SPS. FELIPE AND LETICIA CANNU, PETITIONERS, VS. SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE FINANCE CORPORATION, RESPONDENTS.

Cannu versus Galang

The Case

This is a petition for review on certiorari brought by spouses Felipe and Leticia Cannu against spouses Gil and Fernandina Galang and the National Home Mortgage Finance Corporation. The Cannus sued for specific performance and damages, asking the court to declare them owners of a house and lot in Las Piñas City which they had agreed to buy from the Galangs under a Deed of Sale with Assumption of Mortgage Obligation. The Galangs countered that the Cannus breached the contract by failing to pay the balance of the purchase price and by failing to keep up the mortgage amortizations, and asked that the sale be rescinded. The case matters because it is the Supreme Court's clean statement of when rescission or resolution under Article 1191 of the Civil Code may be decreed, how substantial a breach must be, and why that remedy is a principal action and not a subsidiary one.

Procedural History

The Cannus filed their complaint for specific performance and damages before Branch 135 of the Regional Trial Court of Makati City. After trial, the trial court dismissed the complaint for lack of merit. On the Galangs' counterclaim, it rescinded the Deed of Sale with Assumption of Mortgage Obligation, declared it nullified, and ordered mutual restitution, with the Galangs returning the partial payments and the Cannus returning possession of the property. It also awarded litigation expenses and attorney's fees. The Cannus moved for reconsideration, which was denied, and then appealed to the Court of Appeals.

The Court of Appeals affirmed the trial court with modification. It held that the Cannus were bound to pay the purchase price and to assume the mortgage, that their failure to pay was a substantial breach, and that their later tender of a manager's check was not an effective mode of payment because tender must be completed by consignation. It ordered the Galangs to return partial payments of 135,000 pesos. The Cannus moved for reconsideration, which the Court of Appeals denied. The case then reached the Supreme Court by petition for review on certiorari.

Facts

Spouses Gil and Fernandina Galang obtained a loan from Fortune Savings and Loan Association to buy a house and lot in Pulang Lupa, Las Piñas, covered by Transfer Certificate of Title Number T-8505 in their names. A real estate mortgage secured the loan. In early 1990, the National Home Mortgage Finance Corporation purchased the mortgage loan from Fortune Savings. Fernandina Galang authorized her attorney-in-fact, Adelina Timbang, to sell the property.

Petitioner Leticia Cannu agreed to buy the property for 120,000 pesos and to assume the balance of the mortgage obligations with the National Home Mortgage Finance Corporation and with CERF Realty, the developer. A Deed of Sale with Assumption of Mortgage Obligation dated 20 August 1990 was executed, reciting a consideration of 250,000 pesos plus assumption of the mortgage. The Cannus immediately took possession. Of the 120,000 pesos, they paid only 75,000 pesos in installments from July 1990 to November 1991, leaving a balance of 45,000 pesos. They also made only six amortization payments to the National Home Mortgage Finance Corporation from 1990 to 1993, and their formal assumption of the mortgage was never approved by that corporation for lack of requirements.

Despite repeated demands by Adelina Timbang and Fernandina Galang to pay the 45,000 peso balance or to vacate, the Cannus refused. In March 1993, Leticia Cannu wrote the National Home Mortgage Finance Corporation claiming that ownership had been transferred to them. On 21 May 1993, Fernandina Galang paid 233,957.64 pesos to fully settle the mortgage loan. The Cannus opposed the release of the title to the Galangs, so the corporation held the release in abeyance. The Cannus then sued, and the Galangs set up rescission in their counterclaim.

Issues

• Whether or not the Cannus' breach of their obligation to pay the balance of the purchase price was substantial.
• Whether or not there was substantial compliance with their obligation to pay the monthly amortizations to the National Home Mortgage Finance Corporation.
• Whether or not the circumstances of the case militate against rescission, including the alleged waiver by the Galangs and the absence of proof of their readiness to restore what they received.
• Whether or not the action for rescission is subsidiary, such that Article 1383 of the Civil Code applies.

