Navales vs Rias G.R. no. l-3489

Key terms: Enumeration by the law is exclusive. No obligation exists if its source is not one of those enumerated under Art. 1157 of the Civil Code.

Law/doctrines: Art. 1157 Civil Code

Facts:

On the 18th of November, 1904, Vicente Navales filed a complaint with the Court of First Instance of Cebu against Eulogia Rias and Maximo Requiroso, claiming that the latter should be sentenced to pay him the sum of 1,200 pesos, Philippine currency, as damages, together with costs and such other expenses as the court might consider just and equitable. To this end he alleged that the said defendants, without due cause, ordered the pulling down and destruction of his house erected in Daanbuangan, town of Naga, Island of Cebu, which was 6 meters in height with an area of 8.70 square meters, built of wood with a nipa roof, and worth 1,000 pesos, which amount he expended in its construction. He further alleged that the destruction took place in the month of April, 1904, and that, notwithstanding his efforts, he had not obtained any reimbursement from the defendants, and that by reason of their refusal he had been prejudiced to the extent of 200 pesos, Philippine currency.

The defendant, in answer to the foregoing complaint, denied all and each one of the allegations therein contained, and asked that judgment be entered dismissing the complaint with costs against the plaintiff.

After considering the proofs submitted by both parties and the proceedings upon the trial, the judge, on the 17th of January, 1906, rendered judgment declaring that the decision entered by the justice of the peace of Naga, and the order given by virtue thereof were illegal, as well as the action of the deputy sheriff Luciano Bacayo, that the defendant were thereby liable for the damages caused to the plaintiff, which amounted to 500 pesos, and that the defendants were sentenced to pay the said sum to the plaintiff, with costs. The defendant upon being informed of this decision, asked that it be set aside, and also moved for a new trial on the ground that the decision was not in accordance with the weight of the evidence. The motion was denied, to which exception was taken, and at the request of the interested party, the corresponding bill of exceptions was limited.

The aim of this litigation, therefore, is to obtain payment through a judicial decision, of the damages said to have been caused by the execution of a judgment rendered by the justice of the peace, in an action for ejectment.

It is undeniable that, in order to remove from the land of Eulogia Rias, situated within the jurisdiction of the town of Naga, the house which Vicente Navales had constructed thereon, by virtue of the decision of the justice in the action instituted by the said Eulogia Rias against the owner of the house , Vicente Navales, the deputy sheriff who carried the judgment into execution was obliged to destroy the said house and removed it from the land, according to the usual procedure in the action for ejectment.

In the order of execution issued to the deputy sheriff, the directive portion of the judgment of the justice of the peace was inserted, and it contained the essential statement that the said judgment, by reason of its not having been appealed from, had become final, and from the contents of the same may be inferred that there had been an action for ejectment between the above-named parties, and that there was no reason why it should not be enforced when it had already become final and acquired the nature of res adjudicata.

Issue: Whether plaintiff can obtain payment through a judicial decision of the damages said to have been caused by the execution of a judgment rendered by the justice of the peace, in an action for ejectment

Ruling:

No.

Enumeration by the law is exclusive. No obligation exists if its source is not one of those enumerated under Art. 1157 of the Civil Code.

In this case, no proof has been submitted  that a contract had been entered into between the plaintiff and the defendants, or that the latter had committed illegal acts or omissions or incurred in any kind of fault or negligence, from any of which an obligation might have arisen on the part of the defendants to indemnify the plaintiff. For this reason, the claim for indemnity, on account of acts performed by the sheriff while enforcing a judgment, can not under any consideration be sustained. The illegality of the judgment of the justice of the peace, that of the writ of execution thereunder, or of the acts performed by the sheriff for the enforcement of the judgment, has not been shown.

Office of the Solicitor General vs AYALA LAND INCORPORATED G.R. no. 177056

Key terms used: Statutory construction has it that if a statute is clear and unequivocal, it must be given its literal meaning and applied without any attempt at interpretation. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book.

Laws/doctrines: Art. 1158 Civil Code

Facts:

This is a Petition for Review filed by plaintiff seeking the reversal and setting aside of the decision of CA which affirmed the decision of RTC, which denied the Motion for Reconsideration of OSG. The RTC adjudged that defendants Ayala Land Incorporated (Ayala Land), Robinsons Land Corporation (Robinsons), Shangri-la Plaza Corporation (Shangri-la), and SM Prime Holdings, Inc. (SM Prime) could not be obliged to provide free parking spaces in their malls to their patrons and the general public.

The Senate Committee on Trade and Commerce found that the collection of parking fees by shopping malls is contrary to National Building Code and figuratively speaking, the Code has “expropriated” the land for parking. Also, Committee stated that the collection of parking fees would be against Article II of RA 9734 (Consumer Act of the Philippines) as to the State’s policy of protecting the interest of consumers. Moreover, Section 201 of the National Building Code gives the responsibility for the administration and enforcement of the provisions of the Code, including the imposition of penalties for administrative violations thereof to the Secretary of Public Works. This is not being strictly followed as the LGUs are tasked to discharge the regulatory powers of DPWH instead of DPWH instead. As such, Senate Committee recommended that: 1) Office of Solicitor General should institute the action to enjoin the collection of parking fees and enforce the sanctions for violation of National Building Code; 2) DTI pursuant to RA 7394 should enforce the provisions of Code relative to parking; and 3) Congress should amend and update the National Building Code to prohibit the collection of parking fees and its waiver of liability.

Defendant SM Prime assailed the recommendation of the Committee and filed a Petition for Declaratory Relief under Rule 63 of the Revised Rules of Court against DPWH and local building officials, contending that: 1) Rule XIX of Implementing Rules and Regulations of National Building Code is unconstitutional and void; 2) defendant has the legal right to lease parking spaces; and 3) National Building Code IRR is ineffective as it was not published for 3 consecutive weeks in newspaper of general circulation as mandated by Section 211 of PD 1096.

OSG then filed a Petition for Declaratory Relief and Injunction (with Prayer for Temporary Restraining Order and Writ of Preliminary Injunction) to the RTC against defendants, prohibiting them from collecting parking fees and contending that their practice of charging parking fees is violative of National Building Code.

The RTC held that: 1) OSG has the capacity to institute the proceeding it being a controversy of public welfare; 2) a petition for declaratory relief is proper since all the requisites are present; 3) the Building Code with its IRR does not necessarily impose that parking spaces shall be free of charge and providing parking spaces for free can be considered as unlawful taking of property right without just compensation; and 4) there was no sufficient evidence to justify any award for damages. They deemed that the defendants are not obligated to provide parking spaces free of charge.

OSG appealed the decision to CA, saying that RTC erred in holding that the National Building Code did not intend the parking spaces to be free of charge. On the other hand, defendant SM filed a separate appeal to the CA, contending that: 1) RTC erred in failing to declare Rule XIX of IRR as unconstitutional; 2) RTC erred in failing to declare IRR ineffective for not having been published as required by law; 3) RTC erred in dismissing the OSG’s petition for failure to exhaust administrative remedies; and 4) RTC erred in failing to declare that OSG has no legal standing as it is not a real party-in-interest.

CA denied the appeals of both plaintiffs and defendants on the following grounds: 1) OSG did not fail to exhaust administrative remedies and that an administrative review is not a condition precedent to judicial relief where the question in dispute is purely a legal one and nothing of an administrative nature is to be or can be done; 2) the validity of National Building Code IRR cannot be proceeded as it was not discussed in RTC and the controversy could be settled on other grounds without touching the issue of validity since the courts should refrain from passing upon the constitutionality of a law; and 3) Section 803 of National Building Code and Rule XIX of IRR are clear that they are only intended to control the occupancy of areas and structures, and in the absence of provision of law, defendants could not be obliged to provide parking spaces free of charge.

As such, OSG presented itself to SC for the instant Petition for Review.

Issue: Did the CA erred in affirming the ruling of the lower court that defendants are not obliged to provide free parking spaces to their customers or the public

Ruling:

No.

Statutory construction has it that if a statute is clear and unequivocal, it must be given its literal meaning and applied without any attempt at interpretation. Since Section 803 of the National Building Code and Rule XIX of its IRR do not mention parking fees, then simply, said provisions do not regulate the collection of the same. Article 1158 of the New Civil Code states that: “Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book.”

In this case, The explicit directive of the afore-quoted statutory and regulatory provisions, garnered from a plain reading thereof, is that defendants, as operators/lessors of neighborhood shopping centers, should provide parking and loading spaces, in accordance with the minimum ratio of one slot per 100 square meters of shopping floor area. There is nothing therein pertaining to the collection (or non-collection) of parking fees by defendants. In fact, the term "parking fees" cannot even be found at all in the entire National Building Code and its IRR. The OSG cannot rely on Section 102 of the National Building Code to expand the coverage of Section 803 of the same Code and Rule XIX of the IRR, so as to include the regulation of parking fees. The OSG limits its citation to the first part of Section 102 of the National Building Code declaring the policy of the State "to safeguard life, health, property, and public welfare, consistent with the principles of sound environmental management and control"; but totally ignores the second part of said provision, which reads, "and to this end, make it the purpose of this Code to provide for all buildings and structures, a framework of minimum standards and requirements to regulate and control their location, site, design, quality of materials, construction, use, occupancy, and maintenance." While the first part of Section 102 of the National Building Code lays down the State policy, it is the second part thereof that explains how said policy shall be carried out in the Code. Section 102 of the National Building Code is not an all-encompassing grant of regulatory power to the DPWH Secretary and local building officials in the name of life, health, property, and public welfare. On the contrary, it limits the regulatory power of said officials to ensuring that the minimum standards and requirements for all buildings and structures, as set forth in the National Building Code, are complied with.

Consequently, the OSG cannot claim that in addition to fixing the minimum requirements for parking spaces for buildings, Rule XIX of the IRR also mandates that such parking spaces be provided by building owners free of charge. If Rule XIX is not covered by the enabling

law, then it cannot be added to or included in the implementing rules. The rule-making power of administrative agencies must be confined to details for regulating the mode or proceedings to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic law.

Lastly, the State cannot impose the prohibition by generally invoking police power since said prohibition amounts to a taking of defendants’ property without payment of just compensation.

People vs Galicia G.R. no. 194070

Key terms: Extinguishment of criminal and civil liability. Under Article 89 of the Revised Penal Code, criminal liability, as applied to personal penalties, is totally extinguished by the death of the convict. Moreover, the death of accused-appellant during the pendency of their appeal extinguishes not only their criminal liabilities, but their civil liabilities as well for damages arising solely from the said crimes. “The death of the accused likewise extinguished the civil liability that was based exclusively on the crime for which the accused was

convicted (i.e., ex delicto), because no final judgment of conviction was yet rendered by the time of his death. Only civil liability predicated on a source of obligation other than the delict survived the death of the accused, which the offended party can recover by means of a separate civil action.

Laws/doctrines: Art. 1161 Civil Code

Facts:

Accused-appellant Benjamin Galicia was tried and eventually convicted of five counts of rape by the Regional Trial Court (RTC), Branch 25, in Naga City. The dispositive portion of the Joint Judgment dated 03 April 2007, in Criminal Cases Nos. 2004-0034 to 43, reads as follows:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered finding the accused guilty beyond reasonable doubt in five (5) counts of rape, namely, Crim. Cases Nos. 2004-0034, 2004-0035, 2004-0036, 2004-0037 and 2004-0038, and hereby sentences him to suffer the penalty of reclusion perpetua and to pay the complainant the sum of Php 50,000.00 as civil indemnity, Php 50,000.00 as moral damages and Php 50,000.00 as exemplary damages, for each count. Considering that accused has been under preventive detention during the pendency of the trial in these cases, let the same be credited in the service of his sentence, if still applicable.SO ORDERED.

Thereafter, the RTC issued a Final Commitment Order dated 25 April 2007 committing accused-appellant Galicia to the National Bilibid Prison in Muntinlupa City.

On 07 May 2007, accused-appellant Galicia, through the Public Attorney’s Office, filed a Notice of Appeal.3 His appeal was eventuallydocketed with the Court of Appeals as CA-G.R. CR-H.C. No. 02818. After the parties filed their respective briefs,4 the Court of Appealspromulgated its Decision denying the appeal of accused-appellant Galicia and affirming his conviction in toto:

WHEREFORE, premises considered herein appeal is hereby DENIED for evident lack of merit and the challenged RTC Decision promulgated on 25 April 2007 is AFFIRMED in toto.

Following the adverse Decision of the appellate court, accused-appellant appeals to this Court through a Notice of Appeal.6 The Court resolved to accept his appeal and notified the parties to file their supplemental briefs, if they so desired.7 Plaintiff- appellee Republic, through the Office of the Solicitor General, however, manifested that it would no longer file a supplemental brief, as the issues had been exhaustively discussed in its appellate brief.8 Similarly, the Public Attorney’s Office, counsel for accused-appellant Galicia, adopted its brief in the appellate proceedings as its supplemental brief to the instant appeal with this Court.Pursuant to the directives of the Court, the Bureau of Corrections confirmed receipt of the custody of accused-appellant in the New Bilibid Prison on 16 November 2007.

While the appeal was still pending, the Court, on 24 April 2012, received a Notice from the Bureau of Corrections advising it that accused-appellant Galicia had died at the New Bilibid Prison Hospital on 03 December 2011.11 In compliance with the Court’s Resolution,12 the Bureau of Corrections thereafter sent accused-appellant’s Certificate of Death, in which the immediate cause of death was recorded as “Squamous Cell Carcinoma, Well Differentiated (L) Axillary Area.”

Issue: Whether the accused’s death during the pendency of his appeal extinguishes his criminal and civil liability

Ruling:

Yes, the death of accused-appellant Galicia during the pendency of his appeal in this Court results in the total extinguishment of his criminal liability for the five counts of rape. Under Article 89 of the Revised Penal Code, criminal liability, as applied to personal penalties, is totally extinguished by the death of the convict.

Moreover, the death of accused-appellant during the pendency of their appeal extinguishes not only their criminal liabilities, but their civil liabilities as well for damages arising solely from the said crimes. “The death of the accused likewise extinguished the civil liability that was based exclusively on the crime for which the accused was convicted (i.e., ex delicto), because no final judgment of conviction was yet rendered by the time of his death. Only civil liability predicated on a source of obligation other than the delict survived the death of the accused, which the offended party can recover by means of a separate civil action.

PILAR JOAQUIN, ET AL. vs. FELIX ANICETO, ET AL. L-18719

Key terms: It is now settled that for an employer to be subsidiarily liable, the following requisites must be present: (1) That an employee has committed a crime in the discharge of his duties; (2) that said employee is insolvent and has not satisfied his civil liability; (3) that the employer is engaged in some kind of industry.

What this article 33 authorizes is an action against the employee on his primary civil liability. It cannot apply to an action against the employer to enforce his subsidiary civil liability as stated above, because such liability arises only after conviction of the employee in the criminal case. Any action brought against him before the conviction of his employee is premature.

Laws/doctrines: Art. 33, 1161 (all Civil Code), Art. 100,103 (all Revised Penal Code)

Facts:

While Pilar Joaquin was on the sidewalk of Aviles Street, Manila, on April 27, 1960, a taxicab driven by Felix Aniceto and owned by Ruperto Rodelas bumped her As a result, she suffered physical injuries.

Aniceto was charged with serious physical injuries through reckless imprudence in the Municipal Court (now the City Court) of Manila. He was subsequently found guilty and sentenced to imprisonment. However, no ruling was made on his civil liability to the offended party in view of the latter's reservation to file a separate civil action for damages for the injuries suffered by her.

Aniceto appealed the judgment of conviction to the Court of First Instance of Manila. While the criminal case was thus pending appeal, Pilar Joaquin, the injured party, filed this case for damages in the Court of First Instance of Manila, in accordance with the reservation which she had earlier made. Felix Aniceto and Ruperto Rodelas, driver and owner, respectively, of the taxicab were made party defendants.

At the trial of this case, the plaintiff blocked all attempts of Rodelas to prove that, as employer, he had exercised due diligence in the selection and supervision of his employee, on the ground that such a defense is not available in a civil action brought under the Penal Code to recover the subsidiary civil liability arising from the crime. The lower court sustained plaintiff's objection. However, it dismissed the case on the ground that in the absence of a final judgment of conviction against the driver in the criminal case, any action to enforce the employer's subsidiary civil liability would be premature. Such liability, the trial court added, may only be enforced on proof of the insolvency of the employee. Hence, this appeal.

