THIRD DIVISION

[G.R. No. 108346. July 11, 2001.]

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE ,

petitioners, vs . COURT OF APPEALS, DAVID A. RAYMUNDO and
GEORGE RAYMUNDO , respondents.

Marciano J. Cagatan and Mariano R. Logarta for petitioners.

M.B. Tomacruz for private respondents.

SYNOPSIS

Petitioners entered into a deed of sale with assumption of mortgage with private
respondents paying a downpayment of P800,000 and assuming the mortgage amount of
P1.8M in favor of BPI. Petitioners further agreed "to strictly and faithfully comply with all
the terms and conditions appearing in the real estate mortgage signed and executed by
the vendor in favor of BPI . . . as if the same were originally signed and executed by the
vendee." As part of the deed, petitioner Avelina with her husband's consent executed an
undertaking that during the pendency of the application for the assumption of mortgage
she agreed to continue paying said loan in accordance with the mortgage deed and that in
the event of violation of any of the terms and conditions of the deed of real estate
mortgage, she agreed that the P800,000 downpayment shall be forfeited as liquidated
damages and the deed of sale with assumption of mortgage shall be deemed
automatically cancelled. When the bank denied the application for assumption of
mortgage, petitioners stopped making payments. Thus, notice of cancellation/rescission
was sent to petitioners for non-performance of their obligation. Aggrieved, petitioners filed
a complaint against private respondent for speci c performance, nullity of cancellation,
writ of possession and damages. Both parties admitted that their agreement mandated
that petitioners should pay the purchase price balance of P1.8M to private respondents in
case the request to assume the mortgage would be disapproved. The trial court
dismissed the complaint, but on reconsideration, directed the parties to proceed with the
sale. On appeal, the Court of Appeals upheld the validity of the rescission. Hence, this
recourse. ADCIca

The failure of the vendee to pay the balance of the purchase price constitutes a
breach on the performance of a reciprocal obligation, and not a violation of the terms and
conditions of the mortgage contract. This gave rise to the vendor's right to rescind the
contract. However, the automatic rescission and forfeiture of payment clauses in the
mortgage contract does not apply. Considering that the rescission of the contract was
based on Article 1191 of the Civil Code, mutual restitution by the parties is required.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. — In a

contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its equivalent.
Private respondents had already performed their obligation through the execution of the
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 Deed of Sale, which effectively transferred ownership of the property to petitioner through
constructive delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.
2. ID.; ID.; RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING
OBLIGATION. — 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 it, 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.
IEHScT

3. ID.; ID.; ID.; ID.; CASE AT BAR. — In the present case, private respondents
validly exercised their right to rescind the contract, because of the failure of petitioners to
comply with their obligation to pay the balance of the purchase price. Indubitably, the latter
violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondents' right to rescind the same in accordance
with law.
4. ID.; ID.; ID.; FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH
WAS NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. — As discussed earlier, the
breach committed by petitioners was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract. Therefore, the automatic
rescission and forfeiture of payment clauses stipulated in the contract does not apply.
Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners should be returned by private respondents,
lest the latter unjustly enrich themselves at the expense of the former.
5. ID.; ID.; ID.; OBLIGATION CREATED. — 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. IDAEHT

DECISION

PANGANIBAN , J : p

A substantial breach of a reciprocal obligation, like failure to pay the price in the
manner prescribed by the contract, entitles the injured party to rescind the obligation.
Rescission abrogates the contract from its inception and requires a mutual restitution of
benefits received.
The Case
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 Before us is a Petition for Review on Certiorari 1 questioning the Decision 2 of the
Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its
Resolution 3 dated December 29, 1992 denying petitioner's motion for reconsideration. 4
The dispositive portion of the assailed Decision reads:
"WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET
ASIDE and the Decision dated November 14, 1990 dismissing the [C]omplaint is
REINSTATED. The bonds posted by plaintiffs-appellees and defendants-
appellants are hereby RELEASED." 5

The Facts
The factual antecedents of the case, as found by the CA, are as follows:
" . . .. David Raymundo [herein private respondent] is the absolute and
registered owner of a parcel of land, together with the house and other
improvements thereon, located at 1918 Kamias St., Dasmariñas Village, Makati
and covered by TCT No. 142177. Defendant George Raymundo [herein private
respondent] is David's father who negotiated with plaintiffs Avelina and Mariano
Velarde [herein petitioners] for the sale of said property, which was, however,
under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A';
Exh. '1', pp. 11-12, Record) was executed by defendant David Raymundo, as
vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms
and conditions:

'xxx xxx xxx

'That for and in consideration of the amount of EIGHT HUNDRED

THOUSAND PESOS (P800,000.00), Philippine currency, receipt of which in
full is hereby acknowledged by the VENDOR from the VENDEE, to his entire
and complete satisfaction, by these presents the VENDOR hereby SELLS,
CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with
full warranty of a legal and valid title as provided by law, unto the VENDEE,
her heirs, successors and assigns, the parcel of land mentioned and
described above, together with the house and other improvements thereon.
'That the aforesaid parcel of land, together with the house and other
improvements thereon, were mortgaged by the VENDOR to the BANK OF
THE PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the payment of
a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as evidenced by a Real Estate
Mortgage signed and executed by the VENDOR in favor of the said Bank of
the Philippine Islands, on _________ and which Real Estate Mortgage was
rati ed before Notary Public for Makati, _________, as Doc. No. _____, Page
No. ____, Book No. ____, Series of 1986 of his Notarial Register.

'That as part of the consideration of this sale, the VENDEE hereby

assumes to pay the mortgage obligations on the property herein sold in the
amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in favor of Bank of the Philippine
Islands, in the name of the VENDOR, and further agrees to strictly and
faithfully comply with all the terms and conditions appearing in the Real
Estate Mortgage signed and executed by the VENDOR in favor of BPI,
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 including interests and other charges for late payment levied by the Bank,
as if the same were originally signed and executed by the VENDEE.

'It is further agreed and understood by the parties herein that the
capital gains tax and documentary stamps on the sale shall be for the
account of the VENDOR; whereas, the registration fees and transfer tax
thereon shall be for the account of the VENDEE.' (Exh. 'A', pp. 11-12,
Record).'
"On the same date, and as part of the above-document, plaintiff Avelina
Velarde, with the consent of her husband, Mariano, executed an Undertaking (Exh.
'C', pp. 13-14, Record). the pertinent Portions of which read, as follows:
'xxx xxx xxx

'Whereas, as per Deed of Sale with Assumption of Mortgage, I paid

Mr. David A. Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, and assume the mortgage obligations
on the property with the Bank of the Philippine Islands in the amount of
ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the terms and conditions of the
Deed of Real Estate Mortgage dated _________, signed and executed by Mr.
David A. Raymundo with the said Bank, acknowledged before Notary
Public for Makati, ______, as Doc. No. ___, Page No. ____, Book No. _____,
Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the
mortgage obligations on the property is not yet approved by the mortgagee
Bank, I have agreed to pay the mortgage obligations on the property with
the Bank in the name of Mr. David A. Raymundo, in accordance with the
terms and conditions of the said Deed of Real Estate Mortgage, including
all interests and other charges for late payment.

'WHEREAS, this undertaking is being executed in favor of Mr. David

A. Raymundo, for purposes of attesting and con rming our private
understanding concerning the said mortgage obligations to be assumed.
cCEAHT

'NOW, THEREFORE, for and in consideration of the foregoing

premises, and the assumption of the mortgage obligations of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde,
with the consent of my husband, Mariano Z. Velarde, do hereby bind and
obligate myself, my heirs, successors and assigns, to strictly and faithfully
comply with the following terms and conditions:

'1. That until such time as my assumption of the mortgage

obligations on the property purchased is approved by the mortgagee bank,
the Bank of the Philippine Islands, I shall continue to pay the said loan in
accordance with the terms and conditions of the Deed of Real Estate
Mortgage in the name of Mr. David A. Raymundo, the original Mortgagor.

'2. That, in the event I violate any of the terms and conditions of
the said Deed of Real Estate Mortgage, I hereby agree that my
downpayment of P800,000.00, plus all payments made with the Bank of
the Philippine Islands on the mortgage loan, shall be forfeited in favor of
Mr. David A. Raymundo, as and by way of liquidated damages, without
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 necessity of notice or any judicial declaration to that effect, and Mr. David
A. Raymundo shall resume total and complete ownership and possession
of the property sold by way of Deed of Sale with Assumption of Mortgage,
and the same shall be deemed automatically cancelled and be of no
further force or effect, in the same manner as if (the) same had never been
executed or entered into.
'3. That I am executing this Undertaking for purposes of binding
myself, my heirs, successors and assigns, to strictly and faithfully comply
with the terms and conditions of the mortgage obligations with the Bank of
the Philippine Islands, and the covenants, stipulations and provisions of
this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned
and identi ed above, [does] hereby con rm and agree to the undertakings
of the Vendee pertinent to the assumption of the mortgage obligations by
the Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'

