Sps. Velarde v. CA, G.R. 108346, 11 July 2001
Sps. Velarde v. CA, G.R. 108346, 11 July 2001
Sps. Velarde v. CA, G.R. 108346, 11 July 2001
THIRD DIVISION
DECISION
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the
manner prescribed by the contract, entitles the injured party to rescind the obligation.
Rescission abrogates the contract from its inception and requires a mutual restitution of
benefits received.
The Case
"WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET
ASIDE and the Decision dated November 14, 1990 dismissing the
[C]omplaint is REINSTATED. The bonds posted by plaintiffs-appellees and
defendants-appellants are hereby RELEASED."[5]
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A';
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Exh. `1', pp. 11-12, Record) was executed by defendant David Raymundo,
as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following
terms and conditions:
`x x x xxx xxx
`That the aforesaid parcel of land, together with the house and
other improvements thereon, were mortgaged by the VENDOR to
the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to
secure the payment of a loan of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the
VENDOR in favor of the said Bank of the Philippine Islands,
on______ and which Real Estate Mortgage was ratified before
Notary Public for Makati, _______, as Doc. No. ____, Page No.
___, Book No. ___, Series of 1986 of his Notarial Register.
"On the same date, and as part of the above-document, plaintiff Avelina
Velarde, with the consent of her husband, Mariano, executed an Undertaking
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(Exh. `C', pp. 13-14, Record), the pertinent portions of which read, as
follows:
`x x x xxx xxx
`2. That, in the event I violate any of the terms and conditions of
the said Deed of Real Estate Mortgage, I hereby agree that my
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"This undertaking was signed by Avelina and Mariano Velarde and David
Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8
million was from the proceeds of a loan that plaintiffs were to secure from a
bank with defendant's help. Defendants had a standing approved credit line
with the Bank of the Philippine Islands (BPI). The parties agreed to avail of
this, subject to BPI's approval of an application for assumption of mortgage
by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to
continue paying the monthly interests of the loan secured by a real estate
mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the
loan secured by the aforementioned mortgage for three (3) months as
follows: September 19, 1986 at P27,225.00; October 20, 1986 at
P23,000.00; and November 19, 1986 at P23,925.00 (Exh. `E', `H' & `J', pp.
15, 17 and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for
Assumption of Mortgage with BPI was not approved (Exh. `J', p. 133,
Record). This prompted plaintiffs not to make any further payment.
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Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and
Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order
dated May 15, 1991,[9] Judge Abad Santos granted petitioners' Motion for
Reconsideration and directed the parties to proceed with the sale. He instructed
petitioners to pay the balance of P1.8 million to private respondents who, in turn, were
ordered to execute a deed of absolute sale and to surrender possession of the disputed
property to petitioners.
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-
Santiago's earlier Decision dismissing petitioners' Complaint. Upholding the validity of
the rescission made by private respondents, the CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that `as
part of the consideration of this sale, the VENDEE (Velarde)' would assume
to pay the mortgage obligation on the subject property in the amount of
P1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since
the price to be paid by the Vendee Velarde includes the downpayment of
P800,000.00 and the balance of P1.8 million, and the balance of P1.8 million
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"It was likewise agreed that in case of violation of the mortgage obligation,
the Deed of Sale with Assumption of Mortgage would be deemed
`automatically cancelled and of no further force and effect, as if the same
had never been executed or entered into.' While it is true that even if the
contract expressly provided for automatic rescission upon failure to pay the
price, the vendee may still pay, he may do so only for as long as no demand
for rescission of the contract has been made upon him either judicially or by
a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent
Velarde a notarial notice dated January 8, 1987 of cancellation/rescission of
the contract due to the latter's failure to comply with their obligation. The
rescission was justified in view of Velarde's failure to pay the price (balance)
which is substantial and fundamental as to defeat the object of the parties in
making the agreement. As adverted to above, the agreement of the parties
involved a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which entitles
the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28).
Thus, the non-payment of the mortgage obligation by appellees Velarde
would create a right to demand payment or to rescind the contract, or to
criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos,
184 SCRA 614). Upon appellees' failure, therefore, to pay the balance, the
contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720).
Consequently, appellees Velarde having violated the contract, they have lost
their right to its enforcement and hence, cannot avail of the action for
specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA
635)."[10]
The Issues
"I.
The Court of Appeals erred in holding that the non-payment of the mortgage
obligation resulted in a breach of the contract.
"II.
The Court of Appeals erred in holding that the rescission (resolution) of the
contract by private respondents was justified.
"III.
