THIRD DIVISION

[G.R. No. 80479. July 28, 1989.]

AGUSTINA LIQUETTE TAN, petitioner, vs. COURT OF APPEALS AND SPS.
MARIANO SINGSON and VISITACION SINGSON, respondents.
Noe Villanueva for petitioner.
Jose Beltran for private respondents.
SYLLABUS
1.
CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION; POWER TO
RESCIND; IMPLIED IN RECIPROCAL OBLIGATIONS. That the power to rescind
obligations is implied in reciprocal ones in case one of the obligors should not
comply with what is incumbent upon him is clear from a reading of the Civil
Code provisions.
2.
ID.; ID.; ID.; HOW EFFECTED. In the absence of a stipulation to the
contrary, this power must be invoked judicially; it cannot be exercised solely on
a party's own judgment that the other has committed a breach of the
obligation.
3.
ID.; ID.; ID.; ALLOWED ONLY IN CASE OF SUBSTANTIAL BREACH.
Rescission will not be permitted for a slight or casual breach of the contract but
only for such breaches as are so substantial and fundamental as to defeat the
object of the parties in making the agreement.
4.
ID.; ID.; ID.; ID.; DETERMINATION OF SUBSTANTIAL BREACH ADDRESSED
TO THE SOUND DISCRETION OF THE COURT. A court, in determining whether
rescission is warranted, must exercise its discretion judiciously considering that
the question of whether a breach of a contract is substantial depends upon the
attendant circumstances.
5.
ID.; ID.; ID.; SLIGHT DELAY IN THE PERFORMANCE OF OBLIGATION WHERE
TIME IS NOT OF THE ESSENCE, NOT A GROUND. Where time is not the
essence in the agreement, a slight delay on the part of the party in the
performance of their obligation, is not sufficient ground for the resolution of the
agreement more so when the delay was not totally attributable to them.
6.
ID.; ID.; FAILURE OF A THIRD PERSON TO FULFILL THE CONDITION OF A
CONTRACT WILL NOT PREJUDICE THE RIGHTS OF THE OBLIGOR WHO HAVE
SUBSTANTIALLY COMPLIED WITH HIS OBLIGATION. Where the fulfillment of

the condition (in a conditional obligation) does not depend on the will of the
obligor, but on that of a third person, the obligor's part of the contract is
complied with, if he does all that is in his power and it then becomes incumbent
upon the other contracting party to comply with the terms of the contract.
7.
ID.; ID.; DELAY IS INCURRED BY A PARTY BY A DEMAND MADE BY THE
OTHER TO FULFILL OBLIGATION. Where the sellers are ready, willing and able
to comply with their obligation to deliver title to the property subject of the sale
and had already demanded that petitioner pay the full amount of the purchase
price, the petitioner must be considered as having incurred in delay.
8.
ID.; ID.; BREACH OF CONTRACT; REMEDY AVAILABLE TO AGGRIEVED
PARTY. The breach of a contract gives the aggrieved party under the law and
even under general principles of fairness, the right to rescind the contract or to
ask for specific performance.
9.
ID.; ID.; VOIDABLE CONTRACT; CONSENT MUST BE OBTAINED THROUGH
INSIDIOUS WORDS OR MACHINATIONS. The contract of sale is not voidable
where no evidence was shown that through insidious words or machinations
under Article 1338 of the Civil Code, the seller had induced the buyer to enter
into the contract.
10. ID.; ID.; COURT, WITH DISCRETIONARY POWER TO ALLOW A PERIOD
WITHIN WHICH AN OBLIGATION MAY BE PERFORMED. The Court is given a
discretionary power to allow a period within which a person in default may be
permitted to perform his obligation.
DECISION
CORTES, J p:
The instant petition for review raises the main issue of whether the private
respondents committed a substantial breach of their obligation so as to warrant
petitioner's exercise of her right to rescind the contract of sale under Article
1191 of the Civil Code.
The antecedents of the instant controversy had been summarized in the
respondent court's decision * as follows:
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The evidence shows that defendants-appellants spouses (private respondents

herein) are the owners of a house and lot located at No. 34 Easter Road, Baguio
City, and covered by T.C.T. No. T-13826, which were then for sale. On June 14,

1984, plaintiff-appellee together with her agent went to see said spouses at
their residence regarding the property. After appellants had shown appellee
around the house and had conversation about the encumbrances and/or liens
on the property, the parties finally agreed on the price of P1,800,000.00, with
appellee to advance earnest money of P200,000.00 to enable appellants to
secure the cancellation of the mortgage and lien annotated on the title of the
property and the balance of the price to be paid by appellee on June 21, 1984.
Forthwith, appellee handed to appellants a check for P200,000.00 and
thereupon the parties signed a receipt (Exh. A) in the following tenor:
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In turn, appellants handed to appellee a xerox copy of the title and other papers
pertaining to the property as well as an inventory of the furnishings of the
house that are included in the sale. There (3) days thereafter, i.e., on June 17,
1984, appellee returned to appellants' house together with her daughter
Corazon and one Ines, to ask for a reduction of the price to P1,750,000.00 and
appellants spouses agreed, and so another receipt entitled "Agreement" (Exh.
B) was signed by the parties as follows:
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The very same day that appellants received the earnest money of P200,000.00,
they started paying their mortgage loan with the Development Bank of the
Philippines (DBP) to clear up the title of the subject property. On June 14, 1984,
appellants paid the bank P30,000.00 per receipt, Exhibit B; on June 18, 1984
another P50,000.00 (Exh. 4-c); on June 29, 1984, P20,000.00 (Exh. 4-D); and on
July 5, 1984, P70,909.59 and another P19,886.60 (Exhs. 4-F and 4-G) in full
payment of the mortgage loan. On July 9, 1984, the DBP executed a cancellation
of mortgage, which was registered with the Registry of Property of Baguio City
in July 12, 1984. Appellants also paid all the taxes due and in arrears on the
property. It likewise appears that appellants paid in full on July 17, 1984 the cost
price of the 338 square meter lot which was awarded to appellant Visitacion
Singson per her townsite sale application for said property. And the request of
the City Sheriff of Baguio City to lift the notice of levy in execution dated
February 2, 1978 in Civil Case No. Q-10202, Pio S. Acampado, et al. v. Mariano D.
Singson, et al., was duly annotated on the back of TCT No. T-13826 on August 2,
1979.
On June 25, 1984, appellee accompanied by her daughter Corazon and her
lawyer, Atty. Vicente Quitoriano, went to Baguio City to inquire about the status

of the property and appellants told her that the Development Bank of the
Philippines was taking some time processing their payments and preparing the
deed of cancellation of the mortgage. On that occasion, the parties agreed on
an extension of two (2) weeks for the execution of the deed of sale. Here, the
parties' respective versions on the matter parted ways. According to appellants,
it was appellee who asked for the extension because she was not yet ready to
pay the balance of P1,550,000.00. On the other hand, appellee said that it was
appellants who asked for it because the title of the property was not yet
cleared. The court below believed appellee because on said date the
Development Bank had not yet executed the deed of cancellation of mortgage,
and no title has yet been issued for the driveway although already fully paid for.
Immediately, upon execution by the DBP of the deed of cancellation of
mortgage of July 9, 1984, appellants tried to contact appellee and/or her
daughter Corazon to come to Baguio City for the formal execution of the deed
of sale, but to no avail. Instead, appellants received a telegram from Atty.
Quitoriano cancelling the sale and demanding the return of the P200,000.00
earnest money. Appellants countered with a letter of their lawyer, Atty. Teofisto
Rodes, calling on appellee to perform her part of the contract because "the title
to the house and lot right now suffers no imperfection or doubt. The levy on
execution has long been lifted, the mortgage indebtedness released, the portion
of the public land used as driveway has long been awarded and fully paid for the
City of Baguio. In short, the title can now be transferred in your name upon
execution of the contract of sale. . . Your refusal will compel Us to sue for
specific performance . . ."
Before appellants could make good their threat, appellee "jumped the gun", so
to speak, upon them by filing in court on August 27, 1984 the case for recovery
of sum of money with damages which is now this case on appeal before us.
In her complaint, appellee alleged that she gave appellants spouses P200,000.00
upon their assurances that they could transfer to her the house and lot she was
buying from them free from any liens and encumbrances, including the
furnishings thereof and the adjacent lot being used as driveway, on June 25,
1984, but that day had come and passed without appellants being able to make
good their promise, because she "discovered to her shock and dismay that she
had been dealt with in bad faith by defendants" as the mortgage on the
property was not released or cancelled and the driveway was still public land
and could not be validly transferred to her as any disposition thereof would yet
require approval by the Secretary of Agriculture and Natural Resources. Hence,

the suit against appellants spouses for recovery of the P200,000.00 earnest
money which is, in essence and concept, one for rescission with damages.
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[CA Decision, pp. 1-6; Rollo, pp. 53-57.]

The Regional Trial Court which took cognizance of Civil Case No. 3709-V filed by
petitioner Agustina Liquette Tan rendered a decision disposing of the case as
follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants:
(1) Ordering the rescission of the contracts entered into by and between
plaintiff and the defendants, which are embodied in Exhs. "A" or "1 and "B" or
"2";
(2) Ordering the defendants, spouses Mariano Singson and Visitacion Singson
to return to plaintiff the P200,000.00 earnest money given by her to
defendants;
(3) Ordering the defendants to pay plaintiff interest at the rate of 12% per
annum on the P200,000.00 from the filing of the complaint until fully paid;
(4) Ordering the defendant (sic) to pay plaintiff moral damages in the sum of
P50,000.00;
(5) Ordering the defendants to pay plaintiff the amount of P20,000.00 as
attorney's fees; and
(6)

Ordering the defendants to pay the costs of this suit.

SO ORDERED. [Rollo. pp. 49-50.]

Private respondents interposed an appeal from said decision alleging that the
trial court erred.
I.
. . . in considering the consent of appellee to the agreement was vitiated
by fraud.
II.

. . . in resolving in favor of the appellee the sole right of rescission.

III. . . . in considering the adjacent lot as part of the sale agreed upon by the
parties.
IV.

. . . in deciding the case in favor of the appellee and awarding damages.

On August 24, 1987, the respondent Court of Appeals promulgated a decision

reversing that of the trial court, the decretal portion of which reads as follows:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE and a new one
is hereby entered ordering immediately upon the finality of this judgment
appellants spouses to execute and sign an absolute deed of sale conveying to
appellee free from any lien or encumbrance the house and lot covered by T.C.T.
No. 13826 of the Registry of Deeds of Baguio City together with the furnishings
and appliances listed in Exhibit C and the adjacent lot used as driveway covered
by the Order of Award, Exhibit E-3 and appellee to pay appellants spouses the
sum of P1,550,000.00 plus interest at the legal rate from the finality of this
judgment until fully paid.
SO ORDERED. [Rollo, p. 61.]
Petitioners filed the instant petition for review on certiorari assailing the
conclusion of the respondent Court of Appeals that the private respondents had
not committed a substantial breach of their obligation and therefore, there was
no legal basis for the judgment ordering rescission of the contract. Petitioners
maintain that since private respondents were not prepared to convey the title
to the subject property on the date agreed upon in view of the various liens and
encumbrances thereon, the former are entitled to rescind the contract pursuant
to Article 1191 of the Civil Code which states:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
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.
After a thorough examination of the allegations contained in the parties'
pleadings, the Court finds the instant petition to be devoid of any merit.

That the power to rescind obligations is implied in reciprocal ones in case one of
the obligors should not comply with what is incumbent upon him is clear from a
reading of the Civil Code provisions. However, it is equally settled that, in the
absence of a stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment that the other has
committed a breach of the obligation. Where there is nothing in the contract
empowering the petitioner to rescind it without resort to the courts, the
petitioner's action in unilaterally terminating the contract in this case is
unjustified [Philippine Amusement Enterprises, Inc. v. Natividad, G.R. No. L12876. September 29, 1967, 21 SCRA 284].
In this case, petitioner received on July 17, 1984 through her daughter Cora Tan
Singson, a telegram from private respondent Visitacion Singson advising the
former that the papers for the sale of the property are ready for final execution.
The parties likewise met on June 25, 1984, the day agreed upon for the full
payment of the purchase price, and they agreed on a further extension of two
weeks for the execution of the deed of sale. Despite this agreement, private
respondents suddenly received a telegram from Atty. Quitoriano, counsel for
the petitioner, unilaterally stopping the sale and demanding the return of the
earnest money paid by petitioner [Exhibit "9", Original Records, p. 99].
Petitioner, in rescinding the sale, claims that a substantial breach of the
obligation has been committed by the private respondents as indicated by the
following facts proved to be existing as of the date agreed upon for the
consummation of the sale:
1.
That no title has yet been issued by the Registry of Deeds of the City of
Baguio in the name of either of the respondents in connection with the 338square meter lot where the driveway is located;
2.
That the private respondents have not paid in full the total consideration
for the said lot to the City of Baguio because they were able to complete the
payment of the purchase price only on July 17, 1984 as found out by the
respondent court in its decision (Please see page 8 of the Court of Appeals'
decision, Annex "B");
3.
That private respondents have not acquired the "previous consent of the
Secretary of Natural Resources" for the said transfer to the petitioner as
required by the award;
4.
That the restrictions indicated in the AWARD makes whatever conveyance
to be made by the awardee of the lot within the prohibited period as null and

void and could cause the forfeiture of all the payments already made as well as
the improvements introduced therein;
5.
That there are still liens and encumbrances insofar as TCT No. T-13826
consisting of a mortgage with the DBP and a notice of levy and Writ of
Execution. [Rollo, pp. 14-15.]
Alternatively, petitioner seeks annulment of the contract on the ground of fraud
since private respondents had misrepresented to her that they could validly
convey title to the property subject of the contract which however is
encumbered with various existing liens.
1.
The alleged breach of the obligation by the private respondents, which
consists in a mere delay for a few days in clearing the title to the property,
cannot be considered substantial enough to warrant rescission of the contract.
A thorough review of the records clearly indicates that private respondents had
substantially complied with their undertaking of clearing the title to the
property which has a total land area of 886 square meters. It must be pointed
out that the subject lot consists of private land, with an area of 548 square
meters, covered by TCT No. T-13826 and of a portion of the public land which
has been awarded to the private respondents under Townsite Sales Application
No. 7-676-A. While TCT No. T-13826 was subject to a mortgage in favor of DBP,
private respondents, upon receipt of the earnest money paid by petitioner,
utilized the same to settle its obligations with DBP thus enabling them to secure
a cancellation of the existing mortgage, which was duly noted in the title to the
property [See Original Records, p. 94].
It is a settled principle of law that rescission will not be permitted for a slight or
casual breach of the contract but only for such breaches as are so substantial
and fundamental as to defeat the object of the parties in making the agreement
[Universal Food Corporation v. Court of Appeals, G.R. No. L-29155, May 13,
1970, 33 SCRA 1; Philippine Amusement Enterprises, Inc. v. Natividad, supra;
Roque v. Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741] . A court, in
determining whether rescission is warranted, must exercise its discretion
judiciously considering that the question of whether a breach of a contract is
substantial depends upon the attendant circumstances [Corpus v. Alikpala, et
al., G.R. Nos. L-23720 and L-23707, January 17, 1968, 22 SCRA 104].
In this case, as to the lot covered by TCT No. T-13826, it is true that as of June
25, 1984, the date set for the execution of the final deed of sale, the mortgage
lien in favor of DBP annotated in the title has not yet been cancelled as it took

DBP some time in processing the papers relative thereto. However, just a few
days after, or on July 12, 1984, the cancellation of the DBP mortgage was
entered by the Register of Deeds and duly noted on the title. Time not being of
the essence in the agreement, a slight delay on the part of the private
respondents in the performance of their obligation, is not sufficient ground for
the resolution of the agreement [Biando and Espanto v. Embestro and Bardaje,
105 Phil. 1164 (1959)], more so when the delay was not totally attributable to
them.
As to the notice of levy and execution annotated on TCT No. T-13826, a request
to lift the same had already been filed with the Register of Deeds and duly
noted on the title [Original Records, p. 95]. The fact that said notice had not yet
been cancelled by the Register of Deeds as of June 25, 1984 cannot prejudice
the sellers who must be deemed to have substantially complied with their
obligation. The rule in this jurisdiction is that where the fulfillment of the
condition (in a conditional obligation) does not depend on the will of the
obligor, but on that of a third person, the obligor's part of the contract is
complied with, if he does all that is in his power and it then becomes incumbent
upon the other contracting party to comply with the terms of the contract
[Article 1182, Civil Code; Smith Bell and Co. v. Sotelo Matti, 44 Phil. 874 (1922)].
On the other hand, private respondents' interest in the public land used as a
driveway can likewise be conveyed to petitioner although no title has yet been
issued in the name of Visitacion Singson. Such portion of the public land has
long been awarded to Singson in 1972 and payment of the purchase price
thereof has already been completed as of July 17, 1984. The fact that the
consent of the Secretary of Agriculture and Natural Resources to the sale of the
property to petitioner has not yet been secured cannot be considered a
substantial breach of private respondents' obligation under the contract of sale.
In Juanico and Barredo v. American Land Commercial Co., Inc., et al. [97 Phil.
221 1955)], this Court had ruled that the prior approval of the Secretary of
Agriculture and Natural Resources is required only in cases of sale and
encumbrance of the public land during the pendency of the application by the
purchaser and before his compliance with the requirements of the law. Thus:
. . . But such approval becomes unnecessary after the purchaser had complied
with all the requirements of the law, even if the patent has not been actually
issued, for in that case the rights of the purchaser are already deemed vested,
the issuance of the patent being a mere ceremony. Thus, "the execution and
delivery of the patent after the right to it has become complete, are the mere

ministerial acts of the officers charged with that duty" . . . And, as it has been
held, "One who has done everything which is necessary in order to entitle him
to receive a patent for public land has, even before the patent is actually issued
by the land department, a complete acquitable estate in the land which he can
sell and convey, mortgage or lease. A fortiori a contract to convey land made
before the issuance of a patent but after final proof has been made and the land
paid for is not illegal". . .
[At 227: Emphasis supplied.]
Here, since the land in question had already been awarded to private
respondents since 1972 and all the requirements of the law for the purchase of
public land were subsequently complied with, private respondents, as owners of
said property, can properly convey title thereto to petitioner.
Inasmuch as the private respondents are ready, willing and able to comply with
their obligation to deliver title to the property subject of the sale and had
already demanded that petitioner pay the full amount of the purchase price, the
petitioner must be considered as having incurred in delay. This conclusion is
warranted by the clear provision of Article 1169 of the Civil Code which states:
Art. 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extra-judicially demands from them the fulfillment
of their obligation.
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In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by
the other begins.
It is basic that the breach of a contract gives the aggrieved party under the law
and even under general principles of fairness, the right to rescind the contract
or to ask for specific performance [Nagarmull v. Binalbagan-Isabela Sugar Co.,
Inc., G.R. No. L-22470, May 28, 1970, 33 SCRA 46.] Petitioner having failed to
comply with her obligation of paying the balance of the purchase price despite
demands by private respondents, private respondents were clearly entitled to
their counterclaim for specific performance, as correctly adjudged by the
respondent court.
2.
The claim that petitioner's consent to the contract was vitiated by fraud
and, therefore, the contract in question is voidable is patently unmeritorious.

The contract of sale is not voidable where no evidence was shown that through
insidious words or machinations under Article 1338 of the Civil Code, the seller
had induced the buyer to enter into the contract (Caram v. Laureta, Jr., G.R. No.
L-28740, February 24, 1981, 103 SCRA 7].
In this case, the evidence on record fully supports the finding of the appellate
court that private respondents did not represent to petitioner that the house
and lot they were selling were free from liens and encumbrances. Rather, they
told her that the property was mortgaged to the DBP which was why they asked
her to advance P200,000.00 as earnest money so that they could settle the
mortgage indebtedness and clear up the title [Rollo, p. 60]. The testimony of
petitioner herself shows that she was furnished with xerox copies of the title, at
the back of which was a memorandum of the encumbrances of the property
[TSN, September 30, 1985, p. 4]. Further, it is undisputed that at the time
petitioner entered into the agreement in question, she was accompanied by her
daughter Corazon and one Maria Lorenzo whom she could have asked to
explain the particulars of the transaction that she could not understand [Rollo,
p. 61].
One final point, the decision of the respondent Court of Appeals ordered
execution by private respondents of the absolute deed of sale conveying the
subject property to petitioner and payment by petitioner of the balance of the
purchase price immediately upon finality of such judgment. However, under the
third paragraph of Article 1191 of the Civil Code, the Court is given a
discretionary power to allow a period within which a person in default may be
permitted to perform his obligation [Kapisanan Banahaw v. Dejarme and Alvero,
55 Phil. 339 (1930)]. Considering the huge amount of money involved in this
sale, the Court, in the exercise of its sound discretion, hereby fixes a period of
ninety (90) days within which petitioner shall pay the balance of the purchase
price amounting to one million and five hundred fifty thousand pesos
(P1,550,000.00) plus interest thereon at the legal rate from finality of this
judgment until fully paid. After such payment has been made, the private
respondents are ordered to sign and execute the necessary absolute deed of
sale in favor of petitioner.
WHEREFORE, the assailed decision of the respondent Court of Appeals granting
the counterclaim for specific performance of herein private respondents is
hereby AFFIRMED with the MODIFICATION that the petitioner is given a period
of ninety (90) days within which to pay the sum of one million and five hundred
fifty thousand pesos (P1,550,000.00) representing the balance of the purchase

price, with interest thereon at the legal rate from the finality of this judgment
until fully paid. The private respondents are ordered to sign and execute the
absolute deed of sale after the petitioner has completed payment of the
purchase price and the interest thereon.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.
Footnotes
*
Penned by Justice Manuel T. Reyes and concurred in by Justices Oscar R.
Victoriano and Hector C. Fule.

THIRD DIVISION
[G.R. No. 108346. July 11, 2001.]
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT
OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
Marciano J. Cagatan and Mariano R. Logarta for petitioners.
M.B. Tomacruz for private respondents.
SYNOPSIS
Petitioners entered into a deed of sale with assumption of mortgage with
private respondents paying a downpayment of P800,000 and assuming the
mortgage amount of P1.8M in favor of BPI. Petitioners further agreed "to
strictly and faithfully comply with all the terms and conditions appearing in the
real estate mortgage signed and executed by the vendor in favor of BPI . . . as if
the same were originally signed and executed by the vendee." As part of the
deed, petitioner Avelina with her husband's consent executed an undertaking
that during the pendency of the application for the assumption of mortgage she
agreed to continue paying said loan in accordance with the mortgage deed and
that in the event of violation of any of the terms and conditions of the deed of
real estate mortgage, she agreed that the P800,000 downpayment shall be
forfeited as liquidated damages and the deed of sale with assumption of
mortgage shall be deemed automatically cancelled. When the bank denied the
application for assumption of mortgage, petitioners stopped making payments.
Thus, notice of cancellation/rescission was sent to petitioners for nonperformance of their obligation. Aggrieved, petitioners filed a complaint against
private respondent for specific performance, nullity of cancellation, writ of
possession and damages. Both parties admitted that their agreement mandated
that petitioners should pay the purchase price balance of P1.8M to private
respondents in case the request to assume the mortgage would be disapproved.
The trial court dismissed the complaint, but on reconsideration, directed the
parties to proceed with the sale. On appeal, the Court of Appeals upheld the
validity of the rescission. Hence, this recourse. ADCIca
The failure of the vendee to pay the balance of the purchase price constitutes a
breach on the performance of a reciprocal obligation, and not a violation of the
terms and conditions of the mortgage contract. This gave rise to the vendor's
right to rescind the contract. However, the automatic rescission and forfeiture
of payment clauses in the mortgage contract does not apply. Considering that

the rescission of the contract was based on Article 1191 of the Civil Code,
mutual restitution by the parties is required.
SYLLABUS
1.
CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. In a
contract of sale, the seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer to pay therefor a price certain in
money or its equivalent. Private respondents had already performed their
obligation through the execution of the Deed of Sale, which effectively
transferred ownership of the property to petitioner through constructive
delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.
2.
ID.; ID.; RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING
OBLIGATION. The right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them. The breach contemplated in the said
provision is the obligor's failure to comply with an existing obligation. When the
obligor cannot comply with what is incumbent upon it, the obligee may seek
rescission and, in the absence of any just cause for the court to determine the
period of compliance, the court shall decree the rescission. IEHScT
3.
ID.; ID.; ID.; ID.; CASE AT BAR. In the present case, private respondents
validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase
price. Indubitably, the latter violated the very essence of reciprocity in the
contract of sale, a violation that consequently gave rise to private respondents'
right to rescind the same in accordance with law.
4.
ID.; ID.; ID.; FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH
WAS NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. As discussed
earlier, the breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of the
mortgage contract. Therefore, the automatic rescission and forfeiture of
payment clauses stipulated in the contract does not apply. Instead, Civil Code
provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their
original situation prior to the inception of the contract. Accordingly, the initial
payment of P800,000 and the corresponding mortgage payments in the

amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by

petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former.
5.
ID.; ID.; ID.; OBLIGATION CREATED. Rescission creates the obligation to
return the object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to restore. To
rescind is to declare a contract void at its inception and to put an end to it as
though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.
IDAEHT
DECISION
PANGANIBAN, J p:
A substantial breach of a reciprocal obligation, like failure to pay the price in the
manner prescribed by the contract, entitles the injured party to rescind the
obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received. CIcTAE
The Case
Before us is a Petition for Review on Certiorari 1 questioning the Decision 2 of
the Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well
as its Resolution 3 dated December 29, 1992 denying petitioner's motion for
reconsideration. 4
The dispositive portion of the assailed Decision reads:
"WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET
ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is
REINSTATED. The bonds posted by plaintiffs-appellees and defendantsappellants are hereby RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
" . . .. David Raymundo [herein private respondent] is the absolute and
registered owner of a parcel of land, together with the house and other
improvements thereon, located at 1918 Kamias St., Dasmarias Village, Makati
and covered by TCT No. 142177. Defendant George Raymundo [herein private

respondent] is David's father who negotiated with plaintiffs Avelina and

Mariano Velarde [herein petitioners] for the sale of said property, which was,
however, under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh.
'1', pp. 11-12, Record) was executed by defendant David Raymundo, as vendor,
in favor of plaintiff Avelina Velarde, as vendee, with the following terms and
conditions:
'xxx

xxx

xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND

PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby
acknowledged by the VENDOR from the VENDEE, to his entire and complete
satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and
valid title as provided by law, unto the VENDEE, her heirs, successors and
assigns, the parcel of land mentioned and described above, together with the
house and other improvements thereon.
'That the aforesaid parcel of land, together with the house and other
improvements thereon, were mortgaged by the VENDOR to the BANK OF THE
PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the payment of a loan of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, as evidenced by a Real Estate Mortgage signed and executed by the
VENDOR in favor of the said Bank of the Philippine Islands, on _________ and
which Real Estate Mortgage was ratified before Notary Public for Makati,
_________, as Doc. No. _____, Page No. ____, Book No. ____, Series of 1986 of
his Notarial Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to
pay the mortgage obligations on the property herein sold in the amount of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, in favor of Bank of the Philippine Islands, in the name of the VENDOR,
and further agrees to strictly and faithfully comply with all the terms and
conditions appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI, including interests and other charges for late payment
levied by the Bank, as if the same were originally signed and executed by the
VENDEE.
'It is further agreed and understood by the parties herein that the capital gains
tax and documentary stamps on the sale shall be for the account of the

VENDOR; whereas, the registration fees and transfer tax thereon shall be for the
account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina
Velarde, with the consent of her husband, Mariano, executed an Undertaking
(Exh. 'C', pp. 13-14, Record). the pertinent Portions of which read, as follows:
'xxx

xxx

xxx

'Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A.
Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, and assume the mortgage obligations on the property with
the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in
accordance with the terms and conditions of the Deed of Real Estate Mortgage
dated _________, signed and executed by Mr. David A. Raymundo with the said
Bank, acknowledged before Notary Public for Makati, ______, as Doc. No. ___,
Page No. ____, Book No. _____, Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage obligations
on the property is not yet approved by the mortgagee Bank, I have agreed to
pay the mortgage obligations on the property with the Bank in the name of Mr.
David A. Raymundo, in accordance with the terms and conditions of the said
Deed of Real Estate Mortgage, including all interests and other charges for late
payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A.
Raymundo, for purposes of attesting and confirming our private understanding
concerning the said mortgage obligations to be assumed. cCEAHT
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the
assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, with the Bank of the
Philippine islands, I, Mrs. Avelina D. Velarde, with the consent of my husband,
Mariano Z. Velarde, do hereby bind and obligate myself, my heirs, successors
and assigns, to strictly and faithfully comply with the following terms and
conditions:
'1. That until such time as my assumption of the mortgage obligations on the
property purchased is approved by the mortgagee bank, the Bank of the
Philippine Islands, I shall continue to pay the said loan in accordance with the

terms and conditions of the Deed of Real Estate Mortgage in the name of Mr.
David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and conditions of the said
Deed of Real Estate Mortgage, I hereby agree that my downpayment of
P800,000.00, plus all payments made with the Bank of the Philippine Islands on
the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and
by way of liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A. Raymundo shall resume total and
complete ownership and possession of the property sold by way of Deed of Sale
with Assumption of Mortgage, and the same shall be deemed automatically
cancelled and be of no further force or effect, in the same manner as if (the)
same had never been executed or entered into.
'3. That I am executing this Undertaking for purposes of binding myself, my
heirs, successors and assigns, to strictly and faithfully comply with the terms and
conditions of the mortgage obligations with the Bank of the Philippine Islands,
and the covenants, stipulations and provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified
above, [does] hereby confirm and agree to the undertakings of the Vendee
pertinent to the assumption of the mortgage obligations by the Vendee with the
Bank of the Philippine Islands. (Exh. 'C', pp. 13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David
Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8
million was from the proceeds of a loan that plaintiffs were to secure from a
bank with defendant's help. Defendants had a standing approved credit line
with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPI's approval of an application for assumption of mortgage by
plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue
paying the monthly interests of the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the
loan secured by the aforementioned mortgage for three (3) months as follows:
September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and
November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17 and 18, Record).

