FIRST DIVISION

G.R. No. 142618

July 12, 2007

PCI LEASING AND FINANCE, INC., Petitioner, vs.

GIRAFFE-X CREATIVE IMAGING, INC., Respondent.
DECISION
GARCIA, J.:
On a pure question of law involving the application of Republic Act (R.A.)
No. 5980, as amended by R.A. No. 8556 in relation to Articles 1484 and
1485 of the Civil Code, petitioner PCI Leasing and Finance, Inc. (PCI
LEASING, for short) has directly come to this Court via this petition for
review under Rule 45 of the Rules of Court to nullify and set aside the
Decision and Resolution dated December 28, 1998 and February 15,
2000, respectively, of the Regional Trial Court (RTC) of Quezon City,
Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of money
and/or personal property with prayer for a writ of replevin, thereat
instituted by the petitioner against the herein respondent, Giraffe-X
Creative Imaging, Inc. (GIRAFFE, for brevity).
The facts:
On December 4, 1996, petitioner PCI LEASING and respondent
GIRAFFE entered into a Lease Agreement,1whereby the former leased
out to the latter one (1) set of Silicon High Impact Graphics and
accessories worthP3,900,00.00 and one (1) unit of Oxberry Cinescan
6400-10 worth P6,500,000.00. In connection with this agreement, the
parties subsequently signed two (2) separate documents, each
denominated as Lease Schedule.2 Likewise forming parts of the basic
lease agreement were two (2) separate documents denominated
Disclosure Statements of Loan/Credit Transaction (Single Payment or
Installment Plan)3 that GIRAFFE also executed for each of the leased
equipment. These disclosure statements inter alia described GIRAFFE,
vis--vis the two aforementioned equipment, as the "borrower" who
acknowledged the "net proceeds of the loan," the "net amount to be
financed," the "financial charges," the "total installment payments" that it
must pay monthly for thirty-six (36) months, exclusive of the 36% per
annum "late payment charges." Thus, for the Silicon High Impact
Graphics, GIRAFFE agreed to pay P116,878.21 monthly, and for Oxberry

Cinescan, P181.362.00 monthly. Hence, the total amount GIRAFFE has

to pay PCI LEASING for 36 months of the lease, exclusive of monetary
penalties imposable, if proper, is as indicated below:
P116,878.21 @ month (for the Silicon High
Impact Graphics) x 36 months =

P 4,207,615.56

-- PLUS-P181,362.00 @ month (for the Oxberry

Cinescan) x 36 months =
Total Amount to be paid by GIRAFFE
(or the NET CONTRACT AMOUNT)

P 6,529,032.00

P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit

the amount of P3,120,000.00 by way of "guaranty deposit," a sort of
performance and compliance bond for the two equipment. Furthermore,
the same agreement embodied a standard acceleration clause, operative
in the event GIRAFFE fails to pay any rental and/or other accounts due.
A year into the life of the Lease Agreement, GIRAFFE defaulted in its
monthly rental-payment obligations. And following a three-month default,
PCI LEASING, through one Atty. Florecita R. Gonzales, addressed a
formal pay-or-surrender-equipment type of demand letter4 dated February
24, 1998 to GIRAFFE.
The demand went unheeded.
Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING
instituted the instant case against GIRAFFE. In its complaint,5 docketed
in said court as Civil Case No. 98-34266 and raffled to Branch
2276 thereof, PCI LEASING prayed for the issuance of a writ of replevin
for the recovery of the leased property, in addition to the following relief:
2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and
against the defendant [GIRAFFE], as follows:
a. Declaring the plaintiff entitled to the possession of the subject
properties;

b. Ordering the defendant to pay the balance of rental/obligation

in the total amount of P8,248,657.47 inclusive of interest and
charges thereon;
c. Ordering defendant to pay plaintiff the expenses of litigation
and cost of suit. (Words in bracket added.)
Upon PCI LEASINGs posting of a replevin bond, the trial court issued a
writ of replevin, paving the way for PCI LEASING to secure the seizure
and delivery of the equipment covered by the basic lease agreement.
Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to
Dismiss, therein arguing that the seizure of the two (2) leased equipment
stripped PCI LEASING of its cause of action. Expounding on the point,
GIRAFFE argues that, pursuant to Article 1484 of the Civil Code on
installment sales of personal property, PCI LEASING is barred from
further pursuing any claim arising from the lease agreement and the
companion contract documents, adding that the agreement between the
parties is in reality a lease of movables with option to buy. The given
situation, GIRAFFE continues, squarely brings into applicable play
Articles 1484 and 1485 of the Civil Code, commonly referred to as the
Recto Law. The cited articles respectively provide:
ART. 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following
remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to
pay;
(2) Cancel the sale, should the vendee's failure to pay cover two
or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void. (Emphasis added.)
ART. 1485. The preceding article shall be applied to contracts purporting
to be leases of personal property with option to buy, when the lessor has
deprived the lessee of the possession or enjoyment of the thing.

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil
Code applies to its contractual relation with PCI LEASING because the
lease agreement in question, as supplemented by the schedules
documents, is really a lease with option to buy under the companion
article, Article 1485. Consequently, so GIRAFFE argues, upon the seizure
of the leased equipment pursuant to the writ of replevin, which seizure is
equivalent to foreclosure, PCI LEASING has no further recourse against
it. In brief, GIRAFFE asserts in its Motion to Dismiss that the civil
complaint filed by PCI LEASING is proscribed by the application to the
case of Articles 1484 and 1485, supra, of the Civil Code.
In its Opposition to the motion to dismiss, PCI LEASING maintains that
its contract with GIRAFFE is a straight lease without an option to buy.
Prescinding therefrom, PCI LEASING rejects the applicability to the suit
of Article 1484 in relation to Article 1485 of the Civil Code, claiming that,
under the terms and conditions of the basic agreement, the relationship
between the parties is one between an ordinary lessor and an ordinary
lessee.
In a decision7 dated December 28, 1998, the trial court granted
GIRAFFEs motion to dismiss mainly on the interplay of the following
premises: 1) the lease agreement package, as memorialized in the
contract documents, is akin to the contract contemplated in Article 1485
of the Civil Code, and 2) GIRAFFEs loss of possession of the leased
equipment consequent to the enforcement of the writ of replevin is "akin
to foreclosure, the condition precedent for application of Articles 1484
and 1485 [of the Civil Code]." Accordingly, the trial court dismissed Civil
Case No. Q-98-34266, disposing as follows:
WHEREFORE, premises considered, the defendant [GIRAFFE] having
relinquished any claim to the personal properties subject of replevin
which are now in the possession of the plaintiff [PCI LEASING], plaintiff is
DEEMED fully satisfied pursuant to the provisions of Articles 1484 and
1485 of the New Civil Code. By virtue of said provisions, plaintiff is
DEEMED estopped from further action against the defendant, the plaintiff
having recovered thru (replevin) the personal property sought to be
payable/leased on installments, defendants being under protection of
said RECTO LAW. In view thereof, this case is hereby DISMISSED.
With its motion for reconsideration having been denied by the trial court
in its resolution of February 15, 2000,8petitioner has directly come to this
Court via this petition for review raising the sole legal issue of whether or
not the underlying Lease Agreement, Lease Schedules and the
Disclosure Statements that embody the financial leasing arrangement

between the parties are covered by and subject to the consequences of

Articles 1484 and 1485 of the New Civil Code.
As in the court below, petitioner contends that the financial leasing
arrangement it concluded with the respondent represents a straight lease
covered by R.A. No. 5980, the Financing Company Act, as last amended
by R.A. No. 8556, otherwise known as Financing Company Act of 1998,
and is outside the application and coverage of the Recto Law. To the
petitioner, R.A. No. 5980 defines and authorizes its existence and
business.
The recourse is without merit.
R.A. No. 5980, in its original shape and as amended, partakes of a
supervisory or regulatory legislation, merely providing a regulatory
framework for the organization, registration, and regulation of the
operations of financing companies. As couched, it does not specifically
define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or
transactional financial leasing and other financial leasing concepts. Thus,
the relevancy of Article 18 of the Civil Code which reads:
Article 18. - In matters which are governed by special laws, their
deficiency shall be supplied by the provisions of this [Civil] Code.
Petitioner foists the argument that the Recto Law, i.e., the Civil Code
provisions on installment sales of movable property, does not apply to a
financial leasing agreement because such agreement, by definition, does
not confer on the lessee the option to buy the property subject of the
financial lease. To the petitioner, the absence of an option-to-buy
stipulation in a financial leasing agreement, as understood under R.A.
No. 8556, prevents the application thereto of Articles 1484 and 1485 of
the Civil Code.

immovable property in consideration of the periodic payment by the

lessee of a fixed amount of money sufficient to amortize at least seventy
(70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than
two (2) years during which the lessee has the right to hold and use the
leased property but with no obligation or option on his part to purchase
the leased property from the owner-lessor at the end of the lease
contract.
In its previous holdings, however, the Court, taking into account the
following mix: the imperatives of equity, the contractual stipulations in
question and the actuations of parties vis--vis their contract, treated
disguised transactions technically tagged as financing lease, like here, as
creating a different contractual relationship. Notable among the Courts
decisions because of its parallelism with this case is BA Finance
Corporation v. Court of Appeals10 which involved a motor vehicle. Thereat,
the Court has treated a purported financial lease as actually a sale of a
movable property on installments and prevented recovery beyond the
buyers arrearages. Wrote the Court in BA Finance:
The transaction involved is one of a "financial lease" or "financial
leasing," where a financing company would, in effect, initially purchase a
mobile equipment and turn around to lease it to a client who gets, in
addition, an option to purchase the property at the expiry of the lease
period. xxx.
xxx

xxx

xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' are primarily organized for the purpose of
extending credit facilities to consumers either by leasing of motor
vehicles, and office machines and equipment, and other movable
property."

We are not persuaded.

The Court can allow that the underlying lease agreement has the
earmarks or made to appear as a financial leasing,9 a term defined in
Section 3(d) of R.A. No. 8556 as -

"'Credit' shall mean any loan, any contract to sell, or sale or contract of
sale of property or service, under which part or all of the price is
payable subsequent to the making of such sale or contract; any rentalpurchase contract; .;"

a mode of extending credit through a non-cancelable lease contract

under which the lessor purchases or acquires, at the instance of the
lessee, machinery, equipment, office machines, and other movable or

The foregoing provisions indicate no less than a mere financing scheme

extended by a financing company to a client in acquiring a motor vehicle
and allowing the latter to obtain the immediate possession and use

thereof pending full payment of the financial accommodation that is

given.

appellate court.11 (Italics in the original; underscoring supplied and words

in bracket added.)

In the case at bench, xxx. [T]he term of the contract [over a motor
vehicle] was for thirty six (36) months at a "monthly rental"
(P1,689.40), or for a total amount of P60,821.28. The contract also
contained [a] clause [requiring the Lessee to give a guaranty deposit in
the amount of P20,800.00] xxx

In Cebu Contractors Consortium Co. v. Court of Appeals,12 the Court

viewed and thus declared a financial lease agreement as having been
simulated to disguise a simple loan with security, it appearing that the
financing company purchased equipment already owned by a capitalstrapped client, with the intention of leasing it back to the latter.

After the private respondent had paid the sum of P41,670.59, excluding
the guaranty deposit of P20,800.00, he stopped further payments. Putting
the two sums together, the financing company had in its hands the
amount of P62,470.59 as against the total agreed "rentals" of P60,821.28
or an excess of P1,649.31.

In the present case, petitioner acquired the office equipment in question

for their subsequent lease to the respondent, with the latter undertaking
to pay a monthly fixed rental therefor in the total amount of P292,531.00,
or a total of P10,531,116.00 for the whole 36 months. As a measure of
good faith, respondent made an up-front guarantee deposit in the amount
of P3,120,000.00. The basic agreement provides that in the event the
respondent fails to pay any rental due or is in a default situation, then the
petitioner shall have cumulative remedies, such as, but not limited to, the
following:13

The respondent appellate court considered it only just and equitable for
the guaranty deposit made by the private respondent to be applied to his
arrearages and thereafter to hold the contract terminated. Adopting the
ratiocination of the court a quo, the appellate court said:

1. Obtain possession of the property/equipment;

xxx In view thereof, the guaranty deposit of P20,800.00 made by the
defendant should and must be credited in his favor, in the interest of
fairness, justice and equity. The plaintiff should not be allowed to unduly
enrich itself at the expense of the defendant. xxx This is even more
compelling in this case where although the transaction, on its face,
appear ostensibly, to be a contract of lease, it is actually a financing
agreement, with the plaintiff financing the purchase of defendant's
automobile . The Court is constrained, in the interest of truth and
justice, to go into this aspect of the transaction between the plaintiff and
the defendant with all the facts and circumstances existing in this
case, and which the court must consider in deciding the case, if it is to
decide the case according to all the facts. xxx.
xxx

xxx

xxx

Considering the factual findings of both the court a quo and the appellate
court, the only logical conclusion is that the private respondent did opt, as
he has claimed, to acquire the motor vehicle, justifying then the
application of the guarantee deposit to the balance still due and
obligating the petitioner to recognize it as an exercise of the option by the
private respondent. The result would thereby entitle said respondent to
the ownership and possession of the vehicle as the buyer thereof. We,
therefore, see no reversible error in the ultimate judgment of the

2. Retain all amounts paid to it. In addition, the guaranty deposit

may be applied towards the payment of "liquidated damages";
3. Recover all accrued and unpaid rentals;
4. Recover all rentals for the remaining term of the lease had it
not been cancelled, as additional penalty;
5. Recovery of any and all amounts advanced by PCI LEASING
for GIRAFFEs account xxx;
6. Recover all expenses incurred in repossessing, removing,
repairing and storing the property; and,
7. Recover all damages suffered by PCI LEASING by reason of
the default.
In addition, Sec. 6.1 of the Lease Agreement states that the guaranty
deposit shall be forfeited in the event the respondent, for any reason,
returns the equipment before the expiration of the lease.

At bottom, respondent had paid the equivalent of about a years lease

rentals, or a total of P3,510,372.00, more or less. Throw in the guaranty
deposit (P3,120,000.00) and the respondent had made a total cash
outlay ofP6,630,372.00 in favor of the petitioner. The replevin-seized
leased equipment had, as alleged in the complaint, an estimated residual
value of P6,900.000.00 at the time Civil Case No. Q-98-34266 was
instituted on May 4, 1998. Adding all cash advances thus made to the
residual value of the equipment, the total value which the petitioner had
actually obtained by virtue of its lease agreement with the respondent
amounts to P13,530,372.00 (P3,510,372.00 + P3,120,000.00
+ P6,900.000.00 = P13,530,372.00).
The acquisition cost for both the Silicon High Impact Graphics equipment
and the Oxberry Cinescan was, as stated in no less than the petitioners
letter to the respondent dated November 11, 199614 approving in the
latters favor a lease facility, was P8,100,000.00. Subtracting the
acquisition cost of P8,100,000.00 from the total amount,
i.e., P13,530,372.00, creditable to the respondent, it would clearly appear
that petitioner realized a gross income of P5,430,372.00 from its lease
transaction with the respondent. The amount of P5,430,372.00 is not yet
a final figure as it does not include the rentals in arrears, penalties
thereon, and interest earned by the guaranty deposit.
As may be noted, petitioners demand letter15 fixed the amount
of P8,248,657.47 as representing the respondents "rental" balance which
became due and demandable consequent to the application of the
acceleration and other clauses of the lease agreement. Assuming, then,
that the respondent may be compelled to pay P8,248,657.47, then it
would end up paying a total of P21,779,029.47 (P13,530,372.00
+ P8,248,657.47 =P21,779,029.47) for its use - for a year and two
months at the most - of the equipment. All in all, for an investment
of P8,100,000.00, the petitioner stands to make in a years time, out of
the transaction, a total of P21,779,029.47, or a net of P13,679,029.47, if
we are to believe its outlandish legal submission that the PCI LEASINGGIRAFFE Lease Agreement was an honest-to-goodness straight lease.
A financing arrangement has a purpose which is at once practical and
salutary. R.A. No. 8556 was, in fact, precisely enacted to regulate
financing companies operations with the end in view of strengthening
their critical role in providing credit and services to small and medium
enterprises and to curtail acts and practices prejudicial to the public
interest, in general, and to their clienteles, in particular.16 As a regulated
activity, financing arrangements are not meant to quench only the thirst

for profit. They serve a higher purpose, and R.A. No. 8556 has made that
abundantly clear.
We stress, however, that there is nothing in R.A. No. 8556 which defines
the rights and obligations, as between each other, of the financial lessor
and the lessee. In determining the respective responsibilities of the
parties to the agreement, courts, therefore, must train a keen eye on the
attendant facts and circumstances of the case in order to ascertain the
intention of the parties, in relation to the law and the written agreement.
Likewise, the public interest and policy involved should be considered. It
may not be amiss to state that, normally, financing contracts come in a
standard prepared form, unilaterally thought up and written by the
financing companies requiring only the personal circumstances and
signature of the borrower or lessee; the rates and other important
covenants in these agreements are still largely imposed unilaterally by
the financing companies. In other words, these agreements are usually
one-sided in favor of such companies. A perusal of the lease agreement
in question exposes the many remedies available to the petitioner, while
there are only the standard contractual prohibitions against the
respondent. This is characteristic of standard printed form contracts.
There is more. In the adverted February 24, 1998 demand letter17 sent to
the respondent, petitioner fashioned its claim in the alternative: payment
of the full amount of P8,248,657.47, representing the unpaid balance for
the entire 36-month lease period or the surrender of the financed asset
under pain of legal action. To quote the letter:
Demand is hereby made upon you to pay in full your outstanding balance
in the amount of P8,248,657.47 on or before March 04, 1998 OR to
surrender to us the one (1) set Silicon High Impact Graphics and one (1)
unit Oxberry Cinescan 6400-10
We trust you will give this matter your serious and preferential attention.
(Emphasis added).
Evidently, the letter did not make a demand for the payment of
the P8,248,657.47 AND the return of the equipment; only either one of
the two was required. The demand letter was prepared and signed by
Atty. Florecita R. Gonzales, presumably petitioners counsel. As such, the
use of "or" instead of "and" in the letter could hardly be treated as a
simple typographical error, bearing in mind the nature of the demand, the
amount involved, and the fact that it was made by a lawyer. Certainly Atty.

