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G.R. No. 142618 July 12, 2007

PCI LEASING AND FINANCE, INC.,Petitioner,vs.GIRAFFE-X CREATIVE IMAGING, INC.,Respondent.

D E C I S I O N

GARCIA, J .:

On a pure question of law involving the application of Republic Act (R.A.)No. 5980, as amended by R.A. No. 8556 in relation to Articles 1484 and1485 of the Civil Code, petitioner PCI Leasing and Finance, Inc. (PCILEASING, for short) has directly come to this Court via this petition forreview under Rule 45 of the Rules of Court to nullify and set aside theDecision and Resolution dated December 28, 1998 and February 15, 2000,respectively, of the Regional Trial Court (RTC) of Quezon City, Branch 227,in its Civil Case No. Q-98-34266, a suit for a sum of money and/or personal

property with prayer for a writ of replevin, thereat instituted by the petitioneragainst the herein respondent, Giraffe-X Creative Imaging, Inc. (GIRAFFE,for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFEentered into a Lease Agreement,

1whereby the former leased out to the

latter one (1) set of Silicon High Impact Graphics and accessories worthP

3,900,00.00 and one (1) unit of Oxberry Cinescan 6400-10 worthP

6,500,000.00. In connection with this agreement, the parties subsequentlysigned two (2) separate documents, each denominated as Lease Schedule.

2

Likewise forming parts of the basic lease agreement were two (2) separatedocuments denominated Disclosure Statements of Loan/Credit Transaction(Single Payment or Installment Plan)

3that GIRAFFE also executed for each

of the leased equipment. These disclosure statements inter alia describedGIRAFFE, vis--vis the two aforementioned equipment, as the "borrower"who acknowledged the "net proceeds of the loan," the "net amount to befinanced," the "financial charges," the "total installment payments" that itmust pay monthly for thirty-six (36) months, exclusive of the 36% per annum"late payment charges." Thus, for the Silicon High Impact Graphics,GIRAFFE agreed to pay P116,878.21 monthly, and for Oxberry Cinescan,P181.362.00 monthly. Hence, the total amount GIRAFFE has to pay PCILEASING for 36 months of the lease, exclusive of monetary penaltiesimposable, if proper, is as indicated below:

P116,878.21 @ month (for the Silicon HighImpact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

P181,362.00 @ month (for the OxberryCinescan) x 36 months = P 6,529,032.00

Total Amount to be paid by GIRAFFE(or the NET CONTRACT AMOUNT) P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit theamount of P

3,120,000.00 by way of "guaranty deposit," a sort ofperformance and compliance bond for the two equipment. Furthermore, thesame agreement embodied a standard acceleration clause, operative in theevent GIRAFFE fails to pay any rental and/or other accounts due.

A year into the life of the Lease Agreement, GIRAFFE defaulted in itsmonthly rental-payment obligations. And following a three-month default,PCI LEASING, through one Atty. Florecita R. Gonzales, addressed a formalpay-or-surrender-equipment type of demand letter

4dated February 24, 1998

to GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING institutedthe instant case against GIRAFFE. In its complaint,

5docketed in said court

as Civil Case No. 98-34266 and raffled to Branch 2276thereof, PCI

LEASING prayed for the issuance of a writ of replevin for the recovery of the

leased property, in addition to the following relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] andagainst the defendant [GIRAFFE], as follows:

a. Declaring the plaintiff entitled to the possession of the subjectproperties;

b. Ordering the defendant to pay the balance of rental/obligation inthe total amount of P8,248,657.47 inclusive of interest and chargesthereon;
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c. Ordering defendant to pay plaintiff the expenses of litigation andcost of suit. (Words in bracket added.)

Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writof replevin, paving the way for PCI LEASING to secure the seizure anddelivery of the equipment covered by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion toDismiss, therein arguing that the seizure of the two (2) leased equipmentstripped PCI LEASING of its cause of action. Expounding on the point,GIRAFFE argues that, pursuant to Article 1484 of the Civil Code oninstallment sales of personal property, PCI LEASING is barred from furtherpursuing any claim arising from the lease agreement and the companioncontract documents, adding that the agreement between the parties is inreality a lease of movables with option to buy. The given s ituation, GIRAFFEcontinues, squarely brings into applicable play Articles 1484 and 1485 of theCivil Code, commonly referred to as the Recto Law. The cited articlesrespectively provide:

ART. 1484. In a contract of sale of personal property the price of which ispayable in installments, the vendor may exercise any of the followingremedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two ormore installments;

(3) Foreclose the chattel mortgage on the thing sold, if one hasbeen constituted, should the vendee's failure to pay cover two ormore installments. In this case, he shall have no further action

against the purchaser to recover any unpaid balance of the price.Any agreement to the contrary shall be void. (Emphasis added.)

ART. 1485. The preceding article shall be applied to contracts purporting tobe leases of personal property with option to buy, when the lessor hasdeprived the lessee of the possession or enjoyment of the thing.

It is thus GIRAFFEs posture that the aforequoted Article 1484 of the CivilCode applies to its contractual relation with PCI LEASING because the leaseagreement in question, as supplemented by the schedules documents, isreally a lease with option to buy under the companion article, Article 1485.

Consequently, so GIRAFFE argues, upon the seizure of the leasedequipment pursuant to the writ of replevin, which seizure is equivalent toforeclosure, PCI LEASING has no further recourse against it. In brief,GIRAFFE asserts in its Motion to Dismiss that the civil complaint filed by PCILEASING is proscribed by the application to the case of Articles 1484 and1485, supra, of the Civil Code.

In its Opposition to the motion to dismiss, PCI LEASING maintains that itscontract with GIRAFFE is a straight lease without an option to buy.Prescinding therefrom, PCI LEASING rejects the applicability to the suit ofArticle 1484 in relation to Article 1485 of the Civil Code, claiming that, underthe terms and conditions of the basic agreement, the relationship betweenthe parties is one between an ordinary lessor and an ordinary lessee.

In a decision7dated December 28, 1998, the trial court granted GIRAFFEs

motion to dismiss mainly on the interplay of the following premises: 1) thelease agreement package, as memorialized in the contract documents, isakin to the contract contemplated in Article 1485 of the Civil Code, and 2)GIRAFFEs loss of possession of the leased equipment consequent to theenforcement of the writ of replevin is "akin to foreclosure, the conditionprecedent for application of Articles 1484 and 1485 [of the Civil Code]."Accordingly, the trial court dismissed Civil Case No. Q-98-34266, disposingas follows:

WHEREFORE, premises considered, the defendant [GIRAFFE] havingrelinquished any claim to the personal properties subject of replevin whichare now in the possession of the plaintiff [PCI LEASING], plaintiff isDEEMED fully satisfied pursuant to the provisions of Articles 1484 and 1485of the New Civil Code. By virtue of said provisions, plaintiff is DEEMEDestopped from further action against the defendant, the plaintiff havingrecovered thru (replevin) the personal property sought to be payable/leasedon installments, defendants being under protection of said RECTO LAW. In

view thereof, this case is hereby DISMISSED.

