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G.R. No. L-22590 March 20, 1987 contest for the junior lightweight championship of the
SOLOMON BOYSAW and ALFREDO M. YULO,
JR., plaintiffs-appellants,
vs.
INTERPHIL PROMOTIONS, INC., LOPE
SARREAL, SR., and MANUEL NIETO,
JR., defendants-appellees.
Felipe Torres and Associates for plaintiffs-appellants.
V.E. Del Rosario & Associates for defendant-appellee
M. Nieto, Jr.
A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee
Interphil Promotions, Inc.
RESOLUTION
FERNAN, J.:
This is an appeal interposed by Solomon Boysaw and
Alfredo Yulo, Jr., from the decision dated July 25, 1963
and other rulings and orders of the then Court of First
Instance [CFI] of Rizal, Quezon City, Branch V in Civil
Case No. Q-5063, entitled "Solomon Boysaw and
Alfredo M. Yulo, Jr., Plaintiffs versus Interphil
Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto,
Jr., Defendants," which, among others, ordered them to
jointly and severally pay defendant-appellee Manuel
Nieto, Jr., the total sum of P25,000.00, broken down into
P20,000.00 as moral damages and P5,000.00 as
attorney's fees; the defendants-appellees Interphil
Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as
unrealized profits, P33,369.72 as actual damages and
P5,000.00 as attorney's fees; and defendant-appellee
Lope Sarreal, Sr., the additional amount of P20,000.00
as moral damages aside from costs.
The antecedent facts of the case are as follows:
On May 1, 1961, Solomon Boysaw and his then
Manager, Willie Ketchum, signed with Interphil
Promotions, Inc. represented by Lope Sarreal, Sr., a
contract to engage Gabriel "Flash" Elorde in a boxing
world.
It was stipulated that the bout would be held at the Rizal
Memorial Stadium in Manila on September 30, 1961 or
not later than thirty [30] days thereafter should a
postponement be mutually agreed upon, and that
Boysaw would not, prior to the date of the boxing
contest, engage in any other such contest without the
written consent of Interphil Promotions, Inc.
On May 3, 1961, a supplemental agreement on certain
details not covered by the principal contract was entered
into by Ketchum and Interphil. Thereafter, Interphil
signed Gabriel "Flash" Elorde to a similar agreement,
that is, to engage Boysaw in a title fight at the Rizal
Memorial Stadium on September 30, 1961.
On June 19, 1961, Boysaw fought and defeated Louis
Avila in a ten-round non-title bout held in Las Vegas,
Nevada, U.S.A. [pp. 26-27, t.s.n., session of March 14,
1963].
On July 2, 1961, Ketchum on his own behalf and on
behalf of his associate Frank Ruskay, assigned to J.
Amado Araneta the managerial rights over Solomon
Boysaw.
Presumably in preparation for his engagement with
Interphil, Solomon Boysaw arrived in the Philippines on
July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned to
Alfredo J. Yulo, Jr. the managerial rights over Boysaw
that he earlier acquired from Ketchum and Ruskay. The
next day, September 2, 1961, Boysaw wrote Lope
Sarreal, Sr. informing him of his arrival and presence in
the Philippines.
On September 5, 1961, Alfredo Yulo, Jr. wrote to
Sarreal informing him of his acquisition of the
managerial rights over Boysaw and indicating his and
Boysaw's readiness to comply with the boxing contract
of May 1, 1961. On the same date, on behalf of Interphil
Sarreal wrote a letter to the Games and Amusement
Board [GAB] expressing concern over reports that there
had been a switch of managers in the case of Boysaw, of
which he had not been formally notified, and requesting

that Boysaw be called to an inquiry to clarify the
situation.
The GAB called a series of conferences of the parties
concerned culminating in the issuance of its decision to
schedule the Elorde-Boysaw fight for November 4,
1961. The USA National Boxing Association which has
supervisory control of all world title fights approved the
date set by the GAB
Yulo, Jr. refused to accept the change in the fight date,
maintaining his refusal even after Sarreal on September
26, 1961, offered to advance the fight date to October
28, 1961 which was within the 30-day period of
allowable postponements provided in the principal
boxing contract of May 1, 1961.
Early in October 1961, Yulo, Jr. exchanged
communications with one Mamerto Besa, a local boxing
promoter, for a possible promotion of the projected
Elorde-Boysaw title bout. In one of such
communications dated October 6, 1961, Yulo informed
Besa that he was willing to approve the fight date of
November 4,1961 provided the same was promoted by
Besa.
While an Elorde-Boysaw fight was eventually staged,
the fight contemplated in the May 1, 1961 boxing
contract never materialized.
As a result of the foregoing occurrences, on October 12,
1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr.
and Manuel Nieto, Jr. in the CFI of Rizal [Quezon City
Branch] for damages allegedly occasioned by the refusal
of Interphil and Sarreal, aided and abetted by Nieto, Jr.,
then GAB Chairman, to honor their commitments under
the boxing contract of May 1,1961.
On the first scheduled date of trial, plaintiff moved to
disqualify Solicitor Jorge Coquia of the Solicitor
General's Office and Atty. Romeo Edu of the GAB
Legal Department from appearing for defendant Nieto,
Jr. on the ground that the latter had been sued in his
personal capacity and, therefore, was not entitled to be
represented by government counsel. The motion was
denied insofar as Solicitor General Coquia was
concerned, but was granted as regards the
disqualification of Atty. Edu.
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The case dragged into 1963 when sometime in the early
part of said year, plaintiff Boysaw left the country
without informing the court and, as alleged, his counsel.
He was still abroad when, on May 13, 1963, he was
scheduled to take the witness stand. Thus, the lower
court reset the trial for June 20, 1963. Since Boysaw was
still abroad on the later date, another postponement was
granted by the lower court for July 23, 1963 upon
assurance of Boysaw's counsel that should Boysaw fail
to appear on said date, plaintiff's case would be deemed
submitted on the evidence thus far presented.
On or about July 16, 1963, plaintiffs represented by a
new counsel, filed an urgent motion for postponement of
the July 23, 1963 trial, pleading anew Boysaw's inability
to return to the country on time. The motion was denied;
so was the motion for reconsideration filed by plaintiffs
on July 22, 1963.
The trial proceeded as scheduled on July 23, 1963 with
plaintiff's case being deemed submitted after the
plaintiffs declined to submit documentary evidence
when they had no other witnesses to present. When
defendant's counsel was about to present their case,
plaintiff's counsel after asking the court's permission,
took no further part in the proceedings.
After the lower court rendered its judgment dismissing
the plaintiffs' complaint, the plaintiffs moved for a new
trial. The motion was denied, hence, this appeal taken
directly to this Court by reason of the amount involved.
From the errors assigned by the plaintiffs, as having
been committed by the lower court, the following
principal issues can be deduced:
1. Whether or not there was a violation of the fight
contract of May 1, 1961; and if there was, who was
guilty of such violation.
2. Whether or not there was legal ground for the
postponement of the fight date from September 1, 1961,
as stipulated in the May 1, 1961 boxing contract, to
November 4,1961,
3. Whether or not the lower court erred in the refusing a
postponement of the July 23, 1963 trial.

4. Whether or not the lower court erred in denying the
appellant's motion for a new trial.
5. Whether or not the lower court, on the basis of the
evidence adduced, erred in awarding the appellees
damages of the character and amount stated in the
decision.
On the issue pertaining to the violation of the May 1,
1961 fight contract, the evidence established that the
contract was violated by appellant Boysaw himself
when, without the approval or consent of Interphil, he
fought Louis Avila on June 19, 1961 in Las Vegas
Nevada. Appellant Yulo admitted this fact during the
trial. [pp. 26-27, t.s.n., March 14, 1963].
While the contract imposed no penalty for such
violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law on
contracts recognizes the principle that actionable injury
inheres in every contractual breach. Thus:
Those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in
any manner contravene the terms thereof, are liable for
damages. [Art. 1170, Civil Code].
Also:
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. [Part 1, Art.
1191, Civil Code].
There is no doubt that the contract in question gave rise
to reciprocal obligations. "Reciprocal obligations are
those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such
that the obligation of one is dependent upon the
obligation of the other. They are to be performed
simultaneously, so that the performance of one is
conditioned upon the simultaneous fulfillment of the
other" [Tolentino, Civil Code of the Philippines, Vol. IV,
p. 175.1
The power to rescind is given to the injured party.
"Where the plaintiff is the party who did not perform the
undertaking which he was bound by the terms of the
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agreement to perform 4 he is not entitled to insist upon
the performance of the contract by the defendant, or
recover damages by reason of his own breach " [Seva
vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied].
Another violation of the contract in question was the
assignment and transfer, first to J. Amado Araneta, and
subsequently, to appellant Yulo, Jr., of the managerial
rights over Boysaw without the knowledge or consent of
Interphil.
The assignments, from Ketchum to Araneta, and from
Araneta to Yulo, were in fact novations of the original
contract which, to be valid, should have been consented
to by Interphil.
Novation which consists in substituting a new debtor in
the place of the original one, may be made even without
the knowledge or against the will of the latter, but not
without the consent of the creditor.[Art. 1293, Civil
Code, emphasis supplied].
That appellant Yulo, Jr., through a letter, advised
Interphil on September 5, 1961 of his acquisition of the
managerial rights over Boysaw cannot change the fact
that such acquisition, and the prior acquisition of such
rights by Araneta were done without the consent of
Interphil. There is no showing that Interphil, upon
receipt of Yulo's letter, acceded to the "substitution" by
Yulo of the original principal obligor, who is Ketchum.
The logical presumption can only be that, with
Interphil's letter to the GAB expressing concern over
reported managerial changes and requesting for
clarification on the matter, the appellees were not
reliably informed of the changes of managers. Not being
reliably informed, appellees cannot be deemed to have
consented to such changes.
Under the law when a contract is unlawfully novated by
an applicable and unilateral substitution of the obligor by
another, the aggrieved creditor is not bound to deal with
the substitute.
The consent of the creditor to the change of debtors,
whether in expromision or delegacion is an,
indispensable requirement . . . Substitution of one debtor
for another may delay or prevent the fulfillment of the
obligation by reason of the inability or insolvency of the

new debtor, hence, the creditor should agree to accept
the substitution in order that it may be binding on him.
Thus, in a contract where x is the creditor and y is the
debtor, if y enters into a contract with z, under which he
transfers to z all his rights under the first contract,
together with the obligations thereunder, but such
transfer is not consented to or approved by x, there is no
novation. X can still bring his action against y for
performance of their contract or damages in case of
breach. [Tolentino, Civil Code of the Philippines, Vol.
IV, p. 3611.
From the evidence, it is clear that the appellees, instead
of availing themselves of the options given to them by
law of rescission or refusal to recognize the substitute
obligor Yulo, really wanted to postpone the fight date
owing to an injury that Elorde sustained in a recent bout.
That the appellees had the justification to renegotiate the
original contract, particularly the fight date is undeniable
from the facts aforestated. Under the circumstances, the
appellees' desire to postpone the fight date could neither
be unlawful nor unreasonable.
We uphold the appellees' contention that since all the
rights on the matter rested with the appellees, and
appellants' claims, if any, to the enforcement of the
contract hung entirely upon the former's pleasure and
sufferance, the GAB did not act arbitrarily in acceding to
the appellee's request to reset the fight date to November
4, 1961. It must be noted that appellant Yulo had earlier
agreed to abide by the GAB ruling.
In a show of accommodation, the appellees offered to
advance the November 4, 1961 fight to October 28, 1961
just to place it within the 30- day limit of allowable
postponements stipulated in the original boxing contract.
The refusal of appellants to accept a postponement
without any other reason but the implementation of the
terms of the original boxing contract entirely overlooks
the fact that by virtue of the violations they have
committed of the terms thereof, they have forfeited any
right to its enforcement.
On the validity of the fight postponement, the violations
of the terms of the original contract by appellants vested
the appellees with the right to rescind and repudiate such
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contract altogether. That they sought to seek an
adjustment of one particular covenant of the contract, is
under the circumstances, within the appellee's rights.
While the appellants concede to the GAB's authority to
regulate boxing contests, including the setting of dates
thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is their
contention that only Manuel Nieto, Jr. made the decision
for postponement, thereby arrogating to himself the
prerogatives of the whole GAB Board.
The records do not support appellants' contention.
Appellant Yulo himself admitted that it was the GAB
Board that set the questioned fight date. [pp. 32-42,
t.s.n., Jan. 17, 1963]. Also, it must be stated that one of
the strongest presumptions of law is that official duty
has been regularly performed. In this case, the absence
of evidence to the contrary, warrants the full application
of said presumption that the decision to set the Elorde-
Boysaw fight on November 4, 1961 was a GAB Board
decision and not of Manuel Nieto, Jr. alone.
Anent the lower court's refusal to postpone the July 23,
1963 trial, suffice it to say that the same issue had been
raised before Us by appellants in a petition for certiorari
and prohibition docketed as G.R. No. L-21506. The
dismissal by the Court of said petition had laid this issue
to rest, and appellants cannot now hope to resurrect the
said issue in this appeal.
On the denial of appellant's motion for a new trial, we
find that the lower court did not commit any reversible
error.
The alleged newly discovered evidence, upon which the
motion for new trial was made to rest, consists merely of
clearances which Boysaw secured from the clerk of
court prior to his departure for abroad. Such evidence
cannot alter the result of the case even if admitted for
they can only prove that Boysaw did not leave the
country without notice to the court or his counsel.
The argument of appellants is that if the clearances were
admitted to support the motion for a new trial, the lower
court would have allowed the postponement of the trial,
it being convinced that Boysaw did not leave without
notice to the court or to his counsel. Boysaw's testimony

upon his return would, then, have altered the results of
the case.
We find the argument without merit because it confuses
the evidence of the clearances and the testimony of
Boysaw. We uphold the lower court's ruling that:
The said documents [clearances] are not evidence to
offset the evidence adduced during the hearing of the
defendants. In fact, the clearances are not even material
to the issues raised. It is the opinion of the Court that the
'newly discovered evidence' contemplated in Rule 37 of
the Rules of Court, is such kind of evidence which has
reference to the merits of the case, of such a nature and
kind, that if it were presented, it would alter the result of
the judgment. As admitted by the counsel in their
pleadings, such clearances might have impelled the
Court to grant the postponement prayed for by them had
they been presented on time. The question of the denial
of the postponement sought for by counsel for plaintiffs
is a moot issue . . . The denial of the petition for
certiorari and prohibition filed by them, had he effect of
sustaining such ruling of the court . . . [pp. 296-297,
Record on Appeal].
The testimony of Boysaw cannot be considered newly
discovered evidence for as appellees rightly contend,
such evidence has been in existence waiting only to be
elicited from him by questioning.
We cite with approval appellee's contention that "the two
qualities that ought to concur or dwell on each and every
of evidence that is invoked as a ground for new trial in
order to warrant the reopening . . . inhered separately on
two unrelated species of proof" which "creates a legal
monstrosity that deserves no recognition."
On the issue pertaining to the award of excessive
damages, it must be noted that because the appellants
wilfully refused to participate in the final hearing and
refused to present documentary evidence after they no
longer had witnesses to present, they, by their own acts
prevented themselves from objecting to or presenting
proof contrary to those adduced for the appellees.
On the actual damages awarded to appellees, the
appellants contend that a conclusion or finding based
upon the uncorroborated testimony of a lone witness
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cannot be sufficient. We hold that in civil cases, there is
no rule requiring more than one witness or declaring that
the testimony of a single witness will not suffice to
establish facts, especially where such testimony has not
been contradicted or rebutted. Thus, we find no reason to
disturb the award of P250,000.00 as and for unrealized
profits to the appellees.
On the award of actual damages to Interphil and Sarreal,
the records bear sufficient evidence presented by
appellees of actual damages which were neither objected
to nor rebutted by appellants, again because they
adamantly refused to participate in the court
proceedings.
The award of attorney's fees in the amount of P5,000.00
in favor of defendant-appellee Manuel Nieto, Jr. and
another P5,000.00 in favor of defendants-appellees
Interphil Promotions, Inc. and Lope Sarreal, Sr., jointly,
cannot also be regarded as excessive considering the
extent and nature of defensecounsels' services which
involved legal work for sixteen [16] months.
However, in the matter of moral damages, we are
inclined to uphold the appellant's contention that the
award is not sanctioned by law and well- settled
authorities. Art. 2219 of the Civil Code provides:
Art. 2219. Moral damages may be recovered in the
following analogous cases:
1) A criminal offense resulting in physical injuries;
2) Quasi-delict causing physical injuries;
3) Seduction, abduction, rape or other lascivious acts;
4) Adultery or concubinage;
5) Illegal or arbitrary detention or arrest;
6) Illegal search;
7) Libel, slander or any other form of defamation;
8) Malicious prosecution;
9) Acts mentioned in Art. 309.

10) Acts and actions referred to in Arts., 21, 26, 27, 28,
29, 30, 32, 34 and 35.
The award of moral damages in the instant case is not
based on any of the cases enumerated in Art. 2219 of the
Civil Code. The action herein brought by plaintiffs-
appellants is based on a perceived breach committed by
the defendants-appellees of the contract of May 1, 1961,
and cannot, as such, be arbitrarily considered as a case of
malicious prosecution.
Moral damages cannot be imposed on a party litigant
although such litigant exercises it erroneously because if
the action has been erroneously filed, such litigant may
be penalized for costs.
The grant of moral damages is not subject to the whims
and caprices of judges or courts. The court's discretion in
granting or refusing it is governed by reason and justice.
In order that a person may be made liable to the payment
of moral damages, the law requires that his act be
wrongful. The adverse result of an action does not per se
make the act wrongful and subject the actor to the
payment of moral damages. The law could not have
meant to impose a penalty on the right to litigate; such
right is so precious that moral damages may not be
charged on those who may exercise it erroneously. For
these the law taxes costs. [Barreto vs. Arevalo, et. al. No.
L-7748, Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]
WHEREFORE, except for the award of moral damages
which is herein deleted, the decision of the lower court is
hereby affirmed.
SO ORDERED.
G.R. No. L-28602 September 29, 1970
UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as
JUDGE of the COURT OF FIRST INSTANCE IN
QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo,
Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
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Norberto J. Quisumbing for private respondents.
REYES, J.B.L., J.:
Three (3) orders of the Court of First Instance of Rizal
(Quezon City), issued in its Civil Case No. 9435, are
sought to be annulled in this petition for certiorari and
prohibition, filed by herein petitioner University of the
Philippines (or UP) against the above-named respondent
judge and the Associated Lumber Manufacturing
Company, Inc. (or ALUMCO). The first order, dated 25
February 1966, enjoined UP from awarding logging
rights over its timber concession (or Land Grant),
situated at the Lubayat areas in the provinces of Laguna
and Quezon; the second order, dated 14 January 1967,
adjudged UP in contempt of court, and directed Sta.
Clara Lumber Company, Inc. to refrain from exercising
logging rights or conducting logging operations on the
concession; and the third order, dated 12 December
1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary
injunction against the enforcement or implementation of
the three (3) questioned orders was issued by this Court,
per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated
from the public domain and given as an endowment to
UP, an institution of higher learning, to be operated and
developed for the purpose of raising additional income
for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO
entered into a logging agreement under which the latter
was granted exclusive authority, for a period starting
from the date of the agreement to 31 December 1965,
extendible for a further period of five (5) years by
mutual agreement, to cut, collect and remove timber
from the Land Grant, in consideration of payment to UP
of royalties, forest fees, etc.; that ALUMCO cut and
removed timber therefrom but, as of 8 December 1964,
it had incurred an unpaid account of P219,362.94,
which, despite repeated demands, it had failed to pay;
that after it had received notice that UP would rescind or

terminate the logging agreement, ALUMCO executed an
instrument, entitled "Acknowledgment of Debt and
Proposed Manner of Payments," dated 9 December
1964, which was approved by the president of UP, and
which stipulated the following:
3. In the event that the payments called for in Nos. 1 and
2 of this paragraph are not sufficient to liquidate the
foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said
payments have been applied shall be paid by the
DEBTOR in full no later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply with
any of its promises or undertakings in this document, the
DEBTOR agrees without reservation that the
CREDITOR shall have the right and the power to
consider the Logging Agreement dated December 2,
1960 as rescinded without the necessity of any judicial
suit, and the CREDITOR shall be entitled as a matter of
right to Fifty Thousand Pesos (P50,000.00) by way of
and for liquidated damages;
ALUMCO continued its logging operations, but again
incurred an unpaid account, for the period from 9
December 1964 to 15 July 1965, in the amount of
P61,133.74, in addition to the indebtedness that it had
previously acknowledged.
That on 19 July 1965, petitioner UP informed
respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the
logging agreement that they had entered in 1960; and on
7 September 1965, UP filed a complaint against
ALUMCO, which was docketed as Civil Case No. 9435
of the Court of First Instance of Rizal (Quezon City), for
the collection or payment of the herein before stated
sums of money and alleging the facts hereinbefore
specified, together with other allegations; it prayed for
and obtained an order, dated 30 September 1965, for
preliminary attachment and preliminary injunction
restraining ALUMCO from continuing its logging
operations in the Land Grant.
That before the issuance of the aforesaid preliminary
injunction UP had taken steps to have another
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concessionaire take over the logging operation, by
advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara
Lumber Company, Inc.; the logging contract was signed
on 16 February 1966.
That, meantime, ALUMCO had filed several motions to
discharge the writs of attachment and preliminary
injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition
to enjoin petitioner University from conducting the
bidding; on 27 November 1965, it filed a second petition
for preliminary injunction; and, on 25 February 1966,
respondent judge issued the first of the questioned
orders, enjoining UP from awarding logging rights over
the concession to any other party.
That UP received the order of 25 February 1966 after it
had concluded its contract with Sta. Clara Lumber
Company, Inc., and said company had started logging
operations.
That, on motion dated 12 April 1966 by ALUMCO and
one Jose Rico, the court, in an order dated 14 January
1967, declared petitioner UP in contempt of court and, in
the same order, directed Sta. Clara Lumber Company,
Inc., to refrain from exercising logging rights or
conducting logging operations in the concession.
The UP moved for reconsideration of the aforesaid
order, but the motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the
Land Grant, which purpose, anyway, is embodied in Act
3608 and, therefore, conclusively known, respondent
ALUMCO did not deny the foregoing allegations in the
petition. In its answer, respondent corrected itself by
stating that the period of the logging agreement is five
(5) years - not seven (7) years, as it had alleged in its
second amended answer to the complaint in Civil Case
No. 9435. It reiterated, however, its defenses in the court
below, which maybe boiled down to: blaming its former
general manager, Cesar Guy, in not turning over
management of ALUMCO, thereby rendering it unable
to pay the sum of P219,382.94; that it failed to pursue
the manner of payments, as stipulated in the
"Acknowledgment of Debt and Proposed Manner of

Payments" because the logs that it had cut turned out to
be rotten and could not be sold to Sta. Clara Lumber
Company, Inc., under its contract "to buy and sell" with
said firm, and which contract was referred and annexed
to the "Acknowledgment of Debt and Proposed Manner
of Payments"; that UP's unilateral rescission of the
logging contract, without a court order, was invalid; that
petitioner's supervisor refused to allow respondent to cut
new logs unless the logs previously cut during the
management of Cesar Guy be first sold; that respondent
was permitted to cut logs in the middle of June 1965 but
petitioner's supervisor stopped all logging operations on
15 July 1965; that it had made several offers to petitioner
for respondent to resume logging operations but
respondent received no reply.
The basic issue in this case is whether petitioner U.P.
can treat its contract with ALUMCO rescinded, and may
disregard the same before any judicial pronouncement to
that effect. Respondent ALUMCO contended, and the
lower court, in issuing the injunction order of 25
February 1966, apparently sustained it (although the
order expresses no specific findings in this regard), that
it is only after a final court decree declaring the contract
rescinded for violation of its terms that U.P. could
disregard ALUMCO's rights under the contract and treat
the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly
stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the
debtor ALUMCO, the creditor (UP) has "the right and
the power to consider, the Logging Agreement dated 2
December 1960 as rescinded without the necessity of
any judicial suit." As to such special stipulation, and in
connection with Article 1191 of the Civil Code, this
Court stated in Froilan vs. Pan Oriental Shipping Co., et
al., L-11897, 31 October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from
entering into agreement that violation of the terms of the
contract would cause cancellation thereof, even without
court intervention. In other words, it is not always
necessary for the injured party to resort to court for
rescission of the contract.
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Of course, it must be understood that the act of party in
treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made
known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the
party prejudiced.
In other words, the party who deems the contract
violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will
conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely
does not require that the contracting party who believes
itself injured must first file suit and wait for a judgment
before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate
during the pendency of the suit until the final judgment
of rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent
declaring that judicial action is necessary for the
resolution of a reciprocal obligation, 1 since in every case
where the extrajudicial resolution is contested only the
final award of the court of competent jurisdiction can
conclusively settle whether the resolution was proper or
not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will
remain contestable and subject to judicial invalidation,
unless attack thereon should become barred by
acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing
for a unilateral rescission in case of breach of contract
may render nugatory the general rule requiring judicial

action (v. Footnote, Padilla, Civil Law, Civil Code
Anno., 1967 ed. Vol. IV, page 140) but, as already
observed, in case of abuse or error by the rescinder the
other party is not barred from questioning in court such
abuse or error, the practical effect of the stipulation
being merely to transfer to the defaulter the initiative of
instituting suit, instead of the rescinder.
In fact, even without express provision conferring the
power of cancellation upon one contracting party, the
Supreme Court of Spain, in construing the effect of
Article 1124 of the Spanish Civil Code (of which Article
1191 of our own Civil; Code is practically a
reproduction), has repeatedly held that, a resolution of
reciprocal or synallagmatic contracts may be made
extrajudicially unless successfully impugned in court.
El articulo 1124 del Codigo Civil establece la facultad
de resolver las obligaciones reciprocas para el caso de
que uno de los obligados no cumpliese lo que le
incumbe, facultad que, segun jurisprudencia de este
Tribunal, surge immediatamente despuesque la otra
parte incumplio su deber,sin necesidad de una
declaracion previa de los Tribunales. (Sent. of the Tr.
Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897).
Segun reiterada doctrina de esta Sala, el Art. 1124
regula la resolucioncomo una "facultad" atribuida a la
parte perjudicada por el incumplimiento del contrato, la
cual tiene derecho do opcion entre exigir el
cumplimientoo la resolucion de lo convenido, que puede
ejercitarse, ya en la via judicial, ya fuera de ella, por
declaracion del acreedor, a reserva, claro es, que si la
declaracion de resolucion hecha por una de las partes se
impugna por la otra, queda aquella sometida el examen y
sancion de los Tribunale, que habran de declarar, en
definitiva, bien hecha la resolucion o por el contrario, no
ajustada a Derecho. (Sent. TS of Spain, 16 November
1956; Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada
en el incumplimiento por una de las partes de su
respectiva prestacion, puedetener lugar con eficacia"
1. o Por la declaracion de voluntad de la otra hecha
extraprocesalmente, si no es impugnada en juicio luego
con exito. y 2. 0 Por la demanda de la perjudicada,
cuando no opta por el cumplimientocon la
9
indemnizacion de danos y perjuicios realmente causados,
siempre quese acredite, ademas, una actitud o conducta
persistente y rebelde de laadversa o la satisfaccion de lo
pactado, a un hecho obstativo que de un modoabsoluto,
definitivo o irreformable lo impida, segun el art. 1.124,
interpretado por la jurisprudencia de esta Sala, contenida
en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre otras,
inspiradas por el principio del Derecho intermedio,
recogido del Canonico, por el cual fragenti fidem, fides
non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.)
(Emphasis supplied).
In the light of the foregoing principles, and considering
that the complaint of petitioner University made out
a prima facie case of breach of contract and defaults in
payment by respondent ALUMCO, to the extent that the
court below issued a writ of preliminary injunction
stopping ALUMCO's logging operations, and repeatedly
denied its motions to lift the injunction; that it is not
denied that the respondent company had profited from
its operations previous to the agreement of 5 December
1964 ("Acknowledgment of Debt and Proposed Manner
of Payment"); that the excuses offered in the second
amended answer, such as the misconduct of its former
manager Cesar Guy, and the rotten condition of the logs
in private respondent's pond, which said respondent was
in a better position to know when it executed the
acknowledgment of indebtedness, do not constitute on
their face sufficient excuse for non-payment; and
considering that whatever prejudice may be suffered by
respondent ALUMCO is susceptibility of compensation
in damages, it becomes plain that the acts of the court a
quo in enjoining petitioner's measures to protect its
interest without first receiving evidence on the issues
tendered by the parties, and in subsequently refusing to
dissolve the injunction, were in grave abuse of
discretion, correctible by certiorari, since appeal was not
available or adequate. Such injunction, therefore, must
be set aside.
For the reason that the order finding the petitioner UP in
contempt of court has open appealed to the Court of
Appeals, and the case is pending therein, this Court
abstains from making any pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is
granted, and the order of the respondent court of 25

February 1966, granting the Associated Lumber
Company's petition for injunction, is hereby set aside.
Let the records be remanded for further proceedings
conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando,
Teehankee, Barredo, Villamor and Makasiar, JJ.,
concur.
Reyes, J.B.L., Actg. C.J., is on leave.
G.R. No. 47206 September 27, 1989
GLORIA M. DE ERQUIAGA, administratrix of the
estate of the late SANTIAGO DE ERQUIAGA &
HON. FELICIANO S. GONZALES, petitioners,
vs.
HON. COURT OF APPEALS, AFRICA VALDEZ
VDA. DE REYNOSO, JOSES V. REYNOSO, JR.,
EERNESTO , SYLVIA REYNOSO, LOURDES
REYNOSO, CECILE REYNOSO, EDNA
REYNOSO, ERLINDA REYNOSO & EMILY
REYNOSO, respondents.
Agrava, Lucero, Gineta & Roxas for petitioners.
Bausa, Ampil, Suarez, Parades & Bausa for private
respondents.
GRINO-AQUINO, J.:
This is a case that began in the Court of First Instance of
Sorsogon in 1970. Although the decision dated
September 30, 1972 of the trial court (pp. 79-106, Rollo)
became final and executory because none of the parties
appealed, its execution has taken all of the past
seventeen (17) years with the end nowhere in sight. The
delay in writing finis to this case is attributable to several
factors, not the least of which is the intransigence of the
defeated party. Now, worn down by this attrital suit,
both have pleaded for a decision to end this case.
Assailed in this petition for review are:
(a) the decision of the Court of Appeals dated May 31,
1976 in CA-G.R. No. SP 04811, entitled "Africa Valdez
10
Vda. de Reynoso et al. vs. Hon. Feliciano S. Gonzales
and Santiago de Erquiaga" (pp. 275-290, Rollo);
(b) its resolution dated August 3, 1976, denying the
motion for reconsideration (p. 298, Rollo);
(c) its resolution of August 24, 1977, ordering entry of
judgment (p. 316, Rollo); and
(d) its resolution of October 4, 1977, denying the motion
to set aside the entry of judgment.
Santiago de Erquiaga was the owner of 100% or 3,100
paid-up shares of stock of the Erquiaga Development
Corporation which owns the Hacienda San Jose in
Irosin, Sorsogon (p. 212, Rollo). On November 4,1968,
he entered into an Agreement with Jose L. Reynoso to
sell to the latter his 3,100 shares (or 100%) of Erquiaga
Development Corporation for P900,000 payable in
installments on definite dates fixed in the contract but
not later than November 30, 1968. Because Reynoso
failed to pay the second and third installments on time,
the total price of the sale was later increased to
P971,371.70 payable on or before December 17, 1969.
The difference of P71,371.70 represented brokers'
commission and interest (CFI Decision, pp. 75, 81, 90,
99,Rollo).
As of December 17, 1968, Reynoso was able to pay the
total sum of P410,000 to Erquiaga who thereupon
transferred all his shares (3,100 paid-up shares) in
Erquiaga Development Corporation to Reynoso, as well
as the possession of the Hacienda San Jose, the only
asset of the corporation (p. 100, Rollo). However, as
provided in paragraph 3, subparagraph (c) of the contract
to sell, Reynoso pledged 1,500 shares in favor of
Erquiaga as security for the balance of his obligation (p.
100, Rollo). Reynoso failed to pay the balance of
P561,321.70 on or before December 17, 1969, as
provided in the promissory notes he delivered to
Erquiaga. So, on March 2, 1970, Erquiaga, through
counsel, formally informed Reynoso that he was
rescinding the sale of his shares in the Erquiaga
Development Corporation (CFI Decision, pp. 81-100,
Rollo).
As recited by the Court of Appeals in its decision under
review, the following developments occurred thereafter:

On March 30, 1970, private respondent Santiago de
Erquiaga filed a complaint for rescission with
preliminary injunction against Jose L. Reynoso and
Erquiaga Development Corporation, in the Court of First
Instance of Sorsogon, Branch I (Civil Case
No. 2446).** After issues have been joined and after
trial on the merits, the lower court rendered judgment
(on September 30, 1972),*** the dispositive portion of
which reads as follows:
In view of the foregoing, judgment is hereby rendered in
favor of the plaintiff and against the defendant Jose L.
Reynoso, rescinding the sale of 3,100 paid up shares of
stock of the Erquiaga Development Corporation to the
defendant, and ordering:
(a) The defendant to return and reconvey to the plaintiff
the 3,100 paid up shares of stock of the Erquiaga
Development Corporation which now stand in his name
in the books of the corporation;
(b) The defendant to render a full accounting of the fruits
he received by virtue of said 3,100 paid up shares of
stock of the Erquiaga Development Corporation, as well
as to return said fruits received by him to plaintiff
Santiago de Erquiaga;
(c) The plaintiff to return to the defendant the amount of
P100,000.00 plus legal interest from November 4,1968,
and the amount of P310,000.00 plus legal interest from
December 17, 1968, until paid;
(d) The defendant to pay the plaintiff as actual damages
the amount of P12,000.00;
(e) The defendant to pay the plaintiff the amount of
P50,000.00 as attorney's fees; and
(f) The defendant to pay the costs of this suit and
expenses of litigation. (Annex A-Petition.)
The parties did not appeal therefrom and it became final
and executory.
On March 21, 1973, the CFI of Sorsogon issued an
Order, pertinent portions of which reads:
11
It will be noted that both parties having decided not to
appeal, the decision has become final and executory.
Nevertheless, the Court finds merit in the contention of
the plaintiff that the payment to the defendant of the total
sum of P410,000.00 plus the interest, should be held in
abeyance pending rendition of the accounting by the
defendant of the fruits received by him on account of the
3,100 shares of the capital stock of Erquiaga
Development Corporation. The same may be said with
respect to the sums due the plaintiff from the defendant
for damages and attorney's fees. Indeed it is reasonable
to suppose, as contended by the plaintiff, that when such
accounting is made and the accounting, as urged by
plaintiff, should refer not only to the dividends due from
the shares of stock but to the products of the hacienda
which is the only asset of the Erquiaga Development
Corporation, certain sums may be found due to the
plaintiff from the defendant which may partially or
entirely off set (sic) the amount adjudged against him in
the decision.
It is the sense of the court that the fruits referred to in
the decision include not only the dividends received, if
any, on the 3,100 shares of stocks but more particularly
the products received by the defendant from the
hacienda. The hacienda and the products thereon
produced constitute the physical assets of the Erquiaga
Development Corporation represented by the shares of
stock and it would be absurd to suppose that any
accounting could be made by the defendant without
necessarily taking into account the products received
which could be the only basis for determining whether
dividends are due or not on account of the investment.
The hacienda and its natural fruits as represented by the
shares of stock which the defendant received as manager
and controlling stockholder of the Erquiaga
Development Corporation can not be divorced from the
certificates of stock in order to determine whether the
defendant has correctly reported the income of the
corporation or concealed part of it for his personal
advantage. It is hardly necessary for the Court to restate
an obvious fact that on both legal and equitable grounds,
the Erquiaga Development Corporation and defendant
Jose Reynoso are one and the same persons as far as the
obligation to account for the products of the hacienda is
concerned,' (pp. 4-6, Annex 1, Answer.)

In the same Order, the CFI of Sorsogon appointed a
receiver upon the filing of a bond in the amount of
P100,000.00. The reasons of the lower court for
appointing a receiver 'were that the matter of accounting
of the fruits received by defendant Reynoso as directed
in the decision will take time; that plaintiff Erquiaga has
shown sufficient and justifiable ground for the
appointment of a receiver in order to preserve the
Hacienda which has obviously been mismanaged by the
defendant to a point where the amortization of the loan
with the Development Bank of the Philippines has been
neglected and the arrears in payments have risen to the
amount of P503,510.70 as of October 19, 1972, and
there is danger that the Development Bank of the
Philippines may institute foreclosure proceedings to the
damage and prejudice of the plaintiff.' (p. 7, Id.)
On April 26, 1973, defendant Jose L. Reynoso died and
he was substituted by his surviving spouse Africa Valdez
Vda. de Reynoso and children, as party defendants.
Defendants filed a petition for certiorari with a prayer
for a writ of preliminary injunction seeking the
annulment of the aforementioned Order of March 21,
1973. On June 28, 1973, the Court of Appeals rendered
judgment dismissing the petition with costs against the
petitioners, ruling that said Order is valid and the
respondent court did not commit any grave abuse of
discretion in issuing the same (Annex 2, Id.). Petitioners
brought the case up to the Supreme Court on a petition
for review on certiorari which was denied by said
tribunal in a Resolution dated February 5, 1974 (Annex
3, Id.). Petitioners' motion for reconsideration thereof
was likewise denied by the Supreme Court on March
29,1974.
Upon motion of Erquiaga, the CFI of Sorsogon issued an
order, dated February 12,1975, dissolving the
receivership and ordering the delivery of the possession
of the Hacienda San Jose to Erquiaga, the filing of bond
by said Erquiaga in the amount of P410,000.00
conditioned to the payment of whatever may be due to
the substituted heirs of deceased defendant Reynoso
(petitioners herein) after the approval of the accounting
report submitted by Reynoso. Said order further directed
herein petitioners to allow counsel for Erquiaga to
12
inspect, copy and photograph certain documents related
to the accounting report (Annex B, Petition).
On March 3,1975, the CFI of Sorsogon approved the
P410,000.00 bond submitted by Erquiaga and the
possession, management and control of the hacienda
were turned over to Erquiaga (Annex C, Petition).
Petitioners (Reynosos) filed their motion for
reconsideration which the CFI of Sorsogon denied in an
Order, dated June 23, 1975 (Annex D, Id.).
In an Omnibus Motion, dated July 25,1975, filed by
Erquiaga, and over the objections interposed thereto by
herein petitioners (Reynosos), the CFI of Sorsogon
issued an Order, dated October 9, 1975, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, on the first
count, the defendants are directed (to deliver) to the
plaintiff or his counsel within five (5) days from receipt
of this order the 1,600 shares of stock of the Erquiaga
Development Corporation which are in their possession.
Should the defendants refuse or delay in delivering such
shares of stock, as prayed for, the plaintiff is authorized:
(a) To call and hold a special meeting of the
stockholders of the Erquiaga Development Corporation
to elect the members of the Board of Directors;
(b) In the said meeting the plaintiff is authorized to vote
not only the 1,500 shares of stock in his name but also
the 1,600 shares in the name and possession of the
defendants;
(c) The question as to who shall be elected members of
the Board of Directors and officers of the board is left to
the discretion of the plaintiff;
(d) The members of the board and the officers who are
elected are authorized to execute any and all contracts or
agreements under such conditions as may be required by
the Development Bank for the purpose of restructuring
the loan of the Erquiaga Development Corporation with
the said bank.
On the second count, the prayer to strike out all expenses
alleged[ly] incurred by the defendants in the production
of the fruits of Hacienda San Jose and declaring the

obligation of the plaintiff under paragraph (c) of the
judgment to pay the defendant the sum of P410,000.00
with interest as fully compensated by the fruits earned
by the defendants from the property, as well as the
issuance of a writ of execution against the defendants to
pay the plaintiffs P62,000.00 under paragraphs (e) and
(d) and costs of litigation under paragraph (f) of the
judgment of September 30, 1972, is denied.
The defendants are once more directed to comply with
the order of February 12, 1975, by answering the
interrogatories propounded by counsel for the plaintiff
and allowing said counsel or his representative to
inspect, copy and photograph the documents mentioned
by the plaintiff during reasonable hours of any working
day within twenty (20) days from receipt of this order,
should the defendants persist in their refusal or failure to
comply with the order, the plaintiff may inform the court
seasonably so that the proper action may be taken.
(Annex J, Id.)
Hence, the present petition for certiorari, prohibition and
mandamus instituted by the substituted defendants, heirs
of the deceased defendant Jose L. Reynoso against the
CFI of Sorsogon and (plaintiff) Santiago de Erquiaga.
(pp. 276- 281, Rollo.)
On May 31, 1976, the Court of Appeals rendered
judgment holding that:
IN VIEW OF ALL THE FOREGOING, this court finds
that the respondent court had acted with grave abuse of
discretion or in excess of jurisdiction in issuing the
assailed order of October 9, 1975 (Annex A, Petition)
insofar only as that part of the Order (1) giving private
respondent voting rights on the 3,100 shares of stock of
the Erquiaga Development Corporation without first
divesting petitioners of their title thereto and ordering
the registration of the same in the corporation books in
the name of private respondent, pursuant to Section 10,
Rule 39 of the Revised Rules of Court; (2) authorizing
corporate meetings and election of members of the
Board of Directors of said corporation and (3) refusing
to order the reimbursement of the purchase price of the
3,100 shares of stock in the amount of P410,000.00 plus
interests awarded in said final decision of September 30,
1972 and the set-off therewith of the amount of
13
P62,000.00 as damages and attorney's fees in favor of
herein private respondent are concerned. Let writs
of certiorari and prohibition issue against the aforesaid
acts, and the writ of preliminary injunction heretofore
issued is hereby made permanent only insofar as (1), (2)
and (3) above are concerned. As to all other matters
involved in said Order of October 9, 1975, the issuance
of writs prayed for in the petition are not warranted and
therefore denied.
FINALLY, to give effect to all the foregoing, with a
view of putting an end to a much protracted litigation
and for the best interest of the parties, let a writ
of mandamus issue, commanding the respondent Judge
to order (1) the Clerk of Court of the CFI of Sorsogon to
execute the necessary deed of conveyance to effect the
transfer of ownership of the entire 3,100 shares of stock
of the Erquiaga Development Corporation to private
respondent Santiago Erquiaga in case of failure of
petitioners to comply with the Order of October 9, 1975
insofar as the delivery of the 1,600 shares of stock to
private respondent is concerned, within five (5) days
from receipt hereof; and (2) upon delivery by petitioners
or transfer by the Clerk of Court of said shares of stock
to private respondent, as the case may be, to issue a writ
of execution ordering private respondent to pay
petitioners the amount of P410,000.00 plus interests in
accordance with the final decision of September 30,
1972 in Civil Case No. 2448, setting-off therewith the
amount of P62,000.00 adjudged in favor of private
respondent, and against petitioners' predecessor-in-
interest, Jose L. Reynoso, in the same decision, as
damages and attorney's fees. (pp. 289-290, Rollo.)
It may be seen from the foregoing narration of facts that
as of the time the Court of Appeals rendered its decision
on May 31, 1976 (now under review) only the following
have been done by the parties in compliance with the
final judgment in the main case (Civil Case No. 2446):
1. The Hacienda San Jose was returned to Erquiaga on
March 3, 1975 upon approval of Erquiaga's surety bond
of P410,000 in favor of Reynoso;
2. Reynoso has returned to Erquiaga only the pledged
1,500 shares of stock of the Erquiaga Development

Corporation, instead of 3,100 shares, as ordered in
paragraph (a) of the final judgment.
What the parties have not done yet are:
1. Reynoso has not returned 1,600 shares of stock to
Erquiaga as ordered in paragraph (a,) of the decision;
2. Reynoso has not rendered a full accounting of the
fruits he has received from Hacienda San Jose by virtue
of the 3,100 shares of stock of the Erquiaga
Development Corporation delivered to him under the
sale, as ordered in paragraph (b) of the decision;
3. Erquiaga has not returned the sum of P100,000 paid
by Reynoso on the sale, with legal interest from
November 4, 1968 and P310,000 plus legal interest from
December 17, 1968, until paid (total: P410,000) as
ordered in paragraph (c) of the decision;
4. Reynoso has not paid the judgment of Pl2,000 as
actual damages in favor of Erquiaga, under paragraph (d)
of the judgment;
5. .Reynoso has not paid the sum of P50,000 as
attorney's fees to Erquiaga under paragraph (e) of the
judgment; and
6. Reynoso has not paid the costs of suit and expenses of
litigation as ordered in paragraph (f) of the final
judgment.
The petitioner alleges, in her petition for review, that:
I. The decision of the Court of Appeals requiring the
petitioner to pay the private respondents the sum of
P410,000 plus interest, without first awaiting Reynoso's
accounting of the fruits of the Hacienda San Jose,
violates the law of the case and Article 1385 of the Civil
Code, alters the final order dated February 12, 1975 of
the trial court, and is inequitous.
II. The Court of Appeals erroneously applied the
Corporation Law.
III. The Court of Appeals erred in ordering entry of its
judgment.
14
We address first the third assignment of error for it will
be futile to discuss the first and second if, after all, the
decision complained of is already final, and the entry of
judgment which the Court of Appeals directed to be
made in its resolution of August 24,1977 (p. 316, Rollo)
was proper. After examining the records, we find that the
Court of Appeals' decision is not yet final. The entry of
judgment was improvident for the Court of Appeals, in
its resolution of December 13, 1976, suspended the
proceedings before it "pending the parties' settlement
negotiations" as prayed for in their joint motion (p. 313,
Rollo). Without however giving them an ultimatum or
setting a deadline for the submission of their
compromise agreement, the Court of Appeals, out of the
blue, issued a resolution on August 24, 1977 ordering
the Judgment Section of that Court to enter final
judgment in the case (p. 316, Rollo).
We hold that the directive was precipitate and premature.
Erquiaga received the order on September 2, 1977 and
filed on September 12, 1977 (p. 317, Rollo) a motion for
reconsideration which the Court of Appeals denied on
October 4, 1977 (p. 322, Rollo). The order of denial was
received on October 14, 1977 (p. 7, Rollo). On October
28, 1977, Erquiaga filed in this Court a timely motion
for extension of time to file a petition for review, and the
petition was filed within the extension granted by this
Court.
We now address the petitioners' first and second
assignments of error.
After deliberating on the petition for review, we find no
reversible error in the Court of Appeals' decision
directing the clerk of court of the trial court to execute a
deed of conveyance to Erquiaga of the 1,600 shares of
stock of the Erquiaga Development Corporation still in
Reynoso's name and/or possession, in accordance with
the procedure in Section 10, Rule 39 of the Rules of
Court. Neither did it err in annulling the trial court's
order: (1) allowing Erquiaga to vote the 3,100 shares of
Erquiaga Development Corporation without having
effected the transfer of those shares in his name in the
corporate books; and (2) authorizing Erquiaga to call a
special meeting of the stockholders of the Erquiaga
Development Corporation and to vote the 3,100 shares,
without the pre-requisite registration of the shares in his

name. It is a fundamental rule in Corporation Law
(Section 35) that a stockholder acquires voting rights
only when the shares of stock to be voted are registered
in his name in the corporate books.
Until registration is accomplished, the transfer, though
valid between the parties, cannot be effective as against
the corporation. Thus, the unrecorded transferee cannot
enjoy the status of a stockholder; he cannot vote nor be
voted for, and he will not be entitled to dividends. The
Corporation will be protected when it pays dividend to
the registered owner despite a previous transfer of which
it had no knowledge. The purpose of registration
therefore is two-fold; to enable the transferee to exercise
all the rights of a stockholder, and to inform the
corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder. (Corporation
Code, Comments, Notes and Selected cases by Campos
& Lopez-Campos, p. 838,1981 Edition.)
The order of respondent Court directing Erquiaga to
return the sum of P410,000 (or net P348,000 after
deducting P62,000 due from Reynoso under the
decision) as the price paid by Reynoso for the shares of
stock, with legal rate of interest, and the return by
Reynoso of Erquiaga's 3,100 shares with the
fruits(construed to mean not only dividends but also
fruits of the corporation's Hacienda San Jose) is in full
accord with Art. 1385 of the Civil Code which provides:
ART. 1385. Rescission creates the obligation to return
the things which were the object of the contract, together
with their fruits, and the price with its interest;
consequently, it can be carried out only when he who
demands rescission can return whatever he may be
obliged to restore.
Neither shall rescission take place when the things which
are the object of the contract are legally in the possession
of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded
from the person causing the loss.
The Hacienda San Jose and 1,500 shares of stock have
already been returned to Erquiaga. Therefore, upon the
conveyance to him of the remaining 1,600 shares,
15
Erquiaga (or his heirs) should return to Reynoso the
price of P410,000 which the latter paid for those shares.
Pursuant to the rescission decreed in the final judgment,
there should be simultaneous mutual restitution of the
principal object of the contract to sell (3,100 shares) and
of the consideration paid (P410,000). This should not
await the mutual restitution of the fruits, namely: the
legal interest earned by Reynoso's P410,000 while in the
possession of Erquiaga and its counterpart: the fruits of
Hacienda San Jose which Reynoso received from the
time the hacienda was delivered to him on November
4,1968 until it was placed under receivership by the
court on March 3, 1975. However, since Reynoso has
not yet given an accounting of those fruits, it is only fair
that Erquiaga's obligation to deliver to Reynoso the legal
interest earned by his money, should await the rendition
and approval of his accounting. To this extent, the
decision of the Court of Appeals should be modified. For
it would be inequitable and oppressive to require
Erquiaga to pay the legal interest earned by Reynoso's
P410,000 since 1968 or for the past 20 years (amounting
to over P400,000 by this time) without first requiring
Reynoso to account for the fruits of Erquiaga's hacienda
which he allegedly squandered while it was in his
possession from November 1968 up to March 3, 1975.
WHEREFORE, the petition for review is granted. The
payment of legal interest by Erquiaga to Reynoso on the
price of P410,000 paid by Reynoso for Erquiaga's 3,100
shares of stock of the Erquiaga Development
Corporation should be computed as provided in the final
judgment in Civil Case No. 2446 up to September
30,1972, the date of said judgment. Since Reynoso's
judgment liability to Erquiaga for attorney's fees and
damages in the total sum of P62,000 should be set off
against the price of P410,000 that Erquiaga is obligated
to return to Reynoso, the balance of the judgment in
favor of Reynoso would be only P348,000 which should
earn legal rate of interest after September 30,1972, the
date of the judgment. However, the payment of said
interest by Erquiaga should await Reynoso's accounting
of the fruits received by him from the Hacienda San
Jose. Upon payment of P348,000 by Erquiaga to
Reynoso, Erquiaga's P410,000 surety bond shall be
deemed cancelled. In all other respects, the decision of
the Court of Appeals in CA-G.R. No, 04811-SP is
affirmed. No pronouncement as to costs.

SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.
G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET AL., plaintiffs-
appellees,
vs.
URSULA TORRES CALASANZ, ET
AL., defendants-appellants.
GUTIERREZ, JR., J.:
This is an appeal from the decision of the Court of First
Instance of Rizal, Seventh Judicial District, Branch X,
declaring the contract to sell as not having been validly
cancelled and ordering the defendants-appellants to
execute a final deed of sale in favor of the plaintiffs-
appellees, to pay P500.00 attorney's fees and costs.
The facts being undisputed, the Court of Appeals
certified the case to us since only pure questions of law
have been raised for appellate review.
On December 19, 1957, defendants-appellants Ursula
Torres Calasanz and Tomas Calasanz and plaintiffs-
appellees Buenaventura Angeles and Teofila Juani
entered into a contract to sell a piece of land located in
Cainta, Rizal for the amount of P3,920.00 plus 7%
interest per annum.
The plaintiffs-appellees made a downpayment of
P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P
41.20 until fully paid, the installments being due and
payable on the 19th day of each month. The plaintiffs-
appellees paid the monthly installments until July 1966,
when their aggregate payment already amounted to
P4,533.38. On numerous occasions, the defendants-
appellants accepted and received delayed installment
payments from the plaintiffs-appellees.
16
On December 7, 1966, the defendants-appellants wrote
the plaintiffs-appellees a letter requesting the remittance
of past due accounts.
On January 28, 1967, the defendants-appellants
cancelled the said contract because the plaintiffs-
appellees failed to meet subsequent payments. The
plaintiffs' letter with their plea for reconsideration of the
said cancellation was denied by the defendants-
appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with
the Court of First Instance of Rizal, Seventh Judicial
District, Branch X to compel the defendants-appellants
to execute in their favor the final deed of sale alleging
inter alia that after computing all subsequent payments
for the land in question, they found out that they have
already paid the total amount of P4,533.38 including
interests, realty taxes and incidental expenses for the
registration and transfer of the land.
The defendants-appellants alleged in their answer that
the complaint states no cause of action and that the
plaintiffs-appellees violated paragraph six (6) of the
contract to sell when they failed and refused to pay
and/or offer to pay the monthly installments
corresponding to the month of August, 1966 for more
than five (5) months, thereby constraining the
defendants-appellants to cancel the said contract.
The lower court rendered judgment in favor of the
plaintiffs-appellees. The dispositive portion of the
decision reads:
WHEREFORE, based on the foregoing considerations,
the Court hereby renders judgment in favor of the
plaintiffs and against the defendants declaring that the
contract subject matter of the instant case was NOT
VALIDLY cancelled by the defendants. Consequently,
the defendants are ordered to execute a final Deed of
Sale in favor of the plaintiffs and to pay the sum of
P500.00 by way of attorney's fees. Costs against the
defendants.
A motion for reconsideration filed by the defendants-
appellants was denied.

