12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

56 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

*
G.R. No. 108346. July 11, 2001.

Spouses MARIANO Z. VELARDE and AVELINA D.

VELARDE, petitioners, vs. COURT OF APPEALS, DAVID
A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

Civil Law; Contracts; Sale; In a contract of sale, the seller

obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in
money or its equivalent.—In a contract of sale, the seller obligates
itself to transfer the ownership of and deliver a determinate
thing, and the buyer to pay therefor a price certain in money or its
equivalent. Private respondents had already performed their
obligation through the execution of the Deed of Sale, which
effectively transferred ownership of the property to petitioner
through constructive delivery. Prior physical delivery or
possession is not legally required, and the execution of the Deed of
Sale is deemed equivalent to delivery. Petitioners, on the other
hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse,

_______________

* THIRD DIVISION.

57

VOL. 361, JULY 11, 2001 57

Velarde vs. Court of Appeals

they wanted private respondents to perform obligations beyond

http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 1/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

those stipulated in the contract before fulfilling their own

obligation to pay the full purchase price.
Same; Same; Same; Rescission; Rescission of a party to an
obligation under Article 1191 of the Civil Code is predicated on a
breach of faith by the other party who violates the reciprocity
between them.—The right of rescission of a party to an obligation
under Article 1191 of the Civil Code is predicated on a breach of
faith by the other party who violates the reciprocity between
them. The breach contemplated in the said provision is the
obligor’s failure to comply with an existing obligation. When the
obligor cannot comply with what is incumbent upon it, the obligee
may seek rescission and, in the absence of any just cause for the
court to determine the period of compliance, the court shall decree
the rescission.
Same; Same; Same; Same; Rescission can be carried out only
when the one who demands it can return whatever he may be
obliged to restore.—Rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to
restore. To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to
each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

          Marciano J. Cagatan and Mariano R. Logarta for
petitioners.
     M.B. Tomacruz Law Office for private respondents.

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure

to pay the price in the manner prescribed by the contract,
entitles the injured party to rescind the obligation.
Rescission abrogates the contract from its inception and
requires a mutual restitution of benefits received.
58

58 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 2/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

The Case
1
Before us is a Petition 2
for Review on Certiorari
questioning the Decision of the Court of Appeals (CA) in
CA­GR CV3 No. 32991 dated October 9, 1992, as well as its
Resolution dated December 4
29, 1992 denying petitioner’s
motion for reconsideration.
The dispositive portion of the assailed Decision reads:

“WHEREFORE, the Order dated May 15, 1991 is hereby

ANNULLED and SET ASIDE and the Decision dated November
14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds
posted by plaintiffs­appellees
5
and defendants­appellants are
hereby RELEASED.”

The Facts

The factual antecedents of the case, as found by the CA, are

as follows:

“x x x. David Raymundo [herein private respondent] is the

absolute and registered owner of a parcel of land, together with
the house and other improvements thereon, located at 1918
Kamias St., Dasmariñas Village, Makati and covered by TCT No.
142177. Defendant George Raymundo [herein private respondent]
is David’s father who negotiated with plaintiffs Avelina and
Mariano Velarde [herein petitioners] for the sale of said property,
which was, however, under lease (Exh. ‘6,’ p. 232, Record of Civil
Case No. 15952).
“On August 8, 1986, a Deed of Sale with Assumption of
Mortgage (Exh. ‘A’; Exh. ‘I’, pp. 11­12, Record) was executed by
defendant David Raymundo, as vendor, in favor of plaintiff
Avelina Velarde, as vendee, with the following terms and
conditions:
     ‘x x x      x x x       x x x

___________________

1 Rollo, pp. 37­53.

2 Rollo, pp. 68­78. Penned by Justice Regina G. Ordonez­Benitez and
concurred in by Justices Gloria C. Paras (Division chairman) and Eduardo
G. Montenegro (member).
3 Rollo, p. 81.
4 Rollo, pp. 21­33.
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 3/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

