Grace Park Engineering Co., Inc. vs. Dimaporo

The governing principle is that when both contracting parties commit a breach of obligation and it cannot be determined which party first violated the contract, the obligation is deemed extinguished and each party shall bear its own damages, precluding the award of interest on restitutionary amounts. Furthermore, a decree of rescission necessarily carries the obligation of mutual restitution under Article 1385 of the New Civil Code; a party who seeks rescission must return whatever it received under the contract, including the subject matter and its fruits, regardless of claims regarding incomplete delivery or performance.

On April 1, 1954, Grace Park Engineering Co., Inc. and Mohamad Ali Dimaporo executed a Contract for the Sale of Cassava Flour and Starch Processing Machinery and Equipment for P52,000.00. The agreement required Grace Park to deliver and install the machinery at Dimaporo’s site in Karomatan, Lanao Mill Site within 70 working days, guaranteeing a processing capacity of at least 6 tons per 24-hour operation. Dimaporo assumed the obligation to supply, at his own expense, the building, laborers, food, foundation materials, and an effective water system. Dimaporo paid P15,750.00 in advance, leaving a balance of P36,750.00. During installation, Dimaporo failed to provide the stipulated prerequisites, compelling Grace Park to advance funds for materials and labor with Dimaporo’s prior knowledge and consent. Installation extended to one year and three months. Upon completion, Grace Park demanded payment of the balance and reimbursement of advances. Dimaporo refused, alleging delayed installation and failure to meet the guaranteed output. Grace Park subsequently filed an action for rescission and damages, while Dimaporo counterclaimed for rescission, mutual restitution, and damages.

• The contract stipulated payment terms of P5,750.00 upon signing, P10,000.00 within 30 days before shipment, and the remaining P36,750.00 in twelve monthly installments.
• Paragraph 6 of the contract expressly required Dimaporo to furnish the building, labor, food, foundation materials, and water system necessary for the machinery’s operation.
• Dimaporo failed to comply with these prerequisites, prompting Grace Park to supply the necessary materials and labor and advance related expenses.
• The installation period extended to fifteen months. Grace Park subsequently demanded full payment of the balance and reimbursement of advances.
• Dimaporo refused payment, asserting that the balance never became due and demandable because Grace Park failed to complete installation within 70 days and failed to place the machinery in satisfactory running conditions as guaranteed.
• The trial court found that Dimaporo breached paragraph 6 by failing to supply labor, materials, and water systems, while Grace Park installed machinery that was fundamentally defective and inadequate.
• The trial court determined that the sequence of breaches could not be established and applied the rule on mutual breach to extinguish the contract and deny damages to either party.
• The trial court ordered mutual restitution, requiring Dimaporo to return the machinery and bear transportation expenses to Cotabato, Grace Park to bear freight to Manila, Grace Park to return the P15,750.00 partial payment, and Dimaporo to reimburse P19,628.93 in advances with 6% annual interest from filing.

• Petitioner Dimaporo maintained that he committed no breach of contract and argued that Grace Park was solely liable for failing to complete installation within the stipulated period and for delivering machinery incapable of meeting the warranted output.
• Petitioner contended that he should not be compelled to return the machinery or pay transportation costs because delivery never legally occurred; he asserted that delivery remained contingent upon successful installation and demonstration of the guaranteed 6-ton daily capacity.
• Petitioner argued that the P19,628.93 advance should be offset against damages owed by Grace Park for its contractual violations.
• Petitioner asserted that Grace Park was the first infractor and therefore liable for damages, and further claimed that Grace Park should pay interest on the returned P15,750.00 partial payment.

• Respondent Grace Park relied on the trial court’s factual findings, arguing that Dimaporo’s failure to provide the contractual prerequisites directly caused the installation delay and justified the corporation’s advances for materials and labor.
• Respondent maintained that the machinery was duly shipped and installed, and that Dimaporo’s refusal to pay the balance and reimburse advances constituted a clear breach.
• Respondent supported the trial court’s decree of mutual restitution and the award of P19,628.93, asserting that the advances were necessary expenses incurred due to Dimaporo’s non-compliance and should be reimbursed.

• Procedural Issues:
  • Whether the Supreme Court may disturb the trial court’s factual findings when the appellant directly appeals to the Court.
• Substantive Issues:
  • Whether Dimaporo breached his contractual obligations under paragraph 6 of the agreement.
  • Whether Dimaporo is legally obligated to return the machinery and equipment upon rescission despite claims of incomplete delivery.
  • Whether the trial court correctly applied Article 1192 of the New Civil Code in denying interest on the P19,628.93 and P15,750.00 restitutionary amounts.

