Kinds of Obligations PDF

KINDS OF OBLIGATIONS 2016
Obligation and Contracts

Condition imposed on the perfection of the contract and condition imposed on the performance
of the obligation:
Cases:
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 141634
February 5, 2001
Heirs of Spouses REMEDIOS R. SANDEJAS and ELIODORO P. SANDEJAS SR. -- ROBERTO R. SANDEJAS,
ANTONIO R. SANDEJAS, CRISTINA SANDEJAS MORELAND, BENJAMIN R. SANDEJAS, REMEDIOS R.
SANDEJAS, and heirs of SIXTO S. SANDEJAS II, RAMON R. SANDEJAS, TERESITA R. SANDEJAS, and
ELIODORO R. SANDEJAS JR., all represented by ROBERTO R. SANDEJAS, petitioners,
vs.
ALEX A. LINA, respondent.
PANGANIBAN, J.:
A contract of sale is not invalidated by the fact that it is subject to probate court approval. The transaction remains
binding on the seller-heir, but not on the other heirs who have not given their consent to it. In settling the estate of the
deceased, a probate court has jurisdiction over matters incidental and collateral to the exercise of its recognized
powers. Such matters include selling, mortgaging or otherwise encumbering realty belonging to the estate. Rule 89,
Section 8 of the Rules of Court, deals with the conveyance of real property contracted by the decedent while still
alive. In contrast with Sections 2 and 4 of the same Rule, the said provision does not limit to the executor or
administrator the right to file the application for authority to sell, mortgage or otherwise encumber realty under
administration. The standing to pursue such course of action before the probate court inures to any person who
stands to be benefited or injured by the judgment or to be entitled to the avails of the suit.
1wphi1.nt
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to reverse and set aside the
Decision1 dated April 16, 1999 and the Resolution2 dated January 12, 2000, both promulgated by the Court of
Appeals in CA-GR CV No. 49491. The dispositive portion of the assailed Decision reads as follows: 3
"WHEREFORE, for all the foregoing, [w]e hereby MODIFY the [O]rder of the lower court dated January 13,
1995, approving the Receipt of Earnest Money With Promise to Buy and Sell dated June 7, 1982, only to the
three-fifth (3/5) portion of the disputed lots covering the share of [A]dministrator Eliodoro Sandejas, Sr. [in]
the property. The intervenor is hereby directed to pay appellant the balance of the purchase price of the
three-fifth (3/5) portion of the property within thirty (30) days from receipt of this [O]rder and x x x the
administrator [is directed] to execute the necessary and proper deeds of conveyance in favor of appellee
within thirty (30) days thereafter."
The assailed Resolution denied reconsideration of the foregoing disposition.
The Facts
The facts of the case, as narrated by the Court of Appeals (CA), are as follows:4
"On February 17, 1981, Eliodoro Sandejas, Sr. filed a petition (Record, SP. Proc. No. R-83-15601, pp. 8-10)
in the lower court praying that letters of administration be issued in his favor for the settlement of the estate

of his wife, REMEDIOS R. SANDEJAS, who died on April 17, 1955. On July 1, 1981, Letters of
Administration [were issued by the lower court appointing Eliodoro Sandejas, Sr. as administrator of the
estate of the late Remedios Sandejas (Record, SP. Proc. No. R-83-15601, p. 16). Likewise on the same
date, Eliodoro Sandejas, Sr. took his oath as administrator (Record, SP. Proc. No. R-83-15601, p. 17). x x x.
"On November 19, 1981, the 4th floor of Manila City Hall was burned and among the records burned were
the records of Branch XI of the Court of First Instance of Manila. As a result, [A]dministrator Eliodoro
Sandejas, Sr. filed a [M]otion for [R]econstitution of the records of the case on February 9, 1983 (Record,
SP. Proc. No. R-83-15601, pp. 1-5). On February 16, 1983, the lower court in its [O]rder granted the said
motion (Record, SP. Proc. No. R-83-15601, pp. 28-29).
"On April 19, 1983, an Omnibus Pleading for motion to intervene and petition-in-intervention was filed by
[M]ovant Alex A. Lina alleging among others that on June 7, 1982, movant and [A]dministrator Eliodoro P.
Sandejas, in his capacity as seller, bound and obligated himself, his heirs, administrators, and assigns, to
sell forever and absolutely and in their entirety the following parcels of land which formed part of the estate
of the late Remedios R. Sandejas, to wit:
1. 'A parcel of land (Lot No.22 Block No. 45 of the subdivision plan Psd-21121, being a portion of
Block 45 described on plan Psd-19508, G.L.R.O. Rec. No. 2029), situated in the "Municipality of
Makati, province of Rizal, containing an area of TWO HUNDRED SEVENTY (270) SQUARE
METERS, more or less, with TCT No. 13465;
2. 'A parcel of land (Lot No. 21 Block No. 45 of the subdivision plan Psd-21141, being a portion of
Block 45 described on plan Psd-19508 G.L.R.O. Rec. No. 2029), situated in the Municipality of
Makati, Province of Rizal, containing an area of TWO HUNDRED SEVENTY (270) SQUARE
METERS, more or less, with TCT No. 13464;'
3. 'A parcel of land (Lot No. 5 Block No. 45 of the subdivision plan Psd-21141, being a portion of
Makati, Province of Rizal, containing an area of TWO HUNDRED EIGHT (208) SQUARE METERS,
more or less, with TCT No. 13468;'
4. 'A parcel of land (Lot No. 6, Block No. 45 of the subdivision plan Psd-21141, being a portion of
Makati, Province of Rizal, containing an area of TWO HUNDRED EIGHT (208) SQUARE METERS,
more or less, with TCT No. 13468;'
"The [R]eceipt of the [E]arnest [M]oney with [P]romise to [S]ell and to [B]uy is hereunder quoted, to wit:
'Received today from MR. ALEX A. LINA the sum of ONE HUNDRED THOUSAND (P100,000.00)
PESOS, Philippine Currency, per Metropolitan Bank & Trust Company Chec[k] No. 319913 dated
today for P100,000.00, x x x as additional earnest money for the following:
xxx
xxx
xxx
all registered with the Registry of Deeds of the [P]rovince of Rizal (Makati Branch Office) in the
name of SELLER 'EL!ODORO SANDEJAS, Filipino Citizen, of legal age, married to Remedios
Reyes de Sandejas;' and which undersigned, as SELLER, binds and obligates himself, his heirs,
administrators and assigns, to sell forever and absolutely in their entirety (all of the four (4) parcels
of land above described, which are contiguous to each other as to form one big lot) to said Mr. Alex
A. Lina, who has agreed to buy all of them, also binding on his heirs, administrators and assigns,
for the consideration of ONE MILLION (P1,000,000.00) PESOS, Philippine Currency, upon such
reasonable terms of payment as may be agreed upon by them. The parties have, however, agreed
on the following terms and conditions:

'1. The P100,000.00 herein received is in addition to the P70,000.00 earnest money already
received by SELLER from BUYER, all of which shall form part of, and shall be deducted from, the
purchase price of P1,000,000.00, once the deed of absolute [sale] shall be executed;
'2. As a consideration separate and distinct from the price, undersigned SELLER also
acknowledges receipt from Mr. Alex A. Lina of the sum of ONE THOUSAND (P1,000.00) PESOS,
Philippine Currency, per Metropolitan Bank & Trust Company Check No. 319912 dated today and
payable to SELLER for P1,000.00;
'3. Considering that Mrs. Remedios Reyes de Sandejas is already deceased and as there is a
pending intestate proceedings for the settlement of her estate (Spec. Proc. No.138393, Manila CFI,
Branch XI), wherein SELLER was appointed as administrator of said Estate, and as SELLER, in his
capacity as administrator of said Estate, has informed BUYER that he (SELLER) already filed a
[M]otion with the Court for authority to sell the above parcels of land to herein BUYER, but which
has been delayed due to the burning of the records of said Spec. Pro. No. 138398, which records
are presently under reconstitution, the parties shall have at least ninety (90) days from receipt of
the Order authorizing SELLER, in his capacity as administrator, to sell all THE ABOVE
DESCRIBED PARCELS OF LAND TO HEREIN BUYER (but extendible for another period of ninety
(90) days upon the request of either of the parties upon the other), within which to execute the deed
of absolute sale covering all above parcels of land;
'4. In the event the deed of absolute sale shall not proceed or not be executed for causes either
due to SELLER'S fault, or for causes of which the BUYER is innocent, SELLER binds himself to
personally return to Mr. Alex A. Lina the entire ONE HUNDRED SEVENTY THOUSAND
([P]170,000.00) PESOS In earnest money received from said Mr. Lina by SELLER, plus fourteen
(14%) percentum interest per annum, all of which shall be considered as liens of said parcels of
land, or at least on the share therein of herein SELLER;
'5. Whether indicated or not, all of above terms and conditions shall be binding on the heirs,
administrators, and assigns of both the SELLER (undersigned MR. ELIODORO P. SANDEJAS,
SR.) and BUYER (MR. ALEX A. LINA).' (Record, SP. Proc. No. R-83-15601, pp. 52-54)
"On July 17, 1984, the lower court issued an [O]rder granting the intervention of Alex A. Lina (Record, SP.
Proc. No. R-83-15601, p. 167).
"On January 7, 1985, the counsel for [A]dministrator Eliodoro P. Sandejas filed a [M]anifestation alleging
among others that the administrator, Mr. Eliodoro P. Sandejas, died sometime in November 1984 in Canada
and said counsel is still waiting for official word on the fact of the death of the administrator. He also alleged,
among others that the matter of the claim of Intervenor Alex A. Lina becomes a money claim to be filed in
the estate of the late Mr. Eliodoro P. Sandejas (Record, SP. Proc. No. R-83-15601, p. 220). On February 15,
1985, the, lower court issued an [O]rder directing, among others, that the counsel for the four (4) heirs and
other heirs of Teresita R. Sandejas to move for the appointment of [a] new administrator within fifteen (15)
days from receipt of this [O]rder (Record, SP. Proc. No. R-83-15601, p. 227). In the same manner, on
November 4, 1985, the lower court again issued an order, the content of which reads:
'On October 2, 1985, all the heirs, Sixto, Roberto, Antonio, Benjamin all surnamed Sandejas were
ordered to move for the appointment of [a] new administrator. On October 16, 1985, the same heirs
were given a period of fifteen (15) days from said date within which to move for the appointment of
the new administrator. Compliance was set for October 30, 1985, no appearance for the
aforenamed heirs. The aforenamed heirs are hereby ordered to show cause within fifteen (15) days
from receipt of this Order why this Petition for Settlement of Estate should not be dismissed for lack
of interest and failure to comply with a lawful order of this Court.
'SO ORDERED.' (Record, SP. Proc. No. R-83-15601, p. 273).
"On November 22, 1985, Alex A. Lina as petitioner filed with the Regional Trial Court of Manila an Omnibus
Pleading for (1) petition for letters of administration [and] (2) to consolidate instant case with SP. Proc. No.

R-83-15601 RTC-Branch XI-Manila, docketed therein as SP. Proc. No. 85- 33707 entitled 'IN RE:
INTESTATE ESTATE OF ELIODORO P. SANDEJAS, SR., ALEX A. LINA PETITIONER", [for letters of
administration] (Record, SP. Proc. No.85-33707, pp. 1-7). On November 29, 1985, Branch XXXVI of the
Regional Trial Court of Manila issued an [O]rder consolidating SP. Proc. No. 85-33707, with SP. Proc. No.
R-83-15601 (Record, SP. Proc. No. 85-33707, p. 13). Likewise, on December 13, 1985, the Regional Trial
Court of Manila, Branch XI, issued an [O]rder stating that 'this Court has no objection to the consolidation of
Special proceedings No. 85-331707, now pending before Branch XXXVI of this Court, with the present
proceedings now pending before this Branch' (Record, SP. Proc. No. R-83- 15601, p. 279).
"On January 15, 1986, Intervenor Alex A. Lina filed [a] Motion for his appointment as a new administrator of
the Intestate Estate of Remedios R. Sandejas on the following reasons:
'5.01. FIRST, as of this date, [i]ntervenor has not received any motion on the part of the heirs Sixto,
Antonio, Roberto and Benjamin, all surnamed Sandejas, for the appointment of anew
[a]dministrator in place of their father, Mr. Eliodoro P. Sandejas, Sr.;
'5.02. SECOND, since Sp. Proc. 85-33707, wherein the [p]etitioner is herein Intervenor Alex A. Lina
and the instant Sp. PROC. R-83-15601, in effect are already consolidated, then the appointment of
Mr. Alex Lina as [a]dministrator of the Intestate Estate of Remedios R. Sandejas in instant Sp.
Proc. R-83-15601, would be beneficial to the heirs and also to the Intervenor;
'5.03. THIRD, of course, Mr. Alex A. Lina would be willing to give way at anytime to any
[a]dministrator who may be proposed by the heirs of the deceased Remedios R. Sandejas, so long
as such [a]dministrator is qualified.' (Record, SP. Proc. No. R-83-15601, pp. 281-283)
"On May 15, 1986, the lower court issued an order granting the [M]otion of Alex A. Lina as the new
[a]dministrator of the Intestate Estate of Remedios R. Sandejas in this proceedings. (Record, SP. Proc. No.
R-83-15601, pp. 288- 290)
"On August 281 1986, heirs Sixto, Roberto, Antonio and Benjamin, all surnamed Sandejas, and heirs [sic]
filed a [M]otion for [R]econsideration and the appointment of another administrator Mr. Sixto Sandejasl in
lieu of [I]ntervenor Alex A. Lina stating among others that it [was] only lately that Mr. Sixto Sandejas, a son
and heir, expressed his willingness to act as a new administrator of the intestate estate of his mother,
Remedios R. Sandejas (Record, SP. Proc. No. 85-33707, pp. 29-31). On October 2, 1986, Intervenor Alex
A. Lina filed his [M]anifestation and [C]ounter [M]otion alleging that he ha[d] no objection to the appointment
of Sixto Sandejas as [a]dministrator of the [i]ntestate [e]state of his mother Remedios R. Sandejas (Sp. Proc.
No.85-15601), provided that Sixto Sandejas be also appointed as administrator of the [i]ntestate [e]state of
his father, Eliodoro P . Sandejas, Sr. (Spec. Proc. No. 85-33707), which two (2) cases have been
consolidated (Record, SP. Proc. No. 85-33707, pp. 34-36). On March 30, 1987, the lower court granted the
said [M]otion and substituted Alex Lina with Sixto Sandejas as petitioner in the said [P]etitions (Record, SP.
Proc. No. 85-33707, p. 52). After the payment of the administrator's bond (Record, SP. Proc. No. 83-15601,
pp. 348-349) and approval thereof by the court (Record, SP. Proc. No. 83-15601, p. 361), Administrator
Sixto Sandejas on January 16, 1989 took his oath as administrator of the estate of the deceased Remedios
R. Sandejas and Eliodoro P. Sandejas (Record, SP. Proc. No. 83-15601, p. 367) and was likewise issued
Letters of Administration on the same day (Record, SP. Proc. No. 83-15601, p. 366).
"On November 29, 1993, Intervenor filed [an] Omnibus Motion (a) to approve the deed of conditional sale
executed between Plaintiff-in-lntervention Alex A. Lina and Elidioro [sic] Sandejas, Sr. on June 7, 1982; (b)
to compel the heirs of Remedios Sandejas and Eliodoro Sandejas, Sr. thru their administrator, to execute a
deed of absolute sale in favor of [I]ntervenor Alex A. Lina pursuant to said conditional deed of sale (Record,
SP. Proc. No. 83-15601, pp. 554-561) to which the administrator filed a [M]otion to [D]ismiss and/or
[O]pposition to said omnibus motion on December 13, 1993 (Record, SP. Proc. No.83-15601, pp. 591-603).
"On January 13, 1995, the lower court rendered the questioned order granting intervenor's [M]otion for the
[A]pproval of the Receipt of Earnest Money with promise to buy between Plaintiff-in-lntervention Alex A. Lina
and Eliodoro Sandejas, Sr. dated June 7, 1982 (Record, SP. Proc. No. 83-15601, pp. 652-654 ). x x x."

The Order of the intestate courts disposed as follows:
"WHEREFORE, [i]ntervenor's motion for the approval of the Receipt Of Earnest Money With Promise To
Sell And To Buy dated June 7, 1982, is granted. The [i]ntervenor is directed to pay the balance of the
purchase price amounting to P729,000.00 within thirty (30) days from receipt of this Order and the
Administrator is directed to execute within thirty (30) days thereafter the necessary and proper deeds of
conveyancing."6
Ruling of the Court of Appeals
Overturning the RTC ruling, the CA held that the contract between Eliodoro Sandejas Sr. and respondent was merely
a contract to sell, not a perfected contract of sale. It ruled that the ownership of the four lots was to remain in the
intestate estate of Remedios Sandejas until the approval of the sale was obtained from the settlement court. That
approval was a positive suspensive condition, the nonfulfillment of which was not tantamount to a breach. It was
simply an event that prevented the obligation from maturing or becoming effective. If the condition did not happen, the
obligation would not arise or come into existence.
The CA held that Section 1, Rule 897 of the Rules of Court was inapplicable, because the lack of written notice to the
other heirs showed the lack of consent of those heirs other than Eliodoro Sandejas Sr. For this reason, bad faith was
imputed to him, for no one is allowed to enjoyed a claim arising from ones own wrongdoing. Thus, Eliodoro Sr. was
bound, as a matter of justice and good faith, to comply with his contractual commitments as an owner and heir. When
he entered into the agreement with respondent, he bound his conjugal and successional shares in the property.
Hence, this Petition.8
Issues
In their Memorandum, petitioners submit the following issues for our resolution:
"a) Whether or not Eliodoro P. Sandejas Sr. is legally obligated to convey title to the property referred to in
the subject document which was found to be in the nature of a contract to sell - where the suspensive
condition set forth therein [i.e.] court approval, was not complied with;
"b) Whether or not Eliodoro P. Sandejas Sr. was guilty of bad faith despite the conclusion of the Court of
Appeals that the respondent [bore] the burden of proving that a motion for authority to sell ha[d] been filed in
court;
"c) Whether or not the undivided shares of Eliodoro P. Sandejas Sr. in the subject property is three-fifth (3/5)
and the administrator of the latter should execute deeds of conveyance therefor within thirty days from
receipt of the balance of the purchase price from the respondent; and
"d) Whether or not the respondent's petition-in-intervention was converted to a money claim and whether the
[trial court] acting as a probate court could approve the sale and compel the petitioners to execute [a] deed
of conveyance even for the share alone of Eliodoro P. Sandejas Sr." 9
In brief, the Petition poses the main issue of whether the CA erred in modifying the trial court's Decision and in
obligating petitioners to sell 3/5 of the disputed properties to respondent, even if the suspensive condition had not
been fulfilled. It also raises the following collateral issues: (1) the settlement court's jurisdiction; (2) respondentintervenor's standing to file an application for the approval of the sale of realty in the settlement case, (3) the
decedent's bad faith, and (4) the computation of the decedent's share in the realty under administration.
This Courts Ruling
The Petition is partially meritorious.

Main Issue:
Obligation With a Suspensive Condition
Petitioners argue that the CA erred in ordering the conveyance of the disputed 3/5 of the parcels of land, despite the
nonfulfillment of the suspensive condition -- court approval of the sale -- as contained in the "Receipt of Earnest
Money with Promise to Sell and to Buy" (also referred to as the "Receipt"). Instead, they assert that because this
condition had not been satisfied, their obligation to deliver the disputed parcels of land was converted into a money
claim.
We disagree. Petitioners admit that the agreement between the deceased Eliodoro Sandejas Sr. and respondent was
a contract to sell. Not exactly. In a contract to sell, the payment of the purchase price is a positive suspensive
condition. The vendor's obligation to convey the title does not become effective in case of failure to pay. 10
On the other hand, the agreement between Eliodoro Sr. and respondent is subject to a suspensive condition -- the
procurement of a court approval, not full payment. There was no reservation of ownership in the agreement. In
accordance with paragraph 1 of the Receipt, petitioners were supposed to deed the disputed lots over to respondent.
This they could do upon the court's approval, even before full payment. Hence, their contract was a conditional sale,
rather than a contract to sell as determined by the CA.
When a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the
condition happens or is fulfilled.11 Thus, the intestate court's grant of the Motion for Approval of the sale filed by
respondent resulted in petitioners' obligation to execute the Deed of Sale of the disputed lots in his favor. The
condition having been satisfied, the contract was perfected. Henceforth, the parties were bound to fulfil what they had
expressly agreed upon.
Court approval is required in any disposition of the decedent's estate per Rule 89 of the Rules of Court. Reference to
judicial approval, however, cannot adversely affect the substantive rights of heirs to dispose of their own pro indiviso
shares in the co-heirship or co-ownership.12 In other words, they can sell their rights, interests or participation in the
property under administration. A stipulation requiring court approval does not affect the validity and the effectivity of
the sale as regards the selling heirs. It merely implies that the property may be taken out ofcustodia legis, but only
with the court's permission.13 It would seem that the suspensive condition in the present conditional sale was imposed
only for this reason.
Thus, we are not persuaded by petitioners' argument that the obligation was converted into a mere monetary claim.
Paragraph 4 of the Receipt, which petitioners rely on, refers to a situation wherein the sale has not materialized. In
such a case," the seller is bound to return to the buyer the earnest money paid plus interest at fourteen percent per
annum. But the sale was approved by the intestate court; hence, the proviso does not apply.
Because petitioners did not consent to the sale of their ideal shares in the disputed lots, the CA correctly limited the
scope of the Receipt to the pro-indiviso share of Eliodoro Sr. Thus, it correctly modified the intestate court's ruling by
excluding their shares from the ambit of the transaction.
First Collateral Issue:
Jurisdiction of Settlement Court
Petitioners also fault the CA Decision by arguing, inter alia, (a) jurisdiction over ordinary civil action seeking not
merely to enforce a sale but to compel performance of a contract falls upon a civil court, not upon an intestate court;
and (b) that Section 8 of Rule 89 allows the executor or administrator, and no one else, to file an application for
approval of a sale of the property under administration.
Citing Gil v. Cancio14 and Acebedo v. Abesamis,15 petitioners contend that the CA erred in clothing the settlement
court with the jurisdiction to approve the sale and to compel petitioners to execute the Deed of Sale. They allege
factual differences between these cases and the instant case, as follows: in Gil, the sale of the realty in administration

was a clear and an unequivocal agreement for the support of the widow and the adopted child of the decedent; and
in Acebedo, a clear sale had been made, and all the heirs consented to the disposition of their shares in the realty in
administration.
We are not persuaded. We hold that Section 8 of Rule 89 allows this action to proceed. The factual differences
alleged by petitioners have no bearing on the intestate court's jurisdiction over the approval of the subject conditional
sale. Probate jurisdiction covers all matters relating to the settlement of estates (Rules 74 & 86-91) and the probate of
wills (Rules 75-77) of deceased persons, including the appointment and the removal of administrators and executors
(Rules 78-85). It also extends to matters incidental and collateral to the exercise of a probate court's recognized
powers such as selling, mortgaging or otherwise encumbering realty belonging to the estate. Indeed, the rules on this
point are intended to settle the estate in a speedy manner, so that the benefits that may flow from such settlement
may be immediately enjoyed by the heirs and the beneficiaries. 16
In the present case, the Motion for Approval was meant to settle the decedent's obligation to respondent; hence, that
obligation clearly falls under the jurisdiction of the settlement court. To require respondent to file a separate action -on whether petitioners should convey the title to Eliodoro Sr.'s share of the disputed realty -- will unnecessarily
prolong the settlement of the intestate estates of the deceased spouses.
The suspensive condition did not reduce the conditional sale between Eliodoro Sr. and respondent to one that was
"not a definite, clear and absolute document of sale," as contended by petitioners. Upon the occurrence of the
condition, the conditional sale became a reciprocally demandable obligation that is binding upon the
parties.17That Acebedo also involved a conditional sale of real property18 proves that the existence of the suspensive
condition did not remove that property from the jurisdiction of the intestate court.
Second Collateral Issue:
Intervenor's Standing
Petitioners contend that under said Rule 89, only the executor or administrator is authorized to apply for the approval
of a sale of realty under administration. Hence, the settlement court allegedly erred in entertaining and granting
respondent's Motion for Approval.
1w phi 1.nt
We read no such limitation. Section 8, Rule 89 of the Rules of Court, provides:

"SEC. 8. When court may authorize conveyance of realty which deceased contracted to convey. Notice.
Effect of deed. -- Where the deceased was in his lifetime under contract, binding in law, to deed real
property, or an interest therein, the court having jurisdiction of the estate may, on application for that
purpose, authorize the executor or administrator to convey such property according to such contract, or with
such modifications as are agreed upon by the parties and approved by the court; and if the contract is to
convey real property to the executor or administrator, the clerk of the court shall execute the deed. x x x."
This provision should be differentiated from Sections 2 and 4 of the same Rule, specifically requiring only the
executor or administrator to file the application for authority to sell, mortgage or otherwise encumber real estate for
the purpose of paying debts, expenses and legacies (Section 2); 19 or for authority to sell real or personal estate
beneficial to the heirs, devisees or legatees and other interested persons, although such authority is not necessary to
pay debts, legacies or expenses of administration (Section 4). 20 Section 8 mentions only an application to authorize
the conveyance of realty under a contract that the deceased entered into while still alive. While this Rule does not
specify who should file the application, it stands to reason that the proper party must be one .who is to be benefited or
injured by the judgment, or one who is to be entitled to the avails of the suit. 21
Third Collateral Issue:
Bad Faith

Petitioners assert that Eliodoro Sr. was not in bad faith, because (a) he informed respondent of the need to secure
court approval prior to the sale of the lots, and (2) he did not promise that he could obtain the approval.
We agree. Eliodoro Sr. did not misrepresent these lots to respondent as his own properties to which he alone had a
title in fee simple. The fact that he failed to obtain the approval of the conditional sale did not automatically imply bad
faith on his part. The CA held him in bad faith only for the purpose of binding him to the conditional sale. This was
unnecessary because his being bound to it is, as already shown, beyond cavil.
Fourth Collateral Issue:
Computation of Eliodoro's Share
Petitioners aver that the CA's computation of Eliodoro Sr.'s share in the disputed parcels of land was erroneous
because, as the conjugal partner of Remedios, he owned one half of these lots plus a further one tenth of the
remaining half, in his capacity as a one of her legal heirs. Hence, Eliodoro's share should be 11/20 of the entire
property. Respondent poses no objection to this computation. 22
On the other hand, the CA held that, at the very least, the conditional sale should cover the one half (1/2) pro indiviso
conjugal share of Eliodoro plus his one tenth (1/10) hereditary share as one of the ten legal heirs of the decedent, or
a total of three fifths (3/5) of the lots in administration.23
Petitioners' correct. The CA computed Eliodoro's share as an heir based on one tenth of the entire disputed property.
It should be based only on the remaining half, after deducting the conjugal share. 24
The proper determination of the seller-heir's shares requires further explanation. Succession laws and jurisprudence
require that when a marriage is dissolved by the death of the husband or the wife, the decedent's entire estate under the concept of conjugal properties of gains -- must be divided equally, with one half going to the surviving
spouse and the other half to the heirs of the deceased.25 After the settlement of the debts and obligations, the
remaining half of the estate is then distributed to the legal heirs, legatees and devices. We assume, however, that this
preliminary determination of the decedent's estate has already been taken into account by the parties, since the only
issue raised in this case is whether Eliodoro's share is 11/20 or 3/5 of the disputed lots.
WHEREFORE, The Petition is hereby PARTIALLY GRANTED. The appealed Decision and Resolution
areAFFIRMED with the MODIFICATION that respondent is entitled to only a pro-indiviso share equivalent to 11/20 of
the disputed lots.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.
VITUG, J.:
The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel of land for
a cause traceable to his own failure to have the squatters on the subject property evicted within the contractuallystipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and
exportation of perlite filter aids, permalite insulation and processed perlite ore. In 1988, petitioner and his foreign
partners decided to put up a central warehouse in Metro Manila on a land area of approximately 2,000 square
meters. The project was made known to several freelance real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel of land
measuring 1,952 square meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the lot was covered
by TCT No. 361402 in the name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the
property and, except for the presence of squatters in the area, he found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00
which could be used in taking up an ejectment case against the squatters, private respondent would agree to sell the
property for only P800.00 per square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract,
denominated "Deed of Conditional Sale," was executed between petitioner and private respondent. The simply-drawn
contract read:
DEED OF CONDITIONAL SALE
KNOW ALL MEN BY THESE PRESENTS:
This Contract, made and executed in the Municipality of Makati, Philippines this 9th day of June,
1988 by and between:
ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow, Filipino and
residing at 105 Simoun St., Quezon City, Metro Manila, hereinafter referred to as
the VENDOR;
-andVIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age, Filipino, and
residing at 110 San Miguel St., Plainview Subd., Mandaluyong Metro Manila,
hereinafter referred to as the VENDEE:

W I T N E S S E T H : That
WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area of ONE
THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS, more or less, located in
Barrio San Dionisio, Municipality of Paraaque, Province of Rizal, covered by TCT No. 361402
issued by the Registry of Deeds of Pasig and more particularly described as follows:
xxx xxx xxx
WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the VENDOR has
accepted the offer, subject to the terms and conditions hereinafter stipulated:
NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE HUNDRED SIXTY
ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00) ONLY, Philippine Currency, payable
by VENDEE to in to (sic) manner set forth, the VENDOR agrees to sell to the VENDEE, their heirs,
successors, administrators, executors, assign, all her rights, titles and interest in and to the
property mentioned in the FIRST WHEREAS CLAUSE, subject to the following terms and
conditions:
1. That the sum of FIFTY THOUSAND PESOS (P50,000.00) ONLY Philippine
Currency, is to be paid upon signing and execution of this instrument.
2. The balance of the purchase price in the amount of ONE MILLION FIVE
HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00)
ONLY shall be paid 45 days after the removal of all squatters from the above
described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR
without necessity of demand shall immediately sign, execute, acknowledged (sic)
and deliver the corresponding deed of absolute sale in favor of the VENDEE free
from all liens and encumbrances and all Real Estate taxes are all paid and
updated.
It is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60
days from the date of the signing of this contract the VENDOR shall not be able to remove the
squatters from the property being purchased, the downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the
purchase price of ONE MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED PESOS
(P1,511,600.00) ONLY after 45 days from written notification to the VENDEE of the removal of the
squatters from the property being purchased, the FIFTY THOUSAND PESOS (P50,000.00)
previously paid as downpayment shall be forfeited in favor of the VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer fee,
assurances and such other fees and expenses as may be necessary to transfer the title to the
name of the VENDEE shall be for the account of the VENDEE while capital gains tax shall be paid
by the VENDOR.
IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of Makati
MM, Philippines on this 9th day of June, 1988.
(Sgd.) (Sgd.)
VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.