5 CA Decision, p. 11; rollo, p. 20.

59

VOL. 361, JULY 11, 2001 59

Velarde vs. Court of Appeals

‘That for and in consideration of the amount of EIGHT HUNDRED

THOUSAND PESOS (P800,000.00), Philippine currency, receipt of which
in full is hereby acknowledged by the VENDOR from the VENDEE, to his
entire and complete satisfaction, by these presents the VENDOR hereby
SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided by
law, unto the VENDEE, her heirs, successors and assigns, the parcel of
land mentioned and described above, together with the house and other
improvements thereon.
‘That the aforesaid parcel of land, together with the house and other
improvements thereon, were mortgaged by the VENDOR to the BANK
OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the
payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real
Estate Mortgage signed and executed by the VENDOR in favor of the
said Bank of the Philippine Islands, on____ and which Real Estate
Mortgage was ratified before Notary Public for Makati,____, as Doc. No.
__, Page No. __, Book No. __, Series of 1986 of his Notarial Register.
‘That as part of the consideration of this sale, the VENDEE hereby
assumes to pay the mortgage obligations on the property herein sold in
the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in favor of Bank of the Philippine
Islands, in the name of the VENDOR, and further agrees to strictly and
faithfully comply with all the terms and conditions appearing in the Real
Estate Mortgage signed and executed by the VENDOR in favor of BPI,
including interests and other charges for late payment levied by the
Bank, as if the same were originally signed and executed by the
VENDEE.
‘It is further agreed and understood by the parties herein that the
capital gains tax and documentary stamps on the sale shall be for the
account of the VENDOR; whereas, the registration fees and transfer tax
thereon shall be for the account of the VENDEE.’ (Exh. ‘A,’ pp. 11­12,
Record).’

“On the same date, and as part of the above­document, plaintiff

Avelina Velarde, with the consent of her husband, Mariano,
executed an Undertaking (Exh. ‘C,’ pp. 13­14, Record), the
pertinent portions of which read, as follows:
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 4/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

     ‘x x x      x x x      x x x

60

60 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

‘Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr.

David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, and assume the mortgage obligations
on the property with the Bank of the Philippine Islands in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in accordance with the terms and
conditions of the Deed of Real Estate Mortgage dated____, signed and
executed by Mr. David A. Raymundo with the said Bank, acknowledged
before Notary Public for Makati,___, as Doc. No.___, Page No.___, Book
No. __, Series of 1986 of his Notarial Register.
‘WHEREAS, while my application for the assumption of the mortgage
obligations on the property is not yet approved by the mortgagee Bank, I
have agreed to pay the mortgage obligations on the property with the
Bank in the name of Mr. David A. Raymundo, in accordance with the
terms and conditions of the said Deed of Real Estate Mortgage, including
all interests and other charges for late payment.
‘WHEREAS, this undertaking is being executed in favor of Mr. David
A. Raymundo, for purposes of attesting and confirming our private
understanding concerning the said mortgage obligations to be assumed.
‘NOW, THEREFORE, for and in consideration of the foregoing
premises, and the assumption of the mortgage obligations of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, with the Bank of the Philippine Islands, I, Mrs.
Avelina D. Velarde, with the consent of my husband, Mariano Z. Velarde,
do hereby bind and obligate myself, my heirs, successors and assigns, to
strictly and faithfully comply with the following terms and conditions:

‘1. That until such time as my assumption of the mortgage

obligations on the property purchased is approved by the
mortgagee bank, the Bank of the Philippine Islands, I
shall continue to pay the said loan in accordance with the
terms and conditions of the Deed of Real Estate Mortgage
in the name of Mr. David A. Raymundo, the original
Mortgagor.
‘2. That, in the event I violate any of the terms and
conditions of the said Deed of Real Estate Mortgage, I
hereby agree that my downpayment of P800,000.00, plus
all payments made with the Bank of the Philippine
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 5/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

Islands on the mortgage loan, shall be forfeited in favor of

Mr. David A. Raymundo, as and by way of liqui­

61

VOL. 361, JULY 11, 2001 61

Velarde vs. Court of Appeals

dated damages, without necessity of notice or any judicial

declaration to that effect, and Mr. David A. Raymundo
shall resume total and complete ownership and possession
of the property sold by way of Deed of Sale with
Assumption of Mortgage, and the same shall be deemed
automatically cancelled and be of no further force or effect,
in the same manner as if (the) same had never been
executed or entered into.
‘3. That I am executing this Undertaking for purposes of
binding myself, my heirs, successors and assigns, to
strictly and faithfully comply with the terms and
conditions of the mortgage obligations with the Bank of
the Philippine Islands, and the covenants, stipulations
and provisions of this Undertaking.

That, David A. Raymundo, the vendor of the property mentioned and

identified above, [does] hereby confirm and agree to the undertakings of
the Vendee pertinent to the assumption of the mortgage obligations by
the Vendee with the Bank of the Philippine Islands. (Exh. ‘C,’ pp. 13­14,
Record).’

