Vermen Realty Development Corporation v. Court of Appeals
REITERATIONFacts
The Antecedents: Vermen Realty Development Corporation (Vermen) and Seneca Hardware Co., Inc. (Seneca) entered into an "Offsetting Agreement" where Seneca would supply construction materials worth P552,000.00, and Vermen would pay P276,000.00 in cash and P276,000.00 in the form of two condominium units (Units 601 and 602, Phase I). Vermen was to deliver possession of these units pending completion of Phase II of the condominium project, and Seneca would have the option to transfer to similar units in Phase II upon its completion. Seneca paid P110,151.75 in cash and delivered construction materials worth P219,727.00. Vermen delivered possession of Units 601 and 602. In 1982, Vermen repossessed Unit 602, requiring Seneca's officers to rent alternative accommodation. Vermen claimed Seneca had not paid for the unit and demanded payment for Unit 601. In 1983, the loan for Phase II construction was denied, halting the project. Procedural History: Seneca filed a complaint for rescission of the Offsetting Agreement with damages, alleging Vermen's violation by stopping purchase orders and deliveries. Vermen counter-alleged Seneca's failure to deliver supplies and quoting higher prices. The Regional Trial Court (RTC) dismissed Seneca's complaint and ordered Seneca to pay Vermen the balance of P27,848.25 for Unit 601. The Court of Appeals (CA) set aside the RTC decision, rescinded the Offsetting Agreement, ordered Vermen to return Unit 601 upon payment by Seneca of P330,855.25 plus damages and attorney's fees. The Petition: Vermen sought review of the CA decision, arguing the CA erred in finding Vermen breached the agreement and in supplanting the RTC's conclusions.
Issue(s)
Whether the circumstances warrant rescission of the Offsetting Agreement. Whether Vermen Realty Development Corporation breached the Offsetting Agreement.
Ruling
The petition is DENIED for lack of merit. The Court of Appeals' decision is AFFIRMED. The Offsetting Agreement is rescinded. Vermen Realty Development Corporation is ordered to return Room 601 of Phase I of the Vermen Pines Condominium to Seneca Hardware Co., Inc. upon payment by the latter of P330,855.25, plus damages of P5,000.00 and P50.00 for furnishings, and three (3) days' rental of Room 402. Vermen is also ordered to pay Seneca P10,000.00 as attorney's fees and expenses of litigation. The claim for unrealized profits is denied for not having been duly proved.
Ratio Decidendi
On the issue of rescission of the Offsetting Agreement and breach of contract: The Court ruled in favor of the private respondent, Seneca Hardware Co., Inc., finding that the circumstances warranted rescission of the Offsetting Agreement because Vermen's breach was substantial and fundamental. Seneca did not fail to fulfill its obligation; rather, the discontinuance of deliveries stemmed from Vermen's failure to issue purchase orders. Vermen's allegation that Seneca could not fill orders was unsubstantiated. On the issue of breach of the Offsetting Agreement: Vermen would be unable to fulfill its obligation to allow Seneca to exercise the option to transfer to Phase II units because the construction of Phase II had ceased due to the denial of the loan. This impossibility of performance on Vermen's part constituted a substantial breach of the Offsetting Agreement, as the prospect of transferring to Phase II units was a significant factor for Seneca in entering the agreement. The Court reiterated the general rule that rescission is not permitted for a slight or casual breach but only for a substantial and fundamental breach that defeats the very object of the parties in executing the agreement, which was clearly the case here. Therefore, the rescission of the contract by the Court of Appeals was justified.
Main Doctrine
Rescission of a contract is permissible for a substantial and fundamental breach that defeats the object of the parties, particularly when the impossibility of fulfilling a reciprocal obligation renders the contract's purpose unattainable.