DE ONGSIONG
Vendee Vendor
SIGNED IN THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz 1
Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for
P50,000.00 2 from petitioner. 3
Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against Melchor
Musa and 29 other squatter families with the Metropolitan Trial Court of Paraaque. A few months later, or on 21
February 1989, judgment was rendered ordering the defendants to vacate the premises. The decision was handed
down beyond the 60-day period (expiring 09 August 1988) stipulated in the contract. The writ of execution of the
judgment was issued, still later, on 30 March 1989.
In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner
since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in
his reply of 17 April 1989, refused the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering the favorable decision
rendered by the Court and the writ of execution issued pursuant thereto, it is now possible to eject
the squatters from the premises of the subject property, for which reason, he proposes that he shall
take it upon himself to eject the squatters, provided, that expenses which shall be incurred by
reason thereof shall be chargeable to the purchase price of the land. 4
Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for Luzon,
Farley O. Viloria, asked the Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21 April 1989
within which to relocate and transfer the squatter families. Acting favorably on the request, the court suspended the
enforcement of the writ of execution accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and his client's
willingness to "underwrite the expenses for the execution of the judgment and ejectment of the occupants." 5
In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol that the
Deed of Conditional Sale had been rendered null and void by virtue of his client's failure to evict the squatters from
the premises within the agreed 60-day period. He added that private respondent had "decided to retain the
property." 6
On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very moment that there was a
meeting of the minds of the parties upon the subject lot and the price in the amount of
P1,561,600.00. Moreover, the contract had already been partially fulfilled and executed upon
receipt of the downpayment of your client. Ms. Ongsiong is precluded from rejecting its binding
effects relying upon her inability to eject the squatters from the premises of subject property during
the agreed period. Suffice it to state that, the provision of the Deed of Conditional Sale do not grant
her the option or prerogative to rescind the contract and to retain the property should she fail to
comply with the obligation she has assumed under the contract. In fact, a perusal of the terms and
conditions of the contract clearly shows that the right to rescind the contract and to demand the
return/reimbursement of the downpayment is granted to our client for his protection.

Instead, however, of availing himself of the power to rescind the contract and demand the return,
reimbursement of the downpayment, our client had opted to take it upon himself to eject the
squatters from the premises. Precisely, we refer you to our letters addressed to your client dated
April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given to the injured
party. Undoubtedly, under the circumstances, our client is the injured party.
Furthermore, your client has not complied with her obligation under their contract in good faith. It is
undeniable that Ms. Ongsiong deliberately refused to exert efforts to eject the squatters from the
premises of the subject property and her decision to retain the property was brought about by the
sudden increase in the value of realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to execute the
absolute Deed of Sale. 7
A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued refusal to accept the
return of the P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch 133, Civil Case No.
89-4394 for rescission of the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case No. 7579
on motion of private respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati 8 rendered decision holding
that private respondent had no right to rescind the contract since it was she who "violated her obligation
to eject the squatters from the subject property" and that petitioner, being the injured party, was the party
who could, under Article 1191 of the Civil Code, rescind the agreement. The court ruled that the
provisions in the contract relating to (a) the return/reimbursement of the P50,000.00 if the vendor were to
fail in her obligation to free the property from squatters within the stipulated period or (b), upon the other
hand, the sum's forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price,
amounted to "penalty clauses". The court added:
This Court is not convinced of the ground relied upon by the plaintiff in seeking the rescission,
namely: (1) he (sic) is afraid of the squatters; and (2) she has spent so much to eject them from the
premises (p. 6, tsn, ses. Jan. 3, 1990). Militating against her profession of good faith is plaintiffs
conduct which is not in accord with the rules of fair play and justice. Notably, she caused the
issuance of an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment suit which was
almost two months after she filed the complaint before this Court on June 27, 1989. If she were
really afraid of the squatters, then she should not have pursued the issuance of an alias writ of
execution. Besides, she did not even report to the police the alleged phone threats from the
squatters. To the mind of the Court, the so-called squatter factor is simply factuitous (sic). 9
The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject or
cause the ejectment of the squatters from the property and to execute the absolute deed of conveyance
upon payment of the full purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its decision.10 It
opined that the contract entered into by the parties was subject to a resolutory condition, i.e., the
ejectment of the squatters from the land, the non-occurrence of which resulted in the failure of the object
of the contract; that private respondent substantially complied with her obligation to evict the squatters;
that it was petitioner who was not ready to pay the purchase price and fulfill his part of the contract, and
that the provision requiring a mandatory return/reimbursement of the P50,000.00 in case private
respondent would fail to eject the squatters within the 60-day period was not a penal clause. Thus, it
concluded.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and a new one
entered declaring the contract of conditional sale dated June 9, 1988 cancelled and ordering the
defendant-appellee to accept the return of the downpayment in the amount of P50,000.00 which
was deposited in the court below. No pronouncement as to costs. 11
Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues that, in fine,
center on the nature of the contract adverted to and the P50,000.00 remittance made by petitioner.
A perfected contract of sale may either be absolute or conditional 12 depending on whether the agreement is
devoid of, or subject to, any condition imposed on the passing of title of the thing to be conveyed or on
the obligation of a party thereto. When ownership is retained until the fulfillment of a positive condition the
breach of the condition will simply prevent the duty to convey title from acquiring an obligatory force. If the
condition is imposed on an obligation of a party which is not complied with, the other party may either
refuse to proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is
imposed upon the perfection of the contract itself, the failure of such condition would prevent the juridical
relation itself from coming into existence. 13
In determining the real character of the contract, the title given to it by the parties is not as much significant as its
substance. For example, a deed of sale, although denominated as a deed of conditional sale, may be treated as
absolute in nature, if title to the property sold is not reserved in the vendor or if the vendor is not granted the right to
unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14
The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by one party
of an undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the
other party. The reciprocal obligations referred to would normally be, in the case of vendee, the payment of the
agreed purchase price and, in the case of the vendor, the fulfillment of certain express warranties (which, in the case
at bench is the timely eviction of the squatters on the property).
It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at once
perfected when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a
specified thing or right to another (the buyer) over which the latter agrees. 15
The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter lot in San
Dionisio, Paraaque, Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig and
therein technically described. The purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid
upon the execution of the document of sale and the balance of P1,511,600.00 payable "45 days after the removal of
all squatters from the above described property."
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the property. The
ejectment of the squatters is a condition the operative act of which sets into motion the period of compliance by
petitioner of his own obligation, i.e., to pay the balance of the purchase price. Private respondent's failure "to remove
the squatters from the property" within the stipulated period gives petitioner the right to either refuse to proceed with
the agreement or waive that condition in consonance with Article 1545 of the Civil Code. 16This option clearly
belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a
"potestative condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of
the Civil Code 17 but a "mixed" condition "dependent not on the will of the vendor alone but also of third
persons like the squatters and government agencies and personnel concerned." 18 We must hasten to
add, however, that where the so-called "potestative condition" is imposed not on the birth of the obligation
but on its fulfillment, only the obligation is avoided, leaving unaffected the obligation itself. 19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose between
proceeding with the agreement or waiving the performance of the condition. It is this provision which is the pertinent
rule in the case at bench. Here, evidently, petitioner has waived the performance of the condition imposed on private
respondent to free the property from squatters. 20
In any case, private respondent's action for rescission is not warranted. She is not the injured party. 21 The right of
resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith
by the other party that violates the reciprocity between them. 22 It is private respondent who has failed in
her obligation under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to
shoulder the expenses of the execution of the judgment in the ejectment case and to make arrangements
with the sheriff to effect such execution. In his letter of 23 June 1989, counsel for petitioner has tendered
payment and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to
pay, having been made prior to the demand for rescission, assuming for the sake of argument that such a
demand is proper under Article 1592 23 of the Civil Code, would likewise suffice to defeat private
respondent's prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable to
petitioner or forfeitable by private respondent, since, on the basis of our foregoing conclusions, the matter has ceased
to be an issue. Suffice it to say that petitioner having opted to proceed with the sale, neither may petitioner demand
its reimbursement from private respondent nor may private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASIDE, and another
is entered ordering petitioner to pay private respondent the balance of the purchase price and the latter to execute
the deed of absolute sale in favor of petitioner. No costs.
SO ORDERED.
Suspensive and Resolutory (Art. 1181)

Cases:
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 137552
June 16, 2000
ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z. LAFORTEZA, DENNIS Z. LAFORTEZA,

and LEA Z. LAFORTEZA, petitioners,
vs.
ALONZO MACHUCA, respondent.
GONZAGA-REYES, J.:
This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of Appeals 1 in CA G.R. CV No.
147457 entitled "ALONZO MACHUCA versus ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, LEA
ZULUETA-LAFORTEZA, MICHAEL Z. LAFORTEZA, and DENNIS Z. LAFORTEZA".
The following facts as found by the Court of Appeals are undisputed:

The property involved consists of a house and lot located at No. 7757 Sherwood Street, Marcelo Green
Village, Paraaque, Metro Manila, covered by Transfer Certificate of Title (TCT) No. (220656) 8941 of the
Registered of Deeds of Paraaque (Exhibit "D", Plaintiff, record, pp. 331-332). The subject property is
registered in the name of the late Francisco Q. Laforteza, although it is conjugal in nature (Exhibit "8",
Defendants, record pp. 331-386).
On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special Power of Attorney in favor of
defendants Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr., appointing both as her Attorney-in-fact
authorizing them jointly to sell the subject property and sign any document for the settlement of the estate of
the late Francisco Q. Laforteza (Exh. "A", Plaintiff, record, pp. 323-325).
Likewise on the same day, defendant Michael Z. Laforteza executed a Special Power of Attorney in favor of
defendants Roberto Z. Laforteza and Gonzalo Laforteza, Jr., likewise, granting the same authority (Exh. "B",
record, pp. 326-328) Both agency instruments contained a provision that in any document or paper to
exercise authority granted, the signature of both attorneys- in-fact must be affixed.
On October 27, 1988, defendant Dennis Z. Laforteza executed a Special Power of Attorney in favor of
defendant Roberto Z. Laforteza for the purpose of selling the subject property (Exh. "C", Plaintiff, record, pp.
329-330). A year later, on October 30, 1989, Dennis Z. Laforteza executed another Special Power of
Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Laforteza, Jr. naming both attorneys-infact for the purpose of selling the subject property and signing any document for the settlement of the estate
of the late Francisco Q. Laforteza. The subsequent agency instrument (Exh, "2", record, pp. 371-373)
contained similar provisions that both attorneys-in-fact should sign any document or paper executed in the
exercise of their authority.
1w phi 1.nt
In the exercise of the above authority, on January 20, 1989, the heirs of the late Francisco Q. Laforteza
represented by Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr. entered into a Memorandum of
Agreement (Contract to Sell) with the plaintiff 2 over the subject property for the sum of SIX HUNDRED
THIRTY THOUSAND PESOS (P630,000.00) payable as follows:
(a) P30,000.00 as earnest money, to be forfeited in favor of the defendants if the sale is not
effected due to the fault of the plaintiff;
(b) P600,000.00 upon issuance of the new certificate of title in the name of the late Francisco Q.
Laforteza and upon execution of an extra-judicial settlement of the decedent's estate with sale in
favor of the plaintiff (Par. 2, Exh. "E", record, pp. 335-336).
Significantly, the fourth paragraph of the Memorandum of Agreement (Contract to Sell) dated January 20,
1989 (Exh. "E", supra.) contained a provision as follows:
. . . . Upon issuance by the proper Court of the new title, the BUYER-LESSEE shall be notified in
writing and said BUYER-LESSEE shall have thirty (30) days to produce the balance of
P600,000.00 which shall be paid to the SELLER-LESSORS upon the execution of the Extrajudicial
Settlement with sale.
On January 20, 1989, plaintiff paid the earnest money of THIRTY THOUSAND PESOS (P30,000.00), plus
rentals for the subject property (Exh. "F", Plaintiff, record, p. 339).
On September 18, 1998 3, defendant heirs, through their counsel wrote a letter (Exh. 1, Defendants, record,
p. 370) to the plaintiff furnishing the latter a copy of the reconstituted title to the subject property, advising
him that he had thirty (3) days to produce the balance of SIX HUNDRED PESOS (sic) (P600,000.00) under
the Memorandum of Agreement which plaintiff received on the same date.
On October 18, 1989, plaintiff sent the defendant heirs a letter requesting for an extension of the THIRTY
(30) DAYS deadline up to November 15, 1989 within which to produce the balance of SIX HUNDRED
THOUSAND PESOS (P600,000.00) (Exh. "G", Plaintiff, record, pp. 341-342). Defendant Roberto Z.

Laforteza, assisted by his counsel Atty. Romeo L. Gutierrez, signed his conformity to the plaintiff's letter
request (Exh. "G-1 and "G-2", Plaintiff, record, p. 342). The extension, however, does not appear to have
been approved by Gonzalo Z. Laforteza, the second attorney-in-fact as his conformity does not appear to
have been secured.
On November 15, 1989, plaintiff informed the defendant heirs, through defendant Roberto Z. Laforteza, that
he already had the balance of SIX HUNDRED THOUSAND PESOS (P600,000.00) covered by United
Coconut Planters Bank Manager's Check No. 000814 dated November 15, 1989 (TSN, August 25, 1992, p.
11; Exhs. "H", record, pp. 343-344; "M", records p. 350; and "N", record, p. 351). However, the defendants,
refused to accept the balance (TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff, record, p. 350; and "N-1",
Plaintiff, record, p. 351). Defendant Roberto Z. Laforteza had told him that the subject property was no
longer for sale (TSN, October 20, 1992, p. 19; Exh. "J", record, p. 347).
On November 20, 1998 4, defendants informed plaintiff that they were canceling the Memorandum of
Agreement (Contract to Sell) in view of the plaintiff's failure to comply with his contractual obligations (Exh.
"3").
Thereafter, plaintiff reiterated his request to tender payment of the balance of SIX HUNDRED THOUSAND
PESOS (P600,000.00). Defendants, however, insisted on the rescission of the Memorandum of Agreement.
Thereafter, plaintiff filed the instant action for specific performance. The lower court rendered judgment on
July 6, 1994 in favor of the plaintiff, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff Alonzo Machuca and against the
defendant heirs of the late Francisco Q. Laforteza, ordering the said defendants.
(a) To accept the balance of P600,000.00 as full payment of the consideration for the
purchase of the house and lot located at No. 7757 Sherwood Street, Marcelo Green
Village, Paraaque, Metro Manila, covered by Transfer Certificate of Title No. (220656)
8941 of the Registry of Deeds of Rizal Paraaque, Branch;
(b) To execute a registrable deed of absolute sale over the subject property in favor of the
plaintiff;
(c) Jointly and severally to pay the plaintiff the sum of P20,000.00 as attorney's fees plus
cost of suit.
SO ORDERED. (Rollo, pp. 74-75). 5
Petitioners appealed to the Court of Appeals, which affirmed with modification the decision of the lower
court; the dispositive portion of the Decision reads:
WHEREFORE, the questioned decision of the lower court is hereby AFFIRMED with the
MODIFICATION that defendant heirs Lea Zulueta-Laforteza, Michael Z. Laforteza, Dennis Z.
Laforteza and Roberto Z. Laforteza including Gonzalo Z. Laforteza, Jr. are hereby ordered to pay
jointly and severally the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages.
SO ORDERED. 6
Motion for Reconsideration was denied but the Decision was modified so as to absolve Gonzalo Z.
Laforteza, Jr. from liability for the payment of moral damages. 7 Hence this petition wherein the petitioners
raise the following issues:
I. WHETHER THE TRIAL AND APPELLATE COURTS CORRECTLY CONSTRUED THE
MEMORANDUM OF AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.

II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT RESCISSION WILL NOT LIE IN
THE INSTANT CASE.
III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL FROM RAISING THE ALLEGED
DEFECT IN THE SPECIAL POWER OF ATTORNEY DATED 30 OCTOBER 1989 EXECUTED BY
DENNIS LAFORTEZA.
IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM OF AGREEMENT IMPOSES
RECIPROCAL OBLIGATIONS, WHETHER THE PETITIONERS MAY BE COMPELLED TO SELL
THE SUBJECT PROPERTY WHEN THE RESPONDENT FAILED TO MAKE A JUDICIAL
CONSIGNATION OF THE PURCHASE PRICE?
V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS MAKE THEM LIABLE FOR
MORAL DAMAGES? 8
The petitioners contend that the Memorandum of Agreement is merely a lease agreement with "option to
purchase". As it was merely an option, it only gave the respondent a right to purchase the subject property
within a limited period without imposing upon them any obligation to purchase it. Since the respondent's
tender of payment was made after the lapse of the option agreement, his tender did not give rise to the
perfection of a contract of sale.
It is further maintained by the petitioners that the Court of Appeals erred in ruling that rescission of the
contract was already out of the question. Rescission implies that a contract of sale was perfected unlike the
Memorandum of Agreement in question which as previously stated is allegedly only an option contract.
Petitioner adds that at most, the Memorandum of Agreement (Contract to Sell) is a mere contract to sell, as
indicated in its title. The obligation of the petitioners to sell the property to the respondent was conditioned
upon the issuance of a new certificate of title and the execution of the extrajudicial partition with sale and
payment of the P600,000.00. This is why possession of the subject property was not delivered to the
respondent as the owner of the property but only as the lessee thereof. And the failure of the respondent to
pay the purchase price in full prevented the petitioners' obligation to convey title from acquiring obligatory
force.
Petitioners also allege that assuming for the sake of argument that a contract of sale was indeed perfected,
the Court of Appeals still erred in holding that respondent's failure to pay the purchase price of P600,000.00
was only a "slight or casual breach".
The petitioners also claim that the Court of Appeals erred in ruling that they were not ready to comply with
their obligation to execute the extrajudicial settlement. The Power of Attorney to execute a Deed of Sale
made by Dennis Z. Laforteza was sufficient and necessarily included the power to execute an extrajudicial
settlement. At any rate, the respondent is estopped from claiming that the petitioners were not ready to
comply with their obligation for he acknowledged the petitioners' ability to do so when he requested for an
extension of time within which to pay the purchase price. Had he truly believed that the petitioners were not
ready, he would not have needed to ask for said extension.
Finally, the petitioners allege that the respondent's uncorroborated testimony that third persons offered a
higher price for the property is hearsay and should not be given any evidentiary weight. Thus, the order of
the lower court awarding moral damages was without any legal basis.
The appeal is bereft of merit.
A perusal of the Memorandum Agreement shows that the transaction between the petitioners and the
respondent was one of sale and lease. The terms of the agreement read:

1. For and in consideration of the sum of PESOS: SIX HUNDRED THIRTY THOUSAND
(P630,000.00) payable in a manner herein below indicated, SELLER-LESSOR hereby agree to sell
unto BUYER-LESSEE the property described in the first WHEREAS of this Agreement within six
(6) months from the execution date hereof, or upon issuance by the Court of a new owner's
certificate of title and the execution of extrajudicial partition with sale of the estate of Francisco
Laforteza, whichever is earlier;
2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY THOUSAND (P630,000.00)
shall be paid in the following manner:
P30,000.00 as earnest money and as consideration for this Agreement, which amount
shall be forfeited in favor of SELLER-LESSORS if the sale is not effected because of the
fault or option of BUYER-LESSEE;
P600,000.00 upon the issuance of the new certificate of title in the name of the late
Francisco Laforteza and upon the execution of an Extrajudicial Settlement of his estate
with sale in favor of BUYER-LESSEE free from lien or any encumbrances.
3. Parties reasonably estimate that the issuance of a new title in place of the lost one, as well as
the execution of extrajudicial settlement of estate with sale to herein BUYER-LESSEE will be
completed within six (6) months from the execution of this Agreement. It is therefore agreed that
during the six months period, BUYER-LESSEE will be leasing the subject property for six months
period at the monthly rate of PESOS: THREE THOUSAND FIVE HUNDRED
(P3,500.00). Provided however, that if the issuance of new title and the execution of Extrajudicial
Partition is completed prior to the expiration of the six months period, BUYER-LESSEE shall only
be liable for rentals for the corresponding period commencing from his occupancy of the premises
to the execution and completion of the Extrajudicial Settlement of the estate, provided further that if
after the expiration of six (6) months, the lost title is not yet replaced and the extra judicial partition
is not executed, BUYER-LESSEE shall no longer be required to pay rentals and shall continue to
occupy, and use the premises until subject condition is complied by SELLER-LESSOR;
4. It is hereby agreed that within reasonable time from the execution of this Agreement and the
payment by BUYER-LESSEE of the amount of P30,000.00 as herein above provided, SELLERLESSORS shall immediately file the corresponding petition for the issuance of a new title in lieu of
the lost one in the proper Courts. Upon issuance by the proper Courts of the new title, the BUYERLESSEE shall have thirty (30) days to produce the balance of P600,000.00 which shall be paid to
the SELLER-LESSORS upon the execution of the Extrajudicial Settlement with sale. 9
A contract of sale is a consensual contract and is perfected at the moment there is a meeting of the minds
upon the thing which is the object of the contract and upon the price. 10 From that moment the parties may
reciprocally demand performance subject to the provisions of the law governing the form of contracts. 11The
elements of a valid contract of sale under Article 1458 of the Civil Code are (1) consent or meeting of the
minds; (2) determinate subject matter and (3) price certain money or its equivalent. 12
In the case at bench, there was a perfected agreement between the petitioners and the respondent whereby
the petitioners obligated themselves to transfer the ownership of and deliver the house and lot located at
7757 Sherwood St., Marcelo Green Village, Paraaque and the respondent to pay the price amounting to six
hundred thousand pesos (P600,000.00). All the elements of a contract of sale were thus present. However,
the balance of the purchase price was to be paid only upon the issuance of the new certificate of title in lieu
of the one in the name of the late Francisco Laforteza and upon the execution of an extrajudicial settlement
of his estate. Prior to the issuance of the "reconstituted" title, the respondent was already placed in
possession of the house and lot as lessee thereof for six months at a monthly rate of three thousand five
hundred pesos (P3,500.00). It was stipulated that should the issuance of the new title and the execution of
the extrajudicial settlement be completed prior to expiration of the six-month period, the respondent would
be liable only for the rentals pertaining to the period commencing from the date of the execution of the
agreement up to the execution of the extrajudicial settlement. It was also expressly stipulated that if after the
expiration of the six month period, the lost title was not yet replaced and the extrajudicial partition was not

yet executed, the respondent would no longer be required to pay rentals and would continue to occupy and
use the premises until the subject condition was complied with the petitioners.
The six-month period during which the respondent would be in possession of the property as lessee, was
clearly not a period within which to exercise an option. An option is a contract granting a privilege to buy or
sell within an agreed time and at a determined price. An option contract is a separate and distinct contract
from that which the parties may enter into upon the consummation of the option. 13 An option must be
supported by consideration.14 An option contract is governed by the second paragraph of Article 1479 of the
Civil Code 15, which reads:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.
In the present case, the six-month period merely delayed the demandability of the contract of sale and did
not determine its perfection for after the expiration of the six-month period, there was an absolute obligation
on the part of the petitioners and the respondent to comply with the terms of the sale. The parties made a
"reasonable estimate" that the reconstitution the lost title of the house and lot would take approximately six
months and thus presumed that after six months, both parties would be able to comply with what was
reciprocally incumbent upon them. The fact that after the expiration of the six-month period, the respondent
would retain possession of the house and lot without need of paying rentals for the use therefor, clearly
indicated that the parties contemplated that ownership over the property would already be transferred by
that time.
The issuance of the new certificate of title in the name of the late Francisco Laforteza and the execution of an
extrajudicial settlement of his estate was not a condition which determined the perfection of the contract of sale.
Petitioners' contention that since the condition was not met, they no longer had an obligation to proceed with the sale
of the house and lot is unconvincing. The petitioners fail to distinguish between a condition imposed upon the
perfection of the contract and a condition imposed on the performance of an obligation. Failure to comply with the first
condition results in the failure of a contract, while the failure to comply with the second condition only gives the other
party the option either to refuse to proceed with the sale or to waive the condition. Thus, Art. 1545 of the Civil Code
states:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or he may waive performance of the
condition. If the other party has promised that the condition should happen or be performed, such first
mentioned party may also treat the nonperformance of the condition as a breach of warranty.
Where the ownership in the things has not passed, the buyer may treat the fulfillment by the seller of his
obligation to deliver the same as described and as warranted expressly or by implication in the contract of
sale as a condition of the obligation of the buyer to perform his promise to accept and pay for the thing. 16
In the case at bar, there was already a perfected contract. The condition was imposed only on the performance of the
obligations contained therein. Considering however that the title was eventually "reconstituted" and that the
petitioners admit their ability to execute the extrajudicial settlement of their father's estate, the respondent had a right
to demand fulfillment of the petitioners' obligation to deliver and transfer ownership of the house and lot.
What further militates against petitioners' argument that they did not enter into a contract or sale is the fact that the
respondent paid thirty thousand pesos (P30,000.00) as earnest money. Earnest money is something of value to show
that the buyer was really in earnest, and given to the seller to bind the bargain. 17 Whenever earnest money is given in
a contract of sale, it is considered as part of the purchase price and proof of the perfection of the contract. 18
We do not subscribe to the petitioners' view that the Memorandum Agreement was a contract to sell. There is nothing
contained in the Memorandum Agreement from which it can reasonably be deduced that the parties intended to enter
into a contract to sell, i.e. one whereby the prospective seller would explicitly reserve 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 full payment of the price, such payment being a positive suspensive
condition, the failure of which is not considered a breach, casual or serious, but simply an event which prevented the
obligation from acquiring any obligatory force. 19 There is clearly no express reservation of title made by the
petitioners over the property, or any provision which would impose non-payment of the price as a condition for the
contract's entering into force. Although the memorandum agreement was also denominated as a "Contract to Sell",
we hold that the parties contemplated a contract of sale. A deed of sale is absolute in nature although denominated a
conditional sale in the absence of a stipulation reserving title in the petitioners until full payment of the purchase
price. 20 In such cases, ownership of the thing sold passes to the vendee upon actual or constructive delivery
thereof. 21 The mere fact that the obligation of the respondent to pay the balance of the purchase price was made
subject to the condition that the petitioners first deliver the reconstituted title of the house and lot does not make the
contract a contract to sell for such condition is not inconsistent with a contract of sale. 22
The next issue to be addressed is whether the failure of the respondent to pay the balance of the purchase price
within the period allowed is fatal to his right to enforce the agreement.
We rule in the negative.
Admittedly, the failure of the respondent to pay the balance of the purchase price was a breach of the contract and
was a ground for rescission thereof. The extension of thirty (30) days allegedly granted to the respondent by Roberto
Z. Laforteza (assisted by his counsel Attorney Romeo Gutierrez) was correctly found by the Court of Appeals to be
ineffective inasmuch as the signature of Gonzalo Z. Laforteza did not appear thereon as required by the Special
Powers of Attorney. 23 However, the evidence reveals that after the expiration of the six-month period provided for in
the contract, the petitioners were not ready to comply with what was incumbent upon them,i.e. the delivery of the
reconstituted title of the house and lot. It was only on September 18, 1989 or nearly eight months after the execution
of the Memorandum of Agreement when the petitioners informed the respondent that they already had a copy of the
reconstituted title and demanded the payment of the balance of the purchase price. The respondent could not
therefore be considered in delay for in reciprocal obligations, neither party incurs in delay if the other party does not
comply or is not ready to comply in a proper manner with what was incumbent upon him. 24
Even assuming for the sake of argument that the petitioners were ready to comply with their obligation, we find that
rescission of the contract will still not prosper. The rescission of a sale of an immovable property is specifically
governed by Article 1592 of the New Civil Code, which reads:
In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price
at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even
after the expiration of the period, as long as no demand for rescission of the contract has been made upon
him either judicially or by a notarial act. After the demand, the court may not grant him a new term. 25
It is not disputed that the petitioners did not make a judicial or notarial demand for rescission. The November 20,
1989 letter of the petitioners informing the respondent of the automatic rescission of the agreement did not amount to
a demand for rescission, as it was not notarized. 26 It was also made five days after the respondent's attempt to make
the payment of the purchase price. This offer to pay prior to the demand for rescission is sufficient to defeat the
petitioners' right under article 1592 of the Civil Code. 27 Besides, the Memorandum Agreement between the parties
did not contain a clause expressly authorizing the automatic cancellation of the contract without court intervention in
the event that the terms thereof were violated. A seller cannot unilaterally and extrajudicially rescind a contract or sale
where there is no express stipulation authorizing him to extrajudicially rescind. 28 Neither was there a judicial demand
for the rescission thereof. Thus, when the respondent filed his complaint for specific performance, the agreement was
still in force inasmuch as the contract was not yet rescinded. At any rate, considering that the six-month period was
merely an approximation of the time if would take to reconstitute the lost title and was not a condition imposed on the
perfection of the contract and considering further that the delay in payment was only thirty days which was caused by
the respondents justified but mistaken belief that an extension to pay was granted to him, we agree with the Court of
Appeals that the delay of one month in payment was a mere casual breach that would not entitle the respondents to
rescind the contract. Rescission of a contract will not be permitted for a slight or casual breach, but only such
substantial and fundamental breach as would defeat the very object of the parties in making the agreemant. 29
1avv phi 1

Petitioners' insistence that the respondent should have consignated the amount is not determinative of whether
respondent's action for specific performance will lie. Petitioners themselves point out that the effect of cansignation is
to extinguish the obligation. It releases the debtor from responsibility therefor. 30 The failure of the respondent to
consignate the P600,000.00 is not tantamount to a breach of the contract for by the fact of tendering payment, he
was willing and able to comply with his obligation.
The Court of Appeals correctly found the petitioners guilty of bad faith and awarded moral damages to the
respondent. As found by the said Court, the petitioners refused to comply with, their obligation for the reason
that they were offered a higher price therefor and the respondent was even offered P100,000.00 by the
petitioners' lawyer, Attorney Gutierrez, to relinquish his rights over the property. The award of moral
damages is in accordance with Article 1191 31 of the Civil Code pursuant to Article 2220 which provides that
moral damages may be awarded in case of breach of contract where the defendant acted in bad faith. The
amount awarded depends on the discretion of the court based on the circumstances of each
case. 32 Under the circumstances, the award given by the Court of Appeals amounting to P50,000.00
appears to us to be fair and reasonable.
ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No. 47457 is AFFIRMED and the instant
petition is hereby DENIED.
No pronouncement as to costs.
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 137823
December 15, 2000
REYNALDO MORTEL, petitioner,

vs.
KASSCO, INC. and OSCAR SANTOS, respondents.
DECISION
KAPUNAN, J.:
This is a petition for review on certiorari of the Decision of the Court of Appeals, 1 dated September 30, 1998, in C.A.
GR CV No. 52059 which affirmed the Decision of the Regional Trial Court of Makati City, Branch 66, in Civil Case No.
89-3260 dismissing petitioners complaint for specific performance and/or rescission with damages.
The facts leading to the filing of the present petition are as follows:
KASSCO, Inc. is the registered owner of the lot covered by Transfer Certificate of Title No. 137791 as well as the
building (named "Kassco Building") standing thereon located at the corner of Cavite and Lico Streets, Rizal Avenue,
Sta. Cruz, Manila. To secure a loan obtained from the Philippine National Bank (PNB), which was renting the first
floor of the building, KASSCO, Inc. mortgaged such property to the latter. This mortgage was duly annotated at the
back of TCT No. 137791 on May 11, 1981.
In 1985, KASSCO, Inc. applied for the conversion of the Kassco Building into a condominium which application was
approved by the then Human Settlements Regulatory Commission (HSRC) on August 9, 1985. As a requirement for
registration and issuance of a license to sell, KASSCO, Inc. wrote PNB to secure its approval of the said conversion
and the partial release or cancellation of the mortgage over the fully-paid units.