"On December 15, 1986, plaintiffs were advised that the Application for
Assumption of Mortgage with BPI was not approved (Exh. 'J', p. 133, Record).
This prompted plaintiffs not to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the
latter that their non-payment to the mortgage bank constitute[d] nonperformance of their obligation (Exh. '3', p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as
follows:
'This is to advise you, therefore, that our client is willing to pay the balance in
cash not later than January 21, 1987 provided: (a) you deliver actual possession
of the property to her not later than January 15, 1987 for her immediate
occupancy; (b) you cause the release of title and mortgage from the Bank of P.I.
and make the title available and free from any liens and encumbrances; and (c)
you execute an absolute deed of sale in her favor free from any liens or
encumbrances not later than January 21, 1987.' (Exhs. 'K', '4', p. 223, Record).
"On January 8, 1987, defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended sale of the subject property allegedly
due to the latter's failure to comply with the terms and conditions of the Deed
of Sale with Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226,
Record)." ' 6
Consequently, petitioners filed on February 9, 1987 a Complaint against private
respondents for specific performance, nullity of cancellation, writ of possession
and damages. This was docketed as Civil Case No. 15952 at the Regional Trial
Court of Makati, Branch 149. The case was tried and heard by then Judge
Consuelo Ynares-Santiago (now an associate justice of this Court), who
dismissed the Complaint in a Decision dated November 14, 1990. 7 Thereafter,
petitioners filed a Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals
and Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an
Order dated May 15, 1991, 9 Judge Abad Santos granted petitioners' Motion for
Reconsideration and directed the parties to proceed with the sale. He instructed
petitioners to pay the balance of P1.8 million to private respondents who, in
turn, were ordered to execute a deed of absolute sale and to surrender
possession of the disputed property to petitioners.
Private respondents appealed to the CA.

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge
Ynares-Santiago's earlier Decision dismissing petitioners' Complaint. Upholding
the validity of the rescission made by private respondents, the CA explained its
ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part
of the consideration of this sale, the VENDEE (Velarde)' would assume to pay
the mortgage obligation on the subject property in the amount of P1.8 million in
favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid
by the Vendee Velarde includes the downpayment of P800,000.00 and the
balance of P1.8 million, and the balance of P1.8 million cannot be paid in cash,
Vendee Velarde, as part of the consideration of the sale, had to assume the
mortgage obligation on the subject property. In other words, the assumption of
the mortgage obligation is part of the obligation of Velarde, as vendee, under
the contract. Velarde further agreed 'to strictly and faithfully comply with all the
terms and conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI . . . as if the same were originally signed
and executed by the Vendee.' (p. 2, thereof, p. 12, Record). This was reiterated
by Velarde in the document entitled 'Undertaking' wherein the latter agreed to
continue paying said loan in accordance with the terms and conditions of the
Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was
stipulated that in the event of violation by Velarde of any terms and conditions
of said deed of real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited and the
[D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be cancelled
automatically and of no force and effect (pars. 2 & 3, thereof, pp. 13-14,
Record).
"From these 2 documents, it is therefore clear that part of the consideration of
the sale was the assumption by Velarde of the mortgage obligation of
Raymundo in the amount of P1.8 million. This would mean that Velarde had to
make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage in the
name of Raymundo. The application with BPI for the approval of the assumption
of mortgage would mean that, in case of approval, payment of the mortgage
obligation will now be in the name of Velarde. And in the event said application
is disapproved, Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact
during the hearing on September 15, 1997 (p. 47, t.s.n., September 15, 1987;

see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the nonpayment of the mortgage obligation would result in a violation of the contract.
And, upon Velarde's failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions (1) demand fulfillment of the contract, or (2)
demand its rescission (Article 1191, Civil Code). IEHTaA
"The disapproval by BPI of the application for assumption of mortgage cannot
be used as an excuse for Velarde's non-payment of the balance of the purchase
price. As borne out by the evidence, Velarde had to pay in full in case of BPI's
disapproval of the application for assumption of mortgage. What Velarde should
have done was to pay the balance of P1.8 million. Instead, Velarde sent
Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given
weight by the lower court in reversing the decision rendered by then Judge
Ynares-Santiago. In said letter, Velarde registered their willingness to pay the
balance in cash but enumerated 3 new conditions which, to the mind of this
Court, would constitute a new undertaking or new agreement which is subject
to the consent or approval of Raymundo. These 3 conditions were not among
those previously agreed upon by Velarde and Raymundo. These are mere offers
or, at most, an attempt to novate. But then again, there can be no novation
because there was no agreement of all the parties to the new contract (Garcia,
Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage obligation, the
Deed of Sale with Assumption of Mortgage would be deemed 'automatically
cancelled and of no further force and effect, as if the same had never been
executed or entered into.' While it is true that even if the contract expressly
provided for automatic rescission upon failure to pay the price, the vendee may
still pay, he may do so only for as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act (Article
1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the
latter's failure to comply with their obligation. The rescission was justified in
view of Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the agreement. As
adverted to above, the agreement of the parties involved a reciprocal obligation
wherein the obligation of one is a resolutory condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind the
contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the
mortgage obligation by appellees Velarde would create a right to demand
payment or to rescind the contract, or to criminal prosecution (Edca Publishing

& Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellees' failure,
therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC,
184 SCRA 720). Consequently, appellees Velarde having violated the contract,
they have lost their right to its enforcement and hence, cannot avail of the
action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA
635)." 10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum, 12 interpose the following assignment of
errors:
"I
The Court of Appeals erred in holding that the non-payment of the mortgage
obligation resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission (resolution) of the
contract by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter
gave three 'new conditions' constituting mere offers or an attempt to novate
necessitating a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents' mortgage
obligation did not constitute a breach of contract, considering that their request
to assume the obligation had been disapproved by the mortgagee bank.
Accordingly, payment of the monthly amortizations ceased to be their
obligation and, instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they
also failed to pay the balance of the purchase price. As admitted by both

parties, their agreement mandated that petitioners should pay the purchase
price balance of P1.8 million to private respondents in case the request to
assume the mortgage would be disapproved. Thus, on December 15, 1986,
when petitioners received notice of the bank's disapproval of their application
to assume respondents' mortgage, they should have paid the balance of the
P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to
make such payment only upon the fulfillment of certain conditions not originally
agreed upon in the contract of sale. Such conditional offer to pay cannot take
the place of actual payment as would discharge the obligation of a buyer under
a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer to pay therefor a price certain in
money or its equivalent. 13
Private respondents had already performed their obligation through the
execution of the Deed of Sale, which effectively transferred ownership of the
property to petitioner through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of Sale is
deemed equivalent to delivery. 14
Petitioners, on the other hand, did not perform their correlative obligation of
paying the contract price in the manner agreed upon. Worse, they wanted
private respondents to perform obligations beyond those stipulated in the
contract before fulfilling their own obligation to pay the full purchase price.
IHcTDA
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private
respondents was not justified, inasmuch as the former had signified their
willingness to pay the balance of the purchase price only a little over a month
from the time they were notified of the disapproval of their application for
assumption of mortgage. Petitioners also aver that the breach of the contract
was not substantial as would warrant a rescission. They cite several cases 15 in
which this Court declared that rescission of a contract would not be permitted
for a slight or casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have already

made the initial payment of P800,000 and three (3) monthly mortgage
payments.
As pointed out earlier, the breach committed by petitioners was not so much
their nonpayment of the mortgage obligations, as their nonperformance of their
reciprocal obligation to pay the purchase price under the contract of sale.
Private respondents' right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:
"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 fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil
Code is predicated on a breach of faith by the other party who violates the
reciprocity between them. 16 The breach contemplated in the said provision is
the obligor's failure to comply with an existing obligation. 17 When the obligor
cannot comply with what is incumbent upon it, the obligee may seek rescission
and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission. 18
In the present case, private respondents validly exercised their right to rescind
the contract, because of the failure of petitioners to comply with their
obligation to pay the balance of the purchase price. Indubitably, the latter
violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents' right to rescind the same in
accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase
price one month after it became due; however, this was not equivalent to actual
payment as would constitute a faithful compliance of their reciprocal obligation.
Moreover, the offer to pay was conditioned on the performance by private
respondents of additional burdens that had not been agreed upon in the
original contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the exercise of the
right to rescind.

Misplaced is petitioners' reliance on the cases 19 they cited, because the factual
circumstances in those cases are not analogous to those in the present one. In
Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to
pay for the goods delivered. Moreover, the buyer's offer to pay was
unconditional and was accepted by the seller. In Zepeda, the breach involved a
mere one-week delay in paying the balance of P1,000, which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a few days,
which was for the purpose of clearing the title to the property; there was no
reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight
delay in payment or an irregularity; such breach would not normally defeat the
intention of the parties to the contract. Here, petitioners not only failed to pay
the P1.8 million balance, but they also imposed upon private respondents new
obligations as preconditions to the performance of their own obligation. In
effect, the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale. Hence,
private respondents were left with the legal option of seeking rescission to
protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the
nonperformance of a reciprocal obligation, not a violation of the terms and
conditions of the mortgage contract. Therefore, the automatic rescission and
forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this
controversy.
Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their
original situation prior to the inception of the contract. Accordingly, the initial
payment of P800,000 and the corresponding mortgage payments in the
amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former. IcTEaC
Rescission creates the obligation to return the object of the contract. It can be
carried out only when the one who demands rescission can return whatever he
may be obliged to restore. 20 To rescind is to declare a contract void at its

inception and to put an end to it as though it never was. It is not merely to

terminate it and release the parties from further obligations to each other, but
to abrogate it. from the beginning and restore the parties to their relative
positions as if no contract has been made. 21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to
discuss the third issue raised by petitioners. Suffice it to say that the three
conditions appearing on the January 7, 1987 letter of petitioners to private
respondents were not part of the original contract. By that time, it was already
incumbent upon the former to pay the balance of the sale price. They had no
right to demand preconditions to the fulfillment of their obligation, which had
become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION
that private respondents are ordered to return to petitioners the amount of
P874,150, which the latter paid as a consequence of the rescinded contract,
with legal interest thereon from January 8, 1987, the date of rescission. No
pronouncement as to costs.
SO ORDERED. SDHCac
Melo, Vitug and Sandoval-Gutierrez, JJ ., concur.
Gonzaga-Reyes, J ., is on leave.

FIRST DIVISION
[G.R. No. L-39378. August 28, 1984.]
GENEROSA AYSON-SIMON, plaintiff-appellee, vs. NICOLAS ADAMOS and
VICENTA FERIA, defendants-appellants.
Wenceslao V. Jarin for plaintiff-appellee.
Arnovit, Lacre & Adamos for defendants-appellants.
DECISION
MELENCIO-HERRERA, J p:
Originally, this was an appeal by defendants from the Decision of the then Court
of First Instance of Manila, Branch XX, in Civil Case No. 73942, to the Court of
Appeals (now Intermediate Appellate Court), which Tribunal, certified the case
to us because the issue is a pure question of law.
On December 13, 1943, Nicolas Adamos and Vicente Feria, defendantsappellants herein, purchased two lots forming part of the Piedad Estate in
Quezon City, with an area of approximately 56,395 square meters, from Juan
Porciuncula. Sometime thereafter, the successors-in-interest of the latter filed
Civil Case No. 174 in the then Court of First Instance of Quezon City for
annulment of the sale and the cancellation of Transfer Certificate of Title No.
69475, which had been issued to defendants-appellants by virtue of the
disputed sale. On December 18, 1963, the Court rendered a Decision annulling
the sale, cancelling TCT 69475, and authorizing the issuance of a new title in
favor of Porciuncula's successors-in-interest. The said judgment was affirmed by
the Appellate Court and had attained finality.
In the meantime, on May 29, 1946, during the pendency of the abovementioned case, defendants-appellants sold to GENEROSA Ayson Simon,
plaintiff-appellee herein, the two lots in question for P3,800.00 each, plus an
additional P800.00 paid subsequently for the purpose of facilitating the issuance
of new titles in GENEROSA's name. Due to the failure of defendants-appellants
to comply with their commitment to have the subdivision plan of the lots
approved and to deliver the titles and possession to GENEROSA, the latter filed
suit for specific performance before the Court of First Instance of Quezon City
on September 4, 1963 (Civil Case No. Q-7275). On January 20, 1964, said Court
ordered: LLpr

"WHEREFORE, the plaintiff is declared entitled to a summary judgment and the

defendants are hereby ordered to have the subdivision of Lot No. 6, Block No. 2,
and Lot No. 11, Block No. 3, relocated and resurveyed and the subdivision plan
approved and, if not possible for one reason or another, and in case of the
absence or loss of said subdivision, to cause and effect the subdivision of the
said lots and deliver the titles and possession thereof to the plaintiff. As to the
claim and counterclaim for damages, let the hearing thereon be deferred until
further move by the parties." 1
However, since execution of the foregoing Order was rendered impossible
because of the judgment in Civil Case No. 174, which earlier declared the sale of
the lots in question by Juan Porciuncula to defendants-appellants to be null and
void, GENEROSA filed, on August 16, 1968, another suit in the Court of First
Instance of Manila (Civil Case No. 73942) for rescission of the sale with
damages. On June 7, 1969, the Court rendered judgment, the dispositive
portion of which reads:
"WHEREFORE, judgment is rendered in favor of the plaintiff and against
defendants, ordering the latter jointly and severally, to pay the former the sum
of P7,600.00, the total amount received by them from her as purchase price of
the two lots, with legal rate of interest from May 29, 1946 until fully paid;
another sum of P800.00, with legal rate of interest from August 1, 1966 until
fully paid; the sum of P1,000 for attorney's fees; and the costs of this suit." 2
Hence, the appeal before the Appellate Court on the ground that GENEROSA's
action had prescribed, considering that she had only four years from May 29,
1946, the date of sale, within which to rescind said transaction, and that her
complaint for specific performance may be deemed as a waiver of her right to
rescission since the fulfillment and rescission of an obligation are alternative
and not cumulative remedies.
The appeal is without merit. The Trial Court presided by then Judge, later Court
of Appeals Associate Justice Luis B. Reyes, correctly resolved the issues,
reiterated in the assignments of error on appeal, as follows:
"Defendants contend (1) that the fulfillment and the rescission of the obligation
in reciprocal ones are alternative remedies, and plaintiff having chosen
fulfillment in Civil Case No. Q-7525, she cannot now seek rescission; and (2) that
even if plaintiff could seek rescission the action to rescind the obligation has
prescribed."

"The first contention is without merit. The rule that the injured party can only
choose between fulfillment and rescission of the obligation, and cannot have
both, applies when the obligation is possible of fulfillment. If, as in this case, the
fulfillment has become impossible, Article 1191 3 allows the injured party to
seek rescission even after he has chosen fulfillment.
"True it is that in Civil Case No. 7275 the Court already rendered a Decision in
favor of plaintiff, but since defendants cannot fulfill their obligation to deliver
the titles to and possession of the lots to plaintiff, the portion of the decision
requiring them to fulfill their obligations is without force and effect. Only that
portion relative to the payment of damages remains in the dispositive part of
the decision, since in either case (fulfillment or rescission) defendants may be
required to pay damages.
"The next question to determine is whether the action to rescind the obligation
has prescribed.
"Article 1191 of the Civil Code provides that the injured party may also seek
rescission, if the fulfillment should become impossible. The cause of action to
claim rescission arises when the fulfillment of the obligation became impossible
when the Court of First Instance of Quezon City in Civil Case No. 174 declared
the sale of the land to defendants by Juan Porciuncula a complete nullity and
ordered the cancellation of Transfer Certificate of Title No. 69475 issued to
them. Since the two lots sold to plaintiff by defendants form part of the land
involved in Civil Case No. 174, it became impossible for defendants to secure
and deliver the titles to and the possession of the lots to plaintiff. But plaintiff
had to wait for the finality of the decision in Civil Case No. 174. According to the
certification of the clerk of the Court of First Instance of Quezon City (Exhibit 'E2'), the decision in Civil Case No. 174 became final and executory 'as per entry of
Judgment dated May 3, 1967 of the Court of Appeals.' The action for rescission
must be commenced within four years from that date, May 3, 1967. Since the
complaint for rescission was filed on August 16, 1968, the four year period
within which the action must be commenced had not expired.
"Defendants have the obligation to return to plaintiff the amount of P7,600.00
representing the purchase price of the two lots, and the amount of P800.00
which they received from plaintiff to expedite the issuance of titles but which
they could not secure by reason of the decision in Civil Case No. 174. Defendant
has to pay interest at the legal rate on the amount of P7,600.00 from May 29,
1946, when they received the amount upon the execution of the deeds of sale,

and legal interest on the P800.00 from August 1, 1966, when they received the
same from plaintiff." 4
WHEREFORE, the appealed judgment of the former Court of First Instance of
Manila, Branch XX, in Civil Case No. 73942, dated June 7, 1969, is hereby
affirmed in toto. Costs against defendants-appellants. LibLex
SO ORDERED.
Teehankee, Actg. C.J., Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ., concur.

SECOND DIVISION
[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.
Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special
Counsel Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
SYLLABUS
1.
CIVIL LAW; CONTRACTS; BREACH OF CONTRACT; RESCISSION UNDER
ARTICLE 1191 OF THE CIVIL CODE. Where UP and ALUMCO had expressly
stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments"
that, upon default by the debtor LUMCO, 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," respondent Alumco's
contention that it is only after a final court decree declaring the contract
rescinded for violation of its terms that UP could disregard ALUMCO's rights
under the contract and treat the agreement as breached and of no force or
effect is untenable. In connection with Article 1191 of the Civil Code, it is not
always necessary for the injured party to resort to court for rescission of the
contract. (Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964,
12 SCRA 276)
2.
ID..; ID.; ID.; ID.; EXPLANATION. 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 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.
3.
ID.; ID.; ID.; ID.; WHEN JUDICIAL ACTION NECESSARY. There is no
conflict between the ruling that court action is not necessary to declare the
contract rescinded where there is agreement to such effect in case of violation
of the terms thereof and the previous jurisprudence of this court invoked by

respondent declaring that judicial action is necessary for the resolution of a

reciprocal obligation, 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.
4.
ID.; ID.; ID.; ID.; PRACTICAL EFFECT OF UNILATERAL RESCISSION. 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 the 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.
5.
ID.; ID.; ID.; ID.; ID.; CONSTRUCTION BY SUPREME COURT OF SPAIN. 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.
6.
ID.; ID.; ID.; ID.; COURT TO RECEIVE EVIDENCE ON ISSUES; FAILURE
THEREOF CONSTITUTES GRAVE ABUSE OF DISCRETION. 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 subsequently in
refusing to dissolve the injunction, were in grave abuse of discretion for the
following reasons: l) Existence of a prima facie case of breach of contract and
default in payment by respondent ALUMCO; 2) The fact that respondent
company had profited from its operations previous to agreement of December
2, 1964; 3) That the excuses offered for non-payment were not sufficient, and 4)
That whatever prejudice which may be suffered by ALUMCO is susceptible of
compensation in damages.
DECISION
REYES, J.B.L., J p:

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 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 may be 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."
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 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 despues que 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 resolucion como
una `facultad' atribuida a la parte perjudicada por el incumplimiento del
contrato, la cual tiene derecho de opcion entre exigir el cumplimiento " 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 Tribunales, 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, puede tener lugar con
eficacia: 1. Por la declaracion de voluntad de la otra hecha extraprocesalmente,
si no es impugnada en juicio luego con exito; y 2. Por la demanda de la
perjudicada, cuando no opta por el cumplimiento con la indemnizacion de
daos y perjuicios realmente causados, siempre que se acredite, adem s, una
actitud o conducta persistente y rebelde de la adversa o la satisfaccion de lo
pactado, a un hecho obstativo que de un modo absoluto, 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 nonpayment; and considering that whatever prejudice may be suffered by
respondent ALUMCO is susceptible 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
been 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., certifies that Mr. Chief Justice Concepcion is on official
leave.

FIRST DIVISION
[G.R. No. 57455. January 18, 1990.]
EVELYN DE LUNA, ROSALINA DE LUNA, PRUDENCIO DE LUNA, JR., WILLARD DE
LUNA, ANTONIO DE LUNA, and JOSELITO DE LUNA, petitioners, vs. HON.
SOFRONIO F. ABRIGO, Presiding Judge of the Court of First Instance of Quezon,
Branch IX, and LUZONIAN UNIVERSITY FOUNDATION, INC., respondents.
Milberto B. Zurbano for petitioners.
Jovito E. Talabong for private respondent.
SYLLABUS
1.
CIVIL LAW; DONATION; CLASSIFICATION AS TO MOTIVE, PURPOSE OR
CAUSE. From the viewpoint of motive, purpose or cause, donations may be 1)
simple, 2) remuneratory or 3) onerous. A simple donation is one the cause of
which is pure liberality (no strings attached). A remuneratory donation is one
where the donee gives something to reward past or future services or because
of future charges or burdens, when the value of said services, burdens or
charges is less than the value of the donation. An onerous donation is one which
is subject to burdens, charges or future services equal (or more) in value than
that of the thing donated (Edgardo L. Paras, Civil Code of the Philippines
Annotated, 11 ed., 726).
2.
ID.; ONEROUS DONATION GOVERNED BY RULES ON CONTRACT AND
GENERAL RULES ON PRESCRIPTION OF ACTION. Under the old Civil Code, it is
settled rule that donations with an onerous cause are governed not by the law
on donations but by the rules on contracts, as held in the cases of Carlos v.
Ramil, L-6736, September 5, 1911, 20 Phil. 183, Manalo vs. de Mesa, L-9449,
February 12, 1915, 29 Phil. 495. On the matter of prescription of actions for the
revocation of onerous donation, it was held that the general rules on
prescription applies. (Parks v. Province of Tarlac, supra.) The same rules apply
under the New Civil Code as provided in Article 733 thereof which provides:
"Article 733. Donations with an onerous cause shall be governed by the rules on
contracts, and remuneratory donations by the provisions of the present Title as
regards that portion which exceeds the value of the burden imposed."
3.
ID.; CONTRACTS; PARTIES THERETO HAVE THE RIGHT TO ESTABLISH
STIPULATIONS NOT CONTRARY TO LAW. Under Article 1306 of the New Civil
Code, the parties to a contract have the right "to establish such stipulations,
clauses, terms and conditions as they may deemed convenient, provided they

are not contrary to law, morals, good customs, public orders or public policy."
Paragraph 11 of the "Revival of Donation Intervivos, has provided that" violation
of any of the conditions (herein) shall cause the automatic reversion of the
donated area to the donor, his heirs, . . . , without the need of executing any
other document for that purpose and without obligation on the part of the
DONOR". Said stipulation not being contrary to law, morals, good customs,
public order or public policy, is valid and binding upon the foundation who
voluntarily consented thereto.
4.
ID.; ID.; JUDICIAL ACTION FOR RESCISSION OF CONTRACT NOT NECESSARY
WHEN SO STIPULATED. The validity of the stipulation in the contract
providing for the automatic reversion of the donated property to the donor
upon non-compliance cannot be doubted. It is in the nature of an agreement
granting a party the right to rescind a contract unilaterally in case of breach,
without need of going to court. Upon the happening of the resolutory condition
of non-compliance with the conditions of the contract, the donation is
automatically revoked without need of a judicial declaration to that effect. In
the case of University of the Philippines v. de los Angeles, L-28602, September
29, 1970, 35 SCRA 102-107, it was held: ". . . 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 (Froilan v. Pan Oriental Shipping Co., et al., L11897, 31 October 1964,12 SCRA 276)." This was reiterated in the case of
Angeles v. Calasanz, L-42283, March 18, 1985: "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,
334, 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)"
5.
REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENT ON THE PLEADING;
MOTION OF PARTY NECESSARY. On the matter of the donee's noncompliance with the conditions of the donation have been contested by private
respondents who claimed that improvements more valuable than the donated
property had been introduced, a judgment on the pleadings is not proper.
Moreover, in the absence of a motion for judgment on the pleadings, the court
cannot motu proprio render such judgment. Section 1 of Rule 19 provides:

"Where an answer fails to tender an issue, or otherwise admits the material

allegations of the adverse party's pleading, the court may, on motion of that
party, direct judgment on such pleading."
DECISION
MEDIALDEA, J p:
This is a petition for review on certiorari of the Order dated July, 7, 1981 of
respondent judge Sofronio F. Abrigo of the Court of First Instance of Quezon,
Branch IX in Civil Case No. 8624 dismissing the complaint of petitioners on the
ground of prescription of action.
The antecedent facts are as follows:
On January 24, 1965, Prudencio de Luna donated a portion of 7,500 square
meters of Lot No. 3707 of the Cadastral Survey of Lucena covered by Transfer
Certificate of Title No. 1-5775 to the Luzonian Colleges, Inc., (now Luzonian
University Foundation, Inc., herein referred to as the foundation). The donation,
embodied in a Deed of Donation Intervivos (Annex "A" of Petition) was subject
to certain terms and conditions and provided for the automatic reversion to the
donor of the donated property in case of violation or non-compliance (pars. 7
and 10 of Annex "A", p. 20, Rollo). The foundation failed to comply with the
conditions of the donation. On April 9, 1971, Prudencio de Luna "revived" the
said donation in favor of the foundation, in a document entitled "Revival of
Donation Intervivos" (Annex "B" of Petition) subject to terms and conditions
which among others, required:
xxx

xxx

xxx

"3. That the DONEE shall construct at its own expense a Chapel, a Nursery and
Kindergarten School, to be named after St. Veronica, and other constructions
and accessories shall be constructed on the land herein being donated strictly in
accordance with the plans and specifications prepared by the O.R. Quinto &
Associates and made part of this donation; provided that the flooring of the
Altar and parts of the Chapel shall be of granoletic marble.
"4. That the construction of the Chapel, Nursery and Kindergarten School shall
start immediately and must be at least SEVENTY (70) PER CENTUM finished by
the end of THREE (3) YEARS from the date hereof, however, the whole project
as drawn in the plans and specifications made parts of this donation must be
completed within FIVE (5) YEARS from the date hereon, unless extensions are
granted by the DONOR in writing;

