Remedies for breaches of obligations, A1170-1173 Civil Code

Preliminary

The injured party has the following remedies in case of breaches of obligations:

1) Fulfillment of the obligation;

2) Rescicission of obligation; or

3) In addition to Nos. 1 and 2, damages. (See CIVIL CODE, Paragraph 2, Article 1191)

Creditors

Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)

1. Fulfillment of obligations

Article 1191. x x x
The injured party may choose x x x the fulfillment and the rescission of the obligation x x x (1124) (CIVIL CODE)

a. Contracts: Specific performance

For contracts, the option for fulfillment of obligations is referred to as specific performance.

b. Impossibility of performance

Article 1191. x x x
[The injured party] may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. x x x (1124) (CIVIL CODE)

2. Rescission

Article 1191. x x x
The injured party may choose x x x the rescission of the obligation x x x (1124) (CIVIL CODE)
Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) (CIVIL CODE)

a. Power to rescind

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. x x x (1124) (CIVIL CODE)

[Article 1191] refers to rescission applicable to reciprocal obligations. It is invoked when there is noncompliance by one (1) of the contracting parties in case of reciprocal obligations. (Camp John Development Corporation v. Charter Chemical and Coating Corporation, G.R. No. 198849, August 7, 2019, Per Leonen, J.)

Rescission under Article 1191 will be ordered when a party to a contract fails to comply with his or her obligation. Rescission “is a principal action that is immediately available to the party at the time that the reciprocal [obligation] was breached.” (Camp John Development Corporation v. Charter Chemical and Coating Corporation [2019], supra.)

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 of any just cause for the court to determine the period of compliance, the court shall decree the rescission. (Sps. Velarde v. CA, G.R. No. 108346, July 11, 2001, Per Panganiban, J.)

Sps. Velarde v. CA, G.R. No. 108346, July 11, 2001, Per Panganiban, J.:

• [The Buyers] aver that their nonpayment of [the Sellers’] mortgage obligation did not constitute a breach of contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon [the Sellers] again.

• However, [the Buyers] did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As admitted by both parties, their agreement mandated that [the Buyers] should pay the purchase price balance of P1.8 million to [the Sellers] in case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when [the Buyers] received notice of the bank’s disapproval of their application to assume respondents’ mortgage, they should have paid the balance of the P1.8 million loan.

• Instead of doing so, [the Buyers] sent a letter to [the Sellers] offering to make such payment only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a buyer under a contract of sale.

• [The Sellers] had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to [the Buyers] 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.

• [The Buyers]s, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed upon. Worse, they wanted [the Sellers] to perform obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase price.

• [The Buyers]s likewise claim that the rescission of the contract by [the Sellers] was not justified, inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the disapproval of their application for assumption of mortgage. [the Buyers] also aver that the breach of the contract was not substantial as would warrant a rescission. They cite several cases in which this Court declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith, considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.

• As pointed out earlier, the breach committed by [the Buyers]s was not so much their nonpayment of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under the contract of sale. [The Sellers’] right to rescind the contract finds basis in Article 1191 of the Civil Code…

• In the present case, [the Sellers] validly exercised their right to rescind the contract, because of the failure of [the Buyers]s 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 respondent’s right to rescind the same in accordance with law.

• True, [the Buyers] expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance by [the Sellers] of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by [the Buyers] was merely slight or casual as would preclude the exercise of the right to rescind.

Camp John Development Corporation v. Charter Chemical and Coating Corporation, G.R. No. 198849, August 7, 2019, Per Leonen, J.:

• Rescission of the contract is sanctioned here. Under the contract, petitioner and respondent have reciprocal obligations. Respondent, for its part, was bound to render painting services for petitioner’s property. This was completed by respondent in 2003, after which it was belatedly issued a clearance in 2005. Meanwhile, in accordance with the Contractor’s Agreement, petitioner paid part of the contract price with the remaining balance to be paid through offsetting of two (2) Camp John Hay Suites units. However, despite incessant demands from respondent, petitioner failed to deliver these units because their construction had yet to be completed. The law, then, gives respondent the right to seek rescission because petitioner could not comply with what is incumbent upon it. Petitioner, however, claims that the fixing of the period under Article 1197 is the proper remedy, not rescission under Article 1191.

• This Court disagrees. We cannot cure the deficiency here by fixing the period of the obligation. There is no just cause for this Court to fix the period for the benefit of petitioner.