In the same year, KASSCO, Inc., represented by Oscar Santos, entered into an "Agreement" with herein petitioner
Reynaldo Mortel, the pertinent provisions of which provide:
WHEREAS, the SELLER has offered to sell the second floor of the above-mentioned building, with the floor area of
One Hundred Sixty Five (165) square meters, more or less, including common areas (referred to herein as "Second
Floor") and the buyer has agreed to buy the same, subject to the terms and conditions hereinafter set forth:
WHEREAS, the aforementioned property is the subject of an application for conversion into a commercial
condominium filed with the Human Settlements Regulatory Commission of the Ministry of Human Settlements, which
has been recently approved:
NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual stipulations hereinafter set
forth, the parties hereby agree and bind themselves as follows:
1. Object of the Sale
xxx
2. Purchase Price
xxx
3. Manner of Payment
Upon securing the individual condominium certificate of title (CCT) over the Kassco Building, which the
SELLER undertakes to accomplish within one year from execution hereof, the seller shall execute a Deed of
Absolute sale in favor and deliver to the buyer the CCT corresponding to the Second Floor, free from any
liens and encumbrances. Simultaneously, and to secure the payment by the buyer of the purchase price or
balance thereof, the BUYER shall execute a Deed of Mortgage in favor of the SELLER over the said second
Floor. The buyer undertakes to pay the full purchase price, or the remaining thereof, within two (2) months
from the delivery of the CCT. Should the buyer fail to pay in full the agreed purchase price within two (2)
months as herein agreed upon, the parties shall renegotiate the purchase price based on the prevailing
Market Value of the property.
Upon full payment of the BUYER of the purchase price, the SELLER shall deliver to the BUYER a Deed of
Release canceling the aforesaid mortgage.
4. Possession
xxx
5. Lease and Rental
Pending the delivery of the title to the BUYER and payment to the SELLER of the full amount of the
purchase price, a contract of lease for definite period of one (1) year from the date of this agreement, is
hereby constituted on the aforementioned Second Floor of the Kassco Building, subject to the following
terms and conditions:
a. xxx
b. The lease herein constitute shall be deemed automatically terminated upon full payment of the purchase
price to the SELLER, or the expiration of the agreed one (1) year lease period, whichever comes first.

c. If the Deed of Absolute Sale is not executed through no fault of the SELLER, BUYER-LESSEE shall
peacefully and voluntarily vacate the premises upon the expiration of the one (1) year period. However,
should SELLER fail to obtain the CCT or authority to sell within the one (1) year period agreed upon and
delay or failure is attributable to the SELLER, the buyer may exercise any of the following options: 1) renew
and/or extend the lease for another year under such terms and conditions mutually agreed upon between
the parties; or 1) vacate the premises but shall have the right to buy the Second Floor for the purchase price
reasonably fixed at such time that the SELLER is ready to convey ownership thereof.
7. Improvements
xxx
The buyer may introduce additional improvements on the premises herein agreed to be bought and sold but in case
of non-payment of the purchase price and expiration of the lease period, such improvement shall be forfeited in favor
of the SELLER.2
KASSCO, Inc.s request for partial cancellation of mortgage and delivery of TCT No. 137791 remained unacted upon
by PNB such that the one-year period of lease with petitioner, as embodied in the "Agreement" expired without
KASSCO securing and delivering the Condominium Certificate of Title (CCT) to petitioner.
Thus, petitioner and private respondent executed another agreement which substantially contained the same terms
and conditions as the first agreement and modified only insofar as the purchase price and monthly rental fee of
P680,000.00 and P5,000.00, respectively, were increased to P816,000.00 and P7,000.00.
The period covered by the second agreement again lapsed without KASSCO obtaining the release of the mortgage
with PNB and the Condominium Certificate of Title. Nonetheless, petitioner remained in occupation of the premises at
a monthly rental fee of P7,000.00.
On November 10, 1988, KASSCO ordered petitioner to vacate the premises and to pay an additional rental fee of
P2,000.00 per month from October 18, 1987 to October 18,1988. KASSCO also increased the monthly rental fee to
P11,550.00 effective October 18, 1988.
On November 24, 1988, petitioner, in response, demanded from private respondent the delivery of the CCT over the
subject property and the execution of a Deed of Absolute Sale in his favor.
This prompted KASSCO, Inc. to file a complaint for unlawful detainer against petitioner on December 13, 1988.
Petitioner Mortel, in turn, instituted the present case for specific performance or rescission with damages against
KASSCO, Inc. When Oscar Santos failed to file his Answer within the reglementary period, he was declared in default
and herein petitioner presented evidence ex-parte. Meanwhile, during the pendency of the case, the Kassco Building
was foreclosed due to KASSCOs failure to settle its obligation with PNB.
On November 29, 1995, the Regional Trial Court dismissed petitioners complaint. This dismissal was affirmed by the
Court of Appeals on September 30, 1998. Hence, the present petition.
Petitioner contends that since the 1985 and 1986 agreements were in the nature of a contract to sell a condominium,
then the pertinent provisions of the Condominium Law, P.D. 957 and the Law on Sale of Real Estate on Installment,
R.A. 6581, shall apply such that he may recover whatever he has paid as partial payment and monthly rental fees
under said agreements and likewise be reimbursed the value of the improvements he has introduced to the subject
property.
Petitioner further attributes misrepresentation and bad faith to private respondent KASSCO, Inc. for its alleged failure
to inform petitioner that the property was mortgaged to PNB and that it has not yet secured a license to sell at the
time the subject agreements were entered into.
The Court finds no merit in the petition.

In interpretation of contracts, it is an elementary rule that if the terms of a contract are clear and leave no doubt as to
the intentions of the contracting parties, then the literal meaning of its stipulations shall control. 3
Clearly discernible from the subject Agreements is the existence of two contracts - the first is the principal contract to
sell the second floor of the Kassco Building, and second is a contract of lease over the same property, pending
delivery of title by KASSCO, effective for a period of one year from date of execution of the said agreements.
From its terms, the first contract is doubtlessly a contract to sell because ownership is reserved in the vendor and title
is not to pass until full payment of the purchase price.4 Moreover, this contract to sell is subject to a suspensive
condition which is the acquisition of individual condominium certificates of title (CCT) over the building which private
respondent undertook to accomplish within one year from date of execution. In contracts subject to a suspensive
condition, the birth or effectivity of such contracts only takes place if and when the event constituting the condition
happens or is fulfilled, and if the suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.5
In the present petition, the effectivity of the contract to sell is conditioned upon the obtainment and delivery of the
condominium certificate of title to petitioner by private respondent. Under the terms of the agreement, title shall only
pass and a deed of absolute sale shall only be executed in favor of the buyer upon securing individual CCTs over the
subject property. The non-fulfillment of this condition is thus evident when KASSCO, Inc. failed to secure the partial
cancellation of its mortgage and the return of its Transfer Certificate of Title by PNB, both of which were
indispensable to registration and the issuance of a license to sell a condominium, which in turn, are prerequisites to
the issuance of a CCT.
When private respondent thus failed to secure CCTs over the property subject of this controversy, the contract to sell
did not take into effect. Consequently, the laws invoked by petitioner, PD 957 and RA 6581, find no application to the
present case because said laws presuppose the existence of a valid and effective contract to sell a condominium. As
succinctly pointed out by the Court of Appeals, the parties must have, in fact, anticipated the non-fulfillment of the
suspensive condition when they incorporated the lease contract in their agreements. 6Moreover, the subsequent act of
herein petitioner, specifically, the payment of monthly rental fees evidenced by receipts denominated as "rental"
confirm petitioners assent to the lease contract embodied in the subject agreements. Since, the conditional obligation
is deemed not to have existed by reason of the non-fulfillment of the suspensive condition, the award of damages
under Art. 1191 of the Civil Code7 is unwarranted.
1wphi1
As to the allegation of bad faith and misrepresentation on the part of private respondent KASSCO, Inc., again, the
contention is bereft of merit. It is well-settled that bad faith cannot be presumed and must be established by clear and
convincing evidence.8 And the person who seeks damages due to the acts of another has the burden of proving that
the latter acted in bad faith or with ill-motive.9 In the case under scrutiny, petitioner failed to show bad faith on the part
of private respondent KASSCO, Inc. We quote with approval the disquisitions of the court a quoon the matter as
affirmed by the Court of Appeals:
In the ordinary course of things, prudence dictates that a buyer of a real property (plaintiff claims to be so) would look
into the title thereof. xxx Plaintiff is a sales manager of PHILAMLIFE Co. and it is expected that a person holding such
a position will not readily enter into a contract without exercising ordinary care by checking the title covering the
property.
Moreover, plaintiff testified that he learned of the mortgage in the middle of the year 1986 when the first agreement
was in operation (TSN, Oct. 23, 1993: p.11-12). If this was so, plaintiff should have asked for explanation about the
said mortgage or protested the same. This, he did not do. Notwithstanding this knowledge, he entered into another
agreement for (sic) October 18, 1986 to October 18, 1987 with the same terms and conditions as the 1985
agreement except for the purchase price and the monthly rents. (Exh. "B" or "2"). 10
As to the alleged representations made by private respondent that it had license to sell condominium units at the time
the subject agreements were executed, the Court finds no such misrepresentation. The only assurance given by
private respondent to herein petitioner is that its application for conversion of the Kassco Building into a commercial
condominium has been approved by the HSRC. In fact, the undertaking assumed by herein private respondent to
secure individual condominium certificates of title over the subject property within one year from date of execution of
the agreement is an indication that its registration and the issuance of its license to sell was still in process.

Finally, it must be pointed out that neither the law nor the courts will excuse a party from an unwise or undesirable
contract he or she entered into with all the required formalities and with full awareness of its consequences 11 as in the
case of herein petitioner.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals, dated September 30,
1998, in CA-GR CV No. 52059 is hereby AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-48194 March 15, 1990
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
vs.
COURT OF APPEALS and LEONARDO TIRO, respondents.
Eddie Tamondong for petitioners.
Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.
REGALADO, J.:
Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA-G.R. No. 52296-R, dated March
6, 1978, 1 the dispositive portion whereof decrees:
WHEREFORE, the judgment appealed from is hereby set aside and another one entered ordering
the defendants-appellees, jointly and solidarily, to pay plaintiff-appellant the sum of P79,338.15 with
legal interest thereon from the filing of the complaint, plus attorney's fees in the amount of
P8,000.00. Costs against defendants-appellees. 2
As found by respondent court or disclosed by the records, 3 this case was generated by the following
antecedent facts.
Private respondent is a holder of an ordinary timber license issued by the Bureau of Forestry covering 2,535 hectares
in the town of Medina, Misamis Oriental. On February 15, 1966 he executed a "Deed of Assignment" 4 in favor of
herein petitioners the material parts of which read as follows:

xxx xxx xxx
I, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis Oriental, for and
in consideration of the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,000.00),
Philippine Currency, do by these presents, ASSIGN, TRANSFER AND CONVEY, absolutely and
forever unto JOSE M. JAVIER and ESTRELLA F. JAVIER, spouses, of legal age and a resident
(sic) of 2897 F.B. Harrison, Pasay City, my shares of stocks in the TIMBERWEALTH
CORPORATION in the total amount of P120,000.00, payment of which shall be made in the
following manner:

1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;
2. The balance of P100,000.00 shall be paid P10,000.00 every shipment of
export logs actually produced from the forest concession of Timberwealth
Corporation.
That I hereby agree to sign and endorse the stock certificate in favor of Mr. & Mrs. Jose M. Javier,
as soon as stock certificates are issued.
xxx xxx xxx
At the time the said deed of assignment was executed, private respondent had a pending application, dated October
21, 1965, for an additional forest concession covering an area of 2,000 hectares southwest of and adjoining the area
of the concession subject of the deed of assignment. Hence, on February 28, 1966, private respondent and
petitioners entered into another "Agreement" 5 with the following stipulations:
xxx xxx xxx
1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede and convey whatever
rights he may acquire, absolutely and forever, to TIMBERWEALTH CORPORATION, a corporation
duly organized and existing under the laws of the Philippines, over a forest concession which is
now pending application and approval as additional area to his existing licensed area under O.T.
License No. 391-103166, situated at Medina, Misamis Oriental;
2. That for and in consideration of the aforementioned transfer of rights over said additional area to
TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER and JOSE M. JAVIER, both directors
and stockholders of said corporation, do hereby undertake to pay LEONARDO TIRO, as soon as
said additional area is approved and transferred to TIMBERWEALTH CORPORATION the sum of
THIRTY THOUSAND PESOS (P30,000.00), which amount of money shall form part of their paid up
capital stock in TIMBERWEALTH CORPORATION;
3. That this Agreement is subject to the approval of the members of the Board of Directors of the
TIMBERWEALTH CORPORATION.
xxx xxx xxx
On November 18, 1966, the Acting Director of Forestry wrote private respondent that his forest concession was
renewed up to May 12, 1967 under O.T.L. No. 391-51267, but since the concession consisted of only 2,535 hectares,
he was therein informed that:
In pursuance of the Presidential directive of May 13, 1966, you are hereby given until May 12, 1967
to form an organization such as a cooperative, partnership or corporation with other adjoining
licensees so as to have a total holding area of not less than 20,000 hectares of contiguous and
compact territory and an aggregate allowable annual cut of not less than 25,000 cubic meters,
otherwise, your license will not be further renewed. 6
Consequently, petitioners, now acting as timber license holders by virtue of the deed of assignment executed by
private respondent in their favor, entered into a Forest Consolidation Agreement 7 on April 10, 1967 with other
ordinary timber license holders in Misamis Oriental, namely, Vicente L. De Lara, Jr., Salustiano R. Oca
and Sanggaya Logging Company. Under this consolidation agreement, they all agreed to pool together
and merge their respective forest concessions into a working unit, as envisioned by the aforementioned
directives. This consolidation agreement was approved by the Director of Forestry on May 10, 1967. 8 The
working unit was subsequently incorporated as the North Mindanao Timber Corporation, with the
petitioners and the other signatories of the aforesaid Forest Consolidation Agreement as incorporators. 9

On July 16, 1968, for failure of petitioners to pay the balance due under the two deeds of assignment, private
respondent filed an action against petitioners, based on the said contracts, for the payment of the amount of
P83,138.15 with interest at 6% per annum from April 10, 1967 until full payment, plus P12,000.00 for attorney's fees
and costs.
On September 23, 1968, petitioners filed their answer admitting the due execution of the contracts but interposing the
special defense of nullity thereof since private respondent failed to comply with his contractual obligations and,
further, that the conditions for the enforceability of the obligations of the parties failed to materialize. As a
counterclaim, petitioners sought the return of P55,586.00 which private respondent had received from them pursuant
to an alleged management agreement, plus attorney's fees and costs.
On October 7, 1968, private respondent filed his reply refuting the defense of nullity of the contracts in this wise:
What were actually transferred and assigned to the defendants were plaintiff's rights and interest in
a logging concession described in the deed of assignment, attached to the complaint and marked
as Annex A, and agreement Annex E; that the "shares of stocks" referred to in paragraph II of the
complaint are terms used therein merely to designate or identify those rights and interests in said
logging concession. The defendants actually made use of or enjoyed not the "shares of stocks" but
the logging concession itself; that since the proposed Timberwealth Corporation was owned solely
and entirely by defendants, the personalities of the former and the latter are one and the same.
Besides, before the logging concession of the plaintiff or the latter's rights and interests therein
were assigned or transferred to defendants, they never became the property or assets of the
Timberwealth Corporation which is at most only an association of persons composed of the
defendants. 10
and contending that the counterclaim of petitioners in the amount of P55,586.39 is actually only a part of the sum of
P69,661.85 paid by the latter to the former in partial satisfaction of the latter's claim. 11
After trial, the lower court rendered judgment dismissing private respondent's complaint and ordering him to pay
petitioners the sum of P33,161.85 with legal interest at six percent per annum from the date of the filing of the answer
until complete payment. 12
As earlier stated, an appeal was interposed by private respondent to the Court of Appeals which reversed the
decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in respondent court for extension of time to file a motion for
reconsideration, for the reason that they needed to change counsel. 13 Respondent court, in its resolution dated
March 31, 1978, gave petitioners fifteen (15) days from March 28, 1978 within which to file said motion for
reconsideration, provided that the subject motion for extension was filed on time. 14 On April 11, 1978,
petitioners filed their motion for reconsideration in the Court of Appeals. 15 On April 21, 1978, private
respondent filed a consolidated opposition to said motion for reconsideration on the ground that the
decision of respondent court had become final on March 27, 1978, hence the motion for extension filed
on March 28, 1978 was filed out of time and there was no more period to extend. However, this was not
acted upon by the Court of Appeals for the reason that on April 20, 1978, prior to its receipt of said
opposition, a resolution was issued denying petitioners' motion for reconsideration, thus:
The motion for reconsideration filed on April 11, 1978 by counsel for defendants-appellees is
denied. They did not file any brief in this case. As a matter of fact this case was submitted for
decision without appellees' brief. In their said motion, they merely tried to refute the rationale of the
Court in deciding to reverse the appealed judgment. 16
Petitioners then sought relief in this Court in the present petition for review on certiorari. Private respondent filed his
comment, reiterating his stand that the decision of the Court of Appeals under review is already final and executory.

Petitioners countered in their reply that their petition for review presents substantive and fundamental questions of
law that fully merit judicial determination, instead of being suppressed on technical and insubstantial reasons.
Moreover, the aforesaid one (1) day delay in the filing of their motion for extension is excusable, considering that
petitioners had to change their former counsel who failed to file their brief in the appellate court, which substitution of
counsel took place at a time when there were many successive intervening holidays.
On July 26, 1978, we resolved to give due course to the petition.
The one (1) day delay in the filing of the said motion for extension can justifiably be excused, considering that aside
from the change of counsel, the last day for filing the said motion fell on a holiday following another holiday, hence,
under such circumstances, an outright dismissal of the petition would be too harsh. Litigations should, as much as
possible, be decided on their merits and not on technicalities. In a number of cases, this Court, in the exercise of
equity jurisdiction, has relaxed the stringent application of technical rules in order to resolve the case on its
merits. 17 Rules of procedure are intended to promote, not to defeat, substantial justice and, therefore, they
should not be applied in a very rigid and technical sense.

We now proceed to the resolution of this case on the merits.
The assignment of errors of petitioners hinges on the central issue of whether the deed of assignment dated February
15, 1966 and the agreement of February 28, 1966 are null and void, the former for total absence of consideration and
the latter for non-fulfillment of the conditions stated therein.
Petitioners contend that the deed of assignment conveyed to them the shares of stocks of private respondent in
Timberwealth Corporation, as stated in the deed itself. Since said corporation never came into existence, no share of
stocks was ever transferred to them, hence the said deed is null and void for lack of cause or consideration.
We do not agree. As found by the Court of Appeals, the true cause or consideration of said deed was the transfer of
the forest concession of private respondent to petitioners for P120,000.00. This finding is supported by the following
considerations, viz:
1. Both parties, at the time of the execution of the deed of assignment knew that the Timberwealth Corporation stated
therein was non-existent. 18
2. In their subsequent agreement, private respondent conveyed to petitioners his inchoate right over a forest
concession covering an additional area for his existing forest concession, which area he had applied for, and his
application was then pending in the Bureau of Forestry for approval.
3. Petitioners, after the execution of the deed of assignment, assumed the operation of the logging concessions of
private respondent. 19
4. The statement of advances to respondent prepared by petitioners stated: "P55,186.39 advances to L.A. Tiro be
applied to succeeding shipments. Based on the agreement, we pay P10,000.00 every after (sic) shipment. We had
only 2 shipments" 20
5. Petitioners entered into a Forest Consolidation Agreement with other holders of forest concessions on the strength
of the questioned deed of assignment. 21
The aforesaid contemporaneous and subsequent acts of petitioners and private respondent reveal that the cause
stated in the questioned deed of assignment is false. It is settled that the previous and simultaneous and subsequent
acts of the parties are properly cognizable indica of their true intention. 22 Where the parties to a contract have
given it a practical construction by their conduct as by acts in partial performance, such construction may
be considered by the court in construing the contract, determining its meaning and ascertaining the
mutual intention of the parties at the time of contracting. 23 The parties' practical construction of their
contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as

an important, significant, convincing, persuasive, or influential factor in determining the proper
construction of the agreement. 24
The deed of assignment of February 15, 1966 is a relatively simulated contract which states a false cause or
consideration, or one where the parties conceal their true agreement. 25 A contract with a false consideration is
not null and void per se. 26 Under Article 1346 of the Civil Code, a relatively simulated contract, when it
does not prejudice a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their real agreement.
The Court of Appeals, therefore, did not err in holding petitioners liable under the said deed and in ruling that
. . . In view of the analysis of the first and second assignment of errors, the defendants-appellees
are liable to the plaintiff-appellant for the sale and transfer in their favor of the latter's forest
concessions. Under the terms of the contract, the parties agreed on a consideration of
P120,000.00. P20,000.00 of which was paid, upon the signing of the contract and the balance of
P100,000.00 to be paid at the rate of P10,000.00 for every shipment of export logs actually
produced from the forest concessions of the appellant sold to the appellees. Since plaintiffappellant's forest concessions were consolidated or merged with those of the other timber license
holders by appellees' voluntary act under the Forest Consolidation Agreement (Exhibit D),
approved by the Bureau of Forestry (Exhibit D-3), then the unpaid balance of P49,338.15 (the
amount of P70,661.85 having been received by the plaintiff-appellant from the defendantsappellees) became due and demandable. 27
As to the alleged nullity of the agreement dated February 28, 1966, we agree with petitioners that they cannot be held
liable thereon. The efficacy of said deed of assignment is subject to the condition that the application of private
respondent for an additional area for forest concession be approved by the Bureau of Forestry. Since private
respondent did not obtain that approval, said deed produces no effect. When a contract is subject to a suspensive
condition, its birth or effectivity can take place only if and when the event which constitutes the condition happens or
is fulfilled. 28 If the suspensive condition does not take place, the parties would stand as if the conditional
obligation had never existed. 29

The said agreement is a bilateral contract which gave rise to reciprocal obligations, that is, the obligation of private
respondent to transfer his rights in the forest concession over the additional area and, on the other hand, the
obligation of petitioners to pay P30,000.00. The demandability of the obligation of one party depends upon the
fulfillment of the obligation of the other. In this case, the failure of private respondent to comply with his obligation
negates his right to demand performance from petitioners. Delivery and payment in a contract of sale, are so
interrelated and intertwined with each other that without delivery of the goods there is no corresponding obligation to
pay. The two complement each other. 30
Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy of the sale of a mere hope or
expectancy is deemed subject to the condition that the thing will come into existence. In this case, since private
respondent never acquired any right over the additional area for failure to secure the approval of the Bureau of
Forestry, the agreement executed therefor, which had for its object the transfer of said right to petitioners, never
became effective or enforceable.
WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED. The agreement of the parties
dated February 28, 1966 is declared without force and effect and the amount of P30,000.00 is hereby ordered to be
deducted from the sum awarded by respondent court to private respondent. In all other respects, said decision of
respondent court is affirmed.
SO ORDERED.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 112127 July 17, 1995

CENTRAL PHILIPPINE UNIVERSITY, petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN
LOPEZ AND REMARENE LOPEZ, respondents.
BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the Court of Appeals
which reversed that of the Regional Trial Court of Iloilo City directing petitioner to reconvey to private respondents the
property donated to it by their predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of the Central
Philippine College (now Central Philippine University [CPU]), executed a deed of donation in favor of the latter of a
parcel of land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for
which Transfer Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the following
annotations copied from the deed of donation
1. The land described shall be utilized by the CPU exclusively for the establishment and use of a
medical college with all its buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in any way encumber
said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under
obligation to erect a cornerstone bearing that name. Any net income from the land or any of its
parks shall be put in a fund to be known as the "RAMON LOPEZ CAMPUS FUND" to be used for
improvements of said campus and erection of a building thereon. 1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for annulment of
donation, reconveyance and damages against CPU alleging that since 1939 up to the time the action was filed the
latter had not complied with the conditions of the donation. Private respondents also argued that petitioner had in fact
negotiated with the National Housing Authority (NHA) to exchange the donated property with another land owned by
the latter.
In its answer petitioner alleged that the right of private respondents to file the action had prescribed; that it did not
violate any of the conditions in the deed of donation because it never used the donated property for any other
purpose than that for which it was intended; and, that it did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation and declared it
null and void. The court a quo further directed petitioner to execute a deed of the reconveyance of the property in
favor of the heirs of the donor, namely, private respondents herein.

Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the back of
petitioner's certificate of title were resolutory conditions breach of which should terminate the rights of the donee thus
making the donation revocable.
The appellate court also found that while the first condition mandated petitioner to utilize the donated property for the
establishment of a medical school, the donor did not fix a period within which the condition must be fulfilled, hence,
until a period was fixed for the fulfillment of the condition, petitioner could not be considered as having failed to
comply with its part of the bargain. Thus, the appellate court rendered its decision reversing the appealed decision
and remanding the case to the court of origin for the determination of the time within which petitioner should comply
with the first condition annotated in the certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in the certificate of
title of petitioner are onerous obligations and resolutory conditions of the donation which must be fulfilled noncompliance of which would render the donation revocable; (b) in holding that the issue of prescription does not
deserve "disquisition;" and, (c) in remanding the case to the trial court for the fixing of the period within which
petitioner would establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of donation executed
by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his donation was onerous, one executed for a
valuable consideration which is considered the equivalent of the donation itself, e.g., when a donation imposes a
burden equivalent to the value of the donation. A gift of land to the City of Manila requiring the latter to erect schools,
construct a children's playground and open streets on the land was considered an onerous donation. 3 Similarly,
where Don Ramon Lopez donated the subject parcel of land to petitioner but imposed an obligation upon
the latter to establish a medical college thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on 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.
Thus, when a person donates land to another on the condition that the latter would build upon the land a school, the
condition imposed was not a condition precedent or a suspensive condition but a resolutory one. 4 It is not correct to
say that the schoolhouse had to be constructed before the donation became effective, that is, before the
donee could become the owner of the land, otherwise, it would be invading the property rights of the
donor. The donation had to be valid before the fulfillment of the condition. 5 If there was no fulfillment or
compliance with the condition, such as what obtains in the instant case, the donation may now be
revoked and all rights which the donee may have acquired under it shall be deemed lost and
extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is unavailing.
The condition imposed by the donor, i.e., the building of a medical school upon the land donated, depended
upon the exclusive will of the donee as to when this condition shall be fulfilled. When petitioner accepted the
donation, it bound itself to comply with the condition thereof. Since the time within which the condition should
be fulfilled depended upon the exclusive will of the petitioner, it has been held that its absolute acceptance
and the acknowledgment of its obligation provided in the deed of donation were sufficient to prevent the
statute of limitations from barring the action of private respondents upon the original contract which was the
deed of donation. 6
Moreover, the time from which the cause of action accrued for the revocation of the donation and recovery of the
property donated cannot be specifically determined in the instant case. A cause of action arises when that which
should have been done is not done, or that which should not have been done is done. 7 In cases where there is no
special provision for such computation, recourse must be had to the rule that the period must be counted
from the day on which the corresponding action could have been instituted. It is the legal possibility of
bringing the action which determines the starting point for the computation of the period. In this case, the
starting point begins with the expiration of a reasonable period and opportunity for petitioner to fulfill what
has been charged upon it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and improvements on the
property cannot be quantified in a specific number of years because of the presence of several factors and
circumstances involved in the erection of an educational institution, such as government laws and regulations
pertaining to education, building requirements and property restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances it can be inferred that a period
was intended, the general rule provided in Art. 1197 of the Civil Code applies, which provides that the courts may fix
the duration thereof because the fulfillment of the obligation itself cannot be demanded until after the court has fixed
the period for compliance therewith and such period has arrived. 8
This general rule however cannot be applied considering the different set of circumstances existing in the instant
case. More than a reasonable period of fifty (50) years has already been allowed petitioner to avail of the opportunity
to comply with the condition even if it be burdensome, to make the donation in its favor forever valid. But,
unfortunately, it failed to do so. Hence, there is no more need to fix the duration of a term of the obligation when such
procedure would be a mere technicality and formality and would serve no purpose than to delay or lead to an
unnecessary and expensive multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of
the obligors cannot comply with what is incumbent upon him, the obligee may seek rescission and the
court shall decree the same unless there is just cause authorizing the fixing of a period. In the absence of
any just cause for the court to determine the period of the compliance, there is no more obstacle for the
court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring to incidental
circumstances of a gratuitous contract should be resolved in favor of the least transmission of rights and
interests.10 Records are clear and facts are undisputed that since the execution of the deed of donation up
to the time of filing of the instant action, petitioner has failed to comply with its obligation as donee.
Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only just and
equitable now to declare the subject donation already ineffective and, for all purposes, revoked so that
petitioner as donee should now return the donated property to the heirs of the donor, private respondents
herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is REINSTATED and
AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is accordingly MODIFIED. Consequently,
petitioner is directed to reconvey to private respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered
by Transfer Certificate of Title No. T-3910-A within thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Potestative, casual and mixed (Art. 1182)