With its motion for reconsideration having been denied by the trial court in itsresolution of February 15, 2000,

8petitioner has directly come to this Court

via this petition for review raising the sole legal issue of whether or not theunderlying Lease Agreement, Lease Schedules and the DisclosureStatements that embody the financial leasing arrangement between theparties are covered by and subject to the consequences of Articles 1484 and1485 of the New Civil Code.
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As in the court below, petitioner contends that the financial leasingarrangement it concluded with the respondent represents a straight leasecovered by R.A. No. 5980, the Financing Company Act, as last amended byR.A. No. 8556, otherwise known as Financing Company Act of 1998, and isoutside the application and coverage of the Recto Law. To the petitioner,R.A. No. 5980 defines and authorizes its existence and business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of asupervisory or regulatory legislation, merely providing a regulatoryframework for the organization, registration, and regulation of the operationsof financing companies. As couched, it does not specifically define the rightsand obligations of parties to a financial leasing arrangement. In fact, it doesnot go beyond defining commercial or transactional financial leasing andother financial leasing concepts. Thus, the relevancy of Article 18 of the CivilCode which reads:

Article 18. - In matters which are governed by special laws, theirdeficiency shall be supplied by the provisions of this [Civil] Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Codeprovisions on installment sales of movable property, does not apply to afinancial leasing agreement because such agreement, by definition, does notconfer on the lessee the option to buy the property subject of the financiallease. To the petitioner, the absence of an option-to-buy stipulation in afinancial leasing agreement, as understood under R.A. No. 8556, preventsthe application thereto of Articles 1484 and 1485 of the Civil Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarksor made to appear as a financial leasing,

9a term defined in Section 3(d) of

R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract underwhich the lessor purchases or acquires, at the instance of the lessee,machinery, equipment, office machines, and other movable or immovableproperty in consideration of the periodic payment by the lessee of a fixedamount of money sufficient to amortize at least seventy (70%) of thepurchase price or acquisition cost, including any incidental expenses and amargin of profit over an obligatory period of not less than two (2) years

during which the lessee has the right to hold and use the leased property but with no obligation or option on his part to purchase the leased propertyfrom the owner-lessor at the end of the lease contract.

In its previous holdings, however, the Court, taking into account the followingmix: the imperatives of equity, the contractual stipulations in question andthe actuations of parties vis--vis their contract, treated disguisedtransactions technically tagged as financing lease, like here, as creating adifferent contractual relationship. Notable among the Courts decisionsbecause of its parallelism with this case is BA Finance Corporation v. Courtof Appeals

10which involved a motor vehicle. Thereat, the Court has treated

a purported financial lease as actually a sale of a movable property oninstallments and prevented recovery beyond the buyers arrearages. Wrotethe Court in BA Finance:

The transaction involved is one of a "financial lease" or "financial leasing,"where a financing company would, in effect, initially purchase a mobileequipment and turn around to lease it to a client who gets, in addition, anoption to purchase the property at the expiry of the lease period. xxx.

x x x x x x x x x

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' are primarily organized for the purpose ofextending credit facilities to consumers either by leasing of motorvehicles, and office machines and equipment, and othermovableproperty."

"'Credit' shall mean any loan, any contract to sell, or sale or contract ofsale of property or service, under which part or all of the price is payable

subsequent to the making of such sale or contract; any rental-purchasecontract; .;"

The foregoing provisions indicate no less than a mere financing schemeextended by a financing company to a client in acquiring a motor vehicle andallowing the latter to obtain the immediate possession and use thereofpending full payment of the financial accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a motor vehicle]was for thirty six (36) months at a "monthly rental" (P1,689.40), or for a
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total amount of P60,821.28. The contract also contained [a] clause [requiringthe Lessee to give a guaranty deposit in the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59, excluding theguaranty deposit of P20,800.00, he stopped further payments. Putting thetwo sums together, the financing company had in its hands the amount ofP62,470.59 as against the total agreed "rentals" of P60,821.28 or an excessof P1,649.31.

The respondent appellate court considered it only just and equitable for theguaranty deposit made by the private respondent to be applied to hisarrearages and thereafter to hold the contract terminated. Adopting theratiocination of the court a quo, the appellate court said:

xxx In view thereof, the guaranty deposit of P20,800.00 made by thedefendant should and must be credited in his favor, in the interest offairness, justice and equity. The plaintiff should not be allowed to undulyenrich itself at the expense of the defendant. xxx This is even more

compelling in this case where although the transaction, on its face, appearostensibly, to be a contract of lease, it is actually a financing agreement, withthe plaintiff financing the purchase of defendant's automobile . The Courtis constrained, in the interest of truth and justice, to go into this aspect of thetransaction between the plaintiff and the defendant with all the facts andcircumstances existing in this case, and which the court must consider indeciding the case, if it is to decide the case according to all the facts. xxx.

x x x x x x x x x

Considering the factual findings of both the court a quo and the appellatecourt, the only logical conclusion is that the private respondent did opt, as hehas claimed, to acquire the motor vehicle, justifying then the application of

the guarantee deposit to the balance still due and obligating the petitioner torecognize it as an exercise of the option by the private respondent. Theresult would thereby entitle said respondent to the ownership andpossession of the vehicle as the buyer thereof. We, therefore, see noreversible error in the ultimate judgment of the appellate court.

11(Italics in

the original; underscoring supplied and words in bracket added.)

In Cebu Contractors Consortium Co. v. Court of Appeals,12

the Court viewedand thus declared a financial lease agreement as having been simulated todisguise a simple loan with security, it appearing that the financing companypurchased equipment already owned by a capital-strapped client, with theintention of leasing it back to the latter.

In the present case, petitioner acquired the office equipment in question fortheir subsequent lease to the respondent, with the latter undertaking to pay amonthly fixed rental therefor in the total amount of P292,531.00, or a total ofP10,531,116.00 for the whole 36 months. As a measure of good faith,respondent made an up-front guarantee deposit in the amount ofP3,120,000.00. The basic agreement provides that in the event the

respondent fails to pay any rental due or is in a default situation, then thepetitioner shall have cumulative remedies, such as, but not limited to, thefollowing:

13

1. Obtain possession of the property/equipment;

2. Retain all amounts paid to it. In addition, the guaranty depositmay be applied towards the payment of "liquidated damages";

3. Recover all accrued and unpaid rentals;

4. Recover all rentals for the remaining term of the lease had it not

been cancelled, as additional penalty;

5. Recovery of any and all amounts advanced by PCI LEASING forGIRAFFEs account xxx;

6. Recover all expenses incurred in repossessing, removing,repairing and storing the property; and,

7. Recover all damages suffered by PCI LEASING by reason of thedefault.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty

deposit shall be forfeited in the event the respondent, for any reason, returnsthe equipment before the expiration of the lease.

At bottom, respondent had paid the equivalent of about a years leaserentals, or a total of P3,510,372.00, more or less. Throw in the guarantydeposit (P

3,120,000.00) and the respondent had made a total cash outlay ofP6,630,372.00 in favor of the petitioner. The replevin-seized leasedequipment had, as alleged in the complaint, an estimated residual value ofP6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May4, 1998. Adding all cash advances thus made to the residual value of theequipment, the total value which the petitioner had actually obtained byvirtue of its lease agreement with the respondent amounts to
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P13,530,372.00 (P

3,510,372.00 + P3,120,000.00 + P6,900.000.00 =P13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipmentand the Oxberry Cinescan was, as stated in no less than the petitionersletter to the respondent dated November 11, 1996

14approving in the latters

favor a lease facility, was P

8,100,000.00. Subtracting the acquisition cost ofP

8,100,000.00 from the total amount, i.e., P13,530,372.00, creditable to therespondent, it would clearly appear that petitioner realized a gross income ofP

5,430,372.00 from its lease transaction with the respondent. The amount ofP

5,430,372.00 is not yet a final figure as it does not include the rentals inarrears, penalties thereon, and interest earned by the guaranty deposit.

