Elisco Tool Manufacturing Corp. Vs. Court of Appeals et. al.
May 31, 1999
GR 109966
Facts:
-Private respondent Rolando Lantan was employed at the Elisco Tool Manufacturing
Corporation as head of its cash department. On January 9, 1980, he entered into an agreement
with the company which provided as follows:
- that, Elisco Tool Manufacturing Corp is the owner of a car which for and in consideration of a
monthly rental of P 1010.65 will be leased to Rolando Lantan for 5 years
- That, Rolando Lantan shall pay the lease thru salary deduction from his monthly remuneration
in the amount as above specified for a period of FIVE (5) years;
- That, he shall for the duration of the lease contract, shoulder all expenses and costs of
registration, insurance, repair and maintenance, gasoline, oil, part replacement inclusive of all
expenses necessary to maintain the vehicle in top condition
-That, at the end of FIVE (5) year period or upon payment of the 60th monthly rental, Lantan
may exercise the option to purchase the motor vehicle from Elisco and all monthly rentals shall
be applied to the payment of the full purchase price of the car and further, should Lantan
desire to exercise this option before the 5-year period lapse, he may do so upon payment of the
remaining balance on the five year rental unto Elisco, it being understood however that the
option is limited to the EMPLOYEE;
-That, in case of default in payment THREE (3) accumulated monthly rentals, Elisco shall have
the full right to lease the vehicle to another EMPLOYEE;
-That, in the event of resignation and or dismissal from the service, Lantan shall return the
subject motor vehicle to the EMPLOYER in good working and body condition.
-On the same day, January 9, 1980, private respondent executed a promissory note which
states his promise to pay P 1,010.65 without the necessity of notice or demand in accordance
with the schedule of payment
- After taking possession of the car, Lantan installed accessories worth P15,000.00
-In 1981, Elisco Tool ceased operations, as a result of which private respondent Rolando Lantan
was laid off. Nonetheless, as of December 4, 1984, private respondent was able to make
payments for the car in the total amount of P61,070.94.
-On June 6, 1986, petitioner filed a complaint, entitled “replevin plus sum of money,” against
private respondent Rolando Lantan, his wife Rina, and two other persons, identified only as
John and Susan Doe, before the Regional Trial Court of Pasig, Metro Manila.
-Petitioner alleged that private respondents failed to pay the monthly rentals that despite
demands, private respondents failed to settle their obligation thereby entitling petitioner to the
possession of the car; that petitioner was ready to post a bond in an amount double the value
of the car, which was P60,000; and that in case private respondents could not return the car,
they should be held liable for the amount of P60,000 plus the accrued monthly rentals thereof,
with interest at the rate of 14% per annum, until fully paid.
- Upon the posting of the bond, the sheriff took possession of the car and after 5 days turned it
over to the petitioner
- private respondents claim that their agreement was to buy and sell and not lease with option
to buy the car
- in its reply, petitioner maintained that the contract was one of lease with option to purchase
and that the promissory note was merely a “nominal security” for the agreement.
- trial court rendered its decision in favor of the private respondent
- petitioner appealed to CA, petitioner filed motion for execution pending appeal
- CA affirmed in toto the decision of the trial court, hence the petition for review on certiorari
Issue/s:
Whether the Court of Appeals erred
(a) in disregarding the admission in the pleadings as to what documents contain the terms of
the parties’ agreement.
(b) in holding that the interest stipulation in respondents’ Promissory Note was not valid and
binding.
(c) in holding that respondents had fully paid their obligations.
Held:
The decision of the Court of Appeals is AFFIRMED with costs against petitioner.
Ratio:
First. Petitioner does not deny that private respondent Rolando Lantan acquired the vehicle in
question under a car plan for executives of the Elizalde group of companies. Under a typical car
plan, the company advances the purchase price of a car to be paid back by the employee
through monthly deductions from his salary. The company retains ownership of the motor
vehicle until it shall have been fully paid for. However, retention of registration of the car in the
company’s name is only a form of a lien on the vehicle in the event that the employee would
abscond before he has fully paid for it. There are also stipulations in car plan agreements to the
effect that should the employment of the employee concerned be terminated before all
installments are fully paid, the vehicle will be taken by the employer and all installments paid
shall be considered rentals per agreement.
This Court has long been aware of the practice of vendors of personal property of denominating
a contract of sale on installment as one of lease to prevent the ownership of the object of the
sale from passing to the vendee until and unless the price is fully paid. As this Court noted in
Vda. de Jose v. Barrueco:
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make
a bargain in that form, for one reason or another, have frequently resorted to the device of
making contracts in the form of leases either with options to the buyer to purchase for a small
consideration at the end of term, provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee.
It is obvious that such transactions are leases only in name. The so-called rent must necessarily
be regarded as payment of the price in installments since the due payment of the agreed
amount results, by the terms of the bargain, in the transfer of title to the lessee.
Second. The contract being one of sale on installment, the Court of Appeals correctly applied to
it the following provisions of the Civil Code:
The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars
the exercise of the others. This limitation applies to contracts purporting to be leases of
personal property with option to buy by virtue of Art. 1485. The condition that the lessor has
deprived the lessee of possession or enjoyment of the thing for the purpose of applying Art.
1485 was fulfilled in this case by the filing by petitioner of the complaint for replevin to recover
possession of movable property. By virtue of the writ of seizure issued by the trial court, the
deputy sheriff seized the vehicle on August 6, 1986 and thereby deprived private respondents
of its use. The car was not returned to private respondent until April 16, 1989, after two (2)
years and eight (8) months, upon issuance by the Court of Appeals of a writ of execution.
Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the amount
that they were supposed to pay as of May 1986, plus interest at the legal rate. At the same
time, it prayed for the issuance of a writ of replevin or the delivery to it of the motor vehicle
“complete with accessories and equipment.” In the event the car could not be delivered to
petitioner, it was prayed that private respondent Rolando Lantan be made to pay petitioner the
amount of P60,000.00, the “estimated actual value” of the car, “plus accrued monthly rentals
thereof with interests at the rate of fourteen percent (14%) per annum until fully paid.” This
prayer of course cannot be granted, even assuming that private respondents have defaulted in
the payment of their obligation. This led the trial court to say that petitioner wanted to eat its
cake and have it too.
Both the trial court and the Court of Appeals correctly ruled that private respondents could no
longer be held liable for the amounts of P39,054.86 or P60,000.00 because private respondents
had fulfilled their part of the obligation. The agreement does not provide for the payment of
interest on unpaid monthly “rentals” or installments because it was entered into in pursuance
of a car plan adopted by the company for the benefit of its deserving employees. As the trial
court correctly noted, the car plan was intended to give additional benefits to executives of the
Elizalde group of companies.
Third. Private respondents presented evidence that they “felt bad, were worried, embarrassed
and mentally tortured” by the repossession of the car. This has not been rebutted by petitioner.
