SECOND DIVISION

[G.R. No. 150673. February 28, 2003]

SUPERLINES TRANSPORTATION COMPANY, INC., and MANOLET LAVIDES, petitioners, vs. ICC LEASING & FINANCING CORPORATION,respondent. DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the Decision[1] of the Court of Appeals in CAG.R. No. 65126 reversing on appeal the Decision[2] of Branch 142 of the Regional Trial Court of Makati City in Civil Case No. 97-816.

The Antecedents In 1995, Superlines Transportation Co., Inc. (Superlines, for brevity) decided to acquire five new buses from the Diamond Motors Corporation for the price of P10,873,582.00. However, Superlines lacked financial resources for the purpose. By virtue of a board resolution, Superlines authorized its President and General Manager, Manolet Lavides, a graduate of the Ateneo de Manila School of Law and a businessman for twenty years, to look for and negotiate with a financing corporation for a loan for the purchase of said buses. Lavides negotiated with ICC Leasing & Financing Corporation (ICC, for brevity) through the latters Assistant Vice-President for Operations Aida F. Albano, for a financial scheme for the planned purchase. ICC agreed to finance the purchase of the new buses via a loan and proposed a three-year term for the payment thereof at a fixed interest rate of 22% per annum. The new buses to be purchased were to be used by Superlines as security for the loan. ICC required Superlines to submit certificates of registration of the said buses under the name of Superlines before the appropriate document was executed by the parties and their transactions consummated. On October 19, 1995, Diamond Motors Corporation sold to Superlines five new buses under Vehicle Invoice Nos. 9225 to 9229.[3] Superlines, through Lavides, acknowledged receipt of the buses. On November 22, 1995, the vehicle invoices were filed with the Land Transportation Office which then issued certificates of registration covering the five buses under the name of Superlines.[4] With the buses now registered under

its name, Superlines, through Lavides, executed two documents, namely: a deed of chattel mortgage over the said buses as security for the purchase price of the buses in the amount of P13,114,287.00[5] loaned by ICC to Superlines, which deed was annotated on the face of said certificates of registration, and a promissory note in favor of ICC binding and obliging itself to pay to the latter the amount of P10,873,582.00 in monthly installments of P415,290.00, the first installment to start on December 23, 1995, with interest thereon at the rate of 22% per annum until full payment of said amount [6] in favor of Superlines and ICC covenanted in said deed that:

Effective upon the breach of any condition of this mortgage, and in case of loss or damage of the mortgaged property/ies and in addition to the remedies herein stipulated, the MORTGAGEE is hereby appointed attorney-in-fact of the MORTGAGOR with full power and authority, by the use of force if necessary, to take actual possession of the mortgaged property/ies without the necessity of any judicial order or any other permission or power, to remove, sell or dispose of the mortgaged property/ies, and collect rents therefor, to execute bill of sale, lease or agreements that may be deemed convenient; to make repairs or improvements in the mortgaged property/ies and pay the same and perform any other act which the MORTGAGEE may deem convenient for the proper administration of the mortgaged property/ies; and to file, prove, justify, prosecute, compromise or settle insurance claims with the insurance company, without the participation of the MORTGAGOR, under such terms and conditions as the Mortgagee as attorney-in-fact may consider fair and reasonable. The payment of any expenses advanced by the MORTGAGEE or its assigns in connection with the purpose indicated herein is also guaranteed by this mortgage. Any amount received from the sale, disposal or administration abovementioned may be executed by the MORTGAGEE by virtue of this power and applied to the satisfaction of the obligations hereby secured, which act is hereby ratified. The MORTGAGEE shall have the option of selling the property/ies either at public or private sale at the municipality or at the capital of the province where it may be situated at the time; or at any municipality where the MORTGAGEE may have a branch, office, or at Metro Manila, the MORTGAGOR hereby waiving all rights to any notice of such sale. The MORTGAGOR hereby expressly waives the term of thirty (30) days or any other term granted or which may hereafter be granted him/it by law as the period which must elapse before the MORTGAGEE or its assigns shall be entitled to foreclose this mortgage, it being expressly understood and agreed that the MORTGAGEE may foreclose this mortgage at any time after the breach of any condition hereof.

It is further agreed that in case of the sale at public auction under foreclosure proceedings of the property/ies herein mortgaged, or of any part thereof, the MORTGAGEE shall be entitled to bid for the properties so sold, or for any part thereof, to buy the same, or any part thereof, and to have the amount of his/its bid applied to the payment of the obligations secured by this mortgage without requiring payment in cash of the amount of such bid. The remedies of the MORTGAGEE under the powers hereby conferred upon him/it shall be and are in addition to and cumulative with such right of action as the said MORTGAGEE or the assigns may have in accordance with the present or any future laws of the Philippines.
[7]

Superlines and Lavides executed a Continuing Guaranty to pay jointly and severally in favor of ICC the amount of P13,114,285.00.[8] ICC drew and delivered to Superlines Metrobank Check No. 0661909113, dated November 23, 1995, payable to the account of Superlines in the amount of P10,873,582.00,[9] representing the net proceeds of the loan. The latter acknowledged receipt of the check in Cash Voucher No. 0.0769. [10] Superlines remitted the said check to Diamond Motors Corporation in full payment of the purchase price of the new buses. After paying only seven monthly amortizations for the period of December 1995 to June 1996, Superlines defaulted in the payment of its obligation to ICC.[11] On April 2, 1997, ICC wrote Superlines demanding full payment of its outstanding obligation, which as of March 31, 1997 amounted to P12,606,020.55.[12] However, Superlines failed to heed said demand. ICC filed a complaint[13] for collection of sum of money with prayer for a writ of replevin on April 21, 1997 with Branch 142 of the Regional Trial Court of Makati City against Superlines and Lavides. The case was entitled ICC Leasing & Finance Corporation vs. Superlines Transportation Co., Inc., et al. and docketed as Civil Case No. 97-816. ICC alleged, by way of alternative cause of action, that: .... .... ...

13. In the event that the Plaintiff fails to locate and/or seize the abovedescribed mortgaged vehicles from Defendant, its agents and/or assigns, or any such person other than said Defendant or its representatives, Defendant is obligated to pay Plaintiff the sum of P12,072,895.59, and an amount equivalent to 5% of the total amount due from Defendant as and for attorneys fees, plus expenses of collection, the costs of suit and cost of Replevin Bond.
ICC prayed that after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that: 1. A Writ of Replevin be issued, ordering the Court Sheriff and/or any of his deputies, to seize from Defendant, its agents and/or assigns, or any such person other than said Defendant or its representatives in possession thereof at present, the above-described vehicles wherever they may be found, to take and keep the same in custody and, to dispose of them in accordance with Section 6, Rule 60 of the Revised Rules of Court. 2. Judgment be rendered in favor of the Plaintiff and against the Defendant, as follows:
a) Declaring that Plaintiff is entitled to the possession of the subject properties in accordance with the terms and conditions of the Chattel Mortgage; b) Ordering Defendant, in case the amount realized from the sale of the mortgaged properties shall be insufficient to cover its total indebtedness, to pay the Plaintiff the deficiency; c) Ordering Defendant to pay Plaintiff the expenses of litigation and costs of suit, including the costs of the Replevin Bond, plus the stipulated attorneys fees.

As to the
ALTERNATIVE CAUSE OF ACTION

Ordering Defendants to pay the outstanding principal balance of P12,072,895.59, to pay the costs of suit, expenses of litigation and the costs of the Replevin Bond, plus an amount equivalent to 5% of the total amount due as and for attorneys fees.
In the meantime, the trial court issued a writ of seizure for the five mortgaged buses.[14] On May 29, 1997, the sheriff took possession of the five buses in compliance with the writ of seizure issued by the trial court. [15] Thereafter, ICC instituted extra-judicial foreclosure proceedings over the subject buses. An auction sale was held on July 2, 1997. ICC offered a bid ofP7,200,000.00 for the motor vehicles and was declared the winning bidder, resulting in a deficiency of P5,406,029.55. In addition, ICC incurred necessary expenses in the amount ofP920,524.62. Superlines thus still owed ICC the amount of P6,326,556.17. In their Answer with Counterclaim, Superlines and Lavides asserted that the real agreement of the parties was one of financing a sale of personal property, the prices for which shall be payable on installments. Relying on Article 1484(3)

of the Civil Code, Superlines and Lavides claimed that since the chattel mortgage on subject buses was already foreclosed by ICC, the latter had no further action against Superlines and Lavides for the unpaid balance of the price. They interposed compulsory damages in the total amount of P750,000.00 excluding costs of suit. Leonardo Serrano, Jr., the Executive Vice-President and Chief Operations Officer of ICC, testified that the transaction forged by ICC and Superlines was an amortized commercial loan and not a consumer loan, because under the latter transaction, ICC should have paid the price of the purchase of its customers (Superlines) directly to the suppliers. However, ICC did not do business directly with Diamond Motors Corporation; it transacted directly with Superlines. ICC remitted the purchase price of the buses directly to Superlines and not to Diamond Motors Corporation. ICC had no contract with Diamond Motors Corporation. On the other hand, Lavides testified that he and ICCs Assistant Vice President for Operations Aida Albano agreed on a consumer loan for the financing of the purchase of the buses, with ICC as the vendor, and Superlines as the vendee, of said buses; and that ICC had a special arrangement with Diamond Motors Corporation on the purchase by Superlines of the buses. On June 1, 1999, the trial court rendered a decision ordering the dismissal of the case and for ICC to pay damages and litigation expenses to Superlines and Lavides, the decretal portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered DISMISSING the instant complaint and ORDERING plaintiff to pay defendants the following:
1. The sum of P150,000.00 as and for attorneys fees; 2. The sum of P300,000.00 as moderate damages; 3. The sum of P50,000.00 as litigation expenses and 4. The costs of suit.

SO ORDERED.

[16]

The trial court found that, as testified to by Lavides, ICC and Superlines forged a consumer loan agreement and not an amortized commercial loan. It further declared that, as testified to by Lavides, there was a special arrangement for the purchase by ICC of said buses. The trial court finally stated that Superlines purchased the buses from ICC, the purchase price therefor payable in monthly installments. ICC appealed the trial courts decision to the Court of Appeals. On July 30, 2001, the appellate court rendered a decision reversing the decision of the RTC and ordering Superlines and Lavides to pay the deficiency claim of ICC. The decretal portion thereof reads:

In view of the foregoing, it is Our conclusion that plaintiff-appellant is entitled to the deficiency claim of P5,376,543.96 (Exh. F-1, p. 155 Record), plus costs of P71,807.22 for the Replevin Bond (Exh. H, p. 156, Record) and attorneys fees of P508,000.00 (Exh. G, p. 156, Record). WHEREFORE, the appealed Decision is REVERSED and SET ASIDE and a new one is rendered ordering defendants to pay jointly and severally the sum of P5,956,351.18 to the plaintiff. SO ORDERED.
[17]

