RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE IS THE PROPER REMEDY WHEN A

PARTY BREACHES A RECIPROCAL OBLIGATION

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RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE IS THE PROPER REMEDY WHEN A
PARTY BREACHES A RECIPROCAL OBLIGATION
Rescission under Article 1191 of the Civil Code is the proper remedy when a party breaches a reciprocal
obligation. Because each case has its own distinct circumstances, this Court's power to fix a period of
an obligation under Article 1197 is discretionary and should be exercised only if there is just cause
(Camp John Hay Development Corporation vs. Charter Chemical and Coating Corporation, G.R.
No. 198849, August 7, 2019).

Camp John Hay Development Corporation vs. Charter Chemical and Coating Corporation
G.R. No. 198849, August 7, 2019
Leonen, J.

FACTS:
Camp John Hay Development Corporation (hereinafter Camp John) is the investment arm of a
consortium engaged in the construction of the Camp John Hay Manor in Baguio City. In January 2001,
Camp John entered into a Contractor's Agreement with Charter Chemical and Coating Corporation
(hereinafter Charter Chemical), the company awarded to complete the interior and exterior painting
works of unit 2E of the Camp John Hay Manor for P15,500,000.00. This was inclusive of the price of two
(2)-studio type units at Camp John Hay Suites, the total amount of which would be based on the units
chosen by Charter Chemical.

In 2003, Charter Chemical completed the painting works, after which Camp John issued a Final
Inspection and Acceptance Certificate belatedly on May 30, 2005. Charter Chemical demanded the
execution of the deed of sale and delivery of the titles of the 2 units in September 2004, with a follow-up
in April 2005. In June 2005, Camp John and Charter Chemical executed contracts to sell. In August
2005, Camp John issued certifications to Charter Chemical that the 2 units were fully paid under their
offsetting scheme. However, the units were not delivered because the construction of Camp John Hay
Suites was not yet complete.

Camp John had initially estimated that the construction would be completed by 2006. In a Lease
Agreement executed October 19, 1996, Camp John and Bases Conversion on and Development
Authority (BCDA) provided for a period of 3.5 years from the execution of the Lease Agreement to
complete the various physical components in Camp John Hay. When this timetable was not followed
due to alleged mutual delays and force majeure, they revised the targeted completion dates. Admitting
various unforeseen events, Camp John again failed to complete its construction on 2006.

Due to the subsisting construction delay in the construction, Charter Chemical wrote Camp John,
demanding that it transfer the units or pay the value of these units. When it felt that further demands
would be futile, Charter Chemical filed before the Construction Industry Arbitration Commission a
Request for Arbitration under the arbitration clause. The arbitral tribunal ruled that Charter Chemical was
entitled to its claim for the value of the two (2) units. The ruling was affirmed by CA.

In a PFR on Certiorari, Camp John contends that the action filed should have been for the fixing of a
period under Articles 1191 and 1197 of CC, and not an action for the rescission of the contract. Charter
Chemical argues that since Camp John was already delayed in delivering the units in 2007, the arbitral
tribunal and CA correctly applied Article 1191 of CC, awarding indemnity for damages to them.

VILLAROMAN 1
ISSUE:
What is the proper remedy in the case: Rescission under Art. 1191 of the Civil Code or the fixing of the
period by the court under Art. 1197 of the same law? RESCISSION UNDER ART. 1191

HELD:
1. RESCISSION OF THE CONTRACT IS SANCTIONED HERE.

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

Rescission on account of breach of reciprocal obligations is provided under Article 1191 of the Civil Code
which provides: The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him. The injured party may choose between the
fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is
understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

This provision refers to rescission applicable to reciprocal obligations. It is invoked when there is
noncompliance by one (1) of the contracting parties in case of reciprocal obligations. Reciprocal
obligations are those which arise from the same cause, and in which each party is a debtor and a creditor
of the other, such that the obligation of one is dependent upon the obligation of the other. They are to
be performed simultaneously such that the performance of one is conditioned upon the simultaneous
fulfillment of the other.”