Gonzales would have known that a world of difference exists between

"and" and "or" in the manner that the word was employed in the letter.
A rule in statutory construction is that the word "or" is a disjunctive term
signifying dissociation and independence of one thing from other things
enumerated unless the context requires a different interpretation. 18
In its elementary sense, "or", as used in a statute, is a disjunctive article
indicating an alternative. It often connects a series of words or
propositions indicating a choice of either. When "or" is used, the various
members of the enumeration are to be taken separately.19
The word "or" is a disjunctive term signifying disassociation and
independence of one thing from each of the other things enumerated. 20
The demand could only be that the respondent need not return the
equipment if it paid the P8,248,657.47 outstanding balance, ineluctably
suggesting that the respondent can keep possession of the equipment if
it exercises its option to acquire the same by paying the unpaid balance
of the purchase price. Stated otherwise, if the respondent was not
minded to exercise its option of acquiring the equipment by returning
them, then it need not pay the outstanding balance. This is the logical
import of the letter: that the transaction in this case is a lease in name
only. The so-called monthly rentals are in truth monthly amortizations of
the price of the leased office equipment.
On the whole, then, we rule, as did the trial court, that the PCI LEASINGGIRAFFE lease agreement is in reality a lease with an option to purchase
the equipment. This has been made manifest by the actions of the
petitioner itself, foremost of which is the declarations made in its demand
letter to the respondent. There could be no other explanation than that if
the respondent paid the balance, then it could keep the equipment for its
own; if not, then it should return them. This is clearly an option to
purchase given to the respondent. Being so, Article 1485 of the Civil
Code should apply.
The present case reflects a situation where the financing company can
withhold and conceal - up to the last moment - its intention to sell the
property subject of the finance lease, in order that the provisions of the
Recto Law may be circumvented. It may be, as petitioner pointed out,
that the basic "lease agreement" does not contain a "purchase option"
clause. The absence, however, does not necessarily argue against the
idea that what the parties are into is not a straight lease, but a lease with

option to purchase. This Court has, to be sure, 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:21
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.
In another old but still relevant case of U.S. Commercial v. Halili,22 a lease
agreement was declared to be in fact a sale of personal property by
installments. Said the Court:
. . . There can hardly be any question that the so-called contracts of lease
on which the present action is based were veritable leases of personal
property with option to purchase, and as such come within the purview of
the above article [Art. 1454-A of the old Civil Code on sale of personal
property by installment]. xxx
Being leases of personal property with option to purchase as
contemplated in the above article, the contracts in question are subject to
the provision that when the lessor in such case "has chosen to deprive
the lessee of the enjoyment of such personal property," "he shall have no
further action" against the lessee "for the recovery of any unpaid balance"
owing by the latter, "agreement to the contrary being null and void."
In choosing, through replevin, to deprive the respondent of possession of
the leased equipment, the petitioner waived its right to bring an action to
recover unpaid rentals on the said leased items. Paragraph (3), Article
1484 in relation to Article 1485 of the Civil Code, which we are hereunder
re-reproducing, cannot be any clearer.

ART. 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following
remedies:

an instant killing out of the transaction at the expense of its client, the
respondent. The Recto Law was precisely enacted to prevent this kind of
aberration. Moreover, due to considerations of equity, public policy and
justice, we cannot allow this to happen. Not only to the respondent, but
those similarly situated who may fall prey to a similar scheme.
1avvphil.zw+

xxx

xxx

xxx

(3) Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void.

WHEREFORE, the instant petition is DENIED and the trial courts

decision is AFFIRMED.
Costs against petitioner.
SO ORDERED.

ART. 1485. The preceding article shall be applied to contracts purporting

to be leases of personal property with option to buy, when the lessor has
deprived the lessee of the possession or enjoyment of the thing.
As we articulated in Elisco Tool Manufacturing Corp. v. Court of
Appeals,23 the remedies provided for in Article 1484 of the Civil Code 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 the same Article 1485.
The condition that the lessor has deprived the lessee of possession or
enjoyment of the thing for the purpose of applying Article 1485 was
fulfilled in this case by the filing by petitioner of the complaint for a sum of
money with prayer for replevin to recover possession of the office
equipment.24 By virtue of the writ of seizure issued by the trial court, the
petitioner has effectively deprived respondent of their use, a situation
which, by force of the Recto Law, in turn precludes the former from
maintaining an action for recovery of "accrued rentals" or the recovery of
the balance of the purchase price plus interest. 25
The imperatives of honest dealings given prominence in the Civil Code
under the heading: Human Relations, provide another reason why we
must hold the petitioner to its word as embodied in its demand letter.
Else, we would witness a situation where even if the respondent
surrendered the equipment voluntarily, the petitioner can still sue upon its
claim. This would be most unfair for the respondent. We cannot allow the
petitioner to renege on its word. Yet more than that, the very word "or" as
used in the letter conveys distinctly its intention not to claim both the
unpaid balance and the equipment. It is not difficult to discern why: if we
add up the amounts paid by the respondent, the residual value of the
property recovered, and the amount claimed by the petitioner as sued
upon herein (for a total of P21,779,029.47), then it would end up making

FIRST DIVISION

G.R. No. 106418 July 11, 1996

DANIEL L. BORBON II AND FRANCISCO L. BORBON, petitioners,
vs.
SERVICEWIDE SPECIALISTS, INC. & HON. COURT OF
APPEALS, respondents.

VITUG, J.:p
From the decision of the Court of Appeals in CA-G.R. CV No.
30693 which affirmed that of the Regional Trial Court, NCJR,
Branch 39, Manila, in Civil Case No. 85-29954, confirming the
disputed possession of a motor vehicle in favor of private
respondent and ordering the payment to it by petitioners of
liquidated damages and attorney's fees, the instant appeal was
interposed.
The appellate court adopted the factual findings of the court a
quo, to wit:
The plaintiff's evidence shows among others that on
December 7, 1984, defendants Daniel L. Borbon and
Francisco Borbon signed a promissory note (Exh. A)
which states among others as follows:
PROMISSORY NOTE
Acct. No. 115008276
Makati, Metro Manila,
Philippines
December 7, 1984

"P122,856.00
"For value received (installment price of the chattel/s
purchased), I/We jointly and severally promised to pay
Pangasinan Auto Mart, Inc. or order, at its office at NMI
Bldg., Buendia Avenue, Makati, MM the sum of One
Hundred Twenty Two Thousand Eight Hundred Fifty Six
only (P122,856.00), Philippine Currency, to be payable
without need or notice or demand, in installments of the
amounts following and at the dates hereinafter set forth,
to wit: P10,238.00 monthly for Twelve (12) months due
and payable on the 7th day of each month starting
January, 1985, provided that at a late payment charge of
3% per month shall be added on each unpaid installment
from due date thereof until fully paid.
xxx xxx xxx
"It is further agreed that if upon such default, attorney's
services are availed of, an additional sum, equal to twenty
five percent (25%) of the total sum due thereon, which
shall not be less than five hundred pesos, shall be paid to
the holder hereof for attorney's fees plus an additional
sum equivalent to twenty five percent (25%) of the total
sum due which likewise shall not be less than five
hundred pesos for liquidated damages, aside from
expenses of collection and the legal costs provided for in
the Rules of Court.
"It is expressly agreed that all legal actions arising out of
this note or in connection with the chattel(s) subject
hereof shall only be brought in or submitted to the
jurisdiction of the proper court either in the City of Manila
or in the province, municipality or city where the branch of
the holder hereof is located.
"Acceptance by the holder thereof of payment of any
installment or any part hereof of payment of any

installment or any part thereof after due dated (sic) shall

not be considered as extending the time for the payment
or any of the conditions hereof. Nor shall the failure of the
holder hereof to exercise any of its right under this note
constitute or be deemed as a waiver of such rights.
"Maker:

To secure the Promissory Note, the defendants executed

a Chattel mortgage (Exh. B) on
"One (1) Brand new 1984 Isuzu
KCD 20 Crew Cab (Conv.)
Serial No. KCD20D0F 207685
Key No. 5509

(S/t) DANIEL L. BORBON, II

(Exhs. A and B, p. 2 tsn, September 10, 1985)

Address: 14 Colt St., Rancho Estate I,

Concepcion Dos, Marikina, MM

The rights of Pangasinan Auto mart, Inc. was later

assigned to Filinvest Credit Corporation on December 10,
1984, with notice to the defendants (Exh. C, p. 10,
Record).

(S/t) FRANCISCO BORBON

Address: 73 Sterling Life Home
Pamplona, Las Pias, MM
WITNESSES
(illegible) (illegible)

"PAY TO THE ORDER OF
FILINVEST CREDIT CORPORATION
without recourse, notice, presentment and
demand waived

On March 21, 1985, Filinvest Credit Corporation assigned

all its rights, interest and title over the Promissory Note
and the chattel mortgage to the plaintiff (Exh. D; p. 3, tsn,
Sept. 30, 1985).
The promissory note stipulates that the installment of
P10,238.00 monthly should be paid on the 7th day of
each month starting January 1985, but the defendants
failed to comply with their obligation (p. 3, tsn, Sept. 30,
1985).
Because the defendants did not pay their monthly
installments, Filinvest demanded from the defendants the
payment of their installments due in January 29, 1985 by
telegram (Exh. E; pp. 3-4, tsn, Sept. 30, 1985).

PANGASINAN AUTO MART, INC.

BY:
(S/T) K.N. DULCE
Dealer"

After the accounts were assigned to the plaintiff, the

plaintiff attempted to collect by sending a demand letter to
the defendants for them to pay their entire obligation
which, as of March 12, 1985, totaled P185,257.80 (Exh.
H; pp. 3-4, tsn, Sept. 30, 1985).

For their defense, the defendants claim that what they

intended to buy from Pangasinan Auto mart was a
jeepney type Isuzu K. C. Cab. The vehicle they bought
was not delivered (pp. 11-12, tsn, Oct. 17, 1985). Instead,
through misinterpretation and machination, the
Pangasinan Motor Inc. delivered an Isuzu crew cab, as
this is the unit available at their warehouse. Later the
representative of Pangasinan Auto mart, Inc. (assignor)
told the defendants that their available stock is an Isuzu
Cab but minus the rear body, which the defendants
agreed to deliver with the understanding that the
Pangasinan Auto Mart, Inc. will refund the defendants the
amount of P10,000.00 to have the rear body completed
(pp. 12-34, Exhs. 2 to 3-3A).
Despite communications with the Pangasinan Auto Mart,
Inc. the latter was not able to replace the vehicle until the
vehicle delivered was seized by order of this court. the
defendants argue that an asignee stands in the place of
an assignor which, to the mind of the court, is correct. The
asignee exercise all the rights of the assignor (Gonzales
vs. Rama Plantation Co., C.V. 08630, Dec. 2, 1986).
The defendants further claim that they are not in default of
their obligation because the Pangasinan Auto Mart was
first guilty of not fulfilling its obligation in the contract. the
defendants claim that neither party incurs delay if the
other does not comply with his obligation. (citing Art.
1169, N.C.C.) 1
In sustaining the decision of the court a quo, the appellate court
ruled that the petitioners could avoid liability under the promissory
note and the chattel mortgage that secured it since private
respondent took the note for value and in good faith.
In their appeal to this Court, petitioners merely seek a
modification of the decision of the appellate court insofar as it has
upheld the court a quo in the award of liquidated damages and

attorney's fees in favor of private respondent. Petitioners invoke

the provisions of Article 1484 of the Civil Code which reads:
Art. 1484. In a contract of sale of personal property the
price of which is payable in installments, the vendor may
exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee
fail to pay;
(2) Cancel the sale, should the vendee's failure to pay
cover two or more installments;
(3) Foreclose the chattel mortgage or the thing sold, if one
has been constituted, should the vendee's failure to pay
cover two or more installments. In this case, he shall have
no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the
contrary shall be void.
The remedies under Article 1484 of the Civil Code are not
cumulative but alternative and exclusive, 2 which means, as so held
in Nonato vs. Intermediate Appellate Court and Investor's Finance
Corporation, 3 that
. . . Should the vendee or purchaser of a personal
property default in the payment of two or more of the
agreed installments, the vendor or seller has the option to
avail of any of these three remedies either to exact
fulfillment by the purchaser of the obligation, or to cancel
the sale, or to foreclose the mortgage on the purchased
personal property, if one was constituted. These remedies
have been recognized as alternative, not cumulative, that
the exercise of on e would bar the exercise of the others. 4
When the seller assigns his credit to another person, the latter is
likewise bound by the same law. Accordingly, when the assignee
forecloses on the mortgage, there can be no further recovery of
the deficiency, 5 and the seller-mortgagee is deemed to have

renounced any right thereto. 6 A contrario, in the event of the sellermortgagee first seeks, instead, the enforcement of the additional
mortgages, guarantees or other security arrangements, he must be
then be held to have lost by waiver or non-choice his lien on the
chattel mortgage of the personal property sold by and mortgaged
back to him, although, similar to an action for specific performance,
he may still levy on it.

In ordinary alternative obligations, a mere choice categorically an

unequivocally made and then communicated by the person
entitled to exercise the option concludes the parties. The creditor
may not thereafter exercise any other option, unless the chosen
alternative proves to be innefectual or unavailing due to no fault
on his part. This rule, in essence, is the difference between
alternative obligations, on the one hand, and alternative
remedies, upon the other hand, where, in the latter case, the
choice generally becomes conclusive only upon the exercise of
the remedy. For instance, in one of the remedies expressed in
Article 1484 of the Civil Code, it is only when there has been a
foreclosure of the chattel mortgage that the vendee-mortgagor
would be permitted to escape from a deficiency liability. Thus, if
the case is one for specific performance, even when this action is
selected after the vendee has refused to surrender the mortgaged
property to permit an extrajudicial foreclosure, that property may
still be levied on execution and an alias writ may be issued if the
proceeds thereof are insufficient to satisfy the judgment
credit. 7 So, also, a mere demand to surrender the object which is not
heeded by the mortgagor will not amount to a foreclosure, 8 but the
repossession thereof by the vendor-mortgagee would have the effect
of a foreclosure.
The parties here concede that the action for replevin has been
instituted for the foreclosure of the vehicle in question (now in the
possession of private respondent). The sole issue raised before
us in this appeal is focused on the legal propriety of the
affirmance by the appellate court of the awards made by the
court a quo of liquidated damages and attorney's fees to private
respondent. Petitioners hold that under Article 1484 of the Civil
Code, aforequoted, the vendor-mortgagee or its assignees loses

any right "to recover any unpaid balance of the price" and any
"agreement to the contrary (would be) void.
The argument is aptly made. In Macondray & Co. vs.
Eustaquio, 9 we have said that the phrase "any unpaid balance" can
only mean the deficiency judgment to which the mortgagee may be
entitled to when the proceeds from the auction sale are insufficient to
cover the "full amount of the secured obligations which . . . include
interest on the principal, attorney's fees, expenses of collection, and
the costs." In sum, we have observed that the legislative intent is not
to merely limit the proscription of any further action to the "unpaid
balance of the principal" but, as so later ruled in Luneta Motor Co.
vs. Salvador, 10 to all other claims that may be likewise be called in
for in the accompanying promissory note against the buyermortgagor or his guarantor, including costs and attorney's fees.
In Filipinas Investment & Finance Corporation vs. Ridad 11 while
we reiterated and expressed our agreement on the basic philosophy
behind Article 1484, we stressed, nevertheless, that the protection
given to the buyer-mortgagor should not be considered to be without
circumscription or as being preclusive of all other laws or legal
principles. Hence, borrowing from the examples made in Filipinas
Investment, where the mortgagor unjustifiably refused to surrender
the chattel subject of the mortgage upon failure of two or more
installments, or if he concealed the chattel to place it beyond the
reach of the mortgagee, that thereby constrained the latter to seek
court relief, the expenses incurred for the prosecution of the case,
such as attorney's fees, could rightly be awarded.
Private respondent bewails the instant petition in that petitioners
have failed to specifically raise the issue on liquidated damages
and attorney's fees stipulated in the actionable documents. In
several cases, we have ruled that as long as the questioned
items bear relevance and close relation to those specifically
raised, the interest of justice would dictate that they, too, must be
considered and resolved and that the rule that only theories
raised in the initial proceedings may be taken up by a party
thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action. 12

Given the circumstances, we must strike down the award for

liquidated damages made by the court a quobut we uphold the
grant of attorney's fees which we, like the appellate court, find it
to be reasonable. Parenthetically, while the promissory note may
appear to have been a negotiable instrument, private respondent,
however, clearly cannot claim unawareness of its accompanying
documents so as to thereby gain a right greater than that of the
assignor.