Issue: May an employee's primary civil liability for crime and his employer's subsidiary liability therefor be proved in a separate civil action even while the criminal case against the employee is still pending?

Ruling:

No.

Obligations from law, contract, quasi-contract, crime and quasi-delict.1According to appellant, her action is one to enforce the civil liability arising from crimes. With respect to obligations arising from crimes, Article 1161 of the New Civil Code provides: Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of article 2177, and of the pertinent provisions of Chapter 2, Preliminary, Title, on Human Relations, and of Title XVIII of this Book, regulating damages.

The Revised Penal Code provides in turn that "every person criminally liable for a felony is also civilly liable" 2and that in default of the persons criminally liable, employers, teachers persons and corporations engaged in any kind of industry shall be civilly liable for felonies committed by their servants, pupils, workmen, apprentices or employees in the discharge of their duties. The Revised Penal Code authorizes the determination of subsidiary liability. The Civil Code negatives its applicability providing that civil obligations arising from crimes or misdemeanors shall be governed by the provisions of the Penal Code. In other words, the Penal Code affirms its jurisdiction while the Civil Code negatives its jurisdiction.

It is now settled that for an employer to be subsidiarily liable, the following requisites must be present: (1) That an employee has committed a crime in the discharge of his duties; (2) that said employee is insolvent and has not satisfied his civil liability; (3) that the employer is engaged in some kind of industry. Without the conviction of the employee, the employer cannot be subsidiarily liable.

Now, it is no reason to bring such action against the employer on the ground that in cases of defamation, fraud and physical injuries, Article 33 of the Civil Code authorizes a civil action that is "entirely separate, and distinct from the criminal action

What this article 33 authorizes is an action against the employee on his primary civil liability. It cannot apply to an action against the employer to enforce his subsidiary civil liability as stated above, because such liability arises only after conviction of the employee in the criminal case. Any action brought against him before the conviction of his employee is premature.

In cases of negligence, the injured party or his heirs has the choice, between an action to enforce the civil liability arising from crime under Article 100 of the Revised Penal Code and an action for quasi-delict under Articles 2176-2194 of the Civil Code.

If he chooses an action for quasi-delict, he may hold an employer liable for the negligent act of the employee subject, however, to the employer's defense of exercise of the diligence of a good father of the family. On the other hand, should he choose to prosecute his action under Article 100 of the Penal Code, he can hold the employer subsidiarily liable only upon prior conviction of the employee. While a separate and independent civil action for damages may be brought against the employee under Article 33 of the Civil Code, no such action may be filed against the employer on the latter's subsidiary civil liability because such liability is governed not by the Civil Code but by the Penal Code, under which conviction of the employee is a condition s ine qua non for the employer's subsidiary liability. If the court trying the employee's liability adjudges the employee liable, but the court trying the criminal action acquits the employee, the subsequent insolvency of the employee cannot make the employer subsidiary liable to the offended party or to the latter's heirs.

NORKIS DISTRIBUTORS, INC., vs. THE COURT OF APPEALS & ALBERTO NEPALES G.R. No. 91029

Key terms: In all forms of delivery, it is necessary that the act of delivery whether constructive or actual, be coupled with the intention of delivering the thing. The act, without the intention, is insufficient. In other words, the critical factor in the different modes of effecting delivery, which gives legal effect to the act, is the actual intention of the vendor to deliver, and its acceptance by the vendee. Without that intention, there is no tradition

Laws/doctrines: Art. 1164, 1496 (all Civil Code), Doctrine of Res Perit Domino

Facts:

Plaintiff Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha motorcycles in Negros Occidental with office in Bacolod City with Avelino Labajo as its Branch Manager. On September 20, 1979, private defendant Alberto Nepales bought from the Norkis-Bacolod branch a brand new Yamaha Wonderbike motorcycle Model YL2DX with Engine No.  L2-329401K Frame No. NL2-0329401, Color Maroon, then displayed in the Norkis showroom. The price of P7,500.00 was payable by means of a Letter of Guaranty from the Development Bank of the Philippines (DBP), Kabankalan Branch, which Norkis' Branch Manager Labajo agreed to accept. Hence, credit was extended to Nepales for the price of the motorcycle payable by DBP upon release of his motorcycle loan. As security for the loan, Nepales would execute a chattel mortgage on the motorcycle in favor of DBP. Branch Manager Labajo issued Norkis Sales Invoice No. 0120 (Exh.1) showing that the contract of sale of the motorcycle had been perfected. Nepales signed the sales invoice to signify his conformity with the terms of the sale. In the meantime, however, the motorcycle remained in Norkis' possession.

On November 6, 1979, the motorcycle was registered in the Land Transportation Commission in the name of Alberto Nepales. A registration certificate (Exh. 2) in his name was issued by the Land Transportation Commission on November 6, 1979 (Exh. 2-b). The registration fees were paid by him, evidenced by an official receipt, Exhibit 3.

On January 22, 1980, the motorcycle was delivered to a certain Julian Nepales who was allegedly the agent of Alberto Nepales but the latter denies it (p. 15, t.s.n., August 2, 1984). The record shows that Alberto and Julian Nepales presented the unit to DBP's Appraiser-Investigator Ernesto Arriesta at the DBP offices in Kabankalan, Negros Occidental Branch (p. 12,  Rollo). The motorcycle met an accident on February 3, 1980 at Binalbagan, Negros Occidental. An investigation conducted by the DBP revealed that the unit was being driven by a certain Zacarias Payba at the time of the accident (p. 33,  Rollo). The unit was a total wreck (p. 36, t.s.n., August 2,1984; p. 13, Rollo), was returned, and stored inside Norkis' warehouse.

On March 20, 1980, DBP released the proceeds of private defendant's motorcycle loan to Norkis in the total sum of P7,500. As the price of the motorcycle later increased to P7,828 in March, 1980, Nepales paid the difference of P328 (p. 13,  Rollo) and demanded the delivery of the motorcycle. When Norkis could not deliver, he filed an action for specific performance with damages against Norkis in the Regional Trial Court of Himamaylan, Negros Occidental, Sixth (6th) Judicial Region, Branch LVI, where it was docketed as Civil Case No. 1272. He alleged that Norkis failed to deliver the motorcycle which he purchased, thereby causing him damages.

Norkis answered that the motorcycle had already been delivered to private defendant before the accident, hence, the risk of loss or damage had to be borne by him as owner of the unit.

Issue: Who should bear the loss of the motorcycle

Ruling:

The seller plaintiff Norkis.

In all forms of delivery, it is necessary that the act of delivery whether constructive or actual, be coupled with the intention of delivering the thing. The act, without the intention, is insufficient.

In other words, the critical factor in the different modes of effecting delivery, which gives legal effect to the act, is the actual intention of the vendor to deliver, and its acceptance by the vendee. Without that intention, there is no tradition 

The Code imposes upon the vendor the obligation to deliver the thing sold. The thing is considered to be delivered when it is placed in the hands and possession of the vendee.. It is true that the same article declares that the execution of a public instrument is equivalent to the delivery of the thing which is the object of the contract, but, in order that this symbolic delivery may produce the effect of tradition, it is necessary that the vendor shall have had such control over the thing sold that, at the moment of the sale, its material delivery could have been made. It is not enough to confer upon the purchaser the ownership and the right of possession. The thing sold must be placed in his control. When there is no impediment whatever to prevent the thing sold passing into the tenancy of the purchaser by the sole will of the vendor, symbolic delivery through the execution of a public instrument is sufficient. But  if notwithstanding the execution of the instrument, the purchaser cannot have the enjoyment and material tenancy of the thing and make use of it himself or through another in his name, because such tenancy and enjoyment are opposed by the interposition of another will, then fiction yields to reality-the delivery has not been effected.

In this case, the issuance of a sales invoice does not prove transfer of ownership of the thing sold to the buyer. An invoice is nothing more than a detailed statement of the nature, quantity and cost of the thing sold and has been considered not a bill of sale. The Court of Appeals correctly ruled that the purpose of the execution of the sales invoice dated September 20, 1979 and the registration of the vehicle in the name of plaintiff-appellee (private defendant) with the Land Registration Commission was not to transfer to Nepales the ownership and dominion over the motorcycle, but only to comply with the requirements of the Development Bank of the Philippines for processing private defendant's motorcycle loan. On March 20, 1980, before private defendant's loan was released and before he even paid Norkis, the motorcycle had already figured in an accident while driven by one Zacarias Payba. Payba was not shown by Norkis to be a representative or relative of private defendant. The latter's supposed relative, who allegedly took possession of the vehicle from Norkis did not explain how Payba got hold of the vehicle on February 3, 1980. Norkis' claim that Julian Nepales was acting as Alberto's agent when he allegedly took delivery of the motorcycle, is controverted by the latter. Alberto denied having authorized Julian Nepales to get the motorcycle from Norkis Distributors or to enter into any transaction with Norkis relative to said motorcycle. This circumstances more than amply rebut the disputable presumption of delivery upon which Norkis anchors its defense to Nepales' action.

Lastly, Article 1496 of the Civil Code which provides that "in the absence of an express assumption of risk by the buyer, the things sold remain at seller's risk until the ownership thereof is transferred to the buyer," is applicable to this case, for there was neither an actual nor constructive delivery of the thing sold, hence, the risk of loss should be borne by the seller, Norkis, which was still the owner and possessor of the motorcycle when it was wrecked. This is in accordance with the well-known doctrine of res perit domino.

 

ALFREDO P. PACIS and CLEOPATRA D. PACIS,  vs. JEROME JOVANNE MORALES G.R. no. 169467

Key terms: Under Article 1161 of the Civil Code, plaintiffs may enforce their claim for damages based on the civil liability arising from the crime under Article 100 of the Revised Penal Code or they may opt to file an independent civil action for damages under the Civil Code. Unlike the subsidiary liability of the employer under Article 103 of the Revised Penal Code, the liability of the employer, or any person for that matter, under Article 2176 of the Civil Code is primary and direct, based on a person’s own negligence.

The degree of care and diligence required of a good father of a family is required for the employer to exempt him from civil liability.

Laws/doctrines: Art. 1161, 2176, 2180 (all Civil Code), Art. 100, 103 (all Revised Penal Code)

Facts:

On January 19, 1991, Alfred Dennis Pacis, then 17 years old and a first year student at the Baguio Colleges Foundation taking up BS Computer Science, died due to a gunshot wound in the head which he sustained while he was at the Top Gun Firearm[s] and Ammunition[s] Store located at Upper Mabini Street, Baguio City. The gun store was owned and operated by defendant Jerome Jovanne Morales. With Alfred Pacis at the time of the shooting were Aristedes Matibag and Jason Herbolario. They were sales agents of the defendant, and at that particular time, the caretakers of the gun store. The bullet which killed Alfred Dennis Pacis was fired from a gun brought in by a customer of the gun store for repair.

The gun, an AMT Automag II Cal. 22 Rimfire Magnum with Serial No. SN-H34194, was left by defendant Morales in a drawer of a table located inside the gun store. Defendant Morales was in Manila at the time. His employee Armando Jarnague, who was the regular caretaker of the gun store was also not around. He left earlier and requested sales agents Matibag and Herbolario to look after the gun store while he and defendant Morales were away. Jarnague entrusted to Matibag and Herbolario a bunch of keys used in the gun store which included the key to the drawer where the fatal gun was kept. It appears that Matibag and Herbolario later brought out the gun from the drawer and placed it on top of the table. Attracted by the sight of the gun, the young Alfred Dennis Pacis got hold of the same. Matibag asked Alfred Dennis Pacis to return the gun. The latter followed and handed the gun to Matibag. It went off, the bullet hitting the young Alfred in the head.

A criminal case for homicide was filed against Matibag before branch VII of this Court. Matibag, however, was acquitted of the charge against him because of the exempting circumstance of "accident" under Art. 12, par. 4 of the Revised Penal Code. By agreement of the parties, the evidence adduced in the criminal case for homicide against Matibag was reproduced and adopted by them as part of their evidence in the instant case.

Issue: Whether defendant (gun store owner and operator) is civilly liable for the death of Aldred Pacis.

Ruling:

Yes, defendant did not exercise the degree of care and diligence required of a good father of a family, much less, the degree of care required of someone dealing with dangerous weapons as would exempt him from liability.

Under Article 1161 of the Civil Code, plaintiffs may enforce their claim for damages based on the civil liability arising from the crime under Article 100 of the Revised Penal Code or they may opt to file an independent civil action for damages under the Civil Code. Unlike the subsidiary liability of the employer under Article 103 of the Revised Penal Code, the liability of the employer, or any person for that matter, under Article 2176 of the Civil Code is primary and direct, based on a person’s own negligence. Article 2176 states that “Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called quasi-delict and is governed by the provisions of this Chapter.”

Moreover, Under PNP Circular No. 9, entitled the "Policy on Firearms and Ammunition Dealership/Repair," a person who is in the business of purchasing and selling of firearms and ammunition must maintain basic security and safety requirements of a gun dealer, otherwise his License to Operate Dealership will be suspended or canceled. A higher degree of care is required of someone who has in his possession or under his control an instrumentality extremely dangerous in character, such as dangerous weapons or substances. Such person in possession or control of dangerous instrumentalities has the duty to take exceptional precautions to prevent any injury being done thereby.1 Unlike the ordinary affairs of life or business which involve little or no risk, a business dealing with dangerous weapons requires the exercise of a higher degree of care.

In this case, the case for damages arouse out of the accidental shooting of plaintiffs’ son. Instead of enforcing their claim for damages in the homicide case filed against Matibag, plaintiffs opted to file an independent civil action for damages against defendant whom they alleged was Matibag’s employer. Plaintiffs based their claim for damages under Articles 2176 and 2180 of the Civil Code.

As a gun store owner, defendant is presumed to be knowledgeable about firearms safety and should have known never to keep a loaded weapon in his store to avoid unreasonable risk of harm or injury to others. Defendant has the duty to ensure that all the guns in his store are not loaded. Firearms should be stored unloaded and separate from ammunition when the firearms are not needed for ready-access defensive use. With more reason, guns accepted by the store for repair should not be loaded precisely because they are defective and may cause an accidental discharge such as what happened in this case. Defendant was clearly negligent when he accepted the gun for repair and placed it inside the drawer without ensuring first that it was not loaded. In the first place, the defective gun should have been stored in a vault. Before accepting the defective gun for repair, defendant should have made sure that it was not loaded to prevent any untoward accident. Indeed, defendant should never accept a firearm from another person, until the cylinder or action is open and he has personally checked that the weapon is completely unloaded. For failing to insure that the gun was not loaded, defendant himself was negligent. Furthermore, it was not shown in this case whether defendant had a License to Repair which authorizes him to repair defective firearms to restore its original composition or enhance or upgrade firearms.

SANTIAGO CRUZADO vs. ESTEFANIA BUSTOS and MANUEL ESCALER G.R. no. L-10244

Key terms: That the contract of purchase and sale, as consensual, is perfected by consent as to the price and the thing and is consummated by the reciprocal delivery of the one and the other, the full ownership of the thing sold being conveyed to the vendee, from which moment the rights of action derived from this right may be exercised.

Laws/doctrines: Art. 1164 Civil Code

Facts:

This is an action to recover the possession and ownership over a piece of land from the defendants. Plaintiff’s claim of ownership was based on a deed of sale executed by Bustos in favor of plaintiff’s father of the land in question with P2,200.00 as consideration on Sept. 7, 1875. Escaler was included as defendant because Bustos sold the land in question to him in Sept., 1891. Plaintiff and his predecessor in interest were never in possession of the land in question. The land in question remained in the possession of Bustos from the date of sale until long after, when Bustos sold it to Escaler who took possession. It was found out that the sale was simulated and for the sole purpose of making it appear that the plaintiff’s father was a property owner, in order to enable the latter to hold office as procurador, for

this was an indispensable requisite for his appointment. Plaintiff’s father held such office for many years due to the liberality of the pretended vendor.

Issue: Will the plaintiff’s action for recovery of possession and ownership prosper?

Ruling:

No, the deed of sale, though it had the appearance of truth, aside from being simulated was not consummated.

Although it is not necessary that the thing sold or its price should have been delibered in order that the sale is deemed perfected, yet there is no transmission of ownership until the land sold has been delivered, and the moment such delivery is made the sale is regarded as consummated.

