Obligations and Contracts
Resolution/Rescission | Art. 1191
Velarde v CA
source: http://www.lawyerly.ph
DIVISION
[ GR No. 108346, Jul 11, 2001 ]
SPS. MARIANO Z. VELARDE AND AVELINA D. VELARDE v.
CA
DECISION
413 Phil. 360
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay
the price in the manner prescribed by the contract, entitles the
injured party to rescind the obligation. Rescission abrogates the
contract from its inception and requires a mutual restitution of
benefits received.
The Case
Before us is a Petition for Review on Certiorari[1] questioning the
Decision[2] of the Court of Appeals (CA) in CA-GR CV No.
32991 dated October 9, 1992, as well as its Resolution[3] dated
December 29, 1992 denying petitioner's motion for
reconsideration.[4]
The dispositive portion of the assailed Decision reads:
"WHEREFORE, the Order dated May 15, 1991 is hereby
ANNULLED and SET ASIDE and the Decision dated November
14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds
posted by plaintiffs-appellees and defendants-appellants are
hereby RELEASED."[5]
The Facts
The factual antecedents of the case, as found by the CA, are as
follows:
"x x x. David Raymundo [herein private respondent] is the
absolute and registered owner of a parcel of land, together with
the house and other improvements thereon, located at 1918
Kamias St., Dasmariñas Village, Makati and covered by TCT No.
142177. Defendant George Raymundo [herein private
respondent] is David's father who negotiated with plaintiffs
Avelina and Mariano Velarde [herein petitioners] for the sale of
said property, which was, however, under lease (Exh. `6', p. 232,
Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of
Mortgage (Exh. 'A'; Exh. `1', pp. 11-12, Record) was executed by
defendant David Raymundo, as vendor, in favor of plaintiff
Avelina Velarde, as vendee, with the following terms and
conditions:
`x x x x x x x x x
`That for and in consideration of the amount of EIGHT
HUNDRED THOUSAND PESOS (P800,000.00), Philippine
currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete
satisfaction, by these presents the VENDOR hereby SELLS,
CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided
by law, unto the VENDEE, her heirs, successors and assigns,
the parcel of land mentioned and described above, together with
the house and other improvements thereon.
`That the aforesaid parcel of land, together with the house and
other improvements thereon, were mortgaged by the VENDOR
to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro
Manila, to secure the payment of a loan of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, as evidenced by a Real Estate Mortgage signed and
executed by the VENDOR in favor of the said Bank of the
Philippine Islands, on______ and which Real Estate Mortgage
was ratified before Notary Public for Makati, _______, as Doc.
No. ____, Page No. ___, Book No. ___, Series of 1986 of his
Notarial Register.
Page 1 of 27
`That as part of the consideration of this sale, the VENDEE
hereby assumes to pay the mortgage obligations on the property
herein sold in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in
favor of Bank of the Philippine Islands, in the name of the
VENDOR, and further agrees to strictly and faithfully comply with
all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI,
including interests and other charges for late payment levied by
the Bank, as if the same were originally signed and executed by
the VENDEE.
`It is further agreed and understood by the parties herein that the
capital gains tax and documentary stamps on the sale shall be
for the account of the VENDOR; whereas, the registration fees
and transfer tax thereon shall be for the account of the
VENDEE.' (Exh. `A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff
Avelina Velarde, with the consent of her husband, Mariano,
executed an Undertaking (Exh. `C', pp. 13-14, Record), the
pertinent portions of which read, as follows:
`x x x x x x x x x
`Whereas, as per Deed of Sale with Assumption of Mortgage, I
paid Mr. David A. Raymundo the sum of EIGHT HUNDRED
THOUSAND PESOS (P800,000.00), Philippine currency, and
assume the mortgage obligations on the property with the Bank
of the Philippine Islands in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, in accordance with the terms and conditions of the
Deed of Real Estate Mortgage dated _________, signed and
executed by Mr. David A. Raymundo with the said Bank,
acknowledged before Notary Public for Makati, _____, as Doc.
No. ___, Page No. ___, Book No. __, Series of 1986 of his
Notarial Register.
`WHEREAS, while my application for the assumption of the
mortgage obligations on the property is not yet approved by the
mortgagee Bank, I have agreed to pay the mortgage obligations
on the property with the Bank in the name of Mr. David A.
Raymundo, in accordance with the terms and conditions of the
said Deed of Real Estate Mortgage, including all interests and
other charges for late payment.
`WHEREAS, this undertaking is being executed in favor of Mr.
David A. Raymundo, for purposes of attesting and confirming our
private understanding concerning the said mortgage obligations
to be assumed.
`NOW, THEREFORE, for and in consideration of the foregoing
premises, and the assumption of the mortgage obligations of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, with the Bank of the
Philippine islands, I, Mrs. Avelina D. Velarde, with the consent of
my husband, Mariano Z. Velarde, do hereby bind and obligate
myself, my heirs, successors and assigns, to strictly and faithfully
comply with the following terms and conditions:
`1. That until such time as my assumption of the mortgage
obligations on the property purchased is approved by the
mortgagee bank, the Bank of the Philippine Islands, I shall
continue to pay the said loan in accordance with the terms and
conditions of the Deed of Real Estate Mortgage in the name of
Mr. David A. Raymundo, the original Mortgagor.
`2. That, in the event I violate any of the terms and conditions of
the said Deed of Real Estate Mortgage, I hereby agree that my
downpayment of P800,000.00, plus all payments made with the
Bank of the Philippine Islands on the mortgage loan, shall be
forfeited in favor of Mr. David A. Raymundo, as and by way of
liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A Raymundo shall
resume total and complete ownership and possession of the
property sold by way of Deed of Sale with Assumption of

Mortgage, and the same shall be deemed automatically
cancelled and be of no further force or effect, in the same
manner as if (the) same had never been executed or entered
into.
`3. That I am executing this Undertaking for purposes of binding
myself, my heirs, successors and assigns, to strictly and faithfully
comply with the terms and conditions of the mortgage obligations
with the Bank of the Philippine Islands, and the covenants,
stipulations and provisions of this Undertaking.
`That, David A. Raymundo, the vendor of the property mentioned
and identified above, [does] hereby confirm and agree to the
undertakings of the Vendee pertinent to the assumption of the
mortgage obligations by the Vendee with the Bank of the
Philippine Islands. (Exh. `C', pp. 13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde
and David Raymundo.
"It appears that the negotiated terms for the payment of the
balance of P1.8 million was from the proceeds of a loan that
plaintiffs were to secure from a bank with defendant's help.
Defendants had a standing approved credit line with the Bank of
the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPI's approval of an application for assumption of
mortgage by plaintiffs. Pending BPI's approval o[f] the
application, plaintiffs were to continue paying the monthly
interests of the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly
interest on the loan secured by the aforementioned mortgage for
three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at
P23,925.00 (Exh. `E', `H' & `J', pp. 15, 17 and 18, Record).
"On December 15, 1986, plaintiffs were advised that the
Application for Assumption of Mortgage with BPI was not
approved (Exh. `J', p. 133, Record). This prompted plaintiffs not
to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs
informing the latter that their non-payment to the mortgage bank
constitute[d] non-performance of their obligation (Exh. `3', p. 220,
Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel,
responded, as follows:
`This is to advise you, therefore, that our client is willing to pay
the balance in cash not later than January 21, 1987 provided: (a)
you deliver actual possession of the property to her not later than
January 15, 1987 for her immediate occupancy; (b) you cause
the release of title and mortgage from the Bank of P.I. and make
the title available and free from any liens and encumbrances;
and (c) you execute an absolute deed of sale in her favor free
from any liens or encumbrances not later than January 21, 1987.'
(Exhs. `K', `4', p. 223, Record).
"On January 8, 1987, defendants sent plaintiffs a notarial notice
of cancellation/rescission of the intended sale of the subject
property allegedly due to the latter's failure to comply with the
terms and conditions of the Deed of Sale with Assumption of
Mortgage and the Undertaking (Exh. `5', pp. 225-226,
Record).'"[6]
Consequently, petitioners filed on February 9, 1987 a Complaint
against private respondents for specific performance, nullity of
cancellation, writ of possession and damages. This was
docketed as Civil Case No. 15952 at the Regional Trial Court of
Makati, Branch 149. The case was tried and heard by then
Judge Consuelo Ynares-Santiago (now an associate justice of
this Court), who dismissed the Complaint in a Decision dated
November 14, 1990.[7] Thereafter, petitioners filed a Motion for
Reconsideration.[8]
Meanwhile, then Judge Ynares-Santiago was promoted to the
Court of Appeals and Judge Salvador S. A. Abad Santos was
assigned to the sala she vacated. In an Order dated May 15,
Page 2 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
1991,[9] Judge Abad Santos granted petitioners' Motion for
Reconsideration and directed the parties to proceed with the
sale. He instructed petitioners to pay the balance of P1.8 million
to private respondents who, in turn, were ordered to execute a
deed of absolute sale and to surrender possession of the
disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad Santos and
reinstated then Judge Ynares-Santiago's earlier Decision
dismissing petitioners' Complaint. Upholding the validity of the
rescission made by private respondents, the CA explained its
ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was
stipulated that `as part of the consideration of this sale, the
VENDEE (Velarde)' would assume to pay the mortgage
obligation on the subject property in the amount of P1.8 million in
favor of BPI in the name of the Vendor (Raymundo). Since the
price to be paid by the Vendee Velarde includes the
downpayment of P800,000.00 and the balance of P1.8 million,
and the balance of P1.8 million cannot be paid in cash, Vendee
Velarde, as part of the consideration of the sale, had to assume
the mortgage obligation on the subject property. In other words,
the assumption of the mortgage obligation is part of the
obligation of Velarde, as vendee, under the contract. Velarde
further agreed `to strictly and faithfully comply with all the terms
and conditions appearing in the Real Estate Mortgage signed
and executed by the VENDOR in favor of BPI x x x as if the
same were originally signed and executed by the Vendee.' (p.2,
thereof, p.12, Record). This was reiterated by Velarde in the
document entitled `Undertaking' wherein the latter agreed to
continue paying said loan in accordance with the terms and
conditions of the Deed of Real Estate Mortgage in the name of
Raymundo. Moreover, it was stipulated that in the event of
violation by Velarde of any terms and conditions of said deed of
real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited
and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would
thereby be cancelled automatically and of no force and effect
(pars. 2 & 3, thereof, pp. 13-14, Record).
"From these 2 documents, it is therefore clear that part of the
consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of P1.8 million.
This would mean that Velarde had to make payments to BPI
under the [D]eed of [R]eal [E]state [M]ortgage in the name of
Raymundo. The application with BPI for the approval of the
assumption of mortgage would mean that, in case of approval,
payment of the mortgage obligation will now be in the name of
Velarde. And in the event said application is disapproved,
Velarde had to pay in full. This is alleged and admitted in
Paragraph 5 of the Complaint. Mariano Velarde likewise
admitted this fact during the hearing on September 15, 1997 (p.
47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n.,
October 8, 1989). This being the case, the non-payment of the
mortgage obligation would result in a violation of the contract.
And, upon Velarde's failure to pay the agreed price, the[n]
Raymundo may choose either of two (2) actions - (1) demand
fulfillment of the contract, or (2) demand its rescission (Article
1191, Civil Code).
"The disapproval by BPI of the application for assumption of
mortgage cannot be used as an excuse for Velarde's non-
payment of the balance of the purchase price. As borne out by
the evidence, Velarde had to pay in full in case of BPI's
disapproval of the application for assumption of mortgage. What
Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January
7, 1987 (Exh. `K', `4') which was strongly given weight by the
lower court in reversing the decision rendered by then Judge
Ynares-Santiago. In said letter, Velarde registered their
willingness to pay the balance in cash but enumerated 3 new

conditions which, to the mind of this Court, would constitute a
new undertaking or new agreement which is subject to the
consent or approval of Raymundo. These 3 conditions were not
among those previously agreed upon by Velarde and
Raymundo. These are mere offers or, at most, an attempt to
novate. But then again, there can be no novation because there
was no agreement of all the parties to the new contract (Garcia,
Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would
be deemed `automatically cancelled and of no further force and
effect, as if the same had never been executed or entered into.'
While it is true that even if the contract expressly provided for
automatic rescission upon failure to pay the price, the vendee
may still pay, he may do so only for as long as no demand for
rescission of the contract has been made upon him either
judicially or by a notarial act (Article 1592, Civil Code). In the
case at bar, Raymundo sent Velarde a notarial notice dated
January 8, 1987 of cancellation/rescission of the contract due to
the latter's failure to comply with their obligation. The rescission
was justified in view of Velarde's failure to pay the price
(balance) which is substantial and fundamental as to defeat the
object of the parties in making the agreement. As adverted to
above, the agreement of the parties involved a reciprocal
obligation wherein the obligation of one is a resolutory condition
of the obligation of the other, the non-fulfillment of which entitles
the other party to rescind the contract (Songcuan vs. IAC, 191
SCRA 28). Thus, the non-payment of the mortgage obligation by
appellees Velarde would create a right to demand payment or to
rescind the contract, or to criminal prosecution (Edca Publishing
& Distribution Corporation vs. Santos, 184 SCRA 614). Upon
appellees' failure, therefore, to pay the balance, the contract was
properly rescinded (Ruiz vs. IAC, 184 SCRA 720).
Consequently, appellees Velarde having violated the contract,
they have lost their right to its enforcement and hence, cannot
avail of the action for specific performance (Voysaw vs. Interphil
Promotions, Inc., 148 SCRA 635)."[10]
Hence, this appeal.[11]
The Issues
Petitioners, in their Memorandum,[12] interpose the following
assignment of errors:
"I.
The Court of Appeals erred in holding that the non-payment of
the mortgage obligation resulted in a breach of the contract.
"II.
The Court of Appeals erred in holding that the rescission
(resolution) of the contract by private respondents was justified.
"III.
The Court of Appeals erred in holding that petitioners' January 7,
1987 letter gave three `new conditions' constituting mere offers
or an attempt to novate necessitating a new agreement between
the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents'
mortgage obligation did not constitute a breach of contract,
considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of
the monthly amortizations ceased to be their obligation and,
instead, it devolved upon private respondents again.
Page 3 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
However, petitioners did not merely stop paying the mortgage
obligations; they also failed to pay the balance of the purchase
price. As admitted by both parties, their agreement mandated
that petitioners should pay the purchase price balance of P1.8
million to private respondents in case the request to assume the
mortgage would be disapproved. Thus, on December 15, 1986,
when petitioners received notice of the bank's disapproval of
their application to assume respondents' mortgage, they should
have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private
respondents offering to make such payment only upon the
fulfillment of certain conditions not originally agreed upon in the
contract of sale. Such conditional offer to pay cannot take the
place of actual payment as would discharge the obligation of a
buyer under a contract of sale.
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.[13]
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.[14]
Petitioners, on the other hand, did not perform their correlative
obligation of paying the contract price in the manner agreed
upon. Worse, they wanted private respondents to perform
obligations beyond those stipulated in the contract before
fulfilling their own obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by
private respondents was not justified, inasmuch as the former
had signified their willingness to pay the balance of the purchase
price only a little over a month from the time they were notified of
the disapproval of their application for assumption of mortgage.
Petitioners also aver that the breach of the contract was not
substantial as would warrant a rescission. They cite several
cases[15] in which this Court declared that rescission of a
contract would not be permitted for a slight or casual breach.
Finally, they argue that they have substantially performed their
obligation in good faith, considering that they have already made
the initial payment of P800,000 and three (3) monthly mortgage
payments.
As pointed out earlier, the breach committed by petitioners was
not so much their nonpayment of the mortgage obligations, as
their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents'
right to rescind the contract finds basis in Article 1191 of the Civil
Code, which explicitly provides as follows:
"Art. 1191. -- The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between fulfillment and the
rescission of the obligation, with 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 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.[16] The
breach contemplated in the said provision is the obligor's failure
to comply with an existing obligation.[17] When the obligor
cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the
court to determine the period of compliance, the court shall
decree the rescission.[18]

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.
True, petitioners expressed their willingness to pay the balance
of the purchase price one month after it became due; however,
this was not equivalent to actual payment as would constitute a
faithful compliance of their reciprocal obligation. Moreover, the
offer to pay was conditioned on the performance by private
respondents of additional burdens that had not been agreed
upon in the original contract. Thus, it cannot be said that the
breach committed by petitioners was merely slight or casual as
would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases[19] they cited
because the factual circumstances in those cases are not
analogous to those in the present one. In Song Fo there was, on
the part of the buyer, only a delay of twenty (20) days to pay for
the goods delivered. Moreover, the buyer's offer to pay was
unconditional and was accepted by the seller. In Zepeda, the
breach involved a mere one-week delay in paying the balance of
P1,000, which was actually paid. In Tan, the alleged breach was
private respondent's delay of only a few days, which was for the
purpose of clearing the title to the property; there was no
reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist
of a slight delay in payment or an irregularity; such breach would
not normally defeat the intention of the parties to the contract.
Here, petitioners not only failed to pay the P1.8 million balance,
but they also imposed upon private respondents new obligations
as preconditions to the performance of their own obligation. In
effect, the qualified offer to pay was a repudiation of an existing
obligation, which was legally due and demandable under the
contract of sale. Hence, private respondents were left with the
legal option of seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
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.
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.[20]
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.[21]
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer
necessary to discuss the third issue raised by petitioners. Suffice
Page 4 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
it to say that the three conditions appearing on the January 7,
1987 letter of petitioners to private respondents were not part of
the original contract. By that time, it was already incumbent upon
the former to pay the balance of the sale price. They had no right
to demand preconditions to the fulfillment of their obligation,
which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with
the MODIFICATION that private respondents are ordered to
return to petitioners the amount of P874,150, which the latter
paid as a consequence of the rescinded contract, with legal
interest thereon from January 8, 1987, the date of rescission. No
pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, and Sandoval-Gutierrez, JJ., concur.
Gonzaga-Reyes, J., on leave.
Cannu v Galang
source: http://www.lawyerly.ph
DIVISION
[ GR NO. 139523, May 26, 2006 ]
SPS. FELIPE AND LETICIA CANNU v. SPS. GIL AND
FERNANDINA GALANG AND NATIONAL HOME MORTGAGE
FINANCE CORPORATION
DECISION
G.R. No. 139523
CHICO-NAZARIO, J.:
Before Us is a Petition for Review on Certiorari which seeks to
set aside the decision[1] of the Court of Appeals dated 30
September 1998 which affirmed with modification the decision of
Branch 135 of the Regional Trial Court (RTC) of Makati City,
dismissing the complaint for Specific Performance and Damages
filed by petitioners, and its Resolution[2] dated 22 July 1999
denying petitioners' motion for reconsideration.
A complaint[3] for Specific Performance and Damages was filed
by petitioners-spouses Felipe and Leticia Cannu against
respondents-spouses Gil and Fernandina Galang and the
National Home Mortgage Finance Corporation (NHMFC) before
Branch 135 of the RTC of Makati, on 24 June 1993. The case
was docketed as Civil Case No. 93-2069.
The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a
loan from Fortune Savings & Loan Association for P173,800.00
to purchase a house and lot located at Pulang Lupa, Las Piñas,
with an area of 150 square meters covered by Transfer
Certificate of Title (TCT) No. T-8505 in the names of
respondents-spouses. To secure payment, a real estate
mortgage was constituted on the said house and lot in favor of
Fortune Savings & Loan Association. In early 1990, NHMFC
purchased the mortgage loan of respondents-spouses from
Fortune Savings & Loan Association for P173,800.00.
Respondent Fernandina Galang authorized[4] her attorney-in-
fact, Adelina R. Timbang, to sell the subject house and lot.
Petitioner Leticia Cannu agreed to buy the property for
P120,000.00 and to assume the balance of the mortgage
obligations with the NHMFC and with CERF Realty[5] (the
Developer of the property).
Of the P120,000.00, the following payments were made by
petitioners:
Date
Amount Paid
July 19, 1990
P40,000.00[6]