There is thus a factual basis for the award of moral damages. In addition, petitioner acted in a
wanton, fraudulent, reckless and oppressive manner in filing the instant case, hence, the award
of exemplary damages is justified. The award of attorney’s fees is likewise proper considering
that private respondents were compelled to incur expenses to protect their rights
----------------LEGARDA v SALDANA
FACTS: Saldana entered into a contract with Legarda Hermanos. Legarda agreed to sell 2 equal
lots for P1,500 each, payable in 120 equal installments over a period of 10 years at 10% per
annum. Saldana paid 95 of the 120 installments over 8 years, which was recorded in his account
with Legarda, but without stating as to which lots the payments were made. The said account
stated that Saldana still owed 1,311.72 for the 2 lots, although he had already pain more the
P1,500, the value of one lot.
After 5 years, Saldana contacted Legardo Hermanos stating that he was interested in building a
house on the lots, however, he was prevented from doing such because Hermanos failed to
introduce the stipulated improvements on the subdivision (roads to his lots). He further
indicated his intentions to continue his payments.
In his reply, Legarda Hermanos said that since Saldana failed to complete the 120 payments in
time, as they have previously stipulated, all the amounts paid, together with the improvements
on the premises have been considered as rents paid and as payment for damages.
Furthermore, the sale was cancelled.
Saldana then filed an action demanding the delivery of the 2 lots and for the execution of the
corresponding deed of conveyance after payment of the outstanding balance.
Subsequently, Legarda Hermanos partitioned the subdivision among the brothers and sisters,
and the two lots were among those allotted to Jose Legarda (co- respondent).
The lower court sustained Legarda Hermanos’ cancellation of the contracts and dismissed
Saldana’s complaint. The CA eventually reversed this.
The CA ordered Legarda Hermanos to deliver to Saldana one of the two lots, at his option.
Furthermore, Hermanos was told to execute the deed of conveyance.
ISSUE: Should the claim of Hermanos Legarda be upheld? He claims that the payment should be
considered as rent and that the sale should be cancelled? – No.
HELD: The SC applied the principles of equity and justice, as correctly held by the CA.
considering that Saldana had already paid the total sum of P3,582.06 including interests, which
is even more than the value of the two lots.
And even if the sum applied to the principal alone were to be considered, which was of the
total of P1,682.28, the same was already more than the value of one lot, which is P1,500.00.
The only balance due on both lots was P1,317.72, which was even less than the value of one lot.
By this, the court ruled that Saldana had already paid for at least one lot. And he is given the
choice as to which one.
Even considering that Saldana as having defaulted after February 1956, when he suspended
payments after the 95th installment, he had as of the already paid by way of principal
(P1,682.28) more than the full value of one lot (P1,500.00). Furthermore, regardless of the
propriety of applying Article 1592 thereto, Legarda Hermanos was not denied substantial
justice. According to ART. 1234, “If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a strict and complete fulfillment, less
damages suffered by the obligee,” and “that in the interest of justice and equity, the decision
appealed from may be upheld upon the authority of ART. 1234.”
The Board of Commissioners of the HLURB only modified the award. The Office of the President
adopted the findings of facts and conclusions of law by the Board thus was elevated to the CA
which likewise affirmed the decision of the OP. Hence, the case at bar.
ISSUE: W/N Pacifico has paid at least 2 years of installments
HELD: NO
The total payments made by Pacifico amounted to
P846, 600. What should be used as divisor is the amount of the installment in the
downpayment. The P750, 000 downpayment was to be paid in 6 monthly installments
therefore deducting it from what he paid, the remaining balance is P96,600. Pacifico was able
to pay the downpayment in 11 months after the last monthly installment was due. But he failed
to pay at least 2 years of installments therefore he is not entitled to a refund of the cash
surrender value of his payments under Sec. 3 of RA 6552. What is applicable is Sec 4 which
provides that the buyer should be given a grace period of not less than 60 days and if he should
still fail to do so, the seller may cancel the contract after 30 days from receipt of the buyer of
the notice of cancellation.
Pacifico admitted that the under the restructured scheme, the 1st installment on the 70%
balance of the purchase was due on Jan 5, 1998. Although he issued checks to cover for them,
the 1st 2 were dishonored. When he was notified of the dishonor, he took no action hence the
60 day grace period lapsed. Hence the cancellation was justified.
-------------------MCLAUGHLIN v CA
FACTS: Petitioner Luisa McLaughlin (seller) and private respondent Ramon Flores (buyer)
entered into a contract of conditional sale of real property. The total purchase price is
P140,000. P26,550 should be paid upon execution of the deed and the balance not later than
May 31, 1977 with an interest of 1% per month until fully paid.
Flores failed to pay and hence petitioner filed a complaint for the rescission of the deed of
conditional sale. Eventually, the parties entered into a compromise agreement, which was
accepted by the court.
The parties agreed that Flores shall pay P50,000 upon signing of the agreement and the balance
in 2 equal installments payable on June 30, 1980 and December 31, 1980. Flores also agreed to
pay P1,000 monthly rental until the obligation is fully paid for the use of the subject matter of
the deed of conditional sale. They also agreed that in the event Flores fails to comply with his
obligations, the petitioner will be entitled to the issuance of a writ of execution rescinding the
deed of conditional sale and all the payments made will be forfeited in favor of the plaintiff.
On October 15, 1980, petitioner wrote to Flores demanding payment of the balance on or
before October 31. This demand included the installment due on June 30 and December 31,
1980. On October 30, Flores sent a letter signifying his willingness and intention to pay the full
balance.
On November 7, petitioner filed a motion for writ of
execution alleging that Flores failed to pay the installment due on June 1980 and also failed to
pay the monthly rentals from that date. She prayed that the deed of conditional sale be
rescinded with forfeiture of all payments and payment of the monthly rentals and eviction of
Flores. The trial court granted the motion.
On November 17, Flores filed a motion for reconsideration tendering at the same time a
certified manager’s check payable to petitioner and covering the entire obligation including the
December 1980 installment. The trial court denied the motion.
On appeal, the CA ruled in favor of Flores holding that the delay in payment was not a violation
of an essential condition which would warrant a rescission since On November 17 or just 17
days from the October 31 deadline set by petitioner, Flores tendered the certified manager’s
check and that it was inequitable for Flores to forfeit all the payments made (P101,550).
ISSUE: WHETHER it is inequitable to cancel the contract and to have the amount paid by Flores
be forfeited to petitioner particularly after Flores had tendered the certified manager’s check in
full payment of the obligation. – YES.
HELD: There is already substantial compliance by Flores with the compromise agreement. More
importantly, the Maceda law recognizes the vendor’s right to cancel the contract to sell upon
the breach and nonpayment of the stipulated installments but requires a grace period after at
least 2 years of regular installment payments.
But in cases where less than 2 years of installments were paid, the seller shall give the buyer a
grace period of not less than 60 days from the date the installment became due. If the buyer
fails to pay the installments due at the expiration of the grace period, the seller may cancel the
contract after thirty days from the receipt by the buyer of the notice of the cancellation or the
demand for rescission of the contract by a notarial act. Assuming that under the terms of
agreement the December 31 installment was due when on October 15 petitioner demanded
payment of the balance on or before October 31, petitioner could cancel the contract after 30
days from the receipt by Flores of the notice of
cancellation.
Considering petitioner’s motion for execution filed on
November 7 as a notice of cancellation, petitioner could cancel the contract after 30 days from
the receipt by Flores of said motion.
Flores’ tender of payment together with his motion for reconsideration on November 17 was
well within the 30 day period granted by law.