As earlier stated, the then Court of Appeals certified the
case to us considering that the appeal involves pure
questions of law.
The defendants-appellants assigned the following
alleged errors of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING
THE CONTRACT TO SELL (ANNEX "A" OF
COMPLIANCE) AS HAVING BEEN LEGALLY AND
VALIDLY CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID
CONTRACT TO SELL HAS NOT BEEN LEGALLY
AND VALIDLY CANCELLED, THE LOWER
COURT ERRED IN ORDERING DEFENDANTS TO
EXECUTE A FINAL DEED OF SALE IN FAVOR OF
THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING
DEFENDANTS TO PAY PLAINTIFFS THE SUM OF
P500.00 AS ATTORNEY'S FEES.
The main issue to be resolved is whether or not the
contract to sell has been automatically and validly
cancelled by the defendants-appellants.
The defendants-appellants submit that the contract was
validly cancelled pursuant to paragraph six of the
contract which provides:
xxx xxx xxx
SIXTH.—In case the party of the SECOND PART fails
to satisfy any monthly installments, or any other
payments herein agreed upon, he is granted a month of
grace within which to make the retarded payment,
together with the one corresponding to the said month of
grace; it is understood, however, that should the month
of grace herein granted to the party of the SECOND
PART expired; without the payments corresponding to
both months having been satisfied, an interest of 10%
17
per annum will be charged on the amounts he should
have paid; it is understood further, that should a period
of 90 days elapse, to begin from the expiration of the
month of grace herein mentioned, and the party of
SECOND PART has not paid all the amounts he should
have paid with the corresponding interest up to that
date, the party of the FIRST PART has the right to
declare this contract cancelled and of no effect, and as
consequence thereof, the party of the FIRST PART may
dispose of the parcel of land covered by this contract in
favor of other persons, as if this contract had never been
entered into. In case of such cancellation of the contract,
all the amounts paid in accordance with this agreement
together with all the improvements made on the
premises, shall be considered as rents paid for the use
and occupation of the above mentioned premises, and as
payment for the damages suffered by failure of the party
of the SECOND PART to fulfill his part of the
agreement; and the party of the SECOND PART hereby
renounces all his right to demand or reclaim the return of
the same and obliges himself to peacefully vacate the
premises and deliver the same to the party of the FIRST
PART. (Emphasis supplied by appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-
appellees failed to pay the August, 1966 installment
despite demands for more than four (4) months. The
defendants-appellants point to Jocson v. Capitol
Subdivision (G.R. No. L-6573, February 28, 1955)
where this Court upheld the right of the subdivision
owner to automatically cancel a contract to sell on the
strength of a provision or stipulation similar to paragraph
6 of the contract in this case. The defendants-appellants
also argue that even in the absence of the aforequoted
provision, they had the right to cancel the contract to sell
under Article 1191 of the Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that
the Jocson ruling does not apply. They state that
paragraph 6 of the contract to sell is contrary to law
insofar as it provides that in case of specified breaches of
its terms, the sellers have the right to declare the contract
cancelled and of no effect, because it granted the sellers
an absolute and automatic right of rescission.

Article 1191 of the Civil Code on the rescission of
reciprocal obligations provides:
The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
xxx xxx xxx
Article 1191 is explicit. In reciprocal obligations, either
party the right to rescind the contract upon the failure of
the other to perform the obligation assumed thereunder.
Moreover, there is nothing in the law that prohibits the
parties from entering into an agreement that violation of
the terms of the contract would cause its cancellation
even without court intervention (Froilan v. Pan Oriental
Shipping, Co., et al., 12 SCRA 276)—
Well settled is, however, the rule that a judicial action
for the rescission of a contract is not necessary where the
contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions' (Lopez v.
Commissioner of Customs, 37 SCRA 327, and cases
cited therein)
Resort to judicial action for rescission is obviously not
contemplated . . . The validity of the stipulation can not
be seriously disputed. It is in the nature of a facultative
resolutory condition which in many cases has been
upheld by this Court. (Ponce Enrile v. Court of Appeals,
29 SCRA 504).
The rule that it is not always necessary for the injured
party to resort to court for rescission of the contract
when the contract itself provides that it may be rescinded
for violation of its terms and conditions, was qualified
by this Court in University of the Philippines v. De los
Angeles, (35 SCRA 102) where we explained that:
Of course, it must be understood that the act of a party in
treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made
18
known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the
party prejudiced.
In other words, the party who deems the contract
violated many consider it resolved or rescinded, and act
accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will
conclusively and finally settle whether the action taken
was or was not correct in law. ... .
We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent
declaring that judicial action is necessary for the
resolution of a reciprocal obligation; (Ocejo, Perez &
Co. v. International Banking Corp., 37 Phil. 631;
Republic v. Hospital de San Juan de Dios, et al., 84 Phil.
820) since in every case where the extrajudicial
resolution is contested only the final award of the court
of competent jurisdiction can conclusively settle whether
the resolution was proper or not. It is in this sense that
judicial action will be necessary, as without it, the
extrajudicial resolution will remain contestable and
subject to judicial invalidation, unless attack thereon
should become barred by acquiescence, estoppel or
prescription.
The right to rescind the contract for non-performance of
one of its stipulations, therefore, is not absolute.
InUniversal Food Corp. v. Court of Appeals (33 SCRA
1) the Court stated that—
The general rule is that rescission of a contract will not
be permitted for a slight or casual breach, but only for
such substantial and fundamental breach as would defeat
the very object of the parties in making the agreement.
(Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil.
821, 827) The question of whether a breach of a contract
is substantial depends upon the attendant circumstances.

(Corpus v. Hon. Alikpala, et al., L-23707 & L-23720,
Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-
appellees violated Section two of the contract to sell
which provides:
SECOND.—That in consideration of the agreement of
sale of the above described property, the party of the
SECOND PART obligates himself to pay to the party of
the FIRST PART the Sum of THREE THOUSAND
NINE HUNDRED TWENTY ONLY (P3,920.00),
Philippine Currency, plus interest at the rate of 7% per
annum, as follows:
(a) The amount of THREE HUNDRED NINETY TWO
only (P392.00) when this contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY
(P4l.20) on or before the 19th day of each month, from
this date until the total payment of the price above
stipulated, including interest.
because they failed to pay the August installment,
despite demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-
appellants is so slight and casual when we consider that
apart from the initial downpayment of P392.00 the
plaintiffs-appellees had already paid the monthly
installments for a period of almost nine (9) years. In
other words, in only a short time, the entire obligation
would have been paid. Furthermore, although the
principal obligation was only P 3,920.00 excluding the 7
percent interests, the plaintiffs- appellees had already
paid an aggregate amount of P 4,533.38. To sanction the
rescission made by the defendants-appellants will work
injustice to the plaintiffs- appellees. (See J.M. Tuazon
and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly
enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in
good faith, the obligor may recover as though there had
been a strict and complete fulfillment, less damages
suffered by the obligee.
19
also militates against the unilateral act of the defendants-
appellants in cancelling the contract.
We agree with the observation of the lower court to the
effect that:
Although the primary object of selling subdivided lots is
business, yet, it cannot be denied that this subdivision is
likewise purposely done to afford those landless, low
income group people of realizing their dream of a little
parcel of land which they can really call their own.
The defendants-appellants cannot rely on paragraph 9 of
the contract which provides:
NINTH.-That whatever consideration of the party of the
FIRST PART may concede to the party of the SECOND
PART, as not exacting a strict compliance with the
conditions of paragraph 6 of this contract, as well as any
other condonation that the party of the FIRST PART
may give to the party of the SECOND PART with
regards to the obligations of the latter, should not be
interpreted as a renunciation on the part of the party of
the FIRST PART of any right granted it by this contract,
in case of default or non-compliance by the party of the
SECOND PART.
The defendants-appellants argue that paragraph nine
clearly allows the seller to waive the observance of
paragraph 6 not merely once, but for as many times as he
wishes.
The defendants-appellants' contention is without merit.
We agree with the plaintiffs-appellees that when the
defendants-appellants, instead of availing of their alleged
right to rescind, have accepted and received delayed
payments of installments, though the plaintiffs-appellees
have been in arrears beyond the grace period mentioned
in paragraph 6 of the contract, the defendants-appellants
have waived and are now estopped from exercising their
alleged right of rescission. In De Guzman v. Guieb (48
SCRA 68), we held that:
xxx xxx xxx
But defendants do not deny that in spite of the long
arrearages, neither they nor their predecessor, Teodoro
de Guzman, even took steps to cancel the option or to

eject the appellees from the home-lot in question. On the
contrary, it is admitted that the delayed payments were
received without protest or qualification. ... Under these
circumstances, We cannot but agree with the lower court
that at the time appellees exercised their option,
appellants had already forfeited their right to invoke the
above-quoted provision regarding the nullifying effect of
the non-payment of six months rentals by appellees by
their having accepted without qualification on July 21,
1964 the full payment by appellees of all their
arrearages.
The defendants-appellants contend in the second
assignment of error that the ledger of payments show a
balance of P671,67 due from the plaintiffs-appellees.
They submit that while it is true that the total monthly
installments paid by the plaintiffs-appellees may have
exceeded P3,920.00, a substantial portion of the said
payments were applied to the interests since the contract
specifically provides for a 7% interest per annum on the
remaining balance. The defendants-appellants rely on
paragraph 2 of the contract which provides:
SECOND.—That in consideration of the agreement of
sale of the above described property, the party of the
SECOND PART obligates himself to pay to the party of
the FIRST PART the Sum of THREE THOUSAND
NINE HUNDRED TWENTY ONLY (P 3,920.00),
Philippine Currency, plus interest at the rate of 7% per
annum ... . (Emphasis supplied)
The plaintiffs-appellees on the other hand are firm in
their submission that since they have already paid the
defendants-appellants a total sum of P4,533.38, the
defendants-appellants must now be compelled to execute
the final deed of sale pursuant to paragraph 12 of the
contract which provides:
TWELFTH.—That once the payment of the sum of
P3,920.00, the total price of the sale is completed, the
party to the FIRST PART will execute in favor of the
party of the SECOND PART, the necessary deed or
deeds to transfer to the latter the title of the parcel of
land sold, free from all hens and encumbrances other
than those expressly provided in this contract; it is
understood, however, that au the expenses which may be
20
incurred in the said transfer of title shall be paid by the
party of the SECOND PART, as above stated.
Closely related to the second assignment of error is the
submission of the plaintiffs-appellees that the contract
herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to
sell entered into by the parties has some characteristics
of a contract of adhesion. The defendants-appellants
drafted and prepared the contract. The plaintiffs-
appellees, eager to acquire a lot upon which they could
build a home, affixed their signatures and assented to the
terms and conditions of the contract. They had no
opportunity to question nor change any of the terms of
the agreement. It was offered to them on a "take it or
leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA
36 1), we held that:
xxx xxx xxx
... (W)hile generally, stipulations in a contract come
about after deliberate drafting by the parties thereto. . . .
there are certain contracts almost all the provisions of
which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is
the signing of his signature or his "adhesion" thereto.
Insurance contracts, bills of lading, contracts of sale of
lots on the installment plan fall into this category.
(Paras, Civil Code of the Philippines, Seventh ed., Vol.
1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated
the plaintiffs-appellees to pay the defendants-appellants
the sum of P3,920.00 plus 7% interest per annum, it is
likewise true that under paragraph 12 the seller is
obligated to transfer the title to the buyer upon payment
of the P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must
be construed against the party causing it. We agree with
the observation of the plaintiffs-appellees to the effect
that "the terms of a contract must be interpreted against
the party who drafted the same, especially where such
interpretation will help effect justice to buyers who, after
having invested a big amount of money, are now sought
to be deprived of the same thru the prayed application of

a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence,
and in its entirety is most unfair to the buyers."
Thus, since the principal obligation under the contract is
only P3,920.00 and the plaintiffs-appellees have already
paid an aggregate amount of P4,533.38, the courts
should only order the payment of the few remaining
installments but not uphold the cancellation of the
contract. Upon payment of the balance of
P671.67 without any interest thereon, the defendants-
appellants must immediately execute the final deed of
sale in favor of the plaintiffs-appellees and execute the
necessary transfer documents as provided in paragraph
12 of the contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack
of merit. The decision appealed from is AFFIRMED
with the modification that the plaintiffs-appellees should
pay the balance of SIX HUNDRED SEVENTY ONE
PESOS AND SIXTY-SEVEN CENTAVOS (P671.67)
without any interests. Costs against the defendants-
appellants.
SO ORDERED.
[G.R. No. 97347. July 6, 1999]
JAIME G. ONG, petitioner, vs. THE HONORABLE COURT
OF APPEALS, SPOUSES MIGUEL K. ROBLES
and ALEJANDRO M. ROBLES, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari from
the judgment rendered by the Court of Appeals which,
except as to the award of exemplary damages, affirmed
the decision of the Regional Trial Court of Lucena City,
Branch 60, setting aside the Agreement of Purchase and
Sale entered into by herein petitioner and private
respondent spouses in Civil Case No. 85-85.
On May 10, 1983, petitioner Jaime Ong, on the one
hand, and respondent spouses Miguel K. Robles and
Alejandra Robles, on the other hand, executed an
Agreement of Purchase and Sale respecting two parcels
21
of land situated at Barrio Puri, San Antonio,
Quezon. The terms and conditions of the contract read:
1. That for and in consideration of the agreed purchase
price of TWO MILLION PESOS (P2,000,000.00),
Philippine currency, the mode and manner of payment is
as follows:
A. The initial payment of SIX HUNDRED THOUSAND
PESOS (P600,000.00) as verbally agreed by the parties,
shall be broken down as follows:
1. P103,499.91 shall be paid, and as already paid by
the BUYER to the SELLERS on March 22, 1983, as
stipulated under the Certification of undertaking dated
March 22, 1983 and covered by a check voucher of even
date.
2. That the sum of P496,500.09 shall be paid directly by
the BUYER to the Bank of Philippine Islands to answer
for the loan of the SELLERS which as of March 15,
1983 amounted to P537,310.10, and for the interest that
may accrued (sic) from March 15, 1983, up to the time
said obligation of the SELLERS with the said bank has
been settled, provided however that the amount in excess
of P496,500.09, shall be chargeable from the time
deposit of the SELLERS with the aforesaid bank.
B. That the balance of ONE MILLION FOUR
HUNDRED THOUSAND (P1,400,000.00) PESOS shall
be paid by the BUYER to the SELLERS in four (4)
equal quarterly installments of THREE HUNDRED
FIFTY THOUSAND PESOS (P350,000.00), the first to
be due and payable on June 15, 1983, and every quarter
thereafter, until the whole amount is fully paid, by these
presents promise to sell to said BUYER the two (2)
parcels of agricultural land including the rice mill and
the piggery which are the most notable improvements
thereon, situated at Barangay Puri, San Antonio Quezon,
x x x.
2. That upon the payment of the total purchase price by
the BUYER the SELLERS bind themselves to deliver to
the former a good and sufficient deed of sale and
conveyance for the described two (2) parcels of land,
free and clear from all liens and encumbrances.
 22

3. That immediately upon the execution of this petitioner.[8] Petitioner, in return, voluntarily gave the
document, the SELLERS shall deliver, surrender and spouses authority to operate the rice mill.[9] He, however,
transfer possession of the said parcels of land including continued to be in possession of the two parcels of land
all the improvements that may be found thereon, to while private respondents were forced to use the rice
the BUYER, and the latter shall take over from mill for residential purposes.
the SELLER the possession, operation, control and
On August 2, 1985, respondent spouses, through
management of the RICEMILL and PIGGERY found on
counsel, sent petitioner a demand letter asking for the
the aforesaid parcels of land.
return of the properties. Their demand was left
unheeded, so, on September 2, 1985, they filed with the
4. That all payments due and payable under this contract
Regional Trial Court of Lucena City, Branch 60, a
shall be effected in the residence of
complaint for rescission of contract and recovery of
the SELLERS located at Barangay Puri, San Antonio,
properties with damages. Later, while the case was still
Quezon unless another place shall have been
pending with the trial court, petitioner introduced major
subsequently designated by both parties in writing.
improvements on the subject properties by constructing
a complete fence made of hollow blocks and expanding
x x x x x x x x x.[1]
the piggery. These prompted the respondent spouses to
On May 15, 1983, petitioner Ong took possession ask for a writ of preliminary injunction.[10] The trial court
of the subject parcels of land together with the piggery, granted the application and enjoined petitioner from
building, ricemill, residential house and other introducing improvements on the properties except for
improvements thereon. repairs.[11]
Pursuant to the contract they executed, petitioner On June 1, 1989 the trial court rendered a decision,
paid respondent spouses the sum of P103,499.91[2] by the dispositive portion of which reads as follows:
depositing it with the United Coconut Planters
Bank. Subsequently, petitioner deposited sums of money IN VIEW OF THE FOREGOING, judgment is hereby
with the Bank of Philippine Islands (BPI),[3] in rendered:
accordance with their stipulation that petitioner pay the
loan of respondents with BPI. a) Ordering that the contract entered into by plaintiff
spouses Miguel K. Robles and Alejandra M. Robles and
To answer for his balance of P1,400,000.00
the defendant, Jaime Ong captioned Agreement
petitioner issued four (4) post-dated Metro Bank checks
of Purchase and Sale, marked as Exhibit A set aside;
payable to respondent spouses in the amount of
P350,0000.00 each, namely: Check No. 157708 dated
b) Ordering defendant, Jaime Ong to deliver the two (2)
June 15, 1983,[4] Check No. 157709 dated September
parcels of land which are the subject matter of Exhibit A
15,1983,[5] Check No. 157710 dated December 15,
together with the improvements thereon to the spouses
1983[6] and Check No. 157711 dated March 15,
Miguel K. Robles and Alejandro M. Robles;
1984.[7] When presented for payment, however, the
checks were dishonored due to insufficient
c) Ordering plaintiff spouses, Miguel Robles and
funds. Petitioner promised to replace the checks but
Alejandra Robles to return to Jaime Ong the sum of
failed to do so. To make matters worse, out of the
P497,179.51;
P496,500.00 loan of respondent spouses with the Bank
of the Philippine Islands, which petitioner, as per
d) Ordering defendant Jaime Ong to pay the plaintiffs
agreement, should have paid, petitioner only managed to
the sum of P100,000.00 as exemplary damages; and
dole out no more than P393,679.60. When the bank
threatened to foreclose the respondent spouses mortgage, e) Ordering defendant Jaime Ong to pay the plaintiffs
they sold three transformers of the rice mill worth spouses Miguel K. Robles and Alejandra Robles the sum
P51,411.00 to pay off their outstanding obligation with of P20,000.00 as attorneys fees and litigation expenses.
said bank, with the knowledge and conformity of

The motion of the plaintiff spouses Miguel K. Roles and
Alejandra Robles for the appointment of receivership is
rendered moot and academic.
SO ORDERED.[12]
From this decision, petitioner appealed to the Court
of Appeals, which affirmed the decision of the Regional
Trial Court but deleted the award of exemplary
damages. In affirming the decision of the trial court, the
Court of Appeals noted that the failure of petitioner to
completely pay the purchase price is a substantial breach
of his obligation which entitles the private respondents
to rescind their contract under Article 1191 of the New
Civil Code. Hence, the instant petition.
At the outset, it must be stated that the issues raised
by the petitioner are generally factual in nature and were
already passed upon by the Court of Appeals and the
trial court. Time and again, we have stated that it is not
the function of the Supreme Court to assess and evaluate
all over again the evidence, testimonial and
documentary, adduced by the parties to an appeal,
particularly where, such as in the case at bench, the
findings of both the trial court and the appellate court on
the matter coincide. There is no cogent reason shown
that would justify the court to discard the factual
findings of the two courts below and to superimpose its
own.[13]
The only pertinent legal issues raised which are
worthy of discussion are: (1) whether the contract
entered into by the parties may be validly rescinded
under Article 1191 of the New Civil Code; and (2)
whether the parties had novated their original contract as
to the time and manner of payment.
Petitioner contends that Article 1191 of the New
Civil Code is not applicable since he has already paid
respondent spouses a considerable sum and has therefore
substantially complied with his obligation. He cites
Article 1383 instead, to the effect that where specific
performance is available as a remedy, rescission may not
be resorted to.
A discussion of the aforesaid articles is in order.
Rescission, as contemplated in Articles 1380, et
seq., of the New Civil Code, is a remedy granted by law
to the contracting parties and even to third persons, to
23
secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of
things to their condition at the moment prior to the
celebration of the contract.[14] It implies a contract,
which even if initially valid, produces a lesion or a
pecuniary damage to someone.[15]
On the other hand, Article 1191 of the New Civil
Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise
from the same cause, and in which each party is a debtor
and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the
other.[16] They are to be performed simultaneously such
that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of
reciprocal obligations under Article 1191 of the New
Civil Code should be distinguished from rescission of
contracts under Article 1383. Although both presuppose
contracts validly entered into and subsisting and both
require mutual restitution when proper, they are not
entirely identical.
While Article 1191 uses the term rescission, the
original term which was used in the old Civil Code, from
which the article was based, was
[17]
resolution. Resolution is a principal action which is
based on breach of a party, while rescission under
Article 1383 is a subsidiary action limited to cases of
rescission for lesion under Article 1381 of the New Civil
Code, which expressly enumerates the following
rescissible contracts:
1. Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than
one fourth of the value of the things which are the object
thereof;
2. Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter
cannot in any manner collect the claims due them;
4. Those which refer to things under litigation if they have
been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
5. All other contracts specially declared by law to be subject
to rescission.
 24

Obviously, the contract entered into by the parties We are not persuaded. Article 1292 of the New
in the case at bar does not fall under any of those Civil Code states that, In order that an obligation may be
mentioned by Article 1381. Consequently, Article 1383 extinguished by another which substitutes the same, it is
is inapplicable. imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point
May the contract entered into between the parties,
incompatible with each other.
however, be rescinded based on Article 1191?
Novation is never presumed, it must be proven as a
A careful reading of the parties Agreement of
fact either by express stipulation of the parties or by
Purchase and Sale shows that it is in the nature of a
implication derived from an irreconcilable
contract to sell, as distinguished from a contract of
incompatibility between the old and the new
sale. In a contract of sale, the title to the property passes
obligation.[22] Petitioner cites the following instances as
to the vendee upon the delivery of the thing sold; while
proof that the contract was novated: the retrieval of the
in a contract to sell, ownership is, by agreement,
transformers from petitioners custody and their sale by
reserved in the vendor and is not to pass to the vendee
the respondents to MERALCO on the condition that the
until full payment of the purchase price.[18] In a contract
proceeds thereof be accounted for by the respondents
to sell, the payment of the purchase price is a positive
and deducted from the price of the contract; the take-
suspensive condition, the failure of which is not a
over by the respondents of the custody and operation of
breach, casual or serious, but a situation that prevents the
the rice mill; and the continuous and regular withdrawals
obligation of the vendor to convey title from acquiring
by respondent Miguel Robles of installment sums per
an obligatory force.[19]
vouchers (Exhs. 8 to 47) on the condition that these
Respondents in the case at bar bound themselves to installments be credited to petitioners account and
deliver a deed of absolute sale and clean title covering deducted from the balance of the purchase price.
the two parcels of land upon full payment by the buyer
Contrary to petitioners claim, records show that the
of the purchase price of P2,000,000.00. This promise to
parties never even intended to novate their previous
sell was subject to the fulfillment of the suspensive
agreement. It is true that petitioner paid respondents
condition of full payment of the purchase price by the
small sums of money amounting to P48,680.00, in
petitioner. Petitioner, however, failed to complete
contravention of the manner of payment stipulated in
payment of the purchase price. The non-fulfillment of
their contract. These installments were, however,
the condition of full payment rendered the contract to
objected to by respondent spouses, and petitioner replied
sell ineffective and without force and effect. It must be
that these represented the interest of the principal
stressed that the breach contemplated in Article 1191 of
amount which he owed them.[23] Records further show
the New Civil Code is the obligors failure to comply
that petitioner agreed to the sale of MERALCO
with an obligation already extant, not a failure of a
transformers by private respondents to pay for the
condition to render binding that obligation.[20] Failure to
balance of their subsisting loan with the Bank of
pay, in this instance, is not even a breach but merely an
Philippine Islands.Petitioners letter of authorization
event which prevents the vendors obligation to convey
reads:
title from acquiring binding force.[21] Hence, the
agreement of the parties in the case at bench may be set
xxxxxxxxx
aside, but not because of a breach on the part of
petitioner for failure to complete payment of the
Under this authority, it is mutually understood that
purchase price. Rather, his failure to do so brought about
whatever payment received from MERALCO as
a situation which prevented the obligation of respondent
payment to the transformers will be considered as partial
spouses to convey title from acquiring an obligatory
payment of the undersigneds obligation to Mr. and Mrs.
force.
Miguel K. Robles.
Petitioner insists, however, that the contract was
novated as to the manner and time of payment.
 25

The same will be utilized as partial payment to existing bench. The subsequent acts of the parties hardly
loan with the Bank of Philippine Islands. demonstrate their intent to dissolve the old obligation as
a consideration for the emergence of the new one. We
It is also mutually understood that this payment to the repeat to the point of triteness, novation is never
Bank of Philippine Islands will be reimbursed to Mr. and presumed, there must be an express intention to novate.
Mrs. Miguel K. Robles by the undersigned.
As regards the improvements introduced by
[Underscoring supplied][24]
petitioner to the premises and for which he claims
reimbursement, we see no reason to depart from the
It should be noted that while it was agreed that part
ruling of the trial court and the appellate court that
of the purchase price in the sum of P496,500.00 would
petitioner is a builder in bad faith. He introduced the
be directly deposited by petitioner to the Bank of
improvements on the premises knowing fully well that
Philippine Islands to answer for the loan of respondent
he has not paid the consideration of the contract in full
spouses, petitioner only managed to deposit
and over the vigorous objections of respondent
P393,679.60. When the bank threatened to foreclose the
spouses. Moreover, petitioner introduced major
properties, petitioner apparently could not even raise the
improvements on the premises even while the case
sum needed to forestall any action on the part of the
against him was pending before the trial court.
bank.Consequently, he authorized respondent spouses to
sell the three (3) transformers. However, although the The award of exemplary damages was correctly
parties agreed to credit the proceeds from the sale of the deleted by the Court of Appeals inasmuch as no moral,
transformers to petitioners obligation, he was supposed temperate, liquidated or compensatory damages in
to reimburse the same later to respondent spouses. This addition to exemplary damages were awarded.
can only mean that there was never an intention on the
WHEREFORE, the decision rendered by the Court
part of either of the parties to novate petitioners manner
of Appeals is hereby AFFIRMED with the
of payment.
MODIFICATION that respondent spouses are ordered to
Petitioner contends that the parties verbally agreed return to petitioner the sum of P48,680.00 in addition to
to novate the manner of payment when respondent the amounts already awarded. Costs against petitioner.
spouses proposed to operate the rice mill on the
SO ORDERED.
condition that they will account for its earnings. We find
that this is unsubstantiated by the evidence on
record. The tenor of his letter dated August 12, 1984 to
respondent spouses, in fact, shows that petitioner had a
little misunderstanding with respondent spouses whom
[G.R. No. 129107. September 26, 2001]
he was evidently trying to appease by authorizing them
to continue temporarily with the operation of the rice
mill. Clearly, while petitioner might have wanted to
novate the original agreement as to his manner of ALFONSO L. IRINGAN, petitioner, vs. HON.
payment, the records are bereft of evidence that COURT OF APPEALS and ANTONIO PALAO,
respondent spouses willingly agreed to modify their represented by his Attorney-in-Fact, FELISA P.
previous arrangement. DELOS SANTOS,respondents.
In order for novation to take place, the concurrence
of the following requisites is indispensable: (1) there
must be a previous valid obligation; (2) there must be an DECISION
agreement of the parties concerned to a new contract; (3)
QUISUMBING, J.:
there must be the extinguishment of the old contract; and
(4) there must be the validity of the new contract.[25] The
This petition assails the Decision[1] dated April 30,
aforesaid requisites are not found in the case at
1997 of the Court of Appeals in CA G.R. CV No. 39949,

affirming the decision of the Regional Trial Court and
deleting the award of attorneys fee.
The facts of the case are based on the records.
On March 22, 1985, private respondent Antonio
Palao sold to petitioner Alfonso Iringan, an undivided
portion of Lot No. 992 of the Tuguegarao Cadastre,
located at the Poblacion of Tuguegarao and covered by
Transfer Certificate of Title No. T-5790. The parties
executed a Deed of Sale[2] on the same date with the
purchase price of P295,000.00, payable as follows:
(a) P10,000.00 upon the execution of this instrument,
and for this purpose, the vendor acknowledges having
received the said amount from the vendee as of this date;
(b) P140,000.00 on or before April 30, 1985;
(c) P145,000.00 on or before December 31, 1985.[3]
When the second payment was due, Iringan paid
only P40,000. Thus, on July 18, 1985, Palao sent a
letter[4] to Iringan stating that he considered the contract
as rescinded and that he would not accept any further
payment considering that Iringan failed to comply with
his obligation to pay the full amount of the second
installment.
On August 20, 1985, Iringan through his counsel
Atty. Hilarion L. Aquino,[5] replied that they were not
opposing the revocation of the Deed of Sale but asked
for the reimbursement of the following amounts:
(a) P50,000.00 cash received by you;
(b) P3,200.00 geodetic engineers fee;
(c) P500.00 attorneys fee;
(d) the current interest on P53,700.00.[6]
In response, Palao sent a letter dated January 10,
1986,[7] to Atty. Aquino, stating that he was not
amenable to the reimbursements claimed by Iringan.
On February 21, 1989, Iringan, now represented by
a new counsel Atty. Carmelo Z. Lasam, proposed that
the P50,000 which he had already paid Palao be
reimbursed[8] or Palao could sell to Iringan, an
equivalent portion of the land.
1. In holding that the lower court did not err in affirming the
26
Palao instead wrote Iringan that the latters standing
obligation had reached P61,600, representing payment of
arrears for rentals from October 1985 up to March
1989.[9] The parties failed to arrive at an agreement.
On July 1, 1991, Palao filed a Complaint[10] for
Judicial Confirmation of Rescission of Contract and
Damages against Iringan and his wife.
In their Answer,[11] the spouses alleged that the
contract of sale was a consummated contract, hence, the
remedy of Palao was for collection of the balance of the
purchase price and not rescission. Besides, they said that
they had always been ready and willing to comply with
their obligations in accordance with said contract.
In a Decision[12] dated September 25, 1992, the
Regional Trial Court of Cagayan, Branch I, ruled in
favor of Palao and affirmed the rescission of the
contract. It disposed,
WHEREFORE, the Court finds that the evidence
preponderates in favor of the plaintiff and against the
defendants and judgment is hereby rendered as follows:
(a) Affirming the rescission of the contract of sale;
(b) Cancelling the adverse claim of the defendants
annotated at the back of TCT No. T-5790;
(c) Ordering the defendants to vacate the premises;
(d) Ordering the defendants to pay jointly and severally
the sum of P100,000.00 as reasonable compensation for
use of the property minus 50% of the amount paid by
them; and to pay P50,000.00 as moral
damages;P10,000.00 as exemplary damages;
and P50,000.00 as attorneys fee; and to pay the costs of
suit.
SO ORDERED.[13]
As stated, the Court of Appeals affirmed the above
decision. Hence, this petition for review.
Iringan avers in this petition that the Court of
Appeals erred:
rescission of the contract of sale; and

2. In holding that defendant was in bad faith for resisting
rescission and was made liable to pay moral and
exemplary damages.[14]
We find two issues for resolution: (1) whether or
not the contract of sale was validly rescinded, and (2)
whether or not the award of moral and exemplary
damages is proper.
On the first issue, petitioner contends that no
rescission was effected simply by virtue of the
letter[15] sent by respondent stating that he considered the
contract of sale rescinded. Petitioner asserts that a
judicial or notarial act is necessary before one party can
unilaterally effect a rescission.
Respondent Palao, on the other hand, contends that
the right to rescind is vested by law on the obligee and
since petitioner did not oppose the intent to rescind the
contract, Iringan in effect agreed to it and had the legal
effect of a mutually agreed rescission.
Article 1592 of the Civil Code is the applicable
provision regarding the sale of an immovable property.
Article 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure to
pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may
pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made
upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term. (Italics
supplied)
Article 1592 requires the rescinding party to serve
judicial or notarial notice of his intent to resolve the
contract.[16]
In the case of Villaruel v. Tan King,[17] we ruled in
this wise,
since the subject-matter of the sale in question is real
property, it does not come strictly within the provisions
of article 1124 (now Article 1191) of the Civil Code, but
is rather subjected to the stipulations agreed upon by the
contracting parties and to the provisions of article 1504
(now Article 1592) of the Civil Code.[18]
27
Citing Manresa, the Court said that the requirement
of then Article 1504, refers to a demand that the vendor
makes upon the vendee for the latter to agree to the
resolution of the obligation and to create no obstacles to
this contractual mode of extinguishing obligations.[19]
Clearly, a judicial or notarial act is necessary before
a valid rescission can take place, whether or not
automatic rescission has been stipulated. It is to be noted
that the law uses the phrase even though[20] emphasizing
that when no stipulation is found on automatic
rescission, the judicial or notarial requirement still
applies.
On the first issue, both the trial and appellate courts
affirmed the validity of the alleged mutual agreement to
rescind based on Article 1191 of the Civil Code,
particularly paragraphs 1 and 2 thereof.
Article 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation, with
payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the
latter should become impossible. [Emphasis ours.]
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
But in our view, even if Article 1191 were
applicable, petitioner would still not be entitled to
automatic rescission. In Escueta v. Pando,[21] we ruled
that under Article 1124 (now Article 1191) of the Civil
Code, the right to resolve reciprocal obligations, is
deemed implied in case one of the obligors shall fail to
comply with what is incumbent upon him. But that right
must be invoked judicially. The same article also
provides: The Court shall decree the resolution
demanded, unless there should be grounds which justify

the allowance of a term for the performance of the
obligation.
This requirement has been retained in the third
paragraph of Article 1191, which states that the court
shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
Consequently, even if the right to rescind is made
available to the injured party,[22] the obligation is
not ipso facto erased by the failure of the other party to
comply with what is incumbent upon him. The party
entitled to rescind should apply to the court for a decree
of rescission.[23] The right cannot be exercised solely on
a partys own judgment that the other committed a breach
of the obligation.[24] The operative act which produces
the resolution of the contract is the decree of the court
and not the mere act of the vendor.[25] Since a judicial or
notarial act is required by law for a valid rescission to
take place, the letter written by respondent declaring his
intention to rescind did not operate to validly rescind the
contract.
Notwithstanding the above, however, in our view
when private respondent filed an action for Judicial
Confirmation of Rescission and Damages[26] before the
RTC, he complied with the requirement of the law for
judicial decree of rescission. The
[27]
complaint categorically stated that the purpose was 1)
to compel appellants to formalize in a public document,
their mutual agreement of revocation and rescission;
and/or 2) to have a judicial confirmation of the said
revocation/rescission under terms and conditions fair,
proper and just for both parties.[28] In Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc.,[29] we held that
even a crossclaim found in the Answer could constitute a
judicial demand for rescission that satisfies the
requirement of the law.[30]
Petitioner contends that even if the filing of the case
were considered the judicial act required, the action
should be deemed prescribed based on the provisions of
Article 1389 of the Civil Code.[31]
This provision of law applies to rescissible
contracts,[32] as enumerated and defined in Articles
1380[33] and 1381.[34] We must stress however, that the
rescission in Article 1381 is not akin to the term
rescission in Article 1191 and Article 1592.[35] In
Articles 1191 and 1592, the rescission is a principal
28
action which seeks the resolution or cancellation of the
contract while in Article 1381, the action is a subsidiary
one limited to cases of rescission for lesion as
enumerated in said article.[36]
The prescriptive period applicable to rescission
under Articles 1191 and 1592, is found in Article
1144,[37] which provides that the action upon a written
contract should be brought within ten years from the
time the right of action accrues. The suit was brought on
July 1, 1991, or six years after the default. It was filed
within the period for rescission. Thus, the contract of
sale between the parties as far as the prescriptive period
applies, can still be validly rescinded.
On the issue of moral and exemplary damages,
petitioner claims that the Court of Appeals erred in
finding bad faith on his part when he resisted the
rescission[38] and claimed he was ready to pay but never
actually paid respondent, notwithstanding that he knew
that appellees principal motivation for selling the lot was
to raise money to pay his SSS loan.[39] Petitioner would
have us reverse the said CA findings based on the
exception[40]that these findings were made on a
misapprehension of facts.
The records do not support petitioners claims. First,
per the records, petitioner knew respondents reason for
selling his property. As testified to by petitioner[41] and
in the deposition[42] of respondent, such fact was made
known to petitioner during their negotiations as well as
in the letters sent to petitioner by Palao.[43] Second,
petitioner adamantly refused to formally execute an
instrument showing their mutual agreement to rescind
the contract of sale, notwithstanding that it was
petitioner who plainly breached the terms of their
contract when he did not pay the stipulated price on
time, leaving private respondent desperate to find other
sources of funds to pay off his loan. Lastly, petitioner did
not substantiate by clear and convincing proof, his
allegation that he was ready and willing to pay
respondent. We are more inclined to believe his claim of
readiness to pay was an afterthought intended to evade
the consequence of his breach. There is no record to
show the existence of such amount, which could have
been reflected, at the very least, in a bank account in his
name, if indeed one existed; or, alternatively, the proper
deposit made in court which could serve as a formal

tender of payment.[44] Thus, we find the award of moral
and exemplary damages proper.
WHEREFORE, the petition is DENIED. The
assailed decision dated April 30, 1997 of the Court of
Appeals in CA G.R. CV No. 39949, affirming the
Regional Trial Court decision and deleting the award of
attorneys fees, is hereby AFFIRMED. Costs against the
petitioner.
SO ORDERED.
G.R. No. 83851. March 3, 1993.
VISAYAN SAWMILL COMPANY, INC., and ANG
TAY, petitioners, vs. THE HONORABLE COURT
OF APPEALS and RJH TRADING, represented by
RAMON J. HIBIONADA, proprietor, respondents.
Saleto J. Erames and Edilberto V. Logronio for
petitioners.
Eugenio O. Original for private respondent.
SYLLABUS
1. CIVIL LAW; CONTRACT TO SELL; EFFECT OF
VENDEE'S FAILURE TO COMPLY WITH POSITIVE
SUSPENSIVE CONDITION; CASE AT BAR. — The
petitioner corporation's obligation to sell is
unequivocally subject to a positive suspensive condition,
i.e., the private respondent's opening, making or
indorsing of an irrevocable and unconditional letter of
credit. The former agreed to deliver the scrap iron only
upon payment of the purchase price by means of an
irrevocable and unconditional letter of credit. Otherwise
stated, the contract is not one of sale where the buyer
acquired ownership over the property subject to the
resolutory condition that the purchase price would be
paid after delivery. Thus, there was to be no actual sale
until the opening, making or indorsing of the irrevocable
and unconditional letter of credit. Since what obtains in
the case at bar is a mere promise to sell, the failure of the
private respondent to comply with the positive
suspensive condition cannot even be considered a breach
— casual or serious — but simply an event that
prevented the obligation of petitioner corporation to
29
convey title from acquiring binding force. In Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc., this
Court stated: ". . . The upshot of all these stipulations is
that in seeking the ouster of Maritime for failure to pay
the price as agreed upon, Myers was not rescinding (or
more properly, resolving) the contract, but precisely
enforcing it according to its express terms. In its suit
Myers was not seeking restitution to it of the ownership
of the thing sold (since it was never disposed of), such
restoration being the logical consequence of the
fulfillment of a resolutory condition, express or implied
(Article 1190); neither was it seeking a declaration that
its obligation to sell was extinguished. What it sought
was a judicial declaration that because the suspensive
condition (full and punctual payment) had not been
fulfilled, its obligation to sell to Maritime never arose or
never became effective and, therefore, it (Myers) was
entitled to repossess the property object of the contract,
possession being a mere incident to its right of
ownership. It is elementary that, as stated by Castan, --
'b) Si la condicion suspensiva llega a faltar, la obligacion
se tiene por no existente, y el acreedor pierde todo
derecho, incluso el de utilizar las medidas
conservativas.'(3 Castan, Derecho Civil, 7a Ed., p. 107).
(Also Puig Peña, Der. Civ., T. IV (1), p. 113).'"
2. ID.; ID.; ID.; RESCISSION. — The obligation of the
petitioner corporation to sell did not arise; it therefore
cannot be compelled by specific performance to comply
with its prestation. In short, Article 1191 of the Civil
Code does not apply; on the contrary, pursuant to Article
1597 of the Civil Code, the petitioner corporation may
totally rescind, as it did in this case, the contract. Said
Article provides: "ART. 1597. Where the goods have not
been delivered to the buyer, and the buyer has repudiated
the contract of sale, or has manifested his inability to
perform his obligations, thereunder, or has committed a
breach thereof, the seller may totally rescind the contract
of sale by giving notice of his election so to do to the
buyer."
3. ID.; ID.; IN CASE AT BAR, VENDOR'S CONSENT
TO DIGGING UP AND GATHERING OF SCRAP
IRON NOT CONSTRUED AS DELIVERY THEREOF;
REASONS THEREFOR. — Paragraph 6 of the
Complaint reads: "6. That on May 17, 1983 Plaintiff
with the consent of defendant Ang Tay sent his men to

the stockyard of Visayan Sawmill Co., Inc. at Cawitan,
Sta. Catalina, Negros Oriental to dig and gather the scrap
iron and stock the same for weighing." This permission
or consent can, by no stretch of the imagination, be
construed as delivery of the scrap iron in the sense that,
as held by the public respondent, citing Article 1497 of
the Civil Code, petitioners placed the private respondent
in control and possession thereof. In the first place, said
Article 1497 falls under the Chapter Obligations of the
Vendor, which is found in Title VI (Sales), Book IV of
the Civil Code. As such, therefore, the obligation
imposed therein is premised on an existing obligation to
deliver the subject of the contract. In the instant case, in
view of the private respondent's failure to comply with
the positive suspensive condition earlier discussed, such
an obligation had not yet arisen. In the second place, it
was a mere accommodation to expedite the weighing
and hauling of the iron in the event that the sale would
materialize. The private respondent was not thereby
placed in possession of and control over the scrap iron.
Thirdly, We cannot even assume the conversion of the
initial contract or promise to sell into a contract of sale
by the petitioner corporation's alleged implied delivery
of the scrap iron because its action and conduct in the
premises do not support this conclusion. Indeed,
petitioners demanded the fulfillment of the suspensive
condition and eventually cancelled the contract.
4. ID.; CONTRACTS; DAMAGES; MORAL
DAMAGES; PURPOSE OF AWARD THEREOF;
EXEMPLARY DAMAGES. — In contracts, such as in
the instant case, moral damages may be recovered if
defendants acted fraudulently and in bad faith, while
exemplary damages may only be awarded if defendants
acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner. In the instant case, the refusal of the
petitioners to deliver the scrap iron was founded on the
non-fulfillment by the private respondent of a suspensive
condition. It cannot, therefore, be said that the herein
petitioners had acted fraudulently and in bad faith or in a
wanton, reckless, oppressive or malevolent manner.
What this Court stated in Inhelder Corp. vs. Court of
Appeals needs to be stressed anew: "At this juncture, it
may not be amiss to remind Trial Courts to guard against
the award of exhorbitant (sic) damages that are way out
of proportion to the environmental circumstances of a
case and which, time and again, this Court has reduced
30
or eliminated. Judicial discretion granted to the Courts in
the assessment of damages must always be exercised
with balanced restraint and measured objectivity." For,
indeed, moral damages are emphatically not intended to
enrich a complainant at the expense of the defendant.
They are awarded only to enable the injured party to
obtain means, diversion or amusements that will serve to
obviate the moral suffering he has undergone, by reason
of the defendant's culpable action. Its award is aimed at
the restoration, within the limits of the possible, of the
spiritual status quo ante, and it must be proportional to
the suffering inflicted.
ROMERO, J., dissenting:
1. CIVIL LAW; CONTRACT OF SALE; DEFINED;
WHEN PERFECTED; CASE AT BAR. — Article 1458
of the Civil Code has this definition: "By a contract of
sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate
thing and the other to pay therefor a price certain in
money or its equivalent." Article 1475 gives the
significance of this mutual undertaking of the parties,
thus: "The contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the
object of the contract and upon the price. From that
moment, the parties may reciprocally demand
performance, subject to the provisions of the law
governing the form of contracts." Thus, when the parties
entered into the contract entitled "Purchase and Sale of
Scrap Iron" on May 1, 1983, the contract reached the
stage of perfection, there being a meeting of the' minds
upon the object which is the subject matter of the
contract and the price which is the consideration.
Applying Article 1475 of the Civil Code, from that
moment, the parties may reciprocally demand
performance of the obligations incumbent upon them,
i.e., delivery by the vendor and payment by the vendee.
2. ID.; ID.; DELIVERY; HOW ACCOMPLISHED;
CASE AT BAR. — From the time the seller gave access
to the buyer to enter his premises, manifesting no
objection thereto but even sending 18 or 20 people to
start the operation, he has placed the goods in the control
and possession of the vendee and delivery is effected.
For according to Article 1497, "The thing sold shall be
understood as delivered when it is placed in the control

and possession of the vendee." Such action or real
delivery (traditio) is the act that transfers ownership.
Under Article 1496 of the Civil Code, "The ownership of
the thing sold is acquired by the vendee from the
moment it is delivered to him in any of the ways
specified in Articles 1497 to 1501, or in any other
manner signifying an agreement that the possession is
transferred from the vendor to the vendee."
3. ID.; ID.; PROVISION IN CONTRACT
REGARDING MODE OF PAYMENT NOT
ESSENTIAL REQUISITE THEREOF; WHEN
PROVISION CONSIDERED A SUSPENSIVE
CONDITION. — a provision in the contract regarding
the mode of payment, like the requirement for the
opening of the Letter of Credit in this case, is not among
the essential requirements of a contract of sale
enumerated in Articles 1305 and 1474, the absence of
any of which will prevent the perfection of the contract
from happening. Likewise, it must be emphasized that
not every provision regarding payment should
automatically be classified as a suspensive condition. To
do so would change the nature of most contracts of sale
into contracts to sell. For a provision in the contract
regarding the payment of the price to be considered a
suspensive condition, the parties must have made this
clear in certain and unambiguous terms, such as for
instance, by reserving or withholding title to the goods
until full payment by the buyer. This was a pivotal
circumstance in the Luzon Brokerage case where the
contract in question was replete with very explicit
provisions such as the following: "Title to the properties
subject of this contract remains with the Vendor and
shall pass to, and be transferred in the name of the
Vendee only upon complete payment of the full price . .
.;" 10 the Vendor (Myers) will execute and deliver to the
Vendee a definite and absolute Deed of Sale upon full
payment of the Vendee . . .; and "should the Vendee fail
to pay any of the monthly installments, when due, or
otherwise fail to comply with any of the terms and
conditions herein stipulated, then this Deed of
Conditional Sale shall automatically and without any
further formality, become null and void." It is apparent
from a careful reading of Luzon Brokerage, as well as
the cases which preceded it and the subsequent ones
applying its doctrines, that the mere insertion of the price
and the mode of payment among the terms and
31
conditions of the agreement will not necessarily make it
a contract to sell. The phrase in the contract "on the
following terms and conditions" is standard form which
is not to be construed as imposing a condition, whether
suspensive or resolutory, in the sense of the happening
of a future and uncertain event upon which an obligation
is made to depend. There must be a manifest
understanding that the agreement is in what may be
referred to as "suspended animation" pending
compliance with provisions regarding payment. The
reservation of title to the object of the contract in the
seller is one such manifestation. Hence, it has been
decided in the case of Dignos v. Court of Appeals that,
absent a proviso in the contract that the title to the
property is reserved in the vendor until full payment of
the purchase price or a stipulation giving the vendor the
right to unilaterally rescind the contract the moment the
vendee fails to pay within the fixed period, the
transaction is an absolute contract of sale and not a
contract to sell.
4. ID.; ID.; CONTRACT OF SALE DISTINGUISHED
FROM CONTRACT TO SELL; EFFECT OF NON-
PAYMENT OF PURCHASE PRICE; EFFECT OF
DELIVERY ON OWNERSHIP OF OBJECT OF
CONTRACT. — In a contract of sale, the non-payment
of the price is a resolutory condition which extinguishes
the transaction that, for a time, existed and discharges
the obligations created thereunder. On the other hand,
"the parties may stipulate that ownership in the thing
shall not pass to the purchaser until he has fully paid the
price." In such a contract to sell, the full payment of the
price is a positive suspensive condition, such that in the
event of non-payment, the obligation of the seller to
deliver and transfer ownership never arises. Stated
differently, in a contract to sell, ownership is not
transferred upon delivery of property but upon full
payment of the purchase price. Consequently, in a
contract of sale, after delivery of the object of the
contract has been made, the seller loses ownership and
cannot recover the same unless the contract is rescinded.
But in the contract to sell, the seller retains ownership
and the buyer's failure to pay cannot even be considered
a breach, whether casual or substantial, but an event that
prevented the seller's duty to transfer title to the object of
the contract.

5. ID.; ID.; CASE OF SYCIP V. NATIONAL
COCONUT CORPORATION, ET AL., G.R. NO. L-
6618, APRIL 28, 1956, DISTINGUISHED FROM
CASE AT BAR. — Worthy of mention before
concluding is Sycip v. National Coconut Corporation, et
al. since, like this case, it involves a failure to open on
time the Letter of Credit required by the seller. In Sycip,
after the buyer offered to buy 2,000 tons of copra, the
seller sent a telegram dated December 19, 1946 to the
buyer accepting the offer but on condition that the latter
opens a Letter of Credit within 48 hours. It was not until
December 26, 1946, however, that the Letter of Credit
was opened. The Court, speaking through Justice
Bengzon, held that because of the delay in the opening
of the Letter of Credit; the seller was not obliged to
deliver the goods. Two factors distinguish Sycip from
the case at bar. First, while there has already been a
perfected contract of sale in the instant case, the parties
in Sycip were still undergoing the negotiation process.
The seller's qualified acceptance in Sycip served as a
counter offer which prevented the contract from being
perfected. Only an absolute and unqualified acceptance
of a definite offer manifests the consent necessary to
perfect a contract. Second, the Court found in Sycip that
time was of the essence for the seller who was anxious
to sell to other buyers should the offeror fail to open the
Letter of Credit within the stipulated time. In contrast,
there are no indicia in this case that can lead one to
conclude that time was of the essence for petitioner as
would make the eleven-day delay a fundamental breach
of the contract.
6. ID.; OBLIGATIONS AND CONTRACTS;
RESCISSION UNDER ARTICLE 1191 OF THE CIVIL
CODE; WHEN PROPER; DELAY IN PAYMENT FOR
TWENTY DAYS NOT CONSIDERED A Court, petitioners urge this Court to set aside the
SUBSTANTIAL BREACH OF CONTRACT; CASE
AT BAR. — The right to rescind pursuant to Article
1191 is not absolute. Rescission will not be permitted for
slight or casual breach of the contract. Here, petitioners
claim that the breach is so substantial as to justify
rescission . . . I am not convinced that the circumstances
may be characterized as so substantial and fundamental
as to defeat the object of the parties in making the
agreement. None of the alleged defects in the Letter of
Credit would serve to defeat the object of the parties. It
is to be stressed that the purpose of the opening of a
32
Letter of Credit is to effect payment. The above-
mentioned factors could not have prevented such
payment. It is also significant to note that petitioners sent
a telegram to private respondents on May 23, 1983
cancelling the contract. This was before they had even
received on May 26, 1983 the notice from the bank
about the opening of the Letter of Credit. How could
they have made a judgment on the materiality of the
provisions of the Letter of Credit for purposes of
rescinding the contract even before setting eyes on said
document? To be sure, in the contract, the private
respondents were supposed to open the Letter of Credit
on May 15, 1983 but, it was not until May 26, 1983 or
eleven (11) days later that they did so. Is the eleven-day
delay a substantial breach of the contract as could justify
the rescission of the contract? In Song Fo and Co. v.
Hawaiian-Philippine Co., it was held that a delay in
payment for twenty (20) days was not a violation of an
essential condition of the contract which would warrant
rescission for non-performance. In the instant case, the
contract is bereft of any suggestion that time was of the
essence. On the contrary, it is noted that petitioners
allowed private respondents' men to dig and remove the
scrap iron located in petitioners' premises between May
17, 1983 until May 30, 1983 or beyond the May 15,
1983 deadline for the opening of the Letter of Credit.
Hence, in the absence of any indication that the time was
of the essence, the eleven-day delay must be deemed a
casual breach which cannot justify a rescission.
DECISION
DAVIDE, JR., J p:
By this petition for review under Rule 45 of the Rules of
decision of public respondent Court of Appeals in C.A.-
G.R. CV No. 08807, 1 promulgated on 16 March 1988,
which affirmed with modification, in respect to the
moral damages, the decision of the Regional Trial Court
(RTC) of Iloilo in Civil Case No. 15128, an action for
specific performance and damages, filed by the herein
private respondent against the petitioners. The
dispositive portion of the trial court's decision reads as
follows:

"IN VIEW OF THE ABOVE FINDINGS, judgment is
hereby rendered in favor of plaintiff and against the
defendants ordering the latter to pay jointly and severally
plaintiff, to wit:
1) The sum of Thirty-Four Thousand Five Hundred
Eighty Three and 16/100 (P34,583.16), as actual
damages;
2) The sum of One Hundred Thousand (P100,000.00)
Pesos, as moral damages;
3) The sum of Ten Thousand (P10,000.00) Pesos, as
exemplary damages;
4) The sum of TWENTY Five Thousand (P25,000.00)
Pesos, as attorney's fees; and
5) The sum of Five Thousand (P5,000.00) Pesos as
actual litis expenses." 2
The public respondent reduced the amount of moral
damages to P25,000.00.
The antecedent facts, summarized by the public
respondent, are as follows:
"On May 1, 1983, herein plaintiff-appellee and
defendants-appellants entered into a sale involving scrap
iron located at the stockyard of defendant-appellant
corporation at Cawitan, Sta. Catalina, Negros Oriental,
subject to the condition that plaintiff-appellee will open
a letter of credit in the amount of P250,000.00 in favor
of defendant-appellant corporation on or before May 15,
1983. This is evidenced by a contract entitled `Purchase
and Sale of Scrap Iron' duly signed by both parties.
On May 17, 1983, plaintiff-appellee through his man
(sic), started to dig and gather and (sic) scrap iron at the
defendant-appellant's (sic) premises, proceeding with
such endeavor until May 30 when defendants-appellants
allegedly directed plaintiff-appellee's men to desist from
pursuing the work in view of an alleged case filed
against plaintiff-appellee by a certain Alberto Pursuelo.
This, however, is denied by defendants-appellants who
allege that on May 23, 1983, they sent a telegram to
plaintiff-appellee cancelling the contract of sale because
33
of failure of the latter to comply with the conditions
thereof.
On May 24, 1983, plaintiff-appellee informed
defendants-appellants by telegram that the letter of credit
was opened May 12, 1983 at the Bank of the Philippine
Islands main office in Ayala, but then (sic) the
transmittal was delayed.
On May 26, 1983, defendants-appellants received a letter
advice from the Dumaguete City Branch of the Bank of
the Philippine Islands dated May 26, 1983, the content
of which is quited (sic) as follows:
'Please be advised that we have received today cable
advise from our Head Office which reads as follows:
'Open today our irrevocable Domestic Letter of Credit
No. 01456-d fot (sic) P250,000.00 favor ANG TAY c/o
Visayan Sawmill Co., Inc. Dumaguete City, Negros
Oriental Account of ARMACO-MARSTEEL ALLOY
CORPORATION 2nd Floor Alpap 1 Bldg., 140 Alfaro
stp (sic) Salcedo Village, Makati, Metro Manila
Shipments of about 500 MT of assorted steel scrap
marine/heavy equipment expiring on July 24, 1983
without recourse at sight draft drawn on Armaco
Marsteel Alloy Corporation accompanied by the
following documents: Certificate of Acceptance by
Armaco-Marsteel Alloy Corporation shipment from
Dumaguete City to buyer's warehouse partial shipment
allowed/transhipment (sic) not allowed'.
For your information'.
On July 19, 1983, plaintiff-appellee sent a series of
telegrams stating that the case filed against him by
Pursuelo had been dismissed and demanding that
defendants-appellants comply with the deed of sale,
otherwise a case will be filed against them.
In reply to those telegrams, defendants-appellants'
lawyer, on July 20, 1983 informed plaintiff-appellee's
lawyer that defendant-appellant corporation is unwilling
to continue with the sale due to plaintiff-appellee's
failure to comply with essential pre-conditions of the
contract.