G.R. No. 202358

November 27, 2013

WHEREFORE, the appealed decision is MODIFIED by deleting

therefrom the award for liquidated damages; in all other respects,
the judgment of the appellate court is AFFIRMED. No costs.

The Case G.R. No. 202358 is a petition for review assailing the
Decision promulgated on 11 November 2011 as well as the
Resolution promulgated on 19 June 2012 by the Court of Appeals (CA)
in CA-G.R. SP No. 105964. The CA reversed and set aside the 8 October
2008 Order of Branch 197 of the Regional Trial Court of Las Pias City
(RTC) in Civil Case No. LP-07-0143. The CA also dismissed the unlawful
detainer case filed by Gatchalian Realty, Inc. GRI) against Evelyn M.
Angeles (Angeles).

GATCHALIAN REALTY, INC., Petitioner,

vs.
EVELYN M. ANGELES, Respondent.
DECISION
CARPIO, J.:
1

The Metropolitan Trial Court (MeTC) rendered on 28 February 2006 a

decision in Civil Case No. 6809 in favor of GRI and against Angeles. In
its decision dated 13 February 2008, the RTC set aside the decision of
the MeTC and dismissed the ejectment case filed by GRI against
Angeles. The RTC reversed itself in an Order dated 17 June 2008, and
affirmed with modification the decision of the MeTC. The RTC denied
Angeles Motion for Reconsideration in an Order dated 8 October 2008.
5

The Facts
The CA recited the facts as follows:
On 28 December 1994, [Angeles] purchased a house (under Contract to
Sell No. 2272) and lot (under Contract to Sell No. 2271) from [GRI]
valued at Seven Hundred Fifty Thousand Pesos (Php 750,000.00) and
Four Hundred Fifty Thousand Pesos (Php 450,000.00), respectively, with
twenty-four percent (24%) interest per annum to be paid by installment
within a period of ten years.

SECOND DIVISION

The house and lot were delivered to [Angeles] in 1995. Nonetheless,

under the contracts to sell executed between the parties, [GRI] retained
ownership of the property until full payment of the purchase price.

After sometime, [Angeles] failed to satisfy her monthly installments with

[GRI]. [Angeles] was only able to pay thirty-five (35) installments for
Contract to Sell No. 2271 and forty-eight (48) installments for Contract to
Sell No. 2272. According to [GRI], [Angeles] was given at least twelve
(12) notices for payment in a span of three (3) years but she still failed to
settle her account despite receipt of said notices and without any valid
reason. [Angeles] was again given more time to pay her dues and
likewise furnished with three (3) notices reminding her to pay her
outstanding balance with warning of impending legal action and/or
rescission of the contracts, but to no avail. After giving a total of fifty-one
(51) months grace period for both contracts and in consideration of the
continued disregard of the demands of [GRI], [Angeles] was served with
a notice of notarial rescission dated 11 September 2003 by registered
mail which she allegedly received on 19 September 2003 as evidenced
by a registry return receipt.
Consequently [Angeles] was furnished by [GRI] with a demand letter
dated 26 September 2003 demanding her to pay the amount of One
Hundred Twelve Thousand Three Hundred Four Pesos and Forty Two
Centavos (Php 112,304.42) as outstanding reasonable rentals for her use
and occupation of the house and lot as of August 2003 and to vacate the
same. She was informed in said letter that the fifty percent (50%)
refundable amount that she is entitled to has already been deducted with
the reasonable value for the use of the properties or the reasonable
rentals she incurred during such period that she was not able to pay the
installments due her. After deducting the rentals from the refundable
amount, she still had a balance of One Hundred Twelve Thousand Three
Hundred Four Pesos and Forty Two Centavos (Php 112,304.42) which
she was required to settle within fifteen (15) days from receipt of the
letter.
Allegedly, [Angeles] subsequently sent postal money orders through
registered mail to [GRI]. In a letter dated 27 January 2004 [Angeles] was
notified by [GRI] of its receipt of a postal money order sent by [Angeles].
More so, she was requested to notify [GRI] of the purpose of the
payment. [Angeles] was informed that if the postal money order was for
her monthly amortization, the same will not be accepted and she was
likewise requested to pick it up from [GRIs] office. On 29 January 2004,
another mail with a postal money order was sent by [Angeles] to [GRI]. In
her 6 February 2004 letter, [GRI] was informed that the postal money
orders were supposed to be payments for her monthly amortization.
Again, in its 8 February 2004 letter, it was reiterated by [GRI] that the
postal money orders will only be accepted if the same will serve as
payment of her outstanding rentals and not as monthly amortization. Four

(4) more postal money orders were sent by [Angeles] by registered mail
to [GRI].
For her continued failure to satisfy her obligations with [GRI] and her
refusal to vacate the house and lot, [GRI] filed a complaint for unlawful
detainer against [Angeles] on 11 November 2003.
8

The MeTCs Ruling

The MeTC of Branch 79, Las Pias City ruled in favor of GRI. The MeTC
determined that the case was for an unlawful detainer, and thus assumed
jurisdiction. The MeTC further held that the facts show that GRI was able
to establish the validity of the rescission:
A careful scrutiny of the evidence presented by both parties regarding
payments made clearly show that [Angeles] defaulted in the payment of
the monthly installments due. Repeated notices and warnings were given
to her but she still and failed to update her account (Exhibits "E" to "E-1"
and "G" to "G-2", [GRIs] Position Paper). This is a clear violation of the
condition of their contracts. An ample grace period, i.e., 51 months, was
granted to her by [GRI] but she still failed to pay the whole amount due
as provided in paragraph 6 of the contracts and Section 3 of RA 6552.
[Angeles] has been in arrears beyond the grace period provided under
the contracts and law. The last payment received by [GRI], which
represents [Angeles] 35th installment, was made in July 2002. On the
other hand, the last payment, which represents her 48th installment,
[was] received [by GRI] in April 1999. Thus, [GRI], as seller, can
terminate or rescind the contract by giving her the notice of notarial
rescission of the contracts. The notarial rescission of the contracts was
executed on September 26, 2003 and served upon [Angeles].
9

Although the MeTC agreed with Angeles that her total payment is already
more than the contracted amount, the MeTC found that Angeles did not
pay the monthly amortizations in accordance with the terms of the
contract. Interests and penalties accumulated and increased the amount
due. Furthermore, the MeTC found the monthly rentals imposed by GRI
reasonable and within the range of the prevailing rental rates in the
vicinity. Compensation between GRI and Angeles legally took effect in
accordance with Article 1290 of the Civil Code. The MeTC ruled that GRI
is entitled to P1,060,896.39 by way of reasonable rental fee
less P574,148.40 as of May 2005, thus leaving a balance of P486,747.99
plus the amount accruing until Angeles finally vacates the subject
premises.
10

The dispositive portion of the MeTCs Decision reads:

201 of the Las Pias RTC dismissed Angeles Petition for Certiorari for
forum-shopping.
13

WHEREFORE, in view of the foregoing, the Court renders judgment for

[GRI] and against [Angeles] and all persons claiming rights under her, as
follows:
1. Ordering [Angeles] and all persons claiming rights
under her to immediately vacate the property subject of
this case situated at Blk. 3, Lot 8, Lanzones St., Phase 3C, Gatchalian Subdivision, Las Pias City and surrender
possession thereof to [GRI];
2. Ordering the encashment of the Postal Money Order
(PMO) in the total amount of Php 120,000.00 in favor of
[GRI];
3. Ordering [Angeles] to pay [GRI] the outstanding
amount of Php 486,747.99 representing reasonable
monthly rentals of the subject premises as of May 2005
less the amount of the postal money orders [worth] Php
120,000.00 and all the monthly rentals that will accrue
until she vacates the subject premises and have
possession thereof turned over to [GRI], plus the interests
due thereon at the rate of twelve percent (12%) per
annum from the time of extra-judicial demand;
4. Ordering [Angeles] to pay [GRI] the amount of Php
20,000.00 as attorneys fees; and
5. Costs of suit.
[Angeles] counterclaims are hereby dismissed for lack of merit.
SO ORDERED.

11

On 21 March 2006, Angeles filed a notice of appeal with the MeTC. A

week later, on 28 March 2006, Angeles filed a motion to dismiss based
on lack of jurisdiction. The Las Pias RTC denied Angeles motion to
dismiss in an order dated 28 July 2006.
Angeles also filed on 2 October 2006 a Petition for Certiorari with
Immediate Issuance of Temporary Restraining Order and Injunction,
which was docketed as SCA Case No. 06-008. On 3 May 2007, Branch
12

GRI, on the other hand, filed a Motion for Execution Pending Appeal. A
Writ of Execution Pending Appeal was issued in favor of GRI on 25
August 2006, and the properties were turned over to GRI on 10 October
2006.
14

The RTCs Ruling

Angeles appeal before Branch 197 of the Las Pias RTC initially
produced a result favorable to her. The RTC found that the case was one
for ejectment. As an ejectment court, the MeTCs jurisdiction is limited
only to the issue of possession and does not include the title or
ownership of the properties in question.
The RTC pointed out that Republic Act No. 6552 (R.A. 6552) provides
that the non-payment by the buyer of an installment prevents the
obligation of the seller to convey title from acquiring binding force.
Moreover, cancellation of the contract to sell may be done outside the
court when the buyer agrees to the cancellation. In the present case,
Angeles denied knowledge of GRIs notice of cancellation. Cancellation
of the contract must be done in accordance with Section 3 of R.A. 6552,
which requires a notarial act of rescission and refund to the buyer of the
cash surrender value of the payments on the properties. Thus, GRI
cannot insist on compliance with Section 3(b) of R.A. 6552 by applying
Angeles cash surrender value to the rentals of the properties after
Angeles failed to pay the installments due. Contrary to the MeTCs ruling,
there was no legal compensation between GRI and Angeles. The RTC
ruled:
There being no valid cancellation of the Contract to Sell, this Court finds
merit in the appeal filed by [Angeles] and REVERSES the decision of the
court a quo. This Court recognized [Angeles] right to continue occupying
the property subject of the Contract to Sell.
WHEREFORE, premises considered, the decision of the lower court is
hereby SET ASIDE and the ejectment case filed by [GRI] is hereby
DISMISSED.
SO ORDERED.

15

GRI filed a Motion for Reconsideration. The RTC issued an Order on 17

June 2008 which ruled that GRI had complied with the provisions of R.A.
6552, and had refunded the cash surrender value to Angeles upon its
cancellation of the contract to sell when it deducted the amount of the
cash surrender value from rentals due on the subject properties. The
RTC relied on this Courts ruling in Pilar Development Corporation v.
Spouses Villar. The RTC ruled:
16

Applying the above Pilar ruling in the present case, the cash surrender
value of the payments made by [Angeles] shall be applied to the rentals
that accrued on the property occupied by [Angeles], which rental is fixed
by this Court in the amount of seven thousand pesos per month
(P7,000.00). The total rental payment due to Gatchalian Realty Inc. is six
hundred twenty three thousand (P623,000.00) counted from June 1999
to October 2006. According to R.A. 6552, the cash surrender value,
which in this case is equivalent to fifty percent (50%) of the total payment
made by [Angeles], should be returned to her by [GRI] upon cancellation
of the contract to sell on September 11, 2003. Admittedly no such return
was ever made by [GRI]. Thus, the cash surrender value, which in this
case is equivalent to P182,094.48 for Contract to Sell No. 2271
and P392,053.92 for Contract to Sell No. 2272 or a total cash surrender
value of P574,148.40 should be deducted from the rental payment or
award owing to [Angeles].
WHEREFORE, premises considered, the Motion for Reconsideration is
hereby GRANTED. The earlier decision dated February 13, 2008 is SET
ASIDE and the decision of the court a quo is MODIFIED to wit:
1. Ordering [Angeles] and all persons claiming rights
under her to immediately vacate the property subject of
this case situated at Blk. 3, Lot 8, Lanzones St., Phase 3C, Gatchalian Subdivision, Las Pias City and surrender
possession thereof to [GRI];
2. Ordering the encashment of the Postal Money Order
(PMO) in the total amount of Php 120,000.00 in favor of
[GRI];
3. Ordering defendant, Evelyn M. Angeles, to pay plaintiff,
Gatchalian Realty Inc., the outstanding rental amount of
forty eight thousand eight hundred fifty one pesos and
sixty centavos (P48,851.60) and legal interest of six
percent (6%) per annum, until the above amount is paid;

4. Ordering [Angeles] to pay [GRI] the amount of Php

20,000.00 as attorneys fees; and
5. Costs of suit.
SO ORDERED.

17

The Court of Appeals Ruling

The CA dismissed GRIs complaint for unlawful detainer, and reversed
and set aside the RTCs decision. Although the CA ruled that Angeles
received the notice of notarial rescission, it ruled that the actual
cancellation of the contract between the parties did not take place
because GRI failed to refund to Angeles the cash surrender value. The
CA denied GRIs motion for reconsideration.
GRI filed the present petition for review before this Court on 10 August
2012.
The Issues
GRI assigned the following errors of the CA:
The court a quo committed reversible error when it declared that there
was no refund of the cash surrender value in favor of [Angeles] pursuant
to R.A. No. 6552; and
The court a quo erred in holding that the actual cancellation of the
contract between the parties did not take place.
18

The Courts Ruling

GRIs petition has no merit. We affirm the ruling of the CA with
modification.
Validity of GRIs
Cancellation of the Contracts
Republic Act No. 6552, also known as the Maceda Law, or the Realty
Installment Buyer Protection Act, has the declared public policy of
"protecting buyers of real estate on installment payments against onerous
and oppressive conditions." Section 3 of R.A. 6552 provides for the
19

rights of a buyer who has paid at least two years of installments but
defaults in the payment of succeeding installments. Section 3 reads:

a) to pay without additional interest, the installments in

arrears within the total grace period earned by
him/her/them which is hereby fixed at the rate of one (1)
month grace period for every one (1) year of installment
payment made, but this right can be exercised by the
VENDEE/S only once in every five (5) years of the life of
this contract and its extension, if any, and

Section 3. In all transactions or contracts involving the sale or financing of

real estate on installment payments, including residential condominium
apartments but excluding industrial lots, commercial buildings and sales
to tenants under Republic Act Numbered Thirty-eight hundred forty-four,
as amended by Republic Act Numbered Sixty-three hundred eighty-nine,
where the buyer has paid at least two years of installments, the buyer is
entitled to the following rights in case he defaults in the payment of
succeeding installments:

b) if the contract is cancelled, the VENDOR shall refund

to the VENDEE/S the cash surrender value of the
payments made on the lot/s equivalent to fifty per cent
(50%) of the total payments made, and after five (5) years
of installment, an additional five per cent (5%) every year
but not to exceed ninety per cent (90%) of the total
payments made; Provided, that the actual cancellation of
the contract shall take place after thirty (30) days from the
receipt by the VENDEE/S of the notice of cancellation or
the demand for rescission of the contract by a notarial act
upon full payment of the cash surrender value to the
VENDEE/S; where, however, the VENDEE/S has/have
paid less than two (2) years of installments, the VENDOR
shall give the VENDEE/S [a] grace period of sixty (60)
days from the date the installment became due; and if the
VENDEE/S fail/s to pay the installment due after the
expiration of the grace period, the VENDOR may cancel
the contract after thirty (30) days from receipt by the
VENDEE/S of the notice of cancellation or the demand for
rescission of the contract by a notarial act; and in case of
cancellation and/or rescission of this contract, all
improvements on the lot/s above-described shall be
forfeited in favor of the VENDOR, and in this connection,
the VENDEE/S obligate/s himself/herself/themselves to
peacefully vacate the premises mentioned above without
necessity of notice or demand by the VENDOR.