"This undertaking was signed by Avelina and Mariano Velarde and David
Raymundo.
"It appears that the negotiated terms for the payment of the balance of
P1.8 million was from the proceeds of a loan that plaintiffs were to secure from a
bank with defendant's help. Defendants had a standing approved credit line with
the Bank of the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPI's approval of an application for assumption of mortgage by
plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue
paying the monthly interests of the loan secured by a real estate mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on

the loan secured by the aforementioned mortgage for three (3) months as
follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and
November 19, 1986 at P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17 and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for
Assumption of Mortgage with BPI was not approved (Exh. 'J', p. 133, Record).
This prompted plaintiffs not to make any further payment.

"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing

the latter that their non-payment to the mortgage bank constitute[d] non-
performance of their obligation (Exh. '3', p. 220, Record).

"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as

follows:

'This is to advise you, therefore, that our client is willing to pay the
balance in cash not later than January 21, 1987 provided: (a) you deliver
actual possession of the property to her not later than January 15, 1987 for
her immediate occupancy; (b) you cause the release of title and mortgage
from the Bank of P.I. and make the title available and free from any liens
and encumbrances; and (c) you execute an absolute deed of sale in her
favor free from any liens or encumbrances not later than January 21,
1987.' (Exhs. 'K', '4', p. 223, Record).
"On January 8, 1987, defendants sent plaintiffs a notarial notice of
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 cancellation/rescission of the intended sale of the subject property allegedly due
to the latter's failure to comply with the terms and conditions of the Deed of Sale
with Assumption of Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)."
'6

Consequently, petitioners led on February 9, 1987 a Complaint against private

respondents for speci c performance, nullity of cancellation, writ of possession and
damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati,
Branch 149. The case was tried and heard by then Judge Consuelo Ynares-Santiago (now
an associate justice of this Court), who dismissed the Complaint in a Decision dated
November 14, 1990. 7 Thereafter, petitioners filed a Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and
Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated
May 15, 1991, 9 Judge Abad Santos granted petitioners' Motion for Reconsideration and
directed the parties to proceed with the sale. He instructed petitioners to pay the balance
of P1.8 million to private respondents who, in turn, were ordered to execute a deed of
absolute sale and to surrender possession of the disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-
Santiago's earlier Decision dismissing petitioners' Complaint. Upholding the validity of the
rescission made by private respondents, the CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that
'as part of the consideration of this sale, the VENDEE (Velarde)' would assume to
pay the mortgage obligation on the subject property in the amount of P1.8 million
in favor of BPI in the name of the Vendor (Raymundo). Since the price to be paid
by the Vendee Velarde includes the downpayment of P800,000.00 and the
balance of P1.8 million, and the balance of P1.8 million cannot be paid in cash,
Vendee Velarde, as part of the consideration of the sale, had to assume the
mortgage obligation on the subject property. In other words, the assumption of
the mortgage obligation is part of the obligation of Velarde, as vendee, under the
contract. Velarde further agreed 'to strictly and faithfully comply with all the terms
and conditions appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI . . . as if the same were originally signed and executed by
the Vendee.' (p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the
document entitled 'Undertaking' wherein the latter agreed to continue paying said
loan in accordance with the terms and conditions of the Deed of Real Estate
Mortgage in the name of Raymundo. Moreover, it was stipulated that in the event
of violation by Velarde of any terms and conditions of said deed of real estate
mortgage, the downpayment of P800,000.00 plus all payments made with BPI or
the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption
of [M]ortgage would thereby be cancelled automatically and of no force and
effect (pars. 2 & 3, thereof, pp. 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration
of the sale was the assumption by Velarde of the mortgage obligation of
Raymundo in the amount of P1.8 million. This would mean that Velarde had to
make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage in the name
of Raymundo. The application with BPI for the approval of the assumption of
mortgage would mean that, in case of approval, payment of the mortgage
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 obligation will now be in the name of Velarde. And in the event said application is
disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph
5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing
on September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n.,
October 8, 1989). This being the case, the non-payment of the mortgage
obligation would result in a violation of the contract. And, upon Velarde's failure
to pay the agreed price, the[n] Raymundo may choose either of two (2) actions —
(1) demand ful llment of the contract, or (2) demand its rescission (Article 1191,
Civil Code).
"The disapproval by BPI of the application for assumption of mortgage
cannot be used as an excuse for Velarde's non-payment of the balance of the
purchase price. As borne out by the evidence, Velarde had to pay in full in case of
BPI's disapproval of the application for assumption of mortgage. What Velarde
should have done was to pay the balance of P1.8 million. Instead, Velarde sent
Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given
weight by the lower court in reversing the decision rendered by then Judge Ynares-
Santiago. In said letter, Velarde registered their willingness to pay the balance in
cash but enumerated 3 new conditions which, to the mind of this Court, would
constitute a new undertaking or new agreement which is subject to the consent or
approval of Raymundo. These 3 conditions were not among those previously
agreed upon by Velarde and Raymundo. These are mere offers or, at most, an
attempt to novate. But then again, there can be no novation because there was no
agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals,
191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage obligation,
the Deed of Sale with Assumption of Mortgage would be deemed 'automatically
cancelled and of no further force and effect, as if the same had never been
executed or entered into.' While it is true that even if the contract expressly
provided for automatic rescission upon failure to pay the price, the vendee may
still pay, he may do so only for as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act (Article
1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the
latter's failure to comply with their obligation. The rescission was justi ed in view
of Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the agreement. As
adverted to above, the agreement of the parties involved a reciprocal obligation
wherein the obligation of one is a resolutory condition of the obligation of the
other, the non-ful llment of which entitles the other party to rescind the contract
(Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to
rescind the contract, or to criminal prosecution (Edca Publishing & Distribution
Corporation vs. Santos, 184 SCRA 614). Upon appellees' failure, therefore, to pay
the balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720).
Consequently, appellees Velarde having violated the contract, they have lost their
right to its enforcement and hence, cannot avail of the action for speci c
performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)." 1 0