March 13, 1991
15,000.00[7]
April 6, 1991
15,000.00[8]
November 28, 1991
5,000.00[9]
Total
P75,000.00
Thus, leaving a balance of P45,000.00.
A Deed of Sale with Assumption of Mortgage Obligation[10]
dated 20 August 1990 was made and entered into by and
between spouses Fernandina and Gil Galang (vendors) and
spouses Leticia and Felipe Cannu (vendees) over the house and
lot in question which contains, inter alia, the following:
NOW, THEREFORE, for and in consideration of the sum of TWO
HUNDRED FIFTY THOUSAND PESOS (P250,000.00),
Philippine Currency, receipt of which is hereby acknowledged by
the Vendors and the assumption of the mortgage obligation, the
Vendors hereby sell, cede and transfer unto the Vendees, their
heirs, assigns and successor in interest the above-described
property together with the existing improvement thereon.
It is a special condition of this contract that the Vendees shall
assume and continue with the payment of the amortization with
the National Home Mortgage Finance Corporation Inc. in the
outstanding balance of P_______________, as of __________
and shall comply with and abide by the terms and conditions of
the mortgage document dated Feb. 27, 1989 and identified as
Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for
Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are
the original signatories.
Petitioners immediately took possession and occupied the house
and lot.
Petitioners made the following payments to the NHMFC:
Date Amount Receipt No.
July 9, 1990 P 14,312.47 D-503986[11]
March 12, 1991 8,000.00 D-729478[12]
February 4, 1992 10,000.00 D-999127[13]
March 31, 1993 6,000.00 E-563749[14]
April 19, 1993 10,000.00 E-582432[15]
April 27, 1993 7,000.00 E-618326[16]
P 55,312.47
Petitioners paid the "equity" or second mortgage to CERF
Realty.[17]
Despite requests from Adelina R. Timbang and Fernandina
Galang to pay the balance of P45,000.00 or in the alternative to
vacate the property in question, petitioners refused to do so.
In a letter[18] dated 29 March 1993, petitioner Leticia Cannu
informed Mr. Fermin T. Arzaga, Vice President, Fund
Management Group of the NHMFC, that the ownership rights
over the land covered by TCT No. T-8505 in the names of
respondents-spouses had been ceded and transferred to her
and her husband per Deed of Sale with Assumption of Mortgage,
and that they were obligated to assume the mortgage and pay
the remaining unpaid loan balance. Petitioners' formal
assumption of mortgage was not approved by the NHMFC.[19]
Because the Cannus failed to fully comply with their obligations,
respondent Fernandina Galang, on 21 May 1993, paid
P233,957.64 as full payment of her remaining mortgage loan
with NHMFC.[20]
Petitioners opposed the release of TCT No. T-8505 in favor of
respondents-spouses insisting that the subject property had
already been sold to them. Consequently, the NHMFC held in
abeyance the release of said TCT.
Thereupon, a Complaint for Specific Performance and Damages
was filed asking, among other things, that petitioners (plaintiffs
Page 5 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
therein) be declared the owners of the property involved subject
to reimbursements of the amount made by respondents-spouses
(defendants therein) in preterminating the mortgage loan with
NHMFC.
Respondent NHMFC filed its Answer.[21] It claimed that
petitioners have no cause of action against it because they have
not submitted the formal requirements to be considered
assignees and successors-in-interest of the property under
litigation.
In their Answer,[22] respondents-spouses alleged that because
of petitioners-spouses' failure to fully pay the consideration and
to update the monthly amortizations with the NHMFC, they paid
in full the existing obligations with NHMFC as an initial step in
the rescission and annulment of the Deed of Sale with
Assumption of Mortgage. In their counterclaim, they maintain
that the acts of petitioners in not fully complying with their
obligations give rise to rescission of the Deed of Sale with
Assumption of Mortgage with the corresponding damages.
After trial, the lower court rendered its decision ratiocinating:
On the basis of the evidence on record, testimonial and
documentary, this Court is of the view that plaintiffs have no
cause of action either against the spouses Galang or the
NHMFC. Plaintiffs have admitted on record they failed to pay the
amount of P45,000.00 the balance due to the Galangs in
consideration of the Deed of Sale With Assumption of Mortgage
Obligation (Exhs. "C" and "3"). Consequently, this is a breach of
contract and evidently a failure to comply with obligation arising
from contracts. . . In this case, NHMFC has not been duly
informed due to lack of formal requirements to acknowledge
plaintiffs as legal assignees, or legitimate tranferees and,
therefore, successors-in-interest to the property, plaintiffs should
have no legal personality to claim any right to the same
property.[23]
The decretal portion of the decision reads:
Premises considered, the foregoing complaint has not been
proven even by preponderance of evidence, and, as such,
plaintiffs have no cause of action against the defendants herein.
The above-entitled case is ordered dismissed for lack of merit.
Judgment is hereby rendered by way of counterclaim, in favor of
defendants and against plaintiffs, to wit:
1. Ordering the Deed of Sale With Assumption of Mortgage
Obligation (Exhs. "C" and "3") rescinded and hereby declared the
same as nullified without prejudice for defendants-spouses
Galang to return the partial payments made by plaintiffs; and the
plaintiffs are ordered, on the other hand, to return the physical
and legal possession of the subject property to spouses Galang
by way of mutual restitution;
2. To pay defendants spouses Galang and NHMFC, each the
amount of P10,000.00 as litigation expenses, jointly and
severally;
3. To pay attorney's fees to defendants in the amount of
P20,000.00, jointly and severally; and
4. The costs of suit.
5. No moral and exemplary damages awarded.[24]
A Motion for Reconsideration[25] was filed, but same was
denied. Petitioners appealed the decision of the RTC to the
Court of Appeals. On 30 September 1998, the Court of Appeals
disposed of the appeal as follows:
Obligations arising from contract have the force of law between
the contracting parties and should be complied in good faith.
The terms of a written contract are binding on the parties thereto.
Plaintiffs-appellants therefore are under obligation to pay
defendants-appellees spouses Galang the sum of P250,000.00,
and to assume the mortgage.

Records show that upon the execution of the Contract of Sale or
on July 19, 1990 plaintiffs-appellants paid defendants-appellees
spouses Galang the amount of only P40,000.00.
The next payment was made by plaintiffs-appellants on March
13, 1991 or eight (8) months after the execution of the contract.
Plaintiffs-appellants paid the amount of P5,000.00.
The next payment was made on April 6, 1991 for P15,000.00
and on November 28, 1991, for another P15,000.00.
From 1991 until the present, no other payments were made by
plaintiffs-appellants to defendants-appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to
be paid on the day of the execution of contract in July, 1990
plaintiffs-appellants have paid, in the span of eight (8) years,
from 1990 to present, the amount of only P75,000.00. Plaintiffs-
appellants should have paid the P250,000.00 at the time of the
execution of contract in 1990. Eight (8) years have already
lapsed and plaintiffs-appellants have not yet complied with their
obligation.
We consider this breach to be substantial.
The tender made by plaintiffs-appellants after the filing of this
case, of the Managerial Check in the amount of P278,957.00
dated January 24, 1994 cannot be considered as an effective
mode of payment.
Performance or payment may be effected not by tender of
payment alone but by both tender and consignation. It is
consignation which is essential in order to extinguish plaintiffs-
appellants obligation to pay the balance of the purchase price.
In addition, plaintiffs-appellants failed to comply with their
obligation to pay the monthly amortizations due on the mortgage.
In the span of three (3) years from 1990 to 1993, plaintiffs-
appellants made only six payments. The payments made by
plaintiffs-appellants are not even sufficient to answer for the
arrearages, interests and penalty charges.
On account of these circumstances, the rescission of the
Contract of Sale is warranted and justified.
...
WHEREFORE, foregoing considered, the appealed decision is
hereby AFFIRMED with modification. Defendants-appellees
spouses Galang are hereby ordered to return the partial
payments made by plaintiff-appellants in the amount of
P135,000.00.
No pronouncement as to cost.[26]
The motion for reconsideration[27] filed by petitioners was
denied by the Court of Appeals in a Resolution[28] dated 22 July
1999.
Hence, this Petition for Certiorari.
Petitioners raise the following assignment of errors:
1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
HELD THAT PETITIONERS' BREACH OF THE OBLIGATION
WAS SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN
EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL
COMPLIANCE WITH THE OBLIGATION TO PAY THE
MONTHLY AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THE OTHER FACTS AND
CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.
Page 6 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THAT THE ACTION FOR RESCISSION
IS SUBSIDIARY.[29]
Before discussing the errors allegedly committed by the Court of
Appeals, it must be stated a priori that the latter made a
misappreciation of evidence regarding the consideration of the
property in litigation when it relied solely on the Deed of Sale
with Assumption of Mortgage executed by the respondents-
spouses Galang and petitioners-spouses Cannu.
As above-quoted, the consideration for the house and lot stated
in the Deed of Sale with Assumption of Mortgage is
P250,000.00, plus the assumption of the balance of the
mortgage loan with NHMFC. However, after going over the
record of the case, more particularly the Answer of respondents-
spouses, the evidence shows the consideration therefor is
P120,000.00, plus the payment of the outstanding loan mortgage
with NHMFC, and of the "equity" or second mortgage with CERF
Realty (Developer of the property).[30]
Nowhere in the complaint and answer of the petitioners-spouses
Cannu and respondents-spouses Galang shows that the
consideration is "P250,000.00." In fact, what is clear is that of
the P120,000.00 to be paid to the latter, only P75,000.00 was
paid to Adelina Timbang, the spouses Galang's attorney-in-fact.
This debunks the provision in the Deed of Sale with Assumption
of Mortgage that the amount of P250,000.00 has been received
by petitioners.
Inasmuch as the Deed of Sale with Assumption of Mortgage
failed to express the true intent and agreement of the parties
regarding its consideration, the same should not be fully relied
upon. The foregoing facts lead us to hold that the case on hand
falls within one of the recognized exceptions to the parole
evidence rule. Under the Rules of Court, a party may present
evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading, among others, its
failure to express the true intent and agreement of the parties
thereto.[31]
In the case at bar, when respondents-spouses enumerated in
their Answer the terms and conditions for the sale of the property
under litigation, which is different from that stated in the Deed of
Sale with Assumption with Mortgage, they already put in issue
the matter of consideration. Since there is a difference as to
what the true consideration is, this Court has admitted evidence
aliunde to explain such inconsistency. Thus, the Court has
looked into the pleadings and testimonies of the parties to thresh
out the discrepancy and to clarify the intent of the parties.
As regards the computation[32] of petitioners as to the
breakdown of the P250,000.00 consideration, we find the same
to be self-serving and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred
when it ruled that their breach of the obligation was substantial.
Settled is the rule that rescission or, more accurately,
resolution,[33] of a party to an obligation under Article 1191[34]
is predicated on a breach of faith by the other party that violates
the reciprocity between them.[35] Article 1191 reads:
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.
Rescission will not be permitted for a slight or casual breach of
the contract. Rescission may be had only for such breaches that
are substantial and fundamental as to defeat the object of the

parties in making the agreement.[36] The question of whether a
breach of contract is substantial depends upon the attending
circumstances[37] and not merely on the percentage of the
amount not paid.
In the case at bar, we find petitioners' failure to pay the
remaining balance of P45,000.00 to be substantial. Even
assuming arguendo that only said amount was left out of the
supposed consideration of P250,000.00, or eighteen (18%)
percent thereof, this percentage is still substantial. Taken
together with the fact that the last payment made was on 28
November 1991, eighteen months before the respondent
Fernandina Galang paid the outstanding balance of the
mortgage loan with NHMFC, the intention of petitioners to
renege on their obligation is utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate
Court,[38] petitioners ask that they be granted additional time to
complete their obligation. Under the facts of the case, to give
petitioners additional time to comply with their obligation will be
putting premium on their blatant non-compliance of their
obligation. They had all the time to do what was required of
them (i.e., pay the P45,000.00 balance and to properly assume
the mortgage loan with the NHMFC), but still they failed to
comply. Despite demands for them to pay the balance, no
payments were made.[39]
The fact that petitioners tendered a Manager's Check to
respondents-spouses Galang in the amount of P278,957.00
seven months after the filing of this case is of no moment.
Tender of payment does not by itself produce legal payment,
unless it is completed by consignation.[40] Their failure to fulfill
their obligation gave the respondents-spouses Galang the right
to rescission.
Anent the second assigned error, we find that petitioners were
not religious in paying the amortization with the NHMFC. As
admitted by them, in the span of three years from 1990 to 1993,
their payments covered only thirty months.[41] This, indeed,
constitutes another breach or violation of the Deed of Sale with
Assumption of Mortgage. On top of this, there was no formal
assumption of the mortgage obligation with NHMFC because of
the lack of approval by the NHMFC[42] on account of petitioners'
non-submission of requirements in order to be considered as
assignees/successors-in-interest over the property covered by
the mortgage obligation.[43]
On the third assigned error, petitioners claim there was no clear
evidence to show that respondents-spouses Galang demanded
from them a strict and/or faithful compliance of the Deed of Sale
with Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made
from petitioners to comply with their obligation. Adelina R.
Timbang, attorney-in-fact of respondents-spouses, per
instruction of respondent Fernandina Galang, made constant
follow-ups after the last payment made on 28 November 1991,
but petitioners did not pay.[44] Respondent Fernandina Galang
stated in her Answer[45] that upon her arrival from America in
October 1992, she demanded from petitioners the complete
compliance of their obligation by paying the full amount of the
consideration (P120,000.00) or in the alternative to vacate the
property in question, but still, petitioners refused to fulfill their
obligations under the Deed of Sale with Assumption of Mortgage.
Sometime in March 1993, due to the fact that full payment has
not been paid and that the monthly amortizations with the
NHMFC have not been fully updated, she made her intentions
clear with petitioner Leticia Cannu that she will rescind or annul
the Deed of Sale with Assumption of Mortgage.
We likewise rule that there was no waiver on the part of
petitioners to demand the rescission of the Deed of Sale with
Assumption of Mortgage. The fact that respondents-spouses
Page 7 of 27
Obligations and Contracts
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accepted, through their attorney-in-fact, payments in installments
does not constitute waiver on their part to exercise their right to
rescind the Deed of Sale with Assumption of Mortgage. Adelina
Timbang merely accepted the installment payments as an
accommodation to petitioners since they kept on promising they
would pay. However, after the lapse of considerable time (18
months from last payment) and the purchase price was not yet
fully paid, respondents-spouses exercised their right of
rescission when they paid the outstanding balance of the
mortgage loan with NHMFC. It was only after petitioners
stopped paying that respondents-spouses moved to exercise
their right of rescission.
Petitioners cite the case of Angeles v. Calasanz[46] to support
their claim that respondents-spouses waived their right to
rescind. We cannot apply this case since it is not on all fours
with the case before us. First, in Angeles, the breach was only
slight and casual which is not true in the case before us.
Second, in Angeles, the buyer had already paid more than the
principal obligation, while in the instant case, the buyers
(petitioners) did not pay P45,000.00 of the P120,000.00 they
were obligated to pay.
We find petitioners' statement that there is no evidence of
prejudice or damage to justify rescission in favor of respondents-
spouses to be unfounded. The damage suffered by
respondents-spouses is the effect of petitioners' failure to fully
comply with their obligation, that is, their failure to pay the
remaining P45,000.00 and to update the amortizations on the
mortgage loan with the NHMFC. Petitioners have in their
possession the property under litigation. Having parted with their
house and lot, respondents-spouses should be fully
compensated for it, not only monetarily, but also as to the terms
and conditions agreed upon by the parties. This did not happen
in the case before us.
Citing Seva v. Berwin & Co., Inc.,[47] petitioners argue that no
rescission should be decreed because there is no evidence on
record that respondent Fernandina Galang is ready, willing and
able to comply with her own obligation to restore to them the
total payments they made. They added that no allegation to that
effect is contained in respondents-spouses' Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with
the case on hand. In the former, the failure of one party to
perform his obligation was the fault of the other party, while in
the case on hand, failure on the part of petitioners to perform
their obligation was due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is
"[i]t (referring to the right to rescind or resolve) can be demanded
only if the plaintiff is ready, willing and able to comply with his
own obligation, and the other is not." In other words, if one party
has complied or fulfilled his obligation, and the other has not,
then the former can exercise his right to rescind. In this case,
respondents-spouses complied with their obligation when they
gave the possession of the property in question to petitioners.
Thus, they have the right to ask for the rescission of the Deed of
Sale with Assumption of Mortgage.
On the fourth assigned error, petitioners, relying on Article 1383
of the Civil Code, maintain that the Court of Appeals erred when
it failed to consider that the action for rescission is subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to
contracts enumerated in Articles 1381[48] of the Civil Code. The
contract involved in the case before us is not one of those
mentioned therein. The provision that applies in the case at bar
is Article 1191.

