Cannu vs. Galang

A buyer’s failure to pay a substantial portion of the purchase price and to update mortgage amortizations for an extended period, despite repeated demands, constitutes a substantial breach that frustrates the object of the contract and justifies rescission (resolution) under Article 1191 of the Civil Code; such rescission is a principal action and need not be preceded by a formal judicial demand where the injured party subsequently prays for rescission in its responsive pleading.

Spouses Gil and Fernandina Galang obtained a loan from Fortune Savings & Loan Association to purchase a house and lot in Las Piñas covered by TCT No. T‑8505, secured by a real estate mortgage. The loan was later purchased by the National Home Mortgage Finance Corporation (NHMFC). Respondent Fernandina Galang authorized her attorney‑in‑fact, Adelina R. Timbang, to sell the property. Petitioners Spouses Felipe and Leticia Cannu agreed to buy the property for P120,000 and to assume the balance of the mortgage obligation with NHMFC and a second mortgage with the developer, CERF Realty. The parties executed a Deed of Sale with Assumption of Mortgage that stated a consideration of P250,000, but their pleadings revealed the true agreed consideration was P120,000 plus the assumption of the existing loans. The buyers took possession but subsequently failed to pay the full purchase price and to keep the amortizations current.

• Nature of the Transaction: Respondents Spouses Galang purchased a house and lot in Pulang Lupa, Las Piñas, covered by TCT No. T‑8505, with a loan from Fortune Savings & Loan Association secured by a real estate mortgage. NHMFC later acquired the mortgage loan. Respondent Fernandina Galang authorized her attorney‑in‑fact, Adelina Timbang, to sell the property.
• The Sale and the True Consideration: Petitioners agreed to buy the property for P120,000 and to assume the balance of the mortgage obligation with NHMFC and a second mortgage with CERF Realty, the developer. A Deed of Sale with Assumption of Mortgage dated 20 August 1990 was executed, but it misstated the consideration as P250,000. The pleadings and evidence showed the real agreed price was P120,000 plus the assumption of the loans. The parol evidence rule was relaxed because the written instrument failed to express the parties’ true intent as to consideration.
• Payments Made by Petitioners: Petitioners paid a total of P75,000 to respondents through their attorney‑in‑fact in installment payments made on 19 July 1990 (P40,000), 13 March 1991 (P15,000), 6 April 1991 (P15,000), and 28 November 1991 (P5,000), leaving a balance of P45,000. To NHMFC, petitioners made six payments between July 1990 and April 1993 totaling P55,312.47. The second mortgage with CERF Realty in the amount of P35,000 was also paid by petitioners, as admitted by respondents’ witness.
• Default, Demands, and Lack of Formal Assumption: After the last payment to respondents on 28 November 1991, petitioners ceased paying the balance despite repeated follow‑ups by Adelina Timbang and demands by respondent Fernandina Galang upon her return from the United States in October 1992. Petitioners also failed to maintain regular amortization payments to NHMFC; their six payments over three years were insufficient to cover arrears, interest, and penalties. NHMFC never approved the formal assumption of mortgage because petitioners did not submit the required documentation.
• Pre‑termination of Mortgage and Filing of Complaint: On 21 May 1993, respondent Fernandina Galang paid P233,957.64 to fully settle the mortgage loan with NHMFC, an act she characterized as an initial step toward rescission. Petitioners opposed the release of the certificate of title to respondents. On 24 June 1993, petitioners filed the complaint for specific performance and damages.

• Insignificance of Breach: Petitioners argued that their failure to pay the remaining P45,000 was a slight breach because they had already paid P75,000 of the P120,000 consideration and had made substantial payments to NHMFC and CERF Realty.
• Substantial Compliance with Mortgage: Petitioners maintained they had substantially complied with their obligation to assume the mortgage by making several payments to NHMFC.
• Waiver and Lack of Demand: Petitioners claimed respondents never demanded strict compliance; by accepting installment payments after the contract date, respondents waived their right to rescind. They relied on Angeles v. Calasanz for the proposition that acceptance of late payments constitutes waiver.
• Subsidiary Nature of Rescission: Petitioners contended that rescission under Article 1191 is a subsidiary action and could not be pursued without proof that respondents were ready, willing, and able to return the amounts they had received, citing Seva v. Berwin & Co., Inc. and Article 1383.
• Right to Additional Time: Invoking Massive Construction, Inc. v. Intermediate Appellate Court, petitioners requested additional time to complete their obligations.

