Philippine Amusement Enterprises v. Natividad
REITERATIONFacts
The Antecedents: Plaintiff Philippine Amusement Enterprises, Inc. (PAEI) leased an automatic phonograph (jukebox) to defendant Soledad Natividad. The contract stipulated a three-year term, automatic renewal, exclusive right for PAEI to maintain a phonograph, and provisions for rental based on gross receipts, maintenance, and repossession in case of breach. The defendants, through Soledad's husband Mariano Natividad, expressed dissatisfaction with the jukebox's performance, citing coin jams and failure to play selected music. They also inquired about purchasing the jukebox. After repeated requests for PAEI to retrieve the jukebox, which were allegedly not promptly addressed, the defendants wrote letters demanding its removal. On July 24, 1961, the defendants decided to return the jukebox and subsequently installed their own. PAEI demanded compliance with the contract, including the re-installation of its jukebox and removal of the defendants' own, citing the exclusivity clause. Procedural History: PAEI filed a complaint against the defendants for the return of the jukebox and payment of damages. The Court of First Instance of Davao rescinded the lease agreement in favor of the defendants, ordered the return of the jukebox, denied PAEI's claims for damages, and dismissed the defendants' counterclaim. PAEI appealed to the Court of Appeals, which certified the case to the Supreme Court due to the questions of law involved. The Petition: PAEI imputed four errors to the lower court, primarily challenging its finding that the facts warranted rescission in favor of the defendants due to PAEI's alleged failure to perform its obligation to render the phonograph suitable for its intended purpose.
Issue(s)
Whether the defendants were justified in unilaterally rescinding the contract of lease without judicial intervention. Whether the alleged defects in the leased phonograph constituted a substantial breach warranting rescission. Whether the defendants' decision to purchase and operate their own jukebox was a consequence of the leased jukebox's defects or a pre-existing plan to profit independently.
Ruling
The Supreme Court reversed the decision of the lower court. It ordered the defendants to return the automatic phonograph to the plaintiff and pay liquidated damages in the amount of P5,850, plus 6% interest from the filing of the complaint, and attorney's fees of P200. Costs were against the defendants.
Ratio Decidendi
On the issue of unilateral rescission: The Court held that the power to rescind reciprocal obligations, as provided by Article 1124 of the Civil Code (now Article 1191), must be invoked judicially and cannot be exercised unilaterally by a party based on their own assessment of a breach. The defendants' action in unilaterally terminating the contract without judicial intervention was deemed unjustified, as there was no stipulation in the contract empowering them to do so. The Court reiterated the principle that such a right must be judicially decreed unless there are grounds to allow a term for performance. On the issue of substantial breach: The Court found that the alleged defects in the jukebox, described as occasional coin jams and failures to play selected music, did not constitute a substantial breach that defeated the object of the contract. The phrase "there are times" connotes occasional failures, not frequent enough to render the jukebox unsuitable or unserviceable. The evidence did not show a significant drop in income attributable to these defects, and the operation remained profitable for both parties. Therefore, rescission was not warranted based on these grounds. On the issue of the defendants' decision to purchase their own jukebox: The Court was inclined to believe that the defendants' decision to buy and operate their own jukebox was made because they found it more profitable to do so, rather than being a direct consequence of the rented jukebox's defects. Their haste in wanting to exit the contractual obligations, coupled with their demand for removal rather than service, suggested a pre-existing plan. The timing of their decision to operate their own jukebox, coinciding with their complaints about the rented one, made their pretense of deciding to buy only after the rented unit failed highly improbable, especially considering the short timeframe for ordering and receiving a jukebox from the United States.
Main Doctrine
The power to rescind reciprocal obligations must be invoked judicially and cannot be exercised unilaterally by a party based on their own judgment of a breach, unless the contract expressly allows it. Furthermore, rescission is only warranted for substantial breaches that defeat the object of the contract, not for slight or casual ones.