The tender made by Flores of a certified bank manager’s check was a valid tender of payment.
It covered the full amount of the obligation. However, although he had made a valid tender of
payment which preserved his rights as a vendee, he did not follow it with consignation or
deposit of the sum due with the court. Hence he remains liable for the payment of his
obligation because of his failure to deposit the amount due with the Court
-------------------LUZON BROKERAGE CO. VS MARITIME BLDG. CO. (43 SCRA 93) Facts:
In Manila, Myers owned 3 parcels of land w/ improvements. Myers then entered into a contract
called a ―Deed of Conditional Sale‖ with Maritime Building. Myers sold the land for P1million.
They agreed on the manner of payment (installment, initial payment upon execution of
contract, interest rate). In the contract it was stipulated that in case of failure of buyer to pay
any of the installments, the contract will be annulled at the option of the seller and all
payments made by the buyer is forfeited. Later on, the stipulated installment of P10k with
5%interest was amended to the P5k with 5.5% per annum. Maritime paid the monthly
installments but failed to pay the monthly installment of March. VP of Maritime wrote to Pres
of Myers requesting for a moratorium on the monthly payment of the installments because the
company was undergoing financial problems. Myers refused. For the months of March, April,
and May, Maritime failed to pay and did not heed the demand of Myers. Myers wrote Maritime
cancelling the ―Deed of Conditional Sale‖ Myers demanded return of possession of properties.
Held Maritime liable for use and occupation amounting to P10k per month.
In the meantime, Luzon Brokerage was leasing the property from Maritime. Myers demanded
from Luzon the payment of monthly rentals of P10k Myers also demanded surrender of
property. While actions and cross claims between Myers and Maritime were happening, the
contract between Maritime and Luzon was extended for 4 more years. Turns out, Maritime‘s
suspension of its payments to Myers corp arose from a previous event: An award of backwages
made by the Court of Industrial Relations in favor of Luzon Labor Union (employees employed
by Luzon). FH Myers was a major stockholder of Luzon Brokerage. Myers promised to
indemnify Schedler (who controlled Maritime) when Shedler purchased FH Myers‘s stock in
Luzon Brokerage company. (This indemnification is for the award of backwages by the CIR)
Schedler claims that after FH Myers estates closed, he was notified that the indemnity on the
Labor Union case will not be honored anymore. And so, Schedler advised Myers corp that
Maritime is withholding payments to Myers corp in order to offset the liability when Myers
heirs failed to honor the indemnity agreement. TC ruled Maritime in breach of contract.
Issue:
Has there been a breach of contract?
Can Myers extrajudicially terminate the contract?
Held:
Yes. Failure to pay monthly installments constitute a breach of contract. Default was not made
in good faith. The letter to Myers corp means that the non-payment of installments was
deliberately made to coerce Myers corp into answering for an alleged promise of the dead FH
Myers. Whatever obligation FH Myers had assumed is not an obligation of Myers corp. No
proof that board of Nyers corp agreed to assume responsibility to debts of FH Myers and heirs.
Schaedler allowed the estate proceedings of FH Myers to close without providing liability. By
the balance (of payment) in the Deed of Conditional Sale, Maritime was attempting to burden
the Myers corp with an uncollectible debt, since enforcement against FH Myers estate was
already barred. Maritime acted in bad faith. Maritime‘s contract with Myers is not the ordinary
sale contemplated in NCC 1592 (transferring ownership simultaneously with delivery). The
distinction between contracts of sale and contract to sell with reserved title has been
recognized by this Court in repeated decisions upholding the power of promisors under
contracts to sell in case of failure of the other party to complete payment, to extrajudicially
terminate the operation of the contract, refuse conveyance and retain the sums or installments
already received, where such rights are expressly provided for, as in this case. Decision
affirmed.
------------------ADELFA PROPERTIES INC v CA
F ACTS: Rosario Jimenez-Castaneda, Salud Jimenez and their brothers, Jose and Dominador
Jimenez, were the registered co-owners of a parcel of land in Las Piñas. In 1988, Jose and
Dominador sold their share consisting of 1/2 of said parcel of land, specifically the eastern
portion thereof, to Adelfa Properties. Subsequently, a “Confirmatory Extrajudicial Partition
Agreement” was executed by the Jimenezes, wherein the eastern portion of the subject lot,
was adjudicated to Jose and Dominador Jimenez, while the western portion was allocated to
Rosario and Salud Jimenez. Thereafter, Adelfa Properties expressed interest in buying the
western portion of the property from Rosario and Salud. Accordingly, in 1989, an “Exclusive
Option to Purchase” was executed between the parties, with the condition that the selling price
shall be P2.86M, that the option money of P50,000 shall be credited as partial payment upon
the consummation of sale, that the balance is to be paid on or before 30 November 1989, and
that in case of default by Adelfa Properties to pay the balance, the option is cancelled and 50%
of the option money shall be forfeited and the other 50% refunded upon the sale of the
property to a third party.
Meanwhile, a complaint was filed by the nephews and nieces of Rosario and Salud against Jose
and Dominador for annulment of the deed of sale in favor of Household Corporation and
recovery of ownership of the property. As a consequence, Adelfa Properties held payment of
the full purchase price and suggested that they settle the case with their nephews and nieces.
In 1990, Adelfa Properties caused to be annotated on the TCT the exclusive option to purchase.
On the same day, Rosario and Salud executed a Deed of Conditional Sale in favor of Emylene
Chua over the same parcel of land for P3M, of which P1.5M was paid to the former on said
date, with the balance to be paid upon the transfer of title to the specified 1/2 portion. Atty.
Bernardo wrote Rosario and Salud informing the latter that in view of the dismissal of the case
against them, Adelfa Properties was willing to pay the purchase price, and he requested that
the corresponding deed of absolute sale be executed. This was ignored by Rosario and Salud.
Jimenez’ counsel sent a letter to Adelfa Properties enclosing therein a check for P25,000.00
representing the refund of 50% of the option money paid under the exclusive option to
purchase. Rosario and Salud then requested Adelfa Properties to return the owner’s duplicate
copy of the certificate of title of Salud Jimenez. Adelfa Properties failed to surrender the
certificate of title.
Rosario and Salud Jimenez filed a petition for the annulment of contract, while Emylene Chua,
the subsequent purchaser of the lot, filed a complaint In intervention. RTC ruled in favor of the
Jimenezes and CA affirmed.
ISSUE: W/N the contract between the Jimenezes and Adelfa Properties is an option contract
HELD: NO. The alleged option contract is a contract to sell, rather than a contract of sale. The
distinction between the two is important for in contract of sale, the title passes to the vendee
upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is
reserved in the vendor and is not to pass until the full payment of the price. In a contract of
sale, the vendor has lost and cannot recover ownership until and unless the contract is resolved
or rescinded; whereas in a contract to sell, title is retained by the vendor until the full payment
of the price, such payment being a positive suspensive condition and failure of which is not a
breach but an event that prevents the obligation of the vendor to convey title from becoming
effective. Thus, a deed of sale is considered absolute in nature where there is neither a
stipulation in the deed that title to the property sold is reserved in the seller until the full
payment of the price, nor one giving the vendor the right to unilaterally resolve the contract
the moment the buyer fails to pay within a fixed period.