• Substantial Breach: Respondents countered that petitioners’ prolonged failure to pay the P45,000 balance and to maintain regular amortizations defeated the object of the sale and constituted a substantial breach.
• No Waiver: Respondents argued that acceptance of delayed partial payments was a mere accommodation and did not amount to a waiver of the right to rescind, especially after petitioners stopped paying altogether.
• Valid Exercise of Rescission: Respondents asserted their right to rescind under Article 1191, maintaining that pre‑terminating the mortgage was a preparatory act to effect rescission and that their counterclaim properly placed the matter before the court.
• Tender Ineffective: Respondents argued that the Manager’s Check for P278,957 tendered by petitioners after the filing of the complaint did not constitute valid payment because it was not accompanied by consignation, as required by law.

• Substantiality of Breach: Whether petitioners’ failure to pay the P45,000 balance of the purchase price and to update mortgage amortizations constituted a substantial breach warranting rescission under Article 1191.
• Substantial Compliance with Mortgage: Whether petitioners substantially complied with their obligation to assume and pay the NHMFC mortgage amortizations.
• Waiver of Right to Rescind: Whether respondents Spouses Galang waived their right to rescind by accepting late installment payments and by failing to make a formal judicial demand before paying off the mortgage.
• Subsidiary Character of Rescission: Whether rescission under Article 1191 is a subsidiary action that requires the party seeking rescission to be ready, willing, and able to return what it received.
• Effect of Unilateral Act: Whether respondents’ pre‑termination of the mortgage loan, without prior judicial authority, invalidated the rescission, and whether their counterclaim for rescission sufficed.

• Substantiality of Breach: The breach was substantial. The unpaid balance of P45,000 represented a significant portion of the true purchase price, and the failure to pay persisted for more than 18 months despite repeated demands. Even treating the written consideration of P250,000 as the benchmark, the 18% shortfall was not merely casual. The totality of circumstances—including petitioners’ cessation of payments and their failure to maintain amortizations—defeated the object of the sale. Rescission is not available for a slight or casual breach, but this breach was fundamental.
• Substantial Compliance with Mortgage: Substantial compliance was not established. Petitioners made only six amortization payments over three years, which were insufficient to cover the arrears, interest, and penalty charges. In addition, the formal assumption of mortgage was never approved by NHMFC because petitioners did not submit the requisite documents. The obligation to assume the mortgage meant more than sporadic payments; it required full compliance with the creditor’s requirements.
• Waiver of Right to Rescind: No waiver occurred. The acceptance of installment payments after the execution of the contract was a mere accommodation, not an unequivocal waiver of the right to rescind. When petitioners stopped paying altogether, respondents were entitled to exercise their right of rescission. Angeles v. Calasanz was distinguished because in that case the breach was slight and the buyer had already paid more than the principal obligation, circumstances absent here.
• Subsidiary Character of Rescission: Rescission under Article 1191 is a principal action, not a subsidiary one. The subsidiary character mandated by Article 1383 applies only to rescission for lesion under Article 1381. Rescission under Article 1191 is founded on breach of reciprocity; it is “retaliatory in character” and not conditioned on the plaintiff’s prior readiness to return what was received. Because respondents had already performed their obligation by delivering possession of the property, they could demand rescission without first proving ability to return payments.
• Effect of Unilateral Act: Although the Deed of Sale with Assumption of Mortgage contained no stipulation authorizing extrajudicial rescission, and respondents’ pre‑termination of the mortgage was thus not a valid unilateral rescission under Tan v. Court of Appeals, respondents’ Answer with Counterclaim effectively sought judicial rescission. Given that the breach was fully litigated and established, it was proper for the court to declare the contract rescinded rather than require a separate action, thereby avoiding multiplicity of suits.