(a) To pay, without additional interest, the unpaid

installments due within the total grace period earned by
him which is hereby fixed at the rate of one month grace
period for every one year of installment payments made:
Provided, That this right shall be exercised by the buyer
only once in every five years of the life of the contract and
its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to
the buyer the cash surrender value of the payments on
the property equivalent to fifty per cent of the total
payments made, and, after five years of installments, an
additional five per cent every year but not to exceed
ninety per cent of the total payments made: Provided,
That the actual cancellation of the contract shall take
place after thirty days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the
cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in
the computation of the total number of installment payments made.
The sixth paragraph of the contracts between Angeles and GRI similarly
provides:
SIXTH - Should the VENDEE/S fail to pay due any monthly installment
the VENDOR shall have the right to cancel this Contract and resell the
lot/s subject matter of this contract to another buyer, provided, however,
that where the VENDEE/S has/have already paid at least two years of
installments, the VENDEE/S will have the right:

20

We examine GRIs compliance with the requirements of R.A. 6552, as it

insists that it extended to Angeles considerations that are beyond what
the law provides.
Grace Period
It should be noted that Section 3 of R.A. 6552 and paragraph six of
Contract Nos. 2271 and 2272, speak of "two years of installments." The
basis for computation of the term refers to the installments that

correspond to the number of months of payments, and not to the number

of months that the contract is in effect as well as any grace period that
has been given. Both the law and the contracts thus prevent any buyer
who has not been diligent in paying his monthly installments from unduly
claiming the rights provided in Section 3 of R.A. 6552.
The MeTC, the RTC, and the CA all found that Angeles was able to pay
35 installments for the lot (Contract No. 2271) and 48 installments for the
house (Contract No. 2272). Angeles thus made installment payments for
less than three years on the lot, and exactly four years on the house.

For paying more than two years of installments on the lot, Angeles was
entitled to receive cash surrender value of her payments on the lot
equivalent to fifty per cent of the total payments made. This right is
provided by Section 3(b) of R.A. 6552, as well as paragraph 6(b) of the
contract. Out of the contract price of P450,000, Angeles paid GRI a total
of P364,188.96 consisting of P135,000 as downpayment
and P229,188.96 as installments and penalties. The cash surrender
value of Angeles payments on the lot amounted to P182,094.48.
27

28

21

Section 3(a) of R.A. 6552 provides that the total grace period
corresponds to one month for every one year of installment payments
made, provided that the buyer may exercise this right only once in every
five years of the life of the contract and its extensions. The buyers failure
to pay the installments due at the expiration of the grace period allows
the seller to cancel the contract after 30 days from the buyers receipt of
the notice of cancellation or demand for rescission of the contract by a
notarial act. Paragraph 6(a) of the contract gave Angeles the same rights.
Both the RTC and the CA found that GRI gave Angeles an accumulated
grace period of 51 months. This extension went beyond what was
provided in R.A. 6552 and in their contracts.

For the same reasons, Angeles was also entitled to receive cash
surrender value of the payments on the house equivalent to fifty per cent
of the total payments made. Out of the contract price of P750,000,
Angeles paid GRI a total of P784,107.84 consisting of P165,000 as
downpayment and P619,107.84 as installments and penalties. The cash
surrender value of Angeles payments on the house amounted
to P392,053.92.
29

30

Actual Cancellation of the Contracts

There was no actual cancellation of the contracts because of GRIs
failure to actually refund the cash surrender value to Angeles.

22

Cancellation of the contracts for the house and lot was contained in a
notice of notarial rescission dated 11 September 2003. The registry
return receipts show that Angeles received this notice on 19 September
2003. GRIs demand for rentals on the properties, where GRI offset
Angeles accrued rentals by the refundable cash surrender value, was
contained in another letter dated 26 September 2003. The registry return
receipts show that Angeles received this letter on 29 September
2003. GRI filed a complaint for unlawful detainer against Angeles on 11
November 2003, 61 days after the date of its notice of notarial rescission,
and 46 days after the date of its demand for rentals. For her part, Angeles
sent GRI postal money orders in the total amount ofP120,000.
31

Receipt of the Notice of Notarial Rescission

32

The registry return of the registered mail is prima facie proof of the facts
indicated therein. Angeles failed to present contrary evidence to rebut
this presumption with competent and proper evidence. To establish its
claim of service of the notarial rescission upon Angeles, GRI presented
the affidavit of its liaison officer Fortunato Gumahad, the registry receipt
from the Greenhills Post Office, and the registry return receipt. We
affirm the CAs ruling that GRI was able to substantiate its claim that it
served Angeles the notarial rescission sent through registered mail in
accordance with the requirements of R.A. 6552.
23

24

25

26

Amount of the Cash Surrender Value

GRI claims that it gave Angeles a refund of the cash surrender value of
both the house and the lot in the total amount of P574,148.40 when it
deducted the amount of the cash surrender value from the amount of
rentals due.

33

34

35

The MeTC ruled that it was proper for GRI to compensate the rentals due
from Angeles occupation of the property from the cash surrender value
due to Angeles from GRI. The MeTC stated that compensation legally
took effect in accordance with Article 1290 of the Civil Code, which reads:
"When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law and extinguishes both
debts to the concurrent amount, even though the creditors and debtors
are not aware of the compensation." In turn, Article 1279 of the Civil Code
provides:

In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) That both debts consist of a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor.

surrender value from the accrued rentals. Moreover, the developer in

Pilar did not unilaterally impose rentals. It was the MeTC that decreed the
amount of monthly rent. Neither did the developer unilaterally reduce the
accrued rentals by the refundable cash surrender value. The cancellation
of the contract took effect only by virtue of this Courts judgment because
of the developers failure to return the cash surrender value.
This was how we ruled in Pilar:
According to R.A. 6552, the cash surrender value, which in this case is
equivalent to fifty percent (50%) of the total payment made by the
respondent spouses, should be returned to them by the petitioner upon
the cancellation of the contract to sell on August 31, 1998 for the
cancellation to take effect. Admittedly, no such return was ever made by
petitioner. Thus, the said cash surrender value is hereby ordered
deducted from the award owing to the petitioner based on the MeTC
judgment, and cancellation takes effect by virtue of this judgment.

However, it was error for the MeTC to apply Article 1279 as there was
nothing in the contracts which provided for the amount of rentals in case
the buyer defaults in her installment payments. The rentals due to GRI
were not liquidated. GRI, in its letter to Angeles dated 26 September
2003, unilaterally imposed the amount of rentals, as well as an annual
10% increase:
PERIOD COVERED

NO. OF
MONTHS

ne to December 1999

RENTALS
PER MONTH
7

11,000.00

nuary to December 2000

12

12,100.00

nuary to December 2001

12

13,310.00

nuary to December 2002

12

14,641.00

16,105.10

nuary to August 2003

TOTAL AMOUNT DUE:

Finally, as regards the award of P7,000.00/month as rental payment

decreed by the MeTC for the use of the property in question from the
time the respondent spouses obtained possession thereof up to the time
that its actual possession is surrendered or restored to the petitioner, the
Court finds the same just and equitable to prevent the respondent
spouses, who breached their contract to sell, from unjustly enriching
themselves at the expense of the petitioner which, for all legal intents and
AMOUNT DUE purposes, never ceased to be the owner of the same property because of
the respondents non-fulfillment of the indispensable condition of full
payment of the purchase price, as embodied in the parties contract to
77,000.00
sell. However, as earlier explained, this sum is to be reduced by the cash
surrender value of the payments so far made by the spouses, and the
145,200.00
resulting net amount still owing as accrued rentals shall be subject to
159,720.00
legal interest from finality of this Decision up to the time of actual
payment thereof.
175,692.02 [sic]
38

128,840.80
Mandatory Twin Requirements:
Notarized Notice of Cancellation and
P 686,452.82 [sic]
Refund of Cash Surrender Value

We cannot subscribe to GRIs view that it merely followed our ruling in

Pilar Development Corporation v. Spouses Villar (Pilar) when it deducted
the cash surrender value from the rentals due. In Pilar, the developer also
failed to refund the cash surrender value to the defaulting buyer when it
cancelled the Contract to Sell through a Notice of Cancellation. It was this
Court, and not the developer, that deducted the amount of the cash
37

This Court has been consistent in ruling that a valid and effective
cancellation under R.A. 6552 must comply with the mandatory twin
requirements of a notarized notice of cancellation and a refund of the
cash surrender value.

In Olympia Housing, Inc. v. Panasiatic Travel Corp., we ruled that the

notarial act of rescission must be accompanied by the refund of the cash
surrender value.
39

x x x The actual cancellation of the contract can only be deemed to take

place upon the expiry of a 30-day period following the receipt by the
buyer of the notice of cancellation or demand for rescission by a notarial
act and the full payment of the cash surrender value.
In Pagtalunan v. Dela Cruz Vda. De Manzano, we ruled that there is no
valid cancellation of the Contract to Sell in the absence of a refund of the
cash surrender value. We stated that:
40

x x x Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender
value of the payments on the property to the buyer before cancellation of
the contract. The provision does not provide a different requirement for
contracts to sell which allow possession of the property by the buyer
upon execution of the contract like the instant case. Hence, petitioner
cannot insist on compliance with the requirement by assuming that the
cash surrender value payable to the buyer had been applied to rentals of
the property after respondent failed to pay the installments due.
(Emphasis supplied)
Remedies of the Buyer
in the Absence of a Valid Cancellation of a Contract to Sell
In view of the absence of a valid cancellation, the Contract to Sell
between GRI and Angeles remains valid and subsisting. Apart from
Olympia and Pagtalunan, we are guided by our rulings in Active Realty &
Development Corp. v. Daroya (Active) and Associated Marine Officers
and Seamens Union of the Philippines PTGWO-ITF v.
Decena (Associated).
41

42

In Olympia , this Court dismissed the complaint for recovery of

possession for having been prematurely filed without complying with the
mandate of R.A. 6552. We ordered the defaulting buyer to pay the
developer the balance as of the date of the filing of the complaint plus
18% interest per annum computed from the day after the date of the filing
of the complaint, but within 60 days from the receipt of a copy of the
decision. Upon payment, the developer shall issue the corresponding
certificate of title in favor of the defaulting buyer. If the defaulting buyer
fails to pay the full amount, then the defaulting buyer shall vacate the
subject property without need of demand and all payments will be

charged as rentals to the property. There was no award for damages and
attorneys fees, and no costs were charged to the parties.
In Pagtalunan, this Court dismissed the complaint for unlawful detainer.
We also ordered the defaulting buyer to pay the developer the balance of
the purchase price plus interest at 6% per annum from the date of filing of
the complaint up to the finality of judgment, and thereafter, at the rate of
12% per annum. Upon payment, the developer shall issue a Deed of
Absolute Sale of the subject property and deliver the corresponding
certificate of title in favor of the defaulting buyer. If the defaulting buyer
fails to pay the full amount within 60 days from finality of the decision,
then the defaulting buyer should vacate the subject property without need
of demand and all payments will be charged as rentals to the property.
No costs were charged to the parties.
In Active, this Court held that the Contract to Sell between the parties
remained valid because of the developers failure to send a notarized
notice of cancellation and to refund the cash surrender value. The
defaulting buyer thus had the right to offer to pay the balance of the
purchase price, and the developer had no choice but to accept payment.
However, the defaulting buyer was unable to exercise this right because
the developer sold the subject lot. This Court ordered the developer to
refund to the defaulting buyer the actual value of the lot with 12% interest
per annum computed from the date of the filing of the complaint until fully
paid, or to deliver a substitute lot at the option of the defaulting buyer.
In Associated, this Court dismissed the complaint for unlawful detainer.
We held that the Contract to Sell between the parties remained valid
because the developer failed to send to the defaulting buyer a notarized
notice of cancellation and to refund the cash surrender value. We ordered
the MeTC to conduct a hearing within 30 days from receipt of the
decision to determine the unpaid balance of the full value of the subject
properties as well as the current reasonable amount of rent for the
subject properties. We ordered the defaulting buyer to pay, within 60 days
from the trial courts determination of the amounts, the unpaid balance of
the full value of the subject properties with interest at 6% per annum
computed from the date of sending of the notice of final demand up to the
date of actual payment. Upon payment, we ordered the developer to
execute a Deed of Absolute Sale over the subject properties and deliver
the transfer certificate of title to the defaulting buyer. In case of failure to
pay within the mandated 60-day period, we ordered the defaulting buyer
to immediately vacate the premises without need for further demand. The
developer should also pay the defaulting buyer the cash surrender value,
and the contract should be deemed cancelled 30 days after the defaulting

buyers receipt of the full payment of the cash surrender value. If the
defaulting buyer failed to vacate the premises, he should be charged
reasonable rental in the amount determined by the trial court.
We observe that this case has, from the institution of the complaint, been
pending with the courts for 10 years. As both parties prayed for the
issuance of reliefs that are just and equitable under the premises, and in
the exercise of our discretion, we resolve to dispose of this case in an
equitable manner. Considering that GRI did not validly rescind Contracts
to Sell Nos. 2271 and 2272, Angeles has two options:
1. The option to pay, within 60 days from the MeTCs
determination of the proper amounts, the unpaid balance of the
full value of the purchase price of the subject properties plus
interest at 6% per annum from 11 November 2003, the date of
filing of the complaint, up to the finality of this Decision, and
thereafter, at the rate of 6% per annum. Upon payment of the full
amount, GRI shall immediately execute Deeds of Absolute Sale
over the subject properties and deliver the corresponding transfer
certificate of title to Angeles.
43

In the event that the subject properties are no longer available,

GRI should offer substitute properties of equal
value. Acceptance of the suitability of the substitute properties is
Angeles sole prerogative. Should Angeles refuse the substitute
properties, GRI shall refund to Angeles the actual value of the
subject properties with 6% interest per annum computed from 11
November 2003, the date of the filing of the complaint, until fully
paid; and
1wphi1

44

2. The option to accept from GRI 574,148.40, the cash

surrender value of the subject properties, with interest at 6% per
annum, computed from 11 November 2003, the date of the filing
of the complaint, until fully paid. Contracts to Sell Nos. 2271 and
2272 shall be deemed cancelled 30 days after Angeles receipt of
GRIs full payment of the cash surrender value. No rent is further
charged upon Angeles as GRI already had possession of the
subject properties on 10 October 2006.
45

1. The Metropolitan Trial Court of Las Pias City is directed to

conduct a hearing within a maximum period of 30 days from
finality of this Decision to (1) determine Evelyn M. Angeles
unpaid balance on Contracts to Sell Nos. 2271 and 2272; and (2)
the actual value of the subject properties as of 11 November
2003.
2. Evelyn M. Angeles shall notify the Metropolitan Trial Court of
Las Pias City and Gatchalian Realty, Inc. within a maximum
period of 60 days from the Metropolitan Trial Court of Las Pias
Citys determination of the unpaid balance whether she will pay
the unpaid balance or accept the cash surrender value.
Should Evelyn M. Angeles choose to pay the unpaid balance, she shall
pay, within 60 days from the MeTCs determination of the proper
amounts, the unpaid balance of the full value of the purchase price of the
subject properties plus interest at 6% per annum from 11 November
2003, the date of filing of the complaint, up to the finality of this Decision,
and thereafter, at the rate of 6% per annum. Upon payment of the full
amount, GRI shall immediately execute Deeds of Absolute Sale over the
subject properties and deliver the corresponding transfer certificate of title
to Angeles.
In the event that the subject properties are no longer available, GRI
should offer substitute properties of equal value. Should Angeles refuse
the substitute properties, GRI shall refund to Angeles the actual value of
the subject properties with 6 interest per annum computed from
November 2003, the date of the filing of the complaint, until fully paid.
Should Evelyn M. Angeles choose to accept payment of the cash
surrender value, she shall receive from GRI P574,148.40 with interest at
6 per annum computed from November 2003, the date of the filing of the
complaint, until fully paid. Contracts to Sell Nos. 2271 and 2272 shall be
deemed cancelled 30 days after Angeles' receipt of GRI's full payment of
the cash surrender value. No rent is further charged upon Evelyn M.
Angeles.
No costs.
SO ORDERED.

WHEREFORE, we DENY the petition. The Decision of the Court of

Appeals in CA-G.R. SP No. 105964 promulgated on 11 November 2011
and the Resolution promulgated on 19 June 2012 are AFFIRMED with
MODIFICATIONS.