The parties never intended to transfer ownership to Adelfa Properties to completion of
payment of the purchase price, this is inferred by the fact that the exclusive option to purchase,
although it provided for automatic rescission of the contract and partial forfeiture of the
amount already paid in case of default, does not mention that Adelfa Properties is obliged to
return possession or ownership of the property as a consequence of non-payment. There is no
stipulation anent reversion or reconveyance of the property in the event that petitioner does
not comply with its obligation. With the absence of such a stipulation, it may legally be inferred
that there was an implied agreement that ownership shall not pass to the purchaser until he
had fully paid the price. Article 1478 of the Civil Code does not require that such a stipulation
be expressly made. Consequently, an implied stipulation to that effect is considered valid and
binding and enforceable between the parties. A contract which contains this kind of stipulation
is considered a contract to sell. Moreover, that the parties really intended to execute a contract
to sell is bolstered by the fact that the deed of absolute sale would have been issued only upon
the payment of the balance of the purchase price, as may be gleaned from Adelfa Properties’
letter dated 16 April 1990 wherein it informed the vendors that it “is now ready and willing to
pay you simultaneously with the execution of the corresponding deed of absolute sale.”
sale as soon as it has been transferred in their name. The balance of P1.19M is due upon the
execution of the deed. When title to the property was finally transferred to their names, the
Coronels sold the property to Mabanag for P1.58M after she paid P300K dp. Because of this,
they cancelled and rescinded the contract with Alcaraz by returning the P50,00 dp.
Alcaraz filed a complaint for specific performance against the Coronels and cause the
annotation of a notice of lis pendens on the TCT. Mabanag, on the other hand, caused the
annotation of a notice of adverse claim with the RD. However, the Coronels executed a Deed of
Absolute Sale in favor Mabanag. RTC ruled in favor of Alcaraz. CA affirmed.
ISSUE: Whether the “receipt of downpayment” serves a contract to sell or a conditional
contract of sale
HELD: NO. The agreement could not have been a contract to sell because the sellers 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,
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 did not
merely promise to sell the property 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. 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, 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 to their names. The suspensive condition was fulfilled on 6 February 1985
and thus, the conditional contract of sale between the parties 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.”
-----------------------------No. L-29155. May 13, 1970
UNIVERSAL FOOD CORPORATION vs. THE COURT OF APPEALS,
MAGDALO V. FRANCISCO, SR. and VICTORIANO V. FRANCISCO
Petition for certiorari to review a decision of the Court of Appeals
FACTS:
Magdalo V. Francisco, Sr. discovered a formula for the manufacture of a food
seasoning (sauce) derived from banana fruits popularly known as MAFRAN
sauce. It was used commercially since 1942, and in the same year Francisco,
Sr. registered his trademark in his name as owner and inventor with the
Bureau of Patents. However, due to lack of sufficient capital to finance the
expansion of the business, Francisco, Sr. secured the financial assistance of
Tirso T. Reyes who, after a series of negotiations, formed Universal Food
Corporation (UFC) eventually leading to the execution of a "Bill of
Assignment". Francisco, Sr. entered into contract with UFC stipulating among
other things that he be the Chief Chemist and Second Vice-President of UFC
and shall have absolute control and supervision over the laboratory
assistants and personnel and in the purchase and safekeeping of the
chemicals used in the preparation of said Mafran sauce and that said
positions are permanent in nature. In line with the terms and conditions of
the Bill of Assignment, Magdalo Francisco was appointed Chief Chemist with a salary of
P300.00 a month. Magdalo Francisco kept the formula of the Mafran sauce
secret to himself. Thereafter, however, due to the alleged scarcity and high
prices of raw materials, UFC issued a Memorandum Supervisor Ricardo
Francisco should be retained in the factory and that the salary of Francisco,
Sr., should be stopped for the time being until the corporation should resume
its operation. Subsequently, UFC issued several Memorandums ordering
Francisco, Sr to produce orders to cope with the orders of the corporation’s
various distributors and with instructions to take only the necessary daily
employees without employing permanent employees. Francisco, Sr. received
his salary as Chief Chemist in the amount of P300.00 a month only until his
services were terminated on November 30, 1960. Thereafter, UFC looked for
a buyer of the corporation including its trademarks, formula and assets at a
price of not less than P300,000.00. Francisco, Sr. filed an action for rescission
of contract and damages due to his dismissal as Chief Chemist
ISSUE:
Whether or not Francisco, Sr. is entitled to rescission due to his dismissal
from UFC
RULING:
YES. Under Art 1191, the power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is incumbent
upon him, the injured party may choose between fulfillment and rescission of
the obligation, with payment of damages in either case. The general rule is
that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. Rescission is
a subsidiary remedy which cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the
same. In this case the dismissal of the respondent patentee Francisco, Sr. as
the permanent chief chemist of the corporation is a fundamental and
substantial breach of the Bill of Assignment. He was dismissed without any
fault or negligence on his part. Thus, apart from the legal principle that the
option·to demand performance or ask for rescission of a contract belongs to
the injured party, the fact remains that the Francisco had no alternative but
to file the present action for rescission and damages
--------------------------------Margarita Suria vs Court of Appeals & Herminom/ Natividad Crispin
FACTS
That on March 31, 1975, plaintiffs being the owners of a parcel of land situated at Barrio San
Antonio, San Pedro, Laguna, entered into a contract denominated as DEED OF SALE WITH
MORTGAGE, with herein defendants, a true copy of said contract.
That the defendants violated the terms and conditions of the contract by failing to pay the
stipulated installments and in fact only one installment due in July 1975 (paid very late in the
month of September, 1975) was made all the others remaining unsettled to the present time;
That repeated verbal and written demands were made by plaintiff upon the defendants for the
payment of the installments, some of said written demands having been made on September
24, 1981, February 7, 1982, February 24, 1983, March 13, 1983, and April 12, 1983, but
defendants for no justifiable reason failOn November 14, 1983, petitioners filed their answer
with counterclaim.
On July 16, 1984, petitioners filed a motion to dismiss complaint, alleging that:That plaintiffs are
not entitled to the subsidiary remedy of rescission because of the presence of remedy of
foreclosure in the Deed of Sale with Mortgage , secondly that, assuming arguendo that
rescission were a proper remedy, it is apparent in the face of the Complaint that the plaintiffs
failed to comply with the requirements of law, hence the rescission was ineffective, illegal, null
and void, and invalid.
On July 26, 1984, private-respondents filed their opposition to the above motion.In the
meantime, on August 6, 1984, petitioners formerly offered to pay private-respondents all the
outstanding balance under the Deed of Sale with Mortgage, which offer was rejected by private
respondents on August 7, 1984. On November 26, 1984, the respondent-Court denied the
motion to dismiss.
ISSUE
Whether or not the seller can resort to the remedy of rescission under Art 1191 which provides
that the subsidiary and equitable remedy of rescission in case of breach of reciprocal obligation.
