OBLIGATIONS AND CONTRACTS – ATTY. GRAVADOR CHAPTER 2 CASE DIGESTS ( SPS. SPS. VELARDE V. COURT OF APPEALS, G.R. NO. 108346, [JULY 11, 2001], 413 PHIL 360-376) SYLLABUS 1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. — In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain in money or its equivalent. Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery. 2. RESCISSION; OBLIGOR'S FAILURE FAILURE TO COMPLY COMPLY WITH EXISTING OBLIGATION. — The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in the said provision is the obligor's failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence ofany just cause for the court to determine the period of compliance, the court shall decree the rescission. 3. CASE AT BAR. — In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents' right to rescind the same in accordance with law. 4. FORFEITURE OF PAYMENT PAYMENT DOES NOT APPLY WHERE BREACH WAS NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. — As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this controversy. Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution i s required to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former. 5. OBLIGATION CREATED. — Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.
Approval of the mortgage obligation with BPI means payment obligation will now be in the name of Velarde. Disapproval means Velarde had to pay in full.
Non-payment of the mortgage obligation results in a v iolation of the contract. Upon Velarde’s failure, Raymunod may choose either: 1. 2.
Demand fulfillment of the contract Demand its rescission (Article 1191)
CA held that petitioners’ letter giving three new conditions constitute mere offers or an attempt to novate necessitating a new agreement between the parties. There can be no novation because there was no agreement of all the parties to the new contract. SUPREME COURT: Petitioners: CA erred. Supreme Court: Petition is partly meritorious. Breach of Contract (nonperformance of a reciprocal obligation): In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price in money or its equivalent. Respondents (Raymundo) had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property. Prior physical delivery is not legally required; DOS is deemed equivalent to delivery. Petitioners did not perform their correlative obligation of paying the contract price in the manner agreed. Worse, they wanted respondents to perform obligations beyond those stipulated. Validity of the Rescission: Rescission: Velarde claims the rescission was not justified and the breach of contract was not substantial enough to warrant a rescission. They also argue that they have substantially performed their obligation in good faith (by paying 800k and 3 monthly mortgage payments). However, SC says that the breach here is not just the slight delay of payment. They failed to pay the 1.8 M balance AND imposed upon respondent (Raymundo) new obligations as preconditions to the performance of their own obligation. Hence, respondents were left with the legal option of seeking rescission to protect their own interest (based on Art 1191). Since it is based on Art 1191 of the CC, mutual restitution is required to bring back the partied to their original situation prior to the inception of the contract. All the payments made by the Velardes should be returned by Raymundo because you know, unjust enrichment. Court of appeals decision is affirmed.
Ruling of the Court of Appeals: (Dismissed Velarde’s Petition) In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the consideration of this sale, Vendee Velarde would assume to pay the mortgage obligation on the subject property in the amount of P1.8M (in the name of Vendor Raymundo). Velarde agreed to strictly and fa ithfully comply with all the terms and conditions. Moreover, it was stipulated that in the event of violation by Velarde of any terms of the said deed, the downpayment o f 800k plus all the payments made would be forfeited and the Deed of Sale will be automatically cancelled and of no force and effect.
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OBLIGATIONS AND CONTRACTS – ATTY. GRAVADOR CHAPTER 2 CASE DIGESTS additional 100,000 gallons was not a definite promise. Still less did it constitute an obligation (SONG FO & CO. V. HAWAIIAN PHILIPPINE CO., G.R. NO. 23769, [SEPTEMBER 16, 1925], 47 PHIL 821-830)
SYLLABUS 1. CONTRACTS; SALES; INSTANT CASE. — The written contract examined and found to provide for the delivery by the HawaiianPhilippine Co. to Song Fo & Company of 300,000 gallons of molasses. 2. PAYMENT. — The terms of payment fixed by the parties are controlling. The time of payment stipulated for in the contract should be treated as of the essence of the contract. 3. RESCISSION. — The general rule is 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. 4. A delay in payment for a small quantity of molasses for some twenty days is not such a violation of an essential condition of the contract as warrants rescission for non-performance.
Had HPC the right to rescind the contract of sale made with SFC? • With reference to the second question, doubt has risen as to when SFC was supposed to make the payments for the delivery of molasses as shown in the documents presented by the parties. It was ultimately settled that payment had to be made upon presentation of accounts at the end of each month • FACT: SFC should have paid for the molasses delivered in December 1922, not later than January 31 1923. Instead payment was not made until February 20, 1923. All the rest of the molasses was paid for either on time or ahead of time. • HPC does not have the right to rescind the contract. It should be noted that the time of payment stipulated for in the contract should be treated as of the essence of the contract.
5. MEASURE OF DAMAGES FOR BREACH OF CONTRACT. — The facts examined and Song Fo & Company allowed P3,000 on account of the greater expense to which it was put in being compelled to secure molasses in the open market.
• There was only a slight breach of contract when the payment was delayed for 20 days after which HPC accepted the payment of the overdue accounts and continued with the contract, waiving its right to rescind the contract. The delay in the payment of SFC was not such a violation for the contract.
6. The facts examined and Song Fo & Company allowed nothing for lost profits on account of the breach of the contract, because of failure of proof.
• GENERAL RULE: 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.
Facts: Hawaiian-Philippine Co (HPC) entered into a contract with Song Fo and Co where it would deliver molasses to the latter. A letter addressed by the administrator of the HPC to SFC on December 13, 1922 contains their contract in writing. It states the ff: 1. 2.
Mr. Song Fo agreed to the delivery of 300,000 gallons of molasses Mr. Song Fo also asked if HPC could supply him with another 100,000 gallons of molasses to which the latter replied that they believe it is possible and that they will do their best to let Mr. Song Fo have the extra 100,000 gallons during the next year.
