OBLIGATIONS AND CONTRACTS ATTY.

GRAVADOR
CHAPTER 2 CASE DIGESTS

(SPS. VELARDE V. COURT OF APPEALS, G.R. NO.
108346, [JULY 11, 2001], 413 PHIL 360-376)
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE
AT BAR. In a contract of sale, the seller obligates itself to
transfer the ownership of and deliver a determinate thing, and
the buyer to pay therefor a price certain in money or its
equivalent. Private respondents had already performed their
obligation through the execution of the Deed of Sale, which
effectively transferred ownership of the property to petitioner
through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the
Deed of Sale is deemed equivalent to delivery.
2. RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH
EXISTING OBLIGATION. The right of rescission of a party to
an obligation under Article 1191 of the Civil Code is predicated
on a breach of faith by the other party who violates the
reciprocity between them. The breach contemplated in the said
provision is the obligor's failure to comply with an existing
obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the
absence ofany just cause for the court to determine the
period of compliance, the court shall decree the rescission.
3. CASE AT BAR. In the present case, private respondents
validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their
obligation to pay the balance of the purchase price. Indubitably,
the latter violated the very essence of reciprocity in the
contract of sale, a violation that consequently gave rise to private
respondents' right to rescind the same in accordance with law.
4. FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH
WAS NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED.
As discussed earlier, the breach committed by petitioners was
the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment
clauses stipulated in the contract does not apply. Instead, Civil
Code provisions shall govern and regulate the resolution of this
controversy. Considering that the rescission of the contract is
based on Article 1191 of the Civil Code, mutual restitution is
required to bring back the parties to their original situation prior
to the inception of the contract. Accordingly, the initial
payment of P800,000 and the corresponding mortgage payments
in the amounts of P27,225, P23,000 and P23,925 (totaling
P874,150.00) advanced by petitioners should be returned by
private respondents, lest the latter unjustly enrich themselves at
the expense of the former.
5. OBLIGATION CREATED. Rescission creates the obligation to
return the object of the contract. It can be carried out only when
the one who demands rescission can return whatever he may be
obliged to restore. To rescind is to declare a contract void at its
inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further
obligations to each other, but to abrogate it from the beginning
and restore the parties to their relative positions as if no contract
has been made.
Ruling of the Court of Appeals: (Dismissed Velardes
Petition)
Approval of the mortgage obligation with BPI
means payment obligation will now be in the name
of Velarde.
Disapproval means Velarde had to pay in full.
Non-payment of the mortgage obligation results in a violation
of the contract. Upon Velardes failure, Raymunod may
choose either:
1. Demand fulfillment of the contract
2. Demand its rescission (Article 1191)
CA held that petitioners letter giving three new conditions
constitute mere offers or an attempt to novate necessitating
a new agreement between the parties. There can be no
novation because there was no agreement of all the parties
to the new contract.
SUPREME COURT:
Petitioners: CA erred.
Supreme Court: Petition is partly meritorious.
Breach of Contract (nonperformance of a reciprocal
obligation): In a contract of sale, the seller obligates itself
to transfer the ownership of and deliver a determinate thing,
and the buyer to pay therefor a price in money or its
equivalent. Respondents (Raymundo) had already performed
their obligation through the execution of the Deed of Sale,
which effectively transferred ownership of the property. Prior
physical delivery is not legally required; DOS is deemed
equivalent to delivery.
Petitioners did not perform their correlative obligation of
paying the contract price in the manner agreed. Worse, they
wanted respondents to perform obligations beyond those
stipulated.
Validity of the Rescission: Velarde claims the rescission
was not justified and the breach of contract was not
substantial enough to warrant a rescission. They also argue
that they have substantially performed their obligation in
good faith (by paying 800k and 3 monthly mortgage
payments).
However, SC says that the breach here is not just the slight
delay of payment. They failed to pay the 1.8 M balance AND
imposed upon respondent (Raymundo) new obligations as
preconditions to the performance of their own obligation.
Hence, respondents were left with the legal option of seeking
rescission to protect their own interest (based on Art 1191).
Since it is based on Art 1191 of the CC, mutual restitution is
required to bring back the partied to their original situation
prior to the inception of the contract. All the payments made
by the Velardes should be returned by Raymundo because
you know, unjust enrichment.
Court of appeals decision is affirmed.

