Extrajudicial rescission without contractual stipulation

Where parties agree to a stipulation allowing extra-judicial rescission, no judicial decree is necessary for rescission to take place; the extra-judicial rescission immediately releases the party from its obligation under the contract, subject only to court reversal if found improper. On the other hand, without a stipulation allowing extra-judicial rescission, it is the judicial decree that rescinds, and not the will of the rescinding party. This may be gathered from previous Supreme Court rulings on the matter.For instance, in Ocejo, Perez & Co. v. International Banking Corporation,[1] where the seller, without having reserved title to the thing sold, sought to re-possess the subject matter of the sale through an action for replevin after the buyer failed to pay its purchase price, the High Court ruled that the action of replevin (which operates on the assumption that the plaintiff is the owner of the thing subject of the suit) “will not lie upon the theory that the rescission has already taken place and that the seller has recovered title to the thing sold.” It was held that the title which had already passed by delivery to the buyer is not ipso facto re-vested in the seller upon the latter’s own determination to rescind the sale because it is the judgment of the court that produces the rescission.

On the other hand, in De Luna v. Abrigo [2] (De Luna), the Court upheld the validity of a stipulation providing for the automatic reversion of donated property to the donor upon non-compliance of certain conditions therefor as the same was akin to an agreement granting a party the right to extra-judicially rescind the contract in case of breach. The Court ruled, in effect, that a subsequent court judgment does not rescind the contract but merely declares the fact that the same has been rescinded, viz.:
[J]udicial intervention is necessary not for purposes of obtaining a judicial declaration rescinding a contract already deemed rescinded by virtue of an agreement providing for rescission even without judicial intervention, but in order to determine whether or not the rescission was proper.[3]

A similar agreement in Roman Catholic Archbishop of Manila v. CA[4] allowing the ipso facto reversion of the donated property upon non-compliance with the conditions was likewise upheld, with the Court reiterating De Luna and declaring in unmistakable terms that:[5]

Where [the propriety of the automatic rescission] is sustained, the decision of the court will be merely declaratory of the revocation, but it is not in itself the revocatory act. (Emphasis and underscoring supplied)

This notwithstanding, jurisprudence still indicates that an extra-judicial rescission based on grounds not specified in the contract would not preclude a party to treat the same as rescinded. The rescinding party, however, by such course of action, subjects himself to the risk of being held liable for damages when the extra-judicial rescission is questioned by the opposing party in court. This was made clear in the case of U.P. v. De Los Angeles,[6] wherein the Supreme Court held as follows:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law.[7] 

These pronouncements, which was also reiterated in the case of Angeles v. Calasanz, [8] sought to explain various rulings that continued to require judicial confirmation even in cases when the rescinding party has a proven contractual right to extra-judicially rescind the contract. The observation then was mainly on the practical effect of a stipulation allowing extra-judicial rescission being merely “to transfer to the defaulter the initiative on instituting suit, instead of the rescinder.”[9]

[1] G.R. No. L-10658, February 14, 1918.

[2] 260 Phil. 157 (1990).

[3] Id. at 166.

[4] G.R. Nos. 77425 and 77450, June 19, 1991, 198 SCRA 300.

[5] Id. at 308-309.

[6] 146 Phil. 108 (1970).

[7] Id. at 114-115.

[8] 220 Phil. 10, 17-18 (1985).

[9] U.P. v. De Los Angeles, 146 Phil. 108 (1970), at 116.