In the concurring opinion of Justice Jose B.L. Reyes in Universal
Food Corp. v. Court of Appeals,[49] rescission under Article
1191 was distinguished from rescission under Article 1381.
Justice J.B.L. Reyes said:
. . . The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations by the
defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda."
Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated to the
existence of that prejudice, because it is the raison d être as well
as the measure of the right to rescind. Hence, where the
defendant makes good the damages caused, the action cannot
be maintained or continued, as expressly provided in Articles
1383 and 1384. But the operation of these two articles is limited
to the cases of rescission for lesion enumerated in Article 1381
of the Civil Code of the Philippines, and does not apply to cases
under Article 1191.
From the foregoing, it is clear that rescission ("resolution" in the
Old Civil Code) under Article 1191 is a principal action, while
rescission under Article 1383 is a subsidiary action. The former
is based on breach by the other party that violates the reciprocity
between the parties, while the latter is not.
In the case at bar, the reciprocity between the parties was
violated when petitioners failed to fully pay the balance of
P45,000.00 to respondents-spouses and their failure to update
their amortizations with the NHMFC.
Petitioners maintain that inasmuch as respondents-spouses
Galang were not granted the right to unilaterally rescind the sale
under the Deed of Sale with Assumption of Mortgage, they
should have first asked the court for the rescission thereof before
they fully paid the outstanding balance of the mortgage loan with
the NHMFC. They claim that such payment is a unilateral act of
rescission which violates existing jurisprudence.
In Tan v. Court of Appeals,[50] this court said:
. . . [T]he power to rescind obligations is implied in reciprocal
ones in case one of the obligors should not comply with what is
incumbent upon him is clear from a reading of the Civil Code
provisions. However, it is equally settled that, in the absence of
a stipulation to the contrary, this power must be invoked
judicially; it cannot be exercised solely on a party's own judgment
that the other has committed a breach of the obligation. Where
there is nothing in the contract empowering the petitioner to
rescind it without resort to the courts, the petitioner's action in
unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not
contain a provision authorizing its extrajudicial rescission in case
one of the parties fails to comply with what is incumbent upon
him. This being the case, respondents-spouses should have
asked for judicial intervention to obtain a judicial declaration of
rescission. Be that as it may, and considering that respondents-
spouses' Answer (with affirmative defenses) with Counterclaim
seeks for the rescission of the Deed of Sale with Assumption of
Mortgage, it behooves the court to settle the matter once and for
all than to have the case re-litigated again on an issue already
heard on the merits and which this court has already taken
cognizance of. Having found that petitioners seriously breached
the contract, we, therefore, declare the same is rescinded in
favor of respondents-spouses.
As a consequence of the rescission or, more accurately,
resolution of the Deed of Sale with Assumption of Mortgage, it is
Page 8 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
the duty of the court to require the parties to surrender whatever
they may have received from the other. The parties should be
restored to their original situation.[51]
The record shows petitioners paid respondents-spouses the
amount of P75,000.00 out of the P120,000.00 agreed upon.
They also made payments to NHMFC amounting to P55,312.47.
As to the petitioners' alleged payment to CERF Realty of
P46,616.70, except for petitioner Leticia Cannu's bare allegation,
we find the same not to be supported by competent evidence.
As a general rule, one who pleads payment has the burden of
proving it.[52] However, since it has been admitted in
respondents-spouses' Answer that petitioners shall assume the
second mortgage with CERF Realty in the amount of
P35,000.00, and that Adelina Timbang, respondents-spouses'
very own witness, testified[53] that same has been paid, it is but
proper to return this amount to petitioners. The three amounts
total P165,312.47 -- the sum to be returned to petitioners.
WHEREFORE, premises considered, the decision of the Court of
Appeals is hereby AFFIRMED with MODIFICATION. Spouses
Gil and Fernandina Galang are hereby ordered to return the
partial payments made by petitioners in the amount of
P165,312.47. With costs.
SO ORDERED.
Puno, Acting C.J., (Chairman), Austria-Martinez, and Callejo, Sr.,
JJ., concur.
Tinga, J., out of the country.
FOOTNOTES
[48] Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot
in any other manner collect the claim due them;
(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to
rescission.
Forest Hills v Vertex Sales
source: http://www.lawyerly.ph
DIVISION
[ GR No. 202205, Mar 06, 2013 ]
FOREST HILLS GOLF v. VERTEX SALES
DECISION
G.R. No. 202205
BRION, J.:
Before the Court is a petition for review on certiorari,[1] filed
under Rule 45 of the Rules of Court, assailing the decision[2]
dated February 22, 2012 and the resolution[3] dated May 31,
2012 of the Court of Appeals (C.A) in CA-G.R. CV No. 89296.
THE FACTS
Petitioner Forest Hills Golf & Country Club (Forest Hills) is a
domestic non-profit stock corporation that operates and
maintains a golf and country club facility in Antipolo City. Forest

Hills was created as a result of a joint venture agreement
between Kings Properties Corporation (Kings) and Fil-Estate
Golf and Development, Inc. (FEGDI). Accordingly, Kings and
FEGDI owned the shares of stock of Forest Hills, holding 40%
and 60% of the shares, respectively.
In August 1997, FEGDI sold to RS Asuncion Construction
Corporation (RSACC) one (1) Class "C" common share of Forest
Hills for P1.1 million. Prior to the full payment of the purchase
price, RSACC transferred its interests over FEGDI's Class "C"
common share to respondent Vertex Sales and Trading, Inc.
(Vertex).[4] RSACC advised FEGDI of the transfer and FEGDI,
in turn, requested Forest Hills to recognize Vertex as a
shareholder. Forest Hills acceded to the request, and Vertex was
able to enjoy membership privileges in the golf and country club.
Despite the sale of FEGDI's Class "C" common share to Vertex,
the share remained in the name of FEGDI, prompting Vertex to
demand for the issuance of a stock certificate in its name.[5] As
its demand went unheeded, Vertex filed a complaint[6] for
rescission with damages against defendants Forest Hills, FEGDI,
and Fil-Estate Land, Inc. (FELI) the developer of the Forest Hills
golf course. Vertex averred that the defendants defaulted in their
obligation as sellers when they failed and refused to issue the
stock certificate covering the Class "C" common share. It prayed
for the rescission of the sale and the return of the sums it paid; it
also claimed payment of actual damages for the defendants'
unjustified refusal to issue the stock certificate.
Forest Hills denied transacting business with Vertex and claimed
that it was not a party to the sale of the share; FELI claimed the
same defense. While admitting that no stock certificate was
issued, FEGDI alleged that Vertex nonetheless was recognized
as a stockholder of Forest Hills and, as such, it exercised rights
and privileges of one. FEGDI added that during the pendency of
Vertex's action for rescission, a stock certificate was issued in
Vertex's name,[7] but Vertex refused to accept it.
THE RTC RULING
In its March 1, 2007 decision,[8] the Regional Trial Court (RTC)
dismissed Vertex's complaint after finding that the failure to issue
a stock certificate did not constitute a violation of the essential
terms of the contract of sale that would warrant its rescission.
The RTC noted that the sale was already consummated
notwithstanding the non-issuance of the stock certificate. The
issuance of a stock certificate is a collateral matter in the
consummated sale of the share; the stock certificate is not
essential to the creation of the relation of a shareholder. Hence,
the RTC ruled that the non- issuance of the stock certificate is a
mere casual breach that would not entitle Vertex to rescind the
sale.[9]
THE CA RULING
Vertex appealed the RTC's dismissal of its complaint. In its
February 22, 2012 decision,[10] the CA reversed the RTC. It
declared that "in the sale of shares of stock, physical delivery of
a stock certificate is one of the essential requisites for the
transfer of ownership of the stocks purchased."[11]
It based its ruling on Section 63 of the Corporation Code,[12]
which requires for a valid transfer of stock
(1)
the delivery of the stock certificate;
(2)
the endorsement of the stock certificate by the owner or his
attorney-in-fact or other persons legally authorized to make the
transfer; and
(3)
to be valid against third parties, the transfer must be recorded in
the books of the corporation.
Page 9 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
Without the issuance of the stock certificate and despite Vertex's
full payment of the purchase price, the share cannot be
considered as having been validly transferred. Hence, the CA
rescinded the sale of the share and ordered the defendants to
return the amount paid by Vertex by reason of the sale. The
dispositive portion reads:
WHEREFORE, in view of the foregoing premises, the appeal is
hereby GRANTED and the March 1, 2007 Decision of the
Regional Trial Court, Branch 161, Pasig City in Civil Case No.
68791 is hereby REVERSED AND SET ASIDE. Accordingly, the
sale of x x x one (1) Class "C" Common Share of Forest Hills
Golf and Country Club is hereby rescinded and defendants-
appellees are hereby ordered to return to Vertex Sales and
Trading, Inc. the amount it paid by reason of the said sale.[13]
(emphasis ours)
The CA denied Forest Hills' motion for reconsideration in its
resolution of May 31, 2012.[14]
THE PARTIES' ARGUMENTS
Forest Hills filed the present petition for review on certiorari to
assail the CA rulings. It argues that rescission should be allowed
only for substantial breaches that would defeat the very object of
the parties making the agreement.
The delay in the issuance of the stock certificate could not be
considered as a substantial breach, considering that Vertex was
recognized as, and enjoyed the privileges of, a stockholder.
Forest Hills also objects to the CA ruling that required it to return
the amount paid by Vertex for the share of stock. It claims that it
was not a party to the contract of sale; hence, it did not receive
any amount from Vertex which it would be obliged to return on
account of the rescission of the contract.
In its comment to the petition,[15] Vertex disagrees and claims
that its compliance with its obligation to pay the price and the
other fees called into action the defendants' compliance with
their reciprocal obligation to deliver the stock certificate, but the
defendants failed to discharge this obligation. The defendants'
three (3)-year delay in issuing the stock certificate justified the
rescission of the sale of the share of stock. On account of the
rescission, Vertex claims that mutual restitution should take
place. It argues that Forest Hills should be held solidarily liable
with FEGDI and FELI, since the delay was caused by Forest
Hills' refusal to issue the share of FEGDI, from whom Vertex
acquired its share.
THE COURT'S RULING
The assailed CA rulings (a) declared the rescission of the sale of
one (1) Class "C" common share of Forest Hills to Vertex and (b)
ordered the return by Forest Hills, FEGDI, and FELI to Vertex of
the amount the latter paid by reason of the sale. While Forest
Hills argues that the ruling rescinding the sale of the share is
erroneous, its ultimate prayer was for the reversal and setting
aside of the ruling holding it liable to return the amount paid by
Vertex for the sale.[16]
The Court finds Forest Hills' prayer justified.
Ruling on rescission of sale
is a settled matter
At the outset, we declare that the question of rescission of the
sale of the share is a settled matter that the Court can no longer
review in this petition. While Forest Hills questioned and
presented its arguments against the CA ruling rescinding the
sale of the share in its petition, it is not the proper party to appeal
this ruling.
As correctly pointed out by Forest Hills, it was not a party to the
sale even though the subject of the sale was its share of stock.

The corporation whose shares of stock are the subject of a
transfer transaction (through sale, assignment, donation, or any
other mode of conveyance) need not be a party to the
transaction, as may be inferred from the terms of Section 63 of
the Corporation Code. However, to bind the corporation as well
as third parties, it is necessary that the transfer is recorded in the
books of the corporation. In the present case, the parties to the
sale of the share were FEGDI as the seller and Vertex as the
buyer (after it succeeded RSACC). As party to the sale, FEGDI
is the one who may appeal the ruling rescinding the sale. The
remedy of appeal is available to a party who has "a present
interest in the subject matter of the litigation and [is] aggrieved or
prejudiced by the judgment. A party, in turn, is deemed
aggrieved or prejudiced when his interest, recognized by law in
the subject matter of the lawsuit, is injuriously affected by the
judgment, order or decree."[17] The rescission of the sale does
not in any way prejudice Forest Hills in such a manner that its
interest in the subject matter the share of stock is injuriously
affected. Thus, Forest Hills is in no position to appeal the ruling
rescinding the sale of the share. Since FEGDI, as party to the
sale, filed no appeal against its rescission, we consider as final
the CA's ruling on this matter.
Ruling on return of amounts paid
by reason of the sale modified
The CA's ruling ordering the "return to [Vertex] the amount it paid
by reason of the sale"[18] did not specify in detail what the
amount to be returned consists of and it did not also state the
extent of Forest Hills, FEGDI, and FELI's liability with regard to
the amount to be returned. The records, however, show that the
following amounts were paid by Vertex to Forest Hills, FEGDI,
and FELI by reason of the sale:
Payee
Date of Payment
Purpose
Amount Paid
FEGDI
February 9, 1999
Purchase price for one (1) Class "C" common share
P780,000.00[19]
FEGDI
February 9, 1999
Transfer fee
P 60,000.00[20]
Forest Hills
February 23, 1999
Membership fee
P 150,000.00[21]
FELI
September 25, 2000
Documentary Stamps
P 6,300.00[22]
FEGDI
September 25, 2000
Notarial fees
P 200.00[23]
A necessary consequence of rescission is restitution: the parties
to a rescinded contract must be brought back to their original
situation prior to the inception of the contract; hence, they must
return what they received pursuant to the contract.[24] Not being
a party to the rescinded contract, however, Forest Hills is under
no obligation to return the amount paid by Vertex by reason of
the sale. Indeed, Vertex failed to present sufficient evidence
showing that Forest Hills received the purchase price for the
share or any other fee paid on account of the sale (other than the
membership fee which we will deal with after) to make Forest
Hills jointly or solidarily liable with FEGDI for restitution.
Although Forest Hills received P150,000.00 from Vertex as
membership fee, it should be allowed to retain this amount. For
three years prior to the rescission of the sale, the nominees of
Page 10 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
Vertex enjoyed membership privileges and used the golf course
and the amenities of Forest Hills.[25] We consider the amount
paid as sufficient consideration for the privileges enjoyed by
Vertex's nominees as members of Forest Hills.
WHEREFORE, in view of the foregoing, the Court PARTIALLY
GRANTS the petition for review on certiorari. The decision dated
February 22, 2012 and the resolution dated May 31, 2012 of the
Court of Appeals in CA-G.R. CV No. 89296 are hereby
MODIFIED. Petitioner Forest Hills Golf & Country Club is
ABSOLVED from liability for any amount paid by Vertex Sales
and Trading, Inc. by reason of the rescinded sale of one (1)
Class "C" common share of Forest Hills Golf & Country Club.
SO ORDERED.
Carpio, (Chairperson), Del Castillo, Perez, and Perlas-Bernabe,
JJ., concur.
Sec. 63. Certificate of stock and transfer of shares. - The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate or certificates endorsed by the owner or his attorney-
in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation. [emphases ours; italics supplied]
FOOTNOTES
Sec. 63. Certificate of stock and transfer of shares. - The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate or certificates endorsed by the owner or his attorney-
in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation. [emphases ours; italics supplied]
Maglasang v Northwestern Univ
source: http://www.lawyerly.ph
DIVISION
[ GR No. 188986, Mar 20, 2013 ]
GALILEO A. MAGLASANG v. NORTHWESTERN UNIVERSITY
DECISION
G.R. No. 188986
SERENO, C.J.:
Before this Court is a Rule 45 Petition, seeking a review of the
27 July 2009 Court of Appeals (CA) Decision in CA-G.R. CV No.