" . . . ." (p. 23, Rollo)

As in the original deed of donation, the "Revival of Donation Intervivos" also
provided for the automatic reversion to the donor of the donated area in case
of violation of the conditions thereof, couched in the following terms:
xxx

xxx

xxx

"11. That violation of any of the conditions herein provided shall cause the
automatic reversion of the donated area to the donor, his heirs, assigns and
representatives, without the need of executing any other document for that
purpose and without obligation whatever on the part of the DONOR." (p. 24,
Rollo)
The foundation, through its president, accepted the donation in the same
document, subject to all the terms and conditions stated in the donation (p. 24,
Rollo). The donation was registered and annotated on April 15, 1971 in the
memorandum of encumbrances as Entry No. 17939 of Transfer Certificate of
Title No. T-5775 (p. 15, Rollo)
On August 3, 1971, Prudencio de Luna and the foundation executed a "Deed of
Segregation" (Annex "C" of Petition) whereby the area donated which is now
known as Lot No. 3707-B of Subdivision Plan Psd-40392 was adjudicated to the
foundation. As a result, Transfer Certificate of Title No. T-16152 was issued in
the name of the foundation. The remaining portion known as Lot No. 3707-A
was retained by the donor. (p. 16, Rollo).
On September 23, 1980, herein petitioners, Evelyn, Rosalina, Prudencio, Jr.,
Willard, Antonio and Joselito, all surnamed de Luna, who claim to be the
children and only heirs of the late Prudencio de Luna who died on August 18,
1980, filed a complaint (pp. 14-17, Rollo) with the Regional Trial Court of
Quezon alleging that the terms and conditions of the donation were not
complied with by the foundation. Among others, it prayed for the cancellation
of the donation and the reversion of the donated land to the heirs. The
complaint was docketed as Civil Case No. 8624.
In its answer (pp. 29-36, Rollo), respondent foundation claimed that it had
partially and substantially complied with the conditions of the donation and that
the donor has granted the foundation an indefinite extension of time to
complete the construction of the chapel. It also invoked the affirmative defense
of prescription of action and prayed for the dismissal of the complaint. prcd

During the pre-trial of the case, the foundation moved for a preliminary hearing
of its affirmative defense of prescription of action which was opposed by the
plaintiffs. After the parties have filed their respective written motions,
oppositions and memoranda, an Order (pp. 40-43, Rollo) dated July 7, 1981 was
issued dismissing the complaint. The dispositive portion of the Order states:
"In view of the foregoing considerations, this Court finds the motion to dismiss
deemed filed by the defendant on the ground of prescription to be well-taken
and the same is hereby GRANTED.
"WHEREFORE, the instant complaint is hereby ordered DISMISSED.
"No pronouncement as to costs.
"SO ORDERED." (pp. 42-43, Rollo)
No motion for reconsideration was filed by petitioners.
On July 22, 1981, petitioners brought the instant petition for review with the
following assignments of error:
"I. THE LOWER COURT ERRED IN HOLDING THAT THE DONEE'S CONSENT TO
THE REVOCATION OF A DONATION TO BE VALID MUST BE GIVEN SUBSEQUENT
TO THE EFFECTIVITY OF THE DONATION OR VIOLATION OF (THE) ANY OF THE
CONDITIONS IMPOSED THEREIN.
"II. THE LOWER COURT ERRED IN TREATING THE COMPLAINT AS ONE FOR
JUDICIAL DECREE OF REVOCATION OF THE DONATION IN QUESTION AS
CONTEMPLATED IN ARTICLE 764 OF THE CIVIL CODE OF THE PHILIPPINES AND
WHICH PRESCRIBES IN FOUR (4) YEARS AND IN NOT CONSIDERING IT AS AN
ACTION TO ENFORCE A WRITTEN CONTRACT WHICH PRESCRIBES IN TEN (10)
YEARS AS PROVIDED IN ARTICLE 1144, HENCE, THE LOWER COURT ERRED IN
DISMISSING THE COMPLAINT.
"III. THE LOWER COURT ERRED IN NOT RENDERING JUDGMENT ON THE
MERITS BY WAY OF JUDGMENT ON THE PLEADINGS." (pp. 1-2, Petitioner's Brief)
We gave due course to the petition on August 3, 1981 (p. 45, Rollo). After the
parties' submission of their respective briefs, the Court resolved to consider the
petition submitted for decision on January 27, 1982 (p. 62, Rollo).
The assailed order of the trial court stated that revocation (of a donation) will
be effective only either upon court judgment or upon consent of the donee as
held in the case of Parks v. Province of Tarlac, No. 24190, July 13, 1926, 49 Phil.

143. The trial court dismissed the claim of petitioners that the stipulation in the
donation providing for revocation in case of non-compliance of conditions in the
donation is tantamount to the consent of the donee, opining that the consent
contemplated by law should be such consent given by the donee subsequent to
the effectivity of the donation or violation of the conditions imposed therein.
The trial court further held that, far from consenting to the revocation, the
donee claimed that it had already substantially complied with the conditions of
the donation by introducing improvements in the property donated valued at
more than the amount of the donated land. In view thereof, a judicial decree
revoking the subject donation is necessary. Accordingly, under Article 764 of the
New Civil Code, actions to revoke a donation on the ground of non-compliance
with any of the conditions of the donation shall prescribe in four years counted
from such non-compliance. In the instant case, the four-year period for filing the
complaint for revocation commenced on April 9, 1976 and expired on April 9,
1980. Since the complaint was brought on September 23, 1980 or more than
five (5) months beyond the prescriptive period, it was already barred by
prescription. LLjur
On the other hand, petitioners argue that Article 764 of the New Civil Code was
adopted to provide a judicial remedy in case of non-fulfillment of conditions
when revocation of the donation has not been agreed upon by the parties. By
way of contrast, when there is a stipulation agreed upon by the parties
providing for revocation in case of non-compliance, no judicial action is
necessary. It is then petitioners' claim that the action filed before the Court of
First Instance of Quezon is not one for revocation of the donation under Article
764 of the New Civil Code which prescribes in four (4) years, but one to enforce
a written contract which prescribes in ten (10) years.
The petition is impressed with merit.
From the viewpoint of motive, purpose or cause, donations may be 1) simple, 2)
remuneratory or 3) onerous. A simple donation is one the cause of which is pure
liberality (no strings attached). A remuneratory donation is one where the
donee gives something to reward past or future services or because of future
charges or burdens, when the value of said services, burdens or charges is less
than the value of the donation. An onerous donation is one which is subject to
burdens, charges or future services equal (or more) in value than that of the
thing donated (Edgardo L. Paras, Civil Code of the Philippines Annotated, 11 ed.,
726).

It is the finding of the trial court, which is not disputed by the parties, that the
donation subject of this case is one with an onerous cause. It was made subject
to the burden requiring the donee to construct a chapel, a nursery and a
kindergarten school in the donated property within five years from execution of
the deed of donation.
Under the old Civil Code, it is settled rule that donations with an onerous cause
are governed not by the law on donations but by the rules on contracts, as held
in the cases of Carlos v. Ramil, L-6736, September 5, 1911, 20 Phil. 183, Manalo
vs. de Mesa, L-9449, February 12, 1915, 29 Phil. 495. On the matter of
prescription of actions for the revocation of onerous donation, it was held that
the general rules on prescription applies. (Parks v. Province of Tarlac, supra.)
The same rules apply under the New Civil Code as provided in Article 733
thereof which provides:
"Article 733.
Donations with an onerous cause shall be governed by the rules
on contracts, and remuneratory donations by the provisions of the present Title
as regards that portion which exceeds the value of the burden imposed."
It is true that Article 764 of the New Civil Code, actions for the revocation of a
donation must be brought within for (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion that the 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.
Under Article 1306 of the New Civil Code, the parties to a contract have the
right "to establish such stipulations, clauses, terms and conditions as they may
deemed convenient, provided they are not contrary to law, morals, good
customs, public orders or public policy." Paragraph 11 of the "Revival of
Donation Intervivos, has provided that" violation of any of the conditions
(herein) shall cause the automatic reversion of the donated area to the donor,
his heirs, . . . , without the need of executing any other document for that
purpose and without obligation on the part of the DONOR". Said stipulation not
being contrary to law, morals, good customs, public order or public policy, is
valid and binding upon the foundation who voluntarily consented thereto. prcd
The validity of the stipulation in the contract providing for the automatic
reversion of the donated property to the donor upon non-compliance cannot be
doubted. It is in the nature of an agreement granting a party the right to rescind

a contract unilaterally in case of breach, without need of going to court. Upon

the happening of the resolutory condition of non-compliance with the
conditions of the contract, the donation is automatically revoked without need
of a judicial declaration to that effect. In the case of University of the Philippines
v. de los Angeles, L-28602, September 29, 1970, 35 SCRA 102-107, it was held:
" . . . 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
(Froilan v. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964,12 SCRA
276)."
This was reiterated in the case of Angeles v. Calasanz, L-42283, March 18, 1985:
"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, 334, 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)".
However, in the University of the Philippines v. Angeles case, (supra), it was held
that in cases where one of the parties contests or denies the rescission, "only
the final award of the court of competent jurisdiction can conclusively settle
whether the resolution is proper or not." It was held, thus:.
" . . . 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."
It is clear, however, that judicial intervention is necessary not for purposes of
obtaining a judicial declaration rescinding a contract already deemed rescinded
by virtue of an agreement providing for rescission even without judicial
intervention, but in order to determine whether or not the rescission was
proper. prcd

The case of Parks v. Province of Tarlac, supra, relied upon by the trial court, is
not applicable in the case at bar. While the donation involved therein was also
onerous, there was no agreement in the donation providing for automatic
rescission, thus, the need for a judicial declaration revoking said donation.
The trial court was therefore not correct in holding that the complaint in the
case at bar is barred by prescription under Article 764 of the New Civil Code
because Article 764 does not apply to onerous donations.
As provided in the donation executed on April 9, 1971, compliance with the
terms and conditions of the contract of donation, shall be made within five (5)
years from its execution. The complaint which was filed on September 23, 1980
was then well within the ten (10) year prescriptive period to enforce a written
contract (Article 1144[1], New Civil Code), counted from April 9, 1976.
Finally, considering that the allegations in the complaint on the matter of the
donee's non-compliance with the conditions of the donation have been
contested by private respondents who claimed that improvements more
valuable than the donated property had been introduced, a judgment on the
pleadings is not proper. Moreover, in the absence of a motion for judgment on
the pleadings, the court cannot motu proprio render such judgment. Section 1
of Rule 19 provides: "Where an answer fails to tender an issue, or otherwise
admits the material allegations of the adverse party's pleading, the court may,
on motion of that party, direct judgment on such pleading." (Emphasis Ours)
ACCORDINGLY, the petition is GRANTED. Civil Case No. 8624 is hereby ordered
reinstated. Respondent judge is ordered to conduct a trial on the merits to
determine the propriety of the revocation of the subject donation.
SO ORDERED.
Narvasa, Cruz, Gancayco and Grio-Aquino, JJ., concur.

SECOND DIVISION
[G.R. No. L-56076. September 21, 1983.]
PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C. CLAVE, Presidential
Executive Assistant, NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT,
respondents.
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.
SYLLABUS
1.
CIVIL LAW; CONTRACTS; WRITTEN NOTICE STILL REQUIRED THOUGH
JUDICIAL ACTION NOT NECESSARY FOR RESCISSION. Well settled is the rule,
as held in previous jurisprudence Torralba vs. de Los Angeles, 96 SCRA 69) that
judicial action for the rescission of a contract is not necessary where the
contract provides that it may be revoked and canceled for violation of any of its
terms and conditions. However, even in the cited case, there was at least a
written notice sent to the defaulter informing him of the rescission. As stressed
in University of the Philippines vs. Walfrido de los Angeles, 33 SCRA 102 (1970)
the act of a party in treating a contract as cancelled should be made known to
the other.
2.
ID.; ID.; EXTRAJUDICIAL RESCISSION; EFFECTIVE IF NOT OPPOSED. A
stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex proprio vigore confer upon the
former the right to take possession thereof if objected to without judicial
intervention and determination (Nera vs. Vacante, 3 SCRA 505 (1961]). This was
reiterated in Zulueta vs. Mariano (111 SCRA 206 [1982]) where we held that
extrajudicial rescission has legal effect where the other party does not oppose it
(Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., p. 168, citing
Magdalena Estate vs. Myrick, 71 Phil. 344). In other words, resolution of
reciprocal contracts may be made extrajudicially unless successfully impugned
in Court. If the debtor impugns the declaration, it shall be subject to judicial
determination (UP vs. de los Angeles, supra).
3.
ID.; ID.; ID.; WAIVER OF RIGHT TO BE NOTIFIED; VALID ONLY WHERE
LIBERTY OF CHOICE FULLY ACCORDED. The indispensability of notice of
cancellation to the buyer was to be later underscored in Republic Act No. 6551
entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments" which took effect on September 14, 1972. The contention that

private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard
form of petitioner corporation, and private respondent had no freedom to
stipulate. A waiver must be certain and unequivocal, and intelligently made;
such waiver follows only where liberty of choice has been fully accorded
(Chavez vs. Court of Appeals, 24 SCRA 663, 682-683(1968]). Moreover, it is a
matter of public policy to protect buyers of real estate on installment payments
against onerous and oppressive conditions. Waiver of notice is one such
onerous and oppressive condition to buyers of real estate on installment
payments.
4.
ID.; ID.; ID.; RIGHT ACCORDED DEFAULTER. As a consequence of the
resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot.
However, considering that the property had already been sold to a third person
and there is no evidence on record that other lots are still available, private
respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action.
(Vercelus vs. Edano, 46 Phil. 801 [1924]). It would be most inequitable if
petitioners were to be allowed to retain private respondent's payments and at
the same time appropriate the proceeds of the second sale to another.
5.
CORPORATION LAW; CORPORATION; SEPARATE AND DISTINCT
PERSONALITY; PIERCING OF CORPORATE FICTION. It is basic that a
corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity
to which it may be related (Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1
SCRA 160 [1961]). As a general rule, a corporation may not be made to answer
for acts or liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate fiction may be
pierced when it is used as a shield to further an end subversive of justice (Emilio
Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 [1965]); or for purposes that could
not have been intended by the law that created it (McConnel vs. CA, 1 SCRA
722, 726 [1961]); or to defeat public convenience, justify wrong, protect fraud,
or defend crime (Yutivo Sons Hardware Co. vs. CTA, supra; McConnel vs. CA,
supra); or to perpetuate fraud or confuse legitimate issues (R.F. Sugay & Co.,
Inc. vs. Reyes, 12 SCRA 700 [1964]) or to circumvent the law or perpetuate
deception; (Gregorio Araneta, Inc. vs. De Paterno & Vidal, 91 Phil. 786 [1952]) or
as an alter ego, adjunct or business conduit for the sole benefit of the

stockholders (McConnel vs. CA, supra; Commissioner of Internal Revenue vs.

Norton Harrison Co., 120 Phil. 684 [1964]).
6.
ID.; ID.; ID.; MERE OWNERSHIP OF ALL CAPITAL STOCK; NOT GROUND FOR
DISREGARDING CORPORATE PERSONALITY. In this case, petitioner Onstott
was made liable because he was then the President of the corporation and he
appeared to be the controlling stockholder. No sufficient proof exists on record
that said petitioner used the corporation to defraud private respondent. He
cannot, therefore, be made personally liable just because he "appears to be the
controlling stockholder." Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality (Liddel &
Co. vs. Collector of Internal Revenue, 2 SCRA 632, 640 [1961]).
DECISION
MELENCIO-HERRERA, J p:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant
Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto
Onstott, jointly and severally, to refund to private respondent, Nazario Dumpit,
the amount of P13,722.50 with 12% interest per annum, as resolved by the
National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as
well as the Resolution of October 28, 1980 denying petitioners' Motion for
Reconsideration of said Resolution of May 2, 1980, are being assailed in this
petition. LLphil
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott,
executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a
parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in
Antipolo, Rizal, with an area of 1,165 square meters, covered by TCT No. 90454,
and owned by said corporation. The sale price was P23,300.00 with 9% interest
per annum, payable with a downpayment of P4,660.00 and monthly
installments of P246.42 until fully paid. Paragraph 6 of the contract provided for
automatic extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace period of
one month, without need of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting
to P13,722.50. The last payment was made on December 5, 1967 for
installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote
petitioner offering to update all his overdue accounts with interest, and seeking
its written consent to the assignment of his rights to a certain Lourdes Dizon. He
followed this up with another letter dated June 20, 1973 reiterating the same
request. Replying, petitioners informed respondent that his Contract to Sell had
long been rescinded pursuant to paragraph 6 of the contract, and that the lot
had already been resold.
Questioning the validity of the rescission of the contract, respondent filed a
letter complaint with the National Housing Authority (NHA) for reconveyance
with an alternative prayer for refund (Case No. 2167). In a Resolution, dated July
10, 1979, the NHA, finding the rescission void in the absence of either judicial or
notarial demand, ordered Palay, Inc. and Alberto Onstott, in his capacity as
President of the corporation, jointly and severally, to refund immediately to
Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of
the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of
said Resolution was denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA
Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential
Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA.
Reconsideration sought by petitioners was denied for lack of merit. Thus, the
present petition wherein the following issues are raised: LibLex
I
"Whether notice or demand is not mandatory under the circumstances and,
therefore, may be dispensed with by stipulation in a contract to sell.
II
Whether petitioners may be held liable for the refund of the installment
payments made by respondent Nazario M. Dumpit.
III
Whether the doctrine of piercing the veil of corporate fiction has application to
the case at bar.
IV
"Whether respondent Presidential Executive Assistant committed grave abuse
of discretion in upholding the decision of respondent NHA holding petitioners
solidarily liable for the refund of the installment payments made by respondent

Nazario M. Dumpit thereby denying substantial justice to the petitioners,

particularly petitioner Onstott."
We issued a Temporary Restraining Order on February 11, 1981 enjoining the
enforcement of the questioned Resolutions and of the Writ of Execution that
had been issued on December 2, 1980. On October 28, 1981, we dismissed the
petition but upon petitioners' motion, reconsidered the dismissal and gave due
course to the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in cancelling the
contract to sell without prior notice or demand upon respondent in view of
paragraph 6 thereof which provides:
"6. That in case the BUYER fails to satisfy any monthly installment, or any
other payments herein agreed upon, the BUYER shall be granted a month of
grace within which to make the payment of the account in arrears together with
the one corresponding to the said month of grace. It shall be understood,
however, that should the month of grace herein granted to the BUYER expire,
without the payments corresponding to both months having been satisfied, an
interest of ten (10%) per cent per annum shall be charged on the amounts the
BUYER should have paid; it is understood further, that should a period of
NINETY (90) DAYS elapse to begin from the expiration of the month of grace
hereinbefore mentioned, and the BUYER shall not have paid all the amounts
that the BUYER should have paid with the corresponding interest up to the date,
the SELLER shall have the right to declare this contract cancelled and of no
effect without notice, and as a consequence thereof, the SELLER may dispose of
the lot/lots covered by this Contract in favor of other persons, as if this contract
had never been entered into. In case of such cancellation of this Contract, all the
amounts which may have been paid by the BUYER in accordance with the
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 for liquidated damages suffered by virtue of the failure of the
BUYER to fulfill his part of this agreement: and the BUYER hereby renounces his
right to demand or reclaim the return of the same and further obligates himself
peacefully to vacate the premises and deliver the same to the SELLER."
Well settled is the rule, as held in previous jurisprudence, 2 that judicial action
for the rescission of a contract is not necessary where the contract provides that
it may be revoked and cancelled for violation of any of its terms and conditions.
However, even in the cited cases, there was at least a written notice sent to the
defaulter informing him of the rescission. As stressed in University of the

Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract
as cancelled should be made known to the other. We quote the pertinent
excerpt: LLpr
"Of course, it must be understood that the act of a party in treating a contract
as cancelled or resolved in 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 (Ocejo, Perez & Co., vs. International
Banking Corp., 37 Phil. 631; Republic vs. 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.
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." (Emphasis ours).
Of similar import is the ruling in Nera vs. Vacante 4 , reading:
"A stipulation entitling one party to take possession of the land and building if
the other party violates the contract does not ex proprio vigore confer upon the
former the right to take possession thereof if objected to without judicial
intervention and determination."
This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial
rescission has legal effect where the other party does not oppose it. 6 Where it
is objected to, a judicial determination of the issue is still necessary. LLjur
In other words, resolution of reciprocal contracts may be made extrajudicially
unless successfully impugned in Court. If the debtor impugns the declaration, it
shall be subject to judicial determination. 7
In this case, private respondent has denied that rescission is justified and has
resorted to judicial action. It is now for the Court to determine whether
resolution of the contract by petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and
inoperative against private respondent for lack of notice of resolution, as held in
the U.P. vs. Angeles case, supra.
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there
was no contract to rescind in court because from the moment the petitioner
defaulted in the timely payment of the installments, the contract between the
parties was deemed ipso facto rescinded." However, it should be noted that
even in that case notice in writing was made to the vendee of the cancellation
and annulment of the contract although the contract entitled the seller to
immediate repossessing of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to
Buyers of Real Estate on Installment Payments." which took effect on
September 14, 1972, when it specifically provided:
"Sec. 3(b) . . . the actual cancellation of the contract shall take place after thirty
days from receipt by the buyer of the notice of cancellation or the demand for

rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer." (Emphasis supplied).
The contention that private respondent had waived his right to be notified
under paragraph 6 of the contract is neither meritorious because it was a
contract of adhesion, a standard form of petitioner corporation, and private
respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of
choice has been fully accorded. 9 Moreover, it is a matter of public policy to
protect buyers of real estate on installment payments against onerous and
oppressive conditions. Waiver of notice is one such onerous and oppressive
condition to buyers of real estate on installment payments.
Regarding the second issue on refund of the installment payments made by
private respondent. Article 1385 of the Civil Code provides:
"ART. 1385.
Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith.
"In this case, indemnity for damages may be demanded from the person causing
the loss."
As a consequence of the resolution by petitioners, rights to the lot should be
restored to private respondent or the same should be replaced by another
acceptable lot. However, considering that the property had already been sold to
a third person and there is no evidence on record that other lots are still
available, private respondent is entitled to the refund of installments paid plus
interest at the legal rate of 12% computed from the date of the institution of
the action. 10 It would be most inequitable if petitioners were to be allowed to
retain private respondent's payments and at the same time appropriate the
proceeds of the second sale to another. cdphil
We come now to the third and fourth issues regarding the personal liability of
petitioner Onstott, who was made jointly and severally liable with petitioner
corporation for refund to private respondent of the total amount the latter had
paid to petitioner company. It is basic that a corporation is invested by law with

a personality separate and distinct from those of the persons composing it as

well as from that of any other legal entity to which it may be related. 11 As a
general rule, a corporation may not be made to answer for acts or liabilities of
its stockholders or those of the legal entities to which it may be connected and
vice versa. However, the veil of corporate fiction may be pierced when it is used
as a shield to further an end subversive of justice 12 ; or for purposes that
could not have been intended by the law that created it 13 ; or to defeat public
convenience, justify wrong, protect fraud, or defend crime
14 ; or to
perpetuate fraud or confuse legitimate issues; 15 or to circumvent the law or
perpetuate deception; 16 or as an alter ego, adjunct or business conduit for
the sole benefit of the stockholders. 17
We find no badges of fraud on petitioners part. They had literally relied, albeit
mistakenly, on paragraph 6 (supra) of its contract with private respondent when
it rescinded the contract to sell extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the
President of the corporation and he appeared to be the controlling stockholder.
No sufficient proof exists on record that said petitioner used the corporation to
defraud private respondent. He cannot, therefore, be made personally liable
just because he "appears to be the controlling stockholder". Mere ownership by
a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 18 In this respect then, a modification of the
Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public official, dated
May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to
respondent Nazario M. Dumpit the amount of P13,722.50, with interest at
twelve (12%) percent per annum from November 8, 1974, the date of the filing
of the Complaint. The temporary Restraining Order heretofore issued is hereby
lifted.
No costs.
SO ORDERED.
Plana, Relova and Gutierrez, Jr., JJ., concur.
Teehankee, J., concurs in the result.