On July 29, 1983, plaintiff-appellee filed the complaint
below with a petition for preliminary attachment. The
writ of attachment was returned unserved because the
defendant-appellant corporation was no longer in
operation and also because the scrap iron as well as other
pieces of machinery can no longer be found on the
premises of the corporation." 3
In his complaint, private respondent prayed for judgment
ordering the petitioner corporation to comply with the
contract by delivering to him the scrap iron subject
thereof; he further sought an award of actual, moral and
exemplary damages, attorney's fees and the costs of the
suit. 4
In their Answer with Counterclaim, 5 petitioners insisted
that the cancellation of the contract was justified because
of private respondent's non-compliance with essential
pre-conditions, among which is the opening of an
irrevocable and unconditional letter of credit not later
than 15 May 1983.
During the pre-trial of the case on 30 April 1984, the
parties defined the issues to be resolved; these issues
were subsequently embodied in the pre-trial order, to
wit:
"1. Was the contract entitled Purchase and Sale of Scrap
Iron, dated May 1, 1983 executed by the parties
cancelled and terminated before the Complaint was filed
by anyone of the parties; if so, what are the grounds and
reasons relied upon by the cancelling parties; and were
the reasons or grounds for cancelling valid and justified?
2. Are the parties entitled to damages they respectively
claim under the pleadings?" 6
On 29 November 1985, the trial court rendered its
judgment, the dispositive portion of which was quoted
earlier.
Petitioners appealed from said decision to the Court of
Appeals which docketed the same as C.A.-G.R. CV No.
08807. In their Brief, petitioners, by way of assigned
errors, alleged that the trial court erred:
"1. In finding that there was delivery of the scrap iron
subject of the sale;
34
2. In not finding that plaintiff had not complied with the
conditions in the contract of sale;
3. In finding that defendants-appellants were not
justified in cancelling the sale;
4. In awarding damages to the plaintiff as against the
defendants-appellants;
5. In not awarding damages to defendants-appellants." 7
Public respondent disposed of these assigned errors in
this wise:
"On the first error assigned, defendants-appellants argue
that there was no delivery because the purchase
document states that the seller agreed to sell and the
buyer agreed to buy 'an undetermined quantity of scrap
iron and junk which the seller will identify and
designate.' Thus, it is contended, since no identification
and designation was made, there could be no delivery. In
addition, defendants-appellants maintain that their
obligation to deliver cannot be completed until they
furnish the cargo trucks to haul the weighed materials to
the wharf.
The arguments are untenable. Article 1497 of the Civil
Code states:
'The thing sold shall be understood as delivered when it
is placed in the control and possession of the vendee.'
In the case at bar, control and possession over the
subject matter of the contract was given to plaintiff-
appellee, the buyer, when the defendants-appellants as
the sellers allowed the buyer and his men to enter the
corporation's premises and to dig-up the scrap iron. The
pieces of scrap iron then (sic) placed at the disposal of
the buyer. Delivery was therefore complete. The
identification and designation by the seller does not
complete delivery.
On the second and third assignments of error,
defendants-appellants argue that under Articles 1593 and
1597 of the Civil Code, automatic rescission may take
place by a mere notice to the buyer if the latter
committed a breach of the contract of sale.

Even if one were to grant that there was a breach of the
contract by the buyer, automatic rescission cannot take
place because, as already (sic) stated, delivery had
already been made. And, in cases where there has
already been delivery, the intervention of the court is
necessary to annul the contract.
As the lower court aptly stated:
'Respecting these allegations of the contending parties,
while it is true that Article 1593 of the New Civil Code
provides that with respect to movable property, the
rescission of the sale shall of right take place in the
interest of the vendor, if the vendee fails to tender the
price at the time or period fixed or agreed, however,
automatic rescission is not allowed if the object sold has
been delivered to the buyer (Guevarra vs. Pascual, 13
Phil. 311; Escueta vs. Pando, 76 Phil 256), the action
being one to rescind judicially and where (sic) Article
1191, supra, thereby applies. There being already an
implied delivery of the items, subject matter of the
contract between the parties in this case, the defendant
having surrendered the premises where the scraps (sic)
were found for plaintiff's men to dig and gather, as in
fact they had dug and gathered, this Court finds the mere
notice of resolution by the defendants untenable and not
conclusive on the rights of the plaintiff (Ocejo Perez vs.
Int. Bank, 37 Phi. 631). Likewise, as early as in the case
of Song Fo vs. Hawaiian Philippine Company, it has
been ruled that rescission cannot be sanctioned for a
slight or casual breach (47 Phil. 821).'
In the case of Angeles vs. Calasanz (135 (1935) SCRA
323), the Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either
party has the right to rescind the contract upon failure of
the other to perform the obligation assumed thereunder.
Of course, it must be understood that the right of a party
in treating a contract as cancelled or resolved on account
of infractions by the other contracting party must be
made known to the other and is always provisional,
being ever subject to scrutiny and review by the proper
court.'
35
Thus, rescission in cases falling under Article 1191 of
the Civil Code is always subject to review by the courts
and cannot be considered final.
In the case at bar, the trial court ruled that rescission is
improper because the breach was very slight and the
delay in opening the letter of credit was only 11 days.
'Where time is not of the essence of the agreement, a
slight delay by one party in the performance of his
obligation is not a sufficient ground for rescission of the
agreement. Equity and justice mandates (sic) that the
vendor be given additional (sic) period to complete
payment of the purchase price.' (Taguda vs. Vda. de
Leon, 132 SCRA (1984), 722).'
There is no need to discuss the fourth and fifth assigned
errors since these are merely corollary to the first three
assigned errors." 8
Their motion to reconsider the said decision having been
denied by public respondent in its Resolution of 4 May
1988, 9 petitioners filed this petition reiterating the
abovementioned assignment of errors.
There is merit in the instant petition.
Both the trial court and the public respondent erred in
the appreciation of the nature of the transaction between
the petitioner corporation and the private respondent. To
this Court's mind, what obtains in the case at bar is a
mere contract to sell or promise to sell, and not a
contract of sale.
The trial court assumed that the transaction is a contract
of sale and, influenced by its view that there was an
"implied delivery" of the object of the agreement,
concluded that Article 1593 of the Civil Code was
inapplicable; citing Guevarra vs. Pascual 10 and Escueta
vs. Pando, 11 it ruled that rescission under Article 1191
of the Civil Code could only be done judicially. The trial
court further classified the breach committed by the
private respondent as slight or casual, foreclosing,
thereby, petitioners' right to rescind the agreement.
Article 1593 of the Civil Code provides:

"ARTICLE 1593. With respect to movable property, the
rescission of the sale shall of right take place in the
interest of the vendor, if the vendee, upon the expiration
of the period fixed for the delivery of the thing, should
not have appeared to receive it, or, having appeared, he
should not have tendered the price at the same time,
unless a longer period has been stipulated for its
payment."
Article 1191 provides:
"ARTICLE 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period."
xxx xxx xxx
Sustaining the trial court on the issue of delivery, public
respondent cites Article 1497 of the Civil Code which
provides:
"ARTICLE 1497. The thing sold shall be understood as
delivered, when it is placed in the control and possession
of the vendee."
In the agreement in question, entitled PURCHASE AND
SALE OF SCRAP IRON, 12 the seller bound and
promised itself to sell the scrap iron upon the fulfillment
by the private respondent of his obligation to make or
indorse an irrevocable and unconditional letter of credit
in payment of the purchase price. Its principal stipulation
reads, to wit:
xxx xxx xxx
"Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees
to buy, an undetermined quantity of scrap iron and junk
36
which the SELLER will identify and designate now at
Cawitan, Sta. Catalina, Negros Oriental, at the price of
FIFTY CENTAVOS (P0.50) per kilo on the following
terms and conditions:
1. Weighing shall be done in the premises of the
SELLER at Cawitan, Sta. Catalina, Neg. Oriental.
2. To cover payment of the purchase price, BUYER will
open, make or indorse an irrevocable and unconditional
letter of credit not later than May 15, 1983 at the
Consolidated Bank and Trust Company, Dumaguete
City, Branch, in favor of the SELLER in the sum of
TWO HUNDRED AND FIFTY THOUSAND PESOS
(P250,000.00), Philippine Currency.
3. The SELLER will furnish the BUYER free of charge
at least three (3) cargo trucks with drivers, to haul the
weighed materials from Cawitan to the TSMC wharf at
Sta. Catalina for loading on BUYER's barge. All
expenses for labor, loading and unloading shall be for
the account of the BUYER.
4. SELLER shall be entitled to a deduction of three
percent (3%) per ton as rust allowance." (Emphasis
supplied).
The petitioner corporation's obligation to sell is
unequivocally subject to a positive suspensive condition,
i.e., the private respondent's opening, making or
indorsing of an irrevocable and unconditional letter of
credit. The former agreed to deliver the scrap iron only
upon payment of the purchase price by means of an
irrevocable and unconditional letter of credit. Otherwise
stated, the contract is not one of sale where the buyer
acquired ownership over the property subject to the
resolutory condition that the purchase price would be
paid after delivery. Thus, there was to be no actual sale
until the opening, making or indorsing of the irrevocable
and unconditional letter of credit. Since what obtains in
the case at bar is a mere promise to sell, the failure of the
private respondent to comply with the positive
suspensive condition cannot even be considered a breach
— casual or serious — but simply an event that
prevented the obligation of petitioner corporation to
convey title from acquiring binding force. In Luzon

Brokerage Co., Inc. vs. Maritime Building Co., Inc., 13
this Court stated:
" . . . The upshot of all these stipulations is that in
seeking the ouster of Maritime for failure to pay the
price as agreed upon, Myers was not rescinding (or more
properly, resolving) the contract, but precisely enforcing
it according to its express terms. In its suit Myers was
not seeking restitution to it of the ownership of the thing
sold (since it was never disposed of), such restoration
being the logical consequence of the fulfillment of a
resolutory condition, express or implied (article 1190);
neither was it seeking a declaration that its obligation to
sell was extinguished. What it sought was a judicial
declaration that because the suspensive condition (full
and punctual payment) had not been fulfilled, its
obligation to sell to Maritime never arose or never
became effective and, therefore, it (Myers) was entitled
to repossess the property object of the contract,
possession being a mere incident to its right of
ownership. It is elementary that, as stated by Castan, —
'b) Si la condicion suspensiva llega a faltar, la obligacion
se tiene por no existente, y el acreedor pierde todo
derecho, incluso el de utilizar las medidas conservativas.'
(3 Cast n, Derecho Civil, 7a Ed., p. 107). (Also Puig
Peña, Der. Civ., T. IV (1), p. 113)'."
In the instant case, not only did the private respondent
fail to open, make or indorse an irrevocable and
unconditional letter of credit on or before 15 May 1983
despite his earlier representation in his 24 May 1983
telegram that he had opened one on 12 May 1983, the
letter of advice received by the petitioner corporation on
26 May 1983 from the Bank of the Philippine Islands
Dumaguete City branch explicitly makes reference to the
opening on that date of a letter of credit in favor of
petitioner Ang Tay c/o Visayan Sawmill Co. Inc., drawn
without recourse on ARMACO-MARSTEEL ALLOY
CORPORATION and set to expire on 24 July 1983,
which is indisputably not in accordance with the
stipulation in the contract signed by the parties on at
least three (3) counts: (1) it was not opened, made or
indorsed by the private respondent, but by a corporation
which is not a party to the contract; (2) it was not opened
with the bank agreed upon; and (3) it is not irrevocable
and unconditional, for it is without recourse, it is set to
37
expire on a specific date and it stipulates certain
conditions with respect to shipment. In all probability,
private respondent may have sold the subject scrap iron
to ARMACO-MARSTEEL ALLOY CORPORATION,
or otherwise assigned to it the contract with the
petitioners. Private respondent's complaint fails to
disclose the sudden entry into the picture of this
corporation.
Consequently, the obligation of the petitioner
corporation to sell did not arise; it therefore cannot be
compelled by specific performance to comply with its
prestation. In short, Article 1191 of the Civil Code does
not apply; on the contrary, pursuant to Article 1597 of
the Civil Code, the petitioner corporation may totally
rescind, as it did in this case, the contract. Said Article
provides:
"ARTICLE 1597. Where the goods have not been
delivered to the buyer, and the buyer has repudiated the
contract of sale, or has manifested his inability to
perform his obligations, thereunder, or has committed a
breach thereof, the seller may totally rescind the contract
of sale by giving notice of his election so to do to the
buyer."
The trial court ruled, however, and the public respondent
was in agreement, that there had been an implied
delivery in this case of the subject scrap iron because on
17 May 1983, private respondent's men started digging
up and gathering scrap iron within the petitioner's
premises. The entry of these men was upon the private
respondent's request. Paragraph 6 of the Complaint
reads:
"6. That on May 17, 1983 Plaintiff with the consent of
defendant Ang Tay sent his men to the stockyard of
Visayan Sawmill Co., Inc. at Cawitan, Sta. Catalina,
Negros Oriental to dig and gather the scrap iron and
stock the same for weighing." 14
This permission or consent can, by no stretch of the
imagination, be construed as delivery of the scrap iron in
the sense that, as held by the public respondent, citing
Article 1497 of the Civil Code, petitioners placed the
private respondent in control and possession thereof. In
the first place, said Article 1497 falls under the Chapter

15 Obligations of the Vendor, which is found in Title VI
(Sales), Book IV of the Civil Code. As such, therefore,
the obligation imposed therein is premised on an existing
obligation to deliver the subject of the contract. In the
instant case, in view of the private respondent's failure to
comply with the positive suspensive condition earlier
discussed, such an obligation had not yet arisen. In the
second place, it was a mere accommodation to expedite
the weighing and hauling of the iron in the event that the
sale would materialize. The private respondent was not
thereby placed in possession of and control over the
scrap iron. Thirdly, We cannot even assume the
conversion of the initial contract or promise to sell into a
contract of sale by the petitioner corporation's alleged
implied delivery of the scrap iron because its action and
conduct in the premises do not support this conclusion.
Indeed, petitioners demanded the fulfillment of the
suspensive condition and eventually cancelled the
contract.
All told, Civil Case No. 15128 filed before the trial court
was nothing more than the private respondent's
preemptive action to beat the petitioners to the draw.
One last point. This Court notes the palpably excessive
and unconscionable moral and exemplary damages
awarded by the trial court to the private respondent
despite a clear absence of any legal and factual basis
therefor. In contracts, such as in the instant case, moral
damages may be recovered if defendants acted
fraudulently and in bad faith, 16 while exemplary
damages may only be awarded if defendants acted in a
wanton, fraudulent, reckless, oppressive or malevolent
manner. 17 In the instant case, the refusal of the
petitioners to deliver the scrap iron was founded on the
non-fulfillment by the private respondent of a suspensive
condition. It cannot, therefore, be said that the herein
petitioners had acted fraudulently and in bad faith or in a
wanton, reckless, oppressive or malevolent manner.
What this Court stated in Inhelder Corp. vs. Court of
Appeals 18 needs to be stressed anew:
"At this juncture, it may not be amiss to remind Trial
Courts to guard against the award of exhorbitant (sic)
damages that are way out of proportion to the
environmental circumstances of a case and which, time
and again, this Court has reduced or eliminated. Judicial
38
discretion granted to the Courts in the assessment of
damages must always be exercised with balanced
restraint and measured objectivity."
For, indeed, moral damages are emphatically not
intended to enrich a complainant at the expense of the
defendant. They are awarded only to enable the injured
party to obtain means, diversion or amusements that will
serve to obviate the moral suffering he has undergone,
by reason of the defendant's culpable action. Its award is
aimed at the restoration, within the limits of the possible,
of the spiritual status quo ante, and it must be
proportional to the suffering inflicted. 19
WHEREFORE, the instant petition is GRANTED. The
decision of public respondent Court of Appeals in C.A.-
G.R. CV No. 08807 is REVERSED and Civil Case No.
15128 of the Regional Trial Court of Iloilo is ordered
DISMISSED.
Costs against the private respondent.
SO ORDERED.
Narvasa, C .J ., Cruz, Feliciano, Padilla, Bidin and
Bellosillo, JJ ., concur.
Gutierrez, Jr., J ., On terminal leave.
Melo and Quiason, JJ ., No part.
Separate Opinions
ROMERO, J., dissenting:
I vote to dismiss the petition.
Petitioner corporation, Visayan Sawmill Co., Inc.,
entered into a contract on May 1, 1983 with private
respondent RJH Trading Co. represented by private
respondent Ramon J. Hibionada. The contract, entitled
"PURCHASE AND SALE OF SCRAP IRON," stated:
This contract for the Purchase and Sale of Scrap Iron,
made and executed at Dumaguete City, Phil., this 1st day
of May, 1983 by and between:

VISAYAN SAWMILL CO., INC., . . . hereinafter called
the SELLER, and
RAMON J. HIBIONADA, . . . hereinafter called the
BUYER,
witnesseth:
That the SELLER agrees to sell, and the BUYER agrees
to buy, an undetermined quantity of scrap iron and junk
which the SELLER will identify and designate now at
Cawitan, Sta. Catalina, Negros Oriental, at the price of
FIFTY CENTAVOS (P.50) per kilo on the following
terms and conditions:
1. Weighing shall be done in the premises of the
SELLER at Cawitan, Sta. Catalina, Negros Oriental.
2. To cover payment of the purchase price BUYER will
open, make or indorse an irrevocable and unconditional
letter of credit not later than May 15, 1983 at the
Consolidated Bank and Trust Company, Dumaguete
City Branch, in favor of the SELLER in the sum of
TWO HUNDRED AND FIFTY THOUSAND PESOS
(P250,000.00), Philippine currency.
3. The SELLER will furnish the BUYER free of charge
at least three (3) cargo trucks with drivers, to haul the
weighed materials from Cawitan to the TSMC wharf at
Sta. Catalina for loading on BUYER'S barge. All
expenses for labor, loading and unloading shall be for
the account of the BUYER.
4. SELLER shall be entitled to a deduction of three
percent (3%) per ton as rust allowance.
xxx xxx xxx
On May 17, 1983, the workers of private respondents
were allowed inside petitioner company's premises in
order to gather the scrap iron. However, on May 23,
1983, petitioner company sent a telegram which stated:
"RAMON HIBIONADA
RJH TRADING
286 QUEZON STREET
39
ILOILO CITY
DUE YOUR FAILURE TO COMPLY WITH
CONDITIONS BEFORE DEADLINE OUR
CONTRACT FOR PURCHASE SCRAP IRON
CANCELLED
VISAYAN SAWMILL CO., INC."
Hibionada wired back on May 24, 1983 the following:
"ANG TAY VISAYAN SAWMILL
DUMAGUETE CITY
LETTER OF CREDIT AMOUNTING P250,000.00
OPENED MAY 12, 1983 BANK OF PI MAIN OFFICE
AYALA AVENUE MAKATI METRO MANILA BUT
TRANSMITTAL IS DELAYED PLEASE CONSIDER
REASON WILL PERSONALLY FOLLOW-UP IN
MANILA THANKS REGARDS.
RAMON HIBIONADA"
On May 26, 1983, petitioner company received the
following advice from the Dumaguete City Branch of
The Bank of Philippine Islands: cdll
"Opened today our Irrevocable Domestic Letter of
Credit 2-01456-4 for P250,000.00 in favor ANG TAY
c/o Visayan Sawmill Co., Inc. Dumaguete City Negros
Oriental Account of ARMACO-MARSTEEL ALLOW
(sic) CORPORATION 2nd Floor Alpap 1 Bldg., 140
Alfaro st. Salcedo Village Makati Metro Manila
Shipments of about 500 MT of assorted steel scrap
marine/heavy equipment expiring on July 23, 1983
without recourse at slight draft drawn on Armaco-
Marsteel Alloy Corporation accompanied by the
following documents: Certificate of acceptance by
Armaco-Marsteel Allow (sic) Corporation shipment
from Dumaguete City to buyer's warehouse partial
shipment allowed/transhipment not allowed."
Subsequently, petitioners' counsel sent another telegram
to private respondents stating that:
"VISAYAN SAWMILL COMPANY UNWILLING TO
CONTINUE SALE OF SCRAP IRON TO

HIBIONADA DUE TO NON COMPLIANCE WITH
ESSENTIAL PRE CONDITIONS"
Consequently, private respondents filed a complaint for
specific performance and damages with the Regional
Trial Court (RTC) of Iloilo (Branch XXXV) which
decided in favor of private respondents. The RTC
decision having been affirmed by the Court of Appeals,
the present petition was filed.
Finding the petition meritorious, the ponencia reversed
the decision of the Court of Appeals. Based on its
appreciation of the contract in question, it has arrived at
the conclusion that herein contract is not a contract of
sale but a contract to sell which is subject to a positive
suspensive condition, i.e., the opening of a letter of
credit by private respondents. Since the condition was
not fulfilled, the obligation of petitioners to convey title
did not arise. The lengthy decision of Luzon Brokerage
Co., Inc. v. Maritime Co. Inc. 1 penned by Justice J.B.L.
Reyes, was cited as authority on the assumption that
subject contract is indeed a contract to sell but which
will be shown herein as not quite accurate.
Evidently, the distinction between a contract to sell and a
contract of sale is crucial in this case. Article 1458 of the
Civil Code has this definition: "By a contract of sale, one
of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing and the
other to pay therefor a price certain in money or its
equivalent."
Article 1475 gives the significance of this mutual
undertaking of the parties, thus: "The contract of sale is
perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and
upon the price. From that moment, the parties may
reciprocally demand performance, subject to the
provisions of the law governing the form of contracts."
Thus, when the parties entered into the contract entitled
"Purchase and Sale of Scrap Iron" on May 1, 1983, the
contract reached the stage of perfection, there being a
meeting of the' minds upon the object which is the
subject matter of the contract and the price which is the
consideration. Applying Article 1475 of the Civil Code,
from that moment, the parties may reciprocally demand
40
performance of the obligations incumbent upon them,
i.e., delivery by the vendor and payment by the vendee.
Petitioner, in its petition, admits that "[b]efore the
opening of the letter of credit, buyer Ramon Hibionada
went to Mr. Ang Tay and informed him that the letter of
credit was forthcoming and if it was possible for him
(buyer) to start cutting and digging the scrap iron before
the letter of credit arrives and the former (seller)
manifested no objection, and he immediately sent 18 or
20 people to start the operation." 2
From the time the seller gave access to the buyer to enter
his premises, manifesting no objection thereto but even
sending 18 or 20 people to start the operation, he has
placed the goods in the control and possession of the
vendee and delivery is effected. For according to Article
1497, "The thing sold shall be understood as delivered
when it is placed in the control and possession of the
vendee." 3
Such action or real delivery (traditio) is the act that
transfers ownership. Under Article 1496 of the Civil
Code, "The ownership of the thing sold is acquired by
the vendee from the moment it is delivered to him in any
of the ways specified in Articles 1497 to 1501, or in any
other manner signifying an agreement that the
possession is transferred from the vendor to the vendee."
That payment of the price in any form was not yet
effected is immaterial to the transfer of the right of
ownership. In a contract of sale, the non-payment of the
price is a resolutory condition which extinguishes the
transaction that, for a time, existed and discharges the
obligations created thereunder. 4
On the other hand, "the parties may stipulate that
ownership in the thing shall not pass to the purchaser
until he has fully paid the price." 5 In such a contract to
sell, the full payment of the price is a positive suspensive
condition, such that in the event of non-payment, the
obligation of the seller to deliver and transfer ownership
never arises. Stated differently, in a contract to sell,
ownership is not transferred upon delivery of property
but upon full payment of the purchase price. 6
Consequently, in a contract of sale, after delivery of the
object of the contract has been made, the seller loses

ownership and cannot recover the same unless the
contract is rescinded. But in the contract to sell, the
seller retains ownership and the buyer's failure to pay
cannot even be considered a breach, whether casual or
substantial, but an event that prevented the seller's duty
to transfer title to the object of the contract.
At the outset, it must be borne in mind that a provision
in the contract regarding the mode of payment, like the
requirement for the opening of the Letter of Credit in
this case, is not among the essential requirements of a
contract of sale enumerated in Articles 1305 7 and 1474,
8 the absence of any of which will prevent the perfection
of the contract from happening. Likewise, it must be
emphasized that not every provision regarding payment
should automatically be classified as a suspensive
condition. To do so would change the nature of most
contracts of sale into contracts to sell. For a provision in
the contract regarding the payment of the price to be
considered a suspensive condition, the parties must have
made this clear in certain and unambiguous terms, such
as for instance, by reserving or withholding title to the
goods until full payment by the buyer. 9 This was a
pivotal circumstance in the Luzon Brokerage case where
the contract in question was replete with very explicit
provisions such as the following: "Title to the properties
subject of this contract remains with the Vendor and
shall pass to, and be transferred in the name of the
Vendee only upon complete payment of the full price . .
.;" 10 the Vendor (Myers) will execute and deliver to the
Vendee a definite and absolute Deed of Sale upon full
payment of the Vendee . . .; 11 and "should the Vendee
fail to pay any of the monthly installments, when due, or
otherwise fail to comply with any of the terms and
conditions herein stipulated, then this Deed of
Conditional Sale shall automatically and without any
further formality, become null and void." 12
It is apparent from a careful reading of Luzon
Brokerage, as well as the cases which preceded it 13 and
the subsequent ones applying its doctrines, 14 that the
mere insertion of the price and the mode of payment
among the terms and conditions of the agreement will
not necessarily make it a contract to sell. The phrase in
the contract "on the following terms and conditions" is
standard form which is not to be construed as imposing a
condition, whether suspensive or resolutory, in the sense
41
of the happening of a future and uncertain event upon
which an obligation is made to depend. There must be a
manifest understanding that the agreement is in what
may be referred to as "suspended animation" pending
compliance with provisions regarding payment. The
reservation of title to the object of the contract in the
seller is one such manifestation. Hence, it has been
decided in the case of Dignos v. Court of Appeals 15
that, absent a proviso in the contract that the title to the
property is reserved in the vendor until full payment of
the purchase price or a stipulation giving the vendor the
right to unilaterally rescind the contract the moment the
vendee fails to pay within the fixed period, the
transaction is an absolute contract of sale and not a
contract to sell. 16
In the instant case, nowhere in the contract did it state
that the petitioners reserve title to the goods until private
respondents have opened a letter of credit. Nor is there
any provision declaring the contract as without effect
until after the fulfillment of the condition regarding the
opening of the letter of credit.
Examining the contemporaneous and subsequent
conduct of the parties, which may be relevant in the
determination of the nature and meaning of the contract,
17 it is significant that in the telegram sent by petitioners
to Hibionada on May 23, 1983, it stated that "DUE [TO]
YOUR FAILURE TO COMPLY WITH CONDITIONS
BEFORE DEADLINE OUR CONTRACT FOR
PURCHASE SCRAP IRON CANCELLED." And in
some of the pleadings in the course of this litigation,
petitioners referred to the transaction as a contract of
sale. 18
In light of the provisions of the contract,
contemporaneous and subsequent acts of the parties and
the other relevant circumstances surrounding the case, it
is evident that the stipulation for the buyer to open a
Letter of Credit in order to cover the payment of the
purchase price does not bear the marks of a suspensive
condition. The agreement between the parties was a
contract of sale and the "terms and conditions" embodied
therein which are standard form, are clearly resolutory in
nature, the breach of which may give either party the
option to bring an action to rescind and/or seek damages.
Contrary to the conclusions arrived at in the ponencia,

the transaction is not a contract to sell but a contract of
sale.
However, the determination of the nature of the contract
does not settle the controversy. A breach of the contract
was committed and the rights and liabilities of the
parties must be established. The ponencia,
notwithstanding its conclusion that no contract of sale
existed, proceeded to state that petitioner company may
rescind the contract based on Article 1597 of the Civil
Code which expressly applies only to a contract of sale.
It provides:
"ARTICLE 1597. Where the goods have not been
delivered to the buyer, and the buyer has repudiated the
contract of sale, or has manifested his inability to
perform his obligations, thereunder, or has committed a
breach thereof, the seller may totally rescind the contract
of sale by giving notice of his election so to do to the
buyer." (Emhasis supplied).
The ponencia was then confronted with the issue of
delivery since Article 1597 applies only "[w]here the
goods have not yet been delivered." In this case, as
aforestated, the workers of private respondents were
actually allowed to enter the petitioners' premises, thus,
giving them control and possession of the goods. At this
juncture, it is even unnecessary to discuss the issue of
delivery in relation to the right of rescission nor to rely
on Article 1597. In every contract which contains
reciprocal obligations, the right to rescind is always
implied under Article 1191 of the Civil Code in case one
of the parties fails to comply with his obligations. 19
The right to rescind pursuant to Article 1191 is not
absolute. Rescission will not be permitted for slight or
casual breach of the contract. 20 Here, petitioners claim
that the breach is so substantial as to justify rescission,
not only because the Letter of Credit was not opened on
May 15, 1983 as stipulated in the contract but also
because of the following factors: (1) the Letter of Credit,
although opened in favor of petitioners was made against
the account of a certain Marsteel Alloy Corporation,
instead of private respondent's account; (2) the Letter of
Credit referred to "assorted steel scrap" instead of "scrap
iron and junk" as provided in the contract; (3) the Letter
of Credit placed the quantity of the goods at "500 MT"
42
while the contract mentioned "an undetermined quantity
of scrap iron and junk"; (4) no amount from the Letter of
Credit will be released unless accompanied by a
Certificate of Acceptance; and (5) the Letter of Credit
had an expiry date.
I am not convinced that the above circumstances may be
characterized as so substantial and fundamental as to
defeat the object of the parties in making the agreement.
21 None of the alleged defects in the Letter of Credit
would serve to defeat the object of the parties. It is to be
stressed that the purpose of the opening of a Letter of
Credit is to effect payment. The above-mentioned factors
could not have prevented such payment. It is also
significant to note that petitioners sent a telegram to
private respondents on May 23, 1983 cancelling the
contract. This was before they had even received on May
26, 1983 the notice from the bank about the opening of
the Letter of Credit. How could they have made a
judgment on the materiality of the provisions of the
Letter of Credit for purposes of rescinding the contract
even before setting eyes on said document?
To be sure, in the contract, the private respondents were
supposed to open the Letter of Credit on May 15, 1983
but, it was not until May 26, 1983 or eleven (11) days
later that they did so. Is the eleven-day delay a
substantial breach of the contract as could justify the
rescission of the contract?
In Song Fo and Co. v. Hawaiian-Philippine Co. 22 it was
held that a delay in payment for twenty (20) days was
not a violation of an essential condition of the contract
which would warrant rescission for non-performance. In
the instant case, the contract is bereft of any suggestion
that time was of the essence. On the contrary, it is noted
that petitioners allowed private respondents' men to dig
and remove the scrap iron located in petitioners'
premises between May 17, 1983 until May 30, 1983 or
beyond the May 15, 1983 deadline for the opening of the
Letter of Credit. Hence, in the absence of any indication
that the time was of the essence, the eleven-day delay
must be deemed a casual breach which cannot justify a
rescission.
Worthy of mention before concluding is Sycip v.
National Coconut Corporation, et al. 23 since, like this

case, it involves a failure to open on time the Letter of
Credit required by the seller. In Sycip, after the buyer
offered to buy 2,000 tons of copra, the seller sent a
telegram dated December 19, 1946 to the buyer
accepting the offer but on condition that the latter opens
a Letter of Credit within 48 hours. It was not until
December 26, 1946, however, that the Letter of Credit
was opened. The Court, speaking through Justice
Bengzon, held that because of the delay in the opening
of the Letter of Credit; the seller was not obliged to
deliver the goods.
Two factors distinguish Sycip from the case at bar. First,
while there has already been a perfected contract of sale
in the instant case, the parties in Sycip were still
undergoing the negotiation process. The seller's qualified
acceptance in Sycip served as a counter offer which
prevented the contract from being perfected. Only an
absolute and unqualified acceptance of a definite offer
manifests the consent necessary to perfect a contract. 24
Second, the Court found in Sycip that time was of the
essence for the seller who was anxious to sell to other
buyers should the offeror fail to open the Letter of Credit
within the stipulated time. In contrast, there are no
indicia in this case that can lead one to conclude that
time was of the essence for petitioner as would make the
eleven-day delay a fundamental breach of the contract.
In sum, to my mind, both the trial court and the
respondent Court of Appeals committed no reversible
error in their appreciation of the agreement in question
as a contract of sale and not a contract to sell, as well as
holding that the breach of the contract was not
substantial and, therefore, petitioners were not justified
in law in rescinding the agreement.
PREMISES CONSIDERED, the Petition must be
DISMISSED and the decision of the Court of Appeals
AFFIRMED.
G.R. No. 96643. April 23, 1993.
ERNESTO DEIPARINE, JR., petitioner,
vs.
THE HON. COURT OF APPEALS, CESARIO
CARUNGAY and ENGR. NICANOR TRINIDAD,
respondents.
43
Gregorio B. Escasinas for petitioner.
Florido and Associates for respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; RESCISSION IS
USED IN TWO DIFFERENT CONTEXTS IN THE
CIVIL CODE. — Deiparine seems to be confused over
the right of rescission, which is used in two different
contexts in the Civil Code. Under the law on contracts,
there are what are called "rescissible contracts" which
are enumerated in Article 1381 . . . There is also a right
of rescission under the law on obligations as granted in
Article 1191.
2. ID.; ID.; ARTICLES 19, 1159, 1191, 1714, 1715
AND 1727, CIVIL CODE ARE APPLICABLE, WHILE
ARTICLES 1381, 1385 AND 1725, SAME CODE ARE
NOT, IN CASE OF BREACH OF CONSTRUCTION
CONTRACT. — The petitioner challenges the
application by the lower court of Article 1191 of the
Civil Code in rescinding the construction agreement. His
position is that the applicable rules are Articles 1385 and
1725 of the Civil Code . . . Article 1385, upon which
Deiparine relies, deals with the rescission of the
contracts enumerated above, which do not include the
construction agreement in question . . . The construction
contract falls squarely under the coverage of Article
1191 because it imposes upon Deiparine the obligation
to build the structure and upon the Carungays the
obligation to pay for the project upon its completion.
Article 1191, unlike Article 1385, is not predicated on
economic prejudice to one of the parties but on breach of
faith by one of them that violates the reciprocity between
them. The violation of reciprocity between Deiparine
and the Carungay spouses, to wit, the breach caused by
Deiparine's failure to follow the stipulated plans and
specifications, has given the Carungay spouses the right
to rescind or cancel the contract. Article 1725 cannot
support the petitioner's position either, for this
contemplates a voluntary withdrawal by the owner
without fault on the part of the contractor, who is
therefore entitled to indemnity, and even damages, for
the work he has already commenced. There is no such
voluntary withdrawal in the case at bar. On the contrary,
the Carungays have been constrained to ask for judicial

rescission because of the petitioner's failure to comply
with the terms and conditions of their contract. The other
applicable provisions are: Article 1714 . . . Article 1715 .
. . Article 1727 . . . It is a basic principle in human
relations, acknowledged in Article 19 of the Civil Code,
that "every person must, in the performance of his
duties, act with justice, give everyone his due, and
observe honesty and good faith." This admonition is
reiterated in Article 1159, which states that "obligations
arising from contracts have the force of law between the
contracting parties and should be complied with in good
faith." The petitioner has ignored these exhortations and
is therefore not entitled to the relief he seeks.
3. ADMINISTRATIVE LAW; THE PHILIPPINE
DOMESTIC CONSTRUCTION BOARD HAS NO
POWER TO ADJUDICATE A CASE FOR
RESCISSION OF CONSTRUCTION CONTRACT. —
The wording of P.D. 1746 is clear. The adjudicatory
powers of the Philippine Domestic Construction Board
are meant to apply only to public construction contracts.
Its power over private construction contracts is limited to
the formulation and recommendation of rules and
procedures for the adjudication and settlement of
disputes involving such (private) contracts. It therefore
has no jurisdiction over cases like the one at bar which
remain cognizable by the regular courts of justice.
4. LEGAL AND JUDICIAL ETHICS; COUNSEL
WHO TRIES TO MISLEAD THE COURT BY
DELIBERATELY MISQUOTING THE LAW IS
SUBJECT TO DISCIPLINE. — Counsel is obviously
trying to mislead the Court. First, he purposely
misquotes Section 6(b), paragraph 3, substituting the
word "the" for "public," . . . Second, he makes the wrong
emphasis in paragraph 5, . . . For deliberately changing
the language of the above-quoted paragraph 3, Atty.
Gregorio B. Escasinas has committed contempt of this
Court and shall be disciplined. As for paragraph 5, the
correct stress should be on the words "formulate and
recommend," which is all the body can do, rather than on
adjudication and settlement."
DECISION
CRUZ, J p:
44
This case involves not only the factual issue of breach of
contract and the legal questions of jurisdiction and
rescission. The basic inquiry is whether the building
subject of this litigation is safe enough for its future
occupants. The petitioner says it is, but the private
respondents demur. They have been sustained by the
trial court and the appellate court. The petitioner says
they have all erred.
The spouses Cesario and Teresita Carungay entered into
an agreement with Ernesto Deiparine, Jr. on August 13,
19B2, for the construction of a three-story dormitory in
Cebu City. 1 The Carungays agreed to pay P970,000.00,
inclusive of contractor's fee, and Deiparine bound
himself to erect the building "in strict accordance to (sic)
plans and specifications." Nicanor Trinidad, Jr., a civil
engineer, was designated as the representative of the
Carungay spouses, with powers of inspection and
coordination with the contractor.
Deiparine started the construction on September 1, 1982.
2 On November 6, 1982, Trinidad sent him a document
entitled General Conditions and Specifications which
inter alia prescribed 3,000 psi (pounds per square inch)
as the minimum acceptable compressive strength of the
building. 3
In the course of the construction, Trinidad reported to
Cesario Carungay that Deiparine had been deviating
from the plans and specifications, thus impairing the
strength and safety of the building. On September 25,
1982, Carungay ordered Deiparine to first secure
approval from him before pouring cement. 4 This order
was not heeded, prompting Carungay to send Deiparine
another memorandum complaining that the "construction
works are faulty and done haphazardly . . . mainly due to
lax supervision coupled with . . . inexperienced and
unqualified staff." 5 This memorandum was also
ignored.
After several conferences, the parties agreed to conduct
cylinder tests to ascertain if the structure thus far built
complied with safety standards. Carungay suggested
core testing. Deiparine was reluctant at first but in the
end agreed. He even promised that if the tests should
show total failure, or if the failure should exceed 10%,

he would shoulder all expenses; otherwise, the tests
should be for the account of Carungay.
The core testing was conducted by Geo-Testing
International, a Manila-based firm, on twenty-four core
samples. On the basis of 3,000 psi, all the samples
failed; on the basis of 2,500 psi, only three samples
passed; and on the basis of 2,000 psi, nineteen samples
failed. 6 This meant that the building was structurally
defective.
In view of this finding, the spouses Carungay filed
complaint with the Regional Trial Court of Cebu for the
rescission of the construction contract and for damages.
Deiparine moved to dismiss, alleging that the court had
no jurisdiction over construction contracts, which were
now cognizable by the Philippine Construction
Development Board pursuant to Presidential Decree No.
1746. The motion was denied in an order dated April 12,
1984.
After trial on the merits, Judge Juanito A. Bernad
rendered judgment: a) declaring the construction
agreement rescinded; b) condemning Deiparine to have
forfeited his expenses in the construction in the same of
P244,253.70; c) ordering Deiparine to reimburse to the
spouses Carungay the sum of P15,104.33 for the core
testing; d) ordering Deiparine to demolish and remove
all the existing structures and restore the premises to
their former condition before the construction began,
being allowed at the same time to take back with him all
the construction materials belonging to him; and e)
ordering Deiparine to pay the Carungay spouses
attorney's fees in the amount of P10,000.00 as well as
the costs of the suit. 7
On appeal, the decision was affirmed in toto by the
respondent court on August 14, 1990. 8 His motion for
reconsideration having been denied, petitioner Ernesto
Deiparine, Jr. has come to this Court to question once
more the jurisdiction of the regular courts over the case
and the power of the trial court to grant rescission. He
will lose again.
The challenge to the jurisdiction of the trial court is
untenable.
45
P.D. 1746 created the Construction Industry Authority of
the Philippines (CIAP) as the umbrella organization
which shall exercise jurisdiction and supervision over
certain administrative bodies acting as its implementing
branches. The implementing body in this case is the
Philippine Domestic Construction Board (PDCB) and
not the inexistent Philippine Construction Development
Board as maintained by Deiparine.
Among the functions of the PDCB under Section 6 of
the decree are to:
xxx xxx xxx
3. Adjudicate and settle claims and implementation of
public construction contracts and for this purpose,
formulate and adopt the necessary rules and regulations
subject to the approval of the President:
xxx xxx xxx
5. Formulate and recommend rules and procedures for
the adjudication and settlement of claims and disputes in
the implementation of contracts in private construction;
(Emphasis supplied)
Deiparine argues that the Philippine Construction
Development Board (that is, the Philippine Domestic
Construction Board) has exclusive jurisdiction to hear
and try disputes arising from domestic constructions. He
invokes the above-mentioned functions to prove his
point.
His counsel is obviously trying to mislead the Court.
First, he purposely misquotes Section 6(b), paragraph 3,
substituting the word "the" for "public," thus:
3. Adjudicate and settle claims and disputes in the
implementation of the construction contracts and for this
purpose, formulate and adopt the necessary rules and
regulations subject to the approval of the President;
(Emphasis ours).
Second, he makes the wrong emphasis in paragraph 5,
thus:
5. Formulate and recommend rules and procedures for
the ADJUDICATION and SETTLEMENT of CLAIMS

and DISPUTES in the implementation of CONTRACTS
in PRIVATE CONSTRUCTIONS.
For deliberately changing the language of the
abovequoted paragraph 3, Atty. Gregorio P. Escasinas
has committed contempt of this Court and shall be
disciplined. As for paragraph 5, the correct stress should
be on the words "formulate and recommend," which is
all the body can do, rather than on "adjudication and
settlement."
The wording of P.D. 1746 is clear. The adjudicatory
powers of the Philippine Domestic Construction Board
are meant to apply only to public construction contracts.
Its power over private construction contracts is limited to
the formulation and recommendation of rules and
procedures for the adjudication and settlement of
disputes involving such (private) contracts. It therefore
has no jurisdiction over cases like the one at bar which
remain cognizable by the regular courts of justice.
On the issue of rescission, Deiparine insists that the
construction agreement does not specify any
compressive strength for the structure nor does it require
that the same be subjected to any kind of stress test.
Therefore, since he did not breach any of his covenants
under the agreement, the court erred in rescinding the
contract.
The record shows that Deiparine commenced the
construction soon after the signing of the contract, even
before Trinidad had submitted the contract documents,
including the General Conditions and Specifications.
According to Eduardo Logarta, the petitioner's own
project engineer, Deiparine actually instructed him and
some of the other workers to ignore the specific orders
or instructions of Carungay or Trinidad relative to the
construction. 9 Most of these orders involved safety
measures such as: (1) the use of two concrete vibrators
in the pouring of all columns, beams and slabs; (2)
making PVC pipes well-capped to prevent concrete from
setting inside them; (3) the use of 12-mm reinforcement
bars instead of 10-mm bars; (4) the use of mixed
concrete reinforcements instead of hollow block
reinforcements; and (5) securing the approval of the
owner or his representative before any concrete-pouring
46
so that it could be determined whether the cement
mixture complied with safety standards. Deiparine
obviously wanted to avoid additional expenses which
would reduce his profit.
Parenthetically, it is not disputed that Deiparine is not a
civil engineer or an architect but a master mariner and
former ship captain; 10 that Pio Bonilla, a retainer of
Deiparine Construction, was not the supervising
architect of the protect; 11 that the real supervisor of the
construction was Eduardo-Logarta, who was only a third
year civil engineering student at the time; 12 that his
understudy was Eduardo Martinez, who had then not yet
passed the board examinations; 13 and that the supposed
project engineer, Nilo Paglinawan, was teaching full-
time at the University of San Jose-Recoletos, and had in
fact entered the construction site only after November 4,
1982, although the construction had already begun two
months earlier. 14
It was after discovering that the specifications and the
field memorandums were not being followed by
Deiparine that Carungay insisted on the stress tests.
There were actually two sets of specifications. The first
"Specifications" are labeled as such and are but a general
summary of the materials to be used in the construction.
These were prepared by Trinidad prior to the execution
of the contract for the purpose only of complying with
the document requirements of the loan application of
Cesario Carungay with the Development Bank of the
Philippines. The other specifications, which were also
prepared by Trinidad, are entitled "General Conditions
and Specifications" and laid down in detail the
requirements of the private respondent in the
construction of his building.
In his testimony, Deiparine declared that when the
contract was signed on August 13, 1982, it was
understood that the plans and specifications would be
given to him by Trinidad later. 15 Deiparine thus
admitted that the plans and specifications referred to in
the construction agreement were not the first
Specifications but the General Conditions and
Specifications submitted by Trinidad in November 1982.
This second set of specifications required a structural
compressive strength of 3,000 psi. 16 It completely

belies Deiparine's contention that no compressive
strength of the dormitory was required.
Deiparine further argues that by following the concrete
mixture indicated in the first specifications, that is, 1:2:4,
the structure would still attain a compressive strength of
2,500 psi, which was acceptable for dormitories.
According to him, the 3,000 psi prescribed in the
General Conditions and Specifications was
recommended for roads, not for buildings. In so arguing,
he is interpreting the two specifications together but
applying only the first and rejecting the second.
Deiparine also avers that the contract does not also
require any kind of test to be done on the structure and
that, test or no test, he has not violated the agreement.
Nevertheless, he subjected the building to a cylinder test
just to convince Carungay that the unfinished dormitory
was structurally sound.
A cylinder test is done by taking samples from fresh
concrete, placing them in a cylinder mold and allowing
them to harden for a maximum of 28 days, following
which they are subjected to compression to determine if
the cement mixture to be poured conforms to accepted
standards in construction. 17 Carungay was not satisfied
with the results of the cylinder test because they were
inconsistent and could easily be falsified by the simple
expedient of replacing the samples with a good mixture
although a different mixture had been used in the actual
pouring. Consequently, Carungay requested core testing,
a more reliable procedure because the specimens
obtained by extracting concrete from the hardened
existing structure would determine its actual strength.
The core test is less prone to manipulation than the
cylinder test because the samples in the former are taken
from the building which is already standing. 18
Deiparine vehemently refused to go along with the core
test, insisting that the results of the cylinder test earlier
made were conclusive enough to prove that the building
was structurally sound. What was the real reason for this
refusal? After all, Carungay would shoulder the
expenses if the specimens passed the core test, unlike the
cylinder test, which was for the petitioner's account. The
only logical explanation would be that Deiparine was not
sure that the core test would prove favorable to him.
47
We see no reason to disturb the factual finding of the
courts below that Deiparine did not deal with the
Carungays in good faith. His breach of this duty
constituted a substantial violation of the contract
correctible by judicial rescission.
The petitioner challenges the application by the lower
court of Article 1191 of the Civil Code in rescinding the
construction agreement. His position is that the
applicable rules are Articles 1385 and 1725 of the Civil
Code.
Article 1385 states:
Rescission creates the obligation to return the things
which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can
be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
Article 1725 provides that in a contract for a piece of
work:
The owner may withdraw at will from the construction
of the work, although it may have been commenced,
indemnifying the contractor for all the latter's expenses,
work, and the usefulness which the owner may obtain
therefrom, and damages.
Deiparine seems to be confused over the right of
rescission, which is used in two different contexts in the
Civil Code.
Under the law on contracts, there are what are called
"rescissible contracts" which are enumerated in Article
1381 thus:
(1) Those which are entered into by guardians whenever
the wards who they represent suffer lesion by more than
one-fourth of the value of the things which are the object
thereof;
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding
number:
(3) Those undertaken in fraud of creditors when the later
cannot in any other manner collect the claims due them:

(4) Those which refer to things under litigation if they
have been entered into by the defendants without the
knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be
subject to rescission.
Article 1385, upon which Deiparine relies, deals with the
rescission of the contracts enumerated above, which do
not include the construction agreement in question.
There is also a right of rescission under the law on
obligations as granted in Article 1191, providing 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 the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
This was the provision the trial court and the respondent
court correctly applied because it relates to contracts
involving reciprocal obligations like the subject
construction contract. The construction contract fails
squarely under the coverage of Article 1191 because it
imposes upon Deiparine the obligation to build the
structure and upon the Carungays the obligation to pay
for the project upon its completion.
Article 1191, unlike Article 1385, is not predicated on
economic prejudice to one of the, parties but on breach
of faith by one of them that violates the reciprocity
between them. 19 The violation of reciprocity between
Deiparine and the Carungay spouses, to wit, the breach
48
caused by Deiparine's failure to follow the stipulated
plans and specifications, has given the Carungay spouses
the right to rescind or cancel the contract.
Article 1725 cannot support the petitioner's position
either, for this contemplates a voluntary withdrawal by
the owner without fault on the part of the contractor,
who is therefore entitled to indemnity, and even
damages, for the work he has already commenced. there
is no such voluntary withdrawal in the case at bar. On
the contrary, the Carungays have been constrained to ask
for judicial rescission because of the petitioner's failure
to comply with the terms and conditions of their
contract.
The other applicable provisions are:
Article 1714. If the contractor agrees to produce the
work from material furnished by him, he shall deliver
the thing produced to the employer and transfer
dominion over the thing. This contract shall be governed
by the following articles as well as by the pertinent
provisions on warranty of title and against hidden
defects and the payment of price in a contract of sale.
Article 1715. The contractor shall execute the work in
such a manner that it has the qualities agreed upon and
has no defects which destroy or lessen its value or fitness
for its ordinary or stipulated use. Should the work be not
of such quality, the employer may require that the
contractor remove the defect or execute another work. If
the contractor fails or refuses to comply with this
obligation, the employer may have the defect removed or
another work executed, at the contractor's cost.
Article 1727. The contractor is responsible for the work
done by persons employed by him.
While it is true that the stress test was not required in
any of the contract documents, conducting the test was
the only manner by which the owner could determine if
the contractor had been faithfully complying with his
presentations under their agreement. Furthermore, both
parties later agreed in writing that the core test should be
conducted. When the structure failed under this test the
Carungay spouses were left with no other recourse than
to rescind their contract.

