Breach of reciprocity

The breach of contract with reciprocal obligations by any of the parties thereto entitles the injured party to ask for its resolution (rescission) or for specific performance of the obligation with payment of damages in either case (Article 1191 Civil Code). These damages may take the form of interest (Article 2210). This rescission is predicated on the breach of faith by the defendant that violates the reciprocity between the parties. It is a principal action retaliatory in character it being unjust that a party be held bound to fulfill his promise when the other violates his.

 On the other hand, a contract may also be rescinded by reason of injury or damage caused to a party under Article 1381 of the Civil Code. Here the cause of action is subordinated to the existence of the damage or prejudice because it is the raison d’etre as well as the measure of the right to rescind. 

This case between a religious congregation operating a school in the Visayas (RVM) and the heirs of Trining (the Heirs) explains the distinction between the two actions.

The case involved a parcel of land (Lot 159 B-2) belonging to the Heirs and adjacent to the school of RVM which the latter wanted to purchase. After negotiations with the RVM’s Mother Superior General in Manila, a Contract to Sell dated June 2, 1999 was made out and signed by all the Heirs and the Mother Superior of the School as witness. The contract pegged the price of the land at P5,555,000 with 10% of the total consideration as down payment.

On June 7, 1999, the Heirs acknowledged receipt of P555,500 as down payment for the lot from the School with “conforme” signed by the School’s Mother Superior. Thereafter, the Heirs executed an extrajudicial settlement of the estate of Trining adjudicating unto themselves the said Lot 159 B-2 thus paving the way for the issuance of TCT T-39194 in their names pro-indiviso.

Armed with the Title and an undated Deed of Absolute Sale signed by all of them, they tried to schedule a meeting with the Mother Superior General in Manila to finalize the transaction and obtain payment of the remaining balance of the purchase price in the amount of P4,999,500. However, they failed; and their succeeding attempts were likewise rebuffed. Later the counsel for the RVM denied the Heirs demand for payment because the Contract to Sell was merely signed by the School’s Mother Superior as a witness and that RVM will only be in a financial position to pay the balance in two years. Hence the Heirs filed an action for specific performance or rescission.

After trial, the Regional Trial Court (RTC) ruled that there was indeed a perfected contract of sale between the parties and ordered the rescission of the contract with forfeiture of down-payment and exemplary damages and attorney’s fees.

On appeal, the Court of Appeals (CA), while sustaining the RTC finding on the existence of a perfected contract of sale, set aside the RTC decision on the existence of fraud or bad faith. Thus instead of ordering rescission with forfeiture of the down-payment, the CA ordered the specific performance of the sale and required RVM to pay the remaining balance of the purchase price with 6% interest per annum until fully paid as the most equitable resolution. According to the CA since the records do not show if the balance was to be paid in 2 years as claimed by RVM or upon transfer of title in the name of the Heirs as the latter averred, rescission cannot be availed of because it is a subsidiary remedy available only when the injured party has no other legal means to obtain reparation for the damage caused.

RVM however questioned the imposition of the interest, given the CA’s order of specific performance and factual finding on the absence of fraud or bad faith by either party. RVM argued that the imposition of interest is not in keeping with equity since the Heirs retained possession for the duration of the litigation without simultaneously requiring the latter to pay rentals. Was RVM correct?

No. As there was already a perfected and binding contract of sale, RVM had the corresponding obligation to pay the remaining balance of the purchase price upon the issuance of the title in the name of the Heirs. The supposed two-year period within which to pay the balance did not affect the nature of the agreement as a perfected contract of sale. In fact this two-year period is neither reflected in any of the drafts of the contract nor in the acknowledgment receipt of the down payment executed by the Heirs with the conformity of the School’s Mother Superior. In any event, the two-year period to effect payment has been mooted by lapse of time.

But the CA mistakenly found that this is an action for rescission based on damage or injury under Article 1381 of the Civil Code because the Heirs cause of action against RVM is predicated on the breach of the reciprocal obligation under Article 1191. RVM indeed committed a breach of the obligation when it suddenly refused to execute and sign the agreement and pay the balance of the purchase price. Hence the Heirs are entitled to damages, whether the action is for rescission or specific performance (RVM vs. Orola et. al. G.R. 169790, April 30, 2008)

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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