EN BANC
[G.R. No. L-17858-9. July 13, 1962.]
MANUEL S. CAMUS, petitioner, vs. PRICE, INC., respondent.
[G.R. No. L-17865-6. July 13, 1962.]
PRICE, INC., vs. HON. COURT OF APPEALS and MANUEL S. CAMUS, respondents.
SYLLABUS
1.
CONTRACTS; LEASE; RECIPROCAL OBLIGATIONS; DEFAULT IN THE
PERFORMANCE OF CORRESPONDING DUTIES. Where, as in the present case,
both parties defaulted in the performance of their corresponding duties, but it
could not be determined with definiteness who of them committed the first
infraction of the terms of the contract, the parties are in pari delicto and the
contract is deemed extinguished, with the parties suffering their respective
loses.
2.
ID.; ID.; ID.; ID.; WHEN LESSEE MAY BE REQUIRED TO PAY FOR OCCUPANCY
OF PROPERTY. Considering that the lessee was in continuous occupancy of
the premises during the pendency of the case, conducting the pendency of the
case, conducting the operating its business therein and profiting thereby,
whereas the lessor was not only deprived of the possession of his property but
also of the rentals therefor, said lessee must be required to compensate the
lessor for such occupancy until it vacates the premises.
DECISION
BARRERA, J p:
On March 30, 1951, Manuel S. Camus and Price, Inc. entered into a contract of
lease, the pertinent terms of which read:
"1. That said party of the first part/Lessor (Manuel S. Camus) hereby grants,
demise and let the said party of the second part/Lessee (Price, Inc.), for lawful
business purposes, all that certain strong material building with the lot and
parcel of land, Nos. 15 and 16, Block No. 1, Tambobong Estate, Psd-11759 of
with an area of 1,700 square meters, situated, lying, and being at No. 60 C.
Arellano Street, Malabon, Rizal, covered as Lots the Rural Progress
Administration, to have and to hold the same for the full term of ten (10) years
from April 1, 1951 to March 31, 1960, inclusive, at the monthly of P300.00,
Philippine Currency, for the above-mentioned building, to be paid without the

necessity of express demand therefor on the 1st. five (5) days of each ensuing
month at the residence of the first part/Lessor at Malabon, Rizal; and also at the
monthly rental of One Hundred Pesos (P100.00) Philippine Currency, for the use
of the leased premises, payable beginning when the construction of the factory
is already finished, and likewise payable at the time and place aforementioned;
"2. That the party of the second part/Lessee, shall have or cause to erect,
build or construct a Factory building and Warehouse of strong materials
appropriate to or in furtherance of the business of the party of the second
part/Lessee, on the said lot, the plan as to the form and size and other
specifications thereof being subject to the joint approval of both parties
concerned, at the expense of the party of the second part/Lessee; and that the
buildings thereon constructed shall be insured with a competent Insurance
Company by the party of the second part/Lessee, in an amount equal to the
insurable interest of the party of the first part/Lessor, in the sum of the least
Fifty Thousand Pesos (P50,000.00) Philippine Currency, for himself, his heirs
and/or administrators as his beneficiary; and that the insured shall
automatically become, without cost, the property of the first part/Lessor,
immediately upon the termination of this contract;
xxx

xxx

xxx"

"5. That the party of the first part/Lessor likewise covenants and agrees to
cause or make the necessary filling, at his sole expense, within a year from the
signing of this contract, the vacant portion of the along the river with an area of
about 500 square meters of increase its elevation and enable the party of the
second part/Lessee, to facilitate or make use of the whole lot; as well as to
construct, building or cause to, erect the necessary concrete stone walls
provided with barbed with barbed wires on top thereof and all expenses
incurred or to incurred incident to the filing as well as to the construction,
building and erection of the stone walls, one (1) meter high, with barbed wire to
be borne solely by the party of the first part/Lessor;
xxx

xxx

xxx

"14. Provided, always, that in case of a breach of any of the covenants on the
part of the party of the second part/Lessee, herein contained, the party of the
first part/Lessor, may, while default the shall continue, and notwithstanding any
waiver of any prior breach of conditions, without notice or demand, enter upon
the premises, and thereby terminate this lease and may thereupon expel and
remove the party of the second part/Lessee;

"15. That it is still furthermore agreed that, in case of court litigation by virtue
of non-payment of the agreed rents or any other breach of this contract on the
part of the party of the second part/Lessee, the party of the first part/Lessor,
shall be entitled to collect P1,000.00 as liquidated damages and P500.00 as
attorney's fees, exclusive of cost legally taxable.". . . (Emphasis supplied.)
On January 19, 1954, the lessee instituted Civil Case No. 2582 of the court of
First Instance of Rizal against the lessor, for specific performance, damages and
extension of the period of the lease, allegedly due to the latter's failure to
comply with the aforequoted provisions of paragraph 5 of the contract. These
days later, or on January 22, 1954, the Lessor, in turn, filed in the Justice of the
Peace Court of Malabon an action for unlawful detainer (ejectment) against the
Lessee (Civil Case No. 1159), allegedly by reason of said defendant's nonpayment of rentals since February 16, 1953.
On February 10, 1954, the justice of the Peace Court rendered a decision in the
ejectment case, in favor of the lessor, ordering the Lessee to vacate the
premises and pay the plaintiff Lessor rentals in arrears amounting until it finally
delivers possession of the property to the Lessor; liquidate damages in the sum
of P1,000.00; attorney's fees for P500.00 and costs.
The Lessee appealed to the Court of First Instance of Rizal, filing therein a cash
bond to cover the amounts adjudged by the Justice of the Peace Court, as well
as the current rentals. The Lessor then filed a motion for execution of the
decision appealed from, which was opposed by the Lessee. As the Court of First
Instance granted said motion for execution, the Lessee instituted certiorari
proceedings in this Court (G.R. No. L-8253).
In issuing the writ of certiorari prayed for therein, 1 on the ground that the CFI
Judge committed a grave abuse of discretion in issuing an order for the
execution of the decision of the Justice of the Peace Court despite the "strong
equities in favor of Price (Lessee) and the dubious legality or propriety of the
decision of the justice of the peace court", this Court said:
"In their answer, respondents (Camus, et al.) admit some of the allegations of
the petition and deny other allegations thereof. Among other things, they,
moreover, allege that the obligations of Camus, under the contract of lease, are
independent of those of Price: that the filling and construction provided in said
contract, have 'already been totally' completed; and that the order of July 24,
1954, and the writ of execution were duly issued, for Price had failed, either to
pay, or to deposit, the amount of the rentals for April, May and June, 1954.

"At the outset, it should be noted that the very pictures submitted by
respondents, as Annexes 9 and 10 to their answer, dated October 11, 1954,
show that the stone wall constructed by Camus is of 'adobe', and has no barbed
wire fence, whereas the contract of lease provides for 'concrete stone walls . . .
with barbed wire.' Furthermore, although the portion of the leased property
reproduced in Annex 9 appears to have been filed, there is evidence (which has
not been contradicted) to the effect that the elevation of said portion is lower
by 40 centimeters than the average elevation of said property (see Annex L).
Moreover, the pictures Annexes M, N, and O, taken on February 16, 1954,
reveal that said portion was then unfilled and even under water. Anyhow, it is
completed within the year, which expired on March 20, 1952, stipulated in the
contract of lease. In fact, the answer filed by respondents before this Court
impliedly admits the failure of Camus to make the filling and construction within
said period. . .
"At any rate, there is prima facie, if not strong evidence that Camus had not
complied with some of his obligations under the contract dates back to March
20, 1952, or about eleven (11) months prior to the alleged default of Price in the
payment of rentals (or from February 16, 1953). . . .
It was then held that the obligations of the parties in the contract being
reciprocal, the Lessee did not incur delay until the Lessor complies with what
was incumbent upon him applying Article 1169 of the Civil Code.
After the case was remanded to the lower court for further proceedings, the 2
cases Civil Cases Nos. 2582 (for specific performance filed by Price, Inc.) and
2650 (for unlawful detainer by Camus) were tried jointly during the parties
adduced evidence in support of their respective allegations. Later, the trial court
rendered judgment ordering (1) the cancellation and return of the bond to the
Lessee (Price, Inc.); (2) said Lessee to insure the factory building and warehouse
for P50,000.00 within 1 month; and (3) the Lessor Camus to fill up the low
portion of the leased premises and enclose the from compliance by the Lessor
of his aforementioned obligation.
Only the lessor, Manuel Camus, appealed to the Court of Appeals.
The Case.
In its decision of September 14, 1960, the court of Appeals, passing upon the
respective obligations of the parties under the contract stated:

". . ., it was proved that the lot along the Malabon River, obviously an accretion
of lots Nos. 15 and 16, was declared for tax purposes by Ricardo, now
represented by his widow, Rosario Sevilla Vda. de Camus, on March 12, 1951
(Tax Declaration No. 10202), and he had been paying taxes therefor as follows:
for 1948, 1949, 1950 and 1951 paid on March 15, 1951, for 1952, on March 26,
1952, for 1953 on March 30, 1953, for 1954 on March 17,, 1954, and for 1955
on March 30, 1955 (Exh. 14-B). This shows that prior to March 20, 1951, when
the contract of lease was executed and prior to the filing of civil case No. 2582
by appellee (Price Inc.) against appellant (Camus), Ricardo had already been
claiming the possession, if not the ownership, of the lot bordering the river,
which had accumulated by gradual accretion a total area of 1,425 square
meters, the same having been determined even prior to the execution of the
contract of lease as shown in the tax declaration issued on March 12, 1951. . . .
". . . Nevertheless, we cannot sustain appellant's contention that the 500 square
meters which he obligated himself to fill up and construct a fence should be
inside the boundaries of lots Nos. 15 and 16, irrespective of the vacant space
therein, because paragraph 5 of the contract of lease is clear that said portion of
500 square meters is along the Malabon River. This portion is separate and
distinct from the 1,700 (should be 1,761) square meters of land leased under
paragraph 1 of said contract. Still, it is unreasonable to conclude that appellant
intended to include the entire area of 1,425 square meters along the river, nor
that he only miscalculated the exact area thereof, as the land he leased to
appellee. Under the stated facts, we, therefor, hold that appellant, with the
apparent conformity of Sy Suan, referred in paragraph 5 of the contract of lease
to only a portion of 500 square of the entire area containing 1,425 square
meters, and that he bound himself to fill up said portion at his expense and to
enclose with a one-meter high stone wall and barbed wire on top within a
period of one year from March 20, 1951.
"To require appellant, as the lower court held, to finish filling up the entire area
bordering the Malabon River and to surround it with a concrete wall throughout
the river bank, would seem unfair to said appellant and contrary to the true
intention of the parties in the contract of lease, the principal reason being that
the entire area of the lot along the river is undisputedly 1,425 square meters,
and not only 500 square meters as stipulated in paragraph 5 of the contract.
Besides, it is illogical to allow appellee to utilize more than 500 square meters.
Neither would it be just to compel appellant to incur expenses in filling up and
building a fence for more than 500 square meters, even if appellee allegedly
planned to build a 'hot room' and 'cool-room'. However, in failing to fill up 500

square meters of the vacant lot along the Malabon River, appellant just the
same violated the contract.
". . . Although we subscribe to the view that reciprocal obligations are embodied
in the contract of lease, yet we cannot see our way clear that it was appellant
who first committed the breach thereof. Undoubtedly, appellee did not insure
the factory building and warehouse. Sy Suan's testimony on this point that he
tried to insure but the premiums charged were too high on account of the
absence of a stone wall along the river bank, is unmeritorious. When asked, he
could not even mention the name of the insurance company he approached,
much less the amount of premiums allegedly charged.
"Moreover, upon failure of appellee to pay rentals, appellant wrote it a letter on
January 4, 1954. The question of filling up the vacant lot along the river in
accordance with paragraph 5 of the contract of lease was brought up by
appellee only in its letter or reply dated January 11, 1954. As things stand, in so
far as the third issue is concerned, we cannot really determine who between the
parties was actually the first who violated the contract. What we see, that the
parties are in pari delicto. . ."
Based on the foregoing findings, the Court of Appeals declared the contract
extinguished, but the parties were made to bear their own losses. (Art. 1192,
Civil Code). However, as the Lessee was found to be in continued possession of
the parties and in operation of its business during the pendency of the case, it
was ordered to compensate the Lessor in the sum of P200.00 a month from
February 16, 1953 until it vacated the premises. Furthermore, the lifetime of the
contract, having expired on March 31, 1960, the factory building and the
warehouse were declared to have automatically become the properties of the
Lessor.
From said decision, both parties appealed to this Court.
The Lessor, as appellant (in Nos. L-17858-59), contends that the Court of
Appeals erred in not finding the Lessee Price, Inc. as the first violator of the
contract, and in requiring the latter to pay him only the amount of P200.00 a
month for the use and occupation of the properties from February 16, 1953
until the same are finally vacated.
In its appeal (Nos. L-17865-66), the Lessee, on the other hand, maintains that
the Court of Appeals erred in not declaring the Lessor as the first to have
committed the breach of the agreement; in requiring said lessee to compensate
Camus in the amount of P200.00 a month notwithstanding its finding that the

parties are in pari delicto, and must suffer their own damages; and holding the
lease to have terminated as of March 31, 1960.
From the findings of the Court of Appeals heretofore quoted , which we are not
here to review, it appears that the strip of land, with an area of 1,425 square
meters, was not originally part of lots 15 and 16 subject of the contract: that the
Lessor actually started the filling in and fencing of a portion of 500 square
meters thereof, as undertaken by him, but did not completely comply
therewith, the fence being only of adobe stones without barbed wires, and the
filling being 40 centimeters lower than the elevation of the lot under lease; that,
on the other hand, notwithstanding the completion of the factory building and
warehouse, the Lessee, in his turn, failed to secure insurance therefor to secure
insurance therefor as stipulated; that the Lessee, likewise, defaulted in the
payment of the rentals as of February 16, 1953; and that the Lessor's failure to
comply with its obligation could not be the cause of their Lessee's nonfulfillment of its commitments under the contract. With these established facts,
the conclusion reached by the Court of Appeals, that the parties were in pari
delicto is not without foundation or justification.
Although in the incidental case G.R. No. L-8253, this Court in effect declared the
Lessor Camus prima facie to be the first to commit a breach of the agreement, it
may be pointed out that in making such pronouncement, only the matter of the
Lessee's default in the payment of rentals was considered. Upon the
continuation of the proceedings, however, it was established, as so found by the
Court of Appeals, that the Lessee also failed to cover the buildings in
September, 1951, with insurance in violation of the specific terms of the
contract. As a matter of fact, until the instant cases were filed, no such
insurance was drawn on the aforesaid factory building and warehouse.
Upon the other hand, while it may be true that the duty imposed on the Lessor
under the contract, to increase the elevation of the low portion of the lot and
erect thereon a concrete stone wall topped with barbed wire was provided only
to "facilitate or make use (by the Lessee) of the whole lot" allegedly a
subordinate and collateral condition of the contract it is not herein denied
that such condition was not complied with by the Lessor. And this obligation
matured in March, 1952. Even assuming, therefore, that the Lessee's obligation
to insure the building arose after the completion of the construction of the
buildings in September, 1951, as the Lessor also defaulted in the performance of
his corresponding duty, it can not really be determined with definiteness who of
the parties committed the first infraction of the terms of the contract. Under

the circumstances, the conclusion reached by the Court of Appeals, that the
parties are actually in pari delicto, must be sustained, and the contract deemed
extinguished, with the parties suffering their respective losses.
Considering, however, that the Lessee was (and must still be) in continuous
occupancy of the premises during the pendency of the case, conducting and
operating its business therein as usual and profiting thereby, whereas the Lessor
was not only deprived of the possession of his property but also of the rentals
therefor since February 16, 953, said Lessee must be required to compensate
the Lessor for such occupancy. The Lessor, on the other hand, as a result of the
termination of the lease, will acquire the buildings of the lessee which were
constructed on the leased premises. Under the circumstances of the case, we
find the decision of the Court of Appeals directing the payment by Price, Inc. of
the sum of P200.00 per month from February 16, 1953, until it vacates the
premises, to be in accord with justice.
Wherefore, the decision of the Court of Appeals appealed from is hereby
affirmed in all respects without costs. So ordered.
Bengzon, C.J., Padilla, Labrador, Paredes, Dizon, Regal and Makalintal, JJ.,
concur.
Footnotes
1.

Price. Inc. vs Camus, et al., G.R. No. L-8253, May 25, 1955.

SECOND DIVISION
[G.R. No. L-29900. June 28, 1974.]
IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased,
GEORGE PAY, petitioner-appellant, vs. SEGUNDINA CHUA VDA. DE PALANCA,
oppositor-appellee.
Florentino B. del Rosario for petitioner-appellant.
Manuel V. San Jose for oppositor-appellee.
DECISION
FERNANDO, J p:
There is no difficulty attending the disposition of this appeal by petitioner on
questions of law. While several points were raised, the decisive issue is whether
a creditor is barred by prescription in his attempt to collect on a promissory
note executed more than fifteen years earlier with the debtor sued promising to
pay either upon receipt by him of his share from a certain estate or upon
demand, the basis for the action being the latter alternative. The lower court
held that the ten-year period of limitation of actions did apply, the note being
immediately due and demandable, the creditor admitting expressly that he was
relying on the wording "upon demand." On the above facts as found, and with
the law being as it is, it cannot be said that its decision is infected with error. We
affirm.
From the appealed decision, the following appears: "The parties in this case
agreed to submit the matter for resolution on the basis of their pleadings and
annexes and their respective memoranda submitted. Petitioner George Pay is a
creditor of the Late Justo Palanca who died in Manila on July 3, 1963. The claim
of the petitioner is based on a promissory note dated January 30, 1952,
whereby the late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca
promised to pay George Pay the amount of P26,900.00, with interest thereon at
the rate of 12% per annum. George Pay is now before this Court, asking that
Segundina Chua vda. de Palanca, surviving spouse of the late Justo Palanca, he
appointed as administratrix of a certain piece of property which is a residential
dwelling located at 2656 Taft Avenue, Manila, covered by Tax Declaration No.
3114 in the name of Justo Palanca, assessed at P41,800.00. The idea is that once
said property is brought under administration, George Pay, as creditor, can file
his claim against the administratrix." 1 It then stated that the petition could not
prosper as there was a refusal on the part of Segundina Chua Vda, de Palanca to

be appointed as administratrix; that the property sought to be administered no

longer belonged to the debtor, the late Justo Palanca; and that the rights of
petition creditor had already prescribed. The promissory note, dated January
30, 1962, is worded thus: "'For value received from time to time since 1947, we
[jointly and severally promise to] pay to Mr. [George Pay] at his office at the
China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred
Pesos] (P26,900.00), with interest thereon at the rate of 12% per annum upon
receipt by either of the undersigned of cash payment from the Estate of the late
Don Carlos Palanca or upon demand.' . . . As stated, this promissory note is
signed by Rosa Gonzales Vda. de Carlos Palanca and Justo Palanca." 2 Then
came this paragraph: "The Court has inquired whether any cash payment has
been received by either of the signers of this promissory note from the Estate of
the late Carlos Palanca. Petitioner informed that he does not insist on this
provision but that petitioner is only claiming on his right under the promissory
note." 3 After which, came the ruling that the wording of the promissory note
being "upon demand," the obligation was immediately due. Since it was dated
January 30, 1952, it was clear that more "than ten (10) years has already
transpired from that time until to-date. The action, therefore, of the creditor
has definitely prescribed." 4 The result, as above noted, was the dismissal of the
petition.
In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner
did assail the correctness of the rulings of the lower court as to the effect of the
refusal of the surviving spouse of the late Justo Palanca to be appointed as
administratrix, as to the property sought to be administered no longer
belonging to the debtor, the late Justo Palanca, and as to the rights of
petitioner-creditor having already prescribed. As noted at the outset, only the
question of prescription need detain us in the disposition of this appeal.
Likewise, as intimated, the decision must be affirmed, considering the clear
tenor of the promissory note.
From the manner in which the promissory note was executed, it would appear
that petitioner was hopeful that the satisfaction of his credit could be realized
either through the debtor sued receiving cash payment from the estate of the
late Carlos Palanca presumptively as one of the heirs, or, as expressed therein,
"upon demand." There is nothing in the record that would indicate whether or
not the first alternative was fulfilled. What is undeniable is that on August 26,
1961, more than fifteen years after the execution of the promissory note on
January 30, 1952, this petition was filed. The defense interposed was
prescription Its merit is rather obvious. Article 1179 of the Civil Code provides:

"Every obligation whose performance does not depend upon a future or

uncertain event, or upon a past event unknown to the parties, is demandable at
once." This used to be Article 1113 of the Spanish Civil Code of 1889. As far back
as Floriano v. Delgado, 5 a 1908 decision, it has been applied according to its
express language. The well-known Spanish commentator, Manresa, on this
point, states: "Dejando, con acierto, el caracter m s teorico y grafico del acto, o
sea la perfeccion de este, se fija, para determinar el concepto de la obligacion
pura, en el distintivo de esta, y que es consecuencia de aqui: la exigibilidad
immediata." 6
The obligation being due and demandable, it would appear that the filing of the
suit after fifteen years was much too late. For again, according to the Civil Code,
which is based on Section 43 of Act No. 190, the prescriptive period for a
written contract is that of ten years. 7 This is another instance where this Court
has consistently adhered to the express language of the applicable norm. 8
There is no necessity therefore of passing upon the other two legal questions
raised as to whether or not it did suffice for the petition to fail just because the
surviving spouse refuses to be made administratrix, or just because the estate
was left with no other property. The decision of the lower court cannot be
overturned.
WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against
George Pay.
Zaldivar (Chairman), Barredo, Antonio, Fernandez and Aquino, JJ., concur.

SECOND DIVISION
[G.R. No. 48194. March 15, 1990.]
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners, vs. COURT OF APPEALS and
LEONARDO TIRO, respondents.
Eddie Tamondong for petitioners.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.
SYLLABUS
1.
REMEDIAL LAW; RULES OF PROCEDURE; MUST BE APPLIED WITH
LIBERALITY TO PROMOTE SUBSTANTIAL JUSTICE. The one (1) day delay in the
filing of the said motion for extension can justifiably be excused, considering
that aside from the change of counsel, the last day for filing the said motion fell
on a holiday following another holiday, hence, under such circumstances, an
outright dismissal of the petition would be too harsh. Litigations should, as
much as possible, be decided on their merits and not on technicalities. In a
number of cases, this Court, in the exercise of equity jurisdiction, has relaxed
the stringent application of technical rules in order to resolve the case on its
merits. Rules of procedure are intended to promote, not to defeat, substantial
justice and, therefore, they should not be applied in a very rigid and technical
sense.
2.
CIVIL LAW; CONTRACTS; PREVIOUS, SIMULTANEOUS AND SUBSEQUENT
ACTS OF THE PARTIES; INDICATIVE OF PARTIES' TRUE INTENTION WHICH MAY
BE CONSIDERED BY THE COURT IN CONSTRUING THE CONTRACT. The
contemporaneous and subsequent acts of petitioners and private respondent
reveal that the cause stated in the questioned deed of assignment is false. It is
settled that the previous and simultaneous and subsequent acts of the parties
are properly cognizable indicia of their true intention. Where the parties to a
contract have given it a practical construction by their conduct as by acts in
partial performance, such construction may be considered by the court in
construing the contract, determining its meaning and ascertaining the mutual
intention of the parties at the time of contracting. The parties' practical
construction of their contract has been characterized as a clue or index to, or as
evidence of, their intention or meaning and as an important, significant,
convincing, persuasive, or influential factor in determining the proper
construction of the agreement.

3.
ID.; ID.; WITH FALSE CAUSE OR CONSIDERATION; NOT CONSIDERED NULL
AND VOID PER SE. The deed of assignment of February 15, 1966 is a relatively
simulated contract which states a false cause or consideration, or one where
the parties conceal their true agreement. (Art. 1345 of the Civil Code). A
contract with a false consideration is not null and void per se. [Concepcion vs.
Sta. Ana, 87 Phil. 787 (1950)] Under Article 1346 of the Civil Code, a relatively
simulated contract, when it does not prejudice a third person and is not
intended for any purpose contrary to law, morals, good customs, public order or
public policy binds the parties to their real agreement.
4.
ID.; ID.; BILATERAL CONTRACT; GIVES RISE TO RECIPROCAL OBLIGATION.
The agreement is a bilateral contract which gave rise to reciprocal
obligations, that is, the obligation of private respondent to transfer his rights in
the forest concession over the additional area and, on the other hand, the
obligation of petitioners to pay P30,000.00. The demandability of the obligation
of one party depends upon the fulfillment of the obligation of the other. In this
case, the failure of private respondent to comply with his obligation negates his
right to demand performance from petitioners. Delivery and payment in a
contract of sale, are so interrelated and intertwined with each other that
without delivery of the goods there is no corresponding obligation to pay. The
two complement each other.
5.
ID.; OBLIGATIONS; WITH SUSPENSIVE CONDITION; EFFECT. As to the
alleged nullity of the agreement dated February 28, 1966, we agree with
petitioners that they cannot be held liable thereon. The efficacy of said deed of
assignment is subject to the condition that the application of private respondent
for an additional area for forest concession be approved by the Bureau of
Forestry. Since private respondent did not obtain that approval, said deed
produces no effect. When a contract is subject to a suspensive condition, its
birth or effectivity can take place only if and when the event which constitutes
the condition happens or is fulfilled. If the suspensive condition does not take
place, the parties would stand as if the conditional obligation had never existed.
6.
ID.; SALE OF A MERE HOPE OR EXPECTANCY; EFFICACY THEREOF DEEMED
SUBJECT TO THE CONDITION THAT THE THING WILL COME INTO EXISTENCE.
Under the second paragraph of Article 1461 of the Civil Code, the efficacy of the
sale of a mere hope or expectancy is deemed subject to the condition that the
thing will come into existence. In this case, since private respondent never
acquired any right over the additional area for failure to secure the approval of
the Bureau of Forestry, the agreement executed therefor, which had for its

object the transfer of said right to petitioners, never became effective or

enforceable.
DECISION
REGALADO, J p:
Petitioners pray for the reversal of the decision of respondent Court of Appeals
in CA-G.R. No. 52296-R, dated March 6, 1978, 1 the dispositive portion whereof
decrees:
"WHEREFORE, the judgment appealed from is hereby set aside and another one
entered ordering the defendants-appellees, jointly and solidarily, to pay
plaintiff-appellant the sum of P79,338.15 with legal interest thereon from the
filing of the complaint, plus attorney's fees in the amount of P8,000.00. Costs
against defendants-appellees." 2
As found by respondent court or disclosed by the records, 3 this case was
generated by the following antecedent facts. cdphil
Private respondent is a holder of an ordinary timber license issued by the
Bureau of Forestry covering 2,535 hectares in the town of Medina, Misamis
Oriental. On February 15, 1966 he executed a "Deed of Assignment" 4 in favor
of herein petitioners the material parts of which read as follows:
xxx

xxx

xxx

"I, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis
Oriental, for and in consideration of the sum of ONE HUNDRED TWENTY
THOUSAND PESOS (P120,000.00), Philippine Currency, do by these presents,
ASSIGN, TRANSFER AND CONVEY, absolutely and forever unto JOSE M. JAVIER
and ESTRELLA F. JAVIER, spouses, of legal age and a resident (sic) of 2897 F.B.
Harrison, Pasay City, my shares of stocks in the TIMBERWEALTH CORPORATION
in the total amount of P120,000.00, payment of which shall be made in the
following manner:
1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;
2. The balance of P100,000.00 shall be paid P10,000.00 every shipment of
export logs actually produced from the forest concession of Timberwealth
Corporation.
"That I hereby agree to sign and endorse the stock certificate in favor of Mr. &
Mrs. Jose M. Javier, as soon as stock certificates are issued."

xxx

xxx

xxx

At the time the said deed of assignment was executed, private respondent had
a pending application, dated October 21, 1965, for an additional forest
concession covering an area of 2,000 hectares southwest of and adjoining the
area of the concession subject of the deed of assignment. Hence, on February
28, 1966, private respondent and petitioners entered into another "Agreement"
5 with the following stipulations:
xxx

xxx

xxx

"1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede
and convey whatever rights he may acquire, absolutely and forever, to
TIMBERWEALTH CORPORATION, a corporation duly organized and existing
under the laws of the Philippines, over a forest concession which is now pending
application and approval as additional area to his existing licensed area under
O.T. License No 391-103166, situated at Medina, Misamis Oriental;
"2. That for and in consideration of the aforementioned transfer of rights
over said additional area to TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER
and JOSE M. JAVIER, both directors and stockholders of said corporation, do
hereby undertake to pay LEONARDO TIRO, as soon as said additional area is
approved and transferred to TIMBERWEALTH CORPORATION the sum of THIRTY
THOUSAND PESOS (P30,000.00), which amount of money shall form part of
their paid up capital stock in TIMBERWEALTH CORPORATION; llcd
"3. That this Agreement is subject to the approval of the members of the
Board of Directors of the TIMBERWEALTH CORPORATION."
xxx

xxx

xxx

On November 18, 1966, the Acting Director of Forestry wrote private

respondent that his forest concession was renewed up to May 12, 1967 under
O.T.L. No. 391-51267, but since the concession consisted of only 2,535 hectares,
he was therein informed that:
"In pursuance of the Presidential directive of May 13, 1966, you are hereby
given until May 12, 1967 to form an organization such as a cooperative,
partnership or corporation with other adjoining licensees so as to have a total
holding area of not less than 20,000 hectares of contiguous and compact
territory and an aggregate allowable annual cut of not less than 25,000 cubic
meters, otherwise, your license will not be further renewed." 6