EMILLA M. URACA, CONCORDIA D. CHING and ONG SENG,

represented by ENEDINO H. FERRER,petitioners,
vs.
COURT OF APPEALS, JACINTO VELEZ, JR., CARMEN VELEZ TING,
AVENUE MERCHANDISING, INC., FELIX TING AND ALFREDO
GO, respondents.

PANGANIBAN, J.:
Novation is never presumed; it must be sufficiently established that a
valid new agreement or obligation has extinguished or changed an
existing one. The registration of a later sale must be done in good faith to
entitle the registrant to priority in ownership over the vendee in an earlier
sale.
Statement of the Case
These doctrines are stressed by this Court as it resolves the instant
petition challenging the December 28, 1993 Decision 1 of Respondent
Court of Appeals 2 in CA-G.R. SP No. 33307, which reversed and set aside
the judgment of the Regional Trial Court of Cebu City, Branch 19, and
entered a new one dismissing the petitioners' complaint. The dispositive
portion of the RTC decision reads: 3
WHEREFORE, judgment is hereby rendered:
1) declaring as null and void the three (3) deeds of sale
executed by the Velezes to Felix C. Ting, Manuel Ting
and Alfredo Go;
THIRD DIVISION

G.R. No. 115158 September 5, 1997

2) ordering Carmen Velez Ting and Jacinto M. Velez, Jr.

to execute a deed of absolute sale in favor of Concordia
D. Ching and Emilia M. Uraca for the properties in
question for P1,400,000.00, which sum must be delivered
by the plaintiffs to the Velezes immediately after the
execution of said contract;

3) ordering Carmen Velez Ting and Jacinto M. Velez, Jr.

to reimburse Felix C. Ting, Manuel C. Ting and Alfredo Go
whatever amount the latter had paid to the former;
4) ordering Felix C. Ting, Manuel C. Ting and Alfredo Go
to deliver the properties in question to the plaintiffs within
fifteen (15) days from receipt of a copy of this decision;
5) ordering all the defendants to pay, jointly and severally,
the plaintiffs the sum of P20,000.00 as attorney's fees.
SO ORDERED.
The Antecedent Facts

Uraca agreed to the price of P1,400,000.00 but counterproposed that payment be paid in installments with a
down payment of P1,000,000.00 and the balance of
P400,000 to be paid in 30 days. Carmen Velez Ting did
not accept the said counter-offer of Emilia Uraca although
this fact is disputed by Uraca.
No payment was made by (herein petitioners) to the
Velezes on July 12, 1985 and July 13, 1985.
On July 13, 1985, the Velezes sold the subject lot and
commercial building to the Avenue Group (Private
Respondent Avenue Merchandising Inc.) for
P1,050,000.00 net of taxes, registration fees, and
expenses of the sale.

The facts narrated by the Court of Appeals are as follows: 4

The Velezes (herein private respondents) were the
owners of the lot and commercial building in question
located at Progreso and M.C. Briones Streets in Cebu
City.
Herein (petitioners) were the lessees of said commercial
building. 5
On July 8, 1985, the Velezes through Carmen Velez Ting
wrote a letter to herein (petitioners) offering to sell the
subject property for P1,050,000.00 and at the same time
requesting (herein petitioners) to reply in three days.

On July 10, 1985, (herein petitioners) through Atty.

Escolastico Daitol sent a reply-letter to the Velezes
accepting the aforesaid offer to sell.
On July 11, 1985, (herein petitioner) Emilia Uraca went to
see Carmen Ting about the offer to sell but she was told
by the latter that the price was P1,400,000.00 in cash or
manager's check and not P1,050,000.00 as erroneously
stated in their letter-offer after some haggling. Emilia

At the time the Avenue Group purchased subject property

on July 13, 1985 from the Velezes, the certificate of title of
the said property was clean and free of any annotation of
adverse claims or lis pendens.
On July 31, 1985 as aforestated, herein (petitioners) filed
the instant complaint against the Velezes.
On August 1, 1985, (herein petitioners) registered a notice
of lis pendens over the property in question with the
Office of the Register of Deeds. 6
On October 30, 1985, the Avenue Group filed an ejectment
case against (herein petitioners) ordering the latter to vacate
the commercial building standing on the lot in question.

Thereafter, herein (petitioners) filed an amended

complaint impleading the Avenue Group as new
defendants (after about 4 years after the filing of the
original complaint).
The trial court found two perfected contracts of sale between the Velezes
and the petitioners involving the real property in question. The first sale

was for P1,050,000.00 and the second was for P1,400,000.00. In respect
to the first sale, the trial court held that "[d]ue to the unqualified
acceptance by the plaintiffs within the period set by the Velezes, there
consequently came about a meeting of the minds of the parties not only
as to the object certain but also as to the definite consideration or cause
of the contract." 7 And even assuming arguendo that the second sale was
not perfected, the trial court ruled that the same still constituted a mere
modificatory novation which did not extinguish the first sale. Hence, the trial
court held that "the Velezes were not free to sell the properties to the Avenue
Group." 8 It also found that the Avenue Group purchased the property in bad
faith. 9
Private respondents appealed to the Court of Appeals. As noted earlier,
the CA found the appeal meritorious. Like the trial court, the public
respondent held that there was a perfected contract of sale of the
property for P1,050,000.00 between the Velezes and herein petitioners. It
added, however, that such perfected contract of sale was subsequently
novated. Thus, it ruled: "Evidence shows that that was the original
contract. However, the same was mutually withdrawn, cancelled and
rescinded by novation, and was therefore abandoned by the parties when
Carmen Velez Ting raised the consideration of the contract [by]
P350,000.00, thus making the price P1,400,000.00 instead of the original
price of P1,050,000.00. Since there was no agreement as to the 'second'
price offered, there was likewise no meeting of minds between the
parties, hence, no contract of sale was perfected." 10 The Court of Appeals
added that, assuming there was agreement as to the price and a second
contract was perfected, the later contract would be unenforceable under the
Statute of Frauds. It further held that such second agreement, if there was
one, constituted a mere promise to sell which was not binding for lack of
acceptance or a separate consideration. 11
The Issues
Petitioners allege the following "errors" in the Decision of Respondent
Court:
I

Since it ruled in its decision that there was no meeting of

the minds on the "second" price offered (P1,400,000.00),
hence no contract of sale was perfected, the Court of
Appeals erred in not holding that the original written
contract to buy and sell for P1,050,000.00 the Velezes
property continued to be valid and enforceable pursuant
to Art. 1279 in relation with Art. 1479, first paragraph, and
Art. 1403, subparagraph 2 (e) of the Civil Code.
II
The Court of Appeals erred in not ruling that petitioners
have better rights to buy and own the Velezes' property
for registering their notice of lis pendens ahead of the
Avenue Group's registration of their deeds of sale taking
into account Art. 1544, 2nd paragraph, of the Civil
Code. 12
The Court's Ruling
The petition is meritorious.
First Issue: No Extinctive Novation
The lynchpin of the assailed Decision is the public respondent's
conclusion that the sale of the real property in controversy, by the
Velezes to petitioners for P1,050,000.00, was extinguished by novation
after the said parties negotiated to increase the price to P1,400,000.00.
Since there was no agreement on the sale at the increased price, then
there was no perfected contract to enforce. We disagree.
The Court notes that the petitioners accepted in writing and without
qualification the Velezes' written offer to sell at P1,050,000.00 within the
three-day period stipulated therein. Hence, from the moment of
acceptance on July 10, 1985, a contract of sale was perfected since
undisputedly the contractual elements of consent, object certain and
cause concurred. 13 Thus, this question is posed for our resolution: Was
there a novation of this perfected contract?

Article 1600 of the Civil Code provides that "(s)ales are extinguished by
the same causes as all other obligations, . . . ." Article 1231 of the same
Code states that novation is one of the ways to wipe out an obligation.
Extinctive novation requires: (1) the existence of a previous valid
obligation; (2) the agreement of all the parties to the new contract; (3) the
extinguishment of the old obligation or contract; and (4) the validity of the
new one. 14 The foregoing clearly show that novation is effected only when a
new contract has extinguished an earlier contract between the same parties.
In this light, novation is never presumed; it must be proven as a fact either by
express stipulation of the parties or by implication derived from an
irreconcilable incompatibility between old and new obligations or
contracts. 15 After a thorough review of the records, we find this element
lacking in the case at bar.
As aptly found by the Court of Appeals, the petitioners and the Velezes
did not reach an agreement on the new price of P1,400,000.00
demanded by the latter. In this case, the petitioners and the Velezes
clearly did not perfect a new contract because the essential requisite of
consent was absent, the parties having failed to agree on the terms of the
payment. True, petitioners made a qualified acceptance of this offer by
proposing that the payment of this higher sale price be made by
installment, with P1,000,000.00 as down payment and the balance of
P400,000.00 payable thirty days thereafter. Under Article 1319 of the Civil
Code, 16 such qualified acceptance constitutes a counter-offer and has the
ineludible effect of rejecting the Velezes' offer. 17 Indeed, petitioners' counteroffer was not accepted by the Velezes. It is well-settled that "(a)n offer must
be clear and definite, while an acceptance must be unconditional and
unbounded, in order that their concurrence can give rise to a perfected
contract." 18 In line with this basic postulate of contract law, "a definite
agreement on the manner of payment of the price is an essential element in
the formation of a binding and enforceable contract of sale." 19 Since the
parties failed to enter into a new contract that could have extinguished their
previously perfected contract of sale, there can be no novation of the latter.
Consequently, the first sale of the property in controversy, by the Velezes to
petitioners for P1,050,000.00, remained valid and existing.
In view of the validity and subsistence of their original contract of sale as
previously discussed, it is unnecessary to discuss public respondent's

theses that the second agreement is unenforceable under the Statute of

Frauds and that the agreement constitutes a mere promise to sell.
Second Issue: Double Sale of an Immovable
The foregoing holding would have been simple and straightforward. But
Respondent Velezes complicated the matter by selling the same property
to the other private respondents who were referred to in the assailed
Decision as the Avenue Group.
Before us therefore is a classic case of a double sale first, to the
petitioner; second, to the Avenue Group. Thus, the Court is now called
upon to determine which of the two groups of buyers has a better right to
said property.
Article 1544 of the Civil Code provides the statutory solution:
xxx xxx xxx
Should it be immovable property, the ownership shall
belong to the person acquiring it who in good faith first
recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain
to the person who in good faith was first in the
possession; and, in the absence thereof, to the person
who presents the oldest title, provided there is good faith.
Under the foregoing, the prior registration of the disputed property by the
second buyer does not by itself confer ownership or a better right over
the property. Article 1544 requires that such registration must be coupled
with good faith. Jurisprudence teaches us that "(t)he governing principle
is primus tempore, potior jure (first in time, stronger in right). Knowledge
gained by the first buyer of the second sale cannot defeat the first buyer's
rights except where the second buyer registers in good faith the second
sale ahead of the first, as provided by the Civil Code. Such knowledge of
the first buyer does not bar her from availing of her rights under the law,
among them, to register first her purchase as against the second buyer.

But in converso, knowledge gained by the second buyer of the first sale
defeats his rights even if he is first to register the second sale, since such
knowledge taints his prior registration with bad faith. This is the price
exacted by Article 1544 of the Civil Code for the second buyer being able
to displace the first buyer; that before the second buyer can obtain
priority over the first, he must show that he acted in good faith
throughout (i.e, in ignorance of the first sale and of the first buyer's rights)
from the time of acquisition until the title is transferred to him by
registration or failing registration, by delivery of possession." 20 (Emphasis
supplied)
After a thorough scrutiny of the records of the instant case, the Court
finds that bad faith tainted the Avenue Group's purchase on July 13, 1985
of the Velezes' real property subject of this case, and the subsequent
registration thereof on August 1, 1995. The Avenue Group had actual
knowledge of the Velezes' prior sale of the same property to the
petitioners, a fact antithetical to good faith. For a second buyer like the
Avenue Group to successfully invoke the second paragraph, Article 1544
of the Civil Code, it must possess good faith from the time of the sale in
its favor until the registration of the same. This requirement of good faith
the Avenue Group sorely failed to meet. That it had knowledge of the
prior sale, a fact undisputed by the Court of Appeals, is explained by the
trial court thus:
The Avenue Group, whose store is close to the properties
in question, had known the plaintiffs to be the lesseeoccupants thereof for quite a time. Felix Ting admitted to
have a talk with Ong Seng in 1983 or 1984 about the
properties. In the cross-examination, Manuel Ting also
admitted that about a month after Ester Borromeo
allegedly offered the sale of the properties Felix Ting went
to see Ong Seng again. If these were so, it can be safely
assumed that Ong Seng had consequently told Felix
about plaintiffs' offer on January 11, 1985 to buy the
properties for P1,000,000.00 and of their timely
acceptance on July 10, 1985 to buy the same at
P1,050,000.00.

The two aforesaid admissions by the Tings, considered

together with Uraca's positive assertion that Felix Ting
met with her on July 11th and who was told by her that
the plaintiffs had transmitted already to the Velezes their
decision to buy the properties at P1,050,000.00, clinches
the proof that the Avenue Group had prior knowledge of
plaintiffs' interest. Hence, the Avenue Group defendants,
earlier forewarned of the plaintiffs' prior contract with the
Velezes, were guilty of bad faith when they proceeded to
buy the properties to the prejudice of the plaintiffs. 21
The testimony of Petitioner Emilia Uraca supports this finding of the trial
court. The salient portions of her testimony follow:
BY ATTY. BORROMEO: (To witness)
Q According to Manuel Ting in his
testimony, even if they know, referring to
the Avenue Group, that you were tenants
of the property in question and they were
neighbors to you, he did not inquire from
you whether you were interested in buying
the property, what can you say about that?
A It was Felix Ting who approached me
and asked whether I will buy the property,
both the house and the land and that was
on July 10, 1985.
ATTY BORROMEO: (To witness)
Q What was your reply, if any?
A Yes, sir, I said we are going to buy this
property because we have stayed for a
long time there already and we have a
letter from Carmen Ting asking us whether
we are going to buy the property and we

have already given our answer that we are

willing to buy.

of whether the annotation of lis pendens automatically negated good faith

in such registration.

COURT: (To witness)

Q What do you mean by that, you mean
you told Felix Ting and you showed him
that letter of Carmen Ting?

WHEREFORE, the petition is GRANTED. The assailed Decision of the

Court of Appeals is hereby SET ASIDE and the dispositive portion of the
trial court's decision dated October 19, 1990 is REVIVED with the
following MODIFICATION the consideration to be paid under par. 2 of
the disposition is P1,050,000.00 and not P1,400,000.00. No Costs.

WITNESS:

SO ORDERED.

A We have a letter of Carmen Ting where

she offered to us for sale the house and
lot and I told him that I have already
agreed with Concordia Ching, Ong Seng
and my self that we buy the land. We want
to buy the land and the building. 22
We see no reason to disturb the factual finding of the trial court that the
Avenue Group, prior to the registration of the property in the Registry of
Property, already knew of the first sale to petitioners. It is hornbook
doctrine that "findings of facts of the trial court, particularly when affirmed
by the Court of Appeals, are binding upon this Court" 23 save for
exceptional
circumstances 24 which we do not find in the factual milieu of the present
case. True, this doctrine does not apply where there is a variance in the
factual findings of the trial court and the Court of Appeals. In the present
case, the Court of Appeals did not explicitly sustain this particular holding of
the trial court, but neither did it controvert the same. Therefore, because the
registration by the Avenue Group was in bad faith, it amounted to no
"inscription" at all. Hence, the third and not the second paragraph of Article
1544 should be applied to this case. Under this provision, petitioners are
entitled to the ownership of the property because they were first in actual
possession, having been the property's lessees and possessors for decades
prior to the sale.
Having already ruled that petitioners' actual knowledge of the first sale
tainted their registration, we find no more reason to pass upon the issue
EN BANC

G.R. No. 83851. March 3, 1993.