As may be noted, petitioners demand letter15

fixed the amount ofP

8,248,657.47 as representing the respondents "rental" balance whichbecame due and demandable consequent to the application of theacceleration and other clauses of the lease agreement. Assuming, then, thatthe respondent may be compelled to pay P

8,248,657.47, then it would endup paying a total of P21,779,029.47 (P13,530,372.00 + P8,248,657.47 =

P21,779,029.47) for its use - for a year and two months at the most - of theequipment. All in all, for an investment of P

8,100,000.00, the petitionerstands to make in a years t ime, out of the transaction, a total ofP21,779,029.47, or a net of P13,679,029.47, if we are to believe itsoutlandish legal submission that the PCI LEASING-GIRAFFE LeaseAgreement was an honest-to-goodness straight lease.

A financing arrangement has a purpose which is at once practical andsalutary. R.A. No. 8556 was, in fact, precisely enacted to regulate financingcompanies operations with the end in view of strengthening their critical rolein providing credit and services to small and medium enterprises and tocurtail acts and practices prejudicial to the public interest, in general, and totheir clienteles, in particular.

16As a regulated activity, financing

arrangements are not meant to quench only the thirst for profit. They serve ahigher purpose, and R.A. No. 8556 has made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines therights and obligations, as between each other, of the financial lessor and thelessee. In determining the respective responsibilities of the parties to theagreement, courts, therefore, must train a keen eye on the attendant factsand circumstances of the case in order to ascertain the intention of theparties, in relation to the law and the written agreement. Likewise, the publicinterest and policy involved should be considered. It may not be amiss tostate that, normally, financing contracts come in a standard prepared form,

unilaterally thought up and written by the financing companies requiring onlythe personal circumstances and signature of the borrower or lessee; therates and other important covenants in these agreements are still largelyimposed unilaterally by the financing companies. In other words, theseagreements are usually one-sided in favor of such companies. A perusal ofthe lease agreement in question exposes the many remedies available to

the petitioner, while there are only the standard contractual prohibitionsagainst the respondent. This is characteristic of standard printed formcontracts.

There is more. In the adverted February 24, 1998 demand letter17

sent to therespondent, petitioner fashioned its claim in the alternative: payment of thefull amount of P

8,248,657.47, representing the unpaid balance for the entire36-month lease period or the surrender of the financed asset under pain oflegal action. To quote the letter:

Demand is hereby made upon you to pay in full your outstanding balance inthe amount of P8,248,657.47 on or before March 04, 1998 OR to surrenderto us the one (1) set Silicon High Impact Graphics and one (1) unit Oxberry

Cinescan 6400-10

We trust you will give this matter your serious and preferential attention.(Emphasis added).

Evidently, the letter did not make a demand for the payment of theP8,248,657.47 AND the return of the equipment; only either one of the twowas required. The demand letter was prepared and signed by Atty. FlorecitaR. Gonzales, presumably petitioners counsel. As such, the use of "or"instead of "and" in the letter could hardly be treated as a simpletypographical error, bearing in mind the nature of the demand, the amountinvolved, and the fact that it was made by a lawyer. Certainly Atty. Gonzales

would have known that a world of difference exists between "and" and "or" inthe manner that the word was employed in the letter.

A rule in statutory construction is that the word "or" is a disjunctive termsignifying dissociation and independence of one thing from other thingsenumerated unless the context requires a different interpretation.

18

In its elementary sense, "or", as used in a statute, is a disjunctive articleindicating an alternative. It often connects a series of words or propositionsindicating a choice of either. When "or" is used, the various members of theenumeration are to be taken separately.

19
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The word "or" is a disjunctive term signifying disassociation andindependence of one thing from each of the other things enumerated.

20

The demand could only be that the respondent need not return theequipment if it paid the P

8,248,657.47 outstanding balance, ineluctablysuggesting that the respondent can keep possession of the equipment if itexercises its option to acquire the same by paying the unpaid balance of thepurchase price. Stated otherwise, if the respondent was not minded toexercise its option of acquiring the equipment by returning them, then it neednot pay the outstanding balance. This is the logical import of the letter: thatthe transaction in this case is a lease in name only. The so-called monthlyrentals are in truth monthly amortizations of the price of the leased officeequipment.

On the whole, then, we rule, as did the trial court, that the PCI LEASING-GIRAFFE lease agreement is in reality a lease with an option to purchasethe equipment. This has been made manifest by the actions of the petitioneritself, foremost of which is the declarations made in its demand letter to therespondent. There could be no other explanation than that if the respondent

paid the balance, then it could keep the equipment for its own; if not, then itshould return them. This is clearly an option to purchase given to therespondent. Being so, Article 1485 of the Civil Code should apply.

The present case reflects a situation where the financing company canwithhold and conceal - up to the last moment - its intention to sell theproperty subject of the finance lease, in order that the provisions of theRecto Law may be circumvented. It may be, as petitioner pointed out, thatthe basic "lease agreement" does not contain a "purchase option" clause.The absence, however, does not necessarily argue against the idea thatwhat the parties are into is not a straight lease, but a lease with option topurchase. This Court has, to be sure, long been aware of the practice ofvendors of personal property of denominating a contract of sale on

installment as one of lease to prevent the ownership of the object of the salefrom passing to the vendee until and unless the price is fully paid. As thisCourt noted in Vda. de Jose v. Barrueco:

21

Sellers desirous of making conditional sales of their goods, but who do notwish openly to make a bargain in that form, for one reason or another, havefrequently resorted to the device of making contracts in the form of leaseseither with options to the buyer to purchase for a small consideration at theend of term, provided the so-called rent has been duly paid, or withstipulations that if the rent throughout the term is paid, title shall thereuponvest in the lessee. It is obvious that such transactions are leases only in

name. The so-called rent must necessarily be regarded as payment of theprice in installments since the due payment of the agreed amount results, bythe terms of the bargain, in the transfer of title to the lessee.

In another old but still relevant case of U.S. Commercial v. Halili,22

a leaseagreement was declared to be in fact a sale of personal property byinstallments. Said the Court:

. . . There can hardly be any question that the so-called contracts of lease onwhich the present action is based were veritable leases of personal propertywith option to purchase, and as such come within the purview of the abovearticle [Art. 1454-A of the old Civil Code on sale of personal property byinstallment]. xxx

Being leases of personal property with option to purchase as contemplatedin the above article, the contracts in question are subject to the provision thatwhen the lessor in such case "has chosen to deprive the lessee of theenjoyment of such personal property," "he shall have no further action"

against the lessee "for the recovery of any unpaid balance" owing by thelatter, "agreement to the contrary being null and void."

In choosing, through replevin, to deprive the respondent of possession of theleased equipment, the petitioner waived its right to bring an action to recoverunpaid rentals on the said leased items. Paragraph (3), Article 1484 inrelation to Article 1485 of the Civil Code, which we are hereunder re-reproducing, cannot be any clearer.