HELD
The petition is hereby GRANTED. The Intermediate Appellate Court’s decision is REVERSED and
SET ASIDE. The petitioners are ordered to pay the balance of their indebtedness under the
Deed of Absolute Sale with Mortgage with legal interests from the second installment due on
October 24, 1975 until fully paid,
1.) There is no dispute that the parties entered into a contract of sale as distinguished from a
contract to sell. By the contract of sale, the vendor obligates himself to transfer the ownership
of and to deliver a determinate thing to the buyer, who in turn, is obligated to pay a price
certain in money or its equivalent (Art. 1458, Civil Code). From the respondents’ own
arguments, we note that they have fully complied with their part of the reciprocal obligation.
2.) The petitioners’ breach of obligations is not with respect to the perfected contract of sale
but in the obligations created by the mortgage contract. The remedy of rescission is not a
principal action retaliatory in character but becomes a subsidiary one which by law is available
only in the absence of any other legal remedy. The relationship between the parties is no longer
one of buyer and seller because the contract of sale has been perfected and consummated. It is
already one of a mortgagor and a mortgagee. In consideration of the petitioners’ promise to
pay on installment basis the sum they owe the respondents, the latter have accepted the
mortgage as security for the obligation. 3)The petitioners have offered to pay au past due
accounts. Considering the lower purchasing value of the peso in terms of prices of real estate
today, the respondents are correct in stating they have suffered losses. However, they are also
to blame for trusting persons who could not or would not comply with their obligations in time.
They could have foreclosed on the mortgage immediately when it fell due instead of waiting all
these years while trying to enforce the wrong remedy.
-----------------Facts:
Private respondent entered into a “Conditional Deed of Sale” with petitioner over a parcel of
land in Paranaque, the latter advancing P50,000 for the eviction of squatters therein. An
ejectment suit was then filed by the private respondent against the squatters. Although
successful, private respondent sought the return of the downpayment she received because
“she could not get rid of the squatters”.
Issue:
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?
Held:
A perfected contract of sale may either be absolute or conditional 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. 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.
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. 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. 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. 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. This option clearly
belongs to petitioner and not to private respondent.
In contracts of sale particularly, Article 1545 of the Civil Code allows the obligee to choose
between proceeding with the agreement or waiving the performance of the condition. Here,
evidently, petitioner has waived the performance of the condition imposed on private
respondent to free the property from squatters.
The right of resolution of a party to an obligation is predicated on a breach of faith by the other
party that violates the reciprocity between them. 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.
-------------------VICENTE LIM v. CA, GR No. 118347, 1996-10-24
Facts:
Private respondent Liberty Luna is the owner of a piece of land located at the corner of G.
Araneta Avenue and Quezon Avenue in Quezon City.
On September 2, 1988 private respondent sold the land to petitioners Vicente and Michael Lim
for P3,547,600.00.
As prepared by petitioners' broker, Atty. Rustico Zapata of the Zapata Realty Company, the
receipt embodying the agreement[1]... read as follows:
The seller assumes full responsibility to eject the squatters/occupants within a period of sixty
(60) days from the date of receipt of the earnest money; and in case the seller shall fail in her
commitment to eject the squatters/occupants within said period, the seller shall... refund to the
buyer this sum of P200,000.00 [plus another sum of ONE HUNDRED THOUSAND (P100,000.00)
PESOS as liquidated damages];
Private respondent Luna failed to eject the squatters from the land despite her alleged efforts
to do so.
On January 17, 1989, the parties met at the office of Edmundo Kaimo to negotiate a price
increase to facilitate the ejectment of the squatters.
After a few days, private respondent tried to return the earnest money alleging her failure to
eject the squatters.
She claimed that as a result of her failure to remove the squatters from the land, the contract
of sale ceased to exist and she no longer had the obligation... to sell and deliver her property to
petitioners.
The appellate court described the sale in this case as a "contract with a conditional obligation"
whereby the private respondent's obligation to sell and deliver and the petitioners' obligation
to... pay the balance of the purchase price depended on the fulfillment of the condition that the
squatters be removed within 60 days.
Issues:
The first question is whether as a result of private respondent's failure to eject the squatters
from the land, petitioners, as the Court of Appeals ruled, lost the right to demand that the land
be sold to them.
Ruling:
We hold that they did not... and that the appellate court erred in holding otherwise. The
agreement, as quoted, shows a perfected contract of sale.
Indeed, the earnest money given is proof of the perfection of the contract. As Art. 1482 of the
Civil Code states, "Whenever earnest money is given in a contract of sale, it shall be considered
as part of the price and as proof of the perfection of the contract."
Private respondent Luna contends that as the condition of ejecting the squatters was not met,
she no longer has an obligation to proceed with the sale of her lot.
Private respondent fails to distinguish between a condition imposed... on the perfection of the
contract and a condition imposed on the performance of an obligation.
Failure to comply with the first condition results in the failure of a contract, while failure to
comply with the second condition only gives the other party the option either to... refuse to
proceed with the sale or to waive the condition.
In this case, there is already a perfected contract. The condition was imposed only on the
performance of the obligation.
Hence, petitioners have the right to choose whether to demand the return of P200,000.00
which they have paid as earnest money or to proceed with... the sale. They have chosen to
proceed with the sale and private respondent cannot refuse to do so.
Principles:
Private respondent fails to distinguish between a condition imposed... on the perfection of the
contract and a condition imposed on the performance of an obligation. Failure to comply with
the first condition results in the failure of a contract, while failure to comply with the second
condition only gives the other party the option either to... refuse to proceed with the sale or to
waive the condition.
In this case, there is already a perfected contract. The condition was imposed only on the
performance of the obligation. Hence, petitioners have the right to choose whether to demand
the return of P200,000.00 which they have paid as earnest money or to proceed with... the
sale. They have chosen to proceed with the sale and private respondent cannot refuse to do
so.
--------------------G.R. No. L-11897
October 31, 1964
FERNANDO A. FROILAN, Plaintiff-Appellee, vs. PAN ORIENTAL SHIPPING COMPANY, defendantappellant,
REPUBLIC OF THE PHILIPPINES, and COMPANIA MARITIMA, intervenors-appellees.
Sycip, Salazar & Associates and Enrique Fernando & Emma Quisumbing-Fernando for
defendant-appellant.
The Government Corporate Counsel for intervenors-appellees.
Rafael Dinglasan for plaintiff-appellee.
BARRERA, J.:
On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat
described as MV/FS 197 for the sum of P200,000.00, with a down payment of P50,000,00. To
secure payment of the unpaid balance of the purchase price, a mortgage was constituted on
the vessel in favor of the Shipping Administration in a contract which provides, among others,
the following:
In the event that the FIRST PARTY should elect to exercise its rights to rescind under the terms
of this contract, it shall have the right to take possession of the vessel herein sold in the
condition that it is at the time of rescission but in no case in a worse condition than when
originally delivered to the second party, ordinary wear and tear excepted and in case at the
time of rescission the condition of the vessel is not satisfactory to the FIRST PARTY, it shall have
the right to have the vessel reconditioned, repaired, dry-docked at the expense of the SECOND
PARTY. The same right is hereby granted to the FIRST PARTY in case the SECOND PARTY should
for any reason refuse or fail to comply with this condition of sale and return the vessel herein
sold in a condition not satisfactory to the FIRST PARTY.chanroblesvirtualawlibrarychanrobles
virtual law library
The right of rescission shall be considered as a cumulative remedy granted to the FIRST PARTY
and shall not in any way prejudice his right to demand immediate and complete payment of the
purchase price of the vessel under the terms herein provided, and to demand and collect from
the SECOND PARTY such damages caused by the non-compliance with this contract.