“This undertaking was signed by Avelina and Mariano Velarde

and David Raymundo.
“It appears that the negotiated terms for the payment of the
balance of P1.8 million was from the proceeds of a loan that
plaintiffs were to secure from a bank with defendant’s help.
Defendants had a standing approved credit line with the Bank of
the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPI’s approval of an application for assumption of
mortgage by plaintiffs. Pending BPI’s approval o[f] the
application, plaintiffs were to continue paying the monthly
interests of the loan secured by a real estate mortgage.
“Pursuant to said agreements, plaintiffs paid BPI the monthly
interest on the loan secured by the aforementioned mortgage for
three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at
P23,925.00 (Exh. ‘E,’ ‘H’ & ‘J,’ pp. 15, 17 and 18, Record).

http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 6/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

“On December 15, 1986, plaintiffs were advised that the

Application for Assumption of Mortgage with BPI was not
approved (Exh. ‘J,’ p. 133, Record). This prompted plaintiffs not to
make any further payment.
“On January 5, 1987, defendants, thru counsel, wrote plaintiffs
informing the latter that their non­payment to the mortgage bank
constitute[d] non­performance of their obligation (Exh. ‘3,’ p. 220,
Record).
“In a Letter dated January 7, 1987, plaintiffs, thru counsel,
responded, as follows:

62

62 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

This is to advise you, therefore, that our client is willing to pay the
balance in cash not later than January 21, 1987 provided: (a) you deliver
actual possession of the property to her not later than January 15, 1987
for her immediate occupancy; (b) you cause the release of title and
mortgage from the Bank of P.I. and make the title available and free
from any liens and encumbrances; and (c) you execute an absolute deed of
sale in her favor free from any liens or encumbrances not later than
January 21, 1987.’ (Exhs. ‘K,’ ‘4’ p. 223, Record).

‘On January 8, 1987, defendants sent plaintiffs a notarial

notice of cancellation/rescission of the intended sale of the subject
property allegedly due to the latter’s failure to comply with the
terms and conditions of the Deed of Sale with Assumption6 of
Mortgage and the Undertaking (Exh. ‘5’ pp. 225­226, Record).’ ”

Consequently, petitioners filed on February 9, 1987 a

Complaint against private respondents for specific
performance, nullity of cancellation, writ of possession and
damages. This was docketed as Civil Case No. 15952 at the
Regional Trial Court of Makati, Branch 149. The case was
tried and heard by then Judge Consuelo YnaresSantiago
(now an associate justice of this Court), who dismissed the7
Complaint in a Decision dated November 14, 1990. 8
Thereafter, petitioners filed a Motion for Reconsideration.
Meanwhile, then Judge Ynares­Santiago was promoted
to the Court of Appeals and Judge Salvador S.A. Abad
Santos was assigned to 9the sala she vacated. In an Order
dated May 15, 1991, Judge Abad Santos granted
petitioners’ Motion for Reconsideration and directed the
parties to proceed with the sale. He instructed petitioners
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 7/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

to pay the balance of P1.8 million to private respondents

who, in turn, were ordered to execute a deed of absolute
sale and to surrender possession of the disputed property to
petitioners.
Private respondents appealed to the CA.

_________________

6 Rollo, pp. 68­73.

7 Records, pp. 280­284.
8 Records, pp. 285­293.
9 Records, pp. 339­341.

63

VOL. 361, JULY 11, 2001 63

Velarde vs. Court of Appeals

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and

reinstated then Judge Ynares­Santiago’s earlier Decision
dismissing petitioners’ Complaint. Upholding the validity
of the rescission made by private respondents, the CA
explained its ruling in this wise:

“In the Deed of Sale with Assumption of Mortgage, it was

stipulated that ‘as part of the consideration of this sale, the
VENDEE (Velarde)’ would assume to pay the mortgage obligation
on the subject property in the amount of P1.8 million in favor of
BPI in the name of the Vendor (Raymundo). Since the price to be
paid by the Vendee Velarde includes the downpayment of
P800,000.00 and the balance of P1.8 million, and the balance of
P1.8 million cannot be paid in cash, Vendee Velarde, as part of
the consideration of the sale, had to assume the mortgage
obligation on the subject property. In other words, the assumption
of the mortgage obligation is part of the obligation of Velarde, as
vendee, under the contract. Velarde further agreed ‘to strictly and
faithfully comply with all the terms and conditions appearing in
the Real Estate Mortgage signed and executed by the VENDOR in
favor of BPI x x x as if the same were originally signed and
executed by the Vendee.’ (p. 2, thereof, p. 12, Record). This was
reiterated by Velarde in the document entitled ‘Undertaking’
wherein the latter agreed to continue paying said loan in
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 8/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