Hence, this appeal. 1 1

The Issues
Petitioners, in their Memorandum, 1 2 interpose the following assignment of errors:
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 "I
The Court of Appeals erred in holding that the non-payment of the
mortgage obligation resulted in a breach of the contract.
"II

The Court of Appeals erred in holding that the rescission (resolution) of the
contract by private respondents was justified.
"III

The Court of Appeals erred in holding that petitioners' January 7, 1987

letter gave three 'new conditions' constituting mere offers or an attempt to novate
necessitating a new agreement between the parties."

The Court's Ruling

The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents' mortgage obligation
did not constitute a breach of contract, considering that their request to assume the
obligation had been disapproved by the mortgagee bank. Accordingly, payment of the
monthly amortizations ceased to be their obligation and, instead, it devolved upon private
respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also
failed to pay the balance of the purchase price. As admitted by both parties, their
agreement mandated that petitioners should pay the purchase price balance of P1.8
million to private respondents in case the request to assume the mortgage would be
disapproved. Thus, on December 15, 1986, when petitioners received notice of the bank's
disapproval of their application to assume respondents' mortgage, they should have paid
the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make
such payment only upon the ful llment of certain conditions not originally agreed upon in
the contract of sale. Such conditional offer to pay cannot take the place of actual payment
as would discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer to pay therefor a price certain in money or its
equivalent. 1 3
Private respondents had already performed their obligation through the execution of
the Deed of Sale, which effectively transferred ownership of the property to petitioner
through constructive delivery. Prior physical delivery or possession is not legally required,
and the execution of the Deed of Sale is deemed equivalent to delivery. 1 4
Petitioners, on the other hand, did not perform their correlative obligation of paying
the contract price in the manner agreed upon. Worse, they wanted private respondents to
perform obligations beyond those stipulated in the contract before ful lling their own
obligation to pay the full purchase price. IHcTDA

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 Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents
was not justi ed, inasmuch as the former had signi ed their willingness to pay the balance
of the purchase price only a little over a month from the time they were noti ed of the
disapproval of their application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission. They cite several
cases 1 5 in which this Court declared that rescission of a contract would not be permitted
for a slight or casual breach. Finally, they argue that they have substantially performed their
obligation in good faith, considering that they have already made the initial payment of
P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their
nonpayment of the mortgage obligations, as their nonperformance of their reciprocal
obligation to pay the purchase price under the contract of sale. Private respondents' right
to rescind the contract nds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
"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 ful llment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen ful llment, if the latter should become
impossible."