This contract was duly approved by the President of the
Philippines.chanroblesvirtualawlibrarychanrobles virtual law library
Froilan appeared to have defaulted in spite of demands, not only in the payment of the first
installment on the unpaid balance of the purchase price and the interest thereon when they fell
due, but also failed in his express undertaking to pay the premiums on the insurance coverage
of the vessel, obliging the Shipping Administration to advance such payment to the insurance
company. Consequently, the Shipping Administration requested the Commissioner of Customs
on June 1, 1948 to refuse clearance on the vessel and the voyage thereof was ordered
suspended.chanroblesvirtualawlibrarychanrobles virtual law library
Thereafter, Froilan asked for a reconsideration of the action taken by the Shipping
Administration, claiming that his failure to pay the required installments was due to the fact
that he was awaiting the decision of the President on the petition of the shipowners for an
extension of the period of payment of the purchased vessels, which petition was favorably
acted upon.chanroblesvirtualawlibrarychanrobles virtual law library
On July 3, 1948, the Shipping Administration and Froilan entered into an agreement whereby
the latter undertook to liquidate immediately all of his outstanding accounts, including the
insurance premiums, within 30 days, and have the vessel overhauled, and promised that in case
of his default, he shall "waive, any formal notice of demand and to redeliver the said vessel
peaceably and amicably without any other proceedings" (Exh.
39).chanroblesvirtualawlibrarychanrobles virtual law library
Again, Froilan failed to settle his accounts within the prescribed period, thus, the Shipping
Administration threatened to rescind the contract unless payment be immediately made. On
August 28, 1948, upon Froilan's request, the Shipping Administration agreed to release the
vessel on condition that the same would be overhauled and repaired and the accrued interest
on the first installment would be paid. The Administration also allowed the mortgagor to pay
his overdue accounts, amounting now to P48,500.00 in monthly installments, with warming
that in case of further default, it would immediately repossess the vessel and rescind the
contract. Froilan failed to pay. On January 17, 1949, the Shipping Administration required him
to return the vessel or else file a bond for P25,000.00 in five days. In a letter dated January 28,
1949, Froilan requested that the period for filing the bond be extended to February 15, 1949,
upon the express condition and understanding that:
... . If I fail to file the required bond on the said date, February 15, 1949, to the satisfaction of
the Shipping Administration, I am willing to relinquish and I do hereby relinquish any and all
rights I have or may have on the said vessel including any payments made thereon to the
Shipping Administration, without prejudice to other rights the Shipping Administration may
have against me under the contract of sale executed in my
favor.chanroblesvirtualawlibrarychanrobles virtual law library
I wish to reiterate that if I fail to file the bond within the period I have requested, any and all
rights I have on the vessel and any payments made to the Shipping Administration shall be
considered automatically forfeited in favor of the Shipping Administration and the ownership of
the said vessel will be as it is hereby automatically transferred to the Shipping Administration
which is then hereby authorized to take immediate possession of said vessel. (Exh. 66)
This letter of Froilan was submitted by the General Manager of the Shipping Administration to
the board of directors for proper consideration. By resolution of January 31, 1949, the petition
was granted subject specifically to the conditions set forth therein. Froilan again failed to make
good his promises. Hence, on February 18, 1949, the General Manager of the Shipping Administration wrote the Collector of Customs of Manila, advising the latter that the Shipping
Administration, by action of its board, terminated the contract with Froilan, and requesting the
suspension of the clearance of the boat effective that date (Exh.
70).chanroblesvirtualawlibrarychanrobles virtual law library
On February 21, 1949, the General Manager directed its officers, Capt. Laconico and others, to
take immediate possession of the vessel and to suspend the unloading of all cargoes on the
same until the owners thereof made the corresponding arrangement with the Shipping
Administration. Pursuant to these instructions, the boat was, not only actually repossessed, but
the title thereto was registered again in the name of the Shipping Administration, thereby retransferring the ownership thereof to the government.chanroblesvirtualawlibrarychanrobles
virtual law library
On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental,
offered to charter said vessel FS-197 for a monthly rent of P3,000.00. Because the government
was then spending for the guarding of the boat and subsistence of the crew-members since
repossession, the Shipping Administration on April 1, 1949, accepted Pan Oriental's offer "in
principle" subject to the condition that the latter shall cause the repair of the vessel, advancing
the cost of labor and drydocking thereof, and the Shipping Administration to furnish the
necessary spare parts. In accordance with this charter contract, the vessel was delivered to the
possession of Pan Oriental.chanroblesvirtualawlibrarychanrobles virtual law library
In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the
obligations he assumed and asked that he be given another extension up to March 15, 1949 to
file the necessary bond. Then on March 8, Froilan offered to pay all his overdue accounts.
However, as he failed to fulfill even these offers made by him in these two communications, the
Shipping Administration denied his petition for reconsideration (of the rescission of the
contract) on March 22, 1949. It should be noted that while his petition for reconsideration was
denied on March 22, it does not appear when he formally formulated his appeal. In the
meantime, as already stated, the boat has being repossessed by the Shipping Administration
and the title thereto re-registered in the name of the government, and delivered to the Pan
Oriental in virtue of the charter agreement. On June 2, 1949, Froilan protested to the President
against the charter of the vessel.chanroblesvirtualawlibrarychanrobles virtual law library
On the same date, the Executive Office advised the Administration and the Commissioner of
Customs not to dispose of the vessel in favor of another party pending final decision by the
President on the appeal of Froilan (Exhs. 93-A and 93-D). But since the vessel was already
cleared in favor of Pan Oriental prior to the receipt of the foregoing communication, and
allegedly in order to prevent its being made answerable for damages, the General Manager of
the Shipping Administration advised the Collector of Customs not to suspend the voyage of the
vessel pending final decision on the appeal of Froilan. Similar manifestation, to allow the Pan
Oriental's operation of the vessel without prejudice to whatever action the President may take
in the case, was also made by the Administration to the Executive
Secretary.chanroblesvirtualawlibrarychanrobles virtual law library
On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter
agreement and signed a bareboat contract with option to purchase, containing the following
pertinent provisions:
III. CHARTER HIRE, TIME OF PAYMENT. - The CHARTERER shall pay to the owner a monthly
charter hire of THREE THOUSAND (P3,000.00) PESOS from date of delivery of the vessel,
payable in advance on or before the 5th of every current month until the return of the vessel to
OWNER or purchase of the vessel by CHARTERER.chanroblesvirtualawlibrarychanrobles virtual
law library
XII. RIGHT OF OPTION TO PURCHASE. - The right of option to purchase the vessel at the price of
P150,000.00 plus the amount expended for its present repairs is hereby granted to the
CHARTERER within 120 days from the execution of this Contract, unless otherwise extended by
the OWNER. This right shall be deemed exercised only if, before the expiration of the said
period, or its extension by the OWNER the CHARTERER completes the payment, including any
amount paid as Charter hire, of a total sum of not less than twenty-five percentum (25%) of
said price of the vessel.chanroblesvirtualawlibrarychanrobles virtual law library
The period of option may be extended by the OWNER without in any way affecting the other
provisions, stipulations, and terms of this contract.chanroblesvirtualawlibrarychanrobles virtual
law library
If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the
period stipulated, or within the extension thereof by the OWNER, its right of option to purchase
shall be deemed terminated, without prejudice to the continuance of the Charter Party
provisions of this contract. The right to dispose of the vessel or terminate the Charter Party at
its discretion is reserved to the OWNER.chanroblesvirtualawlibrarychanrobles virtual law library
XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. - After the CHARTERER has exercised his right of
option as provided in the preceding paragraph (XII), the vessel shall be deemed conditionally
sold to the purchaser, but the ownership thereof shall not be deemed transferred unless and
until all the price of the vessel, together with the interests thereon, and any other obligation
due and payable to the OWNER under this contract, have been fully paid by the CHARTERER.
xxx
xxx
xxxchanrobles virtual law library
XXI. APPROVAL OF THE PRESIDENT. - This contract shall take effect only upon approval of His
Excellency, the President.
