University of the Philippines v. Angeles
REITERATIONFacts
The Antecedents: The University of the Philippines (UP) entered into a logging agreement with Associated Lumber Manufacturing Company, Inc. (ALUMCO) for timber rights over its Land Grant. ALUMCO incurred significant unpaid accounts, prompting UP to consider rescinding the agreement. ALUMCO executed an "Acknowledgment of Debt and Proposed Manner of Payments," which stipulated that upon failure to pay, UP could consider the logging agreement rescinded without judicial suit, with ALUMCO liable for liquidated damages. ALUMCO again incurred an unpaid account after this acknowledgment. UP then informed ALUMCO that it considered the logging agreement rescinded and filed a complaint for collection, obtaining a preliminary attachment and injunction against ALUMCO's operations. UP subsequently awarded logging rights to Sta. Clara Lumber Company, Inc. Procedural History: ALUMCO filed several motions to discharge the writs, which were denied. ALUMCO also filed petitions to enjoin UP from conducting bidding and for preliminary injunction. The Court of First Instance (CFI) of Rizal issued an order on February 25, 1966, enjoining UP from awarding logging rights. After UP had already contracted with Sta. Clara Lumber Company, Inc., ALUMCO moved for UP to be declared in contempt, which the CFI granted in an order dated January 14, 1967, also directing Sta. Clara Lumber Company, Inc. to cease operations. The CFI denied UP's motion for reconsideration on December 12, 1967. The Petition: UP filed a petition for certiorari and prohibition to annul the three orders of the CFI, arguing that it had the right to unilaterally rescind the contract based on ALUMCO's breaches and the express stipulation in the acknowledgment of debt. This Court issued a preliminary injunction against the enforcement of the questioned orders.
Issue(s)
Whether UP can extrajudicially rescind its contract with ALUMCO and disregard the same before any judicial pronouncement to that effect. Whether the respondent judge committed grave abuse of discretion in enjoining UP and holding it in contempt.
Ruling
The Supreme Court granted the writ of certiorari, set aside the order of February 25, 1966, and remanded the records for further proceedings. The Court abstained from ruling on the contempt order as it was pending appeal in the Court of Appeals.
Ratio Decidendi
On Issue 1: The Court ruled that UP was legally justified in treating the contract as rescinded without prior judicial action. Relying on the doctrine in Froilan v. Pan Oriental Shipping Co., the Court held that there is nothing in the law that prohibits parties from entering into an agreement that a violation of terms would cause cancellation without court intervention. While Article 1191 generally implies judicial rescission, it does not prevent a party from acting on a breach extrajudicially, though they do so 'at their own risk.' This means the extrajudicial rescission is always subject to court review if contested, but the injured party is not required to passively wait for a years-long lawsuit while damages accumulate. The practical effect of such a stipulation is to transfer the initiative of instituting a lawsuit to the defaulting party. Consequently, the stipulation in the Acknowledgment of Debt was valid and enforceable. On Issue 2: The respondent judge committed grave abuse of discretion in issuing the injunction and refusing to dissolve it. The trial court's orders effectively ignored the express stipulation between the parties and the prima facie evidence of ALUMCO's repeated defaults. By enjoining UP's measures to protect its interests without first receiving evidence on the issues of breach, the judge hindered UP's right to minimize its own damages as required by Article 2203 of the Civil Code. The Court found that ALUMCO's excuses, such as the misconduct of its manager or the quality of the logs, were insufficient on their face to justify its failure to pay. Therefore, the injunction issued by the CFI was unwarranted and correctible by certiorari as the ordinary remedy of appeal was inadequate.
Main Doctrine
A party to a contract may validly consider it rescinded extrajudicially upon breach by the other party, without prior judicial intervention, provided that this action is taken at its own risk and is subject to judicial review. The stipulation in a contract allowing unilateral rescission upon default is valid and does not violate the general rule requiring judicial action, as the defaulting party retains the right to contest the rescission in court.