Rescission under Article 1191 will be ordered when a party to a contract fails to comply with his or her
obligation. Rescission “is a principal action that is immediately available to the party at the time that the
reciprocal obligation was breached.” The right of rescission of a party to an obligation under Article 1191
of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between
them. The breach contemplated in the said provision is the obligor’s failure to comply with an existing
obligation. When the obligor cannot comply with what is incumbent upon him, the obligee may seek
rescission and, in the absence of any just cause for the court to determine the period of compliance, the
court shall decree the rescission. Resolution grants the injured party the option to pursue, as principal
actions, either a rescission or specific performance of the obligation, with payment of damages in either
case.

2. ON THE OTHER HAND, SC CANNOT CURE THE DEFICIENCY HERE BY FIXING THE PERIOD
OF THE OBLIGATION. THERE IS NO JUST CAUSE FOR THE SC TO FIX THE PERIOD FOR
THE BENEFIT OF PETITIONER.

Article 1197 applies “when the obligation does not fix a period but from its nature and circumstances it
can be inferred that a period was intended.” This provision allows the courts to fix the duration “because
the fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for
compliance therewith and such period has arrived.” The power of the courts to fix a period is
discretionary. The surrounding facts of each case must be taken into consideration in deciding whether
the fixing of a period is sanctioned. The discretion to fix an obligation’s period is addressed to the court’s
judgment and is tempered by equitable considerations. SC mentioned instances when the court refused
to fix a period, citing Central Philippine University vs. CA and Araneta vs. Philippine Sugar Estates as
bases.

Here, there is no just cause for SC to determine the period of compliance. As can be gleaned from the
records of this case, the obligation of petitioner to build the Camp John Hay Suites had been dragging

VILLAROMAN 2
for years even before it entered into the Contractor’s Agreement with respondent. The MOA that
petitioner executed with BCDA shows that the construction of the Camp John Hay Suites began in 1996.
When respondent demanded the units’ transfer in 2007, more than 10 years had lapsed; yet, within
those years, petitioner was still not able to complete the construction of the Camp John Hay Suites. To
tolerate petitioner’s excuses would only cause more delay and burden to respondent. To belatedly fix
the period for petitioner’s compliance would mean refusing immediate payment to respondent.
Petitioner’s noncompliance with its obligation to deliver the 2 units as payment to respondent can no
longer be excused. The law and jurisprudence are clear. When the obligor cannot comply with its
obligation, the obligee may exercise its right to rescind the obligation, and the courts will order the
rescission in the absence of any just cause to fix the period. Here, lacking any reasonable explanation
and just cause for the fixing of the period for petitioner’s noncompliance, the rescission of the obligation
is justified.

3. ON THIS NOTE, SC MADE A CORRELATION BETWEEN THE RESCISSION MENTIONED IN

Rescission of the obligation under Article 1191 is a declaration that a contract is void at its inception. Its
effect is to restore the parties to their original position, insofar as practicable. Rescission has the effect
of “unmaking a contract, or its undoing from the beginning, and not merely its termination.” Hence,
rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare
a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate
it and release the parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.

Mutual restitution is required in cases involving rescission under Article 1191. “Where a contract is
rescinded, it is the duty of the court to require both parties to surrender that which they have respectively
received and to place each other as far as practicable in his original situation; the rescission has the
effect of abrogating the contract in all parts.”

Restitution under Article 1385 of the Civil Code equally applies for rescission under Article 1191. Despite
the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the term
“resolution”, the amendment thereto (presently, Article 1191) explicitly and clearly used the term
“rescission”. Unless Article 1191 is subsequently amended to revert back to the term “resolution”, SC
has no alternative but to apply the law, as it is written.

Article 1385 provides: Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore. Neither shall
rescission take place when the things which are the object of the contract are legally in the possession
of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from
the person causing the loss.

Although rescission repeals the contract from its inception, it does not disregard all the consequences
that the contract has created. What mutual rescission entails is “the return of the benefits that each party
may have received as a result of the contract.”

Here, it is clear that only petitioner benefited from the contract. Respondent has already performed the
painting works in 2003, and it was accepted by petitioner as satisfactory. Since this service cannot be
undone and petitioner has already enjoyed the value of the painting services over the years, respondent
is entitled to the payment of the painting services with interest in accordance with Articles 1191 and 2210
of the Civil Code. The interest shall be computed from the date of extrajudicial demand by respondent
in accordance with Article 1169 of the Civil Code.

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