Chanelay Development Corporation vs. Government Service Insurance System

Where a contract expressly provides that all improvements shall automatically become the property of the innocent party without reimbursement upon termination for breach, the defaulting party cannot claim unjust enrichment or reimbursement. Moreover, rescission and specific performance are mutually exclusive remedies under Article 1191 of the Civil Code; a party who elects to rescind a reciprocal obligation cannot thereafter demand performance of the obligation that would have accrued had the contract continued.

GSIS owned Kanlaon Tower II (Chanelay Towers) situated at Roxas Boulevard, Pasay City, and sought a partner to renovate and sell 108 unsold units. After public bidding, GSIS selected CDC, and on June 16, 1995, the parties executed a Joint Venture Agreement. Under paragraph 4.02 of the JVA, CDC undertook to renovate the building at its own expense and pay GSIS ₱180.3 million regardless of actual sales, plus 71% of proceeds from unit sales. CDC began renovations in late 1995 and completed them in early 1997. During the renovation period, CDC constructed 21 additional units on the ground, 10th, and 11th floors and reapportioned 50 basement parking slots, titling these improvements in its own name without GSIS consent. CDC failed to remit the guaranteed ₱180.3 million payment despite several extensions, prompting GSIS to terminate the JVA on November 9, 1998, pursuant to paragraph 7.01.

The Joint Venture Agreement: On June 16, 1995, GSIS and CDC entered into a JVA where CDC agreed to renovate Kanlaon Tower II (Chanelay Towers) and sell 108 unsold units at its own expense. Paragraph 4.02 required CDC to pay GSIS ₱180.3 million regardless of actual sales receipts, plus 71% of proceeds from unit sales. Paragraph 7.01 provided for automatic termination and forfeiture of improvements without reimbursement upon CDC's breach.

Unauthorized Constructions: During renovations commencing late 1995, CDC constructed 21 additional units on the ground, 10th, and 11th floors and reapportioned 50 parking slots at the basement, titling these improvements in CDC's name without GSIS consent.

Breach and Termination: CDC failed to remit the guaranteed ₱180.3 million payment despite several extensions granted by GSIS. On November 9, 1998, GSIS terminated the JVA pursuant to paragraph 7.01.

Proceedings Below: CDC filed a complaint for reformation, seeking to delete the guaranteed payment clause and compel acceptance of units as satisfaction of GSIS's profit share. Goldesc and ETS intervened as unit holders who had entered into contracts to sell with CDC. The RTC dismissed the complaint, upheld the termination, ordered payment of ₱180.3 million, declared improvements forfeited, nullified CDC's titles and contracts with third parties, but denied GSIS's claims for damages and attorney's fees. The Court of Appeals affirmed but deleted the ₱180.3 million award and ordered CDC to return payments to Goldesc and ETS.

Reformation of Instrument (CDC): CDC maintained that the JVA should be reformed under Article 1359 of the Civil Code because the true intention of the parties was to enter into a partnership agreement, not a joint venture with guaranteed payments. It argued that the guaranteed payment clause under paragraph 4.02 did not reflect the parties' true intention and should be deleted to conform to the alleged partnership arrangement.

Reimbursement for Improvements (CDC): CDC argued that Article 1385 of the Civil Code required mutual restitution upon rescission, entitling it to reimbursement for renovation expenses. It contended that forfeiture without reimbursement would result in unjust enrichment of GSIS, analogous to a builder on another's land.

Authority to Contract (CDC): CDC maintained that Article 3.01 of the JVA designated it as the "sole and exclusive marketing agent" with "full power and authority," thereby authorizing it to enter into contracts to sell with third parties, including Goldesc and ETS, and that GSIS was bound by these contracts.

Alternative Remedies (GSIS in G.R. No. 210539): GSIS argued that termination of the contract necessarily entailed enforcement of its terms prior to termination, citing Pryce Corp. v. PAGCOR. It maintained that the ₱180.3 million was compensation for surrendering possession and was automatically due regardless of subsequent termination.

Liquidated Damages (GSIS): GSIS pleaded for equity, arguing that it was entitled to liquidated damages despite not having specifically prayed for them in its counterclaim before the trial court.

Validity of Termination (GSIS): GSIS countered that CDC's reliance on Article 1385 was misplaced because the JVA was terminated pursuant to clause 7.01, not merely rescinded under Article 1381. The termination clause expressly provided for automatic forfeiture of improvements without reimbursement upon breach.