The Court of Appeals stated that ICC and Superlines entered into an amortized commercial loan agreement with ICC as creditor-mortgagee and Superlines as debtor-mortgagor, and ordered Superlines and Lavides to pay to ICC jointly and severally the sum of P5,956,351.18 as deficiency.[18] It further declared that it was Diamond Motors Corporation and not ICC which sold the subject buses to Superlines. It held that no evidence had been presented by Superlines to show that ICC bought the said buses from Diamond Motors Corporation under a special arrangement and that ICC sold the buses to Superlines. The appellate court also ruled that Article 1484(3) is applicable only where there is vendor-vendee relationship between the parties and since ICC did not sell the buses to Superlines, the latter cannot invoke said law. Hence, this petition. Petitioners contend that the appellate court committed serious errors of law and/or grave abuse of discretion amounting to excess or lack of jurisdiction:
1. In concluding that Article 1484 (3) of the Civil Code is inapplicable to the instant transaction between the parties, and in holding that said transaction was an amortized commercial loan, the same being patently contrary to the unrebutted evidence as well as the admissions of the respondents sole witness that the parties may verbally agree as regards the financial scheme applied for and that the chattel mortgage, promissory note and other documents executed in the case of a commercial loan are no different from those documents executed in the case of a consumer loan. 2. In concluding that the respondent is in any event entitled to deficiency judgment as it is deemed to have chosen the remedy of exacting fulfillment of the obligation under paragraph (1) of Article 1484 of the Civil Code, the same being patently contrary to incontestable fact that what respondent availed of in the instant case is foreclosure of the chattel mortgage and not the alternative prayer contained in the relief portion of its complaint.[19]

Anent the first assignment of error, petitioners aver that the findings of the Court of Appeals that the transaction forged by petitioners and private respondent was an amortized commercial loan and not a consumer loan are belied by the evidence on record, more specifically the testimony of Lavides and

that of respondents witness Leonardo Serrano, Jr. The Promissory Note and Chattel Mortgage executed by petitioner Superlines and the Continuing Guaranty executed by both petitioners are not conclusive of the nature of the transaction concluded by them, private respondent and Diamond Motors Corporation. Petitioners further claim that the appellate court also ignored the unrebutted testimony of Lavides that respondent and Diamond Motors Corporation forged a special arrangement under which the latter will expedite the issuance of the certificates of registration over the buses under the name of Superlines. Petitioners also argue that the word vendee in Article 1484(3) of the New Civil Code is used in its generic term, and hence, it may mean an assignee or a mortgagee such as respondent. For its part, respondent contends that the findings and conclusions of the Court of Appeals were buttressed by the documentary and testimonial evidence on record which should prevail over those of the trial court:

We do not agree with the lower court that Art. 1484 (3) of the New Civil Code is applicable to the instant case. DIAMOND is the seller of the five units of buses and not the plaintiff. No convincing evidence, except the self-serving testimony of defendant Manolet Lavides, was presented to prove that there was an internal arrangement between the plaintiff, as financing agent, and Diamond, as seller of the buses. In fact, defendant Lavides admitted under oath that DIAMOND and plaintiff did not enter into transaction over the sale of the buses (TSN, February 26, 1999, p. 12). The conclusion of the lower court that the parties entered into a financing scheme covered by Article 1484 (3) of the New Civil Code is therefore unsubstantiated. The evidence shows that the transaction between the parties was an amortized commercial loan to be paid in installments. Defendants failed to prove that a special arrangement regarding the nature of the transaction was agreed upon between the plaintiff and the defendants. Aida Albano, plaintiffs employee who allegedly agreed with the request of defendant Manolet Lavides for a special arrangement, was not presented. It bears emphasizing that whoever alleges fraud or mistake affecting a transaction must substantiate his allegation, since it is presumed that a person takes ordinary care of his concerns and private transactions have been fair and regular (Mangahas vs. CA, 304 SCRA 375). If indeed defendant Manolet Lavides, a law graduate from a prestigious law school (TSN, February 26, 1999, p. 3) and a successful businessman for twenty (20) years ...., who admits to having meticulously examined the subject documents ... intended a financing scheme covered by Art. 1484 of the New Civil Code, he should have objected to the contents of the documents and incorporated therein his true intent.
[20]

At the core of petitioners case is their claim that the findings of facts of the Court of Appeals and its conclusions anchored thereon are belied by the evidence on record in contrast to those of the trial court. It bears stressing, however, that in a petition for review on certiorari, only questions of law may be raised in said petition. The jurisdiction of this Court in cases brought to it from the Court of Appeals is confined to reviewing and reversing the errors of law ascribed to it, findings of facts being conclusive on this Court. The Court is not tasked to calibrate and assess the probative weight of evidence adduced by the parties during trial all over again.[21] In those instances where the findings of facts of the trial court and its conclusions anchored on said findings are inconsistent with those of the Court of Appeals, this Court does not automatically delve into the record to determine which of the discordant findings and conclusions should prevail and to resolve the disputed facts for itself. This Court is tasked to merely determine which of the findings of the two tribunals are conformable to the facts at hand.[22] So long as the findings of facts of the Court of Appeals are consistent with or are not palpably contrary to the evidence on record, this Court shall decline to embark on a review on the probative weight of the evidence of the parties. Indeed, in Tan vs. Lim,[23] this Court, citing its ruling in Hermo vs. Court of Appeals,[24] held that it is the findings of the Court of Appeals and not those of the trial court which are final and conclusive on this Court. The rule is not without exception. This Court may review the findings of facts of the Court of Appeals and its conclusions based thereon if the inference made by the appellate court from its findings of facts is manifestly erroneous, absurd or impossible, or when the judgment of the said court is premised on a misappreciation of facts.[25] In this case, the findings of facts of the Court of Appeals and its conclusions anchored thereon are in terra firma, buttressed as they are by the evidence on record. The Court of Appeals correctly ruled that the findings of facts, deductions, and conclusions of the trial court are not warranted by the evidence on record. Petitioners failed to adduce a preponderance of evidence to prove that respondents and Diamond Motors Corporation entered into a special arrangement relative to the issuance of certificates of registration over the buses under the name of petitioner Superlines. Petitioners were also unable to prove that respondent purchased from Diamond Motors Corporation the new buses. In contrast, the vehicle invoices of Diamond Motors Corporation [26] irrefragably show that it sold the said buses to petitioner Superlines. The net proceeds of the loan were remitted by respondent to petitioner Superlines and the latter remitted the same to Diamond Motors Corporation in payment of the purchase price of the buses. In fine, respondent and Diamond Motors Corporation had no direct business transactions relative to the purchase of the buses and the payment of the purchase price thereof. As aptly observed by the Court of Appeals, petitioner Lavides is a graduate of the Ateneo de Manila University School of Law. He had been in business for twenty years or so. It is incredible that petitioner Superlines through

petitioner Lavides never required respondent and Diamond Motors Corporation to execute a deed evidencing their special agreement or arrangement if indeed they had one. The trial court indulged in a non sequitur when it quoted part of the testimony of Leonardo Serrano, Jr. out of context and used it as anchor for its finding that respondent and Diamond Motors Corporation forged a special arrangement. The testimony of Leonardo Serrano, Jr. is as follows:
ATTY. FABIE Q Q Now, on page 12 of the transcript of stenographic notes of October 9, 1998, to the question of Atty. Agcaoili, the question is this and I quote: Now, after that visit to the office of Superlines Inc. in Atimonan, Quezon what other circumstances or events transpired in connection with the evaluation or approval of the loan of the defendants Superlines?

And your answer was this: A The regular paper requirements, meaning the way the loan proposal and the approval report inclusive of credit showing credit checking was presented for approval by our Executive Committee.

ATTY. FABIE What is this regular papers requirement you are referring to, Mr. Witness? WITNESS A Those papers that are presented to the Executive Committee, Sir.

ATTY. FABIE Q Papers that are presented to the Executive Committee?

WITNESS A This will include evaluation report of the corporations financial statement credit checking from his creditors and this will include evidence of the collaterals being presented for the loan, Sir.

ATTY. FABIE Q In this particular case of Superlines Transportation Company, those requirements were complied with, Mr. Witness?

WITNESS A Yes, Sir.

ATTY. FABIE Q By way, in consumer loan, these papers are practically the same, am I correct, Mr. Witness?

WITNESS A In consumer loan, sometimes we have additional requirements, Sir.

ATTY. FABIE Q What is that, Mr. Witness?

WITNESS A Because they are individual applicants, we require them to submit their certificate of employment with the corresponding amount of their salary, Sir.

ATTY. FABIE Q You mean to say that consumer loan are specifically for individual and entities are not supposed to apply in consumer loans, is that what you mean, Mr. Witness?

WITNESS A As a matter of practice, we classify them as consumer loan, loans for individuals, Sir.

ATTY. FABIE Q For individuals only?

WITNESS A Yes, sir.

ATTY. FABIE Q So, you did not extend consumer loans to corporations other than individuals, Mr. Witness?

WITNESS A For companies or corporations, we classified them as commercial loan already, Sir.

ATTY. FABIE Q Although the scheme adopted on both loans are the same or would be the same, Mr. Witness?

WITNESS A In consumer loan, Sir, usually it is for purposes of buying a car or a motor vehicle, Sir.

ATTY. FABIE Q That is the normal practice, Mr. Witness?

WITNESS A Yes, Sir. That is the normal practice.

ATTY. FABIE Q But arrangement can be made by your company regarding the nature of the transaction, am I correct? Specific arrangement?

WITNESS A What do you mean?

ATTY. FABIE Q That you may depart from certain requirements between your company and the applicant? Mr. Witness?

WITNESS A When the company ......

ATTY. FABIE Q In special cases?

WITNESS A When the company is presented with a loan proposal, we require them to submit documents depending on the loan proposal, Sir.

ATTY. FABIE Q Now, did Superlines Transportation Company or Mr. Lavides present to you a loan proposal and where is that now, Mr. Witness?

WITNESS A The loan proposal of Mr. Lavides, Mr. Witness?

ATTY. FABIE Q Yes, in writing?

WITNESS A No, not in writing?

ATTY. FABIE Q No written loan proposal, Mr. Witness?

WITNESS A It was verbally told to us the purpose of his loan, Sir.

ATTY. FABIE Q Now, is that normal in your corporation, Mr. Witness?

WITNESS A In the practice?

ATTY. FABIE Q I am asking you whether that is normal in your corporation that you do not require any written loan proposal from the applicants, Mr. Witness?

WITNESS A We do not, Sir.

ATTY. FABIE Q Even in consumer loan, Mr. Witness?

WITNESS A We only require when the consumer or individual is applying. Then we require him to submit the application form.

ATTY. FABIE Q So, there is an application form, Mr. Witness?

WITNESS A For consumer loan, yes. And in commercial loan, you dont require the applicant to submit a written loan proposal, Mr. Witness?

ATTY. FABIE Q

WITNESS A As a matter of (loan) marketing consideration, anybody who wants ....

ATTY. FABIE Q I am asking you whether that is normal in your operation like Superlines?

WITNESS A This .....

ATTY. AGCAOILI Already answered, Your Honor. ATTY. FABIE I am asking him now to specific, Your Honor. COURT Witness may answer. WITNESS A That is not normal. Sorry. That is normal. We do not require them. That is the regular practice.

ATTY. FABIE Q And why not?

ATTY. AGCAOILI Objection, misleading. It was already answered that that was the normal practice, Your Honor. ATTY. FABIE

Why do you not require the applicants to submit papers or written loan proposal, Mr. Witness?

WITNESS A Because in our business marketing consideration, we finance companies after evaluation of a particular account and if this account is credit worthy, we sometimes do away with it, Sir.

ATTY. FABIE Q So, what is normal is that you ask for written loan proposal and what is sometimes not normal is that you do not require them to submit any loan proposal, Mr. Witness?

WITNESS A We....