VISAYAN SAWMILL COMPANY, INC., and ANG TAY, petitioners, vs.
THE HONORABLE COURT OF APPEALS and RJH TRADING,
represented by RAMON J. HIBIONADA, proprietor, respondents.
SYLLABUS
1. CIVIL LAW; CONTRACT TO SELL; EFFECT OF VENDEE'S FAILURE
TO COMPLY WITH POSITIVE SUSPENSIVE CONDITION; CASE AT
BAR. The petitioner corporation's obligation to sell is unequivocally
subject to a positive suspensive condition, i.e., the private respondent's
opening, making or indorsing of an irrevocable and unconditional letter of
credit. The former agreed to deliver the scrap iron only upon payment of
the purchase price by means of an irrevocable and unconditional letter of
credit. Otherwise stated, the contract is not one of sale where the buyer
acquired ownership over the property subject to the resolutory condition
that the purchase price would be paid after delivery. Thus, there was to
be no actual sale until the opening, making or indorsing of the irrevocable
and unconditional letter of credit. Since what obtains in the case at bar is
a mere promise to sell, the failure of the private respondent to comply
with the positive suspensive condition cannot even be considered a
breach casual or serious but simply an event that prevented the
obligation of petitioner corporation to convey title from acquiring binding
force. In Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., this
Court stated: ". . . The upshot of all these stipulations is that in seeking
the ouster of Maritime for failure to pay the price as agreed upon, Myers
was not rescinding (or more properly, resolving) the contract, but
precisely enforcing it according to its express terms. In its suit Myers was
not seeking restitution to it of the ownership of the thing sold (since it was
never disposed of), such restoration being the logical consequence of the
fulfillment of a resolutory condition, express or implied (Article 1190);
neither was it seeking a declaration that its obligation to sell was
extinguished. What it sought was a judicial declaration that because the
suspensive condition (full and punctual payment) had not been fulfilled,
its obligation to sell to Maritime never arose or never became effective
and, therefore, it (Myers) was entitled to repossess the property object of
the contract, possession being a mere incident to its right of ownership. It
is elementary that, as stated by Castan, -- 'b) Si la condicion suspensiva
llega a faltar, la obligacion se tiene por no existente, y el acreedor pierde
todo derecho, incluso el de utilizar las medidas conservativas.'(3 Castan,
Derecho Civil, 7a Ed., p. 107). (Also Puig Pea, Der. Civ., T. IV (1), p.
113).'"

2. ID.; ID.; ID.; RESCISSION. The obligation of the petitioner

corporation to sell did not arise; it therefore cannot be compelled by
specific performance to comply with its prestation. In short, Article 1191 of
the Civil Code does not apply; on the contrary, pursuant to Article 1597 of
the Civil Code, the petitioner corporation may totally rescind, as it did in
this case, the contract. Said Article provides: "ART. 1597. Where the
goods have not been delivered to the buyer, and the buyer has
repudiated the contract of sale, or has manifested his inability to perform
his obligations, thereunder, or has committed a breach thereof, the seller
may totally rescind the contract of sale by giving notice of his election so
to do to the buyer."
3. ID.; ID.; IN CASE AT BAR, VENDOR'S CONSENT TO DIGGING UP
AND GATHERING OF SCRAP IRON NOT CONSTRUED AS DELIVERY
THEREOF; REASONS THEREFOR. Paragraph 6 of the Complaint
reads: "6. That on May 17, 1983 Plaintiff with the consent of defendant
Ang Tay sent his men to the stockyard of Visayan Sawmill Co., Inc. at
Cawitan, Sta. Catalina, Negros Oriental to dig and gather the scrap iron
and stock the same for weighing." This permission or consent can, by no
stretch of the imagination, be construed as delivery of the scrap iron in
the sense that, as held by the public respondent, citing Article 1497 of the
Civil Code, petitioners placed the private respondent in control and
possession thereof. In the first place, said Article 1497 falls under the
Chapter Obligations of the Vendor, which is found in Title VI (Sales),
Book IV of the Civil Code. As such, therefore, the obligation imposed
therein is premised on an existing obligation to deliver the subject of the
contract. In the instant case, in view of the private respondent's failure to
comply with the positive suspensive condition earlier discussed, such an
obligation had not yet arisen. In the second place, it was a mere
accommodation to expedite the weighing and hauling of the iron in the
event that the sale would materialize. The private respondent was not
thereby placed in possession of and control over the scrap iron. Thirdly,
We cannot even assume the conversion of the initial contract or promise
to sell into a contract of sale by the petitioner corporation's alleged
implied delivery of the scrap iron because its action and conduct in the
premises do not support this conclusion. Indeed, petitioners demanded
the fulfillment of the suspensive condition and eventually cancelled the
contract.
4. ID.; CONTRACTS; DAMAGES; MORAL DAMAGES; PURPOSE OF
AWARD THEREOF; EXEMPLARY DAMAGES. In contracts, such as
in the instant case, moral damages may be recovered if defendants acted
fraudulently and in bad faith, while exemplary damages may only be
awarded if defendants acted in a wanton, fraudulent, reckless,

oppressive or malevolent manner. In the instant case, the refusal of the

petitioners to deliver the scrap iron was founded on the non-fulfillment by
the private respondent of a suspensive condition. It cannot, therefore, be
said that the herein petitioners had acted fraudulently and in bad faith or
in a wanton, reckless, oppressive or malevolent manner. What this Court
stated in Inhelder Corp. vs. Court of Appeals needs to be stressed anew:
"At this juncture, it may not be amiss to remind Trial Courts to guard
against the award of exhorbitant (sic) damages that are way out of
proportion to the environmental circumstances of a case and which, time
and again, this Court has reduced or eliminated. Judicial discretion
granted to the Courts in the assessment of damages must always be
exercised with balanced restraint and measured objectivity." For, indeed,
moral damages are emphatically not intended to enrich a complainant at
the expense of the defendant. They are awarded only to enable the
injured party to obtain means, diversion or amusements that will serve to
obviate the moral suffering he has undergone, by reason of the
defendant's culpable action. Its award is aimed at the restoration, within
the limits of the possible, of the spiritual status quo ante, and it must be
proportional to the suffering inflicted.
ROMERO, J., dissenting:
1. CIVIL LAW; CONTRACT OF SALE; DEFINED; WHEN PERFECTED;
CASE AT BAR. Article 1458 of the Civil Code has this definition: "By a
contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing and the other
to pay therefor a price certain in money or its equivalent." Article 1475
gives the significance of this mutual undertaking of the parties, thus: "The
contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts."
Thus, when the parties entered into the contract entitled "Purchase and
Sale of Scrap Iron" on May 1, 1983, the contract reached the stage of
perfection, there being a meeting of the' minds upon the object which is
the subject matter of the contract and the price which is the
consideration. Applying Article 1475 of the Civil Code, from that moment,
the parties may reciprocally demand performance of the obligations
incumbent upon them, i.e., delivery by the vendor and payment by the
vendee.
2. ID.; ID.; DELIVERY; HOW ACCOMPLISHED; CASE AT BAR. From
the time the seller gave access to the buyer to enter his premises,
manifesting no objection thereto but even sending 18 or 20 people to

start the operation, he has placed the goods in the control and
possession of the vendee and delivery is effected. For according to
Article 1497, "The thing sold shall be understood as delivered when it is
placed in the control and possession of the vendee." Such action or real
delivery (traditio) is the act that transfers ownership. Under Article 1496 of
the Civil Code, "The ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways
specified in Articles 1497 to 1501, or in any other manner signifying an
agreement that the possession is transferred from the vendor to the
vendee."
3. ID.; ID.; PROVISION IN CONTRACT REGARDING MODE OF
PAYMENT NOT ESSENTIAL REQUISITE THEREOF; WHEN
PROVISION CONSIDERED A SUSPENSIVE CONDITION. a provision
in the contract regarding the mode of payment, like the requirement for
the opening of the Letter of Credit in this case, is not among the essential
requirements of a contract of sale enumerated in Articles 1305 and 1474,
the absence of any of which will prevent the perfection of the contract
from happening. Likewise, it must be emphasized that not every provision
regarding payment should automatically be classified as a suspensive
condition. To do so would change the nature of most contracts of sale into
contracts to sell. For a provision in the contract regarding the payment of
the price to be considered a suspensive condition, the parties must have
made this clear in certain and unambiguous terms, such as for instance,
by reserving or withholding title to the goods until full payment by the
buyer. This was a pivotal circumstance in the Luzon Brokerage case
where the contract in question was replete with very explicit provisions
such as the following: "Title to the properties subject of this contract
remains with the Vendor and shall pass to, and be transferred in the
name of the Vendee only upon complete payment of the full price . . .;" 10
the Vendor (Myers) will execute and deliver to the Vendee a definite and
absolute Deed of Sale upon full payment of the Vendee . . .; and "should
the Vendee fail to pay any of the monthly installments, when due, or
otherwise fail to comply with any of the terms and conditions herein
stipulated, then this Deed of Conditional Sale shall automatically and
without any further formality, become null and void." It is apparent from a
careful reading of Luzon Brokerage, as well as the cases which preceded
it and the subsequent ones applying its doctrines, that the mere insertion
of the price and the mode of payment among the terms and conditions of
the agreement will not necessarily make it a contract to sell. The phrase
in the contract "on the following terms and conditions" is standard form
which is not to be construed as imposing a condition, whether suspensive
or resolutory, in the sense of the happening of a future and uncertain
event upon which an obligation is made to depend. There must be a

manifest understanding that the agreement is in what may be referred to

as "suspended animation" pending compliance with provisions regarding
payment. The reservation of title to the object of the contract in the seller
is one such manifestation. Hence, it has been decided in the case of
Dignos v. Court of Appeals that, absent a proviso in the contract that the
title to the property is reserved in the vendor until full payment of the
purchase price or a stipulation giving the vendor the right to unilaterally
rescind the contract the moment the vendee fails to pay within the fixed
period, the transaction is an absolute contract of sale and not a contract
to sell.

sale in the instant case, the parties in Sycip were still undergoing the
negotiation process. The seller's qualified acceptance in Sycip served as
a counter offer which prevented the contract from being perfected. Only
an absolute and unqualified acceptance of a definite offer manifests the
consent necessary to perfect a contract. Second, the Court found in
Sycip that time was of the essence for the seller who was anxious to sell
to other buyers should the offeror fail to open the Letter of Credit within
the stipulated time. In contrast, there are no indicia in this case that can
lead one to conclude that time was of the essence for petitioner as would
make the eleven-day delay a fundamental breach of the contract.

4. ID.; ID.; CONTRACT OF SALE DISTINGUISHED FROM CONTRACT

TO SELL; EFFECT OF NON-PAYMENT OF PURCHASE PRICE;
EFFECT OF DELIVERY ON OWNERSHIP OF OBJECT OF CONTRACT.
In a contract of sale, the non-payment of the price is a resolutory
condition which extinguishes the transaction that, for a time, existed and
discharges the obligations created thereunder. On the other hand, "the
parties may stipulate that ownership in the thing shall not pass to the
purchaser until he has fully paid the price." In such a contract to sell, the
full payment of the price is a positive suspensive condition, such that in
the event of non-payment, the obligation of the seller to deliver and
transfer ownership never arises. Stated differently, in a contract to sell,
ownership is not transferred upon delivery of property but upon full
payment of the purchase price. Consequently, in a contract of sale, after
delivery of the object of the contract has been made, the seller loses
ownership and cannot recover the same unless the contract is rescinded.
But in the contract to sell, the seller retains ownership and the buyer's
failure to pay cannot even be considered a breach, whether casual or
substantial, but an event that prevented the seller's duty to transfer title to
the object of the contract.

6. ID.; OBLIGATIONS AND CONTRACTS; RESCISSION UNDER

ARTICLE 1191 OF THE CIVIL CODE; WHEN PROPER; DELAY IN
PAYMENT FOR TWENTY DAYS NOT CONSIDERED A SUBSTANTIAL
BREACH OF CONTRACT; CASE AT BAR. The right to rescind
pursuant to Article 1191 is not absolute. Rescission will not be permitted
for slight or casual breach of the contract. Here, petitioners claim that the
breach is so substantial as to justify rescission . . . I am not convinced
that the circumstances may be characterized as so substantial and
fundamental as to defeat the object of the parties in making the
agreement. None of the alleged defects in the Letter of Credit would
serve to defeat the object of the parties. It is to be stressed that the
purpose of the opening of a Letter of Credit is to effect payment. The
above-mentioned factors could not have prevented such payment. It is
also significant to note that petitioners sent a telegram to private
respondents on May 23, 1983 cancelling the contract. This was before
they had even received on May 26, 1983 the notice from the bank about
the opening of the Letter of Credit. How could they have made a
judgment on the materiality of the provisions of the Letter of Credit for
purposes of rescinding the contract even before setting eyes on said
document? To be sure, in the contract, the private respondents were
supposed to open the Letter of Credit on May 15, 1983 but, it was not
until May 26, 1983 or eleven (11) days later that they did so. Is the
eleven-day delay a substantial breach of the contract as could justify the
rescission of the contract? In Song Fo and Co. v. Hawaiian-Philippine
Co., it was held that a delay in payment for twenty (20) days was not a
violation of an essential condition of the contract which would warrant
rescission for non-performance. In the instant case, the contract is bereft
of any suggestion that time was of the essence. On the contrary, it is
noted that petitioners allowed private respondents' men to dig and
remove the scrap iron located in petitioners' premises between May 17,
1983 until May 30, 1983 or beyond the May 15, 1983 deadline for the
opening of the Letter of Credit. Hence, in the absence of any indication

5. ID.; ID.; CASE OF SYCIP V. NATIONAL COCONUT CORPORATION,

ET AL., G.R. NO. L-6618, APRIL 28, 1956, DISTINGUISHED FROM
CASE AT BAR. Worthy of mention before concluding is Sycip v.
National Coconut Corporation, et al. since, like this case, it involves a
failure to open on time the Letter of Credit required by the seller. In Sycip,
after the buyer offered to buy 2,000 tons of copra, the seller sent a
telegram dated December 19, 1946 to the buyer accepting the offer but
on condition that the latter opens a Letter of Credit within 48 hours. It was
not until December 26, 1946, however, that the Letter of Credit was
opened. The Court, speaking through Justice Bengzon, held that
because of the delay in the opening of the Letter of Credit; the seller was
not obliged to deliver the goods. Two factors distinguish Sycip from the
case at bar. First, while there has already been a perfected contract of

that the time was of the essence, the eleven-day delay must be deemed
a casual breach which cannot justify a rescission.
DECISION
DAVIDE, JR., J p:
By this petition for review under Rule 45 of the Rules of Court, petitioners
urge this Court to set aside the decision of public respondent Court of
Appeals in C.A.-G.R. CV No. 08807, 1 promulgated on 16 March 1988,
which affirmed with modification, in respect to the moral damages, the
decision of the Regional Trial Court (RTC) of Iloilo in Civil Case No.
15128, an action for specific performance and damages, filed by the
herein private respondent against the petitioners. The dispositive portion
of the trial court's decision reads as follows:
"IN VIEW OF THE ABOVE FINDINGS, judgment is hereby rendered in
favor of plaintiff and against the defendants ordering the latter to pay
jointly and severally plaintiff, to wit:
1) The sum of Thirty-Four Thousand Five Hundred Eighty Three and
16/100 (P34,583.16), as actual damages;
2) The sum of One Hundred Thousand (P100,000.00) Pesos, as moral
damages;
3) The sum of Ten Thousand (P10,000.00) Pesos, as exemplary
damages;
4) The sum of TWENTY Five Thousand (P25,000.00) Pesos, as
attorney's fees; and
5) The sum of Five Thousand (P5,000.00) Pesos as actual litis
expenses." 2
The public respondent reduced the amount of moral damages to
P25,000.00.
The antecedent facts, summarized by the public respondent, are as
follows:

"On May 1, 1983, herein plaintiff-appellee and defendants-appellants

entered into a sale involving scrap iron located at the stockyard of
defendant-appellant corporation at Cawitan, Sta. Catalina, Negros
Oriental, subject to the condition that plaintiff-appellee will open a letter of
credit in the amount of P250,000.00 in favor of defendant-appellant
corporation on or before May 15, 1983. This is evidenced by a contract
entitled `Purchase and Sale of Scrap Iron' duly signed by both parties.
On May 17, 1983, plaintiff-appellee through his man (sic), started to dig
and gather and (sic) scrap iron at the defendant-appellant's (sic)
premises, proceeding with such endeavor until May 30 when defendantsappellants allegedly directed plaintiff-appellee's men to desist from
pursuing the work in view of an alleged case filed against plaintiffappellee by a certain Alberto Pursuelo. This, however, is denied by
defendants-appellants who allege that on May 23, 1983, they sent a
telegram to plaintiff-appellee cancelling the contract of sale because of
failure of the latter to comply with the conditions thereof.
On May 24, 1983, plaintiff-appellee informed defendants-appellants by
telegram that the letter of credit was opened May 12, 1983 at the Bank of
the Philippine Islands main office in Ayala, but then (sic) the transmittal
was delayed.
On May 26, 1983, defendants-appellants received a letter advice from
the Dumaguete City Branch of the Bank of the Philippine Islands dated
May 26, 1983, the content of which is quited (sic) as follows:
'Please be advised that we have received today cable advise from our
Head Office which reads as follows:
'Open today our irrevocable Domestic Letter of Credit No. 01456-d fot
(sic) P250,000.00 favor ANG TAY c/o Visayan Sawmill Co., Inc.
Dumaguete City, Negros Oriental Account of ARMACO-MARSTEEL
ALLOY CORPORATION 2nd Floor Alpap 1 Bldg., 140 Alfaro stp (sic)
Salcedo Village, Makati, Metro Manila Shipments of about 500 MT of
assorted steel scrap marine/heavy equipment expiring on July 24, 1983
without recourse at sight draft drawn on Armaco Marsteel Alloy
Corporation accompanied by the following documents: Certificate of
Acceptance by Armaco-Marsteel Alloy Corporation shipment from
Dumaguete City to buyer's warehouse partial shipment
allowed/transhipment (sic) not allowed'.
For your information'.