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. 1 6 The breach contemplated in the said provision is the obligor's failure to
comply with an existing obligation. 1 7 When the obligor cannot comply with what is
incumbent upon it, 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.
18

In the present case, private respondents validly exercised their right to rescind the
contract, because of the failure of petitioners to comply with their obligation to pay the
balance of the purchase price. Indubitably, the latter violated the very essence of
reciprocity in the contract of sale, a violation that consequently gave rise to private
respondents' right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase
price one month after it became due; however, this was not equivalent to actual payment
as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer
to pay was conditioned on the performance by private respondents of additional burdens
that had not been agreed upon in the original contract. Thus, it cannot be said that the
breach committed by petitioners was merely slight or casual as would preclude the
exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases 1 9 they cited, because the factual
circumstances in those cases are not analogous to those in the present one. In Song Fo
there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods
delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the
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 seller. In Zepeda, the breach involved a mere one-week delay in paying the balance of
P1,000, which was actually paid. In Tan, the alleged breach was private respondent's delay
of only a few days, which was for the purpose of clearing the title to the property; there
was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in
payment or an irregularity; such breach would not normally defeat the intention of the
parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but
they also imposed upon private respondents new obligations as preconditions to the
performance of their own obligation. In effect, the quali ed offer to pay was a repudiation
of an existing obligation, which was legally due and demandable under the contract of sale.
Hence, private respondents were left with the legal option of seeking rescission to protect
their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance
of a reciprocal obligation, not a violation of the terms and conditions of the mortgage
contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated
in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil
Code, mutual restitution is required to bring back the parties to their original situation prior
to the inception of the contract. Accordingly, the initial payment of P800,000 and the
corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925
(totaling P874,150.00) advanced by petitioners should be returned by private respondents,
lest the latter unjustly enrich themselves at the expense of the former.

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. 2 0 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. 2 1
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss
the third issue raised by petitioners. Su ce it to say that the three conditions appearing on
the January 7, 1987 letter of petitioners to private respondents were not part of the
original contract. By that time, it was already incumbent upon the former to pay the
balance of the sale price. They had no right to demand preconditions to the ful llment of
their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION
that private respondents are ordered to return to petitioners the amount of P874,150,
which the latter paid as a consequence of the rescinded contract, with legal interest
thereon from January 8, 1987, the date of rescission. No pronouncement as to costs.

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 SO ORDERED. SDHCac

Melo, Vitug and Sandoval-Gutierrez, JJ ., concur.

Gonzaga-Reyes, J ., is on leave.

Footnotes

1. Rollo, pp. 37-53.

2. Rollo, pp. 68-78. Penned by Justice Regina G. Ordoñez-Benitez and concurred in by
Justices Gloria C. Paras (Division chairman) and Eduardo G. Montenegro (member).

3. Rollo, p. 81.
4. Rollo, pp. 21-33.
5. CA Decision, p. 11; rollo, p. 20.
6. Rollo, pp. 68-73.
7. Records, pp. 280-284.
8. Records, pp. 285-293.
9. Records, pp. 339-341.

10. Rollo, pp. 75-78.

11. To eradicate its backlog of old cases, the Court on February 27, 2001 resolved to
redistribute long-pending cases to justices who had no backlog, and who were thus
tasked to prioritize them. Consequently, this case was raffled and assigned to the
undersigned ponente for study and report.

12. Rollo, p. 227.

13. Coronel vs. CA, 263 SCRA 15, October 7, 1996.
14. Power Commercial and Industrial Corp. vs. CA, June 20, 1997.
15. Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, September 16, 1925; Tan v.
Court of Appeals, 175 SCRA 656, July 28, 1989; and Zepeda v. Court of Appeals, 216
SCRA 293, December 9, 1992.

16. Uy v. Court of Appeals, 314 SCRA 69, September 9, 1999; Romeo v. Court of Appeals,
250 SCRA 223, November 23, 1995.

17. Cheng v. Genato, 300 SCRA 722, December 29, 1998.

18. Central Philippine University v. Court of Appeals, 246 SCRA 511, July 17, 1995.
19. See footnote 15.
20. Co v. Court of Appeals, 312 SCRA 528, August 17, 1999. Vitug, Compendium of Civil
Law and Jurisprudence, 1993 revised ed, p. 556.

21. Ocampo v. Court of Appeals, 233 SCRA 551, June 30, 1994.

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