SPOUSES LAM vs.KODAK PHILIPPINES, LTD.
The Lam Spouses
G.R. No. 167615; January 11, 2016
LEONEN, J.:
Facts:
 On January 8, 1992, the Lam Spouses and
Kodak Philippines, Ltd. entered into an
agreement (Letter Agreement) for the sale of
three (3) units of the Kodak Minilab System
22XL6 (Minilab Equipment) in the amount of
₱1,796,000.00 per unit, with the following terms:
“This confirms our verbal agreement for Kodak
Phils., Ltd. To provide Colorkwik Laboratories,
Inc. with three (3) units Kodak Minilab System
22XL . . . for your proposed outlets in Rizal
Avenue (Manila), Tagum (Davao del Norte), and
your existing Multicolor photo counter in Cotabato
City under the following terms and conditions:
1. Said Minilab Equipment packages will
avail a total of 19% multiple order
discount based on prevailing equipment
price provided said equipment packages
will be purchased not later than June 30,
1992.
2. 19% Multiple Order Discount shall be
applied in the form of merchandise and
delivered in advance immediately after
signing of the contract. * Also includes
start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be
payable in 48 monthly installments at
THIRTY FIVE THOUSAND PESOS
(P35,000.00) inclusive of 24% interest
rate for the first 12 months; the balance
shall be re-amortized for the remaining
36 months and the prevailing interest
shall be applied.
5. Prevailing price of Kodak Minilab
System 22XL as of January 8, 1992 is at
ONE MILLION SEVEN HUNDRED
NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior
notice. *Secured with PDCs; 1st monthly
amortization due 45 days after
installation.”
 Kodak Philippines, Ltd. delivered one (1) unit of
the Minilab Equipment in Tagum, Davao
Province. The delivered unit was installed by
Noritsu representatives.
issued postdated checks amounting to
₱35,000.00 each for 12 months as payment for
the first delivered unit, with the first check due on
March 31, 1992.
 The Lam Spouses requested that Kodak
Philippines, Ltd. not negotiate the check dated
March 31, 1992 allegedly due to insufficiency of
funds. The same request was made for the check
due on April 30, 1992. However, both checks
were negotiated by Kodak Philippines, Ltd. and
were honored by the depository bank. The 10
other checks were subsequently dishonored after
the Lam Spouses ordered the depository bank to
stop payment.
 Kodak Philippines, Ltd. canceled the sale and
demanded that the Lam Spouses return the unit.
The Lam Spouses ignored the demand but also
rescinded the contract through the letter dated
November 18, 1992 on account of Kodak
Philippines, Ltd.’s failure to deliver the two (2)
remaining Minilab Equipment units.
 Kodak Philippines, Ltd. filed a Complaint for
replevin and/or recovery of sum of money. The
Lam Spouses failed to appear during the pre-trial
conference. Thus, they were declared in default.
 Kodak Philippines, Ltd. presented evidence ex-
parte. The trial court issued the Decision in favor
of Kodak Philippines, Ltd. ordering the seizure of
the Minilab Equipment. Based on this Decision,
Kodak Philippines, Ltd. was able to obtain a writ
of seizure for the Minilab Equipment installed at
the Lam Spouses’ outlet in Tagum, Davao
Province. The writ was enforced and Kodak
Philippines, Ltd. gained possession of the Minilab
Equipment unit, accessories, and the generator
set.
 The Lam Spouses then filed before the CA a
Petition to Set Aside the Orders issued by the trial
court. These Orders were subsequently set aside
by the CA, and the case was remanded to the trial
court for pre-trial.
 In its Decision, the RTC dismissed the case and
ordered the plaintiff to pay Lam Spouses
 Lam Spouses filed their Notice of Partial Appeal.
Kodak Philippines, Ltd. also filed an appeal.
However, the CA dismissed it for Kodak
Philippines, Ltd.’s failure to file its appellant’s
brief, without prejudice to the continuation of the
Lam Spouses’ appeal. The Resolution became
final and executory.
 CA modified the decision of the RTC.
1
Issues:
(1) Whether the contract between petitioners
Spouses Alexander and Julie Lam and
respondent Kodak Philippines, Ltd. pertained to
obligations that are severable, divisible, and
susceptible of partial performance under Article
1225 of the New Civil Code; and
(2) Upon rescission of the contract, what the parties
are entitled to under Article 1190 and Article 1522
of the New Civil Code.
Held:
(1) The Letter Agreement contained an
indivisible obligation.
The intention of the parties is for there to be a single
transaction covering all three (3) units of the Minilab
Equipment. Respondent’s obligation was to deliver all
products purchased under a "package," and, in turn,
petitioners’ obligation was to pay for the total purchase
price, payable in installments.
The intention of the parties to bind themselves to an
indivisible obligation can be further discerned through
their direct acts in relation to the package deal. There was
only one agreement covering all three (3) units of the
Minilab Equipment and their accessories. The Letter
Agreement specified only one purpose for the buyer,
which was to obtain these units for three different outlets.
If the intention of the parties were to have a divisible
contract, then separate agreements could have been
made for each Minilab Equipment unit instead of covering
all three in one package deal. Furthermore, the 19%
multiple order discount as contained in the Letter
Agreement was applied to all three acquired units. The
"no downpayment" term contained in the Letter
Agreement was also applicable to all the Minilab
Equipment units. Lastly, the fourth clause of the Letter
Agreement clearly referred to the object of the contract as
"Minilab Equipment Package."
In ruling that the contract between the parties intended to
cover divisible obligations, the Court of Appeals
highlighted: (a) the separate purchase price of each item;
(b) petitioners’ acceptance of separate deliveries of the
units; and (c) the separate payment arrangements for
each unit. However, through the specified terms and
conditions, the tenor of the Letter Agreement indicated an
intention for a single transaction. This intent must prevail
even though the articles involved are physically separable
and capable of being paid for and delivered individually,
consistent with the New Civil Code: Article 1225. For the
purposes of the preceding articles, obligations to give
definite things and those which are not susceptible of
partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a
certain number of days of work, the accomplishment of
work by metrical units, or analogous things which by their
nature are susceptible of partial performance, it shall be
divisible. However, even though the object or service may
be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties.
In Nazareno v. Court of Appeals, the indivisibility of an
obligation is tested against whether it can be the subject
of partial performance: An obligation is indivisible when it
cannot be validly performed in parts, whatever may be the
nature of the thing which is the object thereof. The
indivisibility refers to the prestation and not to the object
thereof. In the present case, the Deed of Sale of January
29, 1970 supposedly conveyed the six lots to Natividad.