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 87047 October 31, 1990
FRANCISCO LAO LIM, petitioner,
vs.
COURT OF APPEALS and BENITO VILLAVICENCIO DY, respondents.
Gener E. Asuncion for petitioner.
Natividad T. Perez for private respondent.
REGALADO, J.:
Respondent Court of Appeals having affirmed in toto on June 30, 1988 in CA-G.R. SP No. 13925, 1 the decision of
the Regional Trial Court of Manila, Branch XLVI in Civil Case No. 87-42719, entitled "Francisco Lao Lim
vs. Benito Villavicencio Dy," petitioner seeks the reversal of such affirmance in the instant petition.
The records show that private respondent entered into a contract of lease with petitioner for a period of three (3)
years, that is, from 1976 to 1979. After the stipulated term expired, private respondent refused to vacate the
premises, hence, petitioner filed an ejectment suit against the former in the City Court of Manila, docketed therein as
Civil Case No. 051063-CV. The case was terminated by a judicially approved compromise agreement of the parties
providing in part:
3. That the term of the lease shall be renewed every three years retroacting from October 1979 to
October 1982; after which the abovenamed rental shall be raised automatically by 20% every three
years for as long as defendant needed the premises and can meet and pay the said increases, the
defendant to give notice of his intent to renew sixty (60) days before the expiration of the term; 2
By reason of said compromise agreement the lease continued from 1979 to 1982, then from 1982 to 1985. On April
17, 1985, petitioner advised private respondent that he would no longer renew the contract effective October,
1985. 3 However, on August 5, 1985, private respondent informed petitioner in writing of his intention to
renew the contract of lease for another term, commencing November, 1985 to October, 1988. 4 In reply to
said letter, petitioner advised private respondent that he did not agree to a renewal of the lease contract
upon its expiration in October, 1985. 5
On January 15, 1986, because of private respondent's refusal to vacate the premises, petitioner filed another
ejectment suit, this time with the Metropolitan Trial Court of Manila in Civil Case No. 114659-CV. In its decision of
September 24, 1987, said court dismissed the complaint on the grounds that (1) the lease contract has not expired,
being a continuous one the period whereof depended upon the lessee's need for the premises and his ability to pay
the rents; and (2) the compromise agreement entered into in the aforesaid Civil Case No. 051063-CV constitutes res
judicata to the case before it. 6
Petitioner appealed to the Regional Trial Court of Manila which, in its decision of January 28, 1988 in Civil Case No.
87-42719, affirmed the decision of the lower court. 7
As stated at the outset, respondent Court of Appeals affirmed in full said decision of the Regional Trial Court and held
that (1) the stipulation in the compromise agreement which, in its formulation, allows the lessee to stay on the

premises as long as he needs it and can pay rents is valid, being a resolutory condition and, therefore, beyond the
ambit of Article 1308 of the Civil Code; and (2) that a compromise has the effect of res judicata. 8
Petitioner's motion for reconsideration having been denied by respondent Court of Appeals, this present petition is
now before us. We find the same to be meritorious.
Contrary to the ruling of respondent court, the disputed stipulation "for as long as the defendant needed the premises
and can meet and pay said increases" is a purely potestative condition because it leaves the effectivity and
enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a suspensive condition
because the renewal of the lease, which gives rise to a new lease, depends upon said condition. It should be noted
that a renewal constitutes a new contract of lease although with the same terms and conditions as those in the
expired lease. It should also not be overlooked that said condition is not resolutory in nature because it is not a
condition that terminates the lease contract. The lease contract is for a definite period of three (3) years upon the
expiration of which the lease automatically terminates.
The invalidity of a condition in a lease contract similar to the one at bar has been resolved in Encarnacion vs.
Baldomar, et al. 9 where we ruled that in an action for ejectment, the defense interposed by the lessees that
the contract of lease authorized them to continue occupying the premises as long as they paid the rents is
untenable, because it would leave to the lessees the sole power to determine whether the lease should
continue or not. As stated therein, "(i)f this defense were to be allowed, so long as defendants elected to
continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue
it; conversely, although the owner should desire the lease to continue, the lessees could effectively thwart
his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of
the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3rd ed.,
pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100.)
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 is dictated solely by the lessee.
The interpretation made by respondent court cannot, therefore, be upheld. Paragraph 3 of the compromise
agreement, read and interpreted in its entirety, is actually to the effect that the last portion thereof, which gives the
private respondent sixty (60) days before the expiration of the term the right to give notice of his intent to renew, is
subject to the first portion of said paragraph that "the term of the lease shall be renewed every three (3) years,"
thereby requiring the mutual agreement of the parties. The use of the word "renew" and the designation of the period
of three (3) years clearly confirm that the contract of lease is limited to a specific period and that it is not a continuing
lease. The stipulation provides for a renewal of the lease every three (3) years; there could not be a renewal if said
lease did not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby construed as providing for a definite period of three (3)
years and that the automatic increase of the rentals by twenty percent (20%) will take effect only if the parties decide
to renew the lease. A contrary interpretation will result in a situation where the continuation and effectivity of the
contract will depend only upon the will of the lessee, in violation of Article 1308 of the Civil Code and the aforesaid
doctrine in Encarnacion. The compromise agreement should be understood as bearing that import which is most
adequate to render it effectual. 10 Where the instrument is susceptible of two interpretations, one which will
make it invalid and illegal and another which will make it valid and legal, the latter interpretation should be
adopted. 11
Moreover, perpetual leases are not favored in law, nor are covenants for continued renewals tending to create a
perpetuity, and the rule of construction is well settled that a covenant for renewal or for an additional term should not
be held to create a right to repeated grants in perpetuity, unless by plain and unambiguous terms the parties have
expressed such intention. 12 A lease will not be construed to create a right to perpetual renewals unless the
language employed indicates dearly and unambiguously that it was the intention and purpose of the
parties to do so. 13 A portion in a lease giving the lessee and his assignee the right to perpetual renewals

is not favored by the courts, and a lease will be construed as not making such a provision unless it does
so clearly. 14
As we have further emphasized:
It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease
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. We are not
aware of any presumption in law that the term of a lease is designed for the benefit of the lessee
alone. Kohand Cruz in effect rested upon such a presumption. But that presumption cannot
reasonably be indulged in casually in an era of rapid economic change, marked by, among other
things, volatile costs of living and fluctuations in the value of the domestic currency. The longer the
period the more clearly unreasonable such a presumption would be. In an age like that we live in,
very specific language is necessary to show an intent to grant a unilateral faculty to extend or
renew a contract of lease to the lessee alone, or to the lessor alone for that matter. We hold that
the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are overruled. 15
In addition, even assuming that the clause "for as long as the defendant needed the premises and can meet and pay,
said increases" gives private respondent an option to renew the lease, the same will be construed as providing for but
one renewal or extension and, therefore, was satisfied when the lease was renewed in 1982 for another three (3)
years. A general covenant to renew is satisfied by one renewal and will not be construed to confer the right to more
than one renewal unless provision is clearly and expressly made for further renewals. 16Leases which may have
been intended to be renewable in perpetuity will nevertheless be construed as importing but one renewal
if there is any uncertainty in that regard. 17
The case of Buccat vs. Dispo et al., 18 relied upon by responddent court, to support its holding that
respondent lessee can legally stay on the premises for as long as he needs it and can pay the rents, is
not in point. In said case, the lease contract provides for an indefinite period since it merely stipulates
"(t)hat the lease contract shall remain in full force and effect as long as the land will serve the purpose for
which it is intended as a school site of the National Business Institute, but the rentals now stipulated shall
be subject to review every after ten (10) years by mutual agreement of the parties." This is in clear
contrast to the case at bar wherein, to repeat, the lease is fixed at a period of three (3) years although
subject to renewal upon agreement of the parties, and the clause "for as long as defendant needs the
premises and can meet and pay the rents" is not an independent stipulation but is controlled by said fixed
term and the option for renewal upon agreement of both parties.
On the second issue, we agree with petitioner that respondent court erred in holding that the action for ejectment is
barred by res judicata. While it is true that a compromise agreement has the effect of res judicata this doctrine does
not apply in the present case. It is elementary that for a judgment to be a bar to a subsequent case, (1) it must be a
final judgment, (2) the court which rendered it had jurisdiction over the subject matter and the parties, (3) it must be a
judgment on the merits, and (4) there must be identity between the two cases as to parties, subject matter and cause
of action. 19
In the case at bar, the fourth requisite is lacking. Although there is identity of parties, there is no identity of subject
matter and cause of action. The subject matter in the first ejectment case is the original lease contract while the
subject matter in the case at bar is the lease created under the terms provided in the subsequent compromise
agreement. The lease executed in 1978 is one thing; the lease constituted in 1982 by the compromise agreement is
another.
There is also no identity, in the causes of action. The test generally applied to determine the identity of causes of
action is to consider the identity of facts essential to their maintenance, or whether the same evidence would sustain
both causes of action. 20 In the case at bar, the delict or the wrong in the first case is different from that in
the second, and the evidence that will support and establish the cause of action in the former will not
suffice to support and establish that in the latter.

In the first ejectment case, the cause of action was private respondent's refusal to comply with the lease contract
which expired on December 31, 1978. In the present case, the cause of action is a similar refusal but with respect to
the lease which expired in October, 1985 under the compromise agreement. While the compromise agreement may
be res judicata as far as the cause of action and issues in the first ejectment case is concerned, any cause of action
that arises from the application or violation of the compromise agreement cannot be said to have been settled in said
first case. The compromise agreement was meant to settle, as it did only settle, the first case. It did not, as it could
not, cover any cause of action that might arise thereafter, like the present case which was founded on the expiration
of the lease in 1985, which necessarily requires a different set of evidence. The fact that the compromise agreement
was judicially approved does not foreclose any cause of action arising from a violation of the terms thereof.
WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET ASIDE. Private respondent is
hereby ordered to immediately vacate and return the possession of the leased premises subject of the present action
to petitioner and to pay the monthly rentals due thereon in accordance with the compromise agreement until he shall
have actually vacated the same. This judgment is immediately executory.
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 124290 January 16, 1998

ALLIED BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS , HON. JOSE C. DE GUZMAN, OSCAR D. TAN-QUECO, LUCIA D. TANQUECO-MATIAS,
RUBEN D. TANQUECO and NESTOR D. TANQUECO, respondents.
BELLOSILLO, J.:
There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a contract of lease to the
effect that the contract "may be renewed for a like term at the option of the lessee" is void for being potestative or
violative of the principle of mutuality of contracts under Art. 1308 of the Civil Code and, corollarily, what is the
meaning of the clause "may be renewed for a like term at the option of the lessee;" and, (b) whether a lessee has the
legal personality to assail the validity of a deed of donation executed by the lessor over the leased premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at No. 2 Sarmiento
Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No. 136779 in their name. On 30 June
1978 they leased the property to petitioner Allied Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for
the first three (3) years, adjustable by 25% every three (3) years thereafter. 1 The lease contract specifically
states in its Provision No. 1 that "the term of this lease shall be fourteen (14) years commencing from
April 1, 1978 and may be renewed for a like term at the option of the lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a concrete
building with a floor area of 340-square meters which it used as a branch office. As stipulated, the ownership of the
building would be transferred to the lessors upon the expiration of the original term of the lease.

Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject property in favor of
their four (4) children, namely, private respondents herein Oscar D. Tanqueco, Lucia Tanqueco-Matias, Ruben D.
Tanqueco and Nestor D. Tanqueco, who accepted the donation in the same public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified petitioner ALLIED
that they were no longer interested in renewing the lease. 2 ALLIED replied that it was exercising its option to
renew their lease under the same terms with additional proposals. 3 Respondent Ruben D. Tanqueco,
acting in behalf of all the donee-lessors, made a counter-proposal. 4 ALLIED however rejected the
counter-proposal and insisted on Provision No. 1 of their lease contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the premises. But the
latter asserted its sole option to renew the lease and enclosed in its reply letter a cashier's check in the amount of
P68,400.00 representing the advance rental payments for six (6) months taking into account the escalation clause.
Private respondents however returned the check to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After trial, the MeTC-Br.
33 declared Provision No. 1 of the lease contract void for being violative of Art. 1308 of the Civil Code thus
. . . but such provision [in the lease contract], to the mind of the Court, does not add luster to
defendant's cause nor constitutes as an unbridled or unlimited license or sanctuary of the
defendants to perpetuate its occupancy on the subject property. The basic intention of the law in
any contract is mutuality and equality. In other words, the validity of a contract cannot be left at (sic)
the will of one of the contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil
Code, which provides: The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them . . . Using the principle laid down in the case of Garcia
v. Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot be left at
the sole option or will of the defendant notwithstanding provision no. 1 of their expired contract. For
that would amount to a situation where the continuance and effectivity of a contract will depend
only upon the sole will or power of the lessee, which is repugnant to the very spirit envisioned
under Article 1308 of the New Civil Code . . . . the theory adopted by this Court in the case at bar
finds ample affirmation from the principle echoed by the Supreme Court in the case of Lao Lim
v. CA, 191 SCRA 150, 154, 155.
On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision was affirmed. 5
On 20 February 1993, while the case was pending in the Court of Appeals ALLIED vacated the leased premises by
reason of the controversy. 6
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence valid and binding
on both parties, and the exercise by petitioner of its option to renew the contract was part of their agreement and in
pursuance thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of
contracts. It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be left
to the will of one of them." This binding effect of a contract on both parties is based on the principle that the
obligations arising from the contracts have the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which it is repugnant to have one party bound by
the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a
condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory
restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is
fundamentally part of the consideration in the contract and is no different from any other provision of the lease
carrying an undertaking on the part of the lessor to act conditioned on the performance by the lessee. It is a purely
executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which

the rights is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a
substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void
for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has
a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually
fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor
may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently
decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the
lessee since they remain with the same faculties in respect to fulfillment. 7
The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not applicable here. In that case, the
stipulation in the disputed compromise agreement was to the effect that the lessee would be allowed to
stay in the premises "as long as he needs it and can pay the rents." In the present case, the questioned
provision states that the lease "may be renewed for a like term at the option of the lessee." The lessor is
bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he
exercises his option and the lessor cannot thereafter be executed from performing his part of the
agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is misplaced. In that case,
what was involved was a contract to sell involving residential lots, which gave the vendor the right to
declare the contract called and of no effect upon the failure of the vendee to fulfill any of the conditions
therein set forth. In the instant case, we are dealing with a contract of lease which gives the lessee the
right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee," we sustain
petitioner's contention that its exercise of the option resulted in the automatic extension of the contract of lease under
the same terms and conditions. The subject contract simply provides that "the term of this lease shall be fourteen (14)
years and may be renewed for a like term at the option of the lessee." As we see it, the only term on which there has
been a clear agreement is the period of the new contract, i.e., fourteen (14) years, which is evident from the clause
"may be renewed for a like term at the option of the lessee," the phrase "for a like term"referring to the period. It is
silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and
conditions as in the original contract, or shall it be under the terms and conditions as may be mutually agreed upon by
the parties after the expiration of the existing lease?
In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In the case the lessee was
given the sole option to renew the lease, but the contract failed to specify the terms and conditions that
would govern the new contract. When the lease expired, the lessee demanded an extension under the
same terms and conditions. The lessor expressed conformity to the renewal of the contract but refused to
accede to the claim of the lessee that the renewal should be under the same terms and conditions as the
original contract. In sustaining the lessee, this Court made the following pronouncement:
. . . in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It was
held that "such a clause relates to the very contract in which it is placed, and does not permit the
defendant upon the renewal of the contract in which the clause is found, to insist upon different
terms and those embraced in the contract to be renewed;" and that "a stipulation to renew always
relates to the contract in which it is found and the rights granted thereunder, unless it expressly
provides for variations in the terms of the contract to be renewed."
The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am.
Jur. 2d, Sec. 1159, at p. 45, we find the following citations: "The rule is well-established that a
general covenant to renew or extend a lease which makes no provision as to the terms of a
renewal or extension implies a renewal or extension upon the same terms as provided in the
original lease."

In the lease contract under consideration, there is no provision to indicate that the renewal will be
subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions
of lease contracts of the kind presently considered that the principles stated above squarely apply.
We do not agree with the contention of the appellants that if it was intended by the parties to renew
the contract under the same terms and conditions stipulated in the contract of lease, such should
have expressly so stated in the contract itself. The same argument could easily be interposed by
the appellee who could likewise contend that if the intention was to renew the contract of lease
under such new terms and conditions that the parties may agree upon, the contract should have so
specified. Between the two assertions, there is more logic in the latter.
The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to
a contract of lease, the tenant is the one favored and not the landlord. "As a general rule, in
construing provisions relating to renewals or extensions, where there is any uncertainty, the tenants
is favored, and not the landlord, because the latter, having the power of stipulating in his own favor,
has neglected to do so; and also upon the principle that every man's grant is to be taken most
strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).
Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the renewed
contract were still subject to mutual agreement by and between the parties, then the option which is an integral
part of the consideration for the contract would be rendered worthless. For then, the lessor could easily defeat the
lessee's right of renewal by simply imposing unreasonable and onerous conditions to prevent the parties from
reaching an agreement, as in the case at bar. As in a statute no word, clause, sentence, provision or part of a
contract shall be considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be
reasonably avoided. To this end, a construction which will render every word operative is to be preferred over that
which would make some words idle and nugatory. 11
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its abandonment of
whatever rights it had under the renewal clause. Consequently, what remains to be done is for ALLIED to pay rentals
for the continued use of premises until it vacated the same, computed from the expiration of the original term of the
contract on 31 March 1992 to the time it actually left the premises on 20 February 1993, deducting therefrom the
amount of P68,400.00 consigned in court by ALLIED and any other amount which it may have deposited or advanced
in connection with the lease. Since the old lease contract was deemed renewed under the same terms and conditions
upon the exercise by ALLIED of its option, the basis of the computation of rentals should be the rental rate provided
for in the existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A person who is not
principally or subsidiarily bound has no legal capacity to challenge the validity of the contract. 12 He must first have
an interest in it. "Interest" within the meaning of the term means material interest, an interest to be
affected by the deed, as distinguished from a mere incidental interest. Hence, a person who is not a party
to a contract and for whose benefit it was not expressly made cannot maintain an action on it, even if the
contract, if performed by the parties thereto would incidentally affect him, 13 except when he is prejudiced
in his rights with respect to one of the contracting parties and can show the detriment which could
positively result to him from the contract in which he had no intervention. 14 We find none in the instant
case.
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that petitioner
ALLIED BANKING CORPORATION already vacated the leased premises as of 20 February 1993, the renewed lease
contract is deemed terminated as of that date. However, petitioner is required to pay rentals to respondent lessors at
the rate provided in their existing contract, subject to computation in view of the consignment in court of P68,400.00
by petitioner, and of such other amounts it may have deposited or advanced in connection with the lease.
SO ORDERED.
Constructive Fulfillment of Suspensive Condition (Art. 1186):

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 158361
April 10, 2013
INTERNATIONAL HOTEL CORPORATION, Petitioner,

vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents.
DECISION
BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out of a substantially performed contract, the principle of
quantum meruit may be used to determine his compensation in the absence of a written agreement for that purpose.
The principle of quantum meruit justifies the payment of the reasonable value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on November 8, 2002,1 disposing:
WHEREFORE, premises considered, the decision dated August 26, 1993 of the Regional Trial Court, Branch 13,
Manila in Civil Case No. R-82-2434 is AFFIRMED with Modification as to the amounts awarded as follows:
defendant-appellant IHC is ordered to pay plaintiff-appellant Joaquin P700,000.00 and plaintiff-appellant
SuarezP200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors of the
International Hotel Corporation (IHC) for him to render technical assistance in securing a foreign loan for the
construction of a hotel, to be guaranteed by the Development Bank of the Philippines (DBP). 2 The proposal
encompassed nine phases, namely: (1) the preparation of a new project study; (2) the settlement of the unregistered
mortgage prior to the submission of the application for guaranty for processing by DBP; (3) the preparation of papers
necessary to the application for guaranty; (4) the securing of a foreign financier for the project; (5) the securing of the
approval of the DBP Board of Governors; (6) the actual follow up of the application with DBP 3; (7) the overall
coordination in implementing the projections of the project study; (8) the preparation of the staff for actual hotel
operations; and (9) the actual hotel operations. 4
The IHC Board of Directors approved phase one to phase six of the proposal during the special board meeting on
February 11, 1969, and earmarked P2,000,000.00 for the project.5 Anent the financing, IHC applied with DBP for a
foreign loan guaranty. DBP processed the application,6 and approved it on October 24, 1969 subject to several
conditions.7
On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC to request the payment of his
fees in the amount of P500,000.00 for the services that he had provided and would be providing to IHC in relation to
the hotel project that were outside the scope of the technical proposal. Joaquin intimated his amenability to receive
shares of stock instead of cash in view of IHCs financial situation.8

On July 11, 1969, the stockholders of IHC met and granted Joaquins request, allowing the payment for both Joaquin
and Rafael Suarez for their services in implementing the proposal.9
On June 20, 1970, Joaquin presented to the IHC Board of Directors the results of his negotiations with potential
foreign financiers. He narrowed the financiers to Roger Dunn & Company and Materials Handling Corporation. He
recommended that the Board of Directors consider Materials Handling Corporation based on the more beneficial
terms it had offered. His recommendation was accepted.10
Negotiations with Materials Handling Corporation and, later on, with its principal, Barnes International (Barnes),
ensued. While the negotiations with Barnes were ongoing, Joaquin and Jose Valero, the Executive Director of IHC,
met with another financier, the Weston International Corporation (Weston), to explore possible financing. 11When
Barnes failed to deliver the needed loan, IHC informed DBP that it would submit Weston for DBPs consideration. 12 As
a result, DBP cancelled its previous guaranty through a letter dated December 6, 1971. 13
On December 13, 1971, IHC entered into an agreement with Weston, and communicated this development to DBP
on June 26, 1972. However, DBP denied the application for guaranty for failure to comply with the conditions
contained in its November 12, 1971 letter.14
Due to Joaquins failure to secure the needed loan, IHC, through its President Bautista, canceled the 17,000 shares
of stock previously issued to Joaquin and Suarez as payment for their services. The latter requested a
reconsideration of the cancellation, but their request was rejected.
Consequently, Joaquin and Suarez commenced this action for specific performance, annulment, damages and
injunction by a complaint dated December 6, 1973 in the Regional Trial Court in Manila (RTC), impleading IHC and
the members of its Board of Directors, namely, Felix Angelo Bautista, Sergio O. Rustia, Ephraim G. Gochangco,
Mario B. Julian, Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna and Hermenegildo R. Reyes. 15 The
complaint alleged that the cancellation of the shares had been illegal, and had deprived them of their right to
participate in the meetings and elections held by IHC; that Barnes had been recommended by IHC President
Bautista, not by Joaquin; that they had failed to meet their obligation because President Bautista and his son had
intervened and negotiated with Barnes instead of Weston; that DBP had canceled the guaranty because Barnes had
failed to release the loan; and that IHC had agreed to compensate their services with 17,000 shares of the common
stock plus cash of P1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B. Julian and Benjamin J. Bautista, filed an answer
claiming that the shares issued to Joaquin and Suarez as compensation for their "past and future services" had been
issued in violation of Section 16 of the Corporation Code; that Joaquin and Suarez had not provided a foreign
financier acceptable to DBP; and that they had already received P96,350.00 as payment for their services.17
On their part, Lirag and Lacerna denied any knowledge of or participation in the cancellation of the shares. 18
Similarly, Gochangco and Reyes denied any knowledge of or participation in the cancellation of the shares, and
clarified that they were not directors of IHC.19 In the course of the proceedings, Reyes died and was substituted by
Consorcia P. Reyes, the administratrix of his estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC held IHC liable pursuant to the second paragraph of Article
1284 of the Civil Code, disposing thusly:
WHEREFORE, in the light of the above facts, law and jurisprudence, the Court hereby orders the defendant
International Hotel Corporation to pay plaintiff Francisco B. Joaquin, the amount of Two Hundred Thousand Pesos
(P200,000.00) and to pay plaintiff Rafael Suarez the amount of Fifty Thousand Pesos (P50,000.00); that the said
defendant IHC likewise pay the co-plaintiffs, attorneys fees of P20,000.00, and costs of suit.
IT IS SO ORDERED.21

The RTC found that Joaquin and Suarez had failed to meet their obligations when IHC had chosen to negotiate with
Barnes rather than with Weston, the financier that Joaquin had recommended; and that the cancellation of the shares
of stock had been proper under Section 68 of the Corporation Code, which allowed such transfer of shares to
compensate only past services, not future ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT PLAINTIFFS-APPELLANTS FULLY PERFORMED ALL
THAT WAS INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE SHARES OF STOCK PREVIOUSLY
ISSUED TO PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION SEVEN HUNDRED PESOS (sic)
(P2,700,000.00), INCLUDING INTEREST THEREON FROM 1973, REPRESENTING THE TOTAL
OBLIGATION DUE PLAINTIFFS-APPELLANTS.23
On the other hand, IHC attributed errors to the RTC, as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS HAVE NOTBEEN COMPLETELY
PAID FOR THEIR SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT TO PAY TWO HUNDRED
THOUSAND PESOS (P200,000.00) AND FIFTY THOUSAND PESOS (P50,000.00) TO PLAINTIFFS-APPELLANTS
FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ, RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-APPELLANTS ATTORNEYS FEES AND COSTS OF
SUIT.24
In its questioned decision promulgated on November 8, 2002, the CA concurred with the RTC, upholding IHCs
liability under Article 1186 of the Civil Code. It ruled that in the context of Article 1234 of the Civil Code, Joaquin had
substantially performed his obligations and had become entitled to be paid for his services; and that the issuance of
the shares of stock was ultra vires for having been issued as consideration for future services.
Anent how much was due to Joaquin and Suarez, the CA explained thusly:
This Court does not subscribe to plaintiffs-appellants view that defendant-appellant IHC agreed to pay
themP2,000,000.00. Plaintiff-appellant Joaquins letter to defendant-appellee F.A. Bautista, quoting defendantappellant IHCs board resolutions which supposedly authorized the payment of such amount cannot be sustained.
The resolutions are quite clear and when taken together show that said amount was only the "estimated maximum
expenses" which defendant-appellant IHC expected to incur in accomplishing phases 1 to 6, not exclusively to
plaintiffs-appellants compensation.This conclusion finds support in an unnumbered board resolution of defendantappellant IHC dated July 11, 1969:
"Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the compensation that was
authorized by this corporation in its Resolution of February 11, 1969 considering that the assistance so far given the
corporation by said Technical Group in continuing our project with the DBP and its request for guaranty for a foreign
loan is 70% completed leaving only some details which are now being processed. It is estimated thatP400,000.00

worth of Common Stock would be reasonable for the present accomplishments and to this effect, the President is
authorized to issue the same in the name of the Technical Group, as follows:
P200,000.00 in common stock to Rafael Suarez, as associate in the Technical Group, and P200,000.00 in common
stock to Francisco G. Joaquin, Jr., also a member of the Technical Group.
It is apparent that not all of the P2,000,000.00 was allocated exclusively to compensate plaintiffs-appellants. Rather, it
was intended to fund the whole undertaking including their compensation. On the same date, defendant-appellant
IHC also authorized its president to pay-appellant Joaquin P500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what defendant-appellant IHC agreed to pay
plaintiffs-appellants. While this Court cannot decree that the cancelled shares be restored, for they are without a
doubt null and void, still and all, defendant-appellant IHC cannot now put up its own ultra vires act as an excuse to
escape obligation to plaintiffs-appellants. Instead of shares of stock, defendant-appellant IHC is ordered to pay
plaintiff-appellant Joaquin a total of P700,000.00 and plaintiff-appellant Suarez P200,000.00, both to be paid in cash.
Although the lower court failed to explain why it was granting the attorneys fees, this Court nonetheless finds its
award proper given defendant-appellant IHCs actions.25
Issues
In this appeal, the IHC raises as issues for our consideration and resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING COMPENSATION AND EVEN
MODIFYING THE PAYMENT TO HEREIN RESPONDENTS DESPITE NON-FULFILLMENT OF THEIR
OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING ATTORNEYS FEES TO
RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was erroneously applied; that it had no intention of preventing
Joaquin from complying with his obligations when it adopted his recommendation to negotiate with Barnes; that
Article 1234 of the Civil Code applied only if there was a merely slight deviation from the obligation, and the omission
or defect was technical and unimportant; that substantial compliance was unacceptable because the foreign loan was
material and was, in fact, the ultimate goal of its contract with Joaquin and Suarez; that because the obligation was
indivisible and subject to a suspensive condition, Article 1181 of the Civil Code 27 applied, under which a partial
performance was equivalent to non-performance; and that the award of attorneys fees should be deleted for lack of
legal and factual bases.
On the part of respondents, only Joaquin filed a comment, 28 arguing that the petition was fatally defective for raising
questions of fact; that the obligation was divisible and capable of partial performance; and that the suspensive
condition was deemed fulfilled through IHCs own actions.29
Ruling
We deny the petition for review on certiorari subject to the ensuing disquisitions.
1.
IHC raises questions of law

We first consider and resolve whether IHCs petition improperly raised questions of fact.
A question of law exists when there is doubt as to what the law is on a certain state of facts, but, in contrast, a
question of fact exists when the doubt arises as to the truth or falsity of the facts alleged. A question of law does not
involve an examination of the probative value of the evidence presented by the litigants or by any of them; the
resolution of the issue must rest solely on what the law provides on the given set of circumstances. 30 When there is
no dispute as to the facts, the question of whether or not the conclusion drawn from the facts is correct is a question
of law.31
Considering that what IHC seeks to review is the CAs application of the law on the facts presented therein, there is
no doubt that IHC raises questions of law. The basic issue posed here is whether the conclusions drawn by the CA
were correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot be the source of IHCs obligation to pay respondents IHC
argues that it should not be held liable because: (a) it was Joaquin who had recommended Barnes; and (b) IHCs
negotiation with Barnes had been neither intentional nor willfully intended to prevent Joaquin from complying with his
obligations.
IHCs argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition, 32 whose application calls for two
requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual prevention
of the fulfillment. Mere intention of the debtor to prevent the happening of the condition, or to place ineffective
obstacles to its compliance, without actually preventing the fulfillment, is insufficient. 33
The error lies in the CAs failure to determine IHCs intent to pre-empt Joaquin from meeting his obligations. The June
20, 1970 minutes of IHCs special board meeting discloses that Joaquin impressed upon the members of the Board
that Materials Handling was offering more favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors of the International Hotel Corporation were present with the
exception of Directors Benjamin J. Bautista and Sergio O. Rustia who asked to be excused because of previous
engagements. In that meeting, the President called on Mr. Francisco G. Joaquin, Jr. to explain the different
negotiations he had conducted relative to obtaining the needed financing for the hotel project in keeping with the
authority given to him in a resolution approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted several local and foreign financiers through different brokers and
after examining the different offers he narrowed down his choice to two (2), to wit: the foreign financier recommended
by George Wright of the Roger Dunn & Company and the offer made by the Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation of the two (2) offers specifically with regard to
the terms and repayment of the loan and the rate of interest requested by them, he concluded that the offer made by
the Materials Handling Corporation is much more advantageous because the terms and conditions of payment as
well as the rate of interest are much more reasonable and would be much less onerous to our corporation. However,
he explained that the corporation accepted, in principle, the offer of Roger Dunn, per the corporations telegrams to
Mr. Rudolph Meir of the Private Bank of Zurich, Switzerland, and until such time as the corporations negotiations with
Roger Dunn is terminated, we are committed, on one way or the other, to their financing.

It was decided by the Directors that, should the negotiations with Roger Dunn materialize, at the same time as the
offer of Materials Handling Corporation, that the funds committed by Roger Dunn may be diverted to other borrowers
of the Development Bank of the Philippines. With this condition, Director Joaquin showed the advantages of the offer
of Materials Handling Corporation. Mr. Joaquin also informed the corporation that, as of this date, the bank
confirmation of Roger Dunn & Company has not been received. In view of the fact that the corporation is racing
against time in securing its financing, he recommended that the corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and after hearing the clarification and explanation
made by Mr. C. M. Javier who was present and who represented the Materials Handling Corporation, the Directors
present approved unanimously the recommendation of Mr. Joaquin to entertain the offer of Materials Handling
Corporation.34
Evidently, IHC only relied on the opinion of its consultant in deciding to transact with Materials Handling and, later on,
with Barnes. In negotiating with Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin and Suarez
from meeting their undertaking. Such absence of any intention negated the basis for the CAs reliance on Article 1186
of the Civil Code.
Nor do we agree with the CAs upholding of IHCs liability by virtue of Joaquin and Suarezs substantial performance.
In so ruling, the CA applied Article 1234 of the Civil Code, which states:
Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there
had been a strict and complete fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits breaching the contract 35 after honestly and
faithfully performing all the material elements thereof except for some technical aspects that cause no serious harm
to the obligee.36 IHC correctly submits that the provision refers to an omission or deviation that is slight, or technical
and unimportant, and does not affect the real purpose of the contract.
Tolentino explains the character of the obligors breach under Article 1234 in the following manner, to wit:
In order that there may be substantial performance of an obligation, there must have been an attempt in good faith to
perform, without any willful or intentional departure therefrom. The deviation from the obligation must be slight, and
the omission or defect must be technical and unimportant, and must not pervade the whole or be so material that the
object which the parties intended to accomplish in a particular manner is not attained. The non-performance of a
material part of a contract will prevent the performance from amounting to a substantial compliance.
The party claiming substantial performance must show that he has attempted in good faith to perform his contract,
but has through oversight, misunderstanding or any excusable neglect failed to completely perform in certain
negligible respects, for which the other party may be adequately indemnified by an allowance and deduction from the
contract price or by an award of damages. But a party who knowingly and wilfully fails to perform his contract in any
respect, or omits to perform a material part of it, cannot be permitted, under the protection of this rule, to compel the
other party, and the trend of the more recent decisions is to hold that the percentage of omitted or irregular
performance may in and of itself be sufficient to show that there had not been a substantial performance.37
By reason of the inconsequential nature of the breach or omission, the law deems the performance as substantial,
making it the obligees duty to pay.38 The compulsion of payment is predicated on the substantial benefit derived by
the obligee from the partial performance. Although compelled to pay, the obligee is nonetheless entitled to an
allowance for the sum required to remedy omissions or defects and to complete the work agreed upon. 39
Conversely, the principle of substantial performance is inappropriate when the incomplete performance constitutes a
material breach of the contract. A contractual breach is material if it will adversely affect the nature of the obligation
that the obligor promised to deliver, the benefits that the obligee expects to receive after full compliance, and the
extent that the non-performance defeated the purposes of the contract.40 Accordingly, for the principle embodied in
Article 1234 to apply, the failure of Joaquin and Suarez to comply with their commitment should not defeat the
ultimate purpose of the contract.