• Article 1197 applies “when the obligation does not fix a period but from its nature and circumstances it can be inferred that a period was intended[.]”74 This provision allows the courts to fix the duration “because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance therewith and such period has arrived.”75

b. Principal action

Rescission or resolution under Article 1191, therefore, is a principal action that is immediately available to the party at the time that the reciprocal prestation was breached. (The Wellex Group, Inc. v. U-Land Airlines, Co., Ltd., G.R. No. 167519, January 14, 2015, Per Leonen, J.)

c. Substantial breach

Breach – refers to a “failure, without legal excuse, to perform any promise which forms the whole or part of the contract.” (Maglasang v. Northwestern, Inc., University, G.R. No. 188986, March 20, 2013, Per Sereno, CJ.)

Substantial breaches – refer to “fundamental breaches that defeat the object of the parties in entering into an agreement, and the question of whether the breach is slight or substantial is largely determined by the attendant circumstances.” (Municipality of Dasmariñas v. Campos, G.R. No. 232675, July 17, 2019, Per Reyes, A., Jr., J.)

Casual or slight breach – refer to a breach that “does not fundamentally defeat the object of the parties in entering into an agreement.” (Maglasang v. Northwestern, Inc., University [2013], supra.)

[S]ubstantial, unlike slight or casual breaches of contract, are fundamental breaches that defeat the object of the parties in entering into an agreement, since the law is not concerned with trifles. (Maglasang v. Northwestern, Inc., University [2013], supra.)

Axiomatically, the general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. Substantial breaches, unlike slight or casual breaches of contract, are fundamental breaches that defeat the object of the parties in entering into an agreement, and the question of whether the breach is slight or substantial is largely determined by the attendant circumstances. (Municipality of Dasmariñas v. Campos [2019], supra.)

Municipality of Dasmariñas v. Campos, G.R. No. 232675, July 17, 2019, Per Reyes, A., Jr., J.:

• Based on the foregoing, and for a myriad of reasons, a substantial breach of contract was committed by the NHA when it only built a 20-m-wide access road, and not a mere casual breach which the petitioners allege would render nugatory the revocation of the donation.

• As gleaned from the provisions, the object of the agreement is clearly the construction of a 36-m-wide access road from Highway 17 to the Dasmariñas Resettlement Project, which was reiterated no less than three times in the Deed of Donation. There was no allowance for any deviation from that number, as stipulated or in the nature of the undertaking. The failure to construct the access road with the expressly mentioned specifications is unmistakably a breach of the same.

• The Court does not agree with the contention of the petitioners that the condition pertaining to the construction of the access road was complied with because the unpaved 16-m portion was still reserved to be completed. The stipulation in the Deed of Donation is clear that the entire 36-m property must be used for actual construction of the access road, and non-usage of even a portion would constitute contravention of the Deed of Donation, especially in this case when a substantial portion of the property ultimately remained unused for the stated purpose and object of the donation. Law and jurisprudence consistently hold that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

Maglasang v. Northwestern, Inc., University, G.R. No. 188986, March 20, 2013, Per Sereno, CJ.:

• In the case at bar, the parties explicitly agreed that the materials to be delivered must be compliant with the CHED and IMO standards and must be complete with manuals. Aside from these clear provisions in the contracts, the courts a quo similarly found that the intent of the parties was to replace the old IBS in order to obtain CHED accreditation for Northwestern’s maritime-related courses.

• According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as amended by CMO No. 13, Series of 2005, any simulator used for simulator-based training shall be capable of simulating the operating capabilities of the shipboard equipment concerned. The simulation must be achieved at a level of physical realism appropriate for training objectives; include the capabilities, limitations and possible errors of such equipment; and provide an interface through which a trainee can interact with the equipment, and the simulated environment.

• Given these conditions, it was thus incumbent upon GL Enterprises to supply the components that would create an IBS that would effectively facilitate the learning of the students.

• However, GL Enterprises miserably failed in meeting its responsibility. As contained in the findings of the CA and the RTC, petitioner supplied substandard equipment when it delivered components that (1) were old; (2) did not have instruction manuals and warranty certificates; (3) bore indications of being reconditioned machines; and, all told, (4) might not have met the IMO and CHED standards…

• [T]he materials delivered were less likely to pass the CHED standards, because the navigation system to be installed might not accurately point to the true north; and the steering wheel delivered was one that came from an automobile, instead of one used in ships. Logically, by no stretch of the imagination could these form part of the most modern IBS compliant with the IMO and CHED standard…

c. Court’s authority to fix a period

ARTICLE 1191. x x x
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. x x x (CIVIL CODE)

Camp John Development Corporation v. Charter Chemical and Coating Corporation, G.R. No. 198849, August 7, 2019, Per Leonen, J.:

• Rescission of the contract is sanctioned here. Under the contract, [the Client] and [the Contractor] have reciprocal obligations. [The Contractor], for its part, was bound to render painting services for [the Client’s] property. This was completed by [the Contractor] in 2003, after which it was belatedly issued a clearance in 2005. Meanwhile, in accordance with the Contractor’s Agreement, [the Client] paid part of the contract price with the remaining balance to be paid through offsetting of two (2) Camp John Hay Suites units. However, despite incessant demands from [the Contractor], [the Client] failed to deliver these units because their construction had yet to be completed. The law, then, gives [the Contractor] the right to seek rescission because [the Client] could not comply with what is incumbent upon it. [The Client], however, claims that the fixing of the period under Article 1197 is the proper remedy, not rescission under Article 1191.

• This Court disagrees. We cannot cure the deficiency here by fixing the period of the obligation. There is no just cause for this Court to fix the period for the benefit of [the Client].

• Article 1197 applies “when the obligation does not fix a period but from its nature and circumstances it can be inferred that a period was intended[.]” This provision allows the courts to fix the duration “because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance therewith and such period has arrived.”

• There is no just cause for this Court to determine the period of compliance. As can be gleaned from the records of this case, the obligation of [the Client] to build the Camp John Hay Suites had been dragging for years even before it entered into the Contractor’s Agreement with [the Contractor].

• The Memorandum of Agreement that [the Client] executed with the Bases Conversion and Development Authority shows that the construction of the Camp John Hay Suites began in 1996. When [the Contractor] demanded the units’ transfer in 2007, more than 10 years had lapsed; yet, within those years, [the Client] was still not able to complete the construction of the Camp John Hay Suites.

• To tolerate [the Client]’s excuses would only cause more delay and burden to [the Contractor]. [The Client] failed to forward any just cause to convince this Court to set a period. It merely reasoned force majeure and mutual delays with Bases Conversion and Development Authority without offering any explanation for its alleged difficulty in building the units.

• To belatedly fix the period for [the Client’s] compliance would mean refusing immediate payment to [the Contractor]. [The Client’s] noncompliance with its obligation to deliver the two (2) units as payment to [the Contractor] can no longer be excused.

• The law and jurisprudence are clear. When the obligor cannot comply with its obligation, the obligee may exercise its right to rescind the obligation, and this Court will order the rescission in the absence of any just cause to fix the period. Here, lacking any reasonable explanation and just cause for the fixing of the period for [the Client]’s noncompliance, the rescission of the obligation is justified.

d. Rescission voids a contract

Rescission of the obligation under Article 1191 is a declaration that a contract is void at its inception. Its effect is to restore the parties to their original position, insofar as practicable. (Camp John Development Corporation v. Charter Chemical and Coating Corporation [2019], supra.)

Rescission has the effect of “unmaking a contract, or its undoing from the beginning, and not merely its termination.” Hence, 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. (Unlad Resources Development Corporation v. Dragon, G.R. No. 149338, July 28, 2008, Per Nachura, J.)

Accordingly, when a decree for rescission is handed down, it is the duty of the court to require both parties to surrender that which they have respectively received and to place each other as far as practicable in his original situation. The rescission has the effect of abrogating the contract in all parts. (Unlad Resources Development Corporation v. Dragon [2008], supra.)

e. Mutual restitution requirement

Mutual restitution is required in cases involving rescission under Article 1191. “Where a contract is rescinded, it is the duty of the court to require both parties to surrender that which they have respectively received and to place each other as far as practicable in his original situation[;] the rescission has the effect of abrogating the contract in all parts.” (Camp John Development Corporation v. Charter Chemical and Coating Corporation [2019], supra.)

3. Damages

Article 1191. x x x
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. (1124) (CIVIL CODE)
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) (CIVIL CODE)

a. Fraud

Per Article 1170, those guilty of fraud are liable for damages.

Article 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) (CIVIL CODE)

b. Negligence

Per Article 1170, those guilty of negligence are liable for damages.

Article 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) (CIVIL CODE)

Negligence – “consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place.” (CIVIL CODE, Article 1173)

See related:

Negligence in performance of obligations, A1173 Civil Code

1) Bad faith

Article 1173. x x x When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. (1104a) (CIVIL CODE)
Article 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) (CIVIL CODE)
Article 2201. x x x
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. (1107a) (CIVIL CODE)

c. Delay

Per Article 1170, those guilty of delay are liable for damages.