The obligation is clearly indivisible because the
performance of the contract cannot be done in parts,
otherwise the value of what is transferred is diminished.
Petitioners are therefore mistaken in basing the
indivisibility of a contract on the number of obligors.
There is no indication in the Letter Agreement that the
units petitioners ordered were covered by three (3)
separate transactions. The factors considered by the
Court of Appeals are mere incidents of the execution of
the obligation, which is to deliver three units of the Minilab
Equipment on the part of respondent and payment for all
three on the part of petitioners. The intention to create an
indivisible contract is apparent from the benefits that the
Letter Agreement afforded to both parties. Petitioners
were given the 19% discount on account of a multiple
order, with the discount being equally applicable to all
units that they sought to acquire. The provision on "no
down payment" was also applicable to all units.
Respondent, in turn, was entitled to payment of all three
Minilab Equipment units, payable by installments.
(2) The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors
should not comply with what is incumbent
upon him.
The injured party may choose between the fulfilment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfilment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
Rescission under Article 1191 has the effect of mutual
restitution. In Velarde v. Court of Appeals: Rescission
abrogates the contract from its inception and requires a
mutual restitution of benefits received.
The Court of Appeals correctly ruled that both parties
must be restored to their original situation as far as
practicable, as if the contract was never entered into.
2
Petitioners must relinquish possession of the delivered
Minilab Equipment unit and accessories, while
respondent must return the amount tendered by
petitioners as partial payment for the unit received.
Further, respondent cannot claim that the two (2) monthly
installments should be offset against the amount awarded
by the Court of Appeals to petitioners because the effect
of rescission under Article 1191 is to bring the parties
back to their original positions before the contract was
entered into.
When rescission is sought under Article 1191 of the Civil
Code, it need not be judicially invoked because the power
to resolve is implied in reciprocal obligations. The right to
resolve allows an injured party to minimize the damages
he or she may suffer on account of the other party’s failure
to perform what is incumbent upon him or her. When a
party fails to comply with his or her obligation, the other
party’s right to resolve the contract is triggered. The
resolution immediately produces legal effects if the non-
performing party does not question the resolution. Court
intervention only becomes necessary when the party who
allegedly failed to comply with his or her obligation
disputes the resolution of the contract. Since both parties
in this case have exercised their right to resolve under
Article 1191, there is no need for a judicial decree before
the resolution produces effects.
WHEREFORE, the Petition is DENIED.
Areola v CA
Facts:
Prudential Guarantee cancelled Areola’s
personal accident insurance on the grounds that the latter
failed to pay his premiums 7 months after issuing the
policy. Areola was supposed to pay the total amount of
P1,609.65 which included the premium of P1,470.00,
documentary stamp of P110.25 and 2% premium tax of
P29.40. The statement of account had a stipulation not
considering it a receipt. It also reminded the customer to
ask for a receipt after payment. There was also a
stipulation calling for a demand for a provisional receipt
after payment to an agent. A provisional receipt was sent
to petitioner telling him that the provisional receipt would
be confirmed by an official one. The company then
cancelled the policy for non-payment of premiums. After
being surprised, Areola confronted a company agent and
demanded an official receipt. The latter told him that it was
a mistake, but never gave him an official receipt. Areola
sent a letter demanding that he be reinstated or he
would file for damages if his demand was not met. The
company then told him that his payments weren’t in full
yet. The company replied to Areola by telling him that
there was reason to believe that no payment has been
made since no official receipt was issued. The company
then told him that they would still hold him under the
policy. The company then confirmed that he paid the
premium and that they would extend the policy by one
year.
Thereby, the company offered to reinstate same policy it
had previously cancelled and even proposed to extend its
lifetime on finding that the cancellation was erroneous and
that the premiums were paid in full by petitioner-insured
but were not remitted by the company's branch manager,
Mr. Malapit.
However, they were too late for Areola already filed an
action for breach of contract in the trial court.
The company’s defense lay in rectifying its omission;
hence, there was no breach of contract.
The court ruled in favor of Areola and asked Prudential to
pay 250,000 pesos in moral and exemplary damages.
The court held that the company was in bad faith in
cancelling the policy. Had the insured met an accident at
that time, he wouldn’t be covered by the policy.
This ruling was challenged on appeal by respondent
insurance company, denying bad faith in unilaterally
cancelling the policy. The AC absolved Prudential on the
grounds that it was not motivated by negligence, malice
or bad faith in cancelling subject policy. Rather, the
cancellation of the insurance policy was based on what
the existing records showed. The court even added that
the errant manager who didn’t remit the profits was forced
to resign. Areola then filed for a petition in the Supreme
Court.
Issue:
1. Did the erroneous act of cancelling subject insurance
policy entitle petitioner-insured to payment of damages?
2. Did the subsequent act of reinstating the wrongfully
cancelled insurance policy by respondent insurance
company, in an effort to rectify such error, obliterate
whatever liability for damages it may have to bear, thus
absolving it?
Held: Yes. No. Petition granted.
Ratio:
1. Petitioner alleged that the manager’s misappropriation
of his premium payments is the proximate cause of the
cancellation of the insurance policy. Subsequent
reinstatement could not possibly absolve respondent
insurance company from liability, due to the breach of
contract. He contended that damage had already been
done.
Prudential averred that the equitable relief sought by
petitioner-insured was granted to the filing of the
complaint, petitioner-insured is left without a cause of
action. Reinstatement effectively restored petitioner-
insured to all his rights under the policy.
The court held that Malapit's fraudulent act of
misappropriating the premiums paid by petitioner-insured
is directly imputable to respondent insurance company. A
corporation, such as respondent insurance
company, acts solely thru its employees. The
latters' acts are considered as its own. Malapit
represented its interest and acted in its behalf. His act of
3
receiving the premiums collected is well within the
province of his authority. Thus, his receipt of said Velarde vs. Court of Appeals
premiums is receipt by private respondent insurance
company who, by provision of law is bound by the acts of
its agent.