Consequently, petitioners, now acting as timber license holders by virtue of the

deed of assignment executed by private respondent in their favor, entered into
a Forest Consolidation Agreement 7 on April 10, 1967 with other ordinary
timber license holders in Misamis Oriental, namely, Vicente L. De Lara, Jr.,
Salustiano R. Oca and Sanggaya Logging Company. Under this consolidation
agreement, they all agreed to pool together and merge their respective forest
concessions into a working unit, as envisioned by the aforementioned
directives. This consolidation agreement was approved by the Director of
Forestry on May 10, 1967. 8 The working unit was subsequently incorporated as
the North Mindanao Timber Corporation, with the petitioners and the other
signatories of the aforesaid Forest Consolidation Agreement as incorporators. 9
On July 16, 1968, for failure of petitioners to pay the balance due under the two
deeds of assignment, private respondent filed an action against petitioners,
based on the said contracts, for the payment of the amount of P83,138.15 with
interest at 6% per annum from April 10, 1967 until full payment, plus
P12,000.00 for attorney's fees and costs.
On September 23, 1968, petitioners filed their answer admitting the due
execution of the contracts but interposing the special defense of nullity thereof
since private respondent failed to comply with his contractual obligations and,
further, that the conditions for the enforceability of the obligations of the
parties failed to materialize. As a counterclaim, petitioners sought the return of
P55,586.00 which private respondent had received from them pursuant to an
alleged management agreement, plus attorney's fees and costs. prLL
On October 7, 1968, private respondent filed his reply refuting the defense of
nullity of the contracts in this wise:
"What were actually transferred and assigned to the defendants were plaintiffs
rights and interest in a logging concession described in the deed of assignment,
attached to the complaint and marked as Annex A, and agreement Annex E; that
the 'shares of stocks' referred to in paragraph II of the complaint are terms used
therein merely to designate or identify those rights and interests in said logging
concession. The defendants actually made use of or enjoyed not the 'shares of
stocks' but the logging concession itself; that since the proposed Timberwealth
Corporation was owned solely and entirely by defendants, the personalities of
the former and the latter are one and the same. Besides, before the logging
concession of the plaintiff or the latter's rights and interests therein were
assigned or transferred to defendants, they never became the property or

assets of the Timberwealth Corporation which is at most only an association of

persons composed of the defendants." 10
and contending that the counterclaim of petitioners in the amount of
P55,586.39 is actually only a part of the sum of P69,661.85 paid by the latter to
the former in partial satisfaction of the latter's claim. 11
After trial, the lower court rendered judgment dismissing private respondent's
complaint and ordering him to pay petitioners the sum of P33,161.85 with legal
interest at six percent per annum from the date of the filing of the answer until
complete payment. 12
As earlier stated, an appeal was interposed by private respondent to the Court
of Appeals which reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for extension
of time to file a motion for reconsideration, for the reason that they needed to
change counsel. 13 Respondent court, in its resolution dated March 31, 1978,
gave petitioners fifteen (15) days from March 28, 1978 within which to file said
motion for reconsideration, provided that the subject motion for extension was
filed on time. 14 On April 11, 1978, petitioners filed their motion for
reconsideration in the Court of Appeals. 15 On April 21, 1978, private
respondent filed a consolidated opposition to said motion for reconsideration
on the ground that the decision of respondent court had become final on March
27, 1978, hence the motion for extension filed on March 28, 1978 was filed out
of time and there was no more period to extend. However, this was not acted
upon by the Court of Appeals for the reason that on April 20, 1978, prior to its
receipt of said opposition, a resolution was issued denying petitioners' motion
for reconsideration, thus:
"The motion for reconsideration filed on April 11, 1978 by counsel for
defendants-appellees is denied. They did not file any brief in this case. As a
matter of fact this case was submitted for decision without appellees' brief. In
their said motion, they merely tried to refute the rationale of the Court in
deciding to reverse the appealed judgment." 16
Petitioners then sought relief in this Court in the present petition for review on
certiorari. Private respondent filed his comment, reiterating his stand that the
decision of the Court of Appeals under review is already final and executory.
cdphil

Petitioners countered in their reply that their petition for review presents
substantive and fundamental questions of law that fully merit judicial
determination, instead of being suppressed on technical and insubstantial
reasons. Moreover, the aforesaid one (1) day delay in the filing of their motion
for extension is excusable, considering that petitioners had to change their
former counsel who failed to file their brief in the appellate court, which
substitution of counsel took place at a time when there were many successive
intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can justifiably
be excused, considering that aside from the change of counsel, the last day for
filing the said motion fell on a holiday following another holiday, hence, under
such circumstances, an outright dismissal of the petition would be too harsh.
Litigations should, as much as possible, be decided on their merits and not on
technicalities. In a number of cases, this Court, in the exercise of equity
jurisdiction, has relaxed the stringent application of technical rules in order to
resolve the case on its merits. 17 Rules of procedure are intended to promote,
not to defeat, substantial justice and, therefore, they should not be applied in a
very rigid and technical sense.
We now proceed to the resolution of this case on the merits.
The assignment of errors of petitioners hinges on the central issue of whether
the deed of assignment dated February 15, 1966 and the agreement of February
28, 1966 are null and void, the former for total absence of consideration and the
latter for non-fulfillment of the conditions stated therein.
Petitioners contend that the deed of assignment conveyed to them the shares
of stocks of private respondent in Timberwealth Corporation, as stated in the
deed itself. Since said corporation never came into existence, no share of stocks
was ever transferred to them, hence the said deed is null and void for lack of
cause or consideration.
We do not agree. As found by the Court of Appeals, the true cause or
consideration of said deed was the transfer of the forest concession of private
respondent to petitioners for P120,000.00. This finding is supported by the
following considerations, viz: LLjur
1.
Both parties, at the time of the execution of the deed of assignment knew
that the Timberwealth Corporation stated therein was non-existent. 18

2.
In their subsequent agreement, private respondent conveyed to
petitioners his inchoate right over a forest concession covering an additional
area for his existing forest concession, which area he had applied for, and his
application was then pending in the Bureau of Forestry for approval.
3.
Petitioners, after the execution of the deed of assignment, assumed the
operation of the logging concessions of private respondent. 19
4.
The statement of advances to respondent prepared by petitioners stated:
"P55,186.39 advances to L.A. Tiro be applied to succeeding shipments. Based on
the agreement, we pay P10,000.00 every after (sic) shipment. We had only 2
shipments." 20
5.
Petitioners entered into a Forest Consolidation Agreement with other
holders of forest concessions on the strength of the questioned deed of
assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and private
respondent reveal that the cause stated in the questioned deed of assignment is
false. It is settled that the previous and simultaneous and subsequent acts of
the parties are properly cognizable indicia of their true intention. 22 Where the
parties to a contract have given it a practical construction by their conduct as by
acts in partial performance, such construction may be considered by the court
in construing the contract, determining its meaning and ascertaining the mutual
intention of the parties at the time of contracting. 23 The parties' practical
construction of their contract has been characterized as a clue or index to, or as
evidence of, their intention or meaning and as an important, significant,
convincing, persuasive, or influential factor in determining the proper
construction of the agreement. 24
The deed of assignment of February 15, 1966 is a relatively simulated contract
which states a false cause or consideration, or one where the parties conceal
their true agreement. 25 A contract with a false consideration is not null and
void per se. 26 Under Article 1346 of the Civil Code, a relatively simulated
contract, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy
binds the parties to their real agreement. prcd
The Court of Appeals, therefore, did not err in holding petitioners liable under
the said deed and in ruling that

". . . In view of the analysis of the first and second assignment of errors, the
defendants-appellees are liable to the plaintiff-appellant for the sale and
transfer in their favor of the latter's forest concessions. Under the terms of the
contract, the parties agreed on a consideration of P120,000.00. P20,000.00 of
which was paid, upon the signing of the contract and the balance of
P100,000.00 to be paid at the rate of P10,000.00 for every shipment of export
logs actually produced from the forest concessions of the appellant sold to the
appellees. Since plaintiff-appellant's forest concessions were consolidated or
merged with those of the other timber license holders by appellees' voluntary
act under the Forest Consolidation Agreement (Exhibit D), approved by the
Bureau of Forestry (Exhibit D-3), then the unpaid balance of P49,338.15 (the
amount of P70,661.85 having been received by the plaintiff-appellant from the
defendants-appellees) became due and demandable." 27
As to the alleged nullity of the agreement dated February 28, 1966, we agree
with petitioners that they cannot be held liable thereon. The efficacy of said
deed of assignment is subject to the condition that the application of private
respondent for an additional area for forest concession be approved by the
Bureau of Forestry. Since private respondent did not obtain that approval, said
deed produces no effect. When a contract is subject to a suspensive condition,
its birth or effectivity can take place only if and when the event which
constitutes the condition happens or is fulfilled. 28 If the suspensive condition
does not take place, the parties would stand as if the conditional obligation had
never existed. 29
The said agreement is a bilateral contract which gave rise to reciprocal
obligations, that is, the obligation of private respondent to transfer his rights in
the forest concession over the additional area and, on the other hand, the
obligation of petitioners to pay P30,000.00. The demandability of the obligation
of one party depends upon the fulfillment of the obligation of the other. In this
case, the failure of private respondent to comply with his obligation negates his
right to demand performance from petitioners. Delivery and payment in a
contract of sale, are so interrelated and intertwined with each other that
without delivery of the goods there is no corresponding obligation to pay. The
two complement each other. 30
Moreover, under the second paragraph of Article 1461 of the Civil Code, the
efficacy of the sale of a mere hope or expectancy is deemed subject to the
condition that the thing will come into existence. In this case, since private
respondent never acquired any right over the additional area for failure to

secure the approval of the Bureau of Forestry, the agreement executed

therefor, which had for its object the transfer of said right to petitioners, never
became effective or enforceable. prLL
WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED.
The agreement of the parties dated February 28, 1966 is declared without force
and effect and the amount of P30,000.00 is hereby ordered to be deducted
from the sum awarded by respondent court to private respondent. In all other
respects, said decision of respondent court is affirmed.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

FIRST DIVISION
[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.
Juanito M. Acanto for petitioner.
Santos B. Aguadera for private respondents.
SYLLABUS
1.
CIVIL LAW; PROPERTY; MODES OF ACQUIRING OWNERSHIP; DONATION;
CONSIDERED ONEROUS WHEN EXECUTED FOR A VALUABLE CONSIDERATION
WHICH IS CONSIDERED THE EQUIVALENT OF THE DONATION. A clear perusal
of the condition 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. 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.
2.
ID.; ID.; ID.; ID.; MAY BE REVOKED FOR NON-FULFILLMENT OR NONCOMPLIANCE OF THE CONDITIONS SET FORTH THEREIN; CASE AT BAR. 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. It is not correct to say that the
schoolhouse had to be constructed before the donation 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. 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.

3.
ID.; ID.; ID.; ID.; DONEE'S ACCEPTANCE AND ACKNOWLEDGMENT OF ITS
OBLIGATION PROVIDED IN THE DEED, SUFFICIENT TO PREVENT THE STATUTE OF
LIMITATION FROM BARRING THE ACTION OF DONOR UPON THE ORIGINAL
CONTRACT. 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.
4.
ID.; ID.; ID.; ID.; IN CASE OF REVOCATION, 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. 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. 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.
5.
ID.; ID.; ID.; ID.; GENERALLY, WHEN THE OBLIGATION DOES NOT FIX A
PERIOD BUT FROM ITS NATURE AND CIRCUMSTANCES IT CAN BE INFERRED
THAT A PERIOD WAS INTENDED, COURT MAY FIX THE PERIOD FOR
COMPLIANCE. 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.
6.
ID.; ID.; ID.; ID.; WHEN OBLIGOR CANNOT COMPLY WITH WHAT IS
INCUMBENT UPON HIM, THE OBLIGEE MAY SEEK RESCISSION; EXCEPTION.
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. 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.
7.
ID.; ID.; ID.; ID.; IN CASE OF GRATUITOUS DONATION DOUBTS SHOULD BE
RESOLVED IN FAVOR OF THE LEAST TRANSMISSION OF RIGHTS AND INTERESTS.
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.
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 return the donated property to the heirs of the
donor, private respondents herein, by means of reconveyance.
DAVIDE, JR., J, dissenting opinion:
1.
CIVIL LAW; PROPERTY, MODES OF ACQUIRING OWNERSHIP; DONATION;
IN LAW OF DONATION, "CONDITIONS" REFERS TO OBLIGATION OR CHARGES
IMPOSED BY THE DONOR ON THE DONEE. 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 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 it 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. (Italics 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.
2.
ID.; ID.; ID.; ID.; WHEN NO FIXED PERIOD IN WHICH THE CONDITION
SHOULD BE FULFILLED, IT IS THE DUTY OF THE COURT TO FIX A SUITABLE TIME
FOR ITS FULFILLMENT. J. Davide, Jr., 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 Barreto vs. City of Manila, 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.
3.
ID.; ID.; ID.; ID.; MERE FACT THAT THERE IS NO TIME FIXED AS TO WHEN
THE CONDITION THEREOF ARE TO BE FULFILLED DOES NOT IPSO FACTO MEAN
THAT THE STATUTE OF LIMITATION WILL NOT APPLY. There is misplaced
reliance again on a previous decision of this Court in Osmea vs. Rama. 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 facto mean that the statute of
limitations will not apply anymore and the action to revoke the donation
becomes imprescriptible.
4.
ID.; ID.; ID.; ID.; ACTION TO REVOKE THEREOF PRESCRIBES IN FOUR (4)
YEARS. More recently, in De Luna vs. Abrigo, 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.
DECISION
BELLOSILLO, J p:
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.
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 cornerstones 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, privates 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 prescribe; that it did not violate any of the conditions in the deed of
donation because it never used the donated properly 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 11991, 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 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 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 alleged 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 this 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 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 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
acknowledgement 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 government laws and regulations pertaining to
education, building requirements and property restrictions which are beyond
the control of the donee. LibLex
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 that 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 interest. 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 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 Psd1144 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.

SECOND DIVISION
[G.R. No. 87047. October 31, 1990.]
FRANCISCO LAO LIM, petitioner, vs. COURT OF APPEALS and BENITO
VILLAVICENCIO DY, respondents.
Gener E . Asuncion for petitioner.
Natividad T . Perez for private respondent.
DECISION
REGALADO, J p:
Respondent Court of Appeals having affirmed in toto on June 30, 1988 in CAG.R. SP No. 13925 1 the decision of the Regional Trial Court of Manila, Branch
XLVI, in Civil Case No. 8742719, entitled "Francisco Lao Lim vs. Benito
Villavicencio Dy," petitioner seeks the reversal of such affirmance in the instant
petition.
The records show that private respondent entered into a contract of lease with
petitioner for a period of three (3) years, that is, from 1976 to 1979. After the
stipulated term expired, private respondent refused to vacate the premises,
hence, petitioner filed an ejectment suit against the former in the City Court of
Manila, docketed therein as Civil Case No. 051063-CV. The case was terminated
by a judicially approved compromise agreement of the parties providing in part:
"3. That the term of the lease shall be renewed every three years retroacting
from October 1979 to October 1982; after which the abovenamed rental shall
be raised automatically by 20% every three years for as long as defendant
needed the premises and can meet and pay the said increases, the defendant to
give notice of his intent to renew sixty (60) days before the expiration of the
term;" 2
By reason of said compromise agreement the lease continued from 1979 to
1982, then from 1982 to 1985. On April 17, 1985, petitioner advised private
respondent that he would no longer renew the contract effective October,
1985.3 However, on August 5, 1985, private respondent informed petitioner in

writing of his intention to renew the contract of lease for another term,
commencing November, 1985 to October, 1988. 4 In reply to said letter,
petitioner advised private respondent that he did not agree to a renewal of the
lease contract upon its expiration in October, 1985. 5
On January 15, 1986, because of private respondent's refusal to vacate the
premises, petitioner filed another ejectment suit, this time with the
Metropolitan Trial Court of Manila in Civil Case No. 114659-CV. In its decision of
September 24, 1987, said court dismissed the complaint on the grounds that (1)
the lease contract has not expired, being a continuous one the period whereof
depended upon the lessee's need for the premises and his ability to pay the
rents; and (2) the compromise agreement entered into in the aforesaid Civil
Case No. 051063-CV constitutes res judicata to the case before it. 6
Petitioner appealed to the Regional Trial Court of Manila which, in its decision of
January 28, 1988 in Civil Case No. 8742719, affirmed the decision of the lower
court. 7
As stated at the outset, respondent Court of Appeals affirmed in full said
decision of the Regional Trial Court and held that (1) the stipulation in the
compromise agreement which, in its formulation, allows the lessee to stay on
the premises as long as he needs it and can pay rents is valid, being a resolutory
condition and, therefore, beyond the ambit of Article 1308 of the Civil Code;
and (2) that a compromise has the effect of res judicata. 8
Petitioner's motion for reconsideration having been denied by respondent Court
of Appeals, this present petition is now before us. We find the same to be
meritorious.
Contrary to the ruling of respondent court, the disputed stipulation "for as long
as the defendant needed the premises and can meet and pay said increases" is a
purely potestative condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee. It is likewise a
suspensive condition because the renewal of the lease, which gives rise to a
new lease, depends upon said condition. It should be noted that a renewal
constitutes a new contract of lease although with the same terms and
conditions as those in the expired lease. It should also not be overlooked that

said condition is not resolutory in nature because it is not a condition that

terminates the lease contract. The lease contract is for a definite period of three
(3) years upon the expiration of which the lease automatically terminates. prcd
The invalidity of a condition in a lease contract similar to the one at bar has
been resolved in Encarnacion vs. Baldomar, et al., 9 where we ruled that in an
action for ejectment, the defense interposed by the lessees that the contract of
lease authorized them to continue occupying the premises as long as they paid
the rents is untenable, because it would leave to the lessees the sole power to
determine whether the lease should continue or not. As stated therein, "(i)f this
defense were to be allowed, so long as defendants elected to continue the lease
by continuing the payment of the rentals, the owner would never be able to
discontinue it; conversely, although the owner should desire the lease to
continue, the lessees could effectively thwart his purpose if they should prefer
to terminate the contract by the simple expedient of stopping payment of the
rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8
Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100.)"
The continuance, effectivity and fulfillment of a contract of lease cannot be
made to depend exclusively upon the free and uncontrolled 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 is dictated solely by the lessee. Cdpr
The interpretation made by respondent court cannot, therefore, be upheld.
Paragraph 3 of the compromise agreement, read and interpreted in its entirety,
is actually to the effect that the last portion thereof, which gives the private
respondent sixty (60) days before the expiration of the term the right to give
notice of his intent to renew, is subject to the first portion of said paragraph
that "the term of the lease shall be renewed every three (3) years," thereby
requiring the mutual agreement of the parties. The use of the word "renew"
and the designation of the period of three (3) years clearly confirm that the
contract of lease is limited to a specific period and that it is not a continuing
lease. The stipulation provides for a renewal of the lease every three (3) years;

there could not be a renewal if said lease did not expire, otherwise there is
nothing to renew.
Resultantly, the contract of lease should be and is hereby construed as
providing for a definite period of three (3) years and that the automatic increase
of the rentals by twenty percent (20%) will take effect only if the parties decide
to renew the lease. A contrary interpretation will result in a situation where the
continuation and effectivity of the contract will depend only upon the will of the
lessee, in violation of Article 1308 of the Civil Code and the aforesaid doctrine in
Encarnacion. The compromise agreement should be understood as bearing that
import which is most adequate to render it effectual. 10 Where the instrument
is susceptible of two interpretations, one which will make it invalid and illegal
and another which will make it valid and legal, the latter interpretation should
be adopted. 11
Moreover, perpetual leases are not favored in law, nor are covenants for
continued renewals tending to create a perpetuity, and the rule of construction
is well settled that a covenant for renewal or for an additional term should not
be held to create a right to repeated grants in perpetuity, unless by plain and
unambiguous terms the parties have expressed such intention. 12 A lease will
not be construed to create a right to perpetual renewals unless the language
employed indicates clearly and unambiguously that it was the intention and
purpose of the parties to do so. 13 A portion in a lease giving the lessee and his
assignee the right to perpetual renewals is not favored by the courts, and a
lease will be construed as not making such a provision unless it does so clearly.
14
As we have further emphasized:
"It is also important to bear in mind that in a reciprocal contract like a lease, the
period of the lease 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. We are not aware of any presumption
in law that the term of a lease is designed 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 the 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. We hold that the above-quoted rulings in Koh v. Ongsiaco and
Cruz v. Alberto should be and are overruled." 15
In addition, even assuming that the clause "for as long as the defendant needed
the premises and can meet and pay, said increases" gives private respondent an
option to renew the lease, the same will be construed as providing for but one
renewal or extension and, therefore, was satisfied when the lease was renewed
in 1982 for another three (3) years. A general covenant to renew is satisfied by
one renewal and will not be construed to confer the right to more than one
renewal unless provision is clearly and expressly made for further renewals. 16
Leases which may have been intended to be renewable in perpetuity will
nevertheless be construed as importing but one renewal if there is any
uncertainty in that regard. 17
The case of Buccat vs. Dispo, et al., 18 relied upon by respondent court, to
support its holding that respondent lessee can legally stay on the premises for
as long as he needs it and can pay the rents, is not in point. In said case, the
lease contract provides for an indefinite period since it merely stipulates "(t)hat
the lease contract shall remain in full force and effect as long as the land will
serve the purpose for which it is intended as a school site of the National
Business Institute, but the rentals now stipulated shall be subject to review
every after ten (10) years by mutual agreement of the parties." This is in clear
contrast to the case at bar wherein, to repeat, the lease is fixed at a period of
three (3) years although subject to renewal upon agreement of the parties, and
the clause "for as long as defendant needs the premises and can meet and pay
the rents" is not an independent stipulation but is controlled by said fixed term
and the option for renewal upon agreement of both parties.
On the second issue, we agree with petitioner that respondent court erred in
holding that the action for ejectment is barred by res judicata. While it is true
that a compromise agreement has the effect of res judicata, this doctrine does

not apply in the present case. It is elementary that for a judgment to be a bar to
a subsequent case, (1) it must be a final judgment, (2) the court which rendered
it had jurisdiction over the subject matter and the parties, (3) it must be a
judgment on the merits, and (4) there must be identity between the two cases
as to parties, subject matter and cause of action. 19
In the case at bar, the fourth requisite is lacking. Although there is identity of
parties, there is no identity of subject matter and cause of action. The subject
matter in the first ejectment case is the original lease contract while the subject
matter in the case at bar is the lease created under the terms provided in the
subsequent compromise agreement. The lease executed in 1978 is one thing;
the lease constituted in 1982 by the compromise agreement is another. LLjur
There is also no identity, in the causes of action. The test generally applied to
determine the identity of causes of action is to consider the identity of facts
essential to their maintenance, or whether the same evidence would sustain
both causes of action. 20 In the case at bar, the delict or the wrong in the first
case is different from that in the second, and the evidence that will support and
establish the cause of action in the former will not suffice to support and
establish that in the latter.
In the first ejectment case, the cause of action was private respondent's refusal
to comply with the lease contract which expired on December 31, 1978. In the
present case, the cause of action is a similar refusal but with respect to the lease
which expired in October, 1985 under the compromise agreement. While the
compromise agreement may be res judicata as far as the cause of action and
issues in the first ejectment case is concerned, any cause of action that arises
from the application or violation of the compromise agreement cannot be said
to have been settled in said first case. The compromise agreement was meant
to settle, as it did only settle, the first case. It did not, as it could not, cover any
cause of action that might arise thereafter, like the present case which was
founded on the expiration of the lease in 1985, which necessarily requires a
different set of evidence. The fact that the compromise agreement was
judicially approved does not foreclose any cause of action arising from a
violation of the terms thereof. cdrep

WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET

ASIDE. Private respondent is hereby ordered to immediately vacate and return
the possession of the leased premises subject of the present action to petitioner
and to pay the monthly rentals due thereon in accordance with the compromise
agreement until he shall have actually vacated the same. This judgment is
immediately executory.
SO ORDERED.
Melencio-Herrera , Paras, Padilla and Sarmiento, JJ., concur.

EN BANC
[G.R. No. L-5003. June 27, 1953.]
NAZARIO TRILLANA, administrator-appellee, vs. QUEZON COLLEGE, INC.,
claimant-appellant.
Singson, Barnes, Yap & Blanco for appellant.
Delgado, Flores & Macapagal for appellee.
SYLLABUS
OBLIGATIONS AND CONTRACTS; STOCK SUBSCRIPTION; OFFER AND
ACCEPTANCE; FACULTATIVE CONDITION. As the appellant offered its stock
for subscription on the terms stated in a form letter, and D. C. applied for
subscription fixing her own plan of payment, the relation, in the absence of
acceptance by the appellant of the counter offer of D. C., had not ripened into
an enforceable contract. There was imperative need for express acceptance on
appellant's part, because the proposal of D. C. to pay the value of the
subscription after she had harvested fish, was a condition obviously dependent
upon her sole will and, therefore, facultative in nature, rendering the obligation
void under article 1115 of the old Civil Code.
DECISION
PARAS, J p:
Damasa Crisostomo sent the following letter to the Board of Trustees of the
Quezon College:
June 1, 1948
"The BOARD OF TRUSTEES
"Quezon College
"Manila.
"Gentlemen:

"Please enter my subscription to dalawang daan (200) shares of your capital

stock with a par value of P100 each. Enclosed you will find (Babayaran kong
lahat pagkatapos na ako ay makapagpahuli ng isda) pesos as my initial payment
and the balance payable in accordance with law and the rules and regulations of
the Quezon College. I hereby agree to shoulder the expenses connected with
said shares of stock. I further submit myself to all lawful demands, decisions or
directives of the Board of Trustees of the Quezon College and all its duly
constituted officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa
akin sa wikang tagalog na aking nalalaman).
"Very respectfully,
"(Sgd.) DAMASA CRISOSTOMO
Signature of subscriber
"Nilagdaan sa aming harapan:
"JOSE CRISOSTOMO
"EDUARDO CRISOSTOMO"
Damasa Crisostomo died on October 26, 1948. As no payment appears to have
been made on the subscription mentioned in the foregoing letter, the Quezon
College, Inc. presented a claim before the Court of First Instance of Bulacan in
her testate proceeding, for the collection of the sum of P20,000, representing
the value of the subscription to the capital stock of the Quezon College, Inc. This
claim was opposed by the administrator of the estate, and the Court of First
Instance of Bulacan, after hearing, issued an order dismissing the claim of the
Quezon College, Inc., on the ground that the subscription in question was
neither registered in nor authorized by the Securities and Exchange
Commission. From this order the Quezon College, Inc. has appealed.
It is not necessary for us to discuss at length appellant's various assignments of
error relating to the propriety of the ground relied upon by the trial court, since,
as pointed out in the brief for the administrator and appellee, there are other
decisive considerations which, though not touched by the lower court, amply
sustained the appealed order.

It appears that the application sent by Damasa Crisostomo to the Quezon

College, Inc. was written on a general form indicating that an applicant will
enclose an amount as initial payment and will pay the balance in accordance
with law and the rules or regulations of the College. On the other hand, in the
letter actually sent by Damasa Crisostomo, the latter (who requested that her
subscription for 200 shares be entered) not only did not enclose any initial
payment but stated that "babayaran kong lahat pagkatapos na ako ay
makapagpahuli ng isda." There is nothing in the record to show that the Quezon
College, Inc. accepted the term of payment suggested by Damasa Crisostomo,
or that if there was any acceptance the same came to her knowledge during her
lifetime. As the application of Damasa Crisostomo is obviously at variance with
the terms evidenced in the form letter issued by the Quezon College, Inc., there
was absolute necessity on the part of the College to express its agreement to
Damasa's offer in order to bind the latter. Conversely, said acceptance was
essential, because it would be unfair to immediately obligate the Quezon
College, Inc. under Damasa's promise to pay the price of the subscription after
she had caused fish to be caught. In other words, the relation between Damasa
Crisostomo and the Quezon College, Inc. had only thus reached the preliminary
stage whereby the latter offered its stock for subscription on the terms stated in
the form letter, and Damasa applied for subscription fixing her own plan of
payment, a relation, in the absence as in the present case of acceptance by
the Quezon College, Inc. of the counter offer of Damasa Crisostomo, that had
not ripened into an enforceable contract.
Indeed, the need for express acceptance on the part of the Quezon College, Inc.
becomes the more imperative, in view of the proposal of Damasa Crisostomo to
pay the value of the subscription after she had harvested fish, a condition
obviously dependent upon her sole will and, therefore, facultative in nature,
rendering the obligation void, under article 1115 of the old Civil Code which
provides as follows: "If the fulfillment of the condition should depend upon the
exclusive will of the debtor, the conditional obligation shall be void. If it should
depend upon chance, or upon the will of a third person, the obligation shall
produce all its effects in accordance with the provisions of this code." It cannot
be argued that the condition solely is void, because it would have served to

create the obligation to pay, unlike a case, exemplified by Osmea vs. Rama (14
Phil., 99), wherein only the potestative condition was held void because it
referred merely to the fulfillment of an already existing indebtedness.
In the case of Taylor vs. Uy Tieng Piao et al. (43 Phil., 873, 879), this Court
already held that "a condition, facultative as to the debtor, is obnoxious to the
first sentence contained in article 1115 and renders the whole obligation void."
Wherefore, the appealed order is affirmed, and it is so ordered with costs
against the appellant.
Tuason, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., concur.

