Nissan Car Lease Phils., Inc. vs. Lica Management, Inc. and Proton Pilipinas, Inc.

Extrajudicial rescission of a contract under Article 1191 of the Civil Code does not require an express contractual stipulation authorizing such remedy; the power to rescind is implied in reciprocal obligations where one party fails to comply with its undertaking, although the rescinding party proceeds at its own risk and the rescission remains subject to judicial review if questioned by the other party.

Lica Management, Inc. (LMI), absolute owner of a 2,860-square-meter property at 2326 Pasong Tamo Extension, Makati City, entered into a ten-year lease contract with Nissan Car Lease Philippines, Inc. (NCLPI) effective July 1, 1994 to June 30, 2004, with a monthly rental of ₱308,000.00 subject to ten percent annual escalation. By September 1994, NCLPI, with LMI's consent, allowed its subsidiary Nissan Smartfix Corporation to use the premises. NCLPI subsequently accumulated rental arrearages totaling ₱1,741,520.85 as of May 1996. In May 1996, the parties verbally agreed to convert the arrearages into a debt payable through twelve postdated checks, but NCLPI failed to sign the promissory note and defaulted on the checks for June to October 1996. Meanwhile, NCLPI entered into negotiations with Proton Pilipinas, Inc. (Proton) for a sublease, executing a Memorandum of Agreement on October 11, 1996 allowing Proton to commence renovations prior to formal sublease execution.

• Nature of the Contract: On June 24, 1994, LMI and NCLPI executed a Contract of Lease for ten years (July 1, 1994 to June 30, 2004) over commercial premises in Makati City, with a monthly rental of ₱308,000.00 and an annual escalation rate of ten percent. Paragraph 16 provided that any breach or default by either party shall be sufficient ground for the aggrieved party to "rescind" the contract, while Paragraph 18 entitled the injured party to collect damages for non-compliance with contractual provisions.
• Accumulation of Arrearages: NCLPI became delinquent in rental payments, accumulating arrearages of ₱1,741,520.85 as of May 1996. In May 1996, the parties verbally agreed to convert the arrearages into a debt to be covered by a promissory note and twelve postdated checks of ₱162,541.95 each for monthly payments from June 1996 to May 1997. NCLPI delivered the postdated checks but failed to sign the promissory note and subsequently failed to pay the checks for June through October 1996.
• Unauthorized Sublease Negotiations: In October 1996, NCLPI entered into negotiations with Proton for a sublease of the premises. On October 11, 1996, NCLPI and Proton executed a Memorandum of Agreement wherein NCLPI allowed Proton "to immediately commence renovation work even prior to the execution of the Contract of Sublease," and Proton agreed to transmit a check representing three months' rental payments to be deposited only upon execution of the sublease contract. Proton claimed it paid ₱200,000.00 to NCLPI for ten days' use of the property.
• Extrajudicial Rescission: On October 16, 1996 (sent October 18, 1996), LMI sent NCLPI a letter terminating the Contract of Lease due to rental arrears amounting to ₱2,651,570.39, demanding payment and vacation of the premises within five days. NCLPI, through counsel, replied on October 24, 1996, acknowledging the arrearages but requesting deferment of court action citing ongoing negotiations for a sublease.
• Subsequent Lease with Proton: On November 8, 1996, LMI entered into a Contract of Lease with Proton over the subject premises. On November 12, 1996, LMI filed the complaint for sum of money. On November 20, 1996, NCLPI demanded Proton vacate the premises, but Proton refused, claiming occupancy pursuant to its lease contract with LMI.

• Validity of Extrajudicial Rescission: NCLPI maintained that extrajudicial rescission is not permitted in the absence of an express contractual stipulation specifically authorizing such remedy. It argued that Paragraph 16 of the Contract merely granted the "right to rescind," which is the same right already available under Article 1191 of the Civil Code, and does not constitute an express authority for unilateral extrajudicial rescission.
• Procedural Defect in Demand: NCLPI argued that LMI failed to comply with Section 2 of Rule 70 of the Rules of Court, which requires a fifteen-day period to comply with a demand to pay or vacate in cases of land, whereas LMI's demand letter provided only five days.
• Entitlement to Damages: NCLPI asserted that it was entitled to damages for LMI's failure to maintain it in peaceful possession of the premises, alleging that LMI and Proton colluded to unlawfully force NCLPI from the property. It claimed it had no intention of abandoning the lease and that the lease contract between LMI and Proton was void for lack of valid cause or consideration.
• Interest on Security Deposit: NCLPI argued that the security deposit, being in the nature of a forbearance of money, should earn interest at the rate of twelve percent per annum from the date of termination.

• Substantial Breach: LMI countered that NCLPI committed substantial breaches of the Contract of Lease through non-payment of rentals and unauthorized subleasing of the premises to Proton without prior written consent, violating Paragraphs 2, 4, and 5 of the contract.
• Validity of Extrajudicial Rescission: LMI argued that Article 1191 of the Civil Code impliedly grants the right to extrajudicial rescission in reciprocal obligations, and the absence of an express contractual stipulation does not preclude such remedy.
• Proton's Position: Proton asserted that NCLPI misrepresented itself as a lessee in good standing to induce Proton to occupy and renovate the premises, and that Proton was constrained to enter into a lease with LMI only after NCLPI failed to obtain LMI's consent to the sublease and its own lease was terminated.

