OBLICON+CASES-NOV.+22,+2011+ARTS.+1179-1192

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 103577 October 7, 1996

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL, ANNABELLE C. GONZALES (for herself and on behalf of Florida C. Tupper, as attorney-in-fact), CIELITO A. CORONEL, FLORAIDA A. ALMONTE, and CATALINA BALAIS MABANAG, petitioners, vs.THE COURT OF APPEALS, CONCEPCION D. ALCARAZ, and RAMONA PATRICIA ALCARAZ, assisted by GLORIA F. NOEL as attorney-in-fact, respondents.

 MELO, J.:p

The petition before us has its roots in a complaint for specific performance to compel herein petitioners (except the last named, Catalina Balais Mabanag) to consummate the sale of a parcel of land with its improvements located along Roosevelt Avenue in Quezon City entered into by the parties sometime in January 1985 for the price of P1,240,000.00.

The undisputed facts of the case were summarized by respondent court in this wise:

On January 19, 1985, defendants-appellants Romulo Coronel, et al. (hereinafter referred to as Coronels) executed a document entitled "Receipt of Down Payment" (Exh. "A") in favor of plaintiff Ramona Patricia Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:

RECEIPT OF DOWN PAYMENT

P1,240,000.00 — Total amount

50,000 — Down payment———————————

P1,190,000.00 — Balance

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 119627 of the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

We bind ourselves to effect the transfer in our names from our deceased father, Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the down payment above-stated.

On our presentation of the TCT already in or name, We will immediately execute the deed of absolute sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the balance of the P1,190,000.00.

Clearly, the conditions appurtenant to the sale are the following:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of the document aforestated;

2. The Coronels will cause the transfer in their names of the title of the property registered in the name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down payment;

3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute sale in favor of Ramona and the latter will pay the former the whole balance of One Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.

On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter referred to as Concepcion), mother of Ramona, paid the down payment of Fifty Thousand (P50,000.00) Pesos (Exh. "B", Exh. "2").

On February 6, 1985, the property originally registered in the name of the Coronels' father was transferred in their names under TCT No. 327043 (Exh. "D"; Exh. "4")

On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five Hundred Eighty Thousand (P1,580,000.00) Pesos after the latter has paid Three Hundred Thousand (P300,000.00) Pesos (Exhs. "F-3"; Exh. "6-C")

For this reason, Coronels canceled and rescinded the contract (Exh. "A") with Ramona by depositing the down payment paid by Concepcion in the bank in trust for Ramona Patricia Alcaraz.

On February 22, 1985, Concepcion, et al., filed a complaint for specific performance against the Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403 (Exh. "E"; Exh. "5").

On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same property with the Registry of Deeds of Quezon City (Exh. "F"; Exh. "6").

On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in favor of Catalina (Exh. "G"; Exh. "7").

On June 5, 1985, a new title over the subject property was issued in the name of Catalina under TCT No. 351582 (Exh. "H"; Exh. "8").

(Rollo, pp. 134-136)

In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the parties agreed to submit the case for decision solely on the basis of documentary exhibits. Thus, plaintiffs therein (now private respondents) proffered their documentary evidence accordingly marked as Exhibits "A" through "J", inclusive of their corresponding submarkings. Adopting these same exhibits as their own, then defendants (now petitioners) accordingly offered and marked them as Exhibits "1" through "10", likewise inclusive of their corresponding submarkings. Upon motion of the parties, the trial court gave them thirty (30) days within which to simultaneously submit their respective memoranda, and an additional 15 days within which to submit their corresponding comment or reply thereof, after which, the case would be deemed submitted for resolution.

On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who was then temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March 1, 1989, judgment was handed down by Judge Roura from his regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as follows:

WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to execute in favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and covered by Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of Deeds for Quezon City, together with all the improvements existing thereon free from all liens and encumbrances, and once accomplished, to immediately deliver the said document of sale to plaintiffs and upon receipt thereof, the said document of sale to plaintiffs and upon receipt thereof, the plaintiffs are ordered to pay defendants the whole balance of the purchase price amounting to P1,190,000.00 in cash. Transfer Certificate of

Title No. 331582 of the Registry of Deeds for Quezon City in the name of intervenor is hereby canceled and declared to be without force and effect. Defendants and intervenor and all other persons claiming under them are hereby ordered to vacate the subject property and deliver possession thereof to plaintiffs. Plaintiffs' claim for damages and attorney's fees, as well as the counterclaims of defendants and intervenors are hereby dismissed.

No pronouncement as to costs.

So Ordered.

Macabebe, Pampanga for Quezon City, March 1, 1989.

(Rollo, p. 106)

A motion for reconsideration was filed by petitioner before the new presiding judge of the Quezon City RTC but the same was denied by Judge Estrella T. Estrada, thusly:

The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision by the undersigned Presiding Judge should be denied for the following reasons: (1) The instant case became submitted for decision as of April 14, 1988 when the parties terminated the presentation of their respective documentary evidence and when the Presiding Judge at that time was Judge Reynaldo Roura. The fact that they were allowed to file memoranda at some future date did not change the fact that the hearing of the case was terminated before Judge Roura and therefore the same should be submitted to him for decision; (2) When the defendants and intervenor did not object to the authority of Judge Reynaldo Roura to decide the case prior to the rendition of the decision, when they met for the first time before the undersigned Presiding Judge at the hearing of a pending incident in Civil Case No. Q-46145 on November 11, 1988, they were deemed to have acquiesced thereto and they are now estopped from questioning said authority of Judge Roura after they received the decision in question which happens to be adverse to them; (3) While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at this Branch of the Court, he was in all respects the Presiding Judge with full authority to act on any pending incident submitted before this Court during his incumbency. When he returned to his Official Station at Macabebe, Pampanga, he did not lose his authority to decide or resolve such cases submitted to him for decision or resolution because he continued as Judge of the Regional Trial Court and is of co-equal rank with the undersigned Presiding Judge. The standing rule and supported by jurisprudence is that a Judge to whom a case is submitted for decision has the authority to decide the case notwithstanding his transfer to another branch or region of the same court (Sec. 9, Rule 135, Rule of Court).

Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered in the instant case, resolution of which now pertains to the undersigned Presiding Judge, after a meticulous examination of the documentary evidence presented by the parties, she is convinced that the Decision of March 1, 1989 is supported by evidence and, therefore, should not be disturbed.

IN VIEW OF THE FOREGOING, the "Motion for Reconsideration and/or to Annul Decision and Render Anew Decision by the Incumbent Presiding Judge" dated March 20, 1989 is hereby DENIED.

SO ORDERED.

Quezon City, Philippines, July 12, 1989.

(Rollo, pp. 108-109)

Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals (Buena, Gonzaga-Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the trial court.

Hence, the instant petition which was filed on March 5, 1992. The last pleading, private respondents' Reply Memorandum, was filed on September 15, 1993. The case was, however, re-raffled to undersigned ponente only on August 28, 1996, due to the voluntary inhibition of the Justice to whom the case was last assigned.

While we deem it necessary to introduce certain refinements in the disquisition of respondent court in the affirmance of the trial court's decision, we definitely find the instant petition bereft of merit.

The heart of the controversy which is the ultimate key in the resolution of the other issues in the case at bar is the precise determination of the legal significance of the document entitled "Receipt of Down Payment" which was offered in evidence by both parties. There is no dispute as to the fact that said document embodied the binding contract between Ramona Patricia Alcaraz on the one hand, and the heirs of Constancio P. Coronel on the other, pertaining to a particular house and lot covered by TCT No. 119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as follows:

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.

While, it is the position of private respondents that the "Receipt of Down Payment" embodied a perfected contract of sale, which perforce, they seek to enforce by means of an action for specific performance, petitioners on their part insist that what the document signified was a mere executory contract to sell, subject to certain suspensive conditions, and because of the absence of Ramona P. Alcaraz, who left for the United States of America, said contract could not possibly ripen into a contract absolute sale.

Plainly, such variance in the contending parties' contentions is brought about by the way each interprets the terms and/or conditions set forth in said private instrument. Withal, based on whatever relevant and admissible evidence may be available on record, this, Court, as were the courts below, is now called upon to adjudge what the real intent of the parties was at the time the said document was executed.

The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price;

b) Determinate subject matter; and

c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a Contract of Sale because the first essential element is lacking. In a contract to sell, the prospective seller explicity reserves the transfer of title to the prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer ownership of the property subject of the contract to sell until the happening of an event, which for present purposes we shall take as the full payment of the purchase price. What the seller agrees or obliges himself to do is to fulfill is promise to sell the subject property when the entire amount of the purchase price is delivered to him. In other words the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the prospective buyer. In Roque vs. Lapuz (96 SCRA 741 [1980]), this Court had occasion to rule:

Hence, We hold that the contract between the petitioner and the respondent was a contract to sell where the ownership or title is retained by the seller and is not to pass until the full payment of the price, such payment being a positive suspensive condition and failure of

which is not a breach, casual or serious, but simply an event that prevented the obligation of the vendor to convey title from acquiring binding force.

Stated positively, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, the prospective seller's obligation to sell the subject property by entering into a contract of sale with the prospective buyer becomes demandable as provided in Article 1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

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.

A contract to sell may thus be defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.

A contract to sell as defined hereinabove, may not even be considered as a conditional contract of sale where the seller may likewise reserve title to the property subject of the sale until the fulfillment of a suspensive condition, because in a conditional contract of sale, the first element of consent is present, although it is conditioned upon the happening of a contingent event which may or may not occur. If the suspensive condition is not fulfilled, the perfection of the contract of sale is completely abated (cf. Homesite and housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operation of law without any further act having to be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale.

It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the subject property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at bench. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller's title per se, but the latter, of course, may be used for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the sale becomes absolute and this will definitely affect the seller's title thereto. In fact, if there had been previous delivery of the subject property, the seller's ownership or title to the property is automatically transferred to the buyer such that, the seller will no longer have any title to transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the property who may have had actual or constructive knowledge of such defect in the seller's title, or at least was charged with the obligation to discover such defect, cannot be a registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to the second buyer, the first buyer may seek reconveyance of the property subject of the sale.

With the above postulates as guidelines, we now proceed to the task of deciphering the real nature of the contract entered into by petitioners and private respondents.

It is a canon in the interpretation of contracts that the words used therein should be given their natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in the said "Receipt of Down Payment" that they —

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627 of the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

without any reservation of title until full payment of the entire purchase price, the natural and ordinary idea conveyed is that they sold their property.

When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest that there was a clear intent on the part of petitioners to transfer title to the buyer, but since the transfer certificate of title was still in the name of petitioner's father, they could not fully effect such transfer although the buyer was then willing and able to immediately pay the purchase price. Therefore, petitioners-sellers undertook upon receipt of the down payment from private respondent Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names from that of their father, after which, they promised to present said title, now in their names, to the latter and to execute the deed of absolute sale whereupon, the latter shall, in turn, pay the entire balance of the purchase price.

The agreement could not have been a contract to sell because the sellers herein made no express reservation of ownership or title to the subject parcel of land. Furthermore, the circumstance which prevented the parties from entering into an absolute contract of sale pertained to the sellers themselves (the certificate of title was not in their names) and not the full payment of the purchase price. Under the established facts and circumstances of the case, the Court may safely presume that, had the certificate of title been in the names of petitioners-sellers at that time, there would have been no reason why an absolute contract of sale could not have been executed and consummated right there and then.

Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to sell the properly to private respondent upon the fulfillment of the suspensive condition. On the contrary, having already agreed to sell the subject property, they undertook to have the certificate of title changed to their names and immediately thereafter, to execute the written deed of absolute sale.

Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance by the buyer with certain terms and conditions, promised to sell the property to the latter. What may be perceived from the respective undertakings of the parties to the contract is that petitioners had already agreed to sell the house and lot they inherited from their father, completely willing to transfer full ownership of the subject house and lot to the buyer if the documents were then in order. It just happened, however, that the transfer certificate of title was then still in the name of their father. It was more expedient to first effect the change in the certificate of title so as to bear their names. That is why they undertook to cause the issuance of a new transfer of the certificate of title in their names upon receipt of the down payment in the amount of P50,000.00. As soon as the new certificate of title is issued in their names, petitioners were committed to immediately execute the deed of absolute sale. Only then will the obligation of the buyer to pay the remainder of the purchase price arise.

There is no doubt that unlike in a contract to sell which is most commonly entered into so as to protect the seller against a buyer who intends to buy the property in installment by withholding ownership over the property until the buyer effects full payment therefor, in the contract entered into in the case at bar, the sellers were the one who were unable to enter into a contract of absolute sale by reason of the fact that the certificate of title to the property was still in the name of their father. It was the sellers in this case who, as it were, had the impediment which prevented, so to speak, the execution of an contract of absolute sale.

What is clearly established by the plain language of the subject document is that when the said "Receipt of Down Payment" was prepared and signed by petitioners Romeo A. Coronel, et al., the parties had agreed to a conditional contract of sale, consummation of which is subject only to the successful transfer of the certificate of title from the name of petitioners' father, Constancio P. Coronel, to their names.

The Court significantly notes this suspensive condition was, in fact, fulfilled on February 6, 1985 (Exh. "D"; Exh. "4"). Thus, on said date, the conditional contract of sale between petitioners and private respondent Ramona P. Alcaraz became obligatory, the only act required for the consummation thereof being the delivery of the property by means of the execution of the deed of absolute sale in a public instrument, which petitioners unequivocally committed themselves to do as evidenced by the "Receipt of Down Payment."

Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the case at bench. Thus,

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

From the moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.

Since the condition contemplated by the parties which is the issuance of a certificate of title in petitioners' names was fulfilled on February 6, 1985, the respective obligations of the parties under the contract of sale became mutually demandable, that is, petitioners, as sellers, were obliged to present the transfer certificate of title already in their names to private respondent Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.

It is also significant to note that in the first paragraph in page 9 of their petition, petitioners conclusively admitted that:

3. The petitioners-sellers Coronel bound themselves "to effect the transfer in our names from our deceased father Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the downpayment above-stated". The sale was still subject to this suspensive condition. (Emphasis supplied.)

(Rollo, p. 16)

Petitioners themselves recognized that they entered into a contract of sale subject to a suspensive condition. Only, they contend, continuing in the same paragraph, that:

. . . Had petitioners-sellers not complied with this condition of first transferring the title to the property under their names, there could be no perfected contract of sale. (Emphasis supplied.)

(Ibid.)

not aware that they set their own trap for themselves, for Article 1186 of the Civil Code expressly provides that:

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

Besides, it should be stressed and emphasized that what is more controlling than these mere hypothetical arguments is the fact that the condition herein referred to was actually and indisputably fulfilled on February 6, 1985, when a new title was issued in the names of petitioners as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").

The inevitable conclusion is that on January 19, 1985, as evidenced by the document denominated as "Receipt of Down Payment" (Exh. "A"; Exh. "1"), the parties entered into a contract of sale subject only to the suspensive condition that the sellers shall effect the issuance of new certificate title from that of their father's name to their names and that, on February 6, 1985, this condition was fulfilled (Exh. "D"; Exh. "4").

We, therefore, hold that, in accordance with Article 1187 which pertinently provides —

Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation . . .

In obligation to do or not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with.

the rights and obligations of the parties with respect to the perfected contract of sale became mutually due and demandable as of the time of fulfillment or occurrence of the suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations of both seller and buyer arose.

Petitioners also argue there could been no perfected contract on January 19, 1985 because they were then not yet the absolute owners of the inherited property.

We cannot sustain this argument.

Article 774 of the Civil Code defines Succession as a mode of transferring ownership as follows:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to be extent and value of the inheritance of a person are transmitted through his death to another or others by his will or by operation of law.

Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P. Coronel are compulsory heirs who were called to succession by operation of law. Thus, at the point their father drew his last breath, petitioners stepped into his shoes insofar as the subject property is concerned, such that any rights or obligations pertaining thereto became binding and enforceable upon them. It is expressly provided that rights to the succession are transmitted from the moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).

Be it also noted that petitioners' claim that succession may not be declared unless the creditors have been paid is rendered moot by the fact that they were able to effect the transfer of the title to the property from the decedent's name to their names on February 6, 1985.

Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter into an agreement at that time and they cannot be allowed to now take a posture contrary to that which they took when they entered into the agreement with private respondent Ramona P. Alcaraz. The Civil Code expressly states that:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.

Having represented themselves as the true owners of the subject property at the time of sale, petitioners cannot claim now that they were not yet the absolute owners thereof at that time.

Petitioners also contend that although there was in fact a perfected contract of sale between them and Ramona P. Alcaraz, the latter breached her reciprocal obligation when she rendered impossible the consummation thereof by going to the United States of America, without leaving her address, telephone number, and Special Power of Attorney (Paragraphs 14 and 15, Answer with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were correct in unilaterally rescinding rescinding the contract of sale.

We do not agree with petitioners that there was a valid rescission of the contract of sale in the instant case. We note that these supposed grounds for petitioners' rescission, are mere allegations found only in their responsive pleadings, which by express provision of the rules, are deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely bereft of any supporting evidence to substantiate petitioners' allegations. We have stressed time and again that allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]. Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376 [1947]).

Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on February 6, 1985, we cannot justify petitioner-sellers' act of unilaterally and extradicially rescinding the contract of sale, there being no express stipulation authorizing the sellers to extarjudicially rescind the contract of sale. (cf. Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132 SCRA 722 [1984])

Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted for and in behalf of her daughter, if not also in her own behalf. Indeed, the down payment was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and in behalf of Ramona P. Alcaraz. There is no evidence showing that petitioners ever questioned Concepcion's authority to represent Ramona P. Alcaraz when they accepted her personal check. Neither did they raise any objection as regards payment being effected by a third person. Accordingly, as far as petitioners are concerned, the physical absence of Ramona P. Alcaraz is not a ground to rescind the contract of sale.

Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her obligation to pay the full purchase price is concerned. Petitioners who are precluded from setting up the defense of the physical absence of Ramona P. Alcaraz as above-explained offered no proof whatsoever to show that they actually presented the new transfer certificate of title in their names and signified their willingness and readiness to execute the deed of absolute sale in accordance with their agreement. Ramona's corresponding obligation to pay the balance of the purchase price in the amount of P1,190,000.00 (as buyer) never became due and demandable and, therefore, she cannot be deemed to have been in default.

Article 1169 of the Civil Code defines when a party in a contract involving reciprocal obligations may be considered in default, to wit:

Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

xxx xxx xxx

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfill his obligation, delay by the other begins. (Emphasis supplied.)

There is thus neither factual nor legal basis to rescind the contract of sale between petitioners and respondents.

With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise to a case of double sale where Article 1544 of the Civil Code will apply, to wit:

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property.

Should if be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof to the person who presents the oldest title, provided there is good faith.

The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of the second contract of sale was registered with the Registry of Deeds of Quezon City giving rise to the issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.

The above-cited provision on double sale presumes title or ownership to pass to the first buyer, the exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the first buyer, and (b) should there be no inscription by either of the two buyers, when the second buyer, in good faith, acquires possession of the property ahead of the first buyer. Unless, the second buyer satisfies these requirements, title or ownership will not transfer to him to the prejudice of the first buyer.

In his commentaries on the Civil Code, an accepted authority on the subject, now a distinguished member of the Court, Justice Jose C. Vitug, explains:

The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge by the first buyer of the second sale cannot defeat the first buyer's rights except when the second buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33). Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register, since knowledge taints his registration with bad faith (see also Astorga vs. Court of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it has held that it is essential, to merit the protection of Art. 1544, second paragraph, that the second realty buyer must act in good faith in registering his deed of sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).(J. Vitug Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).

Petitioner point out that the notice of lis pendens in the case at bar was annoted on the title of the subject property only on February 22, 1985, whereas, the second sale between petitioners Coronels and petitioner Mabanag was supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is that at the time petitioner Mabanag, the second buyer, bought the property under a clean title, she was unaware of any adverse claim or previous sale, for which reason she is buyer in good faith.

We are not persuaded by such argument.

In a case of double sale, what finds relevance and materiality is not whether or not the second buyer was a buyer in good faith but whether or not said second buyer registers such second sale in good faith, that is, without knowledge of any defect in the title of the property sold.

As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good faith, registered the sale entered into on February 18, 1985 because as early as February 22, 1985, a notice of lis pendens had been annotated on the transfer certificate of title in the names of petitioners, whereas petitioner Mabanag registered the said sale sometime in April, 1985. At the time of registration, therefore, petitioner Mabanag knew that the same property had already been previously sold to private respondents, or, at least, she was charged with knowledge that a previous buyer is claiming title to the same property. Petitioner Mabanag cannot close her eyes to the defect in petitioners' title to the property at the time of the registration of the property.

This Court had occasions to rule that:

If a vendee in a double sale registers that sale after he has acquired knowledge that there was a previous sale of the same property to a third party or that another person claims said property in a pervious sale, the registration will constitute a registration in bad faith and will not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land, 43 Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)

Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz, perfected on February 6, 1985, prior to that between petitioners and Catalina B. Mabanag on February 18, 1985, was correctly upheld by both the courts below.

Although there may be ample indications that there was in fact an agency between Ramona as principal and Concepcion, her mother, as agent insofar as the subject contract of sale is concerned, the issue of whether or not Concepcion was also acting in her own behalf as a co-buyer is not squarely raised in the instant petition, nor in such assumption disputed between mother and daughter. Thus, We will not touch this issue and no longer disturb the lower courts' ruling on this point.

WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the appealed judgment AFFIRMED.

SO ORDERED.

Narvasa, C.J., Davide, Jr. and Francisco, JJ., concur.

Panganiban, J., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 131784 September 16, 1999

FELIX I. GONZALES, petitioner, vs.THE HEIRS OF THOMAS and PAULA CRUZ, herein represented by ELENA C. TALENS, respondents.

PANGANIBAN, J.:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing that import most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff has fulfilled the condition upon which it is premised. Hence, an obligation to purchase cannot be implemented unless and until the sellers have shown their title to the specific portion of the property being sold.

The Case

Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision 1 of the Court of Appeals 2 in CA-GR CV No. 303754, which disposed as follows:

WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby REVERSED. The appellee FELIX GONZALES is hereby ordered to surrender possession of the property covered by the Contract of Lease/Purchase to the appellants, Heirs of Thomas and Paula Cruz, and to pay to the appellants the following amounts:

1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall have recovered possession of the property subject of the Contract of Lease/Purchase;

2. P5,000.00 as attorney's fees; and

3. Costs of suit. 3

On the other hand, the trial court 4 Decision, 5 which was by the CA, ruled as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of the defendant, Felix Gonzales, and against the plaintiffs, as follows:

(1) Ordering the dismissal of the case;

(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and the other sum of P10,000.00 as and for attorney's fees; and

(3) To pay the costs. 6

The Facts

We hereby reproduce, unedited, the Court of Appeals' summary of the facts of this case as follows:

On December 1, 1983, Paula Año Cruz together with the plaintiffs heirs of Thomas and Paula Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A Cruz, Irenea C. Victoria, Leticia C. Salvador and Elena C. Talens, entered into a Contract of Lease/Purchase with the defendant, Felix L. Gonzales, the sole proprietor and manager of Felgon Farms, of a half-portion of a "parcel of land containing an area 12 hectares, more or less, and an accretion of 2 hectares, more or less, situated in Rodriguez Town, Province of Rizal" and covered by Transfer Certificate of Title No. 12111 (Exhibit A, p. 157, Records). The contract of Lease/Purchase contains the following provisions:

1. The terms of this Contract is for a period of one year upon the signing thereof. After the period of this Contract, the LESSEE shall purchase the property on the agreeable price of One Million Pesos (P1,000,000.00) payable within Two (2) years period with an interest of 12% per annum subject to the devalued amount of the Philippine Peso, according to the following schedule of payment:

Upon the execution of the Deed of Sale 50% — and thereafter 25% every six (6) months thereafter, payable within the first ten (10) days of the beginning of each period of six (6) months.