ATTY. AGCAOILI I think counsel is already (arguing) with the witness, Your Honor. The question has been asked several times and the witness consistently answered in the same fashion. ATTY. FABIE The Court will know .... COURT The answer he gave was that with marketing considerations, we do not require papers in consumer loan because the client is credit worthy risk. Sometimes we do not require submission of papers anymore. That is the answer. Alright, proceed. ATTY. FABIE I think that is all for the witness, Your Honor.[27]

Leonardo Serrano, Jr. never testified that respondent and Diamond Motors Corporation had a special arrangement relative to the registration of the new buses. The mere admission of the witness that respondent in the course of its business transactions allowed special arrangements does not constitute proof that it in fact had a special arrangement with Diamond Motors Corporation relative to the registration of the new buses. The evidence on record shows that under the Promissory Note, Chattel Mortgage and Continuing Guaranty, respondent was the creditor-mortgagee of petitioner Superlines and not the vendor of the new buses. Hence, petitioners cannot find refuge in Article 1484(3) of the New Civil Code. As correctly held by the Court of Appeals, what should apply was the Chattel Mortgage executed by petitioner Superlines and respondent in relation to the Chattel Mortgage Law.[28] This Court had consistently ruled that if in an extra-judicial foreclosure of a chattel mortgage a deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. To deny the mortgagee the right to

maintain an action to recover the deficiency after foreclosure of the chattel mortgage would be to overlook the fact that the chattel mortgage is only given as security and not as payment for the debt in case of failure of payment. [29] Both the Chattel Mortgage Law and Act 3135 governing extra-judicial foreclosure of real estate mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee from recovering deficiency of the principal obligation. In a case of recent vintage, this Court held that if the proceeds of the sale are insufficient to cover the debt in an extra-judicial foreclosure of the mortgage, the mortgagee is still entitled to claim the deficiency from the debtor:

To begin with, it is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from the debtor. For when the legislature intends to deny the right of a creditor to sue for any deficiency resulting from foreclosure of security given to guarantee an obligation it expressly provides as in the case of pledges [Civil Code, Art. 2115] and in chattel mortgages, while silent as to the mortgagees right to recover, does not, on the other hand, prohibit recovery of deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial foreclosure is allowed.
[30]

In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals,[31] this Court declared that under Section 14 of the Chattel Mortgage Law, the mortgagor is entitled to recover the balance of the proceeds, upon satisfaction of the principal obligation and costs, thus there is a corollary obligation on the part of the debtor-mortgagor to pay the deficiency in case of a reduction in the price at public auction. In fine then, the Court of Appeals correctly ruled that respondent is entitled to a deficiency judgment against the petitioners. IN LIGHT OF THE FOREGOING, the petition is DENIED. The Decision of the Court of Appeals dated July 30, 2001 appealed from is AFFIRMED in toto. With costs against petitioners. SO ORDERED. Bellosillo, JJ., concur. (Chairman), Mendoza, Quisumbing and Austria-Martinez,

FIRST DIVISION

[G.R. No. 106418. July 11, 1996]

DANIEL L. BORDON II AND FRANCISCO L. BORBON, petitioners, vs. SERVICEWIDE SPECIALISTS, INC. & HON. COURT OF APPEALS,respondents.
DECISION
VITUG, J.:

From the decision of the Court of Appeals in CA-G.R. CV No. 30693 which affirmed that of the Regional Trial Court, NCJR, Branch 39, Manila, in Civil Case No. 85-29954, confirming the disputed possession of a motor vehicle in favor of private respondent and ordering the payment to it by petitioners of liquidated damages and attorney's fees, the instant appeal was interposed. The appellate court adopted the factual findings of the court a quo, to wit: "The plaintiff's evidence shows among others that on December 7, 1984, defendants Daniel L. Borbon and Francisco Borbon signed a promissory note (Exh. A) which states among others as follows: "'PROMISSORY NOTE Acct. No. 115008276 Makati, Metro Manila, Philippines December 7, 1984 'P122,856.00 'For value received (installment price of the chattel/s purchased), I/We jointly and severally promised to pay Pangasinan Auto Mart, Inc. or order, at its office at NMI Bldg. Buendia Avenue, Makati, MM the sum of One Hundred Twenty Two Thousand Eight Hundred Fifty Six only (P122,856.00), Philippine Currency, to be payable without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth, to wit: P10,238.00 monthly for Twelve (12) months due and payable on the 7 day of each month starting January, 1985, provided that a late payment charge of 3% per month shall be added on each unpaid installment from due date thereof until fully paid. xxx xxx xxx

'It is further agreed that if upon such default, attorney's services are availed of, an additional sum equal to twenty five percent (25%) of the total sum due thereon, which shall not be less than five hundred pesos, shall be paid to the holder hereof for attorney's fees plus an additional sum equivalent to twenty five percent (25%) of the total sum due which likewise shall not be less than five hundred pesos for liquidated damages, aside from expenses of collection and the legal costs provided for in the Rules of Court. 'It is expressly agreed that all legal actions arising out of this note or in connection with the chattel(s) subject hereof shall only be brought in or submitted to the jurisdiction of the proper court either in the City of Manila or in the province, municipality or city where the branch of the holder hereof is located. 'Acceptance by the holder hereof of payment of any installment or any part thereof after due dated (sic) shall not be considered as extending the time for the payment or any of the installments aforesaid or as a modification of any of the conditions hereof. Nor shall the failure of the holder hereof to exercise any of its right under this note constitute or be deemed as a waiver of such rights. 'Maker: (S/t) DANIEL L. BORBON, II

Address: 14 Colt St., Rancho Estate I, Concepcion Dos, Marikina, MM (S/t) FRANCISCO BORBON

Address: 73 Sterling Life Home Pamplona, Las Pias, MM "WITNESSES (illegible) ____(illegible)_____

'PAY TO THE ORDER OF FILINVEST CREDIT CORPORATION without recourse, notice, presentment and demand waived PANGASINAN AUTO MART, INC. BY:

(S/T) K.N. DULCE Dealer' "To secure the Promissory Note, the defendants executed a Chattel Mortgage (Exh. B) on 'One (1) Brand new 1984 Isuzu KCD 20 Crew Cab (Conv.) Serial No. KC20D0F 207685 Key No. 5509 (Exhs. A and B, p. 2 tsn, September 10, 1985) "The rights of Pangasinan Auto Mart, Inc. was later assigned to Filinvest Credit Corporation on December 10, 1984, with notice to the defendants (Exh. C, p. 10, Record). "On March 21, 1985, Filinvest Credit Corporation assigned all its rights, interest and title over the Promissory Note and the chattel mortgage to the plaintiff (Exh. D; p. 3, tsn, Sept. 30, 1985). "The promissory note stipulates that the installment of P10,238.00 monthly should be paid on the 7th day of each month starting January 1985, but the defendants failed to comply with their obligation (p. 3, tsn, Sept. 30, 1985). "Because the defendants did not pay their monthly installments, Filinvest demanded from the defendants the payment of their installments due on January 29, 1985 by telegram (Exh. E; pp. 3-4, tsn, Sept. 30, 1985). "After the accounts were assigned to the plaintiff, the plaintiff attempted to collect by sending a demand letter to the defendants for them to pay their entire obligation which, as of March 12, 1985, totaled P185,257.80 (Exh. H; pp. 3-4, tsn, Sept. 30, 1985). "For their defense, the defendants claim that what they intended to buy from Pangasinan Auto Mart was a jeepney type Isuzu K. C. Cab. The vehicle that they bought was not delivered (pp. 11-12, tsn, Oct. 17, 1985). Instead, through misrepresentation and machination, the Pangasinan Motor, Inc. delivered an Isuzu crew cab, as this is the unit available at their warehouse. Later the representative of Pangasinan Auto Mart, Inc. (assignor) told the defendants that their available stock is an Isuzu Cab but minus the rear body, which the defendants agreed to deliver with the understanding that the Pangasinan Auto

Mart, Inc. will refund the defendants the amount of P10,000.00 to have the rear body completed (pp. 12-34, Exhs. 2 to 3-3A). "Despite Communications with the Pangasinan Auto Mart, Inc., the latter was not able to replace the vehicle until the vehicle delivered was seized by order of this court. The defendants argue that an assignee stands in the place of an assignor which, to the mind of the court, is correct. The assignee exercise all the rights of the assignor (Gonzales vs. Rama Plantation Co., C.V. 08630, Dec. 2, 1986). "The defendants further claim that they are not in default of their obligation because the Pangasinan Auto Mart was first guilty of not fulfilling its obligation in the contract. The defendants claim that neither party incurs delay if the other does not comply with his obligation. (citing Art. 1169, N.C.C.)"[1] In sustaining the decision of the court a quo, the appellate court ruled that petitioners could not avoid liability under the promissory note and the chattel mortgage that secured it since private respondent took the note for value and in good faith. In their appeal to this Court, petitioners merely seek a modification of the decision of the appellate court insofar as it has upheld the court a quo in the award of liquidated damages and attorney's fees in favor of private respondent. Petitioners invoke the provisions of Article 1484 of the Civil Code which reads: ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: "(1) pay; Exact fulfillment of the obligation, should the vendee fail to

"(2) Cancel the sale, should the vendee's failure to pay cover two or more installments; "(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void." The remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive,[2] which means, as so held

in Nonato vs. Intermediate Appellate Court and Investor's Finance Corporation,[3] that "x x x Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any of these three remedies either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others."[4] When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the deficiency,[5] and the seller-mortgagee is deemed to have renounced any right thereto.[6] A contrario, in the event the seller-mortgagee first seeks, instead, the enforcement of the additional mortgages, guarantees or other security arrangements, he must then be held to have lost by waiver or non-choice his lien on the chattel mortgage of the personal property sold by any mortgaged back to him, although, similar to an action for specific performance, he may still levy on it. In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgment credit.[7] So, also, a mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure,[8] but the repossession thereof by the vendor-mortgagee would have the effect of foreclosure.

The parties here concede that the action for replevin has been instituted for the foreclosure of the vehicle in question (now in the possession of private respondent). The sole issue raised before us in this appeal is focused on the legal propriety of the affirmance by the appellate court of the awards made by the court a quo of liquidated damages and attorney's fees to private respondent. Petitioners hold that under Article 1484 of the Civil Code, aforequoted, the vendormortgagee or its assignees loses any right "to recover any unpaid balance of the price" and any "agreement to the contrary (would be) void." The argument is aptly made. In Macondray & Co. vs. Eustaquio[9] we have said that the phrase "any unpaid balance" can only mean the deficiency judgment to which the mortgagee may be entitled to when the proceeds from the auction sale are insufficient to cover the "full amount of the secured obligation which x x x include interest on the principal, attorney's fees, expenses of collection, and costs." In sum, we have observed that the legislative intent is not to merely limit the proscription of any further action to the "unpaid balance of the principal" but, as so later ruled in Luneta Motor Co. vs. Salvador,[10] to all other claims that may likewise be called for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees. In Filipinas Investment & Finance Corporation vs. Ridad[11] while we reiterated and expressed our agreement on the basic philosophy behind Article 1484, we stressed, nevertheless, that the protection given to the buyer-mortgagor should not be considered to be without circumscription or as being preclusive of all other laws or legal principles. Hence, borrowing from the examples made in Filipinas Investment, where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, that thereby constrained the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney's fees, could rightly be awarded. Private respondent bewails the instant petition in that petitioners have failed to specifically raise the issue on liquidated damages and attorney's fees stipulated in the actionable documents. In several cases, we have ruled that as long as the questioned items bear relevance and close relation to those specifically raised, the interest of justice would dictate that they, too, must be considered and resolved

and that the rule that only theories raised in the initial proceedings may be taken up by a party thereto on appeal should only refer to independent, not concomitant matters, to support or oppose the cause of action.[12] Given the circumstances, we must strike down the award for liquidated damages made by the court a quo but we uphold the grant of attorney's fees which we, like the appellate court, find to be reasonable. Parenthetically, while the promissory note may appear to have been a negotiable instrument, private respondent, however, clearly cannot claim unawareness of its accompanying documents so as to thereby gain a right greater than that of the assignor. WHEREFORE, the appealed decision is MODIFIED by deleting therefrom the award for liquidated damages; in all other respects the judgment of the appellate court is AFFIRMED. No cost. SO ORDERED. Padilla (Chairman), Bellosillo, Kapunan, and Hermosisima, Jr., JJ., concur.
Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-29155 May 13, 1970 UNIVERSAL FOOD CORPORATION, petitioner, vs. THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents. Wigberto E. Taada for petitioner. Teofilo Mendoza for respondents.