The primary objective of the parties in entering into the services agreement was to obtain a foreign loan to finance the
construction of IHCs hotel project. This objective could be inferred from IHCs approval of phase 1 to phase 6 of the
proposal. Phase 1 and phase 2, respectively the preparation of a new project study and the settlement of the
unregistered mortgage, would pave the way for Joaquin and Suarez to render assistance to IHC in applying for the
DBP guaranty and thereafter to look for an able and willing foreign financial institution acceptable to DBP. All the
steps that Joaquin and Suarez undertook to accomplish had a single objective to secure a loan to fund the
construction and eventual operations of the hotel of IHC. In that regard, Joaquin himself admitted that his assistance
was specifically sought to seek financing for IHCs hotel project.41
Needless to say, finding the foreign financier that DBP would guarantee was the essence of the parties contract, so
that the failure to completely satisfy such obligation could not be characterized as slight and unimportant as to have
resulted in Joaquin and Suarezs substantial performance that consequentially benefitted IHC. Whatever benefits IHC
gained from their services could only be minimal, and were even probably outweighed by whatever losses IHC
suffered from the delayed construction of its hotel. Consequently, Article 1234 did not apply.
3.
IHC is nonetheless liable to pay under the rule on constructive fulfillment of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code, IHC was liable based on the
nature of the obligation.
Considering that the agreement between the parties was not circumscribed by a definite period, its termination was
subject to a condition the happening of a future and uncertain event.42 The prevailing rule in conditional obligations
is that the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the
happening of the event that constitutes the condition.43
To recall, both the RTC and the CA held that Joaquin and Suarezs obligation was subject to the suspensive
condition of successfully securing a foreign loan guaranteed by DBP. IHC agrees with both lower courts, and even
argues that the obligation with a suspensive condition did not arise when the event or occurrence did not happen. In
that instance, partial performance of the contract subject to the suspensive condition was tantamount to no
performance at all. As such, the respondents were not entitled to any compensation.
We have to disagree with IHCs argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the sole will of the respondents
because it required the action and discretion of third persons an able and willing foreign financial institution to
provide the needed funds, and the DBP Board of Governors to guarantee the loan. Such third persons could not be
legally compelled to act in a manner favorable to IHC. There is no question that when the fulfillment of a condition is
dependent partly on the will of one of the contracting parties, 44 or of the obligor, and partly on chance, hazard or the
will of a third person, the obligation is mixed.45 The existing rule in a mixed conditional obligation is that when the
condition was not fulfilled but the obligor did all in his power to comply with the obligation, the condition should be
deemed satisfied.46
Considering that the respondents were able to secure an agreement with Weston, and subsequently tried to reverse
the prior cancellation of the guaranty by DBP, we rule that they thereby constructively fulfilled their obligation.
4.
Quantum meruit should apply in the absence of an express agreement on the fees
The next issue to resolve is the amount of the fees that IHC should pay to Joaquin and Suarez.
Joaquin claimed that aside from the approved P2,000,000.00 fee to implement phase 1 to phase 6, the IHC Board of
Directors had approved an additional P500,000.00 as payment for his services. The RTC declared that he and

Suarez were entitled to P200,000.00 each, but the CA revised the amounts to P700,000.00 for Joaquin
and P200,000.00 for Suarez.
Anent the P2,000,000.00, the CA rightly concluded that the full amount of P2,000,000.00 could not be awarded to
respondents because such amount was not allocated exclusively to compensate respondents, but was intended to be
the estimated maximum to fund the expenses in undertaking phase 6 of the scope of services. Its conclusion was
unquestionably borne out by the minutes of the February 11, 1969 meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP including the preparation of the application, the presentation of
the mechanics of financing, the actual follow up with the different departments of the DBP which includes the
explanation of the feasibility studies up to the approval of the loan, conditioned on the DBPs acceptance of the
project as feasible. The estimated expenses for this particular phase would be contingent, i.e. upon DBPs approval
of the plan now being studied and prepared, is somewhere around P2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made and seconded, unanimously adopted a
resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the Reparations allocation and the plan being negotiated with the
DBP is realized the estimated maximum expenses of P2,000,000.00 for this phase is hereby authorized subject to the
sound discretion of the committee composed of Justice Felix Angelo Bautista, Jose N. Valero and Ephraim G.
Gochangco."47 (Emphasis supplied)
Joaquins claim for the additional sum of P500,000.00 was similarly without factual and legal bases. He had
requested the payment of that amount to cover services rendered and still to be rendered to IHC separately from
those covered by the first six phases of the scope of work. However, there is no reason to hold IHC liable for that
amount due to his failure to present sufficient proof of the services rendered towards that end. Furthermore, his July
11, 1969 letter revealed that the additional services that he had supposedly rendered were identical to those
enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation and action on the fees for my services rendered and to be
rendered to the hotel project and to the corporation. These fees are separate from the fees you have approved in
your previous Board Resolution, since my fees are separate. I realize the position of the corporation at present, in
that it is not in a financial position to pay my services in cash, therefore, I am requesting this Body to consider
payment of my fees even in the form of shares of stock, as you have done to the other technical men and for other
services rendered to the corporation by other people.
Inasmuch as my fees are contingent on the successful implementation of this project, I request that my fees be based
on a percentage of the total project cost. The fees which I consider reasonable for the services that I have rendered

to the project up to the completion of its construction isP500,000.00. I believe said amount is reasonable since this is
approximately only of 1% of the total project cost.
So far, I have accomplished Phases 1-5 of my report dated February 1, 1969 and which you authorized us to do
under Board Resolution of February 11, 1969. It is only Phase 6 which now remains to be implemented. For my
appointment as Consultant dated May 12, 1969 and the Board Resolution dated June 23, 1969 wherein I was
appointed to the Technical Committee, it now follows that I have been also authorized to implement part of Phases 7
& 8.
A brief summary of my accomplished work has been as follows:
1. I have revised and made the new Project Study of your hotel project, making it bankable and feasible.
2. I have reduced the total cost of your project by approximately P24,735,000.00.
3. I have seen to it that a registered mortgage with the Reparations Commission did not affect the
application with the IBP for approval to processing.
4. I have prepared the application papers acceptable to the DBP by means of an advance analysis and the
presentation of the financial mechanics, which was accepted by the DBP.
5. I have presented the financial mechanics of the loan wherein the requirement of the DBP for an
additional P19,000,000.00 in equity from the corporation became unnecessary.
6. The explanation of the financial mechanics and the justification of this project was instrumental in
changing the original recommendation of the Investment Banking Department of the DBP, which
recommended disapproval of this application, to the present recommendation of the Real Estate Department
which is for the approval of this project for proceeding.
7. I have submitted to you several offers already of foreign financiers which are in your files. We are
presently arranging the said financiers to confirm their funds to the DBP for our project,
8. We have secured the approval of the DBP to process the loan application of this corporation as per its
letter July 2, 1969.
9. We have performed other services for the corporation which led to the cooperation and understanding of
the different factions of this corporation.
I have rendered services to your corporation for the past 6 months with no clear understanding as to the
compensation of my services. All I have drawn from the corporation is the amount of P500.00 dated May 12, 1969
and personal payment advanced by Justice Felix Angelo Bautista in the amount of P1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have shown my good faith and willingness to
render services to your corporation which is evidenced by my continued services in the past 6 months as well as the
accomplishments above mentioned. I believe that the final completion of this hotel, at least for the processing of the
DBP up to the completion of the construction, will take approximately another 2 years. In view of the above, I again
reiterate my request for your approval of my fees. When the corporation is in a better financial position, I will request
for a withdrawal of a monthly allowance, said amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)

Joaquin could not even rest his claim on the approval by IHCs Board of Directors. The approval apparently arose
from the confusion between the supposedly separate services that Joaquin had rendered and those to be done under
the technical proposal. The minutes of the July 11, 1969 board meeting (when the Board of Directors allowed the
payment for Joaquins past services and for the 70% project completion by the technical group) showed as follows:
III
The Third order of business is the compensation of Mr. Francisco G. Joaquin, Jr. for his services in the corporation.
After a brief discussion that ensued, upon motion duly made and seconded, the stockholders unanimously approved
a resolution of the following tenor:
RESOLUTION NO. ___
(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a compensation in the amount of Five Hundred Thousand
(P500,000.00) Pesos for his past services and services still to be rendered in the future to the corporation up to the
completion of the Project. The President is given full discretion to discuss with Mr. Joaquin the manner of payment of
said compensation, authorizing him to pay part in stock and part in cash."
1wphi1
Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the compensation that was
authorized by this corporation in its Resolution of February 11, 1969 considering that the assistance so far given the
corporation by said Technical Group in continuing our project with the DBP and its request for guaranty for a foreign
loan is 70% completed leaving only some details which are now being processed. It is estimated thatP400,000.00
worth of Common Stock would be reasonable for the present accomplishments and to this effect, the President is
authorized to issue the same in the name of the Technical Group, as follows:
P200,000.00 in Common Stock to Rafael Suarez, an associate in the Technical Group, and P200,000.00 in Common
stock to Francisco G. Joaquin, Jr., also a member of the Technical Group. 49
Lastly, the amount purportedly included services still to be rendered that supposedly extended until the completion of
the construction of the hotel. It is basic, however, that in obligations to do, there can be no payment unless the
obligation has been completely rendered.50
It is notable that the confusion on the amounts of compensation arose from the parties inability to agree on the fees
that respondents should receive. Considering the absence of an agreement, and in view of respondents constructive
fulfillment of their obligation, the Court has to apply the principle of quantum meruit in determining how much was still
due and owing to respondents. Under the principle of quantum meruit, a contractor is allowed to recover the
reasonable value of the services rendered despite the lack of a written contract.51 The measure of recovery under the
principle should relate to the reasonable value of the services performed. 52 The principle prevents undue enrichment
based on the equitable postulate that it is unjust for a person to retain any benefit without paying for it. Being
predicated on equity, the principle should only be applied if no express contract was entered into, and no specific
statutory provision was applicable.53
Under the established circumstances, we deem the total amount of P200,000.00 to be reasonable compensation for
respondents services under the principle of quantum meruit.
Finally, we sustain IHCs position that the grant of attorneys fees lacked factual or legal basis. Attorneys fees are not
awarded every time a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate. There should be factual or legal support in the records before the award of such fees is sustained. It is not
enough justification for the award simply because respondents were compelled to protect their rights. 54
ACCORDINGLY, the Court DENIES the petition for review on certiorari; and AFFIRMS the decision of the Court of
Appeals promulgated on November 8, 2002 in C.A.-G.R. No. 47094 subject to the MODIFICATIONS that: (a)

International Hotel Corporation is ordered to. pay Francisco G. Joaquin, Jr. and Rafael Suarez P100,000.00 each as
compensation for their services, and (b) the award of P20,000.00 as attorney's fees is deleted.
No costs of suit.
Power to Rescind in Reciprocal Obligations (Arts. 1191-1192)

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-39378 August 28, 1984
GENEROSA AYSON-SIMON, plaintiff-appellee,
vs.
NICOLAS ADAMOS and VICENTA FERIA, defendants-appellants.
Wenceslao V. Jarin for plaintiff-appellee.
Arnovit, Lacre & Adamos for defendants-appellants.
MELENCIO-HERRERA, J.:
Originally, this was an appeal by defendants from the Decision of the then Court of First Instance of Manila, Branch
XX, in Civil Case No. 73942, to the Court of Appeals (now Intermediate Appellate Court), which Tribunal, certified the
case to us because the issue is a pure question of law.
On December 13, 1943, Nicolas Adamos and Vicente Feria, defendants-appellants herein, purchased two lots
forming part of the Piedad Estate in Quezon City, with an area of approximately 56,395 square meters, from Juan
Porciuncula. Sometime thereafter, the successors-in-interest of the latter filed Civil Case No. 174 in the then Court of
First Instance of Quezon City for annulment of the sale and the cancellation of Transfer Certificate of Title No. 69475,
which had been issued to defendants-appellants by virtue of the disputed sale. On December 18, 1963, the Court
rendered a Decision annulling the sale, cancelling TCT 69475, and authorizing the issuance of a new title in favor of
Porciuncula's successors-in-interest. The said judgment was affirmed by the Appellate Court and had attained finality.
In the meantime, on May 29, 1946, during the pendency of the above-mentioned case, defendants-appellants sold to
GENEROSA Ayson Simon, plaintiff-appellee herein, the two lots in question for P3,800.00 each, plus an additional
P800.00 paid subsequently for the purpose of facilitating the issuance of new titles in GENEROSA's name. Due to the
failure of defendants-appellants to comply with their commitment to have the subdivision plan of the lots approved
and to deliver the titles and possession to GENEROSA, the latter filed suit for specific performance before the Court
of First Instance of Quezon City on September 4, 1963 (Civil Case No. Q-7275). On January 20, 1964, said Court
ordered:
WHEREFORE, the plaintiff is declared entitled to a summary judgment and the defendants are
hereby ordered to have the subdivision of Lot No. 6, Block No. 2, and Lot No. 11, Block No. 3,
relocated and resurveyed and the subdivision plan approved and, if not possible for one reason or
another, and in case of the absence or loss of said subdivision, to cause and effect the subdivision
of the said lots and deliver the titles and possession thereof to the plaintiff. As to the claim and
counterclaim for damages, let the hearing thereon be deferred until further move by the parties. 1

However, since execution of the foregoing Order was rendered impossible because of the judgment in Civil Case No.
174, which earlier declared the sale of the lots in question by Juan Porciuncula to defendants-appellants to be null
and void, GENEROSA filed, on August 16, 1968, another suit in the Court of First Instance of Manila (Civil Case No.
73942) for rescission of the sale with damages. On June 7, 1969, the Court rendered judgment, the dispositive
portion of which reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and against defendants, ordering the
latter jointly and severally, to pay the former the sum of P7,600.00, the total amount received by
them from her as purchase price of the two lots, with legal rate of interest from May 29, 1946 until
fully paid; another sum of P800.00, with legal rate 6f interest from August 1, 1966 until fully paid;
the sum of P1,000 for attorney's fees; and the costs of this suit. 2
Hence, the appeal before the Appellate Court on the ground that GENEROSA's action had prescribed, considering
that she had only four years from May 29, 1946, the date of sale, within which to rescind said transaction, and that
her complaint for specific performance may be deemed as a waiver of her right to rescission since the fulfillment and
rescission of an obligation are alternative and not cumulative remedies.
The appeal is without merit. The Trial Court presided by then Judge, later Court of Appeals Associate Justice Luis B.
Reyes, correctly resolved the issues, reiterated in the assignments of error on appeal, as follows:
Defendants contend (1) that the fulfillment and the rescission of the obligation in reciprocal ones
are alternative remedies, and plaintiff having chosen fulfillment in Civil Case No. Q- 7525, she
cannot now seek rescission; and (2) that even if plaintiff could seek rescission the action to rescind
the obligation has prescribed.
The first contention is without merit. The rule that the injured party can only choose between
fulfillment and rescission of the obligation, and cannot have both, applies when the obligation is
possible of fulfillment. If, as in this case, the fulfillment has become impossible, Article
1191 3 allows the injured party to seek rescission even after he has chosen fulfillment.
True it is that in Civil Case No. 7275 the Court already rendered a Decision in favor of plaintiff, but
since defendants cannot fulfill their obligation to deliver the titles to and possession of the lots to
plaintiff, the portion of the decision requiring them to fulfill their obligations is without force and
effect. Only that portion relative to the payment of damages remains in the dispositive part of the
decision, since in either case (fulfillment or rescission) defendants may be required to pay
damages.
The next question to determine is whether the action to rescind the obligation has prescribed.
Article 1191 of the Civil Code provides that the injured party may also seek rescission, if the
fulfillment should become impossible. The cause of action to claim rescission arises when the
fulfillment of the obligation became impossible when the Court of First Instance of Quezon City in
Civil Case No. 174 declared the sale of the land to defendants by Juan Porciuncula a complete
nullity and ordered the cancellation of Transfer Certificate of Title No. 69475 issued to them. Since
the two lots sold to plaintiff by defendants form part of the land involved in Civil Case No. 174, it
became impossible for defendants to secure and deliver the titles to and the possession of the lots
to plaintiff. But plaintiff had to wait for the finality of the decision in Civil Case No. 174, According to
the certification of the clerk of the Court of First Instance of Quezon City (Exhibit "E-2"), the
decision in Civil Case No. 174 became final and executory "as per entry of Judgment dated May 3,
1967 of the Court of Appeals." The action for rescission must be commenced within four years from
that date, May 3, 1967. Since the complaint for rescission was filed on August 16, 1968, the four
year period within which the action must be commenced had not expired.
Defendants have the obligation to return to plaintiff the amount of P7,600.00 representing the
purchase price of the two lots, and the amount of P800.00 which they received from plaintiff to
expedite the issuance of titles but which they could not secure by reason of the decision in Civil

Case No. 174. Defendant has to pay interest at the legal rate on the amount of P7,600.00 from May
29, 1946, when they received the amount upon the execution of the deeds of sale, and legal
interest on the P800.00 from August 1, 1966, when they received the same from plaintiff. 4
WHEREFORE, the appealed judgment of the former Court of First Instance of Manila, Branch XX, in Civil Case No.
73942, dated June 7, 1969, is hereby affirmed in toto. Costs against defendants-appellants.
SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 190080
June 11, 2014
GOLDEN VALLEY EXPLORATION, INC., Petitioner,

vs.
PINKIAN MINING COMPANY and COPPER VALLEY, INC., Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari are the Decision dated July 23, 2009 and the Resolution dated
October 23, 2009 of the Court of Appeals (CA) in CA-G.R. CV. No. 90682 which reversed the Decision dated August
18, 2006 of the Regional Trial Court of Makati City, Branch 145 (RTC) in Civil Case No. 01-324 and, consequently,
affirmed the validity of the rescission of the Operating Agreement between petitioner Golden Valley Exploration, Inc.
(GVEI) and respondent Pinkian Mining Company (PMC) covering various mining claims in Kayapa, Nueva Vizcaya,
as well as the Memorandum of Agreement between PMC and respondent Copper Valley, Inc. (CVI).
1
The Facts
PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, 15 of which were covered by Mining Lease
Contract (MLC) No. MRD-56, while the remaining 66 had pending applications for lease. On October 30, 1987, PMC
entered into an Operating Agreement (OA) with GVEI, granting the latter "full, exclusive and irrevocable possession,
use, occupancy , and control over the [mining claims], and every matter pertaining to the examination, exploration,
development and mining of the [mining claims] and the processing and marketing of the products x x x ," for a period
of 25 years.
5
In a Letter dated June 8, 1999, PMC extra-judicially rescinded the OA upon GVEIs violation of Section 5.01, Article
V thereof. Cited as further justification for its action were reasons such as: (a) violation of Section 2.03, Article II of the
OA, or the failure of GVEI to advance the actual cost for the perfection of the mining claims or for the acquisition of
mining rights, cost of lease applications, lease surveys and legal expenses incidental thereto; (b) GVEIs nonreimbursement of the expenses incurred by PMC General Manager Benjamin Saguid in connection with the visit of a
financier to the mineral property in 1996; (c) its non-remittance of the US$300,000.00 received from Excelsior
Resources, Ltd.; (d) its nondisclosure of contracts entered into with other mining companies with respect to the
mining claims; (e) its being a mere "promoter/broker" of PMCs mining claims instead of being the operator thereof;
and (f) its nonperformance of the necessary works on the mining claims.
10
11
12
GVEI contested PMCs extra-judicial rescission of the OA through a Letter dated December 7, 1999, averring therein
that its obligation to pay royalties to PMC arises only when the mining claims are placed in commercial production
which condition has not yet taken place. It also reminded PMC of its prior payment of the amount ofP185,000.00 as
future royalties in exchange for PMCs express waiver of any breach or default on the part of GVEI.
13

PMC no longer responded to GVEIs letter. Instead, it entered into a Memorandum of Agreement dated May 2, 2000
(MOA) with CVI, whereby the latter was granted the right to "enter, possess, occupy and control the mining claims"
and "to explore and develop the mining claims, mine or extract the ores, mill, process and beneficiate and/or dispose
the mineral products in any method or process," among others, for a period of 25 years.
14
Due to the foregoing, GVEI filed a Complaint for Specific Performance, Annulment of Contract and Damages against
PMC and CVI before the RTC, docketed as Civil Case No. 01-324.
15
The RTC Ruling

On August 18, 2006, the RTC rendered a Decision in favor of GVEI, holding that since the mining claims have not
been placed in commercial production, there is no demandable obligation yet for GVEI to pay royalties to PMC. It
further declared that no fault or negligence may be attributed to GVEI for the delay in the commercial production of
the mining claims because the non-issuance of the requisite Mineral Production Sharing Agreement (MPSA) and
other government permits, licenses, and consent were all affected by factors beyond GVEIs control. The RTC, thus,
declared the rescission of the OA void and the execution of the MOA between PMC and CVI without force and effect.
In this relation, it ordered PMC to comply with the terms and conditions of the OA until the expiration of its period.
16
17
18
At odds with the RTCs ruling, PMC elevated the case on appeal to the CA.
The CA Ruling
In a Decision dated July 23, 2009, the CA reversed the RTC ruling, finding that while the OA gives PMC the right to
rescind only on the ground of (GVEIs) failure to pay the stipulated royalties, Article 1191 of the Civil Code allows
PMC the right to rescind the agreement based on a breach of any of its provisions. It further held that the inaction of
GVEI for a period of more than seven (7) years to operate the areas that were already covered by a perfected mining
lease contract and to acquire the necessary permits and licenses amounted to a substantial breach of the OA, the
very purpose of which was the mining and commercial distribution of derivative products that may be recovered from
the mining property. For the foregoing reasons, the CA upheld the validity of PMCs rescission of the OA and its
subsequent execution of the MOA with CVI.
19
20
21
22
Dissatisfied with the CAs ruling, GVEI filed a motion for reconsideration which was, however, denied by the CA in a
Resolution dated October 23, 2009, hence, this petition.
23
The Issue Before the Court

The central issue for the Courts resolution is whether or not there was a valid rescission of the OA.
The Courts Ruling
The Court resolves the issue in the affirmative.
In reciprocal obligations, either party may rescind the contract upon the others substantial breach of the obligation/s
he had assumed thereunder. The basis therefor is Article 1191 of the Civil Code which states as follows:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law.
More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a breach of faith
that violates the reciprocity between parties to the contract. This retaliatory remedy is given to the contracting party
who suffers the injurious breach on the premise that it is "unjust that a party be held bound to fulfill his promises when
the other violates his."
24
25
As a general rule, the power to rescind an obligation must be invoked judicially and cannot be exercised solely on a
partys own judgment that the other has committed a breach of the obligation. This is so because rescission of a
contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations as
would defeat the very object of the parties in making the agreement. As a well-established exception, however, an
injured party need not resort to court action in order to rescind a contract when the contract itself provides that it may
be revoked or cancelled upon violation of its terms and conditions. As elucidated in Froilan v. Pan Oriental Shipping
Co., "there is x x x 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." Similarly, in Dela Rama
Steamship Co., Inc. v. Tan, it was held that judicial permission to rescind an obligation is not necessary if a contract
contains a special provision granting the power of cancellation to a party.
26
27
28
29
30
31
32
With this in mind, the Court therefore affirms the correctness of the CAs Decision upholding PMCs unilateral
rescission of the OA due to GVEIs non-payment of royalties considering the parties express stipulation in the OA
that said agreement may be cancelled on such ground. This is found in Section 8.01, Article VIII in relation to
Section 5.01, Article V of the OA which provides:
33
34
ARTICLE VIII
CANCELLATION/TERMINATION OF AGREEMENT
8.01 This Agreement may be cancelled or terminated prior to the expiration of the period, original or renewal
mentioned in the next preceding Section only in either of the following ways:
a. By written advance notice of sixty (60) days from OPERATOR to PINKIAN with or without cause by
registered mail or personal delivery of the notice to PINKIAN.
b. By written notice from PINKIAN by registered or personal deliver of the notice to OPERATOR based on
the failure to OPERATOR to make any payments determined to be due PINKIAN under Section 5.01 hereof
after written demand for payment has been made on OPERATOR: Provided that OPERATOR shall have a
grace period of ninety (90) days from receipt of such written demand within which to make the said
payments to PINKIAN.
ARTICLE V
ROYALTIES
5.01 Should the PROPERTIES be placed in commercial production the PINKIAN shall be entitled to a Royalty
computed as follows:
(a) For gold 3.0 percent of net realizable value of gold
(b) For copper and others 2.0 percent of net realizable value
"Net REALIZABLE Value" is gross value less the sum of the following:
(1) marketing expenses including freight and insurance;
(2) all smelter charges and deductions;

(3) royalty payments to the government;
(4) ad valorem and export taxes, if any, paid to the government.
The aforesaid royalties shall be paid to PINKIAN within five (5) days after receipt of the smelter or refinery returns.
(Emphases and underscoring supplied)
By expressly stipulating in the OA that GVEIs non-payment of royalties would give PMC sufficient cause to cancel or
rescind the OA, the parties clearly had considered such violation to be a substantial breach of their agreement. Thus,
in view of the above-stated jurisprudence on the matter, PMCs extra-judicial rescission of the OA based on the said
ground was valid.
In this relation, the Court finds it apt to clarify that the following defenses raised by GVEI in its petition would not impel
a different conclusion:
First, GVEI cannot excuse its non-payment of royalties on the argument that no commercial mining was yet in place.
This is precisely because the obligation to develop the mining areas and put them in commercial operation also
belonged to GVEI as it expressly undertook "to explore, develop, and equip the Claims to mine and beneficiate the
ore thereof by any method or process" and "to enter into contract, agreement, assignments, conveyances and
understandings of any kind whatsoever with reference to the exploration, development, equipping and operation of
the Claims, and the mining and beneficiation of the ore derived therefrom, and marketing the resulting marketable
products."
35
36
Records reveal that when the OA was signed on October 30, 1987, 15 mining claims were already covered by a
perfected mining lease contract, i.e., MLC No. MRD-56, granting to the holder thereof "the right to extract all mineral
deposits found on or underneath the surface of his mining claims x x x; to remove, process and otherwise utilize the
mineral deposits for his own benefit." This meant that GVEI could have immediately extracted mineral deposits from
the covered mineral land and carried out commercial mining operations from the very start. However, despite earlier
demands made by PMC, no meaningful steps were taken by GVEI towards the commercial production of the 15
perfected mining claims and the beneficial exploration of those remaining. Consequently, seven years into the life of
the OA, no royalties were paid to PMC. Compounding its breach, GVEI not only failed to pay royalties to PMC but
also did not carry out its obligation to conduct operations on and/or commercialize the mining claims already covered
by MLC No. MRD-56. Truth be told, GVEIs non-performance of the latter obligation under the OA actually made the
payment of royalties to PMC virtually impossible. Hence, GVEI cannot blame anyone but itself for its breach of the
OA, which, in turn, gave PMC the right to unilaterally rescind the same.
37
Second, neither can GVEI successfully oppose PMCs rescission of the OA on the argument that the ground to
rescind the OA was only limited to its non-payment of royalties precisely because said ground was actually among
the reasons for PMCs rescission thereof. Considering the stipulations above-cited, the ground for non-payment of
royalties was in itself sufficient for PMC to extra-judicially rescind the OA.
In any event, even discounting the ground of non-payment of royalties, PMC still had the right to rescind the OA
based on the other grounds it had invoked therefor, namely, (a) violation of Section 2.03, Article II of the OA, or the
failure of GVEI to advance the actual cost for the perfection of the mining claims or for the acquisition of mining rights,
cost of lease applications, lease surveys and legal expenses incidental thereto, (b) GVEIs non-reimbursement of the
expenses incurred by PMC General Manager Benjamin Saguid in connection with the visit of a financier to the
mineral property in 1996, (c) its non-remittance of the US$300,000.00 received from Excelsior Resources, Ltd., (d) its
non-disclosure of contracts entered into with other mining companies with respect to the mining claims, (e) its being a
mere "promoter/broker" of PMCs mining claims instead of being the operator thereof, and (f) its non-performance of
the necessary works on the mining claims, albeit the said grounds should have been invoked judicially since the court
would still need to determine if the same would constitute substantial breach and not merely a slight or casual breach
of the contract. While Section 8.01, Article VIII of the OA as above-cited appears to expressly restrict the availability
of an extra-judicial rescission only to the grounds stated thereunder, the Court finds that the said stipulation does not
negate PMCs implied statutory right to judicially rescind the contract for other unspecified acts that may actually
amount to a substantial breach of the contract. This is based on Article 1191 of the Civil Code (also above-cited)
which pertinently provides that 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" and that "[t]he court shall decree the rescission claimed,
unless there be just cause authorizing the fixing of a period."
While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this case, the only
recognizable effect, however, is with respect to the reckoning point as to when the contract would be formally
regarded as rescinded. Where parties agree to a stipulation allowing extra-judicial rescission, no judicial decree is
necessary for rescission to take place; the extra-judicial rescission immediately releases the party from its obligation
under the contract, subject only to court reversal if found improper. On the other hand, without a stipulation allowing
extra-judicial rescission, it is the judicial decree that rescinds, and not the will of the rescinding party. This may be
gathered from previous Court rulings on the matter.
1wphi 1
For instance, in Ocejo, Perez & Co. v. International Banking Corporation, where the seller, without having reserved
title to the thing sold, sought to re-possess the subject matter of the sale through an action for replevin after the buyer
failed to pay its purchase price, the Court ruled that the action of replevin (which operates on the assumption that the
plaintiff is the owner of the thing subject of the suit) "will not lie upon the theory that the rescission has already taken
place and that the seller has recovered title to the thing sold." It held that the title which had already passed by
delivery to the buyer is not ipso facto re-vested in the seller upon the latters own determination to rescind the sale
because it is the judgment of the court that produces the rescission.
38
On the other hand, in De Luna v. Abrigo (De Luna), the Court upheld the validity of a stipulation providing for the
automatic reversion of donated property to the donor upon non-compliance of certain conditions therefor as the same
was akin to an agreement granting a party the right to extra-judicially rescind the contract in case of breach. The
Court ruled, in effect, that a subsequent court judgment does not rescind the contract but merely declares the fact
that the same has been rescinded, viz.:
39
[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already
deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to
determine whether or not the rescission was proper. (Emphases and underscoring supplied)
40
A similar agreement in Roman Catholic Archbishop of Manila v. CA allowing the ipso facto reversion of the donated
property upon noncompliance with the conditions was likewise upheld, with the Court reiterating De Luna and
declaring in unmistakable terms that:
41
42
Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely declaratory of
the revocation, but it is not in itself the revocatory act. (Emphasis and underscoring supplied)
This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds not specified in
the contract would not preclude a party to treat the same as rescinded. The rescinding party, however, by such
course of action, subjects himself to the risk of being held liable for damages when the extra-judicial rescission is
questioned by the opposing party in court. This was made clear in the case of U.P. v. De Los Angeles, wherein the
Court held as follows:
43
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly,
without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether the action taken was or was not correct in law. x x x. (Emphases
and underscoring supplied)
44
The pronouncement, which was also reiterated in the case of Angeles v. Calasanz, sought to explain various rulings
that continued to require judicial confirmation even in cases when the rescinding party has a proven contractual right
45

to extra-judicially rescind the contract. The observation then was mainly on the practical effect of a stipulation
allowing extra-judicial rescission being merely "to transfer to the defaulter the initiative on instituting suit, instead of
the rescinder."
46
Proceeding from the foregoing, the Court has determined that the other grounds raised by PMC in its Letter dated
June 8, 1999 to GVEI (the existence of which had not been convincingly disputed herein) amounts to the latter's
substantial breach of the OA. To the Court's mind, said infractions, when taken together, ultimately resulted in GVEI's
failure to faithfully perform its primordial obligation under the OA to explore and develop PMC's mining claims as well
as to put the same into commercial operation. Accordingly, PMC's rescission of the OA on the foregoing grounds, in
addition to the ground of non-payment of royalties, is equally valid.
Finally, the Court cannot lend credence to GVEI's contention that when PMC entered into an agreement with CVI
covering the mining claims, it was committing a violation of the terms and conditions of the OA. As above-explained,
the invocation of a stipulation allowing extra-judicial rescission effectively puts an end to the contract and, thus,
releases the parties from the obligations thereunder, notwithstanding the lack of a judicial decree for the purpose. In
the case at bar, PMC, through its Letter dated June 8, 1999 to GVEI, invoked Section 8.01, Article VIII in relation to
Section 5.01, Article V of the OA which allows it to extra-judicially rescind the contract for GVEI's non-payment of
royalties. Thus, at that point in time, PMC had effectively rescinded the OA and was then considered to have been
released from its legal effects. Accordingly, there stood no legal impediment so as to hinder PMC from entering into a
contract with CVI covering the same mining claims subject of this case.
In fine, the Court denies the instant petition and affirms the assailed CA Decision and Resolution. WHEREFORE, the
petition is DENIED. The Decision dated July 23, 2009 and the Resolution dated October 23, 2009 of the Court of
Appeals in CA-G.R. CV. No. 90682 are hereby AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 108346
July 11, 2001
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract,
entitled the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals (CA) in CA-GR CV
No. 32991 dated October 9, 1992, as well as its Resolution3 dated December 29, 1992 denying petitioner's motion for
reconsideration.4
The dispositive portion of the assailed Decision reads:

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision
dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted by plaintiffsappellees and defendants-appellants are hereby RELEASED."5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land,
together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias Village,
Makati and covered by TCT No. 142177. Defendant George Raymundo [herein private petitioners] is David's
father who negotiated with plaintiffs Avelina and Mariano Velarde [herein petitioners] for the sale of said
property, which was, however, under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12, Record) was
executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the
following terms and conditions:
'x x x
xxx
xxx
'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the
VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE, her
heirs, successors and assigns, the parcel of land mentioned and described above, together with
the house and other improvements thereon.
'That the aforesaid parcel of land, together with the house and other improvements thereon, were
mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to
secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and
executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ and which
Real Estate Mortgage was ratified before Notary Public for Makati, _____, as Doc. No. ______,
Page No. _____, Book No. ___, Series of 1986 of his Notarial Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage
obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of Philippine Islands, in
the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms and
conditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of
BPI, including interests and other charges for late payment levied by the Bank, as if the same were
originally signed and executed by the VENDEE.
'It is further agreed and understood by the parties herein that the capital gains tax and documentary
stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and
transfer tax thereon shall be the account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her
husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x
xxx
xxx
'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the
sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume

the mortgage obligations on the property with the Bank of the Philippine Islands in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in
accordance with the terms and conditions of the Deed of Real Estate Mortgage dated _____,
signed and executed by Mr. David A. Raymundo with the said Bank, acknowledged before Notary
Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No. _____, Series of 1986 of
his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage obligations on the property is
not yet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the
property with the Bank in the name of Mr. David A. Raymundo, in accordance with the terms and
conditions of the said Deed of Real Estate Mortgage, including all interests and other charges for
late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of
attesting and confirming our private understanding concerning the said mortgage obligations to be
assumed.
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the
mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the bank of the Philippine Islands, I, Mrs, Avelina D, Velarde with the
consent of my husband, Mariano Z. Velardo, do hereby bind and obligate myself, my heirs,
successors and assigns, to strictly and faithfully comply with the following terms and conditions:
'1. That until such time as my assumption of the mortgage obligations on the property purchased is
approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the
said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate
Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with the
Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A.
Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A. Raymundo shall resume total and complete ownership
and possession of the property sold by way of Deed of Sale with Assumption of Mortgage, and the
same shall be deemed automatically cancelled and be of no further force or effect, in the same
manner as it (the) same had never been executed or entered into.
'3. That I am executing the Undertaking for purposes of binding myself, my heirs, successors and
assigns, to strictly and faithfully comply with the terms and conditions of the mortgage obligations
with the Bank of the Philippine Islands, and the covenants, stipulations and provisions of this
Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does]
hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the
mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of
a loan that plaintiffs were to secure from a bank with defendant's help. Defendants had a standing approved
credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's
approval of an application for assumption of mortgage by plaintiffs. Pending BPI's approval o[f] the
application, plaintiffs were to continue paying the monthly interests of the loan secured by a real estate
mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20,
1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI,
was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to
the mortgage bank constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than
January 21, 1987 provided: (a) you deliver actual possession of the property to her not later than
January 15, 1987 for her immediate occupancy; (b) you cause the release of title and mortgage
from the Bank of P.I. and make the title available and free from any liens and encumbrances; and
(c) you execute an absolute deed of sale in her favor free from any liens or encumbrances not later
than January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended
sale of the subject property allegedly due to the latter's failure to comply with the terms and conditions of the
Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific
performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil Case No. 15952 at
the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo YnaresSantiago (now an associate justice of this Court), who dismissed the Complaint in a Decision dated November 14,
1990.7 Thereafter, petitioners filed a Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad
Santos was assigned to the sala she vacated. In an Order dated May 15, 1991, 9 Judge Abad Santos granted
petitioner's Motion for Reconsideration and directed the parties to proceed with the sale. He instructed petitioners to
pay the balance of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale
and to surrender possession of the disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier Decision
dismissing petitioners' Complaint. Upholding the validity of the rescission made by private respondents, the CA
explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this
sale, the VENDEE (Velarde)' would assume to pay the mortgage obligation on the subject property in the
amount of P 1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid by
the Vendee Velarde includes the downpayment of P800,000.00 and the balance of Pl.8 million, and the
balance of Pl.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of the sale, had
to assume the mortgage obligation on the subject property. In other words, the assumption of the mortgage
obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed 'to
strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed
and executed by the VENDOR in favor of BPI x x x as if the same were originally signed and executed by
the Vendee. (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the document entitled
'Undertaking' wherein the latter agreed to continue paying said loan in accordance with the terms and
conditions of the Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that
in the event of violation by Velarde of any terms and conditions of said deed of real estate mortgage, the

downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and
the [D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and of no
force and effect (pars. 2 & 3, thereof, pp 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption
by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that
Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage the name of
Raymundo. The application with BPI for the approval of the assumption of mortgage would mean that, in
case of approval, payment of the mortgage obligation will now be in the name of Velarde. And in the event
said application is disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of the
Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p. 47,
t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the nonpayment of the mortgage obligation would result in a violation of the contract. And, upon Velarde's failure to
pay the agreed price, the[n] Raymundo may choose either of two (2) actions - (1) demand fulfillment of the
contract, or (2) demand its rescission (Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for
Velarde's non-payment of the balance of the purchase price. As borne out by the evidence, Velarde had to
pay in full in case of BPI's disapproval of the application for assumption of mortgage. What Velarde should
have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter dated January 7,
1987 (Exh. 'K', '4') which was strongly given weight by the lower court in reversing the decision rendered by
then Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance in cash
but enumerated 3 new conditions which, to the mind of this Court, would constitute a new undertaking or
new agreement which is subject to the consent or approval of Raymundo. These 3 conditions were not
among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at most, an
attempt to novate. But then again, there can be no novation because there was no agreement of all the
parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption
of Mortgage would be deemed 'automatically cancelled and of no further force and effect, as if the same had
never been executed or entered into.' While it is true that even if the contract expressly provided for
automatic rescission upon failure to pay the price, the vendee may still pay, he may do so only for as long as
no demand for rescission of the contract has been made upon him either judicially or by a notarial act
(Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde notarial notice dated January 8, 1987
of cancellation/rescission of the contract due to the latter's failure to comply with their obligation. The
rescission was justified in view of Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the agreement. As adverted to above, the
agreement of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the
contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees
Velarde would create a right to demand payment or to rescind the contract, or to criminal prosecution (Edca
Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee's failure, therefore, to pay
the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees
Velarde having violated the contract, they have lost their right to its enforcement and hence, cannot avail of
the action for specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)." 10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of errors:
"I.
The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach
of the contract.

"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents
was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new conditions'
constituting mere offers or an attempt to novate necessitating a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of
contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank.
Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private
respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the
purchase price. As admitted by both parties, their agreement mandated that petitioners should pay the purchase price
balance of P1.8 million to private respondents in case the request to assume the mortgage would be disapproved.
Thus, on December 15, 1986, when petitioners received notice of the bank's disapproval of their application to
assume respondents' mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the
fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot
take the place of actual payment as would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate things, and the
buyer to pay therefor a price certain in money or its equivalent. 13
Private respondents had already performed their obligation through the execution of the Deed of Sale, which
effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery. 14
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner
agreed upon. Worse, they wanted private respondents to perform obligations beyond those stipulated in the contract
before fulfilling their own obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the
former had signified their willingness to pay the balance of the purchase price only a little over a month from the time
they were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission. They cite several cases 15 in which this Court
declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that

they have substantially performed their obligation in good faith, considering that they have already made the initial
payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage
obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of
sale. Private respondents' right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter
should become impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party who violates the reciprocity between them. 16 The breach contemplated in the said provision is
the obligor's failure to comply with an existing obligation. 17 When the obligor cannot comply with what is incumbent
upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.18
In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the
very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's right
to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due;
however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal
obligation. Moreover, the offer to pay was conditioned on the performance by private respondents of additional
burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in those cases are not
analogous to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20)
days to pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the
seller.
In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing
the title to the property; there was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such
breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay
the P1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the
performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale. Hence, private respondents were left with the legal
option of seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of

payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate
the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required
to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment
of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling
P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich
themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to restore.20 To rescind is to declare a contract void at its
inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative
positions as if no contract has been made.21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by
petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of petitioners to private
respondents were not part of the original contract. By that time, it was already incumbent upon the former to pay the
balance of the sale price. They had no right to demand preconditions to the fulfillment of their obligation, which had
become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private respondents are
ordered to return to petitioners the amount of P874,150, which the latter paid as a consequence of the rescinded
contract, with legal interest thereon from January 8, 1987, the date of rescission. No pronouncement as to costs.
SO ORDERED.
1w phi1.nt

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 169790
April 30, 2008
CONGREGATION OF THE RELIGIOUS OF THE VIRGIN MARY and/or THE SUPERIOR GENERAL OF THE
RELIGIOUS OF THE VIRGIN MARY, represented by The REVEREND MOTHER MA. CLARITA
BALLEQUE,petitioner,
vs.
EMILIO Q. OROLA, JOSEPHINE FATIMA LASERNA OROLA, MYRNA ANGELINE LASERNA OROLA, MANUEL
LASERNA OROLA, MARJORIE MELBA LASERNA OROLA & ANTONIO LASERNA OROLA,respondents.
DECISION
NACHURA, J.:

Challenged in this petition for review on certiorari is the Court of Appeals (CA) Decision1 in CA-G.R. CV. No. 71406
which modified the Regional Trial Court (RTC) Decision2 in Civil Case No. V-7382 ordering the rescission of the
contract of sale between the parties in an action for Specific Performance or Rescission with Damages filed by
respondents Emilio, Josephine Fatima Laserna, Myrna Angeline Laserna, Manuel Laserna, Marjorie Melba Laserna,
& Antonio Laserna, all surnamed Orola, (respondents) against petitioner Congregation of the Religious of the Virgin
Mary (RVM).3
The undisputed facts, as found by the CA and adopted by RVM in its petition, follow.
Sometime in April 1999, [petitioner] Religious of the Virgin Mary (RVM for brevity), acting through its local
unit and specifically through Sr. Fe Enhenco, local Superior of the St. Marys Academy of Capiz and
[respondents] met to discuss the sale of the latters property adjacent to St. Marys Academy. Said property
is denominated as Lot 159-B-2 and was still registered in the name of [respondents] predecessor-ininterest, Manuel Laserna.
In May of 1999, [respondent] Josephine Orola went to Manila to see the Mother Superior General of the
RVM, in the person of Very Reverend Mother Ma. Clarita Balleque [VRM Balleque] regarding the sale of the
property subject of this instant case.
A contract to sell dated June 2, 1999 made out in the names of herein [petitioner] and [respondents] as
parties to the agreement was presented in evidence pegging the total consideration of the property
atP5,555,000.00 with 10% of the total consideration payable upon the execution of the contract, and which
was already signed by all the [respondents] and Sr. Ma. Fe Enhenco, R.V.M. [Sr. Enhenco] as witness.
On June 7, 1999, [respondents] Josephine Orola and Antonio Orola acknowledged receipt of RCBC Check
No. 0005188 dated June 7, 1999 bearing the amount of P555,500.00 as 10% down payment for Lot 159-B-2
from the RVM Congregation (St. Marys Academy of Cadiz [SMAC]) with the "conforme" signed by Sister Fe
Enginco (sic), Mother Superior, SMAC.
[Respondents] executed an extrajudicial settlement of the estate of Trinidad Andrada Laserna dated June
21, 1999 adjudicating unto themselves, in pro indiviso shares, Lot 159-B-2, and which paved the transfer of
said lot into their names under Transfer Certificate of Title No. T-39194 with an entry date of August 13,
1999.4
Thereafter, respondents, armed with an undated Deed of Absolute Sale which they had signed, forthwith scheduled a
meeting with VRM Balleque at the RVM Headquarters in Quezon City to finalize the sale, specifically, to obtain
payment of the remaining balance of the purchase price in the amount of P4,999,500.00. However, VRM Balleque did
not meet with respondents. Succeeding attempts by respondents to schedule an appointment with VRM Balleque in
order to conclude the sale were likewise rebuffed.
In an exchange of correspondence between the parties respective counsels, RVM denied respondents demand for
payment because: (1) the purported Contract to Sell was merely signed by Sr. Enhenco as witness, and not by VRM
Balleque, head of the corporation sole; and (2) as discussed by counsels in their phone conversations, RVM will only
be in a financial position to pay the balance of the purchase price in two years time. Thus, respondents filed with the
RTC a complaint with alternative causes of action of specific performance or rescission.
After trial, the RTC ruled that there was indeed a perfected contract of sale between the parties, and granted
respondents prayer for rescission thereof. It disposed of the case, to wit:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondents] and against
the [petitioner].
1. Dismissing the counterclaim;
2. Ordering the rescission of the Contract to Sell, Exh. "E".

3. Ordering the forfeiture of the downpayment of P555,500 in favor of the [respondents];
4. Ordering [petitioner] corporation sole, the Superior General of the Religious of the Virgin Mary, to pay
[respondents]:
a. P50,000.00 as exemplary damages;
b. P50,000.00 as attorneys fees.
5. Costs against the [petitioner].
Dissatisfied, both parties filed their respective Notices of Appeal. The CA dismissed the respondents appeal because
of their failure to file an Appeal Brief. However, RVMs appeal, where respondents accordingly filed an Appellees
Brief, continued. Subsequently, the CA rendered judgment setting aside the RTC Decision, to wit:
WHEREFORE, with all the foregoing, the decision of the Regional Trial Court, Branch 15, Roxas City dated
March 1, 2001 in [C]ivil [C]ase [N]o. V-7382 for Specific Performance or Rescission with Damages is hereby
SET ASIDE and a new one entered GRANTING [respondents] action for specific performance. [Petitioner
RVM] [is] hereby ordered to pay [respondents] immediately the balance of the total consideration for the
subject property in the amount of P4,999,500.00 with interest of 6% per annum computed from June 7, 2000
or one year from the downpayment of the 10% of the total consideration until such time when the whole
obligation has been fully satisfied. In the same way, [respondents] herein are ordered to immediately deliver
the title of the property and to execute the necessary documents required for the sale as soon as all
requirements aforecited have been complied by [RVM]. Parties are further ordered to abide by their
reciprocal obligations in good faith.
All other claims and counterclaims are hereby dismissed for lack of factual and legal basis.
No pronouncement as to cost.
In modifying the RTC Decision, the CA, albeit sustaining the trial courts finding on the existence of a perfected
contract of sale between the parties, noted that the records and evidence adduced did not preponderate for either
party on the manner of effecting payment for the subject property. In short, the CA was unable to determine from the
records if the balance of the purchase price was due in two (2) years, as claimed by RVM, or, upon transfer of title to
the property in the names of respondents, as they averred. Thus, the CA applied Articles 1383 5 and 13846of the Civil
Code which pronounce rescission as a subsidiary remedy covering only the damages caused.
The appellate court then resolved the matter in favor of the greatest reciprocity of interest pursuant to Article 1378 7 of
the Civil Code. It found that the 2-year period to purchase the property, which RVM insisted on, had been mooted
considering the time elapsed from the commencement of this case. Thus, the CA ordered payment of the balance of
the purchase price with 6% interest per annum computed from June 7, 2000 until complete satisfaction thereof.
Hence, this recourse.
RVM postulates that the order to pay interest is inconsistent with the professed adherence by the CA to the greatest
reciprocity of interest between the parties. Since mutual restitution cannot be had when the CA set aside the
rescission of the contract of sale and granted the prayer for specific performance, RVM argues that the respondents
should pay rentals for the years they continued to occupy, possess, and failed to turn over to RVM the subject
property.
Effectively, the only issue for our resolution is whether RVM is liable for interest on the balance of the purchase price.
At the outset, we must distinguish between an action for rescission as mapped out in Article 1191 of the Civil Code
and that provided by Article 1381 of the same Code. The articles read:

Art. 1191. The power to rescind obligations is impled in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion state in the preceding
number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due
them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1191, as presently worded, speaks of the remedy of rescission in reciprocal obligations within the context of
Article 1124 of the Old Civil Code which uses the term "resolution." The remedy of resolution applies only to
reciprocal obligations8 such that a partys breach thereof partakes of a tacit resolutory condition which entitles the
injured party to rescission. The present article, as in the Old Civil Code, contemplates alternative remedies for the
injured party who is granted the option to pursue, as principal actions, either a rescission or specific performance of
the obligation, with payment of damages in each case. On the other hand, rescission under Article 1381 of the Civil
Code, taken from Article 1291 of the Old Civil Code, is a subsidiary action, and is not based on a partys breach of
obligation.
The esteemed Mr. Justice J.B.L. Reyes, ingeniously cuts through the distinction in his concurring opinion inUniversal
Food Corporation v. CA:9
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument
of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be
denied because under Article 1383 of the Civil Code of the Philippines[,] rescission can not be demanded
except when the party suffering damage has no other legal means to obtain reparation, is predicated on a
failure to distinguish between a rescission for breach of contract under Article 1191 of the Civil Code and a
rescission by reason of lesin or economic prejudice, under Article 1381, et seq. The rescission on account
of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary
action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant.
This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill
his promises when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non
est fides servanda." Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesin or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison d etre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesin enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.
It is probable that the petitioners confusion arose from the defective technique of the new Code that terms
both instances as "rescission" without distinctions between them; unlike the previous Spanish Civil Code of
1889, that differentiated "resolution" for breach of stipulations from "rescission" by reason of lesin or
damage. But the terminological vagueness does not justify confusing one case with the other, considering
the patent difference in causes and results of either action.
In the case at bench, although the CA upheld the RTCs finding of a perfected contract of sale between the parties,
the former disagreed with the latter that fraud and bad faith were attendant in the sale transaction. The appellate
court, after failing to ascertain the parties actual intention on the terms of payment for the sale, proceeded to apply
Articles 1383 and 1384 of the Civil Code declaring rescission as a subsidiary remedy that may be availed of only
when the injured party has no other legal means to obtain reparation for the damage caused. In addition, considering
the absence of fraud and bad faith, the CA felt compelled to arrive at a resolution most equitable for the parties. The
CAs most equitable resolution granted respondents prayer for specific performance of the sale and ordered RVM to
pay the remaining balance of the purchase price, plus interest. It set aside and deleted the RTCs order forfeiting the
downpayment of P555,500.00 in favor of, and payment of exemplary damages, attorneys fees and costs of suit to,
respondents.
Nonetheless, RVM is displeased. It strenuously objects to the CAs imposition of interest. RVM latches on to the CAs
characterization of its resolution as most equitable which, allegedly, is not embodied in the dispositive portion of the
decision ordering the payment of interest. RVM is of the view that since the CA decreed specific performance of the
contract without a finding of bad faith by either party, and respondents retained possession of the subject property for
the duration of the litigation, the imposition of interest is not keeping with equity without simultaneously requiring
respondents to pay rentals for their continued and uninterrupted stay thereon. In all, RVM phrases the issue in
metaphysical terms, i.e., the most equitable solution.
We completely disagree. The law, as applied to this factual milieu, leaves no room for equivocation. Thus, we are not
wont to apply equity in this instance.
As uniformly found by the lower courts, we likewise find that there was a perfected contract of sale between the
parties. A contract of sale carries the correlative duty of the seller to deliver the property and the obligation of the
buyer to pay the agreed price.10 As there was already a binding contract of sale between the parties, RVM had the
corresponding obligation to pay the remaining balance of the purchase price upon the issuance of the title in the
name of respondents. The supposed 2-year period within which to pay the balance did not affect the nature of the
agreement as a perfected contract of sale.11 In fact, we note that this 2-year period is neither reflected in any of the
drafts to the contract,12 nor in the acknowledgment receipt of the downpayment executed by respondents Josephine
and Antonio with the conformity of Sr. Enhenco.13 In any event, we agree with the CAs observation that the 2-year
period to effect payment has been mooted by the lapse of time.
However, the CA mistakenly applied Articles 1383 and 1384 of the Civil Code to this case because respondents
cause of action against RVM is predicated on Article 1191 of the same code for breach of the reciprocal obligation. It
is evident from the allegations in respondents Complaint 14 that the instant case does not fall within the enumerated
instances in Article 1381 of the Civil Code. Certainly, the Complaint did not pray for rescission of the contract based
on economic prejudice.
Moreover, contrary to the CAs finding that the evidence did not preponderate for either party, the records reveal, as
embodied in the trial courts exhaustive disquisition, that RVM committed a breach of the obligation when it suddenly
refused to execute and sign the agreement and pay the balance of the purchase price. 15 Thus, when RVM refused to
pay the balance and thereby breached the contract, respondents rightfully availed of the alternative remedies
provided in Article 1191. Accordingly, respondents are entitled to damages regardless of whichever relief, rescission
or specific performance, would be granted by the lower courts. 16

Yet, RVM stubbornly argues that given the CAs factual finding on the absence of fraud or bad faith by either party, its
order to pay interest is inequitable.
The argument is untenable. The absence of fraud and bad faith by RVM notwithstanding, it is liable to respondents
for interest. In ruling out fraud and bad faith, the CA correspondingly ordered the fulfillment of the obligation and
deleted the RTCs order of forfeiture of the downpayment along with payment of exemplary damages, attorneys fees
and costs of suit. But RVMs contention disregards the common finding by the lower courts of a perfected contract of
sale. As previously adverted to, RVM breached this contract of sale by refusing to pay the balance of the purchase
price despite the transfer to respondents names of the title to the property. The 2-year period RVM relies on had long
passed and expired, yet, it still failed to pay. It did not even attempt to pay respondents the balance of the purchase
price after the case was filed, to amicably end this litigation. In fine, despite a clear cut equitable decision by the CA,
RVM refused to lay the matter to rest by complying with its obligation and paying the balance of the agreed price for
the property.
Lastly, to obviate confusion, the clear language of Article 1191 mandates that damages shall be awarded in either
case of fulfillment or rescission of the obligation.17 In this regard, Article 2210 of the Civil Code is explicit that "interest
may, in the discretion of the court, be allowed upon damages awarded for breach of contract." The ineluctable
conclusion is that the CA correctly imposed interest on the remaining balance of the purchase price to cover the
damages caused the respondents by RVMs breach.
WHEREFORE, premises considered, the petition is DENIED. The order granting specific performance and payment
of the balance of the purchase price plus six percent (6%) interest per annum from June 7, 2000 until complete
satisfaction is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 149338
July 28, 2008
UNLAD RESOURCES DEVELOPMENT CORPORATION, UNLAD RURAL BANK OF NOVELETA, INC., UNLAD
COMMODITIES, INC., HELENA Z. BENITEZ, and CONRADO L. BENITEZ II, Petitioners,
vs.
RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ, VICENTE D. CASAS, ROMULO M. VIRATA, FLAVIANO
PERDITO, TEOTIMO BENITEZ, ELENA BENITEZ, and ROLANDO SUAREZ, Respondents.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure seeking the
reversal of the November 29, 2000 Decision1 and August 2, 2001 Resolution2 of the Court of Appeals (CA) in CAG.R. CV No. 54226.
The facts, as found by the CA, are as follows:
On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein petitioner) Unlad Resources,
through its Chairman[,] Helena Z. Benitez[,] entered into a Memorandum of Agreement wherein it is provided that
[respondents], as controlling stockholders of the Rural Bank [of Noveleta] shall allow Unlad Resources to invest four
million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional equity. On the other
hand, [petitioner] Unlad Resources bound itself to invest the said amount of 4.8 million pesos in the Rural Bank; upon

signing, it was, likewise, agreed that [petitioner] Unlad Resources shall subscribe to a minimum of four hundred
eighty thousand pesos (P480,000.00) (sic) common or preferred non-voting shares of stock with a total par value of
four million eight hundred thousand pesos (P4,800,000.00) and pay up immediately one million two hundred
thousand pesos (P1,200,000.00) for said subscription; that the [respondents], upon the signing of the said agreement
shall transfer control and management over the Rural Bank to Unlad Resources. According to the [respondents],
immediately after the signing of the agreement, they complied with their obligation and transferred control of the Rural
Bank to Unlad Resources and its nominees and the Bank was renamed the Unlad Rural Bank of Noveleta, Inc.
However, [respondents] claim that despite repeated demands, Unlad Resources has failed and refused to comply
with their obligation under the said Memorandum of Agreement when it did not invest four million eight hundred
thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional equity and, likewise, it failed to
immediately infuse one million two hundred thousand pesos (P1,200,000.00) as paid in capital upon signing of the
Memorandum of Agreement.
On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources passed Resolution No. 84-041
authorizing the President and the General Manager to lease a mango plantation situated in Naic, Cavite. Pursuant to
this Resolution, the Bank as [lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as
[lessor]. The management of the mango plantation was undertaken by Unlad Commodities, Inc., a subsidiary of
Unlad Resources[,] under a Management Contract Agreement. The Management Contract provides that Unlad
Commodities, Inc. would receive eighty percent (80%) of the net profits generated by the operation of the mango
plantation while the Banks share is twenty percent (20%). It was further agreed that at the end of the lease period,
the Rural Bank shall turn over to the lessor all permanent improvements introduced by it on the plantation.
xxxx
On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central Banks approval to retire
its [Development Bank of the Philippines] preferred shares in the amount of P219,000.00 and giving notice for
subscription to proportionate shares. The [respondents] objected on the grounds that there is already a sinking fund
for the retirement of the said DBP-held preferred shares provided for annually and that it could deprive the Rural
Bank of a cheap source of fund. (sic)
[Respondents] alleged compliance with all of their obligations under the Memorandum of Agreement in that they have
transferred control and management over the Rural bank to the [petitioners] and are ready, willing and able to allow
[petitioners] to subscribe to a minimum of four hundred eighty thousand (P480,000.00) (sic) common or preferred
non-voting shares of stocks with a total par value of four million eight hundred thousand pesos (P4,800,000.00) in the
Rural Bank. However, [petitioners] have failed and refused to subscribe to the said shares of stock and to pay the
initial amount of one million two hundred thousand pesos (P1,200,000.00) for said subscription.3
On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of Makati City, Branch 61 a
Complaint4 for rescission of the agreement and the return of control and management of the Rural Bank from
petitioners to respondents, plus damages. After trial, the RTC rendered a Decision,5 the dispositive portion of which
provides:
WHEREFORE, Premises Considered, judgment is hereby rendered, as follows:
1. The Memorandum of Agreement dated 29 December 1991 (sic) is hereby declared rescinded and:
(a) Defendant Unlad Resources Development Corporation is hereby ordered to immediately return
control and management over the Rural Bank of Noveleta, Inc. to Plaintiffs; and
(b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to Defendants the sum of One
Million Three Thousand Seventy Pesos (P1,003,070.00)
2. The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby appointed as Receiver of the
Rural Bank;

3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired DBP-held preferred shares
available for subscription and the same is hereby ordered to be placed under a sinking fund;
4. Defendant Unlad Resources Development Corporation is hereby ordered to pay plaintiffs the following:
(a) actual compensatory damages amounting to Four Million Six Hundred One Thousand Seven
Hundred Sixty- Five and 38/100 Pesos (P4,601,765.38);
(b) moral damages in the amount of Five Hundred Thousand Pesos (P500,000.00);
(c) exemplary and corrective damages in the amount of One Hundred Thousand Pesos
(P100,000.00); and
(d) attorneys fees in the sum of (P100,000.00), plus cost of suit.
SO ORDERED.6
Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to Dismiss and, subsequently, a
Supplemental Motion to Dismiss, which were both denied. Later, however, the CA, in a Decision dated November 29,
2000, dismissed the appeal for lack of merit and affirmed the RTC Decision in all respects. Petitioners motion for
reconsideration was denied in CA Resolution dated August 2, 2001.
Petitioners are now before this Court alleging that the CA committed a grave and serious reversible error in issuing
the assailed Decision. Petitioners question the jurisdiction of the trial court, something they have done from the
beginning of the controversy, contending that the issues that respondents raised before the trial court are intracorporate in nature and are, therefore, beyond the jurisdiction of the trial court. They point out that respondents
complaint charged them with mismanagement and alleged dissipation of the assets of the Rural Bank. Since the
complaint challenges corporate actions and decisions of the Board of Directors and prays for the recovery of the
control and management of the Rural Bank, these matters fall outside the jurisdiction of the trial court. Thus, they
posit that the judgment of the trial court, as affirmed by the CA, is null and void and may be impugned at any time.
Petitioners further argue that the action instituted by respondents had already prescribed, because Article 1389 of the
Civil Code provides that an action for rescission must be commenced within four years. They claim that the trial court
and the CA mistakenly applied Article 1144 of the Civil Code which treats of prescription of actions in general. They
submit that Article 1389, which deals specifically with actions for rescission, is the applicable law.
Moreover, petitioners assert that they have fully complied with their undertaking under the subject Memorandum of
Agreement, but that the undertaking has become a "legal and factual impossibility" because the authorized capital
stock of the Rural Bank was increased from P1.7 million to only P5 million, and could not accommodate the
subscription by petitioners of P4.8 million worth of shares. Such deficiency, petitioners contend, is with the knowledge
and approval of respondent Renato P. Dragon and his nominees to the Board of Directors.
Petitioners, without conceding the propriety of the judgment of rescission, also argue that the subject Memorandum of
Agreement could not just be ordered rescinded without the corresponding order for the restitution of the parties total
contributions and/or investments in the Rural Bank. Finally, they assail the award for moral and exemplary damages,
as well as the award for attorneys fees, as bereft of factual and legal bases given that, in the body of the Decision, it
was merely stated that respondents suffered moral damages without any discussion or explanation of, nor any
justification for such award. Likewise, the matter of attorneys fees was not at all discussed in the body of the
Decision. Petitioners claim that pursuant to the prevailing rule, attorneys fees cannot be recovered in the absence of
stipulation.
On the other hand, respondents declare that immediately after the signing of the Memorandum of Agreement, they
complied with their obligation and transferred control of the Rural Bank to petitioner Unlad Resources and its
nominees, but that, despite repeated demands, petitioners have failed and refused to comply with their concomitant
obligations under the Agreement.