2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand Five Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1, 1983.

xxx xxx xxx

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years, after which a new Contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.

xxx xxx xxx

(Exhibits A, A-1; pp. 157-158. Records)

The defendant Gonzales paid the P2,500.00 per hectare of P15,000.00 annual rental on the half-portion of the property covered by Transfer Certificate of Title No. 12111 in accordance with the second provision of the Contract of Lease/Purchase (p. 12, TSN, September 14, 1989) and thereafter took possession of the property, installing thereon the defendant Jesus Sambrano as his caretaker (pp. 16-17, 27 TSN, December 12, 1989). The defendant Gonzales did not, however, exercise his option to purchase the property immediately after the expiration of the one-year lease on November 30, 1984 (pp. 19-20, TSN, September 14, 1989). He remained in possession of the property without paying the purchase price provided for in the Contract of Lease/Purchase (Ibid.) and without paying any further rentals thereon (p. 36, TSN, November 7, 1989).

A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales informing him of the lessors' decision to rescind the Contract of Lease/Purchase due to a breach thereof committed by the defendant (Exhibit C; p. 162, Records) The letter also served as a demand on the defendant to vacate the premises within 10 days from receipt of said letter (Ibid.).

The defendant Gonzales refused to vacate the property and continued possession thereof (p. 2, Record). The matter was therefore brought before the barangay captain of San Isidro, but owing to the defendant's refusal to appear before the barangay, a certification allowing the case to be brought to Court was issued on March 18, 1987 (Exhibit E; p. 165, Records).

The lessor, Paula Año Cruz died the following day, March 19, 1987 (p. 9, TSN, September 14, 1989).

A final demand letter to vacate the premises was sent by the remaining lessors who are also the heirs of the deceased lessor Paula Año Cruz, through their counsel on August 24, 1987 which the defendant Gonzales received but did not heed (Exhibits D and D-1; pp. 163-164, Records).

The property subject of the Contract of Lease/Purchase is currently the subject of an Extra-Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property remains in the name of the plaintiffs' predecessors-in-interest, Bernardina Calixto and Severo Cruz (Exhibit B; p. 160, Records).

Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a complaint for recovery of possession of the property — subject of the contract with damages, both moral and compensatory and attorney's fees and litigation expenses (p. 3, Records).

Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of only P50,000.00 of the P500,000.00 agreed down payment on the purchase price of P1,000,000.00, the defendant Gonzales filed his answer on November 23, 1987 praying for a dismissal of the complaint filed against him and an award of moral, exemplary and actual damages, as well as litigation expenses (pp. 19-22, Records).

The defendant Sambrano was, upon motion, declared in default for failure to file an answer despite valid service of summons (p. 30, Records).

The parties limited the issues to be resolved to:

(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is to pay the down payment;

(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and

(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262, Records).

After the termination of the pre-trial conference, the trial court proceeded to hear the case on the merits and arrived at its appealed decision based on the following findings and conclusions:

Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a Transfer Certificate of Title in the name of the lessee within 4 years before a new contract is to be entered into under the same terms and conditions as the original Contract of Lease/Purchase. Thus, before a deed of Sale can be entered into between the plaintiffs and the defendant, the plaintiffs have to obtain the Transfer Certificate of Title in favor of the defendant. Article 1181 of the New Civil Code states that: "In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition." When the obligation assumed by a party to a contract is expressly subjected to a condition, the obligation cannot be

enforced against him unless the condition is complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs. Philippine Trust Co., 68. Phil. 48).1âwphi1.nêt

The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in the contract, does not entitle them to rescind the contract[.] Article 1191 of the New Civil Code states that: "The power to rescind obligations is implied in reciprocal ones, in case one of the obligers should not comply with what is incumbent upon him. The injured party may choose between the fulfillment of the obligation, with the payment of damages in either case. He may seek rescission, even after he has chosen fulfillment, if the latter should become impossible. . . ." The power to rescind is given to the injured party. Where the plaintiff is the party who did not perform, he is not entitled to insist upon the performance of the contract by the defendant or recover damages by reason of his own breach (Mateos vs. Lopez, 6 Phil. 206; Borque vs. Yu Chipco, 14 Phil. 95). An action for specific performance of a contract is an equitable proceeding, and he who seeks to enforce it must himself be fair and reasonable, and do equity (Seva vs. Berwin, 48 Phil. 581). In this case, plaintiffs failed to comply with the conditions precedent after 2-1/2 years from the execution of the contract so as to entitle them to rescind the contract. Although the contract stated that the same be done within 4 years from execution, still, the defendant has to be assured that the land subject of the case will be transferred in his name without any encumbrances, as the Extra-Judicial Partition dated July 17, 1989 was being processed, and continues to be in process to this date. The failure to secure the Transfer Certificate of Title in favor of the defendant entitles not the plaintiffs but, rather, the defendant to either rescind or to ask for specific performances.1âwphi1.nêt

Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New Civil Code states that:

If at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquies[c]ence of the lessor and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in Articles 1682 and 1687. The other terms of the original contract shall be revived.

Article 1682 of the New Civil Code states that:

The lease of a piece of rural land, when its duration has not been fixed, is understood to have been made for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years may have to elapse for the purpose.

The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial demand on July 2, 1986. The contract was entered into on December 1, 1983. The demand was thus made more than a year and a half from the expiry date of the original lease considering that there was no payment made for the second year of the lease. If one has to consider the fact that the defendant was given the option to purchase the property after two years, then, the lease would presumably run for at least two years. If that is so, then, the demand was made seven months after the expiration of the two-year lease. Still, this demand by the plaintiffs will come under the implied new lease of Articles 1682 and 1670 so that the plaintiffs are not entitled to terminate the Contract of Lease.

In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify the defendant in due time of their intention to that effect. Nor can they rescind the Contract of Purchase in view of the fact that there is a condition precedent which the plaintiffs have not fulfilled. It is the defendant now who has the option to either rescind or demand the performance of the contract. Moreover, according to Article 1654 of the New Civil Code, the lessor is obliged to deliver the thing which is the object of the contract in such condition as to render it fit for the use intended. Considering that the lessors-plaintiffs have not delivered the property in whole over the protest of the defendant, the latter suffered damages therefor. (p. 4-6, Decision; pp. 262-264, Records)

Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of having committed the following errors:

I

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS COULD NOT VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT (EXHIBIT "A") AND THEREAFTER TO TAKE POSSESSION OF THE LAND IN QUESTION AND EJECT THEREFROM DEFENDANTS-APPELLEES.

II

THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED AND PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)

The case was submitted for decision without the appellee's brief as per the Court's resolution dated July 8, 1992 (p. 71, Rollo).

Ruling of the Court of Appeals

The Court of Appeals reversed the trial court in this wise:

The trial court, in its decision interpreted the ninth provision of the Contract of Lease/Purchase to mean that before the appellee exercises his option to purchase the property by paying the 50% plus interest on the P1,000,000.00 purchase price, the appellants must first transfer the title to the property in the appellee's name. The Court finds this interpretation of the provision strained if not altogether absurd. The transfer of title to the property in the appellee's name cannot be interpreted as a condition precedent to the payment of the agreed purchase price because such interpretation not only runs counter [to] the explicit provisions of the contract but also is contrary to the normal course of things anent the sale of real properties. The terms of the contract [are] explicit and require no interpretation. Upon the expiration of the lease, the lessee shall purchase the property. Besides, the normal course of things anent the sale of real properties dictates that there must first be payment of the agreed purchase price before transfer of title to the vendee's name can be made.

This was precisely what the appellants and Paula Año Cruz had in mind when they had the ninth provision incorporated in the Contract of Lease/Purchase. They had asked for a period of 4 years from the time they receive the downpayment of 50% within which to have [the] title to the property transferred in the name of the appellee The reason for this four (4) year period is [that] title to the property still remains in the name of the original owners, the predecessors-in-interest of the herein appellants and [transferring] the title to their names and eventually to the lessee-purchaser, appellee herein, would take quite some time.

The appellee wanted to have the title to the property transferred in his name first before he exercises his option to purchase allegedly in accordance with the ninth provision of the contract. But the ninth provision does not give him this right. A reading of the contract in its entirety shows that the 4 year period asked for by the appellants within which to have title to the property transferred in the appellee's name will only start to run when the appellee exercises his option to purchase. Since the appellee never exercised his option to purchase, then appellee is not entitled to have the title to the property transferred in his name.

Attributing reversible errors to the appellate court, petitioner elevated the case to this Court. 7

The Issues

In his Memorandum, 8 petitioner submits the "following main issues":

I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of discretion in the interpretation of [the] law between the parties.

II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts which resulted [in] departing from the usual course of judicial proceedings.

For these issues to be resolved, petitioner asks this Court to answer the following questions:

1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Contract and that [in] paragraph No. 9 thereof?

2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner could exercise his option to buy the property?

3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?

In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of the Contract.

The Court's Ruling

The Petition is meritorious.

Main Issue:

Interpretation of Paragraph Nine

In its first paragraph, the disputed agreement provides that petitioner shall lease the property for one year, after which he "shall purchase" it. Paragraph nine, on the other hand, requires herein respondents to obtain a separate and distinct Transfer Certificate of Title (TCT) over the property, viz.:

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the lease portion to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years, after which a new Contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.

Alleging that petitioner has not purchased the property after the lapse of one year, respondents seek to rescind the Contract and to recover the property. Petitioner, on the other hand, argues that he could not be compelled to purchase the property, because respondents have not complied with paragraph nine, which obligates them to obtain a separate and distinct title in their names. He contends that paragraph nine was a condition precedent to the purchase of the property.

To be sure, this paragraph — and the entire agreement, for that matter — is not a model of how a contract should be worded. It is an invitation to a litigation, as in fact the parties had to go all to way up to this Court to plead for a resolution of their conflict which is rooted in their failure to express themselves clearly. Small wonder, even the two lower courts gave contradictory understanding of this provision, thereby necessitating the intervention of the highest court of the land.

Both the trial court: and the Court of Appeals (CA) interpreted this provision to mean that the respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial court held that this obligation was a condition precedent to petitioner's purchase of the property. Since respondents had not performed their obligation, they could not compel petitioner to buy the parcel of land. The CA took the opposite view, holding that the property should be purchased first before respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.

As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains that respondents were obligated to procure a TCT in their names before he could be obliged to purchase the property in question.

Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of several meanings, it shall be understood as bearing that import most adequate to render it effectual. 9 Considering the antecedents of the ownership of the disputed lot, it appears that petitioner's interpretation renders clause nine most effectual.

The record shows that at the time the contract was executed, the land in question was still registered in the name of Bernardina Calixto and Severo Cruz, respondents' predecessors-in-interest. There is no showing whether respondents were the only heirs of Severo Cruz or whether the other half of the land in the name of Bernardina Calixto was adjudicated to them by any means. In fact, they admit that extrajudicial proceedings were still ongoing. Hence, when the Contract of Lease/Purchase was executed, there was no assurance that the respondents were indeed the owners of the specific portion of the lot that petitioner wanted to buy, and if so, in what concept and to what extent.

Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT in their names. This was necessary to enable them to show their ownership of the stipulated portion of the land and their concomitant right to dispose of it. Absent any title in their names, they could not have sold the disputed parcel of land.

It is well-settled principle in law that no one can five what one does not have — nemo dat quod non habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer can acquire no more than what the seller can transfer legally. 10

Because the property remained registered in the names of their predecessors-in-interest, private respondents could validly sell only their undivided interest in the estate of Severo Cruz, the extent of which was however not shown in the records. There being no partition of the estate thus, far, there was no guarantee as to how much and which portion would be adjudicated to respondents.

In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold. 11 In this case, the respondent could not deliver ownership or title to a specific portion of the yet undivided property. True, they could have intended to sell their hereditary interest, but in the context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific portion of the land to be segregated, identified and specifically titled. Hence, by the said Contract, the respondents as sellers were given a maximum of four years within which to acquire a separate TCT in their names, preparatory to the execution of the deed of sale and the payment of the agreed price in the manner described in paragraph nine.

This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to help them expedite the transfer of the TCT to their names. Ineluctably, the intention of the parties was to have the title transferred first to respondents' names as a condition for the completion of the purchase.

In holding that clause nine was not a condition precedent to the purchase of the property, the CA relied on a literal interpretation to the effect that the TCT should be obtained in the name of the petitioner-vendee.

It reasoned that the title could be transferred to the name of the buyer only after the completion of the purchase. Thus, petitioner should first purchase the property before respondents could be obliged to transfer the TCT to his name.

We disagree. The literal interpretation not only ignores the factual backdrop of the case; it also utilizes a faulty parsing of paragraph nine, which should purportedly read as follows: "The lessors . . . shall undertake to obtain a separate and distinct TCT . . . to the LESSEE within a reasonable period of time which shall not in any case exceed four (4) years . . .. " Read in its entirety, however, paragraph nine does not say that the TCT should be obtain in the name of the lessee. In fact, paragraph nine requires respondents to obtain a "TCT over the herein leased portion to the LESSEE," thereby showing that the crucial phrase "to the LESSEE" adverts to "the leased portion" and not to the name which should appear in the new TCT.

Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after a separate TCT had been obtained, "a new contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned."

If, as the CA held, petitioner should purchase the property first before the title can be transferred to his name, why should there be a waiting period of four years before the parties can execute the new contract evidencing the sale? Why should the petitioner still be required to pay rentals after it purchases and pays for the property? The Contract could not have envisioned this absurd scenario.

Clearly, the appellate court's literal interpretation of the first portion of paragraph nine renders the latter portion thereof ineffectual. In other words, that portion can only mean that the respondents should first obtain a TCT in their names, after which petitioner is given time to purchase and pay for the property.

Respondents insist that "the obligation of petitioner to buy the disputed land immediately after the termination of the one year lease period isexplicit." 12 However, it is more reasonable to state that the first paragraph was effectively modified by the ninth. To repeat, petitioner can be compelled to perform his obligation under the first paragraph, only after respondents have complied with the ninth. Unless and until respondents have done so, the first paragraph cannot be enforced against the petitioner.

In sum, we hold that the ninth provision was intended to ensure that respondents would have a valid title over the specific portion they were selling to petitioner. Only after the title is assured may the obligation to buy the land and to pay the sums stated in the Contract be enforced within the period stipulated. Verily, the petitioner's obligation to purchase has not yet ripened and cannot be enforced until and unless respondents can prove their title to the property subject of the Contract.

Secondary Issues

Ninth Clause Was

a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in their names and not in the name of petitioner, it logically follows that such undertaking was a condition precedent to the latter's obligation to purchase and pay for the land. Put differently, petitioner's obligation to purchase the land is a conditional one and is governed by Article 1181 of the CivilCode. 13

Condition has been defined as "every future and uncertain event upon which an obligation or provision is made to depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who execute the juridical act." 14 Without it, the sale of the property under the Contract cannot be perfected, and petitioner cannot be obliged to purchase the property. "When the consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not perfected unless that condition is first complied with." 15

The Court has held that "[w]hen the obligation assumed by a party to a contract is expressly subjected to a condition, the obligation cannot be enforced against him unless the condition is complied with." 16

Furthermore, "[t]he obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain event, so that if that event does not take place, the parties would stand as if the conditional obligation had never existed." 17

In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents comply with the suspensive condition that they acquire first a separate and distinct TCT in their names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to purchase the land has not arisen.

Respondents Cannot

Rescind the Contract

In the same vein, respondents cannot rescind the contract, they have not caused the transfer of the TCT to their names, which is a condition precedent to petitioner's obligation. This Court has held that "there can be no rescission (or more properly, resolution) of an obligation as yet non-existent, because the suspensive condition has not happened." 18

Since the reversal of the CA Decision is inevitable, the trial court's judgment should be reinstated. However, we find no sufficient factual or legal justifications for the award of moral damages and attorney's fees.1âwphi1.nêt

WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET ASIDE. The Decision of the trial court is REINSTATED, but the award of moral damages and attorney's fees is DELETED for lack of basis. No costs.

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., took no part.

Footnotes

1 Penned by Justice Ramon A. Barcelona; concurred in by Justices Jesus M. Elbinias (chairman) and Artemio G. Tuquero (member).

2 Eleventh Division.

3 CA Decision, p. 14; rollo, p. 59.

4 Regional Trial Court of San Mateo, Rizal, Branch 75.

5 Written by Judge Cipriano D. Roma.

6 RTC Decision, pp. 6-7; rollo, pp. 43-44.

7 This case was deemed submitted for decision on January 6, 1999, upon receipt by this Court of respondents' Memorandum. Petitioner's Memorandum was filed earlier.

8 See pp. 10-11; rollo, pp. 103-104.

9 Art. 1373, Civil Code.

10 Segura v. Segura, 165 SCRA 368, September 19, 1988.

11 Dawson v. Register of Deeds, GR No. 120600, September 22, 1998, per Panganiban, J.; Salazar v. Court of Appeals, 258 SCRA 317, July 5, 1996; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381, August 18, 1972; Pingol v. Court of Appeals, 226 SCRA 118, September 6, 1993.

12 Respondents' Memorandum, p. 11; rollo, p. 123.

13 The provision reads:

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.

14 Arturo Tolentino, Civil Code of the Philippines, Vol. IV, p. 144; citing Brugi, p. 108; 1 Rugigiero 289; 1 Colin & Capitant 194.

15 Ruperto v. Kosea, 26 Phil 227, December 4, 1913, per Torres, J.

16 Wise & Co. v. Kelly, 37 Phil 696, February 21, 1918, per Fisher J.; PNB v. Philippine Trust Co., 68 Phil 48, May 12, 1939, per Diaz, J.; Roque v. Lapuz, 96 SCRA 741.

17 Rose Packing Company, Inc. v. Court of Appeals, 167 SCRA 309, November 14, 1988, per Paras, J.; Gaite v. Fonacier, 2 SCRA 831.

18 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 46 SCRA 381, August 18, 1972, per Reyes, J.B.L., J.

Republic of the PhilippinesSUPREME 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 plaintiff-appellant'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 defendants-appellees) 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.

Melencio-Herrera, Paras, Padilla and Sarmiento JJ., concur.

 Footnotes

1 Penned by Justice Crisolito Pascual, with Justices Samuel F. Reyes and Rafael C. Climaco concurring.

2 Rollo, 60.

3 Ibid., 49-55.

4 Ibid., 49-55.

5 Ibid., 16-17.

6 Folder of Original Exhibits for Plaintiff, Exh. A.

7 Id., Exh. D, D-1 to D-2.

8 Id., Exh. D-3.

9 Folder of Original Exhibits for Defendants, Exh. 18.

10 Rollo, 73; Record on Appeal, CA-G.R. No. 52296-R, 35-36.

11 Ibid., id., id., 36-37.

12 Ibid., id., id., 103-114.

13 Rollo, CA-G.R. No. 52296-R, 73-74.

14 Ibid., id., 75.

15 Ibid., id., 76-86.

16 Ibid., id., 87.

17 Helmuth, Jr. vs. People of the Philippines, et al., 112 SCRA 573 (1982); St. Peter Memorial Park, Inc., et al. vs. Cleofas, et al., 121 SCRA 287 (1983); Serrano vs. Court of Appeals, et al., 139 SCRA 179 (1985).

18 Rollo, 34.

19 Ibid., 54.

20 Folder of Original Exhibits for Defendants, Exh. 9.

21 Folder of Original Exhibits for Plaintiff, Exh. D.

22 Velasquez, et al. vs. Teodoro, et al., 16 Phil. 757 (1923); Bacordo vs. Alcantara, et al., 14 SCRA 730 (1965).

23 17A C.J.S. 228.

24 Op. cit., 233-231.

25 Art. 1345, Civil Code.

26 Concepcion vs. Sta. Ana, 87 Phil. 787 (1950).

27 Rollo, 58-59.

28 Art. 1181, Civil Code; Araneta vs. Rural Progress Administration, 92 Phil. 98 (1952).

29 Gaite vs. Fonacier, et al., 2 SCRA 830 (1961).

30 Pio Barretto Sons, Inc. vs. Compania Maritima, 62 SCRA 147 (1975).

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-58286 May 16, 1983

AGAPITO B. DUCUSIN and AGAPITO T. DUCUSIN, JR., petitioners, vs.HON. COURT OF APPEALS, VIRGILIO S. BALIOLA and LILIA S. BALIOLA, respondents.

Agapito Ducusin in his own behalf.

Roberto Brodette for respondents.

 GUERRERO, J.:

Petition for certiorari praying that the judgment in CA-G.R. No. SP-11473- PR entitled "Virgilio S. Baliola and Lilia S. Baliola vs. Hon. Alfredo L. Benipayo, Judge, CFI of Manila, Branch XVI, Agapito Ducusin and Agapito Ducusin, Jr." be set aside and reversed, the dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from is hereby MODIFIED. The complaint for ejectment is hereby DISMISSED. Petitioners are hereby ordered to pay private respondent Agapito Ducusin Sr. the sum of P263.29 as their proportionate share for the use of the booster pump. Petitioners are likewise ordered to share in the expenses incurred for the use of the booster pump in the future until the termination of the contract of lease. No costs.