Under Art. 1096 of the old Civil Code (now Art. 1164 New Civil Code), the plaintiff does not acquire a property right in the land purchased until it has been delivered to him or he has taken possession of it, and because neither the plaintiff nor his predecessor in interest ever took possession of the land in question, neither of them acquired any property right therein and consequently could not bring an action for the recovery of the land, which arises out of a real right over such land in question.

In this case, it is unquestionable that the contract of sale of the 65 balitas of land was perfect and binding upon both contracting parties, since they both appear in that instrument to have agreed upon the thing sold, to wit, the 65 balitas of land, and upon the price, P2,200; but it is also undeniable that the said contract was not consummated, inasmuch as, notwithstanding that the deed of sale was accomplished and this document was kept by the pretended purchaser, it is positively certain that the latter did not pay the purchase price of P2,200, and never took possession of the land apparently sold in the said deed. All that this vendee afterwards did was to pledge the land on March 14, 1876, that is, six months and some days after the 7th of September, 1875, the date when he purchased it as security for the faithful discharge of the duties of his office of procurador of the Court of First Instance of Pampanga.

EQUATORIAL REALTY DEVELOPMENT, INC. vs. MAYFAIR THEATER, INC. G.R. No. 133879            

Key terms: Rent is a civil fruit that belongs to the owner of the property producing it by right of accession. Consequently and ordinarily, the rentals that fell due from the time of the perfection of the sale to plaintiff until its rescission by final judgment should belong to the owner of the property during that period. By a contract of sale, "one of the contracting parties obligates himself to transfer ownership of and to deliver a determinate thing and the other to pay therefor a price certain in money or its equivalent

Delivery has been described as a composite act, a thing in which both parties must join and the minds of both parties concur. It is an act by which one party parts with the title to and the possession of the property, and the other acquires the right to and the possession of the same. In its natural sense, delivery means something in addition to the delivery of property or title; it means transfer of possession. In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery contemplate "the absolute giving up of the control and custody of the property on the part of the vendor, and the assumption of the same by the vendee.

The execution of a public instrument gives rise, therefore, only to a prima facie presumption of delivery. Such presumption is destroyed when the instrument itself expresses or implies that delivery was not intended; or when by other means it is shown that such delivery was not effected, because a third person was actually in possession of the thing. In the latter case, the sale cannot be considered consummated.

Laws/doctrines: Art. 1164, 1462 (all Civil Code)

Facts:

Mayfair Theater, Inc. was a lessee of portions of a building owned by Carmelo & Bauermann, Inc. Their lease contracts of 20

years (1. which covered a portion of the second floor and mezzanine of a two-storey building with about 1,610 square meters of

floor area, which defendant used as a movie house known as Maxim Theater 2. two store spaces on the ground floor and the

mezzanine, with a combined floor area of about 300 square meters also used as a movie house “Miramar Theater”)

Lease contracts contained a provision granting Mayfair a right of first refusal to purchase the subject properties.

However, before the contracts ended, the subject properties were sold for P11,300 by Carmelo to Equatorial Realty

Development, Inc.

This prompted Mayfair to file a case for the annulment of the Deed of Absolute Sale between Carmelo and Equatorial, specific

performance and damages.

In 1996, the Court ruled in favor of Mayfair.

Barely five months after Mayfair had submitted its Motion for Execution, Equatorial filed an action for collection of sum of money

against Mayfair claiming payment of rentals or reasonable compensation for the defendant’s use of the subject premises after its

lease contracts had expired.

Maxim Theater contract expired on May 31, 1987, while the Lease Contract covering the premises occupied by Miramar Theater

lapsed on March 31, 1989.

The lower court debunked the claim of Equatorial for unpaid back rentals, holding that the rescission of the Deed of Absolute

Sale in the mother case did not confer on Equatorial any vested or residual propriety rights, even in expectancy.

It further ruled that the Court categorically stated that the Deed of Absolute Sale had been rescinded subjecting the present

complaint to res judicata.

Hence, Equatorial filed the present petition

Issue: Whether Equatorial was the owner of the subject property and could thus be entitled to back rentals.

Ruling:

No, no right of ownership was transferred from Carmelo to Equatorial in view of a patent failure to deliver the property to the buyer.

Rent is a civil fruit that belongs to the owner of the property producing it by right of accession. Consequently and ordinarily, the rentals that fell due from the time of the perfection of the sale to plaintiff until its rescission by final judgment should belong to the owner of the property during that period. By a contract of sale, "one of the contracting parties obligates himself to transfer ownership of and to deliver a determinate thing and the other to pay therefor a price certain in money or its equivalent."

Ownership of the thing sold is a real right, which the buyer acquires only upon delivery of the thing to him "in any of the ways specified in articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee." This right is transferred, not merely by contract, but also by tradition or delivery. Non nudis pactis sed traditione dominia rerum transferantur. And there is said to be delivery if and when the thing sold "is placed in the control and possession of the vendee."  Thus, it has been held that while the execution of a public instrument of sale is recognized by law as equivalent to the delivery of the thing sold, such constructive or symbolic delivery, being merely presumptive, is deemed negated by the failure of the vendee to take actual possession of the land sold.

Delivery has been described as a composite act, a thing in which both parties must join and the minds of both parties concur. It is an act by which one party parts with the title to and the possession of the property, and the other acquires the right to and the possession of the same. In its natural sense, delivery means something in addition to the delivery of property or title; it means transfer of possession. In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery contemplate "the absolute giving up of the control and custody of the property on the part of the vendor, and the assumption of the same by the vendee.

The execution of a public instrument gives rise, therefore, only to a prima facie presumption of delivery. Such presumption is destroyed when the instrument itself expresses or implies that delivery was not intended; or when by other means it is shown that such delivery was not effected, because a third person was actually in possession of the thing. In the latter case, the sale cannot be considered consummated.

In this case, plaintiff never took actual control and possession of the property sold, in view of defendant's timely objection to the sale and the continued actual possession of the property. The objection took the form of a court action impugning the sale which, as we know, was rescinded by a judgment rendered by this Court in the mother case. It has been held that the execution of a contract of sale as a form of constructive delivery is a legal fiction. It holds true only when there is no impediment that may prevent the passing of the property from the hands of the vendor into those of the vendee. When there is such impediment, "fiction yields to reality — the delivery has not been effected." Hence, defendant's opposition to the transfer of the property by way of sale to Equatorial was a legally sufficient impediment that effectively prevented the passing of the property into the latter's hands.

Second, although under Art. 1164 of the Civil Code, Equatorial as buyer acquired a right to the fruits of the thing sold from the time the obligation to deliver the property arose, because of the judgment rescinding the sale, its right to the fruits cannot anymore be enforced by Equatorial.

Art. 1385 of the Civil Code provides that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; x x x" Not only the land and building sold, but also the rental payments paid, if any, had to be returned by the buyer.

Third, the fact that Mayfair paid rentals to Equatorial during the litigation should not be interpreted to mean either actual delivery or ipso facto recognition of Equatorial's title.

The CA Records of the mother case show that Equatorial as alleged buyer of the disputed properties and as alleged successor-in-interest of Carmelo's rights as lessor submitted two ejectment suits against Mayfair. Filed in the Metropolitan Trial Court of Manila, the first was docketed as Civil Case No. 121570 on July 9, 1987; and thesecond, as Civil Case No. 131944 on May 28, 1990. Mayfair eventually won them both. However, to be able to maintain physical possession of the premises while awaiting the outcome of the mother case, it had no choice but to pay the rentals.

The rental payments made by Mayfair should not be construed as a recognition of Equatorial as the new owner. They were made merely to avoid imminent eviction.  While it may be conceded that, theoretically, a rescissible contract is valid until rescinded. However, this general principle is not decisive to the issue of whether Equatorial ever acquired the right to collect rentals. What is decisive is the civil law rule that ownership is acquired, not by mere agreement, but by tradition or delivery. Under the factual environment of this controversy as found by this Court in the mother case, Equatorial was never put in actual and effective control or possession of the property because of Mayfair's timely objection.

In short, the sale to Equatorial may have been valid from inception, but it was judicially rescinded before it could be consummated. Plaintiff never acquired ownership, not because the sale was void, as erroneously claimed by the trial court, but because the sale was not consummated by a legally effective delivery of the property sold.

Fourth, assuming for the sake of argument that there was valid delivery, plaintiff is not entitled to any benefits from the "rescinded" Deed of Absolute Sale because of its bad faith. This being the law of the mother case decided in 1996, it may no longer be changed because it has long become final and executory.

The contract of sale between Equatorial and Carmelo is characterized by bad faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have cautioned it to look further into the agreement to determine if it involved stipulations that would prejudice its own interests.

"On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair

UNIVERSITY OF THE PHILIPPINES vs WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON CITY, et al. L-28602

Key terms: There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.

In every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.

Laws/doctrines: Art. 1191 Civil Code

Facts:

That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an institution of higher learning, to be operated and developed for the purpose of raising additional income for its support, pursuant to Act 3608;

That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was granted exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid account of P219,362.94,

which, despite repeated demands, it had failed to pay; that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which was approved by the president of UP, and which stipulated the following:

3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance outstanding after the said payments have been applied shall be paid by the DEBTOR in full no later than June 30, 1965;

5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for liquidated damages;

ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously acknowledged.

That on 19 July 1965, plaintiff UP informed defendant ALUMCO that it had, as of that date, considered as rescinded and of no further legal effect the logging agreement that they had entered in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and alleging the facts hereinbefore specified, together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging operations in the Land Grant.

That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16 February 1966.

That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction but were denied by the court;

That on 12 November 1965, ALUMCO filed a petition to enjoin plaintiff University from conducting the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, defendant judge issued the first of the questioned orders, enjoining UP from awarding logging rights over the concession to any other party. That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company, Inc., and said company had started logging operations.

That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967, declared plaintiff UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in the concession. The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.

Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608 and, therefore, conclusively known, defendant ALUMCO did not deny the foregoing allegations in the petition. In its answer, defendant corrected itself by stating that the period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order, was invalid; that plaintiff's supervisor refused to allow defendant to cut new logs unless the logs previously cut during the management of Cesar Guy be first sold; that defendant was permitted to cut logs in the middle of June 1965 but plaintiff's supervisor stopped all logging operations on 15 July 1965; that it had made several offers to plaintiff for defendant to resume logging operations but defendant received no reply.

Issue: whether plaintiff U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect.

Ruling:

Yes.

 the act of party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

The party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages

In this case, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of the Civil Code, there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.

Considering that the complaint of plaintiff University made out a prima facie case of breach of contract and defaults in payment by defendant ALUMCO, to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the defendant company had profited from its operations previous to the agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten condition of the logs in private defendant's pond, which said defendant was in a better position to know when it executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by defendant ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining plaintiff's measures to protect its interest without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the

injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be set aside.

FIDELA DEL CASTILLO Vda. DE MISTICA vs. Spouses BERNARDINO NAGUIAT and MARIA PAULINA GERONA-NAGUIAT G.R. no. 137909

Key terms: The failure to pay in full the purchase price stipulated in a deed of sale does not ipso facto grant the seller the right to rescind the agreement. Unless otherwise stipulated by the parties, rescission is allowed only when the breach of the contract is substantial and fundamental to the fulfillment of the obligation.

In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission.10 Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on the violation of the reciprocity between parties, brought about by a breach of faith by one of them.11 Rescission, however, is allowed only where the breach is substantial and fundamental to the fulfillment of the obligation.

Laws/doctrines: Art. 1191, 1182 (all Civil Code)

Facts:

Eulalio Mistica is the owner of a parcel of land located at Malhacan, Meycauayan, Bulacan. A portion thereof was leased to defendant Naguiat. Consequently, Mistica entered into a contract to sell with defendant over a portion of lot containing an area of 200 sq. mtrs.

The agreement was reduced to writing in a document entitled “Kasulatan sa Pagbibilihan”

P 20k – as the total purchase:

P 2k – upon signing;

P 18k – to be paid within 10yrs;

In case non payment, vendee shall pay an interest of 12% per annum.

Pursuant to said agreement, defendant gave a downpayment of P2K & made another partial payment of P1K & thereafter failed to make any payments. Eulalio Mistica died sometime in Oct. 1986.

On 4 December 1991, plaintiff filed a complaint for rescission alleging that the failure and refusal of defendants to pay the balance of the purchase price constitutes a violation of the contract which entitles her to rescind the same; that [defendants] have been in possession of the subject portion and they should be ordered to vacate and surrender possession of the same to [plaintiff] ; that the reasonable amount of rental for the subject land is P200.00 a month; that on account of the unjustified actuations of [defendants], [plaintiff] has been constrained to litigate where she incurred expenses for attorney’s fees and litigation expenses in the sum ofP20,000.00.

Defendants contended that the contract cannot be rescinded on the ground that it clearly stipulates that in case of failure to pay the balance as stipulated, a yearly interest of 12% is to be paid. [Defendant Bernardino Naguiat] likewise alleged that sometime in October 1986, during the wake of the late Eulalio Mistica, he offered to pay the remaining balance to [plaintiff] but the latter refused and hence, there is no breach or violation committed by them and no damages could yet be incurred by the late Eulalio Mistica, his heirs or assigns pursuant to the said document; that he is presently the owner in fee simple of the subject lot having acquired the same by virtue of a Free Patent Title duly awarded to him by the Bureau of Lands; and that his title and ownership had already become indefeasible and incontrovertible.

Issue: Whether the Honorable Court of Appeals erred in the application of Art. 1191 of the New Civil Code, as it ruled that there is no breach of obligation inspite of the lapse of the stipulated period and the failure of the private defendants to pay.

"2. Whether the Honorable Court of Appeals [e]rred in ruling that rescission of the contract is no longer feasible considering that a certificate of title had been issued in favor of the private defendants.

"3. Whether the Honorable Court of Appeals erred in ruling that since the 58 sq. m. portion in question is covered by a certificate of title in the names of private defendants reconveyance is no longer feasible and proper

Ruling:

1st issue:

No, the transaction between Eulalio Mistica and defendants, as evidenced by the Kasulatan was clearly a Contract of Sale.

A  A deed of sale is considered absolute in nature when there is neither a stipulation in the deed that title to the property sold is reserved to the seller until the full payment of the price; nor a stipulation giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period.

In a contract of sale, the remedy of an unpaid seller is either specific performance or rescission.10 Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated on the violation of the reciprocity between parties, brought about by a breach of faith by one of them.11 Rescission, however, is allowed only where the breach is substantial and fundamental to the fulfillment of the obligation.

In this case, the failure of defendants to pay the balance of the purchase price within ten years from the execution of the Deed did not amount to a substantial breach. In the Kasulatan, it was stipulated that payment could be made even after ten years from the execution of the Contract, provided the vendee paid 12 percent interest. The stipulations of the contract constitute the law between the parties; thus, courts have no alternative but to enforce them as agreed upon and written. During the 10 year period, plaintiff and her deceased husband never made any demand for the balance of the purchase price. Plaintiff even refused the payment tendered by defendants during her husband’s funeral, thus showing that she was not exactly blameless for the lapse of the ten-year period. Had she accepted the tender, payment would have been made well within the agreed period.

The Civil Code prohibits purely potestative, suspensive, conditional obligations that depend on the whims of the debtor, because such obligations are usually not meant to be fulfilled. Indeed, to allow the fulfillment of conditions to depend exclusively on the debtor’s will would be to sanction illusory obligations. The Kasulatan does not allow such thing. First, nowhere is it stated in the Deed that payment of the purchase price is dependent upon whether defendants want to pay it or not. Second, the fact that they already made partial payment thereof only shows that the parties intended to be bound by the Kasulatan.

2nd issue:

No, the rescission would be unjust to defendants.

The issuance of a certificate of title in favor of defendants does not determine whether plaintiff is entitled to rescission. It is a fundamental principle in land registration that such title serves merely as an evidence of an indefeasible and incontrovertible title to the property in favor of the person whose name appears therein.

3rd issue:

Yes.

Registration has never been a mode of acquiring ownership over immovable property, because it does not create or vest title, but merely confirms one already created or vested.20Registration does not give holders any better title than what they actually have.21 Land erroneously included in the certificate of title of another must be reconveyed in favor of its true and actual owner.

Rodriguez vs Belgica L-10801

Key terms: Reciprocal obligations (granting of the authority and payment of the loan). If the performance of the obligation is not set on different dates, but either by law, contract or custom, the performance must be simultaneous.