Article 1910 thus reads:
FACTS:
Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within The private respondent executed a Deed of Sale with
the scope of his authority. Assumption of Mortgage, with a balance of P1.8 million,
As for any obligation wherein the agent has exceeded his
in favor of the petitioners. Pursuant to said agreements,
power, the principal is not bound except when he ratifies
it expressly or tacitly. plaintiffs paid the bank (BPI) for three (3) months until they
Malapit's failure to remit the premiums he received cannot were advised that the Application for Assumption of
constitute a defense for private respondent insurance Mortgage was denied. This prompted the plaintiffs not to
company; no exoneration from liability could result
therefrom. The fact that private respondent insurance make any further payment. Private respondent wrote the
company was itself defrauded due to the anomalies that petitioners informing the non-fulfillment of the obligations.
took place does not free the same from its obligation to Petitioners, thru counsel responded that they are willing
petitioner Areola. As held in Prudential Bank v. Court of
Appeals to pay in cash the balance subject to several conditions.
“A bank is liable for wrongful acts of its officers done in the Private respondents sent a notarial notice of
interests of the bank or in the course of dealings of the cancellation/rescission of the Deed of Sale. Petitioners
officers in their representative capacity but not
filed a complaint which was consequently dismissed by
for acts outside the scope of their authority. Accordingly,
a banking corporation is liable to innocent third persons an outgoing judge but was reversed by the assuming
where the representation is made in the course of its judge in their Motion for Reconsideration. The Court of
business by an agent acting within the general scope of Appeals reinstated the decision to dismiss.
his authority even though the agent is secretly abusing his
authority and attempting to perpetrate a fraud upon his
principal or some other person.” ISSUE:
Prudential is liable for damages for the Whether or not there is a substantial breach of contract
fraudulent acts committed by Malapit. Reinstating the
insurance policy can not obliterate the injury inflicted. A that would entitle its rescission.
contract of insurance creates reciprocal obligations for
both insurer and insured. Reciprocal obligations are those RULING:
which arise from the same cause and in which each party
YES. Article 1191 of the New Civil Code applies. The
is both a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the breach committed did not merely consist of a slight delay
other. in payment or an irregularity; such breach would not
2. Due to the agreement to enter into a contract of
normally defeat the intention of the parties to the contract.
insurance where Prudential promised to extend protection
to petitioner-insured against the risk insured, there was Here, petitioners not only failed to pay the P1.8 million
a debtor creditor relation ship between the two parties. balance, but they also imposed upon private respondents
Under Article 1191, the injured party is given a choice new obligations as preconditions to the performance of
between fulfillment or rescission of the obligation in case
one of the obligors fails to comply with what is incumbent their own obligation. In effect, the qualified offer to pay
upon him. However, said article entitles the injured party was a repudiation of an existing obligation, which was
to payment of damages, regardless of whether he legally due and demandable under the contract of sale.
demands fulfillment or rescission of the obligation.
The damages would be nominal because the insurance Hence, private respondents were left with the legal option
company took steps to rectify the contract . There was of seeking rescission to protect their own interest.
also no actual or substantial damage inflicted. Nominal
damages are "recoverable where a legal right is
technically violated and must be vindicated against an
invasion that has produced no actual present loss of any SPOUSES JAIME AND MATILDE POON, Petitioners, v.
kind, or where there has been a breach of contract and no PRIME SAVINGS BANK REPRESENTED BY THE
substantial injury or actual damages whatsoever have
PHILIPPINE DEPOSIT INSURANCE CORPORATION
been or can be shown.”
AS STATUTORY LIQUIDATOR, Respondent. G.R. No.
183794, June 13, 2016 NATURE OF ACTION:
4
Rescission of Contract TOPIC: Fortuitous event/penal
clause PONENTE: SERENO, C.J.: FACTS: Petitioners
owned a commercial building in Naga City, Matilde Poon
and Prime Saving Bank(PSB) executed a 10-year
Contract of Lease (Contract) over the building for the
latter's use as its branch office in Naga City. In paragraph
24 of the Contract, it provides: - Should the lease[d]
premises be closed, deserted or vacated by the LESSEE,
the LESSOR shall have the right to terminate the lease
without the necessity of serving a court order and to
immediately repossess the leased premises. Thereafter
the LESSOR shall open and enter the leased premises in
the presence of a representative of the LESSEE (or of the
proper authorities) for the purpose of taking a complete
inventory of all furniture, fixtures, equipment and/or other
materials or property found within the leased premises.
The LESSOR shall thereupon have the right to enter into
a new contract with another party. All advanced rentals
shall be forfeited in favor of the LESSOR. Barely three
years later, however, the BSP placed PSB under the
receivership of the Philippine Deposit Insurance
Corporation (PDIC) On 12 May 2000, PSB vacated the
leased premises and surrendered them to petitioners.
Subsequently, the PDIC issued petitioners a demand
letter11 asking for the return of the unused advance rental
amounting to P3,480,000 on the ground that paragraph
24 of the lease agreement had become inoperative,
because respondent's closure constituted force majeure.
Petitioners, however, refused the PDIC's demand.12
They maintained that they were entitled to retain the
remainder of the advance rentals following paragraph 24
of their Contract. Consequently, PSB sued petitioners
before the RTC for a partial rescission of contract and/or
recovery of a sum of money. RTC ordered the partial
rescission of the lease agreement Parties' respective
claims for damages and attorney's fees are dismissed.
The CA affirmed the RTC Decision, but had a different
rationale for applying Article 1229. The appellate court
ruled that the closure of respondent's business was not a
fortuitous event. Still, the CA sustained the trial court's
interpretation of the proviso on the forfeiture of advance
rentals as a penal clause and the consequent application
of Article 1229. ISSUES: 1. Whether or not PSB may be
released from its contractual obligations on the ground of
fortuitous event under Article 1174 of the Civil Code and
unforeseen event under Article 1267 of the Civil Code; 2.
