David Raymundo is the absolute and registered owner of a parcel of land, together with the house and other improvements thereon. Private Respondent George Raymundo is David’s father who negotiated with plaintiffs Avelina and Mariano Velarde, the petitioners, for the sale of said property, which was, however, under lease. On August 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee.
It is further agreed and understood by the parties that the capital gains tax and documentary stamps on the sale shall be for the account of the vendor; whereas, the registration fees and transfer tax thereon shall be for the account of the vendee. On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband, Mariano, executed an Undertaking.
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 of 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, however, plaintiffs were advised that the Application for Assumption of Mortgage with BPI was not approved, which 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 constituted non-performance of their obligation. Thereafter, 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.
ISSUE:
Whether or not the Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was justified.
RULING:
A substantial breach of a reciprocal obligation entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received.
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.
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in the said provision is the obligor’s failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause
The private respondents therefore validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents’ right to rescind the same in accordance with law. The 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. 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.
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. 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.
ALEXANDER G. ASUNCION vs. EDUARDO B. EVANGELISTA and COURT OF APPEALS
G.R. No. 133491 1999 Oct 13
FACTS:
On September 9, 1980, private respondent borrowed P500,000 from Paluwagan ng Bayan Savings and Loan Association to use as working capital for Embassy Farms. He executed a real estate mortgage on three of his properties as security for the loan. On November 4, 1981, private respondent mortgaged 10 titles more in favor of PAIC Savings and Mortgage Bank, formerly First Summa Savings and Mortgage Bank, as security for a loan he obtained from it in the amount of P1,712,000. Private respondent obtained another loan in the amount of P844,625.78 from Mercator Finance
Corporation. The loan was secured by a real estate mortgage on five 5 other landholdings of private respondent.
Private respondents aggregate debt exposure totaled P3,056,625.78. However, he defaulted in his loan payments. By June 1984, his aggregate debt had ballooned to almost six million pesos.
On August 2, 1984, petitioner and private respondent executed a Memorandum of Agreement. Upon the execution of the Memorandum, petitioner paid private respondent one million pesos, P500,000.00 within a ninety-day period in four disbursements. The second installment, in the like amount of three hundred thousand pesos, was supposed to be remitted by petitioner to private respondent for the purpose of financing the operations of the piggery pursuant to the Memorandum. Instead, petitioner agreed to pay to PAIC Savings & Mortgage Bank.
Aside from paying the aforesaid amount of P300,000.00 to PAIC Savings & Mortgage Bank, petitioner also paid P400,000.00 in favor of Paluwagan ng Bayan Savings and Loan Association.
For his part, private respondent was obligated under the Memorandum of Agreement to "execute, sign and deliver any and all documents" necessary for the transfer and conveyance of several parcels of land he owned but mortgaged with the banks and financial institutions and to "cede, transfer and convey in a manner absolute and irrevocable any and all of his shares of stocks in Embassy Farms, Inc." as well as "cause to be so transferred to petitioner or his nominee such shares of stock until they constitute 90% of the paid-in equity of said corporation". However, more than a year after the signing of the Memorandum of Agreement, the landholdings of private respondent which were mortgaged to Paluwagan ng Bayan Savings and Loan Association, PAIC Savings and Mortgage Bank and Mercator Finance Corporation still remained titled in his name. Neither did he inform said mortgagees of the transfer of his lands. As to the shares of stock, it was incumbent upon private respondent to endorse and deliver them to petitioner so he could also have them transferred in his name, but private respondent never did. He refused to honor his obligations under the Memorandum of Agreement and even countered with a demand letter of his own. He accused petitioner of having failed to restructure his loans with Paluwagan ng Bayan Savings and Loan Association, PAIC Savings and Mortgage Bank and Mercator Finance Corporation and blamed him for the foreclosure of his landholdings, including the piggery site of Embassy Farms, Inc.
Petitioner then filed in the RTC a complaint for rescission of the Memorandum of Agreement with a prayer for damages. The Court declared the Memorandum of Agreement rescinded and of no further force and effect. Both petitioner and private respondent repaired to the Court of Appeals. The court affirmed the decision of the trial court and ordered its immediate execution.
1. Whether the non-compliance of one party in a reciprocal obligation amounts to rescission of the obligation.
2. Whether or not the Court shall allow the grant of damages corresponding to the value of the land foreclosed by private respondent's creditors upon the latter's failure to make his loan payments.
RULING:
1. The parties' Memorandum of Agreement is a contract of sale where a price certain is paid in exchange for a determinate thing that is sold and delivered. However, it shows that it constitutes not a mere isolated, simple, short-term business deal calling for the outright sale and purchase of land and shares of stocks belonging to private respondent, but a set of chronological, reciprocal and conditional obligations that both petitioner and private respondent must faithfully comply with to ensure the full enforcement of all its stipulations.
Petitioner and private respondent entered into what the law regards as reciprocal obligations. Reciprocity arises from identity of cause, and necessarily the two obligations are created at the same time. Reciprocal obligations, therefore, are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other.
Article 1191 of the Civil Code governs the situation where there is non-compliance by one party in case of reciprocal obligations. It provides:
"The power to rescind the 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 2388 and the Mortgage Law."
The effect of rescission is also provided in the Civil Code in Article 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 persons causing the loss."
