Universal Food Corporation, petitioner, v. The Court of Appeals, Magdalo V. Francisco, Sr.

, and
Victoriano V. Francisco, respondents
G.R. No. L-29155 | May 13, 1970
[Topic: ART. 1380 – Rescission as distinguished from rescission under ARTs. 1191 & 1592]

FACTS:
Back in 1938, Magdalo Francisco discovered and invented a formula or recipe for the manufacture of a
food seasoning sauce derived from the banana fruit popularly known as the “Mafran sauce”; that the
manufacture of this product was commercially sold in 1942, and in the same year he registered his
trademark in his name as both owner and inventor of said sauce with the Bureau of Patents; but that due to
financial constraints, in 1960, he secured the financial assistance of Tirso Reyes who, after a series of
negotiations, formed with other partners the corporation known as Universal Food Corp., which also
eventually led to the execution on May 11, 1960 of the contract called, “Bill of Assignment”.
In conformity with the terms and conditions of the Bill of Assignment, Magdalo was appointed
Chief Chemist of Universal Food Corp. Since the start of the operations of Universal Food Corp., Magdalo
would never allow anyone to come into the laboratory as he prepared the ingredients of the Mafran sauce
in order to keep the secret formula to himself. However, he expressed willingness to share the secret
formula to Universal Food Corp. provided that the same should be placed inside a locked vault or safe to
be opened only when he is already incapacitated to carry out his duties as Chief Chemist of Universal Food
Corp., but he never got what he asked.
On Nov. 28, 1960, due to an alleged scarcity and high prices of raw materials, the Secretary-
Treasurer of Universal Food Corp. issued a memorandum that the salary of Magdalo Francisco should be
stopped for the meantime until the corporation should resume operations. Magdalo received his salary as
Chief Chemist until his services were terminated on Nov. 30, 1960. After the issuance of some successive
memorandums without having recalled Magdalo back to work, the latter filed an action on Feb. 14, 1961
for rescission of the Bill of Assignment and to declare that Universal Food Corp. should not have any right
to use the Mafran trademark and formula.
The trial court dismissed the complaint of Magdalo. So he appealed to the CA, which rendered
judgment favorably for Magdalo. Hence, this present petition instituted by herein petitioner Universal Food
Corp., appealing from that decision of the CA.

ISSUE:
Whether or not respondent Magdalo is properly entitled to a rescission of the Bill of Assignment [YES].

HELD:
The Court ruled in the affirmative. The Civil Code provides the ff. articles governing rescission of contracts:
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 rescission of the obligation, with the payment of damages in either case….
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 of the same.
ART. 1384: Rescission shall be only to the extent necessary to cover the damages cause.
Firstly, the Court pointed out that the provisions of the Bill of Assignment are indeed reciprocal in
nature (i.e., a reciprocal obligation); and it has also been established that petitioner Universal Food Corp.
violated certain provisions, particularly paragraphs 5-(a) and (b), by its termination of the services of
respondent Magdalo without any lawful and justifiable cause.
The general rule is that rescission of a contract will not be permitted for a slight or casual breach,
but only for a substantial breach as would defeat the very object of the parties in making the agreement.
The question of whether a breach of contract is substantial or not depends upon the attendant circumstances.
In this case, the Court found that the dismissal or termination of respondent Magdalo’s employment
in Universal Food Corp., as the permanent Chief Chemist, is a fundamental and substantial breach of the
Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the
principle that the option to demand performance or rescission of contract belongs to the injured
party, the fact remains that respondent had no alternative but to file the present action for rescission
and damages. The Court emphasizes that respondent Magdalo would not have agreed to the terms of the
Bill of Assignment were it not for the commitment of Universal Food Corp. to appoint him as permanent
Chief Chemist and Second Vice President; and that he would have absolute control and supervision over
all laboratory assistants and personnel to ensure the secrecy of his secret formula; and hence, secure for
himself a lifetime and steady job and income. All these provisions of the Bill of Assignment are so
interdependent that violation of one virtually results in the nullification of the rest.

DISPOSITION:
Judgment of the CA is modified as follows: that the Bill of Assignment is hereby rescinded and Universal
Food Corp. is ordered to return to Magdalo the right to the use of his Mafran sauce trademark and formula,
and that Universal Food Corp. is permanently enjoined from using in any manner the said trademark and
formula.

SEPARATE OPINION:
Reyes, J.B.L., concurring
Justice J.B.L. Reyes concurs with the majority opinion, but would like to add that the rescission demanded
by Magdalo should be denied because under ART. 1383 of the Civil Code that rescission cannot be
demanded except when the party suffering damage has no other legal means to obtain reparation, is
predicated on a failure to distinguish between a rescission for breach of contract under ART. 1191 and a
rescission by reason of lesion or economic prejudice under ART. 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.
On the other hand, in the rescission by reason of lesion or economic prejudice, the cause of action
is subordinated to the existence of that same prejudice, because it is the raison d’etre as well as the measure
of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained as expressly provided in ARTs. 1383 and 1384. But the operation of these two articles is limited
only to cases rescission for lesion under ART. 1381, and is not applicable to cases under ART. 1191.