It appears from the records that on February 20, 1975, petitioner Agapito Ducusin leased to private respondent, Virgilio S. Baliola married to Lilia Baliola a one-door apartment unit located in 3319-A, Magistrado Araulio St., Bacood, Sta. Mesa, Manila under the contract of lease, Exhibit "A", pertinent stipulations of which state:

xxx xxx xxx

Now, therefore, for and in consideration of the foregoing premises and covenants and stipulations herein contained in a monthly rental of Two Hundred and Twenty (P220.00) Pesos, the Lessor hereby lease the one-door residential apartment located at No. 3319-A Maj. Araulio St., Bacood, Manila under the following terms, stipulations and conditions:

l. The lessees agrees to pay to the Lessor on or before the 30th day of each and every month the sum of Two Hundred and Twenty (P220.00) Pesos as rental fee for the subject premises, without need of demand;

2. The term of this contract shall be in a month to month basis commencing on February 19,1975 until terminated by the lessor on the ground that his children need the premises for their own use or residence or upon any ground provided for in accordance with law;

3. The Lessees, hereby warrants that the leased premises will be used by him exclusively as residence only and that Lessees shag not directly or indirectly sublease, assign, transfer, convey or in any manner encumber the right of lease or in any part of the leased premises under any circumstances whatsoever;

4. The Lessees hereby agrees to keep and maintain the premises clean or same in such good and tenantable conditions, and shall comply with all government sanitary regulations and safety, as well as electrical regulations which may be imposed by the government or the lessor himself;

5. All utilities such as light, water, telephone, gas service, etc. in the leased premises shall be paid for by the Lessees,

6. The Lessor hereby undertake to maintain the Lessees in a peaceful enjoyment and possession of the lease premises and warrants that the premises lease by him to the lessees, are in good habitable condition;

7. That all repairs necessary for the preservation of the wire screens, electric switches and other parts, plumbing fixtures, articles or toilet parts and tubes, paints and payment for labor for repairs shall be for the account of the Lessees, except big major repairs;

8. That the Lessees agrees to deposit the amount of four hundred and forty ( P440.00) pesos rental deposit to the Lessor. The said rental deposit which is equivalent to payment of two months rental fee could be used or be paid for the Lessees last two months stay in the leased premises. ... (Exhibit "A"). (Emphasis supplied)

The Baliola spouses occupied the apartment for almost two (2) years, paying its rentals when on January 18, 1977, petitioner Ducusin sent a "Notice to Terminate Lease Contract" to private respondents Baliolas terminating the lease and giving them until March 15, 1977 within which to vacate the premises for the reason that his two children were getting married and will need the apartment for their own use and residence (Exhibit "B"). A second letter dated February 14, 1977 was thereafter sent by Ducusin to respondents Baliolas making an inquiry on any action the latter had taken on the previous notice to terminate the lease contract.

Respondents made no reply to the "Notice to Terminate Lease Contract". Indeed, they wrote a letter to the Secretary of National Defense dated February 12, 1977, reporting that Ducusin was intent on evicting them from the leased premises (Exhibit "6").

So on April 14, 1977, petitioners filed an action for ejectment against the Baliola spouses in the City Court of Manila, Branch XVI, alleging that having constructed the apartment complex for the use and residence of his children (each to a unit) if and when they decide to marry and live independently and that the apartment unit located at 3319-A Magistrado Araullo St., Bacood, Manila having been allotted to his son, Agapito Ducusin, Jr., the said unit is now needed by Agapito, Jr. who is getting married in the month of May, 1977 and that said Agapito, Jr. has decided to live independently.

The complaint for eviction further alleged that the lessees have violated the terms of the contract by subleasing the premises; that the lessees have not used the premises solely for residential purposes but have used the same as factory and/or manufacturing premises for their commercial goods; and that they have neglected to undertake repairs of the apartment and the premises according to their agreement.

The lessees denied the allegations of the lessor and claimed in their Answer that the ejectment suit "is a well-planned scheme to rid the defendants and family out of their apartment, and to circumvent the law prohibiting raising the rental of apartments and houses. "

The City Court of Manila, Branch XVI, decided in favor of the lessor Ducusin on the ground that the "defendants' contract with the plaintiff has already terminated with the notice of termination sent by the plaintiff to the defendants on the ground that he needs the premises for his own children." The trial court's decision states the following dispositive portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, ordering the defendants and all persons claiming possession under them to vacate the premises known as 3319-A Magistrado Araulio St., Bacood, Sta. Mesa, Manila, and surrender possession thereof to the plaintiffs herein; ordering the defendants to pay the plaintiffs the amount of P220.00 monthly as reasonable compensation for the use of the premises starting December 1978 until the premises is finally vacated and possession thereof surrendered to the plaintiffs; ordering the defendants to pay to the plaintiffs the amount of P263.29 as reimbursement for the expenses incurred for the use of the booster pump; ordering the defendants to pay the plaintiff the amount of P700.00 as reasonable attorney's fees, plus the costs of suit.

The lessees appealed to the Court of First Instance of Manila, Branch XVI, assigning the following errors: (a) That the lower court erred in not finding that the written contract of lease falls within the range of P.D. No. 20; (b) That the lower court erred in finding that the need of the leased premises by the plaintiffs-appellees to be lawful and valid and satisfactorily proved by them; (c) That the lower court erred in awarding damages in the form of reimbursement of the expenses for the use of the booster pump and attorney's fees; and (d) That the lower court erred in not allowing defendants-appellants' counter-claim.

The Court of First Instance of Manila, Branch XVI, affirmed the decision of the City Court of Manila, Branch XVI, based on its findings that: (1) mere allegation of the landlord in his need of the premises for the use of the immediate members of his family "constitutes a cause to eject the tenants ..."; (2) the marriage of private respondent Agapito Ducusin, Jr. was proved by the testimony of private respondent Agapito Ducusin, Sr., the latter's son Arturo, photographs depicting married couple and a marriage certificate (Exhibits "F", "G", "H" and "I"); and (3) that petitioners admitted the existence of the verbal agreement to share the expenses incurred for the use of the booster pump.

The lessees, still not satisfied with the CFI decision, went to the Court of Appeals on a petition for review submitting that: "(1) that the respondent CFI of Manila erred in holding that the need of the premises in question by the private respondents is lawful and valid; (2) that the respondent CFI of Manila erred in finding that the need of the premises a quo by the private respondents has been sufficiently proven by them and legally entitle them to judicially eject the petitioners from the premises; (3) that the respondent CFI of Manila erred in ruling that the award by the trial court to private respondents of damages in the form of reimbursement of expenses for the use of the booster pump is proper and legal."

In resolving the appeal, the respondent appellate court proceeded to "examine (the) determination of the questions (1) whether or not an owner of a leased premises can unilaterally terminate the contract of lease under the terms and conditions stated therein; and (2) whether or not the happening of the resolutory condition re: the need of the immediate members of the family of the lessor of the leased premises - has been established by a preponderance of evidence

Sustaining the validity of the clause in the contract of lease in question, the Court of Appeals held:

The clause in the contract of lease dated February 20, 1975 at issue in the instant case reads:

xxx xxx xxx

2. The term of this contract shall be in a month-to-month basis commencing on February 19, 1975 until terminated by mutual agreement or terminated by the lessor on the ground that his children need the premises for their own use or residence or upon any ground provided for in accordance with law-,

xxx xxx xxx (Emphasis supplied.)

The Parties to the contract of lease agreed that the obligations arising from the said contract shall be extinguished due to the following causes; (1) termination of the contract by mutual consent of the Parties; (2) when the lessor elects to terminate the contract on the ground that his children need the premises for their own use or residence and (3) for any cause as provided in accordance with law.

In the complaint for ejectment, private respondents rely on three causes of action to support their claim that the contract of lease entered into with the petitioners was terminated: (1) violation of the clause in the contract against sublease: (21 use of the leased premises for commercial purposes and (3) happening of the resolutory condition - need of the leased premises by the lessor's children. The trial court rejected the first two grounds as not being supported by evidence presented but sustained the private respondents' third cause of action.

The validity of the terms and conditions in a contract is governed by the following Civil Code provisions:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. ...

The resolutory condition in the contract of lease re: the need of the lessor's children of the leased premises is not a condition the happening of which is dependent solely upon the will of the lessor. The happening of the condition depends upon the will of a third person the lessor's children. Whenever the latter require the use of the leased premises for their own needs, then the contract of lease shall be deemed terminated. The validity of the said condition as agreed upon by the parties stands.

We agree with the above ruling of the respondent Court and, therefore, affirm the same.

As to the second issue: whether the need of the immediate members of the family of the lessor of the leased premises has been established by a preponderance of evidence, the respondent court ruled against the lessor Ducusin and We quote:

Upon a careful review of the records of the instant case, We are of the opinion that the private respondents have not proved by a preponderance of evidence the alleged need of the immediate members of his family of the use of the leased premises in dispute,

Private respondent Agapito Ducusin Sr. alleged in his complaint that he needed the leased premises because his son Agapito Ducusin, Jr. was getting married. In the proceedings at the trial Court, he testified that Agapito Ducusin Jr. was getting married on May 1977, hence the latter needed the leased premises (T.S.N., March 7, 1978, pp. 11-12).

No proof of the marriage of private respondent Agapito Ducusin, Jr. was presented from the time of the institution of the case against the petitioners on April 13, 1977 until June 5, 1979

when Arturo Ducusin testified for his father, Agapito Ducusin, Sr. In fact, evidence on the alleged marriage of private respondent Agapito Ducusin, Jr. was only presented after private respondents filed a "Motion To Reopen The Case For Reception of Rebuttal Evidence For Plaintiffs." The evidence consists of photographs of a wedding (Exhibits "J" and "J-1") and a marriage certificate (Exhibit "H"). An alleged letter of the private respondent Agapito Ducusin, Jr. where it stated that the latter intended to settle in the Philippines instead of Canada where he was presently residing with his wife (Exhibits "F" & "G") was also presented.

To give weight and credence to the evidence presented by the private respondents on the need of the landlord's children to occupy and use the leased premises runs counter to the time-honored rule against hearsay evidence.

Private respondent Agapito Ducusin, Jr. though named a plaintiff in the case at bar never appeared during the proceedings in the trial Court. Even his presence in the Philippines in 1977 when the case was instituted remains subject to conjecture. His father, private respondent Agapito Ducusin Sr., merely intimated during the trial Court proceedings that the younger Ducusin applied as an immigrant to Canada (T.S.N. March 7, 1978, pp. 11- 12)

The letters of private respondent Agapito Ducusin, Jr. to his brother Arturo Ducusin, photographs of the alleged wedding of the former and the certificate of marriage of Agapito Ducusin, Jr. are all self-serving. . Petitioners are entitled to cross-examine the person who y made the statements in the letter following the rulings in Pastor v. Gaspar, 2 Phil. 529; U.S. v. Caligagan, 2 Phil. 433; U.S. v. Manalo, 6 Phil. 364. The evidence presented to prove the alleged marriage of Agapito Ducusin, Jr. should be excluded in accordance with the provisions of Rule 130, Sec. 30 of the Rules of Court which states:

Sec. 30. Testimony generally confined to personal knowledge; hearsay excluded: A witness can testify only to those facts which he knows of his own knowledge; that is, which is derived from his own perception, except as otherwise provided in these rules.'

Moreover, even if We are satisfactorily convinced of the marriage of private respondent Agapito Ducusin, Jr., it does not establish the alleged need of the latter to use the leased premises presently occupied by the petitioners. Private respondent Agapito Ducusin, Sr. did not show that the one-door apartment leased to the petitioners was the only place available for the use of his son, Agapito Ducusin, Jr. On the contrary, petitioner Virgilio Baliola testified that private respondent Agapito Ducusin, Sr. informed him before the action was instituted against him that another apartment unit, No. 3319-D similarly owned by the latter would soon be vacated (T.S.N., July 27, 1978, pp. 17-18).

According to the petitioners, the above ruling of the Court of Appeals is erroneous and should be reversed because "I. The contract expired by the termination of the period of the lease and upon notice to vacate, irrespective of the truth or not of petitioner' need of the subject premises; II. The evidence of petitioners on the third cause of action was sufficient to show their need of the premises for their personal use and occupation; and III. There being a provision in the contract on the third cause of action, the house rental laws have not been violated." (Petition, p. 11, Records).

We find for the petitioners. We do not agree with the holding of the respondent court that the petitioners have not proved by a preponderance of evidence the alleged need of the immediate members of his family for the use of the leased premises, which holding is grounded on the assumption that "to give weight and credence to the evidence presented by the private respondents on the need of the landlord's children to occupy and use the leased premises runs counter to the time-honored rule against hearsay evidence. " (CA Decision, p. 108, Records). The Court of Appeals rejected the letters of petitioner Agapito Ducusin, Jr. to his brother, Arturo Ducusin the photographs of the wedding of Ducusin, Jr. and the certificate of marriage of Ducusin, Jr. and Adela Villacorta as self. serving, citing Sec. 30, Rule 130 of the Rules of Court which provides that the witness can testify only to those facts which he knows of his own knowledge. And since the marriage was not proved, the appellate court reasoned out that the need for the use of the leased premises by Ducusin, Jr. was not established.

We reject this holding of the respondent court. In the first place, as pointed out by the petitioners, the testimony of petitioner Agapito Ducusin, Sr. should have been given weight by the appellate court because he testified that his son Agapito Jr. got married to Adela Villacorta on November 25, 1978 in Edmonton Alberta, Canada at the St. Anthony Church and that he knows this fact of marriage since he was present during the wedding ceremony and pictures marked Exhibits "H", "I", "J" and "J-1" were taken of the wedding party after the ceremony and wherein he Identified himself in the picture (Exh. "J") as "the gentleman in dark jacket on the right side" (t.s.n., June 5,1979, pp. 19-21; pp. 177-179, Records). And with the testimony of Arturo Ducusin, a brother of Agapito Jr., which may be considered under Rule 130, Sec. 33 as an act or declaration about pedigree, the word "pedigree" including relationship, family genealogy, birth, marriage, death, the dates when and the places where these facts occurred, and the names of the relatives, as well as the presentation of the marriage certificate of Agapito Ducusin, Jr. and Adela Villacorta (all of which evidence were noted, admitted and considered in the decision of the case before the CFI of Manila, Branch XVI (p. 87, Records) and in the decision of the City Court of Manila, Branch XVI (p. 62, Records) both holding that the marriage has been sufficiently proved, We rule that the Court of Appeals gravely erred in excluding the evidence described above and presented to prove the marriage of Agapito Ducusin, Jr.

We likewise conclude that the intention to use the leased premises as the residence of Ducusin Jr. has been satisfactorily and sufficiently proved by clear, strong, and substantial evidence found in the records of the case. The testimony of the petitioner, Ducusin Sr., that his son needs the leased premises as he was getting married and did in fact got married, for which reason petitioner sent the "Notice to Terminate His Contract" (Exh. "B"); the testimony of Arturo Ducusin -that he had an overseas telephone talk with his brother Agapito Jr. informing that the latter was coming home and that he and his wife were preparing their documents and arriving within the month (t.s.n., pp. 13, 17, June 5, 1979; p. 15, Records) and the documentary evidence (Exh. "F" and "G") which is the letter of the private respondent Agapito Ducusin, Jr. where it stated that he intended to settle in the Philippines instead of Canada where he was presently residing with his wife (CA decision, p. 108, Records) - an these evidence clearly and competently prove the intention of petitioner Agapito Ducusin, Jr. to re side in the Philippines and use the leased premises for his residence and his wife.

The contention of the petitioner that the contract of lease in question is for a definite period, being on a month-to-month basis beginning February 19, 1975 and is, therefore, not covered by P.D. No. 20, is correct. The rule We laid down in Rantael vs. Court of Appeals and Teresa Llave, L-47519, April 30, 97 SCRA 453, is squarely on an fours with the case at bar and is controlling. The Supreme Court said, and We quote:

1. The source of disagreement between petitioner Rantael and respondent Llave relates to the following quoted provisions of the Agreement on Occupancy of Apartment dated August 1, 1974:

The undersigned TENANT hereby agrees with Mrs. Teresa F. Llave as owner, to use, occupy and live in the latter's apartment at Standford, Quezon City, known as Door 51-A on a month to month basis, beginning today, under the following terms and condition until the premises, (are) completely vacated. ...

The aforequoted provisions of the Agreement on Occupancy of Apartment cannot but be read as providing for a definite period for the lease. Period relates to "length of existence; duration" or even a "series of years, months or days in which something is completed" Definite means "having distinct or certain limits; determinate in extent or character; limited fixed." A definite period, therefore, refers to a portion of time certain or ascertainable as to its beginning, duration and termination. As already stated above, the parties further expressly agreed that — 'upon thirty (30) days notice, either party may terminate this agreement, each fulfilling their respective obligations herein agreed.

In the case at bar, the lease entered into between petitioner Rantael and respondent Llave commenced, in accordance with the provisions of the Agreement on Occupancy of Apartment, on August 1, 1974, the date of execution of the said Agreement, considering that the parties employed the phrase "beginning today" with reference to the starting point of the period during which petitioner Rantael would have use and occupancy of the premises of unit 51-A. As to the duration and termination of the aforementioned contractual relations,

the parties used the phrase "on a month to month basis" in the Agreement with reference to the length of time during which petitioner Rantael would have use and occupancy of the leased premises. And month here should be construed, in like manner as in the interpretation of laws pursuant to the provisions of Article 12 of the Civil Code of the Philippines, there being no reason to deviate therefrom, as a period composed of thirty days. The contractual relations between petitioner Rantael and respondent Llave ceased after the expiration of the first thirty days reckoned from August 1, 1974 but continued for the next thirty-day period and expired after the last day thereof, repeating the same cycle for the succeeding thirty-day periods, until the Id respondent Llave exercised her express prerogative under the agreement to terminate the same.

xxx xxx xxx

However, by express exception of P.D. No. 20, judicial ejectment lies "when the lease is for a definite period"or when the fixed or definite period agreed upon has expired. The lease in the case at bar having a definite period, it indubitably follows that the exception, rather than the general rule, applies and, therefore, respondent Llave's right to judicially eject petitioner Rantael from the premises may be duly enforced. This has been the consistent administrative interpretation of the Office of the President, supra. Therefore, no error was committed by respondent appellate court. ...

As to the holding of the respondent court that petitioner Ducusin, Sr. "did not show that the one-door apartment leased to the petitioners was the only place available for the use of his son, Agapito Ducusin, Jr.," on the contrary, We find in the records evidence that out of the eight doors apartment building belonging to the petitioner Ducusin Sr., three doors, now 31 years old, became untenantable due to wear and tear and the remaining five doors were all occupied by tenants; first door, 3319, is occupied by Mr. Coluso, 3319-A by the Baliola spouses, 3319-B by Mr. & Mrs. Magsano, 3319-C by Mr. & Mrs. de los Santos, and 3319-D by Videz. (pp. 13-14, t.s.n., July 27, 1978; see p. 14, Records). From this evidence may be deduced that there is no other place available for the use and residence of petitioner's son, Agapito Ducusin, Jr. Assuming that Agapito Ducusin, Sr. informed his tenant Virgilio Baliola that another apartment unit No. 3319, would soon be vacated, the alleged vacancy is nearly speculative and there is no showing that it actually became vacant and available.

There is, therefore, no factual and legal basis for the respondent court's decision dismissing the complaint for ejectment and reversing the findings of facts of both the City Court of Manila, Branch XVI, and the Court of First Instance of Manila, Branch XVI.

And that brings Us to the last point in the review of the case at bar. Generally, the findings of fact by the Court of Appeals are deemed accepted as the basis for review of the appellate court's decision. But this rule is not without exception such as shown in the case before Us where the Court of Appeals reversed the findings of fact made by the trial court (the City Court of Manila) and also the Court of First Instance, by excluding evidence supposedly hearsay when they are not pursuant to the rules of evidence, by ignoring evidence on record that are competent, clear and substantial and by misapprehending the facts, thereby making manifest the commission of grave abuse of discretion on the part of the respondent appellate court and so warrants and justifies a review not only of the law but also the facts.

We reiterate Our doctrine in Tolentino vs. De Jesus, 56 SCRA 167, where it was ruled that the findings of facts of the Court of Appeals are not conclusive where there is grave abuse of discretion; the judgment is based on misapprehens ion of facts; the findings of facts of the Court of Appeals are contrary to those of the trial court or premised on the absence of evidence and is contradicted by evidence on record; the conclusion is a finding grounded entirely on speculation, surmise and conjectures; and the inference made is manifestly mistaken. These are the exceptions to the general rule. The instant petition is such an exception.

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the respondent Court of Appeals subject of this review is hereby REVERSED and SET ASIDE. The decision of the City Court of Manila, Branch XVI and affirmed on appeal to the Court of First Instance of Manila, Branch XVI is hereby reinstated and restored, with costs in favor of petitioners.

SO ORDERED.

Makasiar, Aquino, Concepcion, Jr., De Castro and Escolin JJ., concur.

Abad Santos, J., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 81158 May 22, 1992

OSCAR A. JACINTO and LIBRADA FRANCO-JACINTO, petitioners, vs.ROGELIO KAPARAZ, RAUL KAPARAZ and ROSE MARIET KAPARAZ, respondents.

Garcia, Iñigo & Ledesma Law Office for petitioners.

 DAVIDE, JR, J.:p

Petitioners urge this Court to review and set aside the decision of the respondent Court of Appeals of 30 July 1987 in C.A.-G.R. CV No. 69357, 1 the dispositive portion of which reads:

WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and judgment is hereby rendered as follows:

1. The Complaint/Amended Complaint is hereby dismissed.

2. The agreement between the parties dated March 11, 1966 (Exhibit "A"; also marked as Exhibit "1" ) is hereby declared extinguished.

3. To prevent unjust enrichment at the expense of another, the defendants-appellants are hereby ordered to reimburse to the plaintiffs-appellees the sum of P500.00 paid by the latter to the Development Bank of the Philippines for the defendants-appellants' P2,600.00 loan account.

No pronouncement as to costs.