It is a basic principle in human relations, acknowledged
in Article 19 of the Civil Code, that "every person must,
in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith."
This admonition is reiterated in Article 1159, which
states that "obligations arising from contracts have the
force of law between the contracting parties and should
be complied with in good faith." The petitioner has
ignored these exhortations and is therefore not entitled to
the relief he seeks.
WHEREFORE, the challenged decision is hereby
AFFIRMED and the instant petition for review is
DENIED, with costs against the petitioner. For
deliberately changing the language of Section 6(b),
paragraph 3, of P.D. No. 1746, Atty. Gregorio B.
Escasinas is hereby fined P1,000.00, with the warning
that repetition of a similar offense will be dealt with
more severely. It is so ordered. Concur.
G.R. No. L-27482 September 10, 1981
GRACE PARK ENGINEERING CO., INC., plaintiff-
appellee,
vs.
MOHAMAD ALI DIMAPORO, defendant-appellant.
DE CASTRO,* J.:
Appeal (prior to the effectivity of Republic Act No.
5440) by Mohamad Ali Dimaporo from a decision of the
Court of First Instance of Rizal, Branch VI (in its Civil
Case No. 3828), the dispositive portion of which reads:
WHEREFORE, all premises considered, judgment is
hereby rendered declaring the rescission of the Contract
for the Sale of Cassava Flour and Starch Processing
Machinery and Equipment, Exh. A, dated April 1, 1954,
and ordering mutual restitution by the parties, defendant
to return to plaintiff the cassava flour and starch
processing machinery and equipment and bear the
transportation expenses thereof to the port of Cotabato,
plaintiff corporation to bear the freight charges thereof
for its shipment to Manila, and, to pay plaintiff the total
amount of P19,628.93 with interest thereon at the rate of
6% per annum from the date of filing of this complaint
49
until full payment of the same, and plaintiff to return to
defendant the amount of P15,750.00 representing the
partial payment made to it by defendant for the purchase
price of said machinery and equipment. No
pronouncement as to damages and costs. 1
Defendant-Appellant Dimaporo questions the validity of
the questioned decision in so far as said decision 1)
orders him to return the cassava flour and starch
processing machinery and equipment and 2) orders him
to pay plaintiff-appellee Grace Park Engineering Co.
P19,628.93 with interest.
The records disclose that on April 1, 1954, Grace Park
Engineering, Inc., and Mohamad Ali Dimaporo entered
into a Contract for the Sale of Cassava Flour and Starch
Processing Machinery and Equipment (Exh.
A) 2 whereby the corporation agreed to sell and install,
for the consideration of P52,000.00, a cassava flour and
starch processing machinery and equipment specifically
described therein at Dimaporo's place in Karomatan
Lanao Mill Site, within a period of 70 working days
from the date of signing of the contract. It was agreed
that P5,750.00 shall be paid upon signing of the contract;
P10,000.00 shall be paid within 30 days from the date of
the signing of the contract but before machinery and
equipment is loaded at Manila Harbor and P36,750.00
shall be payable in 12 monthly installments as provided
in the contract.
In view of the foregoing considerations, the Corporation
guaranteed said machinery and equipment to process at
least 6 tons of cassava flour and starch per 24-hour day
operation, while Dimaporo undertook to supply at his
own expenses the building wherein shall be housed the
machinery and equipment, laborers needed to
complement the operation of the mill, food, foundation
materials, and effective water system (par. 6, Exh. A).
In compliance with the agreement, defendant paid
plaintiff the amounts of P5,750.00 and P10,000.00 as
agreed upon, thus leaving a balance of P36,750.00.
It appears on record, however, that during the course of
installation of said machinery and equipment, Dimaporo
failed to comply with his obligations specified in par. 6
of said contract, so much so that the Corporation was

forced to provide the necessary materials and labor and
advance whatever expenses had been made for that
purpose with previous knowledge and consent given by
Dimaporo because the latter was short of funds during
that time.
It took the Corporation one (1) year and three (3) months
to install the said machinery and equipment, after which,
it demanded from Dimaporo complete payment of the
balance due and for all expenses made in advance arising
from the supply of materials and labor which Dimaporo
failed to provide on time. Dimaporo refused to pay on
the ground that the balance of P36,750.00 never became
due and demandable because of the Corporation's failure
to complete the installation of the machinery and
equipment within the stipulated period and place the
same in satisfactory running conditions as guaranteed by
it in the contract.
Hence, on October 1, 1955 the Corporation brought an
action against Dimaporo for rescission of the aforesaid
contract after mutual restitution by the parties with
provision for damages in its favor. Dimaporo, in his
answer, likewise seeks the rescission of the contract,
after mutual restitution by the parties, but with provision
for the payment by the Corporation of freight charges
that may be incurred due to such restitution, and with the
award of damages in his favor.
After hearing on tile merit, the trial court found both
parties having violated the terms and conditions of the
contract, defendant Dimaporo failing to comply with his
obligations under par. 6 of the contract and plaintiff
corporation liable for installing machinery and
equipment that are basically defective and inadequate.
As to who was the first infractor in point of time, it was
not determined by the trial court. Rescission of the
contract was granted but held that parties should bear
his/its own damages, applying article i 192 of the New
Civil Code which provides:
In case both parties have committed a breach of the
obligation, the liability of the first infractor should be
equitably tempered by the Courts. If it cannot be
determined which of the parties first violated the
contract, the same should be deemed extinguished, and
each shall bear his own damages.
50
From the judgment of the Court below, Dimaporo
directly appealed to this Court imputing seven (7)
assignments of errors committed by the trial court,
which may be synthesized into four (4) main issues:
a) whether he was guilty of breach of contract.
b) whether he was liable to return the machinery and
equipment subject matter of the contract.
c) whether he was liable to pay appellee Corporation the
amount of P19,628.93 with interest.
d) whether he was entitled to the award of damages in
his favor.
Appellant Dimaporo maintained that he has not
committed any breach of contract, Exh. A, particularly
par. 6 thereof that it was appellee Corporation who was
guilty thereof, and points in his appellant's brief
testimonial and documentary evidence in support of the
same. Upon the other hand, the trial court, in its
decision, makes the following findings:
From the entire evidence presented, it appears that
defendant had failed to comply with his obligations
under the contract, Exh. A, more particularly with the
provisions of par. 6 thereof. He was unable to furnish
sufficient laborers needed to complete the operations of
the mill, food, foundation materials and effective water
systems (Exhs. G, G-1, I, I-1, J-1, K, R, CC, KK LL
NN-1). Under Exh. MM, a daily work progress report
duly certified correct by defendant, the hammer mill and
flash drier were already commercially operated on
December 11, 1954 (Exh. MM-3). This necessarily gives
the impression that the installation of the mill has been
completed in accordance with the contract and the
subsequent failure of the project is due to defendant's
fault. ... Taking into consideration defendant's failure to
comply with this obligation, plaintiff's delay in the
complete installation of the machinery and equipment
seems reasonable and understandable. ... 3
The foregoing is a conclusion of fact of the trial court.
The rule is well-settled that factual findings of the trial
court, supported by substantial evidence, are generally
binding on the Supreme Court. They are entitled to great
respect, the lower court having had the opportunity of

weighing carefully what was testified to and did so
without oversight or neglect. 4 Hence the rule that when
a party appeals directly to this Court, he is deemed to
have waived the right to dispute any finding of fact made
by the court below. 5
It is next argued for appellant Dimaporo, that the trial
court erred in ordering the return of the machinery and
equipment subject matter of the contract to appellee
corporation and maintained that although a rescission of
the contract is in order, he has no obligation, however, to
return the machinery and equipment, much less pay the
transportation expenses thereof to the port of Cotabato,
since the machinery and equipment shipped by appellee
corporation were never delivered to appellant. He
contended that by reference to the contract, Exh. A, it is
clear that the obligation of the appellee did not end with
the shipment of the machinery and equipment to the all
site; it must also install the machinery and equipment in
such a manner that they would produce at least 6 tons of
cassava flour per 24 hours of operations so much so that
until such machinery and equipment were installed and
shown to be capable of producing at the warranted rate,
there could be no delivery of such machinery and
equipment to appellant.
This contention is in Our opinion, not sustained by the
terms of the contract or by the facts appearing in
evidence. It is true that under par. 8 of the contract, E
Exh. A, the "SELLER warrants that it will deliver all the
machinery and equipment as agreed in par. 4, guaranteed
to process at least 6 tons of cassava flour or starch per
24-hour day operation." However in said paragraph it
was also stipulated that "this warranty of capacity shall
be attained only when properly coordinated to the
necessary manual labor required for the purpose." And
according to the trial court, "the delay of the completion
of the installation as well as the incapacity of the mill to
produce the desired amount of flour/starch as warranted
by the plaintiff under the contract are attributable to
defendant's non-compliance with his obligation to
furnish food, materials, and water system."
Even assuming that there is some degree of plausibility
in appellant's position, still the lower court did not
commit any error in ordering appellant to return the
machinery and equipment to appellee corporation, for
51
when the former, as defendant in the lower court, filed
his Answer to the complaint of appellee corporation, he
prayed for the rescission of the contract between him and
the plaintiff and for mutual restitution by the
parties. 6 To sustain appellant's contention that he is not
liable for the return of machinery and equipment would
be fundamentally contradicting the very notion of
rescission. The first paragraph of article 1385 of the New
Civil Code provides:
Rescission creates the obligation to return the things
which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can
be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
Furthermore, when a contract is resolved or rescinded, it
is the duty of the court to require the parties to surrender
that which they have severally received and to place
each as far as practicable in his original situation; and
when a resolution is granted, it has the effect of
abrogating the contract in all parts. The party seeking
resolution cannot ask "performance as to part and
resolution as to remainder. 7
The last two issues are both centered on the question of
who is liable for the payment of damages and interests as
a result of the breach of contract. The trial court, in
resolving the issues, applied Article 1192 of the New
Civil Code, which as aforestated, enunciated the rule if
both parties committed a breach of obligation. The trial
court find the following facts: "Both parties have failed
to comply with what is respectively encumbent upon
them to do, and the object of the contract is consequently
defeated; defendant failed to comply with his obligations
under the contract, Exh. A; that further scrutiny of the
evidence shows that the machinery and equipment sold
and installed by plaintiff were all along, by themselves,
defective and inadequate. As to who was the first
infractor in point of time, under said circumstances,
cannot be specifically delineated. Hence, parties should
bear his/its own damages.
Based on these findings, the trial court ruled, as
aforestated in the dispositive portion, that appellant
Dimaporo must pay appellee corporation the total
amount of P19,628.93 which the latter had spent by way

of advances to the former with which to purchase the
necessary materials and supplies at the rate of 6% per
annum; that appellee corporation must return to
appellant the amount of P15,750.00 representing the
partial payment made by it to appellant for the purchase
price of said machinery and equipment. The trial court,
however, made no pronouncement as to damages and
costs.
But appellant would contend that the amount of
P19,628.93 should be offset by the damages that are due
to him by reason of the violations by the appellee
corporation of its obligation under the contract; that
appellee must be required to pay interests on the amount
of P15,750.00 since this amount paid has already been
used by it; and that since the first infractor was the
appellee's corporation, therefore, damages should be
paid by that party to the appellant.
The findings of fact of the trial court that both appellant
Dimaporo and appellee corporation have committed a
breach of obligation are fully supported by the evidence
on record. As We have stated, We are not in a position to
disturb the same. Therefore, it correctly applied Article
1192 of the New Civil Code to the effect that in case
both parties have committed a breach of obligation and it
cannot be determined who was the first infractor, the
contract shall be deemed extinguished and each shall
bear his/its own damages. Consequently, the trial court
committed no reversible error when it ordered appellee
corporation to pay appellant the amount of P15,570.00
representing partial payment of the purchase price of the
machinery and equipment. This is but a consequence of
the decree of rescission granted by the trial court.
Neither did it commit any error when it refused to grant
any interest on the aforesaid amount of P15,570.00. This
is also but a consequence of the enunciated rule that each
party should bear his/its own damages. For the same
reasons, We hold that although appellant is liable to pay
the amount of P19,628.93 which appellee corporation
had spent by way of advances with which to purchase
the necessary materials and supplies, however, he is not
liable to pay interest thereon at the rate of 6% per annum
until full payment of the same, as held by the lower
court. Otherwise, to hold so would be in conflict with the
above-mentioned rule that each party must bear his/its
own damages.
52
PREMISES CONSIDERED, with the only modification
that the sum of P19,628.93 be paid by appellant
Dimaporo to appellee Grace Park Engineering, Inc.,
without interest, the judgment appealed from is affirmed
in all other respects. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-32811 March 31, 1980
FELIPE C. ROQUE, petitioner,
vs.
NICANOR LAPUZ and THE COURT OF
APPEALS, respondents.
Tañada, Sanchez, Tañada, Tañada for petitioner.
N.M. Lapuz for respondent.
GUERRERO, J.:
Appeal by certiorari from the Resolution of the
respondent court 1 dated October 12, 1970 in CA-G.R.
No. L-33998-R entitled "Felipe C. Roque, plaintiff-
appellee, versus Nicanor Lapuz, defendant-
appellant" amending its original decision of April 23,
1970 which affirmed the decision of the Court of First
Instance of Rizal (Quezon City Branch) in Civil Case
No. Q-4922 in favor of petitioner, and the Resolution of
the respondent court denying petitioner's motion for
reconsideration.
The facts of this case are as recited in the decision of the
Trial Court which was adopted and affirmed by the
Court of Appeals:
Sometime in 1964, prior to the approval by the National
Planning Commission of the consolidation and
subdivision plan of plaintiff's property known as the
Rockville Subdivision, situated in Balintawak, Quezon
City, plaintiff and defendant entered into an agreement
of sale covering Lots 1, 2 and 9, Block 1, of said
property, with an aggregate area of 1,200 square meters,
payable in 120 equal monthly installments at the rate of
P16.00, P15.00 per square meter, respectively. In
accordance with said agreement, defendant paid to

plaintiff the sum of P150.00 as deposit and the further
sum of P740.56 to complete the payment of four
monthly installments covering the months of July,
August, September, and October, 1954. (Exhs. A and B).
When the document Exhibit "A" was executed on June
25, 1954, the plan covering plaintiff's property was
merely tentative, and the plaintiff referred to the
proposed lots appearing in the tentative plan.
After the approval of the subdivision plan by the Bureau
of Lands on January 24, 1955, defendant requested
plaintiff that he be allowed to abandon and substitute
Lots 1, 2 and 9, the subject matter of their previous
agreement, with Lots 4 and 12, Block 2 of the approved
subdivision plan, of the Rockville Subdivision, with a
total area of 725 square meters, which are corner lots, to
which request plaintiff graciously acceded.
The evidence discloses that defendant proposed to
plaintiff modification of their previous contract to sell
because he found it quite difficult to pay the monthly
installments on the three lots, and besides the two lots he
had chosen were better lots, being corner lots. In
addition, it was agreed that the purchase price of these
two lots would be at the uniform rate of P17.00 per
square (meter) payable in 120 equal monthly
installments, with interest at 8% annually on the balance
unpaid. Pursuant to this new agreement, defendant
occupied and possessed Lots 4 and 12, Block 2 of the
approved subdivision plan, and enclosed them, including
the portion where his house now stands, with barbed
wires and adobe walls.
However, aside from the deposit of P150.00 and the
amount of P740.56 which were paid under their previous
agreement, defendant failed to make any further
payment on account of the agreed monthly installments
for the two lots in dispute, under the new contract to sell.
Plaintiff demanded upon defendant not only to pay the
stipulated monthly installments in arrears, but also to
make up-to-date his payments, but defendant, instead of
complying with the demands, kept on asking for
extensions, promising at first that he would pay not only
the installments in arrears but also make up-to-date his
payment, but later on refused altogether to comply with
plaintiff's demands.
53
Defendant was likewise requested by the plaintiff to sign
the corresponding contract to sell in accordance with his
previous commitment. Again, defendant promised that
he would sign the required contract to sell when he shall
have made up-to-date the stipulated monthly
installments on the lots in question, but subsequently
backed out of his promise and refused to sign any
contract in noncompliance with what he had represented
on several occasions. And plaintiff relied on the good
faith of defendant to make good his promise because
defendant is a professional and had been rather good to
him (plaintiff).
On or about November 3, 1957, in a formal letter,
plaintiff demanded upon defendant to vacate the lots in
question and to pay the reasonable rentals thereon at the
rate of P60.00 per month from August, 1955. (Exh. "B").
Notwithstanding the receipt of said letter, defendant did
not deem it wise nor proper to answer the same.
In reference to the mode of payment, the Honorable
Court of Appeals found —
Both parties are agreed that the period within which to
pay the lots in question is ten years. They however,
disagree on the mode of payment. While the appellant
claims that he could pay the purchase price at any time
within a period of ten years with a gradual proportionate
discount on the price, the appellee maintains that the
appellant was bound to pay monthly installments.
On this point, the trial court correctly held that —
It is further argued by defendant that under the
agreement to sell in question, he has the right or option
to pay the purchase price at anytime within a period of
ten years from 1954, he being entitled, at the same time,
to a graduated reduction of the price. The Court is
constrained to reject this version not only because it is
contradicted by the weight of evidence but also because
it is not consistent with what is reasonable, plausible and
credible. It is highly improbable to expect plaintiff, or
any real estate subdivision owner for that matter, to
agree to a sale of his land which would be payable
anytime in ten years at the exclusive option of the
purchaser. There is no showing that defendant is a
friend, a relative, or someone to whom plaintiff had to be

grateful, as would justify an assumption that he would
have agreed to extend to defendant such an extra-
ordinary concession. Furthermore, the context of the
document, Exhibit "B", not to mention the other
evidences on records is indicative that the real intention
of the parties is for the payment of the purchase price of
the lot in question on an equal monthly installment basis
for a period of ten years (Exhibits "A", "II", "J" and
"K").
On January 22, 1960, petitioner Felipe C, Roque
(plaintiff below) filed the complaint against defendant
Nicanor Lapuz (private respondent herein) with the
Court of First Instance of Rizal, Quezon City Branch, for
rescission and cancellation of the agreement of sale
between them involving the two lots in question and
prayed that judgment be rendered ordering the rescission
and cancellation of the agreement of sale, the defendant
to vacate the two parcels of land and remove his house
therefrom and to pay to the plaintiff the reasonable rental
thereof at the rate of P60.00 a month from August 1955
until such time as he shall have vacated the premises,
and to pay the sum of P2,000.00 as attorney's fees, costs
of the suit and award such other relief or remedy as may
be deemed just and equitable in the premises.
Defendant filed a Motion to Dismiss on the ground that
the complaint states no cause of action, which motion
was denied by the court. Thereafter, defendant filed his
Answer alleging that he bought three lots from the
plaintiff containing an aggregate area of 1,200 sq. meters
and previously known as Lots 1, 2 and 9 of Block 1 of
Rockville Subdivision at P16.00, P15.00 and P15.00,
respectively, payable at any time within ten years.
Defendant admits having occupied the lots in question.
As affirmative and special defenses, defendant alleges
that the complaint states no cause of action; that the
present action for rescission has prescribed; that no
demand for payment of the balance was ever made; and
that the action being based on reciprocal obligations,
before one party may compel performance, he must first
comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the
acts of the plaintiff, he lost two lots containing an area of
800 sq. meters and as a consequence, he suffered moral
54
damages in the amount of P200.000.00; that due to the
filing of the present action, he suffered moral damages
amounting to P100,000.00 and incurred expenses for
attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and
denied the material averments thereof.
After due hearing, the trial court rendered judgment, the
dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of
plain. plaintiff and against the defendant, as follows:
(a) Declaring the agreement of sale between plaintiff and
defendant involving the lots in question (Lots 4 and 12,
Block 2 of the approved subdivision plan of the
Rockville Subdivision) rescinded, resolved and
cancelled;
(b) Ordering defendant to vacate the said lots and to
remove his house therefrom and also to pay plaintiff the
reasonable rental thereof at the rate of P60.00 per month
from August, 1955 until he shall have actually vacated
the premises; and
(c) Condemning defendant to pay plaintiff the sum of
P2,000.00 as attorney's fees, as well as the costs of the
suit. (Record on Appeal, p. 118)
(a) Declaring the agreement of sale between plaintiff and
defendant involving the lots in question (Lots 4 and 12,
Block 2 of the approved subdivision plan of the
Rockville Subdivision) rescinded, resolved and
cancelled;
(b) Ordering defendant to vacate the said lots and to
remove his house therefrom and also to pay plaintiff the
reasonable rental thereof at the rate of P60.00 per month
from August, 1955 until he shall have actually vacated
premises; and
(c) Condemning defendant to pay plaintiff the sum of
P2,000.00 as attorney's fees, as well as the costs of the
suit. (Record on Appeal. p. 118)
Not satisfied with the decision of the trial court,
defendant appealed to the Court of Appeals. The latter

court, finding the judgment appealed from being in
accordance with law and evidence, affirmed the same.
In its decision, the appellate court, after holding that the
findings of fact of the trial court are fully supported by
the evidence, found and held that the real intention of the
parties is for the payment of the purchase price of the
lots in question on an equal monthly installment basis
for the period of ten years; that there was modification of
the original agreement when defendant actually occupied
Lots Nos. 4 and 12 of Block 2 which were corner lots
that commanded a better price instead of the original
Lots Nos. 1, 2 and 9, Block I of the Rockville
Subdivision; that appellant's bare assertion that the
agreement is not rescindable because the appellee did
not comply with his obligation to put up the requisite
facilities in the subdivision was insufficient to overcome
the presumption that the law has been obeyed by the
appellee; that the present action has not prescribed since
Article 1191 of the New Civil Code authorizing
rescission in reciprocal obligations upon noncompliance
by one of the obligors is the applicable provision in
relation to Article 1149 of the New Civil Code; and that
the present action was filed within five years from the
time the right of action accrued.
Defendant filed a Motion for Reconsideration of the
appellate court's decision on the following grounds:
First — Neither the pleadings nor the evidence,
testimonial, documentary or circumstantial, justify the
conclusion as to the existence of an alleged subsequent
agreement novatory of the original contract admittedly
entered into between the parties:
Second — There is nothing so unusual or extraordinary,
as would render improbable the fixing of ten ears as the
period within which payment of the stipulated price was
to be payable by appellant;
Third — Appellee has no right, under the circumstances
on the case at bar, to demand and be entitled to the
rescission of the contract had with appellant;
Fourth — Assuming that any action for rescission is
availability to appellee, the same, contrary to the
findings of the decision herein, has prescribed;
55
Fifth — Assumming further that appellee's action for
rescission, if any, has not yet prescribed, the same is at
least barred by laches;
Sixth — Assuming furthermore that a cause of action for
rescission exists, appellant should nevertheless be
entitled to tile fixing of a period within which to comply
with his obligation; and
Seventh — At all events, the affirmance of the judgment
for the payment of rentals on the premises from August,
1955 and he taxing of attorney's fees against appellant
are not warranted b the circumstances at bar. (Rollo, pp.
87-88)
Acting on the Motion for Reconsideration, the Court of
Appeals sustained the sixth ground raised by the
appellant, that assuming that a cause of action for
rescission exists, he should nevertheless be entitled to
the fixing of a period within which to comply with his
obligation. The Court of Appeals, therefore, amended its
original decision in the following wise and manner:
WHEREFORE, our decision dated April 23, 1970 is
hereby amended in the sense that the defendant Nicanor
Lapuz is hereby granted a period of ninety (90) days
from entry hereof within which to pay the balance of the
purchase price in the amount of P11,434,44 with interest
thereon at the rate of 8% per annum from August 17,
1955 until fully paid. In the event that the defendant fails
to comply with his obligation as above stated within the
period fixed herein, our original judgment stands.
Petitioner Roque, as plaintiff-appellee below, filed a
Motion for Reconsideration; the Court of Appeals
denied it. He now comes and appeals to this Court on a
writ of certiorari.
The respondent Court of Appeals rationalizes its
amending decision by considering that the house
presently erected on the land subject of the contract is
worth P45,000.00, which improvements introduced by
defendant on the lots subject of the contract are very
substantial, and thus being the case, "as a matter of
justice and equity, considering that the removal of
defendant's house would amount to a virtual forfeiture of
the value of the house, the defendant should be granted a
period within which to fulfill his obligations under the

agreement." Cited as authorities are the cases
of Kapisanan Banahaw vs. Dejarme and Alvero, 55 Phil.
338, 344, where it is held that the discretionary power of
the court to allow a period within which a person in
default may be permitted to perform the stipulation upon
which the claim for resolution of the contract is based
should be exercised without hesitation in a case where a
virtual forfeiture of valuable rights is sought to be
enforced as an act of mere reprisal for a refusal of the
debtor to submit to a usurious charge, and the case
of Puerto vs. Go Ye Pin, 47 O.G. 264, holding that to
oust the defendant from the lots without giving him a
chance to recover what his father and he himself had
spent may amount to a virtual forfeiture of valuable
rights.
As further reasons for allowing a period within which
defendant could fulfill his obligation, the respondent
court held that there exists good reasons therefor, having
in mind that which affords greater reciprocity of rights
(Ramos vs. Blas, 51 O.G. 1920); that after appellant had
testified that plaintiff failed to comply with his part of
the contract to put up the requisite facilities in the
subdivision, plaintiff did not introduce any evidence to
rebut defendant's testimony but simply relied. upon the
presumption that the law has been obeyed, thus said
presumption had been successfully rebutted as Exhibit
"5-D" shows that the road therein shown is not paved
The Court, however, concedes that plaintiff's failure to
comply with his obligation to put up the necessary
facilities in the subdivision will not deter him from
asking f•r the rescission of the agreement since this
obligation is not correlative with defendant's obligation
to buy the property.
Petitioner assails the decision of the Court of Appeals
for the following alleged errors:
I. The Honorable Court of Appeals erred in applying
paragraph 3, Article 1191 of the Civil Code which refers
to reciprocal obligations in general and, pursuant thereto,
in granting respondent Lapuz a period of ninety (90)
days from entry of judgment within which to pay the
balance of the purchase price.
II. The Honorable Court of Appeals erred in not holding
that Article 1592 of the same Code, which specifically
56
covers sales of immovable property and which
constitutes an exception to the third paragraph of Article
1191 of said Code, is applicable to the present case.
III. The Honorable Court of Appeals erred in not holding
that respondent Lapuz cannot avail of the provisions of
Article 1191, paragraph 3 of the Civil Code aforesaid
because he did not raise in his answer or in any of the
pleadings he filed in the trial court the question of
whether or not he is entitled, by reason of a just cause, to
a fixing of a new period.
IV. Assuming arguendo that the agreement entered into
by and between petitioner and respondent Lapuz was a
mere promise to sell or contract to sell, under which title
to the lots in question did not pass from petitioner to
respondent, still the Honorable Court of Appeals erred in
not holding that aforesaid respondent is not entitled to a
new period within which to pay petitioner the balance of
P11,434.44 interest due on the purchase price of
P12.325.00 of the lots.
V. Assuming arguendo that paragraph 3, Article 1191 of
the Civil Code is applicable and may be availed of by
respondent, the Honorable Court of Appeals nonetheless
erred in not declaring that aid respondent has not shown
the existence of a just cause which would authorize said
Court to fix a new period within which to pay the
balance aforesaid.
VI. The Honorable Court of Appeals erred in
reconsidering its original decision promulgated on April
23, 1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into one
issue and that is, whether private respondent is entitled
to the Benefits of the third paragraph of Article 1191,
New Civil Code, for the fixing of period within which he
should comply with what is incumbent upon him, and
that is to pay the balance of P11,434,44 with interest
thereon at the rate of 8% 1et annum from August 17,
1955 until fully paid since private respondent had paid
only P150.00 as deposit and 4 months intallments
amounting to P740.46, or a total of P890.46, the total
price of the two lots agreed upon being P12,325.00.
For his part, petitioner maintains that respondent is not
entitled to the Benefits of paragraph 3, Article 1191,

NCC and that instead, Article 1592 of the New Civil
Code which specifically covers sales of immovable
property and which constitute an exception to the third
paragraph of Art. 1191 of aid Code, is the applicable law
to the case at bar.
In resolving petitioner's assignment of errors, it is well
that We lay clown the oda provisions and pertinent
rulings of the Supreme Court bearing on the crucial issue
of whether Art. 1191, paragraph 3 of the New Civil
Code applies to the case at Bar as held by the appellate
court and supported by the private respondent, or Art.
1592 of the same Code which petitioner strongly argues
in view of the peculiar facts and circumstances attending
this case. Article 1191, New Civil Code, provides:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one at the obligors should not
comply with hat is incumbent upon him
The injured partner may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
Article 1592 also provides:
Art. 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure to
pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may
pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made
upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term.
The controlling and latest jurisprudence is established
and settled in the celebrated case of Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc. and Myers
57
Building Co., G.R. No. L-25885, January 31, 1972, 43
SCRA 93, originally decided in 1972, reiterated in the
Resolution on Motion to Reconsider dated August 18,
1972, 46 SCRA 381 and emphatically repeated in the
Resolution on Second Motion for Reconsideration
promulgated November 16, 1978, 86 SCRA 309, which
once more denied Maritimes Second Motion for
Reconsideration of October 7, 1972. In the original
decision, the Supreme Court speaking thru Justice J.B.L.
Reyes said:
Under the circumstances, the action of Maritime in
suspending payments to Myers Corporation was a
breach of contract tainted with fraud or malice (dolo), as
distinguished from mere negligence (culpa), "dolo"
being succinctly defined as a "conscious and intention
design to evade the normal fulfillment of existing
obligations" (Capistrano, Civil Code of the Philippines,
Vol. 3, page 38), and therefore incompatible with good
faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129;
Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to
ask the court to give it further time to make payment and
thereby erase the default or breach that it had
deliberately incurred. Thus the lower court committed no
error in refusing to extend the periods for payment. To
do otherwise would be to sanction a deliberate and
reiterated infringement of the contractual obligations
incurred by Maritime, an attitude repugnant to the
stability and obligatory force of contracts.
The decision reiterated the rule pointed out by the
Supreme Court in Manuel vs. Rodriguez, 109 Phil. 1, p.
10, that:
In contracts to sell, where ownership is retained by the
seller and is not to pass until the fun payment of the
price, such payment, as we said is a positive suspensive
condition, the failure of which is not a breach, casual or
serious, but simply an event that prevented the
obligation of the vendor to convey title from acquiring
binding i force in accordance with Article 1117 of the
Old Civil Code. To argue that there was only a casual
breach is to proceed from the assumption that the
contract is one of absolute sale, where non-payment is a

resolutory condition, which is not the case." Continuing,
the Supreme Court declared:
... appellant overlooks that its contract with appellee
Myers s not the ordinary sale envisaged by Article 1592,
transferring ownership simultaneously with the delivery
of the real property sold, but one in which the vendor
retained ownership of the immovable object of the sale,
merely undertaking to convey it provided the buyer
strictly complied with the terms of the contract (see
paragraph [d], ante page 5). In suing to recover
possession of the building from Maritime appellee
Myers is not after the resolution or setting aside of the
contract and the restoration of the parties to the status
quo ante as contemplated by Article 1592, but precisely
enforcing the Provisions of the agreement that it is no
longer obligated to part with the ownership or possession
of the property because Maritime failed to comply with
the specific condition precedent, which is to pay the
installments as they fell due.
The distinction between contracts of sale and contracts
to sell with reserved title has been recognized by this
Court in repeated decisions upholding the power of
promisors under contracts to sell in case of failure of the
other party to complete payment, to extrajudicially
terminate the operation of the contract, refuse
conveyance and retain the sums or installments already
received, where such rights are expressly provided for,
as in the case at bar.
In the Resolution denying the first Motion for
Reconsideration, 46 SCRA 381, the Court again
speaking thru Justice J.B.L. Reyes, reiterated the rule
that in a contract to sell, the full payment of the price
through the punctual performance of the monthly
payments is a condition precedent to the execution of the
final sale 4nd to the transfer of the property from the
owner to the proposed buyer; so that there will be no
actual sale until and unless full payment is made.
The Court further ruled that in seeking to oust Maritime
for failure to pay the price as agreed upon, Myers was
not rescinding (or more properly, resolving) the contract
but precisely enforcing it according to its expressed
terms. In its suit, Myers was not seeking restitution to it
of the ownership of the thing sold (since it was never
58
disposed of), such restoration being the logical
consequence of the fulfillment of a resolutory condition,
expressed or implied (Art. 1190); neither was it seeking
a declaration that its obligation to sell was extinguished.
What is sought was a judicial declaration that because
the suspensive condition (full and punctual payment)
had not been fulfilled, its obligation to sell to Maritime
never arose or never became effective and, therefore, it
(Myers) was entitled to repossess the property object of
the contract, possession being a mere incident to its right
of ownership.
The decision also stressed that "there can be no
rescission or resolution of an obligation as yet non-
existent, because the suspensive condition did not
happen. Article 1592 of the New Civil Code (Art. 1504
of Old Civil Code) requiring demand by suit or notarial
act in case the vendor of realty wants to rescind does not
apply to a contract to sell or promise to sell, where title
remains with the vendor until fulfillment to a positive
condition, such as full payment of the price." (Manuel
vs, Rodriguez, 109 Phil. 9)
Maritime's Second Motion for Reconsideration was
denied in the Resolution of the Court dated November
16, 1978, 86 SCRA 305, where the governing law and
precedents were briefly summarized in the strong and
emphatic language of Justice Teehankee, thus:
(a) The contract between the parties was a contract to
sell or conditional sale with title expressly reserved in
the vendor Myers Building Co., Inc. Myers until the
suspensive condition of full and punctual payment of the
full price shall have been met on pain of automatic
cancellation of the contract upon failure to pay any of
the monthly installments when due and retention of the
sums theretofore paid as rentals. When the vendee,
appellant Maritime, willfully and in bad faith failed
since March, 1961 to pay the P5,000. — monthly
installments notwithstanding that it was punctually
collecting P10,000. — monthly rentals from the lessee
Luzon Brokerage Co., Myers was entitled, as it did in
law and fact, to enforce the terms of the contract to sell
and to declare the same terminated and cancelled.
(b) Article 1592 (formerly Article 1504) of the new Civil
Code is not applicable to such contracts to self or

conditional sales and no error was committed by the trial
court in refusing to extend the periods for payment.
(c) As stressed in the Court's decision, "it is irrelevant
whether appellant Maritime's infringement of its contract
was casual or serious" for as pointed out in Manuel vs.
Rodriguez, '(I)n contracts to self. whether ownership is
retained by the seller and is not to pass until the full
payment of the price, such payment, as we said, is a
positive suspensive condition, the failure of which is not
a breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title
from acquiring binding force ...
(d) It should be noted, however, that Maritimes breach
was far from casual but a most serious breach of contract
...
(e) Even if the contract were considered an
unconditional sale so that Article 1592 of the Civil Code
could be deemed applicable, Myers' answer to the
complaint for interpleaded in the court below constituted
a judicial demand for rescission of the contract and by
the very provision of the cited codal article, 'after the
demand, the court may not grant him a new term for
payment; and
(f) Assumming further that Article 1191 of the new Civil
Code governing rescission of reciprocal obligations
could be applied (although Article 1592 of the same
Code is controlling since it deals specifically with sales
of real property), said article provides that '(T)he court
shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period' and there exists
to "just cause" as shown above for the fixing of a further
period. ...
Under the first and second assignments of error which
petitioner jointly discusses, he argues that the agreement
entered into between him and the respondent is a
perfected contract of purchase and sale within the
meaning of Article 1475 of the New Civil Code which
provides that "the contract of sale is perfected at the
moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand
59
performance, subject to the provisions of the law
governing the form of contract."
Petitioner contends that "(n)othing in the decision of the
courts below would show that ownership of the property
remained with plaintiff for so long as the installments
have not been fully paid. Which yields the conclusion
that, by the delivery of the lots to defendant, ownership
likewise was transferred to the latter." (Brief for the
Petitioner, p. 15) And he concludes that the sale was
consummated by the delivery of the two lots, the subject
thereof, by him to the respondent.
Under the findings of facts by the appellate court, it
appears that the two lots subject of the agreement
between the parties herein were delivered by the
petitioner to the private respondent who took possession
thereof and occupied the same and thereafter built his
house thereon, enclosing the lots with adobe stone walls
and barbed wires. But the property being registered
under the Land Registration Act, it is the act of
registration of the Deed of Sale which could legally
effect the transfer of title of ownership to the transferee,
pursuant to Section 50 of Act 496. (Manuel vs.
Rodriguez, et al., 109 Phil. 1; Buzon vs. Lichauco, 13
Phil. 354; Tuazon vs. Raymundo, 28 Phil. 635:
Worcestor vs. Ocampo, 34 Phil. 646). Hence, We hold
that the contract between the petitioner and the
respondent was a contract to sell where the ownership or
title is retained by the seller and is not to pass until the
full payment of the price, such payment being a positive
suspensive condition and failure of which is not a
breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title
from acquiring binding force.
In the case at bar, there is no writing or document
evidencing the agreement originally entered into
between petitioner and private respondent except the
receipt showing the initial deposit of P150.00 as shown
in Exh. "A" and the payment of the 4- months
installment made by respondent corresponding to July,
1954 to October, 1954 in the sum of P740.56 as shown
in Exh. "B". Neither is there any writing or document
evidencing the modified agreement when the 3 lots were
changed to Lots 4 and 12 with a reduced area of 725 sq.
meters, which are corner lots. This absence of a formal

deed of conveyance is a very strong indication that the
parties did not intend immediate transfer of ownership
and title, but only a transfer after full payment of the
price. Parenthetically, We must say that the standard
printed contracts for the sale of the lots in the Rockville
Subdivision on a monthly installment basis showing the
terms and conditions thereof are immaterial to the case at
bar since they have not been signed by either of the
parties to this case.
Upon the law and jurisprudence hereinabove cited and
considering the nature of the transaction or agreement
between petitioner and respondent which We affirm and
sustain to be a contract to sell, the following resolutions
of petitioner's assignment of errors necessarily arise, and
so We hold that:
1. The first and second assignments of errors are without
merit.
The overwhelming weight of authority culminating in
the Luzon Brokerage vs. Maritime cases has laid down
the rule that Article 1592 of the New Civil Code does
not apply to a contract to sell where title remains with
the vendor until full payment of the price as in the case
at bar. This is the ruling in Caridad Estates vs.
Santero, 71 Phil. 120; Aldea vs. Inquimboy 86 Phil.
1601; Jocon vs. Capitol Subdivision, Inc., L-6573, Feb.
28, 1955; Miranda vs. Caridad Estates, L-2077
and Aspuria vs. Caridad Estates, L-2121 Oct. 3, 1950,
all reiterated in Manuel vs. Rodriguez, et al. 109 Phil. 1,
L-13435, July 27, 1960. We agree with the respondent
Court of Appeals that Art, 1191 of the New Civil Code
is the applicable provision where the obligee, like
petitioner herein, elects to rescind or cancel his
obligation to deliver the ownership of the two lots in
question for failure of the respondent to pay in fun the
purchase price on the basis of 120 monthly equal
installments, promptly and punctually for a period of 10
years.
2. We hold that respondent as obligor is not entitled to
the benefits of paragraph 3 of Art. 1191, NCC Having
been in default, he is not entitled to the new period of 90
days from entry of judgment within which to pay
petitioner the balance of P11,434.44 with interest due on
the purchase price of P12,325.00 for the two lots.
60
Respondent a paid P150.00 as deposit under Exh. "A"
and P740.56 for the 4-months installments
corresponding to the months of July to October, 1954.
The judgment of the lower court and the Court of
Appeals held that respondent was under the obligation to
pay the purchase price of the lots m question on an equal
monthly installment basis for a period of ten years, or
120 equal monthly installments. Beginning November,
1954, respondent began to default in complying with his
obligation and continued to do so for the remaining 116
monthly interest. His refusal to pay further installments
on the purchase price, his insistence that he had the
option to pay the purchase price any time in ten years
inspire of the clearness and certainty of his agreement
with the petitioner as evidenced further by the receipt,
Exh. "B", his dilatory tactic of refusing to sign the
necessary contract of sale on the pretext that he will sign
later when he shall have updated his monthly payments
in arrears but which he never attempted to update, and
his failure to deposit or make available any amount since
the execution of Exh "B" on June 28, 1954 up to the
present or a period of 26 years, are all unreasonable and
unjustified which altogether manifest clear bad faith and
malice on the part of respondent puzzle making
inapplicable and unwarranted the benefits of paragraph
3, Art. 1191, N.C.C. To allow and grant respondent an
additional period for him to pay the balance of the
purchase price, which balance is about 92% of the
agreed price, would be tantamount to excusing his bad
faith and sanctioning the deliberate infringement of a
contractual obligation that is repugnant and contrary to
the stability, security and obligatory force of contracts.
Moreover, respondent's failure to pay the succeeding 116
monthly installments after paying only 4 monthly
installments is a substantial and material breach on his
part, not merely casual, which takes the case out of the
application of the benefits of pa paragraph 3, Art. 1191,
N.C.C.
At any rate, the fact that respondent failed to comply
with the suspensive condition which is the full payment
of the price through the punctual performance of the
monthly payments rendered petitioner's obligation to sell
ineffective and, therefore, petitioner was entitled to
repossess the property object of the contract, possession
being a mere incident to his right of ownership (Luzon

Brokerage Co., Inc. vs. Maritime Building Co., Inc., et
al. 46 SCRA 381).
3. We further rule that there exists no just cause
authorizing the fixing of a new period within which
private respondent may pay the balance of the purchase
price. The equitable grounds or considerations which are
the basis of the respondent court in the fixing of an
additional period because respondent had constructed
valuable improvements on the land, that he has built his
house on the property worth P45,000.00 and placed
adobe stone walls with barbed wires around, do not
warrant the fixing of an additional period. We cannot
sanction this claim for equity of the respondent for to
grant the same would place the vendor at the mercy of
the vendee who can easily construct substantial
improvements on the land but beyond the capacity of the
vendor to reimburse in case he elects to rescind the
contract by reason of the vendee's default or deliberate
refusal to pay or continue paying the purchase price of
the land. Under this design, strategem or scheme, the
vendee can cleverly and easily "improve out" the vendor
of his land.
More than that, respondent has not been honest, fair and
reciprocal with the petitioner, hence it would not be fair
and reasonable to the petitioner to apply a solution that
affords greater reciprocity of rights which the appealed
decision tried to effect between the parties. As matters
stand, respondent has been enjoying the possession and
occupancy of the land without paying the other 116
monthly installments as they fall due. The scales of
justice are already tipped in respondent,s favor under the
amended decision of the respondent court. It is only right
that We strive and search for the application of the law
whereby every person must, in the exercise of his rights
and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good
faith (Art. 19, New Civil Code)
In the case at bar, respondent has not acted in good faith.
With malice and deliberate intent, he has twisted the
clear import of his agreement with the petitioner in order
to suit his ends and delay the fulfillment of his obligation
to pay the land he had enjoyed for the last 26 years,
more than twice the period of ten years that he obliged
himself to complete payment of the price.
61
4. Respondent's contention that petitioner has not
complied with his obligation to put up the necessary
facilities in the Rockville Subdivision is not sufficient
nor does it constitute good reason to justify the grant of
an additional period of 90 days from entry of judgment
within which respondent may pay the balance of the
purchase price agreed upon. The Judgment of the
appellate court concedes that petitioner's failure to
comply with his obligation to put up the necessary
facilities in the subdivision will not deter him from
asking for the rescission of the agreement since his
obligation is not correlative with respondent's obligation
to buy the property. Since this is so conceded, then the
right of the petitioner to rescind the agreement upon the
happening or in the event that respondent fails or
defaults in any of the monthly installments would be
rendered nugatory and ineffective. The right of
rescission would then depend upon an extraneous
consideration which the law does not contemplate.
Besides, at the rate the two lots were sold to respondent
with a combined area of 725 sq. meters at the uniform
price of P17.00 per sq. meter making a total price of
P12,325.00, it is highly doubtful if not improbable that
aside from his obligation to deliver title and transfer
ownership to the respondent as a reciprocal obligation to
that of the respondent in paying the price in full and
promptly as the installments fall due, petitioner would
have assumed the additional obligation "to provide the
subdivision with streets ... provide said streets with street
pavements concrete curbs and gutters, fillings as
required by regulations, adequate drainage facilities, tree
plantings, adequate water facilities" as required under
Ordinance No. 2969 of Quezon City approved on May
11, 1956 (Answer of Defendant, Record on Appeal, pp.
35-36) which was two years after the agreement in
question was entered into June, 1y54.
The fact remains, however, that respondent has not
protested to the petitioner nor to the authorities
concerned the alleged failure of petitioner to put up and
provide such facilities in the subdivision because he
knew too well that he has paid only the aggregate sum of
P890.56 which represents more or less 7% of the agreed
price of P12,325.00 and that he has not paid the real
estate taxes assessed by the government on his house
erected on the property under litigation. Neither has

respondent made any allegation in his Answer and in all
his pleadings before the court up to the promulgation of
the Resolution dated October 12, 1970 by the Court of
Appeals, to the effect that he was entitled to a new
period within which to comply with his obligation,
hence the Court could not proceed to do so unless the
Answer is first amended. (Gregorio Araneta, Inc. vs.
Philippine Sugar Estates Development Co., Ltd., G.R.
No. L-22558, May 31, 1967, 20 SCRA 330, 335). It is
quite clear that it is already too late in the day for
respondent to claim an additional period within which to
comply with his obligation.
Precedents there are in Philippine jurisprudence where
the Supreme Court granted the buyer of real property
additional period within which to complete payment of
the purchase price on grounds of equity and justice as in
(1)J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829 where
the vendee religiously satisfied the monthly installments
for eight years and paid a total of P4,134.08 including
interests on the principal obligation of only P3,691.20,
the price of the land; after default, the vendee was
willing to pay all arrears, in fact offered the same to the
vendor; the court granted an additional period of 60 days
-from receipt of judgment for the vendee to make all
installment in arrears plus interest; (2) in Legarda
Hermanos vs. Saldaña, 55 SCRA 324, the Court ruled
that where one purchase, from a subdivision owner two
lots and has paid more than the value of one lot, the
former is entitled to a certificate of title to one lot in case
of default.
On the other hand there are also cases where rescission
was not granted and no new or additional period was
authorized. Thus, in Caridad Estates vs. Santero, 71
Phil. 114, the vendee paid, totalling P7,590.00 or about
25% of the purchase price of P30,000.00 for the three
lots involved and when the vendor demanded revocation
upon the vendee's default two years after, the vendee
offered to pay the arears in check which the vendor
refused; and the Court sustained the revocation and
ordered the vendee ousted from the possession of the
land. In Ayala y Cia vs. Arcache, 98 Phil. 273, the total
price of the land was P457,404.00 payable in
installments; the buyer initially paid P100,000.00 or
about 25% of the agreed price; the Court ordered
rescission in view of the substantial breach and granted
62
no extension to the vendee to comply with his
obligation.
The doctrinal rulings that "a slight or casual breach of
contract is not a ground for rescission. It must be so
substantial and fundamental to defeat the object of the
parties" (Gregorio Araneta Inc. vs. Tuazon de Paterno,
L-2886, August 22, 1962; Villanueva vs. Yulo, L-12985,
Dec. 29,1959); that "where time is not of the essence of t
agreement, a slight delay on the part of one party in the
performance of his obligation is not a sufficient ground
for the rescission of the agreement"( Biando vs.
Embestro L-11919, July 27, 1959; cases cited in Notes
appended to Universal Foods Corporation vs. Court of
Appeals, 33 SCRA 1), convince and persuade Us that in
the case at bar where the breach, delay or default was
committed as early as in the payment of the fifth
monthly installment for November, 1954, that such
failure continued and persisted the next month and every
month thereafter in 1955, 1956, 1957 and year after year
to the end of the ten-year period in 1964 (10 years is
respondent's contention) and even to this time, now more
than twice as long a time as the original period without
respondent adding, or even offering to add a single
centavo to the sum he had originally paid in 1954 which
represents a mere 7% of the total price agreed upon,
equity and justice may not be invoked and applied. One
who seeks equity and justice must come to court with
clean hands, which can hardly be said of the private
respondent.
One final point, on the supposed substantial
improvements erected on the land, respondent's house.
To grant the period to the respondent because of the
substantial value of his house is to make the land an
accessory to the house. This is unjust and
unconscionable since it is a rule in Our Law that
buildings and constructions are regarded as mere
accessories to the land which is the principal, following
the Roman maxim "omne quod solo inadeficatur solo
cedit" (Everything that is built on the soil yields to the
soil).
Pursuant to Art. 1191, New Civil Code, petitioner is
entitled to rescission with payment of damages which
the trial court and the appellate court, in the latter's
original decision, granted in the form of rental at the rate

of P60.00 per month from August, 1955 until respondent
shall have actually vacated the premises, plus P2,000.00
as attorney's fees. We affirm the same to be fair and
reasonable. We also sustain the right of the petitioner to
the possession of the land, ordering thereby respondent
to vacate the same and remove his house therefrom.
WHEREFORE, IN VIEW OF THE FOREGOING, the
Resolution appealed from dated October 12, 1970 is
hereby REVERSED. The decision of the respondent
court dated April 23, 1970 is hereby REINSTATED and
AFFIRMED, with costs against private respondent.
SO ORDERED.
G.R. No. 73893
MARGARITA SURIA AND GRACIA R.
JOVEN, petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT,
HON. JOSE MAR GARCIA (Presiding Judge of the
RTC of Laguna, Branch XXIV, Biñan, Laguna), and
SPOUSES HERMINIO A. CRISPIN and
NATIVIDAD C. CRISPIN,respondents.
De Castro & Cagampang Law Offices for petitioners.
Nelson A. Loyola for private respondents.
RESOLUTION
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the decision
of the Court of Appeals dismissing for lack of merit the
petition for certiorari filed therein.
As factual background, we quote from the Court of
Appeals' decision:
The factual and procedural antecedents of this case may
be briefly stated as follows:
On June 20, 1983, private-respondents filed a complaint
before the Regional Trial Court of Laguna, Branch
XXIV, for rescission of contract and damages, alleging
among others:
63
1. x x x
2. That on March 31, 1975, plaintiffs being the owners
of a parcel of land situated at Barrio San Antonio, San
Pedro, Laguna, entered into a contract denominated as
DEED OF SALE WITH MORTGAGE, with herein
defendants, a true copy of said contract (which is made
an integral part hereof) is hereto attached as ANNEX
."A":
3. x x x
4. That the defendants violated the terms and conditions
of the contract by failing to pay the stipulated
installments and in fact only one installment due in
July 1975 (paid very late in the month of September,
1975) was made all the others remaining unsettled to the
present time;
5. That repeated verbal and written demands were made
by plaintiff upon the defendants for the payment of the
installments, some of said written demands having been
made on September 24, 1981, February 7, 1982,
February 24, 1983, March 13, 1983, and April 12, 1983,
but defendants for no justifiable reason failed to comply
with the demands of plaintiffs;
6. x x x
On November 14, 1983, petitioners filed their answer
with counterclaim.
On July 16, 1984, petitioners filed a motion to disniiss
complaint, alleging that:
1. That plaintiffs are not entitled to
the subsidiary remedy of rescission because of the
presence of remedy of foreclosure in the Deed of Sale
with Mortgage (Annex "A", Complaint);
2. That, assuming arguendo that rescission were a proper
remedy, it is apparent in the face of the Complaint that
the plaintiffs failed to comply with the requirements of
law, hence the rescission was ineffective, illegal, null
and void, and invalid.
On July 26, 1984, private-respondents filed their
opposition to the above motion.

In the meantime, on August 6, 1984, petitioners formerly
offered to pay private-respondents all the outstanding
balance under the Deed of Sale with Mortgage, which
offer was rejected by private respondents on August 7,
1984.
On November 26, 1984, the respondent-Court denied the
motion to dismiss. The order reads:
Defendants through counsel filed a Second Motion to
Dismiss dated July 24, 1984 based on an affirmative
defense raised in their answer, that is, that the complaint
fails to state a cause of action for rescission against
defendants because (1) — plaintiffs are not entitled to
the subsidiary remedy of rescission because of the
presence of the remedy of foreclosure in the Deed of
Sale with Mortgage (Annex "A", Complaint) and (2) —
assuming arguendo that rescission were a proper
remedy, it is apparent from the face of the Complaint
that the plaintiffs failed to comply with the requirements
of law, hence the rescission was ineffective, illegal, null
and void, and invalid.
After a careful perusal of the allegations of the complaint
considered in the light of existing applicable law and
jurisprudence touching on the matters in issue, and
mindful of the settled rule that in a motion to dismiss
grounded on lack of cause of action the allegations of the
complaint must be assumed to be true, the Court finds
and holds that the motion to dismiss dated July 24, 1984
filed by defendants lacks merit and therefore denied the
same.
SO ORDERED.
On January 31, 1985, petitioners filed a motion for
reconsideration to which private-respondents filed their
opposition on February 11, 1985. On February 19, 1985,
petitioners filed their reply.
On March 13, 1985, the respondent-Court denied the
motion for reconsideration. The order reads in part:
xxx xxx xxx
Perusing the grounds invoked by the defendants in their
Motion for Reconsideration and Reply as well as the
objections raised by plaintiffs in their opposition, and it
64
appearing that in its Order dated November 26, 1984, the
Court has sufficiently, althou (sic) succinctly stated its
reason for denying the motion to dismiss dated July 16,
1984, that is, for lack of merit, the Court finds no
overriding reason or justification from the grounds
invoked in the said Motion for Reconsideration for it to
reconsider, change, modify, or set aside its Order dated
November 26, 1984. The Court still believes that the two
(2) grounds invoked by defendants in their Motion to
Dismiss dated July 16, 1984 are not meritorious when
considered in the light of prevailing law and
jurisprudence and the hypothetically admitted
allegations of the complaint, and for that reason it denied
the motion to dismiss in its said order of November 26,
1984.
The instant Motion for Reconsideration is therefore
denied for lack of merit. (Pp, 29-32, Rollo)
The questions raised by petitioner are as follows:
I
IN A DEED OF SALE, WHICH IS COUPLED WITH
A MORTGAGE TO SECURE PAYMENT OF THE
BALANCE OF THE PURCHASE PRICE, MAY THE
SELLER RESORT TO THE REMEDY OF
RESCISSION UNDER ARTICLE 1191 OF THE CIVIL
CODE WHICH PROVIDES FOR THE SUBSIDIARY
AND EQUITABLE REMEDY OF RESCISSION IN
CASE OF BREACH OF RECIPROCAL
OBLIGATIONS?
Otherwise stated,
IS THE SUBSIDIARY AND EQUITABLE REMEDY
OF RESCISSION AVAILABLE IN THE PRESENCE
OF A REMEDY OF FORECLOSURE IN THE LIGHT
OF THE EXPRESS PROVISION OF ARTICLE 1383
OF THE CIVIL CODE THAT: 'THE ACTION FOR
RESCISSION IS SUBSIDIARY; IT CANNOT BE
INSTITUTED EXCEPT WHEN THE PARTY
SUFFERING DAMAGE HAS NO OTHER LEGAL
MEANS TO OBTAIN REPARATION FOR THE
SAME?
xxx xxx xxx

II
MAY THE SELLER LEGALLY DEMAND
RESCISSION OF THE DEED OF SALE WITH
MORTGAGE WITHOUT OFFERING TO RESTORE
TO THE BUYER WHAT HE HAS PAID, AS
REQUIRED BY ARTICLE 1385, OR COMPLYING
WITH THE REQUIREMENTS OF THE MACEDA
LAW (REPUBLIC ACT 6552) GRANTING THE
BUYER A GRACE PERIOD TO PAY WITHOUT
INTEREST, AND, IN CASE OF CANCELLATION IN
CASE THE BUYER STILL COULD NOT PAY
WITHIN THE GRACE PERIOD, REQUIRING THE
SELLER TO ORDER PAYMENT OF THE CASH
SURRENDER VALUE BEFORE THE
CANCELLATION MAY LEGALLY TAKE EFFECT
(SEC. 3[b], LAST PAR., REP. ACT 6552)?
The petition was denied in a minute resolution on June
13, 1986 but was given due course on September 29,
1986 on a motion for reconsideration.
The petition is impressed with merit.
The respondent court rejected the petitioners' reliance on
paragraph (H) of the contract which grants to the
vendors mortgagees the right to foreclose "in the event
of the failure of the vendees-mortgagors to comply with
any provisions of this mortgage." According to the
appellate court, this stipulation merely recognizes the
right of the vendors to foreclose and realize on the
mortgage but does not preclude them from availing of
other remedies under the law, such as rescission of
contract and damages under Articles 1191 and 1170 of
the Civil Code in relation to Republic Act No. 6552.
The appellate court committed reversible error. As will
be explained later, Art. 1191 on reciprocal obligations is
not applicable under the facts of this case. Moreover,
Art. 1383 of the Civil Code provides:
The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no
other legal means to obtain reparation for the same.
The concurring opinion of Justice J.B.L. Reyes
in Universal Food Corp. v. Court of Appeals (33 SCRA
22) was cited by the appellate court.
65
In that case, Justice J.B.L. Reyes explained:
xxx xxx xxx
... The rescission on account of breach of stipulations is
not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the
defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191
may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to
anything other than the culpable breach of his
obligations by the defendant. This rescission is a
principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when
the other violates his. As expressed in the old Latin
aphorism: "Non servanti fidem, non est fides
servanda," Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated
to the existence of that prejudice, because it is the raison
d 'etre as well as the measure of the right to rescind.
Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as
expressly provided in Articles 1383 and 1384. But the
operation of these two articles is limited to the cases of
rescission for lesion enumerated in Article 1381 of the
Civil Code of the Philippines, and does not apply to
cases under Article 1191.
It is probable that the petitioner's confusion arose from
the defective technique of the new Code that terms both
instances as "rescission" without distinctions between
them; unlike the previous Spanish Civil Code of 1889,
that differentiated "resolution" for breach of stipulations
from "rescission" by reason of lesion or damage. But the
terminological vagueness does not justify confusing one
case with the other, considering the patent difference in
causes and results of either action.
According to the private respondents, the applicable law
is Article 1191 of the Civil Code which provides:
The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with
what is incumbent upon him.

