Reliance Commodities, Inc. v. IAC
G.R. No. 74729 (May 31, 2000)
Facts:
On April 19, 1972, Marvin Paez entered into a contract with Samuel Chuason, the president and general manager of Reliance Commodities, Inc., wherein the company agreed to provide Paez with funds and equipment for the operation of manganese mining claims owned by Daniel Garde in Gabaldon, Nueva Ecija. Subsequently, on June 1, 1972, an "Addendum to Operating Agreement" was executed, which outlined the responsibilities of both parties, including the segregation of manganese ores into two classes.
Reliance Commodities provided a cash advance of P8,300.00 to Paez, which he used to hire laborers and purchase necessary supplies for the mining operation that commenced on July 1, 1972. On July 28, 1972, Paez and his wife, Rosa Valino, executed a deed of first real estate mortgage on their property in favor of Reliance Commodities as security for additional cash advances needed for the mining operation.
Reliance Commodities made several cash advances to Paez, totaling P25,030.00, based on the mortgage agreement. However, a dispute arose regarding the cash advances, leading Reliance to demand the return of the equipment provided for the mining operation. Paez's laborers refused to release the equipment due to unpaid wages, prompting Reliance to provide P800.00 for the laborers' salaries.
Eventually, Reliance Commodities foreclosed the mortgage extrajudicially, and the provincial sheriff served notice to Paez that the mortgaged property would be sold at public auction on June 4, 1974. In response, Paez and Valino filed a complaint on May 29, 1974, seeking a preliminary injunction to stop the auction, annul the mortgage deed and addendum, and compel Reliance to provide further cash advances.
In their answer, Reliance claimed that the plaintiffs had violated the contracts by failing to deliver the manganese ores as stipulated, thus justifying their foreclosure of the mortgage. The trial court ruled in favor of Reliance, dismissing the complaint and ordering Paez and Valino to pay Reliance for the cash advances received, along with attorney's fees.
Paez and Valino appealed the decision to the Intermediate Appellate Court, which ruled in their favor, declaring the mortgage and addendum null and void, and ordering Reliance to pay for unrealized profits and attorney's fees.
Legal Issues:
- Did the Intermediate Appellate Court err in finding that Reliance Commodities, Inc. was the party at fault, thus justifying the rescission of the contracts?
- Is restitution available in cases of rescission of contracts under Article 1191 of the Civil Code?
Arguments:
Petitioners (Reliance Commodities, Inc.):
- Reliance argued that Paez failed to deliver any manganese ores as per the contract, which constituted a breach of their reciprocal obligations. They contended that the power to rescind the contracts lies with the injured party, which in this case was Reliance due to Paez's non-performance.
- They maintained that rescission of the contracts should lead to the restoration of what each party received, and thus they were entitled to recover the cash advances made to Paez.
Respondents (Marvin Paez and Rosa Valino):
- Paez and Valino contended that the contracts were void due to the failure of Reliance to fulfill its obligations, which included providing the necessary support for the mining operation.
- They argued that the Intermediate Appellate Court correctly found that Reliance was at fault and that the mortgage and addendum should be annulled.
Court's Decision and Legal Reasoning:
The Supreme Court granted the petition for review, reversing the decision of the Intermediate Appellate Court. The Court held that the evidence showed that Reliance Commodities had made substantial cash advances and provided equipment for the mining operation, while Paez failed to deliver any manganese ores as agreed. The Court emphasized that in reciprocal obligations, the party injured by the breach has the right to rescind the contract.
The Court clarified that rescission of contracts requires the parties to restore what they received under the contract. It ruled that the appellate court's finding that Reliance was at fault was erroneous, and thus the trial court's decision was revived and affirmed, with the modification that the amount to be restituted to Reliance would earn legal interest from the finality of the decision until fully paid.
Significant Legal Principles Established:
- In reciprocal obligations, the injured party has the right to rescind the contract if the other party fails to perform its obligations.
- Rescission of contracts abrogates the contracts in all parts, necessitating the restoration of what each party received.
- Legal interest on amounts to be restituted begins from the finality of the court's decision.