Default or mora, which is a kind of voluntary breach of an obligation, signifies the idea of delay in the fulfillment of an obligation with respect to time. In positive obligations, like an obligation to give, the obligor or debtor incurs in delay from the time the obligee or creditor demands from him the fulfillment of the obligation. (Pineda v. De Vegra, G.R. No. 233774, April 10, 2019, Per Caguioam J.)

d. Contravention of the tenor

Contravention – means “violation.” (Merriam-Webster Online Dictionary)

Per Article 1170, those guilty of contravening the tenor of obligations are liable for damages.

Otherwise stated, persons may be liable for damages if they are found guilty for violating their obligations.

Examples:

1) Parents who are obligated to give support but do not do so may be held liable for damages;

2) House builders who are obligated to follow the specifications in a blueprint but did not do so;

3) Sellers who are obligated to observe their express warranties but fail or refuse to do so.

4, Miscellaneous

a. Equally at fault (in pari delicto)

Article 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. x x x (n) (CIVIL CODE)

Under [Article 1191], the second infractor is not liable for damages at all; the damages for the second breach, which would have been payable by the second infractor to the first infractor, being compensated instead by the mitigation of the first infractor’s liability for damages arising from his earlier breach. The first infractor, on the other hand, is liable for damages, but the same shall be equitably tempered by the courts, since the second infractor also derived or thought he would derive some advantage by his own act or neglect. (Ong v. Bogñalbal, G.R. No. 14910, September 12, 2006, Per Chico-Nazario, J.)

Central Bank of the Philippines v. CA, G.R. No. L-45710, October 3, 1985, Per Makasiar, CJ.:

• Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.

• Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon.

Sps. Yao v. Matela, G.R. Nos. 167767 and 167799, August 29, 2006, Per Ynares-Santiago, J.:

• On March 30, 1997, the spouses Yao contracted the services of Matela, a licensed architect, to manage and supervise the construction of a two-unit townhouse at a total cost of P5,090,560.00.

• The construction started in the first week of April 1997 and was completed in April 1998, with additional works costing P300,000.00. Matela alleged that the spouses Yao paid him the amount of P4,649,078.00, thereby leaving a balance of P741,482.00.5 When his demand for payment of P741,482.00 went unheeded, Matela filed a complaint6 for sum of money with the Regional Trial Court of Las Piñas City which was docketed as LP-98-0263 and raffled to Branch 275.

• In their answer, the spouses Yao denied that the project was completed in April 1998. Instead, they alleged that Matela abandoned the project without notice. They claimed that they paid Matela the sum of P4,699,610.93 which should be considered as sufficient payment considering that Matela used sub-standard materials causing damage to the project which needed a substantial amount of money to repair.

• [SC RESOLUTION] Our evaluation of the records reveal that Matela failed to comply with his obligation to construct the townhouses based on the agreed specifications. As such, he cannot be discharged from his obligations by mere delivery of the same to the spouses Yao.

• Again, based on the photographs presented as evidence, we find that there were unfinished electrical conduits, electrical outlets with loose wirings and outlets with exposed wires.

• The Specification also provided for several kinds of tiles to be installed on the floors and on the walls. However, the exhibits showed decaying and unfinished cabinet floors, stairways and bathroom floors with missing tiles, uninstalled bathroom fixtures and exposed plumbing fixtures. The bath tub was uninstalled that it can be easily pulled out of its concrete receptacle. The exhibits also showed unfinished windows, unpainted walls, rusted metalworks and balusters.

• The agreed construction cost of the project was P5,090,560.00, however, the amounts reflected in the Building Permit, the Certificate of Completion and the Certificate of Occupancy are far less. In the Building Permit, the total cost was pegged at P2,191,700.00; in the Certificate of Completion, the actual cost of construction was P2,347,706.81; while in the Certificate of Occupancy the cost of the project as built was declared at P2,341,706.00. Considering the discrepancies, the conclusiveness of the said documents fall when arrayed against the pieces of evidence introduced by the spouses Yao.

• However, we find that the spouses Yao likewise failed to comply with their undertakings.

• As alleged by Matela, the spouses Yao made periodic payments to him based on progress billings. This was contained in the Summary of Cash Payments and the Summary of WLY Invoices that he submitted as part of his formal offer of evidence. However, the spouses Yao refused to pay the balance of the agreed construction cost despite demands. The spouses Yao justified their non-payment by arguing that Matela abandoned the project and that there were defects in its construction.