Lack of Authority (GSIS): GSIS argued that Article 3.01 limited CDC's authority to marketing activities only and did not grant blanket authority to enter into contracts to sell or lease. Article 3.04 reserved to GSIS alone the authority to execute final Deeds of Conveyance/Absolute Sale.

Mutually Exclusive Remedies (CDC in G.R. No. 210539): CDC (as respondent in the second petition) argued that GSIS could not claim the guaranteed payment because it had already elected rescission under Article 1191 by terminating the JVA. Specific performance and rescission are alternative, not cumulative, remedies under the Civil Code.

Procedural Bar (CDC): CDC contended that GSIS could not raise liquidated damages for the first time on appeal when it was not included in the counterclaim below, citing Agustin v. Bacalan.

Reimbursement of Improvements: Whether CDC is entitled to reimbursement for renovation expenses despite the JVA's express forfeiture clause.

Binding Effect of Unauthorized Contracts: Whether GSIS is bound to honor CDC's contracts to sell with third parties (Goldesc and ETS).

Alternative Remedies: Whether GSIS, having elected rescission of the JVA, may still recover the guaranteed payment of ₱180.3 million stipulated in paragraph 4.02.

Liquidated Damages: Whether GSIS is entitled to liquidated damages when such claim was not raised in its counterclaim before the trial court.

Forfeiture Without Reimbursement: The forfeiture of improvements without reimbursement was the necessary consequence of valid termination under paragraph 7.01 of the JVA. The provision expressly stated that upon cancellation, "all constructions or improvements existing at the time of said cancellation shall automatically become the property of GSIS without any right on the part of CDC for reimbursement for the value thereof." CDC agreed to this term and was bound by it. The requisites for reformation under Article 1359 were absent; the JVA terms were clear and unequivocal, and CDC's action for reformation was merely a ruse to evade obligations. CDC's inconsistent positions between the consolidated petitions—abandoning the reformation claim in G.R. No. 210423 while resurrecting it in G.R. No. 210539—were barred by the principle that fair play prohibits flip-flopping.

No Authority to Bind Principal: GSIS is not bound by CDC's contracts with third parties. Article 3.01 designated CDC merely as a marketing agent with authority limited to marketing activities, not to entering into contracts to sell or lease. Article 3.04 reserved to GSIS alone the authority to execute final Deeds of Conveyance. Persons dealing with an agent are charged with inquiry into the nature and extent of the agent's authority; Goldesc and ETS failed to ascertain CDC's limited authority and acted at their peril.

Mutually Exclusive Remedies: GSIS is not entitled to the ₱180.3 million guaranteed payment. Under Article 1191 of the Civil Code, an injured party in a reciprocal obligation must choose between specific performance and rescission; these remedies are mutually exclusive. GSIS elected rescission by invoking paragraph 7.01 and terminating the JVA due to CDC's breaches. Having chosen rescission, GSIS could no longer demand specific performance of the guaranteed payment obligation. The termination invoked was rescission under Article 1191 (reciprocal obligations), not Article 1381 (rescissible contracts), and therefore Article 1385 (mutual restitution) did not apply.

Procedural Bar on Liquidated Damages: GSIS is not entitled to liquidated damages. A counterclaim not presented in the lower court cannot be entertained for the first time on appeal. Equity jurisdiction does not apply where GSIS failed to establish special circumstances warranting suspension of procedural rules, and the trial court found no factual basis for damages claims.

Reformation of Instruments (Article 1359) — Reformation requires: (1) meeting of the minds; (2) instrument not expressing true intention; and (3) failure due to mistake, fraud, inequitable conduct, or accident. The Court applied this to reject CDC's claim, noting that one cannot seek reformation merely because the bargain proved unwise, and CDC failed to prove fraud or inequitable conduct by GSIS.

Mutually Exclusive Remedies (Article 1191) — In reciprocal obligations, the injured party must elect between specific performance and rescission. The Court emphasized that "a party may only choose either specific performance or rescission, not both," and that GSIS could not "have its cake and eat it, too" by terminating the contract yet demanding performance of payment obligations.

Extrajudicial Rescission — Parties may stipulate on extrajudicial rescission under Article 1191, freely determining the terms and conditions for invocation and its effects. The JVA's paragraph 7.01 was such a stipulation, providing for automatic termination and forfeiture without judicial action upon breach.