SO ORDERED. 2

The undisputed antecedent facts are as follows:

On 11 March 1966, herein petitioners and private respondents entered into an agreement (hereinafter referred to as Agreement) under which the private respondents agreed to sell and convey to petitioners a portion consisting of six hundred (600) square meters of a lot located in Matiao, Mati, Davao Oriental and covered by Transfer Certificate of Title No. T-3694 for a total consideration of P1,800.00 of downpayment of P800.00 was paid upon execution of the Agreement. The balance of P1,000.00 was to be paid by petitioners on installment at the rate of P100.00 a month to the Development Bank of the Philippines (DBP) to be applied to private respondents' loan accounts. Paragraphs 5, 6, 7 and 8 of the Agreement read as follows:

That the PARTY OF THE FIRST PART is very much in need of cash to pay the loan to the DEVELOPMENT BANK OF THE PHILIPPINES herein abovementioned which is very much in arrears and the PARTY OF THE SECOND PART is agreeable to advance the sum of EIGHT HUNDRED (P800.00) PESOS as partial payment of the said loan to the Development Bank of

the Philippines provided that the PARTY OF THE FIRST PARTY (sic) shall sell, transfer, cede and convey absolutely to the party of the SECOND PART an area of SIX HUNDRED (600) SQUARE METERS with a frontage of twenty (20) METERS along the present national highway, at the corner of the aforementioned land bordering a proposed five-meter subdivision road adjacent to the property of the PARTY OF THE SECOND PART;

That for and in consideration of the foregoing premises and of the sum of EIGHT HUNDRED (800.00) PESOS which the PARTY OF THE FIRST PARTY (sic) hereby acknowledges to have received from the PARTY OF THE SECOND PART, THE PARTY OF THE FIRST PART hereby agrees, promises and binds himself to sell, cede, transfer, and convey absolutely to the PARTY OF THE SECOND PART SIX HUNDRED (600) SQUARE METERS portion of the property covered by TRANSFER CERTIFICATE OF TITLE NO. T-3694 together with all the improvements thereon, which portion is situated along the national highway and shown as the shaded area in the sketch at the back hereof; the total consideration of the sale of the said SIX HUNDRED (600) SQUARE METERS shall be ONE THOUSAND EIGHT HUNDRED PESOS (P1,800.00), including the amount of EIGHT HUNDRED PESOS (P800.00) advanced by the PARTY OF THE SECOND PART upon the execution of this document;

That the unpaid balance of the total consideration of the sale amounting to ONE THOUSAND (P1,000.00) PESOS shall be paid by the PARTY OF THE SECOND PART directly to the DEVELOPMENT BANK OF THE PHILIPPINES, DAVAO BRANCH, in ten (10) equal monthly installments of ONE HUNDRED (P100.00) PESOS each not later than the 15th day following the end of each month beginning May 10, 1966;

That the PARTY OF THE SECOND PART has the right and privilege by virtue of this (sic) presents to take possession of the area of SIX HUNDRED (600) SQUARE METERS subject of this agreement and to appropriate for himself all the improvements existing thereon effective from the date of execution of this agreement; 3

Paragraph 9 thereof reads:

That the PARTY OF THE FIRST PART agrees and binds himself to acknowledge receipt of every and all monthly payments remitted to the DEVELOPMENT BANK OF THE PHILIPPINES by the PARTY OF THE SECOND PART and further agrees and binds himself to execute the final deed of absolute sale of the SIX HUNDRED (600) SQUARE METERS herein above referred to in favor of the PARTY OF THE SECOND PART as soon as the settlement or partition of the estate of the deceased NARCISA R. KAPARAZ shall have been consummated and effected, but not later than March 31, 1967; 4

Upon the execution of the agreement, petitioners paid the downpayment of P800.00 and were placed in possession of the portion described therein. As to the P1,000.00 which was to be paid directly to the DBP, petitioners claim that they had even made an excess payment of P100.00.

In view of the refusal of private respondents to execute the deed of sale, petitioners filed against them a complaint for specific performance with the then Court of First Instance (now Regional Trial Court) of Davao Oriental. The complaint was docketed as Civil Case No. 586 and was amended on 23 January 1979. In their Answer filed on 28 June 1977, later amended on 19 December 1979 as a consequence of the filing of the amended complaint, private respondents alleged that the sale did not materialize because of the failure of petitioners to fulfill their promise to make timely payments on the stipulated price to the DBP; as a result of such failure, they (private respondents) failed to secure the release of the mortgage on the property. They then prayed for the dismissal of the case and a declaration that the agreement is null and void.

After due trial, the court below rendered on 19 November 1981 a decision in favor of the petitioners, the dispositive portion of which reads as follows:

FOR ALL THE FOREGOING, judgment is hereby rendered in favor of the plaintiffs and against the defendants ––

(1) Declaring the plaintiffs to be the owners of the property consisting of six hundred (600) square meters, more or less, denominated as Lot H-12, Psd-11-000576, which was formerly a portion of the property covered by Transfer Certificate of Title No. T-3694, and now covered by Transfer Certificate of Title No. T-5824 in the name of defendant Rogelio Kaparaz;

(2) Ordering defendant Rogelio Kaparaz to reconvey this property to the plaintiffs herein;

(3) Ordering defendants to pay plaintiffs reasonable attorney's fees in the amount of P3,000.00 and to pay the costs.

SO ORDERED. 5

The facts as found by the trial court are as follows:

xxx xxx xxx

The adduced evidence will show that the parties herein above executed a certain agreement (Exh. "A" for the plaintiffs; Exhibit "1" for the defendants) dated March 11, 1966, the pertinent portions of which are hereunder quoted, to wit:

xxx xxx xxx

From the foregoing provisions of the said agreement, the defendants herein have bound themselves to sell and convey a portion of the property covered by Transfer Certificate of Title No. T-3694, consisting of SIX HUNDRED (600) SQUARE METERS, to the plaintiffs for a consideration of P1,800.00, P800.00 of which had been received by the defendants upon the execution of the document and the remaining balance of P1,000.00 shall be paid by the plaintiffs directly to the Development Bank of the Philippines in "ten (10) equal monthly installments of ONE HUNDRED (P100.00) PESOS EACH not later than the 15th day following the end of each month beginning May 10, 1966". The defendants, on the other hand, have also bound themselves to execute the final deed of absolute sale of the portion above-mentioned in favor of the plaintiffs "as soon as the settlement or partition of the estate of the deceased NARCISA R. KAPARAZ shall have been consummated and effected, but not later than March 31, 1967."

It appears that plaintiffs had paid defendant Domingo Kaparaz the amount of P400.00 (Exh. "B"), the P200.00 which was paid by plaintiffs to the development Bank of the Philippines for the account of the late Domingo Kaparaz and the P200.00 was given to said defendant. Plaintiff Oscar Jacinto made another payment to the Development Bank of the Philippines for the account of Domingo and Narcisa Kaparaz covered by Official Receipt No. 1113990, dated November 29, 1966, in the amount of P200.00 (Exh. "F"). Another payment was again made to the Development Bank of the Philippines for the same account by plaintiff Oscar Jacinto covered by Official Receipt No. 1334193, dated December 5, 1968, in the amount of P300.00 (Exh. "C") and another payment also was made on December 9, 1968 in the amount of P200.00 covered by Official Receipt No. 1334196 (Exh. ''H''). All of these payments are certified by the Development Bank of the Philippines (Exh. "E") to have been made by plaintiff Oscar Jacinto and applied to the accounts of Domingo and Narcisa Kaparaz. For the subdivision survey of the lot of six (600) square meters involved in this case, plaintiffs contributed the amount of P80.00 (Exh. "J") and another amount of P350.00 was paid also to Engr. Ladera (Exh. "I") plaintiffs, all in all, aside from the payments that they made to the Surveyor, have paid the Development Bank of the Philippines for the account of the late Domingo Kaparaz in the total amount of P700.00 which in already in excess of the price consideration of P1,800.00 after defendants had received the amount of P1,200.00. Plaintiff Oscar Jacinto explained that the payment was in excess of P100.00 because the balance of P600.00 which was originally intended to be paid for the surveyor was instead paid by him to the bank plus P100.00 to cover the accumulated interests. Thus (sic), making the total payments to the Development Bank of the Philippines in the amount of P700.00.

On the other (hand), defendant Rogelio Kaparaz testified that plaintiffs did not comply with the terms of the agreement (Exh. "A") by having failed to pay the ten (10) equal monthly installments. For failure of plaintiffs to pay the monthly installments, as agreed (sic) in the agreement (Exh. "A" ), he decided to pay the Development Bank of the Philippines of (sic) their accounts. The partial payment was made on July 3, 1967 in the amount of P3,000.00 covered by Official Receipt No. 1160314 (Exh. "2") and another payment for the balance was made on August 15, 1967 in the amount of 73,124.11 covered by Official Receipt No. 1160831 (Exh. "4").

It is likewise admitted that the estate of the late Narcisa R. Kaparaz had already been settled and that six hundred (600) square meters portion of the lot covered by Transfer Certificate of Title No. T-3694, or Lot No. H-12, Psd-11-000576, has already been adjudicated to defendant Rogelio Kaparaz and is now registered in his name under Transfer Certificate of Title No. T-5824. 6

Private respondents appealed from said decision to the Court of Appeals which docketed the case as C.A.-G.R. CV No. 69357. In their Brief, they contended that the trial court erred in: (a) finding that petitioners had fully paid the consideration for the property subject of the agreement, (b) ruling that the delay in the payments to the DBP is only a slight breach of the agreement, (c) holding private respondents' failure to protest petitioners' delay of payment amounted to implied waiver to rescind the agreement, (d) declaring that laches did not operate against petitioners considering that the prescriptive period has not even expired, (e) not holding that the parties are in pari delicto, and (f) ordering Rogelio Kaparaz to reconvey the property in question to petitioners.

As earlier adverted to, in its decision of 30 July 1987, the respondent Court of Appeals reversed the decision of the trial court. The respondent Court was of the opinion that: (a) The petitioners had not fully discharged their obligation under the agreement considering that their last payments to DBP of P300.00 7 and P200.00 8 were "several months delayed beyond the date/s agreed upon by the parties," and that the agricultural loan to which the amortizations of the unpaid balance of P1,000.00 of the purchase price were to be applied had in fact been fully settled by the private respondents. The application of these payments by the DBP to another account of the private respondents was of no moment because the agreement of the parties specifically referred to the agricultural loan. (b) No evidence supports the .conclusion of the trial court that private respondents failed to protest the delay in the payments. On the contrary, the evidence discloses that private respondents demanded from the petitioners the balance of the obligation after the latter had defaulted; having received no response, private respondents themselves paid .the agricultural loan. (c) The delay in the payments was not a slight breach. The dates of the payments were so essential that they were specifically stipulated upon by the parties. The primary importance of timely payments sprang from the nature of the subject bank account consisting of a loan secured by a real estate mortgage which demanded up-to-date amortization to prevent foreclosure. (d) While the trial court was correct in holding that both parties defaulted in the performance of their respective obligations, petitioners were the first to incur in delay. There is, therefore, greater justification to decree rescission. Moreover, even granting that there was no evidence as to who violated the agreement first, then the contract is deemed extinguished pursuant to the second sentence of Article 1192 of the Civil Code. This Article provides that:

In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damage.

Unable to accept the above verdict, petitioner commenced this petition wherein they allege that respondent Court erred in not finding that: (a) petitioners had fully paid the consideration for the 600 square meters of Lot H; (b) private respondents' failure to protest the delay of payments can be considered as estoppel on their part and an implied waiver of their right to rescind the sale; (c) assuming that the last two payments to the DBP were not valid as they were applied to another account, there was at least substantial performance by the petitioners of their obligation; (d) the breach on the part of petitioners was only slight or casual and would not warrant rescission of the sale; (e) under the circumstances, it was necessary for the respondents to make a notarial demand or obtain prior judicial approval to effect rescission of the sale; and finally, (e) the agreement was extinguished.

After the filing of the Comments by private respondents, the reply thereto by petitioners and the rejoinder to the latter by private respondents, the Court gave due course to the petition and required the parties to submit simultaneously their respective Memoranda, 9 which they subsequently complied with. 10

The petition is impressed with merit.

Vital to the resolution of the controversy is the determination of the true nature of the questioned agreement. Is it a contract of sale or a contract to sell? The two are not, of course, the same. In the latter case, ownership is retained by the seller and is not to pass until full payment of the price. Such payment is a positive suspensive condition the failure of which is not a broach, casual or serious, but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. In such a situation, to argue that there was only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a resolutory question. 11 Otherwise stated, as capsulized in Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 12 "there can be no rescission or resolution of an obligation as yet non-existent, because the suspensive condition did not happen." Expanding on this point, this Court, in said case, made the following disquisitions:

. . . The upshot of all these stipulations is that in seeking the ouster of Maritime for failure to pay the price as agreed upon, Myers was not rescinding (or more properly, resolving) the contract, but precisely enforcing it according to its express terms. In its suit Myers was not seeking restitution to it of the ownership of the thing sold (since it was never disposed of), such restoration being the logical consequence of the fulfillment of a resolutory condition, express or implied (article 1190); neither was it seeking a declaration that its obligation to sell was extinguished. What it sought was a judicial declaration that because the suspensive condition (full and punctual payment) had not been fulfilled, its obligation to sell to Maritime never arose or never became effective and, therefore, it (Myers) was entitled to repossess the property object of the contract, possession being a mere incident to its right of ownership. It is elementary that, as stated by Castan, ––

b) Si la condicion suspensive Ilega a faltar, la obligacion se tiene por no existente, y el acreedor pierde todo derecho, incluso el de utilizar las medidas conservativas. (3 Catan Derecho Civil, 7a Ed., p. 107). (Also Puig Peña, Der. Civ., T. IV (1), p. 113).

On the other hand, since in a contract of sale, the non-payment of the price is a resolutory condition, 13 the remedy of the seller under Article 1191 of the Civil Code is to exact fulfillment or to rescind the contract. In respect, however, to the sale of immovable property, this Article must be read together with Article 1592 of the same Code:

Art. 1592. 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.

This Article applies to instances where no stipulation for automatic rescission is made because it says "even though". 14

The agreement in the instant case has all the earmarks of a contract of sale. The possession of the portion sold was immediately delivered to the petitioners. They were granted the right to enjoy all the improvements therein effective from the date of the execution of the agreement. Private respondents unqualifiedly bound themselves to execute the final deed of sale "as soon as the settlement or partition of the estate of the deceased Narcisa R. Kaparaz shall have been consummated and effected, but not later than March 31, 1967" and only upon full payment of the unpaid portion of the purchase price. The private respondents did not reserve unto themselves the ownership of the property until full payment of the unpaid balance of P1,000.00. Finally, there is no stipulation giving the private respondents the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. In reality, the agreement was an absolute sale which allowed the petitioners to pay the remaining balance of the purchase price in installment. We agree with the submission of petitioners 15 that Dignos vs. Court of Appeals 16 applies in this case. In said case, this Court stated:

Thus, it has been held that a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period (Taguba v. Vda. de Leon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305).

As stated earlier, in a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. The latter, with respect to the sale of immovables, is specifically governed by Article 1592 of the Civil Code. 17 In the case at bar, there was non-compliance with the requirements prescribed in these provisions. It is not controverted that private respondents had neither filed an action for specific performance nor demanded the rescission of the agreement either judicially or by a notarial act before the filing of the complaint in Civil Case No. 586. It is only in their Answer that they belatedly raised the defense of resolution of the contract pursuant to Article 1191 by reason of petitioners' breach of their obligation.

Even if the general law on resolution, Article 1191 of the Civil Code, is to be applied, Our decision would still be for the petitioners. The third paragraph of this Article reads:

xxx xxx xxx

The Court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

It is not denied that petitioners made two (2) payments in the sums of P200.00 and P300.00 at a time when what remained unsettled under the agreement was only P400.00. There was then an excess payment of P100.00. These payments were made to the DBP which applied them to an outstanding account of the private respondents. Private respondents neither complained of the delay in these payments nor rejected their application to their account. They were, undoubtedly, benefited by the application because it either satisfied their account or correspondingly reduced it. The claim that the account to which it was applied was not the account stipulated in the agreement is without merit. In the first place, the agreement fails to disclose an express agreement that the monthly amortizations on the P1,000.00 unpaid balance of the purchase price to be made to the DBP should be applied exclusively to the agricultural loan indicated in the exordium of the agreement. The loan was mentioned only to lay the basis for private respondents' need for the downpayment. In the second place, to allow private respondents to reject the payment of P400.00, plus the excess of P100.00 after they benefited therefrom, would be unjust.

Then too, at no time before the filing of their Answer did private respondents declare their intention to rescind the agreement, or if they did, communicate such intention to the petitioners. It was necessary for private respondents to have done so. As this Court held in University of the Philippines vs. De los Angeles: 18

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. 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 others' 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).

Finally, the delay incurred by petitioners was but a casual or slight breach of the agreement, which did not defeat the object of the parties in entering into the agreement. A mere casual breach does not justify rescission. 19 The prompt payment of the monthly amortizations of the unpaid balance of P1,000.00 was not a condition precedent to the execution of the final deed of sale. Besides, petitioners had already paid P1,400.00 of the total consideration of P1,800.00, or exactly 77.77% of the purchase price within the period stipulated. Moreover, they had in fact overpaid the private respondents by P100.00.

Accordingly, We rule that rescission of the agreement was not available to private respondents.

We further rule that the respondent Court erred in declaring the agreement extinguished pursuant to the second sentence of Article 1192 of the Civil Code. Having concluded, although erroneously, that petitioners were the first to breach the agreement, it should have applied the first sentence thereof by equitably tempering petitioners' liability. The second sentence applies only to cases where it cannot be determined which of the parties first violated the contract.

The foregoing disquisitions render unnecessary any discussion on the other issues raised by petitioners.

WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals is REVERSED and the judgment of the lower court is hereby REINSTATED and AFFIRMED. Costs against private respondents.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Romero, JJ., concur.

Footnotes

1 Per Associate Justice Cecilio L. Pe, concurred in by Associate Justices Nathanael P. De Paño, Jr. and Antonio M. Martinez.

2 Rollo, 39.

3 Rollo, 54-55; pages 12-13 of Brief for Petitioners in C.A.-G.R. CV No. 69357.

4 Rollo, 57.

5 Rollo, 13.

6 Rollo, 30-32; Decision in C.A.-G.R. CV No. 69357 (Annex "A" of Petition), 3-5.

7 Exhibit "G".

8 Exhibit "H".

9 Rollo, 129.

10 Id., 138; 148.

11 Manuel vs. Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741 [1980].

12 46 SCRA 381 [1972].

13 Manuel vs. Rodriguez, supra.; Lim vs. Court of Appeals, 182 SCRA 564 [1990], citing Sing Yee vs. Santos, 47 O.G. 6372.

14 PARAS, E.L., Civil Code of the Philippines Annotated, vol. V, 11th ed., 1986, 198.

15 Memorandum for Petitioners, 7; Rollo, 144, et seq.

16 158 SCRA 375 [1988].

17 This was Article 1504 of the old Civil Code; Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 86 SCRA 305 [1978].

18 35 SCRA 102 [1970].

19 Philippine Amusement Enterprises, Inc. vs. Natividad, 21 SCRA 284 [1967]; Angeles vs. Calasanz, 135 SCRA 323 [1985].

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 117009 October 11, 1995

SECURITY BANK & TRUST COMPANY and ROSITO C. MANHIT, petitioners, vs.COURT OF APPEALS and YSMAEL C. FERRER, respondents.

PADILLA, J.:

In this petition for review under Rule 45 of the Rules of Court, petitioners seek a review and reversal of the decision * of respondent Court of Appeals in CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v. Security Bank and Trust Company, et. al." dated 31 August 1994, which affirmed the decision ** of the Regional Trial Court, Branch 63, Makati in Civil Case No. 42712, a complaint for breach of contract with damages.

Private respondent Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company (SBTC) and Rosito C. Manhit to construct the building of SBTC in Davao City for the price of P1,760,000.00. The contract dated 4 February 1980 provided that Ferrer would finish the construction in two hundred (200) working days. Respondent Ferrer was able to complete the construction of the building on 15 August 1980 (within the contracted period) but he was compelled by a drastic increase in the cost of construction materials to incur expenses of about P300,000.00 on top of the original cost. The additional expenses were made known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama as early as March 1980. Respondent Ferrer made timely demands for payment of the increased cost. Said demands were supported by receipts, invoices, payrolls and other documents proving the additional expenses.

In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted by SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle Ferrer's claim but only for P200,000.00. SBTC, instead of paying the recommended additional amount, denied ever authorizing payment of any amount beyond the original contract price. SBTC likewise denied any liability for the additional cost based on Article IX of the building contract which states:

If at any time prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or labor shall supervene through no fault on the part of the contractor whatsoever or any act of the government and its instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the appropriate adjustment on mutual agreement of both parties.

Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer and ordered defendants SBTC and Rosito C. Manhit to pay:

a) P259,417.23 for the increase in price of labor and materials plus 12% interest thereon per annum from 15 August 1980 until fully paid;

b) P24,000.00 as actual damages;

c) P20,000.00 as moral damages;

d) P20,000.00 as exemplary damages;

e) attorney's fees equivalent to 25% of the principal amount due; and

f) costs of suit.

On appeal, the Court of Appeals affirmed the trial court decision.

In the present petition for review, petitioners assign the following errors to the appellate court:

. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY PREPONDERANCE OF EVIDENCE SUFFICIENTLY PROVEN HIS CLAIM AGAINST THE DEFENDANTS-APPELLANTS.

. . . IN INTERPRETING AN OTHERWISE CLEAR AND UNAMBIGUOUS PROVISION OF THE CONSTRUCTION CONTRACT.

. . . IN DISREGARDING THE EXPRESS PROVISION OF THE CONSTRUCTION CONTRACT, THE LOWER COURT VIOLATED DEFENDANTS-APPELLANTS' CONSTITUTIONAL GUARANTY OF NON IMPAIRMENT OF THE OBLIGATION OF CONTRACT. 1

Petitioners argue that under the aforequoted Article IX of the building contract, any increase in the price of labor and/or materials resulting in an increase in construction cost above the stipulated contract price will not automatically make petitioners liable to pay for such increased cost, as any payment above the stipulated contract price has been made subject to the condition that the "appropriate adjustment" will be made "upon mutual agreement of both parties". It is contended that since there was no mutual agreement between the parties, petitioners' obligation to pay amounts above the original contract price never materialized.

Respondent Ysmael C. Ferrer, through counsel, on the other hand, opposed the arguments raised by petitioners. It is of note however that the pleadings filed with this Court by counsel for Ferrer hardly refute the arguments raised by petitioners, as the contents of said pleadings are mostly quoted portions of the decision of the Court of Appeals, devoid of adequate discussion of the merits of respondent's case. The Court, to be sure, expects more diligence and legal know-how from lawyers than what has been exhibited by counsel for respondent in the present case. Under these circumstances, the Court had to review the entire records of this case to evaluate the merits of the issues raised by the contending parties.

Article 22 of the Civil Code which embodies the maxim, Nemo ex alterius incommodo debet lecupletari (no man ought to be made rich out of another's injury) states:

Art. 22. Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.

The above-quoted article is part of the chapter of the Civil Code on Human Relations, the provisions of which were formulated as "basic principles to be observed for the rightful relationship between human beings and for the stability of the social order, . . . designed to indicate certain norms that spring from the fountain of good conscience, . . . guides for human conduct [that] should run as golden threads through society to the end that law may approach its supreme ideal which is the sway and dominance of justice." 2

In the present case, petitioners' arguments to support absence of liability for the cost of construction beyond the original contract price are not persuasive.

Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate adjustment to the contract price in case the cost of the project increases through no fault of the contractor (private respondent). Private respondent informed petitioners of the drastic increase in construction cost as early as March 1980.

Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded payment of P259,417.23, petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural consultant were directed by the bank to verify and compute private respondent's claims of increased cost. A recommendation was then made to settle private respondent's claim for P200,000.00. Despite this recommendation and several demands from private respondent, SBTC failed to make payment. It denied authorizing anyone to make a settlement of private respondent's claim and likewise denied any liability, contending that the absence of a mutual agreement made private respondent's demand premature and baseless.

Petitioners' arguments are specious.

It is not denied that private respondent incurred additional expenses in constructing petitioner bank's building due to a drastic and unexpected increase in construction cost. In fact, petitioner bank admitted liability for increased cost when a recommendation was made to settle private respondent's claim for P200,000.00. Private respondent's claim for the increased amount was adequately proven during the trial by receipts, invoices and other supporting documents.

Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the sole will of the debtor. In the present case, the mutual agreement, the absence of which petitioner bank relies upon to support its non-liability for the increased construction cost, is in effect a condition dependent on petitioner bank's sole will, since private respondent would naturally and logically give consent to such an agreement which would allow him recovery of the increased cost.