On July 19, 1983, plaintiff-appellee sent a series of telegrams stating that

the case filed against him by Pursuelo had been dismissed and
demanding that defendants-appellants comply with the deed of sale,
otherwise a case will be filed against them.

Petitioners appealed from said decision to the Court of Appeals which

docketed the same as C.A.-G.R. CV No. 08807. In their Brief, petitioners,
by way of assigned errors, alleged that the trial court erred:
"1. In finding that there was delivery of the scrap iron subject of the sale;

In reply to those telegrams, defendants-appellants' lawyer, on July 20,

1983 informed plaintiff-appellee's lawyer that defendant-appellant
corporation is unwilling to continue with the sale due to plaintiff-appellee's
failure to comply with essential pre-conditions of the contract.
On July 29, 1983, plaintiff-appellee filed the complaint below with a
petition for preliminary attachment. The writ of attachment was returned
unserved because the defendant-appellant corporation was no longer in
operation and also because the scrap iron as well as other pieces of
machinery can no longer be found on the premises of the corporation." 3
In his complaint, private respondent prayed for judgment ordering the
petitioner corporation to comply with the contract by delivering to him the
scrap iron subject thereof; he further sought an award of actual, moral
and exemplary damages, attorney's fees and the costs of the suit. 4
In their Answer with Counterclaim, 5 petitioners insisted that the
cancellation of the contract was justified because of private respondent's
non-compliance with essential pre-conditions, among which is the
opening of an irrevocable and unconditional letter of credit not later than
15 May 1983.
During the pre-trial of the case on 30 April 1984, the parties defined the
issues to be resolved; these issues were subsequently embodied in the
pre-trial order, to wit:
"1. Was the contract entitled Purchase and Sale of Scrap Iron, dated May
1, 1983 executed by the parties cancelled and terminated before the
Complaint was filed by anyone of the parties; if so, what are the grounds
and reasons relied upon by the cancelling parties; and were the reasons
or grounds for cancelling valid and justified?
2. Are the parties entitled to damages they respectively claim under the
pleadings?" 6
On 29 November 1985, the trial court rendered its judgment, the
dispositive portion of which was quoted earlier.

2. In not finding that plaintiff had not complied with the conditions in the
contract of sale;
3. In finding that defendants-appellants were not justified in cancelling the
sale;
4. In awarding damages to the plaintiff as against the defendantsappellants;
5. In not awarding damages to defendants-appellants." 7
Public respondent disposed of these assigned errors in this wise:
"On the first error assigned, defendants-appellants argue that there was
no delivery because the purchase document states that the seller agreed
to sell and the buyer agreed to buy 'an undetermined quantity of scrap
iron and junk which the seller will identify and designate.' Thus, it is
contended, since no identification and designation was made, there could
be no delivery. In addition, defendants-appellants maintain that their
obligation to deliver cannot be completed until they furnish the cargo
trucks to haul the weighed materials to the wharf.
The arguments are untenable. Article 1497 of the Civil Code states:
'The thing sold shall be understood as delivered when it is placed in the
control and possession of the vendee.'
In the case at bar, control and possession over the subject matter of the
contract was given to plaintiff-appellee, the buyer, when the defendantsappellants as the sellers allowed the buyer and his men to enter the
corporation's premises and to dig-up the scrap iron. The pieces of scrap
iron then (sic) placed at the disposal of the buyer. Delivery was therefore
complete. The identification and designation by the seller does not
complete delivery.

On the second and third assignments of error, defendants-appellants

argue that under Articles 1593 and 1597 of the Civil Code, automatic
rescission may take place by a mere notice to the buyer if the latter
committed a breach of the contract of sale.
Even if one were to grant that there was a breach of the contract by the
buyer, automatic rescission cannot take place because, as already (sic)
stated, delivery had already been made. And, in cases where there has
already been delivery, the intervention of the court is necessary to annul
the contract.
As the lower court aptly stated:
'Respecting these allegations of the contending parties, while it is true
that Article 1593 of the New Civil Code provides that with respect to
movable property, the rescission of the sale shall of right take place in the
interest of the vendor, if the vendee fails to tender the price at the time or
period fixed or agreed, however, automatic rescission is not allowed if the
object sold has been delivered to the buyer (Guevarra vs. Pascual, 13
Phil. 311; Escueta vs. Pando, 76 Phil 256), the action being one to
rescind judicially and where (sic) Article 1191, supra, thereby applies.
There being already an implied delivery of the items, subject matter of the
contract between the parties in this case, the defendant having
surrendered the premises where the scraps (sic) were found for plaintiff's
men to dig and gather, as in fact they had dug and gathered, this Court
finds the mere notice of resolution by the defendants untenable and not
conclusive on the rights of the plaintiff (Ocejo Perez vs. Int. Bank, 37 Phi.
631). Likewise, as early as in the case of Song Fo vs. Hawaiian
Philippine Company, it has been ruled that rescission cannot be
sanctioned for a slight or casual breach (47 Phil. 821).'
In the case of Angeles vs. Calasanz (135 (1935) SCRA 323), the
Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either party has the right
to rescind the contract upon failure of the other to perform the obligation
assumed thereunder.
Of course, it must be understood that the right of a party in treating a
contract as cancelled or resolved on account of infractions by the other
contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court.'

Thus, rescission in cases falling under Article 1191 of the Civil Code is
always subject to review by the courts and cannot be considered final.
In the case at bar, the trial court ruled that rescission is improper because
the breach was very slight and the delay in opening the letter of credit
was only 11 days.
'Where time is not of the essence of the agreement, a slight delay by one
party in the performance of his obligation is not a sufficient ground for
rescission of the agreement. Equity and justice mandates (sic) that the
vendor be given additional (sic) period to complete payment of the
purchase price.' (Taguda vs. Vda. de Leon, 132 SCRA (1984), 722).'
There is no need to discuss the fourth and fifth assigned errors since
these are merely corollary to the first three assigned errors." 8
Their motion to reconsider the said decision having been denied by
public respondent in its Resolution of 4 May 1988, 9 petitioners filed this
petition reiterating the abovementioned assignment of errors.
There is merit in the instant petition.
Both the trial court and the public respondent erred in the appreciation of
the nature of the transaction between the petitioner corporation and the
private respondent. To this Court's mind, what obtains in the case at bar
is a mere contract to sell or promise to sell, and not a contract of sale.
The trial court assumed that the transaction is a contract of sale and,
influenced by its view that there was an "implied delivery" of the object of
the agreement, concluded that Article 1593 of the Civil Code was
inapplicable; citing Guevarra vs. Pascual 10 and Escueta vs. Pando, 11 it
ruled that rescission under Article 1191 of the Civil Code could only be
done judicially. The trial court further classified the breach committed by
the private respondent as slight or casual, foreclosing, thereby,
petitioners' right to rescind the agreement.
Article 1593 of the Civil Code provides:
"ARTICLE 1593. With respect to movable property, the rescission of the
sale shall of right take place in the interest of the vendor, if the vendee,
upon the expiration of the period fixed for the delivery of the thing, should
not have appeared to receive it, or, having appeared, he should not have

tendered the price at the same time, unless a longer period has been
stipulated for its payment."

1. Weighing shall be done in the premises of the SELLER at Cawitan,

Sta. Catalina, Neg. Oriental.

Article 1191 provides:

2. To cover payment of the purchase price, BUYER will open, make or

indorse an irrevocable and unconditional letter of credit not later than
May 15, 1983 at the Consolidated Bank and Trust Company, Dumaguete
City, Branch, in favor of the SELLER in the sum of TWO HUNDRED AND
FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency.

"ARTICLE 1191. The power to rescind obligations is implied in reciprocal

ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period."
xxx xxx xxx
Sustaining the trial court on the issue of delivery, public respondent cites
Article 1497 of the Civil Code which provides:
"ARTICLE 1497. The thing sold shall be understood as delivered, when it
is placed in the control and possession of the vendee."
In the agreement in question, entitled PURCHASE AND SALE OF
SCRAP IRON, 12 the seller bound and promised itself to sell the scrap
iron upon the fulfillment by the private respondent of his obligation to
make or indorse an irrevocable and unconditional letter of credit in
payment of the purchase price. Its principal stipulation reads, to wit:
xxx xxx xxx
"Witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy, an
undetermined quantity of scrap iron and junk which the SELLER will
identify and designate now at Cawitan, Sta. Catalina, Negros Oriental, at
the price of FIFTY CENTAVOS (P0.50) per kilo on the following terms
and conditions:

3. The SELLER will furnish the BUYER free of charge at least three (3)
cargo trucks with drivers, to haul the weighed materials from Cawitan to
the TSMC wharf at Sta. Catalina for loading on BUYER's barge. All
expenses for labor, loading and unloading shall be for the account of the
BUYER.
4. SELLER shall be entitled to a deduction of three percent (3%) per ton
as rust allowance." (Emphasis supplied).
The petitioner corporation's obligation to sell is unequivocally subject to a
positive suspensive condition, i.e., the private respondent's opening,
making or indorsing of an irrevocable and unconditional letter of credit.
The former agreed to deliver the scrap iron only upon payment of the
purchase price by means of an irrevocable and unconditional letter of
credit. Otherwise stated, the contract is not one of sale where the buyer
acquired ownership over the property subject to the resolutory condition
that the purchase price would be paid after delivery. Thus, there was to
be no actual sale until the opening, making or indorsing of the irrevocable
and unconditional letter of credit. Since what obtains in the case at bar is
a mere promise to sell, the failure of the private respondent to comply
with the positive suspensive condition cannot even be considered a
breach casual or serious but simply an event that prevented the
obligation of petitioner corporation to convey title from acquiring binding
force. In Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 13 this
Court stated:
" . . . The upshot of all these stipulations is that in seeking the ouster of
Maritime for failure to pay the price as agreed upon, Myers was not
rescinding (or more properly, resolving) the contract, but precisely
enforcing it according to its express terms. In its suit Myers was not
seeking restitution to it of the ownership of the thing sold (since it was
never disposed of), such restoration being the logical consequence of the
fulfillment of a resolutory condition, express or implied (article 1190);
neither was it seeking a declaration that its obligation to sell was

extinguished. What it sought was a judicial declaration that because the

suspensive condition (full and punctual payment) had not been fulfilled,
its obligation to sell to Maritime never arose or never became effective
and, therefore, it (Myers) was entitled to repossess the property object of
the contract, possession being a mere incident to its right of ownership. It
is elementary that, as stated by Castan,
'b) Si la condicion suspensiva llega a faltar, la obligacion se tiene por no
existente, y el acreedor pierde todo derecho, incluso el de utilizar las
medidas conservativas.' (3 Cast n, Derecho Civil, 7a Ed., p. 107). (Also
Puig Pea, Der. Civ., T. IV (1), p. 113)'."
In the instant case, not only did the private respondent fail to open, make
or indorse an irrevocable and unconditional letter of credit on or before 15
May 1983 despite his earlier representation in his 24 May 1983 telegram
that he had opened one on 12 May 1983, the letter of advice received by
the petitioner corporation on 26 May 1983 from the Bank of the Philippine
Islands Dumaguete City branch explicitly makes reference to the opening
on that date of a letter of credit in favor of petitioner Ang Tay c/o Visayan
Sawmill Co. Inc., drawn without recourse on ARMACO-MARSTEEL
ALLOY CORPORATION and set to expire on 24 July 1983, which is
indisputably not in accordance with the stipulation in the contract signed
by the parties on at least three (3) counts: (1) it was not opened, made or
indorsed by the private respondent, but by a corporation which is not a
party to the contract; (2) it was not opened with the bank agreed upon;
and (3) it is not irrevocable and unconditional, for it is without recourse, it
is set to expire on a specific date and it stipulates certain conditions with
respect to shipment. In all probability, private respondent may have sold
the subject scrap iron to ARMACO-MARSTEEL ALLOY CORPORATION,
or otherwise assigned to it the contract with the petitioners. Private
respondent's complaint fails to disclose the sudden entry into the picture
of this corporation.
Consequently, the obligation of the petitioner corporation to sell did not
arise; it therefore cannot be compelled by specific performance to comply
with its prestation. In short, Article 1191 of the Civil Code does not apply;
on the contrary, pursuant to Article 1597 of the Civil Code, the petitioner
corporation may totally rescind, as it did in this case, the contract. Said
Article provides:

"ARTICLE 1597. Where the goods have not been delivered to the buyer,
and the buyer has repudiated the contract of sale, or has manifested his
inability to perform his obligations, thereunder, or has committed a breach
thereof, the seller may totally rescind the contract of sale by giving notice
of his election so to do to the buyer."
The trial court ruled, however, and the public respondent was in
agreement, that there had been an implied delivery in this case of the
subject scrap iron because on 17 May 1983, private respondent's men
started digging up and gathering scrap iron within the petitioner's
premises. The entry of these men was upon the private respondent's
request. Paragraph 6 of the Complaint reads:
"6. That on May 17, 1983 Plaintiff with the consent of defendant Ang Tay
sent his men to the stockyard of Visayan Sawmill Co., Inc. at Cawitan,
Sta. Catalina, Negros Oriental to dig and gather the scrap iron and stock
the same for weighing." 14
This permission or consent can, by no stretch of the imagination, be
construed as delivery of the scrap iron in the sense that, as held by the
public respondent, citing Article 1497 of the Civil Code, petitioners placed
the private respondent in control and possession thereof. In the first
place, said Article 1497 falls under the Chapter 15 Obligations of the
Vendor, which is found in Title VI (Sales), Book IV of the Civil Code. As
such, therefore, the obligation imposed therein is premised on an existing
obligation to deliver the subject of the contract. In the instant case, in
view of the private respondent's failure to comply with the positive
suspensive condition earlier discussed, such an obligation had not yet
arisen. In the second place, it was a mere accommodation to expedite
the weighing and hauling of the iron in the event that the sale would
materialize. The private respondent was not thereby placed in possession
of and control over the scrap iron. Thirdly, We cannot even assume the
conversion of the initial contract or promise to sell into a contract of sale
by the petitioner corporation's alleged implied delivery of the scrap iron
because its action and conduct in the premises do not support this
conclusion. Indeed, petitioners demanded the fulfillment of the
suspensive condition and eventually cancelled the contract.
All told, Civil Case No. 15128 filed before the trial court was nothing more
than the private respondent's preemptive action to beat the petitioners to
the draw.

One last point. This Court notes the palpably excessive and
unconscionable moral and exemplary damages awarded by the trial court
to the private respondent despite a clear absence of any legal and factual
basis therefor. In contracts, such as in the instant case, moral damages
may be recovered if defendants acted fraudulently and in bad faith, 16
while exemplary damages may only be awarded if defendants acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner. 17 In the
instant case, the refusal of the petitioners to deliver the scrap iron was
founded on the non-fulfillment by the private respondent of a suspensive
condition. It cannot, therefore, be said that the herein petitioners had
acted fraudulently and in bad faith or in a wanton, reckless, oppressive or
malevolent manner. What this Court stated in Inhelder Corp. vs. Court of
Appeals 18 needs to be stressed anew:
"At this juncture, it may not be amiss to remind Trial Courts to guard
against the award of exhorbitant (sic) damages that are way out of
proportion to the environmental circumstances of a case and which, time
and again, this Court has reduced or eliminated. Judicial discretion
granted to the Courts in the assessment of damages must always be
exercised with balanced restraint and measured objectivity."
For, indeed, moral damages are emphatically not intended to enrich a
complainant at the expense of the defendant. They are awarded only to
enable the injured party to obtain means, diversion or amusements that
will serve to obviate the moral suffering he has undergone, by reason of
the defendant's culpable action. Its award is aimed at the restoration,
within the limits of the possible, of the spiritual status quo ante, and it
must be proportional to the suffering inflicted. 19
WHEREFORE, the instant petition is GRANTED. The decision of public
respondent Court of Appeals in C.A.-G.R. CV No. 08807 is REVERSED
and Civil Case No. 15128 of the Regional Trial Court of Iloilo is ordered
DISMISSED.
Costs against the private respondent.
SO ORDERED.
Narvasa, C .J ., Cruz, Feliciano, Padilla, Bidin and Bellosillo, JJ ., concur.
Gutierrez, Jr., J ., On terminal leave.
Melo and Quiason, JJ ., No part.