88989,[1] which modified the Regional Trial Court (RTC)
Decision of 8 January 2007 in Civil Case No. Q-04-53660.[2] The
CA held that petitioner substantially breached its contracts with
respondent for the installation of an integrated bridge system
(IBS).
The antecedent facts are as follows:[3]
On 10 June 2004, respondent Northwestern University
(Northwestern), an educational institution offering maritime-
related courses, engaged the services of a Quezon City-based
firm, petitioner GL Enterprises, to install a new IBS in Laoag City.
The installation of an IBS, used as the students' training
laboratory, was required by the Commission on Higher
Education (CHED) before a school could offer maritime
transportation programs.[4]
Since its IBS was already obsolete, respondent required
petitioner to supply and install specific components in order to
form the most modern IBS that would be acceptable to CHED
and would be compliant with the standards of the International
Maritime Organization (IMO). For this purpose, the parties
executed two contracts.
The first contract partly reads:[5]
That in consideration of the payment herein mentioned to be
made by the First Party (defendant), the Second Party agrees to
furnish, supply, install and integrate the most modern
INTEGRATED BRIDGE SYSTEM located at Northwestern
University Mock Boat in accordance with the general conditions,
plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
INTEGRATED BRIDGE SYSTEM
A. 2-RADAR SYSTEM
B. OVERHEAD CONSOLE MONITORING SYSTEM
C. ENGINE TELEGRAPH SYSTEM
D. ENGINE CONTROL SYSTEM
E. WEATHER CONTROL SYSTEM
F. ECDIS SYSTEM
G. STEERING WHEEL SYSTEM
H. BRIDGE CONSOLE
TOTAL COST:
PhP 3,800,000.00
LESS: OLD MARITIME
EQUIPMENT TRADE-IN VALUE
1,000,000.00
DISCOUNT
100,000.00
PROJECT COST (MATERIALS & INSTALLATION)
PhP 2,700,000.00
(Emphasis in the original)
The second contract essentially contains the same terms and
conditions as follows:[6]
That in consideration of the payment herein mentioned to be
made by the First Party (defendant), the Second Party agrees to
furnish, supply, install & integrate the most modern
INTEGRATED BRIDGE SYSTEM located at Northwestern
University MOCK BOAT in accordance with the general
conditions, plans and specifications of this contract.
SUPPLY & INSTALLATION OF THE FOLLOWING:
1. ARPA RADAR SIMULATION ROOM
xxxx
2. GMDSS SIMULATION ROOM
xxxx
TOTAL COST: PhP 270,000.00
(Emphasis in the original)
Page 11 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
Common to both contracts are the following provisions: (1) the
IBS and its components must be compliant with the IMO and
CHED standard and with manuals for simulators/major
equipment; (2) the contracts may be terminated if one party
commits a substantial breach of its undertaking; and (3) any
dispute under the agreement shall first be settled mutually
between the parties, and if settlement is not obtained, resort
shall be sought in the courts of law.
Subsequently, Northwestern paid P1 million as down payment to
GL Enterprises. The former then assumed possession of
Northwestern's old IBS as trade-in payment for its service. Thus,
the balance of the contract price remained at P1.97 million.[7]
Two months after the execution of the contracts, GL Enterprises
technicians delivered various materials to the project site.
However, when they started installing the components,
respondent halted the operations. GL Enterprises then asked for
an explanation.[8]
Northwestern justified the work stoppage upon its finding that the
delivered equipment were substandard.[9] It explained further
that GL Enterprises violated the terms and conditions of the
contracts, since the delivered components (1) were old; (2) did
not have instruction manuals and warranty certificates; (3)
contained indications of being reconditioned machines; and (4)
did not meet the IMO and CHED standards. Thus, Northwestern
demanded compliance with the agreement and suggested that
GL Enterprises meet with the former's representatives to iron out
the situation.
Instead of heeding this suggestion, GL Enterprises filed on 8
September 2004 a Complaint[10] for breach of contract and
prayed for the following sums: P1.97 million, representing the
amount that it would have earned, had Northwestern not stopped
it from performing its tasks under the two contracts; at least
P100,000 as moral damages; at least P100,000 by way of
exemplary damages; at least P100,000 as attorney's fees and
litigation expenses; and cost of suit. Petitioner alleged that
Northwestern breached the contracts by ordering the work
stoppage and thus preventing the installation of the materials for
the IBS.
Northwestern denied the allegation. In its defense, it asserted
that since the equipment delivered were not in accordance with
the specifications provided by the contracts, all succeeding
works would be futile and would entail unnecessary expenses.
Hence, it prayed for the rescission of the contracts and made a
compulsory counterclaim for actual, moral, and exemplary
damages, and attorney's fees.
The RTC held both parties at fault. It found that Northwestern
unduly halted the operations, even if the contracts called for a
completed project to be evaluated by the CHED. In turn, the
breach committed by GL Enterprises consisted of the delivery of
substandard equipment that were not compliant with IMO and
CHED standards as required by the agreement.
Invoking the equitable principle that "each party must bear its
own loss," the trial court treated the contracts as impossible of
performance without the fault of either party or as having been
dissolved by mutual consent. Consequently, it ordered mutual
restitution, which would thereby restore the parties to their
original positions as follows:[11]
Accordingly, plaintiff is hereby ordered to restore to the
defendant all the equipment obtained by reason of the First
Contract and refund the downpayment of P1,000,000.00 to the
defendant; and for the defendant to return to the plaintiff the
equipment and materials it withheld by reason of the non-
continuance of the installation and integration project. In the
event that restoration of the old equipment taken from
defendant's premises is no longer possible, plaintiff is hereby
ordered to pay the appraised value of defendant's old equipment

at P1,000,000.00. Likewise, in the event that restoration of the
equipment and materials delivered by the plaintiff to the
defendant is no longer possible, defendant is hereby ordered to
pay its appraised value at P1,027,480.00.
Moreover, plaintiff is likewise ordered to restore and return all the
equipment obtained by reason of the Second Contract, or if
restoration or return is not possible, plaintiff is ordered to pay the
value thereof to the defendant.
SO ORDERED.
Aggrieved, both parties appealed to the CA. With each of them
pointing a finger at the other party as the violator of the
contracts, the appellate court ultimately determined that GL
Enterprises was the one guilty of substantial breach and liable
for attorney's fees.
The CA appreciated that since the parties essentially sought to
have an IBS compliant with the CHED and IMO standards, it was
GL Enterprises' delivery of defective equipment that materially
and substantially breached the contracts. Although the contracts
contemplated a completed project to be evaluated by CHED,
Northwestern could not just sit idly by when it was apparent that
the components delivered were substandard.
The CA held that Northwestern only exercised ordinary prudence
to prevent the inevitable rejection of the IBS delivered by GL
Enterprises. Likewise, the appellate court disregarded
petitioner's excuse that the equipment delivered might not have
been the components intended to be installed, for it would be
contrary to human experience to deliver equipment from Quezon
City to Laoag City with no intention to use it.
This time, applying Article 1191 of the Civil Code, the CA
declared the rescission of the contracts. It then proceeded to
affirm the RTC's order of mutual restitution. Additionally, the
appellate court granted P50,000 to Northwestern by way of
attorney's fees.
Before this Court, petitioner rehashes all the arguments he had
raised in the courts a quo.[12] He maintains his prayer for actual
damages equivalent to the amount that he would have earned,
had respondent not stopped him from performing his tasks under
the two contracts; moral and exemplary damages; attorney's
fees; litigation expenses; and cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is
whether the CA gravely erred in (1) finding substantial breach on
the part of GL Enterprises; (2) refusing petitioner's claims for
damages, and (3) awarding attorney's fees to Northwestern.
RULING OF THE COURT
Substantial Breaches of the Contracts
Although the RTC and the CA concurred in ordering restitution,
the courts a quo, however, differed on the basis thereof. The
RTC applied the equitable principle of mutual fault, while the CA
applied Article 1191 on rescission.
The power to rescind the obligations of the injured party is
implied in reciprocal obligations, such as in this case. On this
score, the CA correctly applied Article 1191, which provides thus:
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.
Page 12 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
The two contracts require no less than substantial breach before
they can be rescinded. Since the contracts do not provide for a
definition of substantial breach that would terminate the rights
and obligations of the parties, we apply the definition found in our
jurisprudence.
This Court defined in Cannu v. Galang[13] that substantial,
unlike slight or casual breaches of contract, are fundamental
breaches that defeat the object of the parties in entering into an
agreement, since the law is not concerned with trifles.[14]
The question of whether a breach of contract is substantial
depends upon the attending circumstances.[15]
In the case at bar, the parties explicitly agreed that the materials
to be delivered must be compliant with the CHED and IMO
standards and must be complete with manuals. Aside from these
clear provisions in the contracts, the courts a quo similarly found
that the intent of the parties was to replace the old IBS in order to
obtain CHED accreditation for Northwestern's maritime-related
courses.
According to CHED Memorandum Order (CMO) No. 10, Series
of 1999, as amended by CMO No. 13, Series of 2005, any
simulator used for simulator-based training shall be capable of
simulating the operating capabilities of the shipboard equipment
concerned. The simulation must be achieved at a level of
physical realism appropriate for training objectives; include the
capabilities, limitations and possible errors of such equipment;
and provide an interface through which a trainee can interact
with the equipment, and the simulated environment.
Given these conditions, it was thus incumbent upon GL
Enterprises to supply the components that would create an IBS
that would effectively facilitate the learning of the students.
However, GL Enterprises miserably failed in meeting its
responsibility. As contained in the findings of the CA and the
RTC, petitioner supplied substandard equipment when it
delivered components that (1) were old; (2) did not have
instruction manuals and warranty certificates; (3) bore indications
of being reconditioned machines; and, all told, (4) might not have
met the IMO and CHED standards. Highlighting the defects of
the delivered materials, the CA quoted respondent's testimonial
evidence as follows:[16]
Q: In particular which of these equipment of CHED requirements
were not complied with?
A: The Radar Ma'am, because they delivered only 10-inch PPI,
that is the monitor of the Radar. That is 16-inch and the
gyrocompass with two (2) repeaters and the history card. The
gyrocompass - there is no marker, there is no model, there is no
serial number, no gimbal, no gyroscope and a bulb to work it
properly to point the true North because it is very important to the
Cadets to learn where is the true North being indicated by the
Master Gyrocompass.
xxxx
Q: Mr. Witness, one of the defects you noted down in this history
card is that the master gyrocompass had no gimbals, gyroscope
and balls and was replaced with an ordinary electric motor. So
what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the
gyrocompass to work so it will point the true North but they being
replaced with the ordinary motor used for toys so it will not
indicate the true North.
Q: So what happens if it will not indicate the true North?

A: It is very big problem for my cadets because they must[,] to
learn into school where is the true North and what is that
equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an
ordinary automobile. And what is the implication of this?
A: Because. on board Ma'am, we are using the real steering
wheel and the cadets will be implicated if they will notice that the
ship have the same steering wheel as the car so it is not
advisable for them.
Q:. And another one is that the gyrocompass repeater was only
refurbished and it has no serial number. What is wrong with that?
A: It should be original Ma'am because this gyro repeater, it must
to repeat also the true [N]orth being indicated by the Master Gyro
Compass so it will not work properly, I don't know it will work
properly. (Underscoring supplied)
Evidently, the materials delivered were less likely to pass the
CHED standards, because the navigation system to be installed
might not accurately point to the true north; and the steering
wheel delivered was one that came from an automobile, instead
of one used in ships. Logically, by no stretch of the imagination
could these form part of the most modern IBS compliant with the
IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that
the equipment it delivered was substandard. However, it
reiterates its rejected excuse that Northwestern should have
made an assessment only after the completion of the IBS.[17]
Thus, petitioner stresses that it was Northwestern that breached
the agreement when the latter halted the installation of the
materials for the IBS, even if the parties had contemplated a
completed project to be evaluated by CHED. However, as aptly
considered by the CA, respondent could not just "sit still and wait
for such day that its accreditation may not be granted by CHED
due to the apparent substandard equipment installed in the
bridge system."[18] The appellate court correctly emphasized
that, by that time, both parties would have incurred more costs
for nothing.
Additionally, GL Enterprises reasons that, based on the
contracts, the materials that were hauled all the way from
Quezon City to Laoag City under the custody of the four
designated installers might not have been the components to be
used.[19] Without belaboring the point, we affirm the conclusion
of the CA and the RTC that the excuse is untenable for being
contrary to human experience.[20]
Given that petitioner, without justification, supplied substandard
components for the new IBS, it is thus clear that its violation was
not merely incidental, but directly related to the essence of the
agreement pertaining to the installation of an IBS compliant with
the CHED and IMO standards. Consequently, the CA correctly
found substantial breach on the part of petitioner.
In contrast, Northwestern's breach, if any, was characterized by
the appellate court as slight or casual.[21] By way of negative
definition, a breach is considered casual if it does not
fundamentally defeat the object of the parties in entering into an
agreement. Furthermore, for there to be a breach to begin with,
there must be a "failure, without legal excuse, to perform any
promise which forms the whole or part of the contract."[22]
Here, as discussed, the stoppage of the installation was justified.
The action of Northwestern constituted a legal excuse to prevent
the highly possible rejection of the IBS. Hence, just as the CA
concluded, we find that Northwestern exercised ordinary
prudence to avert a possible wastage of time, effort, resources
and also of the ?2.9 million representing the value of the new
IBS.
Actual Damages, Moral and Exemplary
Page 13 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
Damages, and Attorney's Fees
As between the parties, substantial breach can clearly be
attributed to GL Enterprises. Consequently, it is not the injured
party who can claim damages under Article 1170 of the Civil
Code. For this reason, we concur in the result of the CA's
Decision denying petitioner actual damages in the form of lost
earnings, as well as moral and exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code
allows the grant thereof when the court deems it just and
equitable that attorney's fees should be recovered. An award of
attorney's fees is proper if one was forced to litigate and incur
expenses to protect one's rights and interest by reason of an
unjustified act or omission on the part of the party from whom the
award is sought.[23]
Since we affirm the CA's finding that it was not Northwestern but
GL Enterprises that breached the contracts without justification, it
follows that the appellate court correctly awarded attorney's fees
to respondent. Notably, this litigation could have altogether been
avoided if petitioner heeded respondent's suggestion to amicably
settle; or, better yet, if in the first place petitioner delivered the
right materials as required by the contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the
Court of Appeals in CA-G.R. CV No. 88989 is hereby
AFFIRMED.
SO ORDERED.
Leonardo-De Castro, Bersamin, Villarama, Jr., and *Leonen, JJ.,
concur.
* Additional member in lieu of Associate Justice Bienvenido L.
Reyes due to his prior action in the Court of Appeals.
Swire Realty v Yu
source: http://www.lawyerly.ph
DIVISION
[ GR No. 207133, Mar 09, 2015 ]
SWIRE REALTY DEVELOPMENT CORPORATION v. JAYNE
YU
DECISION
PERALTA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the
1997 Rules of Civil Procedure which seeks to reverse and set
aside the Decision [1] dated January 24, 2013 and Resolution [2]
dated April 30, 2013 of the Court of Appeals (CA) in CA-G.R. SP
No. 121175.
The facts follow.
Respondent Jayne Yu and petitioner Swire Realty Development
Corporation entered into a Contract to Sell on July 25, 1995
covering one residential condominium unit, specifically Unit 3007
of the Palace of Makati, located at P. Burgos corner Caceres
Sts., Makati City, with an area of 137.30 square meters for the
total contract price of P7,519,371.80, payable in equal monthly
installments until September 24, 1997. Respondent likewise
purchased a parking slot in the same condominium building for
P600,000.00.
On September 24, 1997, respondent paid the full purchase price
of P7,519,371.80 for the unit while making a down payment of
P20,000.00 for the parking lot. However, notwithstanding full
payment of the contract price, petitioner failed to complete and
deliver the subject unit on time. This prompted respondent to file
a Complaint for Rescission of Contract with Damages before the

Housing and Land Use Regulatory Board (HLURB) Expanded
National Capital Region Field Office (ENCRFO).
On October 19, 2004, the HLURB ENCRFO rendered a Decision
[3] dismissing respondent's complaint. It ruled that rescission is
not permitted for slight or casual breach of the contract but only
for such breaches as are substantial and fundamental as to
defeat the object of the parties in making the agreement. It
disposed of the case as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered ordering [petitioner] the following:
To finish the subject unit as pointed out in the inspection Report
To pay [respondent] the following:
the amount of P100,000 as compensatory damages for the
minor irreversible defects in her unit [respondent], or, in the
alternative, conduct the necessary repairs on the subject unit to
conform to the intended specifications;
moral damages of P20,000.00
Attorney's fees of P20,000.00
On the other hand, [respondent] is hereby directed to
immediately update her account insofar as the parking slot is
concerned, without interest, surcharges or penalties charged
therein.
All other claims and counterclaims are hereby dismissed for lack
of merit.
IT IS SO ORDERED. [4]
Respondent then elevated the matter to the HLURB Board of
Commissioners.
In a Decision [5] dated March 30, 2006, the HLURB Board of
Commissioners reversed and set aside the ruling of the HLURB
ENCRFO and ordered the rescission of the Contract to Sell,
ratiocinating:
We find merit in the appeal. The report on the ocular inspection
conducted on the subject condominium project and subject unit
shows that the amenities under the approved plan have not yet
been provided as of May 3, 2002, and that the subject unit has
not been delivered to [respondent] as of August 28, 2002, which
is beyond the period of development of December 1999 under
the license to sell. The delay in the completion of the project as
well as of the delay in the delivery of the unit are breaches of
statutory and contractual obligations which entitles [respondent]
to rescind the contract, demand a refund and payment of
damages.
The delay in the completion of the project in accordance with the
license to sell also renders [petitioner] liable for the payment of
administrative fine.
Wherefore, the decision of the Office below is set aside and a
new decision is rendered as follows:
Declaring the contract to sell as rescinded and directing
[petitioner] to refund to [respondent] the amount of
P7,519,371.80 at 6% per annum from the time of extrajudicial
demand on January 05, 2001: subject to computation and
payment of the correct filing fee;
Directing [petitioner] to pay respondent attorney's fees in the
amount of P20,000.00;
Directing [petitioner] to pay an administrative fine of P10,000.00
for violation of Section 20, in relation to Section 38 of P.D. 957:
SO ORDERED. [6]
Petitioner moved for reconsideration, but the same was denied
by the HLURB Board of Commissioners in a Resolution [7] dated
June 14, 2007.
Page 14 of 27
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Unfazed, petitioner appealed to the Office of the President (OP)
on August 7, 2007.
In a Decision [8] dated November 21, 2007, the OP, through
then Deputy Executive Secretary Manuel Gaite, dismissed
petitioner's appeal on the ground that it failed to promptly file its
appeal before the OP. It held:
Records show that [petitioner] received its copy of the 30 March
2006 HLURB Decision on 17 April 2006 and instead of filing an
appeal, it opted first to file a Motion for Reconsideration on 28
April 2006 or eleven (11) days thereafter. The said motion
interrupted the 15-day period to appeal.
On 23 July 2007, [petitioner] received the HLURB Resolution
dated 14 June 2007 denying the Motion for Reconsideration.
Based on the ruling in United Overseas Bank Philippines, Inc. v.
Ching (486 SCRA 655), the period to appeal decisions of the
HLURB Board of Commissioners to the Office of the President is
15 days from receipt thereof pursuant to Section 15 of P.D. No.
957 and Section 2 of P.D. No. 1344 which are special laws that
provide an exception to Section 1 of Administrative Order No. 18.
Corollary thereto, par. 2, Section 1 of Administrative Order No.
18, Series of 1987 provides that:
The time during which a motion for reconsideration has been
pending with the Ministry/Agency concerned shall be deducted
from the period of appeal. But where such a motion for
reconsideration has been filed during office hours of the last day
of the period herein provided, the appeal must be made within
the day following receipt of the denial of said motion by the
appealing party. (Underscoring supplied)
xxxx
Accordingly, the [petitioner] had only four (4) days from receipt
on 23 July 2007 of HLURB Resolution dated 14 June 2007, or
until 27 July 2007 to file the Notice of Appeal before this Office.
However, [petitioner] filed its appeal only on 7 August 2007 or
eleven (11) days late.
Thus, this Office need not delve on the merits of the appeal filed
as the records clearly show that the said appeal was filed out of
time.
WHEREFORE, premises considered, [petitioner]'s appeal is
hereby DISMISSED, and the HLURB Decision dated 30 March
2006 and HLURB Resolution dated 14 June 2007 are hereby
AFFIRMED.
SO ORDERED. [9]
Immediately thereafter, petitioner filed a motion for
reconsideration against said decision.
In a Resolution [10] dated February 17, 2009, the OP, through
then Executive Secretary Eduardo Ermita, granted petitioner's
motion and set aside Deputy Executive Secretary Gaite's
decision. It held that after a careful and thorough evaluation and
study of the records of the case, the OP was more inclined to
agree with the earlier decision of the HLURB ENCRFO as it was
more in accord with facts, law and jurisprudence relevant to the
case. Thus:
WHEREFORE, premises considered, the instant Motion for
Reconsideration is hereby GRANTED. The Decision and
Resolution of the HLURB Third Division Board of
Commissioners, dated March 30, 2006 and June 14, 2007,
respectively, are hereby SET ASIDE, and the HLURB ENCRFO
Decision dated October 19, 2004 is hereby REINSTATED.
SO ORDERED. [11]