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter
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First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents' mortgage obligation did
not constitute a breach of contract, considering that their request to assume the
obligation had been disapproved by the mortgagee bank. Accordingly, payment of the
monthly amortizations ceased to be their obligation and, instead, it devolved upon
private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also
failed to pay the balance of the purchase price. As admitted by both parties, their
agreement mandated that petitioners should pay the purchase price balance of P1.8
million to private respondents in case the request to assume the mortgage would be
disapproved. Thus, on December 15, 1986, when petitioners received notice of the
bank's disapproval of their application to assume respondents' mortgage, they should
have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make
such payment only upon the fulfillment of certain conditions not originally agreed upon
in the contract of sale. Such conditional offer to pay cannot take the place of actual
payment as would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its
equivalent.[13] Private respondents had already performed their obligation through the
execution of the Deed of Sale, which effectively transferred ownership of the property
to petitioner through constructive delivery. Prior physical delivery or possession is not
legally required, and the execution of the Deed of Sale is deemed equivalent to
delivery.[14]
Petitioners, on the other hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse, they wanted private respondents to
perform obligations beyond those stipulated in the contract before fulfilling their own
obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was
not justified, inasmuch as the former had signified their willingness to pay the balance
of the purchase price only a little over a month from the time they were notified of the
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disapproval of their application for assumption of mortgage. Petitioners also aver that
the breach of the contract was not substantial as would warrant a rescission. They cite
several cases[15] in which this Court declared that rescission of a contract would not be
permitted for a slight or casual breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that they have already made the
initial payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their
nonpayment of the mortgage obligations, as their nonperformance of their reciprocal
obligation to pay the purchase price under the contract of sale. Private respondents'
right to rescind the contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
The injured party may choose between fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between
them.[16] The breach contemplated in the said provision is the obligor's failure to
comply with an existing obligation.[17] When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence of any just
cause for the court to determine the period of compliance, the court shall decree the
rescission.[18]
In the present case, private respondents validly exercised their right to rescind the
contract, because of the failure of petitioners to comply with their obligation to pay the
balance of the purchase price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently gave rise to private
respondents' right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price
one month after it became due; however, this was not equivalent to actual payment as
would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer
to pay was conditioned on the performance by private respondents of additional
burdens that had not been agreed upon in the original contract. Thus, it cannot be said
that the breach committed by petitioners was merely slight or casual as would preclude
the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases[19] they cited because the factual
circumstances in those cases are not analogous to those in the present one. In Song Fo
there was, on the part of the buyer, only a delay of twenty (20) days to pay for the
goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted
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by the seller. In Zepeda, the breach involved a mere one-week delay in paying the
balance of P1,000, which was actually paid. In Tan, the alleged breach was private
respondent's delay of only a few days, which was for the purpose of clearing the title to
the property; there was no reference whatsoever to the nonpayment of the contract
price.
In the instant case, the breach committed did not merely consist of a slight delay in
payment or an irregularity; such breach would not normally defeat the intention of the
parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance,
but they also imposed upon private respondents new obligations as preconditions to the
performance of their own obligation. In effect, the qualified offer to pay was a
repudiation of an existing obligation, which was legally due and demandable under the
contract of sale. Hence, private respondents were left with the legal option of seeking
rescission to protect their own interest.
Mutual Restitution
Required in Rescission
Considering that the rescission of the contract is based on Article 1191 of the Civil
Code, mutual restitution is required to bring back the parties to their original situation
prior to the inception of the contract. Accordingly, the initial payment of P800,000 and
the corresponding mortgage payments in the amounts of P27,225, P23,000 and
P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried
out only when the one who demands rescission can return whatever he may be obliged
to restore.[20] To rescind is to declare a contract void at its inception and to put an end
to it as though it never was. It is not merely to terminate it and release the parties
from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.[21]
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss
the third issue raised by petitioners. Suffice it to say that the three conditions
appearing on the January 7, 1987 letter of petitioners to private respondents were not
part of the original contract. By that time, it was already incumbent upon the former to
pay the balance of the sale price. They had no right to demand preconditions to the
fulfillment of their obligation, which had become due.
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SO ORDERED.
[2] Rollo, pp. 68-78. Penned by Justice Regina G. Ordoñez-Benitez and concurred in by
[11] To eradicate its backlog of old cases, the Court on February 27, 2001 resolved to
redistribute long-pending cases to justices who had no backlog, and who were thus
tasked to prioritize them. Consequently, this case was raffled and assigned to the
undersigned ponente for study and report.
[14] Power Commercial and Industrial Corp. v. CA, 274 SCRA 597, June 20, 1997.
[15] Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, September 16, 1925; Tan
v. Court of Appeals, 175 SCRA 656, July 28, 1989; and Zepeda v. Court of Appeals,
216 SCRA 293, December 9, 1992.
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[16] Uy v. Court of Appeals, 314 SCRA 69, September 9, 1999; Romero v. Court of
[18] Central Philippine University v. Court of Appeals, 246 SCRA 511, July 17, 1995.
[20] Co v. Court of Appeals, 312 SCRA 528, August 17, 1999. Vitug, Compendium of
[21] Ocampo v. Court of Appeals, 233 SCRA 551, June 30, 1994.
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