HPC was able to deliver 55,006 gallons of molasses before the breach of contract. SFC filed a complaint with two causes of action for breach of contract against the HPC and asked for P70,369.50 HPC answered that there was a delay in the payment from SFC and that HPC has the right to rescind the contract due to that and claims it as a special defense. The judgment of the trial court condemned HPC to pay SFC a total of P35,317.93, with legal interest from the date of the presentation of the complaint, and with costs.
On the basis first, of a contract for 300,000 gallons of molasses, and second, of a contract imprudently breached by HPC, what is the measure of damages? • The first cause of action of SFC is based on the greater expense to which it was put in being compelled to secure molasses from other sources to which Supreme Court ruled that P3,000 should be paid by HPC with legal interest from October 2, 1923 until payment. 55,006 gallons were delivered before the o breach. (This leaves 244,994 gallon) 100,000 gallons of molasses were o secured from the Central North Negros Sugar Co., Inc at 2 cents a gallon, so plaintiff suffered no material loss in having to make this purchase. (this leaves as a result 144,994 gallons) o 100,000 gallons were secured from Central Victorias Milling at 3.5 cents per gallon. This meant a loss of approximately P2,174.91 • The second cause of action was based on the lost profits on account of the breach of contract. Supreme Court said that SFC is not entitled to recover anything under the second cause of action because the testimony of Mr. Song Heng will follow the same line of thought as that of the trial court which in unsustainable and there was no means for the court to find out what items make up the P14,000 of alleged lost profits.
Issues and Ruling: Did HPC agree to sell 400,000 gallons o f molasses or 300,000 gallons of molasses?
Judgment in favor of plaintiff. They are entitled to damages in the amount of 3,000 for breach of contract committed by defendant.
• Only 300,000 gallons of molasses was agreed to by HPC as seen in the documents presented in court. HPC also believed it possible to accommodate SFC by supplying the latter company with an extra 100,000 gallons. However, the language used with reference to the
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OBLIGATIONS AND CONTRACTS – ATTY. GRAVADOR CHAPTER 2 CASE DIGESTS VERMEN REALTY DEVELOPMENT CORP. V. COURT OF APPEALS, G.R. NO. 101762, [JULY 6, 1993] SYLLABUS 1. CIVIL LAW; OBLIGATION AND CONTRACTS; RECIPROCAL OBLIGATION; ITS NATURE. — Reciprocal obligations are those created or established at the same time, out of the same cause, and which results in a mutual relationship of creditor and debtor between parties. In reciprocal obligations, the performance of one is conditioned on the simultaneous fulfillment of the other obligation (Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 [1957]). Under the agreement, private respondent shall deliver to petitioner construction materials worth P552,000.00 under the conditions set forth in the Offsetting Agreement.
On the other hand, it would already be impossible for petitioner to fulfill its obligation of allowing respondent to transfer from phase 1 to phase 2 as the construction of phase 2 has ceased (loan was disapproved). Its impossibility necessitates rescission of the contract for it constitutes substantial breach of the agreement. It would be the height of injustice to make private respondent wait for something that may never come. Petition denied for lack of merit.
Petitioner's obligation under the agreement is three-fold: a. he shall pay private respondent P276,000.00 in cash b. he shall deliver possession of units 601 and 602 (with total value of P 276,000.00) to private respondent; c. upon completion of Vermen Pines Condominiums Phase II, private respondent shall be given option to transfer to similar units therein. 2. RESCISSION (BETTER TERM IS "RESOLUTION") OF RECIPROCAL OBLIGATION UNDER ARTICLE 1191 OF THE CIVIL CODE; GENERAL RULE; PETITIONER'S NON-FULFILLMENT OF ITS OBLIGATION UNDER THE OFFSETTING AGREEMENT CONSTITUTES SUBSTANTIAL BREACH, NECESSITATING RESOLUTION OF THE CONTRACT. —Article 1191 of the Civil Code provides the remedy of rescission in (more appropriately, the term is "resolution") in case of reciprocal obligations, where one of the obligors fails to comply with what is incumbent upon him. The general rule is that rescission of a contract will not be permitted for a slight or causal breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in executing the agreement. The question of whether a breach of contract is substantial depends upon the attendant circumstances. The impossibility of fulfillment of the obligation on the part of petitioner necessitates resolution of the contract for indeed, the non-fulfillment of the obligation aforementioned constitutes substantial breach of the Offsetting Agreement. The possibility of exercising the option of whether or not to transfer to condominium units in Phase II was one of the factors which were considered by private respondent when it entered into the agreement. Since the construction of the Vermen Pines Condominium Phase II has stopped, petitioner would be in no position to perform its obligation to give private respondent the option to transfer to Phase II. It would be the height of i njustice to make private respondent wait for something that may never come.
Trial Court – dismissed Vermen Realty’s complaint and ordered Seneca Hardware to pay Vermen its counterclaim. Court of Appeals – reversed RTC decision. Supreme Court – ruled in favor of Seneca Hardware.
Ruling: The Offsetting Agreement are reciprocal in nature. Reciprocal obligations are those created or established at the same time, out of the same cause, and which results in a mutual relationship. The performance of one is conditioned on the simultaneous fulfillment of the other obligation. Remedy: Art 1191 – Remedy of rescission for substantial and fundamental breaches (depends on attendant circumstances) It is evident that respondent (Seneca) did not fail to fulfill its obligations in the agreement. The discontinuance of delivery of construction materials to petitioner stemmed from the failure of petitioner to send purchase orders to private respondent.
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