• Evidently, both parties in this case breached their respective obligations… in situations such as the one discussed above, where it cannot be conclusively determined which of the parties first violated the contract, equity calls and justice demands that we apply the solution provided in Article 1192 of the Civil Code…

• In the instant case, the losses to be incurred by the parties will come, as far as Matela is concerned, in the form of the alleged unpaid balance of the construction cost that he is seeking to collect from the spouses Yao. For the latter, the losses that they will bear is the cost of repairing the defects in the project. We consider the amount of P4,699,610.93 which Matela has already received from the spouses Yao, as sufficient payment for his services and the materials used in the project.

1) If first infractor cannot be determined

Article 1192. x x x If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n) (CIVIL CODE)

Fong v. Dueñas, G.R. No. 185592, June 15, 2015, Per Brion, J.:

• Both parties verbally agreed to incorporate a company that would hold the shares of Danton and Bakcom and which, in turn, would be the platform for their food business. Fong obligated himself to contribute half of the capital or ₱32.5 Million in cash. On the other hand, Dueñas bound himself to shoulder the other half by contributing his Danton and Bakcom shares, which were allegedly also valued at ₱32.5 Million. Aside from this, Dueñas undertook toprocess Alliance’s incorporation and registration with the SEC.

When the proposed company remained unincorporated by October 30, 1997, Fong cancelled the joint venture agreement and demanded the return of his ₱5 Million contribution.

• For his part, Dueñas explained that he could not immediately return the ₱5 Million since he had invested it in his two companies. He found nothing irregular in this as eventually, the Danton and Bakcom shares would form part of Alliance’s capital.

• Dueñas’ assertion is erroneous.

• The parties never agreed that Fong would invest his money in Danton and Bakcom. Contrary to Dueñas’ submission, Fong’s understanding was that his money would be applied to his shareholdings in Alliance.

• In this light, we conclude that Fong’s cash contributions play an indispensable part in Alliance’s incorporation. The process necessarily requires the money not only to fund Alliance’s registration with the SEC but also its initial capital subscription.

• Thus, Dueñas erred when he invested Fong’s contributions in his two companies. This money should have been used in processing Alliance’s registration. Its incorporation would not materialize if there would be no funds for its initial capital. Moreover, Dueñas represented that Danton and Bakcom’s shares were valued at ₱32.5 Million. If this was true, then there was no need for Fong’s additional ₱5 Million investment, which may possibly increase the value of the Danton and Bakcom shares.

• However, the Court notes that Fong also breached his obligation in the joint venture agreement. In his June 13, 1997 letter, Fong expressly informed Dueñas that he would be limiting his cash contribution from ₱32.5 Million to ₱5 Million…

• Fong’s diminution of his capital share to ₱5 Million also amounted to a substantial breach of the joint venture agreement, which breach occurred before Fong decided to rescind his agreement with Dueñas. Thus, Fong also contributed to the non-incorporation of Alliance that needed ₱65 Million as capital to operate.

• Fong cannot entirely blame Dueñas since the substantial reduction of his capital contribution also greatly impeded the implementation of their agreement to engage in the food business and to incorporate a holding company for it.

• As both parties failed to comply with their respective reciprocal obligations, we apply Article 1192 of the Civil Code…

• Notably, the Court is not aware of the schedule of performance of the parties’ obligations since the joint venture agreement was never reduced to writing. The facts, however, show that both parties began performing their obligations after executing the joint venture agreement. Fong started remitting his share while Dueñas started processing the Boboli international license for the proposed corporation’s food business.

• The absence of a written contract renders the Court unsure as to whose obligation must be performed first. It is possible that the parties agreed that Fong would infuse capital first and Dueñas’ submission of the documents on the Danton and Bakcom shares would just follow. It could also be the other way around. Further, the parties could have even agreed to simultaneously perform their respective obligations.

• Despite these gray areas, the fact that both Fong and Dueñas substantially contributed to the non-incorporation of Alliance and to the failure of their food business plans remains certain.

• As the Court cannot precisely determine who between the parties first violated the agreement, we apply the second part of Article 1192 which states: “if it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages.”

• In these lights, the Court holds that the joint venture agreement between Fong and Dueñas is deemed extinguished through rescission under Article 1192 in relation with Article 1191 of the Civil Code. Dueñas must therefore return the ₱5 Million that Fong initially contributed since rescission requires mutual restitution. After rescission, the parties must go back to their original status before they entered into the agreement. Dueñas cannot keep Fong’s contribution as this would constitute unjust enrichment.

• No damages shall be awarded to any party in accordance with the rule under Article 1192 of the Civil Code that in case of mutual breach and the first infractor of the contract cannot exactly be determined, each party shall bear his own damages.

References

Chapter 2 – Nature and Effects of Obligations, Title I, Book IV, Republic Act No. 386, Civil Code

Similar Posts