Whether or not the proviso in the parties' Contract
allowing the forfeiture of advance rentals was a penal
clause HELD: 21 1. No. The closure of respondent's
business was neither a fortuitous nor an unforeseen event
that rendered the lease agreement functus officio. The
period during which the bank cannot do business due to
insolvency is not a fortuitous event, unless it is shown that
the government's action to place a bank under
receivership or liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has acted
without jurisdiction. Respondent posits that it should be
released from its contract with petitioners, because the
closure of its business upon the BSP's order constituted
a fortuitous event as the Court held in Provident Savings
Bank. The cited case, however, must always be read in
the context of the earlier Decision in Central Bank v. Court
of Appeals. The Court ruled in that case that the Monetary
Board had acted arbitrarily and in bad faith in ordering the
closure of Provident Savings Bank. Accordingly, in the
subsequent case of Provident Savings Bank it was held
that fuerza mayor had interrupted the prescriptive period
to file an action for the foreclosure of the subject
mortgage. In contrast, there is no indication or allegation
that the BSP's action in this case was tainted with
arbitrariness or bad faith. Instead, its decision to place
respondent under receivership and liquidation
proceedings was pursuant to Section 30 of Republic Act
No. 7653. Moreover, respondent was partly accountable
for the closure of its banking business. It cannot be said,
then, that the closure of its business was independent of
its will as in the case of Provident Savings Bank. The legal
effect is analogous to that created by contributory
negligence in quasi-delict actions. The difficulty of
performance should be such that the party seeking to be
released from a contractual obligation would be placed at
a disadvantage by the unforeseen event. Mere
inconvenience, unexpected impediments, increased
expenses, or even pecuniary inability to fulfill an
engagement, will not relieve the obligor from an
undertaking that it has knowingly and freely contracted.
Clearly, the closure of respondent's business was not an
unforeseen event. As the lease was long-term, it was not
lost on the parties that such an eventuality might occur,
as it was in fact covered by the terms of their Contract.
Besides, as We have previously discussed, the event was
not independent of respondent's will. 2 Yes. The forfeiture
clause in the Contract is penal in nature. It is settled that
a provision is a penal clause if it calls for the forfeiture of
any remaining deposit still in the possession of the lessor,
without prejudice to any other obligation still owing, in the
event of the termination or cancellation of the agreement
by reason of the lessee's violation of any of the terms and
conditions thereof. This kind of agreement may be validly
entered into by the parties. The clause is an accessory
obligation meant to ensure the performance of the
principal obligation by imposing on the debtor a special
prestation in case of nonperformance or inadequate
performance of the principal obligation. It is evident from
5
the above-quoted testimony of Jaime Poon that the
stipulation on the forfeiture of advance rentals under
paragraph 24 is a penal clause in the sense that it
provides for liquidated damages. In effect, the penalty for
the premature termination of the Contract works both
ways. As the CA correctly found, the penalty was to
compel respondent to complete the 10-year term of the
lease. Petitioners, too, were similarly obliged to ensure
the peaceful use of their building by respondent for the
entire duration of the lease under pain of losing the
remaining advance rentals paid by the latter. The
forfeiture clauses of the Contract, therefore, served the
two functions of a penal 22 clause, i.e., (1) to provide for
liquidated damages and (2) to strengthen the coercive
force of the obligation by the threat of greater
responsibility in case of breach.47 As the CA correctly
found, the prestation secured by those clauses was the
parties' mutual obligation to observe the fixed term of the
lease. For this reason, We sustain the lower courts'
finding that the forfeiture clause in paragraph 24 is a penal
clause, even if it is not expressly labelled as such.
WHEREFORE, the Petition for Review on Certiorari is
DENIED.
University of the Philippines v. De Los Angeles
G.R. No. L-28602 September 29, 1970
FACTS: On November 2, 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, which expressly states that, upon default by the
debtor ALUMCO, the creditor (UP) has “the right and the
power to consider the Logging Agreement as rescinded
without the necessity of any judicial suit.”
ALUMCO continued its logging operations, but
again incurred an unpaid account. On July 19, 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. UP filed a complaint against ALUMCO for the
collection or payment of the herein before stated sums of
money and it prayed for and obtained an order for
preliminary attachment and preliminary injunction
restraining ALUMCO from continuing its logging
operations in the Land Grant. Respondent ALUMCO
contended 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.
ISSUE: Whether or not petitioner U.P. can treat
its contract with ALUMCO rescinded and may disregard
the same before any judicial pronouncement to that effect.
HELD: 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 as rescinded without
the necessity of any judicial suit." In connection with
Article 1191 of the Civil Code, the Court stated in
Froilan vs. Pan Oriental Shipping Co that “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.”
It must be understood that the act of party in
treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made
known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the
other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the
matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to
6
damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the
party prejudiced.
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner,
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
Ponenete: Leonen, J.
Facts:
Wellex and U-Land agreed to develop a long-
term business relationship through the creation of joint
interest in airline operations and property development
projects in the Philippines. The agreement includes: I.
Acquisition of APIC and PEC shares; II. Operation and
management of APIC/PEC/APC; III. Entering into and
funding a joint development agreement; and IV. The
option to acquire from WELLEX shares of stock of
EXPRESS SAVINGS BANK ("ESB") up to 40% of the
outstanding capital stock of ESB of U-Land. The
provisions of the memorandum were agreed to be
executed within 40 days from its execution date.
The 40-day period lapsed but Wellex and U-Land
were not able to enter into any share purchase agreement
although drafts were exchanged between the two.
However, Despite the absence of a share purchase
agreement, U-Land remitted to Wellex a total of
US$7,499,945.00. Wellex acknowledged the receipt of
these remittances in a confirmation letter addressed to U-
Land and allegedly delivered stock certificates and TCTs
of subject properties. Despite these transactions, Wellex
and U-Land still failed to enter into the share purchase
agreement and the joint development agreement. Thus,
U-Land filed a Complaint72 praying for rescission of the
First Memorandum of Agreement and damages against
Wellex and for the issuance of a Writ of Preliminary
Attachment. Note: After verification with the Securities
and Exchange Commission, U-Land discovered that
"APIC did not own a single share of stock in APC.
RTC: Ruled In favor of Uland and ordered rescission of
contract under Art. 1911 of the civil code. Basis of
rescission: Wellex’s misrepresentation that APIC was a
majority shareholder of APC that compelled it to enter into
the agreement..
“Notwithstanding the said remittances, APIC does not
own a single share of APC. On the other hand, defendant
could not even satisfactorily substantiate its claim that at
least it had the intention to cause the transfer of APC
shares to APIC. Defendant obviously did not enter into the
stipulated SPA because it did not have the shares of APC
transferred to APIC despite its representations. Under the
circumstances, it is clear that defendant fraudulently
violated the provisions of the MOA.”
On appeal, the Court of Appeals affirmed the
ruling of the Regional Trial Court. Hence this petition.