Respondent sought reconsideration of said resolution, however,
the same was denied by the OP in a Resolution [12] dated
August 18, 2011.
Consequently, respondent filed an appeal to the CA.
In a Decision dated January 24, 2013, the CA granted
respondent's appeal and reversed and set aside the Order of the
OP. The fallo of its decision reads:
WHEREFORE, the Petition is hereby GRANTED. The assailed
Resolution dated 17 February 2009 and Order dated 18 August
2011 of the Office of the President, in O.P. Case No. 07-H-283,
are hereby REVERSED and SET ASIDE. Accordingly, the
Decision dated 30 March 2006 and Resolution dated 14 June
2007 of the HLURB Board of Commissioners in HLURB Case
No. REM-A-050127-0014, are REINSTATED.
SO ORDERED. [13]
Petitioner moved for reconsideration, however, the CA denied
the same in a Resolution dated April 30, 2013.
Hence, the present petition wherein petitioner raises the
following grounds to support its petition:
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING
THE LEGAL PRECEPTS THAT:
TECHNICAL RULES ARE NOT BINDING UPON
ADMINISTRATIVE AGENCIES; and
RESCISSION WILL BE ORDERED ONLY WHERE THE
BREACH COMPLAINED OF IS SUBSTANTIAL AS TO DEFEAT
THE OBJECT OF THE PARTIES IN ENTERING INTO THE
AGREEMENT. [14]
In essence, the issues are: (1) whether petitioner's appeal was
timely filed before the OP; and (2) whether rescission of the
contract is proper in the instant case.
We shall resolve the issues in seriatim.
First, the period to appeal the decision of the HLURB Board of
Commissioners to the Office of the President has long been
settled in the case of SGMC Realty Corporation v. Office of the
President, [15] as reiterated in the cases of Maxima Realty
Management and Development Corporation v. Parkway Real
Estate Development Corporation [16] and United Overseas Bank
Philippines, Inc. v. Ching. [17]
In the aforementioned cases, we ruled that the period to appeal
decisions of the HLURB Board of Commissioners is fifteen (15)
days from receipt thereof pursuant to Section 15 [18] of PD No.
957 [19] and Section 2 [20] of PD No. 1344 [21] which are
special laws that provide an exception to Section 1 of
Administrative Order No. 18. Thus, in the SGMC Realty
Corporation v. Office of the President case, the Court explained:
As pointed out by public respondent, the aforecited
administrative order allows aggrieved party to file its appeal with
the Office of the President within thirty (30) days from receipt of
the decision complained of. Nonetheless, such thirty-day period
is subject to the qualification that there are no other statutory
periods of appeal applicable. If there are special laws governing
particular cases which provide for a shorter or longer
reglementary period, the same shall prevail over the thirty-day
period provided for in the administrative order. This is in line with
the rule in statutory construction that an administrative rule or
regulation, in order to be valid, must not contradict but conform
to the provisions of the enabling law.
We note that indeed there are special laws that mandate a
shorter period of fifteen (15) days within which to appeal a case
to public respondent. First, Section 15 of Presidential Decree No.
Page 15 of 27
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957 provides that the decisions of the National Housing Authority
(NHA) shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of the decision. Second,
Section 2 of Presidential Decree No. 1344 states that decisions
of the National Housing Authority shall become final and
executory after the lapse of fifteen (15) days from the date of its
receipt. The latter decree provides that the decisions of the NHA
is appealable only to the Office of the President. Further, we note
that the regulatory functions of NHA relating to housing and land
development has been transferred to Human Settlements
Regulatory Commission, now known as HLURB. x x x [22]
Records show that petitioner received a copy of the HLURB
Board of Commissioners' decision on April 17, 2006.
Correspondingly, it had fifteen days from April 17, 2006 within
which to file its appeal or until May 2, 2006. However, on April
28, 2006, or eleven days after receipt of the HLURB Board of
Commissioner's decision, it filed a Motion for Reconsideration,
instead of an appeal.
Concomitantly, Section 1 of Administrative Order No. 18 [23]
provides that the time during which a motion for reconsideration
has been pending with the ministry or agency concerned shall be
deducted from the period for appeal. Petitioner received the
HLURB Board Resolution denying its Motion for Reconsideration
on July 23, 2007 and filed its appeal only on August 7, 2007.
Consequently therefore, petitioner had only four days from July
23, 2007, or until July 27, 2007, within which to file its appeal to
the OP as the filing of the motion for reconsideration merely
suspended the running of the 15-day period. However, records
reveal that petitioner only appealed to the OP on August 7, 2007,
or eleven days late. Ergo, the HLURB Board of Commissioners'
decision had become final and executory on account of the fact
that petitioner did not promptly appeal with the OP.
In like manner, we find no cogent reason to exempt petitioner
from the effects of its failure to comply with the rules.
In an avuncular case, we have held that while the dismissal of an
appeal on purely technical grounds is concededly frowned upon,
it bears emphasizing that the procedural requirements of the
rules on appeal are not harmless and trivial technicalities that
litigants can just discard and disregard at will. Neither being a
natural right nor a part of due process, the rule is settled that the
right to appeal is merely a statutory privilege which may be
exercised only in the manner and in accordance with the
provisions of the law. [24]
Time and again, we have held that rules of procedure exist for a
noble purpose, and to disregard such rules, in the guise of liberal
construction, would be to defeat such purpose. Procedural rules
are not to be disdained as mere technicalities. They may not be
ignored to suit the convenience of a party. [25] The reason for
the liberal application of the rules before quasi-judicial agencies
cannot be used to perpetuate injustice and hamper the just
resolution of the case. Neither is the rule on liberal construction a
license to disregard the rules of procedure. [26]
Thus, while there may be exceptions for the relaxation of
technical rules principally geared to attain the ends of justice,
petitioner's fatuous belief that it had a fresh 15-day period to
elevate an appeal with the OP is not the kind of exceptional
circumstance that merits relaxation.
Second, Article 1191 of the Civil Code sanctions the right to
rescind the obligation in the event that specific performance
becomes impossible, to wit:
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in

either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with Articles
1385 and 1388 and the Mortgage Law.
Basic is the rule that the right of rescission of a party to an
obligation under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party who violates the reciprocity
between them. The breach contemplated in the said provision is
the obligor's failure to comply with an existing obligation. When
the obligor cannot comply with what is incumbent upon it, the
obligee may seek rescission and, in the absence of any just
cause for the court to determine the period of compliance, the
court shall decree the rescission. [27]
In the instant case, the CA aptly found that the completion date
of the condominium unit was November 1998 pursuant to
License No. 97-12-3202 dated November 2, 1997 but was
extended to December 1999 as per License to Sell No. 99-05-
3401 dated May 8, 1999. However, at the time of the ocular
inspection conducted by the HLURB ENCRFO, the unit was not
yet completely finished as the kitchen cabinets and fixtures were
not yet installed and the agreed amenities were not yet available.
Said inspection report states:
May 3, 2002:
The unit of the [respondent] is Unit 3007, which was labeled as
P2-07, at the Palace of Makati, located at the corner of P.
Burgos Street and Caceres Street, Poblacion, Makati City.
Based on the approved plans, the said unit is at the 26th Floor.
During the time of inspection, the said unit appears to be
completed except for the installation of kitchen cabinets and
fixtures.
Complainant pinpointed to the undersigned the deficiencies as
follows:
The delivered unit has high density fiber (HDF) floorings instead
of narra wood parquet.
The [petitioners] have also installed baseboards as borders
instead of pink porrino granite boarders.
Walls are newly painted by the respondent and the alleged
obvious signs of cladding could not be determined.
Window opening at the master bedroom conforms to the
approved plans. As a result it leaves a 3 inches (sic) gap
between the glass window and partitioning of the master's
bedroom.
It was verified and confirmed that a square column replaced the
round column, based on the approved plans.
At the time of inspection, amenities such as swimming pool and
change room are seen at the 31st floor only. These amenities
are reflected on the 27th floor plan of the approved condominium
plans. Health spa for men and women, Shiatsu Massage Room,
Two-Level Sky Palace Restaurant and Hall for games and
entertainments, replete with billiard tables, a bar, indoor golf with
spectacular deck and karaoke rooms were not yet provided by
the [petitioner].
The [master's] bedroom door bore sign of poor quality of
workmanship as seen below.
The stairs have been installed in such manner acceptable to the
undersigned.
Page 16 of 27
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Bathrooms and powder room have been installed in such
manner acceptable to the undersigned. [28]
From the foregoing, it is evident that the report on the ocular
inspection conducted on the subject condominium project and
subject unit shows that the amenities under the approved plan
have not yet been provided as of May 3, 2002, and that the
subject unit has not been delivered to respondent as of August
28, 2002, which is beyond the period of development of
December 1999 under the license to sell. Incontrovertibly,
petitioner had incurred delay in the performance of its obligation
amounting to breach of contract as it failed to finish and deliver
the unit to respondent within the stipulated period. The delay in
the completion of the project as well as of the delay in the
delivery of the unit are breaches of statutory and contractual
obligations which entitle respondent to rescind the contract,
demand a refund and payment of damages.
WHEREFORE, premises considered, the instant petition is
DENIED. The Decision dated January 24, 2013 and Resolution
dated April 30, 2013 of the Court of Appeals in CA-G.R. SP No.
121175 are hereby AFFIRMED, with MODIFICATION that moral
damages be awarded in the amount of P20,000.00
SO ORDERED.
Velasco, Jr., (Chairperson), Villarama, Jr., Reyes, and Jardeleza,
JJ., Concur.
.
FOOTNOTES
Section 15. Decision. The case shall be decided within thirty (30)
days from the time the same is submitted for decision. The
Decision may order the revocation of the registration of the
subdivision or condominium project, the suspension,
cancellation, or revocation of the license to sell and/or forfeiture,
in whole or in part, of the performance bond mentioned in
Section 6 hereof. In case forfeiture of the bond is ordered, the
Decision may direct the provincial or city engineer to undertake
or cause the construction of roads and other requirements for the
subdivision or condominium as stipulated in the bond,
chargeable to the amount forfeited. Such decision shall be
immediately executory and shall become final after the lapse of
15 days from the date of receipt of the Decision.
Section 2. The decision of the National Housing Authority shall
become final and executory after the lapse of fifteen (15) days
from the date of its receipt. It is appealable only to the President
of the Philippines and in the event the appeal is filed and the
decision is not reversed and/or amended within a period of thirty
(30) days, the decision is deemed affirmed. Proof of the appeal
of the decision must be furnished the National Housing Authority
Fong v Duenas
DIVISION
[ GR No. 185592, Jun 15, 2015 ]
GEORGE C. FONG v. JOSE V. DUEÑAS
DECISION
BRION, J.:
We resolve in this petition for review on certiorari[1] the
challenge to the September 16, 2008 decision[2] and the
December 8, 2008 resolution[3] of the Court of Appeals (CA) in
CA-G.R. CV No. 88396.
These assailed CA rulings annulled the June 27, 2006
decision[4] and October 30, 2006 order[5] of the Regional Trial
Court of Makati, Branch 64 (trial court), which directed
respondent Jose V. Dueñas (Dueñas) to pay Five Million Pesos

(P5 Million) to petitioner George C. Fong (Fong), and imposed a
six percent (6%) annual interest on this amount.
Factual Antecedents
Dueñas is engaged in the bakery, food manufacturing, and
retailing business, which are all operated under his two
companies, D.C. DANTON, Inc. (Danton) and Bakcom Food
Industries, Inc. (Bakcom). He was an old acquaintance of Fong
as they were former schoolmates at the De La Salle
University.[6]
Sometime in November 1996, Dueñas and Fong entered into a
verbal joint venture contract where they agreed to engage in the
food business and to incorporate a holding company under the
name Alliance Holdings, Inc. (Alliance or the proposed
corporation). Its capitalization would be Sixty Five Million Pesos
(P65 Million), to which they would contribute in equal parts.[7]
The parties agreed that Fong would contribute Thirty Two Million
and Five Hundred Thousand Pesos (P32.5 Million) in cash while
Dueñas would contribute all his Danton and Bakcom shares
which he valued at P32.5 Million.[8] Fong required Dueñas to
submit the financial documents supporting the valuation of these
shares.
On November 25, 1996, Fong started remitting in tranches his
share in the proposed corporation’s capital. He made the
remittances under the impression that his contribution would be
applied as his subscription to fifty percent (50%) of Alliance’s
total shareholdings. On the other hand, Dueñas started
processing the Boboli[9] international license that they would use
in their food business. Fong’s cash contributions are summarized
below.[10]
Date
Amount
November 25, 1996
P1,980,475.20
January 14, 1997
P1,000,000.00
February 8, 1997
P500,000.00
March 7, 1997
P100,000.00
April 28, 1997
P500,000.00
June 13, 1997
P919,524.80
Total
P5,000,000.00
On June 13, 1997, Fong sent a letter to Dueñas informing him of
his decision to limit his total contribution from P32.5 Million to P5
Million. This letter reads:
June 13, 1997
Mr. Jose Dueñas
c/o Camira Industries
Re: Proposed JV in Bakcom, D.C. Danton and Boboli
Dear Jojit,
Enclosed is our check for P919,534.80 representing our
additional advances to subject company in process of
incorporation. This will make our total advances to date
amounting to P5 million.
Since we agreed in principal late last year to pursue subject
matter, the delays in implementing the joint venture have caused
us to rethink our position. First, we were faced with the ‘personal’
factor which was explained to you one time. This has caused us
to turn down a number of business opportunities. Secondly,
since last year, the operation of Century 21 has been taking
more time from us than anticipated. That is why we decided to
relinquish our original plan to manage and operate ‘Boboli’
Page 17 of 27
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knowing this limitation. For us, it does not make sense anymore
to go for a significant shareholding when we cannot be hands on
and participate actively as originally planned. For your
information, we will probably be giving up our subway franchise
too.
Together with our business advisers and legal counsel, we came
to a decision to hold our commitment (from advances to
investment) at P5 million only for now from the original plan of
P32.5 million, if this is acceptable to you.
We know that our decision will somewhat upset the overall plans.
But it will probably be more problematic for us in the long run if
we continue full speed. We have put our money down in trust
and good faith despite the much delayed financials. We continue
to believe in your game plan and capabilities to achieve the
desired goals for subject undertaking. Please permit us instead
to be just a modest silent investor now with a take out plan when
time and price is right.
Thank you for your kind understanding and consideration.
With best regards.
(Signed) George Fong[11]
Fong observed that despite his P5 Million contribution, Dueñas
still failed to give him the financial documents on the valuation of
the Danton and Bakcom shares. Thus, except for Dueñas’
representations, Fong had nothing to rely on to ensure that these
shares were really valued at P32.5 Million. Moreover, Dueñas
failed to incorporate and register Alliance with the Securities and
Exchange Commission (SEC).[12]
These circumstances convinced Fong that Dueñas would no
longer honor his obligations in their joint venture agreement.[13]
Thus, on October 30, 1997, Fong wrote Dueñas informing him of
his decision to cancel the joint venture agreement. He also
asked for the refund of the P5 Million that he advanced.[14] In
response, Dueñas admitted that he could not immediately return
the money since he used it to defray the business expenses of
Danton and Bakcom.[15]
To meet Fong’s demand, Dueñas proposed several schemes for
payment of the P5 Million.[16] However, Fong did not accept any
of these proposed schemes. On March 25, 1998, Fong wrote a
final letter of demand[17] informing Dueñas that he would file a
judicial action against him should he still fail to pay after receipt
of this written demand.
Since Dueñas did not pay, Fong filed a complaint against him for
collection of a sum of money and damages[18] on April 24, 1998.
The Trial Court’s Ruling
In its June 27, 2006 decision, the trial court ruled in favor of Fong
and held that a careful examination of the complaint shows that
although it was labeled as an action for collection of a sum of
money, it was actually an action for rescission.[19]
The trial court noted that Dueñas’ failure to furnish Fong with the
financial documents on the valuation of the Danton and Bakcom
shares, as well as the almost one year delay in the incorporation
of Alliance, caused Fong to rescind the joint venture
agreement.[20] According to the trial court, these are adequate
and acceptable reasons for rescission.
The trial court also held that Dueñas erroneously invested
Fong’s cash contributions in his two companies, Danton and
Bakcom. The signed receipts,[21] presented as evidence,
expressly provided that each remittance should be applied as
advance subscription to Fong’s shareholding in Alliance. Thus,
Dueñas’ investment of the money in Danton and Bakcom was
clearly unauthorized and contrary to the parties’ agreement.

