THIRD DIVISION

G.R. No. 108346 July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,
vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, responde
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
injured party to rescind the obligation. Rescission abrogates the contract from its incepti
benefits received.
The Case
Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court o
dated October 9, 1992, as well as its Resolution3 dated December 29, 1992 denying pet
The dispositive portion of the assailed Decision reads:
"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE
1990 dismissing the [C]omplaint is RESINSTATED. The bonds posted by plaintiffs-appe
hereby RELEASED."5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
"x x x. David Raymundo [herein private respondent] is the absolute and registered owne
house and other improvements thereon, located at 1918 Kamias St., Dasmariñas Villag
142177. Defendant George Raymundo [herein private petitioners] is David's father who
Mariano Velarde [herein petitioners] for the sale of said property, which was, however, u
Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp.
defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee,
'x x x xxx xxx
'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to h
these presents the VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND D
full warranty of a legal and valid title as provided by law, unto the VENDEE, her heirs, su
land mentioned and described above, together with the house and other improvements
'That the aforesaid parcel of land, together with the house and other improvements ther
to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila to secure the payme
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as evidenced by
executed by the VENDOR in favor of the said Bank of the Philippine Islands, on _____ a
ratified before Notary Public for Makati, _____, as Doc. No. ______, Page No. _____, B
Notarial Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the m
herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1
favor of Bank of Philippine Islands, in the name of the VENDOR, and further agrees to s
terms and conditions appearing in the Real Estate Mortgage signed and executed by th
interests and other charges for late payment levied by the Bank, as if the same were ori
VENDEE.
'It is further agreed and understood by the parties herein that the capital gains tax and d
for the account of the VENDOR; whereas, the registration fees and transfer tax thereon
(Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with th
executed an Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x xxx xxx
'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymu
THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage obl
of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED THOUSAND
currency, in accordance with the terms and conditions of the Deed of Real Estate Mortg
by Mr. David A. Raymundo with the said Bank, acknowledged before Notary Public for M
No. _____, Book No. _____, Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage obligations on the
mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the
Raymundo, in accordance with the terms and conditions of the said Deed of Real Estate
other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for p
private understanding concerning the said mortgage obligations to be assumed.
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assum
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine cur
Islands, I, Mrs, Avelina D, Velarde with the consent of my husband, Mariano Z. Velardo,
my heirs, successors and assigns, to strictly and faithfully comply with the following term
'1. That until such time as my assumption of the mortgage obligations on the property pu
bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accorda
Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original Mort
'2. That, in the event I violate any of the terms and conditions of the said Deed of Real E
downpayment of P800,000.00, plus all payments made with the Bank of the Philippine Is
forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated damages, witho
declaration to that effect, and Mr. David A. Raymundo shall resume total and complete
property sold by way of Deed of Sale with Assumption of Mortgage, and the same shall
be of no further force or effect, in the same manner as it (the) same had never been exe
'3. That I am executing the Undertaking for purposes of binding myself, my heirs, succes
faithfully comply with the terms and conditions of the mortgage obligations with the Bank
covenants, stipulations and provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified above, [
undertakings of the Vendee pertinent to the assumption of the mortgage obligations by t
Philippine Islands. (Exh. 'C', pp. 13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million was
plaintiffs were to secure from a bank with defendant's help. Defendants had a standing a
Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of
mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to cont
loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secure
three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P2
P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption of M
(Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that t
constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the balance in cash not la
you deliver actual possession of the property to her not later than January 15, 1987 for h
cause the re- lease of title and mortgage from the Bank of P.I. and make the title availab
encumbrances; and (c) you execute an absolute deed of sale in her favor free from any
January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescissio
property allegedly due to the latter's failure to comply with the terms and conditions of th
Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respond
cancellation, writ of possession and damages. This was docketed as Civil Case No. 159
Makati, Branch 149. The case was tried and heard by then Judge Consuelo Ynares-San
Court), who dismissed the Complaint in a Decision dated November 14, 1990.7 Thereaft
Reconsideration.8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Jud
assigned to the sala she vacated. In an Order dated May 15, 1991,9 Judge Abad Santos
Reconsideration and directed the parties to proceed with the sale. He instructed petition
private respondents who, in turn, were ordered to execute a deed of absolute sale and t
property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-S
petitioners' Complaint. Upholding the validity of the rescission made by private responde
wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the c
(Velarde)' would assume to pay the mortgage obligation on the subject property in the a
the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde
P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million cannot be p
the consideration of the sale, had to assume the mortgage obligation on the subject prop
the mortgage obligation is part of the obligation of Velarde, as vendee, under the contra
faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage
in favor of BPI x x x as if the same were originally signed and executed by the Vendee. (
reiterated by Velarde in the document entitled 'Undertaking' wherein the latter agreed to
accordance with the terms and conditions of the Deed of Real Estate Mortgage in the na
stipulated that in the event of violation by Velarde of any terms and conditions of said de
downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan wo
[S]ale with [A]ssumption of [M]ortgage would thereby be Cancelled automatically and of
thereof, pp 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the sale w
mortgage obligation of Raymundo in the amount of Pl.8 million. This would mean that V
under the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo. The application w
