VERMEN REALTY DEVELOPMENT CORPORATION, PETITIONER, VS. THE COURT OF APPEALS AND SENECA HARDWARE CO., INC., RESPONDENTS.

Petitioner seeks a review of the decision of the Court of Appeals
in CA-G.R. CV No. 15730, which set aside the decision of the Regional Trial
Court of Quezon City, Branch 92 in Civil Case No. Q-45232. The dispositive portion of the assailed
decision reads as follows:

“WHEREFORE, the decision a quo is set aside. As prayed for by plaintiff-appellant, the
‘Offsetting Agreement’ (Exhibit “E” or “2”) is hereby rescinded. Room 601 of Phase I of the Vermen Pines
Condominium should be returned by plaintiff-appellant to defendant-appellee
upon payment by the latter of the sum of P330,855.25 to the former, plus
damages in the sum of P5,000.00 and P50.00 for the furnishings of Phase I of
Condo (sic) Units Nos. 601 and 602, and three (3) day rental of Room 402 during
the Holy Week of 1982, respectively. In
addition, defendant-appellee is hereby ordered to pay plaintiff-appellant, who
was compelled to litigate and hire the services of counsel to protect its
interests against defendant-appellee’s violation of their Offsetting Agreement,
the sum of P10,000.00 as an award for attorney’s fee (sic) and other expenses
of litigation. The claim for unrealized
profits in a sum equivalent to 10% to 20% percent or P522,000.00 not having been
duly proved, is therefore DENIED. No
costs.” (Rollo, p. 31).

On March 2, 1981, petitioner Vermen Realty and Develop­ment
Corporation, as First Party, and private respondent Seneca Hardware Co., Inc.,
as Second Party, entered into a contract denominated as “Offsetting
Agreement”. The said agreement
contained the following stipulations:

“1.     That the FIRST PARTY
is the owner/developer of VERMEN PINES CONDOMINIUM located at Bakakeng Road,
Baguio City;

“2.     That the SECOND PARTY
is in business of construction materials and other hardware items;

“3.     That the SECOND PARTY
desires to buy from the FIRST PARTY two (2) residential condominium units,
studio type, with a total floor area of 76.22 square meter (sic) more or less
worth TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS only;

“4.     That the FIRST PARTY
desires to buy from the SECOND PARTY construction materials mostly steel bars,
electrical materials and other related items worth FIVE HUNDRED FIFTY TWO
THOUSAND (P552,000.00) PESOS only;

“5.     That the FIRST PARTY
shall pay the SECOND PARTY TWO HUNDRED SEVENTY SIX THOUSAND (P276,000.00) PESOS
in cash upon delivery of said construction materials and the other TWO HUNDRED
SEVENTY SIX THOUSAND (P276,000.00) PESOS shall be paid in the form of two (2)
residential condominium units, studio type, with a total floor area of 76.22
square meter (sic) more or less also worth P276,000.00;

“6.     That, for every
staggered delivery of construction materials, fifty percent (50%) shall be paid
by the FIRST PARTY to the SECOND PARTY C.O.D. and, fifty percent (50%) shall be
credited to the said condominium unit in favor of the SECOND PARTY;

“7.     That the SECOND PARTY
shall deliver to the FIRST PARTY said construction materials under the agreed
price and conditions stated in the price quotation approved by both parties and
made an integral part of this document;

“8.     That the SECOND PARTY
is obliged to start delivering to the FIRST PARTY all items in the purchase
order seven (7) days from receipt of said purchase order until such time that
the whole amount of P552,000.00 is settled;

“9.     That the place of
delivery shall be Vermen Pines Condominium at Bakakeng Road, Baguio City;

“10.   That the freight cost
of said materials shall be borne fifty percent (50%) by the FIRST PARTY and
fifty percent (50%) by the SECOND PARTY;

“11.   That the FIRST PARTY
pending comple­tion of the VERMEN PINES CONDOMINIUM PHASE II which is the
subject of this contract, shall deliver to the SECOND PARTY the possession of
residential condominium, Phase I, Unit Nos. 601 and 602, studio type with a
total area of 76.2 square meters or less, worth P276,000.00;

“12.   That after the
completion of Vermen Pines Condominium Phase II, the SECOND PARTY shall be
given by the FIRST PARTY the first option to transfer from Phase I to Phase II
under the same price, terms and conditions.” (Rollo, pp. 26-28).