• Procedural:
  • The Court held that factual findings of the trial court, when supported by substantial evidence, are binding on the Supreme Court. Because Dimaporo filed a direct appeal, he was deemed to have waived the right to dispute the lower court’s factual determinations. The Court declined to re-evaluate the evidence, emphasizing that the trial court had the distinct advantage of observing witness demeanor and weighing testimonial credibility.
• Substantive:
  • The Court found that Dimaporo breached paragraph 6 of the contract by failing to furnish labor, materials, and an effective water system. The trial court’s conclusion that the installation delay and failure to meet production capacity were attributable to Dimaporo’s non-compliance was sustained.
  • The Court ruled that Dimaporo must return the machinery, holding that a party seeking rescission cannot demand resolution of the contract while retaining the subject matter. The obligation of mutual restitution is inherent in rescission under Article 1385 of the New Civil Code. Dimaporo’s own prayer for rescission and mutual restitution in his Answer precluded his contention that he could retain the machinery without returning it.
  • The Court affirmed that both parties breached the contract and that the first infractor could not be determined. Applying Article 1192 of the New Civil Code, the Court held that the contract is extinguished and each party must bear its own damages. Consequently, the trial court erred in imposing 6% annual interest on the P19,628.93 advance. The Court modified the judgment to require payment of the principal amount without interest, while sustaining the return of the P15,750.00 partial payment without interest.

• Binding Nature of Trial Court Factual Findings — The Supreme Court consistently defers to the factual findings of trial courts when supported by substantial evidence, recognizing the lower court’s superior position to assess witness credibility and weigh evidence. The Court applied this doctrine to refuse re-examination of the breach sequence and the adequacy of the machinery, holding that direct appeal constitutes a waiver of the right to challenge factual determinations.
• Mutual Restitution in Rescission — Rescission inherently carries the obligation to return the objects of the contract, along with their fruits and the price with interest, and may only be demanded when the claimant can return what it received. The Court applied this principle to reject Dimaporo’s argument that he need not return the machinery, emphasizing that a party who seeks rescission cannot simultaneously demand retention of the subject matter.
• Article 1192 Rule on Mutual Breach — When both contracting parties commit a breach of obligation and the first infractor cannot be determined, the obligation is deemed extinguished and each party bears its own damages. The Court invoked this doctrine to strike down the award of interest on restitutionary amounts, holding that imposing interest would contradict the statutory mandate that each party absorb its own losses in cases of indeterminate mutual breach.

• "Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore." — The Court quoted Article 1385 of the New Civil Code to establish that rescission is fundamentally reciprocal; a party cannot unilaterally demand contract termination while retaining the benefits received, thereby grounding the order for Dimaporo to return the machinery.
• "In case both parties have committed a breach of the obligation, the liability of the first infractor should be equitably tempered by the Courts. If it cannot be determined which of the parties first violated the contract, the same should be deemed extinguished, and each shall bear his own damages." — The Court cited Article 1192 of the New Civil Code to justify the removal of interest on the P19,628.93 award, reasoning that awarding interest would improperly convert a statutory extinguishment of damages into a compensatory liability.

• Corliss vs. Manila Railroad Company — Cited for the settled rule that factual findings of trial courts, supported by substantial evidence, are conclusive on the Supreme Court.
• Miguel vs. Court of Appeals — Followed to reinforce the principle that appellate courts must respect the trial court’s factual determinations absent grave abuse of discretion or misapprehension of facts.
• Yturralde vs. Vagilidad — Invoked to support the binding effect of trial court findings of fact on higher tribunals.
• Samson, Jr. vs. Tarroza — Applied to emphasize the deference owed to the trial court’s assessment of evidence and witness credibility.
• Perez vs. Araneta — Cited as controlling precedent on the finality of trial court factual findings when supported by the record.
• Cebu Portland Cement Co. vs. Mun. of Naga, Cebu — Relied upon for the rule that a party who directly appeals to the Supreme Court waives the right to contest the trial court’s factual findings.
• Pascua vs. Capuyoc — Cited to affirm that direct appellate review precludes re-litigation of factual issues resolved by the lower court.
• Po Pauco vs. Siguenza and Aguilar — Invoked to establish that rescission requires the surrender of what each party received and aims to restore them to their original positions.
• Magdalena Estate Inc. vs. Louis J. Myrick — Applied to support the principle that a party seeking resolution cannot demand performance for part of the contract and rescission for the remainder.
• Verceluz vs. Edano — Cited to reinforce the reciprocal nature of restitution upon contract rescission.

• Article 1192, New Civil Code — Governs cases where both parties breach a contract and the first infractor cannot be identified. The Court applied it to extinguish the obligation and deny damages to either party, thereby precluding interest on restitutionary sums.
• Article 1385, New Civil Code — Establishes the obligation of mutual restitution upon rescission. The Court relied on it to compel Dimaporo to return the machinery, holding that rescission cannot be invoked while retaining the subject matter of the contract.