UNIVERSITY OF THE PHILIPPINES, PETITIONER, VS. WALFREDO DE LOS ANGELES, IN HIS CAPACITY AS JUDGE OF THE COURT OF FIRST INSTANCE IN QUEZON CITY, ET AL., RESPONDENTS.

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in
its Civil Case No. 9435, are sought to be annulled in this petition for
certiorari and prohibition, filed by herein petitioner University of the
Philippines (or UP) against the above-named respondent judge and the Associated
Lumber Manufacturing Company, Inc. (or ALUMCO). 
The first order, dated 25 February 1966, enjoined UP from awarding
logging rights over its timber concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged
UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to
refrain from exercising logging rights or conducting logging operations on the
concession; and the third order, dated 12 December 1967, denied reconsideration
of the order of contempt.

As prayed for in the petition, a writ of preliminary injunction
against the enforcement or implementation of the three (3) questioned orders
was issued by this Court, per its resolution on 9 February 1968.

The petition alleged the following:

That the above-mentioned Land Grant was segregated from the
public domain and given as an endowment to UP, an institution of higher learning, to be
operated and developed for the purpose of raising additional income for its
support, pursuant to Act 3608;

That on or about 2 November 1960, UP and ALUMCO entered into a logging
agreement under which the latter was granted exclusive authority, for a period
starting from the date of the agreement to 31 December 1965, extendible for a
further period of five (5) years by mutual agreement, to cut, collect and
remove timber from the Land Grant, in consideration of payment to UP of
royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an
unpaid account of P219,362.94, which, despite repeated demands, it had failed
to pay; that after it had received notice that UP would rescind or terminate
the logging agreement, ALUMCO executed an instrument, entitled “Acknow­ledgment
of Debt and Proposed Manner of Payments”, dated 9 December 1964, which was
approved by the president of UP, and which stipulated the fol­lowing:

“3.  In the event that
the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to
liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR,
the balance outstanding after the said payments have been applied shall be paid
by the DEBTOR in full no later than June 30, 1965;

“x x x x x                                x x x x x                       x x
x x x

“5.  In the event that
the DEBTOR fails to comply with any of its promises or undertakings in this
document, the DEBTOR agrees without reserva­tion that the CREDITOR shall have
the right and the power to consider the Logging Agreement dated December 2, 1960 as rescinded without
the necessity of any judicial suit, and the CREDITOR shall be entitled as a
matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for
liquidated damages;”

ALUMCO continued its logging operations, but again incurred an
unpaid account, for the period from 9
December 1964 to 15 July
1965, in the amount of P61,133.74, in addition to the indebtedness that
it had previously acknowledged.

That on 19 July 1965, petitioner UP informed respondent ALUMCO
that it had, as of that date, considered as rescinded and of no further legal effect the logging agreement that they had
entered in 1960; and on 7
September 1965, UP filed a complaint against ALUMCO, which was docketed as
Civil Case No. 9435 of the Court of First Instance of Rizal
(Quezon City), for the collection or payment of the
hereinbefore-­stated sums of money and alleging the facts hereinbefore
specified, together with other allegations; it prayed for and obtained an order,
dated 30 September 1965, for preliminary attachment and preliminary injunction
restraining ALUMCO from continuing its
logging operations in the Land Grant.

That before the issuance of the aforesaid preliminary injunction
UP had taken steps to have another concessionaire take over the logging operation,
by advertising an invitation to bid; that bidding was conducted, and the
concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract
was signed on 16 February 1966.

That, meantime, ALUMCO had filed several motions to discharge the
writs of attachment and preliminary injunction but were denied by the court;

That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner
University from conducting the bidding; on 27 November 1965, it filed a second
petition for preliminary injunction; and, on 25 February 1966, res­pondent
judge issued the first of the questioned orders, enjoining UP from awarding
logging rights over the concession to any other party.