In the Deed of Sale with Assumption of Mortgage, it was

stipulated that as part of the consideration of this sale,
Vendee Velarde would assume to pay the mortgage obligation
on the subject property in the amount of P1.8M (in the name
of Vendor Raymundo). Velarde agreed to strictly and faithfully
comply with all the terms and conditions. Moreover, it was
stipulated that in the event of violation by Velarde of any
terms of the said deed, the downpayment of 800k plus all the
payments made would be forfeited and the Deed of Sale will
be automatically cancelled and of no force and effect.

1
(MDS)
OBLIGATIONS AND CONTRACTS ATTY. GRAVADOR
CHAPTER 2 CASE DIGESTS
(SONG FO & CO. V. HAWAIIAN PHILIPPINE CO., G.R.
NO. 23769, [SEPTEMBER 16, 1925], 47 PHIL 821-830)
SYLLABUS
1. CONTRACTS; SALES; INSTANT CASE. The written contract
examined and found to provide for the delivery by the Hawaiian-
Philippine Co. to Song Fo & Company of 300,000 gallons of
molasses.
2. PAYMENT. The terms of payment fixed by the parties are
controlling. The time of payment stipulated for in the contract
should be treated as of the essence of the contract.
3. RESCISSION. The general rule is that rescission will not be
permitted for a slight or casual breach of the contract, but only
for such breaches as are so substantial and fundamental as to
defeat the object of the parties in making the agreement.
4. A delay in payment for a small quantity of molasses for some
twenty days is not such a violation of an essential condition of
the contract as warrants rescission for non-performance.
5. MEASURE OF DAMAGES FOR BREACH OF CONTRACT. The
facts examined and Song Fo & Company allowed P3,000 on
account of the greater expense to which it was put in being
compelled to secure molasses in the open market.
6. The facts examined and Song Fo & Company allowed nothing
for lost profits on account of the breach of the contract, because
of failure of proof.
Facts:
Hawaiian-Philippine Co (HPC) entered into a contract with
Song Fo and Co where it would deliver molasses to the latter.
A letter addressed by the administrator of the HPC to SFC on
December 13, 1922 contains their contract in writing. It states
the ff:
1. Mr. Song Fo agreed to the delivery of 300,000
gallons of molasses
2. Mr. Song Fo also asked if HPC could supply him with
another 100,000 gallons of molasses to which the
latter replied that they believe it is possible and that
they will do their best to let Mr. Song Fo have the
extra 100,000 gallons during the next year.
HPC was able to deliver 55,006 gallons of molasses before the
breach of contract.
SFC filed a complaint with two causes of action for breach of
contract against the HPC and asked for P70,369.50
HPC answered that there was a delay in the payment from
SFC and that HPC has the right to rescind the contract due to
that and claims it as a special defense.
The judgment of the trial court condemned HPC to pay SFC a
total of P35,317.93, with legal interest from the date of the
presentation of the complaint, and with costs.
Issues and Ruling:
Did HPC agree to sell 400,000 gallons of molasses or 300,000
gallons of molasses?
Only 300,000 gallons of molasses was agreed to by HPC
as seen in the documents presented in court. HPC also
believed it possible to accommodate SFC by supplying
the latter company with an extra 100,000 gallons.
However, the language used with reference to the
(MDS)
additional 100,000 gallons was not a definite promise.
Still less did it constitute an obligation
Had HPC the right to rescind the contract of sale made with
SFC?
With reference to the second question, doubt has risen as
to when SFC was supposed to make the payments for the
delivery of molasses as shown in the documents presented
by the parties. It was ultimately settled that payment had
to be made upon presentation of accounts at the end of
each month
FACT: SFC should have paid for the molasses delivered in
December 1922, not later than January 31 1923. Instead
payment was not made until February 20, 1923. All the rest
of the molasses was paid for either on time or ahead of
time.
HPC does not have the right to rescind the contract. It
should be noted that the time of payment stipulated for in
the contract should be treated as of the essence of the
contract.
There was only a slight breach of contract when the
payment was delayed for 20 days after which HPC
accepted the payment of the overdue accounts and
continued with the contract, waiving its right to rescind the
contract. The delay in the payment of SFC was not such a
violation for the contract.
GENERAL RULE: rescission will not be permitted for a
slight or casual breach of the contract, but only for such
breaches as are so substantial and fundamental.
On the basis first, of a contract for 300,000 gallons of
molasses, and second, of a contract imprudently breached by
HPC, what is the measure of damages?
The first cause of action of SFC is based on the greater
expense to which it was put in being compelled to secure
molasses from other sources to which Supreme Court
ruled that P3,000 should be paid by HPC with legal
interest from October 2, 1923 until payment.
o 55,006 gallons were delivered before the
breach. (This leaves 244,994 gallon)
o 100,000 gallons of molasses were
secured from the Central North Negros
Sugar Co., Inc at 2 cents a gallon, so
plaintiff suffered no material loss in
having to make this purchase. (this
leaves as a result 144,994 gallons)
o 100,000 gallons were secured from
Central Victorias Milling at 3.5 cents per
gallon. This meant a loss of
approximately P2,174.91
The second cause of action was based on the lost profits
on account of the breach of contract. Supreme Court said
that SFC is not entitled to recover anything under the
second cause of action because the testimony of Mr. Song
Heng will follow the same line of thought as that of the trial
court which in unsustainable and there was no means for
the court to find out what items make up the P14,000 of
alleged lost profits.
Judgment in favor of plaintiff. They are entitled to
damages in the amount of 3,000 for breach of contract
committed by defendant.
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OBLIGATIONS AND CONTRACTS ATTY. GRAVADOR
CHAPTER 2 CASE DIGESTS