Laws/doctrines: Art. 1169 Civil Code

Facts:

The parties have discussed and considered the terms and conditions set forth in said Offer of Compromise submitted by the attorney for the plaintiffs and as a result thereof they have arrived at an amicable settlement, the terms of which were dictated in open court by the attorneys of both parties in the presence of their clients, with the exception of plaintiffs Mariano Rodriguez and his wife Marina Rodriguez who were represented by their son, Atty. Jose Rodriguez. The terms and conditions of said Compromise Agreement are as follows: .

Atty. Fineza:

If your Honor please, as regards the Motion Re Offer of Compromise presented by the plaintiffs dated August 26, 1955, we wish to inform this Honorable Court that with regards to paragraph 1-A wherein the length of time given to the defendants to pay the plaintiffs of P35,000.00 is thirty (30) days, we request that said period be seventy (70) days counted from today, August 30, 1955. With regard to Paragraphs 1-B and 1-C, we are agreeable to the terms and conditions therein stated: Court: .

Any objection to the said counter proposal of the defendants? .

Atty. Orendain: .

We have no objection, Your Honor.

Court: - (To defendant Mr. Porfirio Belgica).

Mr. Porfirio Belgica, have you heard what Atty. Fineza, your lawyer, have proposed to the Court and are you agreeable to the same? .

Defendant Porfirio Belgica: .

Yes, Your Honor.

Atty. Fineza: .

Inasmuch as defendant Porfirio Belgica will have to negotiate a portion of the part pertaining to him to raise the amount of P35,000.00 with which he will pay the plaintiffs, we request that the plaintiffs make new selection of the portion they desire as per plan Exhibit E.

Atty. Orendain:.

According to my clients, Your Honor, I was instructed to choose the portion which is nearest to Quezon City, in other words, the portion in the bigger lot which is the Southern portion as appears in Exhibit E and which is encircled in red pencil, subject to relocation or readjustment after a survey is made.

That the plaintiffs will sign the necessary transfer of the 36% in favor of the defendants upon payment of the P35,000.00.

That the plaintiffs agree to grant authority to defendant Porfirio Belgica to negotiate the sale or mortgage of the 36% which is proposed to be conveyed to him, for the purpose of raising the P35,000.00 to be paid to the plaintiffs.

That the Motion re Offer of Compromise is hereby made a part and parcel of the Compromise Agreement, as modified.

Parties agree that in the event the defendants fail to pay to the plaintiffs said amount of P35,000.00 within the period above fixed or stipulated, the plaintiffs will automatically be the owners of the 36% of the two parcels of land, and that the 14% pertaining to the defendants will be taken from the portion towards Caloocan, or more particularly in the portion encircled in blue pencil, subject to the survey and relocation of a surveyor. Court: .

Make of record that this Compromise Agreement was made in open court in the presence of Atty. Jose Rodriguez, who is the son of the plaintiff Mariano Rodriguez, their attorney Mr. Ignacio M. Orendain, the defendant Mr. Porfirio Belgica and his counsel Atty. Jose S. Fineza.

Parties respectfully pray this Honorable Court to render judgment in accordance therewith without costs.

The transcript of the notes taken by the Stenographer of the proceedings taken by the parties before they arrived at an amicable settlement was signed by the parties and their respective attorneys and submitted to this Court for corresponding decision.

IN VIEW OF THE FOREGOING, judgment is hereby rendered approving en toto the foregoing Compromise Agreement and the parties are hereby ordered to abide by and comply with the terms and conditions contained in said Compromise Agreement, without pronouncement as to costs.

On September 3, 1955, the defendants filed a Motion for Withdrawal of Exhibits, particularly the Certificates of Titles covering the lands, subject matter of the present controversy. Among the reasons given in the motion was "the defendants have already taken steps to effect that partition of the property for the purpose of delimiting the respectively portion which would appertain to each, which delimitation has to be effected in order that defendants may have the opportunity of negotiating their half or any portion thereof to raise the P35,000.00 which he undertook to pay to plaintiffs. The above motion bore the conformity of counsel for the plaintiffs.

On November 19, 1955, after the lapse of the seventy (70) day period stipulated in the compromise agreement, and upon the failure of the defendants to pay, the plaintiffs presented a motion praying that the defendants be ordered to deliver to the plaintiffs the Certificates of the Titles so that 14% of the property pertaining to the defendant could be segregated. An opposition was registered by the defendants, contending that the inability to meet the obligation to pay the P35,000.00 was due to the deliberate refusal of the plaintiffs to grant the authority to defendant Porfirio Belgica to negotiate the sale or mortgage of the 36%; and that since the decision had created reciprocal obligations, the refusal or failure on the part of one to comply did not make the other in default. In the opposition, the defendants prayed that the plaintiffs be ordered to grant defendant Porfirio Belgica the authority to negotiate the sale or mortgage of the 36%. the lower court, On November 26, 1955, ordered the defendants to surrender to the Court the TCT's they withdrew, not latter than December 1, 1955. On this date the defendants filed a "Motion to Compel Plaintiffs to Comply with the Conditions of the Judgment", reiterating in substance, the reason they invoked in their previous oppositions. On December 15, 1955, the trial court acting on the motion of the defendants, handed down the following order, to wit:

Defendant Belgica's contention is that the plaintiffs Mariano Rodriguez has refused to grant the authority adverted to. Said defendant, however, has not done anything, nor has filed any petition with the Court regarding the alleged refusal of the plaintiff Rodriguez to grant such authority before the expiration of the 70-day period fixed by the parties within which to pay the said amount of P35,000.00. The petition to compel the plaintiffs to comply with the conditions of the judgment, namely to command said plaintiffs to grant the authority above referred to was only filed on December 1, 1955, or after the expiration of 90 days. In the opinion of the Court, the decision rendered in this case has already become final and executory under the terms and conditions stipulated by the parties and upon which said decision was based.

IN VIEW OF THE FOREGOING, the said motion to compel the plaintiffs to comply with the condition embodied in the judgment is hereby DENIED.".

The above ordered is now the subject to the present appeal, appellants contending in their lone assignment of error that the lower court erred "in denying the motion of December 1, 1955 (to compel the plaintiffs to grant the authority), on the ground that because of the failure of defendants-appelants to pay the plaintiffs-appelees the amount P35,000.00 within the period of seventy days, the judgment of August 30,1955, has already become due and executory.".

Issue: Whether the denial of the motion of compel the plaintiffs to grant the authority is proper and legal

Ruling:

No.

In this case, on the plaintiffs -appellees was impose the obligation of granting to defendants-appellants the requisite authority to negotiate either the sale or mortgage of the 36% interest in the property. This is understandable, because on the face of the two certificates of the title covering the properties, defendants owned only 14%, while plaintiffs owned 86%. Without such authority executed by plaintiffs in favor of the defendants, it was difficult, not to say impossible for the latter to affect a negotiation. This the plaintiffs the fully knew, because in the compromise, they acknowledged that the amount of P35,000.00 due to them would be paid

within 70 days from the August 30, 1953, with money to be delivered from the sale of mortgage of the property. It was, therefore, incumbent upon the plaintiffs "to grant authority" to defendants to negotiate the sale or mortgage of the 36% of the property. Considering that the reciprocal obligation has been established by the compromise agreement, the sequence in which the reciprocal obligations of the parties are to be performed, is quite clear. The giving of the authority to sell or mortgage precedes the obligation of the defendants to pay P35,000.00.

Until this authority is granted by the plaintiff, the 70 day period for payment will not commence to run. The plaintiffs insinuated that defendant did not ask for the authority. There was, however the statement or allegation by the defendants to the effects that they made verbal request for such authority but plaintiffs refused to give, a statement or allegation discredited by the lower court. But even without a request, from the very nature of the obligation assumed by plaintiffs, demand by defendants that it be performed, was not necessary

It is true that defendants' petition to compel the plaintiffs to grant the authority repeatedly mentioned, was only filed on December 1, 1955, after the expiration of the 70-day period. But the actuations or acts of the defendants have always been lulled by a sense of an honest but insecure misunderstanding, as to the scope and extent of the terms and conditions of the compromise. To show that defendants had not abandoned their obligation to pay the sum of P35,000.00, on September 3, 1955, within the 70-day period which expired on November 8, 1955, they filed a motion to withdraw documents and certificates of title to delimit the respective portions, in order that they (defendants) might have an opportunity of negotiating one-half or any portion to raise P35,000.00 to which motion the plaintiffs agreed. While waiting for the grant of authority to descend, like manna from Heaven, the defendants were surprised to receive, on November 19, 1955, plaintiffs' motion to have the titles returned so that the defendants' 14% could be segregated, as they (plaintiffs) wanted to remain with the 86% of the properties.

The compromise agreement being onerous the doubt should be settled in favor of the greatest reciprocity of interests. Without the authority in question the obligation of the defendants to pay the plaintiffs the sum of P35,000.00 cannot be considered as having matured, and the lapse of the 70-day period fixed in the decision cannot be adjudged as having resulted in the forfeiture of their right to repurchase their 36% interest in the properties.

Lastly, the claim of the appellees that the appellants failed to comply with their initial obligation to delimit the property, as stated by them in their motion to withdraw, is not supported by the evidence. The delimitation or segregation of the property to be sold or mortgaged which appellants should have done first so that the authority could have been granted, had long been accomplished. 

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ vs AYALA CORPORATION G.R. no. 149734

Key terms used: In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes.

An option is a preparatory contract in which one party grants to another, for a fixed period and at a determined price, the privilege to buy or sell, or to decide whether or not to enter into a principal contract. It binds the party who has given the option not to enter into the principal contract with any other person during the period designated, and within that period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration.44

In a right of first refusal, on the other hand, while the object might be made determinate, the exercise of the right would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up.

Laws/doctrines: Art. 1169, 1193, 1197 (all Civil Code)

Facts:

Daniel Vasquez owns Conduit Development, Inc. In 1981, Vasquez enters into a Memorandum of Agreement (MOA) with Ayala Corporation wherein Ayala bought Conduit from Vasquez. Ayala committed to develop Conduit’s lands including 4 parcels of land adjacent to Vasquez’ retained land. Be it noted that these parcels of land were in the 3rd phase of Ayala’s development plan. Paragraph 5.15 of the MOA provides:

5.15. The BUYER (AYALA) agrees to give the SELLERS (Vasquez) a first option to purchase four developed lots next to the “Retained Area” at the prevailing market price at the time of the purchase.”

In 1990, Ayala was able to develop the said lots. (This was after some slump, and some litigation between Conduit’s former contractor (GP construction) and GP’s subcontractor (Lancer Builders).) Ayala then offered to sell the 4 parcels of land to Vasquez at P6.5k/sq. m. which was the market price in 1990. Vasquez refused the offer. Vasquez contended that the purchase price should be P460/sq. m. which was the market price in 1981 (time of purchase). Ayala then lowered the purchase price to P5k/sq. m. but Vasquez refused again. Instead he made a counter offer to buy the lots at P2k/sq. m. This time, Ayala refused.

Issue: Whether defendant was in delay for failing to offer the subject lots for sale to plaintiffs within 3 years from the execution of the MOA

Ruling:

No.

In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially. Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes.

In this case, no such day certain was fixed in the MOA . Petitioners, therefore, cannot demand performance after the three (3) year period fixed by the MOA for the development of the first phase of the property since this is not the same period contemplated for the development of the subject lots. Since the MOA does not specify a period for the development of the subject lots, petitioners should have petitioned the court to fix the period in accordance with Article 119734 of the Civil Code. As no such action was filed by petitioners, their complaint for specific performance was premature, the obligation not being demandable at that point. Accordingly, Ayala Corporation cannot likewise be said to have delayed performance of the obligation.

Even assuming that the MOA imposes an obligation on Ayala Corporation to develop the subject lots within three (3) years from date thereof, Ayala Corporation could still not be held to have been in delay since no demand was made by petitioners for the performance of its obligation.

Petitioners' letters which dealt with the three (3)-year timetable were all dated prior to April 23, 1984, the date when the period was supposed to expire. In other words, the letters were sent before the obligation could become legally demandable. Moreover, the letters were mere reminders and not categorical demands to perform. More importantly, petitioners waived the three (3)-year period as evidenced by their agent, Engr. Eduardo Turla's letter to the effect that petitioners agreed that the three (3)-year period should be counted from the termination of the case filed by Lancer. At best, petitioners' letters can only be construed as mere reminders which cannot be considered demands for performance because it must appear that the tolerance or benevolence of the creditor must have ended.

SOLAR HARVEST, INC., vs. DAVAO CORRUGATED CARTON CORPORATION G.R. no. 176868

Key terms used: In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties’ respective obligations should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the present article, 19 that is, the other party would incur in delay only from the moment the other party demands fulfillment of the former’s obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue.

Laws/doctrines: Art. 1169, 1191 (all Civil Code)

Facts:

In the 1st quarter of 1998, Solar Harvest and Davao Corrugated entered into an unwritten agreement. Solar Harvest placed orders for customized boxes for its business of exporting bananas at USD 1.10 each. Plaintiff made a full payment of USD 40,150.00. By Jan. 3, 2001 plaintiff had not received any of the ordered boxes. On Feb. 19, 2001Davao Corrugated replied that as early as April 3, 1998, order/boxes are completed and Solar Harvest failed to pick themup from their warehouse within 30 days from completion as agreed upon. Defendant mentioned that plaintiff even placed additional order of 24,000.00 boxes, out of which, 14,000 had already been manufactured without any advance payment from Solar Harvest. Davao Corrugated then demanded that Solar Harvest remove boxes from their warehouse pay balance of USD 15,400.00 for the additional boxes and P132,000 as storage fee. On August 17, 2001 Solar harvest filed complaint against Davao Corrugated for sum of money and damages claiming that the agreement was for the delivery of the boxes, which Davao Corrugated did not do. They further alleged that whenever repeated follow-up was made to Davao Corrugated, they would only see sample boxes and get promise of delivery. Due to Davao Corrugated’s failure to deliver, Solar Harvest had to cancel the order and demanded payment and/or refund which Davao Corrugated refused to pay.

Davao Corrugated counterclaimed that they had already completed production of the 36,500 boxes plusan additional 14,000 boxes (which was part of the additional 24,000 order that is unpaid). The agreement was for SolarHarvest to pick up the boxes, which they did not do. They even averred that on Oct. 8, 1998 Solar Harvest’s representative Bobby Que even went to the warehouse to inspect and saw that indeed boxes were ready for pick up. On Feb. 20, 1999, Que visited the factory again and said that they ought to sell the boxes to recoup some of the costs of the14,000 additional orders because their transaction to ship the bananas did not materialize. Solar Harvest denies that they made the additional order.

Issue: Whether defendant did commit any breach of its contractual obligation with plaintiff to justify a cause of action for rescission

Ruling:

No.

The right to rescind a contract arises once the other party defaults in the performance of his obligation. In determining when default occurs, Art. 1191 should be taken in conjunction with Art. 1169 of the same law.

In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties’ respective obligations should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the present article,19 that is, the other party would incur in delay only from the moment the other party demands fulfillment of the former’s obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue.

In this case, plaintiff’s claim for reimbursement actually partakes of rescission of contract under Art. 1191 of the Civil Code. There was lack of demand by plaintiff upon defendant to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that plaintiff made a "follow-up" upon defendant, which, however, would not qualify as a demand for the fulfillment of the obligation. Plaintiff’s witness also testified that they made a follow-up of the boxes, but not a demand. Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter was sent to defendant. Without a previous demand for the fulfillment of the obligation, plaintiff would not have a cause of action for rescission against defendant as the latter would not yet be considered in breach of its contractual obligation. Even assuming that a demand had been previously made before filing the present case, plaintiff’s claim for reimbursement would still fail, as the circumstances would show that defendant was not guilty of breach of contract.

Aside from the pictures of the finished boxes and the production report thereof, there is ample showing that the boxes had already been manufactured by defendant. There is the testimony of Estanislao who accompanied Que to the factory, attesting that, during their first visit to the company, they saw the pile of plaintiff’s boxes and Que took samples thereof. Que, plaintiff’s witness, himself confirmed this incident. He testified that Tan pointed the boxes to him and that he got a sample and saw that it was blank. Que’s absolute assertion that the boxes were not manufactured is, therefore, implausible and suspicious.