Private respondent admitted in open court that petitioner paid him the initial sum of one million pesos upon the signing of the Memorandum of Agreement as well as various sums of money as fees for the restructuring of his loans. Thereupon, private respondent was obligated to execute a deed of sale with assumption of mortgage, both in compliance with the Memorandum of Agreement and to ensure the legal efficacy of petitioner's promise to assume his loan obligations. However, private respondent failed to perform his substantial obligations under the Memorandum of Agreement. Hence, petitioner sought the rescission of the Memorandum of Agreement and ceased infusing capital into the piggery business of private respondent.
2. The Court cannot allow the grant of damages corresponding to the value of the land foreclosed by private respondent's creditors upon the latter's failure to make his loan payments. In case of rescission, while damages may be assessed in favor of the prejudiced party, only those kinds of damages consistent with the remedy of rescission may be granted, keeping in mind that had the parties opted for specific performance, other kinds of damages would have been called for which are absolutely distinct from those kinds of damages accruing in the case of rescission.
An obligation may be resolved if one of the obligors fails to comply with that which is incumbent upon him; and it is declared that the person prejudiced may elect between exacting the fulfillment of the obligation (specific performance) and its resolution, with compensation for damage and payment of interest in either case. One is not entitled to pursue both of the inconsistent remedies. In estimating the damages to be awarded in case of rescission, those elements of damages only can be admitted that are compatible with the idea of rescission and in estimating the damages to be awarded in case the lessor elects for specific performance only those elements of damages can be admitted which are compatible with the conception of specific performance. Thus, damages which would only be consistent with the conception of specific performance cannot be awarded in an action where rescission is sought.
In cases of resolution or rescission, the parties are bound to restore to each the thing which has been the subject matter of the contract, precisely as in the situation where a decree of nullity is granted. In the common case of the resolution of a contract of sale for failure of the purchaser to pay the stipulated price, the seller is entitled to be restored to the possession of the thing sold, if it has already been delivered. But he cannot have both the thing sold and the price which was agreed to be paid, for the resolution of the contract has the effect of destroying the obligation to pay the price.
the other party had contracted to pay. The termination of the lease has the effect of destroying the obligation to pay rent for the future.
WILLIAM UY and RODEL ROXAS vs. COURT OF APPEALS, HON. ROBERT BALAO and NATIONAL HOUSING AUTHORITY
G.R. No. 120465 1999 Sep 9
FACTS:
Petitioners William Uy and Rodel Roxas are agents authorized to sell eight parcels of land by the owners thereof. By virtue of such authority, petitioners offered to sell the lands, located in Tuba, Tadiangan, Benguet to respondent National Housing Authority (NHA) to be utilized and developed as a housing project. On February 14, 1989, the NHA Board passed Resolution No. 1632 approving the acquisition of said lands at the cost of P23.867 million, pursuant to which the parties executed a series of Deeds of Absolute Sale covering the subject lands. Of the eight parcels of land, however, only five were paid for by the NHA because of the report it received from the Land Geosciences Bureau of the Department of Environment and Natural Resources (DENR) that the remaining area is located at an active landslide area and therefore, not suitable for development into a housing project. On 22 November 1991, the NHA issued Resolution No. 2352 cancelling the sale over the three parcels of land. The NHA, through Resolution No. 2394, subsequently offered the amount of P1.225 million to the landowners as danos perjuicios.
On 9 March 1992, petitioners filed before the RTC of Quezon City a Complaint for Damages against NHA and its General Manager Robert Balao. After trial, the RTC rendered a decision declaring the cancellation of the contract to be justified. The trial court nevertheless awarded damages to plaintiffs in the sum of P1.255 million, the same amount initially offered by NHA to petitioners as damages. Upon appeal by petitioners, the Court of Appeals reversed the decision of the trial court and entered a new one dismissing the complaint. It held that since there was "sufficient justifiable basis" in cancelling the sale, "it saw no reason" for the award of damages.
ISSUE:
Whether or not the CA erred in declaring that respondent NHA had any legal basis for rescinding the sale involving the last three parcels covered by NHA Resolution No. 1632.
RULING:
Petitioners confuse the cancellation of the contract by the NHA as a rescission of the contract under Article 1191 of the Civil Code. The right of rescission or, more accurately, resolution, of a party to an obligation under Article 1191 is predicated on a
breach of faith by the other party that violates the reciprocity between them. The power to rescind, therefore, is given to the injured party. Article 1191 states:
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.
In this case, the NHA did not rescind the contract. Indeed, it did not have the right to do so for the other parties to the contract, the vendors, did not commit any breach, much less a substantial breach of their obligation. Their obligation was merely to deliver the parcels of land to the NHA, an obligation that they fulfilled. The NHA did not suffer any injury by the performance thereof.
The cancellation, therefore, was not a rescission under Article 1191. Rather, the cancellation was based on the negation of the cause arising from the realization that the lands, which were the object of the sale, were not suitable for housing.
Cause is the essential reason which moves the contracting parties to enter into it. In other words, the cause is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. Cause, which is the essential reason for the contract, should be distinguished from motive, which is the particular reason of a contracting party which does not affect the other party. In this case, it is clear, and petitioners do not dispute, that NHA would not have entered into the contract were the lands not suitable for housing. In other words, the quality of the