Further, it cannot be denied that petitioner bank derived benefits when private respondent completed the construction even at an increased cost.

Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent. Such unjust enrichment, as previously discussed, is not allowed by law.

Finally, with respect to the award of attorney's fees to respondent, the Court has previously held that, "even with the presence of an agreement between the parties, the court may nevertheless reduce attorney's fees though fixed in the contract when the amount thereof appears to be unconscionable or unreasonable." 3 As previously noted, the diligence and legal know-how exhibited by counsel for private respondent hardly justify an award of 25% of the principal amount due, which would be at least P60,000.00. Besides, the issues in this case are far from complex and intricate. The award of attorney's fees is thus reduced to P10,000.00.

WHEREFORE, with the above modification in respect of the amount of attorney's fees, the appealed decision of the Court of Appeals in CA G.R. CV No. 40450 is AFFIRMED.

SO ORDERED.

Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.

Footnotes

* Justice Lourdes K. Tayao-Jaguros, ponente, with Justices Jesus M. Elbiñas and Bernardo Ll. Salas, concurring.

** Penned by Judge Julio R. Logarta.

1 Rollo, p. 13.

2 Report of the Code Commission, p. 39, cited in Padilla, Ambrosio, Civil Code Annotated, Vol. 1, 1975.

3 Roldan v. Court of Appeals, G.R. No. 97006, 9 February 1993, 218 SCRA 713.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION 

G.R. No. 70789 October 19, 1992

RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R. TANTOCO, SR., and ROMEO S. VERGARA, petitioners, vs.THE INTERMEDIATE APPELLATE COURT and ILIGAN DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and ROBERTO G. BORROMEO, respondents. 

MELO, J.:

When petitioners informed herein private respondents to stop the delivery of pulp wood supplied by the latter pursuant to a contract of sale between them, private respondents sued for breach of their covenant. The court of origin dismissed the complaint but at the same time enjoined petitioners to respect the contract of sale if circumstances warrant the full operation in a commercial scale of petitioners' Baloi plant and to continue accepting and paying for deliveries of pulp wood products from Romeo Lluch (page 14, Petition; page 20, Rollo). On appeal to the then Intermediate Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who spoke for the First Civil Cases Division, with Justices Caguioa, Quetulio-Losa, and Luciano, concurring, modified the judgment by directing herein petitioners to pay private respondents, jointly and severally, the sum of P30,000.00 as moral damages and P15,000.00 as attorney's fees (pages 48-58, Rollo).

In the petition at bar, it is argued that the Appellate Court erred;

A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE CONTRACT OF SALE PETITIONER TANTOCO WHO SIGNED MERELY AS REPRESENTATIVE OF PETITIONER RUSTAN, AND PETITIONER VERGARA WHO DID NOT SIGN AT ALL;

B. . . . IN HOLDING THAT PETITIONER RUSTAN'S DECISION TO SUSPEND TAKING DELIVERY OF PULP WOOD FROM RESPONDENT LLUCH, WHICH WAS PROMPTED BY SERIOUS AND UNFORESEEN DEFECTS IN THE MILL, WAS NOT IN THE LAWFUL EXERCISE OF ITS RIGHTS UNDER THE CONTRACT OF SALE; and

C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEY'S FEES IN THE ABSENCE OF FRAUD OR BAD FAITH.

(page 18, Petition; page 24, Rollo)

The generative facts of the controversy, as gathered from the pleadings, are fairly simple.

Sometime in 1966, petitioner Rustan established a pulp and paper mill in Baloi, Lano del Norte. On March 20, 1967, respondent Lluch, who is a holder of a forest products license, transmitted a letter to petitioner Rustan for the supply of raw materials by the former to the latter. In response thereto, petitioner Rustan proposed, among other things, in the letter-reply:

2. That the contract to supply is not exclusive because Rustan shall have the option to buy from other suppliers who are qualified and holder of appropriate government authority or license to sell and dispose pulp wood.

These prefatory business proposals culminated in the execution, during the month of April, 1968, of a contract of sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc. undertook to pay the price of P30.00 per cubic meter of pulp wood raw materials to be delivered at the buyer's plant in Baloi, Lanao del Norte. Of pertinent significance to the issue at hand are the following stipulations in the bilateral undertaking:

3. That BUYER shall have the option to buy from other SELLERS who are equally qualified and holders of appropriate government authority or license to sell or dispose, that BUYER shall not buy from any other seller whose pulp woods being sold shall have been established to have emanated from the SELLER'S lumber and/or firewood concession. . . .

And that SELLER has the priority to supply the pulp wood materials requirement of the BUYER;

xxx xxx xxx

7. That the BUYER shall have the right to stop delivery of the said raw materials by the seller covered by this contract when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessarily provided, however, that the SELLER is given sufficient notice.

(pages 8-9, Petition; pages 14-15, Rollo)

In the installation of the plant facilities, the technical staff of Rustan Pulp and Paper Mills, Inc. recommended the acceptance of deliveries from other suppliers of the pulp wood materials for which the corresponding deliveries were made. But during the test run of the pulp mill, the machinery line thereat had major defects while deliveries of the raw materials piled up, which prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries. The suppliers were informed to stop deliveries and the letter of similar advice sent by petitioners to private respondents reads:

September 30, 1968

Iligan Diversified Projects, Inc.Iligan City

Attention: Mr. Romeo A. Lluch

Dear Mr. Lluch:

This is to inform you that the supply of raw materials to us has become sufficient and we will not be needing further delivery from you. As per the terms of our contract, please stop delivery thirty (30) days from today.

Very truly yours,

RUSTAN PULP AND PAPERMILLS, INC.

By

DR. ROMEO S. VERGARAResident Manager

Private respondent Romeo Lluch sought to clarify the tenor of the letter as to whether stoppage of delivery or termination of the contract of sale was intended, but the query was not answered by petitioners. This alleged ambiguity notwithstanding, Lluch and the other suppliers resumed deliveries after the series of talks between Romeo S. Vergara and Romeo Lluch.

On January 23, 1969, the complaint for contractual breach was filed which, as earlier noted, was dismissed. In the process of discussing the merits of the appeal interposed therefrom, respondent Court clarified the eleven errors assigned below by herein petitioners and it seems that petitioners were quite satisfied with the Appellate Court's in seriatim response since petitioners trimmed down their discourse before this Court to three basic matters, relative to the nature of liability, the propriety of the stoppage, and the feasibility of awarding moral damages including attorney's fees.

Respondent Court found it ironic that petitioners had to exercise the prerogative regarding the stoppage of deliveries via the letter addressed to Iligan Diversified Project, Inc. on September 30, 1968 because petitioners never really stopped accepting deliveries from private respondents until December 23, 1968. Petitioner's paradoxial stance portrayed in this manner:

. . . We cannot accept the reasons given by appellees as to why they were stopping deliveries of pulp wood materials. First, We find it preposterous for a business company like the appellee to accumulate stockpiles of cut wood even after its letter to appellants dated September 30, 1968 stopping the deliveries because the supply of raw materials has become sufficient. The fact that appellees were buying and accepting pulp wood materials from other sources other than the appellants even after September 30, 1968 belies that they have more than sufficient supply of pulp wood materials, or that they are unable to go into full commercial operation or that their machineries are defective or even that the pulp wood materials coming from appellants are sub-standard. Second, We likewise find the court a quo's finding that "even with one predicament in which defendant Rustan found itself wherein commercial operation was delayed, it accommodated all its suppliers of raw materials, including plaintiff, Romeo Lluch, by allowing them to deliver all its stockpiles of cut wood" (Decision, page 202, Record on Appeal) to be both illogical and inconsistent. Illogical, because as appellee Rustan itself claimed "if the plant could not be operated on a commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries of raw materials." Inconsistent because this kind of "concern" or "accommodation" is not usual or consistent with ordinary business practice considering that this would mean adequate losses to the company. More so, if We consider that appellee is a new company and could not therefore afford to absorb more losses than it already allegedly incurred by the consequent defects in the machineries.

Clearly therefore, this is a breach of the contract entered into by and between appellees and appellants which warrants the intervention of this Court.

xxx xxx xxx

. . . The letter of September 30, 1968, Exh. "D" shows that defendants were terminating the contract of sale (Exh. "A"), and refusing any future or further delivery — whether on the ground that they had sufficient supply of pulp wood materials or that appellants cannot meet the standard of quality of pulp wood materials that Rustan needs or that there were defects in appellees' machineries resulting in an inability to continue full commercial operations.

Furthermore, there is evidence on record that appellees have been accepting deliveries of pulp wood materials from other sources, i.e. Salem Usman, Fermin Villanueva and Pacasum even after September 30, 1968.

Lastly, it would be unjust for the court a quo to rule that the contract of sale be temporarily suspended until Rustan, et al., are ready to accept deliveries from appellants. This would make the resumption of the contract purely dependent on the will of one party — the appellees, and they could always claim, as they did in the instant case, that they have more than sufficient supply of pulp wood when in fact they have been accepting the same from other sources. Added to this, the court a quo was imposing a new condition in the contract, one that was not agreed upon by the parties.

(Pages B-10, Decision; Pages 55-57, Rollo)

The matter of Tantoco's and Vergara's joint and several liability as a result of the alleged breach of the contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally exercise the right of stoppage should there be a glut of raw materials at its plant.

And insofar as the express discretion on the part of petitioners is concerned regarding the right of stoppage, We feel that there is cogent basis for private respondent's apprehension on the illusory resumption of deliveries inasmuch as the prerogative suggests a condition solely dependent upon the will of petitioners. Petitioners can stop delivery of pulp wood from private respondents if the supply at the plant is sufficient as ascertained by petitioners, subject to re-delivery when the need arises as determined likewise by petitioners. This is Our simple understanding of the literal import of paragraph 7 of the obligation in question. A purely potestative imposition of this character must be obliterated from the face of the contract without affecting the rest of the stipulations considering that the condition relates to the fulfillment of an already existing obligation and not to its inception (Civil Code Annotated, by Padilla, 1987

Edition, Volume 4, Page 160). It is, of course, a truism in legal jurisprudence that a condition which is both potestative (or facultative) and resolutory may be valid, even though the saving clause is left to the will of the obligor like what this Court, through Justice Street, said in Taylor vs. Uy Tieng Piao and Tan Liuan (43 Phil. 873; 879; cited in Commentaries and Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991 edition, page 152). But the conclusion drawn from the Taylor case, which allowed a condition for unilateral cancellation of the contract when the machinery to be installed on the factory did not arrive in Manila, is certainly inappropriate for application to the case at hand because the factual milieu in the legal tussle dissected by Justice Street conveys that the proviso relates to the birth of the undertaking and not to the fulfillment of an existing obligation.

In support of the second ground for allowance of the petition, petitioners are of the impression that the letter dated September 30, 1968 sent to private respondents is well within the right of stoppage guaranteed to them by paragraph 7 of the contract of sale which was construed by petitioners to be a temporary suspension of deliveries. There is no doubt that the contract speaks loudly about petitioners' prerogative but what diminishes the legal efficacy of such right is the condition attached to it which, as aforesaid, is dependent exclusively on their will for which reason, We have no alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil Code). It is for this same reason that We are not inclined to follow the interpretation of petitioners that the suspension of delivery was merely temporary since the nature of the suspension itself is again conditioned upon petitioner's determination of the sufficiency of supplies at the plant.

Neither are We prepared to accept petitioners' exculpation grounded on frustration of the commercial object under Article 1267 of the New Civil Code, because petitioners continued accepting deliveries from the suppliers. This conduct will estop petitioners from claiming that the breakdown of the machinery line was an extraordinary obstacle to their compliance to the prestation. It was indeed incongruous for petitioners to have sent the letters calling for suspension and yet, they in effect disregarded their own advice by accepting the deliveries from the suppliers. The demeanor of petitioners along this line was sought to be justified as an act of generous accommodation, which entailed greater loss to them and "was not motivated by the usual businessman's obsession with profit" (Page 34, Petition; Page 40, Rollo). Altruism may be a noble gesture but petitioners' stance in this respect hardly inspires belief for such an excuse is inconsistent with a normal business enterprise which takes ordinary care of its concern in cutting down on expenses (Section 3, (d), Rule 131, Revised Rules of Court). Knowing fully well that they will encounter difficulty in producing output because of the defective machinery line, petitioners opted to open the plant to greater loss, thus compounding the costs by accepting additional supply to the stockpile. Verily, the petitioner's action when they acknowledged that "if the plant could not be operated on a commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries of raw materials." (Page 202, Record on Appeal; Page 8, Decision; Page 55, Rollo).

Petitioners argue next that Tantoco and Vergara should not have been adjudged to pay moral damages and attorney's fees because Tantoco merely represented the interest of Rustan Pulp and Paper Mills, Inc. while Romeo S. Vergara was not privy to the contract of sale. On this score, We have to agree with petitioners' citation of authority to the effect that the President and Manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the person composing it (Bangued Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's supposed non-participation in the contract of sale although he signed the letter dated September 30, 1968 is completely immaterial. The two exceptions contemplated by Article 1897 of the New Civil Code where agents are directly responsible are absent and wanting.

WHEREFORE, the decision appealed from is hereby MODIFIED in the sense that only petitioner Rustan Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as awarded by respondent Court.

SO ORDERED.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Republic of the PhilippinesSUPREME 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. 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. 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. 16 Leases 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.

Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., Concur.

Footnotes

1 Per Justice Emeterio C. Cui, with Justices Luis A. Javellana and Jesus M. Elbinias concurring.

2 Original Record, 19.

3 Ibid., 7.

4 Ibid., 63.

5 Ibid., 8.

6 Rollo, 68-70.

7 Ibid., 61-67.

8 Ibid., 39-42.

9 77 Phil. 470 (1946).

10 Art. 1373, Civil Code.

11 De Luna, et al. vs. Linatoc, 74 Phil. 15 (1942).

12 51 C.J.S. 606.

13 50 Am. Jur. 2d 56.

14 50 Am. Jur. 2d 53.

15 Fernandez vs. Court of Appeals, 166 SCRA 577 (1988).

16 51 C.J.S. 605-606.

17 Becker vs. Submarine Oil Co., 55 Cal App 698, 204 P. 245.

18 160 SCRA 240 (1988).

19 Aroc, etc. vs. People's Homesite and Housing Corporation, et al., 81 SCRA 350 (1978); Gitgano vs Borromeo, etc., et al., 133 SCRA 437 (1984); Santos vs. Intermediate Appellate Court, et al., 145 SCRA 592 (1986).

20 Pagsisihan, et al. vs. Court of Appeals, et al., 95 SCRA 540 (1980); Aroc vs. People's Homesite and Housing Corporation, et al., ante, as cited in Angela Estate, Inc. vs. Bacolod-Murcia Milling Co, Inc., et al. 144 SCRA 482 (1986).

Republic of the PhilippinesSUPREME 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 contractually-stipulated 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, Parañaque, 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;

-and-

VIRGILIO 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 Parañaque, 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 Parañaque. 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 Parañaque 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, Parañaque, 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. 16 This 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.

Feliciano, Romero, Melo and Panganiban, JJ., concur.

Footnotes

1 Records, pp. 60-61.

2 Exh. 9.

3 Exh. 2.

4 Records, p. 116.

5 Exh. 8-B.

6 Exh. D.

7 Records, pp. 74-75.

8 Presided by Judge Buenaventura J. Guerrero.

9 Records, p. 205.

10 Penned by Associate Justice Fermin A. Martin, Jr. and concurred in by Associate Justices Emeterio C. Cui and Cezar D. Francisco.

11 Rollo, p. 46.

12 Art. 1458, second paragraph, Civil Code of the Philippines.

13 See Ang Yu Asuncion, et al., vs. Court of Appeals, 238 SCRA 602.

14 Ibid., Vol. V, p. 3 citing Dignos v. Court of Appeals, No. L-59266, February 29, 1988, 158 SCRA 375.

15 Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.

16 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 thing 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.

17 Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code.

18 Decision, p. 17.

19 See Osmeña vs. Rama, 14 Phil. 99.

20 See: Intestate Estate of the Late Ricardo P. Presbitero, Sr. v. Court of Appeals, 217 SCRA 372.

21 In Boysaw v. Interphil. Promotions, Inc. (148 SCRA 635, 643), the Court has said: "The power to rescind is given to the injured party. 'Where the plaintiff is the party who did not perform the undertaking which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the contract by the defendant, or recover damages by reason of his own breach.'"

22 Deiparine, Jr. v. Court of Appeals, 221 SCRA 503, 513 citing Universal Food Corporation v. Court of Appeals, 33 SCRA 1.

23 See Ocampo v. Court of Appeals, supra. Art. 1592 states: "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."

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners, vs.THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II), respondents.

Ernesto P. Pangalangan for petitioners.

Luis General, Jr. for private respondent.

 NOCON, J.:

The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his contract charges himself with an obligation possible to be performed, he must perform it, unless its performance is rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party desires to be excused from performance in the event of contingencies arising thereto, it is his duty to provide the basis therefor in his contract.

With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which provides:

When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

In the report of the Code Commission, the rationale behind this innovation was explained, thus:

The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing violence to that intention to hold their contemplation, it would be doing violence to that intention to hold the obligor still responsible. 2

In other words, fair and square consideration underscores the legal precept therein.

Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former insists that the complaint should have been dismissed for failure to state a cause of action.

The antecedent facts, as narrated by respondent Court of Appeals are, as follows:

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating an electric power service in the same city.

On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the operation of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent in the following places:

(a) 3 units — The Main Office of (private respondent);

(b) 2 Units — The Warehouse of (private respondent);

(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion Pequeña;

(d) 1 Unit — The Residence of (private respondent's) President;

(e) 1 Unit — The Residence of (private respondent's) Acting General Manager; &

(f) 2 Units — To be determined by the General Manager. 3

Said contract also provided:

(a) That the term or period of this contract shall be as long as the party of the first part has need for the electric light posts of the party of the second part it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to remove the electric lightpost; (sic) 4

It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of the Board of Directors of private respondent and at the same time the legal counsel of petitioner.

After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in conformity with the guidelines of the National Electrification Administration (NEA) which direct that the reasonable compensation for the use of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners' use of the posts, the telephone cables strung by them thereon have become much heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at which points those posts were broken during typhoons; that a post now costs as much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish the inequities thereon.

As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay private respondent said amount despite demands.

And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten (10) telephone units which had caused it great inconvenience and damages to the tune of not less than P100,000.00

In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does not sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the

same having been filed more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel, since private respondent seeks to enforce the contract in the same action. Petitioners further alleged that their utilization of private respondent's posts could not have caused their deterioration because they have already been in use for eleven (11) years; and that the value of their expenses for the ten (10) telephone lines long enjoyed by private respondent free of charge are far in excess of the amounts claimed by the latter for the use of the posts, so that if there was any inequity, it was suffered by them.

Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines in areas outside Naga City for which its posts were used by them; and that if petitioners had refused to comply with private respondent's demands for payment for the use of the posts outside Naga City, it was probably because what is due to them from private respondent is more than its claim against them.

And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had been categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior quality."

During the trial, private respondent presented the following witnesses:

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was petitioner Maggay who prepared the contract; that the understanding between private respondent and petitioners was that the latter would only use the posts in Naga City because at that time, petitioners' capability was very limited and they had no expectation of expansion because of legal squabbles within the company; that private respondent agreed to allow petitioners to use its posts in Naga City because there were many subscribers therein who could not be served by them because of lack of facilities; and that while the telephone lines strung to the posts were very light in 1977, said posts have become heavily loaded in 1989.

(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared that the posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili, Canaman, and Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in 1989 are much bigger than those in November, 1977; that in 1987, almost 100 posts were destroyed by typhoon Sisang: around 20 posts were located between Naga City and the town of Pili while the posts in barangay Concepcion, Naga City were broken at the middle which had been bored by petitioner's linemen to enable them to string bigger telephone lines; that while the cost per post in 1977 was only from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending on the size; that some lines that were strung to the posts did not follow the minimum vertical clearance required by the National Building Code, so that there were cases in 1988 where, because of the low clearance of the cables, passing trucks would accidentally touch said cables causing the posts to fall and resulting in brown-outs until the electric lines were repaired.

(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private telephone systems of electric cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post, and considering the escalation of prices since 1985, electric cooperatives have been charging from P10.00 to P15.00 per post, which is what petitioners should pay for the use of the posts.

(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on the poor service rendered by petitioner's telephone lines, like the telephone in their Complaints Section which was usually out of order such that they could not respond to the calls of their customers. In case of disruption of their telephone lines, it would take two to three hours for petitioners to reactivate them notwithstanding their calls on the emergency line.

(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him to study the contract sometime during the latter part of 1982 or in 1983, as it had appeared very disadvantageous to private respondent. Notwithstanding his recommendation for the filing of a court action to reform the contract, the former general managers of private respondent wanted to adopt a soft approach with petitioners about the matter until the term of General Manager Henry Pascual who, after failing to settle the matter amicably with petitioners, finally agreed for him to file the present action for reformation of contract.

On the other hand, petitioner Maggay testified to the following effect:

(1) It is true that he was a member of the Board of Directors of private respondent and at the same time the lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a member of the Board of Directors of private respondent, was the one who saw to it that the contract was fair to both parties.

(2) With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long as it wishes without paying anything therefor except for long distance calls through PLDT out of which the latter get only 10% of the charges.

(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have remained erect up to the present;

(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only small holes to pass through; and

(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according to standard and comparable to those of PLDT. The accidents mentioned by private respondent involved trucks that were either overloaded or had loads that protruded upwards, causing them to hit the cables.

(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was that the coverage thereof would include the whole area serviced by petitioners because at that time, they already had subscribers outside Naga City. Private respondent, in fact, had asked for telephone connections outside Naga City for its officers and employees residing there in addition to the ten (10) telephone units mentioned in the contract. Petitioners have not been charging private respondent for the installation, transfers and re-connections of said telephones so that naturally, they use the posts for those telephone lines.

(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in accordance with engineering standards and practice and comparable to the best in the country.

On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private respondent's first cause of action, that while the contract appeared to be fair to both parties when it was entered into by them during the first year of private respondent's operation and when its Board of Directors did not yet have any experience in that business, it had become disadvantageous and unfair to private respondent because of subsequent events and conditions, particularly the increase in the volume of the subscribers of petitioners for more than ten (10) years without the corresponding increase in the number of telephone connections to private respondent free of charge. The trial court concluded that while in an action for reformation of contract, it cannot make another contract for the parties, it can, however, for reasons of justice and equity, order that the contract be reformed to abolish the inequities therein. Thus, said court ruled that the contract should be reformed by ordering petitioners to pay private respondent compensation for the use of their posts in Naga City, while private respondent should also be ordered to pay the monthly bills for the use of the telephones also in Naga City. And taking into consideration the guidelines of the NEA on the rental of posts by telephone companies and the increase in the costs of such posts, the trial court opined that a monthly rental of P10.00 for each post of private respondent used by petitioners is reasonable, which rental it should pay from the filing of the complaint in this case on January 2, 1989. And in like manner, private respondent should pay petitioners from the same date its monthly bills for the use and transfers of its telephones in Naga City at the same rate that the public are paying.

