfere with the shipping of our own and planters
sugars to Iloilo. Mr. Song Fo also asked if we could supply him with another 100,000 gallons
of molasses, and we stated we believe that this is possible and will do our best to let you have
these extra 100,000 gallons during the next year the same to be taken by you before
November 1st, 1923, along with the 300,000, making 400,000 gallons in all.

Regarding the payment for our molasses, Mr. Song Fo gave us to understand that you would
pay us at the end of each month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your answer regarding this matter, we remain.
Yours very truly,

HAWAIIAN-PHILIPPINE COMPANY
BY R. C. PITCAIRN
Administrator.

Exhibit G is the answer of the manager of Song Fo & Company to the Hawaiian-Philippine Co. on
December 16, 1922. This letter reads:

December 16th, 1922.

Messrs. HAWAIIAN-PHILIPPINE CO.,

Silay, Neg. Occ., P.I.
DEAR SIRS: We are in receipt of your favours dated the 9th and the 13th inst. and understood
all their contents.
In connection to yours of the 13th inst. we regret to hear that you mentioned Mr. Song Fo the
one who visited your Central, but it was not for he was Mr. Song Heng, the representative and
the manager of Messrs. Song Fo & Co.
With reference to the contents of your letter dated the 13th inst. we confirm all the
arrangements you have stated and in order to make the contract clear, we hereby quote below
our old contract as amended, as per our new arrangements.
(a) Price, at 2 cents per gallon delivered at the central.
(b) All handling charges and expenses at the central and at the dock at Mambaguid for our
account.
(c) For services of one locomotive and flat cars necessary for our six tanks at the rate of P48
for the round trip dock to central and central to dock. This service to be restricted to one trip
for the six tanks.
Yours very truly,

SONG FO & COMPANY

By __________________________
Manager.

We agree with appellant that the above quoted correspondence is susceptible of but one interpretation.
The Hawaiian-Philippine Co. agreed to deliver to Song Fo & Company 300,000 gallons of molasses.
The Hawaiian-Philippine Co. also believed it possible to accommodate Song Fo & Company by
supplying the latter company with an extra 100,000 gallons. But the language used with reference to
the additional 100,000 gallons was not a definite promise. Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows anything, it is simply that the defendant did not
consider itself obliged to deliver to the plaintiff molasses in any amount. On the other hand, Exhibit
A, a letter written by the manager of Song Fo & Company on October 17, 1922, expressly mentions
an understanding between the parties of a contract for P300,000 gallons of molasses.
We sustain appellant's point of view on the first question and rule that the contract between the parties
provided for the delivery by the Hawaiian-Philippine Co. to song Fo & Company of 300,000 gallons
of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale made with Song Fo &
Company? The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding the payment for our molasses, Mr. Song Fo
(Mr. Song Heng) gave us to understand that you would pay us at the end of each month for molasses
delivered to you." In Exhibit G, we find Song Fo & Company stating that they understand the
contents of Exhibit F, and that they confirm all the arrangements you have stated, and in order to
make the contract clear, we hereby quote below our old contract as amended, as per our new
arrangements. (a) Price, at 2 cents per gallon delivered at the central." In connection with the portion
of the contract having reference to the payment for the molasses, the parties have agree on a table
showing the date of delivery of the molasses, the amount and date thereof, the date of receipt of
account by plaintiff, and date of payment. The table mentioned is as follows:

Date of
delivery

Account and date thereof

Date of
receipt of
account by
plaintiff

Date of
payment

1923

1923

1922

Dec. 18

P206.16

Dec. 26/22

Jan. 5

Feb. 20

Dec. 29

206.16

Jan. 3/23

do

Do

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

1923

Jan. 5

Feb. 12

206.16

Mar. 12/23

do

Do

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

Some doubt has risen as to when Song Fo & Company was expected to make payments for the
molasses delivered. Exhibit F speaks of payments "at the end of each month." Exhibit G is silent on
the point. Exhibit M, a letter of March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the
Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on presentation of bills for each
delivery." Exhibit O, another letter from Warner, Barnes & Co., Ltd. to Song Fo & Company dated
April 2, 1923, is of a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-Philippine
Co. to Song Fo & Company on April 2, 1923, by which the Hawaiian-Philippine Co. gave notice of
the termination of the contract, gave as the reason for the rescission, the breach by Song Fo &
Company of this condition: "You will recall that under the arrangements made for taking our
molasses, you were to meet our accounts upon presentation and at each delivery." Not far removed
from this statement, is the allegation of plaintiff in its complaint that "plaintiff agreed to pay
defendant, at the end of each month upon presentation accounts."
Resolving such ambiguity as exists and having in mind ordinary business practice, a reasonable
deduction is that Song Fo & Company was to pay the Hawaiian-Philippine Co. upon presentation of
accounts at the end of each month. Under this hypothesis, Song Fo & Company should have paid for
the molasses delivered in December, 1922, and for which accounts were received by it on January 5,
1923, not later than January 31 of that year. Instead, payment was not made until February 20, 1923.
All the rest of the molasses was paid for either on time or ahead of time.
The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the
contract should be treated as of the essence of the contract. Theoretically, agreeable to certain
conditions which could easily be imagined, the Hawaiian-Philippine Co. would have had the right to
rescind the contract because of the breach of Song Fo & Company. But actually, there is here present