ART. 1484. In a contract of sale of personal property the price of which ispayable in installments, the vendor may exercise any of the followingremedies:

x x x x x x x x x

(3) Foreclose the chattel mortgage on the thing sold, if one has beenconstituted, should the vendee's failure to pay cover two or moreinstallments. In this case, he shall have no further action against thepurchaser to recover any unpaid balance of the price. Any agreement to thecontrary shall be void.

ART. 1485. The preceding article shall be applied to contracts purporting tobe leases of personal property with option to buy, when the lessor hasdeprived the lessee of the possession or enjoyment of the thing.


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As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,23

the remedies provided for in Article 1484 of the Civil Code are alternative,not cumulative. The exercise of one bars the exercise of the others. Thislimitation applies to contracts purporting to be leases of personal propertywith option to buy by virtue of the same Article 1485. The condition that thelessor has deprived the lessee of possession or enjoyment of the thing for

the purpose of applying Article 1485 was fulfilled in this case by the filing bypetitioner of the complaint for a sum of money with prayer for replevin torecover possession of the office equipment.

24By virtue of the writ of seizure

issued by the trial court, the petitioner has effectively deprived respondent oftheir use, a situation which, by force of the Recto Law, in turn precludes theformer from maintaining an action for recovery of "accrued rentals" or therecovery of the balance of the purchase price plus interest.

25

The imperatives of honest dealings given prominence in the Civil Codeunder the heading: Human Relations, provide another reason why we musthold the petitioner to its word as embodied in its demand letter. Else, wewould witness a situation where even if the respondent surrendered theequipment voluntarily, the petitioner can still sue upon its claim. This would

be most unfair for the respondent. We cannot allow the petitioner to renegeon its word. Yet more than that, the very word "or" as used in the letterconveys distinctly its intention not to claim both the unpaid balance and theequipment. It is not difficult to discern why: if we add up the amounts paid bythe respondent, the residual value of the property recovered, and theamount claimed by the petitioner as sued upon herein (for a total ofP21,779,029.47), then it would end up making an instant killing out of thetransaction at the expense of its client, the respondent. The Recto Law wasprecisely enacted to prevent this kind of aberration. Moreover, due toconsiderations of equity, public policy and justice, we cannot allow this tohappen.1avvphil.zw+Not only to the respondent, but those similarly situatedwho may fall prey to a similar scheme.

WHEREFORE, the instant petition is DENIED and the trial courts decision isAFFIRMED.

Costs against petitioner.

SO ORDERED.


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G.R. No. L-26578 January 28, 1974

LEGARDA HERMANOS and JOSE LEGARDA, petitioners,

vs.FELIPE SALDAA and COURT OF APPEALS (FIFTH DIVISION) *respondents.

Manuel Y. Macias for petitioners.

Mario E. Ongkiko for private respondent.

TEEHANKEE, J .:1wph1.t

The Court, in affirming the decision under review of the Court ofAppeals, which holds that the respondent buyer of two smallresidential lots on installment contracts on a ten-year basis who hasfaithfully paid for eight continuous years on the principal alone alreadymore than the value of one lot, besides the larger stipulated interestson both lots, is entitled to the conveyance of one fully paid lot of hischoice, rules that the judgment is fair and just and in accordance withlaw and equity.

The action originated as a complaint for delivery of two parcels of landin Sampaloc, Manila and for execution of the corresponding deed ofconveyance after payment of the balance still due on their purchaseprice. Private respondent as plaintiff had entered into two written

contracts with petitioner Legarda Hermanos as defendant subdivisionowner, whereby the latter agreed to sell to him Lots Nos. 7 and 8 ofblock No. 5N of the subdivision with an area of 150 square meterseach, for the sum of P1,500.00 per lot, payable over the span of tenyears divided into 120 equal monthly installments of P19.83 with 10%interest per annum, to commence on May 26, 1948, date of execution ofthe contracts. Subsequently, Legarda Hermanos partitioned thesubdivision among the brothers and sisters, and the two lots wereamong those allotted to co-petitioner Jose Legarda who was thenincluded as co-defendant in the action.

It is undisputed that respondent faithfully paid for eight continuousyears about 95 (of the stipulated 120) monthly installments totallingP3,582.06 up to the month of February, 1956, which as per petitioners'own statement of account, Exhibit "1", was applied to respondent'saccount (without distinguishing the two lots), as follows:

To interests P1,889.78

To principal 1,682.28

Total P3,582.061

It is equally undisputed that after February, 1956 up to the filing ofrespondent's complaint in the Manila court of first instance in 1961,respondent did not make further payments. The account thus showsthat he owed petitioners the sum of P1,317.72 on account of thebalance of the purchase price (principal) of the two lots (in the totalsum of P3,000.00), although he had paid morethan the stipulated

purchase price of P1,500.00 for one lot.

Almost five years later, on February 2, 1961 just before the filing of theaction, respondent wrote petitioners stating that his desire to build ahouse on the lots was prevented by their failure to introduceimprovements on the subdivision as "there is still no road to theselots," and requesting information of the amount owing to update hisaccount as "I intend to continue paying the balance due on said lots."

Petitioners replied in their letter of February 11, 1961 that asrespondent had failed to complete total payment of the 120installments by May, 1958 as stipulated in the contracts to sell,"pursuant to the provisions of both contracts all the amounts paid in

accordance with the agreement together with the improvements on thepremises have been considered as rents paid and as payment fordamages suffered by your failure," 2and "Said cancellation being inorder, is hereby confirmed."

From the adverse decision of July 17, 1963 of the trial court sustainingpetitioners' cancellation of the contracts and dismissing respondent'scomplaint, respondent appellate court on appeal rendered its judgmentof July 27, 1966 reversing the lower court's judgment and orderingpetitioners "to deliver to the plaintiff possession of one of the two lots,


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at the choice of defendants, and to execute the corresponding deed ofconveyance to the plaintiff for the said lot,"3ruling as follows:

During the hearing, plaintiff testified that hesuspended payments because the lots were notactually delivered to him, or could not be, due to the

fact that they were completely under water; and alsobecause the defendants-owners failed to makeimprovements on the premises, such as roads, fillingof the submerged areas, etc., despite repeatedpromises of their representative, the said Mr. Cenon.As regards the supposed cancellation of thecontracts, plaintiff averred that no demand has beenmade upon him regarding the unpaid installments,and for this reason he could not be declared in defaultso as to entitle the defendants to cancel the saidcontracts.

