Palay Inc.

and Albert Onstott vs Jacobo Clave, President Executive Assistant National Housing
Authority and Nazario Dumpit | 124 SCRA 640 (1983)
FACTS

Palay, Inc. through its President, Albert Onstott, executed a Contract to Sell a parcel of Land (in
Crestview Heights Subdivision in Antipolo, owned by Palay) in favor of Dumpit
o Sale price: P23,300 with 9% interest/annum
o Terms: DP of P4,660 and monthly installments of P246.42 until fully paid

Par. 6 of the contract provided for automatic extrajudicial recission upon default in payment of
any monthly installments, without notice and forfeiture of all installments paid, after the lapse of
90 days from the expiration of the 1 month grace period

Dumpit paid the DP and several installments but was not able to fully pay

6 years later, Dumpit wrote Palay offering to update all his overdue accounts with interest, and
asking for consent to the assignment of his rights to a certain Lourdes Dizon

Palay Inc, informed him that his Contract to Sell had long been rescinded and the lot had
already been resold

Questioning the validity of the rescission, Dumpit filed a letter complaint with NHA for
reconveyance with an alternative prayer for refund

NHA: found that the rescission was void since there no judicial or notarial demand
o Ordered Palay Inc and Onstott, jointly and severally to refund to Dumpit amounting to
P13,722.50 with 12% interest

On appeal to the Office of the President, Palay Inc alleges that NHAs resolution was contrary
to law

Presidential Executive Assistant Jacobo Clave affirmed the NHA

ISSUES
(1) w/n the notice or demand is not mandatory under the circumstances, and may be dispensed
with by stipulation in a contract to sell
(2) W/n the installment paid should be refunded
(3) w/n Palay Inc and Ostott may be held liable for the refund of the installment payments
(4) w/n the doctrine of piercing the corporate veil of corporate fiction applies to this case
HELD:
(1) No. The act of a party in cancelling a contract should be made known to the other (UP vs Delos
Angeles)

Judicial action for the recission of a contract is not necessary where the contract provides that it
may be revoked and cancelled for violation of any of its terms and conditions

BUT, written notice sent to the person that defaulted informing him of the rescission is needed
o If the other party denies that the rescission was proper, it may resort to judicial action
o A party who deems the contract violated may consider it rescinded, without previous
court action, but it proceeds at its own risk, since the court may later on find that the
rescission was improper
(so basically, you can unilaterally rescind a contract if it is violated, since the law doesnt require that you
must first file a case to protect yourself, and wait for the court to say, yes, you can rescind. But, you will
do so at your own risk, since the other party, in finding that the rescission was not justified, can file a
case and the court may rule on the latters favor, and order may be liable for damages)

Notice of Cancellation to a buyer is also provided for in RA 6551 (An Act to Provide Protection
to Buyers of Real Estate on Installment Payments)

Also, Dumpit cannot be said to have waived his right to be notified, since the contract was a
contract of adhesion, thus, he had no freedom to stipulate
o It is also a matter of public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions
o To waive such notice is onerous and oppressive to buyers

(2) Yes. Based on Art 1385

Due to the act of rescission made by Palay, the rights to the lot should be restored to Dumpit or
it should be replaced by another acceptable lot
o But since it was already sold, Dumpit is entitled to the refund of installments paid plus
legal interest
o It is inequitable if Palay kept the amount and at the same time, appropriate the
proceeds of the second sale to another
(3) Only the corporation, Palay Inc and (4) No. No circumstances that warrant that the veil may be
pierced are present

A corporation is vested by law with a personality separate and distinct from the persons
composing it

General rule: A corporation may not be made to answer for the acts or liabilities of its
stockholders or the legal entities it is connected to

Exception: veil of corporate fiction may be pierced when

o it is used as a shield to further an end subversive of justice
o it is used for purposed that could not have been intended by the law that created it
o it is used to defeat public convenience, justify wrong, protect fraud, or defend crime
o it is used to perpetrate fraud or confuse legitimate issues
o it is used to circumvent the law
o it is used as an alter ego or business conduit for the sole benefit of the stockholders

In this case, no badges of fraud are present on the part of Palay

o They had just mistakenly relied on the contract when they rescinded such
extrajudicially and sold the lot to a 3rd person

Ostott should not be liable

o Just because he is the President and appears to be the controlling stockholder of
Palay Inc, no proof exist that he used Palay Inc to defraud Numbit
o He cannot be made personally liable just because he appears to be the controlling
stockholder
o Mere ownership by a single stockholder is not sufficient ground for disregarding the
separate corporate personality