On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and
restored to him all his rights thereunder, on condition that he would give not less than
P10,000.00 to settle partially his overdue accounts and that reimbursement of the expenses
incurred for the repair and drydocking of the vessel performed by Pan Oriental was to be made
in accordance with future adjustment between him and the Shipping Administration (Exh. I).
Later, pursuant to this reservation, Froilan's request to the Executive Secretary that the
Administration advance the payment of the expenses incurred by Pan Oriental in the
drydocking and repair of the vessel, was granted on condition that Froilan assume to pay the
same and file a bond to cover said undertaking (Exh. 111).chanroblesvirtualawlibrarychanrobles
virtual law library
On September 7, 1949, the formal bareboat charter with option to purchase filed on June 4,
1949, in favor of the Pan Oriental was returned to the General Manager of the Shipping
Administration without action (not disapproval), only because of the Cabinet resolution of
September 6, 1949 restoring Froilan to his rights under the conditions set forth therein, namely,
the payment of P10,000.00 to settle partially his overdue accounts and the filing of a bond to
guarantee the reimbursement of the expenses incurred by the Pan Oriental in the drydocking
and repair of the vessel. But Froilan again failed to comply with these conditions. And so the
Cabinet, considering Froilan's consistent failure to comply with his obligations, including those
imposed in the resolution of September 6, 1949, resolved to reconsider said previous resolution
restoring him to his previous rights. And, in a letter dated December 3, 1949, the Executive
Secretary authorized the Administration to continue its charter contract with Pan Oriental in
respect to FS-197 and enforce whatever rights it may still have under the original contract with
Froilan (Exh. 188).chanroblesvirtualawlibrarychanrobles virtual law library
Froilan, for his part, petitioned anew for a reconsideration of this action of the Cabinet,
claiming that other ship purchasers, including the President-Treasurer of the Pan Oriental
himself, had also defaulted in payment and yet no action to rescind their contracts had been
taken against them. He also offered to make a cash partial payment of P10,000.00 on his
overdue accounts and reimburse Pan Oriental of all its necessary expense on the vessel. Pan
Oriental, however, not only expressed its unwillingness to relinquish possession of the vessel,
but also tendered the sum of P15,000.00 which, together with its alleged expenses already
made on the vessel, cover 25% of the cost of the vessel, as provided in the option granted in
the bareboat contract (Exh. 122). This amount was accepted by the Administration as deposit,
subject to the final determination of Froilan's appeal by the President. The Executive Secretary
was also informed of the exercise by Pan Oriental of said option to
purchase.chanroblesvirtualawlibrarychanrobles virtual law library
On August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the
original contract of sale, on condition that he shall pay the sum of P10,000.00 upon delivery of
the vessel to him, said amount to be credited to his outstanding accounts; that he shall
continue paying the remaining installments due, and that he shall assume the expenses
incurred for the repair and drydocking of the vessel (Exh. 134). Pan Oriental protested to this
restoration of Froilan's rights under the contract of sale, for the reason that when the vessel
was delivered to it, the Shipping Administration had authority to dispose of the said property,
Froilan having already relinquished whatever rights he may have thereon. Froilan paid the
required cash of P10,000.00, and as Pan Oriental refused to surrender possession of the vessel,
he filed an action for replevin in the Court of First Instance of Manila (Civil Case No. 13196) to
recover possession thereof and to have him declared the rightful owner of said
property.chanroblesvirtualawlibrarychanrobles virtual law library
Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from
Pan Oriental and its delivery to the plaintiff. Pan Oriental tried to question the validity of this
order in a petition for certiorari filed in this Court (G.R. No. L-4577), but the same was dismissed
for lack of merit by resolution of February 22, 1951. Defendant accordingly filed an answer,
denying the averments of the complaint.chanroblesvirtualawlibrarychanrobles virtual law
library
The Republic of the Philippines, having been allowed to intervene in the proceeding, also
prayed for the possession of the vessel in order that the chattel mortgage constituted thereon
may be foreclosed. Defendant Pan Oriental resisted said intervention, claiming to have a better
right to the possession of the vessel by reason of a valid and subsisting contract in its favor, and
of its right of retention, in view of the expenses it had incurred for the repair of the said vessel.
