OBLIGATIONS AND CONTRACTS ATTY.

GRAVADOR
CHAPTER 2 CASE DIGESTS

(SPS. VELARDE V. COURT OF APPEALS, G.R. NO. 108346, [JULY 11, 2001], 413 PHIL 360-376)
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. In a contract of sale, the seller obligates itself to transfer the
ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain in money or its equivalent. Private respondents
had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to
petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is
deemed equivalent to delivery.

2. RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING OBLIGATION. 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. The breach
contemplated in the said provision is the obligor's failure to comply with an existing obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence ofany just cause for the court to determine the period of compliance,
the court shall decree the rescission.

3. CASE AT BAR. In the present case, private respondents validly exercised their right to rescind the contract, because of the
failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very
essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents' right to rescind the same in
accordance with law.

4. FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH WAS NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. As discussed
earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the
mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this controversy. Considering that the rescission of the contract is based on
Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and
P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.

5. OBLIGATION CREATED. Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to restore. 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.

Ruling of the Court of Appeals: (Dismissed Velardes Petition)

In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the consideration of this sale, Vendee Velarde
would assume to pay the mortgage obligation on the subject property in the amount of P1.8M (in the name of Vendor Raymundo).
Velarde agreed to strictly and faithfully comply with all the terms and conditions. Moreover, it was stipulated that in the e vent of
violation by Velarde of any terms of the said deed, the downpayment of 800k plus all the payments made would be forfeited and the
Deed of Sale will be automatically cancelled and of no force and effect.

Approval of the mortgage obligation with BPI means payment obligation will now be in the name of Velarde.
Disapproval means Velarde had to pay in full.

Non-payment of the mortgage obligation results in a violation of the contract. Upon Velardes failure, Raymunod may choose either:

1. Demand fulfillment of the contract

CA held that petitioners letter giving three new conditions constitute mere offers or an attempt to novate necessitating a n ew
agreement between the parties. There can be no novation because there was no agreement of all the parties to the new contract.

SUPREME COURT:

Petitioners: CA erred.
Supreme Court: Petition is partly meritorious.

Breach of Contract (nonperformance of a reciprocal obligation): In a contract of sale, the seller obligates itself to transfer the
ownership of and deliver a determinate thing, and the buyer to pay therefor a price in money or its equivalent. Respondents
(Raymundo) had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership
of the property. Prior physical delivery is not legally required; DOS is deemed equivalent to delivery.

Petitioners did not perform their correlative obligation of paying the contract price in the manner agreed. Worse, they wanted
respondents to perform obligations beyond those stipulated.

Validity of the Rescission: Velarde claims the rescission was not justified and the breach of contract was not substantial enough to
warrant a rescission. They also argue that they have substantially performed their obligation in good faith (by paying 800k and 3
monthly mortgage payments). However, SC says that the breach here is not just the slight delay of payment. They failed to pay the
1.8 M balance AND imposed upon respondent (Raymundo) new obligations as preconditions to the performance of their own
obligation. Hence, respondents were left with the legal option of seeking rescission to protect their own interest (based on Art 1191).

Since it is based on Art 1191 of the CC, mutual restitution is required to bring back the partied to their original situation prior to the
inception of the contract. All the payments made by the Velardes should be returned by Raymundo cause you know, unjust
enrichment.

COURT OF APPEALS DECISION IS AFFIRMED.