CASTRO, J.:

Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco,

Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1 On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1
On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or corrective damages. On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the present recourse. The Court of Appeals arrived at the following "uncontroverted" findings of fact: That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and in the same year plaintiff registered his trademark in his name as owner and inventor with the Bureau of Patents; that due to lack of sufficient capital to finance the

expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1). Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor and superintendent with a salary of P250.00 a month. Since the start of the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret to himself. However, said plaintiff expressed a willingness to give the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November 28, 1960, SecretaryTreasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly approved by the President and General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960, President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him to report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with the orders of the corporation's various distributors and dealers, and with instructions to take only the necessary daily employees without employing permanent employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees who are connected in the production of Mafran Sauce and also some additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation including its trademarks, formula and assets at a price of not less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action on February 14, 1961. About a

month afterwards, in a letter dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present action was already filed in court (Exhibit J). 1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169 of the same Code, 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; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been guilty of default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of Assignment.

The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2
The Bill of Assignment sets forth the following terms and conditions: THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE; THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production of MAFRAN SAUCE and other food products and from other business which the Party of the Second Part may engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine and declare, said Party of the First Part hereby assign, transfer, and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part; THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of the Second Part and after a competent auditor designated by the Board of Directors shall have duly examined and audited its books of accounts and shall have certified as to the correctness of its Financial Statement;

THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the Party of the First Part and to increase its production, shall endeavor or undertake such research, study, experiments and testing, to invent or cause to invent additional formula or formulas, the property rights and interest thereon shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in consideration of the foregoing premises, covenants and stipulations: THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be entitled to the following Participation: (a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second VicePresident and Chief Chemist of the Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor thereof and in the event that the Treasurer or any officer who may have the custody of the funds, assets and other properties of the Party of the Second Part comes from the Party of the First Part, then the Auditor shall not be appointed from the latter; furthermore should the Auditor be appointed from the Party representing the majority shares of the Party of the Second Part, then the Treasurer shall be appointed from the Party of the First Part; (b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of their respective position, then, their shares or assigns and who may have necessary qualifications shall be preferred to succeed them; (c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of Directors of the Party of the Second Part; (d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the preparation of said products; THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in which case then the property rights and interests over said trademark and formula shall automatically revert the Party of the First Part. Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part

ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula."

However, a perceptive analysis of the entire instrument and the language employed therein 3 would lead one to the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the parties, 4 as we shall presently show.
Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for the use of a patented invention.
'Royalty,' when used in connection with a license under a patent, means the compensation paid by the licensee to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5

Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping of the chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6 Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark and formula and not merely the right to use it for then such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become part of the property in the hands of the receiver thereof. 7 Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below for ready reference:

3. ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights over the said trademark and formula so that the defendant corporation could use the formula in the preparation and manufacture of the mafran sauce, and the trade name for the marketing of said project, as appearing in said contract .... 3. Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint. Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent patentee.

Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the least transmission of right," 9 and is there a better example of least transmission of rights than allowing or permitting only the use, without transfer of ownership, of the formula for Mafran sauce. The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce."
2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character." The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position as chief chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to retain only a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was even designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he could draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the petitioner had to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides, the records will show that the respondent patentee had knowledge of the resumption of production by the corporation, but in spite of such knowledge he did not report for work.

The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work, considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist, while the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of the resumption of operations. The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received a copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no weight because the president and general manager of the corporation had no power to make the designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father. In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time being until the corporation resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twenty-three days afterwards, or on December 29, the same president and general manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full blast production. And finally, at the hearing held on October 24, 1961, the same president and general manager admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is theseparation pay." The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers, 11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission, the petitioner corporation, thru its

president and general manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff." 3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the following articles of the new Civil Code 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 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 of the Mortgage Law. 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. ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused. At the moment, we shall concern ourselves with the first two paragraphs of 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 rescission of the obligation, with payment of damages in either case. In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause. Upon the factual milieu, is rescission of the Bill of Assignment proper?

The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. 12 The question of whether a breach of a contract is substantial depends upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the

corporation 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 legal principle that the option to demand performance or ask for rescission of a contract belongs to the injured party, 14 the fact remains that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the purchase and safeguarding of said products;" and that only by all these measures could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second Vice-President and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said product all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of the rest.
4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is that the said respondent patentee refused to go back to work, notwithstanding the call for him to return which negates his right to be paid his back salaries for services which he had not rendered; and that if the said respondent is entitled to be paid any back salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already formally called him back to work. The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation.

5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and formula." ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its assigns and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur. Teehankee J., took no part. Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-28602 September 29, 1970 UNIVERSITY OF THE PHILIPPINES, petitioner, vs. WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON CITY, et al., respondents. Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V. Fernandez for petitioner. Norberto J. Quisumbing for private respondents.

REYES, J.B.L., J.: Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or UP) against the above-named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or conducting logging operations on the concession; and the third order, dated 12 December 1967, denied reconsideration of the order of contempt. As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9 February 1968. The petition alleged the following: That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an institution of higher learning, to be operated and developed for the purpose of raising additional income for its support, pursuant to Act 3608; That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was granted exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which was approved by the president of UP, and which stipulated the following: 3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance outstanding after the said payments have been applied shall be paid by the DEBTOR in full no later than June 30, 1965; xxx xxx xxx 5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for liquidated damages;

ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously acknowledged. That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as rescinded and of no further legal effect the logging agreement that they had entered in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and alleging the facts hereinbefore specified, together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging operations in the Land Grant. That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16 February 1966. That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction but were denied by the court; That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, respondent judge issued the first of the questioned orders, enjoining UP from awarding logging rights over the concession to any other party. That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company, Inc., and said company had started logging operations. That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in the concession. The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967. Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order, was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs previously cut during the management of Cesar Guy be first sold; that

respondent was permitted to cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging operations but respondent received no reply. The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently sustained it (although the order expresses no specific findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect. We find that position untenable. In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276: there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract. Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation, 1 since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the

extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder. In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully impugned in court. El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun jurisprudencia de este Tribunal, surge immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897). Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion hecha por una de las partes se impugna por la otra, queda aquella sometida el examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cualfragenti fidem, fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University made out a prima facie case of breach of contract and defaults in payment by respondent ALUMCO, to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the respondent

company had profited from its operations previous to the agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten condition of the logs in private respondent's pond, which said respondent was in a better position to know when it executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining petitioner's measures to protect its interest without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be set aside. For the reason that the order finding the petitioner UP in contempt of court has open appealed to the Court of Appeals, and the case is pending therein, this Court abstains from making any pronouncement thereon. WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside. Let the records be remanded for further proceedings conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur. Reyes, J.B.L., Actg. C.J., is on leave.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 142310 September 20, 2004

ARRA REALTY CORPORATION and SPOUSES CARLOS ARGUELLES and REMEDIOS DELA RAMA ARGUELLES, petitioners, vs. GUARANTEE DEVELOPMENT CORPORATION AND INSURANCE AGENCY and ENGR. ERLINDA EALOZA,respondents. DECISION CALLEJO, SR., J.:

Arra Realty Corporation (ARC) was the owner of a parcel of land, located in Alvarado Street, Legaspi Village, Makati City, covered by Transfer Certificate of Title (TCT) No. 112269 issued by the Register of Deeds.1 Through its president, Architect Carlos D. Arguelles, the ARC decided to construct a five-story building on its property and engaged the services of Engineer Erlinda Pealoza as project and structural engineer. In the process, Pealoza and the ARC, through Carlos Arguelles, agreed on November 18, 1982 that Pealoza would share the purchase price of one floor of the building, consisting of 552 square meters for the price of P3,105,838: P901,738, payable within sixty (60) days from November 20, 1982, and the balance payable in twenty (20) equal quarterly installments of P110,205. The parties further agreed that the payments of Pealoza would be credited to her account in partial payment of her stock subscription in the ARCs capital stock.2 Sometime in May 1983, Pealoza took possession of the one-half portion of the second floor, with an area of 552 square meters3 where she put up her office and operated the St. Michael International Institute of Technology. Unknown to her, ARC had executed a real estate mortgage over the lot and the entire building in favor of the China Banking Corporation as security for a loan on May 12, 1983. 4 The deed was annotated at the dorsal portion of TCT No. 112269 on June 3, 1983. 5 From February 23, 1983 to May 31, 1984, Pealoza paid P1,175,124.59 for the portion of the second floor of the building she had purchased from the ARC.6 She learned that the property had been mortgaged to the China Banking Corporation sometime in July 1984. Thereafter, she stopped paying the installments due on the purchase price of the property. Pealoza wrote the China Banking Corporation on August 1, 1984 informing the bank that the ARC had conveyed a portion of the second floor of the building to her, and that she had paid P1,175,124.59 out of the total price ofP3,105,838. She offered to open an account with the bank in her name in the amount of P300,000, and to make monthly deposits of P50,000 each, to serve as payments of the equivalent loan of the ARC upon the execution of the appropriate documents. She also proposed for the bank to assist her in requesting the ARC to execute a deed of absolute sale over the portion of the second floor she had purchased and the issuance of the title in her name upon the payment of the purchase price. 7 However, the bank rejected her proposal.8 She then wrote the ARC on August 31, 1984 informing it of China Banking Corporations rejection of her offer to assume its equivalent loan from the bank and reminded it that it had conformed to her proposal to assume the payment of its loan from the bank up to the equivalent amount of the balance of the purchase price of the second floor of the building as agreed upon, and the consequent execution by the ARC of a deed of absolute sale over the property in her favor.9 Pealoza then sent a copy of a deed of absolute sale with assumption of mortgage for the ARCs consideration, and informed the latter that, in the meantime, she was withholding installment payments.10 On October 3, 1984, Pealoza transferred the school to another building she had purchased, but retained her office therein. She later discovered that her office had been padlocked. 11 She had the office reopened and continued holding office thereat. To protect her rights as purchaser, she executed on November 26, 1984 an affidavit of adverse claim over the property which was annotated at the dorsal portion of TCT No. 112269 on

