Palay, Inc. v. Clave
REITERATIONFacts
The Antecedents: Petitioner Palay, Inc., through its President Albert Onstott, entered into a Contract to Sell with private respondent Nazario Dumpit for a parcel of land in Antipolo, Rizal. The contract stipulated automatic extrajudicial rescission upon default in payment after a grace period, with forfeiture of installments paid. Respondent Dumpit made payments totaling P13,722.50 but defaulted on subsequent installments. Approximately six years later, he attempted to update his account and assign his rights, but petitioners informed him the contract had been rescinded and the lot resold. Procedural History: Challenging the rescission, respondent Dumpit filed a complaint with the National Housing Authority (NHA) for reconveyance or refund. The NHA, in a Resolution dated July 10, 1979, declared the rescission void for lack of judicial or notarial demand and ordered petitioners to refund the amount paid with interest. Petitioners' motion for reconsideration was denied. On appeal to the Office of the President, Presidential Executive Assistant Jacobo Clave affirmed the NHA's Resolution in a Resolution dated May 2, 1980, and subsequently denied petitioners' motion for reconsideration. The Petition: Petitioners assail the Resolutions of the Presidential Executive Assistant and the NHA, raising issues regarding the necessity of notice for rescission, their liability for refund, the piercing of the corporate veil to hold petitioner Onstott personally liable, and alleged grave abuse of discretion. They argue that paragraph 6 of the contract allowed for automatic rescission without notice. The Supreme Court issued a Temporary Restraining Order and later gave due course to the petition, ultimately modifying the assailed Resolution by lifting the personal liability of petitioner Onstott but affirming the refund obligation of Palay, Inc.
Issue(s)
Whether notice or demand is mandatory under the circumstances and may be dispensed with by stipulation in a contract to sell. Whether petitioners may be held liable for the refund of installment payments made by respondent Nazario M. Dumpit. Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar. Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the NHA decision holding petitioners solidarily liable.
Ruling
The questioned Resolution of the Presidential Executive Assistant dated May 2, 1980, is modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the Complaint. The temporary restraining order is lifted.
Ratio Decidendi
On the necessity of notice for rescission: The Court held that while jurisprudence allows extrajudicial rescission when stipulated in a contract, such rescission must be made known to the other party. The act of rescission is provisional and subject to judicial review. In this case, the rescission was ineffective against the private respondent for lack of notice, as required by the ruling in University of the Philippines vs. Walfrido de los Angeles. Even if the contract provided for automatic rescission, the buyer's right to question the rescission necessitates that the act of rescission be communicated to them. The stipulation for automatic rescission without notice in a contract of adhesion is considered an onerous and oppressive condition, contrary to public policy, especially under Republic Act No. 6551 which mandates notice of cancellation. On the liability for refund: Article 1385 of the Civil Code provides that rescission creates the obligation to return the things that were the object of the contract, together with their fruits and the price with its interest. Since the property had already been sold to a third person and there was no evidence of available substitute lots, private respondent is entitled to a refund of the installments paid plus legal interest. It would be inequitable for petitioners to retain the payments and the proceeds of the second sale. On piercing the veil of corporate fiction: The Court reiterated the principle of separate corporate personality. The veil of corporate fiction may be pierced only when it is used to shield fraud, defeat justice, or perpetrate illegal acts. In this case, there were no badges of fraud. Petitioners mistakenly relied on the rescission clause. Petitioner Onstott, as President, could not be held personally liable solely on the basis of being a controlling stockholder without sufficient proof of using the corporation to defraud the private respondent. Therefore, the personal liability imposed on Onstott was modified. On grave abuse of discretion: The Presidential Executive Assistant did not commit grave abuse of discretion in upholding the NHA's decision regarding the refund, as the NHA correctly found the rescission to be invalid due to lack of notice. However, the personal liability of Onstott was modified, indicating a correction of the ruling rather than a complete affirmation of grave abuse of discretion in all aspects.
Main Doctrine
Extrajudicial rescission of a contract to sell is ineffective and inoperative against the buyer for lack of notice of rescission, even if the contract provides for automatic rescission upon default. The buyer is entitled to a refund of installments paid plus legal interest.