FIRST DIVISION
[G.R. No. 4437. September 9, 1909.]
TOMAS OSMEA, plaintiff-appellee, vs. CENONA RAMA, defendant-appellant.
Filemon Sotto for appellant.
J.H. Junquera for appellee.
SYLLABUS
CONTRACT; CONDITIONAL PROMISE TO PAY. A condition imposed upon a
contract by the promisor, the performance of which depends upon his exclusive
will, is void, in accordance with the provisions of article 1115 of the Civil Code.
DECISION
JOHNSON, J p:
It appears from the record that upon the 15th day of November, 1890, the
defendant herein executed and delivered to Victoriano Osmea the following
contract:
"EXHIBIT A.
P200.00.
"CEBU, November 15, 1890.
"I, Doa Cenona Rama, a resident of this city, and of legal age, have received
from Don Victoriano Osmea the sum of two hundred pesos in cash which I will
pay in sugar in the month of January or February of the coming year, at the
price ruling on the day of delivering the sugar into his warehouses, and I will pay
him interest at the rate of half a cuartillo per month on each peso, beginning on
this date until the day of the settlement; and if I can not pay in full, a balance
shall be struck, showing the amount outstanding at the end of each June,
including interest, and such balance as may be outstanding against me shall be
considered as capital which I will always pay in sugar, together with the interest
mentioned above. I further promise that I will sell to the said Seor Osmea all
the sugar that I may harvest, and as a guarantee, pledge as security all of my

present and future property, and as special security the house with tile roof and
ground floor of stone in which I live in Pagina; in proof whereof, I sign this
document, and he shall be entitled to make claim against me at the expiration
of the term stated in this document.
(Signed) "CENONA RAMA.
"Witnesses:
"FAUSTO PEALOSA.
"FRANCISCO MEDALLE."
On the 27th day of October, 1891, the defendant executed and delivered to the
said Victoriano Osmea the following contract:
"EXHIBIT B.
"CEBU, October 27, 1891.
"On this date I have asked for a further loan and have received from Don
Victoriano Osmea the sum of seventy pesos in cash, fifty pesos of which I have
loaned to Don Evaristo Peares, which we will pay in sugar in the month of
January of the coming year according to the former conditions.
(Signed) "CENONA RAMA.
"FROM Don Evaristo Peares

P50

"Doa Cenona Rama 20

____
P70
"Received Evaristo Peares."
Some time after the execution and delivery of the above contracts, the said
Victoriano Osmea died. In the settlement and division of the property of his
estate the above contracts became the property of one of his heirs, Agustina
Rafols. Later, the date does not appear, the said Agustina Rafols ceded to the
present plaintiff all of her right and interest in said contracts.

On the 15th day of March, 1902, the plaintiff presented the contracts to the
defendant for payment and she acknowledged her responsibility upon said
contracts by an indorsement upon them in the following language:
"EXHIBIT C.
"CEBU, March 15, 1902.
"On this date I hereby promise, in the presence of two witnesses, that, if the
house of strong materials in which I live in Pagina is sold, I will pay my
indebtedness to Don Tomas Osmea as set forth in this document.
(Signed) "CENONA RAMA."
The defendant not having paid the amount due on said contracts; the plaintiff,
upon the 26th day of June, 1906, commenced the present action in the Court of
First Instance of the Province of Cebu. The complaint filed in said cause alleged
the execution and delivery of the above contracts, the demand for payment,
and the failure to pay on the part of the defendant, and the prayer for a
judgment for the amount due on the said contracts. The defendant answered by
filing a general denial and setting up the special defense of prescription.
The case was finally brought on to trial in the Court of First Instance, and the
only witness produced during the trial was the plaintiff himself. The defendant
did not offer any proof whatever in the lower court.
After hearing the evidence adduced during the trial, the lower court rendered a
judgment in favor of the plaintiff and against the defendant for the sum of P200
with interest at the rate of 18 3/4 per cent per annum, from the 15th day of
November, 1890, and for the sum of P20, with interest at the rate of 18 3/4 per
cent per annum, from the 27th day of October, 1891, until the said sums were
paid. From this judgment the defendant appealed.
The lower court found that P50 of the P70 mentioned in Exhibit B had not been
borrowed by the defendant, but by one Evaristo Peares; therefore the
defendant had no responsibility for the payment of the said P50.
The only questions raised by the appellant were questions of fact. The appellant
alleges that the proof adduced during the trial of the cause was not sufficient to

support the findings of the lower court. It was suggested during the discussion
of the case in this court that, in the acknowledgment above quoted of the
indebtedness made by the defendant, she imposed the condition that she
would pay the obligation if she sold her house. If that statement found in her
acknowledgment of the indebtedness should be regarded as a condition, it was
a condition which depended upon her exclusive will, and is, therefore, void.
(Art. 1115, Civil Code.) The acknowledgment, therefore, was an absolute
acknowledgment of the obligation and was sufficient to prevent the statute of
limitation from barring the action upon the original contract.
We are satisfied, from all of the evidence adduced during the trial, that the
judgment of the lower court should be affirmed. So ordered.
Arellano, C.J., Torres, Carson and Moreland, JJ., concur.

FIRST DIVISION
[G.R. No. 117009. October 11, 1995.]
SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners, vs.
COURT OF APPEALS and YSMAEL C. FERRER, respondents.
Cauton & Associates for petitioners. cdll
Jesus B. Santos for private respondent.
SYLLABUS
1.
CIVIL LAW; HUMAN RELATIONS; UNJUST ENRICHMENT; NOT ALLOWED.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its
fulfillment depends upon the sole will of the debtor. In the present case, the
mutual agreement, the absence of which petitioner bank relies upon to support
its non-liability for the increased construction cost, is in effect a condition
dependent on petitioner bank's sole will, since private respondent would
naturally and logically give consent to such an agreement which would allow
him recovery of the increased cost. Further, it cannot be denied that petitioner
bank derived benefits when private respondent completed the construction
even at an increased cost. Hence, to allow petitioner bank to acquire the
constructed building at a price far below its actual construction cost would
undoubtedly constitute unjust enrichment for the bank to the prejudice of
private respondent. Such unjust enrichment, as previously discussed, is not
allowed by law.
2.
ID.; AWARD OF ATTORNEY'S FEES; REDUCED WHEN THE AMOUNT
THEREOF APPEARS TO BE UNCONSCIONABLE OR UNREASONABLE; CASE AT BAR.
With respect to the award of attorney's fees to respondent, the Court has
previously held that, "even with the presence of an agreement between the
parties, the court may nevertheless reduce attorney's fees though fixed in the
contract when the amount thereof appears to be unconscionable or
unreasonable." As previously noted, the diligence and legal know-how exhibited
by counsel for private respondent hardly justify an award of 25% of the principal
amount due, which would be at least P60,000.00. Besides, the issues in this case

are far from complex and intricate. The award of attorney's fees is thus reduced
to P10,000.00.
DECISION
PADILLA, J p:
In this petition for review under Rule 45 of the Rules of Court, petitioners seek a
review and reversal of the decision * of respondent Court of Appeals in CA-G.R.
CV No. 40450, entitled "Ysmael C . Ferrer v. Security Bank and Trust Company,
et. al." dated 31 August 1994, which affirmed the decision ** of the Regional
Trial Court, Branch 63, Makati in Civil Case No. 42712, a complaint for breach of
contract with damages. cdasia
Private respondent Ysmael C. Ferrer was contracted by herein petitioners
Security Bank and Trust Company (SBTC) and Rosito C. Manhit to construct the
building of SBTC in Davao City for the price of P1,760,000.00. The contract dated
4 February 1980 provided that Ferrer would finish the construction in two
hundred (200) working days. Respondent Ferrer was able to complete the
construction of the building on 15 August 1980 (within the contracted period)
but he was compelled by a drastic increase in the cost of construction materials
to incur expenses of about P300,000.00 on top of the original cost. The
additional expenses were made known to petitioner SBTC thru its VicePresident Fely Sebastian and Supervising Architect Rudy de la Rama as early as
March 1980. Respondent Ferrer made timely demands for payment of the
increased cost. Said demands were supported by receipts, invoices, payrolls and
other documents proving the additional expenses.
In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a
representative of an architectural firm consulted by SBTC, verified Ferrer's
claims for additional cost. A recommendation was then made to settle Ferrer's
claim but only for P200,000.00. SBTC, instead of paying the recommended
additional amount, denied ever authorizing payment of any amount beyond the
original contract price. SBTC likewise denied any liability for the additional cost
based on Article IX of the building contract which states:

"If at any time prior to the completion of the work to be performed hereunder,
increase in prices of construction materials and/or labor shall supervene
through no fault on the part of the contractor whatsoever or any act of the
government and its instrumentalities which directly or indirectly affects the
increase of the cost of the project, OWNER shall equitably make the appropriate
adjustment on mutual agreement of both parties." cdtai
Ysmael C. Ferrer then filed a complaint for breach of contract with damages.
The trial court ruled for Ferrer and ordered defendants SBTC and Rosito C.
Manhit to pay:
a) P259,417.23 for the increase in price of labor and materials plus 12%
interest thereon per annum from 15 August 1980 until fully paid;
b)

P24,000.00 as actual damages; cdt

c)

P20,000.00 as moral damages;

d)

P20,000.00 as exemplary damages;

e)

attorney's fees equivalent to 25% of the principal amount due; and

f)

costs of suit. aisadc

On appeal, the Court of Appeals affirmed the trial court decision.

In the present petition for review, petitioners assign the following errors to the
appellate court:
". . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF
EVIDENCE SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE DEFENDANTSAPPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION
OF THE CONSTRUCTION CONTRACT. cdasia
. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION
CONTRACT, THE LOWER COURT VIOLATED DEFENDANTS-APPELLANTS'
CONSTITUTIONAL GUARANTY OF NON-IMPAIRMENT OF THE OBLIGATION OF
CONTRACT. 1

Petitioners argue that under the aforequoted Article IX of the building contract,
any increase in the price of labor and/or materials resulting in an increase in
construction cost above the stipulated contract price will not automatically
make petitioners liable to pay for such increased cost, as any payment above
the stipulated contract price has been made subject to the condition that the
"appropriate adjustment" will be made "upon mutual agreement of both
parties." It is contended that since there was no mutual agreement between the
parties, petitioners' obligation to pay amounts above the original contract price
never materialized. cdtai
Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the
arguments raised by petitioners. It is of note however that the pleadings filed
with this Court by counsel for Ferrer hardly refute the arguments raised by
petitioners, as the contents of said pleadings are mostly quoted portions of the
decision of the Court of Appeals, devoid of adequate discussion of the merits of
respondent's case. The Court, to be sure, expects more diligence and legal
know-how from lawyers than what has been exhibited by counsel for
respondent in the present case. Under these circumstances, the Court had to
review the entire records of this case to evaluate the merits of the issues raised
by the contending parties.
Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius
incommodo debet lecupletari (no man ought to be made rich out of another's
injury) states:
"ARTICLE 22.
Every person who through an act of performance by another,
or any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to him."
cdt
The above-quoted article is part of the chapter of the Civil Code on Human
Relations, the provisions of which were formulated as "basic principles to be
observed for the rightful relationship between human beings and for the
stability of the social order, . . . designed to indicate certain norms that spring
from the fountain of good conscience, . . . guides for human conduct [that]

should run as golden threads through society to the end that law may approach
its supreme ideal which is the sway and dominance of justice." 2
In the present case, petitioners' arguments to support absence of liability for
the cost of construction beyond the original contract price are not persuasive.
Under the previously quoted Article IX of the construction contract, petitioners
would make the appropriate adjustment to the contract price in case the cost of
the project increases through no fault of the contractor (private respondent).
Private respondent informed petitioners of the drastic increase in construction
cost as early as March 1980. aisadc
Petitioners in turn had the increased cost evaluated and audited. When private
respondent demanded payment of P259,417.23, petitioner bank's VicePresident Rosito C. Manhit and the bank's architectural consultant were
directed by the bank to verify and compute private respondent's claims of
increased cost. A recommendation was then made to settle private
respondent's claim for P200,000.00. Despite this recommendation and several
demands from private respondent, SBTC failed to make payment. It denied
authorizing anyone to make a settlement of private respondent's claim and
likewise denied any liability, contending that the absence of mutual agreement
made private respondent's demand premature and baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred additional expenses in
constructing petitioner bank's building due to a drastic and unexpected increase
in construction cost. In fact, petitioner bank admitted liability for increased cost
when a recommendation was made to settle private respondent's claim for
P200,000.00. Private respondent's claim for the increased amount was
adequately proven during the trial by receipts, invoices and other supporting
documents. cdta
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its
fulfillment depends upon the sole will of the debtor. In the present case, the
mutual agreement, the absence of which petitioner bank relies upon to support
its non-liability for the increased construction cost, is in effect a condition

dependent on petitioner bank's sole will, since private respondent would

naturally and logically give consent to such an agreement which would allow
him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits when private
respondent completed the construction even at an increased cost.
Hence, to allow petitioner bank to acquire the constructed building at a price far
below its actual construction cost would undoubtedly constitute unjust
enrichment for the bank to the prejudice of private respondent. Such unjust
enrichment, as previously discussed, is not allowed by law. cdasia
Finally, with respect to the award of attorney's fees to respondent, the Court
has previously held that, "even with the presence of an agreement between the
parties, the court may nevertheless reduce attorney's fees though fixed in the
contract when the amount thereof appears to be unconscionable or
unreasonable." 3 As previously noted, the diligence and legal know-how
exhibited by counsel for private respondent hardly justify an award of 25% of
the principal amount due, which would be at least P60,000.00. Besides, the
issues in this case are far from complex and intricate. The award of attorney's
fees is thus reduced to P10,000.00.
WHEREFORE, with the above modification in respect of the amount of
attorney's fees, the appealed decision of the Court of Appeals in CA G.R. CV No.
40450 is AFFIRMED.
SO ORDERED. CDta

THIRD DIVISION
[G.R. No. 107207. November 23, 1995.]
VIRGILIO R. ROMERO, petitioner, vs. HON. COURT OF APPEALS and ENRIQUETA
CHUA VDA. DE ONGSIONG, respondents. cdll
Antonio C. Cabreros, Jr. & Peter M. Porras Law Offices and Yap, Apostol,
Gumaru & Balgua for petitioner.
Joaquin "Bobby" Yuseco for private respondent.
SYLLABUS
1.
CIVIL LAW; CONTRACTS; SALES; NATURE AND FORM; CONSTRUED. A
perfected contract of sale may either be absolute or conditional depending on
whether the agreement is devoid of, or subject to, any condition imposed on
the passing of title of the thing to be conveyed or on the obligation of a party
thereto. When ownership is retained until the fulfillment of a positive condition
the breach of the condition will simply prevent the duty to convey title from
acquiring an obligatory force. If the condition is imposed on an obligation of a
party which is not complied with, the other party may either refuse to proceed
or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is
imposed upon the perfection of the contract itself, the failure of such condition
would prevent the juridical relation itself from coming into existence.
2.
ID.; ID.; CHARACTER THEREOF; DETERMINED BY THE SUBSTANCE, NOT BY
THE TITLE GIVEN BY THE PARTIES. In determining the real character of the
contract, the title given to it by the parties is not as much significant as its
substance. For example, a deed of sale, although denominated as a deed of
conditional sale, may be treated as absolute in nature, if title to the property
sold is not reserved in the vendor or if the vendor is not granted the right to
unilaterally rescind the contract predicated on the fulfillment or non-fulfillment,
as the case may be, of the prescribed condition.
3.
ID.; ID.; ID.; TERM "CONDITION" IN THE CONTEXT OF A PERFECTED
CONTRACT OF SALE; CONSTRUED. The term "condition" in the context of a
perfected contract of sale pertains, in reality, to the compliance by one party of

an undertaking the fulfillment of which would beckon, in turn, the

demandability of the reciprocal prestation of the other party. The reciprocal
obligations referred to would normally be, in the case of vendee, the payment
of the agreed purchase price and, in the case of the vendor, the fulfillment of
certain express warranties (which, in the case at bench is the timely eviction of
the squatters on the property).
4.
ID.; ID.; ID.; WHEN PERFECTED. A sale is at once perfected when a
person (the seller) obligates himself, for a price certain, to deliver and to
transfer ownership of a specified thing or right to another (the buyer) over
which the latter agrees.
5.
ID.; ID.; ID.; CONDITIONAL SALE; FULFILLMENT OF CONDITION; OPERATIVE
ACT SETTING INTO MOTION VENDEE'S OBLIGATION. From the moment the
contract is perfected, the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which, according
to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the
property. The ejectment of the squatters is a condition the operative act of
which sets into motion the period of compliance by petitioner of his own
obligation, i.e., to pay the balance of the purchase price. cdlex
6.
ID.; ID.; ID.; ID.; RIGHT OF A VENDEE IN CASE OF NON-FULFILLMENT OF
CONDITION. Private respondent's failure "to remove the squatters from the
property" within the stipulated period gives petitioner the right to either refuse
to proceed with the agreement or waive that condition in consonance with
Article 1545 of the Civil Code. This option clearly belongs to petitioner and not
to private respondent. In contracts of sale particularly, Article 1545 of the Civil
Code, aforementioned, allows the obligee to choose between proceeding with
the agreement or waiving the performance of the condition. It is this provision
which is the pertinent rule in the case at bench. Here, evidently, petitioner has
waived the performance of the condition imposed on private respondent to free
the property from squatters.
7.
ID.; ID.; ID.; ID.; CONDITION IN CASE AT BAR; NOT POTESTATIVE. We
share the opinion of the appellate court that the undertaking required of private

respondent does not constitute a "potestative condition dependent solely on

his will" that might, otherwise, be void in accordance with Article 1182 of the
Civil Code but a "mixed" condition "dependent not on the will of the vendor
alone but also of third persons like the squatters and government agencies and
personnel concerned." We must hasten to add, however, that where the socalled "potestative condition" is imposed not on the birth of the obligation but
on its fulfillment, only the condition is avoided, leaving unaffected the
obligation itself.
8.
ID.; ID.; ID.; ID.; ACTION FOR RESCISSION; NOT WARRANTED IN CASE AT
BAR. Private respondent's action for rescission is not warranted. She is not
the injured party. The right of resolution of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the other party that
violates the reciprocity between them. It is private respondent who has failed in
her obligation under the contract. Petitioner did not breach the agreement. He
has agreed, in fact, to shoulder the expenses of the execution of the judgment
in the ejectment case and to make arrangements with the sheriff to effect such
execution. In his letter of 23 June 1989, counsel for petitioner has tendered
payment and demanded forthwith the execution of the deed of absolute sale.
Parenthetically, this offer to pay, having been made prior to the demand for
rescission, assuming for the sake of argument that such a demand is proper
under Article 1592 of the Civil Code, would likewise suffice to defeat private
respondent's prerogative to rescind thereunder. cdlex
DECISION
VITUG, J p:
The parties pose this question: May the vendor demand the rescission of a
contract for the sale of a parcel of land for a cause traceable to his own failure
to have the squatters on the subject property evicted within the contractuallystipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of
production, manufacture and exportation of perlite filter aids, permalite
insulation and processed perlite ore. In 1988, petitioner and his foreign partners
decided to put up a central warehouse in Metro Manila on a land area of

approximately 2,000 square meters. The project was made known to several
freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied
by a broker, offered a parcel of land measuring 1,952 square meters. Located in
Barangay San Dionisio, Paraaque, Metro Manila, the lot was covered by TCT
No. 361402 in the name of private respondent Enriqueta Chua vda. de
Ongsiong. Petitioner visited the property and, except for the presence of
squatters in the area, he found the place suitable for a central warehouse.
cdasia
Later, the Flores spouses called on petitioner with a proposal that should he
advance the amount of P50,000.00 which could be used in taking up an
ejectment case against the squatters, private respondent would agree to sell
the property for only P800.00 per square meter. Petitioner expressed his
concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional
Sale," was executed between petitioner and private respondent. The simplydrawn contract read:
"DEED OF CONDITIONAL SALE
"KNOW ALL MEN BY THESE PRESENTS:
"This Contract, made and executed in the Municipality of Makati, Philippines
this 9th day of June, 1988 by and between:
"ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and
residing at 105 Simoun St., Quezon City, Metro Manila, hereinafter referred to
as the VENDOR;
and
"VIRGILIO R. ROMERO, married to Severina L. Lat, of legal age, Filipino and
residing at 110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila,
hereinafter referred to as the VENDEE: cdtai
"WITNESSETH: That

"WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area
of ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more
or less, located in Barrio San Dionisio, Municipality of Paraaque, Province of
Rizal, covered by TCT No. 361402 issued by the Registry of Deeds of Pasig and
more particularly described as follows:
xxx

xxx

xxx

"WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land as the
VENDOR has accepted the offer, subject to the terms and conditions hereinafter
stipulated:
"NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY,
Philippine Currency, payable by VENDEE to in to (sic) manner set forth, the
VENDOR agrees to sell to the VENDEE, their heirs, successors, administrators,
executors, assign, all her rights, titles and interest in and to the property
mentioned in the FIRST WHEREAS CLAUSE, subject to the following terms and
conditions: cdt
"1. That the sum of FIFTY THOUSAND PESOS (50,000.00) ONLY Philippine
Currency, is to be paid upon signing and execution of this instrument.
"2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY shall
be paid 45 days after the removal of all squatters from the above described
property.
"3. Upon full payment of the overall purchase price as aforesaid, VENDOR
without necessity of demand shall immediately sign, execute, acknowledged
(sic) and deliver the corresponding deed of absolute sale in favor of the VENDEE
free from all liens and encumbrances and all Real Estates taxes are all paid and
updated.
"It is hereby agreed, covenanted and stipulated by and between the parties
hereto that if after 60 days from the date of the signing of this contract the
VENDOR shall not be able to remove the squatters from the property being

purchased, the downpayment made by the buyer shall be returned/reimbursed

by the VENDOR to the VENDEE. aisadc
"That in the event that the VENDEE shall not be able to pay the VENDOR the
balance of the purchase price of ONE MILLION FIVE HUNDRED ELEVEN
THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from
written notification to the VENDEE of the removal of the squatters from the
property being purchased, the FIFTY THOUSAND PESOS (P50,000.00) previously
paid as downpayment shall be forfeited in favor of the VENDOR.
"Expenses for the registration such as registration fees, documentary stamp,
transfer fee, assurance and such other fees and expenses as may be necessary
to transfer the title to the name of the VENDEE shall be for the account of the
VENDEE while capital gains tax shall be paid by the VENDOR.
"IN WITNESS WHEREOF, parties hereunto signed those (sic) presents in the City
of Makati MM, Philippines on this 9th day of June, 1988.
(Sgd.)

(Sgd.)

VIRGILIO R. ROMERO ENREQUETA CHUA VDA.

DE ONGSIONG
Vendee

Vendor

"SIGNED IN THE PRESENCE OF:

(Sgd.)

(Sgd.)