Applicable Provisions

Article 1191 of the Civil Code provides:

Article 1191. 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 the provision the Court applies, because the contract of sale is reciprocal and the remedy of resolution for breach is implied by law.

Article 1383 of the Civil Code, invoked by the petitioners, provides:

Article 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

The Court holds that this subsidiary character applies only to the rescission for lesion enumerated in Article 1381, and not to resolution for breach under Article 1191.

Ruling

On the first issue, the Court held that the breach was substantial. Rescission or resolution under Article 1191 rests on a breach of faith that violates the reciprocity between the parties, and it will not be permitted for a slight or casual breach. Whether a breach is substantial depends on the attending circumstances, not merely on the percentage unpaid. The Court found that even if only 45,000 pesos remained out of a supposed 250,000 peso consideration, that is eighteen percent, still substantial; and taken with the fact that the last payment was made on 28 November 1991, eighteen months before Fernandina Galang settled the mortgage, the intention to renege was clear. The Court also corrected the Court of Appeals' misappreciation of the evidence: the true consideration was 120,000 pesos plus assumption of the mortgage and payment of the equity to CERF Realty, not 250,000 pesos, and because the deed failed to express the true intent of the parties, the case fell within an exception to the parole evidence rule, allowing evidence aliunde.

On the second issue, the Court found that the Cannus were not religious in paying the amortizations. In three years from 1990 to 1993, their payments covered only thirty months, and there was no formal assumption of the mortgage because the National Home Mortgage Finance Corporation never approved it for lack of requirements. This was a separate breach of the deed.

On the third issue, the Court found sufficient evidence of demands. Adelina Timbang made constant follow-ups after the last payment, and Fernandina Galang demanded full payment or vacation of the property upon her return from America in October 1992 and again in March 1993. The acceptance of installment payments through the attorney-in-fact was mere accommodation and did not constitute waiver of the right to rescind. The Court also rejected the argument that the Galangs had to show readiness to restore, because they had already complied by delivering possession, and the rule is that rescission may be demanded only if the plaintiff is ready, willing and able to comply with his own obligation while the other is not.

On the fourth issue, the Court held that the subsidiary character of rescission under Article 1383 applies only to the contracts enumerated in Article 1381, and the contract here is not one of them. The applicable provision is Article 1191, under which resolution is a principal action, retaliatory in character, based on the breach of faith that violates reciprocity. The Court quoted the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corporation versus Court of Appeals, which explained that rescission on account of breach of stipulations is not predicated on injury to economic interests but on the breach of faith by the defendant, and is not a subsidiary action. The Court also noted that the power to rescind must be invoked judicially, but found that the Galangs' payment of the outstanding mortgage was not a unilateral rescission; it was the act that triggered their exercise of the right after the Cannus stopped paying.

Doctrine

Resolution or rescission under Article 1191 of the Civil Code is implied in reciprocal obligations when one obligor fails to comply with what is incumbent upon him. It is not permitted for a slight or casual breach; the breach must be substantial and fundamental as to defeat the object of the parties in making the agreement. Whether a breach is substantial depends on the attending circumstances, not merely on the percentage of the amount unpaid. Tender of payment alone does not produce legal payment unless completed by consignation. Acceptance of installment payments does not amount to waiver of the right to rescind. Resolution under Article 1191 is a principal action, retaliatory in character, and is not subject to the subsidiary character of rescission for lesion under Articles 1381 and 1383. The injured party may choose between fulfillment and rescission, with damages in either case.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals, with the modification that the Galangs return the partial payments of 135,000 pesos to the Cannus.

Remember This

Memorize this line: rescission under Article 1191 requires a substantial and fundamental breach, and it is a principal action, not a subsidiary one. Examiners use this case to test the distinction between resolution for breach under Article 1191 and rescission for lesion under Articles 1381 and 1383, and to test whether a given breach is substantial enough to justify rescission.