no outstanding fact which would legally sanction the rescission of the contract by the HawaiianPhilippine Co.
The general rule is that rescission will not be permitted for a slight or casual breach of the contract,
but only for such breaches as are so substantial and fundamental as to defeat the object of the parties
in making the agreement. A delay in payment for a small quantity of molasses for some twenty days is
not such a violation of an essential condition of the contract was warrants rescission for nonperformance. Not only this, but the Hawaiian-Philippine Co. waived this condition when it arose by
accepting payment of the overdue accounts and continuing with the contract. Thereafter, Song Fo &
Company was not in default in payment so that the Hawaiian-Philippine co. had in reality no excuse
for writing its letter of April 2, 1923, cancelling the contract. (Warner, Barnes & Co. vs. Inza [1922],
43 Phil., 505.)
We rule that the appellant had no legal right to rescind the contract of sale because of the failure of
Song Fo & Company to pay for the molasses within the time agreed upon by the parties. We sustain
the finding of the trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract
imprudently breached by the Hawaiian-Philippine Co., what is the measure of damages? We again
turn to the facts as agreed upon by the parties.
The first cause of action of the plaintiff is based on the greater expense to which it was put in being
compelled to secure molasses from other sources. Three hundred thousand gallons of molasses was
the total of the agreement, as we have seen. As conceded by the plaintiff, 55,006 gallons of molasses
were delivered by the defendant to the plaintiff before the breach. This leaves 244,994 gallons of
molasses undelivered which the plaintiff had to purchase in the open market. As expressly conceded
by the plaintiff at page 25 of its brief, 100,000 gallons of molasses were secured from the Central
North Negros Sugar Co., Inc., at two centavos a gallon. As this is the same price specified in the
contract between the plaintiff and the defendant, the plaintiff accordingly suffered no material loss in
having to make this purchase. So 244,994 gallons minus the 100,000 gallons just mentioned leaves as
a result 144,994 gallons. As to this amount, the plaintiff admits that it could have secured it and more
from the Central Victorias Milling Company, at three and one-half centavos per gallon. In other
words, the plaintiff had to pay the Central Victorias Milling company one and one-half centavos a
gallon more for the molasses than it would have had to pay the Hawaiian-Philippine Co. Translated
into pesos and centavos, this meant a loss to the plaintiff of approximately P2,174.91. As the
conditions existing at the central of the Hawaiian-Philippine Co. may have been different than those
found at the Central North Negros Sugar Co., Inc., and the Central Victorias Milling Company, and as
not alone through the delay but through expenses of transportation and incidental expenses, the
plaintiff may have been put to greater cost in making the purchase of the molasses in the open market,
we would concede under the first cause of action in round figures P3,000.
The second cause of action relates to lost profits on account of the breach of the contract. The only
evidence in the record on this question is the stipulation of counsel to the effect that had Mr. Song
Heng, the manager of Song Fo & Company, been called as a witness, he would have testified that the
plaintiff would have realized a profit of P14,948.43, if the contract of December 13, 1922, had been
fulfilled by the defendant. Indisputably, this statement falls far short of presenting proof on which to
make a finding as to damages.
In the first place, the testimony which Mr. Song Heng would have given undoubtedly would follow
the same line of thought as found in the decision of the trial court, which we have found to be
unsustainable. In the second place, had Mr. Song Heng taken the witness-stand and made the
statement attributed to him, it would have been insufficient proof of the allegations of the complaint,
and the fact that it is a part of the stipulation by counsel does not change this result. And lastly, the
testimony of the witness Song Heng, it we may dignify it as such, is a mere conclusion, not a proven

fact. As to what items up the more than P14,000 of alleged lost profits, whether loss of sales or loss of
customers, or what not, we have no means of knowing.
We rule that the plaintiff is entitled to recover damages from the defendant for breach of contract on
the first cause of action in the amount of P3,000 and on the second cause of action in no amount.
Appellant's assignments of error are accordingly found to be well taken in part and not well taken in
part.
Agreeable to the foregoing, the judgment appealed from shall be modified and the plaintiff shall have
and recover from the defendant the sum of P3,000, with legal interest form October 2, 1923, until
payment. Without special finding as to costs in either instance, it is so ordered.
Avancea, C.J., Johnson, Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
The Lawphil Project - Arellano Law Foundation

G.R. No. L-47362

December 19, 1940