Plaintiff had the burden to prove that the agreement was, in fact, for defendant to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole witness, Que, was not even competent to testify on the terms of the agreement and, therefore, we cannot give much credence to his testimony. It appeared from the testimony of Que that he did not personally place the order with Tan. Without such authority, TADECO would not have allowed defendant to deposit the boxes within its premises.

Tanguilig vs CA G.R. no. 117190

Key terms: It is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration  and, in case of doubt, their contemporaneous and subsequent acts shall be principally considered.  

In order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss or destruction of the object of the contract. 4 requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation in or aggravation of the injury to the creditor.

Laws/doctrines: Art. 1167, 1174 (all Civil Code)

Facts:

Sometime in April 1987 plaintiff Jacinto M. Tanguilig doing business under the name and style J.M.T. Engineering and General Merchandising proposed to defendant Vicente Herce Jr. to construct a windmill system for him. After some negotiations they agreed on the construction of the windmill for a consideration of P60,000.00 with a one-year guaranty from the date of completion and acceptance by defendant Herce Jr. of the project. Pursuant to the agreement defendant paid plaintiff a down payment of P30,000.00 and an installment payment of P15,000.00, leaving a balance of P15,000.00.

On 14 March 1988, due to the refusal and failure of defendant to pay the balance, plaintiff filed a complaint to collect the amount. In his Answer before the trial court defendant denied the claim saying that he had already paid this amount to the San Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which the windmill system was to be connected. According to defendant, since the deep well formed part of the system the payment he tendered to SPGMI should be credited to his account by plaintiff. Moreover, assuming that he owed plaintiff a balance of P15,000.00, this should be offset by the defects in the windmill system which caused the structure to collapse after a strong wind hit their place. 1

Plaintiff denied that the construction of a deep well was included in the agreement to build the windmill system, for the contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive of other incidental materials needed for the project. He also disowned any obligation to repair or reconstruct the system and insisted that he delivered it in good and working condition to defendant who accepted the same without protest. Besides, its collapse was attributable to a typhoon, a force majeure, which relieved him of any liability.

Issue: Whether the agreement to construct the windmill system included the installation of a deep well

Whether plaintiff is under obligation to reconstruct the windmill after it collapsed.

Ruling:

1st issue:

No.

It is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration  5 and, in case of doubt, their contemporaneous and subsequent acts shall be principally considered. 6 

In this case, nowhere in either proposal of plaintiff and defendant is the installation of a deep well mentioned even remotely. Neither is there an itemization or description of the materials to be used in constructing the deep well. There is absolutely no mention in the two (2) documents that a deep well pump is a component of the proposed windmill system. The contract prices fixed in both proposals cover only the features specifically described therein and no other. While the words "deep well" and "deep well pump" are mentioned in both, these do not indicate that a deep well is part of the windmill system. They merely describe the type of deep well pump for which the proposed windmill would be suitable. As correctly pointed out by plaintiff, the words "deep well" preceded by the prepositions "for" and "suitable for" were meant only to convey the idea that the proposed windmill would be appropriate for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of plaintiff was to include a deep well in the agreement to construct a windmill, he would have used instead the conjunctions "and" or "with." Since the terms of the instruments are clear and leave no doubt as to their meaning they should not be disturbed.

The claim of Pili that Herce Jr. wrote him a letter is unsubstantiated. The alleged letter was never presented in court by private defendant for reasons known only to him. But granting that this written communication existed, it could not have simply contained a request for Pili to install a deep well; it would have also mentioned the party who would pay for the undertaking. It strains credulity that defendant would keep silent on this matter and leave it all to plaintiff Tanguilig to verbally convey to Pili that the deep well was part of the windmill construction and that its payment would come from the contract price of P60,000.00.

It is also unusual that Pili would readily consent to build a deep well the payment for which would come supposedly from the windmill contract price on the mere representation of plaintiff, whom he had never met before, without a written commitment at least from the former. For if indeed the deep well were part of the windmill project, the contract for its installation would have been strictly a matter between plaintiff and Pili himself with the former assuming the obligation to pay the price. That it was defendant Herce Jr. himself who paid for the deep well by handing over to Pili the amount of P15,000.00 clearly indicates that the contract for the deep well was not part of the windmill project but a separate agreement between defendant and Pili. Besides, if the price of P60,000.00 included the deep well, the obligation of defendant was to pay the entire amount to plaintiff without prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the latter. Significantly, when asked why he tendered payment directly to Pili and not to plaintiff, defendant explained, rather lamely, that he did it "because he has (sic) the money, so (he) just paid the money in his possession."

Second, defendant cannot claim that Pili accepted his payment on behalf of plaintiff. While the law is clear that “payment shall be made to the person in whose favor the obligation has been constituted or his successor-in-interest or any person authorized to receive it. It does not appear that Pili and/ or SPGMI was so authorized.

Third, defendant cannot claim the benefit of the law concerning "payments made by a third person." 10 The Civil Code provisions do not apply in the instant case because no creditor-debtor relationship between plaintiff and Guillermo Pili and/or SPGMI has been established regarding the construction of the deep well. Specifically, witness Pili did not testify that he entered into a contract with plaintiff for the construction of defendant's deep well. If SPGMI was really commissioned by plaintiff to construct the deep well, an agreement particularly to this effect should have been entered into.

The contemporaneous and subsequent acts of the parties concerned effectively belie defendant's assertions. These circumstances only show that the construction of the well by SPGMI was for the sole account of defendant and that plaintiff merely supervised the installation of the well because the windmill was to be connected to it. There is no legal nor factual basis by which this Court can impose upon plaintiff an obligation he did not expressly assume nor ratify.

2nd issue:

Yes, plaintiff failed to show that the collapse of the windmill was due solely to a fortuitous event.

In order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss or destruction of the object of the contract. 4 requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation in or aggravation of the injury to the creditor.

In this case, plaintiff failed to show that the collapse  collapse of the windmill was due solely to a fortuitous event. Interestingly, the evidence does not disclose that there was actually a typhoon on the day the windmill collapsed. Plaintiff merely stated that there was a "strong wind." But a strong wind in this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not turn.

The appellate court correctly observed that "given the newly-constructed windmill system, the same would not have collapsed had there been no inherent defect in it which could only be attributable to the appellee."13 It emphasized that defendant had in his favor the presumption that "things have happened according to the ordinary course of nature and the ordinary habits of life."  14 This presumption has not been rebutted by plaintiff.

Finally, plaintiff's argument that private defendant was already in default in the payment of his outstanding balance of P15,000.00 and hence should bear his own loss, is untenable. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him.  15 When the windmill failed to function properly it became incumbent upon plaintiff to institute the proper repairs in accordance with the guaranty stated in the contract. Thus, defendant cannot be said to have incurred in delay; instead, it is plaintiff who should bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point that if a person obliged to do something fails to do it, the same shall be executed at his cost.

AGUSTINA LIQUETTE TAN, vs. COURT OF APPEALS AND SPS. MARIANO SINGSON and VISITACION SINGSON G.R. no. 80479

Key terms: 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 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 plaintiff to rescind it without resort to the courts, the plaintiff's action in unilaterally terminating the contract in this case is unjustified.

Mere delay for a few days in clearing the title to the property cannot be considered substantial enough to warrant rescission of the contract.

Laws/doctrines: Art. 1191, 1169, 1182 (all Civil Code)

Facts:

defendants-appellants spouses (private defendants herein) are the owners of a house and lot located at No. 34 Easter Road, Baguio City, and covered by T.C.T. No. T-13826, which were then for sale. On June 14, 1984, plaintiff-appellee together with her agent went to see said spouses at their residence regarding the property. After appellants had shown appellee around the house and had conversation about the encumbrances and/or liens on the property, the parties finally agreed on the price of Pl,800,000.00, with appellee to advance earnest money of P200,000.00 to enable appellants to secure the cancellation of the mortgage and lien annotated on the title of the property and the balance of the price to be paid by appellee on June 21, 1984. Forthwith, appellee handed to appellants a check for P200,000.00 and thereupon the parties signed a receipt (Exh. A) in the following tenor:

In turn, appellants handed to appellee a xerox copy of the title and other papers pertaining to the property as well as an inventory of the furnishings of the house that are included in the sale. There (3) days thereafter, i.e., on June 17, 1984, appellee returned to appellants' house together with her daughter Corazon and one Ines, to ask for a reduction of the price to Pl,750,000.00 and appellants spouses agreed, and so another receipt entitled "Agreement" (Exh. B) was signed by the parties as follows:

The very same day that appellants received the earnest money of P 200,000.00, they started paying their mortgage loan with the Development Bank of the Philippines (DBP) to clear up the title of the subject property. On June 14, 1984, appellants paid the bank P30,000.00 per receipt, Exhibit B; on June 18, 1984 another P50,000.00 (Exh. 4-c); on June 29, 1984, P20,000.00 (Exh. 4-D); and on July

5, 1984, P70,909.59 and another P19,886.60 (Exhs. 4-F and 4-G) in full payment of the mortgage loan. On July 9, 1984, the DBP executed a cancellation of mortgage, which was registered with the Registry of Property of Baguio City in July 12, 1984. Appellants also paid all the taxes due and in appears on the property. It likewise appears that appellants paid in full on July 17, 1984 the cost price of the 338 square meter lot which was awarded to appellant Visitacion Singson per her townsite sale application for said property. And the request of the City Sheriff of Baguio City to lift the notice of levy in execution dated February 2, 1978 in Civil Case No. Q-10202, Pio S. Acampado, et al. v. Mariano D. Singson, et al., was duly annotated on the back of TCT No. T-1 3826 on August 2, 1979.

On June 25, 1984, appellee accompanied by her daughter Corazon and her lawyer, Atty. Vicente Quitoriano, went to Baguio City to inquire about the status of the property and appellants told her that the Development Bank of the Philippines was taking some time processing their payments and preparing the deed of cancellation of the mortgage. On that occasion, the parties agreed on an extension of two (2) weeks for the execution of the deed of sale. Here, the parties' respective versions on the matter parted ways. According to appellants, it was appellee who asked for the extension because she was not yet ready to pay the balance of P l,550,000.00. On the other hand, appellee said that it was appellants who asked for it because the title of the property was not yet cleared. The court below believed appellee because on said date the Development Bank had not yet executed the deed of cancellation of mortgage, and no title has yet been issued for the driveway although already fully paid for.

Immediately, upon execution by the DBP of the deed of cancellation of mortgage of July 9, 1984, appellants tried to contact appellee and/or her daughter Corazon to come to Baguio City for the formal execution of the deed of sale, but to no avail. Instead, appellants received a telegram from Atty. Quitoriano cancelling the sale and demanding the return of the P200,000.00 earnest money. Appellants countered with a letter of their lawyer, Atty. Tiofisto Rodes, calling on appellee to perform her part of the contract because "the title to the house and lot right now suffers no imperfection or doubt. The levy on execution has long been lifted, the mortgage indebtedness released, the portion of the public land used as driveway has long been awarded and fully paid for the City of Baguio. In short, the title can now be transferred in your name upon execution of the contract of sale ... Your refusal will compel us to sue for specific performance. . .

Before appellants could make good their threat, appellee "jumped the gun", so to speak, upon them by filing in court on August 27, 1984 the case for recovery of sum of money with damages which is now this case on appeal before us.

In her complaint, appellee alleged that she gave appellants spouses P200,000.00 upon their assurances that they could transfer to her the house and lot she was buying from them free from any liens and encumbrances, including the furnishings thereof and the adjacent lot being used as driveway, on June 25, 1984, but that day had come and passed without appellants being able to make good their promise, because she "discovered to her shock and dismay that she had been dealt with in bad faith by defendants" as the mortgage on the property was not released or cancelled and the driveway was still public land and could not be validly transferred to her as any disposition thereof would yet require approval by the Secretary of Agriculture and Natural Resources. Hence, the suit against appellants spouses for recovery of the P200,000.00 earnest money which is, in essence and concept, one for rescission with damages.

Issue: whether the private defendants committed a substantial breach of their obligation so as to warrant plaintiff's exercise of her right to rescind the contract of sale under Article 1191 of the Civil Code.

Ruling:

No, the alleged breach of the obligation by the private defendants which consists in a mere delay for a few days in clearing the title to the property, cannot be considered substantial enough to warrant rescission of the contract.

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 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 plaintiff to rescind it without resort to the courts, the plaintiff's action in unilaterally terminating the contract in this case is unjustified.

Rescission will not be permitted for a slight or casual breach of the contract but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. A court, in determining whether rescission is warranted, must exercise its discretion judiciously considering that the question of whether a breach of a contract is substantial depends upon the attendant circumstances.

In this case, plaintiff received on July 17, 1984 through her daughter Cora Tan Singson, a telegram from private defendant Visitacion Singson advising the former that the papers for the sale of the property are ready for final execution. The parties likewise met on June 25, 1984, the day agreed upon for the full payment of the purchase price, and they agreed on a further extension of two weeks for the execution of the deed of sale. Despite this agreement, 'private defendants suddenly received a telegram from Atty. Quitoriano, counsel for the plaintiff, unilaterally stopping the sale and demanding the return of the earnest money paid by plaintiff. 

Private defendants had substantially complied with their undertaking of clearing the title to the property which has a total land area of 886 square meters. It must be pointed out that the subject lot consists of private land, with an area of 548 square meters, covered by TCT No. T-13826 and of a portion of the public land which has been awarded to the private defendants under Townsite Sales Application No. 7-676-A. While TCT No. T-13826 was subject to a mortgage in favor of DBP, private defendants, upon receipt of the earnest money paid by plaintiff, utilized the same to settle its obligations with DBP thus enabling them to secure a cancellation of the existing mortgage, which was duly noted in the title to the property.

As to the notice of levy and execution annotated on TCT No. T-13826, a request to lift the same had already been filed with the Register of Deeds and duly noted on the title (Original Records, p. 95]. The fact that said notice had not yet been cancelled by the Register of Deeds as of June 25, 1984 cannot prejudice the sellers who must be deemed to have substantially complied with their obligation. The rule in this jurisdiction is that where the fulfillment of the condition (in a conditional obligation) does not depend on the will of the obligor, but on that of a third person, the obligor's part of the contract is complied with.

Second, private defendants' interest in the public land used as a driveway can likewise be conveyed to plaintiff although no title has yet been issued in the name of Visitacion Singson. Such portion of the public land has long been awarded to Singson in 1972 and payment of the purchase price thereof has already been completed as of July 17, 1984. The fact that the consent of the Secretary of Agriculture and Natural Resources to the sale of the property to plaintiff has not yet been secured cannot be considered a substantial breach of private defendants' obligation under the contract of sale. Prior approval of the Secretary of Agriculture and Natural Resources is required only in cases of sale and encumbrance of the public land during the pendency of the application by the purchaser and before his compliance with the requirements of the law. 

Here, since the land in question had already been awarded to private defendants since 1972 and all the requirements of the law for the purchase of public land were subsequently complied with, private defendants, as owners of said property, can properly convey title thereto to plaintiff.

Third, inasmuch as the private defendants are ready, willing and able to comply with their obligation to deliver title to the property subject of the sale and had already demanded that plaintiff pay the full amount of the purchase price, the plaintiff must be considered as having incurred in delay.

Article 1169 of the Civil Code which states: “Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially demands from them the fulfillment of their obligation.” “In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.”

The breach of a contract gives the aggrieved party under the law and even under general principles of fairness, the right to rescind the contract or to ask for specific performance. Plaintiff having failed to comply with her obligation of paying the balance of the purchase price despite demands by private defendants, private defendants were clearly entitled to their counterclaim for specific performance, as correctly adjudged by the defendant court.

Fourth, the claim that plaintiff’s consent to  the contract was vitiated by fraud and, therefore, the contract in question is voidable is patently unmeritorious. The contract of sale is not voidable where no evidence was shown that through insidious words or machinations under Article 1338 of the Civil Code, the seller had induced the buyer to enter into the contract.