Petitioners invokes Suria v. Intermediate
Appellate Court, which held that an "action for rescission
is not a principal action that is retaliatory in character
under Article 1191 of the Civil Code, but a subsidiary one
which is available only in the absence of any other legal
remedy under Article 1384 of the Civil Code Respondent
U-land avers that this case was inapplicable because the
pertinent provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil Code. The
"rescission" referred to in Article 1191 referred to
"resolution" of a contract due to a breach of a mutual
obligation, while Article 1384 spoke of "rescission"
because of lesion and damage. Thus, the rescission that
is relevant to the present case is that of Article 1191,
which involves breach in a reciprocal obligation. It is, in
fact, resolution, and not rescission as a result of fraud or
lesion, as found in Articles 1381, 1383, and 1384 of the
Civil Code.
Issue: Whether or not respondent U-Land correctly
sought the principal relief of rescission or resolution under
Article 1191.
Held: Yes.
Respondent U-Land is praying for rescission or
resolution under Article 1191, and not rescission under
Article 1381. The failure of one of the parties to comply
with its reciprocal prestation allows the wronged party to
seek the remedy of Article 1191. The wronged party is
entitled to rescission or resolution under Article 1191, and
even the payment of damages. It is a principal action
precisely because it is a violation of the original reciprocal
prestation. Article 1381 and Article 1383, on the other
hand, pertain to rescission where creditors or even third
persons not privy to the contract can file an action due to
lesion or damage as a result of the contract. Rescission
or resolution under Article 1191, therefore, is a principal
action that is immediately available to the party at the time
that the reciprocal prestation was breached. Article 1383
mandating that rescission be deemed a subsidiary action
cannot be applicable to rescission or resolution under
Article 1191. Thus, respondent U-Land correctly sought
7
the principal relief of rescission or resolution under Article
1191.
The order is valid. Enforcement of Section 9 of
the First Memorandum of Agreement has the same effect
as rescission or resolution under Article 1191 of the Civil
Code. The parties are obligated to return to each other all
that they may have received as a result of the breach by
petitioner Wellex of the reciprocal obligation. Therefore,
the Court of Appeals did not err in affirming the rescission
granted by the trial court.
Contrary to petitioner Wellex’s argument, this is
not rescission under Article 1381 of the Civil Code. This
case does not involve prejudicial transactions affecting
guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent
actions on the part of the debtor who is in the process of
transferring or alienating property that can be used to
satisfy the obligation of the debtor to the creditor. There is
no allegation of fraud for purposes of evading obligations
to other creditors. The actions of the parties involving the
terms of the First Memorandum of Agreement do not fall
under any of the enumerated contracts that may be
subject of rescission.
Further, respondent U-Land is pursuing
rescission or resolution under Article 1191, which is a
principal action. Justice J.B.L. Reyes’ concurring opinion
in the landmark case of Universal Food Corporation v.
Court of Appeals184 gave a definitive explanation on the
principal character of resolution under Article 1191 and
the subsidiary nature of actions under Article 1381:
The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party
plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a
subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the
culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character, it
being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the
old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of
lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because
it is the raison detre as well as the measure of the right to
rescind. Hence, where the defendant makes good the
damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and
1384. But the operation of these two articles is limited to
the cases of rescission for lesión enumerated in Article
1381 of the Civil Code of the Philippines, and does not
apply to cases under Article 1191.
Rescission or resolution under Article 1191,
therefore, is a principal action that is immediately
available to the party at the time that the reciprocal
prestation was breached. Article 1383 mandating that
rescission be deemed a subsidiary action cannot be
applicable to rescission or resolution under Article 1191.
Thus, respondent U-Land correctly sought the principal
relief of rescission or resolution under Article 1191.
The obligations of the parties gave rise to
reciprocal prestations, which arose from the same cause:
the desire of both parties to enter into a share purchase
agreement that would allow both parties to expand their
respective airline operations in the Philippines and other
neighboring countries.
Other Matters:
1. The MOA is ambiguous. The parties were never
able to arrive at a specific period within which they would
bind themselves to enter into an agreement.
2. There was no express or implied novation of the
First Memorandum of Agreement. There was no
incompatibility between the original terms of the First
Memorandum of Agreement and the remittances made by
respondent U-Land for the shares of stock. These
remittances were actually made with the view that both
parties would subsequently enter into a share purchase
agreement. It is clear that there was no subsequent
agreement inconsistent with the provisions of the First
Memorandum of Agreement. There being no novation of
the First Memorandum of Agreement, respondent U-Land
is entitled to the return of the amount it remitted to
petitioner Wellex. Petitioner Wellex is likewise entitled to
the return of the certificates of shares of stock and titles
of land it delivered to respondent U-Land.
3. Applying Article 1185 of the Civil Code, the
parties are obligated to return to each other all they have
received. petitioner Wellex is obligated to return the
remittances made by respondent U-Land, in the same
way that respondent U-Land is obligated to return the
certificates of shares of stock and the land titles to
petitioner Wellex.
4. The jurisprudence relied upon by petitioner
Wellex is not applicable.
8
5. Petitioner Wellex was not guilty of fraud but of
violating Article 1159 of the Civil Code. The absence of
fraud in a transaction does not mean that rescission under
Article 1191 is not proper. This case is not an action to
declare the First Memorandum of Agreement null and
void due to fraud at the inception of the contract or dolo
causante. This case is not an action for fraud based on
Article 1381 of the Civil Code. Rescission or resolution
under Article 1191 is predicated on the failure of one of
the parties in a reciprocal obligation to fulfill the prestation
as required by that obligation. It is not based on vitiation
of consent through fraudulent misrepresentations.
6. Respondent U-Land was not bound to pay the
US$3 million under the joint development agreement.
7. Respondent U-Land was not obligated to exhaust
the "securities" given by petitioner Wellex
Provisions:
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.
Articles 1380 and 1381, on the other hand, provide an
enumeration of rescissible contracts: ART. 1380.
Contracts validly agreed upon may be rescinded in the
cases established by law. ART. 1381. The following
contracts are rescissible:
(1) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object
thereof;
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial
authority;
(5) All other contracts specially declared by law to be
subject to rescission.
Article 1383 expressly provides for the subsidiary
nature of rescission:
ART. 1383. The action for rescission is subsidiary; it
cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for
the same.
Rescission itself, however, is defined by Article
1385:
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.