The injured party may choose between the fulfilment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfiument, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
There is no dispute that the parties entered into a
contract of sale as distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to
transfer the ownership of and to deliver a determinate
thing to the buyer, who in turn, is obligated to pay a
price certain in money or its equivalent (Art. 1458, Civil
Code). From the respondents' own arguments, we note
that they have fully complied with their part of the
reciprocal obligation. As a matter of fact, they have
already parted with the title as evidenced by the transfer
certificate of title in the petitioners' name as of June 27,
1975.
The buyer, in tum, fulfilled his end of the bargain when
he executed the deed of mortgage. The payments on an
installment basis secured by the execution of a mortgage
took the place of a cash payment. In other words, the
relationship between the parties is no longer one of
buyer and seller because the contract of sale has been
perfected and consummated. It is already one of a
mortgagor and a mortgagee. In consideration of the
petitioners'promise to pay on installment basis the sum
they owe the respondents, the latter have accepted the
mortgage as security for the obligation.
The situation in this case is, therefore, different from that
envisioned in the cited opinion of Justice J.B.L. Reyes.
The petitioners' breach of obligations is not with respect
to the perfected contract of sale but in the obligations
created by the mortgage contract. The remedy of
rescission is not a principal action retaliatory in character
but becomes a subsidiary one which by law is available
66
only in the absence of any other legal remedy. (Art.
1384, Civil Code).
Foreclosure here is not only a remedy accorded by law
but, as earlier stated, is a specific provision found in the
contract between the parties.
The petitioners are correct in citing this Court's ruling
in Villaruel v. Tan King (43 Phil. 251) where we Stated:
At the outset it must be said that since the subject-matter
of the sale in question is real property, it does not come
strictly within the provisions of article 1124 of the Civil
Code, but is rather subjected to the stipulations agreed
upon by the contracting parties and to the provisions of
Article 1504 of the Civil Code.
The "pacto comisorio" of "ley comisoria" is nothing
more than a condition subsequent of the contract of
purchase and sale. Considered carefully, it is the very
condition subsequent that is always attached to all
bilateral obligations according to article 1124; except
that when applied to real property it is not within the
scope of said article 1124, and it is subordinate to the
stipulations made by the contracting parties and to the
provisions of the article on which we are now
commenting" (article 1504). (Manresa, Civil Code,
volume 10, page 286, second edition.)
Now, in the contract of purchase and sale before us, the
parties stipulated that the payment of the balance of one
thousand pesos (P1,000) was guaranteed by the
mortgage of the house that was sold. This agreement has
the two-fold effect of acknowledging indisputably that
the sale had been consummated, so much so that the
vendee was disposing of it by mortgaging it to the
vendor, and of waiving the pacto comisorio, that is, the
resolution of the sale in the event of failure to pay the
one thousand pesos (P1,000) such waiver being proved
by the execution of the mortgage to guarantee the
payment, and in accord therewith the vendor's adequate
remedy, in case of nonpayment, is the foreclosure of
such mortgage. (at pp. 255-256).
xxx xxx xxx
There is, therefore, no cause for the resolution of the sale
as prayed for by the plaintiff. His action, at all events,
 67

should have been one for the foreclosure of the ATIENZA and
mortgage, which is not the action brought in this case. EMERENCIANA
CABANTOG,
Article 1124 of the Civil Code, as we have seen, is not Respondents.
applicable to this case. Neither is the doctrine enunciated
x-------------------------------------------------------------------
in the case of Ocejo, Perez & Co. v. International
----------------------x
Banking Corporation (37 Phil. 631), which plaintiff
alleges to be applicable, because that principle has
DECISION
reference to the sale of personal property. (at p. 257)

The petitioners have offered to pay au past due accounts.

BERSAMIN, J.:
Considering the lower purchasing value of the peso in
The petitioner challenges the decision promulgated on
terms of prices of real estate today, the respondents are
June 21, 2002,[1] whereby the Court of Appeals (CA)
correct in stating they have suffered losses. However,
affirmed the adverse decision rendered by the Regional
they are also to blame for trusting persons who could not
Trial Court, Branch 11, in Malolos, Bulacan (RTC) in
or would not comply with their obligations in time. They
Civil Case No. 50-M-87 entitled Lina Calilap-Asmeron
could have foreclosed on the mortgage immediately
v. Development Bank of the Philippines, Pablo Cruz,
when it fell due instead of waiting all these years while
Trinidad Cabantog, Eni S.P. Atienza, and Emerenciana
trying to enforce the wrong remedy.
Cabantog,[2] an action initiated to set aside the defendant
banks rescission of a deed of conditional sale involving
WHEREFORE, the petition is hereby GRANTED. The
foreclosed property, and to annul the subsequent sales of
Intermediate Appellate Court's decision dated November
the property to other persons.
8, 1985 and the resolution dated December 6, 1985 and
February 28, 1986 are REVERSED and SET ASIDE.
Antecedents
The petitioners are ordered to pay the balance of their
On March 17, 1975, the petitioner and her brother
indebtedness under the Deed of Absolute Sale with
Celedonio Calilap constituted a real estate mortgage over
Mortgage with legal interests from the second
two parcels of land covered by Transfer Certificate of
installment due on October 24, 1975 until fully paid,
Title (TCT) No. T-164117 and TCT No.T-160929, both
failing which the respondents may resort to foreclosure.
of the Registry of Deeds of Bulacan, to secure the
performance of their loan obligation with respondent
SO ORDERED.
Development Bank of the Philippines (DBP).[3] With the
principal obligation being ultimately unpaid, DBP
LINA CALILAP- G.R. No. 157330 foreclosed the mortgage. The mortgaged parcels of land
ASMERON, were then sold to DBP as the highest bidder. The one-
Petitioner, Present: year redemption period expired on September 1, 1981.[4]

CORONA, C.J., As to what thereafter transpired, the petitioner

Chairperson, and DBP tendered conflicting versions.
- versus - LEONARDO-DE
CASTRO,
I
BERSAMIN,
Version of Petitioner
DEL CASTILLO, and
DEVELOPMENT BANK VILLARAMA, JR., JJ. The thrust of the petitioners suit is that DBP accorded to
OF THE PHILIPPINES, her a preferential right to repurchase the property
PABLO Promulgated: covered by TCT No. 164117.[5] Her version follows.
CRUZ,*TRINIDAD
CABANTOG,** ENI S.P. November 23, 2011

In August 1982, the petitioner negotiated with
DBP to buy back the property covered by TCT No.
164117 by offering P15,000.00 as downpayment. Her
offer was rejected by an executive officer of DBPs
Acquired Assets Department, who required her to pay
the full purchase price of P55,500.00 for the property
within ten days.[6] She returned to DBP with the amount,
only to be told that DBP would not sell back only one
lot. Being made to believe that the lot covered by TCT
No. 164117 would be released after paying two
amortizations for the other lot (TCT No. 160929),
however, she signed the deed of conditional sale
covering both lots for the total consideration
of P157,000.00.[7] When she later on requested the
release of the property under TCT No. 164117 after
paying two quarterly amortizations, DBP did not
approve the release. She continued paying the
amortizations until she had paid P40,000.00 in all, at
which point she sought again the release of the lot under
TCT No. 164117. DBP still denied her request, warning
that it would rescind the contract should her remaining
amortizations be still not paid. On August 7, 1985, DBP
rescinded the deed of conditional sale over her
objections.[8]
On November 25, 1987, DBP sold the lot
covered by TCT No. 164117 to respondent Pablo
Cruz via a deed of absolute sale.[9] The petitioner
consequently filed a complaint for the rescission of the
sale to Cruz on January 30, 1987.[10] Notwithstanding
their knowledge of her pending suit against Cruz,
respondents Emerenciana Cabantog and Eni S.P. Atienza
still bought the property from Cruz.[11] Hence, Cabantog
and Atienza were impleaded as additional defendants by
amendment.
II
Version of Respondents
DBP insisted that the petitioners real intention had been
to repurchase the two lots on installment basis. She
manifested her real intention to that effect in writing
through her letter dated September 14, 1981, thus:
September 14, 1981
DEVELOPMENT BANK OF THE PHIL.
68
Acquired Assests [sic] Department
Makati, Metro Manila
ATTENTION: MR. J.A. SANCHEZ, JR.
Assistant Manager
------------------------------------------------------------
Dear Sir:
I wish to inform your good office that I am interested to
reacquire the mortgage properties consisting of two (2)
parcels of land under TCT Nos. T-160929 and T-164117
located at Sumapa, Malolos, Bulacan.
I would like to reacquire the above stated properties
under installment basis but I am requesting your
goodselves [sic] to extend an extension of time up to the
first week of November, 1981 for my money is coming
by that time.
Your kind consideration on the above request is most
highly appreciated, I remain.
Very truly yours,
(sgd.)
LINA CALILAP-ASMERON
Co-maker[12]
The petitioner also sent a telegram on September
15, 1981,[13] whereby she similarly expressed to DBP her
interest in reacquiring the properties. On November 16,
1981, DBP received another telegram from
her,[14] requesting DBP to put the bidding of the
properties on hold. A year later, she sent a letter dated
August 31, 1982 to reiterate her intention to repurchase
the two properties and to offer to deposit P55,500.00 as
initial payment, to wit:
August 31, 1982
The Manager
Acquired Assets Management Department
Development Bank of the Philippines
Makati, Metro Manila

Dear Sir:
This has reference to our former properties consisting of
two parcels of land with an aggregate area of 2,082.5
sq.m. covered by TCT Nos. T-160929 and T-164117
together with all the improvements erected thereon
located at Bo. Sumpang Matanda, Malolos, Bulacan.
I wish to inform you that in view of my intense desire to
preserve said properties for our familys use, I am
offering to buy back these properties for P157,000.00,
payable on terms, balance to be paid in five (5) years on
the quarterly amortization plan.
This is my last appeal for your assistance in my wish to
preserve these properties and should I fail to
consummate the sale, I bind myself to whatever rules
and regulations the Bank may impose with regards to my
deposit.
If this offer is acceptable to you, I am willing to deposit
the amount of P55,500.00 on or before September 10,
1982.
May I be advised accordingly?
Thank you.
Very truly yours,
(Sgd.)
LINA CALILAP-ASMERON[15]
The petitioner subsequently made the
downpayment on September 10, 1992,[16] and DBP
formally accepted the offer through its letter dated
September 14, 1982, stating therein the terms and
conditions.[17] Said terms and conditions, which were
later embodied in the deed of conditional sale executed
on January 21, 1983, included one that bound her to pay
the first amortization of P7,304.15 three months from the
execution of the deed, and the remaining amortizations
to be due and payable every three months thereafter.[18]
DBP presented the duplicate copies of the
receipts indicating her timely payment for the first
quarterly amortization; however, she incurred delays in
her subsequent installments.[19] She made her last
69
payment amounting to P4,500.00 on March 12,
1985,[20] leaving five quarterly amortizations unpaid.[21]
On January 20, 1986, the petitioner sent a handwritten
letter requesting DBP to put on hold any plans of selling
the subject property, viz:
January 20, 1986
Mr. V.M. Macapagal
Executive Officer
Acquired Assets Mgmt. Division
Development Bank of the Philippines
Makati, Metro Manila
Dear Sir:
This is with reference regarding my Sale Acct. No. 617
under the name of my late brother Celedonio R. Calilap
which are located in Sumapa, Malolos, Bulacan.
In connection with these properties, I have already made
an arrangement that Im going to pay my whole
obligations through a private financier under your
Incentive Plan, which according to my last
communication with them it was extended so I have to
make an advance notice of four (4) days before paying
so I may know the exact amount.
I wanted it to be formal, so I send [sic] a letter to
your good office for the reason that last January 17,
1986, your appraiser went to our place and made an
assessment of my properties. May I request again to
please hold any sale of the said property for Im doing
my best to settle my obligation at the soonest possible
time, for sure after a week or two after the snap election.
Thank you very much for your kind consideration and
hoping for your help regarding my request.
Respectfully yours,
(sgd.)
LINA CALILAP-ASMERON[22]
DBP replied by its letter dated February 5,
[23]
1986, demanding payment of the petitioners
remaining obligation of P121,013.75 in cash, otherwise,
it would be constrained to sell the property. She

responded via telegram,[24] informing DBP that she
would be arriving on March 4, 1986. The telegram was
followed by a handwritten letter dated March 5,
1986[25] stating her willingness to pay 10% of her
outstanding obligations.
On March 12, 1986, DBP demanded the
immediate remittance of the promised
[26]
amount via telegram. When she did not pay the six
quarterly amortizations, DBP rescinded the deed of
conditional sale and applied for a writ of possession on
November 17, 1986 in the RTC (Branch 17) in Malolos,
Bulacan. Its application for the writ of possession was
granted on November 18, 1986.[27]
Ruling of the RTC
Finding the petitioners complaint lacking in merit, the
RTC (Branch 11) rendered its decision on December 28,
1994 dismissing the case.[28] It observed that the
stipulations in the deed of conditional sale and the tenor
of the petitioners communications to DBP clearly
indicated that she had intended to
repurchase both foreclosed properties, not just the
property covered by TCT No. T-164117, thusly:
Lettered as she is, the plaintiff cannot now seek
refuge on the excuse that what she intends to buy was
only the property covered by TCT No. T-164117. The
contents of her letter to the Manager of the Acquired
Assets Division of DBP dated August 31, 1982 (Exh. 1
and its submarkings) and to Asst. Manager J.A. Sanchez
of the DBP dated September 14, 1981 (Exh. 2) clearly
demonstrate in unequivocal terms that she intended to
reacquire both of her foreclosed properties. Moreso, the
telegrams sent by her (Exhs. 3 & 4) to defendant bank
clearly indicates the same intention.
The aforequoted terms and conditions in the
conditional sale which defendant failed to comply are
clear and not susceptible whatsoever to any other
interpretation as to the intention of the contracting
parties. It is settled and fundamental that if the terms of
the contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of
the stipulations shall control (Art. 1370, Civil Code;
Filoil Marketing Corp. vs. IAC GR 67115; Mercantile
Ins. Corp. vs.Ysmael GR 43862; Baliuag Transit Corp.
vs. CA GR 80447). In addition, her subsequent acts of
writing DBP and complying with the terms of the
70
conditional sale bolster the fact of her acquiescence in
the said contract which she voluntarily entered into and
she cannot now take a contrary position.[29]
Ruling of the CA
The petitioner appealed, contending that:
I
THE LOWER COURT GROSSLY ERRED IN NOT
ANNULLING THE RESCISSION MADE BY THE
DEVELOPMENT BANK OF THE PHILIPPINES
(DBP) OF THE CONDITIONAL SALE OF JANUARY
4, 1983, APPELLANT HAVING ALREADY PAID A
SUBSTANTIAL AMOUNT OF P100,000.00 OR
ABOUT TWO-THIRDS OF THE PRICE OR
CONSIDERATION.
II
THE LOWER COURT ERRED IN NOT ANNULLING
THE SALE MADE BY DBP TO PABLO CRUZ AS
WELL AS THE SALE MADE BY THE LATTER TO
THE OTHER DEFENDANTS.
Yet, on June 21, 2002, the CA affirmed the
[30]
RTC, pointing out that the petitioner had not
presented testimonial or documentary evidence to
support or corroborate her claim that she had been
misled into signing the deed of conditional sale. It ruled
that DBP could rescind the contract pursuant to the
terms of the deed of conditional sale itself, and that DBP
exercised its right to rescind only after she had failed to
pay her quarterly amortizations.[31]
Issues
In her present appeal, the petitioner submits:
I
THE HONORABLE COURT OF APPEALS
COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT DISREGARDED THE TESTIMONIAL
EVIDENCE ADDUCED BY THE PETITIONER,
WHICH CLEARLY DETAILED THE TRUTH
SURROUNDING THE EXECUTION OF THE DEED
OF CONDITIONAL SALE OF THE SUBJECT LOT

TO RESPONDENT CRUZ, AND THE LATTER TO
CO-RESPONDENTS CABANTOG AND ATIENZA
NULL AND VOID
II
THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR WHEN IT AFFIRMED THE
DECISION OF THE LOWER COURT UPHOLDING
THE RESPONDENT BANKS RESCISSION OF THE
DEED OF CONDITIONAL SALE CONSIDERING
THAT THE PETITIONER HAD ALREADY PAID A
SUBSTANTIAL AMOUNT OF PHP100,000.00 OR
ABOUT TWO-THIRD OF THE FULL
CONSIDERATION OF PHP157,000.00.
The petitioner avers that her testimonial evidence
sufficiently established the facts behind the execution of
the deed of conditional sale; that she thereby proved that
she had not fully understood the terms contained in the
deed; that DBP could not resort to rescission because her
nonpayment of the amortizations was only a slight or
casual breach; and that the sale made by DBP to Cruz
was tainted with bad faith, which was also true with the
sale from Cruz to Cabantog and Atienza.
DBP counters that the petitioner is raising questions of
fact in her present appeal, which is not allowed under
Rule 45 of the Rules of Court; and that it had the right to
rescind the deed of conditional sale under Article 1191
of the Civil Code.
On her part, Remedios Lim-Cruz, who had substituted
her deceased husband, argues that the petitioner did not
prove bad faith on the part of her husband in purchasing
the property from DBP; and that her husband had relied
in good faith on the title of DBP as the registered owner
of the property at the time of the sale.
Ruling
The appeal lacks merit.
I conflicting; (f) when the CA, in making its findings,
Appeal under Rule 45 is
limited to questions of law only
71
The petitioners submissions, that her testimonial
evidence sufficiently established the facts behind the
execution of the deed of conditional sale, and that she
had not fully understood the terms contained in the deed
of conditional sale, involved questions of fact, for the
consideration and resolution of them would definitely
require the appreciation of evidence. As such, her
petition for review is dismissible for raising factual
issues. Under Rule 45 of the Rules of Court, only
questions of law may be the proper subject of an appeal
in this Court. The version of Section 1 of Rule 45 in
force at the time the petitioner commenced her present
recourse on April 28, 2003 expressly so stated, to wit:
Section 1. Filing of petition with Supreme Court.
A party desiring to appeal by certiorari from a judgment
or final order or resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or other courts
whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must
be distinctly set forth. (1a, 2a) (emphasis supplied)[32]
To be sure, we have not lacked in reminding that
in exercising its power of review the Court is not a trier
of facts and does not normally undertake the re-
examination of the evidence presented by the contending
parties during the trial of the case. For that reason, the
findings of facts of the CA are conclusive and binding
on the Court.
It is true that the Court has recognized several
exceptions, in which it has undertaken the review and re-
appreciation of the evidence. Among the exceptions
have been: (a) when the findings of the CA are grounded
entirely on speculation, surmises or conjectures; (b)
when the inference made by the CA is manifestly
mistaken, absurd or impossible; (c) when there is grave
abuse of discretion on the part of the CA; (d) when the
judgment of the CA is based on a misapprehension of
facts; (e) when the findings of facts of the CA are
went beyond the issues of the case, or its findings are
contrary to the admissions of both the appellant and the
appellee; (g) when the findings of the CA are contrary to

those of the trial court; (h) when the findings of the CA
are conclusions without citation of specific evidence on
which they are based; (i) when the facts set forth in the
petition as well as in the petitioners main and reply
briefs are not disputed by the respondent; (j) when the
findings of fact of the CA are premised on the supposed
absence of evidence and contradicted by the evidence on
record; and (k) when the CA manifestly overlooked
certain relevant facts not disputed by the parties, which,
if properly considered, would justify a different
conclusion.[33]
Although the petitioner submits that the CA
made findings of fact not supported by the evidence on
record, this case does not fall under any of the
recognized exceptions. Her claim that she had
established the circumstances to prove her having been
misled into signing the deed of conditional sale was
unfounded, for the findings of fact of the CA rested on
the records, as the following excerpt from the assailed
decision of the CA indicates:
Appellant would like this Court to believe that she was
misled by appellee DBPs representatives into signing the
Deed of Conditional Sale even if her original intention
was to buy back only one of the properties, i.e., that
which was covered by TCT No. T-164117. However, a
closer scrutiny of the evidence on record reveals that
aside from her bare allegations as to the
circumstances leading to the signing of said Deed of
Conditional Sale, the appellant has not presented
other evidence, testimonial or documentary, to
support or corroborate her claims. On the other hand,
appellee DBP has presented the letter dated August 31,
1982 signed by appellant herself and addressed to the
Manager of the Acquired Assets Management
Department of the appellee DBP, expressing her
intentions to buy back her foreclosed properties. In fact,
she offered therein to pay a total of P157,000.00 for
the two properties with P55,500.00 to be advanced by
her as deposit and the balance to be paid in five (5)
years under a quarterly amortization plan. Said
letter has not been categorically denied by the
appellant as during her testimony she merely feigned
any recollections of its content. Moreover, it is well-
settled that bad faith cannot be presumed and must be
72
established by clear and convincing
evidence.[34] (emphasis supplied)
The petitioner apparently relied solely on her bare
testimony to establish her allegation of having been
misled, and did not present other evidence for the
purpose. She seemingly forgot that, firstly, her bare
allegation of having been misled was not tantamount to
proof, and that, secondly, she, as the party alleging a
disputed fact, carried the burden of proving her
allegation.[35] In other words, her main duty was to
establish her allegation by preponderance of evidence,
because her failure to do so would result in her
defeat.[36]Alas, she did not discharge her burden.
On the other hand, the records contained clear
indicia of her real intention vis--vis her reacquisition of
the two foreclosed properties. The letters and telegrams
she had dispatched to DBP expressed the singular
intention to repurchase both lots, not just the one
covered by TCT No. 164711. That intention even
became more evident and more definite when she set
down the payment terms for the repurchase of both lots
in her letter of August 31, 1982. Given all these, the CA
rightly concluded that her written communications to
DBP had revealed her earnest desire to re-
acquire both foreclosed properties.
II
Article 1332 of the Civil Code
did not apply to the petitioner
The petitioner would have us consider that she had not
given her full consent to the deed of conditional sale on
account of her lack of legal and technical knowledge. In
effect, she pleads for the application of Article 1332 of
the Civil Code, which provides:
Article 1332. When one of the parties is unable to read,
or if the contract is in a language not understood by him,
and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been
fully explained to the former.
We cannot accede to the petitioners plea.

The pertinent terms of the deed of conditional sale read:
NOW THEREFORE for and in consideration of the
foregoing premises and for the total sum of ONE
HUNDRED FIFTY SEVEN THOUSAND PESOS
(P157,000.00), Philippine Currency, to be fully paid as
hereinafter set forth, the VENDOR agrees to convey by
way of sale and the VENDEE agrees to buy the above
stated properties covered by TCT Nos. T-160929 and T-
164117, more particularly described at the back hereof
under the following terms and conditions:
That the downpayment shall be P55,500 and the
balance of P101,500 to be paid in five (5) years on the
quarterly amortization plan at 15% interest per annum
the first amortization ofP7,304.15 shall be due and
payable 3 mos. from the date of execution of the Deed of
Conditional Sale and all subsequent amortizations shall
be due and payable every three (3) months thereafter;
That if the vendee fails to sign the sale document
within 15 days from date of receipt of our notice of
approval of the offer, the approval hereof shall be
deemed automatically revoked and the deposit forfeited
in accordance with the rules and regulations of the Bank.
The Vendee/s may pay the whole or part of the
account under this contract at anytime during the term
hereof; provided, however, that if the vendee/s is in
default in the payment of at least six monthly
amortizations, if payable monthly; two quarterly
amortizations, if payable quarterly; one semi-annual and
annual amortization if payable semi-annually and
annually, the Vendor may, in its option, declare the
whole account due and payable.
xxx
The title to the real estate property and all
improvements thereon shall remain in the name of the
vendor until after the purchase price, advances and
interest shall have been fully paid. The Vendee/s agrees
that in the event of his failure to pay the amortizations or
installments as herein provided for, the contract shall, at
the option of the Vendor, be deemed and considered
annulled, and he shall forfeit, and by these presents,
hereby waives whatever right he might have acquired to
the said property. The Vendor shall then be at liberty
ATTY.toCUISON
dispose of same as if this contract has never been made;
73
and in the event of such annulment, all sums of money
paid under the contract shall be considered and treated as
rentals for the use of the property, and the Vendee/s
waives all rights to ask or demand the return thereof and
he further agrees to vacate peacefully and quietly said
property, hereby waiving in favor of the Vendor
whatever expenses he may have incurred in the property
in the form of improvement or under any concept,
without any right to reimbursement whatsoever.
xxx
It is hereby agreed, covenanted and stipulated by and
between the parties hereto that should the Vendor decide
to rescind this contract in view of the failure of the
Vendee/s to pay the amortization/installments, when
due, or otherwise fail/s to comply with any of the terms
and conditions herein stipulated, and the Vendee/s
refuse/s to peacefully deliver the possession of the
property hereinbove mentioned to the Vendor, thereby
obliging the Vendor to file suit in court with the view to
taking possession thereof, the Vendee/s hereby agree/s to
pay all the expenses of the suit incident thereto, all the
damages that may be incurred thereby, as well as
attorneys fees which it is hereby agreed, shall be 10% of
the total amount due and outstanding, but in no case
shall it be less than P100.00.[37]
It is quite notable that the petitioner did not specify
which of the stipulations of the deed of conditional sale
she had difficulty or deficiency in understanding. Her
generalized averment of having been misled should,
therefore, be brushed aside as nothing but a last attempt
to salvage a hopeless position. Our impression is that the
stipulations of the deed of conditional sale were simply
worded and plain enough for even one with a slight
knowledge of English to easily understand.
The petitioner was not illiterate. She had
appeared to the trial court to be educated, its cogent
observation of her as lettered (supra, at p. 7 hereof)
being based on how she had composed her
correspondences to DBP. Her testimony also revealed
that she had no difficulty understanding English, as the
following excerpt shows:
 74

Q : Mrs. Witness, last time you identified the document,

captioned as Deed of Conditional Sale which was
executed last January 21, 1983, it was read in English
language, correct?
A : Yes, sir.
Q : And, could you testify in this Court without in need of
interpreter?
A : Yes, sir.
Q : So, you are aware or comfortable with the English
language?
A : Yes, sir.[38]
Nor was the petitioners ignorance of the true nature of
the deed of conditional sale probably true. By her own
admission, she had asked the bank officer why she had
been made to sign a deed of conditional sale instead of
an absolute sale, which in itself reflected her full
discernment of the matters subject of her dealings with
DBP, to wit:
COURT:
In calibrating the credibility of the witnesses on
this issue, we take our mandate from Article 1332 of
the Civil Code which provides: When one of the parties
is unable to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged, the
person enforcing the contract must show that the terms
thereof have been fully explained to the former. This
substantive law came into being due to the finding of
the Code Commission that there is still a fairly large
number of illiterates in this country, and documents
are usually drawn up in English or Spanish. It is also
in accord with our state policy of promoting
social justice. It also supplements Article 24 of the
Civil Code which calls on court to be vigilant in the
protection of the rights of those who are
disadvantaged in life.[41] (Emphasis supplied)
III
DBP validly exercised its right to rescind the
deed of conditional sale upon the petitioners default

The petitioner argues that despite the right to rescind due

Q : Now, before you signed this Deed of Conditional Sale
to nonpayment being stipulated in the deed of
sometime on January 21, 1983, did you read this
conditional sale, DBP could not exercise its right
document?
because her nonpayment of an obligation constituted
only a slight or casual breach that did not warrant
A : Yes, your Honor, and I even told the officer of the Bank,
rescission. Moreover, she posits that Article 1191[42] of
that why it should be a Deed of Probitional Sale when
the Civil Code empowers the court to fix the period
in fact it should be a Deed of Absolute Sale because I
within which the obligor may comply with the
paid already the full amount of P55,500.00 for the
obligation.
property covered by TCT No. 164117 and they told me
that after a few amortizations on the other property, they
The petitioners argument lacks persuasion.
are going to release the property which was paid in full
but did not push through, Your Honor.[39]
Firstly, a contract is the law between the parties.
Absent any allegation and proof that the contract is
Thereby revealed was her distinctive ability to
contrary to law, morals, good customs, public order or
understand written and spoken English, the language in
public policy, it should be complied with in good
which the terms of the contract she signed had been
faith.[43] As such, the petitioner, being one of the parties
written.
in the deed of conditional sale, could not be allowed to
conveniently renounce the stipulations that she had
Clearly, Article 1332 of the Civil Code does not
knowingly and freely agreed to.
apply to the petitioner. According to Lim v. Court of
Appeals,[40] the provision came into being because a
Secondly, the issue of whether or not DBP
sizeable percentage of the countrys populace had
validly exercised the right to rescind is a factual one that
comprised of illiterates, and the documents at the time
the RTC and the CA already passed upon and
had been written either in English or Spanish, viz:
 75

determined. The Court, which is not a trier of facts, of going to court. Thus, rescission under Article 1191
adopts their findings, and sustains the exercise by DBP was inevitable due to petitioners failure to pay the
of its right to rescind following the petitioners failure to stipulated price within the original period fixed in the
pay her six monthly amortizations, and after her being agreement.
given due notice of the notarial rescission.[44] As a ACCORDINGLY, the petition for review
consequence of the valid rescission, DBP had the legal is DENIED for lack of merit, and the decision of the
right to thereafter sell the property to a person other than Court of Appeals promulgated on June 21, 2002
the petitioner, like Cruz. In turn, Cruz could validly sell is AFFIRMED.
the property to Cabantog and Trinidad, which he did.
And, thirdly, Article 1191 of the Civil Code did not Costs of suit shall be paid by the petitioner.
prohibit the parties from entering into an agreement
whereby a violation of the terms of the contract would SO ORDERED.
result to its cancellation. In Pangilinan v. Court of
Appeals,[45] the Court upheld the vendors right in a
contract to sell to extrajudicially cancel the contract CONGREGATION OF THE RELIGIOUS OF THE
upon failure of the vendee to pay the installments and VIRGIN MARY and/or THE SUPERIOR GENERAL
even to retain the sums already paid, holding: OF THE RELIGIOUS OF THE VIRGIN MARY,
represented by The REVEREND MOTHER MA.
[Article 1191 of the Civil Code] makes it available to the CLARITA BALLEQUE,
injured party alternative remedies such as the power to Petitioner,
rescind or enforce fulfillment of the contract, with
damages in either case if the obligor does not comply - versus -
with what is incumbent upon him. There is nothing in
this law which prohibits the parties from entering EMILIO Q. OROLA, JOSEPHINE FATIMA
into an agreement that a violation of the terms of the LASERNA OROLA, MYRNA ANGELINE
contract would cause its cancellation even without LASERNA OROLA, MANUEL LASERNA OROLA,
court intervention. The rationale for the foregoing is MARJORIE MELBA LASERNA OROLA &
that in contracts providing for automatic revocation, ANTONIO LASERNA OROLA,
judicial intervention is necessary not for purposes of Respondents.
obtaining a judicial declaration rescinding a contract
already deemed rescinded by virtue of an agreement x-------------------------------------------------------------------
providing for rescission even without judicial -----------------x
intervention, but in order to determine whether or
not the rescission was proper. Where such propriety
is sustained, the decision of the court will be merely
declaratory of the revocation, but it is not itself the
revocatory act. Moreover, the vendors right in DECISION
contracts to sell with reserved title to extrajudicially
cancel the sale upon failure of the vendee to pay the NACHURA, J.:
stipulated installments and retain the sums and
installments already received has long been
recognized by the well-established doctrine of 39
years standing. The validity of the stipulation in the
contract providing for automatic rescission upon Challenged in this petition for review on certiorari is the
non-payment cannot be doubted. It is in the nature of Court of Appeals (CA) Decision[1] in CA-G.R. CV. No.
an agreement granting a party the right to rescind a 71406 which modified the Regional Trial Court (RTC)
contract unilaterally in case of breach without need Decision[2] in Civil Case No. V-7382 ordering the

rescission of the contract of sale between the parties in
an action for Specific Performance or Rescission with
Damages filed by respondents Emilio, Josephine Fatima
Laserna, Myrna Angeline Laserna, Manuel Laserna,
Marjorie Melba Laserna, & Antonio Laserna, all
surnamed Orola, (respondents) againstpetitioner
Congregation of the Religious of the Virgin Mary
(RVM).[3]
The undisputed facts, as found by the CA and adopted
by RVM in its petition, follow.
Sometime in April 1999, [petitioner] Religious
of the Virgin Mary (RVM for brevity), acting through its
local unit and specifically through Sr. Fe Enhenco,
local Superior of the St. Marys Academy of Capiz and
[respondents] met to discuss the sale of the latters
property adjacent to St. Marys Academy. Said property
is denominated as Lot 159-B-2 and was still registered in
the name of [respondents] predecessor-in-interest,
Manuel Laserna.
In May of 1999, [respondent] Josephine Orola
went to Manila to see the Mother Superior General of
the RVM, in the person of Very Reverend Mother Ma.
Clarita Balleque [VRM Balleque] regarding the sale of
the property subject of this instant case.
A contract to sell dated June 2, 1999 made out in
the names of herein [petitioner] and [respondents] as
parties to the agreement was presented in evidence
pegging the total consideration of the property
at P5,555,000.00 with 10% of the total consideration
payable upon the execution of the contract, and which
was already signed by all the [respondents] and Sr. Ma.
Fe Enhenco, R.V.M. [Sr. Enhenco] as witness.
On June 7, 1999, [respondents] Josephine Orola
and Antonio Orola acknowledged receipt of RCBC
Check No. 0005188 dated June 7, 1999 bearing the
amount of P555,500.00 as 10% down payment for Lot
159-B-2 from the RVM Congregation (St. Marys
Academy of Cadiz [SMAC]) with the conforme signed
by Sister Fe Enginco (sic), Mother Superior, SMAC.
[Respondents] executed an extrajudicial
settlement of the estate of Trinidad Andrada Laserna
76
dated June 21, 1999 adjudicating unto themselves, in pro
indiviso shares, Lot 159-B-2, and which paved the
transfer of said lot into their names under Transfer
Certificate of Title No. T-39194 with an entry date
of August 13, 1999.[4]
Thereafter, respondents, armed with an undated Deed of
Absolute Sale which they had signed, forthwith
scheduled a meeting with VRM Balleque at the RVM
Headquarters inQuezon City to finalize the sale,
specifically, to obtain payment of the remaining balance
of the purchase price in the amount of P4,999,500.00.
However, VRM Balleque did not meet with respondents.
Succeeding attempts by respondents to schedule an
appointment with VRM Balleque in order to conclude
the sale were likewise rebuffed.
In an exchange of correspondence between the
parties respective counsels, RVM denied respondents
demand for payment because: (1) the purported Contract
to Sell was merely signed by Sr. Enhenco as witness,
and not by VRM Balleque, head of the corporation sole;
and (2) as discussed by counsels in their phone
conversations, RVM will only be in a financial position
to pay the balance of the purchase price in two years
time. Thus, respondents filed with the RTC a complaint
with alternative causes of action of specific performance
or rescission.
After trial, the RTC ruled that there was indeed a
perfected contract of sale between the parties, and
granted respondents prayer for rescission thereof. It
disposed of the case, to wit:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the [respondents] and against
the [petitioner].
1. Dismissing the counterclaim;
2. Ordering the rescission of the Contract to Sell, Exh. E.
3. Ordering the forfeiture of the downpayment
of P555,500 in favor of the [respondents];
4. Ordering [petitioner] corporation sole, the Superior
General of the Religious of the Virgin Mary, to pay
[respondents]:

a. P50,000.00 as exemplary damages;
b. P50,000.00 as attorneys fees.
5. Costs against the [petitioner].
Dissatisfied, both parties filed their respective Notices of
Appeal. The CA dismissed the respondents appeal
because of their failure to file an Appeal Brief. However,
RVMs appeal, where respondents accordingly filed an
Appellees Brief, continued. Subsequently, the CA
rendered judgment setting aside the RTC Decision, to
wit:
WHEREFORE, with all the foregoing, the decision of
the Regional Trial Court, Branch 15, Roxas City dated
March 1, 2001 in [C]ivil [C]ase [N]o. V-7382 for
Specific Performance or Rescission with Damages is
hereby SET ASIDE and a new one
entered GRANTING [respondents] action for specific
performance. [Petitioner RVM] [is] hereby ordered to
pay [respondents] immediately the balance of the total
consideration for the subject property in the amount
of P4,999,500.00 with interest of 6% per annum
computed from June 7, 2000 or one year from the
downpayment of the 10% of the total consideration until
such time when the whole obligation has been fully
satisfied. In the same way, [respondents] herein are
ordered to immediately deliver the title of the property
and to execute the necessary documents required for the
sale as soon as all requirements aforecited have been
complied by [RVM]. Parties are further ordered to abide
by their reciprocal obligations in good faith.
All other claims and counterclaims are hereby dismissed
for lack of factual and legal basis.
No pronouncement as to cost.
In modifying the RTC Decision, the CA, albeit
sustaining the trial courts finding on the existence of a
perfected contract of sale between the parties, noted that
the records and evidence adduced did not preponderate
for either party on the manner of effecting payment for
77
the subject property. In short, the CA was unable to
determine from the records if the balance of the purchase
price was due in two (2) years, as claimed by RVM, or,
upon transfer of title to the property in the names of
respondents, as they averred. Thus, the CA applied
Articles 1383[5] and 1384[6] of the Civil Code which
pronounce rescission as a subsidiary remedy covering
only the damages caused.
The appellate court then resolved the matter in favor of
the greatest reciprocity of interest pursuant to Article
1378[7] of the Civil Code. It found that the 2-year period
to purchase the property, which RVM insisted on, had
been mooted considering the time elapsed from the
commencement of this case. Thus, the CA ordered
payment of the balance of the purchase price with 6%
interest per annum computed from June 7, 2000 until
complete satisfaction thereof.
Hence, this recourse.
RVM postulates that the order to pay interest is
inconsistent with the professed adherence by the CA to
the greatest reciprocity of interest between the parties.
Since mutual restitution cannot be had when the CA set
aside the rescission of the contract of sale and granted
the prayer for specific performance, RVM argues that
the respondents should pay rentals for the years they
continued to occupy, possess, and failed to turn over to
RVM the subject property.
Effectively, the only issue for our resolution is
whether RVM is liable for interest on the balance of the
purchase price.
At the outset, we must distinguish between an action for
rescission as mapped out in Article 1191 of the Civil
Code and that provided by Article 1381 of the same
Code. The articles read:
Art. 1191. The power to rescind obligations is impled in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,

even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more
than one fourth of the value of the things which are the
object thereof;
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion state in the preceding number;
(3) Those undertaken in fraud of creditors when the
latter cannot in any other manner collect the claims due
them;
(4) Those which refer to things under litigation if they
have been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to be
subject to rescission.
Article 1191, as presently worded, speaks of the remedy
of rescission in reciprocal obligations within the context
of Article 1124 of the Old Civil Code which uses the
term resolution. The remedy of resolution applies only to
reciprocal obligations[8] such that a partys breach thereof
partakes of a tacit resolutory condition which entitles the
injured party to rescission. The present article, as in the
Old Civil Code, contemplates alternative remedies for
the injured party who is granted the option to pursue, as
principal actions, either a rescission or specific
performance of the obligation, with payment of damages
in each case. On the other hand, rescission under Article
1381 of the Civil Code, taken from Article 1291 of the
78
Old Civil Code, is a subsidiary action, and is not based
on a partys breach of obligation.
The esteemed Mr. Justice J.B.L. Reyes, ingeniously cuts
through the distinction in his concurring opinion
in Universal Food Corporation v. CA:[9]
I concur with the opinion penned by Mr. Justice Fred
Ruiz Castro, but I would like to add that the argument of
petitioner, that the rescission demanded by the
respondent-appellee, Magdalo Francisco, should be
denied because under Article 1383 of the Civil Code of
the Philippines[,] rescission can not be demanded except
when the party suffering damage has no other legal
means to obtain reparation, is predicated on a failure to
distinguish between a rescission for breach of contract
under Article 1191 of the Civil Code and a rescission by
reason of lesin or economic prejudice, under Article
1381, et seq. The rescission on account of breach of
stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith
by the defendant, that violates the reciprocity between
the parties. It is not a subsidiary action, and Article 1191
may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to
anything other than the culpable breach of his
obligations by the defendant. This rescission is a
principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when
the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides
servanda. Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesin or
economic prejudice, the cause of action is subordinated
to the existence of that prejudice, because it is the raison
d etre as well as the measure of the right to rescind.
Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as
expressly provided in Articles 1383 and 1384. But the
operation of these two articles is limited to the cases of
rescission for lesin enumerated in Article 1381 of the
Civil Code of the Philippines, and does not apply to
cases under Article 1191.

It is probable that the petitioners confusion arose from
the defective technique of the new Code that terms both
instances as rescission without distinctions between
them; unlike the previous Spanish Civil Code of 1889,
that differentiated resolution for breach of stipulations
from rescission by reason of lesin or damage. But the
terminological vagueness does not justify confusing one
case with the other, considering the patent difference in
causes and results of either action.
In the case at bench, although the CA upheld the RTCs
finding of a perfected contract of sale between the
parties, the former disagreed with the latter that fraud
and bad faith were attendant in the sale transaction. The
appellate court, after failing to ascertain the parties
actual intention on the terms of payment for the sale,
proceeded to apply Articles 1383 and 1384 of the Civil
Code declaring rescission as a subsidiary remedy that
may be availed of only when the injured party has no
other legal means to obtain reparation for the damage
caused. In addition, considering the absence of fraud and
bad faith, the CA felt compelled to arrive at a resolution
most equitable for the parties. The CAs most equitable
resolution granted respondents prayer for specific
performance of the sale and ordered RVM to pay the
remaining balance of the purchase price, plus interest. It
set aside and deleted the RTCs order forfeiting the
downpayment of P555,500.00 in favor of, and payment
of exemplary damages, attorneys fees and costs of suit
to, respondents.
Nonetheless, RVM is displeased. It strenuously objects
to the CAs imposition of interest. RVM latches on to the
CAs characterization of its resolution as most equitable
which, allegedly, is not embodied in the dispositive
portion of the decision ordering the payment of interest.
RVM is of the view that since the CA decreed specific
performance of the contract without a finding of bad
faith by either party, and respondents retained possession
of the subject property for the duration of the litigation,
the imposition of interest is not keeping with equity
without simultaneously requiring respondents to pay
rentals for their continued and uninterrupted stay
thereon. In all, RVM phrases the issue in metaphysical
terms, i.e., the most equitable solution.
79
We completely disagree. The law, as applied to this
factual milieu, leaves no room for equivocation. Thus,
we are not wont to apply equity in this instance.
As uniformly found by the lower courts, we
likewise find that there was a perfected contract of sale
between the parties. A contract of sale carries the
correlative duty of the seller to deliver the property and
the obligation of the buyer to pay the agreed price.[10] As
there was already a binding contract of sale between the
parties, RVM had the corresponding obligation to pay
the remaining balance of the purchase price upon the
issuance of the title in the name of respondents. The
supposed 2-year period within which to pay the balance
did not affect the nature of the agreement as a perfected
contract of sale.[11] In fact, we note that this 2-year
period is neither reflected in any of the drafts to the
contract,[12] nor in the acknowledgment receipt of the
downpayment executed by respondents Josephine and
Antonio with the conformity of Sr. Enhenco.[13] In any
event, we agree with the CAs observation that the 2-year
period to effect payment has been mooted by the lapse of
time.
However, the CA mistakenly applied Articles
1383 and 1384 of the Civil Code to this case because
respondents cause of action against RVM is predicated
on Article 1191 of the same code for breach of the
reciprocal obligation. It is evident from the allegations in
respondents Complaint[14] that the instant case does not
fall within the enumerated instances in Article 1381 of
the Civil Code. Certainly, the Complaint did not pray for
rescission of the contract based on economic prejudice.
Moreover, contrary to the CAs finding that the
evidence did not preponderate for either party, the
records reveal, as embodied in the trial courts exhaustive
disquisition, that RVM committed a breach of the
obligation when it suddenly refused to execute and sign
the agreement and pay the balance of the purchase
price.[15] Thus, when RVM refused to pay the balance
and thereby breached the contract, respondents rightfully
availed of the alternative remedies provided in Article
1191. Accordingly, respondents are entitled to damages
regardless of whichever relief, rescission or specific
performance, would be granted by the lower courts.[16]

Yet, RVM stubbornly argues that given the CAs
factual finding on the absence of fraud or bad faith by
either party, its order to pay interest is inequitable.
The argument is untenable. The absence of fraud
and bad faith by RVM notwithstanding, it is liable to
respondents for interest. In ruling out fraud and bad
faith, the CA correspondingly ordered the fulfillment of
the obligation and deleted the RTCs order of forfeiture
of the downpayment along with payment of exemplary
damages, attorneys fees and costs of suit. But RVMs
contention disregards the common finding by the lower
courts of a perfected contract of sale. As previously
adverted to, RVM breached this contract of sale by
refusing to pay the balance of the purchase price despite
the transfer to respondents names of the title to the
property. The 2-year period RVM relies on had long
passed and expired, yet, it still failed to pay. It did not
even attempt to pay respondents the balance of the
purchase price after the case was filed, to amicably end
this litigation. In fine, despite a clear cut equitable
decision by the CA, RVM refused to lay the matter to
rest by complying with its obligation and paying the
balance of the agreed price for the property.
Lastly, to obviate confusion, the clear language
of Article 1191 mandates that damages shall be awarded
in either case of fulfillment or rescission of the
obligation.[17] In this regard, Article 2210 of the Civil
Code is explicit that interest may, in the discretion of the
court, be allowed upon damages awarded for breach of
contract. The ineluctable conclusion is that the CA
correctly imposed interest on the remaining balance of
the purchase price to cover the damages caused the
respondents by RVMs breach.
WHEREFORE, premises considered, the petition
is DENIED. The order granting specific performance
and payment of the balance of the purchase price plus
six percent (6%) interest per annum from June 7, 2000
until complete satisfaction is hereby AFFIRMED. Costs
against petitioner.
SO ORDERED.
G.R. No. 171076 August 1, 2012
80
GOLDLOOP PROPERTIES INC., Petitioner,
vs.
GOVERNMENT SERVICE INSURANCE
SYSTEM, Respondent.
DECISION
DEL CASTILLO, J.:
This protracted legal battle revolves around the unilateral
of the parties’ contracts.
In this Petition for Review on Certiorari, petitioner
Goldloop Properties Inc. (Goldloop) assails the
September 26, 2005 Decision1 of the Court of Appeals
(CA) in CA-G.R. CV No. 80135 which reversed and set
aside the June 23, 2003 Decision2 of the Regional Trial
Court (RTC) of Pasay City, Branch 111 in Civil Case
No. 00-0149 for Specific Performance and Damages.
Likewise assailed is the January 11, 2006 Resolution3 of
the CA which denied Goldloop’s Motion for
Reconsideration thereto.
Factual Antecedents
The Government Service Insurance System (GSIS) owns
a 2,411-square meter (sq. m.) parcel of land located in
ADB Avenue cor. Sapphire St., Ortigas Center, Pasig
City as well as the Philcomcen Building standing on a
portion thereof. On June 16, 1995, GSIS and Goldloop
executed a Memorandum of Agreement
4
(MOA) whereby Goldloop, at its own expense and
account, would renovate the façade of the Philcomcen
Building as well as construct a condominium building on
the 1,195 sq. m. portion of said land. Goldloop also
undertook to pay GSIS the amount of P 140,890,000.00
for the portion of the land on which the condominium
building shall stand to be remitted in eight installments
within the four-year period following the execution of
the MOA. Said amount is apart from the guaranteed
revenue of P 1,428.28 million5 that the parties would
share when the project is already completed and the
condominium units sold. It was further agreed that
should the gross sales of the condominium project
exceed the said guaranteed revenue, GSIS would be
entitled to 9.86% of the amount in excess of P1,428.28
million and Goldloop, to the balance of 90.14%.6

On June 18, 1996, the parties executed an Addendum to
the Memorandum of Agreemen7 (Addendum) to include
in the project the relocation of an existing powerhouse
and cistern tank within the site of the proposed
condominium building. And since by then Goldloop had
yet to remit to GSIS the first and second installment
payments of the guaranteed amount, the Addendum also
contained stipulations relative thereto, to wit:
2. The parties agree that the expense items identified in
Annex "C" 8 as A.1, A.2.1, A.2.2., A.2.3., A.3.1., B.1
and B.2 are for the account of GSIS; while expense
items A.3.2. and B.3 are for the account of
GOLDLOOP.
3. As a gesture of goodwill and in consideration for the
waiver by GSIS of the interest due from GOLDLOOP
by reason of late payment of the first guaranteed amount
under Section 1.1. of the MOA, GOLDLOOP hereby
agrees to absorb expense Item C of Annex "C" hereof;
4. GOLDLOOP shall advance the payments of all the
expense items due from GSIS which shall, however be
credited as full payment of its first guaranteed
installment and partial payment of the second guaranteed
installment under Section 1.1. of the MOA;
5. As further gesture of goodwill and as additional
consideration for the waiver by GSIS of the interest due
from GOLDLOOP by reason of late payment of the first
guaranteed amount under Section 1.1 of the MOA,
GOLDLOOP hereby agrees not to charge the GSIS any
interest for the amounts to be advanced by GOLDLOOP
in excess of the amount due as its first guaranteed
installment;
6. In consideration of the undertakings of GOLDLOOP
under Sections 3 and 5 hereof, the GSIS hereby waives
in favor of GOLDLOOP the interest due from the latter
by reason of its late payment of the first guaranteed
amount under Section 1.1 of the MOA.9
Goldloop then performed the necessary preparatory
works.10 It also formally launched the project11 and
conducted the pre-selling of the condominium
units.12 Unfortunately, construction could not proceed
because Mayor Vicente P. Eusebio (Mayor Eusebio) of
Pasig City refused to act on the applications for building
81
permits filed in November 199613 and July
1997,14 claiming that GSIS owed Pasig City P54 million
in unpaid real estate taxes. The GSIS, for its part,
through its then President and General Manager, Mr.
Cesar Sarino (Sarino), claimed that GSIS is exempt from
payment thereof by virtue of Republic Act (R.A.) No.
8291.15 Because of this impasse, Mayor Eusebio opted to
hold in abeyance any action on the applications for
building permit until the issue on the tax exemption
provisions of R.A. No. 8291 shall have been settled by
the court through a petition for declaratory relief that
Pasig City intended to file.16
When Mr. Federico C. Pascual (Pascual) was
subsequently appointed as the new President and
General Manager of GSIS, Goldloop’s President, Mr.
Emmanuel R. Zapanta (Zapanta), apprised him of the
situation. Later, however, Goldloop received from GSIS
a letter dated November 23, 1998 informing it of a
recommendation17 to rescind the MOA.18 Zapanta thus
wrote GSIS on December 2, 1998 and reiterated that the
work stoppage due to non-issuance of permit was not
Goldloop’s fault. Assuring GSIS that it would
commence the project as soon as the issue on building
permits is resolved, Zapanta urged GSIS to reconsider its
position.19 Despite this, GSIS still sent Goldloop a notice
of rescission20 dated February 23, 2000 stating that 30
days from the latter’s receipt thereof, the MOA shall be
deemed rescinded for Goldloop’s breach of its
obligations and commitments thereunder, specifically for
failure to pay the guaranteed amount
of P 140,890,000.00 under Section 1.1 and pursuant to
Sections 1.3 and 2.4 of the MOA, viz:
In view of your failure to abide by the provisions of the
Memorandum of Agreement, please be informed that
effective upon the expiration of thirty (30) days from
receipt of this notice, the aforesaid Agreement is deemed
rescinded and terminated for breach of obligations and
commitments pursuant to the following provisions of the
Contract:
Section 1.1 That GOLDLOOP PROPERTIES, INC. will
pay the GSIS a guaranteed amount of ONE HUNDRED
FORTY MILLION EIGHT HUNDRED NINETY
THOUSAND PESOS (P140,890,000.00) as payment for
the 1,195 sq. m. portion of the lot on which the second
 82

tower will stand in accordance with the following undertake the same on Goldloop’s account without
schedule: responsibility on its part for any resulting loss or
damage. Because of this, Goldloop filed on May 17,
Period from signing of thePercentage of TotalAmount 2000 to a be Complaint23 for Specific Performance with
Agreement Amount Remitted Damages before the RTC of Pasay City against GSIS.
Six Months 10% P 14,089,000.00
The case was docketed as Civil Case No. 00-0149 and
Twelve Months 15% 21,133,500.00
raffled to Branch 111 of said court.
Eighteen Months 15% 21,133,500.00
Twenty-four Months 15% 21,133,500.00
Proceedings in the Regional Trial Court
Thirty Months 15% 21,133,500.00
Thirty-Six Months 10% In its complaint, Goldloop belied GSIS’s claim that it
14,089,000.00
Forty-Two Months 10% has not paid the guaranteed amount. It asserted that aside
14,089,000.00
Forty-Eight Months 10% from the amount it expended for the preparatory works
14,089,000.00
100% undertaken, it already paid GSIS the sum
P 140,890,000.00
of P24,824,683.00 in terms of charges on change order
Section 1.3 Payment to GSIS of the amounts provided items. This amount was advanced by Goldloop in favor
for in the preceding paragraphs shall be remitted by of GSIS, with the understanding, per the Addendum, that
GOLDLOOP within the periods stated therein without the same shall be credited as full payment of the first
need of prior demand; and failure to so pay within said installment and as partial payment of the second
periods shall entitle the GSIS to an interest of 18% per installment of the guaranteed amount. Goldloop also
annum, compounded monthly, without prejudice to the claimed to have spent a total of P 44,075,910.70 for
other rights and remedies of the GSIS under this design, marketing fees, project launching, title
Agreement and under applicable laws. annotation, waiver, advances of contractors and other
expenses. All in all, Goldloop already shelled out the
xxxx amount of P68,890,593.70.24

Section 2.4. Should GOLDLOOP fail to start the
construction works within thirty (30) working days from
the date all the relevant permits and licenses from the
concerned agencies are obtained, or within six (6)
months from the date of the execution of this
Agreement, whichever is earlier, or at any given time
abandon the same or otherwise commit any breach of
their obligations and commitments under this
Agreement, this agreement shall be deemed terminated
and cancelled without need of judicial action by giving
thirty (30) days written notice to that effect to
GOLDLOOP [which] hereby agrees to abide by the
decision of the GSIS.21(Underscoring and Emphasis in
the original.)
Subsequently, GSIS sent Goldloop a letter22 dated April
27, 2000 informing it that the MOA was already
officially rescinded. It thus ordered Goldloop to vacate
the premises and clear the same of all debris,
machineries and equipment within five days from receipt
thereof. Failing which, GSIS warned that it would
Goldloop also averred that it was ready, willing and able
to perform all of its obligations under the MOA as
shown by the preparatory works it had undertaken.
However, because of the non-issuance of building
permits by Mayor Eusebio, the project could not push
thru. Goldloop further alleged that GSIS made
assurances that it would secure the necessary permits but
GSIS still failed to obtain the same. Goldloop also
alleged that GSIS delayed the issuance of notice to
proceed despite repeated reminders from Goldloop.
Goldloop also claimed that during Zapanta’s courtesy
call to Pascual, the latter allegedly advised the former to
just wait for the resolution of the problem and even
remarked that "at any rate the real estate market is still
depressed in view of the Asian financial crisis." On the
same day, Zapanta even handed to Pascual a
letter25 dated July 20, 1998 which also spoke of the same
problem.