In this case, private defendants did not represent to plaintiff that the house and lot they were selling were free from liens and encumbrances. Rather, they told her that the property was mortgaged to the DBP which was why they asked her to advance P200,000.00 as earnest money so that they could settle the mortgage indebtedness and clear up the title. The testimony of plaintiff herself shows that she was furnished with xerox copies of the title, at the back of which was a memorandum of the encumbrances of the property. Furthermore, at the time plaintiff entered into the agreement in question, she was accompanied by her daughter Corazon and one Maria Lorenzo whom she could have asked to explain the particulars of the transaction that she could not understand

DARREL CORDERO, EGMEDIO BAUTISTA, ROSEMAY BAUTISTA, MARION BAUTISTA, DANNY BOY CORDERO, LADYLYN CORDERO and BELEN CORDERO, vs. F.S. MANAGEMENT & DEVELOPMENT CORPORATION G.R. no. 167213

Key terms: Under a contract to sell, the seller retains title to the thing to be sold until the purchaser fully pays the agreed purchase price. The full payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract but merely an event that prevents the seller from conveying title to the purchaser in accordance with Article 1184 of the Civil Code. The non-payment of the purchase price renders the contract to sell ineffective and without force and effect.

Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. It also provides the right of the buyer on installments in case he defaults in the payment of succeeding installments.

Laws/doctrines: Art. 1191, 1184, 1592 (all Civil Code)

Facts:

Belen Cordero, in her own behalf and as attorney-in-fact of her co-plaintiffs, entered into a contract to sell with defendant F.S.

Management and Development Corporation (FSMDC) over five (5) parcels of land located in Batangas. Pursuant to the terms and

conditions of the contract, FSMDC paid earnest money. No further payments were made thereafter. Cordero sent FSMDC a demand

letter, revoking the contract to sell and treating the payments already made as payment for damages suffered. FSMDC likewise

demanded the payment for actual damages suffered due to loss of income.

Cordero thereafter filed before the Regional Trial Court of Parañaque a complaint for rescission of contract with damages alleging FSMDC

failed to comply with its obligations under the contract to sell; and that consequently entitled to rescind the contract to sell as well as

demand the payment of damages. FSMDC, on the other hand, alleged that Cordero has no cause of action considering that they were

the first to violate the contract to sell. It was Cordero who prevented FSMDC from complying with its obligation to pay in full by refusing

to execute the final contract of sale unless additional payment of legal interest is made. Moreover, Cordero‘s refusal to execute the final

contract of sale was due to the willingness of another buyer to pay a higher price. 

The RTC issued its decision, finding in favor of Cordero et al. and ordered FSMDC to pay damages and attorney‘s fees. The Court of

Appeals affirmed the decision of the lower court and denied their motion for reconsideration. 

Issue: Whether the subject contract to sell may be subject to rescission under Article 1191 of the Civil Code.

Whether the Court of Appeals erred in setting aside the award of damages.

Ruling:

1st issue:

No.

The nature as well as characteristics of a contract to sell is determinative of the propriety of the remedy of rescission and the award of damages.

Under a contract to sell, the seller retains title to the thing to be sold until the purchaser fully pays the agreed purchase price. The full payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract but merely an event that prevents the seller from conveying title to the purchaser in accordance with Article 1184 of the Civil Code. The non-payment of the purchase price renders the contract to sell ineffective and without force and effect.

In this case, the non-fulfillment by the defendant of his obligation to pay, which is a suspensive condition to the obligation of the plaintiffs to sell and deliver the title to the property, rendered the contract to sell ineffective and without force and effect. The parties stand as if the conditional obligation had never existed.  Article 1191 of the New Civil Code will not apply because it presupposes an obligation already extant. There can be no rescission of an obligation that is still non-existing, the suspensive condition not having happened.

Second, Articles 1191 and 1592 of the Civil Code are applicable to contracts of sale. In contracts to sell, RA 6552 applies. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon non-payment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. It also provides the right of the buyer on installments in case he defaults in the payment of succeeding installments.

In this case, the properties subject of the contract having been intended for commercial, and not for residential, purposes, plaintiffs are entitled to retain the payments already made by defendant. RA 6552 expressly recognizes the vendor’s right to cancel contracts to sell on installment basis industrial and commercial properties with full retention of previous payments.  But even assuming that the properties were not intended for commercial or industrial purpose, since defendant paid less than two years of installments, it is not entitled to any refund. It is on this score that a modification of the challenged issuances of the appellate court is in order.

2nd issue:

No, respecting plaintiffs’ claim for damages, failure to make full payment of the purchase price in a contract to sell is not really a breach, serious or otherwise, but, as stated before, an event that prevents the obligation of the vendor to convey title to the property from arising. Consequently, the award of damages is not warranted in this case. With regard to attorney’s fees, Article 2208 of the Civil Code provides that subject to certain exceptions, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered in the absence of stipulation. None of the enumerated exceptions in Article 2208 is present in this case. It bears stressing that the policy of the law is to put no premium on the right to litigate.

MILA A. REYES, , vs. VICTORIA T. TUPARAN G.R. no. 188064

Key terms: A Contract to Sell may not be considered as a Contract of Sale because the first essential element is lacking. In a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. In other words, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and, thus, ownership is retained by the prospective seller without further remedies by the prospective buyer.

The full payment of the purchase price is the positive suspensive condition, the failure of which is  not a breach of contract, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force. Thus, for its non-fulfilment, there is no contract to speak of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. With this circumstance, there can be no rescission or fulfillment of an obligation that is still non-existent, the suspensive condition not having occurred as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation. Regarding the right to cancel the contract for non-payment of an installment, there is need to initially determine if what the parties had was a contract of sale or a contract to sell.

Unless the parties stipulated it, rescission is allowed only when the breach of the contract is substantial and fundamental to the fulfillment of the obligation. Whether the breach is slight or substantial is largely determined by the attendant circumstances.

Laws/doctrines: Art. 1191, 1458, 1479 (all Civil Code)

Facts:

Plaintiff  Mila  Reyes  owns  a  three‐storey  commercial  building  in  Valenzuela  City. Defendant, Victoria Tuparan leased a space on said building for a monthly  rental  of  P4,  000.  Aside  from  being  a  tenant,  defendant  also  invested  in plaintiff's  financing  business.  On  June  20,  1988,  Plaintiff  borrowed  P2  Million  from  Farmers  Savings  and  Loan  Bank  (FSL  Bank)  and  mortgaged  the  building and lot (subject real properties). 

Reyes decided to sell the property for  P6.5 Million to liquidate her loan and finance her business. Defendant offered  to  conditionally  buy  the  real  properties  for  P4.2  Million  on  installment  basis  without interest and to assume the bank loan. The conditions are the following:

1. Sale will be cancelled if the plaintiff can find a buyer of said properties for  the amount of P6.5 Million within the next three months. All payments made by  the defendant to the plaintiff and the bank will be refunded to Tuparan with  an additional 6% monthly interest.

2.  Plaintiff  Reyes  will  continue  using  the  space  occupied  by  her  drug  store  without rentals for the duration of the installment payments.

3. There will be a lease for 15 years in favor of Reyes for a monthly rental of P8,000 after full payment has been made by the defendant.

4. The defendant will undertake the renewal and payment of the fire insurance policies of the 2 buildings, following the expiration of the current policies, up to  the time the defendant has fully paid the purchase price

They presented the proposal for Tuparan to assume the mortgage to FSL Bank.  The  bank  approved  on  the  condition  that  the  plaintiff  would  remain  as  co‐maker of the mortgage obligation.

Plaintiff's   Contention:

Under  their Deed of Conditional Sale,  the  defendant is obliged  to pay a lump  sum of P1.2 Million in three fixed installments. Defendant, however defaulted  in  the  payment  of  the installments. To  compensate  for  her  delayed  payments,  defendant  agreed  to  pay  plaintiff  monthly  interest.  But  again,  defendant  failed  to  fulfill  this  obligation.  The  plaintiff  further  alleged  that  despite  her  success in finding another buyer according to their conditional sale agreement,  defendant  refused  to cancel  their  transaction. The  defendant also neglected  to renew the fire insurance policy of the buildings.

Defendant's   Answer:

Defendant  alleges  that  the  deed  of  Conditional  Sale  of  Real  Property  with  Assumption of Mortgage was actually a pure and absolute contract of sale with  a  term  period.  It  could  not  be  considered  a  conditional  sale  because  the  performance  of  the  obligation  therein  did  not  depend  upon  a  future  and uncertain  event.  She  also  averred  that  she  was  able  to  fully  pay  the  loan  and  secure  the  release  of  the  mortgage.  Since  she  also  paid  more  than  the  P4.2  Million  purchase  price,  rescission  could  not  be  resorted  to  since  the  parties  could no longer be restored to their original positions.

Issue: whether the CA was correct in ruling that there was no legal basis for the rescission of the Deed of Conditional Sale with Assumption of Mortgage.

Ruling:

Yes, the subject Deed of Conditional Sale with Assumption of Mortgage entered into by and among the two parties and FSL bank on Nov. 26, 1990 is a contract to sell and not a contract of sale.

A Contract to Sell may not be considered as a Contract of Sale because the first essential element is lacking. In a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. In other words, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and, thus, ownership is retained by the prospective seller without further remedies by the prospective buyer.

The full payment of the purchase price is the positive suspensive condition, the failure of which is  not a breach of contract, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force. Thus, for its non-fulfillment, there is no contract to speak of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. With this circumstance, there can be no rescission or fulfillment of an obligation that is still non-existent, the suspensive condition not having occurred as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation. Regarding the right to cancel the contract for non-payment of an installment, there is need to initially determine if what the parties had was a contract of sale or a contract to sell.

In this case, the title and ownership of the subject properties remains with the plaintiff until the defendant fully pays the balance of the purchase price and the assumed mortgage obligation. Thereafter, FSL Bank shall then issue the corresponding deed of cancellation of mortgage and the plaintiff shall execute the corresponding deed of absolute sale in favor of the defendant.

Accordingly, the plaintiff’s obligation to sell the subject properties becomes demandable only upon the happening of the positive suspensive condition, which is the defendant’s full payment of the purchase price. Without defendant’s full payment, there can be no breach of contract to speak of because plaintiff has no obligation yet to turn over the title. Defendant’s failure to pay in full the purchase price is not the breach of contract contemplated under Article 1191 of the New Civil Code but rather just an event that prevents the plaintiff from being bound to convey title to the defendant.

Considering that the Deed of Conditional Sale was not cancelled by Vendor Reyes (plaintiff) and that out of the total purchase price of the subject property in the amount of ₱4,200,000.00, the remaining unpaid balance of Tuparan (defendant) is only ₱805,000.00, a substantial amount of the purchase price has already been paid. It is only right and just to allow Tuparan to pay the said unpaid balance of the purchase price to Reyes.

Second, granting that a rescission can be permitted under Article 1191, the Court still cannot allow it for the reason that, considering the circumstances, there was only a slight or casual breach in the fulfillment of the obligation.

Unless the parties stipulated it, rescission is allowed only when the breach of the contract is substantial and fundamental to the fulfillment of the obligation. Whether the breach is slight or substantial is largely determined by the attendant circumstances.

From the records, it cannot be denied that defendant paid to FSL Bank plaintiff’s mortgage obligation in the amount of ₱2,278,078.13, which formed part of the purchase price of the subject property. Likewise, it is not disputed that defendant paid directly to plaintiff the amount of ₱721,921.87 representing the additional payment for the purchase of the subject property. Clearly, out of the total price of ₱4,200,000.00, defendant was able to pay the total amount of ₱3,000,000.00, leaving a balance of ₱1,200,000.00 payable in three (3) installments.

Out of the ₱1,200,000.00 remaining balance, defendant paid on several dates the first and second installments of ₱200,000.00 each. She, however, failed to pay the third and last installment of ₱800,000.00 due on December 31, 1991. Nevertheless, on August 31, 1992,

defendant, through counsel, offered to pay the amount of ₱751,000.00, which was rejected by plaintiff for the reason that the actual balance was ₱805,000.00 excluding the interest charges.

Considering that out of the total purchase price of ₱4,200,000.00, defendant has already paid the substantial amount of ₱3,400,000.00, more or less, leaving an unpaid balance of only ₱805,000.00, it is right and just to allow her to settle, within a reasonable period of time, the balance of the unpaid purchase price. The Court agrees with the courts below that the defendant showed her sincerity and willingness to comply with her obligation when she offered to pay the plaintiff the amount of ₱751,000.00.

FERNANDO CARRASCOSO, JR vs CA G.R. no. 123672

Key terms used: Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. 60 They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other.

The right of rescission of a party to an obligation under Article 1191 is predicated on a breach of faith by the other party who violates the reciprocity between them.

A contract of sale is a reciprocal obligation. The seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer obligates itself to pay therefor a price certain in money or its equivalent.  The non-payment of the price by the buyer is a resolutory condition which extinguishes the transaction that for a time existed, and discharges the obligations created thereunder.  Such failure to pay the price in the manner prescribed by the contract of sale entitles the unpaid seller to sue for collection or to rescind the contract.

A partially unpaid seller can agree to the buyer’s mortgaging the subject of the sale without changing the time fixed for the payment of the balance of the price. The two agreements are not incompatible with each other such that when one is to be implemented, the other has to be suspended

Laws/doctrines: Art. 1191 Civil Code

Facts:

In March 1972, El Dorado Plantation, Inc. (El Dorado), through its board member Lauro Leviste, executed a Deed of Sale with Fernando Carrascoso, Jr. The subject of the sale was a 1,825 hectare of land. It was agreed that Carrascoso was to pay P1.8M.; that P290K would be paid by Carrascoso to PNB to settle the mortgage upon the said land. P210k would be paid directly to Leviste. The balance of P1.3M plus 10% interest would be paid over the next 3 years at P519k every 25th of March. Leviste also assured that there were no tenants hence the land does not fall under the Land Reform Code. Leviste allowed Carrascoso to mortgage the land which the latter did.

Carrascoso obtained a total of P1.07M as mortgage and he used the same to pay the down payment agreed upon in the contract. Carrascoso defaulted from his obligation which was supposed to be settled on March 25, 1975. Leviste then sent him letters to make good his end of the contract otherwise he will be litigated.

In 1977, Carrascoso executed a Buy and Sell Contract with PLDT. The subject of the sale was the same land sold to Carrascoso by Leviste but it was only the 1000 sq. m. portion thereof. The land is to be sold at P3M. Part of the terms and conditions agreed upon was that Carrascoso is to remove all tenants from the land within one year. He was also being given a 6-month extension in case he’ll need one. Thereafter, PLDT will notify Carrascoso if whether or not PLDt will finalize the sale. Eventually, PLDT gained possession of the land.

Meanwhile, El Dorado filed a civil case against Carrascoso. PLDT intervened averring that it was a buyer in good faith. The Regional Trial Court (RTC) ruled in favor of Carrascoso. The Court of Appeals (CA) reversed the RTC ruling.

Issue: Whether the action for rescission of El Dorado was prematurely filed

Ruling:

No.

Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.60 They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. The right of rescission of a party to an obligation under Article 1191 is predicated on a breach of faith by the other party who violates the reciprocity between them.

A contract of sale is a reciprocal obligation. The seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer obligates itself to pay therefor a price certain in money or its equivalent.  The non-payment of the price by the buyer is a resolutory condition which extinguishes the transaction that for a time existed, and discharges the obligations created thereunder.  Such failure to pay the price in the manner prescribed by the contract of sale entitles the unpaid seller to sue for collection or to rescind the contract.

In this case, El Dorado already performed its obligation through the execution of the March 23, 1972 Deed of Sale of Real Property which effectively transferred ownership of the property to Carrascoso. The latter, on the other hand, failed to perform his correlative obligation of paying in full the contract price in the manner and within the period agreed upon.

The terms of the Deed are clear and unequivocal: Carrascoso was to pay the balance of the purchase price of the property amounting to P1,300,000.00 plus interest thereon at the rate of 10% per annum within a period of three (3) years from the signing of the contract on March 23, 1972. When Jose Leviste informed him that El Dorado was seeking rescission of the contract by letter of February 21, 1977, the period given to him within which to fully satisfy his obligation had long lapsed. Moreover, the El Dorado Board Resolution and the Affidavit of Jose Leviste interposing no objection to Carrascoso’s mortgaging of the property to any bank did not have the effect of suspending the period to fully pay the purchase price, as expressly stipulated in the Deed, pending full payment of any mortgage obligation of Carrascoso. The adverted resolution does not say that the obligation of Carrascoso to pay the balance was extended. Neither is there anything in it that can logically infer said accommodation.