On private respondent's second cause of action, the trial court found that the contract does not mention anything about the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court held that for reason of equity, the contract should be reformed by including therein the provision that for the use of private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this case was filed, or on January 2, 1989, and private

respondent should also pay petitioners the monthly dues on its telephone connections located outside Naga City beginning January, 1989.

And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently proved.

Thus, the following decretal portion of the trial court's decision dated July 20, 1990:

WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the agreement (Exh. A); ordering the defendants to pay plaintiff's electric poles in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole, per month beginning January, 1989 and ordering also the plaintiff to pay defendant NATELCO the monthly dues of all its telephones including those installed at the residence of its officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989. Plaintiff's claim for attorney's fees and expenses of litigation and defendants' counterclaim are both hereby ordered dismissed. Without pronouncement as to costs.

Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision dated May 28, 1992, respondent court affirmed the decision of the trial court, 5 but based on different grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a potestative condition which rendered said condition void. The motion for reconsideration was denied in the resolution dated September 10, 1992. 6 Hence, the present petition.

Petitioners assign the following pertinent errors committed by respondent court:

1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;

2) in ruling that prescription of the action for reformation of the contract in this case commenced from the time it became disadvantageous to private respondent; and

3) in ruling that the contract was subject to a potestative condition in favor of petitioners.

Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily because the contract does not involve the rendition of service or a personal prestation and it is not for future service with future unusual change. Instead, the ruling in the case of Occeña, et al. v. Jabson, etc., et al., 7 which interpreted the article, should be followed in resolving this case. Besides, said article was never raised by the parties in their pleadings and was never the subject of trial and evidence.

In applying Article 1267, respondent court rationalized:

We agree with appellant that in order that an action for reformation of contract would lie and may prosper, there must be sufficient allegations as well as proof that the contract in question failed to express the true intention of the parties due to error or mistake, accident, or fraud. Indeed, in embodying the equitable remedy of reformation of instruments in the New Civil Code, the Code Commission gave its reasons as follows:

Equity dictates the reformation of an instrument in order that the true intention of the contracting parties may be expressed. The courts by the reformation do not attempt to make a new contract for the parties, but to make the instrument express their real agreement. The rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. The rigor of the legalistic rule that a written instrument should be the final and inflexible criterion and measure of the rights and obligations of the contracting parties is thus tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident. (pp. 55-56, Report of Code Commission)

Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where through mistake or accident on the part of either or both of the parties or mistake or fraud on the part of the clerk or typist who prepared the instrument, the true intention of the parties is not expressed therein, then the instrument may be reformed at the instance of either party if there was mutual mistake on their part, or by the injured party if only he was mistaken.

Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a mistake on its part or mutual mistake on the part of both parties when they entered into the agreement Exh. "A", and that because of this mistake, said agreement failed to express their true intention. Rather, plaintiff's evidence shows that said agreement was prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of Directors and its legal counsel at that time, who was also the legal counsel for defendant-appellant, so that as legal counsel for both companies and presumably with the interests of both companies in mind when he prepared the aforesaid agreement, Atty. Maggay must have considered the same fair and equitable to both sides, and this was affirmed by the lower court when it found said contract to have been fair to both parties at the time of its execution. In fact, there were no complaints on the part of both sides at the time of and after the execution of said contract, and according to 73-year old Justino de Jesus, Vice President and General manager of appellant at the time who signed the agreement Exh. "A" in its behalf and who was one of the witnesses for the plaintiff (sic), both parties complied with said contract "from the very beginning" (p. 5, tsn, April 17, 1989).

That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff with the expansion of the business of appellant and the increase in the volume of its subscribers in Naga City and environs through the years, necessitating the stringing of more and bigger telephone cable wires by appellant to plaintiff's electric posts without a corresponding increase in the ten (10) telephone connections given by appellant to plaintiff free of charge in the agreement Exh. "A" as consideration for its use of the latter's electric posts in Naga City, appear, however, undisputed from the totality of the evidence on record and the lower court so found. And it was for this reason that in the later (sic) part of 1982 or 1983 (or five or six years after the subject agreement was entered into by the parties), plaintiff's Board of Directors already asked Atty. Luis General who had become their legal counsel in 1982, to study said agreement which they believed had become disadvantageous to their company and to make the proper recommendation, which study Atty. General did, and thereafter, he already recommended to the Board the filing of a court action to reform said contract, but no action was taken on Atty. General's recommendation because the former general managers of plaintiff wanted to adopt a soft approach in discussing the matter with appellant, until, during the term of General Manager Henry Pascual, the latter, after failing to settle the problem with Atty. Luciano Maggay who had become the president and general manager of appellant, already agreed for Atty. General's filing of the present action. The fact that said contract has become inequitous or disadvantageous to plaintiff as the years went by did not, however, give plaintiff a cause of action for reformation of said contract, for the reasons already pointed out earlier. But this does not mean that plaintiff is completely without a remedy, for we believe that the allegations of its complaint herein and the evidence it has presented sufficiently make out a cause of action under Art. 1267 of the New Civil Code for its release from the agreement in question.

xxx xxx xxx

The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977 and the prevailing circumstances and conditions at the time, were described by Dioscoro Ragragio, the President of plaintiff in 1977 and one of its two officials who signed said agreement in its behalf, as follows:

Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in the City of Naga because at that time the capability of NATELCO was very limited, as a matter of fact we do [sic] not expect to be able to expand because of the legal squabbles going on in the NATELCO. So, even at that time there were so many subscribers in Naga City

that cannot be served by the NATELCO, so as a mater of public service we allowed them to sue (sic) our posts within the Naga City. (p. 8, tsn April 3, 1989)

Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very light and that very few telephone lines were attached to the posts of CASURECO II in 1977, said posts have become "heavily loaded" in 1989 (tsn, id.).

In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's subscribers and the corresponding increase in the telephone cables and wires strung by it to plaintiff's electric posts in Naga City for the more 10 years that the agreement Exh. "A" of the parties has been in effect, there has been no corresponding increase in the ten (10) telephone units connected by appellant free of charge to plaintiff's offices and other places chosen by plaintiff's general manager which was the only consideration provided for in said agreement for appellant's use of plaintiffs electric posts. Not only that, appellant even started using plaintiff's electric posts outside Naga City although this was not provided for in the agreement Exh. "A" as it extended and expanded its telephone services to towns outside said city. Hence, while very few of plaintiff's electric posts were being used by appellant in 1977 and they were all in the City of Naga, the number of plaintiff's electric posts that appellant was using in 1989 had jumped to 1,403,192 of which are outside Naga City (Exh. "B"). Add to this the destruction of some of plaintiff's poles during typhoons like the strong typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the escalation of the costs of electric poles from 1977 to 1989, and the conclusion is indeed ineluctable that the agreement Exh. "A" has already become too one-sided in favor of appellant to the great disadvantage of plaintiff, in short, the continued enforcement of said contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it should now be released therefrom under Art. 1267 of the New Civil Code to avoid appellant's unjust enrichment at its (plaintiff's) expense. As stated by Tolentino in his commentaries on the Civil Code citing foreign civilist Ruggiero, "equity demands a certain economic equilibrium between the prestation and the counter-prestation, and does not permit the unlimited impoverishment of one party for the benefit of the other by the excessive rigidity of the principle of the obligatory force of contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed.,pp. 247-248).

We therefore, find nothing wrong with the ruling of the trial court, although based on a different and wrong premise (i.e., reformation of contract), that from the date of the filing of this case, appellant must pay for the use of plaintiff's electric posts in Naga City at the reasonable monthly rental of P10.00 per post, while plaintiff should pay appellant for the telephones in the same City that it was formerly using free of charge under the terms of the agreement Exh. "A" at the same rate being paid by the general public. In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff, said arrangement to continue only until such time as said parties can re-negotiate another agreement over the samesubject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed by the parties, the aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall be substituted and superseded by their new agreement. . . .. 8

Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this provision, 9 the term "service" should be understood as referring to the "performance" of the obligation. In the present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the contract be for future service with future unusual change. According to Senator Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. Considering practical needs and the

demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the party prejudiced.

In a nutshell, private respondent in the Occeña case filed a complaint against petitioner before the trial court praying for modification of the terms and conditions of the contract that they entered into by fixing the proper shares that should pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the dismissal of the complaint therein for failure to state a sufficient cause of action. We rationalized that the Court of Appeals misapplied Article 1267 because:

. . . respondent's complaint seeks not release from the subdivision contract but that the court "render judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that should pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subject subdivision". The cited article (Article 1267) does not grant the courts (the) authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the parties themselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought. 11

The ruling in the Occeña case is not applicable because we agree with respondent court that the allegations in private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. We, therefore, release the parties from their correlative obligations under the contract. However, our disposition of the present controversy does not end here. We have to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public; while private respondent, in consonance with the contract 12 will return all the telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished further from the Occeña case, necessitates exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the rationalization of respondent court that:

. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . . 14

Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the subject of trial and evidence has been passed upon by respondent court in its well reasoned resolution, which we hereunder quote as our own:

First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this case, we have changed its theory and decided the same on an issue not invoked by plaintiff in the lower court. For basically, the main and pivotal issue in this case is whether the continued enforcement of the contract Exh. "A" between the parties has, through the years (since 1977), become too inequitous or disadvantageous to the plaintiff and too one-sided in favor of defendant-appellant, so that a solution must be found to relieve plaintiff from the continued operation of said agreement and to prevent defendant-appellant from further unjustly enriching itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears to plaintiffs requests for renegotiation, constraining the latter to go to court. But although plaintiff cannot, as we have held, correctly invoke reformation of contract as a proper remedy (there having been no showing of a mistake or error in said contract on the part of any of the parties so as to result in its failure to express

their true intent), this does not mean that plaintiff is absolutely without a remedy in order to relieve itself from a contract that has gone far beyond its contemplation and has become so highly inequitous and disadvantageous to it through the years because of the expansion of defendant-appellant's business and the increase in the volume of its subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in the best way and manner it can in the light of the proven facts and the law or laws applicable thereto.

It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant court may uphold the decision below upon some other point which was ignored or erroneously decided by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate court has the discretion to consider an unassigned error that is closely related to an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also been held that the Supreme Court (and this Court as well) has the authority to review matters, even if they are not assigned as errors in the appeal, if it is found that their consideration is necessary in arriving at a just decision of the case (Saura Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA 143). For it is the material allegations of fact in the complaint, not the legal conclusion made therein or the prayer, that determines the relief to which the plaintiff is entitled, and the plaintiff is entitled to as much relief as the facts warrant although that relief is not specifically prayed for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but very illuminating decision of our Supreme Court through the pen of American jurist Adam C. Carson:

"Under our system of pleading it is the duty of the courts to grant the relief to which the parties are shown to be entitled by the allegations in their pleadings and the facts proven at the trial, and the mere fact that they themselves misconstrue the legal effect of the facts thus alleged and proven will not prevent the court from placing the just construction thereon and adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)

And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme Court also held:

We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues, although not raised before the trial court. The presence of strong consideration of substantial justice has led this Court to relax the well-entrenched rule that, except questions on jurisdiction, no question will be entertained on appeal unless it has been raised in the court below and it is within the issues made by the parties in their pleadings (Cordero v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .

We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the New Civil Code to this case. Defendant-appellant stresses that the applicability of said provision is a question of fact, and that it should have been given the opportunity to present evidence on said question. But defendant-appellant cannot honestly and truthfully claim that it (did) not (have) the opportunity to present evidence on the issue of whether the continued operation of the contract Exh. "A" has now become too one-sided in its favor and too inequitous, unfair, and disadvantageous to plaintiff. As held in our decision, the abundant and copious evidence presented by both parties in this case and summarized in said decision established the following essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this case:

xxx xxx xxx 15

On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that respondent court's ruling that the right of action "arose only after said contract had already become disadvantageous and unfair to it due to subsequent events and conditions, which must be sometime during the latter part of 1982 or in 1983 . . ." 16 is erroneous. In reformation of contracts, what is reformed is not the contract itself, but the instrument embodying the contract. It follows that whether the contract is

disadvantageous or not is irrelevant to reformation and therefore, cannot be an element in the determination of the period for prescription of the action to reform.

Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought within ten (10) years from the time the right of action accrues. Clearly, the ten (10) year period is to be reckoned from the time the right of action accrues which is not necessarily the date of execution of the contract. As correctly ruled by respondent court, private respondent's right of action arose "sometime during the latter part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's) Board of Directors to study said contract as it already appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said contract should thus be considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989 when the complaint in this case was filed, ten (10) years had not yet elapsed." 17

Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either party because petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private respondent's permission for free use of its posts dependent purely on its will.

Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent under the allegations of its complaint and the preponderant evidence presented by it:

. . . we believe that the provision in said agreement —

(a) That the term or period of this contract shall be as long as the party of the first part [herein appellant] has need for the electric light posts of the party of the second part [herein plaintiff] it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to remove the electric light post [sic]"; (Emphasis supplied)

is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the aforesaid agreement to the latter's sole and exclusive will as long as plaintiff is in operation. A similar provision in a contract of lease wherein the parties agreed that the lessee could stay on the leased premises "for as long as the defendant needed the premises and can meet and pay said increases" was recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150, citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee." Further held the High Court in the Lim case:

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 of no equality exists between the lessor and the lessee since the life of the contract is dictated solely by the lessee.

The above can also be said of the agreement Exh. "A" between the parties in this case. There is no mutuality and equality between them under the afore-quoted provision thereof since the life and continuity of said agreement is made to depend as long as appellant needs plaintiff's electric posts. And this is precisely why, since 1977 when said agreement was executed and up to 1989 when this case was finally filed by plaintiff, it could do nothing to be released from or terminate said agreement notwithstanding that its continued effectivity has become very disadvantageous and inequitous to it due to the expansion and increase of appellant's telephone services within Naga City and even outside the same, without a corresponding increase in the ten (10) telephone units being used by plaintiff free of charge, as well as the bad and inefficient service of said telephones to the prejudice and inconvenience of plaintiff and its customers. . . . 18

Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on this definition, respondent court's finding that the provision in the contract, to wit:

(a) That the term or period of this contract shall be as long as the party of the first part (petitioner) has need for the electric light posts of the party of the second part (private respondent) . . ..

is a potestative condition, is correct. However, it must have overlooked the other conditions in the same provision, to wit:

. . . it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is forced to stop, abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light post (sic);

which are casual conditions since they depend on chance, hazard, or the will of a third person. 20 In sum, the contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person, which do not invalidate the aforementioned provision. 21 Nevertheless, in view of our discussions under the first and second issues raised by petitioners, there is no reason to set aside the questioned decision and resolution of respondent court.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and its resolution dated September 10, 1992 are AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

#Footnotes

1 84 Phil. 654.

2 Report of the Code Commission, p. 133; cited in Rollo, p. 57.

3 Records, p. 6.

4 Ibid, pp. 6-7.

5 Rollo, p. 62.

6 Rollo, p. 71.

7 G.R. No. L-44349, October 29, 1976, 73 SCRA 637.

8 Rollo, pp. 54-59.

9 Supra.

10 Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 Edition p. 347.

11 At p. 641.

12 Records, p. 7.

13 Agne, et al. v. Director of Lands, et al., G.R. No. L-40399, February 9, 1990, 181 SCRA 793.

14 Rollo, p.59.

15 Rollo, pp. 66-69.

16 Rollo, pp. 53-54.

17 Rollo, pp. 53-54.

18 Rollo, pp. 59-61.

19 Article 1182 of the New Civil Code.

20 Civil Code of the Philippines Annotated by Edgardo L. Paras, 1985 Edition,p. 171.

21 Ibid.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 133909           February 15, 2000

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, petitioner, vs.MARS CONSTRUCTION ENTERPRISES, respondent.

PANGANIBAN, J.:

Unilateral rescission of a contract is subject to judicial determination. Contractual stipulations should be interpreted together. Ambiguous ones should be construed to conform to the sense that would result when all the provisions are comprehended jointly. Moreover, doubts should be settled in favor of the greatest reciprocity of interests.

The Case

Before the Court is a Petition for Review under Rule 45 of the Rules of Court, seeking the reversal of the May 20, 1998 Decision of the Court of Appeals1 (CA) in CA-GR CV No. 45009, which affirmed the Regional Trial Court (RTC) of Pasig City (Branch 154). The assailed Decision disposed as follows:2

WHEREFORE, [there being] no error in the appealed decision, the same is AFFIRMED in toto.

The Facts

In its assailed Decision, the Court of Appeals relates the facts of this case as follows:3

On July 2, 1982, [Mars Construction Enterprises, Inc., respondent herein] entered into a subcontract/Agreement with . . . Construction & Development Corporation of the Philippines (CDCP) [petitioner herein], later reorganized into the present Philippine National Construction Corporation (PNCC), for the supply of "approximately seventy thousand (70,000) cubic meters of aggregates consisting of:

1. washed sand,

2. washed 3/4" gravel,

3. washed 1-1/2" gravel

4. sub-base.

On August 7, 1982, [respondent] and CDCP executed Amendment No. 1 increasing the amount of the third party liability coverage from P50,000.00 to P100,000.00. On November 5, 1982, [respondent] and CDCP executed Amendment No. 2 amending the scope of services, as follows:

1. Art. I is hereby amended to read:

ART. I — SCOPE OF SERVICES

The FIRST PARTY [respondent] shall supply approximately SEVENTY THOUSAND (70,000) cubic meters of concrete aggregates consisting of the following:

1. [W]ashed sand app. 17,500 cu. m.

2. Washed 3/4" gravel app. 17,500 cu. m.

3. Washed 1 1/2" gravel app. 35,000 cu. m.

4. Sub-base 2" minus crusher run

x x x           x x x           x x x

(Exhibit "C-1", Folder of Exhibits)

Amendment No. 2 also altered Article IV (5.0) of the original Agreement which provided that "(t)he first party guarantees to commence delivery within forty five (45) days after signing of the contract and continue delivery until the quantities enumerated . . . [shall] have been delivered to the jobsite stockpile' to read as follows:

ART. V — DELIVERY

The FIRST PARTY [respondent] shall deliver a minimum of SIX THOUSAND (6,000) cubic meters of combined concrete aggregate per month until the entire requirements of the SECOND PARTY [petitioner] to complete the Philphos Project shall have been satisfied. (Emphasis supplied.)

Actual delivery of aggregates started only in March of 1983, or a delay of eight (8) months of the 45 days stipulated in the Agreement (Agreement, Article IV (5.0); TSN, September 6, 1985, pp. 9-10). There were also non-deliveries between the period June 1983 to January 1984 (TSN, supra). Thus [petitioner] was constrained to obtain the necessary materials from other sources, incurring additional costs representing the difference between the agreed price of P140.00 per cubic meter under the Agreement and the pricing of the outside sources. The difference in cost was reimbursed by [respondent] in accordance with the default clause under the Agreement that "the Second Party [petitioner] can procure from any other quarry operator . . . (and) should such procurement cost the Second Party more than the agreed price above, the excess [would] be for the account of the First

Party . . ." (Article VII, no. 7). A total of P1.578 M was thusly paid by [respondent] (TSN, September 5, 1985, p. 12).

The controversy arose when [petitioner] refused to accept [respondent's] delivery of 17,000.00 cubic meters of washed 1-1/2" gravel, saying that it had no more need for the same. For this, [respondent] claimed the amount of P680,000.00 representing lucrum cessans or unrealized profit with interest at bank rate until fully paid, exemplary damages and attorney's fees. [Respondent] also demanded payment of P118,518.68 (Memorandum for Plaintiff, Record, p. 245) covered by a check tendered by [petitioner] (Exhibit 15) based on a balance on the purchase of 39,200.62 cubic meters of base course amounting to P130,000.00 after deducting half of the overpayment of P23,256.80 made by [respondent] (TSN, April 22, 1986, p. 22).

[Petitioner] denied that it breached the contract and counter-claimed for the amount of P85,120 as price differential of the procurement cost over the agreed price, plus reimbursement of overpayment of P23,256.80 it had made arising from error in measurement. (Answer, Counterclaim).

The lower court rendered judgment, as follows:

Wherefore, the foregoing considered, judgment is hereby rendered in favor of plaintiff and against the defendant ordering the defendant to pay plaintiff: a.) the amount of P680,000.00 as lucrum cessans; b.) the amount of P33,387.91 for the outstanding obligation of PNCC in favor of plaintiff (118,518.68 less price differential of P85,120.77); c.) attorney's fees . . . reduced to the reasonable amount of P50,000.00; and as the costs of litigation.

Ruling of the Court of Appeals

The CA ruled that the Contract and its amendments impelled petitioner to accept delivery of the washed 1.5-inch gravel from the respondent. The figures in the "Scope of Services" provision were interpreted to mean the minimum quantities to be delivered to the petitioner. The petitioner received a total of 8,162.43 cubic meters of washed 1.5 inch gravel from the respondent and 9,978.06 cubic meters from other sources. Hence, the petitioner actually utilized only 18,140.49 cubic meters of aggregates of this specification, which was only about half of the stipulated 35,000 cubic meters. Clearly, it breached the Contract when it refused to accept delivery of the 17,000 cubic meters of washed 1.5-inch gravel from the respondent.

Because of this breach, the respondent was entitled to lucrum cessans, computed by deducting the production cost from the agreed cost per cubic meter of aggregates.1âwphi1.nêt

The outstanding obligation of the petitioner to the respondent was the difference between the subcontractor's quitclaim minus the penalty charges for outsourcing aggregates, which respondent incurred for its failure to deliver. The amount was based on the Quitclaim presented by petitioner and the undisputed Backcharge Invoice No. 354 presented by respondent.

The CA denied the petitioner's prayer for damages arising from the delays in delivery, because respondent had already compensated or paid for such delays. The appellate court rejected petitioner's contention that the respondent committed bad faith by entering into a contract that it was financially incapable of fulfilling, inasmuch as this issue had not been raised before the trial court.

Hence, this Petition.4

Issues

In its Memorandum, the petitioner submits the following "issues" for the Court's consideration:5

i. The honorable Court of Appeals . . . decided that PNCC was compelled to accept the delivery of the 17,000 cubic meters of washed 1-1/2" gravel which is not in accord with law and jurisprudence.

ii. The honorable Court of Appeals . . . decided to award the amount of P680,000.00 as lucrum cessans which is not in accord with law and jurisprudence.

The Court's Ruling

The Petition has no merit.

First Issue:Obligation to Accept Delivery

Petitioner contends that it was not under any obligation to accept 17,000 cubic meters of washed 1.5-inch gravel, because the delivery was made after the actual aggregate requirement of the project had already been fully satisfied, and after respondent had defaulted on its contractual undertakings.