Hence, Goldloop asserted that the rescission was without
basis and clearly made in bad faith. It therefore asked the
RTC to declare the same as null and void, to direct GSIS
to comply with the provisions of the MOA and the
Addendum, and to secure all the necessary permits from
Pasig City. It also prayed for actual damages of still
undetermined amount due to its alleged continuing
character, exemplary damages of P 10 million, attorney’s
fees of P 500,000.00 and costs of suit.
On June 15, 2000, Goldloop applied for the issuance of a
temporary restraining order (TRO) and/or writ of
preliminary injunction.26 This was on account of its
receipt of a letter27 dated May 29, 2000 from GSIS
wherein it was given a final notice to vacate the premises
and to clear it from all debris, machineries and
equipment within five days from receipt thereof,
otherwise, GSIS would undertake the same on
Goldloop’s account. Goldloop also alleged that GSIS
had already leased the premises to the Department of
Interior and Local Government without its knowledge
and consent.28 Claiming lawful possession and
occupancy of the premises on the strength of the MOA
as well as grave and irreparable damage to it should
GSIS take over the property, Goldloop prayed that GSIS
be restrained from disturbing or interfering with its
possession and occupancy of the premises.
Notwithstanding GSIS’s opposition,29 the RTC granted
Goldloop’s application for TRO and accordingly ordered
GSIS to cease and desist from doing acts which would in
any manner tend to disturb Goldloop’s peaceful
possession and occupation of the subject
premises.30 Upon the expiration of the said TRO,
Goldloop applied for the issuance of a writ of
preliminary injunction31 which was likewise granted by
the trial court.32 GSIS moved for reconsideration33 but
was denied by the RTC.34
In its Answer with Affirmative Defenses and
Compulsory Counterclaims,35 GSIS contested
Goldloop’s claim that it had already advanced
P24,824,683.00 in expense items supposed to be for
GSIS’s account. It averred that if at all, the amount
should only be P 21,225,521.08 per the agreed valuation
of said expense items as listed in Annex "C" of the
Addendum and provided further that the works for
83
which said items were intended were indeed completed.
GSIS likewise denied for lack of knowledge and
information Goldloop’s allegation that it
incurred P44,075,910.70 for other expenses; that it
delayed the issuance of the notice to proceed with the
construction; and that Goldloop apprised Pascual of the
situation, both personally and in writing.
Regarding the issue on tax liability, GSIS denied that it
acted in bad faith in not informing Goldloop of the same
as it was within its right to invoke tax exemption
pursuant to its charter.
In gist, GSIS insisted that the rescission of the MOA and
the Addendum was a valid and legitimate exercise of its
right under the provisions thereof; hence, the complaint
against it must be dismissed.
By way of compulsory counterclaims, GSIS prayed for
Goldloop to pay it actual damages for lost
income/unrealized revenues in the amount
of P 68,922,360.73, P 10 million exemplary damages,
and P 1 million attorney’s fees.
Ruling of the Regional Trial Court
In a Decision36 dated June 23, 2003, the RTC found
GSIS’s rescission without valid basis. It ruled that the
failure to proceed with the construction was not due to
Goldloop’s fault and that GSIS was well aware of this.
In fact, Sarino’s January 16, 1998 letter37 to Goldloop
would show that GSIS recognized that the continuing
stand-off between it and the City of Pasig on the issue of
permits was the only stumbling block for Goldloop to
proceed with the construction.
As to Goldloop’s failure to fully pay the guaranteed
amount, the RTC ruled that the same is likewise
attributable to the non-issuance of permits. The RTC
noted that when the construction failed to proceed due to
said non-issuance, would-be buyers who made initial
deposits and/or reservation fees for the condominium
units backed out. Goldloop was thus constrained to
return their deposits, some with interest, in the amount
of P 80 million. Said amount was apart from the P 11
million that it already paid to agents and brokers as
commissions. These hindered Goldloop from complying
with its obligation to pay the guaranteed amount.

Consequently, the RTC adjudged GSIS liable to
Goldloop for damages.
The dispositive portion of the trial court’s Decision
reads:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of plaintiff Goldloop and
against defendant GSIS.
Accordingly, the unilateral cancellation or rescission of
the Memorandum of Agreement and the Addendum to
the MOA is hereby declaredINVALID for lack of valid
basis. Hence, defendant GSIS is hereby directed to
comply with the Memorandum of Agreement dated June
16, 1995 and Addendum dated June 20, 1995.
Congruently, and pending compliance by defendant
GSIS, the injunction issued on July 10, 2000 is hereby
made permanent.
Consistent with the court’s finding, defendant GSIS is
hereby directed to pay to plaintiff the following:
1. Actual damages in the amount of P83,082,749.00;
2. Exemplary Damages in the amount
of P 5,000,000.00;
3. Attorney’s Fees - P 500,000.00;
4. Reimbursement of Filing Fees or Cost of litigation -
P 104,953.50.
SO ORDERED.38
GSIS filed a Notice of Appeal39 which was approved by
the RTC in its Order40 of August 8, 2003.
Ruling of the Court of Appeals
In resolving GSIS’s appeal, the CA noted that under
Section 2.4, Article II of the MOA, GSIS may exercise
its right to rescind, to wit: (1) upon Goldloop’s failure to
start the construction works within 30 working days
from the date all relevant permits and licenses from
concerned agencies are obtained; (2) or within six
months from the date of execution of the agreement,
whichever is earlier; or (3) at any given time, should
Goldloop abandon the project or otherwise commit any
breach of its obligations and commitments.
84
The CA concluded that GSIS cannot rescind the
agreement based on the first two circumstances
considering that Goldloop’s failure to proceed with the
construction works within the said periods was the
necessary consequence of the non-issuance of permits
which, however, cannot be attributed to Goldloop’s
fault. Nevertheless, since nine years had already passed
since the execution of the MOA and the Addendum,
Goldloop is deemed to have abandoned the project under
the third circumstance, even if the same be due to a
justifiable cause, that is, the non issuance of permits. The
CA declared that the delay in the implementation of the
project has been detrimental to the interest of GSIS and
its members but not on the part of Goldloop, which, on
the contrary, had been benefiting from the same because
it had been using the property free of charge. To the
appellate court, this amounts to unjust enrichment and,
hence, the MOA must be equitably rescinded under this
ground. The CA also extinguished the obligations of the
parties relative thereto and ordered each of them to bear
its own damage. The dispositive portion of the CA’s
September 26, 2005 Decision41 reads:
WHEREFORE, premises considered, the appeal is
hereby GRANTED. The June 23, 2003 Decision of the
trial court is REVERSED and SET ASIDE. A new
judgment is entered RESCINDING the MOA and its
Addendum, the obligations of the parties relative thereto
are deemed extinguished, and each to bear its own
damages.
SO ORDERED.42
Goldloop filed a Motion for Reconsideration,43 but the
same was denied in the Resolution44 dated January 11,
2006.
Hence, the present Petition for Review on Certiorari.
Issues
Goldloop faults the CA in rescinding the MOA and the
Addendum, in extinguishing the obligations of the
parties relative thereto, in declaring that each party
should bear its own damage and, in discarding the
findings of facts and conclusions of the RTC.45
Our Ruling
 85

The Court upholds the rescission but for a reason circumstances leading to such claim have arisen,
different from that upon which the CA based its delivered an appropriate written notice to the GSIS to
conclusion. enable the latter to have [the] reason for extension
investigated. The GSIS shall, on the basis of the facts
Reciprocal obligations of the parties and circumstances and of the merits or lack of merit of
under the MOA. the request, grant or deny the request for extension, as it
may deem proper. The decision of the GSIS on this
"Reciprocal obligations are those which arise from the matter shall be final and binding. Failure to provide such
same cause, and which each party is a debtor and a notice constitutes a waiver by x x x GOLDLOOP of any
creditor of the other, such that the obligation of one is claim for extension.
dependent upon the obligation of the other." 46 Here, the
parties’ reciprocal obligations are embodied in Article I Section 1.2 That after the project has been completed
of the MOA, viz: and sold but not later than six (6) months after the 48-
month period, in reference to the schedule of payment in
ARTICLE I Item 1 above, a calculation of the gross sales net of the
ABSOLUTE SALE 8% marketing fee will be made. The GSIS will be
entitled (in addition to the guaranteed amount in excess
Section 1.1 That GOLDLOOP PROPERTIES INC. will of P140.89 Million) to 9.86% of the amount in excess of
pay the GSIS a guaranteed amount of ONE HUNDRED the P1,428.28 Million (the guaranteed revenue for
FORTY MILLION EIGHT HUNDRED NINETY sharing) while GOLDLOOP will be entitled to the
THOUSAND PESOS (P 140,890,000.00) as payment balance of 90.14% in case the gross sales net of the 8%
for the 1,195 sq. m. portion of the lot on which the marketing fee does not exceed P1,428.28 Million, the
second tower will stand in accordance with the following GSIS will not be entitled to any additional amount.
schedule:
GSIS has the right to full information as to all matters
d from signing of thePercentage of TotalAmount to requisite
be in the determination of the gross sales relative
ement Amount Remitted to this project that may be in its possession and a full
Months 10% P 14,089,000.00 disclosure of any information that it may deem material
ve Months 15% 21,133,500.00 and relevant for the purpose.
een Months 15% 21,133,500.00
ty-four Months 15% 21,133,500.00 Section 1.3 Payment to GSIS of the amounts provided
y Months 15% 21,133,500.00 for in the preceding paragraphs shall be remitted by
y-Six Months 10% 14,089,000.00 GOLDLOOP within the periods stated therein without
-Two Months 10% 14,089,000.00 need of prior notice or demand; and failure to so pay
-Eight Months 10% 14,089,000.00 within said periods shall entitle the GSIS to an interest of
100% P 140,890,000.0018% per annum, compounded monthly, without
prejudice to the other rights and remedies of the GSIS
Without prejudice to the right of GSIS to collect the under the Agreement and under applicable laws.
interest provided for in Section 1.3 hereof, the aforesaid
periods may be extended in the event that GOLDLOOP Section 1.4 GSIS warrants that it has title over the
PROPERTIES INC. fails to obtain all the necessary subject property and subject to the obligation of
permits and licenses for causes beyond the control of GOLDLOOP to undertake the conversion of the same to
GOLDLOOP or by reason of force majeure. a condominium property and the identification of the
1,195 sq. m. of vacant lot as a unit thereof capable of
It is expressly agreed that extension of time[/]period being legally sold by GSIS to GOLDLOOP, that same is
provided for herein may not be claimed unless transferable, free from all liens and encumbrances
GOLDLOOP has, prior to the expiration of the contract whatsoever.
time and within fifteen (15) calendar days after the

Section 1.5 After full compliance by GOLDLOOP of its
obligations under the preceding Section, GSIS shall
execute [in] its favor, or in favor of its nominee a Deed
of Absolute Sale for the 1,195 sq. m. portion of the
subject property.47 (Emphasis supplied.)
Clearly, Goldloop’s obligation is to pay for the portion
of the property on which the second tower shall stand
and to construct and develop thereon a condominium
building. On the other hand, GSIS is obliged to deliver
to Goldloop the property free from all liens and
encumbrances and to execute a deed of absolute sale in
Goldloop’s favor.
Goldloop failed to complete its payment
of the guaranteed amount in the manner
prescribed in the contract.
Under Sec. 1.1 of the MOA, Goldloop undertook to pay
GSIS the guaranteed amount of P140,890,000.00, in
eight installments, the first installment of which would
fall due on December 16, 1995 and the subsequent
payments every six months thereafter until June 16,
1999. The dates of payment may be extended if
Goldloop fails to obtain all the necessary permits and
licenses for causes beyond its control or by reason of
force majeure. However, such request for extension must
be in writing and made prior to the expiration of the
contract and within 15 calendar days after the
circumstances leading to such claim for extension have
arisen.
Sec. 1.3, on the other hand, provides for the remittance
to GSIS of such payments without need of demand as
well as for the consequence of nonpayment.
Admittedly, Goldloop failed to pay the first installment
on time; hence, the parties stipulated in the Addendum
that Goldloop shall advance the payment for expense
items which were for GSIS’s account. The money
advanced shall then be credited as full payment of the
first installment and the excess therefrom, as partial
payment of the second. By way of said expense items,
Goldloop claimed to have already advanced in favor of
GSIS the sum of P24,824,683.00.48
Assuming said figure is correct for purposes of this
discussion, the same only covers the full payment of the
86
first installment which is P14,089,000.00 and the excess
therefrom, the partial payment for the P21,133,500.00
second installment. However, we note that the
Addendum was executed on June 18, 1996 or two days
after the second installment payment was supposed to be
remitted (June 16, 1996). Hence, by that time,
Goldloop’s duty to complete the payment for the second
installment had already arisen. However, the records fail
to show that Goldloop, from that time on, endeavored to
at least complete such second installment. Worse, it
totally failed to remit the other subsequent installments.
This was confirmed by Zapanta during the hearing on
the application for writ of preliminary injunction, viz:
ATTY. SILVERA
q So [is it] not true that under Art. 1, Sec. 1.1 of the
MOA, that is, there is in effect a transaction of sale?
WITNESS Zapanta
a I don’t know what is the meaning of sale.
ATTY. SILVERA
q Okay, let’s put it [this] way, did you review or did
you have an opportunity to review this MOA prior to
signing?
a Well, frankly, GSIS we were all in good faith.
q You [mean] you were obligated to pay a guaranteed
amount of 140 million and merely…is that your
position?
a That was the agreement, when we say in good faith
we agreed to the 140 million without even foreseeing the
problem.
COURT
q Of the 140 million provided for, I’m speaking only
not [of] your advances but of the 140 million you are
supposed to pay the GSIS, how many times did you pay,
and how much?
a I cannot say Your Honor, because the addendum to
the contract it says there in the advances…

q Okay, according to you the advances are there, it is
clear, 24 million.
xxxx
I’m asking you whether or not pursuant to the schedule
of payment you are obligated to pay 140 million, right?
Okay, how much have you paid the GSIS in connection
with the schedule of payments?
a Nothing on this project. (Emphasis supplied.)
q In other words, you are trying to tell this Court [that]
there were advances which are covered by the MOA?
a Yes.
q And this is for the account of GSIS?
a Yes, Your Honor.
ATTY. SILVERA
q And there were advances when you were supposed
to start paying this amount?
a It’s already in the agreement.
ATTY. SILVERA
q If based in this Addendum which is the guiding
provision here, it says here the advances of Goldloop
shall be credited as full payment of the first guaranteed
installment and partial payment of the second
installment under Sec. 1.1 of the MOA?
COURT
For the information of the Court, how much is supposed
to be the payment, per month?
a Per six (6) months Your Honor. COURT
q Under the scheduled payment?
a The first payment is 14 million Your Honor. And
then after 6 months it’s 21 million.
87
q So far according to you, you have advanced….
a 24 million Your Honor.
ATTY. SILVERA
That covers the whole payment for the first installment.
And there had been no subsequent payment pursuant to
Sec. 1.1 of the MOA?.
a. No sir, we were already up to our neck in our
expenses.49 (Emphasis supplied.)
The RTC ratiocinated that Goldloop’s failure to comply
with the said obligation was due to the non-issuance of
permits. According to it, Goldloop experienced financial
difficulty when the construction did not push thru since
it had to return the deposits, some with interest, of
would-be buyers and had already paid the commission of
brokers and agents of the condominium units, and these
amounted to millions of pesos. Hence, its failure to pay
was justified.
While the Court is inclined to agree with the RTC that
the non-issuance of permits indeed affected Goldloop’s
ability to pay, it cannot, however, ignore the fact that
Goldloop itself failed to avail of the protection granted
to it by the MOA in case of failure to obtain the
necessary permits and licenses. Under the circumstances,
Goldloop could have applied for an extension within
which to pay the installments of the guaranteed amount
as clearly provided for under the second and third
paragraphs of said Sec. 1.1. Yet again, the records are
bereft of any showing that it ever availed of such
extension. When asked regarding this, Zapanta evaded
the question and instead answered that the contract has
not yet expired, viz:
ATTY. SILVERA
q Would you agree with me in case that those permits
could not be secured Goldloop could ask for an
extension of time subject only to the conditions cited in
the second paragraph and 3rd paragraph of Sec. 1.1, Art.
1 of the MOA on page 3?
a Yes, it says here.

q And would you please tell us if Goldloop ever
availed of this option afforded by the MOA?
a Well, insofar as advising the GSIS of the refusal of
the Pasig City we have voluminous paper…of that, now
with regard to the filing of an extension of time prior to
the expiration of the contracts, we are contending that
the contract is not expired.50
Apparently, Zapanta would want to impress that
Goldloop could still avail of the said extension had not
GSIS untimely rescinded the agreements on February
23, 2000. This was because of Goldloop’s belief that on
said date, the four-year period within which to pay the
guaranteed amount had not yet lapsed considering that
the same should have been reckoned from the date of the
execution of the Addendum on June 18, 1996 and not
from the date of the execution of the MOA on June 16,
1995.51 The Court, however, thinks otherwise. Sec. 9 of
the Addendum reads:
9. GOLDLOOP shall start the renovation of the façade
of the existing tower and construction of the
condominium building on the vacant lot within thirty
(30) working days from date all relevant permits and
licenses from concerned agencies are obtained, or within
six (6) months from date of execution of this Addendum
to Memorandum of Agreement, whichever is earlier.
Failure of GOLDLOOP in this respect shall entitle GSIS
to exercise its right provided for under Section 2.4,
Article II of the Memorandum of Agreement.52
From the above, it is clear that said section did not
extend the four-year period within which to pay the
guaranteed amount. In fact, no mention was made
regarding this. What was extended was the period within
which Goldloop should have started the construction,
which was changed from six months from the date of the
execution of the MOA to six months from the date of
execution of the Addendum. This is very plain from the
said provision.
Be that as it may, it would be too late in the day for
Goldloop to request for an extension. As may be
recalled, such request must be made not only prior to the
expiration of the contract but also within 15 calendar
days after the event leading to such claim for extension
88
has arisen. And since the problem with the non-issuance
of permits had long arisen during that time, Goldloop
cannot anymore avail of the extension even if by then
the contract has not yet expired.
At this point, it bears to stress that:
It is basic that a contract is the law between the parties,
and the stipulations therein – provided that they are not
contrary to law, morals, good customs, public order or
public policy – shall be binding as between the parties.
In contractual relations, the law allows the parties much
leeway and considers their agreement to be the law
between them. This is because ‘courts cannot follow one
every step of his life and extricate him from bad bargains
x x x relieve him from one-sided contracts, or annul the
effects of foolish acts.’ The courts are obliged to give
effect to the agreement and enforce the contract to the
letter.53
Here, as the parties voluntarily and freely executed the
MOA and the Addendum, the terms contained therein
are the law between them.54 Hence, Goldloop should
have completed its payment of the guaranteed amount in
the manner prescribed by the contract. When it could not
do so as a consequence of the non-issuance of permits, it
should have asked for an extension within which to pay
the same. However, since Goldloop neither completed
the payment nor sought for an extension, it is considered
to have breached its commitment and obligation under
Sec. 1.1 of the MOA.
GSIS rescinded the contract pursuant to
its right to rescind under the relevant
provisions of the MOA.
Concededly, parties may validly stipulate the unilateral
rescission of a contract."55 Such is the case here since the
parties conferred upon GSIS the right to unilaterally
rescind the MOA in the earlier quoted Sec. 2.4 and
hereinafter reproduced:
Section 2.4. Should GOLDLOOP fail to start the
construction works within the thirty (30) working days
from date all relevant permits and licenses from
concerned agencies are obtained, or within six (6)
months from the date of the execution of this
Agreement, whichever is earlier, or at any given time

abandon the same or otherwise commit any breach of
their obligations and commitments under this
Agreement, this agreement shall be deemed terminated
and cancelled without need of judicial action by giving
thirty (30) days written notice to that effect
to GOLDLOOP who hereby agrees to abide by the
decision of the GSIS. x x x 56 (Emphasis supplied.)
Under the above-quoted provision, one of the grounds
under which GSIS may validly rescind the MOA is if at
any given time, Goldloop abandons the construction or
otherwise commit any breach of its obligations and
commitments thereunder.
The February 23, 2000 notice clearly specified that GSIS
is rescinding the contract for failure of Goldloop to pay
the guaranteed amount of P140,890,000.00 under Sec.
1.1 of the MOA. This falls under the said ground, it
being a breach of an obligation and commitment under
the said agreement. Because of said breach, Sec. 1.3 of
the MOA which provides for the consequence of the
nonpayment thereof should be read in relation to Sec.
2.4.
Under Sec. 1.3, Goldloop’s failure to pay the guaranteed
amount within the periods provided for in Sec. 1.1 of the
MOA shall entitle GSIS to interest, without prejudice to
its other rights and remedies under the agreement and
applicable laws. This right referred to is the right of
rescission under Sec. 2.4 authorizing GSIS to exercise
the same upon Goldloop’s breach of any of its
obligations and commitments. Clearly therefore, when
GSIS rescinded the MOA and the Addendum, it merely
exercised its right to rescind under Sec. 2.4 in relation to
Sec. 1.3 of the MOA.
However, GSIS is not entirely faultless
since it likewise failed in its obligation to
deliver the property free from burden.
GSIS is, however, not entirely faultless. It also failed to
comply with its obligation, although it cannot be
conclusively determined when it actually begun as the
same only became apparent to Goldloop after the
execution of the MOA and the Addendum. This was
when the City of Pasig formally notified GSIS that it
was holding in abeyance any action on the latter’s
89
application for building permits due to its outstanding
real estate taxes in the amount of P54 million. The fact
that GSIS disputes such tax liability because of its firm
stand that it was tax exempt is beside the point. What is
plain is that the property was by then not free from
burden since real estate taxes were imposed upon it and
these taxes remained unpaid. There was, therefore, on
the part of GSIS, a failure to comply with its obligation
to deliver the property free from burden.
This is not to say, however, that Goldloop’s obligation to
pay the guaranteed amount, as discussed above, did not
arise considering that GSIS could not comply with its
concurrent obligation to deliver the property free from
burden. It is well to note that even before Goldloop
became aware of GSIS’s supposed tax liability with the
City of Pasig through the latter’s October 8, 1997 letter,
Goldloop was already in default in its payment of the
guaranteed amount. As can be recalled and again under
the assumption that Goldloop advanced P24,824,683.00
on behalf of GSIS which amount was credited as full and
partial payment of the first and second installments, the
remaining balance for the second installment should
have been paid as early as June 16, 1996. No such
payment was, however, made. The same thing is true
with respect to the third and fourth installments which
respectively became due on December 16, 1996 and
June 16, 1997. Clearly, Goldloop had already defaulted
in its payments even before it became aware of GSIS’s
tax issues. In short, even before such failure of GSIS
became apparent to Goldloop, the latter had already
committed a breach of its own obligation.
As to when GSIS actually committed its breach of
failing to deliver the property free from any burden, the
same is a different matter which will be discussed later.
In view of the rescission, mutual
restitution is required.
As correctly observed by the RTC, the rescissory action
taken by GSIS is pursuant to Article 119157 of the Civil
Code. In cases involving rescission under the said
provision, mutual restitution is required.58 The parties
should be brought back to their original position prior to
the inception of the contract.59 "Accordingly, when a
decree of rescission is handed down, it is the duty of the

court to require both parties to surrender that which they
have respectively received and to place each other as far
as practicable in [their] original situation."60 Pursuant to
this, Goldloop should return to GSIS the possession and
control of the property subject of their agreements while
GSIS should reimburse Goldloop whatever amount it
had received from the latter by reason of the MOA and
the Addendum.
Here, out of the total amount of expenses which
Goldloop claims to have incurred for the project, it
appears that the only sum it paid to GSIS was that
amount it expended by way of change order of expense
items supposed to be for GSIS’s account and, which
under the Addendum was to be credited as full payment
and partial payment of the first and second installments
of the guaranteed amount, respectively. The figure,
however, remains disputed. Goldloop alleges that the
same amounts to P24,824,683.00. Yet, there is nothing
in the records to support the same. Said amount was not
clearly specified in Goldloop’s Consolidated Financial
Statements for years 1995 to 2000 and Auditor’s
Report.61 What is in the records is a mere self-serving
list of expenses that it submitted and which indicates the
said figure as "Expenses/Charges on Change
Orders".62 GSIS, on the other hand, asserts that the
expense items for its account, per Annex "C" of the
Addendum, is only P 21,225,521.08 and provided that
the works for which the items were supposed to be used,
that is, the relocation of the powerhouse and cistern tank,
were indeed completed. Unfortunately, said Annex "C"
is likewise not part of the records of this case and GSIS
merely quoted the relevant portion of the same in its
Answer. Be that as it may, Zapanta testified that the
installation of the cistern tank was already 100%
complete,63 although there was no mention regarding the
status of the powerhouse. In view of this, the Court can
only consider the sum spent with respect to the
completed installation of the cistern tank which the GSIS
admitted in its Answer as amounting
64
to P 4,122,133.19. Aside from the said amount, GSIS
must also return to Goldloop all equipment, machineries
and other properties of the latter which may be found in
the premises of the subject property.
Damages
90
As discussed, both parties failed to comply with their
respective obligations under their agreements. Hence,
relevant is the provision of Article 1192 of the Civil
Code which reads:
Art. 1192. In case both parties have committed a breach
of the obligation, the liability of the first infractor shall
be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the
contract, the same shall be deemed extinguished, and
each shall bear his own damages. (Emphasis suppied.)
In this case, it cannot be determined with certainty which
between the parties is the first infractor. It could be GSIS
because of the high probability that even before the
execution of the agreements, real property taxes were
already imposed and unpaid such that when GSIS
applied for building permits, the tax liability was already
in the substantial amount of P54 million. It was just that
GSIS could not have been mindful of the same because
of its stand that it is tax exempt. But as this cannot be
conclusively presumed, there exists an uncertainty as to
which between the failure to comply on the part of each
party came first; hence, the last portion of Article 1192
finds application. Pursuant thereto, the parties’
respective claims for damages are thus deemed
extinguished and each of them shall bear its own
damage.
WHEREFORE, finding the rescission of the
Memorandum of Agreement and the Addendum to the
Memorandum of Agreement by the Government Service
Insurance System to be proper, the Petition for Review
on Certiorari isDENIED. The Decision dated September
26, 2005 and Resolution dated January 11, 2006 of the
Court of Appeals in CA-G.R. CV No. 80135 are
hereby AFFIRMED with MODIFICATIONS.
Goldloop Properties Inc. is DIRECTED to immediately
surrender to the Government Service Insurance System
the control and possession of the 2,411-square meter
property located in ADBAvenue cor. Sapphire St.,
Ortigas Center, Pasig City including the Philcomcen
Building standing thereon. The Government Service
Insurance System is ORDERED to reimburse Goldloop
Properties Inc. the amount of P 4,122,133.19 and return
to the latter all its equipment, machineries and other

materials which may be found in the premises of the
subject property. The parties’ respective claims for
damages are deemed EXTINGUISHED and each of
them shall bear its own damage.
SO ORDERED.
SPOUSES FERNANDO
and LOURDES VILORIA,
Petitioners,
- versus -
CONTINENTAL AIRLINES, INC.,
Respondent.
x-------------------------------------------------------------------
-----------------x
DECISION
REYES, J.:
This is a petition for review under Rule 45 of the
Rules of Court from the January 30, 2009 Decision1 of
the Special Thirteenth Division of the Court of Appeals
(CA) in CA-G.R. CV No. 88586 entitled “Spouses
Fernando and Lourdes Viloria v. Continental Airlines,
Inc.,” the dispositive portion of which states:
WHEREFORE, the Decision of the Regional
Trial Court, Branch 74, dated 03 April 2006, awarding
91
US$800.00 or its peso equivalent at the time of payment,
plus legal rate of interest from 21 July 1997 until fully
paid, [P]100,000.00 as moral damages, [P]50,000.00 as
exemplary damages, [P]40,000.00 as attorney’s fees and
costs of suit to plaintiffs-appellees is
hereby REVERSED and SET ASIDE.
Defendant-appellant’s counterclaim
is DENIED.
Costs against plaintiffs-appellees.
SO ORDERED.2
On April 3, 2006, the Regional Trial Court of
Antipolo City, Branch 74 (RTC) rendered a Decision,
giving due course to the complaint for sum of money
and damages filed by petitioners Fernando Viloria
(Fernando) and Lourdes Viloria (Lourdes), collectively
called Spouses Viloria, against respondent Continental
Airlines, Inc. (CAI). As culled from the records, below
are the facts giving rise to such complaint.
On or about July 21, 1997 and while in the
United States, Fernando purchased for himself and his
wife, Lourdes, two (2) round trip airline tickets from San
Diego, California to Newark, New Jersey on board
Continental Airlines. Fernando purchased the tickets at
US$400.00 each from a travel agency called “Holiday
Travel” and was attended to by a certain Margaret Mager
(Mager). According to Spouses Viloria, Fernando agreed
to buy the said tickets after Mager informed them that
there were no available seats at Amtrak, an intercity
passenger train service provider in the United States. Per
the tickets, Spouses Viloria were scheduled to leave for

Newark on August 13, 1997 and return to San Diego on
August 21, 1997.
Subsequently, Fernando requested Mager to
reschedule their flight to Newark to an earlier date or
August 6, 1997. Mager informed him that flights to
Newark via Continental Airlines were already fully
booked and offered the alternative of a round trip flight
via Frontier Air. Since flying with Frontier Air called for
a higher fare of US$526.00 per passenger and would
mean traveling by night, Fernando opted to request for a
refund. Mager, however, denied his request as the
subject tickets are non-refundable and the only option
that Continental Airlines can offer is the re-issuance of
new tickets within one (1) year from the date the subject
tickets were issued. Fernando decided to reserve two (2)
seats with Frontier Air.
As he was having second thoughts on traveling
via Frontier Air, Fernando went to the Greyhound
Station where he saw an Amtrak station nearby.
Fernando made inquiries and was told that there are
seats available and he can travel on Amtrak anytime and
any day he pleased. Fernando then purchased two (2)
tickets for Washington, D.C.
From Amtrak, Fernando went to Holiday Travel
and confronted Mager with the Amtrak tickets, telling
her that she had misled them into buying the Continental
Airlines tickets by misrepresenting that Amtrak was
already fully booked. Fernando reiterated his demand for
a refund but Mager was firm in her position that the
subject tickets are non-refundable.
Upon returning to the Philippines, Fernando sent
a letter to CAI on February 11, 1998, demanding a
refund and alleging that Mager had deluded them into
purchasing the subject tickets.3
92
In a letter dated February 24, 1998, Continental
Micronesia informed Fernando that his complaint had
been referred to the Customer Refund Services of
Continental Airlines at Houston, Texas.4
In a letter dated March 24, 1998, Continental
Micronesia denied Fernando’s request for a refund and
advised him that he may take the subject tickets to any
Continental ticketing location for the re-issuance of new
tickets within two (2) years from the date they were
issued. Continental Micronesia informed Fernando that
the subject tickets may be used as a form of payment for
the purchase of another Continental ticket, albeit with a
re-issuance fee.5
On June 17, 1999, Fernando went to
Continental’s ticketing office at Ayala Avenue, Makati
City to have the subject tickets replaced by a single
round trip ticket to Los Angeles, California under his
name. Therein, Fernando was informed that Lourdes’
ticket was non-transferable, thus, cannot be used for the
purchase of a ticket in his favor. He was also informed
that a round trip ticket to Los Angeles was US$1,867.40
so he would have to pay what will not be covered by the
value of his San Diego to Newark round trip ticket.
In a letter dated June 21, 1999, Fernando
demanded for the refund of the subject tickets as he no
longer wished to have them replaced. In addition to the
dubious circumstances under which the subject tickets
were issued, Fernando claimed that CAI’s act of
charging him with US$1,867.40 for a round trip ticket to
Los Angeles, which other airlines priced at US$856.00,
and refusal to allow him to use Lourdes’ ticket, breached
its undertaking under its March 24, 1998 letter.6
On September 8, 2000, Spouses Viloria filed a
complaint against CAI, praying that CAI be ordered to
refund the money they used in the purchase of the
subject tickets with legal interest from July 21, 1997 and

to pay P1,000,000.00 as moral damages, P500,000.00 as
exemplary damages and P250,000.00 as attorney’s fees.7
CAI interposed the following defenses: (a)
Spouses Viloria have no right to ask for a refund as the
subject tickets are non-refundable; (b) Fernando cannot
insist on using the ticket in Lourdes’ name for the
purchase of a round trip ticket to Los Angeles since the
same is non-transferable; (c) as Mager is not a CAI
employee, CAI is not liable for any of her acts; (d) CAI,
its employees and agents did not act in bad faith as to
entitle Spouses Viloria to moral and exemplary damages
and attorney’s fees. CAI also invoked the following
clause printed on the subject tickets:
3. To the extent not in conflict with the foregoing
carriage and other services performed by each carrier are
subject to: (i) provisions contained in this ticket, (ii)
applicable tariffs, (iii) carrier’s conditions of carriage
and related regulations which are made part hereof (and
are available on application at the offices of carrier),
except in transportation between a place in the United
States or Canada and any place outside thereof to which
tariffs in force in those countries apply.8
According to CAI, one of the conditions
attached to their contract of carriage is the non-
transferability and non-refundability of the subject
tickets.
The RTC’s Ruling
Following a full-blown trial, the RTC rendered
its April 3, 2006 Decision, holding that Spouses Viloria
are entitled to a refund in view of Mager’s
misrepresentation in obtaining their consent in the
93
purchase of the subject tickets.9 The relevant portion of
the April 3, 2006 Decision states:
Continental Airlines agent Ms. Mager was in
bad faith when she was less candid and diligent in
presenting to plaintiffs spouses their booking options.
Plaintiff Fernando clearly wanted to travel via
AMTRAK, but defendant’s agent misled him into
purchasing Continental Airlines tickets instead on the
fraudulent misrepresentation that Amtrak was fully
booked. In fact, defendant Airline did not specifically
denied (sic) this allegation.
Plainly, plaintiffs spouses, particularly plaintiff
Fernando, were tricked into buying Continental Airline
tickets on Ms. Mager’s misleading misrepresentations.
Continental Airlines agent Ms. Mager further relied on
and exploited plaintiff Fernando’s need and told him that
they must book a flight immediately or risk not being
able to travel at all on the couple’s preferred date.
Unfortunately, plaintiffs spouses fell prey to the airline’s
and its agent’s unethical tactics for baiting trusting
customers.”10
Citing Articles 1868 and 1869 of the Civil Code,
the RTC ruled that Mager is CAI’s agent, hence, bound
by her bad faith and misrepresentation. As far as the
RTC is concerned, there is no issue as to whether Mager
was CAI’s agent in view of CAI’s implied recognition of
her status as such in its March 24, 1998 letter.
The act of a travel agent or agency being
involved here, the following are the pertinent New Civil
Code provisions on agency:

Art. 1868. By the contract of agency a person
binds himself to render some service or to do something
in representation or on behalf of another, with the
consent or authority of the latter.
Art. 1869. Agency may be express, or implied
from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing
that another person is acting on his behalf without
authority.
Agency may be oral, unless the law requires a
specific form.
As its very name implies, a travel agency binds
itself to render some service or to do something in
representation or on behalf of another, with the consent
or authority of the latter. This court takes judicial notice
of the common services rendered by travel agencies that
represent themselves as such, specifically the reservation
and booking of local and foreign tours as well as the
issuance of airline tickets for a commission or fee.
The services rendered by Ms. Mager of Holiday
Travel agency to the plaintiff spouses on July 21, 1997
were no different from those offered in any other travel
agency. Defendant airline impliedly if not expressly
acknowledged its principal-agent relationship with Ms.
Mager by its offer in the letter dated March 24, 1998 –
an obvious attempt to assuage plaintiffs spouses’ hurt
feelings.11
Furthermore, the RTC ruled that CAI acted in
bad faith in reneging on its undertaking to replace the
subject tickets within two (2) years from their date of
issue when it charged Fernando with the amount of
94
US$1,867.40 for a round trip ticket to Los Angeles and
when it refused to allow Fernando to use Lourdes’ ticket.
Specifically:
Tickets may be reissued for up to two years from the
original date of issue. When defendant airline still
charged plaintiffs spouses US$1,867.40 or more than
double the then going rate of US$856.00 for the unused
tickets when the same were presented within two (2)
years from date of issue, defendant airline exhibited
callous treatment of passengers.12
The Appellate Court’s Ruling
On appeal, the CA reversed the RTC’s April 3,
2006 Decision, holding that CAI cannot be held liable
for Mager’s act in the absence of any proof that a
principal-agent relationship existed between CAI and
Holiday Travel. According to the CA, Spouses Viloria,
who have the burden of proof to establish the fact of
agency, failed to present evidence demonstrating that
Holiday Travel is CAI’s agent. Furthermore, contrary to
Spouses Viloria’s claim, the contractual relationship
between Holiday Travel and CAI is not an agency but
that of a sale.
Plaintiffs-appellees assert that Mager was a sub-
agent of Holiday Travel who was in turn a ticketing
agent of Holiday Travel who was in turn a ticketing
agent of Continental Airlines. Proceeding from this
premise, they contend that Continental Airlines should
be held liable for the acts of Mager. The trial court held
the same view.
We do not agree. By the contract of agency, a
person binds him/herself to render some service or to do

something in representation or on behalf of another, with
the consent or authority of the latter. The elements of
agency are: (1) consent, express or implied, of the parties
to establish the relationship; (2) the object is the
execution of a juridical act in relation to a third person;
(3) the agent acts as a representative and not for
him/herself; and (4) the agent acts within the scope of
his/her authority. As the basis of agency is
representation, there must be, on the part of the
principal, an actual intention to appoint, an intention
naturally inferable from the principal’s words or actions.
In the same manner, there must be an intention on the
part of the agent to accept the appointment and act upon
it. Absent such mutual intent, there is generally no
agency. It is likewise a settled rule that persons dealing
with an assumed agent are bound at their peril, if they
would hold the principal liable, to ascertain not only the
fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is
upon them to establish it. Agency is never presumed,
neither is it created by the mere use of the word in a
trade or business name. We have perused the evidence
and documents so far presented. We find nothing except
bare allegations of plaintiffs-appellees that
Mager/Holiday Travel was acting in behalf of
Continental Airlines. From all sides of legal prism, the
transaction in issue was simply a contract of sale,
wherein Holiday Travel buys airline tickets from
Continental Airlines and then, through its employees,
Mager included, sells it at a premium to clients.13
The CA also ruled that refund is not available to
Spouses Viloria as the word “non-refundable” was
clearly printed on the face of the subject tickets, which
constitute their contract with CAI. Therefore, the grant
of their prayer for a refund would violate the
proscription against impairment of contracts.
Finally, the CA held that CAI did not act in bad
faith when they charged Spouses Viloria with the higher
amount of US$1,867.40 for a round trip ticket to Los
95
Angeles. According to the CA, there is no compulsion
for CAI to charge the lower amount of US$856.00,
which Spouses Viloria claim to be the fee charged by
other airlines. The matter of fixing the prices for its
services is CAI’s prerogative, which Spouses Viloria
cannot intervene. In particular:
It is within the respective rights of persons owning
and/or operating business entities to peg the premium of
the services and items which they provide at a price
which they deem fit, no matter how expensive or
exhorbitant said price may seem vis-à-vis those of the
competing companies. The Spouses Viloria may not
intervene with the business judgment of Continental
Airlines.14
The Petitioners’ Case
In this Petition, this Court is being asked to
review the findings and conclusions of the CA, as the
latter’s reversal of the RTC’s April 3, 2006 Decision
allegedly lacks factual and legal bases. Spouses Viloria
claim that CAI acted in bad faith when it required them
to pay a higher amount for a round trip ticket to Los
Angeles considering CAI’s undertaking to re-issue new
tickets to them within the period stated in their March
24, 1998 letter. CAI likewise acted in bad faith when it
disallowed Fernando to use Lourdes’ ticket to purchase a
round trip to Los Angeles given that there is nothing in
Lourdes’ ticket indicating that it is non-transferable. As
a common carrier, it is CAI’s duty to inform its
passengers of the terms and conditions of their contract
and passengers cannot be bound by such terms and
conditions which they are not made aware of. Also, the
subject contract of carriage is a contract of adhesion;
therefore, any ambiguities should be construed against
CAI. Notably, the petitioners are no longer questioning
the validity of the subject contracts and limited its claim
for a refund on CAI’s alleged breach of its undertaking
in its March 24, 1998 letter.
 96

Issues

The Respondent’s Case

To determine the propriety of disturbing the

CA’s January 30, 2009 Decision and whether Spouses
In its Comment, CAI claimed that Spouses Viloria have the right to the reliefs they prayed for, this
Viloria’s allegation of bad faith is negated by its Court deems it necessary to resolve the following issues:
willingness to issue new tickets to them and to credit the
value of the subject tickets against the value of the new
ticket Fernando requested. CAI argued that Spouses
Viloria’s sole basis to claim that the price at which CAIa. Does a principal-agent relationship exist between CAI and
was willing to issue the new tickets is unconscionable is Holiday Travel?
a piece of hearsay evidence – an advertisement
appearing on a newspaper stating that airfares fromb. Assuming that an agency relationship exists between CAI and
Manila to Los Angeles or San Francisco cost Holiday Travel, is CAI bound by the acts of Holiday
15
US$818.00. Also, the advertisement pertains to airfares Travel’s agents and employees such as Mager?
in September 2000 and not to airfares prevailing in June
1999, the time when Fernando asked CAI to apply thec. Assuming that CAI is bound by the acts of Holiday Travel’s
value of the subject tickets for the purchase of a new agents and employees, can the representation of Mager
16
one. CAI likewise argued that it did not undertake to as to unavailability of seats at Amtrak be considered
protect Spouses Viloria from any changes or fluctuations fraudulent as to vitiate the consent of Spouse Viloria in
in the prices of airline tickets and its only obligation was the purchase of the subject tickets?
to apply the value of the subject tickets to the purchase
of the newly issued tickets. d. Is CAI justified in insisting that the subject tickets are non-
transferable and non-refundable?

e. Is CAI justified in pegging a different price for the round trip

With respect to Spouses Viloria’s claim that they ticket to Los Angeles requested by Fernando?
are not aware of CAI’s restrictions on the subject tickets
and that the terms and conditions that are printed onf. Alternatively, did CAI act in bad faith or renege its obligation
them are ambiguous, CAI denies any ambiguity and to Spouses Viloria to apply the value of the subject
alleged that its representative informed Fernando that the tickets in the purchase of new ones when it refused to
subject tickets are non-transferable when he applied for allow Fernando to use Lourdes’ ticket and in charging a
the issuance of a new ticket. On the other hand, the word higher price for a round trip ticket to Los Angeles?
“non-refundable” clearly appears on the face of the
subject tickets.

This Court’s Ruling

CAI also denies that it is bound by the acts of

Holiday Travel and Mager and that no principal-agency
relationship exists between them. As an independent I. A principal-agent relationship exists between CAI
contractor, Holiday Travel was without capacity to bind and Holiday Travel.
CAI.

With respect to the first issue, which is a
question of fact that would require this Court to review
and re-examine the evidence presented by the parties
below, this Court takes exception to the general rule that
the CA’s findings of fact are conclusive upon Us and our
jurisdiction is limited to the review of questions of law.
It is well-settled to the point of being axiomatic that this
Court is authorized to resolve questions of fact if
confronted with contrasting factual findings of the trial
court and appellate court and if the findings of the CA
are contradicted by the evidence on record.17
According to the CA, agency is never presumed
and that he who alleges that it exists has the burden of
proof. Spouses Viloria, on whose shoulders such burden
rests, presented evidence that fell short of indubitably
demonstrating the existence of such agency.
We disagree. The CA failed to consider
undisputed facts, discrediting CAI’s denial that Holiday
Travel is one of its agents. Furthermore, in erroneously
characterizing the contractual relationship between CAI
and Holiday Travel as a contract of sale, the CA failed to
apply the fundamental civil law principles governing
agency and differentiating it from sale.
In Rallos v. Felix Go Chan & Sons Realty
Corporation,18 this Court explained the nature of an
agency and spelled out the essential elements thereof:
Out of the above given principles, sprung the
creation and acceptance of the relationship of
agency whereby one party, called the principal
(mandante), authorizes another, called the agent
(mandatario), to act for and in his behalf in transactions
with third persons. The essential elements of agency are:
(1) there is consent, express or implied of the parties to
establish the relationship; (2) the object is the execution
of a juridical act in relation to a third person; (3) the
agent acts as a representative and not for himself, and (4)
the agent acts within the scope of his authority.
97
Agency is basically personal, representative,
and derivative in nature. The authority of the agent to act
emanates from the powers granted to him by his
principal; his act is the act of the principal if done within
the scope of the authority. Qui facit per alium facit se.
"He who acts through another acts himself."19
Contrary to the findings of the CA, all the
elements of an agency exist in this case. The first and
second elements are present as CAI does not deny that it
concluded an agreement with Holiday Travel, whereby
Holiday Travel would enter into contracts of carriage
with third persons on CAI’s behalf. The third element is
also present as it is undisputed that Holiday Travel
merely acted in a representative capacity and it is CAI
and not Holiday Travel who is bound by the contracts of
carriage entered into by Holiday Travel on its behalf.
The fourth element is also present considering that CAI
has not made any allegation that Holiday Travel
exceeded the authority that was granted to it. In fact,
CAI consistently maintains the validity of the contracts
of carriage that Holiday Travel executed with Spouses
Viloria and that Mager was not guilty of any fraudulent
misrepresentation. That CAI admits the authority of
Holiday Travel to enter into contracts of carriage on its
behalf is easily discernible from its February 24, 1998
and March 24, 1998 letters, where it impliedly
recognized the validity of the contracts entered into by
Holiday Travel with Spouses Viloria. When Fernando
informed CAI that it was Holiday Travel who issued to
them the subject tickets, CAI did not deny that Holiday
Travel is its authorized agent.
Prior to Spouses Viloria’s filing of a complaint
against it, CAI never refuted that it gave Holiday Travel
the power and authority to conclude contracts of carriage
on its behalf. As clearly extant from the records, CAI
recognized the validity of the contracts of carriage that
Holiday Travel entered into with Spouses Viloria and
considered itself bound with Spouses Viloria by the
terms and conditions thereof; and this constitutes an
unequivocal testament to Holiday Travel’s authority to
act as its agent. This Court cannot therefore allow CAI

to take an altogether different position and deny that
Holiday Travel is its agent without condoning or giving
imprimatur to whatever damage or prejudice that may
result from such denial or retraction to Spouses Viloria,
who relied on good faith on CAI’s acts in recognition of
Holiday Travel’s authority. Estoppel is primarily based
on the doctrine of good faith and the avoidance of harm
that will befall an innocent party due to its injurious
reliance, the failure to apply it in this case would result
in gross travesty of justice.20 Estoppel bars CAI from
making such denial.
As categorically provided under Article 1869 of
the Civil Code, “[a]gency may be express, or implied
from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing
that another person is acting on his behalf without
authority.”
Considering that the fundamental hallmarks of
an agency are present, this Court finds it rather peculiar
that the CA had branded the contractual relationship
between CAI and Holiday Travel as one of sale. The
distinctions between a sale and an agency are not
difficult to discern and this Court, as early as 1970, had
already formulated the guidelines that would aid in
differentiating the two (2) contracts. In Commissioner of
Internal Revenue v. Constantino,21 this Court
extrapolated that the primordial differentiating
consideration between the two (2) contracts is the
transfer of ownership or title over the property subject of
the contract. In an agency, the principal retains
ownership and control over the property and the agent
merely acts on the principal’s behalf and under his
instructions in furtherance of the objectives for which
the agency was established. On the other hand, the
contract is clearly a sale if the parties intended that the
delivery of the property will effect a relinquishment of
title, control and ownership in such a way that the
recipient may do with the property as he pleases.
98
Since the company retained ownership of the
goods, even as it delivered possession unto the dealer for
resale to customers, the price and terms of which were
subject to the company's control, the relationship
between the company and the dealer is one of agency,
tested under the following criterion:
“The difficulty in distinguishing between
contracts of sale and the creation of an agency to sell has
led to the establishment of rules by the application of
which this difficulty may be solved. The decisions say
the transfer of title or agreement to transfer it for a price
paid or promised is the essence of sale. If such transfer
puts the transferee in the attitude or position of an owner
and makes him liable to the transferor as a debtor for the
agreed price, and not merely as an agent who must
account for the proceeds of a resale, the transaction is a
sale; while the essence of an agency to sell is the
delivery to an agent, not as his property, but as the
property of the principal, who remains the owner and has
the right to control sales, fix the price, and terms,
demand and receive the proceeds less the agent's
commission upon sales made. 1 Mechem on Sales, Sec.
43; 1 Mechem on Agency, Sec. 48; Williston on Sales,
1; Tiedeman on Sales, 1.” (Salisbury v. Brooks, 94 SE
117, 118-119)22
As to how the CA have arrived at the conclusion
that the contract between CAI and Holiday Travel is a
sale is certainly confounding, considering that CAI is the
one bound by the contracts of carriage embodied by the
tickets being sold by Holiday Travel on its behalf. It is
undisputed that CAI and not Holiday Travel who is the
party to the contracts of carriage executed by Holiday
Travel with third persons who desire to travel via
Continental Airlines, and this conclusively indicates the
existence of a principal-agent relationship. That the
principal is bound by all the obligations contracted by
the agent within the scope of the authority granted to
him is clearly provided under Article 1910 of the Civil
Code and this constitutes the very notion of agency.
II. In actions based on quasi-delict, a principal can
only be held liable for the tort committed by its
agent’s employees if it has been established by

preponderance of evidence that the principal was
also at fault or negligent or that the principal exercise
control and supervision over them.
Considering that Holiday Travel is CAI’s agent,
does it necessarily follow that CAI is liable for the fault
or negligence of Holiday Travel’s employees?
Citing China Air Lines, Ltd. v. Court of Appeals, et
al.,23 CAI argues that it cannot be held liable for the
actions of the employee of its ticketing agent in the
absence of an employer-employee relationship.
An examination of this Court’s pronouncements
in China Air Lines will reveal that an airline company is
not completely exonerated from any liability for the tort
committed by its agent’s employees. A prior
determination of the nature of the passenger’s cause of
action is necessary. If the passenger’s cause of action
against the airline company is premised onculpa
aquiliana or quasi-delict for a tort committed by the
employee of the airline company’s agent, there must be
an independent showing that the airline company was at
fault or negligent or has contributed to the negligence or
tortuous conduct committed by the employee of its
agent. The mere fact that the employee of the airline
company’s agent has committed a tort is not sufficient to
hold the airline company liable. There is no vinculum
juris between the airline company and its agent’s
employees and the contractual relationship between the
airline company and its agent does not operate to create
a juridical tie between the airline company and its
agent’s employees. Article 2180 of the Civil Code does
not make the principal vicariously liable for the tort
committed by its agent’s employees and the principal-
agency relationship per se does not make the principal a
party to such tort; hence, the need to prove the
principal’s own fault or negligence.
On the other hand, if the passenger’s cause of
action for damages against the airline company is based
99
on contractual breach or culpa contractual, it is not
necessary that there be evidence of the airline company’s
fault or negligence. As this Court previously stated
in China Air Lines and reiterated in Air France vs.
Gillego,24 “in an action based on a breach of contract of
carriage, the aggrieved party does not have to prove that
the common carrier was at fault or was negligent. All
that he has to prove is the existence of the contract and
the fact of its non-performance by the carrier.”
Spouses Viloria’s cause of action on the basis of
Mager’s alleged fraudulent misrepresentation is clearly
one of tort or quasi-delict, there being no pre-existing
contractual relationship between them. Therefore, it was
incumbent upon Spouses Viloria to prove that CAI was
equally at fault.
However, the records are devoid of any evidence
by which CAI’s alleged liability can be substantiated.
Apart from their claim that CAI must be held liable for
Mager’s supposed fraud because Holiday Travel is
CAI’s agent, Spouses Viloria did not present evidence
that CAI was a party or had contributed to Mager’s
complained act either by instructing or authorizing
Holiday Travel and Mager to issue the said
misrepresentation.
It may seem unjust at first glance that CAI
would consider Spouses Viloria bound by the terms and
conditions of the subject contracts, which Mager entered
into with them on CAI’s behalf, in order to deny
Spouses Viloria’s request for a refund or Fernando’s use
of Lourdes’ ticket for the re-issuance of a new one, and
simultaneously claim that they are not bound by Mager’s
supposed misrepresentation for purposes of avoiding
Spouses Viloria’s claim for damages and maintaining
the validity of the subject contracts. It may likewise be
argued that CAI cannot deny liability as it benefited
from Mager’s acts, which were performed in compliance
with Holiday Travel’s obligations as CAI’s agent.