accordance with the terms and conditions of the Deed of Real

Estate Mortgage in the name of Raymundo. Moreover, it was
stipulated that in the event of violation by Velarde of any terms
and conditions of said deed of real estate mortgage, the
downpayment of P800,000.00 plus all payments made with BPI or
the mortgage loan would be forfeited and the [D]eed of [S]ale with
[Assumption of [M]ortgage would thereby be cancelled
automatically and of no force and effect (pars. 2 & 3, thereof, pp.
13­14, Record).
“From these 2 documents, it is therefore clear that part of the
consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of P1.8 million.
This would mean that Velarde had to make payments to BPI
under the [D]eed of [R]eal [E]state [M]ortgage in the name of
Raymundo. The application with BPI for the approval of the
assumption of mortgage would mean that, in case of approval,
payment of the mortgage obligation will now be in the name of
Velarde. And in the event said application is disapproved, Velarde
had to pay in full. This is alleged and admitted in Paragraph 5 of
the Complaint. Mariano Velarde likewise admitted this fact
during the hearing on September 15, 1997 (p. 47, t.s.n.,
September 15, 1987; see also pp. 16­26, t.s.n., October 8, 1989).
This being the case, the non­payment of the mortgage

64

64 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

obligation would result in a violation of the contract. And, upon

Velarde’s failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions—(1) demand fulfillment of the
contract, or (2) demand its rescission (Article 1191, Civil, Code).
“The disapproval by BPI of the application for assumption of
mortgage cannot, be used as an excuse for Velarde’s non­payment
of the balance of the purchase, price. As borne out by the
evidence, Velarde had to pay in full in case of BPI’s disapproval of
the application for assumption of mortgage. What Velarde should
have done was to pay the balance of P1.8 million. Instead, Velarde
sent Raymundo a letter dated January 7, 1987 (Exh. ‘K,’ ‘4’) which
was strongly given weight by the lower court in reversing the
decision rendered by then Judge Ynares­Santiago. In said letter,
Velarde registered their willingness to pay the balance in cash but
enumerated 3 new conditions which, to the mind of this Court,
would constitute a new undertaking or new agreement which is
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 9/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

subject to the consent or approval of Raymundo. These 3

conditions were not among those previously agreed upon by
Velarde and Raymundo. These are mere offers or, at most, an
attempt to novate. But then again, there can be no novation
because there was no agreement of all the parties to the new
contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
“It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would
be deemed ‘automatically cancelled and of no further force and
effect, as if the same had never been executed or entered into.’
While it is true that even if the contract expressly provided for
automatic rescission upon failure to pay the price, the vendee may
still pay, he may do so only for as long as no demand for rescission
of the contract has been made upon him either judicially or by a
notarial act (Article 1592, Civil Code). In the case at bar,
Raymundo sent Velarde a notarial notice dated January 8, 1987
of cancellation/rescission of the contract due to the latter’s failure
to comply with their obligation. The rescission was justified in
view of Velarde’s failure to pay the price (balance) which is
substantial and fundamental as to defeat the object of the parties
in making the agreement. As adverted to above, the agreement of
the parties involved a reciprocal obligation wherein the obligation
of one is a resolutory condition of the obligation of the other, the
non­fulfillment of which entitles the other party to rescind the
contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non­
payment of the mortgage obligation by appellees Velarde would
create a right to demand payment or to rescind the contract, or to
criminal prosecution (Edca Publishing & Distribution Corporation
vs. Santos, 184 SCRA 614). Upon appellees’ failure, therefore, to
pay the balance, the contract was properly rescinded (Ruiz vs.
IAC, 184 SCRA 720). Consequently, appellees Velarde having

65

VOL. 361, JULY 11, 2001 65

Velarde vs. Court of Appeals

violated the contract, they have lost their right to its enforcement
and hence, cannot avail of the action for specific performance
10
(Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635).”
11
Hence, this appeal.

The Issues
12
Petitioners, in their Memorandum, interpose the following
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 10/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361
12
Petitioners, in their Memorandum, interpose the following
assignment of errors:

“I.

