Velarde vs. Court of Appeals

A substantial breach of a reciprocal obligation, such as the failure to pay the purchase price in the manner prescribed by the contract, entitles the injured party to rescind the obligation under Article 1191 of the Civil Code; rescission abrogates the contract from its inception and requires mutual restitution of benefits received, including the return of payments made by the buyer.

• David Raymundo is the registered owner of a parcel of land with improvements located at 1918 Kamias St., Dasmariñas Village, Makati, covered by TCT No. 142177.
• George Raymundo, David's father, negotiated with petitioners Avelina and Mariano Velarde for the sale of the property, which was under lease at the time.
• On August 8, 1986, the parties executed a Deed of Sale with Assumption of Mortgage, whereby David Raymundo sold the property to Avelina Velarde for P800,000.00 cash consideration plus the assumption of a P1,800,000.00 mortgage obligation with the Bank of the Philippine Islands (BPI).
• On the same date, Avelina Velarde, with the consent of her husband Mariano, executed an Undertaking binding herself to continue paying the mortgage loan in accordance with the terms of the Real Estate Mortgage in Raymundo's name until the assumption was approved by BPI.
• The Undertaking stipulated that if Velarde violated any terms of the mortgage, the downpayment of P800,000.00 plus all mortgage payments would be forfeited as liquidated damages, and the Deed of Sale would be automatically cancelled and deemed of no force and effect.
• The parties agreed that the balance of P1.8 million would be paid from proceeds of a loan that petitioners would secure from a bank with respondents' help, subject to BPI's approval of the assumption application.
• Pending BPI's approval, petitioners paid the monthly interests on the loan for three months: P27,225.00 on September 19, 1986; P23,000.00 on October 20, 1986; and P23,925.00 on November 19, 1986.
• On December 15, 1986, BPI advised petitioners that their Application for Assumption of Mortgage was not approved.
• Petitioners ceased making further payments after receiving the notice of disapproval.
• On January 5, 1987, respondents' counsel wrote petitioners informing them that their non-payment constituted non-performance of their obligation.
• On January 7, 1987, petitioners' counsel responded offering to pay the balance in cash not later than January 21, 1987 subject to three conditions: (a) delivery of actual possession by January 15, 1987; (b) release of title and mortgage from BPI making the title free from liens; and (c) execution of an absolute deed of sale by January 21, 1987.
• On January 8, 1987, respondents sent petitioners a notarial notice of cancellation/rescission of the intended sale due to failure to comply with the terms of the Deed of Sale and Undertaking.

• Petitioners argued that their non-payment of the mortgage obligation did not constitute a breach of contract because their request to assume the mortgage had been disapproved by BPI, thus the obligation to pay the monthly amortizations ceased to be theirs and devolved upon respondents.
• They contended that the rescission by respondents was not justified because they had signified willingness to pay the balance only a little over a month from the notice of disapproval, and the breach was not substantial as to warrant rescission.
• They maintained that they had substantially performed their obligation in good faith, having paid the initial P800,000.00 and three monthly mortgage payments.
• They asserted that their January 7, 1987 letter did not constitute an attempt to novate the contract with new conditions, but merely expressed their willingness to pay.

• Respondents argued that the assumption of the mortgage obligation was part of the consideration for the sale, and the non-payment of the mortgage obligation resulted in a violation of the contract.
• They contended that the disapproval by BPI of the assumption application could not excuse petitioners' non-payment of the balance, as the agreement mandated that petitioners should pay the P1.8 million balance in full if the assumption was disapproved.
• They maintained that the three conditions in petitioners' January 7, 1987 letter constituted new conditions not previously agreed upon, amounting to mere offers or an attempt to novate the contract, which required the consent of all parties.
• They argued that the rescission was valid under Article 1191 of the Civil Code because petitioners failed to pay the price, which was substantial and fundamental to the agreement, and they had sent a notarial notice of rescission on January 8, 1987.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the non-payment of the mortgage obligation and the balance of the purchase price constituted a substantial breach of the contract of sale.
  • Whether the rescission of the contract by private respondents was valid and justified under Article 1191 of the Civil Code.
  • Whether petitioners' January 7, 1987 letter offering to pay subject to three conditions constituted an attempt to novate the contract.