• Extrajudicial Rescission: Whether a contract may be rescinded extrajudicially despite the absence of a special contractual stipulation authorizing such remedy.
• Propriety of Damages: Whether the prevailing facts warrant the dismissal of LMI's claims and the award of NCLPI's claims for damages.
• Interest on Security Deposit: How much interest should be paid on the delayed release of the security deposit in a lease contract.

• Extrajudicial Rescission: Extrajudicial rescission is valid under Article 1191 of the Civil Code even without an express contractual stipulation. The power to rescind is implied in reciprocal obligations where one party fails to comply with its undertaking. The Court reconciled previous rulings in Tan v. Court of Appeals, Iringan v. Court of Appeals, and EDS Manufacturing, Inc. v. Healthcheck International, Inc. with University of the Philippines v. De los Angeles and Golden Valley Exploration, Inc. v. Pinkian Mining Company, clarifying that while extrajudicial rescission is always available, the rescinding party proceeds at its own risk and the rescission remains subject to judicial review if questioned. The practical effect of an express stipulation merely transfers to the defaulter the initiative of instituting suit.
• Substantial Breach: NCLPI's non-payment of rentals and unauthorized sublease to Proton constituted substantial breaches of the Contract of Lease, justifying LMI's extrajudicial rescission. The factual findings of the Court of Appeals, affirming those of the trial court, are binding upon the Supreme Court.
• Rule 70 Inapplicability: Section 2 of Rule 70 of the Rules of Court is inapplicable because LMI's action was for recovery of sum of money, not forcible entry or unlawful detainer. Moreover, NCLPI had already vacated the premises as early as October 11, 1996 when it surrendered possession to Proton for renovations.
• Damages: NCLPI's claim for damages was properly denied. NCLPI came to court with unclean hands, having misrepresented its standing to Proton and having itself provided the bases for the cancellation of its lease. The awards of exemplary damages and attorney's fees in favor of LMI and Proton were affirmed.
• Interest on Rental Arrearages: Following Nacar v. Gallery Frames, the unpaid rentals of ₱2,365,569.61 shall earn interest at six percent per annum from October 18, 1996 (date of extrajudicial demand) until the finality of the judgment, and thereafter at six percent per annum until full satisfaction.
• Security Deposit: LMI is ordered to return the security deposit balance of ₱883,253.72 with interest at six percent per annum from March 25, 2003 (the date NCLPI first raised the issue in its Brief before the Court of Appeals) until the finality of the decision, and thereafter at six percent per annum until satisfaction. The obligation to return the security deposit is not in the nature of a forbearance of money but arises from the contract of lease.

• Extrajudicial Rescission under Article 1191 — The power to rescind is implied in reciprocal obligations under Article 1191 of the Civil Code. An aggrieved party is not prevented from extrajudicially rescinding a contract to protect its interests, even absent an express provision authorizing such right. The act of treating a contract as rescinded is provisional and subject to scrutiny by the proper court; if the court determines rescission was unwarranted, the rescinding party is liable for damages. The only practical effect of an express contractual stipulation allowing extrajudicial rescission is to transfer to the defaulter the initiative of instituting suit, instead of the rescinder.
• Interest Rates under the Civil Code (as modified by Nacar v. Gallery Frames) — When the obligation is breached and no interest rate is stipulated, the interest rate shall be six percent per annum computed from the time of judicial or extrajudicial demand until finality of judgment, and thereafter at six percent per annum until satisfaction, regardless of whether the obligation consists of a loan or forbearance of money.

• "The law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203)."
• "The act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk."
• "The only practical effect of a contractual stipulation allowing extrajudicial rescission is 'merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder.'"

• University of the Philippines v. De los Angeles, G.R. No. L-28602, September 29, 1970 — Controlling precedent establishing that extrajudicial rescission is available under Article 1191 and that the rescinding party proceeds at its own risk subject to judicial review.
• Golden Valley Exploration, Inc. v. Pinkian Mining Company, G.R. No. 190080, June 11, 2014 — Followed for the proposition that extrajudicial rescission based on grounds not specified in the contract does not preclude a party from treating the contract as rescinded, subject to the risk of damages if rescission is found improper.
• Tan v. Court of Appeals, G.R. No. 80479, July 28, 1989 — Distinguished/clarified; previously held that extrajudicial rescission is not possible without express stipulation, but reconciled with the UP v. De los Angeles doctrine.
• Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013 — Controlling precedent for the computation of legal interest at six percent per annum from demand until finality, and six percent per annum thereafter until satisfaction.

• Article 1191, Civil Code of the Philippines — Provides that the power to rescind obligations is implied in reciprocal obligations in case one of the obligors should fail to comply with what is incumbent upon him.
• Article 2203, Civil Code of the Philippines — Mandates that the party suffering loss or injury must exercise due diligence to minimize its own damages.
• Rule 70, Section 2, Rules of Court — Governs the requirement of demand prior to filing suits for forcible entry and unlawful detainer; held inapplicable to actions for sum of money.

Presbitero J. Velasco, Jr. (Chairperson), Lucas P. Bersamin, Martin S. Villarama, Jr., and Jose C. Mendoza.