The Court of Appeals erred in holding that the non­payment of

the mortgage obligation resulted in a breach of the contract.

“II.

The Court of Appeals erred in holding that the rescission

(resolution) of the contract by private respondents was justified.

“III.

The Court of Appeals erred in holding that petitioners’ January

7, 1987 letter gave three ‘new conditions’ constituting mere offers
or an attempt to novate necessitating a new agreement between
the parties.”

The Court’s Ruling

The Petition is partially meritorious.

________________

10 Rollo, pp. 75­78.

11 To eradicate its backlog of old cases, the Court on February 27, 2001
resolved to redistribute long­pending cases to justices who had no backlog,
and who were thus tasked to prioritize them. Consequently, this case was
raffled and assigned to the undersigned ponente for study and report.
12 Rollo, p. 227.

66

66 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

First Issue:
Breach of Contract

Petitioners aver that their nonpayment of private

respondents’ mortgage obligation did not constitute a
breach of contract, considering that their request to assume
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 11/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

the obligation had been disapproved by the mortgagee

bank. Accordingly, payment of the monthly amortizations
ceased to be their obligation and, instead, it devolved upon
private respondents again.
However, petitioners did not merely stop paying the
mortgage obligations; they also failed to pay the balance of
the purchase price. As admitted by both parties, their
agreement mandated that petitioners should pay the
purchase price balance of P1.8 million to private
respondents in case the request to assume the mortgage
would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the bank’s disapproval of their
application to assume respondents’ mortgage, they should
have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private
respondents offering to make such payment only upon the
fulfillment of certain conditions not. originally agreed upon
in the contract of sale. Such conditional offer to pay cannot
take the place of actual payment as would discharge the
obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer
the ownership of and deliver a determinate thing, and the
buyer to pay13
therefor a price certain in money or its
equivalent.
Private respondents had already performed their
obligation through the execution of the Deed of Sale, which
effectively transferred ownership of the property to
petitioner through constructive delivery. Prior physical
delivery or possession is not legally required, and the
execution14 of the Deed of Sale is deemed equivalent to
delivery.

_________________

13 Coronel v. CA, 263 SCRA 15, October 7, 1996.

14 Power Commercial and Industrial Corp. v. CA, 274 SCRA 597 June
20, 1997.

67

VOL. 361, JULY 11, 2001 67

Velarde vs. Court of Appeals

Petitioners, on the other hand, did not perform their

correlative obligation of paying the contract price in the
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 12/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

manner agreed upon. Worse, they wanted private

respondents to perform obligations beyond those stipulated
in the contract before fulfilling their own obligation to pay
the full purchase price.

Second Issue:
Validity of the Rescission

Petitioners likewise claim that the rescission of the

contract by private respondents was not justified,
inasmuch as the former had signified their willingness to
pay the balance of the purchase price only a little over a
month from the time they were notified of the disapproval
of their application for assumption of mortgage. Petitioners
also aver that the breach of the contract was not
substantial as15
would warrant a rescission. They cite
several cases in which this Court declared that rescission
of a contract would not be permitted for a slight or casual
breach. Finally, they argue that they have substantially
performed their obligation in good faith, considering that
they have already made the initial payment of P800,000
and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by
petitioners was not so much their nonpayment of the
mortgage obligations, as their nonperformance of their
reciprocal obligation to pay the purchase price under the
contract of sale. Private respondents’ right to rescind the
contract finds basis in Article 1191 of the Civil Code, which
explicitly provides as follows:

“Art. 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between fulfillment and 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.”

________________

15 Song Fo & Co. v. Hawaiian­Philippine Co., 47 Phil. 821, September

16, 1925; Tan v. Court of Appeals, 175 SCRA 656, July 28, 1989; and
Zepeda v. Court of Appeals, 216 SCRA 293, December 9, 1992.