For Article 1191 to be applicable, however, there
must be reciprocal prestations as distinguished from
mutual obligations between or among the parties. A
prestation is the object of an obligation, and it is the
conduct required by the parties to do or not to do, or to
give.177 Parties may be mutually obligated to each other,
but the prestations of these obligations are not
necessarily reciprocal. The reciprocal prestations must
necessarily emanate from the same cause that gave rise
to the existence of the contract. This distinction is best
illustrated by an established authority in civil law, the late
Arturo Tolentino:
This article applies only to reciprocal obligations. It has no
application to every case where two persons are mutually
debtor and creditor of each other. There must be
reciprocity between them. Both relations must arise from
the same cause, such that one obligation is correlative to
the other. Thus, a person may be the debtor of another by
reason of an agency, and his creditor by reason of a loan.
They are mutually obligated, but the obligations are not
reciprocal. Reciprocity arises from identity of cause, and
necessarily the two obligations are created at the same
time.
Note: Wellex is a corporation established under Philippine
law and it maintains airline operations in the Philippines.
It owns shares of stock in several corporations including
Air Philippines International Corporation (APIC),
Philippine Estates Corporation (PEC), and Express
Savings Bank (ESB). Wellex alleges that it owns all
shares of stock of Air Philippines Corporation (APC).
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly
organized and existing under the laws of Taiwan,
registered to do business . . . in the Philippines." It is
9
engaged in the business of air transportation in Taiwan
and in other Asian countries.
Note: This case distinguished rescission under Art. 1191-
“resolution” and rescission under Art. 1381, 1383 and
1384.
When a party seeks the relief of rescission as provided in
Article 1381, there is no need for reciprocal prestations to
exist between or among the parties. All that is required is
that the contract should be among those enumerated in
Article 1381 for the contract to be considered rescissible.
Unlike Article 1191, rescission under Article 1381 must be
a subsidiary action because of Article 1383.
Rescission or resolution under Article 1191 is a principal
action that is immediately available to the party at the time
that the reciprocal prestation was breached. Mutual
restitution is required in cases involving rescission under
Article 1191. This means bringing the parties back to their
original status prior to the inception of the contract.
Determining the existence of fraud is not necessary in an
action for rescission or resolution under Article 1191. The
existence of fraud must be established if the rescission
prayed for is the rescission under Article 1381.
Ascano-Cupino v Pacific Rehouse
Facts: On 1 October 1994. Honorlita Ascano-Cupino4 and
Flaviana Ascano-Colocado (petitioners), and their sister,
Noeminia Ascano, (collectively, the Ascanos) 5 entered
into a Deed of Conditional Sale with Pacific Rehouse
Corporation (Pacific). The latter obliged itself to purchase
from the Ascanos a parcel of land with an area of 59,753
square meters located in General Trias, Cavite for
P5,975,300.
Following the terms of the Deed of Conditional Sale,
Pacific paid a down payment of P1,792,590 leaving a
balance of P4,182,710, to be paid upon the fulfillment of
certain conditions, namely: (1) the completion of all
documents necessary for the transfer of the certificate of
title of the land; (2) the vendors (the Ascanos) shall
guarantee removal of the tenants, squatters and other
occupants on the land, with the disturbance
compensation to said tenants to be paid by vendors; and
(3) submission by vendors to Pacific of the Affidavit of
Non-Tenancy and the land operation transfer documents.
On 13 February 1995, petitioners submitted to Pacific a
Barangay Agrarian Reform Council Certification stating
that the property was untenanted. They also informed
Pacific that the other necessary documents were being
processed and more expected to be completed the
following month.
The following month, however, petitioners failed to submit
the necessary documents despite several demands from
Pacific to do so. Instead, they informed Pacific that they
wanted to rescind the contract and refused to accept
Pacific's tender of additional payments amounting to
P1,005,180.
Pacific, through Melecio P. Fortuno, Jr. (Fortuno), opened
a savings account with the Capitol Bank of General Trias,
Cavite, in the names of petitioners, depositing in said
account the amount of P1,005,180.11 Pacific then
informed petitioners of the deposit and that "they were
authorized to withdraw the same at [their] convenience."
Thereafter, Pacific learned that petitioners were
negotiating the sale of the property with other buyers
allegedly for a higher consideration. In September 1995,
Pacific effected an annotation of an adverse claim on the
property's title.13redarclaw
Pacific made several demands on petitioners to fulfill their
obligations under the Deed of Conditional Sale. Instead of
heeding the demands, petitioners, through a certain Atty.
Fojas, began negotiating with Pacific for the rescission of
the Deed of Conditional Sale. Pacific made another
demand on petitioners to fulfill all their obligations,
Petitioners continued to ignore the demand.
Pacific then filed a Complaint for Cancellation of Contract,
Sum of Money and Damages before the RTC of Trece
Martires City. However, before pre-trial, Pacific
discovered that petitioners had withdrawn the PI,005,180
it had deposited with Capitol Bank of General Trias. In
view of petitioners' action, Pacific filed an Amended
Complaint changing its cause of action from cancellation
to specific performance.
Petitioners alleged that it was Pacific that defaulted in its
payment. They maintained that the real purchase price
they agreed upon was P200 per square meter, or a total
of P11,950,600, and that allegedly the much lower
amount stated in the Deed of Conditional Sale was put
there at Pacific's request in order to lower the taxes they
would need to pay.
The RTC ruled for the cancellation of the contract and
ordering defendants (Ascanos) to return the amount of
Two Million Six Hundred Two Thousand (P2,602,000.00)
Pesos to the plaintiff; while Plaintiff is hereby ordered to
pay defendants who incurred the following in defending
their rights:LawlibraryofCRAlaw
1. The amount of One Hundred Fifty Thousand
(P150,000.00) Pesos as damages;
2. The amount of One Hundred Thousand (P100,000.00)
Pesos as attorney's fees; and
3. The litigation expenses.
10
The CA granted the appeal by Pacific. The CA held that
"the trial court erred in deciding the case on the basis of
the original complaint." The CA noted that Pacific
amended its complaint from cancellation of contract to
specific performance, which was done with leave of and
allowed by the RTC.
The CA also held that rescission was not warranted in this
case. It ruled that petitioners "were clearly the ones who
failed in their obligation under the contract."28 Pacific then
is the injured party entitled to choose between rescission
of the contract and fulfillment of the obligation. Pacific
chose the latter, as stated in their Amended Complaint for
specific performance.darclaw
Lastly, the CA found that it was proven and undisputed
that a total of P4,497,770 had already been paid by
Pacific leaving only a balance of P4,577,530.
Issue: Whether Rescission is a valid action in the case at
bar.