Since Dueñas was unjustly enriched by Fong’s advance capital
contributions, the trial court ordered him to return the money
amounting to P5 Million and to pay ten percent (10%) of this
amount in attorney’s fees, as well as the cost of the suit.[22]
Fong filed a partial motion for reconsideration from the trial
court’s June 27, 2006 decision and asked for the imposition of a
six percent (6%) annual interest, computed from the date of
extrajudicial demand until full payment of the award. The trial
court granted this prayer in its October 30, 2006 order.[23]
The CA’s Ruling
Dueñas responded to the trial court’s ruling through an appeal
with the CA, which granted the appeal and annulled the trial
court’s ruling.
The CA ruled that Fong’s June 13, 1997 letter evidenced his
intention to convert his cash contributions from “advances” to the
proposed corporation’s shares, to mere “investments.” Thus,
contrary to the trial court’s ruling, Dueñas correctly invested
Fong’s P5 Million contribution to Bakcom and Danton. This did
not deviate from the parties’ original agreement as eventually,
the shares of these two companies would form part of Alliance’s
capital.[24]
Lastly, the CA held that the June 13, 1997 letter showed that
Fong knew all along that he could not immediately ask for the
return of his P5 Million investment. Thus, whether the action filed
was a complaint for collection of a sum of money, or rescission, it
must still fail.[25]
The Petition
Fong submits that the CA erred when it ruled that his June 13,
1997 letter showed his intent to convert his contributions from
advance subscriptions to Alliance’s shares, to investments in
Dueñas’ two companies. Contrary to the CA’s findings, the
receipts and the letter expressly mentioned that his contributions
should all be treated as his share subscription to Alliance.[26]
Also, Fong argues that Dueñas’ unjustified retention of the P5
Million and its appropriation to his (Dueñas’) own business,
amounted to unjust enrichment; and that he contributed to fund
Alliance’s capital and incorporation, not to pay for Danton and
Bakcom’s business expenses.[27]
The Case for Dueñas
Dueñas contends that he could no longer refund the P5 Million
since he had already applied it to his two companies; that this is
proper since Danton and Bakcom’s shares would also form part
of his capital contribution to Alliance.[28]
Moreover, the incorporation did not push through because Fong
unilaterally rescinded the joint venture agreement by limiting his
investment from P32.5 Million to P5 Million.[29] Thus, it was
Fong who first breached the contract, not he. Consequently,
Fong’s failure to comply with his undertaking disqualified him
from seeking the agreement’s rescission.[30]
The Court’s Ruling
We resolve to GRANT the petition.
At the outset, the Court notes that the parties’ joint venture
agreement to incorporate a company that would hold the shares
of Danton and Bakcom and that would serve as the business
vehicle for their food enterprise, is a valid agreement. The failure
to reduce the agreement to writing does not affect its validity or
enforceability as there is no law or regulation which provides that
an agreement to incorporate must be in writing.
With this as premise, we now address the related issues raised
by the parties.
Page 18 of 27
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The body rather than the title of the complaint determines the
nature of the action.
A well-settled rule in procedural law is that the allegations in the
body of the pleading or the complaint, and not its title, determine
the nature of an action.[31]
An examination of Fong’s complaint shows that although it was
labeled as an action for a sum of money and damages, it was
actually a complaint for rescission. The following allegations in
the complaint support this finding:
9. Notwithstanding the aforesaid remittances, defendant failed
for an unreasonable length of time to submit a valuation of the
equipment of D.C. Danton and Bakcom x x x.
10. Worse, despite repeated reminders from plaintiff, defendant
failed to accomplish the organization and incorporation of the
proposed holding company, contrary to his representation to
promptly do so.
xxxx
17. Considering that the incorporation of the proposed holding
company failed to materialize, despite the lapse of one year and
four months from the time of subscription, plaintiff has the right to
revoke his pre-incorporation subscription. Such revocation
entitles plaintiff to a refund of the amount of P5,000,000.00 he
remitted to defendant, representing advances made in favor of
defendant to be considered as payment on plaintiff’s subscription
to the proposed holding company upon its incorporation, plus
interest from receipt by defendant of said amount until fully paid.
[Emphasis supplied.]
Fong’s allegations primarily pertained to his cancellation of their
verbal agreement because Dueñas failed to perform his
obligations to provide verifiable documents on the valuation of
the Danton’s and Bakcom’s shares, and to incorporate the
proposed corporation. These allegations clearly show that what
Fong sought was the joint venture agreement’s rescission.
As a contractual remedy, rescission is available when one of the
parties substantially fails to do what he has obligated himself to
perform.[32] It aims to address the breach of faith and the
violation of reciprocity between two parties in a contract.[33]
Under Article 1191 of the Civil Code, the right of rescission is
inherent in reciprocal obligations, viz:
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. [Emphasis supplied.]
Dueñas submits that Fong’s prayer for the return of his cash
contribution supports his claim that Fong’s complaint is an action
for collection of a sum of money. However, Dueñas failed to
appreciate that the ultimate effect of rescission is to restore the
parties to their original status before they entered in a contract.
As the Court ruled in Unlad Resources v. Dragon:[34]
Rescission has the effect of “unmaking a contract, or its undoing
from the beginning, and not merely its termination.” Hence,
rescission creates the obligation to return the object of the
contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore. To
rescind is to declare a contract void at its inception and to put an
end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but
to abrogate it from the beginning and restore the parties to their
relative positions as if no contract has been made.
Accordingly, when a decree for rescission is handed down, it is
the duty of the court to require both parties to surrender that
which they have respectively received and to place each other
as far as practicable in his original situation.[35] [Emphasis
supplied.]
In this light, we rule that Fong’s prayer for the return of his
contribution did not automatically convert the action to a
complaint for a sum of money. The mutual restitution of the

parties’ original contributions is only a necessary consequence of
their agreement’s rescission.
Rescission under Art. 1191 is applicable in the present case
Reciprocal obligations are those which arise from the same
cause, in which each party is a debtor and a creditor of the other,
such that the obligation of one is dependent on the obligation of
the other.[36]
Fong and Dueñas’ execution of a joint venture agreement
created between them reciprocal obligations that must be
performed in order to fully consummate the contract and achieve
the purpose for which it was entered into.
Both parties verbally agreed to incorporate a company that
would hold the shares of Danton and Bakcom and which, in turn,
would be the platform for their food business. Fong obligated
himself to contribute half of the capital or P32.5 Million in cash.
On the other hand, Dueñas bound himself to shoulder the other
half by contributing his Danton and Bakcom shares, which were
allegedly also valued at P32.5 Million. Aside from this, Dueñas
undertook to process Alliance’s incorporation and registration
with the SEC.
When the proposed company remained unincorporated by
October 30, 1997, Fong cancelled the joint venture agreement
and demanded the return of his P5 Million contribution.
For his part, Dueñas explained that he could not immediately
return the P5 Million since he had invested it in his two
companies. He found nothing irregular in this as eventually, the
Danton and Bakcom shares would form part of Alliance’s capital.
Dueñas’ assertion is erroneous.
The parties never agreed that Fong would invest his money in
Danton and Bakcom. Contrary to Dueñas’ submission, Fong’s
understanding was that his money would be applied to his
shareholdings in Alliance. As shown in Fong’s June 13, 1997
letter, this fact remained to be true even after he limited his
contribution to P5 Million, viz:
Dear Jojit,
Enclosed is our check for P919,534.80 representing our
additional advances to subject company in process of
incorporation. This will make our total advances to date
amounting to P5 million.[37] [Emphasis supplied.]
Moreover, under the Corporation Code, before a stock
corporation may be incorporated and registered, it is required
that at least twenty five percent (25%) of its authorized capital
stock as stated in the articles of incorporation, be first subscribed
at the time of incorporation, and at least twenty five percent
(25%) of the total subscription, be paid upon subscription.[38]
To prove compliance with this requirement, the SEC requires the
incorporators to submit a treasurer’s affidavit and a certificate of
bank deposit, showing the existence of an amount compliant with
the prescribed capital subscription.[39]
In this light, we conclude that Fong’s cash contributions play an
indispensable part in Alliance’s incorporation. The process
necessarily requires the money not only to fund Alliance’s
registration with the SEC but also its initial capital subscription.
This is evident in the receipts which Dueñas himself executed,
one of which provides:
I, JOSE V. DUEÑAS, hereby acknowledge the receipt on
January 14, 1997 of the amount of One Million Pesos (Php
1,000,000.00) Check No. 118 118 7014 Metro Bank, Pasong
Tamo branch dated January 13, 1997 from Mr. George Fong,
which amount shall constitute an advance of the contribution or
investment of Mr. Fong in the joint venture which he and I are in
the process of organizing. Specifically, this amount will be
considered as part of Mr. Fong’s subscription to the shares of
Page 19 of 27
Obligations and Contracts
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stock of the joint venture company which we will incorporate to
embody and carry out our joint venture.[40] [Emphasis supplied.]
Thus, Dueñas erred when he invested Fong’s contributions in his
two companies. This money should have been used in
processing Alliance’s registration. Its incorporation would not
materialize if there would be no funds for its initial capital.
Moreover, Dueñas represented that Danton and Bakcom’s
shares were valued at P32.5 Million. If this was true, then there
was no need for Fong’s additional P5 Million investment, which
may possibly increase the value of the Danton and Bakcom
shares.
Under these circumstances, the Court agrees with the trial court
that Dueñas violated his agreement with Fong. Aside from
unilaterally applying Fong’s contributions to his two companies,
Dueñas also failed to deliver the valuation documents of the
Danton and Bakcom shares to prove that the combined values of
their capital contributions actually amounted to P32.5 Million.
These acts led to Dueñas’ delay in incorporating the planned
holding company, thus resulting in his breach of the contract.
On this basis, Dueñas’ breach justified Fong’s rescission of the
joint venture agreement under Article 1191. As the Court ruled in
Velarde v. Court of Appeals:[41]
The right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the
other party who violates the reciprocity between them. The
breach contemplated in the said provision is the obligor’s failure
to comply with an existing obligation. When the obligor cannot
comply with what is incumbent upon it, the obligee may seek
rescission and in the absence of any just cause for the court to
determine the period of compliance, the court shall decree the
rescission.
In the present case, private respondents validly exercised their
right to rescind the contract, because of the failure of petitioners
to comply with their obligation to pay the balance of the purchase
price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently
gave rise to private respondents’ right to rescind the same in
accordance with law.[42] [Emphasis supplied.]
However, the Court notes that Fong also breached his obligation
in the joint venture agreement.
In his June 13, 1997 letter, Fong expressly informed Dueñas that
he would be limiting his cash contribution from P32.5 Million to
P5 Million because of the following reasons which we quote
verbatim:
First, we were faced with the ‘personal’ factor which was
explained to you one time. This has caused us to turn down a
number of business opportunities;
Secondly, since last year, the operation of Century 21 has been
taking more time from us than anticipated. That is why we
decided to relinquish our original plan to manage and operate
‘Boboli’ knowing this limitation. For us, it does not make sense
anymore to go for a significant shareholding when we cannot be
hands on and participate actively as originally planned.[43] x x x.
Although these reasons appear to be valid, they do not erase the
fact that Fong still reneged on his original promise to contribute
P32.5 Million. The joint venture agreement was not reduced to
writing and the evidence does not show if the parties agreed on
valid causes that would justify the limitation of the parties’ capital
contributions. Their only admission was that they obligated
themselves to contribute P32.5 Million each.
Hence, Fong’s diminution of his capital share to P5 Million also
amounted to a substantial breach of the joint venture agreement,
which breach occurred before Fong decided to rescind his
agreement with Dueñas. Thus, Fong also contributed to the non-
incorporation of Alliance that needed P65 Million as capital to
operate.

Fong cannot entirely blame Dueñas since the substantial
reduction of his capital contribution also greatly impeded the
implementation of their agreement to engage in the food
business and to incorporate a holding company for it.
As both parties failed to comply with their respective reciprocal
obligations, we apply Article 1192 of the Civil Code, which
provides:
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first infractor shall be equitably
tempered by the courts. If it cannot be determined which of the
parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. [Emphasis
supplied.]
Notably, the Court is not aware of the schedule of performance
of the parties’ obligations since the joint venture agreement was
never reduced to writing. The facts, however, show that both
parties began performing their obligations after executing the
joint venture agreement. Fong started remitting his share while
Dueñas started processing the Boboli international license for
the proposed corporation’s food business.
The absence of a written contract renders the Court unsure as to
whose obligation must be performed first. It is possible that the
parties agreed that Fong would infuse capital first and Dueñas’
submission of the documents on the Danton and Bakcom shares
would just follow. It could also be the other way around. Further,
the parties could have even agreed to simultaneously perform
their respective obligations.
Despite these gray areas, the fact that both Fong and Dueñas
substantially contributed to the non-incorporation of Alliance and
to the failure of their food business plans remains certain.
As the Court cannot precisely determine who between the
parties first violated the agreement, we apply the second part of
Article 1192 which states: “if it cannot be determined which of the
parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.”
In these lights, the Court holds that the joint venture agreement
between Fong and Dueñas is deemed extinguished through
rescission under Article 1192 in relation with Article 1191 of the
Civil Code. Dueñas must therefore return the P5 Million that
Fong initially contributed since rescission requires mutual
restitution.[44] After rescission, the parties must go back to their
original status before they entered into the agreement. Dueñas
cannot keep Fong’s contribution as this would constitute unjust
enrichment.
No damages shall be awarded to any party in accordance with
the rule under Article 1192 of the Civil Code that in case of
mutual breach and the first infractor of the contract cannot
exactly be determined, each party shall bear his own damages.
WHEREFORE, premises considered, we hereby GRANT the
petition and reverse the September 16, 2008 decision and
December 8, 2008 resolution of the Court of Appeals in CA-G.R.
CV No. 88396. Respondent Jose V. Dueñas is ordered to
RETURN Five Million Pesos to petitioner George C. Fong. This
amount shall incur an interest of six percent (6%) per annum
from the date of finality of this judgment until fully paid.[45] The
parties’ respective claims for damages are deemed
EXTINGUISHED and each of them shall bear his own damages.
SO ORDERED.
Carpio, (Chairperson), Del Castillo, Leonen, and Jardeleza,* JJ.,
concur.
* Designated as Additional Member in lieu of Associate Justice
Jose Catral Mendoza, per Raffle dated June 10, 2015.
Page 20 of 27
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FOOTNOTES
Boboli is an international food enterprise.
Nolasco v Culapo
source: http://www.lawyerly.ph
DIVISION
[ GR No. 210215, Dec 09, 2015 ]
ROGELIO S. NOLASCO v. CELERINO S. CUERPO
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] are the
Decision[2] dated June 17, 2013 and the Resolution[3] dated
November 19, 2013 of the Court of Appeals (CA) in CA-G.R. CV
No. 95353, which affirmed in toto the Decision[4] dated March 1,
2010 of the Regional Trial Court of Quezon City, Branch 81
(RTC) in Civil Case No. Q-08-63860 ordering the rescission of
the Contract to Sell executed by herein parties and the return of
the amounts already paid by respondents Celerino S. Cuerpo,
Joselito Encabo, Joseph Ascutia, and Domilo Lucenario
(respondents) to petitioners Rogelio S. Nolasco, Nicanora N.
Guevara, Leonarda N. Elpedes, Heirs of Arnulfo S. Nolasco, and
Remedios M. Nolasco, represented by Elenita M. Nolasco
(petitioners), as well as the remaining post-dated checks issued
by respondent Celerino S. Cuerpo representing the remaining
monthly amortizations, all in connection with the said contract.
The Facts
On July 22, 2008, petitioners and respondents entered into a
Contract to Sell[5] (subject contract) over a 165,775-square
meter parcel of land located in Barangay San Isidro, Rodriguez,
Rizal covered by Original Certificate of Title No. 152 (subject
land).[6] The subject contract provides, inter alia, that: (a) the
consideration for the sale is P33,155,000.00 payable as follows:
down payment in the amount of P11,604,250.00 inclusive of the
amount of P2,000,000.00 previously paid by respondents as
earnest money/reservation fee, and the remaining balance of
P21,550,750.00 payable in 36 monthly installments, each in the
amount of P598,632.00 through post-dated checks; (b) in case
any of the checks is dishonored, the amounts already paid shall
be forfeited in petitioners' favor, and the latter shall be entitled to
cancel the subject contract without judicial recourse in addition to
other appropriate legal action; (c) respondents are not entitled to
possess the subject land until full payment of the purchase price;
(d) petitioners shall transfer the title over the subject land from a
certain Edilberta N. Santos to petitioners' names, and, should
they fail to do so, respondents may cause the said transfer and
charge the costs incurred against the monthly amortizations; and
(e) upon full payment of the purchase price, petitioners shall
transfer title over the subject land to respondents.[7] However,
respondents sent petitioners a letter[8] dated November 7, 2008
seeking to rescind the subject contract on the ground of financial
difficulties in complying with the same. They also sought the
return of the amount of P12,202,882.00 they had paid to
petitioners.[9] As their letter went unheeded, respondents filed
the instant complaint[10] for rescission before the RTC.[11]
In their defense,[12] petitioners countered that respondents' act
is a unilateral cancellation of the subject contract as the former
did not consent to it. Moreover, the ground of financial difficulties
is not among the grounds provided by law to effect a valid
rescission.[13]
In view of petitioners' failure to file the required pre-trial brief,
they were declared "as in default" and, consequently,
respondents were allowed to present their evidence ex-parte.[14]
The RTC Ruling