Respondents narrate that shortly after taking over the Rural Bank, petitioners Conrado L. Benitez II and Jorge C.
Cerbo, as President and General Manager, respectively, entered into a Contract of Lease over the Naic, Cavite
mango plantation, and that, as a consequence of this venture, the bank incurred expenses amounting toP475,371.57,
equivalent to 25.76% of its capital and surplus. The respondents further assert that the Central Bank found this
undertaking not inherently connected with bona fide rural banking operations, nor does it fall within the allied
undertakings permitted under Section 26 of Central Bank Circular No. 741 and Section 3379 of the Manual of
Regulations of the Central Bank. Thus, respondents contend that this circumstance, coupled with the fact that
petitioners Helena Z. Benitez and Conrado L. Benitez II were also stockholders and members of the Board of
Directors of Unlad Resources, Unlad Rural Bank, and Unlad Commodities at that time, is adequate proof that the
Rural Banks management had every intention of diverting, dissipating, and/or wasting the banks assets for
petitioners own gain.
They likewise allege that because of the failure of petitioners to comply with their obligations under the Memorandum
of Agreement, respondents, with the exception of Tarcisius Rodriguez, lodged a complaint with the Securities and
Exchange Commission (SEC), seeking rescission of the Agreement, damages, and the appointment of a
management committee, but the SEC dismissed the complaint for lack of jurisdiction.
Furthermore, when the Rural Bank informed respondents of the Central Banks approval of its plan to retire its DBPheld preferred shares, giving notices for subscription to proportionate shares, respondents objected on the ground
that there was already a sinking fund for the retirement of said shares provided for annually, and that the retirement
would deprive the petitioner Rural Bank of a cheap source of fund. It was at that point, respondents claim, that they
instituted the aforementioned Complaint against petitioners before the RTC of Makati.
The respondents also seek the outright dismissal of this Petition for lack of verification as to petitioners Helena Z.
Benitez and Conrado L. Benitez II; lack of proper verification as to petitioners Unlad Resources Development
Corporation, Unlad Rural Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper verified statement of
material dates; and lack of proper sworn certification of non-forum shopping.
They support the proposition that Tijam v. Sibonghanoy7 applies, and that petitioners are indeed estopped from
questioning the jurisdiction of the trial court. They also share the lower courts view that it is Article 1144 of the Civil
Code, and not Article 1389, that is applicable to this case. Finally, respondents allege that the failure of petitioner
Unlad Resources to comply with its undertaking under the Agreement, as uniformly found by the trial court and the
CA, may no longer be assailed in the instant Petition, and that the award of moral and exemplary damages and
attorneys fees is justified.
The Petition is bereft of merit. We uphold the Decision of the CA affirming that of the RTC.
First, the subject of jurisdiction. The main issue in this case is the rescission of the Memorandum of Agreement. This
is to be distinguished from respondents allegation of the alleged mismanagement and dissipation of corporate assets
by the petitioners which is based on the prayer for receivership over the bank. The two issues, albeit related, are
obviously separate, as they pertain to different acts of the parties involved. The issue of receivership does not arise
from the parties obligations under the Memorandum of Agreement, but rather from specific acts attributed to
petitioners as members of the Board of Directors of the Bank. Clearly, the rescission of the Memorandum of
Agreement is a cause of action within the jurisdiction of the trial courts, notwithstanding the fact that the parties
involved are all directors of the same corporation.
Still, the petitioners insist that the trial court had no jurisdiction over the complaint because the issues involved are
intra-corporate in nature.
This argument miserably fails to persuade. The law in force at the time of the filing of the case was Presidential
Decree (P.D.) 902-A, Section 5(b) of which vested the Securities and Exchange Commission with original and
exclusive jurisdiction to hear and decide cases involving controversies arising out of intra-corporate
relations.8Interpreting this statutorily conferred jurisdiction on the SEC, this Court had occasion to state:
Nowhere in said decree do we find even so much as an [intimation] that absolute jurisdiction and control is vested in
the Securities and Exchange Commission in all matters affecting corporations. To uphold the respondents arguments
would remove without legal imprimatur from the regular courts all conflicts over matters involving or affecting

corporations, regardless of the nature of the transactions which give rise to such disputes. The courts would then be
divested of jurisdiction not by reason of the nature of the dispute submitted to them for adjudication, but solely for the
reason that the dispute involves a corporation. This cannot be done. 9
It is well to remember that the respondents had actually filed with the SEC a case against the petitioners which,
however, was dismissed for lack of jurisdiction due to the pendency of the case before the RTC. 10 The SECs Order
dismissing the respondents complaint is instructive:
From the foregoing allegations, it is apparent that the present action involves two separate causes of action which are
interrelated, and the resolution of which hinges on the very document sought to be rescinded. The assertion that the
defendants failed to comply with their contractual undertaking and the claim for rescission of the contract by the
plaintiffs has, in effect, put in issue the very status of the herein defendants as stockholders of the Rural Bank. The
issue as to whether or not the defendants are stockholders of the Rural Bank is a pivotal issue to be determined on
the basis of the Memorandum of Agreement. It is a prejudicial question and a logical antecedent to confer jurisdiction
to this Commission.
It is to be noted, however, that determination of the contractual undertaking of the parties under a contract lies with
the Regional Trial Courts and not with this Commission. x x x11
Be that as it may, this point has been rendered moot by Republic Act (R.A.) No. 8799, also known as the Securities
Regulation Code. This law, which took effect in 2000, has transferred jurisdiction over such disputes to the RTC.
Specifically, R.A. 8799 provides:
Sec. 5. Powers and Functions of the Commission
xxxx
5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is
hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code.
The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.
Section 5 of P.D. No. 902-A reads, thus:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
a) Devices and schemes employed by or any acts of the board of directors, business associates, its officers
or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the
public and/or of the stockholder, partners, members of associations or organizations registered with the
Commission;
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members, or associates; between any or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; and between such corporation, partnership or
association and the state insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers or managers of such
corporations, partnerships or associations.

Consequently, whether the cause of action stems from a contractual dispute or one that involves intra-corporate
matters, the RTC already has jurisdiction over this case. In this light, the question of whether the doctrine of estoppel
by laches applies, as enunciated by this Court in Tijam v. Sibonghanoy, no longer finds relevance.
Second, the issue of prescription. Petitioners further contend that the action for rescission has prescribed under
Article 1398 of the Civil Code, which provides:
Article 1389. The action to claim rescission must be commenced within four years x x x.
This is an erroneous proposition. Article 1389 specifically refers to rescissible contracts as, clearly, this provision is
under the chapter entitled "Rescissible Contracts."
In a previous case,12 this Court has held that Article 1389:
applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We must stress however, that
the "rescission" in Article 1381 is not akin to the term "rescission" in Article 1191 and Article 1592. In Articles 1191
and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Article
1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article.
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144, which provides
that the action upon a written contract should be brought within ten years from the time the right of action accrues.
Article 1381 sets out what are rescissible contracts, to wit:
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due
them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
The Memorandum of Agreement subject of this controversy does not fall under the above enumeration. Accordingly,
the prescriptive period that should apply to this case is that provided for in Article 1144, to wit:
Article 1144. The following actions must be brought within ten years from the time the right of action accrues:
(1) Upon a written contract;
xxxx
Based on the records of this case, the action was commenced on July 3, 1987, while the Memorandum of Agreement
was entered into on December 29, 1981. Article 1144 specifically provides that the 10-year period is counted from
"the time the right of action accrues." The right of action accrues from the moment the breach of right or duty
occurs.13 Thus, the original Complaint was filed well within the prescriptive period.

We now proceed to determine if the trial court, as affirmed by the CA, correctly ruled for the rescission of the subject
Agreement.
Petitioners contend that they have fully complied with their obligation under the Memorandum of Agreement. They
allege that due to respondents failure to increase the capital stock of the corporation to an amount that will
accommodate their undertaking, it had become impossible for them to perform their end of the Agreement.
Again, petitioners contention is untenable. There is no question that petitioners herein failed to fulfill their obligation
under the Memorandum of Agreement. Even they admit the same, albeit laying the blame on respondents.
It is true that respondents increased the Rural Banks authorized capital stock to only P5 million, which was not
enough to accommodate the P4.8 million worth of stocks that petitioners were to subscribe to and pay for. However,
respondents failure to fulfill their undertaking in the agreement would have given rise to the scenario contemplated by
Article 1191 of the Civil Code, which reads:
Article 1191. The power to rescind reciprocal obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law.
Thus, petitioners should have exacted fulfillment from the respondents or asked for the rescission of the contract
instead of simply not performing their part of the Agreement. But in the course of things, it was the respondents who
availed of the remedy under Article 1191, opting for the rescission of the Agreement in order to regain control of the
Rural Bank.
Having determined that the rescission of the subject Memorandum of Agreement was in order, the trial court ordered
petitioner Unlad Resources to return to respondents the management and control of the Rural Bank and for the latter
to return the sum of P1,003,070.00 to petitioners.
Mutual restitution is required in cases involving rescission under Article 1191. This means bringing the parties back to
their original status prior to the inception of the contract. 14 Article 1385 of the Civil Code provides, thus:
ART. 1385. 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; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in the possession
of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191:
[S]ince Article 1385 of the Civil Code expressly and clearly states 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," the Court finds
no justification to sustain petitioners position that said Article 1385 does not apply to rescission under Article 1191. 15

Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not merely its
termination."16 Hence, rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release
the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their
relative positions as if no contract has been made.17
Accordingly, when a decree for rescission is handed down, it is the duty of the court to require both parties to
surrender that which they have respectively received and to place each other as far as practicable in his original
situation. The rescission has the effect of abrogating the contract in all parts. 18
Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was just cause for rescission. With
the contract thus rescinded, the parties must be restored to the status quo ante, that is, before they entered into the
Memorandum of Agreement.
Finally, we must resolve the question of the propriety of the award for damages and attorneys fees.
The trial courts Decision mentioned that the "evidence is clear and convincing that Plaintiffs (herein respondents)
suffered actual compensatory damages amounting to Four Million Six Hundred One Thousand Seven Hundred SixtyFive and 38/100 Pesos (P4,601,765.38) moral damages and attorneys fees."
Though not discussed in the body of the Decision, the records show that the amount of P4,601,765.38 pertains to
actual losses incurred by respondents as a result of petitioners non-compliance with their undertaking under the
Memorandum of Agreement. On this point, respondent Dragon presented testimonial and documentary evidence to
prove the actual amount of damages, thus:
Atty. Cruz
Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement marked as Exhibit A?
A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had by this time amounting to
several millions pesos (sic). They have only put in the whole amount that we have agreed upon (sic).
Q: In this connection did you cause computation of these losses that you incured (sic)?
A: Yes sir.
xxxx
Q: Will you please kindly go through this computation and explain the same to the Honorable Court?
A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three Hundred Ninety Nine Thousand Two
hundred for Nineteen Thousand Nine Hundred Sixty shares which should have been sold if it were sold to others
for P50.00 each for a total of Nine Hundred Ninety Eight Thousand but sold to them for Three Hundred Ninety nine
(sic) Thousand two (sic) Hundred only and of which only Three Hundred Twenty Four Thousand Six Hundred was
paid to me. Therefore, there was a difference of Six Hundred Seven Three (sic) Thousand Four Hundred
(P673,400.00). On the basis of the commulative (sic) lost income every year from March 1982 from the amount of
Seven Six Hundred (sic) Seventy Three Thousand four (sic) Hundred (P673,400.) (sic) there would be a
discommulative (sic) lost (sic) of One Million Ninety Three Thousand Nine Hundred Fifty Two Pesos and forty two
(sic) centavos (P1,093,952.42). Please note that the interest imputed is only at 12% per annum but it should had (sic)
been much higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40% per annum from the so called (sic)
Jobo Bills and yet we only computed the imputed income or lost income at 12% per annum and then there is a 40%
participation on the unrealized earnings due to their failure to put in an stabilized (sic) earnings. You will note that if
they put in 4.8 million Pesos and it would be earning money, 40% of that will go to us because 40% of the bank would
be ours and 60% would be there (sic). But because they did put in the 4.8 million our 40% did not earn up to that

extent and computed again on the basis of 12% the amount (sic) on the commulative (sic) basis up to September
1990 is 2 million three hundred fifty two thousand sixty five pesos and four centavos (sic). (P2,352,065.04). You will
note again that the average return of investment of any Cavite based (sic) Rural Bank has been no less than 20% or
about 30% per annum. And we computed only the earnings at 12%.
xxxx
There were loans granted fraudulently to members of the board and some borrowers which were not all charged
interest for several years and on this basis we computed a 40% shares (sic) on the foregone income interest income
(sic) on all these fraudulently granted loans, without interest being collected and none a project (sic) among a
plantation project (sic), which was funded by the bank but nothing was given back to the bank for several hundred
thousand of pesos (sic). And we arrived an (sic) estimate of the foregone interest income a total of One Million Two
Hundred Five Thousand Eight Hundred Sixty None Pesos and eighty one (sic) centavos and 40 percent share of this
(sic) would be Four Hundred Eighty Two Thousand Three Hundred Forty Seven Pesos and Ninety Two Centavos. All
in all our estimate of the damages we have suffered is Four Million Six Hundred one (sic) Thousand Seven Hundred
Sixty Five Pesos and thirty eight (sic) centavos (P4,601,765.38).19
More importantly, petitioners never raised in issue before the CA this award of actual compensatory damages. They
did not raise the matter of damages in their Appellants Brief, while in their Motion for Reconsideration, they
questioned only the award of moral and exemplary damages, not the award of actual damages. Even in the present
Petition for Review, what petitioners raised was the propriety of the award of moral and exemplary damages and
attorneys fees.
On the grant of moral and exemplary damages and attorneys fees, we note that the trial courts Decision did not
discuss the basis for the award. No mention of these damages awarded or their factual basis is made in the body
of the Decision, only in the dispositive portion. Be that as it may, we have examined the records of the case and
found that the award must be sustained.
It should be remembered that there are two separate causes of action in this case: one for rescission of the
Memorandum of Agreement and the other for receivership based on alleged mismanagement of the company by the
plaintiffs. While the award of actual compensatory damages was based on the breach of duty under the
Memorandum of Agreement, the award of moral damages appears to be based on petitioners mismanagement of
the company when they became members of the Board of Directors of the Rural Bank.
Thus, the trial court said:
Under the Rural Banks management, a systematic diversion of the banks assets was conceived whereby: (a) The
Rural Banks funds would be funneled in the development and improvements of the Benitez Mango Plantation in the
guise of an investment in said plantation; (b) Of the net profits earned from the plantations operations, the Rural
Banks share therein, although it shoulders all of the financial risks, would be a measly twenty percent (20%) thereof
while UCI, without investing a single centavo, would earn eighty percent (80%) of the said profits. Thus, the bulk of
the profits of the mango plantation was also sought to be diverted to an entity wherein Helena Z. Benitez and
Conrado L. Benitez II are not only principal stockholders but also the Chairman of the Board of Directors and
President, respectively. Moreover, Defendant Helena Z. Benitez would be entitled to receive, under the lease
contract, rentals in the total amount of Three Hundred Thousand Pesos (P300,000.00) or ten percent (10%) of gross
profits, whichever is higher. (c) Finally, at the end of the lease period, the Rural Bank was obliged to turn over to the
lessor (Helena Z. Benitez) all permanent improvements introduced by it on the plantation at no cost to Ms. Benitez.
Further, in its report dated March 13, 1985, the [Central Bank] after conducting its general examination upon the
Rural Bank ordered the latter to "explain satisfactorily why the bank engage (sic) in an undertaking not inherently
connected with [bona fide] rural banking operations nor within the allowed allied undertakings," contrary to the
provisions of Section 3379 of the CB Manual of Regulations and Section 26 of CB Circular No. 741, otherwise known
as the "Circular on Rural Banks[.]"
The aforestated CB report states that "total exposure to this project now amounts to P475,371.57 or 25.76% of its
capital and surplus[.]" Notwithstanding a finding by the CB of the undertakings illegality, the defendants nevertheless
persisted in pursuing the Mango Plantation Project and never acceded to the call of [the] CB for it to desist from

further implementing the said project. It was only after another letter from the CB was received when defendant finally
shelved the mango plantation project.
The result of the aforestated report, as well as the actuations of the Defendants in not yielding to the order of the CB,
adequately establishes not only a violation of CB Rules (specifically Section 26, Circular 741 and Section 3379 of the
CB Manual of Regulations, but also, that it has caused undue damage both to the Rural bank as well as its
stockholders.
The initial CB report should have sufficiently apprised Defendants of the illegality of the undertaking. Defendants,
therefore have the duty to terminate the Mango Plantation Project. They, however, [chose] to continue it, apparently
to further their [own] interest in the scheme for their own personal benefit and gain, an act which is clearly contrary to
the fiduciary nature of their relationship with the corporation in which they are officers. Such persistence proves
evident bad faith, or a breach of a known duty through some motive or ill-will, which resulted in the further dissipation
and wastage of the Rural Banks assets, unjustly depriving Plaintiffs of their fair share in the assets of the bank.
All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that these contracts were but part of a
device employed by Defendants to siphon [off] the Rural bank for their personal gain. 20
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury. Though incapable of precise pecuniary computation,
moral damages may be recovered if they are the proximate result of the defendants wrongful act or
omission.21 Article 2220 of the Civil Code further provides that moral damages may be recovered in case of a breach
of contract where the defendant acted in bad faith.22
To award moral damages, a court must be satisfied with proof of the following requisites: (1) an injury whether
physical, mental, or psychological clearly sustained by the claimant; (2) a culpable act or omission factually
established; (3) a wrongful act or omission of the defendant as the proximate cause of the injury sustained by the
claimant; and (4) the award of damages predicated on any of the cases stated in Article 2219.23
1av vphi1
Accordingly, based upon the findings of the trial court, it is clear that respondents are entitled to moral damages. The
acts attributed to the petitioners as directors of the Rural Bank manifestly prejudiced the respondents causing
detriment to their standing as directors and stockholders of the Rural Bank.
Exemplary damages cannot be recovered as a matter of right.24 While these need not be proved, respondents must
show that they are entitled to moral, temperate or compensatory damages before the court may consider the question
of awarding exemplary damages.25 We find that respondents are indeed entitled to moral damages; thus, the award
for exemplary damages is in order.
Anent the award for attorneys fees, Article 2208 of the Civil Code states:
In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot be
recovered, except:
(1) When exemplary damages are awarded.
Hence, the award of exemplary damages is in itself sufficient justification for the award of attorneys fees. 26
WHEREFORE, the foregoing premises considered, the petition is hereby DENIED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 54226 are AFFIRMED.
SO ORDERED.
SUPREME COURT
Manila

EN BANC
G.R. No. L-28602 September 29, 1970

UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON
CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V.
Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
REYES, J.B.L., J.:

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to
be annulled in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or UP)
against the above-named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or ALUMCO).
The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber concession (or
Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14
January 1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from
exercising logging rights or conducting logging operations on the concession; and the third order, dated 12 December
1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three (3)
questioned orders was issued by this Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an
institution of higher learning, to be operated and developed for the purpose of raising additional income for its
support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was
granted exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible for
a further period of five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant, in
consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as
of 8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite repeated demands, it had
failed to pay; that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO
executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December
1964, which was approved by the president of UP, and which stipulated the following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to
liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance
outstanding after the said payments have been applied shall be paid by the DEBTOR in full no later
than June 30, 1965;
xxx xxx xxx

5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this
document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and
the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the
necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Fifty
Thousand Pesos (P50,000.00) by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December
1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously
acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as
rescinded and of no further legal effect the logging agreement that they had entered in 1960; and on 7 September
1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First
Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and alleging
the facts hereinbefore specified, together with other allegations; it prayed for and obtained an order, dated 30
September 1965, for preliminary attachment and preliminary injunction restraining ALUMCO from continuing its
logging operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire
take over the logging operation, by advertising an invitation to bid; that bidding was conducted, and the concession
was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction
but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding; on
27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, respondent judge
issued the first of the questioned orders, enjoining UP from awarding logging rights over the concession to any other
party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company,
Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967,
declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to
refrain from exercising logging rights or conducting logging operations in the concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608
and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing allegations in the petition. In its
answer, respondent corrected itself by stating that the period of the logging agreement is five (5) years - not seven (7)
years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however,
its defenses in the court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not
turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to
pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments"
because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc.,
under its contract "to buy and sell" with said firm, and which contract was referred and annexed to the
"Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the logging contract,
without a court order, was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the
logs previously cut during the management of Cesar Guy be first sold; that respondent was permitted to cut logs in
the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15 July 1965; that it had made
several offers to petitioner for respondent to resume logging operations but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may
disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the lower

court, in issuing the injunction order of 25 February 1966, apparently sustained it (although the order expresses no
specific findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of
its terms that U.P. could disregard ALUMCO's rights under the contract and treat the agreement as breached and of
no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner
of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider,
the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such
special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental
Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from entering into agreement that violation of
the terms of the contract would cause cancellation thereof, even without court intervention. In other
words, it is not always necessary for the injured party to resort to court for rescission of the
contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to the other and is always provisional, being ever
subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly,
without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding
court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law
definitely does not require that the contracting party who believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages
(Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring
that judicial action is necessary for the resolution of a reciprocal obligation, 1 since in every case where the
extrajudicial resolution is contested only the final award of the court of competent jurisdiction can
conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial
invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may
render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed.
Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred
from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the
defaulter the initiative of instituting suit, instead of the rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme
Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own
Civil; Code is practically a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic
contracts may be made extrajudicially unless successfully impugned in court.
El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para
el caso de que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun
jurisprudencia de este Tribunal, surge immediatamente despuesque la otra parte incumplio su

deber, sin necesidad de una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain,
of 10 April 1929; 106 Jur. Civ. 897).
Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad"
atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do opcion
entre exigir el cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en la via
judicial, ya fuera de ella, por declaracion del acreedor, a reserva, claro es, que si la declaracion de
resolucion hecha por una de las partes se impugna por la otra, queda aquella sometida el examen
y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha la resolucion o por el
contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes
de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de voluntad de la otra
hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada,
cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese
acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un
hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el art. 1.124, interpretado por la
jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre otras, inspiradas por el
principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non est servanda. (Ss. de 4
Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).
In the light of the foregoing principles, and considering that the complaint of petitioner University made out aprima
facie case of breach of contract and defaults in payment by respondent ALUMCO, to the extent that the court below
issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied its motions to lift
the injunction; that it is not denied that the respondent company had profited from its operations previous to the
agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses
offered in the second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten
condition of the logs in private respondent's pond, which said respondent was in a better position to know when it
executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-payment; and
considering that whatever prejudice may be suffered by respondent ALUMCO is susceptibility of compensation in
damages, it becomes plain that the acts of the court a quo in enjoining petitioner's measures to protect its interest
without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the
injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate.
Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to the Court of
Appeals, and the case is pending therein, this Court abstains from making any pronouncement thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February 1966,
granting the Associated Lumber Company's petition for injunction, is hereby set aside. Let the records be remanded
for further proceedings conformably to this opinion.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 157480
May 6, 2005
PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioners,

vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:

In legal contemplation, the termination of a contract is not equivalent to its rescission. When an agreement is
terminated, it is deemed valid at inception. Prior to termination, the contract binds the parties, who are thus obliged to
observe its provisions. However, when it is rescinded, it is deemed inexistent, and the parties are returned to
their status quo ante. Hence, there is mutual restitution of benefits received. The consequences of termination may
be anticipated and provided for by the contract. As long as the terms of the contract are not contrary to law, morals,
good customs, public order or public policy, they shall be respected by courts. The judiciary is not authorized to make
or modify contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however, are
empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties agreed upon by
the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 22, 2002 Decision 2 of the
Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003 Resolution3 denying petitioners Motion for
Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil Case No. 9368266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering [Respondent] Philippine
Amusement and Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the total amount
ofP687,289.50 as actual damages representing the accrued rentals for the quarter September to November
1993 with interest and penalty at the rate of two percent (2%) per month from date of filing of the complaint
until the amount shall have been fully paid, and the sum of P50,000.00 as attorneys fees; (2) In Civil Case
No. 93-68337, the appealed decision is REVERSED and SET ASIDE and a new judgment is rendered
ordering [Petitioner] Pryce Properties Corporation to reimburse [Respondent] Philippine Amusement and
Gaming Corporation the amount of P687,289.50 representing the advanced rental deposits, which amount
may be compensated by [Petitioner] Pryce Properties Corporation with its award in Civil Case No. 93-68266
in the equal amount of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC for brevity)
made representations with the Philippine Amusement and Gaming Corporation (PAGCOR) on the possibility
of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of negotiations followed.
PAGCOR representatives went to Cagayan de Oro City to determine the pulse of the people whether the
presence of a casino would be welcomed by the residents. Some local government officials showed keen
interest in the casino operation and expressed the view that possible problems were surmountable. Their
negotiations culminated with PPCs counter-letter proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom of the Hotel
for a period of three (3) years starting December 1, 1992 and until November 30, 1995. On November 13,
1992, they executed an addendum to the contract x x x which included a lease of an additional 1000 square
meters of the hotel grounds as living quarters and playground of the casino personnel. PAGCOR advertised
the start of their casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No. 2295 x x x
dated November 19, 1990 declaring as a matter of policy to prohibit and/or not to allow the establishment of
a gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated October 19, 1992 (or a month
before the contract of lease was executed) was subsequently passed reiterating with vigor and vehemence
the policy of the City under Resolution No. 2295, series of 1990, banning casinos in Cagayan de Oro City.
On December 7, 1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted Ordinance No. 3353
x x x prohibiting the issuance of business permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or any portion thereof for the operation of a
casino.

"In the afternoon of December 18, 1992 and just hours before the actual formal opening of casino
operations, a public rally in front of the hotel was staged by some local officials, residents and religious
leaders. Barricades were placed [which] prevented some casino personnel and hotel guests from entering
and exiting from the Hotel. PAGCOR was constrained to suspend casino operations because of the rally. An
agreement between PPC and PAGCOR, on one hand, and representatives of the rallyists, on the other,
eventually ended the rally on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod of
Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty for violation thereof. On
January 7, 1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x against then public
respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before the Court of Appeals,
docketed as CA G.R. SP No. 29851 praying inter alia, for the declaration of unconstitutionality of Ordinance
No. 3353. PAGCOR intervened in said petition and further assailed Ordinance No. 4475-93 as being
violative of the non-impairment of contracts and equal protection clauses. On March 31, 1993, the Court of
Appeals promulgated its decision x x x, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are hereby
DECLARED UNCONSTITUTIONAL and VOID and the respondents and all other persons acting
under their authority and in their behalf are PERMANENTLY ENJOINED from enforcing those
ordinances.
SO ORDERED.
"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the case to the
Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20, 1994 x x x, the Supreme
Court denied the petition and affirmed the decision of the Court of Appeals.
"In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which, however, another
public rally was held. Casino operations continued for some time, but were later on indefinitely suspended
due to the incessant demonstrations. Per verbal advice x x x from the Office of the President of the
Philippines, PAGCOR decided to stop its casino operations in Cagayan de Oro City. PAGCOR stopped its
casino operations in the hotel prior to September, 1993. In two Statements of Account dated September 1,
1993 x x x, PPC apprised PAGCOR of its outstanding account for the quarter September 1 to November 30,
1993. PPC sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up to the parties earlier
conference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x stating its Board of
Directors decision to collect the full rentals in case of pre-termination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable to the
payment of the full rentals citing as reasons unforeseen legal and other circumstances which prevented it
from complying with its obligations. PAGCOR further stated that it had no other alternative but to preterminate the lease agreement due to the relentless and vehement opposition to their casino operations. In a
letter dated October 12, 1993 x x x, PAGCOR asked PPC to refund the total of P1,437,582.25 representing
the reimbursable rental deposits and expenses for the permanent improvement of the Hotels parking lot. In
a letter dated November 5, 1993 x x x, PAGCOR formally demanded from PPC the payment of its claim for
reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of Manila
docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case for sum of money
in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the contract of lease
due to PAGCORs continuing breach of the contract and further stated that it was exercising its rights under
the contract of lease pursuant to Article 20 (a) and (c) thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266, which the trial
court admitted in an Order dated February 11, 1994. In an Order dated April 27, 1994, Civil Case No. 93-

68377 was ordered consolidated with Civil Case No. 93-68266. These cases were jointly tried by the court a
quo. On August 17, 1995, the court a quo promulgated its decision. Both parties appealed." 5
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award actual and moral
damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the courts ruling that the 2 percent
penalty was to be imposed from the date of the promulgation of the Decision, not from the date stipulated in the
Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the Contract of Lease had
already been terminated as early as September 21, 1993, or at the latest, on October 14, 1993, when PPC received
PAGCORs letter dated October 12, 1993. The gaming corporation added that the trial court erred in 1) failing to
consider that PPC was entitled to avail itself of the provisions of Article XX only when PPC was the party terminating
the Contract; 2) not finding that there were valid, justifiable and good reasons for terminating the Contract; and 3)
dismissing the Complaint of PAGCOR in Civil Case No. 93-68337 for lack of merit, and not finding PPC liable for the
reimbursement of PAGCORS cash deposits and of the value of improvements.
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract of Lease was
unjustified. The appellate court explained that public demonstrations and rallies could not be considered as fortuitous
events that would exempt the gaming corporation from complying with the latters contractual obligations. Therefore,
the Contract continued to be effective until PPC elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had the right to ask for
(1) rescission of the Contract and indemnification for damages; or (2) only indemnification plus the continuation of the
Contract. These two remedies were alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC correctly exercised
the option to terminate the lease agreement. Previously, the Contract remained effective, and PPC could collect the
accrued rentals. However, from the time it terminated the Contract on November 25, 1993, PPC could no longer
demand payment of the remaining rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR had acted in
gross or evident bad faith in failing to pay the rentals from September to November 1993. Such failure was shown
especially by the fact that PPC still had in hand three (3) months advance rental deposits of PAGCOR. The former
could have simply applied this deposit to the unpaid rentals, as provided in the Contract. Neither did PPC adequately
show that its reputation had been besmirched or the hotels goodwill eroded by the establishment of the casino and
the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR had not presented
official receipts to prove the latters alleged expenses. The appellate court, however, upheld the trial courts award to
PPC of P50,000 attorneys fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that Pryce was not
entitled to future rentals or lease payments for the unexpired period of the Contract of Lease between Pryce
and PAGCOR?