Interpreting the Contract

Petitioner adds that the respondent had already delivered aggregates, the combined volume of which was about 45 percent over and above that required in Article I, Amendment 2 of the Contract, Hence, the petitioner refused to accept the "excess" delivery in issue.

This contention is incorrect. The various stipulations in a contract should be interpreted together. Ambiguous ones should be so construed as to conform to the sense that would result if all the provisions are comprehended jointly.6 The "Scope of Services" provision in Amendment 2 stipulated the delivery of 70,000 cubic meters of concrete aggregates consisting of approximately 17,500 cubic meters of washed sand, approximately 17,500 cubic meters of washed .75-inch gravel, 35,000 cubic meters of washed 1.5-inch gravel, and "sub-base 2" minus crusher run. Clearly, at least 35,000 of the 70,000 cubic meters of concrete aggregates that the respondent was supposed to deliver to the petitioner should be washed 1.5-inch gravel. The trial court correctly explained.

. . . Initially, [respondent's] scope of services [was] to supply 70,000 cu. m. of concrete aggregates consisting of washed sand, washed 3/4" gravel, washed 1-1/2" gravel and sub-base (Art. 1 of the Agreement). This was amended per Amendment No. 2 (Exhibit C) to 70,000 cu. m. of concrete aggregates consisting of washed sand approximately 17,500 cu. m., washed 3/4" gravel approximately 17,500 cu. m., washed 1-1/2" gravel approximately 35,000 cu. m., and sub-base 2" minus crusher run. This amendment . . . made the agreement [ambiguous] because the quantity of sub-base 2" minus crusher run was not specified. If said aggregate was included[;] however, the total would definitely be in excess of 70,000 cu. m. . . . [Petitioner] had ordered from [respondent] more than what was specified in the agreement. This act [signified] that the maximum limit of 70,000 cu. m. [was] disregarded [because of] PNCC's needs. What then would be the significance of the quantities stated in Amendment No. 2? We interpret that these are the minimum quantities which must be delivered by [respondent]. Both parties are bound by these figures. . . .

Besides, the stipulation would be too burdensome to the respondent if, as petitioner insists, the breakdown of the specified aggregates were interpreted as mere estimates of the project requirements; the respondent would have then been uncertain as to how much it should deliver. Doubts in contracts should be settled in favor of the greatest reciprocity of interests.8 Accordingly, these figures, as held by the CA, should be deemed the minimum amounts to be procured and delivered. In this way, both parties would know exactly how much to demand from each other to be able to comply with their respective obligations.

Provisional Unilateral Resolution

PNCC Project Director H. R. Taylor's letter of May 17, 1984 informed the respondent of the final quantities of concrete aggregates to be delivered, with the advice that no other deliveries would be accepted. Hence, the petitioner asserts that, after that advice, it was no longer bound to accept any further deliveries from the respondent.

We disagree. Such advice is not a sufficient justification for refusing delivery. The only clause on delivery is Stipulation 2 of Amendment 2, which states that "[t]he FIRST PARTY shall deliver a minimum of SIX THOUSAND (6,000) [c]ubic meters of combined concrete aggregate per month until the entire

requirements of the SECOND PARTY to complete the Philphos Project shall have been satisfied."9 The Contract did not authorize the petitioner to limit, by means of a unilateral advice, the quantity of aggregates that may be delivered. Although there were several occasions when the petitioner advised the respondent on the quality and the quantity of concrete aggregates to be delivered, Mr. Solomon Chu (general manager of respondent) testified that the giving of advice did not become the practice between them.10

By saying that the quantity specified in the letter was its last order, petitioner unilaterally amended its Contract with the respondent. The act of treating a contract as cancelled or rescinded on account of infractions by the other contracting party is always provisional;11 that is, contestable and subject to judicial determination.12 Judicial action is necessary for its rescission in order to afford the other party an opportunity to be heard13 and to determine if the rescission was proper.14 When the herein petitioner resolved or rescinded the Agreement without previous court action, it proceeded at its own risk. Only the final judgment of a court will conclusively and finally settle whether such recourse was correct in law.

Default as Insubstantial Breach

Petitioner avers that respondent was already in default when the former refused the latter's delivery of 17,000 cubic meters of washed 1.5-inch gravel. Hence, its refusal was justified.

We are not persuaded. The contract specifically provided that if the respondent failed to deliver the required aggregates, the petitioner could procure them from other sources so as not to jeopardize the entire construction project. The records reveal that on several occasions, petitioner purchased concrete aggregates from other suppliers.15

Pursuant to Paragraph 3 of Amendment 2, petitioner imposed penalties for the incremental cost of procuring materials from other sources, which respondent willingly paid in the sum of P1,577,000. Since petitioner was already compensated for respondent's defaults, such defaults cannot be considered as a substantial breach that justified the rescission of the Contract and the refusal to accept the questioned delivery.16

Furthermore, when the petitioner exercised its options in case of delay or default on the part of the respondent, the former waived its right to rescind and was thus estopped from rescinding the Contract by reason of such short delivery.17

In light of the foregoing, the CA correctly held that petitioner was under obligation to accept and to pay for the 17,000 cubic meters of washed 1.5-inch gravel delivered by the respondent.18 As found by the CA, the petitioner procured only a total of 18,140.49 cubic meters of washed 1.5-inch gravel from the respondent and from other suppliers (9,978.06 and 8,162.43 cubic meters, respectively). Thus, the respondent had the prerogative to supply, and the petitioner was bound to accept, 16,859.51 (or approximately 17,000) cubic meters of 1.5-inch gravel. Parties to a contract are bound to the fulfillment of what has expressly been stipulated.19

Second Issue:Factual Question of Lost Profits

Petitioner avers that the profits which respondent expected to derive from the Agreement were purely speculative, and that the trial and the appellate courts erroneously believed Mr. Chu's bare testimony on said profits.

We are not persuaded. Whether the respondent failed to realize profits — and if so, how much — and whether the judgment was supported by the evidence presented by it are factual in nature. Factual findings of the trial court, especially when affirmed by the Court of Appeals, as in this case, are binding and conclusive on the Supreme Court. It is not the function of this Court to reexamine the lower courts' findings of fact.20 While there are exceptions to this rule,21 petitioner has not shown its entitlement to any of them.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.1âwphi1.nêt

SO ORDERED.

Melo, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.

Footnotes

1 First Division composed of J. Portia Aliño-Hormachuelos, ponente; JJ Arturo B. Buena (now a member of the Supreme Court) and Buenaventura J. Guerrero, members.

2 CA Decision, p. 38.

3 Ibid., pp. 1-4; rollo, pp. 30-33.

4 This case was deemed submitted for decision upon receipt by this Court of the Memorandum for Mars Construction Enterprises, Inc. on October 11, 1999. This Memorandum was signed by Atty. Luis V. Diores of Diores Law Offices (rollo, p. 93).

5 Rollo, p. 75; the Memorandum for the petitioner was signed by Government Corporate Counsel Jun N. Valerio, Deputy Government Corporate Counsel Elpidio J. Vega, Asst. Government Corporate Counsel Efren B. Gonzales and Government Corporate Attorney IV Manuel V. Fernandez (rollo, p. 75).

6 See Article 1374, Civil Code.

7 RTC Decision, p. 12; CA rollo, p. 66.

8 Art. 1378, Civil Code.

9 Exhibit "C-2," RTC records, p. 42.

10 TSN, December 19, 1985, pp. 6-9.

11 University of the Philippines v. De los Angeles, 35 SCRA 102, 107, September 29, 1970.

12 UP v. De los Angeles, supra.

13 UP v. De los Angeles, supra; Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631, 643, February 14, 1918; Republic v. Hospital de San Juan de Dios, 84 Phil. 820, 827, October 31, 1949; Coronel v. Court of Appeals, 263 SCRA 15, 35, October 7, 1996; and Adelfa Properties, Inc. v. Court of Appeals 240 SCRA 565, 588, January 25, 1988.

14 Pangilinan v. Court of Appeals, 279 SCRA 590, 597, September 29, 1997.

15 Exhibit "I-1," Folder of Exhibits.

16 Power Commercial and Industrial Corporation v. Court of Appeals 274 SCRA 597, 608, June 20, 1997; Siska Dev't. Corp. v. Office of the President of the Phil., 231 SCRA 674, 681, April 22, 1994.

17 Siska Dev't. Corp. v. Office of the President, supra; Angeles v. Calasanz, 135 SCRA 323, 332, March 18, 1985.

18 CA Decision, p. 6; rollo, p. 35.

19 Romero v. Court of Appeals, 250 SCRA 223, 233, November 23, 1995; Pangilinan v. CA, supra, p. 599.

20 SPS. Lagandaon v. Court of Appeals GR Nos. 102526-31, May 21, 1998; National Steel Corporation v. Court of Appeals, GR No. 112287, December 12, 1997.

21 Fuentes v. CA, 268 SCRA 708-709, February 26, 1997.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 139523             May 26, 2005

SPS. FELIPE AND LETICIA CANNU, petitioners, vs.SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE FINANCE CORPORATION, respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision1 of the Court of Appeals dated 30 September 1998 which affirmed with modification the decision of Branch 135 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint for Specific Performance and Damages filed by petitioners, and its Resolution2 dated 22 July 1999 denying petitioners’ motion for reconsideration.

A complaint3 for Specific Performance and Damages was filed by petitioners-spouses Felipe and Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the National Home Mortgage Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on 24 June 1993. The case was docketed as Civil Case No. 93-2069.

The facts that gave rise to the aforesaid complaint are as follows:

Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las Piñas, with an area of 150 square meters covered by Transfer Certificate of Title (TCT) No. T-8505 in the names of respondents-spouses. To secure payment, a real estate mortgage was constituted on the said house and lot in favor of Fortune Savings & Loan Association. In early 1990, NHMFC purchased the mortgage loan of respondents-spouses from Fortune Savings & Loan Association for P173,800.00.

Respondent Fernandina Galang authorized4 her attorney-in-fact, Adelina R. Timbang, to sell the subject house and lot.

Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the balance of the mortgage obligations with the NHMFC and with CERF Realty5 (the Developer of the property).

Of the P120,000.00, the following payments were made by petitioners:

Date Amount PaidJuly 19, 1990 P40,000.006

March 13, 1991 15,000.007

April 6, 1991 15,000.008

November 28, 1991 5,000.009

Total P75,000.00

Thus, leaving a balance of P45,000.00.

A Deed of Sale with Assumption of Mortgage Obligation10 dated 20 August 1990 was made and entered into by and between spouses Fernandina and Gil Galang (vendors) and spouses Leticia and Felipe Cannu (vendees) over the house and lot in question which contains, inter alia, the following:

NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency, receipt of which is hereby acknowledged by the Vendors and the assumption of the mortgage obligation, the Vendors hereby sell, cede and transfer unto the

Vendees, their heirs, assigns and successor in interest the above-described property together with the existing improvement thereon.

It is a special condition of this contract that the Vendees shall assume and continue with the payment of the amortization with the National Home Mortgage Finance Corporation Inc. in the outstanding balance of P_______________, as of __________ and shall comply with and abide by the terms and conditions of the mortgage document dated Feb. 27, 1989 and identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of Notary Public for Quezon City Marites Sto. Tomas Alonzo, as if the Vendees are the original signatories.

Petitioners immediately took possession and occupied the house and lot.

Petitioners made the following payments to the NHMFC:

Date Amount Receipt No.July 9, 1990 P 14,312.47D-50398611

March 12, 1991 8,000.00 D-72947812

February 4, 1992 10,000.00D-99912713

March 31, 1993 6,000.00E-56374914

April 19, 1993 10,000.00E-58243215

April 27, 1993 7,000.00E-61832616

  P 55,312.47  

Petitioners paid the "equity" or second mortgage to CERF Realty.17

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of P45,000.00 or in the alternative to vacate the property in question, petitioners refused to do so.

In a letter18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga, Vice President, Fund Management Group of the NHMFC, that the ownership rights over the land covered by TCT No. T-8505 in the names of respondents-spouses had been ceded and transferred to her and her husband per Deed of Sale with Assumption of Mortgage, and that they were obligated to assume the mortgage and pay the remaining unpaid loan balance. Petitioners’ formal assumption of mortgage was not approved by the NHMFC.19

Because the Cannus failed to fully comply with their obligations, respondent Fernandina Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan with NHMFC.20

Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting that the subject property had already been sold to them. Consequently, the NHMFC held in abeyance the release of said TCT.

Thereupon, a Complaint for Specific Performance and Damages was filed asking, among other things, that petitioners (plaintiffs therein) be declared the owners of the property involved subject to reimbursements of the amount made by respondents-spouses (defendants therein) in preterminating the mortgage loan with NHMFC.

Respondent NHMFC filed its Answer.21 It claimed that petitioners have no cause of action against it because they have not submitted the formal requirements to be considered assignees and successors-in-interest of the property under litigation.

In their Answer,22 respondents-spouses alleged that because of petitioners-spouses’ failure to fully pay the consideration and to update the monthly amortizations with the NHMFC, they paid in full the existing obligations with NHMFC as an initial step in the rescission and annulment of the Deed of Sale with Assumption of Mortgage. In their counterclaim, they maintain that the acts of petitioners in not fully

complying with their obligations give rise to rescission of the Deed of Sale with Assumption of Mortgage with the corresponding damages.

After trial, the lower court rendered its decision ratiocinating:

On the basis of the evidence on record, testimonial and documentary, this Court is of the view that plaintiffs have no cause of action either against the spouses Galang or the NHMFC. Plaintiffs have admitted on record they failed to pay the amount of P45,000.00 the balance due to the Galangs in consideration of the Deed of Sale With Assumption of Mortgage Obligation (Exhs. "C" and "3"). Consequently, this is a breach of contract and evidently a failure to comply with obligation arising from contracts. . . In this case, NHMFC has not been duly informed due to lack of formal requirements to acknowledge plaintiffs as legal assignees, or legitimate tranferees and, therefore, successors-in-interest to the property, plaintiffs should have no legal personality to claim any right to the same property.23

The decretal portion of the decision reads:

Premises considered, the foregoing complaint has not been proven even by preponderance of evidence, and, as such, plaintiffs have no cause of action against the defendants herein. The above-entitled case is ordered dismissed for lack of merit.

Judgment is hereby rendered by way of counterclaim, in favor of defendants and against plaintiffs, to wit:

1. Ordering the Deed of Sale With Assumption of Mortgage Obligation (Exhs. "C" and "3") rescinded and hereby declared the same as nullified without prejudice for defendants-spouses Galang to return the partial payments made by plaintiffs; and the plaintiffs are ordered, on the other hand, to return the physical and legal possession of the subject property to spouses Galang by way of mutual restitution;

2. To pay defendants spouses Galang and NHMFC, each the amount of P10,000.00 as litigation expenses, jointly and severally;

3. To pay attorney’s fees to defendants in the amount of P20,000.00, jointly and severally; and

4. The costs of suit.

5. No moral and exemplary damages awarded.24

A Motion for Reconsideration25 was filed, but same was denied. Petitioners appealed the decision of the RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals disposed of the appeal as follows:

Obligations arising from contract have the force of law between the contracting parties and should be complied in good faith. The terms of a written contract are binding on the parties thereto.

Plaintiffs-appellants therefore are under obligation to pay defendants-appellees spouses Galang the sum of P250,000.00, and to assume the mortgage.

Records show that upon the execution of the Contract of Sale or on July 19, 1990 plaintiffs-appellants paid defendants-appellees spouses Galang the amount of only P40,000.00.

The next payment was made by plaintiffs-appellants on March 13, 1991 or eight (8) months after the execution of the contract. Plaintiffs-appellants paid the amount of P5,000.00.

The next payment was made on April 6, 1991 for P15,000.00 and on November 28, 1991, for another P15,000.00.

From 1991 until the present, no other payments were made by plaintiffs-appellants to defendants-appellees spouses Galang.

Out of the P250,000.00 purchase price which was supposed to be paid on the day of the execution of contract in July, 1990 plaintiffs-appellants have paid, in the span of eight (8) years, from 1990 to present, the amount of only P75,000.00. Plaintiffs-appellants should have paid the P250,000.00 at the time of the execution of contract in 1990. Eight (8) years have already lapsed and plaintiffs-appellants have not yet complied with their obligation.

We consider this breach to be substantial.

The tender made by plaintiffs-appellants after the filing of this case, of the Managerial Check in the amount of P278,957.00 dated January 24, 1994 cannot be considered as an effective mode of payment.

Performance or payment may be effected not by tender of payment alone but by both tender and consignation. It is consignation which is essential in order to extinguish plaintiffs-appellants obligation to pay the balance of the purchase price.

In addition, plaintiffs-appellants failed to comply with their obligation to pay the monthly amortizations due on the mortgage.

In the span of three (3) years from 1990 to 1993, plaintiffs-appellants made only six payments. The payments made by plaintiffs-appellants are not even sufficient to answer for the arrearages, interests and penalty charges.

On account of these circumstances, the rescission of the Contract of Sale is warranted and justified.

. . .

WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification. Defendants-appellees spouses Galang are hereby ordered to return the partial payments made by plaintiff-appellants in the amount of P135,000.00.

No pronouncement as to cost.26

The motion for reconsideration27 filed by petitioners was denied by the Court of Appeals in a Resolution28 dated 22 July 1999.

Hence, this Petition for Certiorari.

Petitioners raise the following assignment of errors:

1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT PETITIONERS’ BREACH OF THE OBLIGATION WAS SUBSTANTIAL.

2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD THAT THERE WAS NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION TO PAY THE MONTHLY AMORTIZATION WITH NHMFC.

3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT MILITATE AGAINST RESCISSION.

4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER THAT THE ACTION FOR RESCISSION IS SUBSIDIARY.29

Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a priori that the latter made a misappreciation of evidence regarding the consideration of the property in litigation

when it relied solely on the Deed of Sale with Assumption of Mortgage executed by the respondents-spouses Galang and petitioners-spouses Cannu.

As above-quoted, the consideration for the house and lot stated in the Deed of Sale with Assumption of Mortgage is P250,000.00, plus the assumption of the balance of the mortgage loan with NHMFC. However, after going over the record of the case, more particularly the Answer of respondents-spouses, the evidence shows the consideration therefor is P120,000.00, plus the payment of the outstanding loan mortgage with NHMFC, and of the "equity" or second mortgage with CERF Realty (Developer of the property).30

Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondents-spouses Galang shows that the consideration is "P250,000.00." In fact, what is clear is that of the P120,000.00 to be paid to the latter, only P75,000.00 was paid to Adelina Timbang, the spouses Galang’s attorney-in-fact. This debunks the provision in the Deed of Sale with Assumption of Mortgage that the amount of P250,000.00 has been received by petitioners.

Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent and agreement of the parties regarding its consideration, the same should not be fully relied upon. The foregoing facts lead us to hold that the case on hand falls within one of the recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties thereto.31

In the case at bar, when respondents-spouses enumerated in their Answer the terms and conditions for the sale of the property under litigation, which is different from that stated in the Deed of Sale with Assumption with Mortgage, they already put in issue the matter of consideration. Since there is a difference as to what the true consideration is, this Court has admitted evidence aliunde to explain such inconsistency. Thus, the Court has looked into the pleadings and testimonies of the parties to thresh out the discrepancy and to clarify the intent of the parties.

As regards the computation32 of petitioners as to the breakdown of the P250,000.00 consideration, we find the same to be self-serving and unsupported by evidence.

On the first assigned error, petitioners argue that the Court erred when it ruled that their breach of the obligation was substantial.

Settled is the rule that rescission or, more accurately, resolution,33 of a party to an obligation under Article 119134 is predicated on a breach of faith by the other party that violates the reciprocity between them.35 Article 1191 reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only for such breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement.36 The question of whether a breach of contract is substantial depends upon the attending circumstances37 and not merely on the percentage of the amount not paid.

In the case at bar, we find petitioners’ failure to pay the remaining balance of P45,000.00 to be substantial. Even assuming arguendo that only said amount was left out of the supposed consideration of P250,000.00, or eighteen (18%) percent thereof, this percentage is still substantial. Taken together with the fact that the last payment made was on 28 November 1991, eighteen months before the respondent

Fernandina Galang paid the outstanding balance of the mortgage loan with NHMFC, the intention of petitioners to renege on their obligation is utterly clear.

Citing Massive Construction, Inc. v. Intermediate Appellate Court,38 petitioners ask that they be granted additional time to complete their obligation. Under the facts of the case, to give petitioners additional time to comply with their obligation will be putting premium on their blatant non-compliance of their obligation. They had all the time to do what was required of them (i.e., pay the P45,000.00 balance and to properly assume the mortgage loan with the NHMFC), but still they failed to comply. Despite demands for them to pay the balance, no payments were made.39

The fact that petitioners tendered a Manager’s Check to respondents-spouses Galang in the amount of P278,957.00 seven months after the filing of this case is of no moment. Tender of payment does not by itself produce legal payment, unless it is completed by consignation.40 Their failure to fulfill their obligation gave the respondents-spouses Galang the right to rescission.

Anent the second assigned error, we find that petitioners were not religious in paying the amortization with the NHMFC. As admitted by them, in the span of three years from 1990 to 1993, their payments covered only thirty months.41 This, indeed, constitutes another breach or violation of the Deed of Sale with Assumption of Mortgage. On top of this, there was no formal assumption of the mortgage obligation with NHMFC because of the lack of approval by the NHMFC42 on account of petitioners’ non-submission of requirements in order to be considered as assignees/successors-in-interest over the property covered by the mortgage obligation.43

On the third assigned error, petitioners claim there was no clear evidence to show that respondents-spouses Galang demanded from them a strict and/or faithful compliance of the Deed of Sale with Assumption of Mortgage.

We do not agree.

There is sufficient evidence showing that demands were made from petitioners to comply with their obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per instruction of respondent Fernandina Galang, made constant follow-ups after the last payment made on 28 November 1991, but petitioners did not pay.44 Respondent Fernandina Galang stated in her Answer45 that upon her arrival from America in October 1992, she demanded from petitioners the complete compliance of their obligation by paying the full amount of the consideration (P120,000.00) or in the alternative to vacate the property in question, but still, petitioners refused to fulfill their obligations under the Deed of Sale with Assumption of Mortgage. Sometime in March 1993, due to the fact that full payment has not been paid and that the monthly amortizations with the NHMFC have not been fully updated, she made her intentions clear with petitioner Leticia Cannu that she will rescind or annul the Deed of Sale with Assumption of Mortgage.

We likewise rule that there was no waiver on the part of petitioners to demand the rescission of the Deed of Sale with Assumption of Mortgage. The fact that respondents-spouses accepted, through their attorney-in-fact, payments in installments does not constitute waiver on their part to exercise their right to rescind the Deed of Sale with Assumption of Mortgage. Adelina Timbang merely accepted the installment payments as an accommodation to petitioners since they kept on promising they would pay. However, after the lapse of considerable time (18 months from last payment) and the purchase price was not yet fully paid, respondents-spouses exercised their right of rescission when they paid the outstanding balance of the mortgage loan with NHMFC. It was only after petitioners stopped paying that respondents-spouses moved to exercise their right of rescission.