assumption of mortgage would mean that, in case of approval, payment of the mortgage
Velarde. And in the event said application is disapproved, Velarde had to pay in full. Thi
5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on Se
September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, t
obligation would result in a violation of the contract. And, upon Velarde's failure to pay th
choose either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand it
"The disapproval by BPI of the application for assumption of mortgage cannot be used a
of the balance of the purchase price. As borne out by the evidence, Velarde had to pay
application for assumption of mortgage. What Velarde should have done was to pay the
Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly
reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde
balance in cash but enumerated 3 new conditions which, to the mind of this Court, would
agreement which is subject to the consent or approval of Raymundo. These 3 condition
agreed upon by Velarde and Raymundo. These are mere offers or, at most, an attempt
no novation because there was no agreement of all the parties to the new contract (Gar
493).
"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of S
would be deemed 'automatically cancelled and of no further force and effect, as if the sa
entered into.' While it is true that even if the contract expressly provided for automatic re
the vendee may still pay, he may do so only for as long as no demand for rescission of t
either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymun
January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to com
rescission was justified in view of Velarde's failure to pay the price (balance) which is su
the object of the parties in making the agreement. As adverted to above, the agreement
obligation wherein the obligation of one is a resolutory condition of the obligation of the o
entitles the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus,
obligation by appellees Velarde would create a right to demand payment or to rescind th
(Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee
the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appe
contract, they have lost their right to its enforcement and hence, cannot avail of the actio
Interphil Promotions, Inc., 148 SCRA 635)."10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of errors:
"I.
The Court of Appeals erred in holding that the non-payment of the mortgage obligation r
"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract by p
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three
offers or an attempt to novate necessitating a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner aver that their nonpayment of private respondents' mortgage obligation did
considering that their request to assume the obligation had been disapproved by the mo
the monthly amortizations ceased to be their obligation and, instead, it devolved
However, petitioners did not merely stop paying the mortgage obligations; they also fai
price. As admitted by both parties, their agreement mandated that petitioners should p
million to private respondents in case the request to assume the mortgage would be
1986, when petitioners received notice of the bank's disapproval of their application to
should have paid the balance of the P1.8 million lo
Instead of doing so, petitioners sent a letter to private respondents offering to make su
certain conditions not originally agreed upon in the contract of sale. Such conditional off
payment as would discharge the obligation of a buyer under a c
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver
 pay therefor a price certain in money or its equivale
Private respondents had already performed their obligation through the execution o
transferred ownership of the property to petitioner through constructive delivery. Prior
legally required, and the execution of the Deed of Sale is deemed eq
Petitioners, on the other hand, did not perform their correlative obligation of paying th
upon. Worse, they wanted private respondents to perform obligations beyond those st
their own obligation to pay the full purchase price
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents wa
had signified their willingness to pay the balance of the purchase price only a little over a
of the disapproval of their application for assumption of mortgage. Petitioners also aver
substantial as would warrant a rescission. They cite several cases 15 in which this Cour
would not be permitted for a slight or casual breach. Finally, they argue that they have
in good faith, considering that they have already made the initial payment of P800,0
payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonp
their nonperformance of their reciprocal obligation to pay the purchase price under the
right to rescind the contract finds basis in Article 1191 of the Civil Code, which
"Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one
what is incumbent upon him.
The injured party may choose between fulfillment and the rescission of the obligation,
case. He may also seek rescission even after he has chosen fulfillment, if the la
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is
other party who violates the reciprocity between them.16 The breach contemplated in the
comply with an existing obligation.17 When the obligor cannot comply with what is incu
rescission and, in the absence of any just cause for the court to determine the period o
rescission.18
In the present case, private respondents validly exercised their right to rescind the contr
to comply with their obligation to pay the balance of the purchase price. Indubitably, t
reciprocity in the contract of sale, a violation that consequently gave rise to private res
accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price on
this was not equivalent to actual payment as would constitute a faithful compliance of th
offer to pay was conditioned on the performance by private respondents of additional b
in the original contract. Thus, it cannot be said that the breach committed by petitioner
preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumst
to those in the present one. In Song Fo there was, on the part of the buyer, only a de
goods delivered. Moreover, the buyer's offer to pay was unconditional and
 In Zepeda, the breach involved a mere one-week delay in paying the balance o
In Tan, the alleged breach was private respondent's delay of only a few days, which wa
the property; there was no reference whatsoever to the nonpayment
In the instant case, the breach committed did not merely consist of a slight delay in pa
would not normally defeat the intention of the parties to the contract. Here, petitioners
balance, but they also imposed upon private respondents new obligations as precond
obligation. In effect, the qualified offer to pay was a repudiation of an existing obli
demandable under the contract of sale. Hence, private respondents were left with the
protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a
the terms and conditions of the mortgage contract. Therefore, the automatic resciss
stipulated in the contract does not apply. Instead, Civil Code provisions shall gove
controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Cod
back the parties to their original situation prior to the inception of the contract. Accordin
the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,9
petitioners should be returned by private respondents, lest the latter unjustly enrich them
Rescission creates the obligation to return the object of the contract. It can be carried
rescission can return whatever he may be obliged to restore.20 To rescind is to declare a
an end to it as though it never was. It is not merely to terminate it and release the partie
but to abrogate it from the beginning and restore the parties to their relative positions as

Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss
Suffice it to say that the three conditions appearing on the January 7, 1987 letter of peti
part of the original contract. By that time, it was already incumbent upon the former to
had no right to demand preconditions to the fulfillment of their obligation,
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION t
return to petitioners the amount of P874,150, which the latter paid as a consequence
interest thereon from January 8, 1987, the date of rescission. No prono
SO ORDERED. 1âwphi 1.nêt

Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.

Footnotes:
1 Rollo, pp. 37-53.
2 Rollo, pp. 68-78. Penned by Justice Regina G. Ordoñez-Benitez and concurred in

chairman) and Eduardo G. Montenegro (member).

3 Rollo, p. 81.
4 Rollo, pp. 21-33.
5 CA Decision, p. 11; Rollo, p. 20.
6 Rollo, pp. 68-73.

7 Records, pp. 280-284.

8 Records, pp. 285-293.

9 Records, pp. 339-341.

10 Rollo, pp. 75-78.

11 To eradicate its backlog of old cases, the Court m Februry 27, 2001 resolved to redistri

had no backlog, and who were thus tasked to prioritize them. Consequently, this case was
ponente for study and report.
12 Rollo, p. 227.
13 Coronel v. CA, 263 SCRA 15, October 7, 1996.
14 Power Commercial and Industrial Corp. v. CA, 274 SCRA 597, June 20, 1997.

15 Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, September 16, 1925; Tan v.

28, 1989; and Zepeda v. Court of Appeals, 216 SCRA 293, December 9, 1992.
16 Uy v. Court of Appeals, 314 SCRA 69, September 9, 1999; Romeo v. Court of Appeal

17 Cheng v. Genato, 300 SCRA 722, December 29, 1998.

18 Central Philippine University v. Court of Appeals, 246 SCRA 511, July 17, 1995.

19 See footnote 15.

20 Co v. Court of Appeals, 312 SCRA 528, August 17,1999. Vitug, Compendium of Civ

ed., p. 556.
21 0campo v. Court of Appeals, 233 SCRA 551, June 30, 1994.

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