• Procedural: N/A
• Substantive:
  • The Court held that petitioners committed a substantial breach of their reciprocal obligation under the contract of sale. The breach was not merely the non-payment of mortgage obligations, but the failure to pay the balance of the purchase price of P1.8 million when the assumption application was disapproved. The execution of the Deed of Sale effected constructive delivery of the property to petitioners, yet they failed to perform their correlative obligation to pay the price in the manner agreed upon.
  • The rescission by respondents was valid under Article 1191 of the Civil Code. The breach was substantial, not slight or casual, as petitioners not only failed to pay the balance but also imposed new obligations on respondents as preconditions to payment, effectively repudiating their existing obligation. The notarial notice of rescission dated January 8, 1987 was properly executed.
  • The Court found it unnecessary to discuss the novation issue in view of its ruling on the first two issues, but noted that the three conditions in the January 7 letter were not part of the original contract and petitioners had no right to demand preconditions to the fulfillment of their obligation which had become due.
  • The Court ordered mutual restitution of benefits received. Respondents were directed to return to petitioners the amount of P874,150.00 (representing the P800,000.00 downpayment and mortgage payments totaling P74,150.00) with legal interest from January 8, 1987, the date of rescission. Rescission abrogates the contract from its inception and requires restoration of the parties to their original positions.

• Rescission of Reciprocal Obligations (Article 1191, Civil Code) — The power to rescind obligations is implied in reciprocal ones when one party fails to comply with what is incumbent upon them. The injured party may choose between fulfillment and rescission. The breach contemplated is the obligor's failure to comply with an existing obligation, which gives rise to the right to rescind.
• Mutual Restitution in Rescission — Rescission creates the obligation to return the object of the contract and can only be carried out when the one who demands rescission can return whatever they are obliged to restore. It abrogates the contract from the beginning and restores the parties to their relative positions as if no contract had been made.
• Constructive Delivery — In a contract of sale, execution of the Deed of Sale is deemed equivalent to delivery, and prior physical delivery or possession is not legally required to transfer ownership.
• Substantial vs. Slight Breach — Rescission is not permitted for a slight or casual breach, but is justified when the breach is substantial and fundamental as to defeat the object of the parties in making the agreement.
• Automatic Rescission Clauses (Article 1592, Civil Code) — Even if a contract expressly provides for automatic rescission upon failure to pay the price, the vendee may still pay for as long as no demand for rescission has been made upon them either judicially or by a notarial act.

• "A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the obligation."
• "Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received."
• "To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made."
• "The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them."

• Song Fo & Co. v. Hawaiian-Philippine Co. (47 Phil. 821) — Cited to distinguish slight delay (20 days) from the substantial breach in the present case where petitioners failed to pay the entire balance and imposed new conditions.
• Tan v. Court of Appeals (175 SCRA 656) — Cited to illustrate slight delay of only a few days, which is insufficient grounds for rescission, unlike the present case.
• Zepeda v. Court of Appeals (216 SCRA 293) — Cited to show that a one-week delay in paying a small balance (P1,000) which was actually paid does not justify rescission.
• Garcia, Jr. v. Court of Appeals (191 SCRA 493) — Cited for the principle that novation requires the agreement of all parties to the new contract, which was lacking when petitioners offered new conditions.
• Songcuan v. IAC (191 SCRA 28) — Cited for the principle that in reciprocal obligations, the obligation of one is a resolutory condition of the obligation of the other.
• Edca Publishing & Distribution Corporation v. Santos (184 SCRA 614) — Cited for the rule that non-payment of the price gives the seller the right to demand payment, rescind the contract, or seek criminal prosecution.
• Ruiz v. IAC (184 SCRA 720) — Cited to support the validity of rescission upon failure to pay the price.
• Voysaw v. Interphil Promotions, Inc. (148 SCRA 635) — Cited for the principle that a party who violates the contract loses the right to its enforcement and cannot avail of specific performance.
• Coronel v. Court of Appeals (263 SCRA 15) — Cited for the definition of a contract of sale where the seller obligates itself to transfer ownership and the buyer to pay a price certain.
• Power Commercial and Industrial Corp. v. Court of Appeals (274 SCRA 597) — Cited for the doctrine of constructive delivery through execution of the deed.
• Uy v. Court of Appeals (314 SCRA 69) and Romero v. Court of Appeals (250 SCRA 223) — Cited for the principle that the right to rescind is predicated on breach of faith violating reciprocity.
• Cheng v. Genato (300 SCRA 722) — Cited for the definition of breach as failure to comply with an existing obligation.
• Central Philippine University v. Court of Appeals (246 SCRA 511) — Cited for the rule that the court shall decree rescission when there is no just cause to determine the period of compliance.
• Co v. Court of Appeals (312 SCRA 528) — Cited for the principle that rescission creates the obligation to return the object of the contract.
• Ocampo v. Court of Appeals (233 SCRA 551) — Cited for the definition of rescission as abrogating the contract from the beginning.

• Article 1191, Civil Code — Provides the power to rescind reciprocal obligations when one party does not comply with their obligation, allowing the injured party to choose between fulfillment and rescission.
• Article 1592, Civil Code — Provides that even with an automatic rescission clause, the vendee may still pay until a demand for rescission is made either judicially or by notarial act.

• Melo, Vitug, and Sandoval-Gutierrez, JJ. — Joined in the decision without separate opinions.