Petitioners cite the case of Angeles v. Calasanz46 to support their claim that respondents-spouses waived their right to rescind. We cannot apply this case since it is not on all fours with the case before us. First, in Angeles, the breach was only slight and casual which is not true in the case before us. Second, in Angeles, the buyer had already paid more than the principal obligation, while in the instant case, the buyers (petitioners) did not pay P45,000.00 of the P120,000.00 they were obligated to pay.

We find petitioners’ statement that there is no evidence of prejudice or damage to justify rescission in favor of respondents-spouses to be unfounded. The damage suffered by respondents-spouses is the effect of petitioners’ failure to fully comply with their obligation, that is, their failure to pay the remaining

P45,000.00 and to update the amortizations on the mortgage loan with the NHMFC. Petitioners have in their possession the property under litigation. Having parted with their house and lot, respondents-spouses should be fully compensated for it, not only monetarily, but also as to the terms and conditions agreed upon by the parties. This did not happen in the case before us.

Citing Seva v. Berwin & Co., Inc.,47 petitioners argue that no rescission should be decreed because there is no evidence on record that respondent Fernandina Galang is ready, willing and able to comply with her own obligation to restore to them the total payments they made. They added that no allegation to that effect is contained in respondents-spouses’ Answer.

We find this argument to be misleading.

First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the former, the failure of one party to perform his obligation was the fault of the other party, while in the case on hand, failure on the part of petitioners to perform their obligation was due to their own fault.

Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t (referring to the right to rescind or resolve) can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation, and the other is not." In other words, if one party has complied or fulfilled his obligation, and the other has not, then the former can exercise his right to rescind. In this case, respondents-spouses complied with their obligation when they gave the possession of the property in question to petitioners. Thus, they have the right to ask for the rescission of the Deed of Sale with Assumption of Mortgage.

On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain that the Court of Appeals erred when it failed to consider that the action for rescission is subsidiary.

Their reliance on Article 1383 is misplaced.

The subsidiary character of the action for rescission applies to contracts enumerated in Articles 138148 of the Civil Code. The contract involved in the case before us is not one of those mentioned therein. The provision that applies in the case at bar is Article 1191.

In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of Appeals,49 rescission under Article 1191 was distinguished from rescission under Article 1381. Justice J.B.L. Reyes said:

. . . The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d être as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191.

From the foregoing, it is clear that rescission ("resolution" in the Old Civil Code) under Article 1191 is a principal action, while rescission under Article 1383 is a subsidiary action. The former is based on breach by the other party that violates the reciprocity between the parties, while the latter is not.

In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay the balance of P45,000.00 to respondents-spouses and their failure to update their amortizations with the NHMFC.

Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the right to unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage, they should have first asked the court for the rescission thereof before they fully paid the outstanding balance of the mortgage loan with the NHMFC. They claim that such payment is a unilateral act of rescission which violates existing jurisprudence.

In Tan v. Court of Appeals,50 this court said:

. . . [T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him is clear from a reading of the Civil Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be exercised solely on a party’s own judgment that the other has committed a breach of the obligation. Where there is nothing in the contract empowering the petitioner to rescind it without resort to the courts, the petitioner’s action in unilaterally terminating the contract in this case is unjustified.

It is evident that the contract under consideration does not contain a provision authorizing its extrajudicial rescission in case one of the parties fails to comply with what is incumbent upon him. This being the case, respondents-spouses should have asked for judicial intervention to obtain a judicial declaration of rescission. Be that as it may, and considering that respondents-spouses’ Answer (with affirmative defenses) with Counterclaim seeks for the rescission of the Deed of Sale with Assumption of Mortgage, it behooves the court to settle the matter once and for all than to have the case re-litigated again on an issue already heard on the merits and which this court has already taken cognizance of. Having found that petitioners seriously breached the contract, we, therefore, declare the same is rescinded in favor of respondents-spouses.

As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with Assumption of Mortgage, it is the duty of the court to require the parties to surrender whatever they may have received from the other. The parties should be restored to their original situation.51

The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As to the petitioners’ alleged payment to CERF Realty of P46,616.70, except for petitioner Leticia Cannu’s bare allegation, we find the same not to be supported by competent evidence. As a general rule, one who pleads payment has the burden of proving it.52 However, since it has been admitted in respondents-spouses’ Answer that petitioners shall assume the second mortgage with CERF Realty in the amount of P35,000.00, and that Adelina Timbang, respondents-spouses’ very own witness, testified53 that same has been paid, it is but proper to return this amount to petitioners. The three amounts total P165,312.47 -- the sum to be returned to petitioners.

WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the partial payments made by petitioners in the amount of P165,312.47. With costs.

SO ORDERED.

Puno, Acting C.J., (Chairman), Austria-Martinez, and Callejo, Sr., JJ., concur. Tinga, J., out of the country.

Footnotes

1 CA Rollo, pp. 50-56; Penned by Associate Justice Eugenio S. Labitoria with Associate Justices Jesus M. Elbinias and Marina L. Buzon, concurring.

2 Id., at 77.

3 Records, pp. 1-12.

4 Exh. A; Records, p. 141.

5 The records do not disclose the nature of the transaction between respondents-spouses and CERF Realty.

6 Exh. G-1; Records, p. 149.

7 Exh. G-3; Id., p. 150.

8 Exh. G-4; Id., p. 152.

9 Exh. G-2; Id., p. 150.

10 Exh. C; Records, pp. 144-145.

11 Exh. I-1; Id., p. 154.

12 Exh. I-3; Id., p. 155.

13 Exh. I-6; Id., p. 157.

14 Exh. I-2; Id., p. 155.

15 Exh. I-5; Id., p. 156.

16 Exh. I-4; Id.

17 TSN, 13 October 1994, pp. 41-42.

18 Exh. F; Records, p. 148.

19 TSN, 13 October 1994, p. 37; Answer with Affirmative Defense of NHMFC, Records, p. 29.

20 Exhs. L and L-1; Records, p. 162.

21 Records, pp. 28-30.

22 Id., pp. 38-45.

23 Rollo, pp. 60-61.

24 Rollo, pp. 61-62.

25 Records, p. 229.

26 Rollo, pp. 38-40.

27 Id., pp. 57-68.

28 Id., p. 77.

29 Rollo, pp. 18-19.

30 TSN, 13 October 1994, pp. 41-42; 09 November 1994, p. 19; Complaint, p. 2, Records, p. 2; Answer of Respondents-spouses Galang, p. 3, Records, p. 40.

31 American Home Assurance Co. v . Tantuco Enterprises, Inc., G.R. No. 138941, 08 October 2001, 366 SCRA 740, 746-747.

32 Exh. H; Records, p. 153.

33 As used in the Old Civil Code.

34 Civil Code.

35 Uy v . Court of Appeals, G.R. No. 120465, 09 September 1999, 314 SCRA 69, 81; Romero v. Court of Appeals, G.R. No. 107207, 23 November 1995, 250 SCRA 223, 235.

36 Ang v . Court of Appeals, G.R. No. 80058, 13 February 1989, 170 SCRA 286, 296; Tan v. Court of Appeals, G.R. No. 80479, 28 July 1989, 175 SCRA 656, 663.

37 Intestate Estate of the Late Ricardo P. Presbitero, Sr. v . Court of Appeals, G.R. No. 102432, 21 January 1993, 217 SCRA 372, 384.

38 G.R. Nos. 70310-11, 01 June 1993, 223 SCRA 1, 10.

39 TSN, 09 November 1994, pp. 12, 16.

40 Philippine National Bank v. Relativo, G.R. No. L-5298, 29 October 1952, 92 Phil. 203, 206.

41 Rollo, p. 25.

42 TSN, 13 October 1994, p. 37.

43 Records, p. 29.

44 TSN, 09 November 1994, p. 12.

45 Records, pp. 41-42.

46 G.R. No. L-42283, 18 March 1985, 135 SCRA 323, 332.

47 48 Phil. 581; Civil Code of the Philippines by Paras, Vol. 4 (1994 Ed).

48 Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claim due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

49 G.R. No. L-29155, 13 May 1970, 33 SCRA 1, 22-23.

50 G.R. No. 80479, 28 July 1989, 175 SCRA 656, 661-662.

51 Ang v. Court of Appeals, G.R. No. 80058, 13 February 1989, 170 SCRA 286, 297.

52 Jimenez v . National Labor Relations Commission, G.R. No. 116960, 02 April 1996, 256 SCRA 84, 89.

53 TSN, 09 November 1994, p. 19.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 80479 July 28, 1989

AGUSTINA LIQUETTE TAN, petitioner, vs.COURT OF APPEALS AND SPS. MARIANO SINGSON and VISITACION SINGSON, respondents.

Noe Villanueva for petitioner.

Jose Beltran for private respondents.

CORTES, J.:

The instant petition for review raises the main issue of whether the private respondents committed a substantial breach of their obligation so as to warrant petitioner's exercise of her right to rescind the contract of sale under Article 1191 of the Civil Code.

The antecedents of the instant controversy had been summarized in the respondent court's decision ** as follows:

x x x

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

x x x

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

x x x

The very same day that appellants received the earnest money of P 200,000.00, they started paying their mortgage loan with the Development Bank of the Philippines (DBP) to clear up the title of the subject property. On June 14, 1984, appellants paid the bank P30,000.00 per receipt, Exhibit B; on June 18, 1984 another P50,000.00 (Exh. 4-c); on June 29, 1984, P20,000.00 (Exh. 4-D); and on July 5, 1984, P70,909.59 and another P19,886.60 (Exhs. 4-F and 4-G) in full payment of the mortgage loan. On July 9, 1984, the DBP executed a cancellation of mortgage, which was registered with the Registry of Property of Baguio City in July 12, 1984. Appellants also paid all the taxes due and in appears on the property. It likewise appears that appellants paid in full on July 17, 1984 the cost price of the 338 square meter lot which was awarded to appellant Visitacion Singson per her townsite sale application for said property. And the request of the City Sheriff of Baguio City to lift the notice of levy in execution dated February 2, 1978 in Civil Case No. Q-10202, Pio S. Acampado, et al. v. Mariano D. Singson, et al., was duly annotated on the back of TCT No. T-1 3826 on August 2, 1979.

On June 25, 1984, appellee accompanied by her daughter Corazon and her lawyer, Atty. Vicente Quitoriano, went to Baguio City to inquire about the status of the property and

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

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

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

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

x x x

[CA Decision, pp. 1-6; Rollo, pp. 53-57.]

The Regional Trial Court which took cognizance of Civil Case No. 3709-V filed by petitioner Agustina Liquette Tan rendered a decision disposing of the case as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants:

(1) Ordering the rescission of the contracts entered into by and between plaintiff and the defendants, which are embodied in Exhs. "A" or "l and "B" or "2";

(2) Ordering the defendants, spouses Mariano Singson and Visitacion Singson to return to plaintiff the P200,000.00 earnest money given by her to defendants;

(3) Ordering the defendants to pay plaintiff interest at the rate of 12% per annum on the P200,000.00 from the filing of the complaint until fully paid;

(4) Ordering the defendant (sic) to pay plaintiff moral damages in the sum of P50,000.00;

(5) Ordering the defendants to pay plaintiff the amount of P20,000.00 as attorney's fees; and

(6) Ordering the defendants to pay the costs of this suit.

SO ORDERED. [Rollo. pp. 49-50.]

Private respondents interposed an appeal from said decision alleging that the trial court erred

I. . . . in considering the consent of appellee to the agreement was vitiated by fraud.

II. . . . in resolving in favor of the appellee the sole right of rescission.

III. .. . in considering the adjacent lot as part of the sale agreed upon by the parties.

IV. . . . in deciding the case in favor of the appellee and awarding damages.

On August 24, 1987, the respondent Court of Appeals promulgated a decision reversing that of the trial court, the decretal portion of which reads as follows:

WHEREFORE, the appealed decision is REVERSED and SET ASIDE and a new one is hereby entered ordering immediately upon the finality of this judgment appellants spouses to execute and sign an absolute deed of sale conveying to appellee free from any lien or encumbrance the house and lot covered by T.C.T. No. 13826 of the Registry of Deeds of Baguio City together with the furnishings and appliances listed in Exhibit C and the adjacent lot used as driveway covered by the Order of Award, Exhibit E-3 and appellee to pay appellants spouses the sum of Pl,550,000.00 plus interest at the legal rate from the finality of this judgment until fully paid.

SO ORDERED. [Rollo, p. 61.]

Petitioners filed the instant petition for review on certiorari assailing the conclusion of the respondent Court of Appeals that the private respondents had not committed a substantial breach of their obligation and therefore, there was no legal basis for the judgment ordering rescission of the contract. Petitioners maintain that since private respondents were not prepared to convey the title to the subject property on the date agreed upon in view of the various liens and encumbrances thereon, the former are entitled to rescind the contract pursuant to Article 1191 of the Civil Code which states:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

After a thorough examination of the allegations contained in the parties' pleadings, the Court finds the instant petition to be devoid of any merit.

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 is clear from a reading of the Civil Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be exercised solely on a party's own judgment that the other has committed a breach of the

obligation. Where there is nothing in the contract empowering the petitioner to rescind it without resort to the courts, the petitioner's action in unilaterally terminating the contract in this case is unjustified [Philippine Amusement Enterprises, Inc. v. Natividad, G.R. No. L-12876. September 29, 1967, 21 SCRA 284].

In this case, petitioner received on July 17, 1984 through her daughter Cora Tan Singson, a telegram from private respondent Visitacion Singson advising the former that the papers for the sale of the property are ready for final execution. The parties likewise met on June 25, 1984, the day agreed upon for the full payment of the purchase price, and they agreed on a further extension of two weeks for the execution of the deed of sale. Despite this agreement, 'private respondents suddenly received a telegram from Atty. Quitoriano, counsel for the petitioner, unilaterally stopping the sale and demanding the return of the earnest money paid by petitioner [Exhibit "9", Original Records, p. 99].

Petitioner, in rescinding the sale, claims that a substantial breach of the obligation has been committed by the private respondents as indicated by the following facts proved to be existing as of the date agreed upon for the consummation of the sale:

1. That no title has yet been issued by the Registry of Deeds of the City of Baguio in the name of either of the respondents in connection with the 338-square meter lot where the driveway is located;

2. That the private respondents have not paid in full the total consideration for the said lot to the City of Baguio because they were able to complete the payment of the purchase price only on July 17, 1984 as found out by the respondent court in its decision (Please see page 8 of the Court of Appeals' decision, Annex "B');

3. That private respondents have not acquired the "previous consent of the Secretary of Natural Resources' for the said transfer to the petitioner as required by the award;

4. That the restrictions indicated in the AWARD makes whatever conveyance to be made by the awardee of the lot within the prohibited period as null and void and could cause the forfeiture of all the payments already made as well as the improvements introduced therein;

5. That there are still liens and encumbrances insofar as TCT No. T-13826 consisting of a mortgage with the DBP and a notice of Levy and Writ of Execution. [Rollo, pp. 14-15.]

Alternatively, petitioner seeks annulment of the contract on the ground of fraud since private respondents had misrepresented to her that they could validly convey title to the property subject of the contract which however is encumbered with various existing liens.

1. The alleged breach of the obligation by the private respondents, which consists in a mere delay for a few days in clearing the title to the property, cannot be considered substantial enough to warrant rescission of the contract.

A thorough review of the records clearly indicates that private respondents had substantially complied with their undertaking of clearing the title to the property which has a total land area of 886 square meters. It must be pointed out that the subject lot consists of private land, with an area of 548 square meters, covered by TCT No. T-13826 and of a portion of the public land which has been awarded to the private respondents under Townsite Sales Application No. 7-676-A. While TCT No. T-13826 was subject to a mortgage in favor of DBP, private respondents, upon receipt of the earnest money paid by petitioner, utilized the same to settle its obligations with DBP thus enabling them to secure a cancellation of the existing mortgage, which was duly noted in the title to the property [See Original Records, p. 94].

It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the contract but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement [Universal Food Corporation v. Court of Appeals, G.R. No. L-29155, May 13, 1970,33 SCRA 1; Philippine Amusement Enterprises, Inc. v. Natividad, supra; Roque v. Lapuz, G.R. No. L-32811, March 31, 1980,96 SCRA 741]. A court, in determining whether rescission is warranted, must exercise its discretion judiciously considering that the question of whether a breach of a contract is

substantial depends upon the attendant circumstances [Corpus v. Alikpala, et al., G.R. Nos. L-23720 and L-23707, January 17, 1968, 22 SCRA 104].

In this case, as to the lot covered by TCT No. T-13826, it is true that as of June 25, 1984, the date set for the execution of the final deed of sale, the mortgage lien in favor of DBP annotated in the title has not yet been cancelled as it took DBP some time in processing the papers relative thereto. However, just a few days after, or on July 12, 1984, the cancellation of the DBP mortgage was entered by the Register of Deeds and duly noted on the title. Time not being of the essence in the agreement, a slight delay on the part of the private respondents in the performance of their obligation, is not sufficient ground for the resolution of the agreement [Biando and Espanto v. Embestro and Bardaje, 105 Phil. 1164 (1959)], more so when the delay was not totally attributable to them.

As to the notice of levy and execution annotated on TCT No. T-13826, a request to lift the same had already been filed with the Register of Deeds and duly noted on the title (Original Records, p. 95]. The fact that said notice had not yet been cancelled by the Register of Deeds as of June 25, 1984 cannot prejudice the sellers who must be deemed to have substantially complied with their obligation. The rule in this jurisdiction is that where the fulfillment of the condition (in a conditional obligation) does not depend on the will of the obligor, but on that of a third person, the obligor's part of the contract is complied with, if he does an that is in his power and it then becomes incumbent upon the other contracting party to comply with the terms of the contract [Article 1182, Civil Code; Smith Bell and Co. v. Sotelo Matti, 44 Phil. 874 (1922)].

On the other hand, private respondents' interest in the public land used as a driveway can likewise be conveyed to petitioner although no title has yet been issued in the name of Visitacion Singson. Such portion of the public land has long been awarded to Singson in 1972 and payment of the purchase price thereof has already been completed as of July 17, 1984. The fact that the consent of the Secretary of Agriculture and Natural Resources to the sale of the property to petitioner has not yet been secured cannot be considered a substantial breach of private respondents' obligation under the contract of sale.

In Juanico and Barredo v. American Land Commercial Co., Inc., et al. (97 Phil. 221 1955)], this Court had ruled that the prior approval of the Secretary of Agriculture and Natural Resources is required only in cases of sale and encumbrance of the public land during the pendency of the application by the purchaser and before his compliance with the requirements of the law. Thus:

... But such approval becomes unnecessary after the purchaser had complied with all the requirements of the law, even if the patent has not been actually issued, for in that case the rights of the purchaser are already deemed vested, the issuance of the patent being a mere ceremony. Thus, "the execution and delivery of the patent after the right to it has become complete, are the mere ministerial acts of the officers charged with that duty" . . . And, as it has been held, One who has done everything which is necessary in order to entitle him to receive a patent for public land has, even before the patent is actually issued by the land department, a complete acquirable estate in the land which he can sell and convey, mortgage or lease. A fortiori a contract to convey land made before the issuance of a patent but after final proof has been made and the land paid for is not illegal... [At 227: Italics supplied.]

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

Inasmuch as the private respondents are ready, willing and able to comply with their obligation to deliver title to the property subject of the sale and had already demanded that petitioner pay the full amount of the purchase price, the petitioner must be considered as having incurred in delay. This conclusion is warranted by the clear provision of Article 1169 of the Civil Code which states:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially demands from them the fulfillment of their obligation.

x x x

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.

It is basic that the breach of a contract gives the aggrieved party under the law and even under general principles of fairness, the right to rescind the contract or to ask for specific performance [Nagarmull v. Binalbagan-Isabela Sugar Co., Inc., G.R. No. L-22470, May 28, 1970, 33 SCRA 46.] Petitioner having failed to comply with her obligation of paying the balance of the purchase price despite demands by private respondents, private respondents were clearly entitled to their counterclaim for specific performance, as correctly adjudged by the respondent court.

2. The claim that petitioner's consent to the contract was vitiated by fraud and, therefore, the contract in question is voidable is patently unmeritorious. The contract of sale is not voidable where no evidence was shown that through insidious words or machinations under Article 1338 of the Civil Code, the seller had induced the buyer to enter into the contract (Caram v. Laureta, Jr., G.R. No. L-28740, February 24, 1981,103 SCRA 7].

In this case, the evidence on record fully supports the finding of the appellate court that private respondents did not represent to petitioner that the house and lot they were selling were free from liens and encumbrances. Rather, they told her that the property was mortgaged to the DBP which was why they asked her to advance P200,000.00 as earnest money so that they could settle the mortgage indebtedness and clear up the title [Rollo, p. 60]. The testimony of petitioner herself shows that she was furnished with xerox copies of the title, at the back of which was a memorandum of the encumbrances of the property [TSN, September 30, 1985, p. 4]. Further, it is undisputed that at the time petitioner entered into the agreement in question, she was accompanied by her daughter Corazon and one Maria Lorenzo whom she could have asked to explain the particulars of the transaction that she could not understand [Rollo, p. 61].

One final point, the decision of the respondent Court of Appeals ordered execution by private respondents of the absolute deed of sale conveying the subject property to petitioner and payment by petitioner of the balance of the purchase price immediately upon finality of such judgment. However, under the third paragraph of Article 1191 of the Civil Code, the Court is given a discretionary power to allow a period within which a person in default may be permitted to perform his obligation [Kapisanan Banahaw v. Dejarme and Alvero, 55 Phil. 339 (1930)]. Considering the huge amount of money involved in this sale, the Court, in the exercise of its sound discretion, hereby fixes a period of ninety (90) days within which petitioner shall pay the balance of the purchase price amounting to one million and five hundred fifty thousand pesos (Pl,550,000.00) plus interest thereon at the legal rate from finality of this judgment until fully paid. After such payment has been made, the private respondents are ordered to sign and execute the necessary absolute deed of sale in favor of petitioner.

WHEREFORE, the assailed decision of the respondent Court of Appeals granting the counterclaim for specific performance of herein private respondents is hereby AFFIRMED with the MODIFICATION that the petitioner is given a period of ninety (90) days within which to pay the sum of one million and five hundred fifty thousand pesos (Pl,550,000.00) representing the balance of the purchase price, with interest thereon at the legal rate from the finality of this judgment until fully paid. The private respondents are ordered to sign and execute the absolute deed of sale after the petitioner has completed payment of the purchase price and the interest thereon.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

Footnotes

** Penned by Justice Manuel T. Reyes and concurred in by Justices Oscar R. Victoriano and Hector C. Fule.

Republic of the PhilippinesSUPREME 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 a prima 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.

Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

Reyes, J.B.L., Actg. C.J., is on leave.

# Footnotes

1 Ocejo Perez & Co. vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan de Dios, et al., 84 Phil. 820.