The issue, therefore, is: Under the above facts, may

defendants be compelled, or not, to allow plaintiff tocomplete payment of the purchase price of the twolots in dispute and thereafter to execute the finaldeeds of conveyance thereof in his favor?

xxx xxx xxx

Whether or not plaintiffs explanation for his failure topay the remaining installments is true, considering thecircumstances obtaining in this case, we elect toapply the broad principles of equi ty and just ice. In thecase at bar, we find that the plaintiff has paid the totalsu mof P3,582.06including interests, which is evenmorethan the value of the tw olots. And even if thesum applied to theprinc ipa l a lonewere to beconsidered, which was of the total of P1,682.28, thesame was already morethan the value of onelot,which is P1,500.00. The only balance due on both lotswas P1,317.72, which was even less than the value ofone lot. We will consider as fu l ly paidby the plaintiffat least oneof the two lots, at the choiceof thedefendants. This is more in line with good consciencethan a total denial to the plaintiff of a little token ofwhat he has paid the defendant Legarda Hermanos.4

Hence, the present petition for review, wherein petitioners insist ontheir right of cancellation under the "plainly valid written agreementswhich constitute the law between the parties" as against "the broadprinciples of equity and justice" applied by the appellate court.Respondent on the other hand while adhering to the validity of thedoctrine of the Caridad Estates cases5which recognizes the right of a

vendor of land under a contract to sell to cancel the contract upondefault, with forfeiture of the installments paid as rentals, disputes itsapplicability herein contending that here petitioners-sellers wereequally in default as the lots were "completely under water" and "thereis neither evidence nor a finding that the petitioners in fact cancelledthe contracts previous to receipt of respondent's letter." 6

The Court finds that the appellate court's judgment finding that of thetotal sum of P3,582.06 (including interests of P1,889.78) already paid byrespondent (which was morethan the value of two lots), the sumapplied by petitioners to theprincipal alone in the amount of P1,682.28was already more than the value of on elot of P1,500.00and hence on eof the two lots as chosen by respondent would be considered asfu l ly

paid, is fair and just and in accordance with law and equity.

As already stated, the monthly payments for eight years made byrespondent were applied to his account without specifying ordistinguishing between the two lots subject of the two agreementsunder petitioners' own statement of account, Exhibit "1".7Evenconsidering respondent as having defaulted after February 1956, whenhe suspended payments after the 95th installment, he had as of thealready paid by way ofprinc ipa l (P1,682.28) more than the full value ofonelot (P1,500.00). The judgment recognizing this fact and orderingthe conveyance to him of onelot of his choice while also recognizingpetitioners' right to retain the interests of P1,889.78 paid by him foreight years on both lots, besides the cancellat ionof the contract for

one lot which thus reverts to petitioners, cannot be deemed to denysubstant ia l just iceto petitioners nor to defeat their rights under theletter and spirit of the contracts in question.

The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc.vs. Javier

8is fully applicable to the present case, with the respondent

at bar being granted lesserbenefits, since norescission of contractwas therein permitted. There, where the therein buyer-appelleeidentically situated as herein respondent buyer had likewise defaultedin completing the payments after having religiously paid the stipulatedmonthly installments for almost eight years and notwithstanding thatthe seller-appellant had duly notified the buyer of the rescission of the


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contract to sell, the Court upheld the lower court's judgment denyingjudicial confirmation of the rescission and instead granting the buyeran additional grace periodof sixty days from notice of judgment to payall the installment payments in arrearstogether with the stipulated 10%interest per annum from the date of default, apart from reasonableattorney's fees and costs, which payments, the Court observed, would

have the plaintiff-seller "recover everything due thereto, pursuant to itscontract with the defendant, including such damages as the formermay have suffered in consequence of the latter's default."

In affirming, the Court held that "Regardless, however, of the proprietyof applying said Art. 1592 thereto, We find that plaintiff herein has notbeen denied substant ial just ice, for, according to Art. 1234 of saidCode: 'If the obligation has been substantially performedin good fa i th,the obligor may recover as though there had been a strict andcomplete fulfillment, less damages suffered by the obligee,'" and "thatin the interest ofjust iceand equity, the decision appealed from may beupheld upon the authority of Article 1234 of the Civil Code." 9

ACCORDINGLY, the appealed judgment of the appellate court is herebyaffirmed. Without pronouncement as to costs.

Makalin tal, C.J., Castro , Makasiar, Esg uerra an d Muoz Palm a, JJ.,concur.1wph1.t

Footnotes

* Composed of Julio Villamor, Jesus Y. Perez andRamon O. Nolasco, JJ.

1 Petitioners' brief, p.3.

2 Decision, Court of Appeals, Rol loat p. 36.

3 Idem. at p. 40.

4 Idem, at pp. 36-40, emphasis supplied.

5 Caridad Estates vs. Santero, 71 Phil. 114; Mirandavs. Caridad Estates, L-2077, Oct. 3, 1950.

6 Respondent's brief, pp. 16-17.

7 Supra, see fn. 1.

8 31 SCRA 829 (Feb. 27, 1970), per Concepcion, C.J.,cit. Sevilla vs. CA, 27 SCRA 1170 (Apr. 28, 1969).

9 Idem, at pp. 832-833, emphasis supplied.


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G.R. No. 167452 January 30, 2007

JESTRA DEVELOPMENT AND MANAGEMENT CORPORATION,Petitioner,vs.DANIEL PONCE PACIFICO, represented by his attorney-in-fact Jordan

M. Pizarras,Respondent.

D E C I S I O N

CARPIO MORALES, J. :

On June 5, 1996, Daniel Ponce Pacifico (Pacifico) signed a ReservationApplication

1with Fil-Estate Marketing Association for the purchase of a

house and lot located at Lot 28, Block 3, Phase II, Jestra Villas, Barangay LaHuerta, Municipality of Paraaque, Metro Manila (the property), and paid thereservation fee of P20,000.

Under the Reservation Application, the total purchase price of the propertywas P2,500,000, and the down payment equivalent to 30% of the purchaseprice or P750,000 was to be paid interest-free in six monthly installmentsdue every fifth of the month starting July 1996 until December 1996. As theP20,000 reservation fee formed part of the down payment, the monthlyinstallment on the down payment was fixed at P121,666.66.

Also under the Reservation Application, upon full payment of the 30% downpayment by Pacifico, he was to sign a contract to sell with the owner anddeveloper of the property, Joprest Development and ManagementCorporation (now Jestra Development and Management Corporation,hereafter Jestra). And the 70% balance on the purchase price or P1,750,000was to be payable in 10 years, to bear interest at 21% per annum, at a

monthly installment of P34,982.50. When the payment of the installments onthe 70% balance should commence, the Reservation Application was silent.

Unable to comply with the schedule of payments, Pacifico requested Jestrato allow him to make periodic payments on the down payment "in an amountthat he could afford," to which Jestra acceded provided that late paymentpenalties/surcharges

2are paid.

With still a remaining balance of P260,000 on the down payment, Pacificoand Jestra executed on March 6, 1997, Contract to Sell No. 83

3over the

property. The said contract was silent on the unsettled balance on the downpayment.

Under the Contract to Sell, Pacifico should have had on November 5, 1996,or one month prior to the deadline stated under the Reservation Application,fully paid the 30% down payment, and that the 120 monthly installments for

the 70% balance or P1,750 should have had commenced on December 7,1996, viz:

SECTION 2. TERMS OF PAYMENT. The PURCHASER agrees to pay theaforecited purchase price [of P2,500,000.00] in the following manner,namely:

2.1 The total amount of SEVEN HUNDRED FIFTY THOUSAND PESOSONLY (P750,000.00) Philippine Currency as down payment on or beforeNovember 5, 1996.