November 27, 1984.12 However, the adverse claim was cancelled on February 11, 1985.13 When the ARC failed to pay its loan to China Banking Corporation, the subject property was foreclosed extrajudicially, and, thereafter, sold at public auction to China Banking Corporation on August 13, 1986 forP13,953,171.07.14 On April 29, 1987, the ARC and the Guarantee Development Corporation and Insurance Agency (GDCIA) executed a deed of conditional sale covering the building and the lot for P22,000,000, part of which was to be used to redeem the property from China Banking Corporation.15 With the money advanced by the GDCIA, the property was redeemed on May 4, 1987.16 On May 14, 1987, the petitioner executed a deed of absolute sale over the lot and building in favor of the GDCIA for P22,000,000.17 The ARC obliged itself under the deed to deliver possession of the property without any occupants therein. The Register of Deeds, thereafter, issued TCT No. 147846 in favor of the GDCIA over the property without any liens or encumbrances on May 15, 1987.18 Of the purchase price of P22,000,000, the GDCIA retained P1,000,000 to answer for any damages arising from any suits of the occupants of the building. On May 28, 1987, Pealoza filed a complaint against the ARC, the GDCIA, and the Spouses Arguelles, with the Regional Trial Court of Makati, Branch 61, for "specific performance or damages" with a prayer for a writ of preliminary injunction. Pealoza prayed for the following reliefs:
WHEREFORE, it is most respectfully prayed of this Honorable Court that 1.- Before hearing, a temporary restraining order immediately issue; 2.- After notice and hearing, and the filing of an injunction bond, a preliminary injunction be issued forthwith enjoining and restraining the defendant Register of Deeds for Makati, Metro Manila, from receiving and registering any document transferring, conveying, encumbering or, otherwise, alienating the land and edifice covered by Transfer Certificate of Title No. 112269 of said Registry of Deeds and from issuing a new title therefor; 3.- After hearing and trial (a) Ordering defendants ARRA and Arguelles to execute a deed of sale in favor of plaintiff over the second floor of that 5-storey edifice built on 119 Alvarado Street, Legaspi Village, Makati, Metro Manila, simultaneously with the tender of the remaining balance on the purchase price thereon; (b) Ordering defendants ARRA and Arguelles, jointly and severally, to pay the plaintiff such moral damages as may be proved during the trial; (c) Ordering defendants ARRA and Arguelles, jointly and severally, to pay the plaintiff exemplary damages in such amount as may be deem (sic) just, sufficient and equitable as exempary (sic) damages;

(d) Ordering defendants ARRA and Arguelles, jointly and severally, to pay the plaintiff an amount equivalent to 20% of whatever she may recover herein as and for attorneys fees;P500.00 per appearance of counsel in Court; and miscellaneous litigation expenses and cost of suit; 4.- On the Alternative Cause of Action, in the event that specific performance cannot be effected for any reason, to render judgment in favor of the plaintiff and against the defendants (a) Ordering the defendants, jointly and reveraaly (sic), to restitute to the plaintiff the sum ofP1,444,124.59 with interest thereon at bank borrowing rate from August 1984 until the same is finally wholly returned; (b) Ordering the defendants, jointly and severally, to pay the plaintiff the difference between the selling price on the second floor of the 5storey edifice after deducting P1,444,124.59 therefrom; (c) Directing defendant Guarantee Development Corporation & Insurance Agency to deposit with the Honorable Court any amount still in its possession on the purchase price of the land and the 5storey edifice in question; (d) Ordering the defendants, jointly and severally, to pay the plaintiff moral and exemplary damages as may be proved during the trial and/or as this Honorable Court may deem just, adequate and equitable in the premises; (e) Ordering the defendants, jointly and severally, to pay the plaintiff an amount equivalent to 20% of whatever she may recover from the defendants in this suit as and for attorneys fees, litigation expenses and costs. PLAINTIFF further prays for such other reliefs and remedies as may be just and equitable in the premises19

On her first cause of action, Pealoza alleged, inter alia:

2.- That on or about November 18, 1982, the plaintiff and defendant ARRA represented by its President and General Manager, defendant Arguelles, entered into an agreement whereby for and in consideration of the amount of P3,105,828.00 on a deferred payment plan payable in five (5) years, defendants ARRA and Arguelles agreed to sell to the plaintiff one (1) whole floor of a prospective 5-storey building which said defendants planned to build on a 992 square meter lot located at 119 Alvarado Street, Legaspi Village, Makati, Metro Manila, covered by Transfer Certificate of Title No. 112269 of the Registry of Deeds for Makati, Metro Manila, copy of which agreement is hereto attached as Annex "A" and made integral part hereof ;

3.- That consonant with the aforementioned agreement between the plaintiff and defendants ARRA and Arguelles, the former paid to said defendants the total amount of P1,377,124.59 as evidenced by receipts and cash vouchers copies of which are hereto attached as Annexes "B," "B-1" to "B-10" and made integral parts hereof; 4.- That upon completion of the 5-storey edifice on May 31, 1984, the plaintiff made her choice of the second floor thereof as the subject matter or object of the sale in her favor, and with the express knowledge and consent of defendants ARRA and Arguelles, she immediately took possession and occupied the same as contained in a certification to said effect of the defendants, and where they further certified that the certificate of condominium corresponding to the second floor "is presently under process," copy of said certification is hereto attached as Annex "C" hereof; 5.- That sometime in August 1984, the plaintiff learned that the defendants ARRA and Arguelles, conspiring with one another in a clear and unmistakeably (sic) scheme to defraud the plaintiff of her investment on the second floor of the 5-storey edifice, mortgaged the land and the building covered by Transfer Certificate of Title No. 112269 of the Registry of Deeds for Makati, Metro Manila, with the China Banking Corporation in order to secure the payment of their loan in the total sum of P6,500,000.00 without the knowledge and/or consent of the plaintiff; 6.- That after verifying the fact of mortgage with the China Banking Corporation and realizing the risk of loss of her investment of P1,377,124.59 she had so far paid on the purchase price of the second floor of the 5-storey edifice, the plaintiff wrote the defendants ARRA and Arguelles on August 31, 1984 proposing to defendants ARRA and Arguelles the execution of a deed of sale with assumption of mortgage in her favor of the portion of the loan corresponding to the second floor of the said edifice and informing them of her resolve to hold further payments on the purchase price of the second floor until her rights and interest over the same shall have been adequately and properly secured, copy of said letter is hereto attached as Annex "D" hereof; 7.- That in order to facilitate the transaction and expeditious execution of the sale over the second floor in her favor, the plaintiff had a Deed of Sale with Assumption of Mortgage prepared and forwarded the same to defendants ARRA and Arguelles for their consideration and signature with an accompanying letter therefor dated September 25, 1984, copy of said draft of a deed of sale with assumption of mortgage and the accompanying letter therefor are hereto attached as Annexes "E" and"E-1," respectively; 8.- That by reason of the unjustified, unwarranted and malicious inaction and/or refusal and failure of the defendants ARRA and Arguelles to comply with plaintiffs perfectly valid and legal demand for the execution of a document of sale over the second floor of the 5-storey edifice, and in order to protect her rights and interest in said transaction, the plaintiff caused to be prepared and executed an affidavit of Adverse Claim and effected the annotation thereof on Transfer Certificate of Title No. 112269 of the Registry of Deeds for Makati, M.M., copy of said Adverse Claim is hereto attached as Annex "F" hereof.20

On her second cause of action, Pealoza alleged, as follows:

9.- That after her occupation and taking possession of the second floor of the said 5storey edifice, the plaintiff caused the installation of a water tank and water pumps thereto; 10.- That the water tank installed on the second floor of the 5-storey edifice involved an outlay of P15,000.00 as evidenced by Cash Vouchers, copies of which are hereto attached as Annexes "G" and "G-1," while the water pumps involved the disbursement of P52,000.00 from the funds of the plaintiff as evidenced by Cash Vouchers, copies of which are hereto attached as Annexes "H," "H-1" hereof; 11.- That when the defendants ARRA and Arguelles mortgaged with (sic) land and the 5-storey edifice to the China Banking Corporation, the mortgage included the water tank and water pumps servicing the second floor thereof installed by the plaintiff;21

Pealoza caused the annotation of the notice of lis pendens at the dorsal portion of TCT No. 112269. The GDCIA interposed the following affirmative and special defenses in its answer to the complaint:
26. Guarantee acquired clean title to the Property, as evidenced by the transfer certificate of title attached as Annex 4 hereof. 27. Guarantee was an innocent purchaser for value and in good faith of the Property who: (i) verified that the title to the Property in the Registry of Deeds of Makati was absolutely free and clear of any encumbrances, liens or claims other than the mortgage to China Banking Corporation; and, (ii) even obtained explicit confirmation of that fact from Arra and Arguelles. 30. Consequently, Guarantee could rely, as it did, on the absence of any annotation of encumbrance on the title to the Property. By clear provision of law, the present action, which is a collateral attack on the title to the Property in question, cannot be allowed by the Court. 31. The complaint (para. 6) admits that plaintiff was unable to pay the purchase price for the portion of the building which she allegedly bought under the letter agreement with Arra dated November 18, 1982 (Annex "A," Complaint). Assuming plaintiffs agreement with Arra to be valid and enforceable, her failure to discharge her part of the agreement bars her from now attempting to compel performance from Arra and Arguelles. 32. Plaintiffs remedy, should her claim, indeed, be meritorious, is a personal action for damages against Arra and Arguelles.22

The GDCIA prayed that, after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that, after due hearing, judgment be rendered: (i) Dismissing the complaint for lack of merit; (ii) Ordering plaintiff to pay attorneys fees in such amount as may be proven in the course of trial; (iii) Ordering plaintiff to pay to Guarantee the amount of P500,000.00 as moral damages; or, in the alternative, should plaintiffs claim be adjudged meritorious, (iv) Ordering defendants Arra and Arguelles, solidarily, to return the purchase price of the Property with interest as stated in the Deed of Conditional Sale; (v) Ordering defendants Arra and Arguelles, solidarily, to pay to Guarantee the amount ofP1,000,000.00 as punitive and exemplary damages; (vi) Ordering defendants Arra and Arguelles to pay attorneys fees in such amount as may be proven in the course of trial; (vii) Ordering defendants Arra and Arguelles to pay to Guarantee the amount of P500,000.00 as moral damages. Other just and equitable reliefs are prayed for.23

The ARC and the Spouses Arguelles interposed the following special and affirmative defenses:
10. Plaintiff has no cause of action against answering defendants; her complaint is definitely a nuisance suit; 11. When answering defendants decided to erect a 5-storey building on their lot in 1982, plaintiff and answering defendants agree that plaintiff will share in the construction of any one (1) floor thereof; hence, the agreement between them (Annex "A"); 12. Plaintiff not only refused and failed to comply with her Agreement despite repeated demands but also grossly violated said agreement as she paid only an initial amount of P200,000.00 on February 7, 1982 in contrary to the specific, express decisive stipulation in Annex "A" which was synchronized with the agreement of Answering Defendants with the contractor of the building, Pyramid Construction & Engineering Corp., who was committed to finish the building in a period of five (5) months; 13. Having committed to construct the 5-storey edifice on their lot, answering defendants has (sic) to raise the required initial amount to start the construction and for this reason, they were constrained to borrow the rest of the amount necessary for the completion of the building and they used their own land and the building itself as

collateral to enable defendant Arguelles to finish the building plus his own funding in the amount ofP7,000,000.00; 14. Despite her non-compliance with her agreement, plaintiff, on her own and without the consent of answering defendants, occupied the second floor of the building and converted the same into a school the St. Michael International School and other business establishments whereby she earned no less thanP3,000,000.00 in a period of four (4) years of her occupancy as a squatter thereof without paying the rentals to answering defendants; 15. Due to plaintiffs persistent requests for the issuance in her favor of a certification of her occupancy of the second floor to enable her to secure a loan in the amount of P3,105,838.00 to complete payment of her obligation, defendant Carlos Arguelles, always a kind and understanding person, issued Annex "C" with the expectation that plaintiff could, indeed, comply with her agreement within a period of three (3) months as she promised; 16. Having failed to fulfill her promise and to comply with her obligation as mentioned in the immediately preceding paragraph hereof, plaintiff voluntarily vacated the second floor of the said building on (sic) May 1986; 17. As a consequence of plaintiffs violation of her written agreement, answering defendants naturally defaulted in their mortgage obligation with China Banking Corporation and answering defendants lot and building were, therefore, foreclosed by said bank and having no means of redeeming the mortgaged properties within the redemption period, answering defendants were compelled to negotiate for the sale of the foreclosed properties which sale was monitored to the plaintiff together with her statement of account; 18. That the negotiation for the sale of the building took almost a year and during such period, plaintiff was cooperative in showing the second floor which she was then occupying to prospective buyers; 19. Whatever right plaintiff may have acquired over the second floor of the subject 5storey building has been extinguished upon her failure to comply with her obligation, which was the payment of the total amount ofP3,105,838.00 within the specific period expressly provided as the essence of the agreement.24