Rowena C. Ongsiong Jack M. Cruz" 1

Alfonso Flores, in behalf of private respondent, forthwith received and

acknowledged a check for P50,000.00 2 from petitioner. 3 aisadc
Pursuant to this agreement, private respondent filed a complaint for ejectment
(Civil Case No. 7579) against Melchor Musa and 29 other squatter families with
the Metropolitan Trial Court of Paraaque. A few months later, or on 21

February 1989, judgment was rendered ordering the defendants to vacate the
premises. The decision was handed down beyond the 60-day period (expiring 09
August 1988) stipulated in the contract. The writ of execution of the judgment
was issued, still later, on 30 March 1989. cdll
In a letter, dated 07 April 1989, private respondent sought to return the
P50,000.00 she received from petitioner since, she said, she could not "get rid of
the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his
reply of 17 April 1989, refused the tender and stated:
"Our client believes that with the exercise of reasonable diligence considering
the favorable decision rendered by the Court and the writ of execution issued
pursuant thereto, it is now possible to eject the squatters from the premises of
the subject property, for which reason, he proposes that he shall take it upon
himself to eject the squatters, provided, that expenses which shall be incurred
by reason thereof shall be chargeable to the purchase price of the land." 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUP"), through
its Regional Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial
Court of Paraaque for a grace period of 45 days from 21 April 1989 within
which to relocate and transfer the squatter families. Acting favorably on the
request, the court suspended the enforcement of the writ of execution
accordingly. cdta
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of
the 45-day grace period and his client's willingness to "underwrite the expenses
for the execution of the judgment and ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private
respondent, advised Atty. Apostol that the Deed of Conditional Sale had been
rendered null and void by virtue of his client's failure to evict the squatters from
the premises within the agreed 60-day period. He added that private
respondent had "decided to retain the property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:
"The contract of sale between the parties was perfected from the very moment
that there was a meeting of the minds of the parties upon the subject lot and

the price in the amount of P1,561,600.00. Moreover, the contract had already
been partially fulfilled and executed upon receipt of the downpayment of your
client. Ms. Ongsiong is precluded from rejecting its binding effects relying upon
her inability to eject the squatters from the premises of subject property during
the agreed period. Suffice it to state that, the provisions of the Deed of
Conditional Sale do not grant her the option or prerogative to rescind the
contract and to retain the property should she fail to comply with the obligation
she had assumed under the contract. In fact, a perusal of the terms and
conditions of the contract clearly shows that the right to rescind the contract
and to demand return/reimbursement of the downpayment is granted to our
client for his protection. cdtai
"Instead, however, of availing himself of the power to rescind the contract and
demand the return, reimbursement of the downpayment, our client had opted
to take it upon himself to eject the squatters from the premises. Precisely, we
refer you to our letters addressed to your client dated April 17, 1989 and June 8,
1989.
"Moreover, it is basic under the law on contracts that the power to rescind is
given to the injured party. Undoubtedly, under the circumstances, our client is
the injured party.
"Furthermore, your client has not complied with her obligation under their
contract in good faith. It is undeniable that Ms. Ongsiong deliberately refused to
exert efforts to eject the squatters from the premises of the subject property
and her decision to retain the property was brought about by the sudden
increase in the value of realties in the surrounding areas.
"Please consider this letter as a tender of payment to your client and a demand
to execute the absolute Deed of Sale." 7 cdtai
A few days later (or on 27 June 1989), private respondent prompted by
petitioner's continued refusal to accept the return of the P50,000.00 advance
payment, filed with the Regional Trial Court of Makati, Branch 133, Civil Case
No. 89-4394 for a rescission of the deed of "conditional" sale, plus damages, and
for the consignation of P50,000.00 cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ
of execution in Civil Case No. 7579 on motion of private respondent but the
squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of
Makati 8 rendered decision holding that private respondent had no right to
rescind the contract since it was she who "violated her obligation to eject the
squatters from the subject property" and that petitioner, being the injured
party, was the party who could, under Article 1191 of the Civil Code, rescind the
agreement. The court ruled that the provision in the contract relating to (a) the
return/reimbursement of the P50,000.00 if the vendor were to fail in her
obligation to free the property from the squatters within the stipulated period
or (b), upon the other hand, the sum's forfeiture by the vendor if the vendee
were to fail in paying the agreed purchase price, amounted to "penalty clauses."
The court added:
"This court is not convinced of the ground relied upon by the plaintiff in seeking
the rescission, namely: (1) he (sic) is afraid of the squatters; and (2) she has
spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3, 1990).
Militating against her profession of good faith is plaintiff's conduct which is not
in accord with the rules of fair play and justice. Notably, she caused the issuance
of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment suit
which was almost two months after she filed the complaint before this Court on
June 27, 1989. If she were really afraid of the squatters, then she should not
have pursued the issuance of an alias writ of execution. Besides, she did not
even report to the police the alleged phone threats from the squatters. To the
mind of the Court, the so-called factor is simply factuitous (sic)." 9 cdasia
The lower court, accordingly, dismissed the complaint and ordered, instead,
private respondent to eject or cause the ejectment of the squatters from the
property and to execute the absolute deed of conveyance upon payment of the
full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the
appellate court rendered its decision. 10 It opined that the contract entered into
by the parties was subject to a resolutory condition, i.e., the ejectment of the

squatters from the land, the non-occurrence of which resulted in the failure of
the object of the contract; that private respondent substantially complied with
her obligation to evict the squatters; that it was petitioner who was not ready to
pay the purchase price and fulfill his part of the contract, and that the provision
requiring a mandatory return/reimbursement of the P50,000.00 in case private
respondent would fail to eject the squatters within the 60-day period was not a
penal clause. Thus, it concluded:
"WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a
new one entered declaring the contract of conditional sale dated June 9, 1988
cancelled and ordering the defendant-appellee to accept the return of the
downpayment in the amount of P50,000.00 which was deposited in the court
below. No pronouncement as to costs." 11 cdt
Failing to obtain a reconsideration, petitioner filed this petition for review on
certiorari raising issues that, in fine, center on the nature of the contract
adverted to and the P50,000.00 remittance made by petitioner. cdll
A perfected contract of sale may either be absolute or conditional 12 depending
on whether the agreement is devoid of, or subject to, any condition imposed on
the passing of title of the thing to be conveyed or on the obligation of a party
thereto. When ownership is retained until the fulfillment of a positive condition
the breach of the condition will simply prevent the duty to convey title from
acquiring an obligatory force. If the condition is imposed on an obligation of a
party which is not complied with, the other party may either refuse to proceed
or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is
imposed upon the perfection of the contract itself, the failure of such condition
would prevent the juridical relation itself from coming into existence. 13
In determining the real character of the contract, the title given to it by the
parties is not as much as significant as its substance. For example, a deed of
sale, although denominated as a deed of conditional sale, may be treated as
absolute in nature, if title to the property sold is not reserved in the vendor or if
the vendor is not granted the right to unilaterally rescind the contract
predicated on the fulfillment or non-fulfillment, as the case may be, of the
prescribed condition. 14 aisadc

The term "condition" in the context of a perfected contract of sale pertains, in

reality, to the compliance by one party of an undertaking the fulfillment of
which would beckon, in turn, the demandability of the reciprocal prestation of
the other party. The reciprocal obligations referred to would normally be, in the
case of vendee, the payment of the agreed purchase price and, in the case of
the vendor, the fulfillment of certain express warranties (which, in the case at
bench is the timely eviction of the squatters on the property).
It would be futile to challenge the agreement here in question as not being a
duly perfected contract. A sale is at once perfected where a person (the seller)
obligates himself, for a price certain, to deliver and to transfer ownership of a
specified thing or right to another (the buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified to be as
1,952-square meter lot in San Dionisio, Paraaque, Rizal, covered by Transfer
Certificate of Title No. 361402 of the Registry of Deeds for Pasig and therein
technically described. The purchase price was fixed at P1,561,600.00, of which
P50,000.00 was to be paid upon the execution of the document of sale and the
balance of P1,511,600 payable "45 days after the removal of all squatters from
the above described property." cdta
From the moment the contract is perfected, the parties are bound not only to
the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good
faith, usage and law. Under the agreement, private respondent is obligated to
evict the squatters on the property. The ejectment of the squatters is a
condition the operative act of which sets into motion the period of compliance
by petitioner of his own obligation, i.e., to pay the balance of the purchase
price. Private respondent's failure to "remove the squatters from the property"
within the stipulated period gives petitioner the right to either refuse to
proceed with the agreement or waive that condition in consonance with Article
1545 of the Civil Code. 16 This option clearly belongs to petitioner and not to
private respondent.
We share the opinion of the appellate court that the undertaking required of
private respondent does not constitute a "potestative condition dependent

solely on his will" that might, otherwise, be void in accordance with Article 1182
of the Civil Code 17 but a "mixed" condition "dependent not on the will of the
vendor alone but also of third persons like the squatters and government
agencies and personnel concerned." 18 We must hasten to add, however, that
where the so-called "potestative condition" is imposed not on the birth of the
obligation but on its fulfillment, only the condition is avoided, leaving
unaffected obligation itself. 19
In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned,
allows the obligee to choose between proceeding with the agreement or
waiving the performance of the condition. It is this provision which is the
pertinent rule in the case at bench. Here, evidently, petitioner has waived the
performance of the condition imposed on private respondent to free the
property from squatters. 20
In any case, private respondent's action for rescission is not warranted. She is
not the injured party. 21 The right of resolution of a party to an obligation under
Article 1191 of the Civil Code is predicated on a breach of faith by the other
party that violates the reciprocity between them. 22 It is private respondent
who has failed in her obligation under the contract. Petitioner did not breach
the agreement. He has agreed, in fact, to shoulder the expenses of the
execution of the judgment in the ejectment case and to make arrangement with
the sheriff to effect such execution. In his letter of 23 June 1989, counsel for
petitioner has tendered payment and demanded forthwith the execution of the
deed of absolute sale. Parenthetically, this offer to pay, having been made prior
to the demand for rescission, assuming for the sake of argument that such a
demand is proper under Article 1592 23 of the Civil Code, would likewise suffice
to defeat private respondent's prerogative to rescind thereunder. LexLibris
There is no need to still belabor the question of whether the P50,000.00
advance payment is reimbursable to petitioner or forfeitable by private
respondent, since, on the basis of our foregoing conclusions, the matter has
ceased to be an issue. Suffice it to say that petitioner having opted to proceed
with the sale, neither may petitioner demand its reimbursement from private
respondent nor may private respondent subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby

REVERSED AND SET ASIDE, and another is entered ordering petitioner to pay
private respondent the balance of the purchase price and the latter to execute
the deed of absolute sale in favor of petitioner. No costs.
SO ORDERED. cdlex
Feliciano, Romero, Melo and Panganiban, JJ., concur.

SECOND DIVISION
[G.R. No. 107112. February 24, 1994.]
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,
vs. THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE,
INC. (CASURECO II), respondents.
SYLLABUS
1.
CIVIL LAW; OBLIGATION AND CONTRACTS; RULE WHERE A PERSON BY HIS
CONTRACT CHARGES HIMSELF WITH AN OBLIGATION POSSIBLE TO BE
PERFORMED. The case of Reyes v. Caltex (Philippines), Inc. enunciated the
doctrine that where a person by his contract charges himself with an obligation
possible to be performed, he must perform it, unless its performance is
rendered impossible by the act of God, by the law, or by the other party, it
being the rule that in case the party desires to be excused from performance in
the event of contingencies arising thereto, it is his duty to provide the basis
therefor in his contract. With the enactment of the New Civil Code, a new
provision was included therein namely, Article 1267 which provides: "When the
service has become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part." In
the report of the Code Commission, the rationale behind this innovation was
explained, thus: "The general rule is that impossibility of performance releases
the obligor. However, it is submitted that when the service has become so
difficult as to be manifestly beyond the contemplation of the parties, the court
should be authorized to release the obligor in whole or in part. The intention of
the parties should govern and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation, it would be doing violence
to that intention to hold the obligor still responsible." In other words, fair and
square consideration underscores the legal precept therein.
2.
ID.; ID.; "SERVICE" UNDER ART. 1267 REFERS TO THE PERFORMANCE OF
AN OBLIGATION; CASE AT BAR. Petitioners assert earnestly that Article 1267
of the New Civil Code is not applicable primarily because the contract does not
involve the rendition of service or a personal prestation and it is not for future
service with future unusual change. Instead, the ruling in the case Occea, et al.

v. Jabson, etc, et al., (G.R. No. L-44349, October 29, 1976, 73 SCRA 637) which
interpreted the article, should be followed in resolving this case. Besides, said
article was never raised by the parties in their pleadings and was never the
subject of trial and evidence. Article 1267 speaks of "service" which has become
so difficult. Taking into consideration the rationale behind this provision, the
term "service" should be understood as referring to the "performance" of the
obligation. In the present case, the obligation of private respondent consists in
allowing petitioners to use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare reading of this article reveals
that it is not a requirement thereunder that the contract be for future service
with future unusual change. According to Senator Arturo M. Tolentino, Article
1267 states in our law the doctrine of unforeseen events. This is said to be
based on the discredited theory of rebus sic stantibus in public international
law; under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract also ceases to
exist. Considering practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief in favor of
the party prejudiced.
3.
ID.; ID.; POTESTATIVE CONDITION; MEANING THEREOF; APPLICATION IN
CASE AT BAR. A potestative condition is a condition, the fulfillment of which
depends upon the sole will of the debtor, in which case, the conditional
obligation is void. Based on this definition, respondent court's finding that the
provision in the contract, to wit: "(a) That the term or period of this contract
shall be as long as the party of the first part (petitioner) has need for the electric
light posts of the party of the second part (private respondent) . . ." is a
potestative condition, is correct. However, it must have overlooked the other
conditions in the same provision, to wit: ". . . it being understood that this
contract shall terminate when for any reason whatsoever, the party of the
second part (private respondent) is forced to stop, abandoned (sic) its operation
as a public service and it becomes necessary to remove the electric light post
(sic);" which are casual conditions since they depend on chance, hazard, or the
will of a third person. In sum, the contract is subject to mixed conditions, that is,

they depend partly on the will of the debtor and partly on chance, hazard or the
will of a third person, which do not invalidate the aforementioned provision.
4.
ID.; PRESCRIPTION OF ACTIONS; RULE ON WRITTEN CONTRACT. Article
1144 of the New Civil Code provides, inter alia, that an action upon a written
contract must be brought within ten (10) years from the time the right of the
action accrues. Clearly, the ten (10) year period is to be reckoned from the time
the right of action accrues which is not necessarily the date of execution of the
contract. As correctly ruled by respondent court, private respondent's right of
action arose "sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's)
Board of Directors to study said contract as it already appeared
disadvantageous to (private respondent). (Private respondent's) cause of action
to ask for reformation of said contract should thus be considered to have arisen
only in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint in
this case was filed, ten (10) years had not yet elapsed."
DECISION
NOCON, J p:
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that
where a person by his contract charges himself with an obligation possible to be
performed, he must perform it, unless its performance is rendered impossible
by the act of God, by the law, or by the other party, it being the rule that in case
the party desires to be excused from performance in the event of contingencies
arising thereto, it is his duty to provide the basis therefor in his contract. LibLex
With the enactment of the New Civil Code, a new provision was included
therein namely, Article 1267 which provides:
"When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in
whole or in part."
In the report of the Code Commission, the rationale behind this innovation was
explained, thus:

"The general rule is that impossibility of performance releases the obligor.

However, it is submitted that when the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the parties
should govern and if it appears that the service turns out to be so difficult as to
have been beyond their contemplation, it would be doing violence to that
intention to hold the obligor still responsible." 2
In other words, fair and square consideration underscores the legal precept
therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the
Court of Appeals of Article 1267 in favor of Camarines Sur II Electric
Cooperative, Inc. in the case before us. Stated differently, the former insists that
the complaint should have been dismissed for failure to state a cause of action.
prLL
The antecedent facts, as narrated by respondent Court of Appeals are, as
follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company
rendering local as well as long distance service in Naga City while private
respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private
corporation established for the purpose of operating an electric power service
in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use
by petitioners in the operation of its telephone service the electric light posts of
private respondent in Naga City. In consideration therefor, petitioners agreed to
install, free of charge, ten (10) telephone connections for the use by private
respondent in the following places:
"(a) 3 units The Main Office of (private respondent);
(b)

2 Units The Warehouse of (private respondent);

(c)

1 Unit The Sub-Station of (private respondent) at Concepcion Pequea;

(d)

1 Unit The Residence of (private respondent's) President;

(e)
&

1 Unit The Residence of (private respondent's) Acting General Manager;

(f)

2 Units To be determined by the General Manager. 3

Said contract also provided:

"(a) That the term or period of this contract shall be as long as the party of the
first part has need for the electric light posts of the party of the second part it
being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes necessary to remove the electric
lightpost;" (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano
M. Maggay, then a member of the Board of Directors of private respondent and
at the same time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private
respondent filed on January 2, 1989 with the Regional Trial Court of Naga City
(Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract with
damages, on the ground that it is too one-sided in favor of petitioners; that it is
not in conformity with the guidelines of the National Electrification
Administration (NEA) which direct that the reasonable compensation for the use
of the posts is P10.00 per post, per month; that after eleven (11) years of
petitioners' use of the posts, the telephone cables strung by them thereon have
become much heavier with the increase in the volume of their subscribers,
worsened by the fact that their linemen bore holes through the posts at which
points those posts were broken during typhoons; that a post now costs as much
as P2,630.00; so that justice and equity demand that the contract be reformed
to abolish the inequities thereon. prLL
As second cause of action, private respondent alleged that starting with the
year 1981, petitioners have used 319 posts in the towns of Pili, Canaman,
Magarao and Milaor, Camarines Sur, all outside Naga City, without any contract
with it; that at the rate of P10.00 per post, petitioners should pay private
respondent for the use thereof the total amount of P267,960.00 from 1981 up

to the filing of its complaint; and that petitioners had refused to pay private
respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor
servicing by petitioners of the ten (10) telephone units which had caused it
great inconvenience and damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be
dismissed because (1) it does not sufficiently state a cause of action for
reformation of contract; (2) it is barred by prescription, the same having been
filed more than ten (10) years after the execution of the contract; and (3) it is
barred by estoppel, since private respondent seeks to enforce the contract in
the same action. Petitioners further alleged that their utilization of private
respondent's post could not have caused their deterioration because they have
already been in use for eleven (11) years; and that the value of their expenses
for the ten (10) telephone lines long enjoyed by private respondent free of
charge are far in excess of the amounts claimed by the latter for the use of the
posts, so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private
respondent had asked for telephone lines in areas outside Naga City for which
its posts were used by them; and that if petitioners had refused to comply with
private respondent's demands for payment for the use of the posts outside
Naga City, it was probably because what is due to them from private respondent
is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that
their telephone service had been categorized by the National
Telecommunication Corporation (NTC) as "very high" and of "superior quality."
During the trial, private respondent presented the following witnesses:
(1) Dioscoro Ragragio, one of the two officials who signed the contract in its
behalf, declared that it was petitioner Maggay who prepared the contract; that
the understanding between private respondent and petitioners was that the
latter would only use the posts in Naga City because at that time, petitioners'
capability was very limited and they had no expectation of expansion because of

legal squabbles within the company; that private respondent agreed to allow
petitioners to use its posts in Naga City because there were many subscribers
therein who could not be served by them because of lack of facilities; and that
while the telephone lines strung to the posts were very light in 1977, said posts
have become heavily loaded in 1989. LLphil
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and
Maintenance Department, declared that the posts being used by petitioners
totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili,
Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that
petitioners' cables strung to the posts in 1989 are much bigger than those in
November, 1977; that in 1987, almost 100 posts were destroyed by typhoon
Sisang: around 20 posts were located between Naga City and the town of Pili
while the posts in barangay Concepcion, Naga City were broken at the middle
which had been bored by petitioner's linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending
on the size; that some lines that were strung to the posts did not follow the
minimum vertical clearance required by the National Building Code, so that
there were cases in 1988 where, because of the low clearance of the cables,
passing trucks would accidentally touch said cables causing the posts to fall and
resulting in brown-outs until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of
private respondent and Manager of Region V of NEA, declared that according to
NEA guidelines in 1985 (Exh. "C"), for the use by private telephone systems of
electric cooperatives' posts, they should pay a minimum monthly rental of P4.00
per post, and considering the escalation of prices since 1985, electric
cooperatives have been charging from P10.00 to P15.00 per post, which is what
petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of
private respondent, testified on the poor service rendered by petitioners'
telephone lines, like the telephone in their Complaints Section which was
usually out of order such that they could not respond to the calls of their
customers. In case of disruption of their telephone lines, it would take two to

three hours for petitioners to reactivate them notwithstanding their calls on the
emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that
the Board of Directors asked him to study the contract sometime during the
latter part of 1982 or in 1983, as it had appeared very disadvantageous to
private respondent. Notwithstanding his recommendation for the filing of a
court action to reform the contract, the former general managers of private
respondent wanted to adopt a soft approach with petitioners about the matter
until the term of General Manager Henry Pascual who, after failing to settle the
matter amicably with petitioners, finally agreed for him to file the present
action for reformation of contract.
On the other hand, petitioner Maggay testified to the following effect:
(1) It is true that he was a member of the Board of Directors of private
respondent and at the same time the lawyer of petitioner when the contract
was executed, but Atty. Gaudioso Tena, who was also a member of the Board of
Directors of private respondent, was the one who saw to it that the contract
was fair to both parties.
(2)

With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10)
telephone units of petitioners for as long as it wishes without paying anything
therefor except for long distance calls through PLDT out of which the latter get
only 10% of the charges. LLpr
(b) In most cases, only drop wires and not telephone cables have been strung
to the posts, which posts have remained erect up to present;
(c) Petitioners' linemen have strung only small messenger wires to many of
the posts and they need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners'
cables in Naga City are according to standard and comparable to those of PLDT.
The accidents mentioned by private respondent involved trucks that were either

overloaded or had loads that protruded upwards, causing them to hit the
cables.
(3) Concerning the second cause of action, the intention of the parties when
they entered into the contract was that the coverage thereof would include the
whole area serviced by petitioners because at that time, they already had
subscribers outside Naga City. Private respondent, in fact, had asked for
telephone connections outside Naga City for its officers and employees residing
there in addition to the ten (10) telephone units mentioned in the contract.
Petitioners have not been charging private respondent for the installation,
transfers and re-connections of said telephones so that naturally, they use the
posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners
cable installations to be in accordance with engineering standards and practice
and comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial
court found, as regards private respondents first cause of action, that while the
contract appeared to be fair to both parties when it was entered into by them
during the first year of private respondents operation and when its Board of
Directors did not yet have any experience in that business, it had become
disadvantageous and unfair to private respondent because of subsequent
events and conditions, particularly the increase in the volume of the subscribers
of petitioners for more than ten (10) years without the corresponding increase
in the number of telephone connections to private respondent free of charge.
The trial court concluded that while in an action for reformation of contract, it
cannot make another contract for the parties, it can, however, for reasons of
justice and equity, order that the contract be reformed to abolish the inequities
therein. Thus, said court ruled that the contract should be reformed by ordering
petitioners to pay private respondent compensation for the use of their posts in
Naga City, while private respondent should also be ordered to pay the monthly
bills for the use of the telephones also in Naga City. And taking into
consideration the guidelines of the NEA on the rental of posts by telephone
companies and the increase in the costs of such posts, the trial court opined
that a monthly rental of P10.00 for each post of private respondent used by

petitioners is reasonable, which rental it should pay from the filing of the
complaint in this case on January 2, 1989. And in like manner, private
respondent should pay petitioners from the same date its monthly bills for the
use and transfers of its telephones in Naga City at the same rate that the public
are paying. cdll
On private respondent's second cause of action, the trial court found that the
contract does not mention anything about the use by petitioners of private
respondent's posts outside Naga City. Therefore, the trial court held that for
reason of equity, the contract should be reformed by including therein the
provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to start
on the date this case was filed, or on January 2, 1989, and private respondent
should also pay petitioners the monthly dues on its telephone connections
located outside Naga City beginning January, 1989.
And with respect to private respondent's third cause of action, the trial court
found the claim not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20,
1990:
"WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering
the reformation of the agreement (Exh. A); ordering the defendants to pay
plaintiff's electric poles in Naga City and in the towns of Milaor, Canaman,
Maragao and Pili, Camarines Sur and in other places where defendant NATELCO
uses plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole,
per month beginning January, 1989 and ordering also the plaintiff to pay
defendant NATELCO the monthly dues of all its telephones including those
installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr.
Antonio Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis
General, Jr. beginning January, 1989. Plaintiff's claim for attorney's fees and
expenses of litigation and defendants' counterclaim are both hereby ordered
dismissed. Without pronouncement as to costs." llcd
Disagreeing with the foregoing judgment, petitioners appealed to respondent
Court of Appeals. In the decision dated May 28, 1992, respondent court

affirmed the decision of the trial court, 5 but based on different grounds to wit:
(1) that Article 1267 of the New Civil Code is applicable and (2) that the contract
was subject to a potestative condition which rendered said condition void. The
motion for reconsideration was denied in the resolution dated September 10,
1992. 6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent
court:
1) in making a contract for the parties by invoking Article 1267 of the New
Civil Code;
2) in ruling that prescription of the action for reformation of the contract in
this case commenced from the time it became disadvantageous to private
respondent; and
3) in ruling that the contract was subject to a potestative condition in favor
of petitioners.
Petitioners assert earnestly that Article 1267 of the New Civil Code is not
applicable primarily because the contract does not involve the rendition of
service or a personal prestation and it is not for future service with future
unusual change. Instead, the ruling in the case Occea, et al. v. Jabson, etc, et
al., 7 which interpreted the article, should be followed in resolving this case.
Besides, said article was never raised by the parties in their pleadings and was
never the subject of trial and evidence.
In applying Article 1267, respondent court rationalized:
"We agree with appellant that in order that an action for reformation of
contract would lie and may prosper, there must be sufficient allegations as well
as proof that the contract in question failed to express the true intention of the
parties due to error or mistake, accident, or fraud. Indeed, in embodying the
equitable remedy of reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
'Equity dictates the reformation of an instrument in order that the true
intention of the contracting parties may be expressed. The courts by the

reformation do not attempt to make a new contract for the parties, but to make
the instrument express their real agreement. The rationale of the doctrine is
that it would be unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting of the minds of
the parties. The rigor of the legalistic rule that a written instrument should be
the final and inflexible criterion and measure of the rights and obligations of the
contracting parties is thus tempered to forestall the effects of mistake, fraud,
inequitable conduct, or accident.' (pp. 55-56, Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in
essence that where through mistake or accident on the part of either or both of
the parties or mistake or fraud on the part of the clerk or typist who prepared
the instrument, the true intention of the parties is not expressed therein, then
the instrument may be reformed at the instance of either party if there was
mutual mistake on their part, or by the injured party if only he was mistaken.
cdphil
Here, plaintiff-appellee did not allege in its complaint, nor does its evidence
prove, that there was a mistake on its part or mutual mistake on the part of
both parties when they entered into the agreement Exh. "A", and that because
of this mistake, said agreement failed to express their true intention. Rather,
plaintiff's evidence shows that said agreement was prepared by Atty. Luciano
Maggay, then a member of plaintiff's Board of Directors and its legal counsel at
that time, who was also the legal counsel for defendant-appellant, so that as
legal counsel for both companies and presumably with the interests of both
companies in mind when he prepared the aforesaid agreement, Atty. Maggay
must have considered the same fair and equitable to both sides, and this was
affirmed by the lower court when it found said contract to have been fair to
both parties at the time of its execution. In fact, there were no complaints on
the part of both sides at the time of and after the execution of said contract,
and according to 73-year old Justino de Jesus, Vice President and General
manager of appellant at the time who signed the agreement Exh. "A" in its
behalf and who was one of the witnesses for the plaintiff (sic), both parties
complied with said contract 'from the very beginning' (p. 5, tsn, April 17, 1989).