2.2 The balance of ONE MILLION SEVEN HUNDTED FIFTY THOUSAND

PESOS ONLY (P1,750,00.00), Philippine Currency, shall be paid in OneHundred Twenty (120) equal monthly installments at THIRTY FOURTHOUSAND NINE HUNDRED EIGHT THREE PESOS ONLY (P34,983.00)Philippine Currency, to commence on December 7, 1996, with interest at therate of Twenty One Percent (21%) per annum. The PURCHASER shallissue One Hundred Twenty (120) postdated checks in favor of theOWNER/DEVELOPER for each of the monthly installments, which checksshall be delivered to the latter upon signing of this CONTRACT. ThePURCHASER shall be subject to the pre-qualification requirements ofCOCOLIFE for the Mortgage Redemption Insurance (MRI) and the BuildingInsurance on the UNIT. Interest re-pricing shall be effected on the 6th Year,to commence on December 7, 2001.

x x x x (Underscoring supplied)

By letter4of November 12, 1997, Pacifico requested Jestra that "the balance

be restructured" in light of the "present business condition."

By November 27, 1997, Pacifico had fully paid the 30% down payment, andby December 4, 1997, he had paid a total of P846,600, P76,600 of whichJestra applied as penalty charges for the belated settlement of the downpayment.
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By letter of December 11, 1997, Jestra, through counsel, sent Pacifico a finaldemand for the payment of P444,738.88

5representing the total of 11

installments due on the 70% balance of the purchase price, inclusive of 21%interest per annum and add-on interest at the rate of P384.81 per day,counted from January 7, 1997. Further, Jestra demanded the payment ofP73,750 representing "penalties for the [belated settlement of the] down

payment." And it reminded Pacifico that "as provided in Section 5 of the saidcontract, [Jestra] reserves its right to automatically cancel or rescind thesame on account of [his] failure/refusal to comply with the terms thereof."

6

Pacifico later requested Jestra, by letter of November 12, 1997, for arestructuring of his unsettled obligation. His request was granted on thecondition that the interest for the period from December 1996 to November1997 amounting to P224,396.37 would be added to the 70% balance on thepurchase price; and that Pacifico issue 12 postdated checks beginning eachyear to cover his amortization payments.

In light of the restructured scheme, the monthly amortization on the 70%balance was from P34,982.50 increased to P39,468, to commence on

January 5, 1998.

Pacifico thus issued to Jestra 12 postdated Security Bank checks to coverhis monthly amortizations from January to December 1998. The checks forJanuary and February 1998 were, however, dishonored due to insufficiencyof funds.

7

By letter of March 24, 1998, Pacifico informed Jestra that due to suddenfinancial difficulties, he was suspending payment of his obligation during the10-month period, and that he wanted to dispose of the property to recoverhis investment.

8And he requested that the postdated checks he issued be

returned to him.

Jestra, by letter9of March 31, 1998, denied Pacificos request to suspend

payment and for the return of the postdated checks. It, however, gave himuntil April 15, 1998 to sell the property failing which it warned him that itwould be constrained to re-open it for sale.

Thereafter, Jestra sent Pacifico a notarial Notice of Cancellation, dated May1, 1998, notifying him that it was, within 30 days after his receipt thereof,exercising its right to cancel the Contract to Sell. Pacifico received the noticeon May 13, 1998.

In a separate move, Jestra through its Credit and Collection Manager sentPacifico a letter dated May 27, 1998, demanding payment of the totalamount of P209,377.75 covering monthly amortizations from January 30 toMay 30, 1998 inclusive of penalties. And it gave him until June 1, 1998 tosettle his account, failing which the Contract to Sell would be automaticallycancelled and it would re-open the property for sale.

10

On February 24, 1999, Pacifico filed a complaint before the Housing andLand Use Regulatory Board (HLURB) against Jestra, docketed as HLURBCase No. REM-122499-10378, claiming that despite his full payment of thedown payment, Jestra failed to deliver to him the property within 90 days asprovided in the Contract to Sell dated March 6, 1997, and Jestra instead soldthe property to another buyer in October of 1998.

11

Pacifico further claimed in his complaint that upon learning of the doublesale, he, through his lawyer, demanded that Jestra deliver the property tohim but it failed to do so without just and valid cause.

Pacifico thus prayed that, among others things, judgment be rendereddeclaring the second sale a nullity, ordering Jestra to deliver the property tohim and to pay him P11,000 a month from July 1997 until delivery.

By Decision12

of March 15, 2000, the Housing and Land Use Arbiter heldJestra liable for failure to comply with Section 3 of Republic Act (RA) No.6552 (Realty Installment Buyer Protection Act) requiring payment by theseller of the cash surrender value of the buyers payments and Section 17 ofPresidential Decree No. 957 (REGULATING THE SALE OF SUBDIVISIONLOTS AND CONDOMINIUMS, PROVIDING PENALTIES FOR VIOLATIONSTHEREOF) requiring it to register the Contract to Sell in the Office of theRegister of Deeds.

The Arbiter found that while Pacifico had paid a total amount of P846,600which is "more or less equivalent to 24 monthly installments under thecontract to sell . . . wherein the monthly amortization is P34,983,"

13he could

no longer demand the delivery of the property, its title having already beentransferred in the name of another buyer.

Thus the Arbiter disposed:

WHEREFORE, premises considered, judgment is hereby rendered in favorof the complainant and ordering respondent:
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1. To pay and/or reimburse to the complainant the total paymentsmade amounting to Eight Hundred Forty Six Thousand Six HundredPesos (P846,600.00) with interest thereon at twelve percent (12%)per annum to be computed from the filing of the complaint on 24February 1999 until fully paid; and

2. To pay complainant the amount of Fifty Thousand Pesos(P50,000.00) as damages and attorneysfees plus the costs oflitigation.

14(Underscoring supplied)

On appeal, the Board of Commissioners of the HLURB modified the decisionof the Arbiter by deleting the award of P50,000 damages and ordering Jestrato pay P20,000 as attorneys fees and P10,000 administrative fine for failureto register the Contract to Sell in the Office of the Register of Deeds.

By Resolution of January 27, 2003, the HLURB Board of Commissionersdenied

15Jestras motion for reconsideration.

By Order16

of December 9, 2003, the Office of the President (OP), to whichthe case was elevated, adopted "by reference the findings of facts andconclusions of law" contained in the HLURB Board Resolution of January27, 2003. And by Order

17dated March 18, 2004, it denied Jestras motion for

reconsideration.

On Jestras petition for review under Rule 43 of the Rules of Court, the Courtof Appeals (CA), by Decision

18dated January 31, 2005, affirmed the Orders

of the OP.

Its motion for reconsideration having been denied by CA Resolution19

ofMarch 16, 2005, Jestra (hereafter petitioner) comes before this Court on apetition for review, faulting the appellate court for:

I. . . . adopting the OPs conclusion that penalty payments shouldbe included in computing the total number of installment paymentsmade by a buyer (in relation to the payment of a cash surrendervalue upon cancellation of a contract to sell) in spite of its exclusionfrom the items to be included in computing the two (2) yearsinstallment payments as provided in RA 6552

II. . . . adopting the OPs conclusion that petitioner failed to deliverpossession of the subject property to respondent upon his fullpayment of the downpayment [sic] and that petitioners act of

canceling the contract to sell was unconscionable despite beingallowed under RA 6552.