A partially unpaid seller can agree to the buyer’s mortgaging the subject of the sale without changing the time fixed for the payment of the balance of the price. The two agreements are not incompatible with each other such that when one is to be implemented, the other has to be suspended. Here, there was no impediment for Carrascoso to pay the balance of the price after mortgaging the land. Also, El Dorado’s subordinating its "preferred claim" or waiving its superior "vendor’s lien" over the land in favor of the mortgagee of said property only means that in a situation where the unpaid price of the Land and loan secured by the mortgage over the Land both become due and demandable, the mortgagee shall have precedence in going after the Land for the satisfaction of the loan. Such accommodations do not necessarily imply the modification of the period fixed in the contract of sale for the payment by Carrascoso of the balance.

The palpable purpose of El Dorado in not raising any objection to Carrascoso’s mortgaging the land was to eliminate any legal impediment to such a contract. El Dorado’s yielding its "superior lien" over the land in favor of the mortgagee was plainly intended to overcome the natural reluctance of lending institutions to accept a land whose price has not yet been fully paid as collateral of a loan. Moreover, plaintiff was not granted extensions. Jose Leviste wrote Carrascoso, by letter of February 21, 1977, calling his attention to his failure to comply, despite "numerous" requests, with his obligation to pay the amount of P1,300,000.00 and 10% annual interest thereon, and advising him that "we would like to rescind the contract of sale." This letter reiterated the term of payment agreed upon in the March 23, 1972 Deed of Sale of Real Property and Carrascosos’s non-compliance therewith.

Furthermore. even if some officers of El Dorado were initially reluctant to file suit against him, the same should not be interpreted to mean that this was brought about by a prior extension of the period to pay the balance of the purchase price of the property as such reluctance could have been due to a myriad of reasons totally unrelated to the period of payment of the balance. If  El Dorado really intended to extend the period of payment of the balance there was absolutely no reason why it did not do it in writing in clear and unmistakable terms. That there is no such writing negates all the speculations of the court a quo and pretensions of Carrascoso. The unalterable fact here remains that on March 23, 1973, with or without demand, the obligation of Carrascoso to pay P519,933.33 became due. The same was true on March 23, 1974 and on March 23, 1975 for equal amounts . Since he did not perform his obligation under the contract of sale, he, therefore, breached it. Having breached the contract, El Dorado’s cause of action for rescission of that contract arose.

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA CATUNGAL-WESSEL vs ANGEL S. RODRIGUEZ G.R. no. 146839

Key terms: The Court has distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party the option to either refuse to proceed with the sale or to waive the condition.

Laws/doctrines: Art. 1197, 1182 (all Civil Code)

Facts:

Agapita Catungal owned a parcel of land in Barrio Talamban, Cebu City. On April 232, 1990, Agapita, with the consent of her husband (Atty. Jose Catungal), entered a Contract to Sell with respondent Angel Rodriguez. This Contract to Sell was further upgraded into a Conditional Deed of Sale where it was stipulated that the sum of P25 million will be payable as follows:

a) P500, 000 down payment upon signing of the agreement;

b) The balance of P24, 500, 000 will be payable in five separate checks: First check shall be for P4, 500, 000 while the remaining balance to be paid in four checks in the amount of P5 million each will be payable only after Rodriguez (Vendee) has successfully negotiated, secured, and provided a Road Right of Way. If however the Road Right of Way could not be negotiated, Rodriguez shall notify the Catungals for them to reassess and solve the problem by taking other options and should the situation ultimately prove futile, he shall take steps to rescind or cancel the herein Conditional Deed of Sale. It was also stipulated that the access road or Road Right of Way leading to the lot shall be the responsibility of the VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne solely by the VENDEE. He shall, however, be accorded with enough time necessary for the success of his endeavor, granting him a free hand in negotiating for the passage.

Spouses Catungal requested an advance of P5 million on the purchase price for personal reasons. However, Rodriguez refused on the ground that the amount was not due under the terms of their agreement. Further, he learned that the Catungals were offering the

property for sale to third parties who are willing to pay a higher amount of money for a Road Right of Way than what Rodriguez has initially negotiated. In other words, instead of assisting Rodriguez in successfully negotiating, the Catungals allegedly maliciously defeated his efforts so to justify the rescission. Rodriguez then received letters signed by Atty. Jose Catungal demanding him to make up his mind about buying the land or exercising his option to buy because they needed money to pay personal obligations or else the Catungals warned that they would consider the contract cancelled.

RTC ruled in favor of Rodriguez finding that his obligation to pay the balance arises only after successfully negotiating a Road Right of Way. CA affirmed the RTC’s decision but the defendants filed a motion for reconsideration and raised for the first time the contention that the court erred in not finding their stipulations null for violating the principle of mutuality of contracts.

Issue: Whether the Conditional Deed of Sale constitutes a potestative condition

Ruling:

No.

The Court has distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party the option to either refuse to proceed with the sale or to waive the condition.

In this case, what the parties entered into is a Conditional Deed of Sale whereby the spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the payment of a certain price but the payment of the purchase price was additionally made contingent on the successful negotiation of a road right of way. It is elementary that "in conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition."

Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the purchase price when he has successfully negotiated and secured a road right of way, is not a condition on the perfection of the contract nor on the validity of the entire contract or its compliance as contemplated in Article 1308. It is a condition imposed only on respondent’s obligation to pay the remainder of the purchase price. In applying Article 1182, such a condition is not purely potestative as petitioners contend. It is not dependent on the sole will of the debtor but also on the will of third persons who own the adjacent land and from whom the road right of way shall be negotiated. In a manner of speaking, such a condition is likewise dependent on chance as there is no guarantee that respondent and the third party-landowners would come to an agreement regarding the road right of way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.

Moreover, from the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee (Rodriguez) that had the obligation to successfully negotiate and secure the road right of way. However, in the decision of the trial court, which was affirmed by the Court of Appeals, it was found that respondent Rodriguez diligently exerted efforts to secure the road right of way but the spouses Catungal, in bad faith, contributed to the collapse of the negotiations for said road right of way. 

Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for respondent’s obligation to pay the balance of the purchase price to arise) in itself partly involves an obligation to do, i.e., the undertaking of respondent to negotiate and secure a road right of way at his own expense.

Second, assuming arguendo that the Catungals were correct that the respondent’s obligation to negotiate a road right of way was one with an uncertain period, their rescission of the Conditional Deed of Sale would still be unwarranted. 

What the Catungals should have done was to first file an action in court to fix the period within which Rodriguez should accomplish the successful negotiation of the road right of way pursuant to Art. 1197 of the Civil Code. Thus, the Catungals’ demand for Rodriguez to make an additional payment of P5,000,000.00 was premature and Rodriguez’s failure to accede to such demand did not justify the rescission of the contract.

Segovia vs Dumatol G.R. no. 141283

Key terms: Consignation to be valid and effective must comply with the following requisites, namely: (a) Tender of payment and refusal to accept without reason; (b) Previous notice of consignation to the persons interested in its fulfillment; (c) After the deposit or consignation has been made, the persons interested shall be notified thereof.

Laws/doctrines: Art. 1226, 1229, 1256-1261 (all Civil Code)

Facts:

Petitioner SEGOVIA DEVELOPMENT CORPORATION (SEGOVIA for brevity) and respondent J. L. DUMATOL REALTY AND DEVELOPMENT CORPORATION (DUMATOL for brevity) are domestic corporations engaged in the business of real estate development.

On 2 March 1989 petitioner SEGOVIA and respondent DUMATOL entered into three (3) separate but identical contracts to sell involving three (3) condominium units, namely, Units Nos. 703, 704 and 904, of the Heart Tower Condominium located at Lot 5, Block 2, Valero Street, Salcedo Village, Makati City. The total contract price for the three (3) units was P6,050,000.00

The contracts, which were in standard form approved by the Housing and Land Use Regulatory Board (HLURB), contained the following provisions:

a. Escalation Clause

2.5 Should there be an increase or decrease in the total Consumer Price Index (CPI) (as set forth by the Central Bank of the Philippines or by any agency of the government), of more that FIFTEEN (15%) PERCENT, from the time this Contract is executed, a corresponding adjustment in the unpaid balance or remaining installment under this Contract shall be made. The amount of adjustment shall be the net percentage of change in excess of FIFTEEN (15%) PERCENT. The Buyer has the option to accelerate payments or pay the balance in full without interest to avoid upward adjustments.

b. Cancellation by the Seller

4.1 x x x x Where less than 2 years of installments were paid, the SELLER shall give the BUYER a grace period of 60 days but a penalty of 3% per month shall be levied upon unpaid installments. If the BUYER fails to comply, the SELLER may cancel the Contract after 30 days from receipt by the BUYER of the Notice of Cancellation or the Demand of Rescission of the Contract by a notarial act without need of judicial action.

Out of the total contract price of P6,050,000.00, respondent DUMATOL was able to pay only the amount of P450,000.00 for the three (3)units . However, the check paid by respondent DUMATOL through Julius Stracham was dishonored by the bank so that only P4,400,000.00 was credited to the account of respondent DUMATOL. Since respondent DUMATOL had been in default in updating its accounts, petitioner SEGOVIA sent on 5 November 1990 a Notice of Rescission officially notifying respondent that the contract to sell for Unit 904 was being rescinded.2

On 15 November 1990 a meeting was held between the two (2) contracting parties whereby it was approved in principle that petitioner would withdraw the action for rescission subject to the condition that respondent would pay for the following: (a) the total balance for the three (3) condominium units, together with interest and the related charges amounting to P2,808,699.00 , would be settled not later than 12:00 o'clock noon of 7 December 1990; and, (b) liquidated damages amounting to P700,000.00.3

Respondent DUMATOL disputed the computation made by petitioner and informed the, latter that it was prepared to pay the remaining balance of the purchase price plus interests, which amounted to only P1,977,200.00. On 29 November 1990 respondent DUMATOL lodged a complaint4 with the HLURB praying among others that the three percent (3%) interest rate being assessed by petitioner on the defaulted payments be declared erroneous and that petitioner be likewise ordered to pay P3,400,000.00 compensatory damages. On 4 December 1990, the settlement of the outstanding balance of the purchase price not having materialized, respondent received another notice of cancellation from petitioner, this time officially informing respondent that the Contracts to Sell for Units 703, 704 and 904 were being cancelled without need of judicial action.5

On 5 December 1990 respondent consigned with the HLURB the amount of P1,977,220.00 in the form of Philippine Savings Bank Check No. 203331 which represented what it believed to be its remaining accountability to petitioner SEGOVIA.

Issue: Whether defendant’s consignation is valid

Whether the imposition of 3% and 6% interests as penalty is iniquitous or unconscionable

Ruling:

1st issue:

No.

Consignation to be valid and effective must comply with the following requisites, namely: (a) Tender of payment and refusal to accept without reason; (b) Previous notice of consignation to the persons interested in its fulfillment; (c) After the deposit or consignation has been made, the persons interested shall be notified thereof.

The essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law. Articles 1256-1261, New Civil Code. These Articles must be accorded a mandatory construction is clearly evident from the very language of the codal provisions themselves which require absolute compliance with the essential requisites therein provided. Substantial compliance is not enough for that would render only directory construction of the law. The use of the words "shall" and "must" which are imperative, operating to impose a duty which may be enforced, positively indicated that all the essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must be essentially done in order that consignation shall be valid and effectual 

In this case, on 10 December 1990, respondent consigned with the HLURB Philippine Savings Bank Check No. 203331 for P1,977,220.00 after it received from petitioner the Notice of Cancellation of the three (3) contracts. Patently, the consignment was made only to forestall an action for rescission which petitioner might take. Be that as it may, respondent never made any prior tender of payment to petitioner notwithstanding respondent's submission that there was substantial compliance with the requirements of consignation.

2nd issue:

Yes.

The three percent (3%) penalty interest is patently iniquitous and unconscionable as to warrant the exercise by this Court of its judicial discretion. A close reading of the contracts to sell will show that the three percent (3%) penalty interest on unpaid installments on a monthly basis (per Sec. 4.1) would translate to a yearly penalty interest of thirty-six percent (36%). Assuming that respondent has an outstanding balance which runs into millions (P2,559,900.00 per HLURB Arbiter's computation), the payments respondent made (amounting to P4.4 million out of the P6.05 million contract price) would be virtually wiped out if the three percent (3%) penalty interest were imposed on the account balance. Respondent DUMATOL stands to lose the three (3) condominium units notwithstanding the fact that it has substantially complied with its contractual obligations.

Although this Court on various occasions has eliminated altogether the three percent (3%) penalty interest for being unconscionable,14 we are not inclined to do the same in this case. A reduction is more consistent with fairness and equity. But it should not lose sight of the fact that petitioner remain an unpaid seller that it has suffered, one way or another, from respondent's non-performance of its contractual obligations. In view of such glaring reality, the Court invokes Art. 1229 of the Civil Code, and as equity dictates, the penalty interest is accordingly reimposed on a reduced rate of one percent (1%) interest per month or twelve percent (12%) per annum.

Second, with respect to the six percent (6%) interest per annum imposed as damages, we disallow the same for lack of legal basis.  the contracts to sell do not provide for a six percent (6%) interest on the unpaid principal and accumulated penalty and interest charges. The interest was raised for the first time on appeal as a claim for twelve, percent (12%) interest which was subsequently reduced to six percent (6%) by the HLURB. Neither can we find statutory justification for the imposition of the six percent (6%) interest in Art. 1226  of the Civil Code. An obligation with a penal clause is one that contains an accessory undertaking, primarily intended to induce faithful performance of the principal prestation.

Such cannot be true in this case because there is no stipulation in the contracts to sell imposing the six percent (6%) interest as penalty for the non-performance of the contractual obligations.

ANITA C. BUCE vs CA G.R. no. 136913

Key terms used: In a reciprocal contract like a lease, the period must be deemed to have been agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone.  The Court is not aware of any presumption in law that the term was deliberately set for the benefit of the lessee alone.

Laws/doctrines: Art. 1196 Civil Code

Facts:

Petitioner leased a 56-square meter parcel of land located at 2068 Quirino Avenue, Pandacan, Manila. The lease contract was for a period of fifteen years to commence on 1 June 1979 and to end on 1 June 1994 "subject to renewal for another ten (10) years, under the same terms and conditions." Petitioner then constructed a building and paid the required monthly rental of P200. Private respondents, through their administrator Jose Tiongco, later demanded a gradual increase in the rental until it reached P400 in 1985. For July and August 1991, petitioner paid private respondents P1,000 as monthly rental.2

On 6 December 1991, private respondents' counsel wrote petitioner informing her of the increase in the rent to P1,576.58 effective January 1992 pursuant to the provisions of the Rent Control Law.3 Petitioner, however, tendered checks dated 5 October 1991,4 5 November 1991,5 5 December  1991,  5 January 1992,7 31 May 1992,8 and 2 January 1993 9 for only P400 each, payable to Jose Tiongco as administrator. As might be expected, private respondents refused to accept the same.

On 9 August 1993, petitioner filed with the Regional Trial Court of Manila a complaint for specific performance with prayer for consignation. She prayed that private respondents be ordered to accept the rentals in accordance with the lease contract and to respect the lease of fifteen years, which was renewable for another ten years, at the rate of P200 a month. Private respondents countered that petitioner had already paid the monthly rent of P1,000 for July and August 1991. Under Republic Act No. 877, as amended, rental payments should already be P1,576.58 10 per month; hence, they were justified in refusing the checks for P400 that petitioner tendered. Moreover, the phrase in the lease contract authorizing renewal for another ten years does not mean automatic renewal; rather, it contemplates a mutual agreement between the parties.

During the pendency of the controversy, counsel for private respondents wrote petitioner reminding her that the contract expired on 1 June 1994 and demanding that she pay the rentals in arrears, which then amounted to P33,000.

Petitioner further maintains that the phrase "renewable for another ten years at the option of both parties" in the Fernandez case clearly indicated the intention of the parties to renew the contract only upon mutual agreement. Whereas in this case the contract states, "This lease shall be for a period of fifteen (15) years effective June 1, 1979, subject to renewal for another ten (10) years, under the same terms and conditions," making this stipulation subject to interpretation with due regard to the contemporaneous and subsequent acts of the parties. The stipulation in the contract allowing the lessee to construct buildings and improvements; her filing of the complaint a year

before the expiration of the initial 15-year term; and private respondents' acceptance of the increased rental are contemporaneous and subsequent acts that signify the intention of the parties to renew the contract.