As found by the appellate court and admitted by both parties,
private respondent had paid petitioner the amount of P110,151.75, and at the
same time delivered construction materials worth P219,727.00. Pending completion of Phase II of the Vermen
Pines Condominiums, petitioner delivered to private respondent units 601 and
602 at Phase I of the Vermen Pines Condominiums (Rollo, p. 28). In 1982, the petitioner repossessed unit
602. As a consequence of the
repossession, the officers of the private respondent corpo­ration had to rent
another unit for their use when they went to Baguio on April 8, 1982. On May 10, 1982, the officers of the private
respondent corporation requested for a clarification of the petitioner’s action
of preventing them and their families from occupying condominium unit 602.

In its reply dated May 24, 1982, the petitioner corpo­ration
averred that Room 602 was leased to another tenant because private respondent
corporation had not paid anything for purchase of the condominium unit. Petitioner corpora­tion demanded payment of
P27,848.25 representing the balance of the purchase price of Room 601.

In 1983, the loan application for the construction of the Vermen
Pines Condominium Phase II was denied. Consequently, construction of the condominium project stopped and has
not been resumed since then.

On June 21, 1985, private respondent filed a complaint with the
Regional Trial Court of Quezon City (Branch 92) for rescission of the
Offsetting Agreement with damages. In
said complaint, private respondent alleged that petitioner Vermen Realty
Corporation had stopped issuing purchase orders of construction materials after
April, 1982, without valid reason, thus resulting in the stoppage of deliveries
of construction materials on its (Seneca Hardware) part, in violation of the
Offsetting Agreement.

In its Answer filed on August 15, 1985, petitioner alleged that
the fault lay with private respondent (plaintiff therein): although petitioner issued purchase orders,
it was private respondent who could not deliver the supplies ordered, alleging
that they were out of stock. (However,
during a hearing on January 28, 1987, the Treasurer of petitioner corporation,
when asked where the purchase orders were, alleged that she was going to
produce the same in court, but the same was never produced (Rollo, p. 30). Moreover, private respondent quoted higher
prices for the construction materials which were available. Thus, petitioner had to resort to its other
suppliers. Anent the query as to why
Unit 602 was leased to another tenant, petitioner averred that this was done
because private respondent had not paid anything for it.

As of December 16, 1986, private respondent had paid petitioner
P110,151.75 in cash, made deliveries of construction materials worth
P219,727.00, leaving a balance P27,848.25 representing the purchase price of
unit 601 (Rollo, p. 28). The price of
one condominium unit was P138,000.00.

After conducting hearings, the trial court rendered a decision
dismissing the complaint and ordering the plaintiff (private respondent in this
petition) to pay defendant (petitioner in this petition) on its counterclaim in
the amount of P27,848.25 representing the balance due on the purchase price of
condominium unit 601.

On appeal, respondent court reversed the trial court’s decision
as adverted to above.

Petitioner now comes before Us with the following assignment of
errors:

I

“THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE
BY THIS HONORABLE COURT, WHEN IT SUPPLANTED CONTRARY TO THE EVIDENCE ON RECORD,
THE TRIAL COURT’S CONCLUSIONS THAT PETITIONER DID NOT VIOLATE THE ‘OFFSETTING
AGREEMENT’ IT ENTERED INTO WITH THE SENECA HARDWARE CO., INC. WITH ITS TOTALLY
BASELESS ‘PERCEPTION’ THAT IT WAS PETITIONER WHICH DISCONTINUED TO ISSUE
PURCHASE ORDERS DUE TO THE STOPPAGE OF THE CONSTRUCTION OF PHASE II OF THE
CONDOMINIUM PROJECT WHEN THE LOAN ON THE SAID PROJECT WAS STOPPED.

II

“THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE
BY THIS HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE ‘OFFSETTING AGREEMENT’ BECAUSE IT DID NOT SEND PURCHASE ORDERS TO
PRIVATE RESPONDENT AND DISCONTINUED THE CONSTRUCTION OF THE CONDOMINIUM PROJECT
DESPITE THE FACT THAT THE EXHIBITS ATTESTING TO THIS FACT WAS FORMALLY OFFERED
IN EVIDENCE IN COURT AND MENTIONED BY IT IN ITS DECISION.

III

“THE RESPONDENT COURT OF APPEALS ERRED, AND ITS ERROR IS REVIEWABLE
BY THIS HONORABLE COURT, WHEN IT CONCLUDED THAT IT WAS PETITIONER WHICH
BREACHED THE ‘OFFSETTING AGREEMENT’ DESPITE THE ADMISSION MADE BY PRIVATE
RESPONDENT’S OWN WITNESS THAT PETITIONER HAD THE DISCRETION TO ORDER OR NOT TO
ORDER THE CONSTRUCTION MATERIAL (SIC) FROM THE FORMER.” (Rollo, p. )

The issue presented before the Court is whether or not the
circumstances of the case warrant rescission of the Offsetting Agreement as
prayed for by Private Respondent when he instituted the case before the trial
court.