Separate Opinions
ROMERO, J., dissenting:
I vote to dismiss the petition.
Petitioner corporation, Visayan Sawmill Co., Inc., entered into a contract
on May 1, 1983 with private respondent RJH Trading Co. represented by
private respondent Ramon J. Hibionada. The contract, entitled
"PURCHASE AND SALE OF SCRAP IRON," stated:
This contract for the Purchase and Sale of Scrap Iron, made and
executed at Dumaguete City, Phil., this 1st day of May, 1983 by and
between:
VISAYAN SAWMILL CO., INC., . . . hereinafter called the SELLER, and
RAMON J. HIBIONADA, . . . hereinafter called the BUYER,
witnesseth:
That the SELLER agrees to sell, and the BUYER agrees to buy, an
undetermined quantity of scrap iron and junk which the SELLER will
identify and designate now at Cawitan, Sta. Catalina, Negros Oriental, at
the price of FIFTY CENTAVOS (P.50) per kilo on the following terms and
conditions:
1. Weighing shall be done in the premises of the SELLER at Cawitan,
Sta. Catalina, Negros Oriental.
2. To cover payment of the purchase price BUYER will open, make or
indorse an irrevocable and unconditional letter of credit not later than
May 15, 1983 at the Consolidated Bank and Trust Company, Dumaguete
City Branch, in favor of the SELLER in the sum of TWO HUNDRED AND
FIFTY THOUSAND PESOS (P250,000.00), Philippine currency.
3. The SELLER will furnish the BUYER free of charge at least three (3)
cargo trucks with drivers, to haul the weighed materials from Cawitan to
the TSMC wharf at Sta. Catalina for loading on BUYER'S barge. All
expenses for labor, loading and unloading shall be for the account of the
BUYER.

4. SELLER shall be entitled to a deduction of three percent (3%) per ton

as rust allowance.
xxx xxx xxx
On May 17, 1983, the workers of private respondents were allowed
inside petitioner company's premises in order to gather the scrap iron.
However, on May 23, 1983, petitioner company sent a telegram which
stated:
"RAMON HIBIONADA
RJH TRADING
286 QUEZON STREET
ILOILO CITY
DUE YOUR FAILURE TO COMPLY WITH CONDITIONS BEFORE
DEADLINE OUR CONTRACT FOR PURCHASE SCRAP IRON
CANCELLED
VISAYAN SAWMILL CO., INC."
Hibionada wired back on May 24, 1983 the following:
"ANG TAY VISAYAN SAWMILL
DUMAGUETE CITY
LETTER OF CREDIT AMOUNTING P250,000.00 OPENED MAY 12,
1983 BANK OF PI MAIN OFFICE AYALA AVENUE MAKATI METRO
MANILA BUT TRANSMITTAL IS DELAYED PLEASE CONSIDER
REASON WILL PERSONALLY FOLLOW-UP IN MANILA THANKS
REGARDS.
RAMON HIBIONADA"
On May 26, 1983, petitioner company received the following advice from
the Dumaguete City Branch of The Bank of Philippine Islands: cdll

"Opened today our Irrevocable Domestic Letter of Credit 2-01456-4 for

P250,000.00 in favor ANG TAY c/o Visayan Sawmill Co., Inc. Dumaguete
City Negros Oriental Account of ARMACO-MARSTEEL ALLOW (sic)
CORPORATION 2nd Floor Alpap 1 Bldg., 140 Alfaro st. Salcedo Village
Makati Metro Manila Shipments of about 500 MT of assorted steel scrap
marine/heavy equipment expiring on July 23, 1983 without recourse at
slight draft drawn on Armaco-Marsteel Alloy Corporation accompanied by
the following documents: Certificate of acceptance by Armaco-Marsteel
Allow (sic) Corporation shipment from Dumaguete City to buyer's
warehouse partial shipment allowed/transhipment not allowed."
Subsequently, petitioners' counsel sent another telegram to private
respondents stating that:
"VISAYAN SAWMILL COMPANY UNWILLING TO CONTINUE SALE OF
SCRAP IRON TO HIBIONADA DUE TO NON COMPLIANCE WITH
ESSENTIAL PRE CONDITIONS"
Consequently, private respondents filed a complaint for specific
performance and damages with the Regional Trial Court (RTC) of Iloilo
(Branch XXXV) which decided in favor of private respondents. The RTC
decision having been affirmed by the Court of Appeals, the present
petition was filed.
Finding the petition meritorious, the ponencia reversed the decision of the
Court of Appeals. Based on its appreciation of the contract in question, it
has arrived at the conclusion that herein contract is not a contract of sale
but a contract to sell which is subject to a positive suspensive condition,
i.e., the opening of a letter of credit by private respondents. Since the
condition was not fulfilled, the obligation of petitioners to convey title did
not arise. The lengthy decision of Luzon Brokerage Co., Inc. v. Maritime
Co. Inc. 1 penned by Justice J.B.L. Reyes, was cited as authority on the
assumption that subject contract is indeed a contract to sell but which will
be shown herein as not quite accurate.
Evidently, the distinction between a contract to sell and a contract of sale
is crucial in this case. Article 1458 of the Civil Code has this definition:
"By a contract of sale, one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing and the other
to pay therefor a price certain in money or its equivalent."
Article 1475 gives the significance of this mutual undertaking of the
parties, thus: "The contract of sale is perfected at the moment there is a

meeting of minds upon the thing which is the object of the contract and
upon the price. From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the form of
contracts."
Thus, when the parties entered into the contract entitled "Purchase and
Sale of Scrap Iron" on May 1, 1983, the contract reached the stage of
perfection, there being a meeting of the' minds upon the object which is
the subject matter of the contract and the price which is the
consideration. Applying Article 1475 of the Civil Code, from that moment,
the parties may reciprocally demand performance of the obligations
incumbent upon them, i.e., delivery by the vendor and payment by the
vendee.
Petitioner, in its petition, admits that "[b]efore the opening of the letter of
credit, buyer Ramon Hibionada went to Mr. Ang Tay and informed him
that the letter of credit was forthcoming and if it was possible for him
(buyer) to start cutting and digging the scrap iron before the letter of
credit arrives and the former (seller) manifested no objection, and he
immediately sent 18 or 20 people to start the operation." 2
From the time the seller gave access to the buyer to enter his premises,
manifesting no objection thereto but even sending 18 or 20 people to
start the operation, he has placed the goods in the control and
possession of the vendee and delivery is effected. For according to
Article 1497, "The thing sold shall be understood as delivered when it is
placed in the control and possession of the vendee." 3
Such action or real delivery (traditio) is the act that transfers ownership.
Under Article 1496 of the Civil Code, "The ownership of the thing sold is
acquired by the vendee from the moment it is delivered to him in any of
the ways specified in Articles 1497 to 1501, or in any other manner
signifying an agreement that the possession is transferred from the
vendor to the vendee."
That payment of the price in any form was not yet effected is immaterial
to the transfer of the right of ownership. In a contract of sale, the nonpayment of the price is a resolutory condition which extinguishes the
transaction that, for a time, existed and discharges the obligations
created thereunder. 4
On the other hand, "the parties may stipulate that ownership in the thing
shall not pass to the purchaser until he has fully paid the price." 5 In such

a contract to sell, the full payment of the price is a positive suspensive

condition, such that in the event of non-payment, the obligation of the
seller to deliver and transfer ownership never arises. Stated differently, in
a contract to sell, ownership is not transferred upon delivery of property
but upon full payment of the purchase price. 6
Consequently, in a contract of sale, after delivery of the object of the
contract has been made, the seller loses ownership and cannot recover
the same unless the contract is rescinded. But in the contract to sell, the
seller retains ownership and the buyer's failure to pay cannot even be
considered a breach, whether casual or substantial, but an event that
prevented the seller's duty to transfer title to the object of the contract.
At the outset, it must be borne in mind that a provision in the contract
regarding the mode of payment, like the requirement for the opening of
the Letter of Credit in this case, is not among the essential requirements
of a contract of sale enumerated in Articles 1305 7 and 1474, 8 the
absence of any of which will prevent the perfection of the contract from
happening. Likewise, it must be emphasized that not every provision
regarding payment should automatically be classified as a suspensive
condition. To do so would change the nature of most contracts of sale into
contracts to sell. For a provision in the contract regarding the payment of
the price to be considered a suspensive condition, the parties must have
made this clear in certain and unambiguous terms, such as for instance,
by reserving or withholding title to the goods until full payment by the
buyer. 9 This was a pivotal circumstance in the Luzon Brokerage case
where the contract in question was replete with very explicit provisions
such as the following: "Title to the properties subject of this contract
remains with the Vendor and shall pass to, and be transferred in the
name of the Vendee only upon complete payment of the full price . . .;" 10
the Vendor (Myers) will execute and deliver to the Vendee a definite and
absolute Deed of Sale upon full payment of the Vendee . . .; 11 and
"should the Vendee fail to pay any of the monthly installments, when due,
or otherwise fail to comply with any of the terms and conditions herein
stipulated, then this Deed of Conditional Sale shall automatically and
without any further formality, become null and void." 12
It is apparent from a careful reading of Luzon Brokerage, as well as the
cases which preceded it 13 and the subsequent ones applying its
doctrines, 14 that the mere insertion of the price and the mode of
payment among the terms and conditions of the agreement will not
necessarily make it a contract to sell. The phrase in the contract "on the
following terms and conditions" is standard form which is not to be
construed as imposing a condition, whether suspensive or resolutory, in

the sense of the happening of a future and uncertain event upon which
an obligation is made to depend. There must be a manifest
understanding that the agreement is in what may be referred to as
"suspended animation" pending compliance with provisions regarding
payment. The reservation of title to the object of the contract in the seller
is one such manifestation. Hence, it has been decided in the case of
Dignos v. Court of Appeals 15 that, absent a proviso in the contract that
the title to the property is reserved in the vendor until full payment of the
purchase price or a stipulation giving the vendor the right to unilaterally
rescind the contract the moment the vendee fails to pay within the fixed
period, the transaction is an absolute contract of sale and not a contract
to sell. 16
In the instant case, nowhere in the contract did it state that the petitioners
reserve title to the goods until private respondents have opened a letter
of credit. Nor is there any provision declaring the contract as without
effect until after the fulfillment of the condition regarding the opening of
the letter of credit.
Examining the contemporaneous and subsequent conduct of the parties,
which may be relevant in the determination of the nature and meaning of
the contract, 17 it is significant that in the telegram sent by petitioners to
Hibionada on May 23, 1983, it stated that "DUE [TO] YOUR FAILURE TO
COMPLY WITH CONDITIONS BEFORE DEADLINE OUR CONTRACT
FOR PURCHASE SCRAP IRON CANCELLED." And in some of the
pleadings in the course of this litigation, petitioners referred to the
transaction as a contract of sale. 18
In light of the provisions of the contract, contemporaneous and
subsequent acts of the parties and the other relevant circumstances
surrounding the case, it is evident that the stipulation for the buyer to
open a Letter of Credit in order to cover the payment of the purchase
price does not bear the marks of a suspensive condition. The agreement
between the parties was a contract of sale and the "terms and conditions"
embodied therein which are standard form, are clearly resolutory in
nature, the breach of which may give either party the option to bring an
action to rescind and/or seek damages. Contrary to the conclusions
arrived at in the ponencia, the transaction is not a contract to sell but a
contract of sale.
However, the determination of the nature of the contract does not settle
the controversy. A breach of the contract was committed and the rights
and liabilities of the parties must be established. The ponencia,
notwithstanding its conclusion that no contract of sale existed, proceeded

to state that petitioner company may rescind the contract based on Article
1597 of the Civil Code which expressly applies only to a contract of sale.
It provides:
"ARTICLE 1597. Where the goods have not been delivered to the buyer,
and the buyer has repudiated the contract of sale, or has manifested his
inability to perform his obligations, thereunder, or has committed a breach
thereof, the seller may totally rescind the contract of sale by giving notice
of his election so to do to the buyer." (Emhasis supplied).
The ponencia was then confronted with the issue of delivery since Article
1597 applies only "[w]here the goods have not yet been delivered." In this
case, as aforestated, the workers of private respondents were actually
allowed to enter the petitioners' premises, thus, giving them control and
possession of the goods. At this juncture, it is even unnecessary to
discuss the issue of delivery in relation to the right of rescission nor to
rely on Article 1597. In every contract which contains reciprocal
obligations, the right to rescind is always implied under Article 1191 of the
Civil Code in case one of the parties fails to comply with his obligations.
19
The right to rescind pursuant to Article 1191 is not absolute. Rescission
will not be permitted for slight or casual breach of the contract. 20 Here,
petitioners claim that the breach is so substantial as to justify rescission,
not only because the Letter of Credit was not opened on May 15, 1983 as
stipulated in the contract but also because of the following factors: (1) the
Letter of Credit, although opened in favor of petitioners was made against
the account of a certain Marsteel Alloy Corporation, instead of private
respondent's account; (2) the Letter of Credit referred to "assorted steel
scrap" instead of "scrap iron and junk" as provided in the contract; (3) the
Letter of Credit placed the quantity of the goods at "500 MT" while the
contract mentioned "an undetermined quantity of scrap iron and junk"; (4)
no amount from the Letter of Credit will be released unless accompanied
by a Certificate of Acceptance; and (5) the Letter of Credit had an expiry
date.
I am not convinced that the above circumstances may be characterized
as so substantial and fundamental as to defeat the object of the parties in
making the agreement. 21 None of the alleged defects in the Letter of
Credit would serve to defeat the object of the parties. It is to be stressed
that the purpose of the opening of a Letter of Credit is to effect payment.
The above-mentioned factors could not have prevented such payment. It
is also significant to note that petitioners sent a telegram to private
respondents on May 23, 1983 cancelling the contract. This was before

they had even received on May 26, 1983 the notice from the bank about
the opening of the Letter of Credit. How could they have made a
judgment on the materiality of the provisions of the Letter of Credit for
purposes of rescinding the contract even before setting eyes on said
document?
To be sure, in the contract, the private respondents were supposed to
open the Letter of Credit on May 15, 1983 but, it was not until May 26,
1983 or eleven (11) days later that they did so. Is the eleven-day delay a
substantial breach of the contract as could justify the rescission of the
contract?
In Song Fo and Co. v. Hawaiian-Philippine Co. 22 it was held that a delay
in payment for twenty (20) days was not a violation of an essential
condition of the contract which would warrant rescission for nonperformance. In the instant case, the contract is bereft of any suggestion
that time was of the essence. On the contrary, it is noted that petitioners
allowed private respondents' men to dig and remove the scrap iron
located in petitioners' premises between May 17, 1983 until May 30, 1983
or beyond the May 15, 1983 deadline for the opening of the Letter of
Credit. Hence, in the absence of any indication that the time was of the
essence, the eleven-day delay must be deemed a casual breach which
cannot justify a rescission.
Worthy of mention before concluding is Sycip v. National Coconut
Corporation, et al. 23 since, like this case, it involves a failure to open on
time the Letter of Credit required by the seller. In Sycip, after the buyer
offered to buy 2,000 tons of copra, the seller sent a telegram dated
December 19, 1946 to the buyer accepting the offer but on condition that
the latter opens a Letter of Credit within 48 hours. It was not until

December 26, 1946, however, that the Letter of Credit was opened. The
Court, speaking through Justice Bengzon, held that because of the delay
in the opening of the Letter of Credit; the seller was not obliged to deliver
the goods.
Two factors distinguish Sycip from the case at bar. First, while there has
already been a perfected contract of sale in the instant case, the parties
in Sycip were still undergoing the negotiation process. The seller's
qualified acceptance in Sycip served as a counter offer which prevented
the contract from being perfected. Only an absolute and unqualified
acceptance of a definite offer manifests the consent necessary to perfect
a contract. 24 Second, the Court found in Sycip that time was of the
essence for the seller who was anxious to sell to other buyers should the
offeror fail to open the Letter of Credit within the stipulated time. In
contrast, there are no indicia in this case that can lead one to conclude
that time was of the essence for petitioner as would make the eleven-day
delay a fundamental breach of the contract.
In sum, to my mind, both the trial court and the respondent Court of
Appeals committed no reversible error in their appreciation of the
agreement in question as a contract of sale and not a contract to sell, as
well as holding that the breach of the contract was not substantial and,
therefore, petitioners were not justified in law in rescinding the
agreement.
PREMISES CONSIDERED, the Petition must be DISMISSED and the
decision of the Court of Appeals AFFIRMED.