In a Decision[15] dated March 1, 2010, the RTC ruled in favor of
respondents and, accordingly, ordered: (a) the rescission of the
subject contract; and (b) the return of the amounts already paid
by respondents to petitioners, as well as the remaining post-
dated checks issued by respondent Celerino S. Cuerpo
representing the remaining monthly amortizations.[16]
It found petitioners to have substantially breached paragraph 7 of
the subject contract which states that "[t]he [petitioners] shall,
within ninety (90) days from the signing of [the subject contract]
cause the completion of the transfer of registration of title of the
property subject of [the said contract], from Edilberta N. Santos
to their names, at [petitioners'] own expense."[17] As such,
respondents were entitled to rescission under Article 1191 of the
Civil Code.[18]
Dissatisfied, petitioners appealed[19] to the CA.
The CA Ruling
In a Decision[20] dated June 17, 2013, the CA affirmed the RTC
ruling. It agreed with the RTC that petitioners substantially
breached paragraph 7 of the subject contract when they did not
effect the transfer of the subject land from Edilberta N. Santos to
petitioners' names within ninety (90) days from the execution of
said contract, thus, entitling respondents to rescind the same. In
this relation, the CA held that under the present circumstances,
the forfeiture of the payments already made by respondents to
petitioners is clearly improper and unwarranted.[21]
Aggrieved, petitioners moved for reconsideration,[22] which was
denied in a Resolution[23] dated November 19, 2013; hence, this
petition.
The Issue Before the Court
The core issue for the Court's resolution is whether or not the CA
correctly affirmed the rescission of the subject contract and the
return of the amounts already paid by respondents to petitioners,
as well as the remaining post-dated checks issued by
respondent Celerino S. Cuerpo representing the remaining
monthly amortizations.
The Court's Ruling
The petition is partially meritorious.
In reciprocal obligations, either party may rescind - or more
appropriately, resolve - the contract upon the other party's
substantial breach of the obligation/s he had assumed
thereunder.[24] This is expressly provided for in Article 1191 of
the Civil Code which states:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with Articles
1385 and 1388 and the Mortgage Law.
"More accurately referred to as resolution, the right of rescission
under Article 1191 is predicated on a breach of faith that violates
the reciprocity between the parties to the contract. This
retaliatory remedy is given to the contracting party who suffers
the injurious breach on the premise that it is 'unjust that a party
be held bound to fulfill his promises when the other violates
his.'"[25] Note that the rescission (or resolution) of a contract will
not be permitted for a slight or casual breach, but only for such
Page 21 of 27
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substantial and fundamental violations as would defeat the very
object of the parties in making the agreement.[26] Ultimately, the
question of whether a breach of contract is substantial depends
upon the attending circumstances.[27]
In the instant case, both the RTC and the CA held that
petitioners were in substantial breach of paragraph 7 of the
subject contract as they did not cause the transfer of the property
to their names from one Edilberta N. Santos within 90 days from
the execution of said contract.[28]
The courts a quo are mistaken.
Paragraph 7 of the subject contract state in full:
7. [Petitioners] shall, within ninety (90) days from the signing of
[the subject contract], cause the completion of the transfer of
registration of title of the property subject of [the subject
contract], from Edilberta N. Santos to their names, at
[petitioners'] own expense. Failure on the part of [petitioners] to
undertake the foregoing within the prescribed period shall
automatically authorize [respondents] to undertake the same in
behalf of [petitioners] and charge the costs incidental to the
monthly amortizations upon due date. (Emphasis and
underscoring supplied)
A plain reading of paragraph 7 of the subject contract reveals
that while the RTC and the CA were indeed correct in finding that
petitioners failed to perform their obligation to effect the transfer
of the title to the subject land from one Edilberta N. Santos to
their names within the prescribed period, said courts erred in
concluding that such failure constituted a substantial breach that
would entitle respondents to rescind (or resolve) the subject
contract. To reiterate, for a contracting party to be entitled to
rescission (or resolution) in accordance with Article 1191 of the
Civil Code, the other contracting party must be in substantial
breach of the terms and conditions of their contract. A substantial
breach of a contract, unlike slight and casual breaches thereof, is
a fundamental breach that defeats the object of the parties in
entering into an agreement.[29] Here, it cannot be said that
petitioners' failure to undertake their obligation under paragraph
7 defeats the object of the parties in entering into the subject
contract, considering that the same paragraph provides
respondents contractual recourse in the event of petitioners' non-
performance of the aforesaid obligation, that is, to cause such
transfer themselves in behalf and at the expense of petitioners.
Indubitably, there is no substantial breach of paragraph 7 on the
part of petitioners that would necessitate a rescission (or
resolution) of the subject contract. As such, a reversal of the
rulings of the RTC and the CA is in order.
The foregoing notwithstanding, the Court cannot grant
petitioners' prayer in the instant petition to order the cancellation
of the subject contract and the forfeiture of the amounts already
paid by respondents on account of the latter's failure to pay its
monthly amortizations,[30] simply because in their Answer with
Compulsory Counterclaim and Motion for Summary
Judgment[31] filed before the RTC, petitioners neither prayed for
this specific relief nor argued that they were entitled to the same.
Worse, petitioners were declared "as in default" for failure to file
the required pre-trial brief and, thus, failed to present any
evidence in support of their defense.[32] It is settled that "[w]hen
a party deliberately adopts a certain theory and the case is
decided upon that theory in the court below, he will not be
permitted to change the same on appeal, because to permit him
to do so would be unfair to the adverse party."[33] The Court's
pronouncement in Peña v. Spouses Tolentino[34] is instructive
on this matter, to wit:
Indeed, the settled rule in this jurisdiction, according to Mon v.
Court of Appeals, is that a party cannot change his theory of the
case or his cause of action on appeal. This rule affirms that
"courts of justice have no jurisdiction or power to decide a
question not in issue." Thus, a judgment that goes beyond the
issues and purports to adjudicate something on which the court
did not hear the parties is not only irregular but also extrajudicial
and invalid. The legal theory under which the controversy was

heard and decided in the trial court should be the same theory
under which the review on appeal is conducted. Otherwise,
prejudice will result to the adverse party. We stress that points of
law, theories, issues, and arguments not adequately brought to
the attention of the lower court will not be ordinarily considered
by a reviewing court, inasmuch as they cannot be raised for the
first time on appeal. This would be offensive to the basic rules of
fair play, justice, and due process.[35] (Emphasis and
underscoring supplied)
WHEREFORE, the petition is PARTIALLY GRANTED.
Accordingly, the Decision dated June 17, 2013 and the
Resolution dated November 19, 2013 of the Court of Appeals in
CA-G.R. CV No. 95353 are hereby REVERSED and SET
ASIDE. The Contract to Sell executed by the parties on July 22,
2008 remains VALID and SUBSISTING.
SO ORDERED.
Sereno, C. J., (Chairperson), Leonardo-De Castro, Bersamin,
and Perez, JJ., concur.
ASB Realty v Ortigas
[source: http://www.lawyerly.ph
DIVISION
[ GR No. 202947, Dec 09, 2015 ]
ASB REALTY CORPORATION v. ORTIGAS
DECISION
BERSAMIN, J.:
This appeal seeks the review and reversal of the amended
decision promulgated on January 9, 2012,[1] whereby the Court
of Appeals (CA) disposed thusly:
WHEREFORE, premises considered, judgment is rendered:
1. Granting the appeal of plaintiff-appellant and herein movant
Ortigas and Company Limited Partnership, and reversing the
Decision of the court a quo dated December 14, 2009;
2. Rescinding the June 24, 1994 Deed of Sale between Ortigas
and Company Limited Partnership and Amethyst Pearl
Corporation in view of the material breached (sic) thereof by
AMETHYST;
3. Ordering ASB Realty Corporation, by way of mutual
restitution, the RECONVEYANCE to ORTIGAS of the subject
property covered by TCT No. PT-105797 upon payment by
ORTIGAS to ASB of the amount of Two Million Twenty Four
Thousand Pesos (PhP 2,024,000.00) plus legal interest at the
rate of 6% per annum from the time of the finality of this
judgment until the same shall have been fully paid; and
4. Ordering the Register of Deeds of Pasig City to cancel TCT
No. PT-105797 and issue a new title over the subject property
under the name of ORTIGAS & COMPANY LIMITED
PARTNERSHIP.
No pronouncement as to cost.
SO ORDERED.[2]
The petitioner also assails the resolution promulgated on July 26,
2012,[3] whereby the CA denied its Motion for Reconsideration.
Antecedents
On June 29, 1994, respondent Ortigas & Company Limited
Partnership (Ortigas) entered into a Deed of Sale with Amethyst
Pearl Corporation (Amethyst) involving the parcel of land with an
area of 1,012 square meters situated in Barrio Oranbo, Pasig
City and registered under Transfer Certificate of Title (TCT) No.
65118 of the Register of Deeds of Rizal[4] for the consideration
Page 22 of 27
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Resolution/Rescission | Art. 1191
of P2,024,000.00. The Deed of Sale[5] contained the following
stipulations, among others:
COVENANTS, CONDITIONS AND RESTRICTIONS
This lot has been segregated by ORTIGAS from its subdivisions
to form part of a zonified BUILDING AREA pursuant to its
controlled real estate development project and subdivision
scheme, and is subject to the following covenants which form
part of the consideration of ORTIGAS' sale to VENDEE and its
assigns, namely:
xxxx
B. BUILDING WORKS AND ARCHITECTURE:
1. The building to be constructed on the lot shall be of reinforced
concrete, cement hollow blocks and other high-quality materials
and shall be of the following height of not more than: fourteen
(14) storeys plus one penthouse.
xxxx
L. SUBMISSION OF PLANS:
The final plans and specifications of the said building shall be
submitted to ORTIGAS for approval not later than six (6) months
from date hereof. Should ORTIGAS object to the same, it shall
notify and specify to the VENDEE in writing the amendments
required to conform with its building restrictions and VENDEE
shall submit the amended plans within sixty (60) days from
receipt of said notice.
M. CONSTRUCTION AND COMPLETION OF BUILDING:
The VENDEE shall finish construction of its building within four
(4) years from December 31, 1991.[6]
As a result, the Register of Deeds of Rizal cancelled TCT No.
65118 and issued TCT No. PT-94175 in the name of
Amethyst.[7] The conditions contained in the Deed of Sale were
also annotated on TCT No. PT-94175 as encumbrances.[8]
On December 28, 1996, Amethyst assigned the subject property
to its sole stockholder, petitioner ASB Realty Corporation (the
petitioner), under a so-called Deed of Assignment in Liquidation
in consideration of 10,000 shares of the petitioner's outstanding
capital stock.[9] Thus, the property was transferred to the
petitioner free from any liens or encumbrances except those duly
annotated on TCT No. PT-94175.[10] The Register of Deeds of
Rizal cancelled TCT No. PT-94175 and issued TCT No. PT-
105797 in the name of the petitioner with the same
encumbrances annotated on TCT No. PT-94175.[11]
On July 7, 2000, Ortigas filed its complaint for specific
performance against the petitioner,[12] which was docketed as
Civil Case No. 67978 of the Regional Trial Court (RTC) in Pasig
City.[13] Ortigas amended the complaint, and alleged,[14]
among others, that:
5. Defendant has violated the terms of the Deed of Absolute Sale
(Annex "A") in the following manner:
a. While the lot may be used only "for office and residential
purposes", defendant introduced constructions on the property
which are commercial in nature, like restaurants, retail stores
and the like (see par. A, Deed of Absolute Sale, Annex "A").
b. The commercial structures constructed by defendant on the
property extend up to the boundary lines of the lot in question
violating the setbacks established in the contract (see par. B.A.,
ibid).
c. Defendant likewise failed to submit the final plans and
specifications of its proposed building not later than six (6)
months from June 29, 1994 and to complete construction of the
same within four (4) years from December 31, 1991. (see pars. L
and M, ibid).

d. Being situated in a first-class office building area, it was
agreed that no advertisements or any kind of commercial signs
shall be allowed on the lot or the improvements therein but this
was violated by defendant when it put up commercial signs and
advertisements all over the area, (see par. F, ibid).
6. Any of the afore-described violations committed by the
defendant empower the plaintiff to sue under parangraph "N.
Unilateral Cancellation", plaintiff may have the Deed of Absolute
Sale (Annex "A") cancelled and the property reverted to it by
paying the defendant the amount it has paid less the items
indicated therein.[15]
For reliefs, Ortigas prayed for the reconveyance of the subject
property, or, alternatively, for the demolition of the structures and
improvements thereon, plus the payment of penalties, attorney's
fees and costs of suit.[16]
During the pendency of the proceedings in the RTC, the
petitioner amended its Articles of Incorporation to change its
name to St. Francis Square Realty Corporation.[17]
After trial on the merits, the RTC rendered its decision on
December 14, 2009,[18] and dismissed the complaint, pertinently
holding as follows:
Ortigas sold the property [to] Amethyst on 29 June 1994.
Amethyst was supposed to finish construction on 31 December
1995. Yet, up to the time the property was transferred to ASB on
28 December 1996, Ortigas never initiated any action against
Amethyst to enforce said provision. Ortigas is therefore guilty of
laches or negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled
to assert it either has abandoned it or declined to assert it. (Tijam
v. Sibonghanoy, L-21450, 15 April 1968, 23 SCRA 29).
It is worth mentioning that the restrictions annotated in TCT No.
94175 (in the name of Amethyst Pearl Corporation) and TCT No.
PT-105797 (in the name of ASB) repeatedly and consistently
refer to the VENDEE. The term VENDEE in the said restrictions
obviously refer to Amethyst Pearls Corporation considering the
fact that the date referred to in Paragraph N thereof
(Construction and Completion of Building), which is four (4)
years from December 31, 1991, obviously refer to the plaintiffs
VENDEE Amethyst Pearl Corporation. Definitely, it cannot refer
to the defendant ASB which is not a vendee of the plaintiff.
Therefore, all references to VENDEE in the restrictions evidently
refer to Amethyst Pearl Corporation, the VENDEE in the sale
from the plaintiff. Such explanation is more consistent with logic
than the plaintiffs convoluted assertions that the said restrictions
apply to the defendant ASB.
Reconveyance of the property to Ortigas necessarily implies
rescission of the sale or transfer from Amethyst to ASB and from
Ortigas to Amethyst. But Amethyst was not made a party to the
case. Reconveyance of the property to the original seller
(Ortigas) applies only on the sale to the original vendee
(Amethyst) and not to subsequent vendees to whom the property
was sold (Ayala Corp. v. Rosa Diana Realty and Dev. Corp.,
G.R. No. 134284, Dec. 1, 2000, 346 SCRA 663).
The non-compliance by the plaintiff with the requisites of its own
restrictions further proves that it had no intention whatsoever to
enforce or implement the same. If at all, this evinces an
afterthought of the plaintiff to belatedly and unjustifiably single
out the defendant for alleged non compliance of the said
restrictions which are not applicable to it anyway.
WHEREFORE, foregoing premises considered, the present
complaint is hereby dismissed for lack of basis.
SO ORDERED.[19]
Ortigas appealed to the CA, which initially affirmed the RTC
under the decision promulgated on September 6, 2011,[20]
ruling thusly:
x x x x ORTIGAS can no longer enforce the said restrictions as
against ASB.
Page 23 of 27
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The "Covenants, Conditions and Restrictions" of ORTIGAS with
respect to the property clearly states the following purpose:
"This lot has been segregated by ORTIGAS from its subdivisions
to form part of a zonified BUILDING AREA pursuant to its
controlled real estate development project and subdivision
scheme. x x x"
However, it appears from the circumstances obtaining in this
case that ORTIGAS failed to pursue the aforequoted purpose. It
never filed a complaint against its vendee, AMETHYST,
notwithstanding that it required the latter to complete
construction of the building within four (4) years from the
execution of the Deed of Sale. Neither did it make a demand to
enforce the subject restriction. Moreover, while it imposed a
restriction on the registration and issuance of title in the name of
the vendee under Paragraph "P" on "Registration of Sale", to wit:
"P. REGISTRATION OF SALE:
The VENDEE hereby agrees that, for the time being, this Deed
will not be registered and that its title shall not be issued until the
satisfactory construction of the contemplated Office Building and
VENDEE's compliance with all conditions therein. x x x"
AMETHYST was nonetheless able to procure the title to the
property in its name, and subsequently, assigned the same to
ASB.
Besides, records show that there are registered owner-
corporations of several properties within the Ortigas area, where
the subject property is located, that have likewise failed to
comply with the restriction on building construction
notwithstanding the fact of its annotation on the titles covering
their properties. In fact, the tax declarations covering these
properties in the respective names of UNIMART INC.,
CHAILEASE DEVELOPMENT CO. INC., CANOGA PARK
DEVELOPMENT CORPORATION, and MAKATI
SUPERMARKET CORPORATION reveal that no improvements
or buildings have been erected thereon.
Notwithstanding such blatant non-compliance, however, records
are bereft of evidence to prove that ORTIGAS took steps to
demand observance of the said restriction from these
corporations, or that it opted to institute any case against them in
order to enforce its rights as seller. Thus, while ORTIGAS
effectively tolerated the non-compliance of these other
corporations, it nonetheless proceeded with the filing of the
Complaint a quo against ASB, seeking the rescission of the
original Deed of Sale on the ground of non-compliance of the
very same restriction being violated by other property owners
similarly situated.
On the basis of the foregoing acts or omissions of ORTIGAS,
and the factual milieu of the present case, it cannot be pretended
that it failed to actively pursue the attainment of its objective of
having a "controlled real estate development project and
subdivision scheme". The Court thus concurs with the
ratiocinations of the RTC when it posited that the restrictions
imposed by ORTIGAS on ASB have been "rendered obsolete
and inexistent" for failure of ORTIGAS to enforce the same
uniformly and indiscriminately against all non-complying property
owners. If the purpose of ORTIGAS for imposing the restrictions
was for its "controlled real estate development project and
subdivision scheme", then it should have sought compliance
from all property owners that have violated the restriction on
building completion. As things stand, ASB would appear to have
been singled out by ORTIGAS, rendering the present action
highly suspect and a mere afterthought.
Consequently, while it may be true that ASB was bound by the
restrictions annotated on its title, specifically the restriction on
building completion, ORTIGAS is now effectively estopped from
enforcing the same by virtue of its inaction and silence.
xxxx