The ARC and the Spouses Arguelles also interposed counterclaims against the GDCIA, while the latter secured a writ of preliminary attachment against its codefendants and garnished their funds. On April 17, 1995, the trial court rendered judgment in favor of Pealoza and the GDCIA, and against the ARC and the Spouses Arguelles, thus:
WHEREFORE, premises above considered, judgment is hereby rendered as prayed for by plaintiff PEALOZA in the case for SUM OF MONEY as against defendants ARRA and SPOUSES CARLOS D. ARGUELLES and REMEDIOS DELA RAMAARGUELLES, who are hereby ORDERED as follows: 1. TO PAY plaintiff the amount of P1,444,124.59 with interest of 12 per centum per annum from August 1984 until fully paid;

2. TO PAY the amount of P150,000.00 for and as attorneys fees; and 3. TO PAY the Costs of the proceedings. The case for SPECIFIC PERFORMANCE and prayer for PRELIMINARY INJUNCTION are considered as DISMISSED on grounds that this case for this alternative relief was filed after the Transfer Certificate of Title of the property was already issued by defendant Register of Deeds in the name of GUARANTEE. The case as against DEFENDANT Guarantee Development Corporation & Insurance Agency (GUARANTEE) is hereby DISMISSED for insufficiency of evidence. The counterclaims of DEFENDANTS are hereby DISMISSED for insufficiency of evidence. SO ORDERED.25

Pealoza, as well as the ARC and the Spouses Arguelles, appealed the decision to the Court of Appeals (CA). The ARC and the Spouses Arguelles alleged that the Regional Trial Court (RTC) erred as follows:
I IN NOT ANNULLING OR RESCINDING THE CONDITIONAL DEED OF SALE OF REALTY DATED APRIL 29, 1987 AND DEED OF ABSOLUTE SALE DATED MAY 14, 1999; II IN NOT ORDERING THE DEFENDANT GUARANTEE DEVELOPMENT AND INSURANCE AGENCY TO PAY DEFENDANTS-APPELLANTS FOR THE MALICIOUS AND UNFOUNDED FILING OF WRIT OF ATTACHMENT AND GARNISHMENT; AND III IN NOT DIRECTING PACES TO PAY ARRA REALTY AND SPOUSES ARGUELLES ARREARS IN RENTALS PLUS INTERESTS AND DISMISSING THE ORIGINAL AND AMENDED COMPLAINTS.26

The CA rendered judgment, on September 30, 1998, affirming with modification the appealed decision. The fallo reads:
WHEREFORE, the appeals of both ARRA Realty Corporation and plaintiff Engineer Erlinda Pealoza are hereby DISMISSED, and the Decision of the lower court is hereby AFFIRMED but the award of P150,000.00 as attorneys fees in favor of said plaintiff is deleted. The Register of Deeds of Makati City is hereby ordered to cancel the Notice of Lis Pendens annotated on Transfer Certificate of Title No. 147845 registered in the name of Guarantee Development Corporation and Insurance Agency.27

The ARC and the Spouses Arguelles filed a motion for reconsideration of the decision of the CA on the following grounds:

1.) THIS HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT PEALOZAS ACTION WAS TANTAMOUNT TO FORFEITURE OR WAIVER OF HER RIGHTS. 2.) THIS HONORABLE COURT OF APPEALS ERRED IN NOT APPRECIATING THE EVIDENCE OF CO-DEFENDANTS ARRA/ARGUELLES ESPECIALLY THE ARREARS IN RENTALS/OUT OF POCKET ADVANCES WITH THE RESULTANT UNJUST ENRICHMENT ON THE PART OF PEALOZA.28

However, the appellate court denied the said motion. Pealoza filed a petition for review on certiorari with this Court docketed as G.R. No. 136876, wherein she made the following assignment of errors:
I The Court of Appeals gravely erred in finding respondent Guarantee an innocent purchaser for value and in good faith contrary to settled jurisprudence that a buyer of a parcel of land who did not pay the purchase price in full and who could not have failed to know or discover that the land sold to him was in the adverse possession of another is a buyer in bad faith. II The Court of Appeals gravely erred in finding that petitioner, who had established her legal right for sum of money against respondents Arra and the Arguelles spouses, may be effectively barred from pursuing her alternative remedy for recovery of title against respondent Guarantee contrary to Section 2, Rule 8 of the Rules of Court. III The Court of Appeals gravely erred in not awarding damages and attorneys fees despite violation of the rights of the petitioner on the wrongful or fraudulent action on the part of the respondents.29 WHEREFORE, premises considered, it is respectfully prayed that the Decision of the Court of Appeals in CA-G.R. CV No. 52911 dated September 30, 1998 as well as its Resolution dated December 23, 1998 be reversed and set aside and that a Decision be rendered: 1. Declaring as null and void the title of Guarantee (TCT No. 147845) over the subject property located at No. 119 Alvarado St., Legaspi Village, Makati, Metro Manila. 2. Ordering respondents to execute a Deed of Sale in favor of the petitioner covering the subject second floor of the subject property simultaneously with the tender of the remaining balance on the purchase price. 3. Ordering respondents, jointly and severally, to pay petitioner moral and exemplary damages of One Million Pesos (P1,000,000.00).

4. Ordering respondents, jointly and severally, to pay petitioner attorneys fees of ten (10%) percent of the amount involved. On the alternative cause of action, in the event that specific performance cannot be affected, to render judgment: 1. Ordering respondents, jointly and severally, to pay petitioner the sum of P1,944,124.59 with interest of twelve (12%) percent from August 1984 until fully paid. 2. Ordering respondents, jointly and severally, to pay moral and exemplary damages of One Million Pesos (P1,000,000.00). 3. Ordering respondents, jointly and severally, to pay attorneys fees of ten (10%) percent of the amount involved. Such other reliefs just and proper are, likewise, prayed for.30

On March 15, 1999, the Court resolved to deny due course to the petition for failure of the petitioner therein to show any reversible error committed by the CA in its decision. Entry of judgment was made of record on April 14, 1999.31 For their part, the ARC and the Spouses Arguelles, now the petitioner, filed their petition for review with this Court, contending that:
I THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW IN NOT HOLDING THAT NO PERFECTED CONTRACT EXISTS BETWEEN ARRA REALTY CORPORATION AND ENGINEER ERLINDA PEALOZA. II THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW IN NOT HOLDING THAT GUARANTEE DEVELOPMENT CORPORATION IS NOT AN INNOCENT PURCHASER FOR VALUE AND THAT AUTOMATIC RESCISSION IS PRESENT.32 III THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS ERROR OF LAW IN NOT HOLDING THAT ENGINEER ERLINDA PEALOZA IS GUILTY OF FRAUD AND IS IN BAD FAITH. HENCE, LIABLE FOR DAMAGES.

At the outset, it must be pointed out that the issues raised by the parties in their respective pleadings in this Court have already been resolved in G.R. No. 136876, where we denied due course to Pealozas petition for review. Nonetheless, considering that the sole petitioner in the said case was Pealoza, whereas the petitioners in the petition at bar are the ARC and the Spouses Arguelles, we shall resolve the petition on its merits. Furthermore, since the issues raised by the

petitioners in their assignment of errors are interrelated, the Court shall delve into and resolve the same simultaneously. The petitioners posit that no contract of sale over the subject property was perfected between the petitioner ARC, on the one hand, and respondent Pealoza, on the other, because the latter failed to pay the balance of the total purchase price of a portion of the second floor of the building as provided in their November 18, 1982 agreement. They aver that respondent Pealoza bound and obliged herself to pay the downpayment of P901,738 on or before January 1983, and the balance in twenty (20) equal quarterly payments of P110,205. However, the petitioners aver, respondent Pealoza was able to complete the downpayment only on March 4, 1983 and managed to pay only three quarterly installments, and part of the fourth quarterly installment. They assert that, in violation of the November 18, 1982 agreement, respondent Pealoza used the property as a school instead of an office, and later abandoned the same without prior notice to the petitioner ARC. The petitioners assert that respondent Pealoza failed to pay for the advances extended to her, amounting to P302,753.06 inclusive of interests, as well as rentals for her occupancy of the property in the total amount of P2,177,935. The petitioners contend that, even if the payments of respondent Pealoza amounting to P1,735,500 would be deducted from the agreed purchase price, she would still end up owing the petitioner ARC the net amount of P930,815.56, excluding interests. They aver that respondent Pealoza should be ordered to pay damages under Article 19 of the New Civil Code because she acted in bad faith, and pray that the payments she made to the petitioner ARC for the purchase of the said portion of the building be forfeited in its favor. The petitioners further contend that respondent GDCIA was a purchaser of the property in bad faith because it purchased the lot and building despite its presumed knowledge of the claims of respondent Pealoza and the fact that the building was occupied by private individuals and/or corporations. The petitioners aver that they even offered to return the P21,000,000 paid by the respondent GDCIA for the property, less the retained P1,000,000, but that the latter rejected the offer. Hence, the deed of absolute sale executed by the petitioner ARC and the respondent GDCIA over the property was automatically rescinded. In her comment on the petition, respondent Pealoza averred that her November 18, 1982 agreement with the petitioner ARC is a perfected contract of sale. She asserts that the CA erred in holding that she was barred from recovering the property from the respondent GDCIA and in not finding that the latter is not an innocent purchaser in good faith because, by its own admission, it purchased the building although it was still occupied. In fact, she notes, the respondent GDCIA retained P1,000,000 of the purchase price of the property to answer for any claims for damages of the said occupants. She prayed, thus:
WHEREFORE, premises considered, it is respectfully prayed that the petition be denied and that the Decision of the Court of Appeals in CA-G.R. CV No. 52911 dated September 30, 1998 as well as its Resolution dated February 21, 2000 be modified in that:

1. Declaring as null and void the title of Guarantee (TCT No. 147845) over the subject property located at No. 119 Alvarado St., Legaspi Village, Makati, Metro Manila. 2. Ordering petitioners and respondent Guarantee to execute a Deed of Sale in favor of the petitioner covering the subject second floor of the subject property simultaneously with the tender of the remaining balance on the purchase price. 3. Ordering petitioners and respondent Guarantee, jointly and severally, to pay Pealoza moral and exemplary damages of One Million Pesos (P1,000,000.00). 4. Ordering petitioners and respondent Guarantee, jointly and severally, to pay Pealoza attorneys fees of ten (10%) percent of the amount involved. In the alternative, in the event that specific performance cannot be affected, to render judgment: 1. Ordering petitioners and respondent Guarantee, jointly and severally, to pay petitioner the sum ofP1,944,124.59 with interest of twelve (12%) percent from August 1984 until fully paid. 2. Ordering petitioners and respondent Guarantee, jointly and severally, to pay moral and exemplary damages of One Million Pesos (P1,000,000.00). 3. Ordering petitioners and respondent Guarantee, jointly and severally, to pay attorneys fees of ten (10%) percent of the amount involved. Such other reliefs just and proper are, likewise, prayed for.33

