Guevara vs. De Pascual

Rescission for non-performance does not affect third persons legally in possession in good faith, but is enforceable against a third possessor who, before disposition, knew of the contract's resolutory right and of the vendor's claim of ownership amounting to rescission.

On November 20, 1906, Manuel Guevara sold to Carmen de Pascual de Duffin, who purchased with the consent of her husband C.R. Duffin, the "New Coin Cafe," a bar or drinking saloon in the city of Manila. By the contract the purchaser agreed to pay the owner of the building P1,200 in monthly installments of P100 each as rent for occupation, to pay a debt due from the seller to Macke, Chandler and Co. amounting to P112, and to pay Guevara P600 on February 28, 1907 and P588 on February 28, 1908. The contract further provided that strict compliance was required and that non-fulfillment of any clause by either party would rescind it, with the purchaser upon breach to immediately return the bar with all appurtenances, furniture and improvements without remuneration.

The purchaser took possession but failed to pay the December rent and failed to pay the whole sum due Macke, Chandler and Co. She additionally became indebted to Macke, Chandler and Co. for other merchandise sold to her. On January 8, 1907, Macke, Chandler and Co. sued her to recover the amount due them and on January 9 caused the sheriff of the city of Manila to attach the personal property in the bar. The sheriff obtained an indemnity bond from Macke, Chandler and Co., proceeded despite notice, and on January 18, 1907 sold the personal property for P410.90.

On January 26, 1907, Guevara commenced this action against Carmen de Pascual, C.R. Duffin, Macke, Chandler and Co., and the sheriff, expressly asking that the contract be declared rescinded. As to notice before the January 18 sale, Guevara alleged written notice to the sheriff on January 16 claiming ownership, which the sheriff admitted receiving as an affidavit of ownership, while as to Macke, Chandler and Co. the allegation of notice was denied and the supporting testimony did not state the notice's contents nor introduce the notice itself.

• Rescission Against Third Persons: Whether the vendor's admitted right to rescind for the buyer's non-performance is enforceable against Macke, Chandler and Co. and the sheriff as third persons.
• Good Faith and Prior Notice: Whether Macke, Chandler and Co. and the sheriff were legally in possession in good faith, depending on whether the vendor took affirmative action to rescind before the January 18, 1907 sale.

• Rescission Against Third Persons: Yes, in part. Rescission was available against the original purchaser and, subject to Articles 1295 and 1298, against third acquirers not legally in possession in good faith.
• Good Faith and Prior Notice: No as to Macke, Chandler and Co., but yes as to the sheriff. Failure to prove timely affirmative notice preserved the creditor's position, while the sheriff's admitted pre-sale knowledge defeated good faith.

• Rescission Against Third Persons: The express resolutory clauses gave an undoubted right to rescind against the purchaser upon admitted non-payment of rent and of the assumed debt. Articles 1290 and following were held inapplicable to such a contract for non-performance, the rights being governed instead by Articles 1506 and 1124. Under Article 1124, rescission having been demanded, it was to be ordered unless third acquirers were protected under Articles 1295 and 1298 and the Mortgage Law, and under Article 1295 rescission requires return of the objects and does not take place when they are legally in the possession of third persons who have not acted in bad faith.
• Good Faith and Prior Notice: Mere non-fulfillment did not by itself operate as rescission; affirmative action indicating intent to rescind was required. As to Macke, Chandler and Co., no such pre-sale action was proven, the allegation of January 16 notice having been denied, the witness not having stated its contents, and the notice itself not having been introduced, so affirmance was required. As to the sheriff, the answer expressly admitted receipt on January 16 of plaintiff's affidavit claiming ownership, procurement of an indemnity bond, and possession of a copy of the contract before the sale, establishing knowledge of the right to rescind and of the ownership claim amounting to rescission; hence possession for execution sale was not in good faith within Article 1295. The action filed January 26, ten days after notice and eight days after sale, therefore supported rescission against the sheriff, with value fixed at P410.90, the only evidence of the value of the property actually sold, the claimed improvements largely not having been susceptible to or included in the execution sale.

• Rescission for non-performance; effect on third persons — Under Article 1124, the power to rescind reciprocal obligations upon non-performance is implied, with the prejudiced party entitled to elect fulfillment or rescission with damages and interest, and rescission is to be ordered unless third acquirers are protected under Articles 1295 and 1298 and the Mortgage Law. Applied here to allow rescission against the defaulting buyer and, conditionally, against third possessors.
• Rescission; non-effect against third persons in good faith — Under Article 1295, rescission obliges return of the things with fruits and price with interest and does not take place when the objects are legally in the possession of third persons who have not acted in bad faith, leaving only indemnity for damages against the person causing lesion. Applied here to shield Macke, Chandler and Co. for want of proof of bad faith or timely notice.
• Rescission requires affirmative act — Mere failure to fulfill does not itself rescind; the vendor must take affirmative action indicating intent to rescind. Applied here to make the January 16 notice and January 26 suit decisive, defeating the sheriff's claim of good faith but failing as to the creditor for lack of proof.

• "The right to rescind the obligations is considered as implied and mutual ones, in case of the obligated persons does not comply with what is incumbent upon him." — States the Article 1124 basis for rescission of reciprocal obligations upon non-performance.
• "The court shall order the rescission demanded, unless third acquirers, in accordance with articles 1295 and 1298, and the provisions of the Mortgage Law." — States the limitation protecting qualifying third acquirers from rescission.
• "Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who have not acted in bad faith." — States the Article 1295 good-faith possessor exception applied to exonerate the attaching creditor.
• "The mere failure to fulfill the contract did not operate as a rescission thereof. It was necessary that the plaintiff take some affirmative action indicating his intention to rescind it." — States the requirement of an affirmative rescissory act, making prior notice determinative of third-party liability.

• Judgment of the Supreme Court of Spain, April 24, 1901 — Cited as authority that Articles 1290 and following of the Civil Code do not refer to rescission of contracts such as the sale with resolutory clause in question.
• Judgment of the Supreme Court of Spain, January 19, 1904 — Cited as authority that mere non-fulfillment does not itself rescind and that affirmative action indicating intent to rescind is necessary.

• Article 1124, Civil Code — Governs implied resolutory power in reciprocal obligations, election between fulfillment and rescission with damages and interest, and judicial ordering of rescission subject to third-acquirer protections; applied to sustain the vendor's rescission right.
• Article 1295, Civil Code — Provides that rescission requires return of things with fruits and price with interest and bars rescission against third persons legally in possession in good faith; applied to distinguish the creditor from the sheriff.
• Articles 1290 and following, 1298, Civil Code; Mortgage Law — Referenced as the general rescission regime held inapplicable to this non-performance rescission, except insofar as Articles 1295 and 1298 and the Mortgage Law protect third acquirers under Article 1124.
• Article 1506, Civil Code — Cited together with Article 1124 as governing the parties' rights under the sale with express resolutory conditions.

Arellano, C.J., Torres, Mapa, Carson and Tracey, JJ., concur.