As counterclaim, defendant demanded of the intervenor to comply with the latter's obligation
to deliver the vessel pursuant to the provisions of the charter
contract.chanroblesvirtualawlibrarychanrobles virtual law library
Thereafter, and upon plaintiff's presenting proof that he had made payment to the intervenor
Republic of the Philippines, of the sum of P162,576.96, covering the insurance premiums,
unpaid balance of the purchase price of the vessel and interest thereon, the lower court by
order of February 8, 1952, dismissed the complaint in intervention on the ground that the claim
or demand therein had already been released. Said dismissal, however, was made without
prejudice to the determination of defendant's right, and that the release and cancellation of the
chattel mortgage did not "prejudge the question involved between the plaintiff and the
defendant which is still the subject of determination in this case."chanrobles virtual law library
In view of the dismissal of its complaint, intervenor Republic of the Philippines also moved for
the dismissal of defendant's counterclaims against it, which was granted by the court. On
appeal by Pan Oriental to this Court (G.R. No. L-6060), said order was reversed and the case
remanded to the lower court for further proceedings.chanroblesvirtualawlibrarychanrobles
virtual law library
Subsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was allowed to
intervene in the proceedings (in the lower court), said intervenor taking common cause with
the plaintiff Froilan. In its answer to the complaint in intervention, defendant set up a
counterclaim for damages in the sum of P50,000.00, alleging that plaintiff secured the Cabinet
resolutions and the writ of replevin, resulting in its deprivation of possession of the, vessel, at
the instigation and inducement of Compañia Maritima. This counterclaim was denied by both
plaintiff and intervenor Maritima.chanroblesvirtualawlibrarychanrobles virtual law library
On September 28, 1956, the lower court rendered a decision upholding Froilan's (and
Compañia Maritima's) right to the ownership and possession of the FS-197. It was ruled that
Froilan's violations of the conditions of the contract of sale in his favor did not automatically
deprive him of his right of ownership of the vessel, which passed to him upon execution of the
contract, but merely gave rise to the Shipping Administration's right either to foreclose the
mortgage or rescind the contract by court action. As the Shipping Administration failed to avail
itself of any of these remedies, Froilan's right of ownership remained unaffected. And the
subsequent resolutions of the Cabinet, restoring him to his rights under the said contract,
reaffirmed the same. The charter contract between the Shipping Administration and defendant
was declared null and void, not only because the former could not have legally bound the
vessel, but also due to the fact that said agreement has not been perfected for lack of approval
by the President of the Philippines. And, even assuming that the said charter contract was valid,
the lower court held that, as the owner (Republic of the Philippines) under the same agreement
was given the right to terminate the charter or dispose of the vessel anytime, the action of the
Cabinet in cancelling or withdrawing the rescission of Froilan's contract, had the effect of
terminating the charter agreement with the defendant. The court also dismissed (1)
defendant's counterclaims against plaintiff Froilan and intervenor Compañia Maritima, on the
ground that it (defendant) was a possessor in bad faith, and consequently, not entitled to
damages; (2) plaintiff's counterclaims against defendant, for the reason that the same should
have been directed against intervenor Republic of the Philippines; and (3) defendant's
counterclaims said intervenor Republic, on the ground that the order dismissing the complaint
in intervention had already become final and it was materially impossible for the latter to
secure possession of the vessel. From this decision, Pan Oriental brought the instant
appeal.chanroblesvirtualawlibrarychanrobles virtual law library
Contrary to appellant's contention, the ruling of the lower court that under the contract of sale
with mortgage, ownership of the vessel passed to Froilan, upon delivery of the property to the
latter, must be sustained. It is to be noted that unlike in the charter contract where it was
specifically prescribed that ownership of the vessel shall be transferred to the vendee only
upon full payment of the purchase price, no similar provision appears in the contract of sale in
favor of Froilan. In the absence of stipulation to the contrary, the ownership of the thing sold
passes to the vendee upon the actual or constructive delivery thereof (Art. 1477, new Civil
Code). It is for this reason that Froilan was able to constitute a mortgage on the vessel in favor
of the Administration, to secure payment of the unpaid balance of the purchase
price.chanroblesvirtualawlibrarychanrobles virtual law library
There is no gainsaying the fact that there was continuous violation by Froilan of the terms of
said contract of sale. The records conclusively show that notwithstanding the numerous
opportunities given him, Froilan had been remiss in the fulfillment of his obligations
thereunder. Nevertheless, the lower court upheld his allegation that the Administration may
not legally rescind the contract without filing the corresponding complaint in
court.chanroblesvirtualawlibrarychanrobles virtual law library
Under Article 11911 of the Civil Code, in case of reciprocal obligations, the power to rescind the
contract where a party incurs in default, is impliedly given to the injured party. Appellee
maintains however, that the law contemplates of rescission of contract by judicial action and
not a unilateral act by the injured party; consequently, the action of the Shipping
Administration contravenes said provision of the law. This is not entirely correct, because there
is also 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. As already held2judicial action is needed where there, is absence of special
provision in the contract granting to a party the right of
rescission.chanroblesvirtualawlibrarychanrobles virtual law library
In the instant case, while it may be true that the contract of sale did not expressly give to the
mortgagee the right to cancel the agreement it was, nevertheless, provided therein that said
party may rescind the contract as it may see fit in case of breach of the terms thereof by the
mortgagor. Taking into account the promises, waivers and representations made by Froilan, to
the extent that he agreed to the automatic transfer of ownership of the vessel to the
Administration, should he fall to fulfill what was incumbent upon him, which did happen, the
rescission of the contract without judicial action is proper.chanroblesvirtualawlibrarychanrobles
virtual law library
The next question to be determined is whether there had been a valid and enforceable charter
contract in favor of appellant Pan Oriental, and what was the effect thereon of the subsequent
restoration to Froilan by the Cabinet, of his rights under the original contract of sale with
mortgage.chanroblesvirtualawlibrarychanrobles virtual law library
It is not disputed that appellant Pan Oriental took possession of the vessel in question after it
had been repossessed by the Shipping Administration and title thereto reacquired by the
government, and operated the same from June 2, 1949 after it had repaired the vessel until it
was dispossessed of the property on February 3, 1951, in virtue of a bareboat charter contract
entered into between said company and the Shipping Administration. In the same agreement,
appellant as charterer, was given the option to purchase the vessel, which may be exercised
upon payment of a certain amount within a specified period. The President and Treasurer of
the appellant company, tendered the stipulated initial payment on January 16, 1950. Appellant
now contends that having exercised the option, the subsequent Cabinet resolutions restoring
Froilan's rights on the vessel violated its existing rights over the same property. To the
contention of plaintiff Froilan that the charter contract never became effective because it never
received presidential approval, as required therein, Pan Oriental answers that the letter of the
Executive Secretary dated December 3, 1949 (Exh. 118), authorizing the Shipping
Administration to continue its charter contract with appellant, satisfies such requirement (of
presidential approval). It is to be noted, however, that said letter was signed by the Executive
Secretary only and not under authority of the President. The same, therefore, cannot be
considered to have attached unto the charter contract the required consent of the Chief
Executive for its validity.chanroblesvirtualawlibrarychanrobles virtual law library
Upon the other hand, the Cabinet resolutions purporting to restore Froilan to his former rights
under the deed of sale, cannot also be considered as an act of the President which is specifically
required in all contracts relating to these vessels (Executive Order No. 31, series of 1946).
Actions of the Cabinet are merely recommendatory or advisory in character. Unless afterwards
specifically adopted by the President as his own executive act, they cannot be considered as
equivalent to the act of approval of the President expressly required in cases involving
disposition of these vessels.chanroblesvirtualawlibrarychanrobles virtual law library
In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor
the Pan Oriental holds a valid contract over the vessel. However, since the intervenor Shipping
Administration, representing the government practically ratified its proposed contract with
Froilan by receiving the full consideration of the sale to the latter, for which reason the
complaint in intervention was dismissed as to Froilan, and since Pan Oriental has no capacity to
question this actuation of the Shipping Administration because it had no valid contract in its
favor, the decision of the lower court adjudicating the vessel to FroiIan and its successor
Compañia Maritima, must be sustained. Nevertheless, under the circumstances already
adverted to, Pan Oriental cannot be considered a possessor in bad faith until after the
institution of the instant case. However, since it is not disputed that said appellant made useful
and necessary expenses on the vessel, appellant is entitled to the refund of such expenses with
the right to retain the vessel until he has been reimbursed therefor (Art. 546, Civil Code). As it is
by the concerted acts of defendants and intervenor Republic of the Philippines that appellant
was deprived of the possession of the vessel over which appellant had a lien for his expenses,
appellees Froilan, Compañia Maritima, and the Republic of the Philippines3are declared liable
for the reimbursement to appellant of its legitimate expenses, as allowed by law, with legal
interest from the time of disbursement.chanroblesvirtualawlibrarychanrobles virtual law library
Modified in this manner, the decision appealed from is affirmed, without costs. Case is
remanded to the lower court for further proceedings in the matter of expenses. So
ordered.chanroblesvirtualawlibrarychanrobles virtual law library
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Paredes, Bengzon, J.P., and Zaldivar,
JJ., concur.
Dizon, Regala and Makalintal, JJ., took no part.