VERMEN REALTY DEVELOPMENT CORP. V. COURT OF On the other hand, it would already be impossible for
APPEALS, G.R. NO. 101762, [JULY 6, 1993] petitioner to fulfill its obligation of allowing respondent to
transfer from phase 1 to phase 2 as the construction of phase
SYLLABUS 2 has ceased (loan was disapproved).

1. CIVIL LAW; OBLIGATION AND CONTRACTS; RECIPROCAL Its impossibility necessitates rescission of the contract for it
OBLIGATION; ITS NATURE. Reciprocal obligations are those constitutes substantial breach of the agreement. It would be
created or established at the same time, out of the same cause, the height of injustice to make private respondent wait for
and which results in a mutual relationship of creditor and debtor something that may never come.
between parties. In reciprocal obligations, the performance of
one is conditioned on the simultaneous fulfillment of the other Petition denied for lack of merit.
obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262
[1957]). Under the agreement, private respondent shall deliver
to petitioner construction materials worth P552,000.00 under
the conditions set forth in the Offsetting Agreement.

Petitioner's obligation under the agreement is three-fold:

a. he shall pay private respondent P276,000.00 in cash
b. he shall deliver possession of units 601 and 602 (with
total value of P276,000.00) to private respondent;
c. upon completion of Vermen Pines Condominiums Phase
II, private respondent shall be given option to transfer
to similar units therein.

2. RESCISSION (BETTER TERM IS "RESOLUTION") OF

RECIPROCAL OBLIGATION UNDER ARTICLE 1191 OF THE CIVIL
CODE; GENERAL RULE; PETITIONER'S NON-FULFILLMENT OF
ITS OBLIGATION UNDER THE OFFSETTING AGREEMENT
CONSTITUTES SUBSTANTIAL BREACH, NECESSITATING
RESOLUTION OF THE CONTRACT. Article 1191 of the Civil
Code provides the remedy of rescission in (more appropriately,
the term is "resolution") in case of reciprocal obligations, where
one of the obligors fails to comply with what is incumbent upon
him.

The general rule is that rescission of a contract will not be

permitted for a slight or causal breach, but only for such
substantial and fundamental breach as would defeat the very
object of the parties in executing the agreement.

The question of whether a breach of contract is substantial

depends upon the attendant circumstances. The impossibility of
fulfillment of the obligation on the part of petitioner necessitates
resolution of the contract for indeed, the non-fulfillment of the
obligation aforementioned constitutes substantial breach of the
Offsetting Agreement. The possibility of exercising the option of
whether or not to transfer to condominium units in Phase II was
one of the factors which were considered by private respondent
when it entered into the agreement. Since the construction of
the Vermen Pines Condominium Phase II has stopped,
petitioner would be in no position to perform its obligation to
give private respondent the option to transfer to Phase II. It
would be the height of injustice to make private respondent wait
for something that may never come.

Trial Court dismissed Vermen Realtys complaint and

ordered Seneca Hardware to pay Vermen its counterclaim.
Court of Appeals reversed RTC decision.
Supreme Court ruled in favor of Seneca Hardware.

Ruling:
The Offsetting Agreement are reciprocal in nature. Reciprocal
obligations are those created or established at the same time,
out of the same cause, and which results in a mutual
relationship. The performance of one is conditioned on the
simultaneous fulfillment of the other obligation.

Remedy: Art 1191 Remedy of rescission for substantial and

fundamental breaches (depends on attendant circumstances)

It is evident that respondent (Seneca) did not fail to fulfill its

obligations in the agreement. The discontinuance of delivery
of construction materials to petitioner stemmed from the
failure of petitioner to send purchase orders to private
respondent.

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(MDS)