Private respondents argue that the alleged contemporaneous and subsequent acts do not determine the real intention of the parties as regards renewal of the lease contract. Had they intended an automatic renewal of the lease contract they would have agreed on a 25-year period instead. Correlatively, private respondents' letter reminding petitioner of the expiration of the contract on 1 June 1994 and demanding payment of the rentals in arrears signifies that they are no longer interested in renewing the contract. Also petitioner's refusal to pay the increased rental of P1,000 as early as 1991 and private respondents' refusal to accept the P400 tendered constituted a disagreement on the rate of rental; hence, any renewal is out of the question.

Issue: Whether the parties intended an automatic renewal of the lease contract when they agreed that the lease shall be for a period of 15 years “subject to renewal for another 10 years.”

Ruling:

No.

In a reciprocal contract like a lease, the period must be deemed to have been agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone.  The Court is not aware of any presumption in law that the term was deliberately set for the benefit of the lessee alone.

The literal meaning of the stipulations shall control if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties.  However, if the terms of the agreement are ambiguous resort is made to contract interpretation which is the determination of the meaning attached to written or spoken words that make the contract. 15 Also, to ascertain the true intention of the parties, their actions, subsequent or contemporaneous, must be principally considered. A fine delineation exists between renewal of the contract and extension of its period. Generally, the renewal of a contract connotes the death of the old contract and the birth or emergence of a new one. A clause in a lease providing for an extension operates of its own force to create an additional term, but a clause providing for a renewal merely creates an obligation to execute a new lease contract for the additional term. As renewal of the contract contemplates the cessation of the old contract, then it is necessary that a new one be executed between the parties. 

In this case, there is nothing in the stipulations in the contract and the parties' actuation that shows that the parties intended an automatic renewal or extension of the term of the contract. Even the RTC conceded that the issue of automatic renewal is debatable. The fact that the lessee was allowed to introduce improvements on the property is not indicative of the intention of the lessors to automatically extend the contract. Considering the original 15-year duration of the contract, structures would have necessarily been constructed, added, or built on the property, which in its previous state was an idle 56-square meter lot in the heart of Manila. Petitioner leased the property for the purpose of turning it into a commercial establishment and to which it has been transformed as Anita's Grocery and Store. Neither the filing of the complaint a year before the expiration of the 15-year term nor private respondents' acceptance of the increased rentals has any bearing on the intention of the parties regarding renewal. It must be recalled that the filing of the complaint was even spawned by private respondents' refusal to accept the payment of monthly rental in the amount of only P400. Moreover, it was not specifically indicated who may exercise the option to renew, neither was it stated that the option was given for the benefit of herein petitioner. Thus, pursuant to Article 1196 of the Civil Code, the period of the lease contract is deemed to have been set for the benefit of both parties. Renewal of the contract may be had only upon their mutual agreement or at the will of both of them. Since the private respondents were not amenable to a renewal, they cannot be compelled to execute a new contract when the old contract terminated on 1 June 1994. It is the owner-lessor's prerogative to terminate the lease at its expiration.   The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the lessee since the life of the contract would be dictated solely by the lessee.

ANTONIO TAN vs COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES G.R. no. 116285

Key terms: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code

Laws/doctrines: Art. 1226, 1229 (all Civil Code)

Facts:

TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.

Executed a promissory note in amount of P3,411,421.32; payable in 5 installments.

TAN failed to pay any installment on the said restructured loa.

In a letter, TAN requested and proposed to respondent CCP a mode of paying the restructured loan

i. 20% of the principal amount of the loan upon the respondent giving its conformity to his proposal

ii. Balance on the principal obligation payable 36 monthly installments until fully paid.

TAN requested for a moratorium on his loan obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation.

i. No favorable response was made to said letters.

ii. CCP demanded full payment, within ten (10) days from receipt of said letter P6,088,735.03.

CCP FILED COMPLAINT collection of a sum of money

TAN interposed the defense that he accommodated a friend who asked for help to obtain a loan from CCP.

i. Claimed that cannot find the friend.

TAN filed a Manifestation wherein he proposed to settle his indebtedness to CCP by down payment of P140,000.00 and to issue1 2 checks every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully paid.

i. CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, representing defendant’s outstanding account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages, plus costs.

REASONS:

i. Reason of loan for accommodation of friend was not credible.

ii. Assuming, arguendo, that the TAN did not personally benefit from loan, he should have filed a 3rd-party complaint against Wilson Lucmen

iii. 3 times the petitioner offered to settle his loan obligation with CCP.

iv. TAN may not avoid his liability to pay his obligation under the promissory note which he must comply with in good faith.

v. TAN is estopped from denying his liability or loan obligation to the private respondent.

TAN APPEALED TO CA, asked for the reduction of the penalties and charges on his loan obligation.

Judgment appealed from is hereby AFFIRMED.

1. No alleged partial or irregular performance.

2. However, the appellate court modified the decision of the trial court by deleting exemplary damages because not proportionate to actual damage caused by the non-performance of the contract

Issue: Whether there are contractual and legal bases for the imposition of penalty interest on the penalty and attorney’s fees

Ruling:

Yes.

Art. 1226 of the Civil Code provides: “In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.”

In this case, the promissory note expressly provides for the imposition of both interest and penalties in case of default on the part of the plaintiff in the payment of the subject restructured loan. The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code. 7 On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan.

Second, there appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code. The continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account. We also took into consideration the offers of the petitioner to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial problems. However, we are not unmindful of the respondent’s long overdue deprivation of the use of its money collectible from the petitioner.

FILINVEST vs. CA G.R. no. 138980

Key terms: A penal clause is an accessory undertaking to assume greater liability in case of breach. 10 It is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach.

Laws/doctrines: Art. 1226, 1229 (all Civil Code)

Facts:

Petitioner awarded to respondent Pacific Equipment Corp (Pecorp) development of its residential subdivisions, a contract amounting to P12,470,000.00. Pecorp posted two surety bonds to guarantee faithful compliance. Both agreed that liquidated damages of P15,000/day shall be paid by Pecorp in case of delay. Petitioner claimed that Pecorp failed to complete the works (94.53%) and claims for damages. Pecorp on the other hand contended that their work stopped due to failure of petitioner to pay for certain completed portion. RTC assigned a commissioner to evaluate the claims and counter-claims. The total amount due to Pecorp was computed to be P1,881,867.66. Petitioner claimed that liquidated damages amounted to P3,990,000.00 Both claims and counter-claims were dismissed. Court of Appeals affirmed the ruling of RTC.

Issue: whether or not the liquidated damages agreed upon by the parties should be reduced considering that: (a) time is of the essence of the contract; (b) the liquidated damages was fixed by the parties to serve not only as penalty in case Pecorp fails to fulfill its obligation on time, but also as indemnity for actual and anticipated damages which Filinvest may suffer by reason of such failure; and (c) the total liquidated damages sought is only 32% of the total contract price, and the same was freely and voluntarily agreed upon by the parties.

Ruling:

Yes.

A penal clause is an accessory undertaking to assume greater liability in case of breach.10 It is attached to an obligation in order to insure performance11 and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. Article 1226 of the Civil Code states: “In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.”

As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public policy. 13 Nevertheless, courts may equitably reduce a stipulated penalty in the contract in two instances: (1) if the principal obligation has been partly or irregularly complied; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code.

In this case, there is no question that the penalty of P15, 000 per day of delay was mutually agreed upon by the parties and that the same was sanctioned by law. But the said penalty charged pegged at P15, 000 per day of delay in the aggregate amount of P3,

990,000.00 was excessive and must be reduced to P 1,881,867.66 considering 94.53% of the project was already complete and that Filinvest did agree to extend the period for completion of the project, which extensions Filinvest included in computing the amount of the penalty, the reduction thereof is clearly warranted.

Moreover, there has been substantial compliance in good faith on the part of Pecorp which renders unconscionable the application of the full force of the penalty especially if we consider that in 1979 the amount ofP15,000.00 as penalty for delay per day was quite steep indeed. Nothing in the records suggests that Pecorp’s delay in the performance of 5.47% of the contract was due to it having acted negligently or in bad faith. Finally, Filinvest is not free of blame either as it likewise failed to do that which was incumbent upon it,  i.e., it failed to pay Pecorp for work actually performed by the latter in the total amount of P1,881,867.66.

Florentino vs Supervalue G.R. no. 172384

Key terms: A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the existence and the measure of damages caused by the breach.

Laws/doctrines: Art. 1226, 1229 (all Civil Code)

Facts:

Petitioner is doing business under the business name "Empanada Royale," a sole proprietorship engaged in the retail of empanada with outlets in different malls and business establishments within Metro Manila. Respondent, on the other hand, is a domestic corporation engaged in the business of leasing stalls and commercial store spaces located inside SM Malls found all throughout the country.5

On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing similar terms and conditions over the cart-type stalls at SM North Edsa and SM Southmall and a store space at SM Megamall. The term of each contract is for a period of four months and may be renewed upon agreement of the parties.6

Upon the expiration of the original Contracts of Lease, the parties agreed to renew the same by extending their terms until 31 March 2000. Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received two letters from the respondent, both dated 14 January 2000, transmitted through facsimile transmissions.8

In the first letter, petitioner was charged with violating Section 8 of the Contracts of Lease by not opening on 16 December 1999 and 26 December 1999.9 Respondent also charged petitioner with selling a new variety of empanada called "mini-embutido" and of increasing the price of her merchandise from P20.00 to P22.00, without the prior approval of the respondent. Respondent observed that petitioner was frequently closing earlier than the usual mall hours, either because of non-delivery or delay in the delivery of stocks to her outlets, again in violation of the terms of the contract. A stern warning was thus given to petitioner to refrain from committing similar infractions in the future in order to avoid the termination of the lease contract.

In the second letter, respondent informed the petitioner that it will no longer renew the Contracts of Lease for the three outlets, upon their expiration on 31 March 2000.12

In a letter-reply dated 11 February 2000, petitioner explained that the "mini-embutido" is not a new variety of empanada but had similar fillings, taste and ingredients as those of pork empanada; only, its size was reduced in order to make it more affordable to the buyers.13

Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease with the petitioner. To the contrary, respondent took possession of the store space in SM Megamall and confiscated the equipment and personal belongings of the petitioner found therein after the expiration of the lease contract.14

In a letter dated 8 May 2000, petitioner demanded that the respondent release the equipment and personal belongings it seized from the SM Megamall store space and return the security deposits, in the sum ofP192,000.00, turned over by the petitioner upon signing of the Contracts of Lease. On 15 June 2000, petitioner sent respondent another letter reiterating her previous demands, but the latter failed or refused to comply therewith. 

On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was filed by the petitioner against the respondent before the RTC of Makati, Branch 57. Petitioner alleged that the respondent made verbal representations that the Contracts of Lease will be renewed from time to time and, through the said representations, the petitioner was induced to introduce improvements upon the store space at SM Megamall in the sum of P200,000.00, only to find out a year later that the respondent will no longer renew her lease contracts for all three outlets.17

In addition, petitioner alleged that the respondent, without justifiable cause and without previous demand, refused to return the security deposits in the amount of P192,000.00. Further, petitioner claimed that the respondent seized her equipment and personal belongings found inside the store space in SM Megamall after the lease contract for the said outlet expired and despite repeated written demands from the petitioner, respondent continuously refused to return the seized items.

For its part, respondent countered that petitioner committed several violations of the terms of their Contracts of Lease by not opening from 16 December 1999 to 26 December 1999, and by introducing a new variety of empanada without the prior consent of the respondent, as mandated by the provision of Section 2 of the Contract of Lease. Respondent also alleged that petitioner infringed the lease contract by frequently closing earlier than the agreed closing hours. Respondent finally averred that petitioner is liable for the amount P106,474.09, representing the penalty for selling a new variety of empanada, electricity and water bills, and rental adjustment, among other charges incidental to the lease agreements. Respondent claimed that the seizure of petitioner’s personal belongings and equipment was in the exercise of its retaining lien, considering that the petitioner failed to settle the said obligations up to the time the complaint was filed.

Considering that petitioner already committed several breaches of contract, the respondent thus opted not to renew its Contracts of Lease with her anymore. The security deposits were made in order to ensure faithful compliance with the terms of their lease agreements; and since petitioner committed several infractions thereof, respondent was justified in forfeiting the security deposits in the latter’s favor.

Issue: Whether or not the respondent is liable to return the security deposits to the petitions.

Ruling:

No, plaintiff was guilty of committing several breaches of contract, she cannot rightfully demand the return of the security deposits for the same are deemed forfeited by reason of evident contractual violations.

A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the existence and the measure of damages caused by the breach.

As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such terms and conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably reduce a stipulated penalty in the contracts in two instances: (1) if the principal obligation has been partly or irregularly complied with; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code. Moreover, the question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factor as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court.

In this case, Section 5 and 18 of the Contract of Lease of the parties is in the nature of a penal clause to ensure plaintiff’s faithful compliance with the terms and conditions of the said contracts.  the forfeiture of the entire amount of the security deposits in the sum of P192,000.00 was excessive and unconscionable considering that the gravity of the breaches committed by the petitioner is not of such degree that the respondent was unduly prejudiced thereby. It is but equitable therefore to reduce the penalty of the petitioner to 50% of the total amount of security deposits. It is in the exercise of its sound discretion that this court tempered the penalty for the breaches committed by the petitioner to 50% of the amount of the security deposits. The forfeiture of the entire sum of  P192,000.00 is clearly a usurious and iniquitous penalty for the transgressions committed by the petitioner. The respondent is under the obligation to return the 50% of P192,000.00 to the petitioner.

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG vs ROBAN LENDING CORPORATION G.R. no. 172592

Key terms: The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings,30 are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.

In a true dacion en pago, the assignment of the property extinguishes the monetary debt.

Laws/doctrines: Art. 1245, 2088 (all Civil Code)

Facts:

From July, 1999 to March 20, 2000, spouses Ong obtained several loans from RLC in the amount of 4million pesos. These loans were secured by a real estate mortgage on Ongs’ parcel of land in Tarlac.

February 12, 2001, the parties executed an amendment to the real estate mortgage consolidating their loans inclusive of charges which totaled around 5.9 million pesos. On the same date, they executed a Dacion in Payment Agreement where the Ongs assigned the properties to the defendant in payment of their total obligation.2002, Ongs filed a complaint in the RTC seeking the mortgage contract be declared abandoned, annulment of deeds, illegal exaction, unjust enrichment and damages alleging the MOA and the Dacion in Payment as void for being pactum commissorium. They also allege the interest rates to be unconscionable.

They claim they’ve made partial payments and because of the illegal exactions, the balance seemed to have not moved at all. They say an accounting is in order.RLC filed an answer with counterclaim. They allege that voluntary execution of the MOA and Dacion in Payment gives the claim of pactum commisorium no leg to stand on; that dacion en pago is warranted by 1245 for being a special form of payment whereby the debtors alienate their property to satisfy the monetary obligation.RTC and CA found no pactum commissorium.

Respondent maintained the legality of its transactions with petitioners, alleging that:

If the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium has no more legal leg to stand on;

The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art. 1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction of their monetary obligation;

The accumulated interest and other charges which were computed for more than two (2) years would stand reasonable and valid taking into consideration [that] the principal loan is P4,000,000 and if indeed it became beyond the Plaintiffs’ capacity to pay then the fault is attributed to them and not the Defendant

Issue: Whether the Memorandum of Agreement (MOA) and the Dacion en pago (DPA) Agreement are null and void for being contrary to public policy and constitute pactum commissorium

Ruling:

Yes, the Memorandum of Agreement and Dacion in Payment (DPA) constitute pactum commissorium prohibited under Art. 2088 of the Civil Code.

The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings,30 are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.

In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon petitioners’ failure to pay their debt within the stipulated period. That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being prohibited by law.

Second, respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.32 This does not persuade. In a true dacion en pago, the assignment of the property extinguishes the monetary debt.33 

In this case, the alienation of the properties was by way of security, and not by way of satisfying the debt.34 The Dacion in Payment did not extinguish petitioners’ obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note forP5,916,117.50 which they were to pay within one year.

Third, Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and attorney’s fees if they are iniquitous or unconscionable.40

This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable – principal plus interest, with interest not paid when due added to and becoming part of the principal and likewise bearing interest at the same rate, compounded monthly42 – unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of demand.43 This Court finds the attorney’s fees of 25% of the principal, interests and interests thereon, and the penalty fees unconscionable, and thus reduces the attorney’s fees to 25% of the principal amount only.