In its comment on the petition, the respondent GDCIA avers that the issues raised by the petitioners and respondent Pealoza in her Comment had already been resolved by this Court in G.R. No. 136876, when the petition therein was denied due course. We rule against the petitioners. Central to the issue is the November 18, 1982 letter-agreement of the parties, which reads:
Ms. Erlinda Pealoza 5th Flr. ODC Intl. Plaza Bldg. Salcedo St., Legaspi Village Makati, Metro Manila Dear Linda: I would like to review the arrangement arrived at our meeting yesterday afternoon. You shall share one (1) floor of the proposed 5-storey office building to be constructed on a 992 sq. mt. lot owned by ARRA Realty

Corporation located at Alvarado St., Legaspi Village, Makati, Metro Mla. The consideration for which you shall own one (1) floor is THREE MILLION ONE HUNDRED FIVE THOUSAND EIGHT HUNDRED THIRTY-EIGHT PESOS (P3,105,838.00) on a deferred payment plan. The initial payment of NINE HUNDRED ONE THOUSAND SEVEN HUNDRED THIRTY-EIGHT PESOS (P901,738.00) shall be paid within sixty (60) days from November 20, 1982 and the balance payable in 20 equal quarterly payments of ONE HUNDRED TEN THOUSAND TWO HUNDRED FIVE PESOS (P110,205.00). Every payment that you make, ARRA shall credit your account by way of partial payment to your stock subscriptions of ARRAs capital stock. As soon as our contractor, Pyramid Construction and Engineering Corporation, complete its commitment with us, which is not more than five (5) months, you shall immediately take possession of the floor of your choice. Further, as soon as practicable, the Title corresponding to the floor that you own shall be transferred to your name. However, should you pay in full at the end of the fourth quarter or at any time prior to the 5-year arrangement, the price shall be adjusted accordingly. I believe that this accurately summarizes our understanding. If you have any questions or if I have not properly stated our agreement, please let me know, otherwise, you may signify your conformity by signing the duplicate copy of this letter. Very truly yours, (Sgd.) CARLOS D. ARGUELLES President & General Manager CONFORME: (Sgd.) PL:FP:ccr ERLINDA PEALOZA Date: __________34

As gleaned from the agreement, the petitioner ARC, as vendor, and respondent Pealoza, as vendee, entered into a contract of sale over a portion of the second floor of the building yet to be constructed for the price of P3,105,838 payable in installments, the first installment of P901,738 to be paid within sixty (60) days from November 20, 1982 or on or before January 20, 1983, and the balance payable in twenty (20) equal quarterly payments of P110,205. As soon as the second floor was constructed within five (5) months, respondent Pealoza would take possession of the property, and title thereto would be transferred to her name. The parties had agreed on the three elements of subject matter, price, and terms of payment. Hence, the contract of sale was perfected, it being consensual in nature, perfected by mere consent, which, in turn, was manifested the moment there was a meeting of the minds as to the offer and the acceptance thereof.35 The perfection of the sale is not negated by the fact that the property subject of the sale was not yet in existence. This is so because the ownership by the seller of the thing sold at the time of the perfection of the contract of sale is not an element of its perfection. A perfected

contract of sale cannot be challenged on the ground of non-ownership on the part of the seller at the time of its perfection. What the law requires is that the seller has the right to transfer ownership at the time the thing is delivered. Perfection per se does not transfer ownership which occurs upon the actual or constructive delivery of the thing sold.36 In May 1983, respondent Pealoza took possession of a portion of the second floor of the building sold to her with an area of 552 square meters. She put up her office and operated the St. Michael International Institute of Technology. Thenceforth, respondent Pealoza became the owner of the property, conformably to Article 1477 of the New Civil Code which reads: Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. In a contract of sale, until and unless the contract is resolved or rescinded in accordance with law, the vendor cannot recover the thing sold even if the vendee failed to pay in full the initial payment for the property. The failure of the buyer to pay the purchase price within the stipulated period does not by itself bar the transfer of ownership or possession of the property sold, nor ipso facto rescind the contract.37 Such failure will merely give the vendor the option to rescind the contract of sale judicially or by notarial demand as provided for by Article 1592 of the New Civil Code:
Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term.

Admittedly, respondent Pealoza failed to pay the downpayment on time. But then, the petitioner ARC accepted, without any objections, the delayed payments of the respondent; hence, as provided in Article 1235 of the New Civil Code, the obligation of the respondent is deemed complied with:
Art. 1235. 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.

The respondent cannot be blamed for suspending further remittances of payment to the petitioner ARC because when she pushed for the issuance of her title to the property after taking possession thereof, the ARC failed to comply. She was aghast when she discovered that in July 1984, even before she took possession of the property, the petitioner ARC had already mortgaged the lot and the building to the China Banking Corporation; when she offered to pay the balance of the purchase price of the property to enable her to secure her title thereon, the petitioner ARC ignored her offer. Under Article 1590 of the New Civil Code, a vendee may suspend the payment of the price of the property sold:

Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has caused the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price.

Respondent Pealoza was impelled to cause the annotation of an adverse claim at the dorsal portion of TCT No. 112269. Her testimony is quoted, thus:
Q: And did you finally acquire the certificate of title to the 2nd floor of the said building? A: No, Sir. Q: Why not? A: Because the said building was mortgaged by ARRA Realty and Architect Arguelles with China Banking Corporation and subsequently sold to Guaranty (sic) Development Corporation. Q: When, for the first time, did you learn about the mortgage of the building to China Banking Corp.? A: It was sometime in July of 1984. Q: How did you learn about it? A: Since I took possession of the 2nd floor and made payments thereon, I asked Architect Arguelles every now and then about the execution of a Deed of Sale to the 2nd floor. Q: What was the reply of Arguelles? A: He told me that he had to work out yet the titling of the 2nd floor as a condominium unit. Q: Was Arguelles able to have the 2nd floor titled as a condominium unit? A: No, Sir. Q: Why not? A: Because he did not take any steps about it. Q: When Arguelles did not take steps about it, what did you do?

A: I inquired why Arguelles was not doing anything about the titling of the 2nd floor and the sale thereof to me. That was how I discovered that Arguelles mortgaged the same to the China Banking Corp.38 Q: With those letters, what did you do? A: On August 31, 1984, I wrote a letter to ARRA requesting them to execute a deed of sale with the assumption of mortgage in my favor. I attached a copy of the deed of sale and assumption of mortgage to the said letter, may I request this letter be marked as Exh. "U" and the deed of sale attached to it with the assumption of mortgage as Exh. "U-1." Q: Did ARRA reply to your letter? A: ARRA and Arguelles ignored the said letter. Q: What did you do then? A: On September 25, 1984, I wrote a letter to ARRA which I request to be marked as Exh. "V" reiterating the signing of the deed of sale and at the same time telling him that I was suspending my payments on the 2nd floor unless and until he signs that Deed of Sale. I offered to pay the full amount so I can get the certificate of title, because I had more than sufficient money to pay him at the time. Here are copies of my bank deposits from 1982 to 1986 which show my liquidity. I request that they be marked as Exh. "W" and "W-1" to "W-59" inclusive. Q: What did ARRA do with that letter? A: ARRA and Arguelles ignored the said letter. Q: What steps did you take? A: Upon [the] advise of my lawyer, I filed a Notice of Adverse Claim dated November 26, 1984, which I request to be marked as Exh. "X" which was inscribed the next day, November 7, 1984, at the back of the Certificate of Title No. 112269, which I request to be marked as Exh. "Y" and the inscription of the Notice of Adverse Claim to be bracketed and marked as Exh. "Y-1."39

Contrary to the claim of the petitioners, respondent Pealoza did not waive her right to enforce the letter-agreement or abandon the property she had purchased from the petitioner ARC. While she transferred the school to another location, the respondent maintained her office in the subject property, only to discover that the petitioner had had her office padlocked. Nevertheless, she had her office reopened and continued holding office thereat for a year or so, thereafter:
Q: In the meantime, did you continue holding office and holding classes for St. Michael on the 2nd floor?

A: Sometime in April of 1986 when classes ended I transferred the St. Michael School to a building which I purchased at Yakal St. also in Makati. Q: Why did you transfer the St. Michael School at that building in Yakal St.? A: Because after three years of operation the St. Michael School has grown too big for the 2nd floor of that building at 119 Alvarado. Q: How about your Engineering Office? A: My Engineering Office has also grown bigger, just right for that space at the 2nd floor, so it remained there. Q: So the office of Pealoza Engineering retained the Alvarado office? A: Yes, Sir. Q: After St. Michael left it, were you able to hold office there peacefully? A: No, Sir. Q: Why not? A: One Monday, I went to our office at the 2nd floor at 119 Alvarado for work. Q: Were you able to enter the office? A: No, Sir. Q: Why not? A: Because the padlock that I placed there had been changed. Q: How did you discover that? A: Because when I was using my key to my padlock, it would not fit. Q: What did you do? A: I went to the office of Engr. Arguelles at ARRA Realty Corp. at the upper floor and asked them why they changed the padlock. Nobody wanted to explain to me why the padlock was changed but they gave me the key and I had it duplicated for my use, so I continued holding office there. I held office in the said premises continuously for about a year. Later on, it was padlocked.40

Respondent Pealoza turned over the possession of the property to the petitioner ARC on October 7, 1986 and, shortly thereafter, filed her complaint against the petitioner ARC. The bare fact that the respondent filed her complaint shortly after vacating the property is evidence of her determination to pursue her claims against the petitioners.

In view of the failure of the petitioner ARC to transfer the title of the property to her name because of the mortgage thereof to China Banking Corporation and the subsequent sale thereof to the GDCIA, respondent Pealoza is entitled to the refund of the amount she paid to the petitioner ARC, conformably to Article 1398 of the New Civil Code, which reads:
Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. We reject the petitioners claim that respondent Pealoza is liable for P2,177,935 by way of advances and unpaid rentals. We note that in their answer to the amended complaint of respondent Pealoza, the petitioners did not interpose any counterclaims for actual damages in the form of unpaid rentals. Neither did the petitioners assign as error in their brief in the CA the failure of the trial court to award P302,753.06 to them for advances. It was only when they moved for the reconsideration of the decision of the CA did they claim, for the first time on appeal, their entitlement to P302,753.06 as refund for advances. The petitioner ARC is, thus, barred from raising the said issue in this Court.41

Likewise barren of factual and legal basis is the petitioners claim for damages against the respondent based on Article 19 of the New Civil Code, which reads:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