However, a person’s vicarious liability is
anchored on his possession of control, whether absolute
or limited, on the tortfeasor. Without such control, there
is nothing which could justify extending the liability to a
person other than the one who committed the tort. As
this Court explained in Cangco v. Manila Railroad
Co.:25
With respect to extra-contractual obligation arising
from negligence, whether of act or omission, it is
competent for the legislature to elect — and our
Legislature has so elected — to limit such liability to
cases in which the person upon whom such an obligation
is imposed is morally culpable or, on the contrary, for
reasons of public policy, to extend that liability,
without regard to the lack of moral culpability, so as
to include responsibility for the negligence of those
persons whose acts or omissions are imputable, by a
legal fiction, to others who are in a position to
exercise an absolute or limited control over them. The
legislature which adopted our Civil Code has elected to
limit extra-contractual liability — with certain well-
defined exceptions — to cases in which moral
culpability can be directly imputed to the persons to be
charged. This moral responsibility may consist in having
failed to exercise due care in one's own acts, or in having
failed to exercise due care in the selection and control of
one's agent or servants, or in the control of persons who,
by reasons of their status, occupy a position of
dependency with respect to the person made liable for
their conduct.26(emphasis supplied)
It is incumbent upon Spouses Viloria to prove
that CAI exercised control or supervision over Mager by
preponderant evidence. The existence of control or
supervision cannot be presumed and CAI is under no
obligation to prove its denial or nugatory assertion.
Citing Belen v. Belen,27 this Court ruled in Jayme v.
Apostol,28 that:
100
In Belen v. Belen, this Court ruled that it was enough for
defendant to deny an alleged employment relationship.
The defendant is under no obligation to prove the
negative averment. This Court said:
“It is an old and well-settled rule of the courts
that the burden of proving the action is upon the
plaintiff, and that if he fails satisfactorily to show the
facts upon which he bases his claim, the defendant is
under no obligation to prove his exceptions. This [rule]
is in harmony with the provisions of Section 297 of the
Code of Civil Procedure holding that each party must
prove his own affirmative allegations, etc.”29 (citations
omitted)
Therefore, without a modicum of evidence that CAI
exercised control over Holiday Travel’s employees or
that CAI was equally at fault, no liability can be imposed
on CAI for Mager’s supposed misrepresentation.
Even on the assumption that CAI may be held liable
for the acts of Mager, still, Spouses Viloria are not
entitled to a refund. Mager’s statement cannot be
considered a causal fraud that would justify the
annulment of the subject contracts that would oblige
CAI to indemnify Spouses Viloria and return the
money they paid for the subject tickets.
Article 1390, in relation to Article 1391 of the
Civil Code, provides that if the consent of the
contracting parties was obtained through fraud, the
contract is considered voidable and may be annulled
within four (4) years from the time of the discovery of
the fraud. Once a contract is annulled, the parties are
obliged under Article 1398 of the same Code to restore
to each other the things subject matter of the contract,
including their fruits and interest.

On the basis of the foregoing and given the
allegation of Spouses Viloria that Fernando’s consent to
the subject contracts was supposedly secured by Mager
through fraudulent means, it is plainly apparent that their
demand for a refund is tantamount to seeking for an
annulment of the subject contracts on the ground of
vitiated consent.
Whether the subject contracts are annullable,
this Court is required to determine whether Mager’s
alleged misrepresentation constitutes causal fraud.
Similar to the dispute on the existence of an agency,
whether fraud attended the execution of a contract is
factual in nature and this Court, as discussed above, may
scrutinize the records if the findings of the CA are
contrary to those of the RTC.
Under Article 1338 of the Civil Code, there is
fraud when, through insidious words or machinations of
one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not
have agreed to. In order that fraud may vitiate consent, it
must be the causal (dolo causante), not merely the
incidental (dolo incidente), inducement to the making of
the contract.30 In Samson v. Court of Appeals,31 causal
fraud was defined as “a deception employed by one
party prior to or simultaneous to the contract in order to
secure the consent of the other.”32
Also, fraud must be serious and its existence
must be established by clear and convincing evidence.
As ruled by this Court in Sierra v. Hon. Court of
Appeals, et al.,33 mere preponderance of evidence is not
adequate:
Fraud must also be discounted, for according to
the Civil Code:
101
Art. 1338. There is fraud when, through
insidious words or machinations of one of the
contracting parties, the other is induced to enter into a
contract which without them, he would not have agreed
to.
Art. 1344. In order that fraud may make a
contract voidable, it should be serious and should not
have been employed by both contracting parties.
To quote Tolentino again, the
“misrepresentation constituting the fraud must be
established by full, clear, and convincing evidence, and
not merely by a preponderance thereof. The deceit must
be serious. The fraud is serious when it is sufficient to
impress, or to lead an ordinarily prudent person into
error; that which cannot deceive a prudent person cannot
be a ground for nullity. The circumstances of each case
should be considered, taking into account the personal
conditions of the victim.”34
After meticulously poring over the records, this
Court finds that the fraud alleged by Spouses Viloria has
not been satisfactorily established as causal in nature to
warrant the annulment of the subject contracts. In fact,
Spouses Viloria failed to prove by clear and convincing
evidence that Mager’s statement was fraudulent.
Specifically, Spouses Viloria failed to prove that (a)
there were indeed available seats at Amtrak for a trip to
New Jersey on August 13, 1997 at the time they spoke
with Mager on July 21, 1997; (b) Mager knew about
this; and (c) that she purposely informed them otherwise.
This Court finds the only proof of Mager’s
alleged fraud, which is Fernando’s testimony that an
Amtrak had assured him of the perennial availability of

seats at Amtrak, to be wanting. As CAI correctly pointed
out and as Fernando admitted, it was possible that during
the intervening period of three (3) weeks from the time
Fernando purchased the subject tickets to the time he
talked to said Amtrak employee, other passengers may
have cancelled their bookings and reservations with
Amtrak, making it possible for Amtrak to accommodate
them. Indeed, the existence of fraud cannot be proved by
mere speculations and conjectures. Fraud is never lightly
inferred; it is good faith that is. Under the Rules of
Court, it is presumed that "a person is innocent of crime
or wrong" and that "private transactions have been fair
and regular."35 Spouses Viloria failed to overcome this
presumption.
IV. Assuming the contrary, Spouses Viloria are
nevertheless deemed to have ratified the subject
contracts.
Even assuming that Mager’s representation is
causal fraud, the subject contracts have been impliedly
ratified when Spouses Viloria decided to exercise their
right to use the subject tickets for the purchase of new
ones. Under Article 1392 of the Civil Code, “ratification
extinguishes the action to annul a voidable contract.”
Ratification of a voidable contract is defined
under Article 1393 of the Civil Code as follows:
Art. 1393. Ratification may be effected expressly or
tacitly. It is understood that there is a tacit ratification if,
with knowledge of the reason which renders the contract
voidable and such reason having ceased, the person who
has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.
102
Implied ratification may take diverse forms,
such as by silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance
and retention of benefits flowing therefrom.36
Simultaneous with their demand for a refund on
the ground of Fernando’s vitiated consent, Spouses
Viloria likewise asked for a refund based on CAI’s
supposed bad faith in reneging on its undertaking to
replace the subject tickets with a round trip ticket from
Manila to Los Angeles.
In doing so, Spouses Viloria are actually asking
for a rescission of the subject contracts based on
contractual breach. Resolution, the action referred to in
Article 1191, is based on the defendant’s breach of faith,
a violation of the reciprocity between the parties37 and
in Solar Harvest, Inc. v. Davao Corrugated Carton
Corporation,38 this Court ruled that a claim for a
reimbursement in view of the other party’s failure to
comply with his obligations under the contract is one for
rescission or resolution.
However, annulment under Article 1390 of the
Civil Code and rescission under Article 1191 are two (2)
inconsistent remedies. In resolution, all the elements to
make the contract valid are present; in annulment, one of
the essential elements to a formation of a contract, which
is consent, is absent. In resolution, the defect is in the
consummation stage of the contract when the parties are
in the process of performing their respective obligations;
in annulment, the defect is already present at the time of
the negotiation and perfection stages of the contract.
Accordingly, by pursuing the remedy of rescission under
Article 1191, the Vilorias had impliedly admitted the
validity of the subject contracts, forfeiting their right to
demand their annulment. A party cannot rely on the
contract and claim rights or obligations under it and at
the same time impugn its existence or validity. Indeed,

litigants are enjoined from taking inconsistent
positions.39
V. Contracts cannot be rescinded for a slight or
casual breach.
CAI cannot insist on the non-transferability of the
subject tickets.
Considering that the subject contracts are not
annullable on the ground of vitiated consent, the next
question is: “Do Spouses Viloria have the right to
rescind the contract on the ground of CAI’s supposed
breach of its undertaking to issue new tickets upon
surrender of the subject tickets?”
Article 1191, as presently worded, states:
The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfilment
and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
103
This is understood to be without prejudice to the rights
of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
According to Spouses Viloria, CAI acted in bad
faith and breached the subject contracts when it refused
to apply the value of Lourdes’ ticket for Fernando’s
purchase of a round trip ticket to Los Angeles and in
requiring him to pay an amount higher than the price
fixed by other airline companies.
In its March 24, 1998 letter, CAI stated that
“non-refundable tickets may be used as a form of
payment toward the purchase of another Continental
ticket for $75.00, per ticket, reissue fee ($50.00, per
ticket, for tickets purchased prior to October 30, 1997).”
Clearly, there is nothing in the above-quoted
section of CAI’s letter from which the restriction on the
non-transferability of the subject tickets can be inferred.
In fact, the words used by CAI in its letter supports the
position of Spouses Viloria, that each of them can use
the ticket under their name for the purchase of new
tickets whether for themselves or for some other person.
Moreover, as CAI admitted, it was only when
Fernando had expressed his interest to use the subject
tickets for the purchase of a round trip ticket between
Manila and Los Angeles that he was informed that he
cannot use the ticket in Lourdes’ name as payment.
Contrary to CAI’s claim, that the subject tickets
are non-transferable cannot be implied from a plain

reading of the provision printed on the subject tickets
stating that “[t]o the extent not in conflict with the
foregoing carriage and other services performed by each
carrier are subject to: (a) provisions contained in this
ticket, x x x (iii) carrier’s conditions of carriage and
related regulations which are made part hereof (and are
available on application at the offices of carrier) x x x.”
As a common carrier whose business is imbued with
public interest, the exercise of extraordinary diligence
requires CAI to inform Spouses Viloria, or all of its
passengers for that matter, of all the terms and
conditions governing their contract of carriage. CAI is
proscribed from taking advantage of any ambiguity in
the contract of carriage to impute knowledge on its
passengers of and demand compliance with a certain
condition or undertaking that is not clearly stipulated.
Since the prohibition on transferability is not written on
the face of the subject tickets and CAI failed to inform
Spouses Viloria thereof, CAI cannot refuse to apply the
value of Lourdes’ ticket as payment for Fernando’s
purchase of a new ticket.
CAI’s refusal to accept Lourdes’ ticket for the
purchase of a new ticket for Fernando is only a
casual breach.
Nonetheless, the right to rescind a contract for
non-performance of its stipulations is not absolute. The
general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such
substantial and fundamental violations as would defeat
the very object of the parties in making the
agreement.40 Whether a breach is substantial is largely
determined by the attendant circumstances.41
While CAI’s refusal to allow Fernando to use
the value of Lourdes’ ticket as payment for the purchase
of a new ticket is unjustified as the non-transferability of
the subject tickets was not clearly stipulated, it cannot,
however be considered substantial. The endorsability of
104
the subject tickets is not an essential part of the
underlying contracts and CAI’s failure to comply is not
essential to its fulfillment of its undertaking to issue new
tickets upon Spouses Viloria’s surrender of the subject
tickets. This Court takes note of CAI’s willingness to
perform its principal obligation and this is to apply the
price of the ticket in Fernando’s name to the price of the
round trip ticket between Manila and Los Angeles. CAI
was likewise willing to accept the ticket in Lourdes’
name as full or partial payment as the case may be for
the purchase of any ticket, albeit under her name and for
her exclusive use. In other words, CAI’s willingness to
comply with its undertaking under its March 24, 1998
cannot be doubted, albeit tainted with its erroneous
insistence that Lourdes’ ticket is non-transferable.
Moreover, Spouses Viloria’s demand for
rescission cannot prosper as CAI cannot be solely
faulted for the fact that their agreement failed to
consummate and no new ticket was issued to Fernando.
Spouses Viloria have no right to insist that a single
round trip ticket between Manila and Los Angeles
should be priced at around $856.00 and refuse to pay the
difference between the price of the subject tickets and
the amount fixed by CAI. The petitioners failed to
allege, much less prove, that CAI had obliged itself to
issue to them tickets for any flight anywhere in the world
upon their surrender of the subject tickets. In its March
24, 1998 letter, it was clearly stated that “[n]on-
refundable tickets may be used as a form of payment
toward the purchase of another Continental ticket”42 and
there is nothing in it suggesting that CAI had obliged
itself to protect Spouses Viloria from any fluctuation in
the prices of tickets or that the surrender of the subject
tickets will be considered as full payment for any ticket
that the petitioners intend to buy regardless of actual
price and destination. The CA was correct in holding
that it is CAI’s right and exclusive prerogative to fix the
prices for its services and it may not be compelled to
observe and maintain the prices of other airline
companies.43

The conflict as to the endorsability of the subject
tickets is an altogether different matter, which does not
preclude CAI from fixing the price of a round trip ticket
between Manila and Los Angeles in an amount it deems
proper and which does not provide Spouses Viloria an
excuse not to pay such price, albeit subject to a reduction
coming from the value of the subject tickets. It cannot be
denied that Spouses Viloria had the concomitant
obligation to pay whatever is not covered by the value of
the subject tickets whether or not the subject tickets are
transferable or not.
There is also no showing that Spouses Viloria
were discriminated against in bad faith by being charged
with a higher rate. The only evidence the petitioners
presented to prove that the price of a round trip ticket
between Manila and Los Angeles at that time was only
$856.00 is a newspaper advertisement for another airline
company, which is inadmissible for being “hearsay
evidence, twice removed.” Newspaper clippings are
hearsay if they were offered for the purpose of proving
the truth of the matter alleged. As ruled in Feria v. Court
of Appeals,:44
[N]ewspaper articles amount to “hearsay evidence, twice
removed” and are therefore not only inadmissible but
without any probative value at all whether objected to or
not, unless offered for a purpose other than proving the
truth of the matter asserted. In this case, the news article
is admissible only as evidence that such publication does
exist with the tenor of the news therein
stated.45 (citations omitted)
The records of this case demonstrate that both
parties were equally in default; hence, none of them can
seek judicial redress for the cancellation or resolution of
the subject contracts and they are therefore bound to
their respective obligations thereunder. As the
1st sentence of Article 1192 provides:
105
Art. 1192. In case both parties have
committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the
courts. If it cannot be determined which of the parties
first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.
(emphasis supplied)
Therefore, CAI’s liability for damages for its
refusal to accept Lourdes’ ticket for the purchase of
Fernando’s round trip ticket is offset by Spouses
Viloria’s liability for their refusal to pay the amount,
which is not covered by the subject tickets. Moreover,
the contract between them remains, hence, CAI is duty
bound to issue new tickets for a destination chosen by
Spouses Viloria upon their surrender of the subject
tickets and Spouses Viloria are obliged to pay whatever
amount is not covered by the value of the subject tickets.
This Court made a similar ruling in Central
Bank of the Philippines v. Court of Appeals.46 Thus:
Since both parties were in default in the
performance of their respective reciprocal obligations,
that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay
his P17,000.00 debt within 3 years as stipulated, they are
both liable for damages.
Article 1192 of the Civil Code provides that in
case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor
shall be equitably tempered by the courts. WE rule that
the liability of Island Savings Bank for damages in not
furnishing the entire loan is offset by the liability of
Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his
overdue P17,000.00 debt. x x x.47

Another consideration that militates against the
propriety of holding CAI liable for moral damages is the
absence of a showing that the latter acted fraudulently
and in bad faith. Article 2220 of the Civil Code requires
evidence of bad faith and fraud and moral damages are
generally not recoverable in culpa contractual except
when bad faith had been proven.48The award of
exemplary damages is likewise not warranted. Apart
from the requirement that the defendant acted in a
wanton, oppressive and malevolent manner, the claimant
must prove his entitlement to moral damages.49
WHEREFORE, premises considered, the
instant Petition is DENIED.
SO ORDERED.
ANITA C. BUCE, petitioner, vs. THE HONORABLE
COURT OF APPEALS, SPS. BERNARDO C.
TIONGCO and ARACELI TIONGCO, SPS.
DIONISIO TIONGCO and LUCILA TIONGCO,
and JOSE M. TIONGCO, respondents.
DECISION
DAVIDE, JR., C.J.: Ncm
The basic issue in this petition is whether the parties
intended an automatic renewal of the lease
contract[1] when they agreed that the lease shall be for a
period of fifteen years "subject to renewal for another
ten (10) years."
Petitioner leased a 56-square meter parcel of land
located at 2068 Quirino Avenue, Pandacan, Manila. The
lease contract was for a period of fifteen years to
commence on 1 June 1979 and to end on 1 June 1994
"subject to renewal for another ten (10) years, under the
same terms and conditions." Petitioner then constructed
a building and paid the required monthly rental of P200.
Private respondents, through their administrator Jose
Tiongco, later demanded a gradual increase in the rental
until it reached P400 in 1985. For July and August 1991,
106
petitioner paid private respondents P1,000 as monthly
rental.[2]
On 6 December 1991, private respondents counsel wrote
petitioner informing her of the increase in the rent
to P1,576.58 effective January 1992 pursuant to the
provisions of the Rent Control Law.[3] Petitioner,
however, tendered checks dated 5 October 1991,[4] 5
November 1991,[5] 5 December 1991,[6] 5 January
1992,[7] 31 May 1992,[8] and 2 January 1993[9] for only
P400 each, payable to Jose Tiongco as administrator. As
might be expected, private respondents refused to accept
the same.
On 9 August 1993, petitioner filed with the Regional
Trial Court of Manila a complaint for specific
performance with prayer for consignation, which was
docketed as Civil Case No. 93-67135. She prayed that
private respondents be ordered to accept the rentals in
accordance with the lease contract and to respect the
lease of fifteen years, which was renewable for another
ten years, at the rate of P200 a month.
In their Answer, private respondents countered that
petitioner had already paid the monthly rent of P1,000
for July and August 1991. Under Republic Act No. 877,
as amended, rental payments should already
be P1,576.58[10] per month; hence, they were justified in
refusing the checks for P400 that petitioner tendered.
Moreover, the phrase in the lease contract authorizing
renewal for another ten years does not mean automatic
renewal; rather, it contemplates a mutual agreement
between the parties. Ncmmis
During the pendency of the controversy, counsel for
private respondents wrote petitioner reminding her that
the contract expired on 1 June 1994 and demanding that
she pay the rentals in arrears, which then amounted
to P33,000.
On 29 August 1995, the RTC declared the lease contract
automatically renewed for ten years and considered as
evidence thereof (a) the stipulations in the contract
giving the lessee the right to construct buildings and
improvements and (b) the filing by petitioner of the
complaint almost one year before the expiration of the
initial term of fifteen years. It then fixed the monthly

rent at P400 from 1 June 1990 to 1 June 1994; P1,000
from 1 June 1994 until 1 June 1999; and P1,500 for the
rest of the period or from 1 June 2000 to 1 June 2004,
reasoning that the continuous increase of rent from P200
to P250 then P300, P400 and finally P1,000 caused "an
inevitable novation of their contract."[11]
On appeal, the Court of Appeals reversed the decision of
the RTC, and ordered petitioner to immediately vacate
the leased premises on the ground that the contract
expired on 1 June 1994 without being renewed and to
pay the rental arrearages at the rate of P1,000
monthly.[12]
According to the Court of Appeals, the phrase in the
contract "this lease shall be for a period of fifteen (15)
years effective June 1, 1979, subject to renewal for
another ten (10) years, under the same terms and
conditions" is unclear as to who may exercise the option
to renew. The stipulation allowing the construction of a
building and other improvements and the fact that the
complaint was filed a year before the expiration of the
contract are not indicative of automatic renewal. It
applied the ruling in Fernandez v. Court of
Appeals[13] that without a stipulation that the option to
renew the lease is solely for the benefit of one party any
renewal of a lease contract must be upon the agreement
of the parties. Since private respondents were not
agreeable to an extension, the original term of the lease
ended on 1 June 1994. Private respondents refusal to
accept petitioners checks for P400 was justified because
although the original contract specified a monthly rental
of P200, the tender and acceptance of the increased
rental of P1,000 novated the contract of lease; thus,
petitioner was estopped from claiming that the monthly
rental is otherwise.
The Court of Appeals denied petitioners motion for
reconsideration. Hence this petition. Scncm
Petitioner contends that by ordering her to vacate the
premises, the Appellate Court went beyond the bounds
of its authority because the case she filed before the RTC
was for "Specific Performance" not unlawful detainer.
The power to order the lessee to vacate the leased
premises is lodged in another forum. Additionally,
private respondents did not pray for the ejectment of
107
petitioners from the leased premises in their Answer
with Counterclaim; well-settled is the rule that a court
cannot award relief not prayed for in the complaint or
compulsory counterclaim.
Petitioner further maintains that the phrase "renewable
for another ten years at the option of both parties" in
the Fernandez case clearly indicated the intention of the
parties to renew the contract only upon mutual
agreement. Whereas in this case the contract states,
"[T]his lease shall be for a period of fifteen (15) years
effective June 1, 1979, subject to renewal for another ten
(10) years, under the same terms and conditions,"
making this stipulation subject to interpretation with due
regard to the contemporaneous and subsequent acts of
the parties. The stipulation in the contract allowing the
lessee to construct buildings and improvements; her
filing of the complaint a year before the expiration of the
initial 15-year term; and private respondents acceptance
of the increased rental are contemporaneous and
subsequent acts that signify the intention of the parties to
renew the contract.
On the other hand, private respondents aver that even if
the original petition filed before the RTC was not for
unlawful detainer, the order of the Court of Appeals
requiring petitioner to vacate the premises is but a
logical consequence of its finding that the lease contract
had expired. To require another litigation would
constitute multiplicity of suits; besides, petitioner has no
other reason to stay in the premises. There is no basis
why Fernandez should not be applied to the case at bar.
Absent contrary stipulation in reciprocal contracts, the
period of lease is deemed to be for the benefit of both
parties. Sdaamiso
Private respondents argue that the alleged
contemporaneous and subsequent acts do not determine
the real intention of the parties as regards renewal of the
lease contract. Had they intended an automatic renewal
of the lease contract they would have agreed on a 25-
year period instead. Correlatively, private respondents
letter reminding petitioner of the expiration of the
contract on 1 June 1994 and demanding payment of the
rentals in arrears signifies that they are no longer
interested in renewing the contract. Also petitioners
refusal to pay the increased rental of P1,000 as early as

1991 and private respondents refusal to accept the P400
tendered constituted a disagreement on the rate of rental;
hence, any renewal is out of the question.
The basic issue, as agreed upon by the parties, is the
correct interpretation of the contract provision "this lease
shall be for a period of fifteen (15) years effective June
1, 1979, subject to renewal for another ten (10) years,
under the same terms and conditions."
The literal meaning of the stipulations shall control if the
terms of the contract are clear and leave no doubt upon
the intention of the contracting parties.[14] However, if
the terms of the agreement are ambiguous resort is made
to contract interpretation which is the determination of
the meaning attached to written or spoken words that
make the contract.[15] Also, to ascertain the true intention
of the parties, their actions, subsequent or
contemporaneous, must be principally considered.[16]
The phrase "subject to renewal for another ten (10)
years" is unclear on whether the parties contemplated an
automatic renewal or extension of the term, or just an
option to renew the contract; and if what exists is the
latter, who may exercise the same or for whose benefit it
was stipulated.
In this jurisdiction, a fine delineation exists between
renewal of the contract and extension of its period.
Generally, the renewal of a contract connotes the death
of the old contract and the birth or emergence of a new
one. A clause in a lease providing for an extension
operates of its own force to create an additional term, but
a clause providing for a renewal merely creates an
obligation to execute a new lease contract for the
additional term. As renewal of the contract contemplates
the cessation of the old contract, then it is necessary that
a new one be executed between the parties.[17] Sdaad
There is nothing in the stipulations in the contract and
the parties actuation that shows that the parties intended
an automatic renewal or extension of the term of the
contract. Even the RTC conceded that the issue of
automatic renewal is debatable. The fact that the lessee
was allowed to introduce improvements on the property
is not indicative of the intention of the lessors to
automatically extend the contract. Considering the
108
original 15-year duration of the contract, structures
would have necessarily been constructed, added, or built
on the property, which in its previous state was an idle
56-square meter lot in the heart of Manila. Petitioner
leased the property for the purpose of turning it into a
commercial establishment and to which it has been
transformed as Anitas Grocery and Store. Neither the
filing of the complaint a year before the expiration of the
15-year term nor private respondents acceptance of the
increased rentals has any bearing on the intention of the
parties regarding renewal. It must be recalled that the
filing of the complaint was even spawned by private
respondents refusal to accept the payment of monthly
rental in the amount of only P400.
Now on the applicability of Fernandez v. Court of
Appeals to the case at bar. Although the factual scenario
in that case with regard to the renewal option is slightly
off-tangent to the case under consideration because the
intention of the parties therein for future
mutual agreement was clearly discernible in their
contract, we cannot completely disregard the
pronouncement of this Court in that case; thus:
[I]n a reciprocal contract like a lease, the period must be
deemed to have been agreed upon for the benefit of both
parties, absent language showing that the term was
deliberately set for the benefit of the lessee or lessor
alone.[18] We are not aware of any presumption in law
that the term was deliberately set for the benefit of the
lessee alone. Koh and Cruz in effect rested upon such a
presumption. But that presumption cannot reasonably be
indulged in casually in an era of rapid economic change,
marked by, among other things, volatile costs of living
and fluctuations in the value of domestic currency. The
longer the period the more clearly unreasonable such a
presumption would be. In an age like that we live in,
very specific language is necessary to show an intent to
grant a unilateral faculty to extend or renew a contract of
lease to the lessee alone or to the lessor alone for that
matter.[19] Scsdaad
In the case at bar, it was not specifically indicated who
may exercise the option to renew, neither was it stated
that the option was given for the benefit of herein
petitioner. Thus, pursuant to theFernandez ruling and
Article 1196 of the Civil Code, the period of the lease

contract is deemed to have been set for the benefit of
both parties. Renewal of the contract may be had only
upon their mutual agreement or at the will of both of
them. Since the private respondents were not amenable
to a renewal, they cannot be compelled to execute a new
contract when the old contract terminated on 1 June
1994. It is the owner-lessors prerogative to terminate the
lease at its expiration.[20] The continuance, effectivity
and fulfillment of a contract of lease cannot be made to
depend exclusively upon the free and uncontrolledHome
choice of the lessee between continuing the payment of
the rentals or not, completely depriving the owner of any
say in the matter. Mutuality does not obtain in such a
contract of lease and no equality exists between the
lessor and the lessee since the life of the contract would
be dictated solely by the lessee.[21]
After the lease terminated on 1 June 1994 without any
agreement for renewal being reached, petitioner became
subject to ejectment from the premises.[22] It must be
noted, however, that private respondents did not include
in their Answer with Counterclaim a prayer for the
restoration of possession of the leased premises. Neither
did they file with the proper Metropolitan Trial Court an
unlawful detainer suit[23] against petitioner after the
expiration of the lease contact. Moreover, the issues
agreed upon by the parties to be resolved during the pre-
trial were the correct interpretation of the contract and
the validity of private respondents refusal to accept
petitioners payment of P400 as monthly rental.[24] They
later limited the issue to the first, i.e., the correct
interpretation of the contract.[25] The issue of possession
of the leased premises was not among the issues agreed
upon by the parties or threshed out before the court a
quo. Neither was it raised by private respondents on
appeal.
Accordingly, as correctly contended by the petitioner,
the Court of Appeals went beyond the bounds of its
authority[26] when after interpreting the questioned
provision of the lease contract in favor of the private
respondents it proceeded to order petitioner to vacate the
subject premises.
WHEREFORE, the instant petition is partly
GRANTED. The assailed decision of the Court of
Appeals is REVERSED insofar as it ordered the
109
petitioner to immediately vacate the leased premises,
without prejudice, however, to the filing by the private
respondents of an action for the recovery of possession
of the subject property.
No costs.
SO ORDERED. DAVIDE, JR.
Development Mutual Fund and Marilou Adea-
Protor, petitioners, vs. Court of Appeals and Dr. Cora
J. Virata (CONVIR) and Associates, Inc.,respondents.
DECISION
PURISIMA, J.:
At bench is a petition for review on certiorari under
Rule 45 of the Revised Rules of Court, to review and set
aside the Decision of the Court of Appeals[1] dated June
30, 1994 in CA-GR No.35240, affirming with
modification the Decision dated March 22, 1991 in Civil
Case No. 12715 of Branch 145,[2] Regional Trial Court
of Makati City.
The antecedent facts that matter can be culled, as
follows:
On January 1, 1985, CONVIR and Associates, Inc.,
represented by its President, Dra. Cora J. Virata, and the
petitioner, Home Development Mutual Fund (HDMF),
represented by its Senior Vice-President, Vicente
Reventar III, entered into a CONSULTANCY
AGREEMENT by virtue of which the former obligated
itself to render medical services to the employees of
HDMF. The said service contract stipulated, among
others:
That this AGREEMENT takes effect on January 1, 1985
up to December 31, 1985, provided however, that either
party who desires to terminate the contract may serve
the other party a written notice at least thirty (30) days
in advance.
On December 16, 1985, Dra. Cora J. Virata
wrote petitioner Marilou O. Adea-Proctor, then Deputy
Chief Executive Officer and Officer-in-Charge of
HDMF, to inform that she (Dra. Cora J. Virata) was
assuming from their (petitioners) silence that subject

Agreement was renewed for the succeeding period,
from January 1, 1986 to December 31, 1986.[3]
In her Reply-letter, dated December 23, 1985,
petitioner Adea-Proctor notified Dra. Cora J. Virata of
the termination of the contract in question upon its
expiration on December 31, 1985; informing Dra. Virata
of the appointment by management of a full-time
physician to the vacant plantilla position, such that her
services would not be needed anymore.[4] But such
letter-reply was formally and actually received by the
private respondents only on January 9, 1986.
In the Complaint filed on January 15, 1986, private
respondents averred that petitioners sudden and
unexpected termination of the Consultancy Agreement,
which requires a written notice thirty (30) days in
advance, did not conform therewith. Consequently,
private respondents prayed for unrealized income of at
least Five Hundred Thousand (P500,000.00) Pesos
resulting from loss of business opportunities, Four
Hundred Thousand (P400,000.00) Pesos, as exemplary
damages, One Hundred Thousand (P100,000.00) Pesos,
as litigation expenses, and 25% of the total amount, as
attorneys fees.
In their Answers sent in on January 14, 1986,
petitioners Adea-Proctor and HDMF sought the
dismissal of the Complaint; contending inter alia that the
Complaint states no cause of action arising from the
termination of the contract, upon expiration of the agreed
period. They argued that private respondents insistence
on the necessity of a notice of renewal of the contract is
predicated on an erroneous interpretation of its
terms, conditions and duration which are clear.
On March 22, 1991, the trial court of origin came
out with a decision; disposing, as follows:
Wherefore, premises considered, judgment is hereby
rendered, ordering defendant Home Development
Mutual Fund, to pay plaintiff the sum of Fifty Thousand
(P50,000.00) Pesos, in Philippine Currency, as
compensatory damages; and Twenty Thousand
(P20,000.00) Pesos, Philippine Currency, as and by way
of attorneys fees, and the costs.
Defendants counterclaims are dismissed/ denied for lack
of merit.
110
SO ORDERED.
On appeal, the aforesaid judgment was affirmed
with modification by the Court of Appeals, deleting the
award of compensatory damages for want of sufficient
evidence to support the same.With the denial of their
motion for
reconsideration, petitioners found their way to this Court
via the present Petition; theorizing, that:
I. THE PUBLIC RESPONDENT ERRED WHEN IT
RULED TO THE EFFECT THAT BECAUSE OF THE
RENEWAL OF THE CONSULTANCY AGREEMENT
SINCE 1981, THE 1985 CONSULTANCY AGREEMENT
IS DEEMED RENEWED FOR ANOTHER TERM
UNLESS ADVANCED NOTICE OF
TERMINATION/NON-RENEWAL IS SERVED BY
EITHER PARTY TO THE OTHER;
II. THE PUBLIC RESPONDENT ERRED WHEN IT
RULED THAT THE MEDICAL SERVICES OF
APPELLEE WAS UNREASONABLY TERMINATED/
NOT RENEWED BECAUSE THE LETTER OF
TERMINATION/NON-RENEWAL WAS SERVED OR
MAILED SO CLOSE TO THE END OF THE YEAR...;
III. THE PUBLIC RESPONDENT ERRED IN
HOLDING PETITIONER LIABLE FOR ATTORNEYS
FEES TO THE APPELLEE UNDER ART. 19 OF THE
NEW CIVIL CODE.
The petition is not impressed with merit.
Our pivot of inquiry is the correct construction or
interpretation of subject Consultancy Agreement,
particularly its provision:
That this agreement takes effect on January 1, 1985 to
December 31, 1985; Provided, however, that either
party who desires to terminate the contract may serve
the other party a written notice at least thirty(30) days in
advance.
The first clause of the aforecited stipulation, which
is the bone of petitioners stance, basically deals with
the term of the contract; while the proviso, which is the
core of private respondents action, prescribes
the manner the service contract in question could be
terminated.

It is petitioners submission that the first clause
referred to is independent, distinct and separate from the
said proviso, such that upon the expiration of the
period stated in the first clause, the Consultancy
Agreement ceased to have any binding effect between
the contracting parties even though they (petitioners) did
not give any written notice of termination at least thirty
(30) days in advance.
We cannot fathom how contracting parties, who
are sui juris, and knowledgeable of the purposes for
which they solemnly put their Agreement into writing,
could be so careless as to includeinconsistent conditions
in such a short and simple provision in their contract
sued upon.
Time-honored is the rule that In the construction of
an instrument where there are several provisions or
particulars, such a construction is, if possible, to be
adopted as will give effect to all.[5]Article 1374 of the
New Civil Code, on the other hand, requires that The
various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that
sense which may result from all of them
taken jointly. Conformably, to ascertain the true
meaning or import of the controverted provision of
subject Consultancy Agreement, its entirety must be
considered; not merely the first clause.[6] Consequently,
petitioners interpretation solely based on the first clause,
and which completely ignored the second clause under
scrutiny, cannot be upheld.
The law mandates that Obligations arising from
contracts have the force of law between the contracting
parties and should be complied with in good faith.[7]
Did petitioners comply with their contractual
obligation in good faith, when they served the requisite
written notice to private respondents nine (9) days after
the expiration of the Agreement?The answer to this
crucial question is in the negative.
The second clause of the contractual provision in
dispute is to the effect that written notice of termination
should be served at least thirty (30) days in advance. As
a rule, the method of terminating a contract is primarily
determined by the stipulation of the parties.[8] Thus, the
requirements of contracts as to notice - as to the time of
giving, form, and manner of service thereof -must be
strictly observed because In an obligation where a period
111
is designated, it is presumed to have been established for
the benefit of both the contracting parties.[9] Thus, the
unilateral termination of the contract in question by the
herein petitioners is violative of the principle of
mutuality of contracts ordained in Art. 1308 of the New
Civil Code.[10]
Petitioner Adea-Proctor contends that on December
26, 1985, she caused personal delivery of her letter-reply
dated December 23, 1985, addressed to private
respondent Dra. Cora Virata, informing the latter of the
impending expiration of the contract which would not be
renewed anymore because the petitioners planned to fill
up the vacant plantilla position with a full-time
physician, as approved by the Board of Trustees of
HDMF.[11] However, petitioner Adea-Proctor claims that
when the said letter was delivered by one Ramon Ortega,
petitioners messenger, to the Makati office of private
respondents, the latters representative, a certain Rose Sy,
refused to receive it. So, petitioner Adea-Proctor had to
send the said letter by registered mail, on the same day,
and private respondents received it on January 9, 1986.
We are not persuaded by petitioners stance. From
the evidence on hand, it can be unerringly gleaned that
within the first week of January, 1986, respondent Dra.
Cora J. Virata was allowed by petitioners to assume her
duties as physician of petitioners employees. As
ratiocinated by the Court of Appeals:
For one thing, if it were true that appellant (petitioner
HDMF) was decided in not renewing the consultancy
agreement with appellee (private respondent Cora
Virata), it should have instructed and informed all its
employees not to avail anymore of appellees medical
services. As it was, appellant
allowed its employees to still avail of appellees medical
services on the first week of January, 1986.[12]
Granting ex gratia argumenti that petitioners caused
personal delivery of their letter-reply on December 26,
1985, we believe that the same could not be deemed a
substantial compliance with their contractual obligation
because it was done just five (5) days prior to the
expiration of the contract. To repeat, what is stipulated is
thirty (30) days in advance. As the trial court stressed:

Necessarily, such notice of termination or non-renewal
must be served within reasonable time, in fairness to the
other party. Under the circumstances obtaining,
however, the defendants (petitioners herein) notice on
plaintiff (private respondent herein) was unreasonable,
particularly as it was served or mailed so close to the
end of the year and at the height of the Christmas
holidays, factors which were unduly disadvantageous to
plaintiff as it leaves no sufficient opportunity to prepare
for the closure of the business with other potential
clients, to the detriment of said plaintiff.[13]
Indeed, private respondents had every reason to
assume that subject service contract was deemed
renewed. As found by the Court of Appeals:
The evidence shows in this case that since 1981,
appellees (private respondent herein) consultancy
agreement with appellant (petitioners herein) had been
renewed, without renegotiation, so that appellee as a
practice would continue her services to appellant even
after expiry date of the contract.
These implied renewals of the contract had been going
on as a practice of both appellant and appellee since
1981, so that at the start of each year, appellee would
just the same, perform her duties as appellants
physician, with contract to be signed in the first few
months of the year. As this was the practice, appellee
could not be blamed for performing her professional
duties as appellants physician even in the absence of a
contract. (CA Decision, p. 5)
Premises studiedly considered, we are of the
irresistible conclusion that the Court of Appeals erred
not in adjudging as renewed the Consultancy Agreement
litigated upon.
In the second assigned error, petitioners theorize
that the Court of
Appeals erred in ruling that the medical services of priva
te respondents were unreasonably terminated because
the December 26, 1985 letter of termination was served
or mailed so close to the end of the year...
We discern nothing reversible in such conclusion
arrived at by public respondent. Ordinarily, what is
reasonable time under the circumstances of a particular
112
case is a mixed question of law and of fact, for
determination by the trier of facts. This Court is not a
trier of facts. Furthermore, well settled is the doctrine
that the findings of fact by the trial court are accorded
great respect by appellate courts and should not be
disturbed on appeal unless the trial court has overlooked,
ignored, or disregarded some fact or circumstances of
sufficient weight or significance which, if considered,
would alter the situation.[14] The facts of the case, as
stated by the trial court, were adopted by the Court of
Appeals. And a conscientious sifting of the records fails
to bring to light any fact or circumstance militative
against the correctness of the said findings of the trial
court and the Court of Appeals.
We are likewise in agreement with the Court of
Appeals finding that petitioners acted in bad faith for
refusing to comply with private respondents valid
demand. Therefore, it is just and equitable that attorneys
fees be recovered,[15] in the reasonable amount fixed
below.
WHEREFORE, the Decision of the Court of
Appeals in C.A. - G.R. No. 35240 is
hereby AFFIRMED in toto. No pronouncement as to
costs.
SO ORDERED.
G.R. No. L-22558 May 31, 1967
GREGORIO ARANETA, INC., petitioner,
vs.
THE PHILIPPINE SUGAR ESTATES
DEVELOPMENT CO., LTD., respondent.
Araneta and Araneta for petitioner.
Rosauro Alvarez and Ernani Cruz Paño for respondent.
REYES, J.B.L., J.:
Petition for certiorari to review a judgment of the Court
of Appeals, in its CA-G.R. No. 28249-R, affirming with
modification, an amendatory decision of the Court of
First Instance of Manila, in its Civil Case No. 36303,
entitled "Philippine Sugar Estates Development Co.,

Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and
Gregorio Araneta, Inc., defendants."
As found by the Court of Appeals, the facts of this case
are:
J. M. Tuason & Co., Inc. is the owner of a big tract land
situated in Quezon City, otherwise known as the Sta.
Mesa Heights Subdivision, and covered by a Torrens
title in its name. On July 28, 1950, through Gregorio
Araneta, Inc., it (Tuason & Co.) sold a portion thereof
with an area of 43,034.4 square meters, more or less, for
the sum of P430,514.00, to Philippine Sugar Estates
Development Co., Ltd. The parties stipulated, among in
the contract of purchase and sale with mortgage, that the
buyer will —
Build on the said parcel land the Sto. Domingo Church
and Convent
while the seller for its part will —
Construct streets on the NE and NW and SW sides of the
land herein sold so that the latter will be a block
surrounded by streets on all four sides; and the street on
the NE side shall be named "Sto. Domingo Avenue;"
The buyer, Philippine Sugar Estates Development Co.,
Ltd., finished the construction of Sto. Domingo Church
and Convent, but the seller, Gregorio Araneta, Inc.,
which began constructing the streets, is unable to finish
the construction of the street in the Northeast side named
(Sto. Domingo Avenue) because a certain third-party, by
the name of Manuel Abundo, who has been physically
occupying a middle part thereof, refused to vacate the
same; hence, on May 7, 1958, Philippine Sugar Estates
Development Co., Lt. filed its complaint against J. M.
Tuason & Co., Inc., and instance, seeking to compel the
latter to comply with their obligation, as stipulated in the
above-mentioned deed of sale, and/or to pay damages in
the event they failed or refused to perform said
obligation.
Both defendants J. M. Tuason and Co. and Gregorio
Araneta, Inc. answered the complaint, the latter
particularly setting up the principal defense that the
action was premature since its obligation to construct the
streets in question was without a definite period which
113
needs to he fixed first by the court in a proper suit for
that purpose before a complaint for specific performance
will prosper.
The issues having been joined, the lower court
proceeded with the trial, and upon its termination, it
dismissed plaintiff's complaint (in a decision dated May
31, 1960), upholding the defenses interposed by
defendant Gregorio Araneta, Inc.1äwphï1.ñët
Plaintiff moved to reconsider and modify the above
decision, praying that the court fix a period within which
defendants will comply with their obligation to construct
the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion,
maintaining that plaintiff's complaint did not expressly
or impliedly allege and pray for the fixing of a period to
comply with its obligation and that the evidence
presented at the trial was insufficient to warrant the
fixing of such a period.
On July 16, 1960, the lower court, after finding that "the
proven facts precisely warrants the fixing of such a
period," issued an order granting plaintiff's motion for
reconsideration and amending the dispositive portion of
the decision of May 31, 1960, to read as follows:
WHEREFORE, judgment is hereby rendered giving
defendant Gregorio Araneta, Inc., a period of two (2)
years from notice hereof, within which to comply with
its obligation under the contract, Annex "A".
Defendant Gregorio Araneta, Inc. presented a motion to
reconsider the above quoted order, which motion,
plaintiff opposed.
On August 16, 1960, the lower court denied defendant
Gregorio Araneta, Inc's. motion; and the latter perfected
its appeal Court of Appeals.
In said appellate court, defendant-appellant Gregorio
Araneta, Inc. contended mainly that the relief granted,
i.e., fixing of a period, under the amendatory decision of
July 16, 1960, was not justified by the pleadings and not
supported by the facts submitted at the trial of the case in
the court below and that the relief granted in effect

allowed a change of theory after the submission of the
case for decision.
Ruling on the above contention, the appellate court
declared that the fixing of a period was within the
pleadings and that there was no true change of theory
after the submission of the case for decision since
defendant-appellant Gregorio Araneta, Inc. itself
squarely placed said issue by alleging in paragraph 7 of
the affirmative defenses contained in its answer which
reads —
7. Under the Deed of Sale with Mortgage of July 28,
1950, herein defendant has a reasonable time within
which to comply with its obligations to construct and
complete the streets on the NE, NW and SW sides of the
lot in question; that under the circumstances, said
reasonable time has not elapsed;
Disposing of the other issues raised by appellant which
were ruled as not meritorious and which are not decisive
in the resolution of the legal issues posed in the instant
appeal before us, said appellate court rendered its
decision dated December 27, 1963, the dispositive part
of which reads —
IN VIEW WHEREOF, judgment affirmed and modified;
as a consequence, defendant is given two (2) years from
the date of finality of this decision to comply with the
obligation to construct streets on the NE, NW and SW
sides of the land sold to plaintiff so that the same would
be a block surrounded by streets on all four sides.
Unsuccessful in having the above decision reconsidered,
defendant-appellant Gregorio Araneta, Inc. resorted to a
petition for review by certiorari to this Court. We gave
it due course.
We agree with the petitioner that the decision of the
Court of Appeals, affirming that of the Court of First
Instance is legally untenable. The fixing of a period by
the courts under Article 1197 of the Civil Code of the
Philippines is sought to be justified on the basis that
petitioner (defendant below) placed the absence of a
period in issue by pleading in its answer that the contract
with respondent Philippine Sugar Estates Development
Co., Ltd. gave petitioner Gregorio Araneta, Inc.
"reasonable time within which to comply with its
114
obligation to construct and complete the streets." Neither
of the courts below seems to have noticed that, on the
hypothesis stated, what the answer put in issue was not
whether the court should fix the time of performance,
but whether or not the parties agreed that the petitioner
should have reasonable time to perform its part of the
bargain. If the contract so provided, then there was a
period fixed, a "reasonable time;" and all that the court
should have done was to determine if that reasonable
time had already elapsed when suit was filed if it had
passed, then the court should declare that petitioner had
breached the contract, as averred in the complaint, and
fix the resulting damages. On the other hand, if the
reasonable time had not yet elapsed, the court perforce
was bound to dismiss the action for being premature. But
in no case can it be logically held that under the plea
above quoted, the intervention of the court to fix the
period for performance was warranted, for Article 1197
is precisely predicated on the absence of any period
fixed by the parties.
Even on the assumption that the court should have found
that no reasonable time or no period at all had been fixed
(and the trial court's amended decision nowhere declared
any such fact) still, the complaint not having sought that
the Court should set a period, the court could not
proceed to do so unless the complaint in as first
amended; for the original decision is clear that the
complaint proceeded on the theory that the period for
performance had already elapsed, that the contract had
been breached and defendant was already answerable in
damages.
Granting, however, that it lay within the Court's power
to fix the period of performance, still the amended
decision is defective in that no basis is stated to support
the conclusion that the period should be set at two years
after finality of the judgment. The list paragraph of
Article 1197 is clear that the period can not be set
arbitrarily. The law expressly prescribes that —
the Court shall determine such period as may under the
circumstances been probably contemplated by the
parties.
All that the trial court's amended decision (Rec. on
Appeal, p. 124) says in this respect is that "the proven

facts precisely warrant the fixing of such a period," a
statement manifestly insufficient to explain how the two
period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code
involves a two-step process. The Court must first
determine that "the obligation does not fix a period" (or
that the period is made to depend upon the will of the
debtor)," but from the nature and the circumstances it
can be inferred that a period was intended" (Art. 1197,
pars. 1 and 2). This preliminary point settled, the Court
must then proceed to the second step, and decide what
period was "probably contemplated by the parties" (Do.,
par. 3). So that, ultimately, the Court can not fix a period
merely because in its opinion it is or should be
reasonable, but must set the time that the parties are
shown to have intended. As the record stands, the trial
Court appears to have pulled the two-year period set in
its decision out of thin air, since no circumstances are
mentioned to support it. Plainly, this is not warranted by
the Civil Code.
In this connection, it is to be borne in mind that the
contract shows that the parties were fully aware that the
land described therein was occupied by squatters,
because the fact is expressly mentioned therein (Rec. on
Appeal, Petitioner's Appendix B, pp. 12-13). As the
parties must have known that they could not take the law
into their own hands, but must resort to legal processes
in evicting the squatters, they must have realized that the
duration of the suits to be brought would not be under
their control nor could the same be determined in
advance. The conclusion is thus forced that the parties
must have intended to defer the performance of the
obligations under the contract until the squatters were
duly evicted, as contended by the petitioner Gregorio
Araneta, Inc.
The Court of Appeals objected to this conclusion that it
would render the date of performance indefinite. Yet, the
circumstances admit no other reasonable view; and this
very indefiniteness is what explains why the agreement
did not specify any exact periods or dates of
performance.
It follows that there is no justification in law for the
setting the date of performance at any other time than
115
that of the eviction of the squatters occupying the land in
question; and in not so holding, both the trial Court and
the Court of Appeals committed reversible error. It is not
denied that the case against one of the squatters,
Abundo, was still pending in the Court of Appeals when
its decision in this case was rendered.
In view of the foregoing, the decision appealed from is
reversed, and the time for the performance of the
obligations of petitioner Gregorio Araneta, Inc. is hereby
fixed at the date that all the squatters on affected areas
are finally evicted therefrom.
Costs against respondent Philippine Sugar Estates
Development, Co., Ltd. So ordered.
Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon,
J.P., Sanchez and Castro, JJ., concur.
G.R. No. L-11827 July 31, 1961
FERNANDO A. GAITE, plaintiff-appellee,
vs.
ISABELO FONACIER, GEORGE KRAKOWER,
LARAP MINES & SMELTING CO., INC.,
SEGUNDINA VIVAS, FRNACISCO DANTE,
PACIFICO ESCANDOR and FERNANDO
TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro
Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First
Instance because the claims involved aggregate more
than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner
and/or holder, either by himself or in a representative
capacity, of 11 iron lode mineral claims, known as the
Dawahan Group, situated in the municipality of Jose
Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29,
1952(Exhibit "3"), Fonacier constituted and appointed
plaintiff-appellee Fernando A. Gaite as his true and

lawful attorney-in-fact to enter into a contract with any
individual or juridical person for the exploration and
development of the mining claims aforementioned on a
royalty basis of not less than P0.50 per ton of ore that
might be extracted therefrom. On March 19, 1954, Gaite
in turn executed a general assignment (Record on
Appeal, pp. 17-19) conveying the development and
exploitation of said mining claims into the Larap Iron
Mines, a single proprietorship owned solely by and
belonging to him, on the same royalty basis provided for
in Exhibit "3". Thereafter, Gaite embarked upon the
development and exploitation of the mining claims in
question, opening and paving roads within and outside
their boundaries, making other improvements and
installing facilities therein for use in the development of
the mines, and in time extracted therefrom what he claim
and estimated to be approximately 24,000 metric tons of
iron ore.
For some reason or another, Isabelo Fonacier decided to
revoke the authority granted by him to Gaite to exploit
and develop the mining claims in question, and Gaite
assented thereto subject to certain conditions. As a
result, a document entitled "Revocation of Power of
Attorney and Contract" was executed on December 8,
1954 (Exhibit "A"),wherein Gaite transferred to
Fonacier, for the consideration of P20,000.00, plus 10%
of the royalties that Fonacier would receive from the
mining claims, all his rights and interests on all the
roads, improvements, and facilities in or outside said
claims, the right to use the business name "Larap Iron
Mines" and its goodwill, and all the records and
documents relative to the mines. In the same document,
Gaite transferred to Fonacier all his rights and interests
over the "24,000 tons of iron ore, more or less" that the
former had already extracted from the mineral claims, in
consideration of the sum of P75,000.00, P10,000.00 of
which was paid upon the signing of the agreement, and
b. The balance of SIXTY-FIVE THOUSAND PESOS
(P65,000.00) will be paid from and out of the first letter
of credit covering the first shipment of iron ores and of
the first amount derived from the local sale of iron ore
made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.
116
To secure the payment of the said balance of
P65,000.00, Fonacier promised to execute in favor of
Gaite a surety bond, and pursuant to the promise,
Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal
and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas,
Pacifico Escandor, Francisco Dante, and Fernando Ty as
sureties (Exhibit "A-1"). Gaite testified, however, that
when this bond was presented to him by Fonacier
together with the "Revocation of Power of Attorney and
Contract", Exhibit "A", on December 8, 1954, he refused
to sign said Exhibit "A" unless another bond under
written by a bonding company was put up by defendants
to secure the payment of the P65,000.00 balance of their
price of the iron ore in the stockpiles in the mining
claims. Hence, a second bond, also dated December 8,
1954 (Exhibit "B"),was executed by the same parties to
the first bond Exhibit "A-1", with the Far Eastern Surety
and Insurance Co. as additional surety, but it provided
that the liability of the surety company would attach
only when there had been an actual sale of iron ore by
the Larap Mines & Smelting Co. for an amount of not
less then P65,000.00, and that, furthermore, the liability
of said surety company would automatically expire on
December 8, 1955. Both bonds were attached to the
"Revocation of Power of Attorney and Contract",
Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of
attorney he gave to Gaite and the two executed and
signed the "Revocation of Power of Attorney and
Contract", Exhibit "A", Fonacier entered into a "Contract
of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc.
the right to develop, exploit, and explore the mining
claims in question, together with the improvements
therein and the use of the name "Larap Iron Mines" and
its good will, in consideration of certain royalties.
Fonacier likewise transferred, in the same document, the
complete title to the approximately 24,000 tons of iron
ore which he acquired from Gaite, to the Larap &
Smelting Co., in consideration for the signing by the
company and its stockholders of the surety bonds
delivered by Fonacier to Gaite (Record on Appeal, pp.
82-94).