In this case, ORTIGAS acquiesced to the conveyance of the
property from AMETHYST to ASB with nary a demand,
reservation or complaint for the enforcement of the restriction on
building construction. It allowed the four-year period within which
to construct a building to lapse before it decided that it wanted,
after all, to enforce the restriction, which cannot be allowed lest
the property rights of the registered owner, ASB, be
transgressed. Such a silence or inaction, which in effect led ASB
to believe that ORTIGAS no longer sought the enforcement of
the restrictions on the contract, therefore bars ORTIGAS from
enforcing the restriction it imposed on the subject property.
xxxx
WHEREFORE, premises considered, the instant appeal is
DENIED. The assailed Decision is hereby AFFIRMED.
SO ORDERED.[21]
Acting on Ortigas' Motion for Reconsideration, however, the CA
promulgated its assailed amended decision on January 9,
2012,[22] whereby it reversed the decision promulgated on
September 6, 2011. It observed and ruled as follows:
It is not disputed that AMETHYST failed to finish construction
within the period stated in the 1994 Deed of Sale. As correctly
pointed out by ORTIGAS, in accordance with Article 1144 of the
Civil Code, the prescriptive period within which to enforce
remedies under the 1994 Deed of sale is ten (10) years from the
time the right of action accrues.
ORTIGAS, therefore, had ten (10) years from 31 December 1995
or until 31 December 2005 within which to file suit to enforce the
restriction. ORTIGAS filed the present complaint on 07 July 2000
well within the prescriptive period for filing the same.
ASB contends that it could not have complied with the particular
restriction to finish construction of the building as the period to
finish the same had already lapsed by the time ASB acquired the
property by way of a Deed of Assignment in Liquidation between
AMETHYST and ASB on 28 December 1996. We hold, however,
that the mere assignment or transfer of the subject property from
AMETHYST to ASB does not serve to defeat the vested right of
ORTIGAS to avail of remedies to enforce the subject restriction
within the applicable prescriptive period.
xxxx
As to the argument that the inaction of ORTIGAS with respect to
other non-compliant properties in the Ortigas area is tantamount
to consenting to such non-compliance, it must be mentioned that
it is the sole prerogative and discretion of Ortigas to initiate any
action against the violators of the deed restrictions. This Court
cannot interfere with the exercise of such prerogative/discretion.
Furthermore, We cannot sustain estoppel in doubtful inference.
Absent the conclusive proof that its essential elements are
present, estoppel must fail. Estoppel, when misapplied, becomes
an effective weapon to accomplish an injustice, inasmuch as it
shuts a man's mouth from speaking the truth.[23]
By its resolution promulgated on July 26, 2012, the CA denied
the petitioner's Motion for Reconsideration[24] for being filed out
of time.[25]
Issues
Hence, this appeal in which ASB submits: (1) that its Motion for
Reconsideration vis-a-vis the CA's amended decision was filed
on time; and (2) that the amended decision promulgated on
January 9, 2012 by CA be reversed and set aside, and the
decision promulgated on September 6, 2011 be reinstated.[26]
The petitioner essentially seeks the resolution of the issue of
whether or not Ortigas validly rescinded the Deed of Sale due to
the failure of Amethyst and its assignee, the petitioner, to fulfil
the covenants under the Deed of Sale.
Ruling of the Court
Page 24 of 27
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Resolution/Rescission | Art. 1191
The petition for review is meritorious.
1.
Petitioner's motion for reconsideration vis-a-vis the amended
decision of the CA was timely filed
In denying the petitioner's Motion for Reconsideration, the CA
concluded as follows:
Per allegation of material dates, the Motion for Reconsideration
filed by Balgos Gumara & Jalandoni, co-counsel with Jose,
Mendoza & Associates, on January 30, 2012 appears to have
been filed on time. However, per registry return attached at the
back of p. 212 of the Rollo, the Motion for Reconsideration was
filed three (3) days late considering that the Amended Decision
was received by defendant appellee's counsel of record, Jose,
Mendoza & Associates, on January 12, 2012.[27]
The conclusion of the CA was unwarranted because the
petitioner established that its filing of the Motion for
Reconsideration was timely.
It is basic that the party who asserts a fact or the affirmative of
an issue has the burden of proving it.[28] Here, that party was
the petitioner. To comply with its burden, it attached to its petition
for review on certiorari: (1) the affidavit executed by Noel S.R.
Rose, Senior Partner of Jose, Mendoza & Associates attesting
that he had requested the postmaster of the Mandaluyong City
Post Office to certify the date when Jose, Mendoza & Associates
had received the copy of the amended decision of the CA;[29]
and (2) the certification issued on August 15, 2012 by
Postmaster Rufino C. Robles, and Letter Carrier, Jojo Salvador,
both of the Mandaluyong Central Post Office, certifying that
Registered Letter No. MVC 457 containing the copy of the
amended decision had been delivered to and received on
January 18, 2012 by Jose, Mendoza & Associates, through Ric
Ancheta.[30] It thereby sought to prove that it had received the
copy of the amended decision only on January 18, 2012, not
January 12, 2012 as stated in the registry return card on record.
Thus, it had until February 2, 2012, or 15 days from January 18,
2012, within which to file the same. In contrast, Ortigas relied
only on the copy of the registry return to refute the petitioner's
assertion.[31] Under the circumstances, the filing on January 30,
2012 of the Motion for Reconsideration was timely.
2.
Ortigas' action for rescission could not prosper
The petitioner reiterates that although the restrictions and
covenants imposed by Ortigas under the Deed of Sale with
Amethyst, particularly with regard to the construction of the
building, were similarly imposed on Ortigas' other buyers and
annotated on the latter's respective certificates of title,[32]
Ortigas never took to task such other buyers and Amethyst for
failing to construct the buildings within the periods contractually
imposed.[33] It maintains, therefore, that Ortigas slept on its
rights because it did not take any action against Amethyst during
the period prescribed in the Deed of Sale.[34] It argues that even
assuming that it was bound by the terms of the Deed of Sale,
certain circumstances occurred in the interim that rendered it
impossible for the petitioner to comply with the covenants
embodied in the Deed of Sale, namely: (1) the delay in the
petitioner's possession of the property resulted from the
complaint for forcible entry it had filed in the Metropolitan Trial
Court in Pasig City; (2) at the time the property was transferred
to the petitioner, the period within which to construct the building
had already expired without Ortigas enforcing the obligation
against Amethyst; and (3) the petitioner was placed under
corporate rehabilitation by the Securities and Exchange
Commission (SEC) by virtue of which a stay order was issued on
May 4, 2000.[35]
In contrast, Ortigas contends that it had the sole discretion
whether or not to commence any action against a party who

violated a restriction in the Deed of Sale;[36] and that it could not
be estopped because the Deed of Sale with Amethyst and the
deeds of sale with its other buyers contained a uniform provision
to the effect that "any inaction, delay or tolerance by OCLP
(Ortigas) in respect to violation of any of the covenants and
restrictions committed by these buyers shall not bar or estop the
institution of an action to enforce them."[37]
In asserting its right to rescind, Ortigas insists that the petitioner
was bound by the covenants of the Deed of Sale annotated on
TCT No. PT-10597 in the name of the petitioner;[38] and that the
petitioner's privity to the Deed of Sale was by virtue of its being
the successor-in-interest or assignee of Amethyst.[39]
After evaluating the parties' arguments and the records of the
case, the Court holds that Ortigas could not validly demand the
reconveyance of the property, or the demolition of the structures
thereon through rescission.
The Deed of Assignment in Liquidation executed between
Amethyst and the petitioner expressly stated, in part, that:
x x x x [T]he ASSIGNOR hereby assigns, transfers and conveys
unto the ASSIGNEE, its successors and assigns, free from any
lien or encumbrance except those that are duly annotated on the
Transfer Certificate of Title (TCT), one parcel of real property
(with improvements). x x x.
xxxx
The ASSIGNEE in turn in consideration of the foregoing
assignment of assets to it, hereby surrenders to ASSIGNOR,
Amethyst Pearl Corporation, Stock Certificate Nos. (006, 007,
008, 009, 010, 011), covering a total of TEN THOUSAND
SHARES (10,000) registered in the name of the ASSIGNEE and
its nominees in the books of ASSIGNOR, receipt of which is
hereby acknowledged, and in addition hereby releases
ASSIGNOR from any and all claims.[40]
The express terms of the Deed of Assignment in Liquidation,
supra, indicate that Amethyst transferred to the petitioner only
the tangible asset consisting of the parcel of land covered by
TCT No. PT-94175 registered in the name of Amethyst. By no
means did Amethyst assign the rights or duties it had assumed
under the Deed of Sale. The petitioner thus became vested with
the ownership of the parcel of land "free from any lien or
encumbrance except those that are duly annotated on the [title]"
from the time Amethyst executed the Deed of Assignment in
Liquidation.
Although the Deed of Sale stipulated that:
3. The lot, together with any improvements thereon, or any rights
thereto, shall not be transferred, sold or encumbered before the
final completion of the building as herein provided unless it is
with the prior express written approval of ORTIGAS.[41]
xxxx
The VENDEE hereby agrees that, for the time being, this Deed
will not be registered and that its title shall not be issued until the
satisfactory construction of the contemplated Office Building and
VENDEE's compliance with all conditions herein. x x x[42]
Ortigas apparently recognized without any reservation the
issuance of the new certificate of title in the name of Amethyst
and the subsequent transfer by assignment from Amethyst to the
petitioner that resulted in the issuance of the new certificate of
title under the name of the petitioner. As such, Ortigas was
estopped from assailing the petitioner's acquisition and
ownership of the property.
The application of estoppel was appropriate. The doctrine of
estoppel was based on public policy, fair dealing, good faith and
justice, and its purpose was to forbid a party to speak against his
own act or omission, representation, or commitment to the injury
of another to whom the act, omission, representation, or
commitment was directed and who reasonably relied thereon.
The doctrine sprang from equitable principles and the equities in
Page 25 of 27
Obligations and Contracts
Resolution/Rescission | Art. 1191
the case, and was designed to aid the law in the administration
of justice where without its aid injustice would result. Estoppel
has been applied by the Court wherever and whenever special
circumstances of the case so demanded.[43]
Yet, the query that persists is whether or not the covenants
annotated on TCT No. PT-10597 bound the petitioner to the
performance of the obligations assumed by Amethyst under the
Deed of Sale.
We agree with Ortigas that the annotations on TCT No. PT-
10597 bound the petitioner but not to the extent that rendered
the petitioner liable for the non-performance of the covenants
stipulated in the Deed of Sale.
Section 39 of Act No. 496 (The Land Registration Act) requires
that every person receiving a certificate of title in pursuance of a
decree of registration, and every subsequent purchaser of
registered land who takes a certificate of title for value in good
faith shall hold the same free of all encumbrances except those
noted on said certificate. An encumbrance in the context of the
provision is "anything that impairs the use or transfer of property;
anything which constitutes a burden on the title; a burden or
charge upon property; a claim or lien upon property."[44] It
denotes "any right to, or interest in, land which may subsist in
another to the diminution of its value, but consistent with the
passing of the fee by conveyance."[45] An annotation, on the
other hand, is "a remark, note, case summary, or commentary on
some passage of a book, statutory provision, court decision, of
the like, intended to illustrate or explain its meaning."[46] The
purpose of the annotation is to charge the purchaser or title
holder with notice of such burden and claims.[47] Being aware of
the annotation, the purchaser must face the possibility that the
title or the real property could be subject to the rights of third
parties.[48]
By acquiring the parcel of land with notice of the covenants
contained in the Deed of Sale between the vendor (Ortigas) and
the vendee (Amethyst), the petitioner bound itself to
acknowledge and respect the encumbrance. Even so, the
petitioner did not step into the shoes of Amethyst as a party in
the Deed of Sale. Thus, the annotation of the covenants
contained in the Deed of Sale did not give rise to a liability on the
part of the petitioner as the purchaser/successor-in-interest
without its express assumption of the duties or obligations
subject of the annotation. As stated, the annotation was only the
notice to the purchaser/successor-in-interest of the burden, claim
or lien subject of the annotation. In that respect, the Court has
observed in Garcia v. Villar:[49]
The sale or transfer of the mortgaged property cannot affect or
release the mortgage; thus the purchaser or transferee is
necessarily bound to acknowledge and respect the
encumbrance.
xxxx
x x x However, Villar, in buying the subject property with notice
that it was mortgaged, only undertook to pay such mortgage or
allow the subject property to be sold upon failure of the mortgage
creditor to obtain payment from the principal debtor once the
debt matures. Villar did not obligate herself to replace the debtor
in the principal obligation, and could not do so in law without the
creditors consent. Article 1293 of the Civil Code provides:
Art. 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the
rights mentioned in articles 1236 and 1237.
Therefore, the obligation to pay the mortgage indebtedness
remains with the original debtors Galas and Pingol. x x x
To be clear, contractual obligations, unlike contractual rights or
benefits, are generally not assignable. But there are recognized
means by which obligations may be transferred, such as by sub-
contract and novation. In this case, the substitution of the
petitioner in the place of Amethyst did not result in the novation

of the Deed of Sale. To start with, it does not appear from the
records that the consent of Ortigas to the substitution had been
obtained despite its essentiality to the novation. Secondly, the
petitioner did not expressly assume Amethyst's obligations under
the Deed of Sale, whether through the Deed of Assignment in
Liquidation or another document. And, thirdly, the consent of the
new obligor (i.e., the petitioner), which was as essential to the
novation as that of the obligee (i.e., Ortigas), was not
obtained.[50]
Even if we would regard the petitioner as the assignee of
Amethyst as far as the Deed of Sale was concerned, instead of
being the buyer only of the subject property, there would still be
no express or implied indication that the petitioner had assumed
Amethyst's obligations. In short, the burden to perform the
covenants under the Deed of Sale, or the liability for the non-
performance thereof, remained with Amethyst. As held in an
American case:
The mere assignment of a bilateral executory contract may not
be interpreted as a promise by the assignee to the assignor to
assume the performance of the assignor's duties, so as to have
the effect of creating a new liability on the part of the assignee to
the other party to the contract assigned. The assignee of the
vendee is under no personal engagement to the vendor where
there is no privity between them. (Champion v. Brown, 6 Johns.
Ch. 398; Anderson v. N. Y. & H. R. R. Co., 132 App. Div. 183,
187, 188; Hugel v. Habel, 132 App. Div. 327, 328.) The assignee
may, however, expressly or impliedly, bind himself to perform the
assignor's duties. This he may do by contract with the assignor
or with the other party to the contract. It has been held (Epstein
v. Gluckin, 233 N. Y. 490) that where the assignee of the vendee
invokes the aid of a court of equity in an action for specific
performance, he impliedly binds himself to perform on his part
and subjects himself to the conditions of the judgment
appropriate thereto. "He who seeks equity must do equity." The
converse of the proposition, that the assignee of the vendee
would be bound when the vendor began the action, did not follow
from the decision in that case. On the contrary, the question was
wholly one of remedy rather than right and it was held that
mutuality of remedy is important only so far as its presence is
essential to the attainment of the ends of justice. This holding
was necessary to sustain the decision. No change was made in
the law of contracts nor in the rule for the interpretation of an
assignment of a contract.
A judgment requiring the assignee of the vendee to perform at
the suit of the vendor would operate as the imposition of a new
liability on the assignee which would be an act of oppression and
injustice, unless the assignee had, expressly or by implication,
entered into a personal and binding contract with the assignor or
with the vendor to assume the obligations of the assignor.[51]
Is rescission the proper remedy for Ortigas to recover the subject
property from the petitioner?
The Civil Code uses rescission in two different contexts, namely:
(1) rescission on account of breach of contract under Article
1191; and (2) rescission by reason of lesion or economic
prejudice under Article 1381. Cogently explaining the differences
between the contexts of rescission in his concurring opinion in
Universal Food Corp. v. Court of Appeals,[52] the eminent
Justice J.B.L. Reyes observed:
x x x The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything;
other than the culpable breach of his obligations by the
defendant. This rescission is in principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his
promises when the other violates his, as expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda."
Hence, the reparation of damages for the breach is purely
secondary.
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Obligations and Contracts
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On the contrary, in the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated to the
existence of that prejudice, because it is the raison d'etre as well
as the measure of the right to rescind. Hence, where the
defendant makes good the damages caused, the action cannot
be maintained or continued, as expressly provided in Articles
1383 and 1384. But the operation of these two articles is limited
to the cases of rescission for lesion enumerated in Article 1381
of the Civil Code of the Philippines, and does not apply to cases
under Article 1191.
Based on the foregoing, Ortigas' complaint was predicated on
Article 1191 of the Civil Code, which provides:
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with articles
1385 and 1388 and the Mortgage Law.
Rescission under Article 1191 of the Civil Code is proper if one
of the parties to the contract commits a substantial breach of its
provisions. It abrogates the contract from its inception and
requires the mutual restitution of the benefits received;[53]
hence, it can be carried out only when the party who demands
rescission can return whatever he may be obliged to restore.
Considering the foregoing, Ortigas did not have a cause of action
against the petitioner for the rescission of the Deed of Sale.
Under Section 2, Rule 2 of the Rules of Court, a cause of action
is the act or omission by which a party violates a right of another.
The essential elements of a cause of action are: (1) a right in
favor of the plaintiff by whatever means and under whatever law
it arises or is created; (2) an obligation on the part of the
defendant not to violate such right; and (3) an act or omission on
the part of the defendant in violation of the right of the plaintiff or
constituting a breach of the obligation of the defendant to the
plaintiff for which the latter may maintain an action for recovery
of damages or other relief. It is only upon the occurrence of the
last element that the cause of action arises, giving the plaintiff
the right to file an action in court for the recovery of damages or
other relief.[54]
The second and third elements were absent herein. The
petitioner was not privy to the Deed of Sale because it was not
the party obliged thereon. Not having come under the duty not to
violate any covenant in the Deed of Sale when it purchased the
subject property despite the annotation on the title, its failure to
comply with the covenants in the Deed of Sale did not constitute
a breach of contract that gave rise to Ortigas' right of rescission.
It was rather Amethyst that defaulted on the covenants under the
Deed of Sale; hence, the action to enforce the provisions of the
contract or to rescind the contract should be against Amethyst. In
other words, rescission could not anymore take place against the
petitioner once the subject property legally came into the juridical
possession of the petitioner, who was a third party to the Deed of
Sale.[55]
In view of the outcome, we consider to be superfluous any
discussion of the other matters raised in the petition, like the
effects of the petitioner's corporate rehabilitation and whether
Ortigas was guilty of laches.
WHEREFORE, the Court GRANTS the petition for review on
certiorari; ANNULS and REVERSES the amended decision
promulgated on January 9, 2012 and the resolution promulgated
on July 26, 2012 by the Court of Appeals in C.A.-G.R. CV No.
94997; DISMISSES Civil Case No. 67978 for lack of cause of
 Obligations and Contracts
Resolution/Rescission | Art. 1191

action; and ORDERS respondent ORTIGAS & COMPANY

LIMITED PARTNERSHIP to pay the costs of suit.

SO ORDERED.

Sereno, C. J., Leonardo-De Castro, Villarama, Jr.,* and Perez,

JJ., concur.

* In lieu of Associate Justice Cstela M. Perlas-Bernabe, who

inhibited due to prior participation in the Court of Appeals, per
the raffle of November 4, 2015.
Article 1385 of the Civil Code relevantly provides:

FOOTNOTES

Article 1385. - x x x

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third
persons who did not act in bad faith. x x x

Page 27 of 27