Held: The Court affirmed the decision of CA. It is clear that
the RTC erred in deciding the case based on the original
complaint and not on the Amended Complaint,
thus:LawlibraryofCRAlaw
[Pacific] in [its] complaint prays for the rescission or
cancellation of contract and to this allegation, the Court
has no recourse but to grant this prayer x x x.
Pacific is entitled to ask
for specific performance.
Article 1191 of the Civil Code states:LawlibraryofCRAlaw
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between fulfillment and the
rescission of the obligation, with 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.
As previously discussed, the Deed of Conditional Sale
clearly spells out the obligations of each party. Based on
the allegations of the parties and the findings of the lower
courts, Pacific has already partially fulfilled its obligation
while petitioners have not.
The obligation of petitioners under the Deed of
Conditional Sale is to "guarantee removal of tenants" and
not merely to pay disturbance compensation. It is an
undertaking specifically given to petitioners under the
Deed of Conditional Sale, considering that Pacific is not
yet the owner of the property and will have no personality
to evict the property's present occupants. Petitioners
failed to fulfill this obligation, as well as the obligation to
deliver the necessary documents to complete the sale.
As previously held by the Court, "the injured party is the
party who has faithfully fulfilled his obligation or is ready
and willing to perform his obligation."64 From the
foregoing, it is clear that Pacific is the injured party,
entitled to elect between rescinding of the contract and
exacting fulfillment of the obligation. It has opted for the
remedy of specific performance, as embodied in its
Amended Complaint.
Moreover, rescission must not be allowed in favor of
petitioners, since they themselves failed to perform their
obligations under the Deed of Conditional
Sale.65redarclaw
As to the purchase price, both the RTC and the CA held
that, given no other evidence to conclude otherwise, the
true purchase price agreed upon by the parties is
P5,975,300, the amount stipulated in the Deed of
Conditional Sale.
The Court agrees.
Swire Realty v Yu
Facts: Respondent Jayne Yu and petitioner Swire Realty
Development Corporation entered into a Contract to Sell
covering one residential condominium unit in Makati City
for the total contract price of P7,519,371.80, payable in
equal monthly installments until September 24, 1997.
Respondent likewise purchased a parking slot in the
same condominium building for P600,000.00.
Respondent paid the full purchase price of P7,519,371.80
for the unit while making a down payment of P20,000.00
for the parking lot. However, notwithstanding full payment
of the contract price, petitioner failed to complete and
deliver the subject unit on time. This prompted respondent
to file a Complaint for Rescission of Contract with
Damages before the Housing and Land Use Regulatory
Board (HLURB) Expanded National Capital Region Field
Office (ENCRFO).
On October 19, 2004, the HLURB ENCRFO rendered a
Decision3 dismissing respondent’s complaint. It ruled that
rescission is not permitted for slight or casual breach of
the contract but only for such breaches as are substantial
and fundamental as to defeat the object of the parties in
making the agreement.
11

Respondent then elevated the matter to the HLURB
Board of Commissioners. In a Decision5 dated March 30,
2006, the HLURB Board of Commissioners reversed and
set aside the ruling of the HLURB ENCRFO and ordered
the rescission of the Contract to Sell, ratiocinating:
We find merit in the appeal. The report on the ocular
inspection conducted on the subject condominium project
and subject unit shows that the amenities under the
approved plan have not yet been provided as of May 3,
2002, and that the subject unit has not been delivered to
[respondent] as of August 28, 2002, which is beyond the
period of development of December 1999 under the
license to sell. The delay in the completion of the project
as well as of the delay in the delivery of the unit are
breaches of statutory and contractual obligations which
entitles [respondent] to rescind the contract, demand a
refund and payment of damages.
The delay in the completion of the project in accordance
with the license to sell also renders [petitioner] liable for
the payment of administrative fine.
Petitioner moved for reconsideration, but the same was
denied by the HLURB Board of Commissioners. Petitioner
appealed to the Office of the President (OP) but was
denied. But when petitioner filed for motion for
reconsideration, it was granted by the OP. The
Respondent now sought for reconsideration but was
denied by the CA. Thus, the present petition.
Issue: Whether rescission of the contract is proper in the
instant case.
Held: [Second issue,] Article 1191 of the Civil Code
sanctions the right to rescind the obligation in the event
that specific performance becomes impossible, to wit:
Article 1191. The power to rescind obligations is implied
in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
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.
Basic is the rule that 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.
In the instant case, the CA aptly found that the completion
date of the condominium unit was November 1998
pursuant to License No. 97-12-3202 dated November 2,
1997 but was extended to December 1999 as per License
to Sell No. 99-05-3401 dated May 8, 1999. However, at
the time of the ocular inspection conducted by the HLURB
ENCRFO, the unit was not yet completely finished as the
kitchen cabinets and fixtures were not yet installed and
the agreed amenities were not yet available.
[From the foregoing,] it is evident that the report on the
ocular inspection conducted on the subject condominium
project and subject unit shows that the amenities under
the approved plan have not yet been provided as of May
3, 2002, and that the subject unit has not been delivered
to respondent as of August 28, 2002, which is beyond the
period of development of December 1999 under the
license to sell. Incontrovertibly, petitioner had incurred
delay in the performance of its obligation amounting to
breach of contract as it failed to finish and deliver the unit
to respondent within the stipulated period. The delay in
the completion of the project as well as of the delay in the
delivery of the unit are breaches of statutory and
contractual obligations which entitle respondent to
rescind the contract, demand a refund and payment of
damages.
Fong v Duenas
George Fong
Jose Duenas
Facts: Dueñas is engaged in the bakery, food
manufacturing, and retailing business, which are all
operated under his two companies, D.C. DANTON, Inc.
(Danton) and Bakcom Food Industries, Inc. (Bakcom). He
was an old acquaintance of Fong as they were former
schoolmates at the De La Salle University.
Sometime in November 1996, Dueñas and Fong entered
into a verbal joint venture contract where they agreed to
engage in the food business and to incorporate a holding
company under the name Alliance Holdings, Inc. (Alliance
or the proposed corporation). Its capitalization would be
Sixty Five Million Pesos (P65 Million), to which they would
contribute in equal parts.
The parties agreed that Fong would contribute Thirty Two
Million and Five Hundred Thousand Pesos (P32.5 Million)
in cash while Dueñas would contribute all his Danton and
Bakcom shares which he valued at P32.5 Million.8 Fong
required Dueñas to submit the financial documents
supporting the valuation of these shares.