68

http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 13/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

68 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

The right of rescission of a party to an obligation under

Article 1191 of the Civil Code is predicated on a breach of
faith by the other
16
party who violates the reciprocity
between them. The breach contemplated in the said
provision is
17
the obligor’s failure to comply with an existing
obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in
the absence of any just cause for the court to determine the 18
period of compliance, the court shall decree the rescission.
In the present case, private respondents validly
exercised their right to rescind the contract, because of the
failure of petitioners to comply with their obligation to pay
the balance of the purchase price. Indubitably, the latter
violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private
respondents’ right to rescind the same in accordance with
law.
True, petitioners expressed their willingness to pay the
balance of the purchase price one month after it became
due; however, this was not equivalent to actual payment as
would constitute a faithful compliance of their reciprocal
obligation. Moreover, the offer to pay was conditioned on
the performance by private respondents of additional
burdens that had not been agreed upon in the original
contract. Thus, it cannot be said that the breach committed
by petitioners was merely slight or casual as would
preclude the exercise of the right to rescind. 19
Misplaced is petitioners’ reliance on the cases they
cited, because the factual circumstances in those cases are
not analogous to those in the present one. In Song Fo there
was, on the part of the buyer, only a delay of twenty (20)
days to pay for the goods delivered. Moreover, the buyer’s
offer to pay was unconditional and was accepted by the
seller. In Zepeda, the breach involved a mere one­week
delay in paying the balance of P1,000, which was actually

_________________

16 Uy v. Court of Appeals, 314 SCRA 69, September 9, 1999; Romeo v.

Court of Appeals, 250 SCRA 223, November 23, 1995.
17 Cheng v. Genato, 300 SCRA 722, December 29, 1998.
18 Central Philippine University v. Court of Appeals, 246 SCRA 511
http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 14/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

July 17, 1995.

19 See footnote 15.

69

VOL. 361, JULY 11, 2001 69

Velarde vs. Court of Appeals

paid. In Tan, the alleged breach was private respondent’s

delay of only a few days, which was for the purpose of
clearing the title to the property; there was no reference
whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely
consist of a slight delay in payment or an irregularity; such
breach would not normally defeat the intention of the
parties to the contract. Here, petitioners not only failed to
pay the P1.8 million balance, but they also imposed upon
private respondents new obligations as preconditions to the
performance of their own obligation. In effect, the qualified
offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract
of sale. Hence, private respondents were left with the legal
option of seeking rescission to protect their own interest.

Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners
was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage
contract. Therefore, the automatic rescission and forfeiture
of payment clauses stipulated in the contract does not
apply. Instead, Civil Code provisions shall govern and
regulate the resolution of this controversy.
Considering that the rescission of the contract is based
on Article 1191 of the Civil Code, mutual restitution is
required to bring back the parties to their original situation
prior to the inception of the contract. Accordingly, the
initial payment of P800,000 and the corresponding
mortgage payments in the amounts of P27,225, P23,000
and P23,925 (totaling P874,150.00) advanced by petitioners
should be returned by private respondents, lest the latter
unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of
the contract. It can be earned out only when the one who

http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 15/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

demands rescission
20
can return whatever he may be obliged
to restore. To rescind

_________________

20 Co v. Court of Appeals, 312 SCRA 528, August 17, 1999. Vitug,

Compendium of Civil Law and Jurisprudence, 1993 revised ed., p. 556.

70

70 SUPREME COURT REPORTS ANNOTATED

Velarde vs. Court of Appeals

is to declare a contract void at its inception and to put an

end to it as though it never was. It is not merely to
terminate it and release the parties from further
obligations to each other, but to abrogate it from the
beginning and restore the parties21
to their relative positions
as if no contract has been made.

Third Issue
Attempt to Novate

In view of the foregoing discussion, the Court finds it no

longer necessary to discuss the third issue raised by
petitioners. Suffice it to say that the three conditions
appearing on the January 7, 1987 letter of petitioners to
private respondents were not part of the original contract.
By that time, it was already incumbent upon the former to
pay the balance of the sale price. They had no right to
demand preconditions to the fulfillment of their obligation,
which had become due.
WHEREFORE, the assailed Decision is hereby
AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the
amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest
thereon from January 8, 1987, the date of rescission. No
pronouncement as to costs.
SO ORDERED.

          Melo (Chairman), Vitug and Sandoval­Gutierrez,

JJ., concur.
     Gonzaga­Reyes, J., On leave.

http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 16/17
12/19/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 361

Judgment affirmed with modification.

Note.—Mutual restitution is required in rescission but

this presupposes that both parties may be restored in their
original situation. (Asuncion vs. Evangelista, 316 SCRA
848 [1999])

——o0o——

_________________

21 Ocampo v. Court of Appeals, 233 SCRA 551, June 30, 1994.

71

© Copyright 2015 Central Book Supply, Inc. All rights reserved.

http://www.central.com.ph/sfsreader/session/00000151b6249309671580e8003600fb002c009e/t/?o=False 17/17