We rule in favor of private respondent. There is no controversy that the provisions of the Offsetting
Agreement are reciprocal in nature. Reciprocal obligations are those created or established at the same
time, out of the same cause, and which results in a mutual relationship of
creditor and debtor between parties. In
reciprocal obliga­tions, the performance of one is conditioned on the
simultaneous fulfillment of the other obligation (Abaya vs. Standard Vacuum Oil
Co., 101 Phil. 1262 [1957]). Under the
agreement, private respondent shall deliver to petitioner construction
materials worth P552,000.00 under the conditions set forth in the Offsetting
Agreement. Petitioner’s obligation
under the agreement is three-fold: he
shall pay private respondent P276,000.00 in cash; he shall deliver possession
of units 601 and 602, Phase I, Vermen
Pines Condominiums (with total value of P276,000.00) to private respondent;
upon completion of Vermen Pines Condominiums Phase II, private respondent shall be given option to transfer to
similar units therein.

Article 1191 of the Civil Code provides the remedy of rescission
in (more appropriately, the term is “resolution”) in case of reciprocal
obligations, where one of the obligors fails to comply with what is incumbent
upon him.

The general rule is that rescission of a contract will not be
permitted for a slight or causal breach, but only for such substantial and
fundamental breach as would defeat the very object of the parties in executing
the agreement. The question of whether
a breach of contract is substantial depends upon the attendant circumstances
(Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, [1970]).

In the case at bar, petitioner argues that it was private
respondent who failed to perform its obligation in the Offsetting
Agreement. It averred that contrary to
the appellate court’s ruling, the mere stoppage of the loan for the
construction of Phase II of the Vermen Pines Condominiums should not have had any effect
on the fulfillment of the obligations set forth in the Offsetting Agreement. Petitioner moreover stresses that contrary
to private respondent’s averments, purchase orders were sent, but there was
failure to deliver the materials ordered because they were allegedly out of
stock. Petitioner points out that, as
admitted by private respondent’s witness, petitioner had the discretion to
order or not to order constructions materials, and that it was only after
petitioner approved the price, after making a canvass from other suppliers,
that the latter would issue a purchase order. Petitioner argues that this was the agreement, and therefore the law
between the parties, hence, when no purchase orders were issued, no provision
of the agreement was violated.

Private respondent, on the other hand, points out that the
subject of the Offsetting Agreement is Phase II of the Vermen Pines
Condominiums. It alleges that since
construction of Phase II of the Vermen Pines Condominiums has failed to begin
(Rollo, p. 104), it has reason to move for rescission of the Offsetting Agreement,
as it cannot forever wait for the delivery of the condominium units to it.

It is evident from the facts of the case that private respondent
did not fail to fulfill its obligation in the Offsetting Agreement. The discontinuance of delivery of
construction materials to petitioner stemmed from the failure of petitioner to
send purchase orders to private respondent. The allegation that petitioner had been sending purchase orders to
private respondent, which the latter could not fill, cannot be given credence. Perhaps in the beginning, it would send
purchase orders to private respondent (as evidenced by the purchase orders
presented in court), and the latter would deliver the construction materials
ordered. However, according to private
respondent, after April, 1982, petitioner stopped sending purchase orders. Petitioner failed to refute this
allegation. When petitioner’s witness,
Treasurer of the petitioner corporation, was asked to produce the purchase
orders in court, the latter promised to do so, but this was never complied
with.

On the other hand, petitioner would never be able to fulfill its
obligation in allowing private respondent to exercise the option to transfer
from Phase I to Phase II, as the construction of Phase II has ceased and the
subject condominium units will never be available.

The impossibility of fulfillment of the obligation on the part of
petitioner necessitates resolution of the contract for indeed, the
non-fulfillment of the obligation aforementioned constitutes substantial breach
of the Offsetting Agreement. The possibility
of exercising the option of whether or not to transfer to condominium units in
Phase II was one of the factors which were considered by private respondent
when it entered into the agreement. Since the construction of the Vermen Pines Condominium Phase II has
stopped, petitioner would be in no position to perform its obligation to give
private respondent the option to transfer to Phase II. It would be the height of injustice to make
private respondent wait for something that may never come.

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.

SO ORDERED.

Feliciano, (Chairman), Davide, Jr., Romero, and Melo, JJ., concur.