RA No. 6552 was enacted to protect buyers of real estate on installmentagainst onerous and oppressive conditions. While the seller has under theAct the option to cancel the contract due to non-payment of installments, he

must afford the buyer a grace period to pay them and, if at least two yearsinstallments have already been paid, to refund the cash surrender value ofthe payments. Thus Section of the Act provides:

SECTION 3. In all transactions or contracts involving the sale or financing ofreal estate on installment payments, including residential condominiumapartments but excluding industrial lots, commercial buildings and sales totenants under Republic Act Numbered Thirty-eight hundred forty-four, asamended by Republic Act Numbered Sixty-three hundred eighty-nine, wherethe buyer has paid at least two years of installments, the buyer is entitled tothe following rights in case he defaults in the payment of succeedinginstallments:

(a) To pay, without additional interest, the unpaid installments duewithin the total grace period earned by him which is hereby fixed atthe rate of one month grace period for every one year of installmentpayments made: Provided, That this right shall be exercised by thebuyer only once in every five years of the life of the contract and itsextensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyerthe cash surrender value of the payments on the propertyequivalent to fifty per cent of the total payments made, and, afterfive years of installments, an additional five per cent every year butnot to exceed ninety per cent of the total payments made: Provided,That the actual cancellation of the contract shall take place afterthirty days from receipt by the buyer of the notice of cancellation orthe demand for rescission of the contract by a notarial act and uponfull payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be included in thecomputation of the total number of installment payments made.

As the records indicate, the total payments made by Pacifico (hereafterrespondent) amounted to P846,600. The appellate court, in concluding thatrespondent paid at least two years of installments, adopted the formula used
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by the HLURB by dividing the amount of P846,600 by the monthlyamortization of P34,983 to thus result to a quotient of 24.2 months.

Petitioner contests the computation, however. It claims that the amount ofP76,600 represents penalty payment and is a separate item to answer for itslost income as a seller due to the delay in the payment

20of the 30% down

payment. It thus submits that the amount of P76,600 does not form part ofthe purchase price and should thus be excluded in determining the totalnumber of installments made.

Petitioner likewise claims that the proper divisor is not P34,983 but P39,468since the parties agreed to restructure the amortizations owing torespondents inability to comply with the schedule of payments previouslyagreed upon in the Contract to Sell, and that if respondents total paymentsless the penalty is to be divided by P39,468, the total installments paid wouldonly cover 19.5 months, hence, it was not obliged under RA No. 6552 to paythe cash surrender value of such total payments.

This Court finds that neither of the parties computations is in order.

The total purchase price of the property is P2,500,000. As provided in theReservation Application, the 30% down payment on the purchase price orP750,000 was to be paid in six monthly installments of P121,666.66. Underthe Contract to Sell, the 70% balance of P1,750,000.00 on the purchaseprice was to be paid in 10 years through monthly installments of P34,983,which was later increased to P39,468 in accordance with the agreement torestructure the same.

While, under the above-quoted Section 3 of RA No. 6552, the down paymentis included in computing the total number of installment payments made, theproper divisor is neither P34,983 nor P39,468, but P121,666.66, the monthly

installment on the down payment.

The P750,000 down payment was to be paid in six monthly installments. Ifthe down payment of P750,000 is to be deducted from the total payment ofP846,600, the remainder is only P96,600. Since respondent was able to paythe down payment in full eleven (11) months after the last monthlyinstallment was due, and the sum of P76,600 representing penalty for delayof payment is deducted from the remaining P96,600, only a balance ofP20,000 remains.

As respondent failed to pay at least two years of installments, he is not,under above-quoted Section 3 of RA No. 6552, entitled to a refund of thecash surrender value of his payments. What applies to the case instead isSection 4 of the same law, viz:

SECTION 4. In case where less than two years of installments were paid,

the seller shall give the buyer a grace period of not less than sixty days fromthe date the installment became due.

If the buyer fails to pay the installments due at the expiration of the graceperiod, the seller may cancel the contract after thirty days from receipt by thebuyer of the notice of cancellation or the demand for rescission of thecontract by a notarial act. (Underscoring supplied)

In Fabrigas v. San Francisco del Monte, Inc.,21

this Court described thecancellation of the contract under Section 4 as a two-step process. First, theseller should extend the buyer a grace period of at least sixty (60) days fromthe due date of the installment. Second, at the end of the grace period, theseller shall furnish the buyer with a notice of cancellation or demand forrescission through a notarial act, effective thirty (30) days from the buyer'sreceipt thereof.

Respondent admits that under the restructured scheme, the first installmenton the 70% balance of the purchase price was due on January 5, 1998.While he issued checks to cover the same, the first two were dishonored dueto insufficiency of funds.

While respondent was notified of the dishonor of the checks, he took noaction thereon, hence, the 60 days grace period lapsed. Respondent madeno further payments thereafter. Instead, he requested for suspension ofpayment and for time to dispose of the property to recover his investment.

Respondent admits that petitioner was justified in canceling the contract tosell via the notarial Notice of Cancellation which he received on May 13,1998. The contract was deemed cancelled

2230 days from May 13, 1998 or

on June 12, 1998.

WHEREFORE, the petition is GRANTED. The assailed Decision andResolution dated January 31, 2005 and March 16, 2005 of the Court ofAppeals are hereby REVERSED and SET ASIDE. The complaint ofrespondent, Daniel Ponce Pacifico, is DISMISSED.1avvphi1.net
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SO ORDERED.

CONCHITA CARPIO MORALESAssociate Justice

Footnotes

1Rollo,p. 48.

2Id. at6.

3Id. at 51.

4Id. at 59.

5Id. at 58.

6Id. at 57.

7Id. at 60-63.

8Id. at 64.

9Id. at 65.

10Duplicate File, Housing and Land Use Regulatory Board.

11Rollo, p. 68.

12Id. at 81-89.

13Id. at 86.

14Id. at 88-89.

15Id. at 95-97.

16Id. at98-99.

17Id. at 100-101.

18CA rollo, pp. 178-194. Penned by Justice Renato C. Dacudao

with the concurrence of Justices Edgardo F. Sundiam and Japar B.Dimaampao.

19Id. at 217.

20Rollo,p. 20.

21G.R. No. 152346, November 25, 2005, 476 SCRA 247, 257.

22Rollo,p. 110.
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G.R. No. L-57552 October 10, 1986

LUISA F. MCLAUGHLIN, petitioner,vs.THE COURT OF APPEALS AND RAMON FLORES, respondents.

R.C. Domingo Jr. & Associates for private respondent.

FERIA, Actg. C.J.

This is an appeal by certiorari from the decision of the Court of Appeals, thedispositive part of which reads as follows:

IN VIEW OF THE FOREGOING PREMISES, the petitionfor certiorari and mandamus is hereby GRANTED and theOrders of respondent court dated November 21 and 27both 1980 are hereby nullified and set aside andrespondent Judge is ordered to order private respondentto accept petitioner's Pacific Banking Corporation certifiedmanager's Check No. MC-A-000311 dated November 17,1980 in the amount of P76,059.71 in full settlement ofpetitioner's obligation, or another check of equivalent kindand value, the earlier check having become stale.

On February 28, 1977, petitioner Luisa F. McLaughlin and privaterespondent Ramon Flores entered into a contract of conditional sale of realproperty. Paragraph one of the deed of conditional sale fixed the totalpurchase price of P140,000.00 payable as follows: a) P26,550.00 upon theexecution of the deed; and b) the balance of P113,450.00 to be paid notlater than May 31, 1977. The parties also agreed that the balance shall bearinterest at the rate of 1% per month to commence from December 1, 1976,until the full purchase price was paid.