Up to December 8, 1955, when the bond Exhibit "B"
expired with respect to the Far Eastern Surety and
Insurance Company, no sale of the approximately
24,000 tons of iron ore had been made by the Larap
Mines & Smelting Co., Inc., nor had the P65,000.00
balance of the price of said ore been paid to Gaite by
Fonacier and his sureties payment of said amount, on the
theory that they had lost right to make use of the period
given them when their bond, Exhibit "B" automatically
expired (Exhibits "C" to "C-24"). And when Fonacier
and his sureties failed to pay as demanded by Gaite, the
latter filed the present complaint against them in the
Court of First Instance of Manila (Civil Case No. 29310)
for the payment of the P65,000.00 balance of the price of
the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the
uniform defense that the obligation sued upon by Gaite
was subject to a condition that the amount of P65,000.00
would be payable out of the first letter of credit covering
the first shipment of iron ore and/or the first amount
derived from the local sale of the iron ore by the Larap
Mines & Smelting Co., Inc.; that up to the time of the
filing of the complaint, no sale of the iron ore had been
made, hence the condition had not yet been fulfilled; and
that consequently, the obligation was not yet due and
demandable. Defendant Fonacier also contended that
only 7,573 tons of the estimated 24,000 tons of iron ore
sold to him by Gaite was actually delivered, and
counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the
presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his
sureties to pay Gaite P65,000.00 become due and
demandable when the defendants failed to renew the
surety bond underwritten by the Far Eastern Surety and
Insurance Co., Inc. (Exhibit "B"), which expired on
December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold
by plaintiff Gaite to defendant Fonacier were actually in
existence in the mining claims when these parties
executed the "Revocation of Power of Attorney and
Contract", Exhibit "A."
117
On the first question, the lower court held that the
obligation of the defendants to pay plaintiff the
P65,000.00 balance of the price of the approximately
24,000 tons of iron ore was one with a term: i.e., that it
would be paid upon the sale of sufficient iron ore by
defendants, such sale to be effected within one year or
before December 8, 1955; that the giving of security was
a condition precedent to Gait's giving of credit to
defendants; and that as the latter failed to put up a good
and sufficient security in lieu of the Far Eastern Surety
bond (Exhibit "B") which expired on December 8, 1955,
the obligation became due and demandable under Article
1198 of the New Civil Code.
As to the second question, the lower court found that
plaintiff Gaite did have approximately 24,000 tons of
iron ore at the mining claims in question at the time of
the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff
Gaite ordering defendants to pay him, jointly and
severally, P65,000.00 with interest at 6% per annum
from December 9, 1955 until payment, plus costs. From
this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental
motions were presented for resolution: a motion to
declare the appellants Larap Mines & Smelting Co., Inc.
and George Krakower in contempt, filed by appellant
Fonacier, and two motions to dismiss the appeal as
having become academic and a motion for new trial
and/or to take judicial notice of certain documents, filed
by appellee Gaite. The motion for contempt is
unmeritorious because the main allegation therein that
the appellants Larap Mines & Smelting Co., Inc. and
Krakower had sold the iron ore here in question, which
allegedly is "property in litigation", has not been
substantiated; and even if true, does not make these
appellants guilty of contempt, because what is under
litigation in this appeal is appellee Gaite's right to the
payment of the balance of the price of the ore, and not
the iron ore itself. As for the several motions presented
by appellee Gaite, it is unnecessary to resolve these
motions in view of the results that we have reached in
this case, which we shall hereafter discuss.

The main issues presented by appellants in this appeal
are:
(1) that the lower court erred in holding that the
obligation of appellant Fonacier to pay appellee Gaite
the P65,000.00 (balance of the price of the iron ore in
question)is one with a period or term and not one with a
suspensive condition, and that the term expired on
December 8, 1955; and
(2) that the lower court erred in not holding that there
were only 10,954.5 tons in the stockpiles of iron ore sold
by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following
provision in the contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby
transfers to Isabelo F. Fonacier all his rights and interests
over the 24,000 tons of iron ore, more or less, above-
referred to together with all his rights and interests to
operate the mine in consideration of the sum of
SEVENTY-FIVE THOUSAND PESOS (P75,000.00)
which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid
upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS
(P65,000.00)will be paid from and out of the first letter
of credit covering the first shipment of iron ore made by
the Larap Mines & Smelting Co., Inc., its assigns,
administrators, or successors in interest.
We find the court below to be legally correct in holding
that the shipment or local sale of the iron ore is not a
condition precedent (or suspensive) to the payment of
the balance of P65,000.00, but was only a suspensive
period or term. What characterizes a conditional
obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated
to the happening of a future and uncertain event; so that
if the suspensive condition does not take place, the
parties would stand as if the conditional obligation had
never existed. That the parties to the contract Exhibit
"A" did not intend any such state of things to prevail is
supported by several circumstances:
118
1) The words of the contract express no contingency in
the buyer's obligation to pay: "The balance of Sixty-Five
Thousand Pesos (P65,000.00) will be paid out of the first
letter of credit covering the first shipment of iron ores . .
." etc. There is no uncertainty that the payment will have
to be made sooner or later; what is undetermined is
merely the exact date at which it will be made. By the
very terms of the contract, therefore, the existence of the
obligation to pay is recognized; only
its maturity or demandability is deferred.
2) A contract of sale is normally commutative and
onerous: not only does each one of the parties assume a
correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the
price),but each party anticipates performance by the
other from the very start. While in a sale the obligation
of one party can be lawfully subordinated to an uncertain
event, so that the other understands that he assumes the
risk of receiving nothing for what he gives (as in the
case of a sale of hopes or expectations, emptio spei), it is
not in the usual course of business to do so; hence, the
contingent character of the obligation must clearly
appear. Nothing is found in the record to evidence that
Gaite desired or assumed to run the risk of losing his
right over the ore without getting paid for it, or that
Fonacier understood that Gaite assumed any such risk.
This is proved by the fact that Gaite insisted on a bond a
to guarantee payment of the P65,000.00, an not only
upon a bond by Fonacier, the Larap Mines & Smelting
Co., and the company's stockholders, but also on one by
a surety company; and the fact that appellants did put up
such bonds indicates that they admitted the definite
existence of their obligation to pay the balance of
P65,000.00.
3) To subordinate the obligation to pay the remaining
P65,000.00 to the sale or shipment of the ore as a
condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or
shipment could not be made unless the appellants took
steps to sell the ore. Appellants would thus be able to
postpone payment indefinitely. The desireability of
avoiding such a construction of the contract Exhibit "A"
needs no stressing.

4) Assuming that there could be doubt whether by the
wording of the contract the parties indented a suspensive
condition or a suspensive period (dies ad quem) for the
payment of the P65,000.00, the rules of interpretation
would incline the scales in favor of "the greater
reciprocity of interests", since sale is essentially onerous.
The Civil Code of the Philippines, Article 1378,
paragraph 1, in fine, provides:
If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.
and there can be no question that greater reciprocity
obtains if the buyer' obligation is deemed to be actually
existing, with only its maturity (due date) postponed or
deferred, that if such obligation were viewed as non-
existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale
of the ore to Fonacier was a sale on credit, and not an
aleatory contract where the transferor, Gaite, would
assume the risk of not being paid at all; and that the
previous sale or shipment of the ore was not a
suspensive condition for the payment of the balance of
the agreed price, but was intended merely to fix the
future date of the payment.
This issue settled, the next point of inquiry is whether
appellants, Fonacier and his sureties, still have the right
to insist that Gaite should wait for the sale or shipment
of the ore before receiving payment; or, in other words,
whether or not they are entitled to take full advantage of
the period granted them for making the payment.
We agree with the court below that the appellant have
forfeited the right court below that the appellants have
forfeited the right to compel Gaite to wait for the sale of
the ore before receiving payment of the balance of
P65,000.00, because of their failure to renew the bond of
the Far Eastern Surety Company or else replace it with
an equivalent guarantee. The expiration of the bonding
company's undertaking on December 8, 1955
substantially reduced the security of the vendor's rights
as creditor for the unpaid P65,000.00, a security that
Gaite considered essential and upon which he had
insisted when he executed the deed of sale of the ore to
Fonacier (Exhibit "A"). The case squarely comes under
119
paragraphs 2 and 3 of Article 1198 of the Civil Code of
the Philippines:
"ART. 1198. The debtor shall lose every right to make
use of the period:
(1) . . .
(2) When he does not furnish to the creditor the
guaranties or securities which he has promised.
(3) When by his own acts he has impaired said
guaranties or securities after their establishment, and
when through fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety
company's bond upon its expiration plainly impaired the
securities given to the creditor (appellee Gaite), unless
immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's
acceptance of the surety company's bond with full
knowledge that on its face it would automatically expire
within one year was a waiver of its renewal after the
expiration date. No such waiver could have been
intended, for Gaite stood to lose and had nothing to gain
barely; and if there was any, it could be rationally
explained only if the appellants had agreed to sell the ore
and pay Gaite before the surety company's bond expired
on December 8, 1955. But in the latter case the
defendants-appellants' obligation to pay became absolute
after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result:
that Gaite acted within his rights in demanding payment
and instituting this action one year from and after the
contract (Exhibit "A") was executed, either because the
appellant debtors had impaired the securities originally
given and thereby forfeited any further time within
which to pay; or because the term of payment was
originally of no more than one year, and the balance of
P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is
whether there were really 24,000 tons of iron ore in the
stockpiles sold by appellee Gaite to appellant Fonacier,

and whether, if there had been a short-delivery as
claimed by appellants, they are entitled to the payment
of damages, we must, at the outset, stress two
things: first, that this is a case of a sale of a specific mass
of fungible goods for a single price or a lump sum, the
quantity of "24,000 tons of iron ore, more or less," stated
in the contract Exhibit "A," being a mere estimate by the
parties of the total tonnage weight of the mass;
and second, that the evidence shows that neither of the
parties had actually measured of weighed the mass, so
that they both tried to arrive at the total quantity by
making an estimate of the volume thereof in cubic
meters and then multiplying it by the estimated weight
per ton of each cubic meter.
The sale between the parties is a sale of a specific mass
or iron ore because no provision was made in their
contract for the measuring or weighing of the ore sold in
order to complete or perfect the sale, nor was the price of
P75,000,00 agreed upon by the parties based upon any
such measurement.(see Art. 1480, second par., New
Civil Code). The subject matter of the sale is, therefore,
a determinate object, the mass, and not the actual
number of units or tons contained therein, so that all that
was required of the seller Gaite was to deliver in good
faith to his buyer all of the ore found in the mass,
notwithstanding that the quantity delivered is less than
the amount estimated by them (Mobile Machinery &
Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171
So. 872, applying art. 2459 of the Louisiana Civil Code).
There is no charge in this case that Gaite did not deliver
to appellants all the ore found in the stockpiles in the
mining claims in questions; Gaite had, therefore,
complied with his promise to deliver, and appellants in
turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and
appellants undertook to buy, not a definite mass, but
approximately 24,000 tons of ore, so that any substantial
difference in this quantity delivered would entitle the
buyers to recover damages for the short-delivery, was
there really a short-delivery in this case?
We think not. As already stated, neither of the parties
had actually measured or weighed the whole mass of ore
cubic meter by cubic meter, or ton by ton. Both parties
predicate their respective claims only upon an estimated
120
number of cubic meters of ore multiplied by the average
tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of
7,375 cubic meters in the stockpiles of ore that he sold to
Fonacier, while appellants contend that by actual
measurement, their witness Cirpriano Manlañgit found
the total volume of ore in the stockpiles to be only 6.609
cubic meters. As to the average weight in tons per cubic
meter, the parties are again in disagreement, with
appellants claiming the correct tonnage factor to be 2.18
tons to a cubic meter, while appellee Gaite claims that
the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the
most reliable estimate of the tonnage factor of iron ore in
this case to be that made by Leopoldo F. Abad, chief of
the Mines and Metallurgical Division of the Bureau of
Mines, a government pensionado to the States and a
mining engineering graduate of the Universities of
Nevada and California, with almost 22 years of
experience in the Bureau of Mines. This witness placed
the tonnage factor of every cubic meter of iron ore at
between 3 metric tons as minimum to 5 metric tons as
maximum. This estimate, in turn, closely corresponds to
the average tonnage factor of 3.3 adopted in his
corrected report (Exhibits "FF" and FF-1") by engineer
Nemesio Gamatero, who was sent by the Bureau of
Mines to the mining claims involved at the request of
appellant Krakower, precisely to make an official
estimate of the amount of iron ore in Gaite's stockpiles
after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic
meters of ore in the stockpiles made by appellant's
witness Cipriano Manlañgit is correct, if we multiply it
by the average tonnage factor of 3.3 tons to a cubic
meter, the product is 21,809.7 tons, which is not very far
from the estimate of 24,000 tons made by appellee
Gaite, considering that actual weighing of each unit of
the mass was practically impossible, so that a reasonable
percentage of error should be allowed anyone making an
estimate of the exact quantity in tons found in the mass.
It must not be forgotten that the contract Exhibit "A"
expressly stated the amount to be 24,000 tons, more or
less. (ch. Pine River Logging & Improvement Co. vs
U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case
as would entitle appellants to the payment of damages,
nor could Gaite have been guilty of any fraud in making
any misrepresentation to appellants as to the total
quantity of ore in the stockpiles of the mining claims in
question, as charged by appellants, since Gaite's estimate
appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed
from, we hereby affirm the same, with costs against
appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera,
Paredes, Dizon, De Leon and Natividad, JJ., concur.
G.R. No. 112127 July 17, 1995
CENTRAL PHILIPPINE UNIVERSITY, petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO,
FRANCISCO N. LOPEZ, CECILIA P. VDA. DE
LOPEZ, REDAN LOPEZ AND REMARENE
LOPEZ, respondents.
BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this
petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional
Trial Court of Iloilo City directing petitioner to reconvey
to private respondents the property donated to it by their
predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who
was then a member of the Board of Trustees of the
Central Philippine College (now Central Philippine
University [CPU]), executed a deed of donation in favor
of the latter of a parcel of land identified as Lot No.
3174-B-1 of the subdivision plan Psd-1144, then a
portion of Lot No. 3174-B, for which Transfer
Certificate of Title No. T-3910-A was issued in the name
of the donee CPU with the following annotations copied
from the deed of donation —
121
1. The land described shall be utilized by the CPU
exclusively for the establishment and use of a medical
college with all its buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to
any third party nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ
CAMPUS", and the said college shall be under
obligation to erect a cornerstone bearing that name. Any
net income from the land or any of its parks shall be put
in a fund to be known as the "RAMON LOPEZ
CAMPUS FUND" to be used for improvements of said
campus and erection of a building thereon. 1
On 31 May 1989, private respondents, who are the heirs
of Don Ramon Lopez, Sr., filed an action for annulment
of donation, reconveyance and damages against CPU
alleging that since 1939 up to the time the action was
filed the latter had not complied with the conditions of
the donation. Private respondents also argued that
petitioner had in fact negotiated with the National
Housing Authority (NHA) to exchange the donated
property with another land owned by the latter.
In its answer petitioner alleged that the right of private
respondents to file the action had prescribed; that it did
not violate any of the conditions in the deed of donation
because it never used the donated property for any other
purpose than that for which it was intended; and, that it
did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner
failed to comply with the conditions of the donation and
declared it null and void. The court a quo further
directed petitioner to execute a deed of the reconveyance
of the property in favor of the heirs of the donor,
namely, private respondents herein.
Petitioner appealed to the Court of Appeals which on 18
June 1993 ruled that the annotations at the back of
petitioner's certificate of title were resolutory conditions
breach of which should terminate the rights of the donee
thus making the donation revocable.
The appellate court also found that while the first
condition mandated petitioner to utilize the donated
property for the establishment of a medical school, the

donor did not fix a period within which the condition
must be fulfilled, hence, until a period was fixed for the
fulfillment of the condition, petitioner could not be
considered as having failed to comply with its part of the
bargain. Thus, the appellate court rendered its decision
reversing the appealed decision and remanding the case
to the court of origin for the determination of the time
within which petitioner should comply with the first
condition annotated in the certificate of title.
Petitioner now alleges that the Court of Appeals erred:
(a) in holding that the quoted annotations in the
certificate of title of petitioner are onerous obligations
and resolutory conditions of the donation which must be
fulfilled non-compliance of which would render the
donation revocable; (b) in holding that the issue of
prescription does not deserve "disquisition;" and, (c) in
remanding the case to the trial court for the fixing of the
period within which petitioner would establish a medical
college. 2
We find it difficult to sustain the petition. A clear
perusal of the conditions set forth in the deed of donation
executed by Don Ramon Lopez, Sr., gives us no
alternative but to conclude that his donation was
onerous, one executed for a valuable consideration
which is considered the equivalent of the donation itself,
e.g., when a donation imposes a burden equivalent to the
value of the donation. A gift of land to the City of
Manila requiring the latter to erect schools, construct a
children's playground and open streets on the land was
considered an onerous donation. 3 Similarly, where Don
Ramon Lopez donated the subject parcel of land to
petitioner but imposed an obligation upon the latter to
establish a medical college thereon, the donation must be
for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional
obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall
depend upon the happening of the event which
constitutes the condition. Thus, when a person donates
land to another on the condition that the latter would
build upon the land a school, the condition imposed was
not a condition precedent or a suspensive condition but a
resolutory one. 4 It is not correct to say that the
schoolhouse had to be constructed before the donation
122
became effective, that is, before the donee could become
the owner of the land, otherwise, it would be invading
the property rights of the donor. The donation had to be
valid before the fulfillment of the condition. 5 If there
was no fulfillment or compliance with the condition,
such as what obtains in the instant case, the donation
may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and
extinguished.
The claim of petitioner that prescription bars the instant
action of private respondents is unavailing.
The condition imposed by the donor, i.e., the building of
a medical school upon the land donated, depended upon
the exclusive will of the donee as to when this condition
shall be fulfilled. When petitioner accepted the donation,
it bound itself to comply with the condition thereof.
Since the time within which the condition should be
fulfilled depended upon the exclusive will of the
petitioner, it has been held that its absolute acceptance
and the acknowledgment of its obligation provided in the
deed of donation were sufficient to prevent the statute of
limitations from barring the action of private
respondents upon the original contract which was the
deed of donation. 6
Moreover, the time from which the cause of action
accrued for the revocation of the donation and recovery
of the property donated cannot be specifically
determined in the instant case. A cause of action arises
when that which should have been done is not done, or
that which should not have been done is done. 7 In cases
where there is no special provision for such
computation, recourse must be had to the rule that the
period must be counted from the day on which the
corresponding action could have been instituted. It is the
legal possibility of bringing the action which determines
the starting point for the computation of the period. In
this case, the starting point begins with the expiration of
a reasonable period and opportunity for petitioner to
fulfill what has been charged upon it by the donor.
The period of time for the establishment of a medical
college and the necessary buildings and improvements
on the property cannot be quantified in a specific number
of years because of the presence of several factors and

circumstances involved in the erection of an educational
institution, such as government laws and regulations
pertaining to education, building requirements and
property restrictions which are beyond the control of the
donee.
Thus, when the obligation does not fix a period but from
its nature and circumstances it can be inferred that a
period was intended, the general rule provided in Art.
1197 of the Civil Code applies, which provides that the
courts may fix the duration thereof because the
fulfillment of the obligation itself cannot be demanded
until after the court has fixed the period for compliance
therewith and such period has arrived. 8
This general rule however cannot be applied considering
the different set of circumstances existing in the instant
case. More than a reasonable period of fifty (50) years
has already been allowed petitioner to avail of the
opportunity to comply with the condition even if it be
burdensome, to make the donation in its favor forever
valid. But, unfortunately, it failed to do so. Hence, there
is no more need to fix the duration of a term of the
obligation when such procedure would be a mere
technicality and formality and would serve no purpose
than to delay or lead to an unnecessary and expensive
multiplication of suits. 9 Moreover, under Art. 1191 of
the Civil Code, when one of the obligors cannot comply
with what is incumbent upon him, the obligee may seek
rescission and the court shall decree the same unless
there is just cause authorizing the fixing of a period. In
the absence of any just cause for the court to determine
the period of the compliance, there is no more obstacle
for the court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is
basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and
interests.10 Records are clear and facts are undisputed
that since the execution of the deed of donation up to the
time of filing of the instant action, petitioner has failed
to comply with its obligation as donee. Petitioner has
slept on its obligation for an unreasonable length of time.
Hence, it is only just and equitable now to declare the
subject donation already ineffective and, for all
purposes, revoked so that petitioner as donee should now
123
return the donated property to the heirs of the donor,
private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court
of Iloilo, Br. 34, of 31 May 1991 is REINSTATED and
AFFIRMED, and the decision of the Court of Appeals of
18 June 1993 is accordingly MODIFIED. Consequently,
petitioner is directed to reconvey to private respondents
Lot No. 3174-B-1 of the subdivision plan Psd-1144
covered by Transfer Certificate of Title No. T-3910-A
within thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.
Quiason and Kapunan, JJ., concur
Separate Opinions
DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the
donation in question is onerous considering the
conditions imposed by the donor on the donee which
created reciprocal obligations upon both parties. Beyond
that, I beg to disagree.
First of all, may I point out an inconsistency in the
majority opinion's description of the donation in
question. In one part, it says that the donation in question
is onerous. Thus, on page 4 it states:
We find it difficult to sustain the petition. A clear
perusal of the conditions set forth in the deed of donation
executed by Don Ramon Lopez, Sr., give us no
alternative but to conclude that his donation
was onerous, one executed for a valuable consideration
which is considered the equivalent of the donation itself,
e.g., when a donation imposes a burden equivalent to the
value of the donation . . . . (emphasis supplied)
Yet, in the last paragraph of page 8 it states that the
donation is basically a gratuitous one. The pertinent
portion thereof reads:

Finally, since the questioned deed of donation herein is
basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and
interest . . . (emphasis supplied)
Second, the discussion on conditional obligations is
unnecessary. There is no conditional obligation to speak
of in this case. It seems that the "conditions" imposed by
the donor and as the word is used in the law of donations
is confused with "conditions" as used in the law of
obligations. In his annotation of Article 764 of the Civil
Code on Donations, Arturo M. Tolentino, citing the
well-known civilists such as Castan, Perez Gonzalez and
Alguer, and Colin & Capitant, states clearly the context
within which the term "conditions" is used in the law of
donations, to wit:
The word "conditions" in this article does not refer to
uncertain events on which the birth or extinguishment of
a juridical relation depends, but is used in the vulgar
sense of obligations or charges imposed by the donor on
the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense. 1 (emphasis supplied)
Clearly then, when the law and the deed of donation
speaks of "conditions" of a donation, what are referred to
are actually the obligations, charges or burdens imposed
by the donor upon the donee and which would
characterize the donation as onerous. In the present case,
the donation is, quite obviously, onerous, but it is more
properly called a "modal donation." A modal donation is
one in which the donor imposes a prestation upon the
donee. The establishment of the medical college as the
condition of the donation in the present case is one such
prestation.
The conditions imposed by the donor Don Ramon Lopez
determines neither the existence nor the extinguishment
of the obligations of the donor and the donee with
respect to the donation. In fact, the conditions imposed
by Don Ramon Lopez upon the donee are the very
obligations of the donation — to build the medical
college and use the property for the purposes specified in
the deed of donation. It is very clear that those
obligations are unconditional, the fulfillment,
performance, existence or extinguishment of which is
124
not dependent on any future or uncertain event or past
and unknown event, as the Civil Code would define a
conditional obligation. 2
Reliance on the case of Parks vs. Province of Tarlac 3 as
cited on page 5 of the majority opinion is erroneous in so
far as the latter stated that the condition in Parks is a
resolutory one and applied this to the present case. A
more careful reading of this Court's decision would
reveal that nowhere did we say, whether explicitly or
impliedly, that the donation in that case, which also has a
condition imposed to build a school and a public park
upon the property donated, is a resolutory condition. 4 It
is incorrect to say that the "conditions" of the donation
there or in the present case are resolutory conditions
because, applying Article 1181 of the Civil Code, that
would mean that upon fulfillment of the conditions, the
rights already acquired will be extinguished. Obviously,
that could not have been the intention of the parties.
What the majority opinion probably had in mind was
that the conditions are resolutory because if they
are notcomplied with, the rights of the donee as such
will be extinguished and the donation will be revoked.
To my mind, though, it is more accurate to state that the
conditions here are not resolutory conditions but, for the
reasons stated above, are the obligations imposed by the
donor.
Third, I cannot subscribe to the view that the provisions
of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are
subject to a period. I draw this conclusion based on our
previous ruling which, although made almost 90 years
ago, still finds application in the present case.
In Barretto vs. City of Manila, 5 we said that when the
contract of donation, as the one involved therein, has no
fixed period in which the condition should be fulfilled,
the provisions of what is now Article 1197 (then Article
1128) are applicable and it is the duty of the court to fix
a suitable time for its fulfillment. Indeed, from the nature
and circumstances of the conditions/obligations of the
present donation, it can be inferred that a period was
contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long
period of time when in fact, he specifically burdened the
donee with the obligation to set up a medical college

therein and thus put his property to good use. There is a
need to fix the duration of the time within which the
conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the
performance of the conditions/obligations in the
donation in resolving the petitioner's claim that
prescription has already barred the present action. I
disagree once more with the ruling of the majority that
the action of the petitioners is not barred by the statute of
limitations. There is misplaced reliance again on a
previous decision of this Court in Osmeña vs.
Rama. 6 That case does not speak of a deed of donation
as erroneously quoted and cited by the majority opinion.
It speaks of a contract for a sum of money where the
debtor herself imposed a condition which will determine
when she will fulfill her obligation to pay the creditor,
thus, making the fulfillment of her obligation dependent
upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the
donee has not imposed any conditions on the fulfillment
of its obligations. Although it is admitted that the
fulfillment of the conditions/obligations of the present
donation may be dependent on the will of the donee as to
when it will comply therewith, this did not arise out of a
condition which the donee itself imposed. It is believed
that the donee was not meant to and does not have
absolute control over the time within which it will
perform its obligations. It must still do so within a
reasonable time. What that reasonable time is, under the
circumstances, for the courts to determine. Thus, the
mere fact that there is no time fixed as to when the
conditions of the donation are to be fulfilled does
not ipso factomean that the statute of limitations will not
apply anymore and the action to revoke the donation
becomes imprescriptible.
Admittedly, the donation now in question is an onerous
donation and is governed by the law on contracts
(Article 733) and the case of Osmeña, being one
involving a contract, may apply. But we must not lose
sight of the fact that it is still a donation for which this
Court itself applied the pertinent law to resolve
situations such as this. That the action to revoke the
donation can still prescribe has been the pronouncement
of this Court as early as 1926 in the case of Parks which,
125
on this point, finds relevance in this case. There, this
Court said,
[that] this action [for the revocation of the donation] is
prescriptible, there is no doubt. There is no legal
provision which excludes this class of action from the
statute of limitations. And not only this, the law itself
recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of
[four] years for the revocation by the subsequent birth of
children [Art. 646, now Art. 763], and . . . by reason of
ingratitude. If no special period is provided for the
prescription of the action for revocation for
noncompliance of the conditions of the donation [Art.
647, now Art. 764], it is because in this respect the
donation is considered onerous and is governed by the
law of contracts and the general rules of prescription. 7
More recently, in De Luna v. Abrigo, 8 this Court
reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code,
actions for the revocation of a donation must be brought
within four (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion
that said article does not apply to onerous donations in
view of the specific provision of Article 733 providing
that onerous donations are governed by the rules on
contracts.
In the light of the above, the rules on contracts and the
general rules on prescription and not the rules on
donations are applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers
to the prescription of an action upon a written contract,
which is what the deed of an onerous donation is. The
prescriptive period is ten years from the time the cause
of action accrues, and that is, from the expiration of the
time within which the donee must comply with the
conditions/obligations of the donation. As to when this
exactly is remains to be determined, and that is for the
courts to do as reposed upon them by Article 1197.
For the reasons expressed above, I register my dissent.
Accordingly, the decision of the Court of Appeals must
be upheld, except its ruling that the conditions of the
donation are resolutory.

Padilla, J., dissents
Separate Opinions
DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the
donation in question is onerous considering the
conditions imposed by the donor on the donee which
created reciprocal obligations upon both parties. Beyond
that, I beg to disagree.
First of all, may I point out an inconsistency in the
majority opinion's description of the donation in
question. In one part, it says that the donation in question
is onerous. Thus, on page 4 it states:
We find it difficult to sustain the petition. A clear
perusal of the conditions set forth in the deed of donation
executed by Don Ramon Lopez, Sr., give us no
alternative but to conclude that his donation
was onerous, one executed for a valuable consideration
which is considered the equivalent of the donation itself,
e.g., when a donation imposes a burden equivalent to the
value of the donation . . . . (emphasis supplied)
Yet, in the last paragraph of page 8 it states that the
donation is basically a gratuitous one. The pertinent
portion thereof reads:
Finally, since the questioned deed of donation herein is
basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and
interest . . . (emphasis supplied)
Second, the discussion on conditional obligations is
unnecessary. There is no conditional obligation to speak
of in this case. It seems that the "conditions" imposed by
the donor and as the word is used in the law of donations
is confused with "conditions" as used in the law of
obligations. In his annotation of Article 764 of the Civil
Code on Donations, Arturo M. Tolentino, citing the
well-known civilists such as Castan, Perez Gonzalez and
Alguer, and Colin & Capitant, states clearly the context
within which the term "conditions" is used in the law of
donations, to wit:
126
The word "conditions" in this article does not refer to
uncertain events on which the birth or extinguishment of
a juridical relation depends, but is used in the vulgar
sense of obligations or charges imposed by the donor on
the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense. 1 (emphasis supplied)
Clearly then, when the law and the deed of donation
speaks of "conditions" of a donation, what are referred to
are actually the obligations, charges or burdens imposed
by the donor upon the donee and which would
characterize the donation as onerous. In the present case,
the donation is, quite obviously, onerous, but it is more
properly called a "modal donation." A modal donation is
one in which the donor imposes a prestation upon the
donee. The establishment of the medical college as the
condition of the donation in the present case is one such
prestation.
The conditions imposed by the donor Don Ramon Lopez
determines neither the existence nor the extinguishment
of the obligations of the donor and the donee with
respect to the donation. In fact, the conditions imposed
by Don Ramon Lopez upon the donee are the very
obligations of the donation — to build the medical
college and use the property for the purposes specified in
the deed of donation. It is very clear that those
obligations are unconditional, the fulfillment,
performance, existence or extinguishment of which is
not dependent on any future or uncertain event or past
and unknown event, as the Civil Code would define a
conditional obligation. 2
Reliance on the case of Parks vs. Province of Tarlac 3 as
cited on page 5 of the majority opinion is erroneous in so
far as the latter stated that the condition in Parks is a
resolutory one and applied this to the present case. A
more careful reading of this Court's decision would
reveal that nowhere did we say, whether explicitly or
impliedly, that the donation in that case, which also has a
condition imposed to build a school and a public park
upon the property donated, is a resolutory condition. 4 It
is incorrect to say that the "conditions" of the donation
there or in the present case are resolutory conditions
because, applying Article 1181 of the Civil Code, that
would mean that upon fulfillment of the conditions, the

rights already acquired will be extinguished. Obviously,
that could not have been the intention of the parties.
What the majority opinion probably had in mind was
that the conditions are resolutory because if they
are notcomplied with, the rights of the donee as such
will be extinguished and the donation will be revoked.
To my mind, though, it is more accurate to state that the
conditions here are not resolutory conditions but, for the
reasons stated above, are the obligations imposed by the
donor.
Third, I cannot subscribe to the view that the provisions
of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are
subject to a period. I draw this conclusion based on our
previous ruling which, although made almost 90 years
ago, still finds application in the present case.
In Barretto vs. City of Manila, 5 we said that when the
contract of donation, as the one involved therein, has no
fixed period in which the condition should be fulfilled,
the provisions of what is now Article 1197 (then Article
1128) are applicable and it is the duty of the court to fix
a suitable time for its fulfillment. Indeed, from the nature
and circumstances of the conditions/obligations of the
present donation, it can be inferred that a period was
contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long
period of time when in fact, he specifically burdened the
donee with the obligation to set up a medical college
therein and thus put his property to good use. There is a
need to fix the duration of the time within which the
conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the
performance of the conditions/obligations in the
donation in resolving the petitioner's claim that
prescription has already barred the present action. I
disagree once more with the ruling of the majority that
the action of the petitioners is not barred by the statute of
limitations. There is misplaced reliance again on a
previous decision of this Court in Osmeña vs.
Rama. 6 That case does not speak of a deed of donation
as erroneously quoted and cited by the majority opinion.
It speaks of a contract for a sum of money where the
debtor herself imposed a condition which will determine
when she will fulfill her obligation to pay the creditor,
127
thus, making the fulfillment of her obligation dependent
upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the
donee has not imposed any conditions on the fulfillment
of its obligations. Although it is admitted that the
fulfillment of the conditions/obligations of the present
donation may be dependent on the will of the donee as to
when it will comply therewith, this did not arise out of a
condition which the donee itself imposed. It is believed
that the donee was not meant to and does not have
absolute control over the time within which it will
perform its obligations. It must still do so within a
reasonable time. What that reasonable time is, under the
circumstances, for the courts to determine. Thus, the
mere fact that there is no time fixed as to when the
conditions of the donation are to be fulfilled does
not ipso factomean that the statute of limitations will not
apply anymore and the action to revoke the donation
becomes imprescriptible.
Admittedly, the donation now in question is an onerous
donation and is governed by the law on contracts
(Article 733) and the case of Osmeña, being one
involving a contract, may apply. But we must not lose
sight of the fact that it is still a donation for which this
Court itself applied the pertinent law to resolve
situations such as this. That the action to revoke the
donation can still prescribe has been the pronouncement
of this Court as early as 1926 in the case of Parks which,
on this point, finds relevance in this case. There, this
Court said,
[that] this action [for the revocation of the donation] is
prescriptible, there is no doubt. There is no legal
provision which excludes this class of action from the
statute of limitations. And not only this, the law itself
recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of
[four] years for the revocation by the subsequent birth of
children [Art. 646, now Art. 763], and . . . by reason of
ingratitude. If no special period is provided for the
prescription of the action for revocation for
noncompliance of the conditions of the donation [Art.
647, now Art. 764], it is because in this respect the
donation is considered onerous and is governed by the
law of contracts and the general rules of prescription. 7

More recently, in De Luna v. Abrigo, 8 this Court
reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code,
actions for the revocation of a donation must be brought
within four (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion
that said article does not apply to onerous donations in
view of the specific provision of Article 733 providing
that onerous donations are governed by the rules on
contracts.
In the light of the above, the rules on contracts and the
general rules on prescription and not the rules on
donations are applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers
to the prescription of an action upon a written contract,
which is what the deed of an onerous donation is. The
prescriptive period is ten years from the time the cause
of action accrues, and that is, from the expiration of the
time within which the donee must comply with the
conditions/obligations of the donation. As to when this
exactly is remains to be determined, and that is for the
courts to do as reposed upon them by Article 1197.
For the reasons expressed above, I register my dissent.
Accordingly, the decision of the Court of Appeals must
be upheld, except its ruling that the conditions of the
donation are resolutory.
Padilla, J., dissents
Footnotes
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and
CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and
style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
128
Novation must be stated in clear and unequivocal terms
to extinguish an obligation. It cannot be presumed and
may be implied only if the old and new contracts are
incompatible on every point.
Before us is a petition for review on certiorari1 assailing
the Court of Appeals’ decision2 in CA-G.R. CV No.
95709, which stemmed from a complaint3 filed in the
Regional Trial Court of Valenzuela City, Branch 171,
for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap
papers, cartons, and other raw materials, under the name
Quality Paper and Plastic Products, Enterprises, to
factories engaged in the paper mill business.4 From
February 2007 to March 2007, he delivered scrap papers
worth 7,220,968.31 to Arco Pulp and Paper Company,
Inc. (Arco Pulp and Paper) through its Chief Executive
Officer and President, Candida A. Santos.5 The parties
allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver
to him their finished products of equivalent value.6
Dan T. Lim alleged that when he delivered the raw
materials, Arco Pulp and Paper issued a post-dated
check dated April 18, 20077 in the amount of
1,487,766.68 as partial payment, with the assurance that
the check would not bounce.8 When he deposited the
check on April 18, 2007, it was dishonored for being
drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric
Sy executed a memorandum of agreement10 where Arco
Pulp and Paper bound themselves to deliver their
finished products to Megapack Container Corporation,
owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by
Dan T. Lim, through his company, Quality Paper and
Plastic Products. The memorandum of agreement reads
as follows:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy that ARCO will deliver 600 tons Test Liner
150/175 GSM, full width 76 inches at the price

of P18.50 per kg. to Megapack Container for Mr. Eric
Sy’s account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials
to be used for the production of the above Test Liners
will be supplied by Quality Paper & Plastic Products
Ent., total of 600 Metric Tons at P6.50 per kg. (price
subject to change per advance notice). Quantity of Local
OCC delivery will be based on the quantity of Test Liner
delivered to Megapack Container Corp. based on the
above production schedule.11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp
and Paper demanding payment of the amount of
7,220,968.31, but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of
money with prayer for attachment with the Regional
Trial Court, Branch 171, Valenzuela City, on May 28,
2007. Arco Pulp and Paper filed its answer15 but failed to
have its representatives attend the pre-trial hearing.
Hence, the trial court allowed Dan T. Lim to present his
evidence ex parte.16
On September 19, 2008, the trial court rendered a
judgment in favor of Arco Pulp and Paper and dismissed
the complaint, holding that when Arco Pulp and Paper
and Eric Sy entered into the memorandum of agreement,
novation took place, which extinguished Arco Pulp and
Paper’s obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of
Appeals. According to him, novation did not take place
since the memorandum of agreement between Arco Pulp
and Paper and Eric Sy was an exclusive and private
agreement between them. He argued that if his name was
mentioned in the contract, it was only for supplying the
parties their required scrap papers, where his conformity
through a separate contract was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a
decision21 reversing and setting aside the judgment dated
September 19, 2008 and ordering Arco Pulp and Paper
to jointly and severally pay Dan T. Lim the amount
of P7,220,968.31 with interest at 12% per annum from
the time of demand; P50,000.00 moral
129
damages;P50,000.00 exemplary damages;
and P50,000.00 attorney’s fees.22
The appellate court ruled that the facts and
circumstances in this case clearly showed the existence
of an alternative obligation.23 It also ruled that Dan T.
Lim was entitled to damages and attorney’s fees due to
the bad faith exhibited by Arco Pulp and Paper in not
honoring its undertaking.24
Its motion for reconsideration25 having been
26
denied, Arco Pulp and Paper and its President and
Chief Executive Officer, Candida A. Santos, bring this
petition for review on certiorari.
On one hand, petitioners argue that the execution of the
memorandum of agreement constituted a novation of the
original obligation since Eric Sy became the new debtor
of respondent. They also argue that there is no legal
basis to hold petitioner Candida A. Santos personally
liable for the transaction that petitioner corporation
entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary
damages and attorney’s fees to respondent who did not
show proof that he was entitled to damages.27
Respondent, on the other hand, argues that the Court of
Appeals was correct in ruling that there was no proper
novation in this case. He argues that the Court of
Appeals was correct in ordering the payment of
7,220,968.31 with damages since the debt of petitioners
remains unpaid.28 He also argues that the Court of
Appeals was correct in holding petitioners solidarily
liable since petitioner Candida A. Santos was "the prime
mover for such outstanding corporate liability."29 In their
reply, petitioners reiterate that novation took place since
there was nothing in the memorandum of agreement
showing that the obligation was alternative. They also
argue that when respondent allowed them to deliver the
finished products to Eric Sy, the original obligation was
novated.30
A rejoinder was submitted by respondent, but it was
noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.31
The issues to be resolved by this court are as follows:
 130

1. Whether the obligation between the parties was either (1) pay the price or(2) deliver the finished
extinguished by novation products of equivalent value to respondent.35

2. Whether Candida A. Santos was solidarily liable with The appellate court, therefore, correctly identified the
Arco Pulp and Paper Co., Inc. obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper,
3. Whether moral damages, exemplary damages, and after receiving the raw materials from respondent, would
attorney’s fees can be awarded either pay him the price of the raw materials or, in the
alternative, deliver to him the finished products of
The petition is denied. equivalent value.

The obligation between the When petitioner Arco Pulp and Paper tendered a check
parties was an alternative to respondent in partial payment for the scrap papers,
obligation they exercised their option to pay the price.
Respondent’s receipt of the check and his subsequent act
The rule on alternative obligations is governed by of depositing it constituted his notice of petitioner Arco
Article 1199 of the Civil Code, which states: Pulp and Paper’s option to pay.

Article 1199. A person alternatively bound by different This choice was also shown by the terms of the
prestations shall completely perform one of them. memorandum of agreement, which was executed on the
same day. The memorandum declared in clear terms that
The creditor cannot be compelled to receive part of one the delivery of petitioner Arco Pulp and Paper’s finished
and part of the other undertaking. products would be to a third person, thereby
extinguishing the option to deliver the finished products
"In an alternative obligation, there is more than one of equivalent value to respondent.
object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally The memorandum of
has the right of election."32 The right of election is agreement did not constitute
extinguished when the party who may exercise that a novation of the original
option categorically and unequivocally makes his or her contract
choice known.33
The trial court erroneously ruled that the execution of the
The choice of the debtor must also be communicated to memorandum of agreement constituted a novation of the
the creditor who must receive notice of it since: The contract between the parties. When petitioner Arco Pulp
object of this notice is to give the creditor . . . and Paper opted instead to deliver the finished products
opportunity to express his consent, or to impugn the to a third person, it did not novate the original obligation
election made by the debtor, and only after said notice between the parties.
shall the election take legal effect when consented by the
creditor, or if impugned by the latter, when declared The rules on novation are outlined in the Civil Code,
proper by a competent court.34 thus:

According to the factual findings of the trial court and Article 1291. Obligations may be modified by:
the appellate court, the original contract between the
parties was for respondent to deliver scrap papers (1) Changing their object or principal conditions;
worth P7,220,968.31 to petitioner Arco Pulp and Paper.
The payment for this delivery became petitioner Arco (2) Substituting the person of the debtor;
Pulp and Paper’s obligation. By agreement, petitioner
Arco Pulp and Paper, as the debtor, had the option to

(3) Subrogating a third person in the rights of the
creditor. (1203)
Article 1292. In order that an obligation may be
extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point
incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be made
even without the knowledge or against the will of the
latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties
when there is a substitution of objects or debtors or when
there is subrogation of the creditor. It occurs only when
the new contract declares so "in unequivocal terms" or
that "the old and the new obligations be on every point
incompatible with each other."36
Novation was extensively discussed by this court in
Garcia v. Llamas:37
Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
Article 1293 of the Civil Code defines novation as
follows:
"Art. 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be made
even without the knowledge or against the will of the
latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned
in articles 1236 and 1237."
In general, there are two modes of substituting the
person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change
does not come from — and may even be made without
the knowledge of — the debtor, since it consists of a
third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the
creditor. In delegacion, the debtor offers, and the creditor
131
accepts, a third person who consents to the substitution
and assumes the obligation; thus, the consent of these
three persons are necessary. Both modes of substitution
by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former.
It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or
modificatory, novation is made either by changing the
object or the principal conditions, referred to as objective
or real novation; or by substituting the person of the
debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal
novation. For novation to take place, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express
when the new obligation declares in unequivocal terms
that the old obligation is extinguished. It is implied when
the new obligation is incompatible with the old one on
every point. The test of incompatibility is whether the
two obligations can stand together, each one with its
own independent existence.38 (Emphasis supplied)
Because novation requires that it be clear and
unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as
to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle — novatio non praesumitur
—that novation is never presumed.At bottom, for
novation tobe a jural reality, its animus must be ever
present, debitum pro debito — basically extinguishing
the old obligation for the new one.39 (Emphasis supplied)
There is nothing in the memorandum of agreement that
states that with its execution, the obligation of petitioner
Arco Pulp and Paper to respondent would be

extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as
respondent’s debtor. It merely shows that petitioner Arco
Pulp and Paper opted to deliver the finished products to
a third person instead.
The consent of the creditor must also be secured for the
novation to be valid:
Novation must be expressly consented to. Moreover, the
conflicting intention and acts of the parties underscore
the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by
the parties to novate the old agreement.40 (Emphasis
supplied)
In this case, respondent was not privy to the
memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first
line of the memorandum, which states:
Per meeting held at ARCO, April 18, 2007, it has been
mutually agreed between Mrs. Candida A. Santos and
Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate
the original agreement between the parties, respondent
must have first agreed to the substitution of Eric Sy as
his new debtor. The memorandum of agreement must
also state in clear and unequivocal terms that it has
replaced the original obligation of petitioner Arco Pulp
and Paper to respondent. Neither of these circumstances
is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial
payment to respondent also conflicts with their alleged
intent to pass on their obligation to Eric Sy. When
respondent sent his letter of demand to petitioner Arco
Pulp and Paper, and not to Eric Sy, it showed that the
former neither acknowledged nor consented to the latter
as his new debtor. These acts, when taken together,
clearly show that novation did not take place. Since there
was no novation, petitioner Arco Pulp and Paper’s
obligation to respondent remains valid and existing.
Petitioner Arco Pulp and Paper, therefore, must still pay
respondent the full amount of P7,220,968.31.
132
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages
may be awarded in case of breach of contract where the
breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal
ground for awarding moral damages if the court should
find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract
where the defendant acted fraudulently or in bad faith.
(Emphasis supplied)
Moral damages are not awarded as a matter of right but
only after the party claiming it proved that the breach
was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a
contract has been breached. They are recoverable only if
the party from whom it is claimed acted fraudulently or
in bad faith or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive.42
Further, the following requisites must be proven for the
recovery of moral damages:
An award of moral damages would require certain
conditions to be met, to wit: (1)first, there must be an
injury, whether physical, mental or psychological,
clearly sustained by the claimant; (2) second, there must
be culpable act or omission factually established; (3)
third, the wrongful act or omission of the defendant is
the proximate cause of the injury sustained by the
claimant; and (4) fourth, the award of damages is
predicated on any of the cases stated in Article 2219 of
the Civil Code.43
Here, the injury suffered by respondent is the loss
of P7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused
by petitioner Arco Pulp and Paper’s act of refusing to
pay its obligations.
When the obligation became due and demandable,
petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a

third person in an effort to evade its liability. This proves
the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code
provides that moral damages may be awarded in the
following instances:
Article 2219. Moral damages may be recovered in the
following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27,
28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not
specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of
the Civil Code, which states: Article 19. Every person
must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Persons who have the right to enter into contractual
relations must exercise that right with honesty and good
faith. Failure to do so results in an abuse of that right,
which may become the basis of an action for damages.
Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct
of human relations. By itself, it is not the basis of an
actionable tort. Article 19 describes the degree of care
133
required so that an actionable tort may arise when it is
alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully
or negligently causes damage to another, shall indemnify
the latter for the same.
Article 21.Any person who wilfully causes loss or injury
to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for
the damage.
To be actionable, Article 20 requires a violation of law,
while Article 21 only concerns with lawful acts that are
contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis
for an injury. It allows recovery should the act have been
willful or negligent. Willful may refer to the intention to
do the act and the desire to achieve the outcome which is
considered by the plaintiff in tort action as injurious.
Negligence may refer to a situation where the act was
consciously done but without intending the result which
the plaintiff considers as injurious.
Article 21, on the other hand, concerns injuries that may
be caused by acts which are not necessarily proscribed
by law. This article requires that the act be willful, that
is, that there was an intention to do the act and a desire
to achieve the outcome. In cases under Article 21, the
legal issues revolve around whether such outcome
should be considered a legal injury on the part of the
plaintiff or whether the commission of the act was done
in violation of the standards of care required in Article
19.45
When parties act in bad faith and do not faithfully
comply with their obligations under contract, they run
the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the
force of law between the contracting parties and should
be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the
instances where moral damages may be recovered since

it only specifies, among others, Article 21. When a party
reneges on his or her obligations arising from contracts
in bad faith, the act is not only contrary to morals, good
customs, and public policy; it is also a violation of
Article 1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but also
under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the
mere breach of the contract. Article 2220 requires that
the breach be done fraudulently or in bad faith. In
Adriano v. Lasala:46
To recover moral damages in an action for breach of
contract, the breach must be palpably wanton, reckless
and malicious, in bad faith, oppressive, or abusive.
Hence, the person claiming bad faith must prove its
existence by clear and convincing evidence for the law
always presumes good faith.
Bad faith does not simply connote bad judgment or
negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or
ill will that partakes of the nature of fraud. It is,
therefore, a question of intention, which can be inferred
from one’s conduct and/or contemporaneous
statements.47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the
intent of the doer, it requires an examination of the
circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in
partial payment of its obligation to respondent, it was
presumably with the knowledge that it was being drawn
against a closed account. Worse, it attempted to shift
their obligations to a third person without the consent of
respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a
dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty
through some motive or interest or ill will that partakes
of the nature of fraud."48 Moral damages may, therefore,
be awarded.
134
Exemplary damages may also be awarded. Under the
Civil Code, exemplary damages are due in the following
circumstances:
Article 2232. In contracts and quasi-contracts, the court
may award exemplary damages if the defendant acted in
a wanton, fraudulent, reckless, oppressive, or malevolent
manner.
Article 2233. Exemplary damages cannot be recovered
as a matter of right; the court will decide whether or not
they should be adjudicated.
Article 2234. While the amount of the exemplary
damages need not be proven, the plaintiff must show that
he is entitled to moral, temperate or compensatory
damages before the court may consider the question of
whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we
stated that:
The purpose of exemplary damages is to serve as a
deterrent to future and subsequent parties from the
commission of a similar offense. The case of People v.
Ranteciting People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages,
exemplary or corrective damages are intended to serve
as a deterrent to serious wrong doings, and as a
vindication of undue sufferings and wanton invasion of
the rights of an injured or a punishment for those guilty
of outrageous conduct. These terms are generally, but
not always, used interchangeably. In common law, there
is preference in the use of exemplary damages when the
award is to account for injury to feelings and for the
sense of indignity and humiliation suffered by a person
as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly
reprehensible conduct of the defendant—associated with
such circumstances as willfulness, wantonness, malice,
gross negligence or recklessness, oppression, insult or
fraud or gross fraud—that intensifies the injury. The
terms punitive or vindictive damages are often used to
refer to those species of damages that may be awarded
against a person to punish him for his outrageous
conduct. In either case, these damages are intended in

good measure to deter the wrongdoer and others like him
from similar conduct in the future.50 (Emphasis supplied;
citations omitted)
The requisites for the award of exemplary damages are
as follows:
(1) they may be imposed by way of example in addition
to compensatory damages, and only after the claimant's
right to them has been established;
(2) that they cannot be recovered as a matter of right,
their determination depending upon the amount of
compensatory damages that may be awarded to the
claimant; and
(3) the act must be accompanied by bad faith or done in
a wanton, fraudulent, oppressive or malevolent
manner.51
Business owners must always be forthright in their
dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were
freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper,
attorney’s fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's
fees and expenses of litigation, other than judicial costs,
cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was
erroneous since no evidence was adduced to prove that
the transaction was also a personal undertaking of
petitioner Santos. We disagree.
135
In Heirs of Fe Tan Uy v. International Exchange
Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is
a juridical entity which is vested with a legal personality
separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it.
Following this principle, obligations incurred by the
corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or
employee of a corporation is generally not held
personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or
an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to
confuse legitimate issues.
....
Before a director or officer of a corporation can be held
personally liable for corporate obligations, however, the
following requisites must concur: (1) the complainant
must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or
that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or
bad faith.
While it is true that the determination of the existence of
any of the circumstances that would warrant the piercing
of the veil of corporate fiction is a question of fact which
cannot be the subject of a petition for review on
certiorari under Rule 45, this Court can take cognizance
of factual issues if the findings of the lower court are not
supported by the evidence on record or are based on a
misapprehension of facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a
corporation cannot be held personally liable for
obligations incurred by the corporation. However, this
veil of corporate fiction may be pierced if complainant is
able to prove, as in this case, that (1) the officer is guilty
of negligence or bad faith, and (2) such negligence or
bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with
respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also
issued the check in partial payment of petitioner
corporation’s obligations to respondent on behalf of
petitioner Arco Pulp and Paper. This is clear on the face
of the check bearing the account name, "Arco Pulp &
Paper, Co., Inc."54 Any obligation arising from these acts
would not, ordinarily, be petitioner Santos’ personal
undertaking for which she would be solidarily liable
with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be
pierced. In Livesey v. Binswanger Philippines:55
Piercing the veil of corporate fiction is an equitable
doctrine developed to address situations where the
separate corporate personality of a corporation is abused
or used for wrongful purposes. Under the doctrine, the
corporate existence may be disregarded where the entity
is formed or used for non-legitimate purposes, such as to
evade a just and due obligation, or to justify a wrong, to
shield or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded
and the individuals composing it and the two
corporations will be treated as identical.56 (Emphasis
supplied)
According to the Court of Appeals, petitioner Santos
was solidarily liable with petitioner Arco Pulp and
Paper, stating that:
In the present case, We find bad faith on the part of the
[petitioners] when they unjustifiably refused to honor
their undertaking in favor of the [respondent]. After the
check in the amount of 1,487,766.68 issued by
[petitioner] Santos was dishonored for being drawn
against a closed account, [petitioner] corporation denied
any privity with [respondent]. These acts prompted the
[respondent] to avail of the remedies provided by law in
order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos
cannot be allowed to hide behind the corporate
veil.1âwphi1 When petitioner Arco Pulp and Paper’s
obligation to respondent became due and demandable,
136
she not only issued an unfunded check but also
contracted with a third party in an effort to shift
petitioner Arco Pulp and Paper’s liability. She
unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to
bad faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of
the decision dated August 13, 2013 in Nacar v. Gallery
Frames,59 the rate of interest due on the obligation must
be modified from 12% per annum to 6% per annum from
the time of demand.
Nacar effectively amended the guidelines stated in
Eastern Shipping v. Court of Appeals,60 and we have laid
down the following guidelines with regard to the rate of
legal interest:
To recapitulate and for future guidance, the guidelines
laid down in the case of Eastern Shipping Linesare
accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the
 137

rate of interest shall be 6% per annum to be computed Petitioners Arco Pulp & Paper Co., Inc. and Candida A.
from default, i.e., from judicial or extrajudicial demand Santos are hereby ordered solidarily to pay respondent
under and subject to the provisions of Article 1169 of the Dan T. Lim the amount of P7,220,968.31 with interest of
Civil Code. 6% per annum at the time of demand until finality of
judgment and its full satisfaction, with moral damages in
2. When an obligation, not constituting a loan or the amount of P50,000.00, exemplary damages in the
forbearance of money, is breached, an interest on the amount of P50,000.00, and attorney's fees in the amount
amount of damages awarded may be imposed at the of P50,000.00.
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made,
the interest shall begin to run only from the date the
judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.

3. When the judgment of the court awarding a sum of

money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.

And, in addition to the above, judgments that have

become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.61 (Emphasis
supplied; citations omitted.)

According to these guidelines, the interest due on the

obligation of P7,220,968.31 should now be at 6% per
annum, computed from May 5, 2007, when respondent
sent his letter of demand to petitioners. This interest
shall continue to be due from the finality of this decision
until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The

decision in CA-G.R. CV No. 95709 is AFFIRMED.