"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the right of PRYCE
to terminate the Contract for cause and to moreover collect rentals from PAGCOR corresponding to the
remaining term of the lease valid and binding?
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract, PRYCE
having rescinded the Contract of Lease?
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited by PAGCOR
support its position that PRYCE was not entitled to future rentals?
"4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?
"5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the Contract of Lease?
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts, particularly in the
PRYCE-PAGCOR Contract of Lease?"7
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues thattermination,
as defined under the Contract, is different from the remedy of rescission prescribed under Article 1659 of the Civil
Code. On the other hand, PAGCOR contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence,
PPC is allegedly no longer entitled to future rentals, because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." 8 In deference to the rights of the parties, the law9allows
them to enter into stipulations, clauses, terms and conditions they may deem convenient; that is, as long as these are
not contrary to law, morals, good customs, public order or public policy. Likewise, it is settled that if the terms of the
contract clearly express the intention of the contracting parties, the literal meaning of the stipulations would be
controlling.10
In this case, Article XX of the parties Contract of Lease provides in part as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall be deemed
essential conditions of this contract, and in the event of default or breach of any of such terms, conditions
and/or covenants, or should the LESSEE become bankrupt, or insolvent, or compounds with his
creditors,the LESSOR shall have the right to terminate and cancel this contract by giving them fifteen (15
days) prior notice delivered at the leased premises or posted on the main door thereof. Upon such
termination or cancellation, the LESSOR may forthwith lock the premises and exclude the LESSEE
therefrom, forcefully or otherwise, without incurring any civil or criminal liability. During the fifteen (15) days

notice, the LESSEE may prevent the termination of lease by curing the events or causes of termination or
cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to the remaining
term of the lease as well as for any and all damages, actual or consequential resulting from such default and
termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to terminate and
cancel the Contract in the event of a default or breach by the lessee; and 2) to make PAGCOR fully liable for rentals
for the remaining term of the lease, despite the exercise of such right to terminate. Plainly, the parties have voluntarily
bound themselves to require strict compliance with the provisions of the Contract by stipulating that a default or
breach, among others, shall give the lessee the termination option, coupled with the lessors liability for rentals for the
remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order or public policy.
Neither is there anything objectionable about the inclusion in the Contract of mandatory provisions concerning the
rights and obligations of the parties.11 Being the primary law between the parties, it governs the adjudication of their
rights and obligations. A court has no alternative but to enforce the contractual stipulations in the manner they have
been agreed upon and written.12 It is well to recall that courts, be they trial or appellate, have no power to make or
modify contracts.13 Neither can they save parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for "termination plus the full payment of future rentals"
under the provisions of the Contract, rather than just rescission under Article 1659 of the Civil Code. This Court is not
unmindful of the fact that termination and rescission are terms that have been used loosely and interchangeably in
the past. But distinctions ought to be made, especially in this controversy, in which the terms mean differently and
lead to equally different consequences.
The term "rescission" is found in 1) Article 1191 14 of the Civil Code, the general provision on rescission of reciprocal
obligations; 2) Article 1659,15 which authorizes rescission as an alternative remedy, insofar as the rights and
obligations of the lessor and the lessee in contracts of lease are concerned; and 3) Article 138016 with regard to the
rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J. B. L. Reyes differentiated rescission under
Article 1191 from that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not predicated on injury to economic interests of
the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations
to the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be
held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: Non
servanti fidem, non est fides servanda. Hence, the reparation of damages for the breach is purely
secondary.
"On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure of the
right to rescind. x x x."18

Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil Code, and that
the term became the basis for rescission under Article 1191 (and, conformably, also Article 1659). 19
Now, as to the distinction between termination (or cancellation) and rescission (more properly, resolution),Huibonhoa
v. CA20 held that, where the action prayed for the payment of rental arrearages, the aggrieved party actually sought
the partial enforcement of a lease contract. Thus, the remedy was not rescission, but termination or cancellation, of
the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the contract
because they sought its partial enforcement in praying for rental arrearages. There is a distinction in law
between cancellation of a contract and its rescission. To rescind is to declare a contract void in its inception
and to put an end to it as though it never were. It is not merely to terminate it and release parties from further
obligations to each other but to abrogate it from the beginning and restore the parties to relative positions
which they would have occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily entail enforcement of its terms prior to
the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract, he
has to fulfill his obligations thereunder that had accrued prior to his ejectment. However, termination of a
contract need not undergo judicial intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the beginning, and not
merely its termination." Rescission may be effected by both parties by mutual agreement; or unilaterally by one of
them declaring a rescission of contract without the consent of the other, if a legally sufficient ground exists or if a
decree of rescission is applied for before the courts.22 On the other hand, termination refers to an "end in time or
existence; a close, cessation or conclusion." With respect to a lease or contract, it means an ending, usually before
the end of the anticipated term of such lease or contract, that may be effected by mutual agreement or by one party
exercising one of its remedies as a consequence of the default of the other. 23
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to their original
situation prior to the inception of the contract.24 Applying this principle to this case, it means that PPC would reacquire possession of the leased premises, and PAGCOR would get back the rentals it paid the former for the use of
the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is the contract
treated as if it never existed. Prior to its termination, the parties are obliged to comply with their contractual
obligations. Only after the contract has been cancelled will they be released from their obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease Contract from the
beginning. This fact was evident when it first sought to collect the accrued rentals from September to November 1993
because, as previously stated, it actually demanded the enforcement of the Lease Contract prior to termination. Any
intent to rescind was not shown, even when it abrogated the Contract on November 25, 1993, because such
abrogation was not the rescission provided for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable, because the remedy resorted to by
the lessors in that case was rescission, not termination. The rights and obligations of the parties in Rios were
governed by Article 1659 of the Civil Code; hence, the Court held that the damages to which the lessor was entitled
could not have extended to the lessees liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of anothers
property after the termination of a contract. We stress that by abrogating the Contract in the present case, PPC
released PAGCOR from the latters future obligations, which included the payment of rentals. To grant that right to
the former is to unjustly enrich it at the latters expense.

However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest from a reading of
the mandatory provision under subparagraph (a) in conjunction with subparagraph (c) of the Contract. A penal clause
is "an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled." 26
Quite common in lease contracts, this clause functions to strengthen the coercive force of the obligation and to
provide, in effect, for what could be the liquidated damages resulting from a breach. 27 There is nothing immoral or
illegal in such indemnity/penalty clause, absent any showing that it was forced upon or fraudulently foisted on the
obligor.28
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the indemnity for
damages and the payment of interests in case of noncompliance; that is, if there is no stipulation to the contrary, 29 in
which case proof of actual damages is not necessary for the penalty to be demanded. 30 There are exceptions to the
aforementioned rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when there is a
stipulation to the contrary, 2) when the obligor is sued for refusal to pay the agreed penalty, and 3) when the obligor is
guilty of fraud. In these cases, the purpose of the penalty is obviously to punish the obligor for the breach. Hence, the
obligee can recover from the former not only the penalty, but also other damages resulting from the nonfulfillment of
the principal obligation. 31
In the present case, the first exception applies because Article XX (c) provides that, aside from the payment of the
rentals corresponding to the remaining term of the lease, the lessee shall also be liable "for any and all damages,
actual or consequential, resulting from such default and termination of this contract." Having entered into the Contract
voluntarily and with full knowledge of its provisions, PAGCOR must be held bound to its obligations. It cannot evade
further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts. 32 This power is explicitly
sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
"Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if
they are iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the courts. To
be considered in fixing the amount of penalty are factors such as -- but not limited to -- the type, extent and purpose
of the penalty; the nature of the obligation; the mode of the breach and its consequences; the supervening realities;
the standing and relationship of the parties; and the like. 33
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were in fact real and
pressing. From the CAs factual findings, which are not contested by either party, we find that PAGCOR conducted a
series of negotiations and consultations before entering into the Contract. It did so not only with the PPC, but also
with local government officials, who assured it that the problems were surmountable. Likewise, PAGCOR took pains
to contest the ordinances34 before the courts, which consequently declared them unconstitutional. On top of these
developments, the gaming corporation was advised by the Office of the President to stop the games in Cagayan de
Oro City, prompting the former to cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be suspended for days on end
since their start in December 1992; and indefinitely from July 15, 1993, upon the advice of the Office of President,
until the formal cessation of operations in September 1993. Needless to say, these interruptions and stoppages
meant that PAGCOR suffered a tremendous loss of expected revenues, not to mention the fact that it had fully
operated under the Contract only for a limited time.

While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals to the tune
ofP7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the circumstances, the
advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for respondents breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are hereby MODIFIED to
include the payment of penalty. Accordingly, respondent is ordered to pay petitioner the additional amount
ofP687,289.50 as penalty, which may be set off or applied against the formers advanced rental deposits. Meanwhile,
the CAs award to petitioner of actual damages representing the accrued rentals for September to November 1993 -with interest and penalty at the rate of two percent (2%) per month, from the date of filing of the Complaint until the
amount shall have been fully paid -- as well as the P50,000 award for attorneys fees, isAFFIRMED. No costs.
SO ORDERED.
Obligations with a period (Arts. 1180, 1193-1198, NCC)

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 142378
March 7, 2002
LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL CORPORATION, petitioner,

vs.
HUANG CHAO CHUN AND YANG TUNG FA, respondents.
PANGANIBAN, J.:
A stipulation in a lease contract stating that its five-year term is subject to "an option to renew" shall be interpreted to
be reciprocal in character. Unless the language shows an intent to allow the lessee to exercise it unilaterally, such
option shall be deemed to benefit both the lessor and the lessee who must both consent to the extension or renewal,
as well as to its specific terms and conditions.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the October 29, 1999 Decision 1and
the March 9, 2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR SP No. 50618. The decretal portion of the
Decision reads as follows:
"WHEREFORE, the petition for review is hereby DISMISSED for lack of merit." 4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The CA sustained the Decision of the Regional Trial Court (RTC) of Quezon City (Branch 217), which had disposed
as follows:
"WHEREFORE, premises considered, the Decision appealed from is AFFIRMED insofar as it dismissed the
complaint and it extended the lease contract up to September 16, 2001; and is MODIFIED such that,
defendants-appellees are ordered to pay plaintiff-appellant the amount of P444,800.00 less 5% as
withholding tax, as their rentals on subject premises from July 16, 1994 to November 13, 1994.
"Costs against the plaintiff-appellant."5

The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"[The present case] originated from an unlawful detainer case filed by petitioner before the Metropolitan Trial
Court of Quezon City on October 9, 1996 which was docketed as Civil Case No. 16349.
"In its Complaint, petitioner alleged that respondents Huang Chao Chun and Yang Tung Fa violated their
amended lease contract over a 1,112 square meter lot it owns, designated as Lot No. 1-A-1, when they did
not pay the monthly rentals thereon in the total amount of P4,322,900.00. It also alleged that the amended
lease contract already expired on September 16, 1996 but respondents refused to surrender possession
thereof plus the improvements made thereon, and pay the rental arrearages despite repeated demands.
"The amended lease contract was entered into by the parties sometime in August, 1991. [Exact day is not
mentioned in amended contract]. The same amended the lease contract previously entered into by the
parties on August 8, 1991. The amended contract contains the following provisions:
'1. That the LESSOR agrees as by the[se] presents hereby agreed to change the lot from LOT 1-A2 with an area of 1,091 sq. meters, to LOT 1-A-1 with an area of 1,112 sq. meters, covered by the
same TCT No. 219417 and located at the same address at No. 2 Scout Chuatuco Street, Quezon
City, Metro Manila.
'2. The monthly rental shall be the same at P100.00 per square meters and/or P111,200.00 per
month, Philippine Currency. All other terms and conditions are the same for strict compliance
thereof'.
"The terms and conditions referred to in paragraph 2 above are the following:
'1. x x x It is expressly agreed and understood that the payment of the rental herein stipulated shall
be made without the necessity of express demand and without delay on any ground whatsoever.
'2. The term of this lease is FIVE (5) YEARS from the effectivity of said lease, and with the option to
renew, specifically shall commence from September 15, 1991 and shall expire on September 16,
1996, and maybe adjusted depending upon the ejectment of tenants.
'3. The LESSEES shall have the option to reconstruct and/or renovate the improvement found
thereon at the expense of the LESSEES, and whatever improvement introduced therein by the
LESSEES in the premises the ownership of it shall become the property of the LESSOR without
extra compensation of the same.
'4. Upon signing of this Contract of Lease, the LESSEES shall make a one (1) year deposit to be
paid unto the LESSOR us follows:
'50% percent upon signing of this Contract of Lease;
'50% percent as payment in full of the one (1) year deposit. Payment of which shall be
made unto the LESSOR on the day of the effectivity date of the Contract of Lease, said
deposit shall be refundable 30 days prior to the termination of the same.
'5. The monthly rental is subject to increase, said increase shall be based upon the imposition of
Real Estate Tax for every two (2) years upon presentation of the increased real estate tax to the
Le[ssees], but said increase shall not be less than 25% percent.
"x x x
xxx
xxx

'9. The parties agree as by these presents have agreed to strictly observe the terms and conditions
of the Contract of Lease. Violation by the Lessees of any of the terms and condition of said contract
is equivalent to forfeitures of the deposit in favor of the Lessor, furthermore the Lessees agreed to
vacate the lease[d] premises for any violation of the terms and condition of said contract, without
going to court.'
"Respondent were joined by the Tsai Chun International Resources Inc. in their answer to the Complaint,
wherein they alleged that the actual lessee over Lot No. 1-A-1 is the corporation.
"Respondents and the corporation denied petitioner's allegations, claiming instead that:
"1. The amended lease contract did not reflect the true intention of the parties because it did not
contemplate an obsolete building that can no longer be renovated, such that petitioner did not become the
owner of the new P24,000,000.00 two-storey building they introduced on Lot No. 1-A-1 when their contract
expired.
"2. Their failure to pay the monthly rentals on the property was due to petitioner's fault when it attempted to
increase the amount of rent in violation of their contract; and
"3. They are entitled to a renewal of their contract in view of the provision therein providing for automatic
renewal, and also in view of the P24,000,000.00 worth of improvements they introduced on the leased
premises.
"After the parties were accorded their respective rights to due process of law, Branch 32 of the MTC
rendered decision on June 23, 1998, the decretal portion of which reads:
'WHEREFORE, premises considered, the Court hereby orders the dismissal of this case, without
pronouncement as to costs.
'SO ORDERED.'
"The aforequoted decision was premised on the resolution of two issues:
'(a) 'Whether or not the Contract of Lease dated August 8, 1991 had expired;' and
'(b) 'Did defendants and/or the corporation incur rental arrearages.'
"The MTC ruled that the contract entered into by the parties may be extended by the lessees for reasons of
justice and equity, citing as its legal bases the case of 'Legarda Koh v. Ongsi[a]co' (36 Phil. [185]) and 'Cruz
v. Alberto' (39 Phil. 991). It also ruled that the corporation's failure to pay the monthly rentals as they fell due
was justified by the fact that petitioner 'refused to honor the basis of the rental increase as stated in their
Lease Agreement."6 (Citations omitted)
Ruling of the Trial Court
The RTC affirmed the Decision of the Metropolitan Trial Court (MeTC) dismissing the unlawful detainer case. The
RTC likewise agreed that the Contract of Lease entered into by the parties could be extended unilaterally by the
lessees for another five years or until September 16, 2001, on the basis of justice and equity.
It also held that the parties had a reciprocal obligation: unless and until petitioner presented "the increased realty tax,"
private respondents were not under any obligation to pay the increased monthly rental.7
In addition, the RTC ruled that petitioner was not entitled to legal interest, and that the 25 percent increase provided
in the Contract of Lease should be based on the imposed real estate tax, not on the monthly rental.

The Court of Appeals affirmed in toto the RTC's dismissal of the unlawful detainer case and extension of the lease
period for another five years, holding that the errors raised had already been fully taken into account by the two
courts below.
It also reasoned that "[t]he elliptical construction of paragraph 5 of the Lease Contract made it awkward to the point of
being ambiguous." There being no agreement on the "proven rent," an ejectment suit based on "the non-payment of
rents that were not agreed upon x x x will not lie."
Hence, this Petition.8
Issues
In its Memorandum, petitioner raises the following issues for the Court's consideration:
I
"Whether the court could still extend the term of the lease, after its expiration. Is expiration of the lease a
proper ground in [a] case of unlawful detainer[?]
II
"Whether non-payment of rentals is a ground to eject, in an unlawful detainer. Is refusal of the lessor to
accept or collect rentals a valid reason for non-payment of rentals[?]
III
"May the court allow the introduction of issues other than the elements of a case for ejectment[?]" 9
This Court's Ruling
The Petition is meritorious.
First Issue:
Extension of Lease Period
Petitioner contends that because the Contract, as amended, had already expired, the MTC had no power to extend
the lease period. We are convinced.
In general, the power of the courts to fix a longer term for a lease is discretionary. Such power is to be exercised only
in accordance with the particular circumstances of a case: a longer term to be granted where equities demanding
extension come into play; to be denied where none appear -- always with due deference to the parties' freedom to
contract.10 Thus, courts are not bound to extend the lease.11
Article 1675 of the Civil Code excludes cases falling under Article 1673 from those under Article 1687. Article 1673
provides among others, that the lessor may judicially eject the lessee upon the expiration of "the period agreed upon
or that which is fixed for the duration of the leases." Where no period has been fixed by the parties, 12 the courts,
pursuant to Article 1687, have the potestative authority to set a longer period of lease. 13
In the case before us, the Contract of Lease provided for a fixed period of five (5) years -- "specifically" from
September 16, 1991 to September 15, 1996. Because the lease period was for a determinate time, it ceased, by

express provision of Article 1669 of the Civil Code, "on the day fixed, without need of a demand." 14 Here, the five-year
period expired on September 15, 1996, whereas the Complaint for ejectment was filed on October 6, 1996. Because
there was no longer any lease that could be extended, the MeTC, in effect, made a new contract for the parties, a
power it did not have.15 Early on, in Bacolod-Murcia Milling v. Banco Nacional Filipino,16 we said that a court could not
supply material stipulations to a contract, as follows:
"It is not the province of the court to alter a contract by construction or to make a new contract for the
parties; its duty is confined to the interpretation of the one which they have made for themselves, without
regard to its wisdom or folly, as the court cannot supply material stipulations or read into contract words
which it does not contain."
Furthermore, the extension of a lease contract must be made before the term of the agreement expires, not
after.17 Upon the lapse of the stipulated period, courts cannot belatedly extend or make a new lease for the
parties,18 even on the basis of equity.19 Because the Lease Contract ended on September 15, 1996, without the
parties reaching any agreement for renewal, respondents can be ejected from the premises. 20
On the other hand, respondents and the lower courts argue that the Contract of Lease provided for an automatic
renewal of the lease period. We are not persuaded.
Citing Koh v. Ongsiaco21 and Cruz v. Alberto,22 the MeTC -- upheld by the RTC and the CA -- ruled that the stipulation
in the Contract of Lease providing an option to renew should be construed in favor of and for the benefit of the
lessee.23 This ruling has however, been expressly reversed in Fernandez v. CA, from which we quote:24
"It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease 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. We are not aware of any presumption in
law that the term of a lease is designed for the benefit of the lessee alone. Koh and Cruz in effect rested
upon such a presumption. But that presumption cannot reasonably be indulged in casually in an era of rapid
economic change, marked by, among other things, volatile costs of living and fluctuations in the value of the
domestic currency. The longer the period the more clearly unreasonable such a presumption would be. In an
age like that we live in, very specific language is necessary to show an intent to grant a unilateral faculty to
extend or renew a contract of lease to the lessee alone, or to the lessor alone for that matter. We hold that
the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are overruled."25
The foregoing doctrine was recently reiterated in Heirs of Amando Dalisay v. Court of Appeals.26 Thus, pursuant
to Fernandez, Dalisay and Article 119627 of the Civil Code, the period of the lease contract is deemed to have been
set for the benefit of both parties. Its renewal may be authorized only upon their mutual agreement or at their joint
will.28 Its continuance, effectivity or fulfillment cannot be made to depend exclusively upon the free and uncontrolled
choice of just one party. While the lessee has the option to continue or to stop paying the rentals, the lessor cannot
be completely deprived of any say on the matter.29 Absent any contrary stipulation in a reciprocal contract, the period
of lease is deemed to be for the benefit of both parties.30
In the instant case, there was nothing in the aforesaid stipulation or in the actuation of the parties that showed that
they intended an automatic renewal or extension of the term of the contract.31 First, demonstrating petitioner's
disinterest in renewing the contract was its letter32 dated August 23, 1996, demanding that respondents vacate the
premises for failure to pay rentals since 1993. As a rule, the owner-lessor has the prerogative to terminate the lease
upon its expiration.33 Second, in the present case, the disagreement of the parties over the increased rental rate and
private respondents' failure to pay it precluded the possibility of a mutual renewal. Third, the fact that the lessor
allowed the lessee to introduce improvements on the property was indicative, not of the former's intention to extend
the contract automatically,34 but merely of its obedience to its express terms allowing the improvements. After all, at
the expiration of the lease, those improvements were to "become its property."
As to the contention that it is not fair to eject respondents from the premises after only five years, considering the
value of the improvements they introduced therein, suffice it to say that they did so with the knowledge of the risk -the contract had plainly provided for a five-year lease period.

Parties are free to enter into any contractual stipulation, provided it is not illegal or contrary to public morals. When
such agreement, freely and voluntarily entered into, turns out to be disadvantageous to a party, the courts cannot
rescue it without crossing the constitutional right to contract. They are not authorized to extricate parties from the
necessary consequences of their acts, and the fact that the contractual stipulations may turn out to be financially
disadvantageous will not relieve the latter of their obligations.35
Second Issue:
Non-Payment of Rentals
Petitioner further argues that respondents should be ejected for nonpayment of the new rental rates. On the other
hand, the latter counter that they did not agree to these new rates. True, mere failure to pay rentals does not make
possession unlawful, but when a valid demand to vacate the premises is made by the lessor, the lessee's continued
withholding of possession becomes unlawful.36 Well-settled is the rule that the failure of the owners/lessors to collect
or their refusal to accept the rentals is not a valid defense. 37
Respondents justify their nonpayment of rentals on the ground that petitioners refused to accept their payments.
Article 1256 of the Civil Code, however, provides that "if the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing
or sum." This provision is more explicit under the Rent Control Law, 38 the pertinent portions of which are similar to the
prevailing law -- the Rental Reform Act of 200239 -- which we reproduce hereunder:
"Section 7. Grounds for Judicial Ejectment.-Ejectment shall be allowed on the following grounds:
"(a) Assignment of lease or subleasing of residential units in whole or in part, including the acceptance of
boarders or bedspacers, without the written consent of the owner/lessor.
"(b) Arrears in payment of rent for a total of three (3) months: Provided, That in the case of refusal by the
lessor to accept payment of the rental agreed upon, the lessee may either deposit, by way of consignation,
the amount in court, or with the city or municipal treasurer, as the case may be, or in a bank in the name of
and with notice to the lessor, within one month after the refusal of the lessor to accept payment.
"The lessee shall thereafter deposit the rental within ten days of every current month. Failure to deposit the
rentals for three (3) months shall constitute a ground for ejectment. If an ejectment case is already pending,
the court upon proper motion may order the lessee or any person or persons claiming under him to
immediately vacate the leased premises without prejudice to the continuation of the ejectment proceedings.
At any time, the lessor may, upon authority of the court, withdraw the rentals deposited.
"The lessor, upon authority of the court in case of consignation or upon joint affidavit by him and the lessee
to be submitted to the city or municipal treasurer and to the bank where deposit was made, shall be allowed
to withdraw the deposits.
xxx
xxx
xxx
"(e) Expiration of the period of the lease contract." 40

On the other hand, the Civil Code provides as follows:
"Art. 1673. The lessor may judicially eject the lessee for any of the following causes:
"(1) When the period agreed upon, or that which is fixed for the duration of lease under Articles 1682 and
1687, has expired;
"(2) Lack of payment of the price stipulated;

"(3) Violation of any of the conditions agreed upon in the contract;
"(4) When the lessee devotes the thing leased to any use or service not stipulated which causes the
deterioration thereof; or if he does not observe the requirement in No. 2 of Article 1657, as regards the use
thereof.
"The ejectment of tenants of agricultural lands is governed by special laws."
Based on the foregoing, respondents should have deposited in a bank or with judicial authorities the rent based on
the previous rate.41 In the instant case, respondents failed to pay the rent from October 1993 to March 1998 or for
four (4) years and three (3) months. They should remember that Article 1658 of the Civil Code provides only two
instances in which the lessee may suspend payment of rent; namely, in case the lessor fails to make the necessary
repairs or to maintain the lessee in peaceful and adequate enjoyment of the property leased.42 None of these is
present in the case at bar.
Moreover, the mere subsequent payment of rentals by the lessee and the receipt thereof by the lessor does not,
absent any other circumstance that may dictate a contrary conclusion, legitimize the unlawful character of the
possession. The lessor may still pursue the demand for ejectment. 43
Having said that, we cannot, on the other hand, authorize a unilateral increase in the rental rate, considering that (1)
the option to renew is reciprocal and, thus, the terms and conditions thereof -- including the rental rate -- must
likewise be reciprocal; and (2) the contracted clause authorizing an increase -- "upon presentation of the increased
real estate tax to lessees" -- has not been complied with by petitioner.
Third Issue:
Issues on Ejectment
Petitioner proceeds to argue that the MeTC should not have allowed the intervention of the Tsai Chun International
Resources, Inc., allegedly the real lessor of the leased premises. In view of our foregoing discussion, there is no
more need to rule on this issue.
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. Respondents and all persons
claiming rights under them are hereby ORDERED TO VACATE the subject premises and to restore peaceful
possession thereof to petitioner. They are also DIRECTED TO PAY the accrued rentals (based on the stipulated rent)
from October 1993 until such time that they vacate the subject property, with interest thereon at the legal rate. No
pronouncement as to costs.
SO ORDERED.
SUPREME COURT
Manila
EN BANC
G.R. No. L-22558
May 31, 1967
GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.
Araneta and Araneta for petitioner.
Rosauro Alvarez and Ernani Cruz Pao for respondent.

REYES, J.B.L., J.:
Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R, affirming with
modification, an amendatory decision of the Court of First Instance of Manila, in its Civil Case No. 36303, entitled
"Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and Gregorio Araneta,
Inc., defendants."
As found by the Court of Appeals, the facts of this case are:
J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa
Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it
(Tuason & Co.) sold a portion thereof with an area of 43,034.4 square meters, more or less, for the sum of
P430,514.00, to Philippine Sugar Estates Development Co., Ltd. The parties stipulated, among in the contract of
purchase and sale with mortgage, that the buyer will
Build on the said parcel land the Sto. Domingo Church and Convent
while the seller for its part will
Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block
surrounded by streets on all four sides; and the street on the NE side shall be named "Sto. Domingo
Avenue;"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and
Convent, but the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the
construction of the street in the Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the
name of Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same;
hence, on May 7, 1958, Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co.,
Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-mentioned
deed of sale, and/or to pay damages in the event they failed or refused to perform said obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly
setting up the principal defense that the action was premature since its obligation to construct the streets in question
was without a definite period which needs to he fixed first by the court in a proper suit for that purpose before a
complaint for specific performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its termination, it dismissed
plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses interposed by defendant Gregorio
Araneta, Inc.
1wph1.t
Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within which
defendants will comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not expressly or
impliedly allege and pray for the fixing of a period to comply with its obligation and that the evidence presented at the
trial was insufficient to warrant the fixing of such a period.
On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of such a period,"
issued an order granting plaintiff's motion for reconsideration and amending the dispositive portion of the decision of
May 31, 1960, to read as follows:
WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of two (2)
years from notice hereof, within which to comply with its obligation under the contract, Annex "A".

Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which motion, plaintiff
opposed.
On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter perfected its
appeal Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing
of a period, under the amendatory decision of July 16, 1960, was not justified by the pleadings and not supported by
the facts submitted at the trial of the case in the court below and that the relief granted in effect allowed a change of
theory after the submission of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and
that there was no true change of theory after the submission of the case for decision since defendant-appellant
Gregorio Araneta, Inc. itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses
contained in its answer which reads
7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within
which to comply with its obligations to construct and complete the streets on the NE, NW and SW sides of
the lot in question; that under the circumstances, said reasonable time has not elapsed;
Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not decisive in
the resolution of the legal issues posed in the instant appeal before us, said appellate court rendered its decision
dated December 27, 1963, the dispositive part of which reads
IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given two (2) years
from the date of finality of this decision to comply with the obligation to construct streets on the NE, NW and
SW sides of the land sold to plaintiff so that the same would be a block surrounded by streets on all four
sides.
Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc. resorted to a
petition for review by certiorari to this Court. We gave it due course.
We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First Instance is
legally untenable. The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought
to be justified on the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its
answer that the contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio
Araneta, Inc. "reasonable time within which to comply with its obligation to construct and complete the streets."
Neither of the courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was
not whether the court should fix the time of performance, but whether or not the parties agreed that the petitioner
should have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period
fixed, a "reasonable time;" and all that the court should have done was to determine if that reasonable time had
already elapsed when suit was filed if it had passed, then the court should declare that petitioner had breached the
contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had
not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be
logically held that under the plea above quoted, the intervention of the court to fix the period for performance was
warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties.
Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed
(and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the
Court should set a period, the court could not proceed to do so unless the complaint in as first amended; for the
original decision is clear that the complaint proceeded on the theory that the period for performance had already
elapsed, that the contract had been breached and defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is
defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of

the judgment. The list paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly
prescribes that
the Court shall determine such period as may under the circumstances been probably contemplated by the
parties.
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts
precisely warrant the fixing of such a period," a statement manifestly insufficient to explain how the two period given
to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that
"the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the
nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This
preliminary point settled, the Court must then proceed to the second step, and decide what period was "probably
contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its
opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. As the record
stands, the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no
circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land
described therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeal,
Petitioner's Appendix B, pp. 12-13). As the parties must have known that they could not take the law into their own
hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the
suits to be brought would not be under their control nor could the same be determined in advance. The conclusion is
thus forced that the parties must have intended to defer the performance of the obligations under the contract until
the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the
circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did
not specify any exact periods or dates of performance.
It follows that there is no justification in law for the setting the date of performance at any other time than that of the
eviction of the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of
Appeals committed reversible error. It is not denied that the case against one of the squatters, Abundo, was still
pending in the Court of Appeals when its decision in this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations
of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally
evicted therefrom.
Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

Kinds of Obligations PDF

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Kinds of Obligations PDF

Enviado por

Direitos autorais:

Formatos disponíveis

KINDS OF OBLIGATIONS 2016

Obligation and Contracts

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

We read no such limitation. Section 8, Rule 89 of the Rules of Court, provides:

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

G.R. No. 107207 November 23, 1995

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

belongs to petitioner and not to private respondent.

KINDS OF OBLIGATIONS 2016

Suspensive and Resolutory (Art. 1181)

June 16, 2000

ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z. LAFORTEZA, DENNIS Z. LAFORTEZA,

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

December 15, 2000

REYNALDO MORTEL, petitioner,

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

herein petitioners the material parts of which read as follows:

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

should not be applied in a very rigid and technical sense.

KINDS OF OBLIGATIONS 2016

obligation had never existed. 29

KINDS OF OBLIGATIONS 2016

G.R. No. 112127 July 17, 1995

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

Potestative, casual and mixed (Art. 1182)

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

G.R. No. 124290 January 16, 1998

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

Constructive Fulfillment of Suspensive Condition (Art. 1186):

KINDS OF OBLIGATIONS 2016

April 10, 2013

INTERNATIONAL HOTEL CORPORATION, Petitioner,

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016

KINDS OF OBLIGATIONS 2016