On June 19, 1979, petitioner filed a complaint in the then Court of FirstInstance of Rizal (Civil Case No. 33573) for the rescission of the deed ofconditional sale due to the failure of private respondent to pay the balancedue on May 31, 1977.

On December 27, 1979, the parties submitted a Compromise Agreement onthe basis of which the court rendered a decision on January 22, 1980. In

said compromise agreement, private respondent acknowledged hisindebtedness to petitioner under the deed of conditional sale in the amountof P119,050.71, and the parties agreed that said amount would be payableas follows: a) P50,000.00 upon signing of the agreement; and b) the balanceof P69,059.71 in two equal installments on June 30, 1980 and December 31,1980.

As agreed upon, private respondent paid P50,000.00 upon the signing of theagreement and in addition he also paid an "escalation cost" of P25,000.00.

Under paragraph 3 of the Compromise Agreement, private respondentagreed to pay one thousand (P l,000.00) pesos monthly rental beginningDecember 5, 1979 until the obligation is duly paid, for the use of the propertysubject matter of the deed of conditional sale.

Paragraphs 6 and 7 of the Compromise Agreement further state:

That the parties are agreed that in the event the defendant

(private respondent) fails to comply with his obligationsherein provided, the plaintiff (petitioner) will be entitled tothe issuance of a writ of execution rescinding the Deed ofConditional Sale of Real Property. In such eventuality,defendant (private respondent) hereby waives his right toappeal to (from) the Order of Rescission and the Writ ofExecution which the Court shall render in accordance withthe stipulations herein provided for.

That in the event of execution all payments made bydefendant (private respondent) will be forfeited in favor ofthe plaintiff (petitioner) as liquidated damages.

On October 15, 1980, petitioner wrote to private respondent demanding thatthe latter pay the balance of P69,059.71 on or before October 31, 1980. Thisdemand included not only the installment due on June 30, 1980 but also theinstallment due on December 31, 1980.

On October 30, 1980, private respondent sent a letter to petitioner signifyinghis willingness and intention to pay the full balance of P69,059.71, and at thesame time demanding to see the certificate of t itle of the property and the taxpayment receipts.


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Private respondent states on page 14 of his brief that on November 3, 1980,the first working day of said month, he tendered payment to petitioner butthis was refused acceptance by petitioner. However, this does not appear inthe decision of the Court of Appeals.

On November 7, 1980, petitioner filed a Motion for Writ of Execution alleging

that private respondent failed to pay the installment due on June 1980 andthat since June 1980 he had failed to pay the monthly rental of P l,000.00.Petitioner prayed that a) the deed of conditional sale of real property bedeclared rescinded with forfeiture of all payments as liquidated damages;and b) the court order the payment of Pl,000.00 back rentals since June1980 and the eviction of private respondent.

On November 14, 1980, the trial court granted the motion for writ ofexecution.

On November 17, 1980, private respondent filed a motion forreconsideration tendering at the same time a Pacific Banking Corporationcertified manager's check in the amount of P76,059.71, payable to the orderof petitioner and covering the entire obligation including the installment dueon December 31, 1980. However, the trial court denied the motion forreconsideration in an order dated November 21, 1980 and issued the writ ofexecution on November 25, 1980.

In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion for clarification of the order of execution rescinding the deed ofconditional sale of real property.

On November 28, 1980, private respondent filed with the Court of Appeals apetition for certiorari and prohibition assailing the orders dated November 21and 27, 1980.

As initially stated above, the appellate court nullified and set aside thedisputed orders of the lower court. In its decision, the appellate court ruled inpart as follows:

The issue here is whether respondent court committed agrave abuse of discretion in issuing the orders datedNovember 21, 1980 and November 27,1980.

The general rule is that rescission will not be permitted fora slight or casual breach of the contract, but only for such

breaches as are substantial and fundamental as to defeatthe object of the parties in making the agreement. (SongFo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821)

In aforesaid case, it was held that a delay in payment for asmall quantity of molasses, for some twenty days is not

such a violation of an essential condition of the contract aswarrants rescission for non-performance.

In Universal Food Corp. vs. Court of Appeals,33 SCRA 1,the Song Fo ruling was reaffirmed.

In the case at bar, McLaughlin wrote Flores on October15, 1980 demanding that Flores pay the balance ofP69,059.71 on or before October 31, 1980. Thus it isundeniable that despite Flores' failure to make thepayment which was due on June 1980, McLaughlinwaived whatever right she had under the compromiseagreement as incorporated in the decision of respondentcourt, to demand rescission.

xxx xxx xxx

It is significant to note that on November 17, 1980, or justseventeen (17) days after October 31, 1980, the deadlineset by McLaughlin, Flores tendered the certified manager'scheck. We hold that the Song Fo ruling is applicableherein considering that in the latter case, there was a 20-day delay in the payment of the obligation as compared toa 17-day delay in the instant case.

Furthermore, as held in the recent case of New PacificTimber & Supply Co., Inc. vs. Hon. Alberto Seneris, L-41764, December 19, 1980, it is the accepted practice inbusiness to consider a cashier's or manager's check ascash and that upon certification of a check, it is equivalentto its acceptance (Section 187, Negotiable InstrumentLaw) and the funds are thereby transferred to the credit ofthe creditor (Araneta v. Tuason, 49 O.G. p. 59).

In the New Pacific Timber & Supply Co., Inc. case, theSupreme Court further held that the object of certifying a


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check is to enable the holder thereof to use it as money,citing the ruling in PNB vs. National City Bank of NewYork,63 Phil. 711.

In the New Pacific Timber case, it was also ruled that theexception in Section 63 of the Central Bank Act that the

clearing of a check and the subsequent crediting of theamount thereof to the account of the creditor is equivalentto delivery of cash, is applicable to a payment through acertified check.

Considering that Flores had already paid P101,550.00under the contract to sell, excluding the monthly rentalspaid, certainly it would be the height of inequity to havethis amount forfeited in favor McLaughlin. Under thequestioned orders, McLaughlin would get back theproperty and still keep P101,550.00.

Petitioner contends that the appellate court erred in not observing theprovisions of Article No. 1306 of the Civil Code of the Philippines and inhaving arbitrarily abused its judicial discretion by disregarding the penalclause stipulated by the parties in the compromise agreement which was thebasis of the decision of the lower court.

We agree with the appellate court that it would be inequitable to cancel thecontract of conditional sale and to have the amount of P101,550.00 (Pl48,126.97 according to private respondent in his brief) already paid by himunder said contract, excluding the monthly rentals paid, forfeited in favor ofpetitioner, particularly after private respondent had tendered the amount ofP76,059.71 in full payment of his obligation.

In the analogous case of De Guzman vs. Court of Appeals, this Courtsustained the order of the respondent judge denying the petitioners' motionfor execution on the ground that the private respondent had substantiallycomplied with the terms and conditions of the compromise agreement, anddirecting the petitioners to immediately execute the necessary documentstransferring to the private respondent the title to the properties (July 23,1985, 137 SCRA 730). In the case at bar, there was also sub

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