That UP received the order of 25 February 1966 after it had concluded its contract with
Sta. Clara Lumber Company, Inc., and said company had started logging
operations.

That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico,
the court, in an order dated 14 January 1967, declared petitioner UP in
contempt of court and, in the same order, directed Sta. Clara Lumber Com­pany,
Inc., to refrain from exercising logging rights or conducting logging
operations in the concession.

The UP moved for
reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.

Except that it denied knowledge of the purpose of the Land Grant,
which purpose, anyway, is embodied in Act 3608 and, therefore, conclusively
known, respondent ALUMCO did not deny the foregoing allegations in the
petition.  In its answer, respondent corrected
itself by stating that the period of the logging agreement is five (5) years
— not seven (7) years, as it had alleged in its second amended answer to the
complaint in Civil Case No. 9435.  It
reiterated, however, its defenses
in the court below, which may be boiled down to:  blaming its former general manager, Cesar
Guy, in not turning over management of ALUMCO, thereby rendering it unable to
pay the sum of P219,382.94; that it failed to pursue the manner of payments, as stipulated in the
“Acknowledgment of Debt and Proposed Manner of Payments” because the
logs that it had cut turned out to be
rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its
contract “to buy and sell” with said firm, and which contract was
referred and annexed to the
“Acknowledgment of Debt and Proposed Manner of Payments”; that
UP’s unilateral rescission of the logging
contract, without a court order, was invalid; that petitioner’s supervisor refused to allow respondent
to cut new logs unless the logs previously cut during the management of Cesar
Guy be first sold; that respondent was
permitted to cut logs in the middle of June, 1965 but petitioner’s supervisor stopped all
logging operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging operations but
respondent received no reply.

The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO
rescinded, and may disregard the same before any judicial pronouncement to that effect. 
Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25 February 1966,
apparently sustained it (although the order expresses no specific
findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard ALUMCO’s rights under the contract and treat the agreement as breached and of no force
or effect.

We find that position
untenable.

In the first
place, UP and ALUMCO had expressly stipulated in the “Acknowledgment of
Debt and Proposed Manner of Payments” that, upon default by the debtor
ALUMCO, the creditor (UP) has “the right and the power to consider the Logging Agreement dated 2 December 1960
as rescinded without the necessity of
any judicial suit”.  As to such
special stipulation, and in connection with Article 1191 of the Civil Code, this
Court stated in Froilan vs. Pan Oriental Shipping
Co., et al. L-11897, 31 October 1964, 12 SCRA 276:

“there
is nothing in the law that prohibits the parties from entering into
agreement that violation of the terms of the contract would cause cancellation
thereof, even without court intervention. 
In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.”

Of course, it must be understood that the act of a party in
treating a contract as cancelled or resolved on account of infractions by the
other contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper
court.  If the other party denies that
rescission is justified, it is free to resort to judicial action in its own
behalf, and bring the matter to court. 
Then, should the court, after due hearing, decide that the resolution of
the contract was not warranted,
the reasonable party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.

In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without previous court
action, but it proceeds at its own risk.  For it is only the final judgment of the
corresponding court
that will conclusively and finally settle whether the action taken was
or was not correct in law.  But the law
definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. 
Otherwise, the party injured by the other’s breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the
final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203).

We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring that judicial
action is ne­cessary for the resolution of a reciprocal obligation,^[1] since in
every case where the extrajudicial resolution is contested only the final
award of the court of competent jurisdiction can conclusively settle
whether the resolution was proper or not. 
It is in this sense that judicial action will be necessary, as without
it, the extrajudicial resolution will remain contestable and subject to
judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission
in case of breach of contract may render nugatory the general rule requiring
judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
but, as already observed, in case of abuse or error by the rescinder,
the other party is not barred from question­ing in court such abuse or error,
the practical effect of the stipulation being merely to transfer to the defaulter the initiative of
instituting suit, instead
of the rescinder.