That the aforesaid contract has become iniquitous or unfavorable or

disadvantageous to the plaintiff with the expansion of the business of appellant
and the increase in the volume of its subscribers in Naga City and environs
through the years, necessitating the stringing of more and bigger telephone
cable wires by appellant to plaintiff's electric posts without a corresponding
increase in the ten (10) telephone connections given by appellant to plaintiff
free of charge in the agreement Exh. "A" as consideration for its use of the
latter's electric posts in Naga City, appear, however, undisputed from the
totality of the evidence on record and the lower court so found. And it was for
this reason that in the later (sic) part of 1982 or 1983 (or five or six years after
the subject agreement was entered into by the parties), plaintiff's Board of
Directors already asked Atty. Luis General who had become their legal counsel
in 1982, to study said agreement which they believed had become
disadvantageous to their company and to make the proper recommendation,
which study Atty. General did, and thereafter, he already recommended to the
Board the filing of a court action to reform said contract, but no action was
taken on Atty. General's recommendation because the former general
managers of plaintiff wanted to adopt a soft approach in discussing the matter
with appellant, until, during the term of General Manager Henry Pascual, the
latter, after failing to settle the problem with Atty. Luciano Maggay who had
become the president and general manager of appellant, already agreed for
Atty. General's filing of the present action. The fact that said contract has
become iniquitous or disadvantageous to plaintiff as the years went by did not,
however, give plaintiff a cause of action for reformation of said contract, for the
reasons already pointed out earlier. But this does not mean that plaintiff is
completely without a remedy, for we believe that the allegations of its
complaint herein and the evidence it has presented sufficiently make out a
cause of action under Art. 1267 of the New Civil Code for its release from the
agreement in question. LibLex
xxx

xxx

xxx

The understanding of the parties when they entered into the Agreement Exh.
"A" on November 1, 1977 and the prevailing circumstances and conditions at

the time, were described by Dioscoro Ragragio, the President of plaintiff in 1977
and one of its two officials who signed said agreement in its behalf, as follows:
'Our understanding at that time is that we will allow NATELCO to utilize the
posts of CASURECO II only in the City of Naga because at that time the capability
of NATELCO was very limited, as a matter of fact we do [sic] not expect to be
able to expand because of the legal squabbles going on in the NATELCO. So,
even at that time there were so many subscribers in Naga City that cannot be
served by the NATELCO, so as a matter of public service we allowed them to sue
(sic) our posts within the Naga City.' (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric
posts of plaintiff were very light and that very few telephone lines were
attached to the posts of CASURECO II in 1977, said posts have become 'heavily
loaded' in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the increase in the
volume of appellant's subscribers and the corresponding increase in the
telephone cables and wires strung by it to plaintiff's electric posts in Naga City
for the more 10 years that the agreement Exh. "A" of the parties has been in
effect, there has been no corresponding increase in the ten (10) telephone units
connected by appellant free of charge to plaintiff's offices and other places
chosen by plaintiff's general manager which was the only consideration
provided for in said agreement for appellant's use of plaintiff's electric posts.
Not only that, appellant even started using plaintiff's electric posts outside Naga
City although this was not provided for in the agreement Exh. "A" as it extended
and expanded its telephone services to towns outside said city. Hence, while
very few of plaintiff's electric posts were being used by appellant in 1977 and
they were all in the City of Naga, the number of plaintiff's electric posts that
appellant was using in 1989 had jumped to 1,403,192 of which are outside Naga
City (Exh. "B"). Add to this the destruction of some of plaintiff's poles during
typhoons like the strong typhoon Sisang in 1987 because of the heavy
telephone cables attached thereto, and the escalation of the costs of electric
poles from 1977 to 1989, and the conclusion is indeed ineluctable that the
agreement Exh. "A" has already become too one-sided in favor of appellant to
the great disadvantage of plaintiff, in short, the continued enforcement of said

contract has manifestly gone far beyond the contemplation of plaintiff, so much
so that it should now be released therefrom under Art. 1267 of the New Civil
Code to avoid appellant's unjust enrichment at its (plaintiff's) expense. As stated
by Tolentino in his commentaries on the Civil Code citing foreign civilist
Ruggiero, 'equity demands a certain economic equilibrium between the
prestation and the counter-prestation, and does not permit the unlimited
impoverishment of one party for the benefit of the other by the excessive
rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil
Code of the Philippines, 1986 ed., pp. 247-248). LexLib
We therefore, find nothing wrong with the ruling of the trial court, although
based on a different and wrong premise (i.e., reformation of contract), that
from the date of the filing of this case, appellant must pay for the use of
plaintiff's electric posts in Naga City at the reasonable monthly rental of P10.00
per post, while plaintiff should pay appellant for the telephones in the same City
that it was formerly using free of charge under the terms of the agreement Exh.
"A" at the same rate being paid by the general public. In affirming said ruling,
we are not making a new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic and essential services being
rendered by both parties herein to the public and to avoid unjust enrichment by
appellant at the expense of plaintiff, said arrangement to continue only until
such time as said parties can re-negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is
reached and executed by the parties, the aforesaid ruling of the lower court and
affirmed by us shall cease to exist and shall be substituted and superseded by
their new agreement. . . ." 8
Article 1267 speaks of "service" which has become so difficult. Taking into
consideration the rationale behind this provision, 9 the term "service" should be
understood as referring to the "performance" of the obligation. In the present
case, the obligation of private respondent consists in allowing petitioners to use
its posts in Naga City, which is the service contemplated in said article.
Furthermore, a bare reading of this article reveals that it is not a requirement
thereunder that the contract be for future service with future unusual change.
According to Senator Arturo M. Tolentino, 10 Article 1267 states in our law the

doctrine of unforeseen events. This is said to be based on the discredited theory

of rebus sic stantibus in public international law; under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions
cease to exist the contract also ceases to exist. Considering practical needs and
the demands of equity and good faith, the disappearance of the basis of a
contract gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occea case filed a complaint against
petitioner before the trial court praying for modification of the terms and
conditions of the contract that they entered into by fixing the proper shares that
should pertain to them out of the gross proceeds from the sales of subdivided
lots. We ordered the dismissal of the complaint therein for failure to state a
sufficient cause of action. We rationalized that the Court of Appeals misapplied
Article 1267 because:
". . . respondent's complaint seeks not release from the subdivision contract
but that the court 'render judgment modifying the terms and conditions of the
contract . . . by fixing the proper shares that should pertain to the herein parties
out of the gross proceeds from the sales of subdivided lots of subject
subdivision'. The cited article (Article 1267) does not grant the courts (the)
authority to remake, modify or revise the contract or to fix the division of shares
between the parties as contractually stipulated with the force of law between
the parties, so as to substitute its own terms for those covenanted by the
parties themselves. Respondent's complaint for modification of contract
manifestly has no basis in law and therefore states no cause of action. Under
the particular allegations of respondent's complaint and the circumstances
therein averred, the courts cannot even in equity the relief sought." 11
The ruling in the Occea case is not applicable because we agree with
respondent court that the allegations in private respondent's complaint and the
evidence it has presented sufficiently made out a cause of action under Article
1267. We, therefore, release the parties from their correlative obligations under
the contract. However, our disposition of the present controversy does not end
here. We have to take into account the possible consequences of merely
releasing the parties therefrom: petitioners will remove the telephone
wires/cables in the posts of private respondent, resulting in disruption of their

essential service to the public; while private respondent, in consonance with the
contract 12 will return all the telephone units to petitioners, causing prejudice
to its business. We shall not allow such eventuality. Rather, we require, as
ordered by the trial court: 1) petitioners to pay private respondent for the use
of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners use private respondent's
posts, the sum of ten (P10.00) pesos per post, per month, beginning January,
1989; and 2) private respondent to pay petitioner the monthly dues of all its
telephones at the same rate being paid by the public beginning January, 1989.
The peculiar circumstances of the present case, as distinguished further from
the Occea case, necessitates exercise of our equity jurisdiction. 13 By way of
emphasis, we reiterate the rationalization of respondent court that: cdll
". . . In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic and
essential services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff . . . ." 14
Petitioners' assertion that Article 1267 was never raised by the parties in their
pleadings and was never the subject of trial and evidence has been passed upon
by respondent court in its well reasoned resolution, which we hereunder quote
as our own:
"First, we do not agree with defendant-appellant that in applying Art. 1267 of
the New Civil Code to this case, we have changed its theory and decided the
same on an issue not invoked by plaintiff in the lower court. For basically, the
main and pivotal issue in this case is whether the continued enforcement of the
contract Exh. "A" between the parties has, through the years (since 1977),
become too iniquitous or disadvantageous to the plaintiff and too one-sided in
favor of defendant-appellant, so that a solution must be found to relieve
plaintiff from the continued operation of said agreement and to prevent
defendant-appellant from further unjustly enriching itself at plaintiff's expense.
It is indeed unfortunate that defendant had turned deaf ears to plaintiff's
requests for renegotiation, constraining the latter to go to court. But although
plaintiff cannot, as we have held, correctly invoke reformation of contract as a
proper remedy (there having been no showing of a mistake or error in said

contract on the part of any of the parties so as to result in its failure to express
their true intent), this does not mean that plaintiff is absolutely without a
remedy in order to relieve itself from a contract that has gone far beyond its
contemplation and has become highly iniquitous and disadvantageous to it
through the years because of the expansion of defendant-appellant's business
and the increase in the volume of its subscribers. And as it is the duty of the
Court to administer justice, it must do so in this case in the best way and
manner it can in the light of the proven facts and the law or laws applicable
thereto. cdphil
It is settled that when the trial court decides a case in favor of a party on a
certain ground, the appellate court may uphold the decision below upon some
other point which was ignored or erroneously decided by the trial court (Garcia
Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de
Paz, 18 SCRA 467). Furthermore, the appellate court has the discretion to
consider an unassigned error that is closely related to an error properly assigned
(Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also
been held that the Supreme Court (and this Court as well) has the authority to
review matters, even if they are not assigned as errors in the appeal, if it is
found that their consideration is necessary in arriving at a just decision of the
case (Saura Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8
SCRA 143). For it is the material allegations of fact in the complaint, not the
legal conclusion made therein or the prayer, that determines the relief to which
the plaintiff is entitled, and the plaintiff is entitled to as much relief as the facts
warrant although that relief is not specifically prayed for in the complaint
(Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844;
Baguioro v. Barrios, 77 Phil. 120). To quote an old but very illuminating decision
of our Supreme Court through the pen of American jurist Adam C. Carson:
'Under our system of pleading it is the duty of the courts to grant the relief to
which the parties are shown to be entitled by the allegations in their pleadings
and the facts proven at the trial, and the mere fact that they themselves
misconstrue the legal effects of the facts thus alleged and proven will not
prevent the court from placing the just construction thereon and adjudicating
the issues accordingly.' (Alzua v. Johnson, 21 Phil. 308)

And in the fairly recent case of Caltex Phil. Inc. v. IAC, 176 SCRA 741, the
Honorable Supreme Court also held:
'We rule that the respondent court did not commit any error in taking
cognizance of the aforesaid issues, although not raised before the trial court.
The presence of strong consideration of substantial justice has led this Court to
relax the well-entrenched rule that, except questions on jurisdiction, no
question will be entertained on appeal unless it has been raised in the court
below and it is within the issues made by the parties in their pleadings (Cordero
v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .'
We believe that the above authorities suffice to show that this Court did not err
in applying Art. 1267 of the New Civil Code to this case. Defendant-appellant
stresses that the applicability of said provision is a question of fact, and that it
should have been given the opportunity to present evidence on said question.
But defendant-appellant cannot honestly and truthfully claim that it (did) not
(have) the opportunity to present evidence on the issue of whether the
continued operation of the contract Exh. "A" has now become too one-sided in
its favor and too iniquitous, unfair, and disadvantageous to plaintiff. As held in
our decision, the abundant and copious evidence presented by both parties in
this case and summarized in said decision established the following essential
and vital facts which led us to apply Art. 1267 of the New Civil Code to this case:
Cdpr
xxx

xxx

xxx." 15

On the issue of prescription of private respondent's action for reformation of

contract, petitioners allege that respondent court's ruling that the right of
action "arose only after said contract had already become disadvantageous and
unfair to it due to subsequent events and conditions, which must be sometime
during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of
contracts, what is reformed is not the contract itself, but the instrument
embodying the contract. It follows that whether the contract is disadvantageous
or not irrelevant to reformation and therefore, cannot be an element in the
determination of the period for prescription of the action to reform.

Article 1144 of the New Civil Code provides, inter alia, that an action upon a
written contract must be brought within ten (10) years from the time the right
of the action accrues. Clearly, the ten (10) year period is to be reckoned from
the time the right of action accrues which is not necessarily the date of
execution of the contract. As correctly ruled by respondent court, private
respondent's right of action arose "sometime during the latter part of 1982 or in
1983 when according to Atty. Luis General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said contract as it already appeared
disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private
respondent's) cause of action to ask for reformation of said contract should thus
be considered to have arisen only in 1982 or 1983, and from 1982 to January 2,
1989 when the complaint in this case was filed, ten (10) years had not yet
elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely
potestative about the prestations of either party because petitioner's
permission for free use of telephones is not made to depend purely on their
will, neither is private respondent's permission for free use of its posts
dependent purely on its will. llcd
Apart from applying Article 1267, respondent court cited another legal remedy
available to private respondent under the allegations of its complaint and the
preponderant evidence presented by it:
". . . we believe that the provision in said agreement
'(a) That the term or period of this contract shall be as long as the party of the
first part [herein appellant] has need for the electric light posts of the party of
the second part [herein plaintiff] it being understood that this contract shall
terminate when for any reason whatsoever, the party of the second part is
forced to stop, abandoned [sic] its operation as a public service and it becomes
necessary to remove the electric light post [sic]'; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it leaves the
continued effectivity of the aforesaid agreement to the latter's sole and
exclusive will as long as plaintiffs is in operation. A similar provision in a contract
of lease wherein the parties agreed that the lessee could stay on the leased

premises 'for as long as the defendant needed the premises and can meet and
pay said increases' was recently held by the Supreme Court in Lim v. C.A., 191
SCRA 150, citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470,
as invalid for being 'a purely potestative condition because it leaves the
effectivity and enjoyment of leasehold rights to the sole and exclusive will of the
lessee.' Further held the High Court in the Lim case: llcd
'The continuance, effectivity and fulfillment of a contract of lease cannot be
made to depend exclusively upon the free and uncontrolled 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 of no equality exists between the lessor and the lessee since the life of the
contract is dictated solely by the lessee.'
The above can also be said of the agreement Exh. "A" between the parties in
this case. There is no mutuality and equality between them under the aforequoted provision thereof since the life and continuity of said agreement is made
to depend as long as appellant needs plaintiff's electric posts. And this is
precisely why, since 1977 when said agreement was executed and up to 1989
when this case was finally filed by plaintiff, it could do nothing to be released
from or terminate said agreement notwithstanding that its continued effectivity
has become very disadvantageous and iniquitous to it due to the expansion and
increase of appellant's telephone services within Naga City and even outside the
same, without a corresponding increase in the ten (10) telephone units being
used by plaintiff free of charge, as well as the bad and inefficient service of said
telephones to the prejudice and inconvenience of plaintiff and its customers. . .
." 18
Petitioners' allegations must be upheld in this regard. A potestative condition is
a condition, the fulfillment of which depends upon the sole will of the debtor, in
which case, the conditional obligation is void. 19 Based on this definition,
respondent court's finding that the provision in the contract, to wit:
"(a) That the term or period of this contract shall be as long as the party of the
first part (petitioner) has need for the electric light posts of the party of the
second part (private respondent) . . ." LLjur

is a potestative condition, is correct. However, it must have overlooked the

other conditions in the same provision, to wit:
". . . it being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part (private respondent) is forced to stop,
abandoned (sic) its operation as a public service and it becomes necessary to
remove the electric light post (sic);"
which are casual conditions since they depend on chance, hazard, or the will of
a third person. 20 In sum, the contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor and partly on chance, hazard or the
will of a third person, which do not invalidate the aforementioned provision. 21
Nevertheless, in view of our discussions under the first and second issues raised
by petitioners, there is no reason to set aside the questioned decision and
resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals dated May 28, 1992 and its resolution dated September 10, 1992 are
AFFIRMED.
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Puno, JJ ., concur.

THIRD DIVISION
[G.R. No. 96053. March 3, 1993.]
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN GALICIA, JUAN
GALICIA, JR. and RODRIGO GALICIA, petitioners, vs. COURT OF APPEALS and
ALBRIGIDO LEYVA, respondents.
Facundo T. Bautista for petitioners.
Jesus T. Garcia for private respondent.
SYLLABUS
1.
CIVIL LAW; CONTRACTS; RESCISSION; WAIVER OF RIGHT THERETO. The
suggestion of petitioners that the covenant must be cancelled in the light of
private respondent's so-called breach seems to overlook petitioners' demeanor
who, instead of immediately filing the case precisely to rescind the instrument
because of non-compliance, allowed private respondent to effect numerous
payments posterior to the grace periods provided in the contract. This apathy of
petitioners who even permitted private respondent to take the initiative in filing
the suit for specific performance against them, is akin to waiver or
abandonment of the right to rescind normally conferred by Article 1191 of the
Civil Code. As aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz
(135 SCRA 323 [1985]; 4 Paras, Civil Code of the Philippines Annotated, Twelfth
Ed. [1989], p. 203): ". . . We agree with the plaintiffs-appellees that when the
defendants-appellants, instead of availing of their alleged right to rescind, have
accepted and received delayed payments of installments, though the plaintiffsappellees have been in arrears beyond the grace period mentioned in paragraph
6 of the contract, the defendants-appellants have waived, and are now
estopped from exercising their alleged right of rescission . . ." In Development
Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818; cited in 4 Padilla,
Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion was
expressed to the effect that: "In a perfected contract of sale of land under an
agreed schedule of payments, while the parties may mutually oblige each other
to compel the specific performance of the monthly amortization plan, and upon
failure of the buyer to make the payment, the seller has the right to ask for a

rescission of the contract under Art. 1191 of the Civil Code, this shall be deemed
waived by acceptance of posterior payments." Both the trial and appellate
courts were, therefore, correct in sustaining the claim of private respondent
anchored on estoppel or waiver by acceptance of delayed payments under
Article 1235 of the Civil Code in that: "When the obligee accepts the
performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied
with."
2.
ID.; ID.; IN RECIPROCAL CONTRACTS BOTH PARTIES ARE CONSIDERED
MUTUALLY OBLIGORS AND OBLIGEES OF EACH OTHER. Respondent court
applied Article 1186 of the Civil Code on constructive fulfillment which
petitioners claim should not have been appreciated because they are the
obligees while the proviso in point speaks of the obligor. But, petitioners must
concede that in a reciprocal obligation like a contract of purchase (Ang vs. Court
of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are
mutually obligors and also obligees (4 Padilla, supra, at p. 197), and any of the
contracting parties may, upon non-fulfillment by the other privy of his part of
the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code).
In short, it is puerile for petitioners to say that they are the only obligees under
the contract since they are also bound as obligors to respect the stipulation in
permitting private respondent to assume the loan with the Philippine Veterans
Bank which petitioners impeded when they paid the balance of said loan. As
vendors, they are supposed to execute the final deed of sale upon full payment
of the balance as determined hereafter.
DECISION
MELO, J p:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to
his demise in 1979, and Celerina Labuguin, in favor of Albrigido Leyva involving
the undivided one-half portion of a piece of land situated at Poblacion, Guimba,
Nueva Ecija for the sum of P50,000.00 under the following terms:
"1. The sum of PESOS: THREE THOUSAND (P3,000.00) is HEREBY
acknowledged to have been paid upon the execution of this agreement;

2.
The sum of PESOS: TEN THOUSAND (P10,000.00) shall be paid within ten
(10) days from and after the execution of this agreement;
3.
The sum of PESOS: TEN THOUSAND (P10,000.00) represents the VENDORS'
indebtedness with the Philippine Veterans Bank which is hereby assumed by the
VENDEE; and
4.
The balance of PESOS: TWENTY SEVEN THOUSAND (P27,000.00) shall be
paid within one (1) year from and after the execution of this instrument." (p. 53,
Rollo). cdll0
is the subject matter of the present litigation between the heirs of Juan Galicia,
Sr. who assert breach of the conditions as against private respondent's claim
anchored on full payment and compliance with the stipulations thereof.
The court of origin which tried the suit for specific performance filed by private
respondent on account of the herein petitioners' reluctance to abide by the
covenant, ruled in favor of the vendee (p. 64, Rollo) while respondent court
practically agreed with the trial court except as to the amount to be paid to
petitioners and the refund to private respondent are concerned (p. 46, Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was
received by Juan Galicia, Sr. According to petitioners, of the P10,000.00 to be
paid within ten days from execution of the instrument, only P9,707.00 was
tendered to, and received by, them on numerous occasions from May 29, 1975,
up to November 3, 1979. Concerning private respondent's assumption of the
vendors' obligation to the Philippine Veterans Bank, the vendee paid only the
sum of P6,926.41 while the difference of the indebtedness came from Celerina
Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single centavo
of the P27,000.00 representing the remaining balance was paid to them.
Because of the apprehension that the heirs of Juan Galicia, Sr. are disavowing
the contract inked by their predecessor, private respondent filed the complaint
for specific performance.
In addressing the issue of whether the conditions of the instrument were
performed by herein private respondent as vendee, the Honorable Godofredo
G. Rilloraza, Presiding Judge of Branch 31 of the Regional Trial Court, Third

Judicial Region stationed at Guimba, Nueva Ecija, decided to uphold private

respondent's theory on the basis of constructive fulfillment under Article 1186
and estoppel through acceptance of piecemeal payments in line with Article
1235 of the Civil Code.
Anent the P10,000.00 specified as second installment, the lower court counted
against the vendors the candid statement of Josefina Tayag who sat on the
witness stand and made the admission that the check issued as payment
thereof was nonetheless paid on a staggered basis when the check was
dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66, Rollo).
Regarding the third condition, the trial court noted that plaintiff below paid
more than P6,000.00 to the Philippine Veterans Bank but Celerina Labuquin, the
sister and co-vendor of Juan Galicia, Sr. paid P3,778.77 which circumstance was
construed to be a ploy under Article 1186 of the Civil Code that "prematurely
prevented plaintiff from paying the installment fully" and "for the purpose of
withdrawing the title to the lot". The acceptance by petitioners of the various
payments even beyond the periods agreed upon, was perceived by the lower
court as tantamount to faithful performance of the obligation pursuant to
Article 1235 of the Civil Code. Furthermore, the trial court noted that private
respondent consigned P18,520.00, an amount sufficient to offset the remaining
balance, leaving the sum of P1,315.00 to be credited to private respondent.
On September 12, 1984, judgment was rendered:
"1. Ordering the defendants heirs of Juan Galicia, to execute the Deed of
Sale of their undivided ONE HALF (1/2) portion of Lot No. 1130, Guimba
Cadastre, covered by TCT No. NT-120563, in favor of plaintiff Albrigido Leyva,
with an equal frontage facing the national road upon finality of judgment; that,
in their default, the Clerk of Court II, is hereby ordered to execute the deed of
conveyance in line with the provisions of Section 10, Rule 39 of the Rules of
Court; prcd
2.
Ordering the defendants, heirs of Juan Galicia, jointly and severally to pay
attorney's fees of P6,000.00 and the further sum of P3,000.00 for actual and
compensatory damages;

3.
Ordering Celerina Labuguin and the other defendants herein to surrender
to the Court the owner's duplicate of TCT No. NT-120563, province of Nueva
Ecija, for the use of plaintiff in registering the portion, subject matter of the
instant suit;
4.
Ordering the withdrawal of the amount of P18,520.00 now consigned with
the Court, and the amount of P17,204.75 be delivered to the heirs of Juan
Galicia as payment of the balance of the sale of the lot in question, the
defendants herein after deducting the amount of attorney's fees and damages
awarded to the plaintiff hereof and the delivery to the plaintiff of the further
sum of P1,315.25 excess or over payment and, defendants to pay the cost of the
suit." (p. 69, Rollo).
and following the appeal interposed with respondent court, Justice Dayrit with
whom Justices Purisima and Aldecoa, Jr. concurred, modified the fourth
paragraph of the decretal portion to read:
"4. Ordering the withdrawal of the amount of P18,500.00 now consigned with
the Court, and that the amount of P16,870.52 be delivered to the heirs of Juan
Galicia, Sr. as payment to the unpaid balance of the sale, including the
reimbursement of the amount paid to Philippine Veterans Bank, minus the
amount of attorney's fees and damages awarded in favor of plaintiff. The excess
of P1,649.48 will be returned to plaintiff. The costs against defendants." (p. 51,
Rollo).
As to how the foregoing directive was arrived at, the appellate court declared:
"With respect to the fourth condition stipulated in the contract, the period
indicated therein is deemed modified by the parties when the heirs of Juan
Galicia, Sr. accepted payments without objection up to November 3, 1979. On
the basis of receipts presented by appellee commencing from August 8, 1975 up
to November 3, 1979, a total amount of P13,908.25 has been paid, thereby
leaving a balance of P13,091.75. Said unpaid balance plus the amount
reimbursable to appellant in the amount of P3,778.77 will leave an unpaid total
of P16,870.52. Since appellee consigned in court the sum of P18,500.00, he is
entitled to get the excess of P1,629.48. Thus, when the heirs of Juan Galicia, Sr.
(obligees) accepted the performance, knowing its incompleteness or irregularity

and without expressing any protest or objection, the obligation is deemed fully
complied with (Article 1235, Civil Code)." (p. 50, Rollo)
Petitioners are of the impression that the decision appealed from, which agreed
with the conclusions of the trial court, is vulnerable to attack via the recourse
before Us on the principal supposition that the full consideration of the
agreement to sell was not paid by private respondent and, therefore, the
contract must be rescinded.
The suggestion of petitioners that the covenant must be cancelled in the light of
private respondent's so-called breach seems to overlook petitioners' demeanor
who, instead of immediately filing the case precisely to rescind the instrument
because of non-compliance, allowed private respondent to effect numerous
payments posterior to the grace periods provided in the contract. This apathy of
petitioners who even permitted private respondent to take the initiative in filing
the suit for specific performance against them, is akin to waiver or
abandonment of the right to rescind normally conferred by Article 1191 of the
Civil Code. As aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz
(135 SCRA 323 [1985]; 4 Paras, Civil Code of the Philippines Annotated, Twelfth
Ed. [1989], p. 203): prcd
" . . . We agree with the plaintiffs-appellees that when the defendantsappellants, instead of availing of their alleged right to rescind, have accepted
and received delayed payments of installments, though the plaintiffs-appellees
have been in arrears beyond the grace period mentioned in paragraph 6 of the
contract, the defendants-appellants have waived, and are now estopped from
exercising their alleged right of rescission . . . "
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818;
cited in 4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a
similar opinion was expressed to the effect that:
"In a perfected contract of sale of land under an agreed schedule of payments,
while the parties may mutually oblige each other to compel the specific
performance of the monthly amortization plan, and upon failure of the buyer to
make the payment, the seller has the right to ask for a rescission of the contract

under Art. 1191 of the Civil Code, this shall be deemed waived by acceptance of
posterior payments."
Both the trial and appellate courts were, therefore, correct in sustaining the
claim of private respondent anchored on estoppel or waiver by acceptance of
delayed payments under Article 1235 of the Civil Code in that:
"When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is
deemed fully complied with."
considering that the heirs of Juan Galicia, Sr. accommodated private respondent
by accepting the latter's delayed payments not only beyond the grace periods
but also during the pendency of the case for specific performance (p. 27,
Memorandum for petitioners; p. 166, Rollo). Indeed, the right to rescind is not
absolute and will not be granted where there has been substantial compliance
by partial payments (4 Caguioa, Comments and Cases on Civil Law, First Ed.
[1968], p. 132). By and large, petitioners' actuation is susceptible of but one
construction that they are now estopped from reneging from their
commitment on account of acceptance of benefits arising from overdue
accounts of private respondent.
Now, as to the issue of whether payments had in fact been made, there is no
doubt that the second installment was actually paid to the heirs of Juan Galicia,
Sr. due to Josefina Tayag's admission in judicio that the sum of P10,000.00 was
fully liquidated. It is thus erroneous for petitioners to suppose that "the
evidence in the records do not support this conclusion" (p. 18, Memorandum
for Petitioners; p. 157, Rollo). A contrario, when the court of origin, as well as
the appellate court, emphasized the frank representation along this line of
Josefina Tayag before the trial court (TSN, September 1, 1983, pp. 3-4; p. 5,
Decision in CA-G.R. CV No. 13339, p. 50, Rollo; p. 3, Decision in Civil Case No.
681-G, p. 66, Rollo), petitioners chose to remain completely mute even at this
stage despite the opportunity accorded to them, for clarification. Consequently,
the prejudicial aftermath of Josefina Tayag's spontaneous reaction may no
longer be obliterated on the basis of estoppel (Article 1431, Civil Code; Section
4, Rule 129; Section 2(a), Rule 131, Revised Rules on Evidence).

Insofar as the third item of the contract is concerned, it may be recalled that
respondent court applied Article 1186 of the Civil Code on constructive
fulfillment which petitioners claim should not have been appreciated because
they are the obligees while the proviso in point speaks of the obligor. But,
petitioners must concede that in a reciprocal obligation like a contract of
purchase (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p.
201), both parties are mutually obligors and also obligees (4 Padilla, supra, at p.
197), and any of the contracting parties may, upon non-fulfillment by the other
privy of his part of the prestation, rescind the contract or seek fulfillment
(Article 1191, Civil Code). In short, it is puerile for petitioners to say that they
are the only obligees under the contract since they are also bound as obligors to
respect the stipulation in permitting private respondent to assume the loan with
the Philippine Veterans Bank which petitioners impeded when they paid the
balance of said loan. As vendors, they are supposed to execute the final deed of
sale upon full payment of the balance as determined hereafter. LibLex
Lastly, petitioners argue that there was no valid tender of payment nor
consignation of the sum of P18,520.00 which they acknowledge to have been
deposited in court on January 22, 1981 five years after the amount of
P27,000.00 had to be paid (p. 23, Memorandum for Petitioners; p. 162, Rollo).
Again this suggestion ignores the fact that consignation alone produced the
effect of payment in the case at bar because it was established below that two
or more heirs of Juan Galicia, Sr. claimed the same right to collect (Article 1256,
(4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. 67-68, Rollo).
Moreover, petitioners did not bother to refute the evidence on hand that, aside
from the P18,520.00 (not P18,500.00 as computed by respondent court) which
was consigned, private respondent also paid the sum of P13,908.25 (Exhibits "F"
to "CC"; p. 50, Rollo). These two figures representing private respondent's
payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid
by petitioners to the bank, will lead us to the sum of P28,649.48 or a refund of
P1,649.48 to private respondent as overpayment of the P27,000.00 balance.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed from
is hereby AFFIRMED with the slight modification of Paragraph 4 of the
dispositive thereof which is thus amended to read:

"4. ordering the withdrawal of the sum of P18,520.00 consigned with the
Regional Trial Court, and that the amount of P16,870.52 be delivered by private
respondent with legal rate of interest until fully paid to the heirs of Juan Galicia,
Sr. as balance of the sale including reimbursement of the sum paid to the
Philippine Veterans Bank, minus the attorney's fees and damages awarded in
favor of private respondent. The excess of P1,649.48 shall be returned to
private respondent also with legal interest until fully paid by petitioners. With
costs against petitioners." cdrep
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ ., concur.
Gutierrez, Jr., J ., is on terminal leave.