Fong started remitting in tranches his share in the
proposed corporation’s capital. He made the remittances
12
under the impression that his contribution would be
applied as his subscription to fifty percent (50%) of
Alliance’s total shareholdings. On the other hand, Dueñas
started processing the Boboli9international license that
they would use in their food business.
On June 13, 1997, Fong sent a letter to Dueñas informing
him of his decision to limit his total contribution from P32.5
Million to P5 Million. This is because of the delays in
implementing their joint venture, that had also turn down
a number of business opportunities for Fong, thus,
caused them to rethink their position in the joint venture.
Fong observed that despite his P5 Million contribution,
Dueñas still failed to give him the financial documents on
the valuation of the Danton and Bakcom shares. Thus,
except for Dueñas’ representations, Fong had nothing to
rely on to ensure that these shares were really valued
at P32.5 Million. Moreover, Dueñas failed to incorporate
and register Alliance with the Securities and Exchange
Commission (SEC).
These circumstances convinced Fong that Dueñas would
no longer honor his obligations in their joint venture
agreement.13 Thus, on October 30, 1997, Fong wrote
Dueñas informing him of his decision to cancel the joint
venture agreement. He also asked for the refund of the P5
Million that he advanced.14 In response, Dueñas admitted
that he could not immediately return the money since he
used it to defray the business expenses of Danton and
Bakcom.
To meet Fong’s demand, Dueñas proposed several
schemes for payment of the P5 Million.16 However, Fong
did not accept any of these proposed schemes. On March
25, 1998, Fong wrote a final letter of demand17 informing
Dueñas that he would file a judicial action against him
should he still fail to pay after receipt of this written
demand.
Since Dueñas did not pay, Fong filed a complaint against
him for collection of a sum of money and damages.
RTC ruled in favor of Fong and held that a careful
examination of the complaint shows that although it was
labeled as an action for collection of a sum of money, it
was actually an action for rescission.
The trial court noted that Dueñas’ failure to furnish Fong
with the financial documents on the valuation of the
Danton and Bakcom shares, as well as the almost one
year delay in the incorporation of Alliance, caused Fong
to rescind the joint venture agreement. According to the
trial court, these are adequate and acceptable reasons for
rescission. Since Dueñas was unjustly enriched by Fong’s
advance capital contributions, the trial court ordered him
to return the money amounting to P5 Million and to pay
ten percent (10%) of this amount in attorney’s fees, as
well as the cost of the suit.
CA reversed the RTC’s ruling. The CA ruled that Fong’s
June 13, 1997 letter evidenced his intention to convert his
cash contributions from "advances" to the proposed
corporation’s shares, to mere "investments." Thus,
contrary to the trial court’s ruling, Dueñas correctly
invested Fong’s P5 Million contribution to Bakcom and
Danton. This did not deviate from the parties’ original
agreement as eventually, the shares of these two
companies would form part of Alliance’s capital.
Lastly, the CA held that the June 13, 1997 letter showed
that Fong knew all along that he could not immediately
ask for the return of his P5 Million investment. Thus,
whether the action filed was a complaint for collection of
a sum of money, or rescission, it must still fail.
Issue: Whether petitioner herein has the right for its
rescission.
Held: The court Granted the Petition. An examination of
Fong’s complaint shows that although it was labeled as
an action for a sum of money and damages, it was
actually a complaint for rescission. The following
allegations in the complaint support this finding:
9. Notwithstanding the aforesaid remittances, defendant
failed for an unreasonable length of time to submit a
valuation of the equipment of D.C. Danton and Bakcom x
x x.
10. Worse, despite repeated reminders from plaintiff,
defendant failed to accomplish the organization and
incorporation of the proposed holding company, contrary
to his representation to promptly do so.
xxxx
17. Considering that the incorporation of the proposed
holding company failed to materialize, despite the lapse
of one year and four months from the time of subscription,
plaintiff has the right to revoke his pre-incorporation
subscription. Such revocation entitles plaintiff to a refund
of the amount of P5,000,000.00 he remitted to defendant,
representing advances made in favor of defendant to be
considered as payment on plaintiff’s subscription to the
proposed holding company upon its incorporation, plus
interest from receipt by defendant of said amount until
fully paid. [Emphasis supplied.]
Fong’s allegations primarily pertained to his cancellation
of their verbal agreement because Dueñas failed to
perform his obligations to provide verifiable documents on
the valuation of the Danton’s and Bakcom’s shares, and
to incorporate the proposed corporation. These
allegations clearly show that what Fong sought was the
joint venture agreement’s rescission.
As a contractual remedy, rescission is available when one
of the parties substantially fails to do what he has
obligated himself to perform.32 It aims to address the
breach of faith and the violation of reciprocity between two
parties in a contract.33 Under Article 1191 of the Civil
Code, the right of rescission is inherent in reciprocal
obligations, viz:
13
The power to rescind obligations is implied in reciprocal sale, a violation that consequently gave rise to private
ones, in case one of the obligors should not comply with respondents’ right to rescind the same in accordance with
what is incumbent upon him. [Emphasis supplied.] law.

Dueñas submits that Fong’s prayer for the return of his

cash contribution supports his claim that Fong’s complaint
is an action for collection of a sum of money. However,
Dueñas failed to appreciate that the ultimate effect of
rescission is to restore the parties to their original status
before they entered in a contract. As the Court ruled in
Unlad Resources v. Dragon:34 Rescission has the effect
of "unmaking a contract, or its undoing from the
beginning, and not merely its termination." Hence,
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.

Accordingly, when a decree for rescission is handed

down, it is the duty of the court to require both parties to
surrender that which they have respectively received and
to place each other as far as practicable in his original
situation.
The Court agrees with the trial court that Dueñas violated
his agreement with Fong (that instead, the money should
have been used in processing Alliance’s registration. Its
incorporation would not materialize if there would be no
funds for its initial capital). Aside from unilaterally applying
Fong’s contributions to his two companies, Dueñas also
failed to deliver the valuation documents of the Danton
and Bakcom shares to prove that the combined values of
their capital contributions actually amounted to P32.5
Million. These acts led to Dueñas’ delay in incorporating
the planned holding company, thus resulting in his breach
of the contract.

On this basis, Dueñas’ breach justified Fong’s rescission

of the joint venture agreement under Article 1191.

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.

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
14