Agency and Authority — Persons dealing with an agent must ascertain not only the fact of agency but also the nature and extent of authority. The Court cited Country Bankers Insurance Corporation v. Keppel Cebu Shipyard to emphasize that third parties are charged with inquiry into an agent's authority and act at their peril if they fail to do so.

Rescission Under Article 1191 vs. Article 1381 — Article 1191 (resolution) applies to reciprocal obligations where breach constitutes a tacit resolutory condition, granting the injured party alternative remedies of specific performance or rescission with damages. Article 1381 provides a subsidiary action for rescission of certain contracts based on specific grounds (lesion, fraud on creditors, etc.) and triggers mutual restitution under Article 1385. The Court distinguished these to hold that Article 1385 did not apply to the extrajudicial termination under Article 1191.

• "One cannot simply ask for reformation if it finds itself at the shorter end of an unwise bargain." — The Court rejected CDC's reformation claim, emphasizing that reformation is not available to relieve a party from the consequences of a bad bargain when the contract terms are clear.

• "It could not have its cake and eat it, too." — The Court's characterization of GSIS's attempt to both rescind the contract and recover the guaranteed payment as if the contract were still in force.

• "Persons dealing with an agent must ascertain not only the fact of agency but also the nature and extent of authority if they were to hold the principal liable for the actions of the agent. The basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent." — Statement of the duty of third parties dealing with agents to verify the scope of authority, applied to deny Goldesc and ETS's claims against GSIS.

• "Here, paragraph 4.02 of the JVA required CDC to pay GSIS ₱180,300,000.00. For GSIS to insist payment of this amount would be tantamount to requiring specific performance. If the JVA is to be pursued to its conclusion, this amount should be complied with as part of exacting performance under the JVA. On the other hand, if rescission is chosen, GSIS may no longer claim this amount." — Explanation of why the guaranteed payment was unavailable once GSIS elected rescission.

Sps. Pajares v. Remarkable Laundry and Dry Cleaning, 806 Phil. 39 (2017) — Distinguished specific performance as requiring exact performance according to precise terms agreed upon, from rescission under Article 1191 as a remedy for breach of reciprocal obligations. The Court followed this distinction to hold that GSIS could not pursue both remedies.

Laperal v. Solid Homes, Inc., 499 Phil. 367 (2005) — Recognized the right of parties to stipulate on extrajudicial rescission under Article 1191. The Court relied on this to uphold the validity of the automatic forfeiture clause in paragraph 7.01 of the JVA.

Congregation of the Religious of the Virgin Mary v. Orola, 576 Phil. 538 (2008) — Distinguished rescission under Article 1191 (reciprocal obligations/resolution) from rescission under Article 1381 (rescissible contracts). The Court applied this to reject CDC's argument that Article 1385 (mutual restitution) applied to the termination.

Pryce Corp. v. PAGCOR, 497 Phil. 490 (2005) — Cited by GSIS to argue that termination entails enforcement of contract terms. The Court distinguished this, noting that GSIS elected rescission rather than enforcement.

Rivera v. Court of Appeals, 257 Phil. 174 (1989) — Applied to bar CDC's flip-flopping arguments between petitions, emphasizing that fair play or due process prohibits parties from changing positions between related cases.

Article 1359, Civil Code — Reformation of instruments when true intention is not expressed due to mistake, fraud, inequitable conduct, or accident. The Court held this inapplicable because CDC failed to prove the requisites and the JVA terms were clear.

Article 1191, Civil Code — Power to rescind reciprocal obligations when one obligor fails to comply, with the injured party having the option between fulfillment and rescission. The Court applied this to hold that GSIS's termination was valid but precluded recovery of the guaranteed payment.

Article 1381, Civil Code — Lists rescissible contracts (those entered into by guardians, in representation of absentees, in fraud of creditors, etc.). The Court distinguished this from Article 1191 to reject CDC's claim for mutual restitution under Article 1385.

Article 1385, Civil Code — Mutual restitution of things and fruits upon rescission. The Court held this applicable only to rescission under Article 1381, not to the extrajudicial rescission under Article 1191 effected pursuant to the JVA termination clause.

Perlas-Bernabe (Chairperson), M. Lopez, Rosario, and J. Lopez, JJ.