In this case, respondent Pealoza suspended the payment of the balance of the purchase price of the property because she had the right to do so. While she failed to pay the purchase price on time, the petitioner ARC nevertheless accepted such delayed payments. The respondent even proposed to assume the loan account of the petitioner ARC with the China Banking Corporation in an amount equivalent to the balance of the purchase price of the subject property, which the petitioner ARC rejected. In fine, respondent Pealoza acted in accord with law and in utmost good faith. Hence, she is not liable for damages to the petitioners under Article 19 of the New Civil Code. The law is that men, singly or in combination, may use any lawful means to accomplish a lawful purpose, although the means adopted may cause injury to another.42 When a person is doing a lawful thing in a lawful way, his conduct is not actionable though it may result in damages to another; for, though the damage caused is undoubted, no legal right of another is invaded; hence, it is said to be damnum absque injuria.43 The elements of abuse of rights are the following: (a) the existence of a legal right or duty, (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. Malice or bad faith is at the core of said provision. 44 Good faith is presumed and he who alleges bad faith has the duty to prove the same.45 Good faith

refers to the state of the mind which is manifested by the acts of the individual concerned. It consists of the intention to abstain from taking an unconscionable and unscrupulous advantage of another.46 Bad faith, on the other hand, does not simply connote bad judgment to simple negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty due to some motive or interest or ill-will that partakes of the nature of fraud.47 Malice connotes illwill or spite and speaks not in response to duty. It implies an intention to do ulterior and unjustifiable harm. The petitioners failed to adduce evidence of bad faith or malice on the part of respondent Pealoza. This cannot be said of the petitioner ARC. It mortgaged the property to China Banking Corporation even after having sold the same to respondent Pealoza, and, thereafter, sold the same anew to GDCIA; respondent Pealoza was, thus, left holding the proverbial bag. On the last issue, the petitioners contend that the deed of conditional sale and deed of absolute sale executed by them and the respondent GDCIA were automatically nullified because the latter had actual or personal knowledge that the property sold had tenants. Furthermore, the respondent GDCIA retained P1,000,000 on account of the claims of respondent Pealoza, Paces Industrial Development Corporation, and Emeterio Samson over the portions of the property. The contention of the petitioners has no merit. First. The petitioners did not file a counterclaim against the respondent GDCIA for the rescission of the aforesaid decision.48 Moreover, the petitioners did not adduce evidence to prove bad faith on the part of the respondent GDCIA. Additionally, the petitioners warranted in the aforesaid deeds in favor of the said respondent, that:
d) It is hereby agreed, convenanted and stipulated by and between the parties hereto that the VENDOR will execute and deliver to the VENDEE a definite or absolute Deed of Sale upon the full payment by the VENDEE of the unpaid balance of the purchase price hereinabove stipulated. 1. The VENDOR undertakes and commits to deliver the Property, including all floors of the building, as entirely vacant to the VENDEE not later than May 15, 1987. Physical possession, however, of the first and second floors of the Building can be turned over to the VENDEE at any time convenient to them.49 The VENDOR undertakes to perform, fulfill and comply with the representations, warranties and undertaking stated in the Deed of Conditional Sale. Should the VENDOR fail to do so, this agreement shall become null and void and the VENDEE shall be entitled to enforce its right under Section 8 of the Deed of Conditional Sale.50

Second. The respondent GDCIA relied on the representations of the petitioners. However, the respondent received claims for ownership of portions of the property from tenants of the building, including respondent Pealoza, which impelled it to retain P1,000,000 of the purchase price to answer for said claims. There is, thus, no

factual and legal basis for the plea of the petitioners that the trial court and the CA erred in not rendering judgment in their favor declaring the said deeds rescinded. On the claim of respondent Pealoza against the petitioners and her co-respondent GDCIA, we agree with the latter that the same is barred by the resolution of this Court in G.R. No. 136876, denying due course to her petition for review of the decision of the CA on the ground that no reversible error was committed by the said court, which resolution has become final and executory. IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The assailed decision and resolution of the Court of Appeals are AFFIRMED. Costs against the petitioners. SO ORDERED.

SECOND DIVISION

[G.R. No. 129107. September 26, 2001]

ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P. DELOS SANTOS,respondents. DECISION
QUISUMBING, J.:

This petition assails the Decision[1] dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949, affirming the decision of the Regional Trial Court and deleting the award of attorneys fee. The facts of the case are based on the records. On March 22, 1985, private respondent Antonio Palao sold to petitioner Alfonso Iringan, an undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located at the Poblacion of Tuguegarao and covered by Transfer Certificate of Title No. T-5790. The parties executed a Deed of Sale[2] on the same date with the purchase price of P295,000.00, payable as follows:

(a) P10,000.00 upon the execution of this instrument, and for this purpose, the vendor acknowledges having received the said amount from the vendee as of this date; (b) P140,000.00 on or before April 30, 1985;

(c) P145,000.00 on or before December 31, 1985.[3]

When the second payment was due, Iringan paid only P40,000. Thus, on July 18, 1985, Palao sent a letter[4] to Iringan stating that he considered the contract as rescinded and that he would not accept any further payment considering that Iringan failed to comply with his obligation to pay the full amount of the second installment. On August 20, 1985, Iringan through his counsel Atty. Hilarion L. Aquino,[5] replied that they were not opposing the revocation of the Deed of Sale but asked for the reimbursement of the following amounts:

(a) P50,000.00 cash received by you; (b) P3,200.00 geodetic engineers fee; (c) P500.00 attorneys fee; (d) the current interest on P53,700.00.[6]
In response, Palao sent a letter dated January 10, 1986,[7] to Atty. Aquino, stating that he was not amenable to the reimbursements claimed by Iringan. On February 21, 1989, Iringan, now represented by a new counsel Atty. Carmelo Z. Lasam, proposed that the P50,000 which he had already paid Palao be reimbursed[8] or Palao could sell to Iringan, an equivalent portion of the land. Palao instead wrote Iringan that the latters standing obligation had reached P61,600, representing payment of arrears for rentals from October 1985 up to March 1989.[9] The parties failed to arrive at an agreement. On July 1, 1991, Palao filed a Complaint[10] for Judicial Confirmation of Rescission of Contract and Damages against Iringan and his wife. In their Answer,[11] the spouses alleged that the contract of sale was a consummated contract, hence, the remedy of Palao was for collection of the balance of the purchase price and not rescission. Besides, they said that they had always been ready and willing to comply with their obligations in accordance with said contract. In a Decision[12] dated September 25, 1992, the Regional Trial Court of Cagayan, Branch I, ruled in favor of Palao and affirmed the rescission of the contract. It disposed,

WHEREFORE, the Court finds that the evidence preponderates in favor of the plaintiff and against the defendants and judgment is hereby rendered as follows: (a) Affirming the rescission of the contract of sale; (b) Cancelling the adverse claim of the defendants annotated at the back of TCT No. T-5790; (c) Ordering the defendants to vacate the premises;

(d) Ordering the defendants to pay jointly and severally the sum of P100,000.00 as reasonable compensation for use of the property minus 50% of the amount paid by them; and to pay P50,000.00 as moral damages; P10,000.00 as exemplary damages; and P50,000.00 as attorneys fee; and to pay the costs of suit. SO ORDERED.[13]
As stated, the Court of Appeals affirmed the above decision. Hence, this petition for review. Iringan avers in this petition that the Court of Appeals erred:
1. In holding that the lower court did not err in affirming the rescission of the contract of sale; and 2. In holding that defendant was in bad faith for resisting rescission and was made liable to pay moral and exemplary damages.[14]

We find two issues for resolution: (1) whether or not the contract of sale was validly rescinded, and (2) whether or not the award of moral and exemplary damages is proper. On the first issue, petitioner contends that no rescission was effected simply by virtue of the letter[15] sent by respondent stating that he considered the contract of sale rescinded. Petitioner asserts that a judicial or notarial act is necessary before one party can unilaterally effect a rescission. Respondent Palao, on the other hand, contends that the right to rescind is vested by law on the obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect agreed to it and had the legal effect of a mutually agreed rescission. Article 1592 of the Civil Code is the applicable provision regarding the sale of an immovable property.

Article 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. (Italics supplied)
Article 1592 requires the rescinding party to serve judicial or notarial notice of his intent to resolve the contract.[16] In the case of Villaruel v. Tan King,[17] we ruled in this wise,

since the subject-matter of the sale in question is real property, it does not come strictly within the provisions of article 1124 (now Article 1191) of the Civil Code, but is rather subjected to the stipulations agreed upon by the

contracting parties and to the provisions of article 1504 (now Article 1592) of the Civil Code.[18]
Citing Manresa, the Court said that the requirement of then Article 1504, refers to a demand that the vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create no obstacles to this contractual mode of extinguishing obligations.[19] Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been stipulated. It is to be noted that the law uses the phrase even though[20]emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial requirement still applies. On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual agreement to rescind based on Article 1191 of the Civil Code, particularly paragraphs 1 and 2 thereof.

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. [Emphasis ours.] The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission. In Escueta v. Pando,[21] we ruled that under Article 1124 (now Article 1191) of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to comply with what is incumbent upon him. But that right must be invoked judicially. The same article also provides: The Court shall decree the resolution demanded, unless there should be grounds which justify the allowance of a term for the performance of the obligation. This requirement has been retained in the third paragraph of Article 1191, which states that the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. Consequently, even if the right to rescind is made available to the injured party,[22] the obligation is not ipso facto erased by the failure of the other party to comply

with what is incumbent upon him. The party entitled to rescind should apply to the court for a decree of rescission.[23] The right cannot be exercised solely on a partys own judgment that the other committed a breach of the obligation.[24] The operative act which produces the resolution of the contract is the decree of the court and not the mere act of the vendor.[25] Since a judicial or notarial act is required by law for a valid rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly rescind the contract. Notwithstanding the above, however, in our view when private respondent filed an action for Judicial Confirmation of Rescission and Damages[26] before the RTC, he complied with the requirement of the law for judicial decree of rescission. The complaint[27] categorically stated that the purpose was 1) to compel appellants to formalize in a public document, their mutual agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said revocation/rescission under terms and conditions fair, proper and just for both parties.[28] In Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,[29] we held that even a crossclaim found in the Answer could constitute a judicial demand for rescission that satisfies the requirement of the law.[30] Petitioner contends that even if the filing of the case were considered the judicial act required, the action should be deemed prescribed based on the provisions of Article 1389 of the Civil Code.[31] This provision of law applies to rescissible contracts,[32] as enumerated and defined in Articles 1380[33] and 1381.[34] We must stress however, that the rescission in Article 1381 is not akin to the term rescission in Article 1191 and Article 1592.[35] In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article.[36] The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144,[37] which provides that the action upon a written contract should be brought within ten years from the time the right of action accrues. The suit was brought on July 1, 1991, or six years after the default. It was filed within the period for rescission. Thus, the contract of sale between the parties as far as the prescriptive period applies, can still be validly rescinded. On the issue of moral and exemplary damages, petitioner claims that the Court of Appeals erred in finding bad faith on his part when he resisted the rescission[38] and claimed he was ready to pay but never actually paid respondent, notwithstanding that he knew that appellees principal motivation for selling the lot was to raise money to pay his SSS loan.[39] Petitioner would have us reverse the said CA findings based on the exception[40] that these findings were made on a misapprehension of facts. The records do not support petitioners claims. First, per the records, petitioner knew respondents reason for selling his property. As testified to by petitioner[41] and in the deposition[42] of respondent, such fact was made known to petitioner during their negotiations as well as in the letters sent to petitioner by Palao.[43] Second, petitioner adamantly refused to formally execute an instrument showing their mutual agreement to rescind the contract of sale, notwithstanding that it was petitioner who plainly breached

the terms of their contract when he did not pay the stipulated price on time, leaving private respondent desperate to find other sources of funds to pay off his loan. Lastly, petitioner did not substantiate by clear and convincing proof, his allegation that he was ready and willing to pay respondent. We are more inclined to believe his claim of readiness to pay was an afterthought intended to evade the consequence of his breach. There is no record to show the existence of such amount, which could have been reflected, at the very least, in a bank account in his name, if indeed one existed; or, alternatively, the proper deposit made in court which could serve as a formal tender of payment.[44] Thus, we find the award of moral and exemplary damages proper. WHEREFORE, the petition is DENIED. The assailed decision dated April 30, 1997 of the Court of Appeals in CA G.R. CV No. 39949, affirming the Regional Trial Court decision and deleting the award of attorneys fees, is hereby AFFIRMED. Costs against the petitioner. SO ORDERED. Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.