In fact, even without express provision conferring the power of
cancellation upon one contracting party, the Supreme Court of Spain, in
cons­truing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191
of our own Civil Code is practically a reproduction), has repeatedly held that
a resolution of reciprocal or synallagmatic contracts
may be made extrajudicially unless successfully
impugned in court.

“El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de que uno de los
obligados no cumpliese lo que le incumbe, facultad que, jurisprudencia de este Tribunal, surge immediatamente
despues que la otra parte incumplio
deber, sin necesidad de una declaracion previa de los Tri­bunales“. 
(Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897).

“Segun reiterada
doctrine de esta Sala,
el Art. 1124 regula la resolucion
como una ‘facultad‘ atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho de opcion entre exigir
el cumplimiento o la resolucion
de lo convenido, que
puede ejercitarse,
ya en la via judicial, ya
fuera de ella, por declaracion
del acreedor, a reserva, claro es, que si
la declaracion de resolucion
hecha por una de las partes
se impugna por la otra, queda aquella
sometida al examen y sancion de los Tribunales, que habran de declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a Derecho.” (Sent.
TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447).

“La resolucion de los contratos sinalagmaticos,
fundada en el incumplimiento
por una de las partes de su
respectiva prestacion, puede tener lugar
con eficacia: 
1.° Por la declaracion
de voluntad de la otra hecha extraprocesalmente, si no es impugnada
en juicio luego con exito; y 2.° Por la demanda
de la perjudicada, cuando
no opta por el cumplimiento con la indemnizacion
de daños y perjuicios realmente causados, siempre que se acredite, edemas, una actitud o conducta persistente y rebelde de la adversa o la satisfaccion de lo pactado, o un hecho obstativo que de un modo absoluto, definitivo o irreformable lo impida, segun el art. 1.124, inter­pretedo por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 nov.
1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non est servanda. (Ss de 4 nov. 1958
y 22 jun. 1959.)” (Emphasis supplied)

In the light of the foregoing principles, and considering that
the ­complaint of petitioner University made out a prima facie case of breach of contract and
defaults in payment by respondent ALUMCO, to the extent that the court below
issued a writ of preliminary injunction stopping ALUMCO’s
logging operations, and repeatedly denied its motions to lift the injunction;
that it is not denied that the respondent company had profited from its
operations previous to the agreement of 5 December 1964 (“Acknowledgment
of Debt and Proposed Manner of Payment”); that the excuses offered in the
second amended answer, such as the misconduct of its former manager Cesar Guy,
and the rotten condition of the logs in private respondent’s pond, which said
respondent was in a better position to know when it executed the acknowledgment
of indebtedness, do not constitute on their face sufficient excuse for
non-payment; and considering that whatever prejudice may be suffered by
respondent ALUMCO is susceptible of compensation in damages, it becomes plain
that the acts of the court a quo in enjoining petitioner’s measures to
protect its interest without first receiving evidence on the issues tendered by
the parties, and in subsequently refusing to dissolve the injunction, were in
grave abuse of discretion, correctible by certiorari, since appeal was not
available or adequate.  Such injunction,
therefore, must be set aside.

For the reason that the order finding the petitioner UP in contempt of
court has been appealed to the Court of Appeals, and the case is pending
therein, this Court abstains from making any pronouncement thereon.

WHEREFORE, the writ of certiorari applied for is granted,
and the order of the respondent court of 25 February 1966, granting the Associated Lumber Company’s
petition for injunction, is hereby set aside. 
Let the records be remanded for further proceedings conformably to this
opinion.

Dizon, Makalintal,
Zaldivar, Ruiz Castro, Fernando, Teehankee, Barredo,
Villamor, and Makasiar,
JJ., concur.

Concepcion, C.J., on official leave.

^[1]
Ocejo, Perez & Co. vs. International Banking Corp., 37
Phil. 631; Republic vs. Hospital de San Juan de Dios,
et al., 84 Phil. 820.