• Rescission under Article 1191 vs. Rescission under Article 1381 — Rescission (resolution) under Article 1191 is a principal action based on breach of reciprocity; it is not subject to the subsidiary character imposed by Article 1383, which applies exclusively to rescission for lesion under Article 1381. The right under Article 1191 arises from the defendant’s violation of the contractual bond, not from economic prejudice to the plaintiff, and does not require the plaintiff to prove readiness to return what was received before seeking rescission.
• Substantial Breach as a Condition for Rescission — Rescission under Article 1191 will not be granted for a slight or casual breach. The breach must be so substantial and fundamental as to defeat the object of the parties in entering the contract. The determination is based on the attending circumstances, not merely on the mathematical percentage of the amount unpaid.
• Waiver of Right to Rescind — The mere acceptance of delayed or partial payments does not, by itself, constitute a waiver of the right to rescind. Waiver requires a clear, unequivocal, and intentional relinquishment of a known right. When late payments are accepted as an accommodation and the obligor ultimately ceases performance, the right to rescind subsists.
• Tender of Payment and Consignation — Tender of payment alone does not produce legal payment. To extinguish an obligation, the tender must be followed by consignation in accordance with law. An unaccompanied tender, especially after the obligee has refused or the obligor is in default, is ineffective.
• Parol Evidence Rule — Exception for True Consideration — When a written contract fails to express the true intent and agreement of the parties as to the consideration, and that defect is squarely put in issue in the pleadings, parol evidence is admissible to explain, modify, or supplement the written instrument.

• “Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only for such breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement.”
• “The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action … This rescission is a principal action retaliatory in character …”
• “Tender of payment does not by itself produce legal payment, unless it is completed by consignation.”
• “In the absence of a stipulation to the contrary, [the power to rescind] must be invoked judicially; it cannot be exercised solely on a party’s own judgment that the other has committed a breach of the obligation.”

• Ang v. Court of Appeals, G.R. No. 80058, 13 February 1989, 170 SCRA 286 — Followed for the rule that rescission under Article 1191 requires a substantial and fundamental breach.
• Tan v. Court of Appeals, G.R. No. 80479, 28 July 1989, 175 SCRA 656 — Followed for the requirement that, absent an extrajudicial rescission clause, the power to rescind must be invoked judicially, but distinguished insofar as the counterclaim here effectively sought judicial rescission.
• Universal Food Corp. v. Court of Appeals, G.R. No. L‑29155, 13 May 1970, 33 SCRA 1 — The concurring opinion of Justice J.B.L. Reyes, distinguishing rescission under Article 1191 (principal action) from rescission under Article 1381 (subsidiary action), was expressly adopted and applied.
• Angeles v. Calasanz, G.R. No. L‑42283, 18 March 1985, 135 SCRA 323 — Distinguished; the breach in that case was only slight and casual, and the buyers had paid more than the principal obligation, unlike the present case.
• Philippine National Bank v. Relativo, 92 Phil. 203 (1952) — Cited for the principle that tender of payment must be completed by consignation to produce legal effect.
• Massive Construction, Inc. v. Intermediate Appellate Court, G.R. Nos. 70310‑11, 01 June 1993, 223 SCRA 1 — Invoked by petitioners but not applied, as the Court found petitioners’ breach to be blatant and prolonged, rendering an extension unjustified.

• Article 1191, Civil Code — The provision on rescission of reciprocal obligations was the central legal basis. It was interpreted as establishing a principal action grounded on breach of reciprocity, and was applied to declare the deed rescinded due to petitioners’ substantial failure to pay and to assume the mortgage.
• Articles 1381 and 1383, Civil Code — These articles govern rescission for lesion and its subsidiary character. The Court held they did not apply because the case involved rescission under Article 1191, not one of the enumerated rescissible contracts for economic prejudice.
• Parol Evidence Rule (now Section 9, Rule 130, Rules of Court) — The exception allowing evidence to explain the failure of a written agreement to express the true intent of the parties was applied to admit proof of the real consideration of P120,000, which had been put in issue by the pleadings.

Justices Reynato S. Puno (Acting Chief Justice and Chairman of the Second Division), Ma. Alicia Austria‑Martinez, and Romeo J. Callejo, Sr., concurred. Associate Justice Dante O. Tinga was on official leave outside the country.